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.

David:
This is the BiggerPockets Podcast show 720. Leverage is great. It’s not great for everybody. It’s meant for people that understand how to use it. There’s a lot of things in life that are like this. Okay. Cars are great, but we don’t let nine-year-olds drive them. We don’t even let 25-year-olds drive them if they haven’t passed a driver’s safety course and passed the test and understand the rules of the road. You got to earn the right to drive. You got to earn the right to play with fire, right. There’s people that use fire in their jobs. There’s welders. There’s different types of people that use heat to conduct certain things, but you don’t just give them the tool and let them go play with it right off the bat. You got to earn that right. Leverage is very similar.
What’s up, everyone? This is David Greene, your host of the BiggerPockets Real Estate Podcast, here today with a Seeing Greene episode for your viewing and listening pleasure. If you’re listening [inaudible 00:00:50] on a podcast, that’s awesome. I appreciate that. But you can also check us out on YouTube, if you want to see what I look like. I’m often told that I am taller in real life than what people thought. I don’t know if that’s a compliment or if what they’re trying to say is I have a shrill tiny voice that makes me sound like I’m four foot two. Not sure which way to take it. So let me know, when you watch me on YouTube, do I look like what you pictured in your head? It’s always fun when you see what someone looks like, and it’s very, very different than what you were expecting, and you can never really look at them the same way again.
In today’s show, we’ve got some really cool stuff. We talk about how to continue house hacking even when your debt-to-income ratio can start to shrink from owning all the new real estate. We talk about if a property that is currently owned should be rented out or if they should stay in that property and not buy a new one. We get into if someone should save $300,000 in taxes or if they should avoid that and save that money in the future, all that and more in today’s Seeing Greene episode. Now, if you’ve never listened to one of these episodes, let me just break it down for you real quick. In these shows, we take questions from you, our listeners, we play them, and then I answer them for everybody to hear with the goal of helping increase your knowledge base and real estate so that you can be more successful on your own path to financial freedom through real estate.
Before we get into today’s show, one last order of business are Quick Tip, and that is 2023 is now here. 2024 is not going to be better than 2023 if you don’t make intentional changes to do so. And 2023 is not going to be any different than 2022 if you don’t make intentional changes to make it that way. So spend some time meditating on what you would like your life to look like. And more importantly, who you would have to be to make that happen. Sometimes we make the mistake of asking, “What do I have to do, or what do I need to accumulate to get what I want?” It’s much better to ask, “Who do I need to become?” Because when you become that person, those things will find you. All right, let’s get to our first question.

Shalom:
Hi, David. Excited to have you answer my question. My name is Shalom, and I’m an avid listener of BiggerPockets. My question is as follows. So currently, I’m a college student in New York City, and I will be graduating soon with an income of $85,000 a year. I’m wondering how I can start house hacking or how I can continue my real estate journey. So currently I have one parking space, which I do arbitrage on. I lease it out for 275, and then arbitrages sublease it to someone else for 335 a month.
Now I’m looking to expand, but I don’t know how to house hack or how I can grow without… because my market is so expensive. So in New York City or in Brooklyn or in the outskirts in New Jersey, duplexes go for a million and a half, two million plus. So how can I house hack or expand in this market with such limiting constraints with… of income and other kinds of things? Thanks.

David:
All right, Shalom. Thank you very much for asking that question. I appreciate it. Let’s dive into this because there is an answer to what you’re asking. You’re talking about house hacking, which is probably my favorite topic in all of real estate to get into. There’s so many ways to do it. It’s such a superior investing strategy. It could be a… It’s flexible. It should be a part of everybody’s strategy, even if they buy properties using different means. House hacking is great.
What you’re talking about is a commonly encountered problem in high-priced areas, more expensive stuff. Like what you’re talking about, New Jersey, New York, you’ll frequently see this. The reason that duplexes sell for so much is someone will buy it, and I know that sounds silly, but think about it. If you’re normally going to be paying four grand a month for your mortgage, but you could buy a duplex and rent out one side for 2,500, it’s a huge win if you only have to pay 1,500.
So if you’re trying to get cash flow, it’s not going to work, but if you’re trying to save on your mortgage, it is going to work. So, unfortunately, all your competition is okay not getting cash flow, which creates more demand. The supply stays the same. Prices go up. That’s what you’re facing with. So if you want a house hack in an expensive market, which you should, there’s two things to think about. The first, well, are you currently paying rent right now?
If you factor in the rent that you’re paying and include that as income in the investment, you might find the numbers look a lot better than what you’re thinking of not doing that. The second thing is you probably aren’t going to be able to buy a duplex because the higher the unit count in the property, the more likely you’re going to make the numbers look better.
The other thing is that you could look into non-traditional house hacks. So we always describe the strategy of house hacking. Brandon Turner and I would do this all the time by talking about, “Buy a duplex, buy a triplex, live in one unit, run out the others,” because it’s very simple to understand the concept. But that doesn’t mean that the execution needs to actually be done like that. It’s kind of hard to make it work that way, to be frank.
It’s easier to go buy a five-bedroom house with three bathrooms, add another bedroom or two to it, so you have six or seven bedrooms, rent out those rooms and live in one of the rooms yourself. Now, this isn’t as comfortable, but that’s what you’re giving up. You’re giving up comfort in order to be able to make money. Now you’re a young guy. You’re making 85K a year, which is not bad at all.
You can take some risk by buying real estate. I think that’s a smart move. You should be investing your money but sacrifice your comfort. You don’t have to just buy a duplex and rent in one side of it. If you were going to do that, I’d buy a duplex that had two to three bedrooms on each side and rent those out individually. You’re always going to increase the revenue a property brings in by increasing the number of units that can be rented out.
This can be done by going from a duplex to a triplex or a triplex to a fourplex or a fourplex that has two bedrooms instead of one bedroom and renting the bedrooms out individually or converting a family room into a bedroom and renting that out. Now, this doesn’t work at scale. It is very difficult to build a large portfolio doing this because now you’re renting out 10 to 12 bedrooms on every single unit. It’s very hard to manage that.
But when you’re new, and you’re just trying to get traction, and you’re going to be building appreciation, buying an expensive market, this is probably the best way to do it. You’re also going to decrease your risk while learning a little bit of the fundamentals of investing in real estate. So that’s the advice that I’d have for you. Stop looking at duplexes.
You got to look at triplexes or fourplexes, and you got to look at single-family homes that have a lot of bedrooms and a lot of bathrooms with sufficient parking and neighbors that aren’t super close because you don’t want them complaining and putting your tenant’s parks in front of their house. So you’re going to have to be looking on the MLS and looking more frequently for the right deal, but be looking for a different kind of deal, and you’ll find that house hacking works a lot better.
All right. Our next question comes from Jesse Goldstein. “Hey, David. Thank you for creating what is clearly the best source of real estate content available. Your show is packed more full of real estate protein than my family after Thanksgiving dinner. My question is about how to apply creative financing strategies used for investment deals to the residential real estate space. As a background, my wife and I are expecting our fourth child and are quickly outgrowing our 2300-square-foot townhome.
Our plan is to rent it out if we can find a bigger place, but since we have not been able to find one price right in the few months since we have been looking, a colleague is relocating out of state in December, recently listed her beautiful home, but with today’s interest rates, it is significantly more than I feel comfortable spending. I was chatting with her a few weeks ago after I heard her saying they had no bites after two price reductions and were considering renting the property out.
It seems both of us have been hurt by higher interest rates. I think we may now be in a situation where they might entertain some creative financing ideas to potentially solve both of our problems. They are set on their 1.3 million market price but currently have a very low-interest rate in the twos and are now getting quite motivated rather than renting it out. We have spoken briefly about a subject to loan installment, land sale contract, lease option, or potentially holding a second mortgage, and we are both seeking advice from real estate attorneys.
What is your impression on employing these strategies in the residential space? None of the local Pennsylvania realtors have been speaking with have heard of this approach. If we proceed down these paths, how might both parties compensate our respective agents for their hard work over the last several months? Thank you.” Okay, let’s dive into this one, Jesse.
First off, when it comes to compensating the agents, that’s something that the seller is going to be responsible for. That needs to come from the seller side regardless of how the transaction is structured. Now, the title and escrow company can handle this for you. They’ll just take out the commissions that would’ve gone to the agents and pay them even if you’re not doing the transaction at what we call an arms lengths deal where you didn’t put on the MLS. They didn’t just find a buyer they don’t know. They’re selling it to you.
Your question comes down to structuring this creatively, and it sounds like what you’re thinking is you can get a better deal if you do that. Based on everything that I’ve seen here, the only part of the deal that sounds better is the interest rate you’ll be getting. You’ll get it in the twos and not in the sevens or the sixes or wherever they are.
You’re not actually getting a better price. They want that 1.3 million. One thing to be aware of is if you take this over and you’re not getting your own loan, there’s a little less due diligence that’s done. So you’re going to want to get an appraisal to make sure you’re not overpaying for that property unless you’re okay paying 1.3 and you don’t care what it appraises for. But odds are, if it’s not selling, they probably have it listed too high, and they’re considering selling to you because they want to get the same money.
Now they’re not actually losing anything here other than they’re keeping that debt on their own book so to speak. So they’re still going to be responsible for making the payment even though you’re the one making it for them, and if they try to buy their next house, they’re going to find that that’s difficult. So, sometimes because the sellers don’t understand the downsides of a subject to, you do all the work, you put it together, maybe you even close on the home, they go to buy their next one, and their lender says, “You can’t buy a house. You still have this mortgage on your name.”
And they say, “Well, no. So-and-so’s paying it.” Doesn’t matter. Still shows up as lean on the property under you. Subject to is not this like catch-all that fixes every single problem. It can work in a lot of cases, but in other cases, it doesn’t. I don’t know that this sounds like one where it says an immediate, “Oh, subject to will make the deal work.” You didn’t mention what the numbers are running it at an interest rate in the twos. Okay, people fall in love with the interest rate. It’s an ego thing. “My rate is high. My rate is low. I’m in the twos.” That doesn’t mean anything.
If the property loses money every month or you could have a cheaper payment if you bought somebody else’s house that you didn’t do subject to. It doesn’t matter what your rate is. It matters what the property’s actually producing. You could theoretically buy a house with a interest rate in the 40% if it cash flowed. If it brought in enough money, that’s what really matters. So you need to do a little bit of homework here, run some numbers and see, “If I buy this property with their mortgage, is it going to perform the way that I want it to perform?”
If it doesn’t just stop looking at it. The purchase price is going to be the problem here, not just the interest rate. If it does work, there’s your answer. Now all you have to do is figure out how to structure it if you’re going to buy it. Part of the problem is you’re going to have to come up with the difference between what they owe and what they’re asking for. So let’s say that there’s a mortgage on this thing for 700,000, and they want to sell it for 1.3.
Well, that $600,000 difference you would have to put as the down payment, or you’d have to pay as a note to them, or you’d have to get from another lender, and that lender’s not going to want to give you the loan because they’re going to be in second position behind the loan that’s already there. See, when we get a loan to purchase a property, we’re paying off the existing liens with the money from the new loan, which puts the new loan back in first position, which is where they’re always going to want to be. This is another complication that comes up with the subject to strategy.
So if they only owe 1.1 million, and they’re trying to sell it for 1.3 million, and you have the $200,000 that you were going to put as a down payment anyways, that could work. But everything’s got to line up for you perfectly if you’re going to make something like this work. My advice is to not look at creative financing as a way to make a bad deal seem like a good deal. It almost sounds like you’re trying to talk yourself into this deal because their rate is in the twos, or you’re like, “Hey, we know each other. Here’s my chance to use all the cool stuff I learned on BiggerPockets.”
I really like the excitement, but that’s not what creative financing is ideally designed to be. It’s more when someone’s in an incredibly distressed situation, and they are very motivated to sell, and they’re willing to do creative financing even though it’s usually not in their best interest. Now, if you’re looking to buy this house for yourself because you mentioned replacing your townhome, so maybe this is a primary residence, then your due diligence is even easier. Look at what your mortgage would be on this house, if you assume their mortgage.
Compare that to what your mortgage would be on a similar house that you might buy if you bought it with today’s interest rates and see which of those situations feels better to you. Do you like this one more at this price, or do you like that one more at that price? And if you like this house more, the only thing you got to work out is that situation with the seller where there may be the discrepancy between how much they owe in their old mortgage that you’re taking over and how much the purchase price is that you’re going to have to pay the difference. Good luck with that.

Guy:
Hey David, thanks for taking the question. My name is Guy Baxter. I’m 26 from San Diego, California. I’ve been listening to the podcast for almost three years now and just this year bought my first property in San Diego. I bought it in May.
I’m coming up on the sixth-month mark and have a few questions about BRRRRing, just with the current market conditions. Since I purchased the property, interest rates have gone up quite a bit, and I’m just trying to decide if I should continue on the path of the BRRRR and kind of bite the bullet with the higher interest rates and pull all of my cash out so I can put it and deploy it somewhere else, or if I should maintain the lower monthly payment and just save up a little bit more for next year to house hack again.
Luckily, with the rising interest rates in San Diego, the prices haven’t quite dropped yet, so I should be able to get most, are all of my money back, maybe a little bit more, and yeah, hopefully, that makes sense. I can’t wait to hear the answer. Thanks.

David:
Hey, thank you for that, Guy. All right. This is a commonly asked question, and I’m going to do my best job to break it down in a way that will help everyone. When trying to decide, “Should I refinance out of my low rate into a higher rate,” which is what you’d have to do to get your money out of the deal to buy the next deal. The wrong question to ask is, “Should I keep my low rate or get a higher rate?”
The right question to ask is, “How much money would I have to spend every month if I refinance to pull my money out more than what I’m spending now?” So let’s say that your debt is at three grand a month, and if you refinance, it’s going to go up to 3,500 at the higher rate with the higher loan balance because you’re pulling the money out. Okay. So now you have a $500 loss if you do this.
You want to compare that to how much money you can make if you reinvest the money that you pulled out. So if you’re pulling out $250,000, can you invest $250,000 in a way that will earn you more than the $500 that it costs you every month extra to take out the new loan? So now you’re comparing 500 extra to what I can get extra somewhere else. That’s the right way to look at this problem. Now, of course, this is only looking at cash flow, whereas real estate makes you money in a lot of different ways.
But if you can get the cash flow somewhat close, it’s a no-brainer to buy the new real estate because you’re going to eventually get appreciation. You’re going to get a loan pay down on a new property. You’re going to get rents that go up on the new property while your mortgage stays the same. So every year, it’s going to theoretically become more valuable to you, and over a 5, 10, 15, 20-year period, having two properties instead of one is almost always going to be a superior investing strategy. So most of the time, most of the time, pulling the money out to buy more real estate, in the long run, will be better, but it’s not always the case.
All right. If you’re cash flowing incredibly well on the San Diego property, maybe it’s a better quality-of-life move for you to just live off of that and not reinvest. If you’ve got a bunch of real estate and you don’t want to buy more, maybe it’s a better move to just stick with where you’re at. But what I want to get at is don’t ask the question of, “Should I get out of the 4% to get into a six and a half percent?” It just doesn’t matter. It matters what the cost of that capital is.
How much does it cost you to pull that money out, and how much can you make with the money if you go reinvest it, or are you going to lose money if you go reinvest it? What if there’s just no opportunities out there? That’s a realistic scenario for a lot of people. There’s nothing to buy that they like. In that case, it doesn’t do you good to do a cash-out refinance and have capital if you’re not going to go spend it on anything. Okay.
So ask yourself the right questions. Think through this. Maybe give us another video submission with some different investment opportunities that I could compare. And then, I can give you a better answer on if you should take the money out of the San Diego house and put it back into the market in a different property.
All right. Thank you, everybody, for submitting your questions. If you didn’t do that, we wouldn’t have a show, and I really appreciate the fact that we’re able to have one. And I want to ask, “Do you like the show?” At this segment of the show is where I read comments from YouTube videos on previous shows, so you get to hear what other people are saying. And here’s also where I would ask if you would please like and subscribe to this video and this channel and leave your comments on YouTube for us to read possibly on a future episode.
All right, this comes from episode 699, tip from a listener regarding an unsafe tenant from Ariel Eve. On question two, call Adult Protective Services to voice your concerns. They will conduct an investigation regarding her safety to live alone. Our next comment comes from Iceman Ant. Ariel’s comment there was from a person who had a tenant and they were concerned about their safety. They were afraid that the person might pass out or possibly even die in the unit that they had, and they wanted to know if they had any actual obligation to care for the person or any liability in that scenario.
Our next comment comes from Iceman Ant. “LOL. He said, programs. It’s cool, David. I also grew up in the VHS area.” All right, this is some criticism that I deserve. I made a comment when referring to old TV shows, and I called him programs because that’s what my grandma used to call them, and it was stuck in my head, and it came out when I was talking. And Iceman called me out on it. It used to be, “Are you watching your favorite program?” I know somebody out there remembers that people used to call TV shows, programs.
There’s certain things like that that we just still say. Like someone will say, “Are you filming?” And I’m like, well, we don’t really use film anymore. Nobody’s used film for a long time. Like now, we would probably say recording, but you’ll still hear people say filming. All right. Our next comment comes from Brie. “I’m concerned about the first viewer’s question as serial house hacking was also going to be my strategy getting started. However, if you cannot apply rental income from the property you’re currently occupying to debt’s income ratios, that presents a huge barrier to qualifying for that second house. This is my first time hearing of this. So the alternative is to move out by either renting or increasing W2 income to afford the two houses without counting the rental income. Any other tips?”
All right. Brie comment and question have to do with the fact that when you’re house hacking, you can’t take the income that you’re being paid and use that towards income for your next property. You’re not allowed to use income from a primary residence to qualify for more properties and your next property in most cases. Now, I believe if it has an ADU or sometimes if it’s a duplex or you’re living in one unit renting out the other, you might be able to. But many times, lenders say, “Nope, that’s your primary. You can’t count the income that’s coming in from it because we can’t verify it.”
This is also a problem when people don’t claim that income on their taxes. If you’re not claiming the income on your taxes, you’re definitely not going to be able to use it to qualify for the next house. And I’m frequently telling people to house hack every single year. The key is when you move out of the last house, it now no longer is a primary residence. It does not matter if your loan is a primary residence loan.
And by the way, if you are wondering, no. If you move out of a house, it’s your primary residence, it doesn’t just automatically adjust to a investment property loan with a higher rate. The bank doesn’t know, doesn’t care, doesn’t matter. You got that loan as a primary residence and those loan terms, if you got a fixed rate, will not change for the next period of time, usually 30 years that you have that loan.
So when you move out of it, you still get a loan that’s a primary residence loan, but now on your taxes, it is now claimed as an income property. You’re now claiming the income that it makes, and you can now use that income to buy additional properties. So sometimes you buy a house, you house hack it, you move out of it into something else, then you start claiming that income on your taxes as an investment property, which won’t hurt your DTI. Then you can buy your next house. You can repeat that process indefinitely. So it slows down how quickly you can acquire new house hacks.
But in a worst-case scenario, you can still do it every two years, right. And once you get to a certain point, you’re not going to need the extra income to qualify. Your debt-to-income ratio is going to be good from the rent that you have of all the previous houses that you bought being counted towards your income. So it can make it a little bit slower to get started, but long-term, it’s not going to hurt you all that much. Thank you for that, Brie.
Next comment comes from Austin. “I think there is something Eli, who asked the house hacking question, could do. You can buy a primary house once every year. So if he’s coming up on that year, let’s say his one year into his house is 12/11/22, he can get the roommates to sign a new lease that just isn’t a rent-by-the-room lease, but the entire house lease. Then get the roommates to sign it for, let’s say, January 1st, 2022. Even though it’s December now, they can agree to a new lease now. So he can be living in the house from 12/11 to 12/31, trying to find a new house.
He can go to his lender now and show his January 1st lease, and they will count 75 or 80% of the rent as income. Or if all his roommates want to move out December 31st, he could just rent, pre-lease the entire house to a family and get a signed lease. Take that signed lease to lender, and they will count 75 or 80% of the rent as income to help the DTI. The other thing Eli could do is to try to buy a duplex. Let’s say the duplex has side A rented at a thousand and side B is vacant. The lender would count 75 or 80% of the rental income from side A towards his DTI. Curious if anyone has other ideas. I am house hacking as well and looking to scale.”
All right. Well, thank you, Austin, for your contribution there. I would… It may be right, but we would need to verify this before we assume that any of the advice you’re getting would just work. So whenever I’m in a scenario like this, I just go to a loan officer, and I say, “Hey, how does this work?” Now, most of the time, the loan officers aren’t going to know either. This is just way too granular. So they’re going to go to the lender, and they’re going to say, “Hey, I need to talk to an account executive. What are your rules for underwriting when it comes to these scenarios?”
And they’re going to go talk to an underwriter. They’re going to wait to hear back. The underwriter’s going to look up the conditions that they have for all the different loan programs and let you know can it work, or can it not work, or what would work. And then we get back to you. This is why I have a loan company, the one brokerage, and this is why I go to them and say, “Hey, this is my problem. How can we fix it?” And I let the professionals work it out. It is tempting to try to figure all this out on a YouTube column, but it’s not wise. There’s no way that anybody here is going to be able to know, and these rules shift all the time.
So your best bet, if you have questions, is to actually contact a loan officer or a loan broker and ask them, “Hey, this is my problem. How can I fix it?” Let them come back to you with some answers. And our last comment comes from Kelly Olson. “David, you keep saying, accountability partner. Try saying accountabilabuddy. It rolls off the tongue and is fun to say.” Accountabilabuddy. Okay, that is easier to say, and it is also a little cheesier, and I don’t know how well green cheese is going to come across. So, for now, I am going to use the very square-ish accountability partner, but I will say, Kelly, accountabilabuddy is probably going to take off. It’s going to be very popular.
And if you guys prefer accountabilabuddy, please let us know in the comments by just writing in accountabilabuddy. All right. We love and we appreciate your engagement. Please continue to do so. Like, subscribe, and comment on this YouTube channel. And if you’re listening on a podcast app, take some time to give us a five-star review. We want to get better and to stay relevant, so please, drop us the line if you’re at Apple Podcast, if you’re on Spotify, Stitcher, whatever it is. We will not stay the top real estate-related podcast in the world if you guys don’t give us those reviews. So that’s why I’m asking for it. Thank you very much. All right. Let’s get back into the show. Our next video comes from JJ Williams in St. Louis, Missouri.

JJ:
Hey David. I’m under contract with a seller finance property. It’s a historic home that we’re going to look into turning into… It’d be three units in the main house, and then there’s also a tiny home associated with it. It is zone multi-family and commercial. So we’re looking to do two Airbnbs on the lower level as well as the tiny home. And then we’re looking to do either an office space or long-term rental in the upper level.
The deal it’s 125 doing 10% down seller finance, and then it’s going to cost about between 70 and $80,000 to rehab everything. I’m just curious. I have stocks to pull all the money out of to do the rehab. Is it smarter to take out a loan against those stocks, or should I just pull them out, use the money, and then, that way, my cash flow’s a little bit better? Let me know what you think. Appreciate you.

David:
Wow, JJ, this is a very interesting question. I don’t get these very often, which is funny because you started off your question giving me all the details of the deal itself, and then when you ask the real question at the end, I realize none of those details are actually relevant. But congratulations on the deal you’re putting together and for explaining how it’s going to work. That’s pretty cool.
All right. The real question here is, “I have stocks. Should I sell the stocks and use the money towards the down payment, or should I take a loan against the stocks to do this?” This is going to come down to how strong your financial position is. If your position is strong, it might be better to take the loan against the stocks. Now, of course, this is assuming the stocks hold their value or go up. If the stocks drop and you take a loan against them, you just went into double jeopardy there. You lost money on the stocks, and you’re losing money on the loan you’re having to pay, right.
And we don’t ever know exactly how it’s going to work out. So most financial gurus like myself are going to give you advice that’s conservative. Almost everyone’s going to say, “Don’t do it.” Okay. This is put on my little Dave Ramsey hat here. “Don’t ever leverage against stocks. In fact, you shouldn’t have leverage on anything. Sell it all and pay cash for the house, sell it all and pay cash for the house. Don’t be stupid.” Now, he might be right because I don’t know enough about your situation to be able to tell you. But I will say if you’re in a strong financial position and you believe in the stocks, it’s not a terrible idea, in my opinion, to take a loan against him to go buy the property.
It is a terrible idea if you can’t make both the house payment and the payment on the loan against your stocks, assuming everything goes wrong with this rental. All right. Now, this is advice I would give to everybody. Assume the worst-case advantage. You can’t rent the property out, nine months go by where it’s vacant. You have to make the loan payment to the person that sold you the property, and you got to make the loan payment against the stocks, and the rehab goes high. Can you still cover all of your debt obligations with the money you have saved up and the money you’re making at work?
If the answer is no, don’t borrow against the stocks. Don’t do anything extra risky if you don’t have that extra money. If the answer is, “Yes, David, I’ve been living beneath my beans for five years. I save a lot of money every month. I work really hard. I’m good with cash.” Well then, my friend have earned the right to use leverage, and that’s just the way that I look at it. Leverage is great. It’s not great for everybody. It’s meant for people that understand how to use it. There’s a lot of things in life that are like this.
Okay. Cars are great, but we don’t let nine-year-olds drive them. We don’t even let 25-year-olds drive them if they haven’t passed a driver’s safety course and pass the test and understand the rules of the road. You got to earn the right to drive. You got to earn the right to play with fire, right. There’s people that use fire in their jobs. There’s welders. There’s different types of people that use heat to conduct certain things. But you don’t just give them the tool and let them go play with it right off the bat. You got to earn that right. Leverage is very similar. Be wise about it. If you can handle it, use it. If you can’t, just wait and use it in the future.
Let me know in the comments what you guys think about my approach to using leverage. All right. Our next question is rad, and it comes from Claudia Dominguez in Coral Springs, Florida. “I purchased a property in late 2021 serving as my primary residence until I can rent it out later in 2022, one-year owner occupancy requirement per the association.” So it sounds like Claudia here bought a property in HOA. “Being that this will be my first rental property, I have several questions I would love help with.”
All right. It’s a three bed, two bathroom, 1800 square foot house. It is a corner unit, single-level townhome with a two-car garage purchased for 322 with 10% down on a 30-year mortgage. Claudia believes that it could rent for 2,500 to 2,800 per month. “Our monthly expenses, including association fees, are 2100.” So what we’re really looking at is 400 to $700 a month in cash flow before we look into maintenance and everything else. All right. Question. “How would I calculate my potential ROI on the property? Our down payment and closing costs came to 50,000. We spent another 5,000 on new floors after move-in before there was damage to laminate that was there before.”
All right, let’s start with that. You don’t calculate the ROI because you’ve been living in it for a year, and it doesn’t matter what you put down. It matters how much equity you have in the property right now. So subtract the realtor fees, the closing costs, any cost of sale from selling this home, and find out how much money you’d have left. All right. You’re then going to take the 400 a month that you’d get if it rented for 2,500. We’re going to go conservative. We’re going to multiply that times 12. Okay. 12 months times 400 a month is $4,800 in a year.
All right. You’re going to divide that by the amount of equity that you have in the house right now. So it’s purchased for 322 with 10% down. So you really don’t have hardly any equity at all, most likely. Okay. Because if you sold the house, your closing costs are probably going to be close to 6%. So that leaves you with only 4% equity in this property, which is probably 12 grand. So let’s say it’s gone up a little bit, and let’s say that you have say… Man, let’s be helpful to you here because Florida had a good year, and let’s say you’ve got $40,000 in equity in this property.
So if we divide the 4,800 by 40,000, that gives us a return on equity of 12%, which is pretty good in today’s market. Okay. But let’s say that you don’t even have 40,000 of equity. If we divide that 4,800 by… Let’s say your house hasn’t got up at all, and you only have about $12,000 in there. Well, now the return on your equity is going to be 40%. So the less equity you have in the deal, the higher the return on your equity is, which means the more sense it makes to rent it out rather than sell it and put the money somewhere else.
So, before I get deeper into your question, it’s already looking like moving out of this property and renting it out is going to be a no-brainer for you, but let’s keep going. “How can I confirm if it makes financial sense to update the bathrooms?” It probably won’t. Just the amount of money you’re going to have to spend update bathrooms isn’t going to increase your rent by as much as you’re thinking. But your question wasn’t, “Should I?” It was, “How could I know?” And so my answer to you is going to be if updating the bathrooms is going to increase the rent that you can bring in by a positive return on investment, it makes sense to do it.
So if you could bump up the rent from 2,400 to 2,800 just by updating the bathrooms, and it was only going to cost you, say, 15 grand to update the bathrooms, and you’re going to hold it as a rental for enough period of time to make back the 15 grand, that’s how you determine that question. “I’m struggling with my own bias that I would not rent a property outdated bathrooms. I’m considering a low-budget remodel because I can get more modern used vanities, and I found that tubs can be painted. I’m just not sure if I should keep spending money on this.”
Okay, first off, good job on you for recognizing your own bias. It probably isn’t as big a deal as you think. However, you’ve swayed me. If you’re looking at doing a low-budget remodel, some of it yourself, where you’re just getting new vanities and painting a tub, yes, that can actually make sense for you to do. I assume this was an entire bathroom remodel that we were talking about.
“If the market continues as it has been the last few quarters, it will mean spending considerably more on the next property I purchased with the intent to rent it out. What criteria should I take into consideration to assure I am purchasing a good investment at what feels like inflated prices? I believe I’ve heard that appreciation should not be an immediate, or do I rate factor for long-term holds? I’m not sure how to estimate the increase in rental rates that might otherwise support purchasing the next property in a tight market.”
Again, the interest rates don’t matter when you’re making this decision. I know that feels weird to hear, and the purchase prices don’t matter. What matters is it going to go up in value from when I paid for it and is it going to cash flow? Now, interest rates and purchase prices do affect cash flow, and they’re relevant for that purpose only. Meaning the higher the purchase price and the higher the rate, the harder it is to cash flow. But in and of themselves, they’re not important. So the criteria that I think you should take into consideration is it will be more of your time and more of your effort spent looking for another deal to replace the one you have.
And this is not uncommon in real estate. In fact, this is probably closer to a healthier market than what we’ve been seeing since the last crash. I know that sounds crazy, but we got spoiled. We got used to buying a property that appreciated every single year that needed very little work that wasn’t intended to cash flow in the first place. This was mostly residential real estate. We’ve all been buying. That cash flowed from day one, and not only cash flow, but cash flowed in double digits. That’s just us being spoiled. And now that we’re not spoiled anymore, we’re angry about it.
But traditionally, the way that real estate is structured, it’s meant to make you money over the long term, not over the short term. So it’s okay if it’s harder than what we thought to make it work. Real estate is still a good investing decision. Question two of three loan options. “What are the best loan options for purchasing a property? I have a W2 job that pays above average for my area. And I have good credit, but I only have enough for about a 10% down payment on the next property. Since I already own one property, I believe that will be forced a conventional loan requiring 10% down.”
All right. So the best loan option for you is to do the same thing on your next house as this first one that you did that we just talked about. You want to use a primary residence loan and put as little down as possible. You don’t have to put down 10%. You can actually put down 5% in a lot of instances or three and a half percent if you don’t already have an FHA loan. If you’re not buying it as a primary residence, meaning you’re moving out of the one you’re in and you’re not going to buy another house to live in, you’re going to go live somewhere else. You can put 10% down many times as a vacation home. Okay.
So these are like a house that you’re going to rent out some of the time. But you’re going to rent out to other people, or you’re not going to live there as your primary resident. So hit us up if you want us to look into finding a vacation home loan for you or go to somebody on BiggerPockets, use their tools there and find a person that’s a member that does mortgages and ask them, “Hey, what options do I have if I don’t want to burn my vacation home loan? I want to buy a primary residence.” But I don’t assume you got to put 10% down. You can very likely get into something for three and a half to 5% since you’re moving out of your current primary residence.
A lot of people think you can only have one primary residence loan at a time. That is not true. You can usually only have one FHA loan or one VA loan at a time. But you can have more than one primary residence loan at a time because not all primary residence loans are VAs and FHAs. You can get a conventional loan, often with 5% down on a primary residence. Question three of three. This is a family-related question.
“I’m house’s hacking to start. I live with my kids in the property that will be rented. We just moved from an apartment that we were only in for seven months after moving from the house we sold in 2021. My intent is to purchase another property and live in it for a bit before renting that one out and then ultimately purchasing my long-term home. I feel as if forcing my children to move every one to two years might negatively affect them, but I don’t want to use my kids an excuse for not carrying out my goals. How do you reconcile some of the demands of real estate investing, in my case, house hacking, where I move my kids around every year to a new place with what feels like shortcomings while raising family?”
Ooh, this is a good question here. And, of course, you’re asking a guy that doesn’t have a family and doesn’t have any kids, and yet I’m still going to sit here and do my best to mansplain away this difficult conversation. First off, I just want to say I understand actually, I can’t literally understand, but I empathize with what you’re going through, and I think you’re a good person for even asking this question. Because, on podcasts like this, we always talk about the financial components to real estate. It is why people are here to listen. However, we’d be foolish to not acknowledge that there’s an emotional component to real estate as well.
This is a part of the process, and if you want your subconscious to get behind what you’re doing and support you in it, you got to satisfy the emotional side of you. So I’m glad you’re asking this, and if other people have been wondering the same thing, don’t feel bad about it. This is totally normal and something that all of us have to work through as investors. In fact, one of the reasons I think I took longer in life to go start a family was because I knew how difficult my law enforcement career, my hundred-hour work weeks, my commitment to building businesses and making money through real estate would affect a family negatively. It is harder, and I think that was in the back of my head, and I just pushed off starting the family because I wanted to build success in this arena first.
It’s obviously a different position I’m in now. So now, if I wanted to start a family, I think I could without some of that guilt. But you’re right there, smack dab in the middle of some of this mom guilt. So let’s work our way through this one. Claudia, the first thing I think about is you want to have an honest conversation with your kids and share why the decision will be a benefit to the family in the future. It’s a teaching tool, right.
So maybe your kids aren’t old enough to understand math, but if they are, you could explain to them, “This is what our house payment is. Now, if we move into the second house, it’s only going to be this much. That means mommy doesn’t have to work as much at work, and I’m able to be home with you more if we move again.” I wouldn’t say, “This means mommy makes this much more money,” because if I was a kid, I heard that, I’d be like, “Oh, cool, so you can buy me more toys now,” which isn’t where you want the conversation to go. So make the correlation between the more money you save, the more that you could be with them.
The next thing that I would do is I would try to find a way to make it fun. Nobody likes moving. It’s a pain, right. So can you make it fun? Can there be some kind of reward that you could give these kids that doesn’t cost money, that will make this less of a… I don’t know if traumatic is the right word, but less of a negative experience. Can you guys all get together and have pizza or popcorn on the floor when moving, sit on bean bags, and share stories of your favorite part of the new house?
Can you take an adventure as a family and walk around the neighborhood and point out the houses that you like the most or see how far away the restaurants are, the ice cream shop, or the movie theater? Can you take them to the new movies and say, “Hey, kids, let’s compare this to the other movie theater and see what about this one might be better.” Right. Can you turn it into a game or a system or a pattern where, every time they move, they learn what it takes to move and so they get better at doing it? Now, I don’t know that if it’s a moving that’s super hard on kids as much as it is changing schools, that’s what I would think. It’s having to lose some of their friends.
So if you’re able to house hack in the same school district, that would definitely be better. If not, I would have a lot of conversations about what they’re going through at school. A lot of parents make the mistake of assuming that everything is good for their kids because their kids aren’t saying anything. But when I was a kid, I wasn’t going to go home and talk to my mom or my dad if I was getting bullied or if I had a issue going on. That didn’t happen very often, but I definitely wasn’t going to go talk about it. And the times I did try to talk about it with my parents, they sort of dismissed it because they had other stuff going on in their lives that they were more stressed about.
So I was like when we did move, it was a very, very, very hard move for me. I was going into seventh grade, so I went into junior high at a new school with a bunch of kids that had way more money than the kids at the last school. And I didn’t dress very good, and I was getting teased, and I had never been teased because I was very popular at my first school. I just didn’t know how do you handle this type of a situation. And there was no one to talk to.
So I would be open with them about are they extroverted? Do they make new friends? Are they introverted? Are they having a hard time making friends? And just give them some advice of what they can do to be more likable in general so that the transition isn’t as difficult for them. Of course, I want to recognize you’re making some sacrifices here. It’s going to be harder on them because you’re doing this. So kudos to you for putting your family first, even though it’s going to be difficult in the short term. All right, our next question comes from Jack Graham.

Jack:
Hey, David. My name is Jack Graham, and I have a big question for you, which is, should I bonus cost segregate some of my properties, so I don’t have to pay income taxes on my regular income? And just for context, I have about five properties worth about 2.5 million in value total. About 40% of that is in equity, and I’m trying to get some of these properties, which two of them I purchased this year, and I looked into YouTube, some videos, everybody brings up a bonus cost segregation.
Being a full-time realtor and ultra investor, I do work more than 75 hours a month in real estate. So I could technically use that part of the tax code to offset my personal income. And this year, I’m supposed to pay about probably 300 to $350,000 in taxes, and I really don’t want to. So my question was for you, “Hey, should I do this? Should I use those two properties that I purchased this year to bonus cost segregate them so I can keep the money in my bank and hopefully purchase new properties in the future, and I could make better use of my money right now versus keeping it… giving it to the government?
And what are the consequences? Do I pay more taxes in the future? If that’s the case, is that something I should still do?” Let me know what your thoughts are. Big fan of BiggerPockets, big fan of you and what you guys do. So thank you so much for everything, and looking forward to your response.

David:
All right, Jack, thank you very much for this. What a great question here. So I’ll give a gist of what you’re describing for anyone that’s unfamiliar with bonus depreciation, then I’ll do my best to answer your question. What Jack is talking about here is, normally, when you buy a property, let’s call it a residential property, the government lets you write off a portion of that property every 27 and a half years because it’s going to be falling apart. So they’re saying the useful life of this property is going to go over 27 and a half years. So you take the total price of the property, divide it by 27.5, and you get to write that off against the income that property generates. So if it makes 500 bucks a month, but the number that I just described is 400 bucks a month, you only pay taxes on $100 a month.
If you are a full-time real estate professional, they will let you take the losses. So sometimes what happens is you get to write off 700 a month, but it only makes 500 a month. So you have $200 a month that is extra that isn’t being covered. If you’re a full-time real estate professional, you can take that $200 and apply it against other ways that you made money through real estate, commissions, income-flipping houses, I believe. Pretty much all the ways that you make income, you can shelter against that 200%. Now, when you combine that allowance with bonus depreciation, you’re actually able to not wait 27 and a half years to take that money. You can do a study where they let you take it all in year one. It’s called a cost segregation study. It’s a little bit more complicated than I’m describing, but I’d be here all day trying to talk about it.
So without giving you the details, the overall strategy is that you look at a property. You determine, “Okay. Well, this much of it is going to wear out much quicker than 27 and a half years, so I’m going to take the loss from that all off the upfront in year one.” When you combine the strategy of taking all your losses into year one with the fact that you’re now able to shelter income from other things full-time real estate professionals can end up avoid paying income taxes. Now, this is how people like Robert Kiyosaki and Donald Trump and me when we say, “I don’t pay any income taxes. I don’t pay taxes at all. I’m not stupid.” This is really what they’re getting at. Okay. It’s not that they’re avoiding taxes like they’re breaking the law is that they’ve reinvested all of their money into new real estate, so they have all these new losses to take against the money that they’re making.
Now, it sounds great, and that’s why we do it because we don’t want to pay taxes. Jack here, you don’t want to pay taxes either, but there is a downside. There’s actually a couple of downsides that I’m going to describe before we know if this is the right move. First off, you can never stop buying real estate when you do this. I say it’s like taking the wolf by the years. As long as you’re buying new real estate… Like I got to buy real estate every single year to offset the money that I made, and sometimes I have to spend close to or sometimes more than 100% of the money that I earned has to go back into real estate to not pay taxes on it. Okay. So if your goal is to save up a big nest egg, this doesn’t always work. Sometimes if you just want cash in the bank, it’s better to pay the taxes.
Second off. It’s not free. Actually, when you take it all upfront, you lose the ability to take it over the next 27 and a half years because you took it all in year one, so that depreciation is gone. You don’t get to shelter any of that income after you’ve taken it right off the bat, which means you’re going to pay higher taxes on the future income that that property makes. Now, as long as you take that future income, included in all the money that you’re making as a real estate professional, and keep buying more real estate, you won’t pay taxes on it. But do you see what I’m talking about here? You’re getting sucked deeper and deeper into this world where you can never stop buying more real estate.
And when you do stop buying more real estate, you’re going to pay taxes on the money you make, and you’re going to make taxes on the income that those properties are making, and that income is not going to be sheltered by depreciation. The last downside that I can think of off the top of my head is the fact that this isn’t free. You actually have to pay for cost segregation studies, which can be anywhere between six and $10,000 a study in my experience. So not only are you not getting to take the depreciation forever, you’re only getting to take it right off the bat. You had to spend six to $10,000 for the luxury of doing that. So yes, you will save $350,000, but you will also take some losses in some of these other ways I describe.
That all being said, if we’re going into a market like right now where I’m expecting to see better opportunities than we’ve been able to see, that extra 300 to 350,000 that you would be spending in taxes is going to do you more good than it normally would. If we were going into a market where prices just kept going up, up, up, up, up. And it didn’t matter how much money you had. You just weren’t going to be able to buy anything, and if you did, you were going to lose money when you bought it, or it might be crashing. That’s a different story. But we’re in a situation now where you could take that 350,000 and wait out to see is it going to dip more. Is it going to, quote-unquote, crash? Having capital right now is more beneficial than having capital in other scenarios where real estate just keeps exploding because of all the money that the government is printing.
So I kind of do lean towards the fact that I think that you should do this, right. Another thing to think about is that if you’re investing for the future wisely and you are growing your equity, there’s ways to make money in real estate that are not taxable, that are not cash flow. So you have to report your cash flow as income because it is. This is why when people are like, “Cash flow, cash flow, cash flow,” and they just get the little dollar signs in their eyes like Scrooge McDuck, and they’re just obsessed with cash flow because it’s going to solve all their problems. It doesn’t. It doesn’t. Now, it’s great. I’m not saying avoid it, but I’m saying it’s not as good as we hype it up to be.
When you get equity, you can do cash-out refinances that are not taxed, not at all. And the cool thing about a cash-out refinance is usually it takes you a long time to build up equity. So usually, during the time you’ve been building that equity, the rents have been going up on the thing you bought. So by the time you do a cash-out refinance, the rents have increased enough to support the additional debt you’re taking out on the cash-out refinance. So you don’t actually take any danger. You don’t lose money when you do it. The property continues to pay for the loan that you took out. You get a cash-out refinance, which is not taxed. You can either live on that money, or you can reinvest that money into the future real estate that you have to keep buying if you’re going to use cost segregation studies and bonus depreciations.
The very last point that I just thought of that I’m going to throw as a little cherry on top for this for you, Mr. Jack Graham is that bonus depreciation will not be around forever. In fact, I believe in 2023, it is set to scale back to where you can only take 80% of the value and in 2024, only 60%, and so forth, until eventually, it’s at zero. So if you’re thinking about doing this, I would say you should do it now because every year, it’s going to get progressively less beneficial until it’s not there at all. Thank you very much for your question. Please let us know what you decide.
All right, and that was our show for today. But what you guys got a little bit of high-level stuff right there at the end with some fancy words like cost segregation, bonus depreciation, some cool stuff there, and then you also got some stuff from beginners like, “Hey, what loan can I use to buy my next house, and should I buy a house at all? How can I keep my debt to income high if I keep house hacking?” And that is what we’re here for. We want to give you as much value as we possibly can so you can find financial freedom through real estate just like many of us, including me, did. And we would love to sit here and root for you guys, guys to watch you on the way.
So thank you very much for following. If you want to know more about me particularly, you could follow me on social media @davidgreene24. Go follow me on Instagram right now. You could also find me on YouTube if you go to youtube.com/@, little @ sign, davidgreene24, and subscribe to my channel and check out the videos that I have there where I do a little bit more personal stuff. You can also follow us at BiggerPockets on YouTube as well. You can follow us on Instagram. You can follow us all over social media. So look us up there and follow as well.
Look, get rid of some of the crap in your life. Okay. Get rid of some of the stuff that isn’t helping you with anything. Just the mindless scrolling or the doom scrolling that you do, and start actually listening to stuff that’s going to give you a better future than what you have right now. Thank you very much for your time and attention. I love you guys. If you have some time, check out another video, and if not, I will see you next week.

With tech layoffs making the news, it’s fairly likely that 2023 wouldn’t be a year in which it is easy to find a comfy tech job. While this would undoubtedly be a time of hardship, it would also be a time of opportunity. Here are the major threats and opportunities for new startups during a market downturn:

1. Capital:

Availability of capital is usually a problem during market downturns. Most startup funds become more conservative and generally speaking invest less in new projects. Even worse for early-stage startups – the risk tolerance of investors might also fall, which means that the available capital for new projects will naturally concentrate on a few “safe” bets.

That said, during economic downturns the usual government policy is to increase spending in order to battle the recession. This means that business loans along with other forms of fiscal stimulus (subsidies, etc.) could become more easily accessible.

2. Costs:

While capital might be a bit more difficult to find, you might need less of it in order to survive. During a recession, the cost of hiring employees, renting office space, and other operational expenses may be lower due to increased availability and reduced demand. This can allow a startup to stretch its funding further and become profitable more quickly.

3. Talent:

By far the biggest reason why a recession is a good time to start a new project is that great tech talent becomes available.

In periods of economic boom, it’s very hard to compete with established tech giants for top talent because of the level of pay and other benefits established corporations can offer. However, due to the layoffs, attracting and keeping high-quality people suddenly becomes easier.

However, in a time of cost-cutting and layoffs in the giants, experienced people suddenly become available on the market. This doesn’t just mean you can find and hire people more easily – you can possibly find co-founders of a very high caliber.

It’s not unheard of in layoff periods for ex-colleagues to become partners and start their own projects related to the industry they were previously working in. A recession is a great period to apply the lessons you learned while working for your previous employer during the economic boom periods, in which big businesses tend to grow more inefficient.

This leads us to our last point:

4. Markets:

The favorable market conditions and availability of capital during periods of economic boom make inefficiency less fatal for large corporations. A recession, however, puts a quick end to this. Consumers become much more cost-conscious and quickly cut their spending for what they consider non-essential products and services. Combined with the fact that capital becomes harder to access, this quickly drives inefficient and rigid businesses into bankruptcy.

This is both a threat and an opportunity for young startups. The agility of such projects gives them the opportunity to adopt innovative practices and business models – in other words, to apply the lessons we mentioned. Moreover, the failure of old businesses opens up space in the market for new companies that are able to provide better products and services.

Nonetheless, the cost-consciousness and conservativeness of consumers make it harder for unestablished brands to attract new customers, which means that in order to be successful, being the new shiny thing isn’t enough. You need to provide something of real value that people are actively searching for.

In conclusion, there are pros and cons of starting businesses during an economic downturn. All things considered, however, the higher likelihood to attract high-quality tech talent to your project makes it a great idea to try something new.

Ashley:
This is Real Estate Rookie, Episode 256.

Isaac:
The biggest thing for me when I was in college, I read Rich Dad Poor Dad and it really changed my mindset in terms of money, in terms of building assets and build a passive income. My parents make pretty good money, but they never really had any type of assets or passive income, and they were always doing the rat race where they constantly have to work to make money and just seeing there’s another side to it and having that idea where I don’t have to actually wake up and work to make money is just a beautiful thing. So I’m just trying to chase that. It’s my big motivation.

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 bring you the inspiration, motivation, and stories you need to hear to kickstart your investing journey. And today I want to shout out someone by the username Keon DGO. Keon left a five-star review on Apple podcast that says, “Invaluable. Love hearing different ways to succeed in real estate. My eyes are now open to the possibilities and have used some of the strategies to get a few slam dunk deals. I hope young people are listening. Great job.”
Keon, we appreciate you. And if you haven’t yet left us an honest rating review on whatever podcast platform it is you’re listening to, take the time and do us that favor because the more reviews we get, the more folks we reach, the more folks we reach, the more folks we help. That’s the goal here.

Ashley:
And we’re back again, live in person. So we have Isaac joining us this time here in Phoenix and he’s going to tell you guys a little bit about himself. And then we are going to do some rookie reply questions. We talk a lot about being a landlord, property management, and also lock systems and how to actually handle locks.

Tony:
And people break into your units, so make sure you stick around for that piece.

Ashley:
Yeah, there’s a good story at the end.

Tony:
But overall, Isaac’s got a really cool story. He’s in a couple of markets, so you’ll learn about how he got into that. And he started pretty young too, which I think is cool. Most of our guests started a little bit later in life, but Isaac’s one of the few that got started early, so cool. All right, so first we want to bring up Isaac Lane. Guys, clap for Isaac Lane.

Ashley:
Woo. Isaac, welcome onto the stage.

Isaac:
Thank you for having-

Ashley:
Yes. So why don’t you tell everyone a little bit about yourself and how you got started in real estate.

Isaac:
Yes, so I’m Isaac Lane. I’m 26 years old and live out here in Phoenix, Arizona. Just recently moved out here in March of this year, started investing in 2021 and in my first year bought three properties consisting of five units altogether. I invest primarily out of state in Columbus, Ohio, mainly single family homes or in small multi-family.

Ashley:
So Isaac, why are you going to meetups? What are you looking for and what value can you bring to other investors?

Isaac:
Yeah, so in terms of value, just the knowledge of investing out-of-state and what’s the best system of doing that. Majority of the properties I’ve bought have been sight unseen and I feel… I mean, fairly comfortable with it, buying them without seeing the properties. And then in terms of what I’m looking at, again, I’m pretty new in the Phoenix area, so just want to learn a little bit more about the area and where are the good places to buy. Looking to get a house hack pretty soon.

Tony:
And can you tell everyone what you do for your day job? Because I think it’s a unique thing that some people here might actually find some value in.

Ashley:
Oh my gosh, I think it’s super valuable.

Isaac:
Yeah, so my degree is in mechanical engineering. I currently do project management for a commercial real estate firm where we help commercial companies looking to renovate their space or move into a new space.

Tony:
So essentially say that I maybe want to open a dentist office and I need a space to… I want to find a space and convert it, that’s an empty shell into a dentist office. Your company could help us do that?

Isaac:
I’m your guy.

Tony:
So just really quickly man, I want to talk a little bit about the motivation for you, right? Because you went to school. Isaac also has his MBA, so he’s a well-educated guy and a lot of folks who go down that path, they just want to focus on climbing that corporate ladder, but you’ve made the decision to build this other path parallel to what you’re doing in your W-2 world. Just lean in… Help me understand why.

Isaac:
Yeah, I think the biggest thing for me, when I was in college I read the Rich Dad Poor Dad and it really changed my mindset in terms of money, in terms of building assets and building a passive income. My parents make pretty good money, but they never really had any type of assets or passive income. And they were always doing the rat race where they constantly have to work to make money. And just seeing there’s another side to it and having that idea where I don’t have to actually wake up and work to make money is just a beautiful thing, so I’m just trying to chase that. It’s my big motivation.

Ashley:
And where are you headed next with your real estate investing?

Isaac:
Yeah, so I want to continue scaling up in Columbus, Ohio. I want to move up to more medium sized multifamily properties and then also working to get a house hack in the Phoenix area.

Tony:
All right. But Isaac, we appreciate you brother. You got any last questions for Isaac?

Ashley:
Actually, I do. One thing is… I got two, actually. One is, what is your best piece of advice for a rookie investor getting started? Maybe it’s something that you learned as a rookie or something you wish you would’ve done.

Isaac:
Yeah, so my biggest piece of advice would be to find a mentor, somebody that’s been through it, that’s tried and true and can really tell… You can really learn from their mistakes and learn from their successes, I think. I try to just learn everything by myself, read as many books as possible, learn from the forums and… It was helpful, but a lot of the mistakes I could have avoided by finding somebody, so…

Ashley:
One of the questions that we’re going to address to you, Isaac, is what are the best first moves decisions to make when buying property out-of-state?

Isaac:
I would say trying to build a team. So I would say the biggest things would be finding a real estate agent and then also a property manager. They’re really going to have the expertise in terms of the market, in terms of which would be the best places to buy, depending on what your strategy is. And then also you got to trust them in terms of managing the property, in terms of the property manager, because, I mean, I vary… A lot of my properties I haven’t actually ever seen in person, so I’m really relying on them to manage it correctly and pretty much receive the income every month. So I would say real estate agent and a PM.

Tony:
Just one follow-up question. If you’re going into a new market out-of-state, how do you find that agent? What steps did you take to find that agent that you trust?

Isaac:
Bigger pockets. Just going on the forums.

Tony:
Say that one more time.

Isaac:
Bigger pockets. That’s the place to go. No, just going on the forums and asking people and they send recommendations, so very helpful.

Ashley:
Okay, and now we’re going to take it to this week’s rookie replies. Our first question is from Brian Parker.
Good evening all. I’m new to the group and to real estate investing in general. I’ve been getting as much education as my time allows. I have a question about property management. How do property management companies handle maintenance? Do they fix the issue and submit invoices to the owner, or withhold the amount from monthly payments to the owner? Just not sure how this part works. I have really been enjoying the amount of comments and great ideas that are shared in this group. So first of all, if you haven’t already joined the Real Estate Rookie Facebook group, do. You get to view some of these great comments and responses for us. Anyone. And if you guys have a question, you can post it into the group. We have over 54,000 people. We’re just like…

Tony:
Which is crazy.

Ashley:
… In the group that can help you with your real estate questions and we may pick it to be a reply on the show. So Isaac, how do property management companies handle maintenance? How have you seen that handled?

Isaac:
Yeah, it depends on the company. So I’ve had three different companies that I’ve worked with and some have a minimum deposit that you have to hold within that account, maybe $500. Some you don’t have a minimum in there. And usually there’s an issue that they call in… The tenant calls in with. They go out, they fix it. Since I’m out-of-state, I need some type of picture or video of what’s being fixed. I’m not paying them unless I have a photo of what’s getting done. And then either they’ll take that amount away from the rent that’s collected that month, before they distribute it out to me, or they’ll just have a running balance within the account. If it goes negative at the end of the month, I just have to pay them that overage that’s owed.

Tony:
You said that you had three different, or you’ve used three different property management companies. Can you really quickly… Just why? What was the impetus to firing one and moving on to that next one?

Isaac:
Yeah, so initially I had a property manager in Illinois, because I had a property in Illinois and then I had another property in Ohio at the same time. So I had those two and then I 10:30 to one out of the property I had in Illinois to go to Columbus. And I had two different experiences with the property managers from Illinois and Ohio and just wanted to try out other PMs to see…
I didn’t have a bad, I guess, experience with the one in Columbus, but I just wanted see if there was somebody better. So I went with somebody else and usually you have to sign a certain contract, maybe a year or two years with them before you come back out or you owe them some type of money. So I went with somebody else just to get the experience to see which one works better for me in terms of… My biggest thing was communication. It would take a while for me to hear back from the guy in Columbus. And especially being out-of-state, I want to hear a response right away, within 24 hours to know what’s going on with the property. So just to, I guess, spread out and figure out who is the best fit for me in terms of a PM company.

Tony:
And do you feel like you found that with that second company in Ohio? Or was it more or less the same between both companies?

Isaac:
I think I found it with the second company.

Tony:
Okay.

Isaac:
They were definitely… I guess the difference was they managed a lot. So they managed right around 300 properties within the area. And the other company, the first company was a bigger company. They managed maybe a thousand. So they were good at what they did, but since I only had a certain amount of units with them, I wasn’t their first priority. So weren’t going to hear back from compared to the smaller company I was with. They didn’t have as many people and they could reach back out.

Tony:
What are your thoughts on that? Going with the mega PM versus going with the smaller mom-and-pop? Because I think there’s pros and cons to both, right?

Ashley:
Yeah, I think one thing too is finding out… When you do find a property management company, are they trying to become that mega company? Because I think that’s where I ran into trouble with mine is that they were somewhat smaller, but they were trying to grow and scale, and they scaled way too fast where they didn’t have the staff, they didn’t have the systems in place. And we had so many issues because they were smaller and they have just exploded in growth over the last couple years. So I would think that would be something to be very cautious of is when you’re interviewing the company, ask what their growth plans are. If you prefer a smaller company, are they actually going to stay smaller and not grow and scale into this bigger company?

Tony:
And I think that just also leads into an important point about building your own real estate business is that sometimes you can scale too fast and the systems and processes that work when you have five properties, five units, may not work when you have 20 and which what works at 20 may not work at 30 and 40. So even as you’re scaling your own business, it’s really important for you to constantly be checking for those different… I don’t know, breaking points in your business.
We want to launch a co-hosting, like a short-term rental property management company. We’re holding off on it for the exact point of we want to make sure that our systems and our processes can support that growth before we turn it on. So just an important point for all of our rookies to understand is that growth just for the sake of growth isn’t always a good thing.

Ashley:
Okay. Let’s take our next question from Scott Forney. What are you doing when buying property that is occupied by tenants? Do you keep the current tenants there? Or do you make them apply again with you? Or are you stuck with the lease they had with the previous owner? What if they aren’t paying rent? Can you get them out now that ownership has changed even if there was a moratorium? This question comes up as it sounds like inherited tenants don’t work out most of the time. So Isaac, what are your thoughts on that?

Isaac:
Yeah, I guess from previous experiences, all the properties I’ve had have had inherited tenants. I would have preferred it to be vacant, preferably, but my first I guess, deal that I received was inherited and I didn’t think to ask if the tenants were up-to-date with rent and found out afterwards, and the seller said [they 00:12:12] hadn’t paid for six month.

Ashley:
They’re not going to willingly give up that information.

Isaac:
They didn’t tell me, “I know you’re thinking about buying this property, but just so you know, the tenants have not paid.” So I got in and found out they were six months late on the rent and hadn’t paid. And at that time the COVID moratorium and they’re trying to get, I guess, some rental assistance through the city. So that was, I guess, the reason why they were still in there. And it just depends what state you’re in. At that time I was in Illinois and they’re not as much of a landlord friendly state. So the eviction would’ve took about three months.
And then, especially for that city itself, they don’t really evict during the wintertime because they don’t want people to be outside when it’s super cold. So I was pretty much just stuck waiting until that rental assistance came in, which took about two months. And it was two months of worrying because I didn’t… Wasn’t sure if I was going to get it or not kind of thing. So usually, yeah, I keep the tenants until their leases is up, or leases are up before I switch them out, but yeah, it’s definitely a lot easier if it’s vacant when you get it.

Ashley:
Yeah. And that is one question that Scott had was are you stuck with the lease they had with the previous owner? Yes. If their lease term says they have another six months on that lease, you are stuck with them for six months, unless you do an eviction and have probable cause for the eviction, like non-payment. One thing that I have done when purchasing a property with inherited tenants is doing an estoppel agreement.

Tony:
Can you spell estoppel?

Ashley:
Actually, I can. E-S-T-O-P-P-E-L.

Tony:
Yeah. And that wasn’t me trying to put you on the spot. I remember the first time I heard it, I was like, “What word is that?”

Ashley:
There might even be two l’s at the end of it, but I think it’s just one.

Tony:
Yeah, yeah.

Ashley:
So estoppel agreement. You can Google samples of these, but basically you ask the seller for permission to give this to the tenant and then they will mail it back to you or get it back to you. And it’s a contact form that shows the… Asks the tenants to supply their contact information. So you can go ahead and put into your property management software for when you’re ready to close, ask them the terms of their lease. So when does it expire? How much is their rent? Do they pay any pet fees? Are utilities included? What utilities do they pay? Do they have any pets? Do they own the appliances, or does the landlord own the appliances? And this is stuff that you can help verify with what the owner said and compare it to what the tenant is saying to you.
And also the terms of the lease, that they both are on the same page, because I’ve bought properties where it’s a verbal agreement. There’s not even a contract, a lease agreement. So this estoppel agreement, then I have the tenant sign it and give it back to me. And then I just use that to gauge more information on the property than ask if they are aware of any repairs or maintenance that needs to be done on the property too.

Tony:
What about the non-payment? How can you, as a prospective buyer, validate whether or not that tenant has been paying rent? What steps would you take?

Ashley:
So if there’s a property management company in place, you can ask to see the detail of their payments on that part. If it is just cash, they give cash to the landlord, that’s definitely a lot harder to track. You could ask for the bank statements showing the deposits. Sometimes in smaller mom-and-pop landlords, they’ll actually give deposit slips to the tenants and they’ll go and deposit their own rent every single month into the bank account, so you can ask for the bank statements to show proof of that. But I think if the landlord tells you one thing and then the tenant tells you one thing, you know that something is off there. So that can be a red flag.

Tony:
And did you ask anything about potential rent payments and the landlord was just untruthful? Or was it just he didn’t say anything, you didn’t say anything and… How did that conversation play out?

Isaac:
So I asked him for the lease to confirm what the rents were, so I knew what the rents were supposed to be according to the lease. But no, I didn’t ask at the time. So a learning lesson for [inaudible 00:16:15].

Ashley:
And I think that is such an easy rookie mistake to make.

Isaac:
Totally.

Ashley:
There’s so many things that you need to ask and to verify and to do, and that’s the Real Estate Rookie Bootcamp. We actually put together an acquisitions’ checklist for the boot campers and where we go through, here’s the things that you should be verifying and asking, because I’ve been ready to close and my realtors say to me, “So you got the utility switch and you got insurance on the place, right? We’re closing tomorrow.” And I’ll be like, “Oh my God, no. I didn’t get insurance on it. I got to do that right now.” And just like there’s so many things that it’s easy to forget one thing.

Tony:
But as the buyer, depending on what the current lease says, you can ask for the property to be delivered vacant. If the lease allows for that current owner to terminate the lease with 30 day notice, you can definitely write, “Hey, I’m not purchasing this property unless the property’s delivered vacant.” And I’ve done that for… Usually our flips will do that, because flips are usually something… There’s stuff like that going on. But if I’m buying a flip, I usually want to deliver it vacant.

Ashley:
So our next question is from James M.
I’ve seen a lot of posts about Keyless Box and other smart devices like smart thermostats being used in rentals. I’m planning out my first rental and I’m wondering how investors are supplying Wi-Fi to these devices with renters in the unit. Are the investors offering free Wi-Fi to the tenants, or do they have a separate secured Wi-Fi network for devices in the unit? Does anyone have any insight into this? That’s a really good question. I never thought about that.

Tony:
That’s a great question. And obviously we’re in the short-term rental space, so all of our units have the smart devices like this, but I’ve never thought about doing it-

Ashley:
But that’s because you’re paying the Wi-Fi all along.

Tony:
Because we’re paying for the wifi, right? If it were… I don’t like… How would you handle that? If you wanted to put a smart lock one of your units, what would you do?

Ashley:
I don’t know. I’m hoping Isaac has the answer to this, because I don’t.

Tony:
Well, I guess, first, do you have any of those smart devices in your long-term rentals?

Isaac:
I do not.

Tony:
If you were to offer one, which route would you take? Would you do the… Or you’re paying for some Wi-Fi or just put it on the guest or the tenant. How would you handle that?

Isaac:
A great question. I would more than likely probably provide my own Wi-Fi for that and then just charge it back to the tenant.

Ashley:
Yeah, increase the rent by however much because the Wi-Fi cost is going to stay the same. It’s not going to be the electric bill where it fluctuates. Most of the time your internet bill is the same every single month.

Tony:
I think that works for a single family residence, but what if you have a small multi, right? Where there’s four units?

Ashley:
Well, then you could do Wi-Fi in each unit and [inaudible 00:18:53]

Tony:
Then just bill it back. Yeah, that’s true. That’s true. Yeah, there you go.

Ashley:
Or you could divide it by all four units, just whatever that is and charge them…

Tony:
Charges all of them. Yeah. Yeah, that’s tricky. I don’t know. I feel like I almost wouldn’t give them the Wi-Fi. I’d say, “Here’s the lock, here instructions on how to set it up when you set up your Wi-Fi.” But just imagine if the Wi-Fi goes down and now they can’t get into their apartment and now they’re calling you.

Ashley:
Yeah, but most of them have Bluetooth capability too, or they have the backup battery.

Tony:
That’s true.

Ashley:
So at the short-term rentals, the encode lock [inaudible 00:19:24].

Tony:
That’s true, even if there’s no Wi-Fi.

Ashley:
Yeah, it still opens it and closes it.

Tony:
That’s a valid point.

Ashley:
But there is RemoteLock, is the company… Do you guys use that at all?

Tony:
We use Encode.

Ashley:
Okay.

Tony:
Yeah.

Ashley:
Yeah, so we started working with RemoteLock to integrate with our short-term rentals to send the code for guests that check in, but they also have a program for apartment complexes.

Tony:
Interesting.

Ashley:
And so yeah, that’d be a good question to ask them as to how they manage that.

Tony:
How does that work?

Ashley:
Yeah.

Tony:
That was a great question.

Ashley:
Yeah.

Tony:
Yeah, got us thinking.

Ashley:
Okay. Our next question is from Michael Rooter. What type of homeowner’s insurance do people like on their rentals?

Tony:
So Isaac, what insurance policies are you putting on your properties?

Isaac:
That is a great question. I mean, it’s through State Farm, but it’s like…

Ashley:
You just tell your insurance agent you’re buying a rental property and they put it on the [inaudible 00:20:21].

Isaac:
Give me the different like… You want the most? This is your deductible, how much do you want? I don’t know. What are the different types?

Ashley:
I don’t know, but I’m saying you would go in… The difference is that you would go and get a landlord policy where you’re covering the building and the structure, and then you have a liability for the property too, where if it was your primary residence you’d be going and you’d be getting insurance on all your furniture, your contents, things like that. So oftentimes it’s actually cheaper for your long-term rental, because as long as there’s not a lot of hazards that are going to create huge liability

Tony:
Like flood insurance in Shreveport, Louisiana.

Ashley:
And then it’s a lot… It’s cheaper because you’re not covering all of the contents within inside the house. And if your finishes aren’t granite and all of these expensive finishes onto the actual property too, then your coverage isn’t going to be as high. So your premium is going to be lower because of that too on an investment property.

Tony:
Isaac, do you or your property management company ask your tenants to get renter’s insurance for your units?

Isaac:
Yeah, that is a requirement that they have to have renter’s insurance just in case there is some type of theft or some type of issue that they’re covered. That it’s not a liability for me.

Tony:
Is it the same for you? You have renter’s insurance?

Ashley:
Yeah, so each tenant is required to do them. What the renter’s insurance covers is their contents within the property. So we had an issue one time at a permit complex where there was ice damming on the roof and it caused… Then the ice started to melt, but where it was damped up, the water started leaking into the roof and it was dripping down into people’s apartments and it damaged some of the people’s contents. And this was still when I was very much brand new at property management, and I just did not like controversy.
And the tenant came to me and was like, “Here’s my bill for my new curtains, my new this.” And I think it was $225 or something and she wanted to be reimbursed for that. And I said, “Well, that’s what your renter’s insurance would cover is your contents for something like that.” And she’s like, “Well, then my premium will go up if I make a claim and this wasn’t my fault.” This was the structure of the building, which was technically weather related that this happened, so it wasn’t our fault either. And I gave in and I caved and I ended up reimbursing her for that, but that really was a lesson to me that really defeated the whole purpose of her even having that policy.

Tony:
It almost goes back to what you say about the lease, right? It’s like, well, what does the lease say?

Ashley:
Right. Yeah.

Tony:
And using the lease to be the bad guy in the situation, but I’ve seen some landlords where they won’t even allow you to move in unless you show proof of your renter’s insurance, just to make sure that that actually is in place.

Ashley:
Yeah, and the property management software, so Rent Ready, Buildium, AppFolio, and all of those ones I’ve seen where there’s a place to upload it where it expires or it’s going to expire, the tenants get a notification, they need to upload their new document, and then it’s all trapped in the property management software. And a lot of times now too, the tenant can actually buy renter’s insurance through the property management software. So when they sign their lease, it gives them the option of buying the insurance policy through them.

Tony:
Do you know how much your tenants are paying for renters insurance?

Ashley:
My one business partner actually lives in the apartment in one of the complexes and it was like $95 for the year. It was nothing.

Tony:
Is it the same in Ohio?

Isaac:
It’s like 10 bucks.

Ashley:
Yeah.

Tony:
Yeah. I think when I was renting, I think I was paying 17 bucks a month for renters insurance. So it’s super inexpensive for those of you guys that are listening, but it can definitely save both the tenant and the landlord, I think, from a lot of headache.

Ashley:
Yeah.

Tony:
All right. So one bonus question, because this one ties into what we were just talking about, but this question comes from Caleb Boyd. And Caleb’s question is, new question here. Do you change the locks after each tenant leaves? So Isaac, how do you guys handle that for your units?

Isaac:
Yeah, typically in terms of security, initially when we first buy the property, we’ll change the locks, put in new locks, and then each turn we’ll put in new locks. And then depending on how long, usually as soon as the property goes vacant, we’ll put in a security system in there. So I use Simply Save just to monitor it, just in case somebody tries to break in while nobody’s there. But yeah, I usually switch out the locks and put it in a security system during the turn.

Tony:
Have you ever not changed the locks at one of your properties and it caused a problem?

Ashley:
No, I have not. But I do have a story about where we thought it was a problem. But before I tell that we do change the locks, and when I was self-managing… I actually just pulled that up, it was landlordlocks.com where you can actually just buy the handle and then it has the lock insert. So instead of changing out the whole door handle, every time you’re just changing out the insert and you set up a master with them. So every time you need to reorder, you’re getting it set on your own master key too. So if you order more locks, it’s integrated into your master system.

Tony:
That’s so cool.

Ashley:
Yeah, so we did that. And then our property management company now, I’m pretty sure they go and buy a new door lock just from Lowe’s every single time. And there’s no rhyme or reason to… Not very efficient. Not how I would do it per se. And then I think how we talked about the lock integration, if you have the key code locks thumb, that’s a lot easier to just change the key code.

Tony:
So somewhat related, but a story of just why you should make sure you’re managing access to your properties. So for our short-term rentals we have two properties that are on adjacent lots, but they’re fenced in together. So if you walked in, you would think it was just one big compound with both properties. And one house is, I don’t know, on the left, one’s on the right, and it’s, I don’t… 50 yards in between the two houses.
So someone books the house on the left, and when they get there, it’s two girls. One girl goes into the house on the left and the other girl’s like, “Oh, there’s another one.” We can see all this on the camera, so we know this is how it happened. They pull up to the house on the left, which is the house they booked, and like, “Oh, there’s another house over here. Let’s walk over here. Oh, let’s see if our door code works.”
And we had left the default codes active on the locks. So each property had its own code, but we never deleted the default codes. So they typed in boom, boom, boom, boom, boom, and the door unlocks. So they get there, at four o’clock they check in, and they’re just… Now they’re in both properties just hanging out in both houses. One girl drags her luggage over to the other house they didn’t book.
And then the family that actually booked that property on the right, they show up and they call us. They’re like, “Hey, somebody’s like in the property.” So we call, we’re like, “What’s going on?” And the girl who was in the wrong house was like, “Oh, I’m, I’m so confused. When we booked, we thought it was both of them.” Which makes no sense, because the listing only had one property in there.
So anyway, long story short, we learned that lesson even for our short-term rentals. We want to make sure that the guest codes activate and deactivate based on when they check in and never use the same code between two different properties, especially if they’re right next door to each other, which in hindsight makes sense. But yeah, it is what it is.

Ashley:
So with the 40 unit apartment complex where we had the master lock set in place, there’s also a lesson in having a master lock. So you have the master key that goes into every door, and then every person gets their own personal key to that door. So we had an issue with a tenant, and she was actually really good friends with the owner of the property. And she came home one day, she had spent the night at a friend’s house, came home, she went and took a shower or something, came back out and there was a set of keys on her bed that weren’t hers.
And she’s going out and clicking the remote on the key because it had a key fob on it for a car. No car is going off. So she is in panic mode that somebody was in her apartment. So she was like, “I’m pretty sure my door was locked and I came in, but I can’t remember. I just don’t know if I did unlock it or not.” And just freaking out that somebody was in her unit. So we’re trying to figure this out. And the thing we can think of first is, oh my, somebody got a hold of a master key or somebody got a hold of her key, but we don’t know for sure.
And so we start integrating this plan to completely change out all of the locks in the building. And the owner’s wife, if she was really good friends with her is, “We need security cameras in this property. This cannot… Something like this shouldn’t be happening.” So we fully integrate. The next day we have an IT guy already coming in, setting up the security cameras. It was probably, maybe… So that happened on a Monday or a Sunday, I think. And that Friday we were set to have the new locks installed the following week, the whole camera system was already put in.
I go out to dinner and I see that tenant with the owner’s wife, and the owner’s wife goes, “Oh my gosh, did she tell you what happened?” And she’s like, “No, don’t tell her. Don’t tell her.” And I was like, “What?” And she goes, “Well, those keys on the bed, when I had left my friend’s house I had accidentally grabbed his keys and put them in my bag and then they fell out of my bag on the bed and when I got to my apartment they ended up being his.”
And the first thing was, “You weren’t going to tell me?” You weren’t going to say, “Oh no, don’t go and spend thousands and thousands of dollars and time switching out the locks.” And they just thought it was so funny that it was just, oh my gosh, it was no big deal. Nothing happened. And here I am sweating and gritting my teeth like, “Are you serious?” But a sigh of relief that the master key was not lost, that nobody had broken into a unit, but yeah, definitely a stressful [inaudible 00:30:23].

Tony:
Good stories, yeah.

Ashley:
So yeah. Well, Isaac, thank you so much for joining us. Can you let everyone know where they can reach out to you and find out some more information about you?

Isaac:
Yeah, most definitely. If you follow me on Instagram, it’s Isaac Lane, so I-S-A-A-C-L-A-N-E-R-E-I. That’s my Instagram. That’s the main way to find… Reach out to me.

Ashley:
Okay, cool. Well, thank you so much. We really appreciate you coming to record with us here, live in Phoenix. I’m Ashley at Wealth from Rentals. He’s Tony @TonyJRobinson, and we’ll be back on Wednesday with a guest.

If you’ve created a product that is selling, congratulations are in order! That’s not easy to do. Now, because of your success, others want to copy, knockoff, and infringe. They want to take advantage of your hard work. This is the reality for inventors of popular products.

Inventors think, all I need is a patent! A patent will solve all of my problems. But that isn’t accurate. A patent gives you the right to sue for patent infringement — an expensive and time-consuming process in which there are no guarantees and the odds do not favor the party with fewer resources. The inventors who are currently protesting the appointment of Congressman Darrell Issa to lead a House Judiciary subcommittee with intellectual property oversight aren’t wrong to think the system isn’t treating them fairly.

But they’re overly focused on the promise of patents — the American dream of being able to own an invention and protect it. Pursuing that dream has become very costly. So costly, in fact, that most inventors can’t afford it. It’s no surprise that litigation funding for patent cases is likely to continue to increase.

However, even if the laws in Congress do change to make it easier for inventors to defend their intellectual property rights, intellectual property protection won’t be enough to stop the copycats, because patents are full of gray areas. I discovered that firsthand when I sued one of the world’s largest toy companies for patent infringement in 2003. After three long years, “right” and “wrong” didn’t factor into our settlement. We were engaged in a war of words.

Had this company infringed on my patent claims or merely worked around them? Who was to say? It was fair game for this company to try to work around the claims in my patents, it dawned on me, because those claims were always going to be interpreted differently by different people at different times.

There was a word for it, actually. Competition.

If you took emotion out of it, deciding to try to work around me was just business.

Of course, no inventor feels that way when it happens to them. When someone uses your invention without paying you royalties, it is devastating and incomprehensible. You feel violated. Don’t they understand how hard you worked? Don’t they know that theft is just plain wrong?

It’s a slippery slope. You can invent and develop something, but still not own it depending on how the language and drawings in your patent are interpreted. If you sue, you could end up winning… but you could also end up losing.

This is the reality, and it’s very upsetting for inventors.

There is a simple solution. Inventors need to focus on protecting their creativity from a business standpoint.

This isn’t easy, because the odds are stacked against the little guy. But it is possible. When you are small, you can be quick, and speed is a great superpower.

If you want to get paid for your creativity, the mindset you need is, “How am I going to outmaneuver the competition every step of the way?”

That includes filing transaction-ready intellectual property and planning ahead for copycats. If your product sells well, there is going to be competition. Congratulations, you just got ripped off!

Many people find this discouraging. But from a business perspective, this is actually good news. You should be celebrating. Most ideas fail because they’re not marketable, remember?

Instead of complaining about the patent system, which is a waste of time and energy, or threatening to sue, inventors should consider the following business strategies to fend off the competition instead.

Business Strategies For Inventors

How to protect your intellectual property from a business perspective.

1. Refuse to let your emotions get the best of you. Don’t threaten to sue anyone. Don’t give anyone a reason to file an inter-partes review (IPR) against your patent with the Patent Trial and Appeal Board at the USPTO.

2. Avoid licensing agreements that tie the grant of license to intellectual property. It’s much better protection to license a product, not a specific patent. Attorneys want to tie the grant of license to intellectual property, but this is negotiable. Basically, you don’t want to give your licensee the option of canceling your licensing agreement in the event that your intellectual property is challenged.

3. Lower your manufacturing costs. Are you manufacturing your product in the most efficient and cost-effective way? This allows you to compete on price. If possible, try to use a material or a manufacturing process that’s not easily copied.

4. License to a market leader. In today’s world, selling first and selling fast have great value. Make sure your licensee has great distribution.

5. Consider sublicensing. Are there territories that your licensee does not sell in? If so, consider seeking out sublicensing agreements with other companies that do. Try to cover all potential distribution points.

6. Build strong relationships with all of the major retailers. Introduce yourself early and follow up often so they know your product is the first and the original. Be reasonable. This will help you stop major retailers from carrying copycat products.

7. File provisional patent applications that include workarounds and variations to help you establish perceived ownership. Beat others to the punch by trying to “steal your invention from yourself.” Include your discoveries in your patent applications. They will help dissuade others from attempting to work around you.

8. Create market demand. When you bring market demand to the table, licensees are less likely to care about intellectual property. Create market demand by showing your invention to customers of the potential licensees.

9. Continue to innovate to stay ahead of the competition. Look to the future and plans correspondingly so that you stay in the lead.

10. Provide great customer service. Love your customers and treat them well. They will come to your defense when you need it. Like Chris Meade, the Forbes 30 Under 30 cofounder of the game Crossnet, said: “They can steal your trademark, but they cannot steal your brand.” Your brand is how you make people feel.

11. Obtain trademarks, copyrights, and design patents. These are simple tools to help you put a stop to online sellers that don’t require you to go to court.

12. Document your journey using social media. You are the first and the original, which is newsworthy. Use social media to let everyone know that you are the creator of this wonderful new product. You are better off fighting in the court of public opinion.

13. License a well-known brand. Brand licensing is great protection for many reasons. It gives your products a very unique point of difference in the marketplace. You also end up leveraging the power of the brand’s legal team.

If you want to become financially successful as a creative person, you need to look at intellectual property protection from a business standpoint.

Dave:
Hey, everyone. Welcome to On The Market. I’m your host, Dave Meyer. Joined today with Henry Washington, Jamil Damji and Kathy Fettke. Happy New Year, everyone.

Kathy:
Happy New Year.

Jamil:
Happy New Year.

Henry:
Happy New Year, guys.

Dave:
I know this episode doesn’t come out till the middle of January, but it’s the first time we’re seeing each other since the new year. Anyone do anything fun over the break?

Kathy:
We got into this routine. I know this isn’t fun, this is weird, but of the cold plunge thing, we’ve been doing it every day.

Dave:
Oh.

Kathy:
Every day, like right now I’m so cold, but I guess it’s good for you. So I’m going with it.

Jamil:
Cold plunges are fantastic, actually. They feel so good. They feel terrible when you’re in it, but afterwards, it’s like being on cloud nine.

Kathy:
On drugs, well, you do. You get epinephrine or something, so something releases and you actually feel like you’re high and it’s a natural high, so then you get addicted to it. So now we go in the cold plunge every day, every morning.

Dave:
Wow. Do you just go straight in the ocean?

Kathy:
That would be one way to do it, but our pool, we don’t want to heat it. It’s so expensive, so we just go in the pool, it’s 50 degrees.

Dave:
Oh, geez.

Kathy:
Stay in there for seven to 10 minutes and it’s cold.

Henry:
Good night.

Kathy:
Come join.

Henry:
Absolutely.

Dave:
I did ask if you did something fun over break, but I guess that that passes as fun for some people. We’re going to get into our topic today, which is a report I wrote, which is called the 2023 State of Real Estate Investing. I basically summarized all of my thoughts and let’s be honest, I stole a lot of your takes from over the last year and basically summarized what I think is going on in the housing market and pose some questions, some thoughts and some advice for what happened in 2023, and I’m hoping we can talk about it today.

Kathy:
Yeah, Dave, that report is awesome, by the way. So good. It’s like you wrote another book in 2022. That’s amazing.

Jamil:
It’s super insightful. I think it should be recommended reading for anybody that’s wanting to get into real estate investing or current real estate investors that may have questions. If this report could become part of even the media consciousness, I feel like we’d all be better prepared. So Dave, thank you for preparing and creating something that is tempered and true and real. It’s not biased. I feel like a lot of times as real estate investors, we want to push like, hey, real estate, real estate, real estate. But it’s like this was a very tempered look and I really appreciated it.

Kathy:
And on the flip side, the news media’s always looking for something terrifying to report on, so they can always, how do I say, manipulate the data into having things look worse than they are. So your graphs in that report give the clarity that people need.

Henry:
Yeah, exactly. That was going to be my point. I think what makes this great, especially for somebody who is new or is not accustomed to looking at data, real estate data, because we say that a lot, make sure you understand the data of your market. And I think what’s great about this is it’s an abbreviated look at different metrics and an unbiased view of you define them, and then you talk about what they mean and then you talk about how it’s currently affecting.
So I think even if you read this five years from now when the market’s completely different, having an understanding of what those metrics are and how they can affect real estate and the near buying decisions is super powerful. So I think this is great.

Dave:
Oh, well thanks guys. And if anyone listening to this wants to download it, it’s basically a full industry report but at Bigger Pockets, we’re giving it away for free. You can download it at biggerpockets.com/report. It’s completely free. And as they all said, it really is meant to give you not just an understanding of current market conditions, but help you analyze the market going forward by understanding some of the market data.
And I appreciate all your kind words, but we do have to debate this, so you have to be a little bit meaner and a little more critical as we move into the next section.
So everyone, if you want to follow along, go download that right now, biggerpockets.com/report. We’re going to take a quick break and then dive into the report so you can understand some of the high level topics that are in there.
All right, let’s just start by getting your all’s take on the 2023 state of real estate investing because I’ll summarize what I put in the report in just a minute, but if you had to say in like 10, 20 words or less, Jamil, how would you describe the state of real estate investing right now?

Jamil:
In 20 words or less? I’d say exciting, opportunistic, motivating, cash intensive, scary, and do it.

Dave:
I like it.

Jamil:
That’s it.

Dave:
I like that you’re saying both exciting and scary because I think that’s a very good way of describing what’s going on. What about you, Henry? How would you describe the current state of investing?

Henry:
Yeah, I think the current state of investing is exactly what we’ve all asked for and what they say, be careful what you ask for. We’ve all invested in real estate so that we can build wealth. Well, wealth is built when the opportunity is created, when you can buy at a discount. Well, this is what buying at a deep discount looks like. So I agree with Jamil. It is exciting and scary, but you need to do it because this is what you asked for. Buy at the discount and start building that wealth.

Dave:
Absolutely. What about you, Kathy?

Kathy:
I’m going to do this in two words, pleasure and pain. Really, kind of like the coal plunge. There’s going to be a lot of pain, a lot of pain. This is going to be a hard year for a lot of people. There’s also going to be pleasure. There’s going to be a lot of opportunity for people. So I do want to just send this message out that that’s part of real estate. You win some, you lose some. If you lose some, just know the next deal, you’re going to get it a better deal and win some. And the hope is that at the end of the game, you’ve won more than you’ve lost.

Dave:
That’s a perfect way of describing it. I think all of you are providing a really good summary of what’s happening, which is basically a correction, and that is scary, but it’s also provides opportunity for people who can afford higher prices or who have been priced out or is too competitive or too busy. And so that’s what we’re starting to see.
And if you download the 2023 State of Real Estate report, you’ll see that basically the way I’ve summarized it and not as concisely as you just did, it’s a full report there, is that basically for two years we saw every major variable, every major data point that helps us understand and predict the housing market was pointing in one direction and that was up. That goes from everything from inventory, housing supply, demographic demand, affordability, mortgage rates, whatever, inflation, whatever it was, every single major thing that as an analyst or as a economist you look at was saying prices are going up.
And I know that for a lot of people, it’s felt like a bubble full of irrational behavior, but there are real reasons why prices went up and not all of them are irrational. A lot of the macroeconomic conditions supported that. Now basically since halfway through last year, we’ve seen some of those variables. Some of the things that dictate the direction of housing prices flip sides, they were all on one side pushing prices up. Now we’ve seen mostly affordability and demand start to go to the other side, and they’re starting to drag on housing prices.
And so what we’re seeing now is a much more balanced market. And I know in contrast to the last two years, balance feels like a crash to a lot of people because we were just seeing things go up so quickly. Now we’re starting to see prices flat line and a lot of markets and some markets they’re still growing and some markets they’re starting to decline.
But this is basically creating a whole new housing market that we haven’t seen in a long time. And as you’ve said, this is creating both fear and there is going to be some loss and some pain as Kathy said, but there is going to be some opportunity. And so if you want to understand those dynamics and how those different variables I was just talking about, I go into those in a lot of detail in the report. So go check that out.
But I think for the purposes of this podcast, I’d love to just focus on the opportunity and risk areas. What are the main areas of opportunity you all see, and what are the things that you are personally going to be staying away from? In the report there’s 11 recommendations for how to invest in 2023. And Kathy, let’s start with you. Which of these or you could pick your own recommendations for 2023 do you think is most pressing for our audience?

Kathy:
I mean, the opportunity is certainly to be a buyer. And that’s what we’re doing as we started a single family rental fund. And we’re actively buying because we have cash. And that was one of your points is if you have cash, you have power today, and you don’t have to have your own personal cash. I mean, that’s what OPM is, other people’s money, you got to figure out how to do that. And there’s many ways, but the opportunity to acquire real estate is incredible right now, but it has to be the right real estate.
It might be a little earlier for certain commercial investments because that market still hasn’t adjusted quite yet. It hasn’t corrected the way it might and probably will. So personally, I probably won’t be looking at commercial until the end of the year or until things sort of level out. But in single family or one to four unit, we are extremely active because this is a market where we can … there’s very little competition right now and prices are down and yet demand for rentals is so, so strong because it’s so difficult for people to buy today.
So we’re still offering this amazing service for people to have a house, have a roof over their heads at hopefully an affordable price because we’re getting the properties at a cheaper price, which means we can rent them for less.

Dave:
All right, great. I have several questions about this. So one of the recommendations was use cash if you can. Does that mean that you’re in your fund, are you using any debt or are you making all cash purchases?

Kathy:
Well, as a fund, we’re raising investor capital. So our goal is 20 million in cash. So we are raising that cash and acquiring the properties with cash, which is the game. If you don’t have to wait 30 days to get a loan and you can just come in with cash and close in seven days, well you’re going to get a pretty good deal because there’s a lot of distress out there.
But then the idea is once we have 50 properties or even 20 properties, we have local banks ready to refi and in the fives. It’s incredible. And these are again, local banks who understand the market, they understand the properties, they understand their collateral, they know that we’re getting it so cheap that they don’t feel it’s risky. So then the idea is we’ll buy 20 to 30, 40 homes, refi those, use that cash, go get some more. It’s kind of a BRRRR fund, I guess.

Dave:
No, it’s a great idea because basically you’re reducing your holding costs. You’re buying for cash and not paying that six or 7% interest, not getting any bridge debt or anything like that. And then once you have it stabilized and producing solid income, then you’re able to service the debt, which sounds like a pretty good rate you’re getting.

Kathy:
A really good rate in keeping the LTV pretty low. But again, if it’s a say, a 70 LTV, but we’re getting all our money back out because we’re forcing the appreciation on it by buying cheap, buying deep. Again, another one of your points, buying really deep, getting these really good prices and the buy box is not a deep renovation. We’re buying deep, but it’s kind of a light renovation, which is really cool. When do you get to do that? Get discounts on stuff you don’t really have to fix too much. And that is the opportunity.
Like I said, one of our first acquisitions was a $120,000 home, a three bedroom, two bath home right next to where all the massive new jobs are coming in North Texas, we’re putting maybe 20, 30,000 into renovation, and the ARV is 220, so take 70% LTV on that. We’re getting our money back and just going to do it again. And then once you buy, take that … you buy the houses, you take the money out, buy more houses, then you get to do it again because the bank will lend on that next group of houses that we bought.

Dave:
Kathy, you talking about buying deep, which again is one of the other recommendations here, which I’m going to ask Jamil. I know this is your thing, we’ll talk about in just a second, but the concept here is basically buying below market value. Kathy, in a correcting market where there is risk that market values are going to go down, do you have a rule of thumb how much below market you’re looking for in order to mitigate any risk of further value depreciation?

Kathy:
Well, this is a rental fund, so what we’re looking at really is the cash flow on it. And that would be the rule of thumb because we’re planning on holding these for five to seven years and we already know that markets change and we won’t be in the same market a year or two from now. What we do know is there’s still tremendous demand for rentals. So we’re not so much looking at the asset value, it really is, is this property going to cash flow once we put all the renovation money in it? So deep enough that it’s a BRRRR property, that would be the main thing that we can refi at the 70% and get our money back out.

Dave:
Awesome. Well, Jamil, I don’t want to speak for you and pick which recommendation or what your recommendation for 2023 is, but is buying deep one of them?

Jamil:
Absolutely. If I had a moniker, it would be buy deep, that would be my name. It’s always been my philosophy and I actually lived in that philosophy when the market was going crazy. A lot of folks didn’t believe that you could still buy property at tremendous discounts when people were paying over asking on the primary retail market.
So very quickly, let me explain this. Primary retail market is MLS where the majority of people trade real estate, secondary real estate market is where I typically play in which is off market investor distress properties that typically can’t be financed. So I used to buy really great deals over here and wouldn’t even touch houses on the retail market because they’d be overpriced and sellers were crazy. Everything’s flipped right now. So right now I’m not going off market. I’m not going to private homeowners and saying, “Hey, let me buy your house at a discount,” because they still are out to lunch.
They still believe that their houses are worth what the house down the road sold for in March of 2022, which was the top of the market. And so I don’t even want to have that argument right now. What I want to do is I want to cut that friction out. I’m going on market, I’m talking to real estate agents who have active listings that are 30, 60, 90 days On The Market, sitting, collecting dust, finding out the motivation of why this seller wants to sell, asking whether or not this seller is coming to terms with the current state of events, and do they realize that if they’re going to trade, they’re going to take a massive hit and if they are really motivated to sell, I have a number in mind that I can present. And one out of 10 times I’m successful at doing that. And I’m buying stuff right now at 50% of ARV.
And so when I buy it 50% of ARV, I’m following along with exactly what Kathy’s saying. I could go and rent that out and refi it and go and do it again and again and again and have infinite returns on this situation. And so buying deep is absolutely one of them. And then secondly, not to take up too much time. The owner finance, I know we talked about in your report subject two, I’m still wary on subject two, the 900 pound gorilla in my world in subject two is the due on sale clause that I don’t necessarily enjoy having a wording in a document that really essentially unwinds what I’ve done here in a subject two deal.
So I’m going for owner finance stuff that it may be a little bit higher priced, 0% down, 0% interest, 30 year term. And if I can rent that and cash flow it, pay down that debt, have a good life.

Dave:
And I think generally people lump together creative financing into one thing. And as you said, Jamil, it’s two different things. Subject two is when you assume someone’s existing mortgage, and there is this thing in mortgages called the due on sale clause, which is if the mortgage changes hands, the bank can call the balance of the loan due. And that generally doesn’t happen, but there’s a chance. And that’s what you’re saying, that risk is too much for you.

Jamil:
Yeah, when markets change and especially with strategies and people getting loud, my best friend is the loudest in the world when it comes to subject two. And lenders are going to take notice. They’re going to see these things and they’re going to understand and they’re going to say, “Are we into this.” Are we okay with some of this stuff that’s going on here, and should we be tightening up and paying more attention to …” Look, you do your insurance wrong on a subject two, the due on sell clause gets invoked. So if we’ve got to be this tiptoe in a real estate transaction, I’m not into it.

Dave:
I also think that the interesting thing in addition to what you’re saying about the popularity of it is that in this type of rising interest rate mortgage, the bank has less incentive to let you hang on to a 3% mortgage, because they could come in, call that due, and then try and get another mortgage at 5%, which is much better for them.

Jamil:
Absolutely.

Dave:
But to your point, seller financing on the other hand-

Jamil:
Hold it.

Dave:
… that it’s basically whatever terms you can negotiate with the seller, and so there’s a lot more flexibility and if you do that properly with a good contract, it’s a lot less risky.

Jamil:
Correct. And that’s where my two biggest bets right now are buying at 50% of ARV and holding and then going and looking at sellers who may not be interested in selling at a discount, but wanting to offer terms because the market is, they have to have flexibility with demand being where it is right now, the flexibility that I need you to provide me is 0% interest, 0% down. I’ll give you your price, but give it to me over 30 years. I make sure that I can cash flow that, stick in a renter, let that renter pay that thing down and hand that property off to my kids. It’s all good.

Dave:
Awesome. Well, I have one more question for you Jamil, and then I’m going to turn this question to Henry, is about flipping because one of the things I wrote in the report is to flip with caution. And in that I said that experienced flippers, James is not here today, but experienced flippers, Henry’s going … I’m going to ask you this, are probably doing really well in this market, but to me, it seems like a dangerous thing to start trying with. And so I’m curious, you sell a lot of your wholesale deals to flippers. Can you tell us a little bit about just market sentiment with flippers right now?

Jamil:
They’re actually really bullish. And so again, because you’re able to get these really deep discounts if you stay in a price point that’s accessible because look, a 7% mortgage on a 400 or 300, 350,000, $450,000 house can still be affordable in a dual income household. And in that situation, that house will sell On The Market. And if you can offer great value, a great product with great design and you pay attention to the quality of the thing that you’re putting out there, you will dominate in this game.
However, if you’re an inexperienced flipper and you’re using dolphin gray on all of your walls and you are not, I know I … dolphin fin gray will drive me crazy. If you’re not tiling your bathrooms all the way to the ceiling, if you were cutting corners and doing dumb stuff, then you will lose your shirt. And so flipping absolutely be experienced, understand what you’re doing, stay in the right price points, you’ll win. If you fall, break any of those rules, you deserve it. Sorry. You do. You messed up.

Dave:
All right. Well, thank you. Henry, you were nodding along with that and I know you do a bunch of flipping. So what is your feeling about flipping in the next year?

Henry:
I mean, I think you nailed it on the head. It’s, you need to flip with caution. And we have to remember this, real estate is a numbers game. It’s always been a numbers game. It’s just when the market was super hot, you didn’t have to necessarily pay as close attention to all of the details of the numbers. Now, if you want to be successful, you have to understand a lot more metrics in order to make the proper offers. And so for us, it’s a numbers game.
I will absolutely buy a property that I’m going to flip if I can get it at a 50% up to 60% discount because I look at my past three flips, my past three flips sold, one sold for 9% less than we listed it for, one sold for 17% less than we listed it for, one sold for 2% higher than we listed it for.
So if you’re doing the math, that’s about an average of a 12% drop. And so if previously when the market was better, we were buying at a 70% discount and turning great profits when we flip it. So now I just factor that in on the front side. If I can get it at a 50% drop, I’m making the same if not better profits than I was when the market was hotter because the analytics, the data’s telling me where I’m going to be able to typically sell those homes.
So if the ARV is a certain number now, I subtract about 12% and I can back into my offer price that way. So we’re just doing the math more diligently on the front side to understand what we’re going to buy. And then I just have to live by that. I have to be more strict about the offers that I make.
I used to joke, because 2021 and 2022 or 2021 and 2020, the prices were so amazing. I’m like, “Man, I should have bought everything I made an offer on in 2019 and 2018.” I remember passing on deals over $5,000 that in 2022 or 2021, that was silly, but hindsight’s 2020. But those fundamentals are going to save me in this market, those fundamentals where a deal doesn’t hit my numbers, even if it’s just 5,000 off, I’m not jumping on it because the market’s not forgiving right now. So I have to be very strict with my numbers. And if you can do that and understand your market and understand what’s causing people to buy, Jamil’s absolutely right.
If it’s a two income household, it’s much more affordable and just understand what’s actually selling. If I look at my market right now, we’re still selling somewhere around 90, 90% list price to sale price. It’s a 10 to 12% typically drop. So things are selling, they’re selling when they’re priced correctly given the current market. So if you can pay attention to the metrics, that helps you understand where to buy and you buy and you stick to your guns about your offers, I think flipping can be still profitable. But you’re absolutely right, you have to do it with caution and you have to be very, very strict.

Jamil:
I wanted to just quickly add in there, I think that 12% drop that Henry’s talking about, you can even play with that with design, with some really, really good design. And if you pay attention to the quality of the product that you put out there and you pay attention to the trends, you look at the magazines, you see what the HGTV shows are. And again, I’m not just saying this because I’m on an A&E television show, Triple Digit Flip, which is an amazing show. You guys should all watch it, but I don’t just say that because of that. I mean it. Design matters right now and it didn’t before. So if you pay attention, you might not lose that 12%. You might be able to still sell at that list price or close to list price because you nailed the renovation.

Dave:
And Henry, just for clarity, you’re saying 12% off list price, but did you still turn a profit on those deals?

Henry:
Yes, absolutely we turned a profit on those deals. That’s because of the due diligence that we do ahead of time and where we made offers even because these are properties that I bought as the market was coming down, and so we just anticipated that if we have to sell at 10 to 12% at 10, we were actually looking between 10 to 15% drop. Can we still turn a profit? And absolutely. So no, I’m not making the profit that I was anticipating making, but absolutely we’re still turning a profit. I haven’t had to take a loss yet.

Dave:
Good for you. Kathy, did you want to jump in there?

Kathy:
Yeah, I just wanted to make a comment on what Jamil said and say I auditioned several times for HGTV flip shows, and I would tell the producer, we’d get down to the last group and I’d say, “I really don’t love flipping property. It scares me. I’m a buy and hold investor, and I think this would be a great show on buy and hold because we could just, it would be so much easier to film. You just stare at the property for five years,” and they just didn’t go for it, man.

Jamil:
Oh, that’s great.

Kathy:
So, I don’t know.

Dave:
I don’t understand that. That sounds like a great TV show.

Kathy:
Seems like a great show. Every year the rents went up 4% and you could just do a little show on that.

Jamil:
Great pitch. I’ll introduce you to some people, Kathy.

Kathy:
Okay. We could picnic outside the house. I don’t know. That’s why there aren’t any buy and hold shows. It’s so boring.

Dave:
But it’s fun in the long run.

Jamil:
Amen.

Dave:
All right. Well the last one of the recommendations I wanted to talk about, Jamil called me out for stealing this from Henry before we started recording, but basically one more I wanted to get into is investing in hybrid cities. And so as Kathy often reminds us, and we talk about very regularly on the show, every market is going to behave differently. And as we’ve started to see the really sexy pandemic winning cities are really starting to see the biggest corrections.
I’m sure Jamil, you’ve talked about that pretty honestly about what’s going on in Phoenix and in your neighborhood cities like Boise, Las Vegas, Austin. Then on the other side, there are cities that don’t typically appreciate but have strong cash flow. These are cities like Detroit or Milwaukee or a lot of places in the Midwest generally speaking, and that is sort of how things used to go before the pandemic, there was some cities that were really strong cash flow, but they didn’t appreciate as much.
Then there are cities that appreciated like crazy, but they generally don’t offer a lot of cash flow. But there are these hybrid cities, and I do think my prediction is that we’re going to return to regional patterns that were before the pandemic, where some markets are going to continue to offer great cash flow. Some are going to appreciate, but not both like we’ve seen over the last two years. But there are some cities that do a little bit of both well, and those are the hybrid cities that I recommend. Henry, I’m guessing you would consider Northwest Arkansas one of those regions?

Henry:
Yeah, man. Absolutely. It’s a great hybrid city. You know me, it’s the unsexy markets.

Jamil:
Let’s use Dave’s term of boring. Boring.

Henry:
Yeah, that’s very true. It’s very true. It’s the boring markets, the places where people typically don’t think of when they’re thinking of investing out of state. This is a large country. There’s a lot of places that can offer you great cash flow and/or great appreciation. Again, what’s cool about is it’s a data game and instead of looking at real estate metrics, you’re looking at more economic indicators.
And if you can find the economic indicators of what’s driving people to live there as far as the economy’s concerned, and then so if you look at certain types of jobs and then look at the job growth across those industries within that area, and then compare that to the average price of a single family homes or small multi-family homes in the area, you can find some pretty sweet areas that offer job growth, growing in industries that are growing and rent prices that are either growing or flat.
But if you know that people are moving there and they have to for these jobs, it gives you a great indicator of places that potentially can give you phenomenal cash flow at reasonable entry prices. Because affordability, it’s subjective. So for people who currently live in a city, they may feel like it’s not affordable for them to afford to live there, but if those people are in Cleveland and then someone from California is trying to invest and they looked that same price, that price point in a place like Cleveland or some other city like that, it seems much more affordable because their dollar goes a lot further.
And so just paying attention to the economic indicators in jobs or industries that you feel are going to be around for a while and then comparing that to what it’s going to cost you versus what the rents are. It’s not hard math. You can find some great unsexy markets or great boring markets that are going to return you phenomenal cash flow.

Dave:
Absolutely. And a couple of the ones I listed in the report were Birmingham, Alabama, Philadelphia, and Madison, Wisconsin, but there are plenty of them out there. Kathy, what are your thoughts on this? I know you always talk about looking at these large macroeconomic indicators. Do you think we’re going to head back to some of the more, the sort of the traditional divergence in regional markets that is normal in the housing market that sort of went away through the pandemic?

Kathy:
I think it just depends on your objective, really. If you are at a stage in life where you’re really just looking for cash flow, you don’t really need growth, you just want to travel the world or raise your kids, whatever it is you want to do and have cash flow that supports your lifestyle, then you want to be in those cash flow markets. And those are usually markets that haven’t gone up so much in price.
And so the price rent ratio is in balance, and Birmingham has always been on our list for that, for cash flow markets. We love Birmingham. It’s a great city. At Real Wealth, that’s been on our list. Indianapolis fits that, Kansas City. These are markets that just chug along. There’s enough growth and job growth that you can get a little appreciation and cash flow kind of in any market.
However, if you are really trying to build a portfolio and grow your wealth into millionaire status, that’s not necessarily where that’s going to happen. Although the last few years it has, those areas have gone up quite a lot. And we were buying in those areas in 2012 and 2010. I mean, I think we were paying 30, $40,000 for properties that are worth four or five times that today. So depending on when you buy and if prices have gone down enough, you could see upside really in those markets as well.
But again, if you’re trying to grow a net worth, then I personally still want to be in those growth markets, and right now you can get a deal. It’s better than last year, especially if you’re able to negotiate with the seller to have them buy down points on your loan. And this is what we’re seeing.
I mean, people are talking about things really slowing down, but we’re not seeing that at Real Wealth. We do one webinar and everything sells in that one webinar because the seller, we’ve negotiated with the seller to pay two points to buy down the rate. So they’re getting a better deal on purchase and they’re getting a darn good interest rate and it cash flows in a growth market.
So to me, that’s where I want to be. Now, granted, with our fund in Dallas, we’re still getting kind of both. It does feel hybrid, but I know what’s happening there. There’s new airport coming in, which I didn’t really want to say because now everybody knows it, but I just said it. And so many huge employers building factories, building their headquarters, they’re not going away anytime soon. So to me, it’s like a supercharged hybrid market in North Dallas and South Dallas, kind of all around Texas, honestly. So yes, since it’s a debate, I’m going to debate you and say for me, I still want to be in hyper-growth markets, that cash flow.

Dave:
Nice. I like it.

Jamil:
She likes cake and eating cake.

Kathy:
I like cake and cake and more cake, and then I have to go in the cold plunge to burn it all off.

Henry:
Dave, I want to ask you a question. So if you’re looking at these hybrid markets, for me it’s a matter of looking at what are the economic indicators as far as job growth, because that is an indication also that people are going to have money to be able to buy these things. But what are some of the other metrics that you’re looking at that are going to ensure that you’re going to get appreciation as well as cash flow?

Dave:
Yeah, I think it’s not rocket science. It’s like population growth and economic growth are the two things. And we talk a lot about job growth, but I think one thing people overlook is another really easy one is wage growth and net income in these markets. Because if you’re expecting rent to grow and prices to grow, not only do you need quantity of jobs, but you need them to be higher paying.
So I think those are some easy ones that people can look at is population growth, wage growth, the unemployment rate I think is going to be particularly important over the next couple of years. And if you want to be conservative, which I recommend in this market, I would look at historical unemployment rates pre pandemic, because what happened in the pandemic is crazy. We saw an unprecedented thing. But look back to markets, what happened in different markets in the last recession or the last economic downturn and see which markets performed well, which ones were more resilient relative to other ones in terms of job growth, wage growth, and population growth because those are likely the most diversified economies and they’re probably going to continue to do pretty well into the future.

Henry:
I think one of the other benefits of the boring or unsexy markets is that they’re typically somewhere in the middle of the country and a lot of these places that kind of had tremendous growth over the past couple of years were coastal cities or places closer to the coastlines, and even during the last downturn here, we weren’t as heavily affected, but we saw it coming. We saw the ripple effect of what happened on the coastlines coming.
And so all that to say is if you’re going to invest in some of these markets, not only can you find your cash flow and your appreciation, but what’s coming won’t be as much of a surprise to you. You’re able to plan for how you get into these assets knowing what’s coming down the road. So you have some foresight when you’re buying in these markets.

Jamil:
Last thing to add, pay attention, especially in these, again, the boring market, the unsexy market, whatever you want to call it, they have pockets that are very sexy within them. There’s areas in Birmingham where I would absolutely kick it, hang out, buy a house. There’s lots of entertainment, food, great things to do. So be mindful of that. If you’re going to be conservative, be conservative in those markets, but go find the popping spots in those boring, unsexy markets and you can’t lose.

Dave:
All right. Well, I think we covered five of the 10 recommendations for 2023. So if you want to check out the other ones, again, biggerpockets.com/report. The last part of the report are just five questions I have. I don’t really have an opinion about any of them. It’s just five things that are going to probably impact the housing market for next year and the year to come, but there’s a lot of uncertainty about them. And you can read all about them, but there’s one in particular I wanted to ask you guys as we wind down the show here.
And that is about the commercial real estate market. Generally speaking, what we’ve been talking about today is mostly residential, four units and below, but the commercial real estate market is very different. It is dictated by a lot of different principles and variables. Particularly of interest to me is how loans are created in the commercial real estate space. So let’s just talk about that a little bit. Kathy, you alluded to this earlier when you were saying that you think … you’re avoiding it for at least the first half of 2023. Can you tell us why?

Kathy:
Because of Brian Burke, if you haven’t listened to that On The Market interview, definitely listen. I’ve said it before, whenever I run into him, which is often at different events, I’ll pull him aside and say, “What are you doing?” Because he’s just so knowledgeable and he’s been so successful.
The commercial market just hasn’t landed yet. It’s in a bit of a free fall in my opinion, but it doesn’t even know it yet. It doesn’t know. It’s kind of like it drove off the cliff and it’s just one of those cartoons, doesn’t know it’s falling. And so a lot of sellers are still blind to what’s happening and a lot of buyers as well. But the big story is money. Real estate doesn’t work without leverage in most cases, and certainly not in commercial, most people don’t have 150 million to put down on a building or 30 million or whatever it is. So it’s just dependent on leverage.
And right now, leverage is really in question right now besides just higher rates, which completely affects the value of the property and that somehow people don’t see that is confusing to me. It’s like when your costs go up, the value goes down of that property unless you can increase income and you can’t because rents are kind of stabilizing. So how are you going to make these numbers work?
But the bigger issue, again, was in another podcast that was so fantastic on a market on liquidity market, what bank is going to lend and even has the money to lend on commercial property given the scenario and the situation? So with so many resets coming where pretty good assets, decent assets have loans coming due and they’re going to have to refine, the money might not be there, and if they can find the money, it’s going to be more expensive. I’m concerned, honestly. I’m a bit concerned about what’s coming in the commercial markets and maybe it’ll get fixed and turned around. Maybe the Fed will come in and save all their buddies in real estate, in commercial real estate. I don’t know, that happened. Let’s not forget that the big banks kind of bail each other out. They don’t want to go down either. That could be a solution there. I don’t know. I’m staying out of it until it stabilizes.

Dave:
Just for the record, we had Brian Burke on last week. It’s a fantastic show if you wanted to check it out. It was just a week ago. I think it was show like 69 or 70. And also Kathy is referencing a conversation we had with the CEO of Fundrise, Ben Miller, to talk about leverage in commercial real estate, which is episode 65 if you want to check that out.

Kathy:
Those were so good.

Dave:
Yeah, great, great shows if you want to listen to that. Jamil, what are your thoughts on the commercial spot?

Jamil:
I got a really interesting insight having a conversation with Grant Cardone just recently, and he’s forecasting a catastrophic situation in the multi-family space coming around the corner. And this is what is his prediction, that a lot of people bought some fantastic assets on some very short-term bridge financing because the market was so overheated and it was so exciting and people were getting in and there were so many syndications and so many purchases made, and a lot of that debt is going to be coming due and none of it is going to be able to be refinanced.
And so there’s going to be an incredible implosion, he calls it the big bridge collapse is going to take place and there’s going to be a huge opportunity in multi-family investing, but it’s not now. And so I’m a fan of Grants. I watch what he does in multi-family investing.
I personally, you guys know my story with multi-family. Every time I touch the burner, I get burnt. And so luckily I didn’t buy that 12 and a half million dollar asset that I was going to purchase because I would be here right now crying my eyes out because I would’ve literally been losing millions of dollars. Instead, I walked away from a half a million dollar earnest deposit to live another day. And so I was going to be one of those people. I was going to be one of those folks on the bridge where it was about to collapse. And I think there’s going to be a lot of investors out there who were going to be caught up in it.

Dave:
Yeah, there’s so much to that. First of all, your story with that property has been a rollercoaster. Just as a reminder, Jamil is going to buy a deal. He had to walk away from it due to financing issues and lost a good deal on earnest money. But now you’re saying that you’re happy about that even though I’m sure it hurt at the time, but it could have been worse if you actually went through with the deal.

Jamil:
Oh, I would’ve been out millions and millions and millions of dollars. There’s no way I would’ve gotten out of that thing because we were, again, overpaying for the current situation, and we would’ve been sinking money into capital improvements. We would’ve been doing a lot of renovations in there. We would’ve been trying to push rents, and we may not have been able to do it. And then when it came time to refinance, we’ve going to have all these lenders looking at us and saying, “Sorry, this just doesn’t pencil out any longer.” And so we would’ve had to come to the table with more liquidity, which we may not have had. And so we probably would’ve ended up giving the asset back and losing our down payment, losing our renovation expenses, and letting some other investor come in and take the opportunity.
And so that’s exactly what would’ve happened, and I think that there’s going to be a ton of opportunities and a ton of situations exactly like that are going to come to you in the next 12 to 18 months that people are going to be able to take advantage of. And like Kathy said, pain or pleasure, someone’s pain is going to be somebody’s pleasure in that situation. I’m just glad it ain’t me.

Dave:
Yeah, I mean, it’s such a good point. Regardless of commercial real estate, just good lesson on recognizing the sunk cost and walking away from it and damage control. I’m sure it hurt to walk away from that, but it’s limiting your downside risk and actually clearly was the right move at this point. Henry, what about you? What are you thinking about the commercial market?

Henry:
Yeah, man, I’m obviously cautious with it. I don’t do large commercial deals, not that I wouldn’t do the right commercial deal, but I have always been in the same boat, and this is just my investment philosophy in general. If I am going to do something outside of my normal bread and butter, my bread and butter is singles, small multis, buy and hold and single family flips. If I’m going to do something outside of that, it’s got to be a home run, no-brainer deal. And I have not seen a ton of those opportunities. I actually see the opposite.
I’ve seen people coming in and paying tremendous amounts of money for these large scale multi-family deals, and even in more specifically in my local market, there’s a ton of new construction, large scale, A class, multi-family properties being built. I mean, literally, you can drive five miles and see five different places being built, and they’re all A class, they’re all competing with each other.
And so as these things are coming into completion, I drive through, and the parking lot just aren’t full. So I know there’s been a ton of money raised and dumped into these properties, and so I think there will be opportunity, just like Jamil and Kathy said down the road of people who can’t get financed for these when the loans come due. But also I see an opportunity in the C class apartment space because I think they’re just not being looked at as much, because just what I see is people when they want to buy the multifamily, they want to buy the A class, they want to dump all their money in the A class, but there’s phenomenal opportunity in the B and C class, especially in the hybrid markets you’re talking about, because not everybody in these hybrid markets is buying. And so I would buy the right B, C class opportunity. I would stay away from A class in my market.

Dave:
All right, well, great. I tend to agree with you guys. I am going against one of my rules or rules of thumb about real estate to not try and time the market, but with the commercial market, I think I’m trying to time the market a little bit, I think. When Kathy and I spoke to Brian, he’s put it well. He said that there’s like a pricing exercise going on, or I forget exactly how he said it, Kathy, but he’s basically said, “People don’t know how to price multi-family assets right now, and that’s not a game I want to be a part of. I’m going to wait until the buyers and sellers figure that out, and as a passive investor, I’ll wait to see where they land before jumping back into that.”
I also recommend, listen, check out, show 721 on the Real Estate podcast. I just finished recording that with the CEO of Bigger Pocket, Scott Trench, who shares his thoughts about the commercial real estate market. Really interesting insights there. So if you want to learn a little bit more about that, check out 721 on the Real Estate Show.
All right, well, thank you all so much. This was a lot of fun. If you want to read the full report again, it’s biggerpockets.com/report. It’s full of all sorts of more information, background, context, recommendations, thoughts for next year. If you want to invest in 2023 and take advantage of some of the opportunities and avoid some of the risks that we’ve been talking about on this show, hopefully that will be a good place for you to get started.
And of course, keep listening to this podcast over the course of the year where we’ll keep you updated on market conditions and help you adjust your real estate investing strategy to meet those market conditions.
Henry, Kathy Jamil, thank you all so much for being here. Thank you all for listening and 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, research by Pooja Genal, and a big thanks to the entire Bigger Pockets team.
The content on the show On The Market are opinions only. All listeners should independently verify data points, opinions, and investment strategies.