Whether you’re an aspiring entrepreneur or you’ve recently opened a business, you’re likely thinking about all the skills you’ll need to make your business thrive. While different types of businesses will require different skill sets of their owners, there are several skills that are universally useful across the small-business landscape.

To share a few of their top picks, 10 members of Young Entrepreneur Council sound off below. Consider their recommendations if you’re looking to improve your leadership skills and better manage the day-to-day operations of your current or future business.

1. The Ability To Sell

The cornerstone of sales is building relationships with your audience. You might have a winning product that solves a problem, but if you cannot communicate the value and build a relationship, you will not win business. Every conversation you have with your teams and with your clients should build stronger relationships. They are not always going to be pleasant, but that does not mean that they do not strengthen a relationship. – Matthew Capala, Alphametic

2. Marketing Skills

Marketing is the most important skill for small-business owners to have. It’s important because it allows you to reach your target audience and convert them into customers. You can always delegate product development, customer service and other tasks to employees, but it’s important for small-business owners to have a strong understanding of marketing so they can be involved in the decision-making process and make sure their company is headed in the right direction. – Syed Balkhi, WPBeginner

3. An Awareness Of The Customer Experience

Having an awareness of the customer experience is high on the list of useful skills for managing day-to-day operations. As you focus on the entire “experience” of your client’s journey, you are able to better understand how your employees also play their role with the client. This is extremely important to show how your clients feel when they interact with your company. Most people make decisions based on emotions, so if your clients feel good, supported and have trust in you and your team, then there’s a higher chance that your clients will be back to work with you over and over again. – Racquelle Pakutz, Zen Freight Solutions Inc.

4. The Ability To Manage Finances

One skill that all small-business owners should have is financial management. This includes understanding financial statements (such as a balance sheet, income statement and cash flow statement), creating and managing a budget and being able to make informed financial decisions for the business. Financial management helps business owners identify and address financial challenges early on. This is essential for projecting the long-term financial stability of the business. By understanding their financial position and being able to effectively manage their financial resources, small-business owners can better navigate the day-to-day operations of their business and set themselves up for success in the long run. – Michael Fellows, Solidity Beginner

5. The Ability To Delegate

The art of delegation is so important for small-business owners. When you have a small team, there can be a temptation to do too much yourself because everyone is working in multiple roles and you don’t want to overload them. But recognizing your team’s strengths and assigning tasks accordingly will make everyone’s lives easier. If the right people are tackling the right tasks, you can ensure everything is completed in a timely manner and no one is held up waiting for something because it got lost on your to-do list. – Diana Goodwin, MarketBox

6. The Ability To Read People And Situations

It’s easy to imagine what happens to a business when you hire the wrong people over and over again or when the team is constantly dealing with unnecessary drama. You can avoid this, though, if you learn basic psychology. It’s essential for running a successful organization and especially for managing day-to-day operations because it affects everything that you do—from hiring to solving problematic situations. If you can “read” people well, you can tell what motivates them, you can feel when someone is not living up to their potential and you can identify why. You also don’t have a problem initiating uncomfortable discussions. – Samuel Thimothy, OneIMS

7. Problem-Solving Skills

Every business owner should know how to solve problems. The type of problem doesn’t matter. Those who know how to solve a problem can use those skills in any situation, whether it’s an employee dispute, a distribution issue or a technical malfunction. Knowing how to solve a problem involves being creative and thinking outside the box. It can stretch your capabilities at times, but those who know how to do this will always be successful. – Baruch Labunski, Rank Secure

8. The Ability To Manage Time

One skill that all small-business owners should have is effective time management. This skill is useful because it allows business owners to prioritize tasks, focusing on the most important and urgent tasks. This can help them be more productive and efficient. Good time management can also help business owners reduce stress and avoid burnout, which can be common in the fast-paced world of entrepreneurship. By being organized and focusing on the most important tasks, business owners can ensure that they are making the most of their time and working toward their goals. – Renato Agrella, Acerca Consulting

9. The Ability To Systematize

In order to get any task off your plate as an owner, you need to be able to create a process, communicate the reason why it is done this way and then eliminate 80% of the decision making that goes into the task. We have a service where we review a client’s accounting file for opportunities to better use the software. In the past, only our most senior consultants were able to perform this task effectively. We have documented the processes so much—with detail on navigation and understanding the “why” of each step—that this is now something our interns learn how to do when they first join us. They don’t present to the client yet, of course, but they do all the leg work. This frees up time for our more senior consultants to provide solutions and get creative instead and paves the pathway for our juniors as well. – Marjorie Adams, Fourlane

10. The Ability To Listen

Successful small-business owners excel at listening to their customers, employees and investors. Strong leaders understand that despite their knowledge and experience, there are things they don’t know. Instead of walking around with a sense of superiority, true leaders listen to the people around them whenever they need to make a decision that will impact countless others. This skill is helpful because it allows you to take in other points of view and life experiences when you make key business decisions. – Chris Christoff, MonsterInsights

Ashley:
This is Real Estate Rookie Episode 257.

Tony :
Something else to think about, Lawrence, as you’re submitting some of these offers is to give the sellers different options. For example, we’re trying to buy a hotel over the summer and we gave them different options on the seller finance deal that we were putting together. One had a higher price point with slightly higher interest, but a lower down payment. Another option had a higher down payment, but then the other terms were a little bit more favorable for us. I think if you want to get to where you’re putting down no more than you said 15% or 7% based on what Pace said, offer that as another option. And maybe even if it’s a slightly higher purchase price, it still works out better for you because the down payment’s going to be smaller.

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

Tony :
And welcome to the Real Estate Rookie Podcast where every week, twice a week, we’re bringing you the inspiration, motivation, and stories you need to hear to kickstart your investing journey. And today I want to shout out a very special person from the Rookie audience. This person goes by the username, The Handyman 317, and Handyman left us a five-star review on Apple Podcasts that says, “Thank you!” With the big exclamation mark. “Definitely one of my favorite weekly podcasts. I’m a contractor and I set a goal to start investing in 2023 for myself after listening to your podcast. Well, listening to your podcast weekly, I gained my confidence and already finished a flip and bought a duplex to hold on all in 2022. I appreciate the service you guys provide, and thank you so much for helping me reach my goals. So much free knowledge on this show.”
Handyman 317, kudos to you for listening and taking advice and taking action, man. That’s the biggest piece. So, if you guys haven’t yet left us an honest rating or review, please do. The more views we get, the more people we can help. The more people we can help, the more stories we get like Handyman 317. Ashley Kehr, what’s up? How are you?

Ashley:
Good. I got two closings today that I’m excited about. I’m selling a property.

Tony :
Busy day.

Ashley:
And then I’m actually using the proceeds to pay off another property.

Tony :
Isn’t that how it goes?

Ashley:
Yeah, I like to keep a couple free and clear, so just transferring some money over. And then I’m actually closing on a refinance for the A-frame property I remodeled.

Tony :
Let’s talk about that just really quickly. You got the refi, right? Refis have dried up tremendously, almost no one’s doing a refi right now. Can you share what’s the reason behind this refinance and why you have to do it right now?

Ashley:
Yeah, and actually the process has been so fast, I can’t believe it compared to trying to refinance the last two years-

Tony :
Last year, yeah.

Ashley:
… when lenders had to bend over lots of people wanting to refinance. But yeah, so I had purchased the property with hard money and my hard money isn’t due for, I think two more months, maybe. I rehabbed it, I used cash to actually rehab the property and now I want to pull my cash back out and we’re going to pay off the hard money lender today. We’re going to refinance with a small local bank. Then we’re just going to have our fixed trade. It’s going to be over 20 years amortized and fixed rate for five years.

Tony :
Yeah, that’s awesome.

Ashley:
And it’s at a 7.4% interest rate.

Tony :
That was my next question, which isn’t terrible, right?

Ashley:
No, no.

Tony :
I’ve seen definitely worse than that. Cool. I’m excited. A-frame’s almost done. That’s like the last step for everything, right?

Ashley:
It’s done. It’s done. Yeah.

Tony :
Yeah, that’s everything.

Ashley:
Yeah, it’s done. Yeah.

Tony :
Cool. Well, there you go. Well, we got a good show for you today. We got our mentees coming back on, so you guys get to hear a quick update from Brandon, Lawrence and Melanie and each one of them is kind of in a different phase and we dig into what each person is struggling with. Brandon, I think, and we talk about this a little bit, the biggest thing holding him back is just fear. And he kind of led into that by just saying he’s fearful of what could happen if he does keep moving forward with this. You get to hear us break that piece down. Lawrence was a man on a mission the last couple of weeks. He did a whole bunch of stuff, so we get to hear what Lawrence was up to you. But Lawrence was a little stuck on how to structure some of these offers that he’s putting out to folks, so we kind of walked through that. And then Melanie, she had a bit of a panic attack with her investing situation, so we break through-

Ashley:
She’s very relatable to me.

Tony :
Yeah, totally, right? And she talks through how she had a freakout moment and how she walked herself off the ledge and how she’s now moving forward with some confidence, and Ash and I give some advice on what we feel she should be doing as well. Each person kind of in a different situation, but hopefully each one of these stories helps our Rookie listeners know that there are other people going through the same things that they’re going through as well.

Ashley:
And if you guys haven’t already, please hype up our mentees in the Real Estate Rookie Facebook group because they’re out here sharing it all with you guys. And sometimes that’s hard to do, especially as a new investor, very unsure is admitting what you don’t know and how you’re feeling about investing. Make sure you guys are hying them up and give them tons of encouragement as we go along for the next 90 days. Brandon, welcome back to the Real Estate Rookie Podcast. How have you been?

Brandon:
Good. Good to be back while braving the cold up here.

Ashley:
Why don’t you tell us a little bit about what you’ve been up to since you were last on.

Brandon:
Since last time, I’ve definitely gotten more narrowed down on the buy box and analyzing properties. Went and walked through a lot more houses, just adding more consistency and just seeing what’s out there for the price points I’ve been looking and just getting more of a feel for what’s been out there, looking at everything that’s new to market.

Ashley:
Did you put together an offer on any of those properties you analyzed or looked at?

Brandon:
No written offers yet. Been working on one that I walked through and just wasn’t really interested at the price point and condition of the property. But they’ve actually been emailing back just wanting us to offer anything or whatever we’re thinking, because it sounds like it’s sitting still and put feedback’s been about the same as mine was.

Tony :
One call out Brandon. You said that not interested at the price point and the condition, but what that lets us understand is that there probably is a price point at that condition where that property makes sense for you. And I think that the challenge from Ashley and I is figure out what that price point is and regardless of what they’re asking, just submit the offer at that price point.
There was a property that I actually just got under contract less than 24 hours ago. I had initially submitted my offer and it was significantly below asking, and the buyers didn’t even counter, they just flat out said no. Then they came back to me last week and said, “Hey, Tony, will you meet us in the middle?” And I said, “No.” Then they came back to me less than 24 hours ago and said, “Okay, fine, we’ll accept your offer.”
So that’s kind of where we’re at in the cycle right now is that as the buyer, even if you’re asking prices significantly lower than what they’re asking for, and obviously this is going to vary by the market, but a lot of times if there’s not enough interest, especially if the condition of the property is not super turnkey, it gives you more leverage as the buyer. So I would say submit that offer, whatever price makes sense for you. Even if they say no today, there’s a chance that that property’s still on the market 14, 30, 45 days from now, now they’re going to come back to you and say, “Hey, Brandon, your offer looks a whole lot better now.”

Brandon:
Nailed it.

Ashley:
What are some other things that you think are holding you back from getting the next deal?

Brandon:
I guess biggest thing is just I haven’t been writing offers on stuff. I need to sit down and work backwards from what it needs and find that purchase price to offer on, even if it’s well off what they’re asking and not be worried about just ticking them off, I guess.

Tony :
Ashley, let me ask you a question, Ash. Have you ever submitted an offer that was so low that the seller said, “I don’t care what your next offer is, I don’t ever want to hear from you again?”

Ashley:
No, I’ve never had that bad. It was more of just no response, that you didn’t say, “My seller isn’t going to even acknowledge that offer.”

Tony :
But had you come back with a different offer, they probably would’ve acknowledged it, right?

Ashley:
Yeah. Oh yeah.

Tony :
Yeah. Maybe it’s happened somewhere, but I’ve never personally met an investor who said, “You know what, Tony, my first offer was so low and I offended the seller so much, they refused to listen to any other offer that I had after that first one.” I think a lot of new investors have this fear around pissing off the seller and them being offended and all these other things, but at the end of the day, if you give them a number that makes sense, they’re going to look at it. Don’t try and make that decision for the seller. I think the bigger thing for you, Brandon, is to do the numbers, figure out what works for you, and then put the onus on the seller to decide if they should be offended or not from there.

Ashley:
There’s so many times people make those lowball offers where they work, the seller accepts it and it’s like, oh my gosh, I didn’t expect that, but yay, they accepted my offer. You never know the reason for somebody selling and money may not be a reason at all, or maybe they don’t understand what the value of their house is or it’s just convenience to sell it to the first person that puts an offer in. Keep putting together offers and submitting them. And then if you’re putting in an inspection period, it’s giving you that second chance to go through the property and make sure your number’s correct too.

Tony :
Yeah, I think one last piece of advice, and this is, again, something that’s happened with me on a deal that we’re working on right now. We’re trying to buy some land to build our primary residence. We want land. Land is super limited where I live in California, super, super rare. And I’ve been talking with the agent who listed the land and same as you, he was like, “Oh, the seller doesn’t want to entertain that offer.” But I kind of got the feeling that the agent wasn’t even presenting my offer to the actual owner.
So what I did is I looked up the land, I traced owner’s contact information. I called them myself last week and said, “Hey, my name’s Tony. I’ve submitted a couple offers. Has your agent even shared my name with you?” The seller was like, “I don’t know. It doesn’t sound super familiar.” So what I’m gathering is that my offer was so low it didn’t quite fit with the agent’s needs, but I talked to the actual owner of the property and now he and I have a very open dialogue and he’s actually open to the offer that I presented. So, if you do feel that you’re getting a little bit of that, sometimes you might have to circumvent the agent to talk right to the owner.

Ashley:
And then, Brandon, when you’re looking at a property too, think about other ways that that property could generate income where maybe you can increase your offer a little bit. If it has a garage unit, can you charge an additional amount of rent for the garage? Maybe if there’s a huge parking lot, can you charge somebody to park their RV or their boat there over the winter? Things like that. Try and find different ways to increase the income or maybe if you’re looking at a property that’s going to have multiple residents in it is having a coin-operated washer and dryer in the basement or somewhere on the property, too, and make some income off of that too. Try and think of different ways to generate income off the property.

Brandon:
Okay.

Tony :
Brandon, one last question for you, man. When you think about submitting those offers, is it more so fear around what the seller’s response might be like? Is it that you’re analyzing a bunch of deals, but you’re just afraid to submit the offers because you don’t want to upset the seller? Or is it that you feel like you’re not analyzing enough deals to begin with? Which one of those issues do you think is a big one for you right now?

Brandon:
I do think it is out of fear of rejection, like you had said, or it getting accepted and then wondering what it didn’t account for type of thing. Or even having multiple offers that aren’t high probabilities and having both of those accepted.

Tony :
All right. Let’s break down both of those. Let’s break down both of those. Your first one was, what happens if they accept my offer, but there are things that it didn’t account for? Just walk through, what do you think you would actually do in that situation? Say that someone accepts one of your offers and now you’re in escrow, you’re during your due diligence period. What steps can you take to make sure that those unknowns get accounted for somehow?

Brandon:
I guess biggest things would be roofing inspectors and contractors to look over things and make sure the numbers I was estimating or planning for are at least close.

Ashley:
One thing you can do is put in a longer due diligence period, so a longer inspection period and ask for multiple times to have access to the property. Instead of having one inspector come in, if you want actual contractors to come in and bid it out, if you don’t think you’re going to be able to get them all right there at the property, same day, same time, then extend out in your contract, in your initial offer, put in a longer period of time and ask to have access as needed to the property, maybe with 24 hours notice if there’s tenants in place, or even the homeowner living there.
That way you can schedule out, okay, over the next two weeks, have the roofing guy coming this way to give me an estimate. I have these other contractors coming in to give me estimates on Thursday and go through a process like that. Then you’re going to get those hardball estimates. And just before you bring the contractors in, when you’re scheduling them, ask them, too, what their turnaround time is on an estimate to make sure that they’re going to get you the information back, too, before that due diligence period is up too. And you probably have a lot of contacts from your business too, from your work.

Brandon:
Yeah, like-

Ashley:
You probably run into a lot of other vendors.

Brandon:
Yeah, that’s numbers that I’m 100% sure, because I did them.

Ashley:
But even, too, do you run into other contractors on jobs or things like that or even your employer, he probably knows other people in different specialty skills, too, that he could connect you with.

Brandon:
Yeah, I’ve made decent friends in basically all the big trades.

Ashley:
That’s a huge advantage.

Brandon:
But not so much cabinets or a contractor overall.

Tony :
Yeah. And then, Brandon, the second thing you mentioned was what happens if you get two properties, two offers accepted? And it’s a reasonable concern to have because I think when you haven’t done your first deal, the idea of getting two at one time is like, oh my god, what am I going to do with that? But just say you were in that situation, what options do you think you’d have?

Brandon:
Trying to come up with the money a different way, see if seller financing is an option for them at all. Because the summer when I did a couple offers, but I would always wait to hear and then with how last summer was the other properties I was interested in were already gone before I heard back on the first one.

Tony :
So if you’re ever in a situation where you have two properties under contract or two offers accepted, first thing is that I would try and do whatever I can to close on both of those deals. I would try and look for a partner. Your idea of the creative finance is another great solution. But say for whatever reason you realize you can’t take both deals down, all you have to do is look at which one of those two deals you like more and then walk away from the other one. If you have a property that’s under contract or that you submitted an offer on a property and it comes back, as long as you’re not submitting your EMD and kind of kicking off the escrow and title process, you can still walk away from that deal. So, don’t feel like you’re automatically obligated to closing that deal. Most sellers, I think would understand like, “Hey, sorry, I had another offer that came in that was accepted.” And I think they would understand that is a legitimate reason to not move forward with that purchase. Don’t be too concerned about that piece.

Brandon:
Okay.

Ashley:
Tony, what do you think that Brandon’s next step should be? Do you think we should have him write some more offers, kind of get over that hurdle?

Tony :
Yeah, I want to see one lowball offer submitted by Brandon between today and the next time we speak.

Ashley:
Okay. And work in that inspection period, if that’s going to make you feel more comfortable. But I think that there’s some kind of fear holding you back and I mean, it’s completely legitimate like, what if I don’t run the numbers correctly or what if I don’t account for something? But that’s why you’re going to have your due diligence period to really break down everything and make sure that that’s the right number for you. And, of course, you can’t protect against everything, so make sure that you have whatever you’re offering on, it’s still going to leave you some reserves even after going in and doing some rehab if necessary too.

Brandon:
Okay.

Ashley:
Think you can handle that, Brandon?

Brandon:
Absolutely.

Ashley:
Okay. Well, thanks so much and we’ll see you in a couple weeks.

Brandon:
Yeah, appreciate it again.

Ashley:
Lawrence, welcome back to the show. Can you tell us what you’ve been up to the last couple weeks?

Lawrence:
Yeah, of course. I was able to do my homework, which consisted of watching those two amazing episodes with Pace Morby. I was able to get a good introduction to creative financing with subject two in seller financing. I’m more of leaning towards seller financing, because right now sellers still have a good amount of equity in their properties, especially in this area. Pace associated seller financing with gain, what does the seller want to gain since he or she may already have the equity in the property?
My biggest hurdle is not falling into analysis paralysis just because I do like to research different concepts. I have started to go onto the MLS listings for rentals and what I’ve started to do is that any rental that has been listed for over 30 days, I am trying to find the owners of those properties. I feel as though two things are happening in that situation. It’s either a landlord who is tired of being a landlord or they are not local to the area and they’ve handed over their property to a property management company that’s either not doing what they’re supposed to be doing or they may be overpricing a property.
I was playing Inspector Gadget and I was able to find one seller because there are a few right now that’s on market. It’s not a ton of aging rental properties on the market and I had to dig, because it was listed with a realty company and so I had to go to the county’s website and find the seller. Anyway, I got the seller’s phone number and email. I reached out to him and he said that he’s on vacation, so to try to get back to him in the middle of January. So I’m like, okay, well, at least I was able to contact him, and then he also lets me know that he’s on vacation and he has a property that’s listed for over 30 days. He may be inclined to selling the property because he’s not worrying about it cash flowing right then and there.
Another thing that I did was I reached out to a previous owner of a property that’s down the street from one of my rentals. He is about to rehab a property and he usually will either turn that rehab into a rental or he will sell it to a retail buyer. I reached out to him and say, “Hey, I’m interested in getting another property with doing seller financing. Would it be something you’re interested in doing?” He said that he would give back to me. So I’m like, okay, I’m tired of the, “I’ll get back to you right now,” that’s promising. I went back to the MLS.
I did find a new listing that hit the market that’s listed for seller financing. I contacted the realtor. However, I’m not too keen about the terms. Right now that particular property, they want 10% interest, 20% down payment, a minimum hold of three years, and a payment penalty that has not been decided. Because I normally buy single family homes, not owner occupied, I usually put down about 15% and then when you add in the closing cost, it kind of goes up to 20%. So I am going to revisit to see if I can maybe do an alternative offer. I’d rather not put 20% down on that particular property. If it still cash flows with the 10% interest, I don’t mind, and I don’t mind the three-year hold because I am into the long term.
But from my homework with Pace, he prefers not to put down more than 7% on properties that are seller finance. And one of his biggest things that he’s keen on would be to always cash flow. That has been what I’ve been up to. Again, I’m doing my research, but I want to continue to take action. My biggest next step, my biggest means would be to have a living document, a Google Document where I have a sheet for aging rentals that are over 30 days. There, I listed a sheet for properties that are on the MLS listed for sale for over 30 days. And I am just going to have to put the work in to contact those sellers and see what I can make happen.

Ashley:
Lawrence, you’ve been busy. This is great. The first thing I want to say is those terms on the seller financing, I mean, a bank’s terms right now are going to be better than that. You’ll give less than 10%.

Lawrence:
Exactly. And it just hit the market. And I mean, it is turnkey ready. What I understand from their property is that it was a flip that won’t sell right now. Because the very first thing that the realtor said was, “Hey, we have different terms for a retail buyer and an investor.” And so I was like, “Okay, well, what’s the terms for the investor?” And those were the terms, and I just was like, mhm.

Ashley:
I think maybe what they’re going after is probably somebody who has bad credit potentially and can’t go to get the bank financing. Because that’s actually my one business partner. When he bought his first house probably eight years ago, maybe 10 years ago, I don’t even know, he bought it from an investor who basically bought houses and seller financed them to people who had bad credit and would charge them… He paid a 10% interest rate and then when he built his credit back up, he went and refinanced out of that loan.

Lawrence:
Exactly. Now that’s why I probably will have another conversation. Right now I’ve worked hard where I’m not in that situation, I’m not going to mention my lender’s information because this is not sponsored, but I can easily be underwritten by almost any lender. All of my properties cash flow, I have a low debt to income ratio, I have great credit, so I want something that’s going to beat bank terms. I’m not going to put down more than 15% if I can go to a lender and do that with about a 8% loan. I definitely would have to get something very competitive if it’s going to be sellar financing.

Ashley:
Yeah, I think you even said it yourself is to go back and put in an offer with different terms. It’s not going to hurt anything, especially if they tried to sell it already, it hasn’t sold. I would put in lower than what the bank would be able to offer you. Even go with Pace’s advice and just do 7% down. I mean, they’re going to hold onto your offer. So if they don’t get anybody else, I mean, you may be their only option.

Tony :
But I think one of the reassuring things, Lawrence, is that you’ve already found a seller who is at least open to that idea. So there’s some proof of concept there that this path you’re going down could end up working for you. It’s just, okay, now how do we get the right terms? You said you’ve been looking at the rentals that have been aging. Have you looked at all at properties that were listed for sell, but that didn’t sell? So like on PropStream there’s like a failed listing filter that you can look at. Have you explored those at all?

Lawrence:
That’s my next list that I’m building, per se, that I’m going to be looking at. I started with the rentals first, but yes. So like I said, I’m going to have that living Google Drive Document or something of that nature where I have one sheet that lists all of the aging rentals and then another sheet that will list all of the aging properties for sale. And I do have another realtor that I’ve reached out to, and I’ve pretty much told that realtor if she’s able to bring me a seller finance deal that I would pay her commission on it.

Tony :
Because I think that bucket of owners, they might be even more open to the idea of seller financing because they just tried to sell the property and they potentially did it unsuccessfully, so they might have a little bit more motivation to go out and do that. Second question for you, Lawrence, are you looking just in the same market that you’ve been investing in or are you open to maybe more remote markets as well?

Lawrence:
Right now, I would say that my risk tolerance is more of where I’m local to, especially because I am a self-managing landlord, so my properties right now are within a mile of each other. That definitely cuts down on maintenance where I can have one local roofer and one local plumber to be able to get there and then me towards prospects and lease them out. As of right now, I want to do at least probably five to seven deals where it’s really local. This would be my fourth deal, hopefully, by the end of this mentorship program. Right now I’m wanting to stay local to my area, kind of dominate and monopolize this area.

Tony :
I love that approach. Yeah. I think maybe just looking at some of those fail listings through PropStream or you can go on Zillow or wherever and manually pull that, but that would probably open you up to a few more owners that might be open to seller financing.

Ashley:
There’s also the website landwatch.com. Have you heard of that, Lawrence? Pace uses it a lot too, and there is over 12,000 listings right now that already say that they’ll do seller financing on LandWatch.

Lawrence:
Wow. Awesome.

Ashley:
So, that’s a great resource starting point too.

Lawrence:
Great, thank you.

Ashley:
Okay, so what do you think is the next step for you?

Lawrence:
The next step would be, like I said, I will reach out to that realtor to see if they would be inclined to a different offer. And if I have to do a mailing campaign-

Ashley:
I think don’t even ask. I think just put it together.

Lawrence:
Just put it together.

Ashley:
Just put it together.

Lawrence:
Okay.

Ashley:
Because the agent can say, “Oh, no, I don’t think they’ll go for that.” But once you’re given the offer, the agent is ethically responsible to, even though Tony had told us a little situation where he didn’t think his offer is getting to the seller, but most agents have a moral responsibility to submit your offer to the seller. So, I think if you ask beforehand if they’re open for an offer, you’re asking the agent what they think and they’re giving the response, not all the time, but this way your offer is getting right in front of the sellers and they’re making the decision.

Lawrence:
Great. So I will submit an offer to them and then I build my list and, like I said, if have to do a… I like to try to find their phone number or email and call them, but if I have to do a mailer campaign, I will. And I will also follow up with those two other landlords who said that they possibly may be interested in selling one of their properties.

Ashley:
One thing just to remember, too, is that even if they say no or you get no response now, months down the road, they could come back to you. I sent mailers out a year ago and I just got a call in… So it was December, I think everybody got them December 23rd of 2021. And this past October, I got a phone call again from somebody who said he got the mailer in December, he was ready to sell now. It just goes to show that people will hold onto your mailers too.

Lawrence:
I definitely like that concept because I’m a huge advocate of networking. Just because it’s a, “not right now,” it doesn’t mean it’s going to be a never end because this area has been monopolized by just a handful of landlords. I’ve started to build a really good name where I’ve worked with two different sellers where I’ve put together off-market deals myself. And so now these local title companies and inspection people are like, “Lawrence, that kid knows what he’s doing. If he says he going to do it, it’s not a matter of if, but when.”

Tony :
I love that. And just something else to think about, Lawrence, as you’re submitting some of these offers, and this is something Ashley talks about a lot as well, is to give the sellers different options. For example, we’re trying to buy a hotel over the summer and we gave them different options on the seller finance deal that we were putting together. One had a higher price point with slightly higher interest, but a lower down payment. Another option had a higher down payment, but then the other terms were a little bit more favorable for us. I think if you want to get to where you’re putting down no more than you said 15% or 7% based on what Pace said, offer that as another option. And maybe even if it’s a slightly higher purchase price, it still works out better for you because the down payment’s going to be smaller. So just play around with different options. Don’t feel like you only have to give them one when you do submit those offers.

Lawrence:
Awesome. I greatly appreciate the feedback.

Ashley:
Well, Lawrence, thanks so much for coming back on with us. We always love having you on and just your energy and it motivates us to keep going and keeps us excited. So, we appreciate that.

Lawrence:
Thank you. I can’t stop. Won’t stop.

Tony :
There you go.

Ashley:
Yeah, awesome. We love to hear that. We’ll check back in with you in a couple weeks.

Lawrence:
Awesome.

Ashley:
Melanie, welcome back to the show. Thank you for coming on again. Can you let everybody know what you’ve been up to the last couple weeks?

Melanie:
Sure. Yeah, thanks so much for having me back. Good to see you guys. It’s definitely been an eventful couple of weeks I would say since we last chatted. I was really looking a lot at Florida and deep diving into just a very specific area and really had my heart set on that. But following our discussion, my homework was to look at some other areas, do some exploration of other locations, and then also to submit some offers. I would say that I jumped into looking at other locations pretty immediately. I thought just like, okay, what else am I somewhat familiar with? What do I know about, to Tony’s earlier recommendation, some of the tourism draws or some of the reasons people would come to an area?
And so I started looking in St. Louis and Kansas City because I felt like those might be areas that might be not the first location you would think of, but also had some potential. Pretty much right off the bat I could see that there were places in my price range, but I was getting a little bit more freaked out about occupancy, just seeing that almost 90% of the Airbnbs I was looking at had zero bookings for anywhere from two to three upwards of six months out. And so I was just kind of doing a little questioning of, okay, is this the market? Is this the particular area? Is it that the draw to these areas is just slower right now?
So I started to get a little bit of cold feet and I started to think, okay, I’m exploring a couple areas, I can definitely look into a few more, but am I really going the right route here right now with an STR? And randomly I had this opportunity pop up in Denver and it was like a multi-family that just had all of these shiny things about it that I was so excited about. I kind of went down that rabbit hole a little bit and I won’t get too sidetracked, but ultimately I wanted to refocus and recenter myself. And so I went back to looking at some other locations and on the forums actually I found a realtor that was talking about some unincorporated areas in Savannah and it just looked really appealing to me.
And so I started poking around a lot and found some things about Savannah I really liked and some beautiful properties and a really great price point. I’ve chased that a little bit more. I’m working with an agent, he’s sending me some listings. I got pre-approved for hopefully a 10% down, but 10, 15 or 20% down payment. Basically I feel really excited about Savannah. I feel like there’s a lot of opportunity. I started making a spreadsheet just with all of these locations and really starting to run analyses on all of these different properties that were popping up. I feel like there have been some viable options in Savannah and now my challenge is to make that offer, make that first offer, which was your recommendation, Ashley. My only hesitancy has been making sure I’m prude, making sure I have a lender, and just getting a little more comfortable with that analysis.
But in general, I had this full panic of, okay, I’m going in the wrong direction, and I kind of just slowed down and reevaluated a little bit and I feel like I’m back on track and have a good feeling about this particular area.

Ashley:
Melanie, that’s great. I’m glad that you have refocused yourself and you’ve even narrowed down a market now that you really want to focus on. I actually have two questions for Tony that were kind of brought up with what you were talking about. And I’m curious as to, Tony, what have you seen for lead times as far as bookings on properties? Because I know I’ve seen on Instagram people post that they’re still getting bookings, but they’re not booking three months out. They’re maybe booking three weeks out or things like that. So, Tony, I’m interested to hear that. Then also, Tony, what’s your take on the Savannah market? Do you know anything about it as a short-term rental?

Tony :
Yeah, two really good questions, Ash. Yes, booking lead times for us across the portfolio have been significantly lower than they were in 2021. This time last year in 2021, we got Christmas booked out by the end of September. This time, Christmas was booking out a few weeks ago. I think the habits of travelers have shifted between last year and this year. Across the board you are seeing more last-minute bookings. I don’t think I would be super concerned if I’m looking at a calendar for a market and I see that 30, 60 days out, there’s still a bunch of gaps in the calendar.
What I would look for is data to show, okay, how are those listings pacing over the last 365 days? What does their pricing look like over the next 365 days? And use that data to help me determine whether or not it’s a viable option. What does their occupancy look like over the last 30 days? Because looking back 30 days might give you a better understanding than if you look forward 30 days. Things to consider.
To answer your second question, Ashley, about Savannah, I actually don’t know anything about Savannah. The only market I’ve really looked at in Georgia was Blue Ridge, and we did that not even as a super deep dive. But, Melanie, it sounds like you found some things there that you feel will draw folks in and that the price points make sense for you. Is that what I’m hearing?

Melanie:
Yeah, that was a major factor, for sure.

Ashley:
Let’s go through some of those items. What are the things that you looked at in the market that you think are big draws that will bring people in?

Melanie:
I mean, obviously it’s by the coast. There’s a lot of people that are drawn to those islands like Tybee Island and a few others. There’s also an Air Force base. There’s a small college that’s, I guess small, it’s got 13,000 students, but well known in the area. I believe it’s a school of art and technology. I want to say the initials are S-C-A-D or something. SCAD or SCAT. And then also the historic district is a huge draw.
I will say that in looking at some of that data, there are properties that are still like 50% or 39% occupancy. I don’t think it’s necessarily 84 or 90% occupancy, which, of course, the higher the occupancy, the better. But they were still, at least the data I was looking at with Rabbu, they were still generating, for example, $3,300 in revenue on a $1,900 month mortgage or something. And I’m trying to be exceptionally conservative with my numbers and factor in property management because I will be out of state and that lower occupancy. I hope that answered your question.

Tony :
Yeah, it does. And I think that’s all good data to look at. I would also use a website like either PriceLabs or AirDNA. I think they give you a little bit more granular data than a Rabbu does. I haven’t spent much time on Rabbu, but I know AirDNA and PriceLabs are super catered towards the short-term rental industry and you get a ton of data when you look at those things. It sounds like you’re happy with that market. Have you looked into the policies of Savannah? Is it easy to get a short-term rental permit? Do you even have to get a permit? What does that whole process look like?

Melanie:
Yeah, so in Savannah proper, there’s a lot more restrictions, but in the unincorporated Chatham County, which is kind of just on the perimeter, it’s much easier. And a lot of the property management companies help you go through that process. They are tightening some restrictions, but there’s still a lot of opportunity. There’s still permits available.

Tony :
And I ask that question because the fact that there are tight restrictions, isn’t necessarily a bad thing. If anything, it almost protects the people that are willing to jump through those hoops and get those permits because not everyone’s going to be willing to do that. So if you are one of those hosts who have one of those harder to get permits, it almost helps because it keeps in, not a hard cap, but almost like a soft cap or an artificial cap on the supply of short-term rentals, which again, if you’re one of those that are operating it, it actually helps you. Have you submitted any offers yet in Savannah?

Melanie:
I haven’t, no. I’ve just been trying to analyze four to five properties over the last couple of days. I did explore some opportunities to do seller financing. It was kind of similar to Lawrence’s terms that he mentioned where the seller was offering a 7% interest rate and 20% down. I was kind of thinking I’d rather just get a loan from a bank. So, no, that’s definitely my next action item is to submit a couple of offers and I’m willing and ready to submit those lowball offers. I think I just wanted to make sure the analysis fit. I sent over a couple examples of my analysis to my agent who’s closed about 30 STRs this year, just to see like, these are my numbers. Do these look like your numbers? Should I be more conservative? Do you have any recommendations? I feel like I’m at that point where I’m ready to start making a couple of offers.

Ashley:
Melanie, you had put a question for us, too, in our group Slack channel about seller financing. Did you want to talk a little bit about that?

Melanie:
Yeah, thanks for mentioning that.

Ashley:
Yeah. One was about how the payments work. Okay, you got the deal under contract, it closed on it. Your attorney has put together an agreement and to kind of start from there is that your attorney will do your closing documents that you would usually have, but will also do a promissory note that goes along with the contract. And that’s where it’ll state that you owe the seller of the property X amount of dollars, and then the terms of the agreement, like what’s the interest rate, what’s the amortization schedule, what’s your monthly payment, things like that and how the repayment period works. What were some of the questions you had about that?

Melanie:
Yeah. I’ve never had a promissory note, and so I think I just was wondering what that actually looks like in practice. Do you have buyers who slowly stop paying? How is that managed and monitored? It seems so unofficial in some ways. And I just wondered… For my long-term rental, they just send me a check once a month. And so I assume it’s as simple as that. But I feel like without that formal entity of a bank or a lender, it just seems a little less easy to monitor. So kind of curious in your experiences, what that actually did look like month over month and if there were ever any issues with it.

Ashley:
I’ve done it both ways. I’ve done it where I was doing the seller financing and somebody was paying me, and then I’ve also paid somebody for seller financing. In both times it was a check sent out. I had it set up as autopay, so my check would go out on the first of the month to them. And then the same with the person that was paying me, they had it on autopay where it was just set up to go. Just like you would pay a mortgage payment, you’re just sending them a check, you’re maybe doing an ACH directly into their bank account. And that’s when I do seller financing offers. I do add that piece in there that’ll be direct deposited into their bank account on this date every single month. It’s just kind of hopefully something a little extra that they’ll appreciate to accept my offer.
But then say they don’t pay, and then that’s where it’s your responsibility to contact your attorney, most likely the one that drew up the promissory note. And that’s where you would go through the foreclosure process just as a bank would. The bank would use their attorney to go through that same formal process. The actual process of that depends on each state. Like New York State, you could pretty much pay for two years before they actually kick you out of your house for a foreclosure. Texas, I think it’s a way shorter time period where it’s so much easier to get people out. And that’s why a lot of investors do offer seller financing or do land leases and things like that because it’s so much easier to get people out, take the house back, and then go ahead and do seller financing again.

Melanie:
And have you ever had to go through that foreclosure process yourself?

Ashley:
No, I haven’t. I haven’t had to, which is a good thing.

Tony :
Yeah. Fingers crossed it stays that way.

Ashley:
Yeah. Any other questions about that, Melanie?

Melanie:
Actually, I guess, yes, one other thing. In a lot of seller financing deals, I feel like the biggest appeal is probably a lower down payment. And so when you see still a 20% down payment, if the interest rate is dramatically lower than what banks are lending at currently, then it’s green lights all the way. But I think I’m curious if there’s other things about a seller finance deal that I’m not considering that may get more appealing and more interesting.

Ashley:
One thing that I think of offhand is convenience. Just like having to go through a bank, it may be more of a, it’s a longer process. You have to put more paperwork in, you have to fill out more forms, all these things. So there’s the convenience method of it that doing seller financing, you really don’t have to do any of that. The formal application, things like that, doing seller financing. Another thing, too, is like you said, the down payment, but also the interest rate. If the person’s just going to have that money sitting in their bank account, well, instead of having the money from the sale sit in their bank account and make 1% interest off of it, instead they’re going to charge you 4% interest, which is still way better than the 7% interest you could get at the bank today is paying that 4% interest, but you’re both making out. In that example, you’re both making more than what you would if you went to the bank and they just put that money into their bank account. So, that’s another thing to consider too.
Then a big advantage for the seller is the tax advantages. The fact that instead of them taking a lump sum when they sell the property, now they’re taxable income is being spread out over the course of the loan. Instead of getting… Say, they sell property for $100,000, well, their tax bracket just increased because now they’re have a higher income based off of selling that investment property. Where they do seller financing, they’ve only made so much off of you in year one out of 20 years, the loan is amortized. It keeps them into that lower tax bracket and they’ll owe less taxes. So that’s a big advantage as to why a lot of people do the seller financing. One thing I always do is hint to ask sellers that they’re willing to do seller financing. They say no right away, I just say, “Oh, okay. I just didn’t know if your EPA had mentioned the tax benefits of it.” Then that kind of puts a little buzz in their ear.

Tony :
Yeah, and I think the other big thing, too, is that you can really create an offer that speaks to what’s important to that seller. For example, maybe the seller is just most concerned with getting the absolute highest purchase price, but maybe the property won’t appraise for the price that they’re looking for. But if you’re doing a seller financing position, they’re the ones that are on the hook for the property. So if they want to sell it for more than what it’s worth, that’s only working out in their favor. Whereas if you’re going with a traditional bank, if the seller wanted half a million bucks, but the property’s only worth 300,000, it’s not going to fly that way. So I think there’s more flexibility to listen to what is important to that seller and then give them an offer that really speaks to what’s motivating them.

Melanie:
Okay. The last thing I was going to say was it seems like if cash is the thing that the seller wants more than anything, that becomes like a seller financing deal killer because they want to cash out and walk away. And ultimately you’re only going to pay your down payment and then a payment over time with interest. That was kind of a learning with the multi-family I looked at this last couple weeks. But thank you so much for talking a little bit about that. That’s really helpful for me.

Ashley:
Yeah. And thank you so much for coming on again with us this week, and we look forward to talking to you again in a couple weeks.

Melanie:
Thank you.
(singing)

One of the first steps entrepreneurs should take after starting their business is getting word out to the public and attracting potential customers via marketing. A customer can’t find and make a purchase from a business unless they first hear about it, and this means marketing should be top of mind for any entrepreneur looking to grow their business.

But when you’re new to entrepreneurship, you may not know the most effective ways to market to your audience, which could cause you to make a mistake that might unintentionally damage your efforts. Here, nine members of Young Entrepreneur Council share some of the mistakes new entrepreneurs might commonly make when it comes to marketing their business, why they fall into these traps and what they should do instead.

1. Providing Education Without Entertainment

Many entrepreneurs make the mistake of marketing their brand with purely educational content, without adding any entertainment value. Brands should instead focus on content that provides a healthy mix of both—call it “edutainment.” If you want customers to buy into your brand, you have to first grab their attention and delight them. Then you can educate them on what makes your product great. – Rob Hoffman, Contact Studios

2. Lacking Understanding About Their Target Audience

One mistake new entrepreneurs might commonly make when it comes to marketing their business is lacking understanding about their target audience. They may be targeting the wrong audience or have a poor understanding of what that target audience wants. This can lead to financial issues. Instead, they should take the time to research their audience to ensure that a market exists. – Kristin Kimberly Marquet, Marquet Media, LLC

3. Marketing Too Broadly

A big mistake many new entrepreneurs make is marketing to a very broad segment. You can’t be everything to everybody. It will be a hundred times more effective if you niche down to a super specific market and solve one very acute and very particular problem. It’s like setting a doctor’s appointment—You can see a generalist pretty much every day, but it may take months before you see a specialist. – Solomon Thimothy, OneIMS

4. Running Paid Ad Campaigns

One mistake that new entrepreneurs commonly make is running paid advertising campaigns. They fall into this trap because paid ads bring quick results. However, they forget that the moment they pull the plug on the ads, the results they see will be gone. Therefore, it’s best to focus on gaining traction organically by creating relevant content. It’s cost-effective and ensures long-term results. – Stephanie Wells, Formidable Forms

5. Using The Wrong Platforms

New marketers often make the mistake of trying to reach customers on all social media platforms instead of the ones where their customers spend their time. For instance, if your primary audience is people in their late 50s, you probably wouldn’t want to market your product on TikTok. Similarly, you wouldn’t pay a premium for LinkedIn ads if your product is designed for teenagers. – John Turner, SeedProd LLC

6. Focusing Too Much On Their Products

One common mistake new entrepreneurs make when marketing their business is focusing too much on their products and not enough on the needs and interests of their target audience, as the entrepreneurs are closer to their products. This can lead to self-centered marketing messages or ones not particularly relevant to the audience, making it difficult to engage and convert potential customers. – Kelly Richardson, Infobrandz

7. Assuming The Audience Knows More Than They Do

New entrepreneurs assume their customers know as much as they do about their product or service. We fall into this trap because we’re so close to the product and overestimate how easy it is to understand. As a marketer, an entrepreneur must make their marketing and brand message easy to understand by the lowest common denominator. Don’t assume people will just “get it.” – Andy Karuza, NachoNacho

8. Ignoring Content Marketing

Many entrepreneurs make the mistake of ignoring content marketing. They often don’t know the value of creating content like blog posts, articles and other material that don’t drive immediate results. They rely on ads instead and forget the importance of storytelling and building relationships with their customers. What they should do instead is invest in content creation too. – Syed Balkhi, WPBeginner

9. Relying On Traditional Marketing Methods

Many new entrepreneurs rely a lot on traditional marketing methods, such as print or radio advertising. This can be expensive and inefficient. Instead of those methods, they should focus on leveraging online marketing strategies such as social media, email marketing, SEO and blogging. These strategies are cost-efficient, can reach a larger audience and their performances can be tracked and tweaked. – Thomas Griffin, OptinMonster

Scott:
This is the BiggerPockets Podcast, show number 721.

Andrew:
Keep in mind, bigger is mentally more daunting, but bigger is easier. It’s the same amount of work to take down a 10-unit as it is to take down a 100-unit. So my philosophy is go as big as you comfortably can. When I mean comfortable is without putting you or your investors at financial risk, but just don’t be scared by the fact that, “Well, it’s a 100 units. I’ve never done that yet.” If you’ve taken down a 10, you’ve taken down a 100. It’s just the amount of the finances, and it actually gets easier the bigger you go.

Scott:
What’s going on everybody? This is Scott Trench, temporary guest on the BiggerPockets Podcast here with the host, Dave Meyer. Sorry, I stole that from you, Dave.

Dave:
Oh, no. I don’t know if I’m the host or the guest. Whatever it is, we’re here together, and we’re taking over the show today.

Scott:
Well, thank you for having me on today, Dave. I appreciate it.

Dave:
Yeah, of course. You’re very smooth at that intro. You’re an old hand at this. We wanted to have you on because we’ve had a couple of questions. You and I have actually had a lot of great conversations offline about this. You have some really interesting thoughts and, frankly, some concerns about the multifamily commercial space that we’re going to talk about here for the first 20 minutes of the show.

Scott:
Yeah, I do. I think that the commercial multifamily has enjoyed a really phenomenal run in creating a tremendous amount of wealth over the past 10, 12 years as rents have really grown almost in accelerating fashion for the last decade as interest rates have come ticking down over that time and as cap rates have come down. That’s created an incredible environment for wealth creation that I worry has run its course and is set to give a lot of that back in the next 12 to 18 months. I want to voice those concerns really and ring the alarm bell here so that investors are very, very wary of this asset class heading into 2023 in particular.

Dave:
All right, great. Well, this will be a great conversation. I’m looking forward to it. I have a lot of questions for you. Just for everyone listening, we’re going to talk to Scott for about 20 minutes. Then we’re going to turn it over to Matt Faircloth and Andrew Cushman who are going to be answering some mentee and listener questions about the multifamily space. So we have a great show for you today. We’re going to cover a lot about commercial and multifamily, so you’ll definitely want to stick around for this. You have some thoughts about what’s going on in the multifamily and commercial space, and we’d love to hear what you’re thinking.

Scott:
I think the first thing that’s concerning me in the multifamily or commercial multifamily and commercial real estate space is that cap rates are lower than interest rates right now in a lot of this space. What that means is when I’m buying a piece of commercial real estate, I’m buying an income stream. If that’s at a 5% cap rate, I might spend $10 million to buy a property that generates $500,000 a year in net operating income. Well, if my interest rate is 5.5% or 6.5%, like Freddie Mac 30-year fixed rate mortgages are averaging 6.42% as at the end of the year, that means that my debt is dilutive. I’m actually going to get a better return by buying all cash or being on the lending side instead of the equity side unless I’m really bullish on appreciation. In the case of commercial real estate, that means I’m really bullish on rent growth or I, for some reason, believe I can reduce operating expenses. So this is a huge problem. This is not sustainable in my opinion. When the average of the market sees cap rates lower than interest rates, that means that the market is going all in on these assumptions for growth. And I don’t understand that. I think it’s a really risky and scary position.
So let’s go through what has to be true for this to work out for investors in the commercial space. One is rent growth has to go up. One way that could happen is supply and demand dynamics. On the supply side, we’re going to have the most inventory coming online since the 1970s. Ivy Zelman estimates that there are going to be 1.6 million units coming online in the next 12 to 18 months in the backlog here. Builders will complete that inventory, and they will monetize it. It’s possible that if things get really bad, they can stop construction, but then that just proves the point that there’s a big risk in this space.
Then the other side of this… So I think that’s a headwind to that rent growth assumption that the market’s going all in on, lots of supply coming online, lots of construction. All you got to do is peek out the window here in Denver and you see the cranes more prolific than they ever have been. That’s saying something because the city’s been booming for a long time. Now, this will all be regional. Some cities will not see the supply coming online. Some cities will see tons of supply coming online and still have no trouble with absorption of those units.

Dave:
Well, just to reiterate, to emphasize that point, Scott, we are already seeing that rents, specifically in multifamily, are flattening and starting to decline in some areas. That’s even before, what you’re saying, this increase in supply comes online because I think that’s sort of towards the middle of 2023 when that’s intended to happen. So we’re already seeing this before the supply glut even starts to impact that dynamic.

Scott:
Yeah, absolutely. I think a better bet is that rents stay flat or maybe even decline over the next 12 months in the multifamily space versus the implicit assumption when cap rates are lower than interest rates that they’re going to explode.
On the demand side, I think we have a wild card here, and I don’t really have any forecasts that I feel really confident in on demand. One of the big arguments for demand is that there are more people, household formation is accelerating. There’s long-term trends supporting that. That’s true, but there’s a whole bunch of volatility from the whole COVID situation: lots of people moving out, getting divorced, breaking up. That creates household formation, in my opinion, artificially. It’s a metric that can move and confuse economists. So I don’t know how to predict household formation in 2023 one way or the other. I think the safest bet is to assume very little household formation. If there’s a mild recession or interest rates keep rising, that’s going to put pressure in the economy. It’s going to result in less wage growth, and we might give back some of those rent increases. I think, if anything, there’s reason to believe that rents, again, stay flat or decline year over year. Again, that’s problematic.
So I worry that in 2023 we could see cap rates increase, which means multifamily asset valuations decline. So that same property that’s generating $500,000 in net operating income goes from being worth $10 million at a 5.0% cap to 7.7% at a 6.5% cap. That’s a 23% crash in the asset value of that property. If you’re levered 70/30, you used 70% debt, 30% equity, that’s going to wipe out the vast majority of your equity. This is the problem that I see brewing in this space or that I worry could be brewing in the 2023 space.

Dave:
Do you see this across all multifamily assets? Are bigger syndications or smaller multi-families disproportionately going to be impacted by this?

Scott:
I think that this is a threat to commercial real estate assets across the board, which would include office space, retail, multifamily and other assets. I think that you’re going to see more pressure on larger assets. You’re going to see pressure on assets that are not financed with Freddie Mac loans at 30-year fixed rates. I think that folks will be disproportionately impacted. I also think you’re going to see folks simply not selling in this period. If you’re invested in a syndication, your syndicator’s probably just not going to sell for the next year or two and hope that prices recover. My worry though is that if interest rates stay high, and they can even come down a little bit, I know you’re thinking that mortgage rates are probable to come down next year, but as long as they just stay much higher than they were for the last couple of years, I think you’re going to see cap rates reset at a higher level, maybe 6.5%, 7% on a nationwide basis, again, varying by region.

Dave:
Well, also ideally, most syndicators and operators will probably hold on. But given the nature of commercial lending, most of them don’t have long-term fixed debt. Some of them might have balloon payments coming due or an adjustable rate mortgage that’s adjusting in the next couple of years, and that could potentially force a sale or further negatively impact the cash flow of the properties.

Scott:
I think that’s true, and I think that’s a really big unknown in the space. I don’t know anyone who has great data on averages in commercial multifamily real estate debt terms. What is the average weighted life of these debts? Is it five years? Is it 10 years? Is it 30 years? Is everyone getting fixed rate Freddie Mac loans on this and we’re all set? My guess is there’s a big spread in these areas and that different folks are going to get impacted very differently. My best guess is that there’s going to be a process rather than an event for this cap rate reset. There’s just going to be continual grinding pressure on operators of these assets over 12 to 18 months, but there could always be some sort of event issue where things come to a head at once.
By the way, this is not news. Asset values in the space have come down 20% to 30% in many markets already. For some of those markets, it was like a light switch and some of it was over time. Brian Burke, I think, has some really good detail on this on a previous BP podcast. Then I also want to call out, you had Ben Miller on the On the Market Podcast, the CEO of Fundrise. He really has a good handle, I think, on the timing and credit issues that are coming up in the space, and how folks are leveraged and why lender A borrowed from lender B to finance property C, and everybody needs liquidity at once, that could create problems. I think that’s really hard to predict. I think, again, that’s a space where nobody has great data, and there’s a big unknown here.

Dave:
It is really hard to find that information. If you want to check out that podcast Scott was talking about, it came out around Christmas on the On the Market feed. You can check that out. It’s called the Great Deleveraging with Ben Miller. Scott, I think this is fascinating and appreciate your take. I’m curious what you would recommend investors do. I guess there’s two sides of that. As a operator, multifamily syndicator, what would you recommend they do? Then as people like me who invest passively in syndications of multifamily deals, what would your advice be?

Scott:
Well, I think if you’re in a current syndication, you got to just kind of pray and hold. There’s not really another option. You’re a limited partner, and there’s nothing to do. So it all comes down to what you can do going forward. I think that if you’re considering investing in a syndication, make sure that it’s a huge winner even in a no-rent growth environment. Throw out the syndicator’s projections on market rent growth and say, if there’s no rent growth, does this thing still make sense over the next couple of years for me? And does it make sense where, even if I have to sell the property with 150 basis point increase in cap rates in that market…? That’s a general rule of thumb. Each region will vary. You definitely can modify those assumptions by your region if you have one of those markets that has a lot of net migration with very little new construction.
Another one is, instead of getting on the equity side in a syndication, consider being on the debt side. There’s preferred equity, which is really consistent with debt in terms of its return profile, although it’s junior to the more senior debt at the top of the stack. Or you can just get into a debt fund. If the cap rate is 5% and the interest rates are 6.5%, why not just earn 6.5% interest rates or even higher with other debt funds? That’s a lower-risk way to earn better cash flow for a period of time. When things change or if they change, you can always go back to being on the equity side or when you have confidence in rent growth. If you’re going to go in on an equity deal, maybe consider finding somebody that is going to syndicate with no leverage at all. Again, if the property’s going to produce a yield at a 5% cap rate, consider using no debt at all. That’s actually going to increase your returns in a no or low-rent growth environment while being lower risk. So that’s really attractive.
These are super bold opinions that I’m trying to bring in here, but I really want to voice this concern because I feel like folks don’t understand this and I feel like they’re getting information… If you’re getting all of your information from people who syndicate real estate deals, recognize that these syndicators, they’re great people, they do a great job in a lot of cases, but this is their livelihood. It’s hard to see perhaps some of the risks in this space if your livelihood depends on raising large amounts of capital, buying deals, and earning money through acquisition fees, management fees, and then having a spin at a carried interest on the [inaudible 00:13:51].

Dave:
That’s great advice, Scott. Thank you. Do you see this potential downturn in commercial real estate? From what you’re saying, it sounds like. I personally believe we’ll see a modest downturn in residential real estate, but this commercial one has more downside according to your analysis. Do you see it spilling over into residential or any other parts of the real estate industry?

Scott:
This is not good news for real estate in a general sense. Look, I think that you have a really good handle on the residential market in particular. You have a good handle on all the markets. I don’t think you spend quite as much time in the commercial space. I would say, by the way, you should take some of my opinions here with a grain of salt because I’m an amateur aspiring journeyman in understanding the commercial real estate markets here. But in the residential space, I think we’ve got a reasonable handle on that. There’s a whole variety of outcomes. But, no, commercial real estate asset values declining will likely be hand in hand with residential real estate asset values declining. We already predict that. I think 3% to 10% declines are the ballpark that you’ve been discussing for residential depending on where interest rates end up at the end of the year next year.

Dave:
Well, that’s super helpful.

Scott:
By the way, if you’re considering investing in residential real estate, put it on the BiggerPockets calculator and look at the property with a 30-year mortgage and reasonable appreciation and rent growth assumptions and put it on there without a mortgage and see what the returns look like. In a lot of cases, the returns are going to be better without a mortgage on the property, which, again, is something that is really interesting and something that should get the wheels turning. You need to really find some good deals right now in order for this to work, and you might want to consider being on the debt side.

Dave:
Awesome. Well, Scott, we really appreciate this very sober and thoughtful analysis. It’s clearly something our audience and anyone considering investing in real estate should be thinking about and learning more about.

Scott:
Well, Dave, one question I have for you is, what do you think? I’m coming in hot with a little bit of doom and gloom here worrying that there’s a really big risk factor brewing in the commercial real estate space. Do you think I’m reasonable with that, or do you think I’m way off?

Dave:
No, I do. I think that it’s a serious concern. I really have a hard time envisioning cap rates staying where they are. I can’t imagine a world where they don’t expand. As you illustrated really well, just modest increases in cap rates have really significant detrimental impacts on asset values. We’re just seeing conditions reverse in a way that cap rates have been extremely low for a very long time, and economic conditions, I don’t think, really support that anymore.
I think what you said about rent growth is accurate. The party that we’ve all seen over the last couple of years where rank growth has been exploding, the economic conditions don’t really support it anymore. I think it’s time to be very cautious and conservative. I don’t see any downside in being really conservative. If you’re wrong and if I’m wrong, then it’s just a bonus for you. If you invest really conservatively and rent growth does increase and cap rates stay low, good for you. But as you said, I think that the most sober and appropriate advice, both in commercial and residential right now, is assume very modest rent growth, if any at all, assume very little appreciation, and if deals still work, then that makes sense. But I don’t think hoping for improving conditions is a wise course of action, at least for the next year and maybe two years.

Scott:
Well, great. Again, I feel a little nervous voicing this concern. I’m essentially coming on the show and saying, “I’m predicting a pretty…” I’m not predicting. I’m worried about an up to 30% decline in asset values in commercial multifamily. That’s one area where I really enjoyed Ben Miller’s podcast where he talked about the credit risks in here, but I really think multifamily is not insulated from this. His risk was for the commercial, like a retail office, those other asset classes. I think multifamily is very exposed right now, and I worry that some of these things have not been priced in appropriately in the market.
Again, it just comes back down to the simple fact of we’re trying to make money as investors. How can you make money if rents aren’t going to grow and your debt is more expensive than the cash flow that you’re buying? That has to change. I think that a reasonable spread between cap rates and interest rates on a national average is about 150 basis points. That amounts to a very large increase that’s going from about 5% on a national average right now to 6.5% cap rates. Again, that destroys a lot of value. So hopefully this is helpful.

Dave:
The only alternative there is that interest rates go down, like you’re saying, you need this spread. But personally I think mortgage rates might go down by the end of 2023, but not a lot, I don’t think by 100 basis points from where they are right now. That is my thought, but I don’t believe that very strongly. I think there’s a lot of different ways that this could go. So I think that the more probable outcome, as you’ve said, is that cap rates go up to get to that historic healthy spread rather than interest rates coming down.

Scott:
There may be a combination. That could be a mitigating factor. They could come down some and cap rates could still go up a portion of this, but I’m very fearful of this space over the next year.

Dave:
All right, Scott. Well, we really appreciate this honest assessment and you sharing your feelings with us. It’s super helpful for everyone listening to this and given me a lot to think about. Before we let you get out of here, what is your quick tip for today?

Scott:
My quick tip is if you’re analyzing commercial real estate or any other real estate, in today’s environment try analyzing it with and without debt first. Then second, if you’re looking at syndicated opportunities, if you’re still interested in syndicated opportunities, make sure that the sponsor is buying deep, buying at a steep discount to market value, that there’s significant opportunities for rent increases just to bring current rents to market, and that the property can still generate an acceptable profit when the syndicator needs to sell it three to five years later, even if that is at a cap rate that is 1.5% higher, 150 basis points higher than what it was purchased at today.

Dave:
Well, thank you Scott Trench, the CEO of BiggerPockets. We appreciate you being on here. With that, we are going to turn it over to Matt Faircloth and Andrew Cushman who are going to be answering some mentee questions about getting into multifamily investing.

Andrew:
Philip Hernandez, welcome to the BiggerPockets Podcast. How you doing, sir?

Philip:
I’m doing well. I am super stoked to be here. Thank you so much, Andrew.

Andrew:
You are part of the inaugural group of the BiggerPockets’s mentee program. You’re here with a few questions that hopefully we can help out with today. Is that correct?

Philip:
Yeah, yeah, that’s right. I’m super stoked and thank you guys so much for your time. My question, in the multifamily world, but also just in the real estate world in general, a lot of times when we’re starting out, the advice is given to partner with somebody that has more experience than you by providing them with some value, either finding the deal or managing the deal or somehow making it easier for the person that has more experience than you. What if the thing that you’re able to do to add value is raise capital? I’m starting to find some… My network is starting to be interested in investing with me more. What if I don’t have the deal? What if somebody else has a deal, but I’m just starting to get to know them, how would you vet the person that you’re thinking of bringing your friends and family’s money into a deal for? What would your checklist look like so you do that in a good way?

Andrew:
Important topic. Just to make sure we’ve got that right, your question is basically, if I’m kind of starting out as a capital raiser, what’s the checklist look like to pick the right partner or co-sponsor to invest that money with?

Philip:
Yeah, exactly. Because vetting a deal as far as doing my own due diligence, I feel reasonably competent at that, but that’s if I’m in control of everything. So what if I’m not in control of everything?

Andrew:
You’re right on. Matt’s probably has a lot to say on this, so I’m going to just roll off a few things, and then I’ll let him take over. Number one is I would say go read Brian Burke’s book, The Hands-Off Investor, because it is written towards LP passive investors. It is the most detailed, in-depth manual for how to vet an operator that I’ve ever seen in my life. So if you are looking at raising money and putting that money with somebody else, you need to be an expert in that book. That’s the first thing that I would do. Even as someone who’s been doing this for a decade and a half, I read every page of his book. There’s a lot to learn in there. So do that.
Second of all is if you’re going to raise other people’s money and then put it in someone else’s deal, do not be just in a limited partner. Make sure that you are either part of the general partnership or at bare minimum have some level of input or control in the deal. Unfortunately, just last week, a friend of mine raised money, put it with another sponsor in a deal in Texas. They had a fire. The deal is going bad. 100% of the equity is going to be lost. One of the biggest frustrations with the friend of mine who raised the money is he has no control. He can’t even get all of the information into what’s going on. So make sure that you have some level of input, some level of control.
I would also recommend when you’re looking at a specific deal, underwrite the deal and do due diligence on the deal as if it was your own deal and you found it. You’re basically duplicating the underwriting and the research that the sponsor’s supposed to be doing. Hopefully everything lines up and you’re like, “Wow, this guy’s great.” But if not, you’re going to find that, and you’re going to save yourself a lot of… You save your investors risk and save your own reputation. Then also realize you are really betting more on that operator than you are on any specific deal, especially as the market is now shifting. Asset management and good operations is where the money is truly made. We’ve all been riding a huge wave for the last 10 years, that has crested, and the good operators are going to be the differentiating factor going forward.
Then also really from your perspective, Philip, just understand that no matter what, you to some degree are placing your reputation in somebody else’s hands. Go through that vetting process, do it slow. If you do it right, it can be a wonderful thing for growing and scaling and focusing on what you’re good at. But just keep that in mind. Matt, I’ll toss it over you to see what you have to add?

Matt:
Well, I could just say, “Hey, I agree with Andrew,” which I do most of the time. Everything Andrew said is 100% correct. Yes, vet them as if you were investing your own capital, and that’s how you should look at it. Above everything else, Philip, is look at this as if this were your money going into this other operator’s deal. Do what you would do if you were writing this check. Because in essence, the person investing is not investing in that deal. They’re investing in you. They’re coming to you to help them find a place to park their capital. They’re not so much like… They could just go to that operator direct. Why would they need to go through you? The reason why they have to go through you is because they trust you. They’re investing with Philip Hernandez in his network and his underwriting prowess and his market knowledge.
So do that. Go through and vet the market, find out why the market’s amazing. Don’t just listen to the syndicate or the operator or the organizer. Come up with your own homework as to why. Don’t just rely on the syndicator’s PDF documents that show financials. Get their real numbers in Excel. Underwrite the deal yourself. Get the rent roll and profit and loss statements from the current owner that they’re buying the property from and do your own analysis of the property. Maybe come up with your own vetting, your own underwriting, and stress test the deal, too. All these things are done by good LP investors that want to invest in a deal, and you need to act as if it’s your powder going into this deal, not your investors. That’s number one.
I could also offer you some thoughts, if you’re looking for it, on how you can protect yourself in raising money for someone else. Because my guess is you’re a great guy, I happen to know that, but you’re not doing this for a hobby. You’re doing this because you would like to get some sort of compensation in exchange for placing one of your investors in the deal, correct?

Philip:
Yeah, definitely.

Matt:
The problem is, and unless I’m wrong, you don’t hold a Series 7 license. You’re not a licensed securities equities broker, are you?

Philip:
Correct.

Matt:
So that operator can’t compensate you for raising capital because what you’re doing is you’re selling a security for them. I can’t cut you a check in dollars and equity that you raise in exchange for raising capital because that would be compensating you as an equity broker for selling a security, and you need a license to do that, which you don’t have. But rest assured, I got you covered.
The way that you do that is you become a member of the GP, the general partnership, as Andrew had said. Now, there’s a carve out there. You can’t just become a GP as a capital raiser. You need to have an active role in the company. A capital raiser’s job pretty much is over after the company gets formed. You know what I’m saying? It’s not like you need more capital forever. You raised the capital and the deal closes, and then you’re done. So what the SEC will want to see, if there’s ever scrutiny on the deal, and to be straight, not what your investor’s going to want to see, do you remain an active partner in the deal? So Phillip’s job does not end once the capital is raised because that gets you an active role in the company as an owner. If you’re an owner of a company, any size owner, you’re allowed to sell equity. You don’t need a securities license if you own a portion of the company. You follow me?

Philip:
Yeah.

Matt:
Now, you own a portion of the company, but you also need to do something more than just raising capital. So you could sit on the asset management team. You could, as we do at DeRosa for my company, what we do is we form a board of directors, and that board of directors has a voice. They have say. We do regular board of directors meetings. We keep minutes. We even are total dorks and do the Robert’s Rules of Order where there’s motions and seconds and ayes and that whole thing. So you can do all that as a board of directors with the capitol raisers having a regular voice on the company. If the operator’s willing to play ball with you and set things up that way, then that’s a great way for you to become a member of the GP, for you to have a say and have control, and also for you to become a member of the GP so that the main organizer can legally compensate you in whatever form or fashion you negotiate for yourself.

Philip:
So if it’s a smaller deal and if there’s three people on the deal, four people on the deal, Andrew, you said make sure that you have a certain level of control. What does that actually look like? Control as far as in the dispo or control…? What would I say, “Oh, this is how I want that to look?” as far as control?

Andrew:
Control in as much as possible. So you get to vote on, like you said, disposition, when/how, approval of price. You get to approve, does it get refinanced? Are you going to fire the property manager and hire a new one? You should have some input into that. You get input on whether or not to make large capital expenditures. Should they be held back, or should you go forward with them? You get to have input on, should distributions be made, or should they be held back to preserve the financial position of the property to get through potential rough times? So the more input you have, the better that is for your investors. Then also you’re going to learn more, too. Especially if you’re on the capital raising side, you’re not going to be spending as much time in operations. You’re going to learn more by doing that as well.

Matt:
What’s interesting Philip, is that you had talked about, this is only a small deal. There’s only three to four of you involved in this project, correct? I didn’t want to scare you or anybody else thinking about, “Oh, board of directors. Well, geez, Microsoft has a board of directors, but this is a little however many size deal. It doesn’t need a board of directors.” Well, yes and no. You don’t have to let terms like that scare you or anyone else. There’s just ways to operate real estate that involves a couple of partners. It involves private capital coming into the deal. Every partner having a say, as Andrew said, in the project is imperative. Every partner having a vote.
By the way, it doesn’t have to be what Phillip says goes. It just has to be Phillip has a vote, Philip has a voice. In all of these things, it’s typically a consensus or even a “Aye say aye, nay say nay” kind of thing to determine whether or not you take the offer, whether or not you decide to replace the roof. This is how semi-complex real estate happens. This could be a four-unit property or a 10-unit property, whatever it is. I don’t want people to view this as any more complex than it needs to be. This could be a very up and down, quick Zoom call that you just make record that the Zoom call happened. Maybe here and again, put yourself on an airplane, Philip, and go out and look at the property.
The last thing I’ll leave you with, and everybody else too, too many folks do real estate investing like this as a dabble. If you’re raising private capital for an operator, you should not raise capital for that operator unless you’re planning on doing it 10 times for their next 10 deals or maybe growing into your own thing eventually. But you shouldn’t dabble in raising capital for an operator. You should do it over and over and over again so that your brand gets attached to them so that people view you as a capital source for them, and it’s something you can do over and over and over again. It’s not something you can try on one time because a typical real estate project could last five years, and if the economy changes a bit, it could be a good bit longer than five years in these projects to take. So you got to make sure that you like working with these folks, and you want to do a lot more work with them.

Philip:
That’s great advice. Thank you guys so much. I really appreciate it.

Matt:
Philip, before you split man, I want to let you know, you were an awesome, awesome, awesome juggernaut in the Multifamily Bootcamp that we had in the one that we kicked off a few months ago, and I want to thank you for bringing the sauce you brought to that. It sounds like you’re doing just the same for the mentee program. I am really grateful to see you here. Saw you at BP Con. I love your vibe, love your energy even though you’re bundled up there in Los Angeles.

Philip:
Thank you. Appreciate it. Appreciate you guys.

Andrew:
All right, take care, Phil.

Matt:
Andrew, we got another question lined up here. I want to bring in… I got Danny, Danny Zapata. Danny, welcome to the BiggerPockets Podcast, man. How are you today?

Danny:
I’m doing excellent. Thank you for having me on.

Matt:
You are quite welcome. What is on your mind? How can Andrew and I brighten your day a bit? What is your real estate question you want to bring for Andrew and I to answer and for the masses to hear our thoughts on?

Danny:
Let me give you a little context. I’m a small multifamily investor currently, I have some properties in Sacramento, and I’m looking to take that next big step to scale. So it’s a really great opportunity to pick both of your brains here right now. The question I have is, besides differences in lending between small and larger multifamilies, what are some of the other things you looked out for when you’re scaling from less than five units to 10 to 20-unit properties?

Matt:
Well, I know, Andrew, you and I have friendly debates on which is better. Andrew got pretty much right into big multifamily real estate because he’s a superhero and he’s able to do that. Most commoners like myself have to climb their way up from five to 10-unit to 30 to 40 and scale up in that. Andrew, I know you have thoughts on this as well. But I’ll give you my thoughts briefly, Danny, in that the profit and loss statement’s still the same. There is still profit, and there’s still losses in that. There’s still income and expenses. So you’re still going to have an income stream.
But as you get into bigger and bigger deals, it perhaps becomes a few more income streams. Perhaps it’s not just rental income. Perhaps your P&L is going to show laundry fees and all kinds of other fun things like trash valet or charging the tenants for cable or other things that come in. So it gets more complex in the revenue side. Additionally, things like late fees and that. I got scrutinized for showing late fee as income on a four-unit property because you’re showing that as revenue. You’re kind of trying to stretch it. But guess what? On bigger multifamily, it becomes more common, and it becomes expected for that to be part of revenue.
Additionally, on the expense side, that can get very big on the expenses on multifamily, not big in the dollars but big in number of line items you may have. On a five-unit, what do you got? Real estate taxes, insurance, maintenance, maybe four or five other line items. For a larger multifamily property, you could have 30 or 40 line items on an expense sheet. You’ve got a big one that a lot of people on small multifamily don’t think about, and that is payroll. Here’s what that means. For a four-unit property that you own, give me a real-life example, Danny, of a small multi that you own right now.

Danny:
I have a fourplex in West Sacramento, a mix of two bedrooms and one studio.

Matt:
Who’s managing it?

Danny:
We have a property manager for that.

Matt:
You don’t write a W2 check to that property manager’s salary that collects your rent and runs that property for you, do you?

Danny:
Correct.

Matt:
For larger multifamily, you’ll see a property management fee, but you’re also going to see staffing charges. It’s a good and a bad thing because that means that you’ve got full-time personnel. The rule of thumb is somewhere over around 80 units a property can afford full-time personnel, and that’s awesome because that means that person’s career, their job is based on making your multifamily property meet its goals, correct? That could be a leasing agent, that could be a maintenance tech, those kinds of things. But you do not have those line items in your four-unit or in your 10-unit or in your 30-unit. It doesn’t have those things.
So you need to budget for full-time staff whose job it is to make that multifamily sing the song you want it to, leasing agents, perhaps larger properties may have a site manager. Larger properties may have multiple maintenance technicians whose job is to repair things that come up on the property big and small. That is far and away the line item that a lot of smaller investors, as I did, get surprised and say, “Oh, wow. I have to budget for that,” but also exciting. I now can give these people job descriptions and give them task lists and use software or whatever to help them fully optimize their positions in what they do and help that bring along my property. So it’s a good thing but you have to get a budget for it. Andrew, I know that you’ve thought of this, too. What other things do you see in the buckets on bigger multifamily that are maybe not in the buckets on small multifamily income expense-wise?

Andrew:
In your comments, so I jumped straight to 92 units because of one of the things you said is that the bigger properties will be able to support their own full-time staff because I was like, man, I don’t want to manage a 30-unit from out of state. That’s really difficult. You really mentioned quite a few of them and a lot of the really important ones.
Some of the other ones that are actually not necessarily line items on the P&L, but some of the other differences, Danny, one, keep in mind, bigger is mentally more daunting, but bigger is easier. It’s the same amount of work to take down a 10-unit as it is to take down a 100-unit. So my philosophy is go as big as you comfortably can. When I mean comfortable is without putting you or your investors at financial risk, but just don’t be scared by the fact that, “Well, it’s a 100 units. I’ve never done that yet.” If you’ve taken down a 10, you’ve taken down a 100. It’s just the amount of the finances, and it actually gets easier the bigger you go.
The other difference when you’re starting to scale from fourplexes to 10 units and 20 units is demographics become that much more important. If you have a fourplex and it’s in a market that’s flat or maybe even declining a little bit, it’s not that hard to fill a vacancy or two because you don’t need that many people to stay full. But if you’ve got a 20-unit and people are moving out of the area and you start getting two, three, four vacancies, it’s going to get harder and harder to keep that property full, and it’s less and less likely for rents to go up. So as you scale up, demographics becomes more and more important because you’re becoming a bigger fish in the pond. When you’re a fourplex in an MSA with a million people, you can kind of swim in your own direction and get away with it. As you collect 10 and 20, 30-unit properties, you’re a little bit more subject to the currents that are flowing around you.
Then also another thing to keep in mind when you get to 10 and 20 units is, if you buy a fourplex, let’s say you house hack it, you get an FHA loan, you move in, you get a vacancy, you probably have the reserve to cover that vacancy for a month or two or three. When you start going to 10 and 20 units, it’s a mental shift of, “No, I am not personally going to be able to cover all of these properties as I add them to my portfolio.” Because if you buy five 20 units, now you’re talking about 100 units. So you have to shift the mentality to really running them each as a business, and that means capitalizing it well upfront. Yeah, you’re not going to be able to float that $30,000 a month mortgage, but that’s okay because you brought an extra $250,000 to the table when you bought it and you set that as a reserve account. So those are also some of the differences that I would keep in mind as you shift from smaller fourplexes to 10, 20, and then on up from there.

Danny:
That’s a great perspective because I’ve always kind of looked at the larger scale in terms of if you have 20 plus units, one vacancy doesn’t hurt you nearly as much as a small multifamily, but at the same time you got to consider all those other things and declining areas and demographics that can affect you and make it super hard to fill and keep it that way.

Matt:
It’s a double-edged sword, Danny. Meaning, it can be very difficult to take a larger property and bring… I’ve brought a 200-unit from 30% occupancy up to 95% occupancy, and I can tell you that was a grind. That’s where I got most of my gray hair. It was tough. Because each time you lease one unit, well, great, that’s a half a percent occupancy. You just move the needle. Whereas you lease an apartment on a four-unit, that’s 25% occupancy, and you just moved the needle. Leasing one apartment could take you from from being in the red into the black. You might have to lease 30, 40, 50-units in a larger multifamily to really make significant cash flow differences.
The good side is that properties like that can take a bit of a hit from the market with regards to occupancy, maybe 5%, whatever. It’s not going to put you underwater. So you lose a couple of apartments, it’s not the end of the world. Your budget is going to have vacancy baked into it. Whereas for a four-unit, you’re either vacant or you’re not. You’re either 75% occupied or you’re 100% occupied. Whereas for a 100-unit apartment building, you could be 85% occupied and be doing okay. Other questions, other thoughts, Danny? What other light can we shine for you here?

Danny:
That’s great. Thank you. As I mentioned, I have a few small multi-families that they do okay cash flow-wise, and I’ve actually budgeted some of that stuff that you’ve talked about in terms of the larger units and keeping accounts for vacancy and different line items there. But what I understand, I’ve gotten some good advice or some interesting advice recently around balancing cash-flowing versus appreciating properties. So I’d like to get your advice on, how do you balance those? Because you know have cash-flow properties that kind of pay the bills. Then you may invest in appreciating properties where you see a lot of potential, but they may not necessarily pay the bills or barely break even. Is there kind of a calculus that you do in terms of how much of each you have in your portfolio?

Andrew:
Danny, I can jump in. I’ve got a few thoughts on that. I know David talks a lot about this kind of thing on the podcast as well. It changes when you move from the smaller stuff into the bigger stuff. Number one, it also changes with the market. David’s talked about a lot of times he would buy stuff the last few years with almost sometimes negative cash flow because he knows in three or four years it’s going to be worth a lot more. That was a great multifamily strategy for the last seven years as well. You could buy a value add that had negative cash flow, get it fixed up nice. Like Matt was saying, he took something from 30% to 95% occupied. Well, it was negative cash flow at 30%, but it probably was cash-flowing pretty well and worth a lot more at 95%.
We’re in a different part of the market. If you’re looking at, again, a 10-unit, 20-unit, I would stick with something that at least cash-flows so that, in a worst case scenario, if the market shifts against you or the rent doesn’t grow or you can’t exit or you can’t execute your value add yet or whatever your business plan is, your worst-case scenario is you hold it and you wait. We are at a point now where the greater focus is hedging against downside risk. Then once that’s hedged, now you focus on, what can I do for upside?
The other beautiful thing about multifamily compared to single family is with single family you really are at the whim of the market. It’s the sales comps. With multifamily, if you are a good operator, you can execute a plan that increases net operating income, and you can force value increase of that property by increasing the net operating income. For me, if I’m looking at a 10-unit property, the current cash flow is important in terms of hedging downside risk and then future cash flow by executing a business plan and buying in the right markets. That is important in terms of creating equity. So with multifamily, you really can have the best of both worlds. You don’t have to say, “Well, I’m going to get no cash flow just so I can get appreciation.” The multifamily, to me, is one of the best investments out there because you can do both.
Also take a global view. Can you carry it personally or within your business? We talked a minute ago about, if I’ve got a 20-unit and I got one vacancy, that’s probably not going to affect me. That’s correct, and, again, that’s one of the advantages. If you’re going to buy a 20-unit that’s almost completely vacant, how are you going to cover that until it is not vacant? Can do it personally? Are you going to raise a big interest reserve upfront before you buy it? There are ways to mitigate that, but just make sure that you have it covered. In today’s market environment, factor that in much more than we have the last five to seven years.
Just as a quick recap, my approach is to try to get both, cash flow and then be able to force appreciation. If you forego the cash flow, to try to get even more appreciation. Make sure you bring lots of reserves to the table, whether it’s yours, whether it’s investors, whether it’s partners, to carry you through that period and get you out to the other side. Matt, you got anything else you want to add?

Matt:
Yeah, man. I’ll throw just… Andrew, you and I are both old enough to be able to say we both invested in 2007/2008 when the bottom fell out. I do not believe that’s what’s going to happen again to the market, but I do certainly believe the market’s going to change. It’s going to go somewhere in 2023, and I would not be banking on appreciation. Appreciation has made a lot of people look like geniuses over the last 10 years, but really what they did was they picked the right markets and they made a lot of money on appreciation that they had no control over. Meaning, just cap rates went down, property values went up, certain markets blew up off the charts. A lot of people have made a lot of money on activities that they had no real control over, but they’re able to tout that they did. So I think you’re going to see a shift.
Personally today, just given what I learned in 2007/2008, cash flow is king, and I think it’ll become more king over the next couple of years. The properties that I owned in 2007/2008 did just fine during that recession if they were cash-flowing. The properties that were cash-flowing, they might not have been worth what I paid for a year or two ago. But if they were cash-flowing, you can weather the storm. You’re not just having to throw money at them to keep them going. Personally, my investment strategy would be invest in nothing that doesn’t cash-flow the very first day that I own it. I’m not doing negative appreciation stuff. I don’t judge anybody that does. That’s just not our strategy. I would be investing in cash flow because cash flow gives you time. Cash flow will give you time to hold it for a while, and cash flow with fixed interest rate debt will give you time to hold it. If things get funky in the market for a little bit, just keep cash-flowing it until you can sell at some point in the near future.
At this point, buying a property with a goal of appreciation to meet your long-term investment goals for yourself or for your investors is really investing in something you can’t control. Yeah, you can push a forced appreciation by increasing rents, by increasing NOI on the property. But the other factor in forced appreciation is cap rate, and cap rate is how a property gets valued. NOI divided by that cap rate is the value at the time. So if cap rates expand a bit, if interest rates stay high for a while, cap rates may start going up. The multifamily that was worth X today could be worth X minus 10% a year or two from now if cap rates continue to stay… if cap rates come up and investors aren’t able to pay for properties what they’re able to pay today. I can’t control what cap rates do. I can’t control NOI. I can control the way I operate my property in that. So I’m investing 100% in the things I can control over the next couple of years. I’ve got no faith in the market taking me to the promised land anymore.

Andrew:
I concur with Matt. Personally, I don’t buy negative cash flow anymore. We did that in the beginning. I don’t do it anymore. I think 2023, a lot of the, let’s say, motivated sellers are going to be people who bought in the last year or two and don’t have the cash flow they need to hold onto the property unfortunately.

Matt:
I 100% concur. Again, I don’t think a bubble’s going to burst, the bottom’s going to drop out. But I do think you’re going to see properties on the market for people that, as Andrew said, they just need to get out just to stop the bleeding or whatever it may be.

Danny:
Quick follow up here. It’s really interesting you mentioned how the market’s changing and you have all these folks who have properties which don’t cash-flow, which may present an opportunity for investors who want to get more in the market. Then you both mentioned, “We don’t want to invest in things or don’t want to invest in things where it doesn’t cash-flow on day one.”
I also live in California, which has some really interesting tenant laws, pretty restrictive. So I look at some of these properties, and from my experience from the smaller ones, the tenants that you acquire the property with aren’t always the ones that you want to keep long term when you reposition. So from that perspective, I’ve been thinking lower occupancy is actually better because it helps you accelerate the repositioning. But if I’m listening to you folks correctly, it’s not an ideal for this kind of market situation. So maybe get a couple thoughts on that.

Matt:
I’ll throw quick thoughts on that one, Andrew. Remember, Danny, when I talk about negative cash flow properties or properties aren’t performing, occupancy, you can solve. Again, we’ve got into a property that was performing economically at 30%. I probably would do that deal again today, I would, because if a deal gets brought to market, and whatever market rate occupancy is, 90, 95%, and it’s still lean on cash flow, that’s not a good deal. But if I can do what I can control, I can lease up, I can run leasing specials, I can put in beautiful kitchens and beautiful bathrooms and those kinds of things, and I can do what I can control to get a property to cash flow, I’m all in. If you’re talking about a property that’s maybe 70% occupied in a market where there’s a lot of rent control and those kinds of things, that’s perhaps an opportunity where the other 20% of units you can put back on the market, you can put back on at market, I like that. Andrew, what do you think, 60%, 75% occupied property in today’s market?

Andrew:
Again, just make sure you can cover it and make sure you can cover it for longer than you would’ve planned last year or the year before. There is opportunity there. There’s just greater risk. Risk, there’s ways to mitigate it, and if you’re going to take on that risk, just make sure you’re doing that.

Matt:
Danny, this has been an awesome conversation and hopefully relatable to everyone here. I appreciate you, man. Thanks for coming on the show today.

Andrew:
Good talking with you, Danny.

Danny:
All right, thank you very much.

Different people have different comfort levels with risk-taking. Some are willing to jump out of an airplane just for the thrill of the adventure, while others may push themselves by reaching out to make a new friend. When it comes to entrepreneurship, your comfort level with risk may not necessarily prevent you from aspiring to be a business owner, but it can affect your success once you become one.

Business owners take risks every day, so those who may be more risk averse by nature may struggle to grow if they aren’t willing to take a chance every once in a while. Here, eight members of Young Entrepreneur Council offer their guidance on how risk-averse entrepreneurs can get more comfortable taking risks and why doing so is important to their long-term success.

1. Assess Risk From Both Emotional And Data-Based Perspectives

Nothing is black and white once it’s measured. Risk can be assessed from two primary perspectives: emotional or data-based. Emotional risk assessment involves considering subjective feelings or perceptions of risk and quantifying them to your best ability. Data-based risk assessment, on the other hand, involves using data and statistical analysis to quantitatively evaluate the likelihood and potential impact of an action or inaction. While the latter is more objective, having both measured in a spreadsheet in front of you will make it easier for your brain to differentiate the two, make better decisions and overcome any internal resistance. As a leader, you following this method will also help others overcome their fears without discounting the real human elements of decision-making. – Benji Rabhan, Aboutly

2. Leverage ‘Fear Testing’ And ‘Dream Testing’

Being a risk-averse entrepreneur is challenging. Being an entrepreneur in and of itself is a risk. I like the method of “fear testing” and “dream testing.” Fear testing is when you write down in the most vivid way you can the worst-case scenario and your battle plan for it. Dream testing is when you write about the best-possible-case scenario if you take your risk. Most entrepreneurs have enough optimism to realize that the promise of the dream is more powerful than the risk of the fear. You are smart enough to right the ship if it capsizes. You are capable enough to handle a worst-case scenario. Bet on yourself and take the leap. – Tyler Bray, TK Trailer Parts

3. Start By Taking Baby Steps

As an entrepreneur, you have to be open to taking calculated risks. If you are not willing to take calculated risks, then you will never reach your full potential or reach your business goals. So, one way to get more comfortable with risk overall is by taking baby steps. It’s best to start with small risks and work your way up from there. – Kristin Kimberly Marquet, Marquet Media, LLC

4. Push Yourself Personally Before Professionally

Learn to take risks personally first, then professionally. The more comfortable you become doing things outside the norm of your life comfort zone, the more you’ll learn to test the boundaries of your work comfort zone. Book a one-way ticket somewhere with no itinerary and figure it out. Go skydiving or climb a big mountain. Even just go to a movie alone. Push yourself personally to do what you would normally be afraid to do. When those uncomfortable things become your new normal, that will trickle into how you think about and operate in business. – Jonathan Ronzio, Trainual

5. Set Up A System Of Rewards And Consequences

I would suggest risk-averse entrepreneurs set up a system of rewards and consequences. This means setting measurable goals that, if achieved, will be rewarded, and if not, will incur some consequence. This system allows entrepreneurs to have a more precise measure of risk, as rewards and consequences provide tangible outcomes to observe the results of any decisions made. Entrepreneurs can use this system to learn from their mistakes and make better decisions in the future. Taking risks involves trying new methods, exploring new markets and pushing boundaries to drive innovation. Identifying and acting on opportunities is necessary if a business is to succeed in today’s competitive business environment. Taking risks is also a way to stay ahead of competitors and remain flexible and adaptive. – Jay Dahal, Machnet

6. Seek Out Networks Of Support

Seek out mentors and networks of other successful business owners who can provide support, guidance and advice. This is especially important for women in business and owners from under-resourced and LGBTQIA+ communities who may face additional challenges, such as discrimination and lack of access to capital, that can make it difficult for them to take risks. By building a supportive network of mentors and peers, business owners can become more confident, gain access to valuable resources and funding and obtain crucial advice and support that can help them navigate these challenges and flourish outside their comfort zone. Risk paralysis prevents us from attaining our highest levels of success, and with the right people around you, you can become comfortable with being uncomfortable. – Lauren Marsicano, Marsicano + Leyva PLLC

7. Shift Your Mindset Around Failure

Don’t take anything too personally. The biggest psychological turnoff for a would-be entrepreneur who’s risk averse is the fear of failure. However, if you shift your mindset to focus on failure being a learning opportunity rather than a personal setback, you won’t fear it as much. Because of that, you won’t fear risk so much. With great risk comes great reward after all, so get used to it. – Andy Karuza, NachoNacho

8. Understand How Risk Taking Differs From Making Bad Choices

Taking risks and making bad choices are not synonymous. If you’re risk-averse, the good news is that you can take calculated risks without feeling haphazard or close to failure. To become more comfortable taking risks, weighing out all possible situations and the pros and cons of the risk is crucial. By doing so, you can assess whether taking a chance is worth it. Ultimately, being a business leader is about taking risks, as there is no guaranteed success when leading a business. However, by approaching risk-taking in a controlled, calculated manner, you can mitigate the downside of taking risks and become more comfortable. – Jared Weitz, United Capital Source Inc.

Dave:
Hey, everyone. Welcome to On the Market. I’m your host, Dave Meyer, joined by Jamil Damji, who looks like he’s in a very dark and very… I don’t even know where… Where are you?

Jamil:
I’m in a penthouse in The Mirage in Las Vegas. For any of you that right now are shaking your head, or feeling like that’s very boujee, it is, but let me-

Dave:
It is.

Jamil:
Let me very quickly qualify the boujeeness of it. Pace was also in the penthouse in the Mirage. We’re both speaking here at a summit. However, his costs $1,000 a night, and mine was $200 a night, because I slipped the front desk girl a $50 bill, and asked her if there was any upgrades.

Dave:
That’s all it took?

Jamil:
That was it.

Dave:
Wow. Good tip from Jamil. That’s awesome. Well, nothing beats… It’s so dark where you are. Nothing beats the blackout shades available in Las Vegas. They know that you need to be able to sleep at any time of day, and it looks very comfy for you.

Jamil:
The blackout shades are a double-edged sword, because they are also called podcast killers.

Dave:
Did you have a rough night last night?

Jamil:
Not a rough night, just… It’s Vegas, man, all the things.

Dave:
It’s so much fun. All right, well, we’ve got a fun thing as well to talk about today. We have Craig O’Boyle, who’s joining us to talk about assumable mortgages, which I honestly… I sometimes just group a lot of creative finance together in my head, and it’s so helpful to really understand the differences and nuances between different types of creative financing. Honestly, I didn’t really know that there was a big difference between generalized assumable mortgages and sub two, which I know your buddy Pace is a big proponent of, but I learned a lot. Did you?

Jamil:
Man, the entire time, I’m sitting here thinking, “I don’t think Craig understands just how…” or he does, but he… I mean, I want to help Craig. I want to help Craig so much just shout about this from the rooftops, because this is one of those moments where I say, “O’Boyle, O’Boyle, O’Boyle.”

Dave:
You just can’t wait to blow this thing up.

Jamil:
I think that there’s a massive opportunity here, and I think that if marketed correctly, and if you educate agents in the right way, we could start creating more activity in the real estate market and so many homes that are sitting on the market stale with trade.

Dave:
Totally. That makes a lot of sense. Well, let’s just get into it then. We’re going to welcome on Craig O’Boyle, who’s visiting us and joining from Assumption Solutions. But first, we’re going to take a quick break.
Craig O’Boyle, welcome to On the Market. Thanks so much for being here.

Craig:
Thanks for having me.

Dave:
Can you tell our audience a little bit about yourself? Who are you, and what is your expertise related to real estate investing?

Craig:
Well, I got licensed in the real estate business as a real estate broker in October of 1995. I was 19 years old, so I’ve been in a little over 27 years. I guess the reason you have me here today though is during that time, I’ve sat at many closing table with buyers, and the topic of the assumability of certain mortgages would come up. It hadn’t made sense for a very long time, because rates have been dropping. About early to mid 2022, we went through a pretty big shift in the rate climate, and I started Assumption Solutions with a partner to help people understand and complete mortgage assumptions.

Dave:
All right. Well, very timely of you. Let’s just start at the top. What is an assumable mortgage?

Craig:
An assumable mortgage is the… Well, the only assumable mortgages that exist are government-backed mortgages. FHA, VA, and USDA mortgages can be assumed. What that means is when you purchase a property, instead of getting a new mortgage, you take over the existing mortgage at the existing rate and term that are in place. That was something that hasn’t really existed in the marketplace since the late ’80s, early 1990s. That’s because rates have effectively been dropping during that entire time. We’re now in a climate where rates have effectively doubled in just a few short months, and it makes sense.
The ones that used to be around used to have what they called non-qualifying assumables, which a non-qualifying assumable is just like what it sounds like. Anybody basically could say, “I want to take that over, jump in, and become responsible for it.” Those are all gone. Now, the only assumable mortgages are qualifying assumables, meaning you have to meet the criteria of the mortgage when it was taken out and put in place. We’re here to help people process those in transactions.

Jamil:
Essentially, what we’re talking about is a creative solution to purchasing a property, but by doing it by the book. We’re actually going to notify the bank. We’re going to let the bank… We’re going to say, “Hey, guys, I’m taking over this property. I’m not doing it subject to… I’m actually going to take over this property. I’m going to qualify for the mortgage so that this due on sale gorilla that for me is the biggest problem in subject two is appeased and fed.” Is that essentially, Craig, the way that the audience should interpret this concept of assumable mortgage?

Craig:
Technically, this is… Unless it’s some private financing or something, this is really the only legal option out there for taking over mortgage. When you take it over, it completely releases the seller and original note holder from liability and responsibility, and transfers it to the new buyer.

Jamil:
How likely is the bank to say yes?

Craig:
Well, so in our processing of this right now, the biggest challenge that we face is the servicers really don’t even understand it themselves. They haven’t been doing these. They don’t have departments for these, so we find that we are actually doing quite a bit of education on their side. We see them putting out information that is patently false and incorrect often to both the owner of the curb property, and the potential buyer of the property. So, in processing these, we’re trying to educate them because we actually see a lot of potential liability to servicers for putting out wrong information to people.
Because if you basically tell a guy who’s got a deal, “Oh, this can’t be done,” even though it’s part of the program that was put in place by VA, FHA, USDA as a benefit to those buyers, you tell them it can’t be done, and then they can’t sell their property, or they lose money. Well, I could see an attorney coming along at some point, and filing some lawsuit against them. We’re trying to straighten that out. We’re using a lot of resources that these government organizations actually have out there about how it should work, but it’s a challenge. There’s a lot of craziness out in this right now because it’s new.

Dave:
Craig, just so I fully understand this, assuming a mortgage is basically when the buyer takes over the existing mortgage of the seller. There’s two ways to do that. One is subject two, but the problem, as Jamil pointed out, with subject two is that it’s not necessarily with the bank’s blessing. There’s this clause in most mortgages called the due on sale clause, where basically if the bank catches wind of what’s happened, and for whatever reason decide they want to say, “You owe me all the loan balance,” they can do that. That is within their rights.
Then what you’re doing with these qualifying assumable mortgages is all above board, and so it’s just… It’s like subject two, but it’s a little bit less risky. Is that the appeal above subject two?

Craig:
Well, if you’re the seller of the property, it’s the best thing you can do if you do it. Now, the challenge is if you’ve got a conventional loan, you don’t have the option. If you don’t want to get rid of that existing note on a conventional scenario, then I guess your only option is subject two. But if you’re the seller of the property, and you can sell it, and you can no longer be on that note, it’s a huge benefit. Because if you’re going on in the future to buy something, it’s not going to show up on your credit, on your DTI, or any of those issues, because you have been released.
Not to mention the issue with if the guy that you let take it over has a shady nature, or doesn’t come through on making those payments, and it goes to foreclosure, well, that loss is coming on you, because you’re still on the hook On that note as far as the lender’s concerned,

Dave:
Craig, that’s a great point. As an investor, you often think of the implications as the buyer. But as a seller too, it obviously makes more sense.

Jamil:
What’s interesting is in Canada, which is where I began my journey in real estate investing, they have actually outlawed assumable mortgages. The reason for it is because the banks and the government in Canada have a very, very close relationship. So, it’s safe to say that in the long-term scheme of the bank’s interest, this doesn’t meet the top of the pile. Given that, who are the advocates, or who are the processors for the assumable mortgage? Because I could guarantee that the bank is not going to put out a person, and they’re not going to lend you a loan originator to help with this process, especially if we’re talking about assuming a mortgage that’s 3.5%, where right now, they’re making money hand over fist at six or seven.
What does that process look like, and what army of people do you need to bring to the closing table in order to process and actually create this situation from start to finish?

Craig:
Sure. You’re right, there’s low motivation on the servicer side. The people that approve these existing mortgage servicer is the one who ultimately has to qualify, receive the packet, and process this. Their motivation is not high. A lot of people that we work with and train are real estate agents, because they are on the front lines with clients who have these marketable assets that they’re trying to sell. So, we educate them about the process, and then when they have a deal, where the buyer and the seller’s going to do it, we onboard it, and we process it. We deal directly with the servicer.
A lot of the agents are out there going to mortgage brokers to try and get information. Mortgage brokers, mortgage bankers, loan originators, they have zero interest in being involved in these, because they don’t make any money. It’s for sale by owners with real estate agents. You’re generally not part of the equation.

Jamil:
Who’s going to get greased to make this happen? Essentially, what I’m trying to understand is do I got to pay the loan originator? Do I got to… Do I need to make sure that the real estate agent makes their commission?

Craig:
Well, you do pay us as at Assumption Solutions. We charge a fee to both the buyer and seller to get a completed assumption. The servicers do have the right to collect a fee for processing these. We’re finding that truthfully, on average, they’re somewhere between $1,000 and $2,000. That’s a lot less than a loan originator would collect at a new origination, so it’s lower. It’s not as much motivation, but our company is born out of something my partner did in the last downturn, where he created a company that effectively processed short sales on behalf of a buyer and seller to make a real estate agent’s life easier to get more deals done, and dealt with the servicers to get short sales done.
Now, this is a lot less of a pain point than that. They were getting those done, but I mean, the servicers in those cases, it was like, “How do we limit our loss?” At least in this scenario, it’s like, “We can make a little money. We keep a loan that’s on the books going forward,” but they’re not originating a new loan at double the interest rate, so not a ton of motivation. I think that’s a little bit behind the fact that they don’t have the process in place and the staff in place, and even the knowledge base that is in place to do these right yet.
We are trying to shorten that curve, and make it simpler, but it’s a process that takes, once you start it, anywhere from 60 to 90 days. Now, the short sale process when it was in the heyday, I mean, it could take six to 12 months. We think it’s still better than that timeframe.

Dave:
Because it takes 60 to 90 days, is the type of seller and therefore the type of property that you see go through these transactions, are there unique characteristics about it? Are these distressed properties, or is there something unique about them?

Craig:
You’re actually not going to be able to complete one on a distressed property.

Dave:
Oh, because it doesn’t qualify?

Craig:
If the loan is not current, it’s very unlikely that the servicer will allow it to be assumed. There’s important things that your listeners should know, especially since you guys are all about the investment side of the world. The only people who can qualify to assume these mortgages are owner occupants. So if you’re coming at this from an investment standpoint, you probably need to be looking at, “I’m going to be an investor who occupies and then turns around and goes to an investment down the road after a significant period of time so that that loan is taken over by you as an owner occupant.”

Jamil:
I think the main concept here is that the banks are wanting to make sure that there’s not a straw buyer situation, or you’re not the straw buyer, and saying, “I’m going to live in this.” Then seven months or 10 months or a year down the road, you say, “I changed my mind.”

Craig:
Well, with regards to a lot of those loans, number one, it’s about intent. It’s hard to put a timeframe on intent, but if you are in there for 30 days, and then it’s a rental, I think you could be in some trouble, but a year. I mean, just talking about VA loans benefit to a veteran. Veterans transfer all the time around the country with their orders, so it’s very common to see a guy get a house, VA loan, and then the army sends him somewhere 6, 9, 12, 18 months later, and it turns into a rental. Matter of fact, in my career, I’ve helped several people.
Gosh, I remember dealing with a gal who she was retiring. She was stationed in the Pentagon, and she was liquidating 10 or 12 homes around the country that she had bought everywhere she went, and was netting out a couple million dollars. This was back in probably the early 2000s. The key with regards to assuming is intent, and if your intent is not to occupy that property when you take it over, then you’re in trouble with loan fraud.

Dave:
Well, would this work with any residential mortgage? Could you do this with a duplex or a quadplex, for example, live in one unit, and live in the others?

Craig:
Let’s take FHA, specifically. FHA, you can do multi-family properties up to one to four units, where you live in one, and rent the others out. I actually connected with a gentleman in the Bigger podcast’s… Is it chat area or something in there who had some questions, because he had a property in Miami that he bought it, lived in. It was a fourplex, lived in it and was looking to sell it, and was getting a lot of people interest when they put it on the market, and mentioned that it was assumable. The challenge is all the people that were coming at them, nobody wanted to live in one of the units.
I said, “I look at it this way. When you’re marketing something to sell, it’s one more asset to the property, because when I put a home for sale, I’m marketing all the assets about it.” I’m marketing if it’s got updates like a new kitchen, if it’s got a great lot, if it’s got a great view, and I’m marketing if it’s got an assumed mortgage. It doesn’t mean it’ll sell that way, but it’s one more asset to market when you’re selling something. If you’re buying something, and if you can go that route, why not jump on it and save?
I mean, if you look at rates, your average $400,000 mortgage… I think in November of 2021, the rates were about 3.1%. By November of 2022, they’re about seven-ish, right? The difference in payment is $953 a month.

Jamil:
Over the life of the mortgage, Craig, what I want to really understand and impart to the listeners right now is what is the value of the note, and can I create an opportunity for me as a homeowner? Because you’ve been using some very interesting language when you call the note the asset, because he’s talking about, “I’ve got a renovated kitchen. I’ve got a renovated bathroom.” These are all things that add or force appreciation to a deal. You’ve got 3.5% mortgage attached to your property. Right now, the market says seven. So over the life of this mortgage, there’s a possibility of that gap costing hundreds of thousands of dollars.
So, what is the value, and how much could a homeowner add to their situation by saying, “Look, I’ve got this beautiful asset that I’m going to allow you to take over or assume the language is beautiful. Assume in this sale, but I want this amount of money as a premium in order to allow you to do it.” What’s the value of this asset, Craig? I think that there’s a lot of people right now. The bells are ringing in their minds, because essentially, the retail real estate market is slowed substantially. If you’re a seller right now, and you’ve got an assumable mortgage, now, you’ve got this gorgeous, beautiful essential asset that you can sell to the world.
What is the value of this, and can you rightfully market it in your listing verbiage?

Craig:
That’s a great question. I think the value of the asset increases the more people know about it, understand it. Right now, when I talk to people, my point is that if you’ve got two homes next to each other, and they’re all the same condition, they got the same lot. They got the same view. One’s got this conventional non-assumable loan on it. One’s got this VA or FHA assumable loan on it. Which one should sell for more? In theory, it should be the assumable, because like I said, at 400, you save $900 a month. Although I’m not sure it’s easy to quantify it just that you should list your home higher.
In the market that we’re in, I look at it as you might just be able to sell faster. That means if you can sell faster, technically, you probably sell for more. Because if your home has been on the market for 60, 90, 180 days, you’re likely chipping away at your list price over time. Now, the more this spreads, and the more people start hunting it, the more they sell faster, or you’re able to say, “Now, we can sell these for more, because they’re out there,” but there are a couple other things that make this process a little bit complicated that it is also a reason for me. It’s difficult to say that yes, it’s worth more.
Let’s talk about what we call the assumption gap. You have the purchase price at 500, and you have a mortgage that exists on the property of 450. We call the difference between those two your assumption gap, which is effectively what you look at as your down payment. The big question that I get from everybody is, “Can you finance that?” Well, there’s no guideline with the government organizations that you can’t get secondary financing, but what we have found is, number one, good luck finding a lender that’s looking to jump into a second mortgage position in the climate that we’re in.
Then number two, if you are able to find it, it’s up to the servicer who’s approving the assumption whether or not they’ll allow it. Everyone we’ve been involved with has been a cash down payment to cover the gap. Is there an opportunity there for a second, whether it’s an owner carry, whether it’s all these other things? Potentially, but we’re not out there telling people that that is an easy thing to accomplish, because we haven’t seen it done yet. So, when you have that gap, it does limit the pool a little bit, so you don’t have as many buyers.
Even though you have this asset to sell, you don’t have as many buyers, because if you think of a traditional VA, FHA loan, they’re designed to be low down payment entry points for buyers, for people that use them. Now, what I’m finding is a lot of the people that are going through these, they’re what I call the move-up person, right? They’re selling something. They’re coming out of something. They’re jumping into these products, because of the savings and because of the long-term makes sense. I mean, we’ve even seen…
The best one I’ve seen, the one that interests me the most that we’ve processed that I’m seeing is we have a loan that somebody’s taken over that’s 15 years old. That means it’s half paid down. It’s a low rate. It’s low below what you could get today, but I just love the fact, and the gap is half a million dollars, but I love the fact that a mortgage amortization, it’s so front loaded in interest. Guys jumping in at a low rate, where most of the interest on the loan has been paid. I love it

Jamil:
I mean, essentially, you’re at one of those very unicorn-type situations where you’re paying down primarily principle at this point. If you’re halfway through, and, like you said, the amortization schedule, if you look at any of that, and if you look at the way that those loans are front loaded, it’s sickening. You realize just how much money you’ve burnt.

Craig:
Well, they know most people sell within five to 10 years.

Jamil:
I mean, you essentially are a renter for the first 10 years of a house on a purchase. This is just incredibly timely and what a wonderful way to provide a solution for people to, a, sell their property, and b, as buyers come in and get financing, that is just unavailable.

Dave:
Craig, I’m curious. If you are a buyer who’s willing to meet these conditions, owner occupy… In the BiggerPockets world, we call an owner-occupied investment house hacking. So if you’re willing to do a house hack, how do you look for this? I get that you’re saying that it’s up to the buyer, excuse me, the seller and the seller’s agent to market it. But if I am bought in and want to find one of these, what’s the best way to do that?

Craig:
Our efforts and training with real estate agents, number one, we’re training people how to expose this asset that they’re marketing. In Colorado, Colorado Springs specifically where I’m located, our MLS system has input fields for this, where you can input one that’s an assumable loan, and then details about the loan, the PITI payment, the loan balance, the type of loan, all that kind of stuff. Nobody has used those fields in our MLS forever, so they don’t even know that. A lot of the agents don’t even know… I mean, most of the agents in the country have been licensed less than 10 years, truthfully.
So, we’re teaching them how to put that in there, how to get it marketed. Unfortunately, a lot of the MLS systems don’t pump that section of data out to public fields. I can build a client a search when they’re looking for a property in our MLS system, and it emails them stuff that meets that criteria. So if you’re looking for X, I can send it to you, but then you’d probably have to talk to me to see it, because the visualization of that criteria is not on my client’s side, unfortunately. I’d love to see some changes in that. We’re working on a lot of areas of contact for getting that out there.
Let’s just talk about finding stuff that maybe isn’t on the market that has this potentially. Because we’re training agents to grow their business by finding those, there’s a lot of data harvesting mailing list things that you can scrub for when things sold, what type of loans they have on them. All that kind of thing is out there. But in our local market, because we’ve done so much training, we’re probably the most robust with this in the country. I keep a search open. I can see every day a couple more assumable loans on the market, because in Colorado Springs, we have a huge military presence with multiple military bases here.
Between March of 2020 and March of 2022, we had 14,000 VA loans alone in our county, either originated or refinanced, which means their rates are most likely below 3.5%, some as low as two and a quarter, and that’s one county. So, there’s a ton out there. These products make up approximately, depending on your location, between 20% and 30% of the marketplace. The more military related your community or your area is, obviously, the more you have because of VA there, but USDA, I think, is it’s more of a rural product, and it’s about 1% of the market.
Then FHA can be used by anybody out there. So finding them, you really need to hunt down somebody who has access to real estate listings, but also who knows this product. Like I said, we’re doing education on this all over the country with agents, because we can process these anywhere in the country.

Dave:
That’s super helpful advice,

Jamil:
Very helpful. My mind is just full of so many opportunities that derive from, a, awareness of the availability of your note having this clause in it, and secondly, being able to execute on that. How does somebody in a reasonable way find out whether or not their mortgage is assumable?

Craig:
Well, it’s very obvious if you’re a veteran, and you took out a VA loan, right? Veterans know their benefits. If you were a first time home buyer, and you did a low downpayment program such as 3.5%, you’re most likely FHA. Now, if you don’t remember what you have, usually, you can go to something like a title company, and run an ownership encumbrance report, which will show you the debts filed against your property. VA and FHA are pretty clear on their deed of trust that they’re VA and FHA all over them. USDA, I mean, same. USDA and FHA are almost identical, so same thing there.
If you used a conventional product, and your downpayment when you bought your home was over 3.5%, most likely, it’s not assumable. Now, I do want to jump in with one thing that is important to talk about with VA loans. VA is a veteran benefit. It’s only a loan product that is available to a veteran when they take it out new. However, VA can be assumed by a non-veteran, but there’s something that’s important to know with that. VA’s process for giving loans is determining the level of eligibility that a veteran has available to them.
So, it’s like… You could do it on VA’s website, but it’s complicated, so I can’t… It’s not a dollar amount. That’s not true. It’s hard to say. There is a cap, but your eligibility’s it’s regional based. It’s got a lot of factors to it. But if you let another veteran assume your VA loan, not only are you released from the liability in the assumption, but your eligibility is released as well. Meaning, you can take 100% of your eligibility to get another VA loan in the future. If you go veteran to non-veteran, the eligibility portion that you used in that loan is stuck to that loan until it’s gone.
We see scenarios where for some veterans, they won’t do anything except veteran to veteran assumptions. However, we see some scenarios where it makes sense. The veteran’s just like, “I don’t care.” The big one I talked about, where it’s 15-year old note, the person selling that home is rather up an age. They’re getting a lot of equity out of the house. They’re actually… I believe they’re downgrading in what they’re going into, so they didn’t need to use a VA loan again. We’ve seen scenarios where some veterans are like, “I just need out of the house. I just want it sold. Whatever sells it first, I don’t care. I’m still getting equity, so I’ll go get a conventional loan in the future.”
There is a caveat to that. With the FHA, USDA, there’s no eligibility issues there at all.

Dave:
Awesome. That’s great. Well, Craig, this has been super helpful. I’m curious, do you have any other tips for our listeners just when it comes to assumable mortgage or just navigating the loan climate in 2023 before we get out of here?

Craig:
I mean, the best tip I can have if you want to assume something is it’s really good to have your penny saved up, either you’re coming out of a property, and you’ve got cash to put down, or you’ve been banking some money away. If you’re looking to buy something, why not capitalize on that low rate? That’s probably never going to come back. I mean, unless the government is foolish enough to think that just printing money is a great thing, hopefully they’ve learned their lesson on that. I don’t know. We’ll see.
But if you’ve got some assets, or you’ve got some cash saved, and you’re looking to get into something as cheap as possible that down the road maybe it makes the sense to turn into a rental, well, it’ll cash flow a heck of a lot better with a two and a quarter rate than it will with a six and a quarter rate.

Dave:
All right. Well, that’s great advice. Craig, thank you so much for joining us. For people who want to learn more about you or potentially work with you and your company, where should they contact you?

Craig:
Our company is Assumption Solutions. Our website is assumptionsolutions.com. We have lots of training. We have lots of info. We have lots of stuff that’s good for whether or not you’re a home buyer or home seller or real estate agent.

Dave:
All right, great. Well, thank you so much, Craig, for being here. We appreciate your time.

Craig:
Thank you.

Jamil:
Take care.

Dave:
Jamil, what’d you think? This seems right up your alley.

Jamil:
Oh my gosh, there’s so much right now that my mind is… I honestly feel like I need to call Craig, and I need to figure out how to bring this opportunity to America. Right now, we’re sitting on this massive opportunity, where people are really struggling with affordability. When you’ve got an assumable mortgage, and a reasonable seller, and an educated agent, and a buyer who obviously wants to rewind and go back in time, and get that opportunity-

Dave:
Now, you could do it. You could go back in time.

Jamil:
Yes. The assumable mortgage is the DeLorean of lending products.

Dave:
Yes, it is. Yeah, it’s amazing. It’s super cool.

Jamil:
Yes.

Dave:
I mean, I guess the only thing I was a little bummed about was to hear that it’s only for owner occupants.

Jamil:
That and then, secondly, just the qualification process and the unmotivated nature of the whole process, because here’s the thing. This is where I always find inefficiencies happen is when we don’t pay people, or people aren’t being monetized or being taken care of through the process.

Dave:
This is not incentivized.

Jamil:
They’re not incentivized. So then if you ever work in a situation, or if you’ve ever tried to navigate a situation where people aren’t incentivized, I can help everybody right now understand what that feels like. Go to a government office, and try to do something.

Dave:
Totally.

Jamil:
You’ll see that lack of motivation from everybody working there, because there’s no incentivization. So, that piece, I feel like, is going to create so much clunkiness, or make this more difficult than we might think that it could be.

Dave:
Than it has to be. This seems like it could be easier, and we would all wish that is what would just happen is the easiest thing. But to me, this just seems like tailor-made for people who want to make their first investment.

Jamil:
Agreed.

Dave:
If you have saved up some money, and you’re sitting around thinking like, “How do I get in? It’s expensive.” It’s like, listen, this is for people who want to owner occupy. We all know house hacking is one of if not the best way for people to get started in the first place. You can house hack, plus get an interest rate from a year ago that is going to increase… They said for a $400,000 home, Craig just said that that’s going to increase your monthly cash flow by nearly $1,000. That’s probably more than most people pay in rent currently.

Jamil:
I know.

Dave:
That would be a huge saving. So if you are new to real estate investing, I think that is huge. I think the other main lesson here is through the BiggerPockets conference and a few other things, I’ve learned that a lot of our audience here on On the Market is real estate agents. To me, this is just a goldmine for real estate agents.

Jamil:
Big time. Big time.

Dave:
If you have a selling contract for a qualifying mortgage, this is worth. They just said it’s worth $12,000 a year. For an owner occupant, if this is a home buyer coming in to buy this, they stay on average seven years. Seven times 12, what’s that? $84,000, that’s $84,000 on average that it would be worth for $400,000 homes.

Jamil:
That’s the entire life of the mortgage?

Dave:
No, that’s seven years. That’s the average amount of time people stay in a mortgage. But if they’re going to stay longer, it’s worth even more. It just seems like… Know what you got. If you’re an agent or a seller, if you have one of these qualified mortgage, that is extremely valuable.

Jamil:
I couldn’t agree with you more, Dave. I feel like this is the peacock feathers of a property right now. I think that there’s a massive opportunity, especially with real estate agents feeling the crunch right now. A lot of you might be listening to this, and sitting on a house right now where you haven’t had an easy time selling it. You’ve got a seller who has a terrible situation, and wants to sell or whatever’s going on, and there’s this gap in information and execution. Real estate agents that are listening to this, please do some homework. Get ahold of Craig, and see if there’s an opportunity there.

Dave:
Absolutely. Great advice. Well, thanks a lot, man. We appreciate you being here. For anyone who wants to connect with you, where should they do that?

Jamil:
Well, I’m always findable on Instagram at J-D-A-M-J-I. That’s @jdamji. Also, I have a YouTube channel where I go live and help people underwrite and learn all about the real estate investing that I do, which is a niche called wholesale. You can find me at youtube.com/jamildamji.

Dave:
Awesome. If you have any questions for me, or thoughts about this episode, please reach out to me on Instagram, where I am @thedatadeli. Thank you all for listening. We’ll see you next time for On The Market.
On The Market is created by me, Dave Meyer, and Kailyn Bennett, produced by Kailyn Bennett, editing by Joel Esparza and Onyx Media, researched by Pooja Jindal, and a big thanks to the entire BiggerPockets team. The content on the show On the Market are opinions only. All listeners should independently verify data points, opinions, and investment strategies.

After Stan Kimer retired from IBM 10 years ago, with 31 years tenure at the company, he formed a diversity training and consulting firm. Called Total Engagement Consulting by Kimer, the Raleigh, NC, business hummed along nicely for a while, until Covid hit, and demand almost totally dried up. Then came the murder of George Floyd and the national racial reckoning that followed, and quite suddenly the phone started ringing off the hook—and continues to do so today. “I went from almost nothing to operating more than full-time,” he says.

Becoming an Entrepreneur

As part of his benefits package, Kimer had access to a year of career transition coaching that was available to retirees. He decided to make the most of the service and work with a coach on a plan he’d long pondered—becoming an entrepreneur. “Working at IBM, I was a little fish in a huge pond,” he says. “I viewed this opportunity as challenge to myself.”

During those three decades at IBM, Kimer had done a variety of jobs, from marketing brand manager to director of sales operations. But one of his gigs was a four-year stint as corporate diversity manager for gay, lesbian, bisexual and transgender diversity. He’d found it particularly rewarding. “It was the most fun I ever had in a job,” he says. That, he decided, would be the remit of his new company.

So he set out his shingle, planning to work part time. Little by little, Kimer added to his expertise, what he calls “my portfolio of diversity knowledge.” He helped one company with its first employee to go through a gender transition. He worked with another on diversity training. He developed workshops on unconscious bias.

Going Beyond Statements

The business grew steadily until March, 2020, when it fell off a proverbial cliff. Then came the killing of George Floyd. “All of a sudden there was immense interest from companies in DEI training and strategy,” he says. “I had clients who realized they couldn’t just issue a statement. They had to start changing their own internal practices.” That interest has only increased since then, with the 2021 murders in Atlanta of eight people, six of whom were women of Asian descent, and last May’s attack at a Buffalo, NY, grocery store in a mostly Black neighborhood, during which 10 people were killed and three wounded, among other tragedies.

He’s also added more services, like helping companies launch employee resource groups and diversity councils. The latter are groups of 15 or so employees who volunteer to help drive a company’s diversity strategy. And he’s working on setting up inclusive recruiting programs.

Other Projects

About ten years ago, on a trip to Kenya, Kimer learned about the struggles of the people of Mtito Andei, Kenya, and the Kamba tribe, who faced high rates of poverty and HIV infection. With that in mind, he donated seed money to build the Kimer Kamba Cultural Center, which provides vocational training, HIV prevention education and help with boosting economic growth through cultural tourism.

Then there’s the figure skating. About seven years ago, at age 59, Kimer took up the sport. He recently won a gold medal in the bronze level for skaters age 66 and older at the U.S. Adult National Championships. He says he’s amassed three clients through contacts he’s made at skating events.