Guest authored by Thomas Scott, Chief Financial Officer at Wrike. Scott has exceptional strategic financial experience with more than 20 years as a top finance executive at startups and publicly traded companies, including Zebra Technologies, Fetch Robotics, Corning Optical Communications, and Spidercloud. Scott is well-versed in building and leading dispersed teams to help support rapidly growing businesses. He is also an avid reader and sports fan.

Do more with less. Attract high potential talent. Exceed expectations. Maximize efficiency. As a long time financial executive in technology businesses these topics are never very far from my mind. I recognize that most of us are constantly competing with larger, better funded organizations in competitive markets so we have to find an edge to deliver value.

The Michael Lewis book “Moneyball” best described this phenomenon in the sports world. The Oakland A’s from Major League Baseball are featured in this story because they used data to identify undervalued players to level the playing field with larger clubs like the New York Yankees. I’ve used this as a metaphor with my own teams to remind them that WE are like the Oakland A’s and always have to identify ways to maintain an edge because we certainly are not going to beat market leaders at their own game.

This year, the sports world has highlighted another interesting lesson in market and talent inefficiencies from the San Francisco 49ers.

3 quarterbacks in 1 year and have not lost since October

You don’t need to be an avid football fan to appreciate that the quarterback position is an integral part of any football team. Teams are willing to mortgage their futures to trade for higher positioned draft picks in the hopes of drafting the next generational star that will deliver playoff success and multiple “big game” titles. Other teams have signed expensive multi-year deals with established quarterbacks to lead them to success with mixed results. The 49ers are no different, but their experience this year potentially highlights an alternative path.

The 49ers are on their third quarterback of the season and will play in the Conference Championship. Their season opening starter, Trey Lance, a recent first round draft pick, was injured in the second game of the season without establishing his long-term value to the team. Enter Jimmy Garoppolo. Garoppolo was the starter for the 49ers for the last few seasons and returned to that role in September before suffering a broken foot in early December that ended his season. This pattern would likely have ended an otherwise successful season for most teams that had to move on to their third string quarterback.

Most fans almost certainly took a deep breath when the ball went to Brock Purdy. Until this moment, Purdy was mostly known for being Mr. Irrelevant 2022. This is the title given to the last pick in the NFL draft each year, and it is a dubious title since most late picks do not even make the team. Instead of disaster, Purdy has stepped into a starting role on a deep and talented team and has played a key role in delivering eight straight wins including two playoff wins.

I would like to see his success continue, but even if he is unable to lead his team to the big game, he has already demonstrated enormous value that was almost completely overlooked by all 32 NFL teams (including the 49ers in earlier rounds). The big question is, what came together to help deliver this result over the course of two months?

Several observations are worth highlighting:

• Absence of significant mistakes
• Poise under pressure
• Not asked to be a hero but to play his role
• Friendly play calling system that features multiple talented players without undue reliance on just one

I kept looking at these observations and thought they were directly applicable to how I think about finding high potential talent in competitive markets.

What lessons can leaders draw from this?

1. Question conventional wisdom and look for other leading indicators: Brock Purdy did not fit the central casting view of what an NFL quarterback should look like. He was not tall enough. His arm was not strong enough. He did not come out of the right school. He did receive four years of experience playing as a starter against elite competition that provided the ability to stay calm under pressure and avoid costly mistakes.

2. Surround key new “hires” with a strong network: Even the highest potential talents benefit from strong role players around them. The best way to drive a quick, efficient ramp is to quickly integrate with your strongest existing team members. This network cuts down on mistakes and more quickly builds effectiveness and confidence within a new organization.

3. Design and then trust the system: It is tempting to look for that strong unicorn talent who can do anything, but they often are just unicorns. Build a repeatable work system that you can use to identify and quickly integrate talent that gives them and your team the best recipe to become productive as quickly as possible.

My own executive team has challenged the company to help our employees and customers do the best work of their lives in 2023. Win or lose, this example from the 49ers delivers a few lessons worth remembering as we seek to deliver this challenge.

David:
This is the BiggerPockets podcast, show 719. Your goal is to get a counter offer, not to get this offer accepted.

Philip:
Yeah.

David:
All right? If they haven’t responded right away, they didn’t love your offer, that’s okay. You want to go tell their agent, “Hey, I want you to get me a counter offer.” Okay? That tells you, you’re moving in the right direction. Okay? If they come off their million, you’re looking to see how far did they come off that million? Did they come down to 900? Did they get into 850? Are they at like 995? Right? That’s going to tell you if this is worth pursuing. If they counter you at five grand off a list, just move on.
What’s going on everyone? This is David Greene, your host of the BiggerPockets podcast. Here today with our follow-up episode from our first interview with our mentees. This is the 90-Day mentor check-in number two. If you didn’t know what was going on, we found three people that reached out to us after BP Con in San Diego who said, “I want to buy real estate and I want to be directly mentored by David and Rob.” And in today’s episode, we are following up with the advice we gave them from the first time we talked and getting an update on how it’s going in their journey. Rob, what were some of your favorite parts of today’s show?

Rob:
I think we gave some very actionable steps to our mentees. One of my favorite things about them is they did what most people don’t do, is they actually took action on goals and homework assignments that we gave them, right? We gave them all actionable things. Last episode, they did everything, and thus most of them had progress towards the end goal that they’re going for. They’re all going through something a little bit different, some actual tactical real estate struggles, all the way to getting out of your comfort zone. If you’re an introvert, how can you overcome that? And you gave some really good advice, I think. I think I actually gave decent advice as an extrovert, and I think we were able to help them out and we gave them some good actionable steps for when they check in. Again, I’m excited because I think they’re starting to turn the corner a little bit.

David:
Yeah. Something to keep in mind as you listen. A common thread in every epic story ever told is that something has to go wrong. There needs to be a challenge, an obstacle. The world at one point was a good place and something has changed and now it’s hard, and the hero has to step up and overcome that obstacle. And it almost always requires the hero finding something in themselves that they did not have.
I challenge you to find any popular story. Star Wars, The Lion King, The Matrix, all of them. They all follow this exact same trend. And in today’s episode, we are following along with our mentees in their hero’s journey as they have to overcome individual obstacles. Now, the deeper that we dive into their journey, the more of these obstacles that start to surface and the better advice we can give them on how to overcome it.
So today’s quick dip is, as you’re listening to today’s show, ask yourself, “Am I struggling with something similar to this person?” And even if you’re not, does this advice apply anywhere else in your life or in your business? You, the listener right now, are on a hero’s journey as well, and we want to tap into that and help you make some progress. I’m just waiting to see how long I’ll wait before Rob will say something.

Rob:
Oh, sorry. Was I supposed to plus that up? It’s just good. It’s not so quick if I jump in, you know what I mean? It then becomes like a… We’re quipping back and forth. It becomes a quip tip at that point. But that was so succinct, so concise. So the brevity was outstanding and I’ve ruined it.

David:
Thank you.

Rob:
And I feel bad now because I didn’t mean to take the thunder away from it.

David:
No, I appreciate that. I wanted your lightning to my thunder. Together, we are a storm that is something to be reckoned with. And if you want to know why my quick tip was faster, it’s because many of you mentioned on YouTube that they’re not so quick tips because we do listen to the YouTube comments that you give. So take a minute to listen to today’s show and give your comments that let us know what you liked, what you didn’t like, what your favorite part of the show was, and give some advice and encouragements to the mentees who show up today and share their journey with everyone. Also, while you’re there, subscribe to BiggerPockets on YouTube. You won’t regret it.
All right, let’s get into today’s show. Okay. We are going to start with Philip. Philip is a high school Spanish teacher from California, where I live, and his goal is to get into multi-family and or a glamp site for a retreat center. If you didn’t catch last episode, Philip is a very creative type, much like Rob Abasolo who looks for an angle of how to make an experience for someone that they’re going to want to keep coming back to, as opposed to a purely analytical person who just says, “I don’t know. What does Excel say?” Which is pretty fun.
So tell us, Phillip, what was the homework that we gave you last time and how did it go?

Philip:
Yeah, thank you so much, David. So my homework was to reach out to land brokers and also to your former guests that started discountlots.com and build out some more resources of agents potentially, or brokers that could help me find land. I reached out to Discount Lots. I had some great conversations with them. One of the challenges was most of the land that they had in a radius of where I live is not really that hospitable for a retreat center. It’s stuff in the desert. It’s stuff that is a great price and I love the business model, but it just doesn’t work for what we’re trying to offer our potential clients.
And then I reached out to several land brokers. And I think one of the challenges I got was they’re really just trying to sell me the land that they had, that I was able to find these brokers on LoopNet, and Crecsi and able to see some of their listings.
And at least for the most part, they really just wanted me to buy the land that they had on, that they had listed, which a lot of times there were access issues or permitting issues or zoning issues that various obvious reasons for me weren’t going to work. So those were challenging. On that end, in a positive note, I spent a lot of my own time sifting through listings and listings that had quite a bit of time on them, and I actually found a piece of land that is in a totally the area that is my target area, and it is in an appreciating area. People are moving. It’s really beautiful and we put an offer on it yesterday. We’ll see if it’s accepted or not. We definitely came in much lower than the listing price, but it’s been on the market for almost a year.
So there’s definitely some things to do there. And then the other homework that you gave me was to don’t just drop some of the shorter term projects that I’m doing with raising money for people and doing some of these more active types of investments like flipping and this kind of stuff. And I met with more potential private money lenders. I met with four potential private money lenders over the last week. Had some really great conversations and just building relationship with those kind of folks. And then also starting to deepen relationship with certain operators and decide like, okay, is this person, do our values align? Do I want to work with them? So that’s where I’m at.

Rob:
Now, when you say potential operators, what exactly do you mean by that?

Philip:
Yeah, so I met with someone that’s doing flips that we are in masterminds together. We are in a couple masterminds together. I visited six of her sites. She’s got sites throughout LA where she’s doing flips and I got to meet her general contractor. I got to see her budget, essentially where did she come in at the start? What she’d been offering her investors and sort of getting an insight into what’s her flow. And that was really actually awesome to be able to just visit her sites and just go in person, see what she’s doing.
Then there’s a team in Florida that I spent some time with virtually that I raised money for a deal for them, and I could see myself doing more stuff with them in the future, but I’m going to take it slow and see how this first one goes out.

Rob:
Now remind me, what is your flipping career thus far?

Philip:
Yeah. So right now, I have five properties in Cleveland and three of them… two of them, I did full rehabs BRRRR style, and then one of them, I got through creative finance. And then I’m in the middle of two rehabs in Cleveland, doing all long distance. Have my general contractors that I’ve developed relationship with out there, and lenders, and essentially a team that I’ve built out there. And it’s been going fine. Things are going fine there, but it’s definitely… I mean, what would I say? It’s less downside but also less upside. And it does feel like I’m doing maybe too many things to do them well. And so I’m trying to hone in on what is the thing that I can really do well and it’s feeling like raising private money is one of them.

Rob:
So for anyone at home, just to catch you up on this, I think our advice to you, Philip, was with the glamp side or with the retreat, whatever you’re building, that’s going to be a project that’s going to take 14 to 18 months, maybe even longer, to actually get up and running. So our recommendation to you was to continue getting your day-to-day projects out the door so that you can make money while you’re trying to basically launch this development. That’s kind of where we left off, right?

Philip:
Yeah, totally. I mean, that’s been in the front of my mind and I’ve, even just thinking about my timeline, I want to be able to build out the retreat center with a long-term vision, not forcing it to make me money in month three or month six or month nine, but something that is built to last. That’s really what I want to do with that, but I also need to eat in the meantime. So I’m trying to find the balance of that.

Rob:
Yeah, yeah. It’s something we all face, right? Because it seems like you’re hungry enough to be good at whatever you do and thus when you have the ability to be good at everything you do, you want to do everything because you’re like, “I can do it.” Right? So as you start to lean into this, you’re good at raising money. I think this is a great niche. I don’t think a lot of people are very good at raising money. It’s a very specific type of skill that it takes to actually pitch an investor and romance them and schmooze them, wine and dine them, and everything like that.
So have you considered jumping into some of these partnerships like you were talking about where your sole purpose is just to provide the money and maybe you get just a piece, maybe a percentage of the profit, or just a piece of equity in that particular project?

Philip:
Yeah, that’s totally what my game plan is right now, and that is what the deal that I worked out with the group that I’m working with in Tampa. And now I’m in the role of, okay, people are really trusting me and they’re trusting my judgment. And I had some of these conversations with Andrew Cushman and Matt Faircloth, but it’s just how do I make sure that I am responsible with how I vet people that I’m potentially raising money for? Which is why the guys in Tampa, they have more deals, but I want to take it slow and see how this first one goes before I do anything else for them. But yeah, I’m definitely starting to lean into that and sort of, okay, I can’t be great at everything, so what are the things that I’m going to sacrifice that they are interesting to me, but maybe I can’t be great in them, especially not in six months or a year.

Rob:
Yeah, that’s okay. Well, like I said, I think leading into the money part of it, the raising money, that’s good. That’s like an important thing. If you’re worried about vetting effectively your other partners, that’s what you’re saying, the people you’re raising money for, have you gone and actually looked at any of their properties or walked to one of their projects?

Philip:
So in the folks in Tampa or the folks in LA?

Rob:
You would be raising money for both, right?

Philip:
Yeah. Yeah. I mean hypothetically, yeah.

Rob:
Okay, so both.

Philip:
Yeah, in LA, yeah, I walked five of her properties, or I walked six of her properties, and then I saw what her purchase price is, what her rehab budget was. Like I said, I got to meet her contractor. And then it was kind of cool. I got to see one of her projects that she hasn’t bought yet, but she’s like… I got to see her sort of idea phase. We met with her agent and some other folks and saw some potentially major issues with a property that she’s thinking of taking on, but then it’s like, okay, what is her game plan for how she would mitigate those?
And yeah, that was awesome, honestly. And then for the folks in Tampa, it was going through, seeing their past projects, a lot of that. And then I interviewed several of the people that have lent money to them in the past. That was a huge part of what I did.

Rob:
Yeah, I see. I see. Well, I think you sort of mentioned it, like walking that project and seeing what they had in the pipeline added a level of legitimacy that was a positive experience for you. I mean, I think that’s what it comes down to. You can vet a bunch of different ways. You can talk to contractors that they’ve worked with before, ask those contractors like, “Hey, did they pay on time?” Talk to different sub vendors or subcontractors, talk to different realtors they’ve worked with, walk those properties, look at the final projects of something that they’ve flipped before. I think those are small steps that you can take.
I think you’re going to have a bunch of check boxes in terms of what different types of things you can do, but the more you can check off, the more you’re going to start feeling better about handing them like a $50,000 check. So it seems like you’ve sort of started to do that with the person in LA. Now you got to go and actually fly out to Florida probably and actually see one of the projects that are currently in construction or in the pipeline.

Philip:
Yeah, totally. That’s definitely my game plan is essentially how being a part of the team of one of these people that our values aligned and am I happy with the way that they’re working in this space?

Rob:
Yeah. Yeah, definitely.

David:
All right, Phillip, so you’ve been drawing out a vision and fundraising for your retreat center, but it sounds like you’re coming up against the hurdle of time scarcity. You’re trying to visit these potential sites on top of your commitments as a teacher. Like you said, you got to eat. So tell me what has been the biggest hurdle that you’re trying to overcome when it comes to having the time that you want to put into this new endeavor?

Philip:
I think for the retreat space, a huge challenge has been… I mean, we talked about last, the time deal flow. I’m still not totally satisfied with my deal flow. I did reach out to one of the groups that the masterminds that I’m a part of to get a broker recommendation for land, had a great conversation with somebody. Now, I am in the position, I do take very seriously the idea of… I don’t want to have five agents doing a bunch of work for me that they’re not compensated for. There is a part of me that’s like, I would really just rather work with one person that’s awesome, than have five people that I’m testing out, like are they okay? Are they good? Just because I do feel like a lot of the agents that are helping me out, they’ll have to go an hour or two hours potentially outside of their normal radius of where they work in order to walk some of these properties for me and to walk some of this land for me.
And yeah, I don’t want to get the reputation as somebody that has an agent do a bunch of work for them for free. I am sort of moving through that as now I have three people essentially looking for properties for me.

David:
So let’s get into your most important next step and what you can do moving forward. So briefly tell me the offer that you wrote on the property. What was it listed forward? What was your offer price?

Philip:
Yeah. So it is listed for a million. It’s been on the market for almost like a 10 months, 11 months. When I went there by myself, I found a listing by myself. And in talking with the listing agent, she was saying that the reason why it hasn’t sold is because the sellers didn’t… potential buyers didn’t have enough to put down, which I don’t think is going to be an issue for me, but… or that they were asking for the seller to carry more paper than they wanted to carry.
So our offer is listed for a million. We put two offers. One of them was 775 and 40% down with a 36-month term, and the other offer was 815 with 40% down, and it’s the same terms. And then yeah, that was our offer. There’s some due diligence things that we really need to assess with the property. The sellers really haven’t done hardly anything as far as seeing does the well function, does the septic in good condition, what’s the status of electrical hookups. There’s a lot of due diligence things that we have to check off before me personally, before I commit a bunch of investors into this project with me. But I could totally see it working.

David:
I hear you. So here’s the homework for you. Your goal is to get a counter offer, not to get this offer accepted.

Philip:
Yeah.

David:
All right. If they haven’t responded right away, they didn’t love your offer, that’s okay. You tell your agent to tell their agent… That reminds me of that Notorious BIG song, tell your friends to tell my friends that we could be friends. You want to go tell their agent, “Hey, I want you to get me a counter offer.” That tells you, you’re moving in the right direction. If they come off their million, you’re looking to see how far did they come off that million? Did they come down to 900? Did they get into 850? Are they at like 995, right? That’s going to tell you this is worth pursuing. If they counter you at five grand off a list, just move on and then check in two weeks and see if anything’s different.
If they counter you significantly lower, you can get into this negotiation going back and forth. And maybe they don’t come all the way down to your 815, maybe they go into 875, you accept it, you start your due diligence, you come back and you ask for that extra 50 to 80 grand off once you have some form of due diligence, but you want to get a counter, you don’t want to get an acceptance. All right?
The next piece of advice I want to give you has to do with working with different realtors. Have a straightforward conversation with each of them and say, “I feel bad wasting your time. What would this relationship need to look like for you to be happy about it? Are you taking hours every week to look for stuff for me? Are you just putting a search together and firing it over? Tell me what you want to see in our relationship differently.” And then I want you, Philip, to gauge that against what feels right to you and look for some congruency. You want to see if you’re clicking with them, but you can’t find that out till everybody lays their cards on the table. So that’s the other piece of advice that I’m going to give you is get everyone to lay those cards on the table. Rob, any last words from you?

Rob:
No, that’s good, man. I think getting a counter offer really is step one and find out if it’s even… You’re spinning your wheels a lot and you don’t even know if the deal is a possibility right now. Let’s find out that it’s even in the wheelhouse before you start calling inspectors, finding out about the septic report and all that kind of stuff. You don’t want to waste too much time spinning your wheels for something that may be just completely not going to happen at all.

David:
Yeah, Phillip, what you’re going to learn is when a seller makes a decision, because we typically speak to the agents. My agent said this, their agent said that. Doesn’t matter. The seller makes a decision on emotions and emotions change quick. So if they say, “No, wait.” In two weeks, their emotional state could be different. If they say, “I don’t want to do 815, but I’ll do 875,” now they’ve already moved in your direction in a couple weeks, they might be like, “You know what, 815 is not sounding so bad.” They hear one piece of bad news on CNN or Fox and all of a sudden they’re like, “Yeah, let’s just sell this thing.” So you’re trying to get some momentum built in the direction you’re going. Sound good?

Philip:
That’s awesome advice. Yeah. Thank you so much. I really appreciate the laying out how to frame some of these conversations with my agents because I really do respect their time a lot and I want to be transparent as possible. If an agent sends me something and it works, I’m going to go with them.

David:
All right.

Speaker X:
Thank you, Philip. We’ll be following up.

Philip:
Thank you so much.

Rob:
Okay. Wendy St. Clair, again, great name, great name. Just to recap, everybody here, you are a high tech marketer from Long Beach. You have nine single family rental properties, you’re ready to branch out of turnkey, and you’re also exploring career opportunities in real estate, other things that you can be doing. Does that all sound about right?

Wendy:
Yes. Very concise.

Rob:
Okay, cool. And so what was your homework from the last time that we spoke with you?

Wendy:
Well, we had three different things and I’m going to go over them really quickly. The first one was you wanted me to look at other opportunities for what I might do in the real estate world. And it really was an important thing for me to do because I kind of soul searched about what I want and what I don’t want and where I am in my life.
One of the great things that really came from it was I realized I don’t want to start from the beginning. I don’t want to build from the start. I have a lot of skills, I have a lot of experience. And so instead of going into something more corporate, I think you’d recommended loan process or that sort of thing, I really am more interested in something more entrepreneurial, not corporate, and eventually moving into more of a retirement mode. So I think I have deemphasized that. I’m going to stick with what I’m doing in high tech marketing for the time being until I work in real estate and do some projects. And as things evolve, maybe something will come around that becomes a bigger priority for me or maybe I find my way into something as I’m doing these other projects.

Rob:
Okay, great. And then did you say that, were there two other pieces of homework?

Wendy:
Yes. So the other part was really, it’s a one other project that had two parts to it and it was, what’s my next move? And so as we talked about, I have some turnkey rentals that are currently in action. And Rob, you were really integral in making me think about this differently, because I had never considered turning one of those existing properties into a mid-term rental or a short-term rental.
So I went back to the board and I looked at the two properties I have vacant right now. One is not closed yet, it’s still being built. The first one is in Baltimore. And I did an analysis of the market there and what it would cost to furnish it and looked at the area and kind of came away with, if I had to do it midterm rental, I could maybe do it, but let’s stick with the long-term rental for that one.
Right now the numbers just didn’t make that much sense. But what did make sense was in the Florida property that I am looking at closing on in March, I’m buying two of these and they’re brand new builds. They’re beautiful, three bedroom, two bath houses. And I think what I’m going to do is I’m going to try to turn one of them into a midterm rental. And I actually had a call this week with Sarah from 30 Day Rental.

Speaker X:
Nice.

Wendy:
And yeah, I talked with them about their services and their design services. They’ve got a great turnkey situation that would be very easy for me to do. It’s fairly affordable to furnish the whole house. And I mean, it’s a learning curve for me. So what’s my time versus money evaluation, how does that go?
So I think for my first one, it might be a great thing to use them for something like this. And when I ran the numbers in that area, there’s not a lot of full houses available for people to rent. And I could probably increase the rent from 1850 a month on the long-term rental to close to 2,700, maybe even 3,000 for a short-term rental. So that kind of makes sense. The only question there is there a market for it? And I’m pretty confident there is, but I got to dig a little deeper.

Rob:
Cool.

Wendy:
Yeah, I thought that was a win. And then the last one was, all right, great. So if we’re going to go down that path with that one, what’s next for Wendy as far as my next investment?
So to recap, I’ve got a W2 job. I’ve got no primary residence, so the time is right for me to use the conventional loan for once and only that I have all my other loans are DSCRs. So I would love to buy a property that I could call my own and maybe house hack it and put multiple people in it, maybe travel nurses. So the question is where do I do that? I’m looking at the Las Vegas market. In the last week. I got a realtor, I’m getting my loans approved and I’ve started looking at properties. There.

Rob:
Awesome.

Wendy:
So that’s what I’m at.

Rob:
Well, let’s get into your struggle the week here. You shared with us that your struggle of the week has been with market analysis. Can you tell us a little bit about what you’re actually getting hung up on in that department?

Wendy:
Sure. Well, I’m an Excel spreadsheet guru. I do use your online tool as well. And I use it especially for the rent analyzer situation. But I then put together my own spreadsheet and I go, “All right, how much could I rent this for, long-term, mid-term? What does this look like?” But I kind of get stuck in my own analysis paralysis. And it’s something about the fear of knowing whether or not the market really will bear this. Do people really want to live together in a house that they don’t know each other? And what, if they are, then what’s important for them? Is it a big room? Is it a lot of open space? Is it a larger place? Is it a pool? What are the parameters that I should work within in order to find the perfect property?

Rob:
So just to recap, it’s like you know that there’s sort of this safety net of long-term rentals and you’re like, that’s something you know… the devil you know, if you will. We’re having a little trouble understanding if there actually is that market for mid-term rentals and short-term rentals. Is that about right?

Wendy:
Yes, and I have a big fear about the short-term rentals that they are getting oversaturated and that there’s just so much complexity with the city thing. So really, I’m kind of interested in the midterm just because of that and it might be easier for me. But yes.

David:
I think first off, I want to commend you for doing, you’re thinking the right way. You’re asking all the right questions. Your brain is operating, I’m going to say just like mine would, but now that sounds like I’m complimenting myself, which is not what I was trying to do there. But I like the way that you’re approaching it here.
I also like your pivot to, “Hey, maybe I’m just going to house hack.” I think that that could be a good way to get into this. I don’t have a word for what you’re doing here, but you’re minimizing risk in several steps. The first is you’re moving to a house hack that minimizes risk. Then you’re thinking, “Well, I want to do medium term rental, but it might not work out.” So another way you could minimize risk would say, “I’m going to try to do a mid-term rental, but I’m going to fall back onto a long-term rental if it doesn’t work. So I’m going to underwrite a property that would break even or make a little bit of money if it was a long-term rental.” I mean, a lot of money is better, but you can’t assume that. And that way, if the city shuts me down or there isn’t the demand that I was hoping for, anything goes wrong, you just boom, throw some tenants in there and what you’ve done is buy yourself time.
It doesn’t mean you can’t do a mid-term rental or short-term rental. It means I don’t have to figure this problem out in the next month or two while I’m bleeding money. You put a long-term tenant in there, you stabilize it, you continue doing market research. Where do I have to advertise this thing? What platform would work? What hospitals are hiring? Can I get in with the HR department to let them know I have properties that are here?
And then when your tenant is going to be out of their lease, you do some research then on like, okay, do I want to convert this into a midterm rental? Now, you’ve got a couple months to buy the furniture, right? What makes real estate hard and stressful is when you compress everything into the short timeframe. But we just assume that’s the way it has to be. I got to buy the property, close in 30 days, then I got to rehab it as quick as I humanly can. Then I got to furnish it as fast as possible. Then I got to eliminate my vacancy and throw a tenant in there. And all of that is a high pressure cooker situation that leads to mistakes happening versus when you can spread this out over time, you can conduct your due diligence and you can get the verification that your subconscious is screaming at you that you need.
Because that’s a very good point, how do I know someone’s going to rent this thing out? I don’t even know where I would look. Well, if you gave yourself a year or even six months to do some research on that and you started slowly, now you figure out what works and then you start slowly converting more units into something like this, then you feel confident about demand. Now you can go balls to the wall. I’m just going to go buy as many of these properties as possible. So I’d like the shifts that you’re making. I think this is very wise. I want to commend you for how you’re looking at it. Rob, what angles are you seeing as she talks?

Rob:
Yeah, totally. So this to me, I think like you said, this is such a great lesson for a lot of people that I think that real estate is about exploration. When we get started, we’re seeing all these opportunities and we’re like, “Oh, we got to try it all.” But I think in this instance, Wendy, my question to you, and I think I know the answer to this, but currently all of your properties, they work as a long-term rental, right?

Wendy:
They do.

Rob:
Okay. That’s sort of what you based just the initial purchase on, right, that they’re going to be long-term rentals?

Wendy:
Yes, they work as long-term rentals, but that’s not… as I got deeper and deeper into it, that does not make a retirement. That is just a little gravy and maybe equity over time. But in most of these markets that the turnkeys I purchased in, they’re questionable as to whether how great their equity is going to grow over time. So it’s not like buying a place in San Diego.

Rob:
Sure. Sure. But I think the point that I’m making here, because this is a good conservative way to get into short-term rentals. If you can make… It’s harder and harder these days with interest rates, but you’ve already bought these purchases with the assumption that they will work as a long-term rental. Now I understand from a retirement standpoint that it may not be as juicy as you want it to be, but you already own the house. So it’s pretty low stakes. It’s a lot lower stakes than if you’re comping out of property that you want it to work as a short-term rental and it barely works as a short-term rental. And some people do that without confirming that it would work as a long-term rental. And those stakes are high for that person because if it doesn’t work, they will lose money. That’s not the case with you.
You might be out your furnishings, worst case scenario, but your stakes here are really low. You can furnish it, try it out as a short-term rental. If that doesn’t work, you can try it out as a mid-term rental. Either way, you tried it two different ways. It’s not like you’re going to lose the house. You can always convert it to a long-term rental.
So I think from my standpoint, I love this strategy because if you can make a deal work for a long-term rental, you can effectively make it work for any other kind of rental out there. Medium, short, medium-short, smedium, whatever you want to do. So I think that it’s honestly not as risky as you think. And probably for you, my action step for you is I think you just need to really educate yourself a lot more, as much as possible on mid-term rentals. Because as we start to learn more about the space, it becomes a lot easier.
That’s my channel. I try to make people feel comfortable about short-term rentals. So I’m going to give you one person that you can go follow right now because you already know about Sarah Weaver, she’s great. But there’s a guy, his name is Jesse Vasquez. He’s got a YouTube channel, he’s got an Instagram channel, and he’s all about mid-term rentals. He talks about how to go and actually give you a contingency plan, like how you actually go and seek out these clients. That’s what you’re scared of, is how am I going to get the people that actually do it?
So his methodology is actually contacting hospital staffing agencies and staffing agencies in general, and then insurance companies and insurance companies that will pay basically for a displaced family to stay in a home. And he kind of teaches the process of getting these contracts and all that kind of stuff. So go look at his content. And just by watching that, it’ll teach you other ways that you can obtain your own clients and leads on the mid-term rental without having to depend on some of the platforms like Airbnb, Furnished Finder, Vrbo.

Wendy:
Awesome.

Rob:
So go get some more education on it. Go follow him. Go find out ways that you can create more deal flow for clients to actually stay as a mid-term tenant, and I think you’ll start feeling a little bit better about this decision. But all in all, I’m going to say low stakes here. You already own the home. It’s going to work no matter what. Small experiment to find out, right? And if it pans out, the upside is actually sounds like it’s going to be pretty good.

Wendy:
Right. Yeah. Cool.

David:
All right, Rob, that was some great advice there as far as a new step for Wendy to take there. Wendy, I’m going to add on this. Take a property you already have, and I want you to do some research on if one of those, or even better, a unit in one of those could be converted into a medium-term rental in that market. If they’re out in the middle of a rural area and you’re renting it out to dairy farmers, maybe that’s not going to be likely. But if you could find something that is in a urban area, I want you to do some research and ask yourself, “If I were to convert this unit into a medium-term rental, what would I do? How would I do the research? What would I do?”
And if it looks promising, look at your leases and see which one’s expiring first, and see if maybe I could try it with one of these. Furnish it. I’d probably go for the least risk one possible, like the cheapest. Something that you could put secondhand furniture. You don’t have to go to, I don’t know, Crate and Barrel or one of those. I don’t know if expensive furniture. I’m not married. I’m assuming Crate and Barrel. I think my assistant said that one time is expensive.

Rob:
CB2, West Elm.

David:
See, I should have asked Rob. He knows all of this. You don’t want to go Saks 5th Avenue on this sucker, okay? You’re looking like, can I get some Goodwill furniture in there to lower my risk and get used to renting it out, seeing what demand is like, experiment with something you’ve already got before you go put a bunch of money into something else if you possibly can.
If you can’t make it work, it’s still going to be a very good exercise to do a stress test, which I think you’re very familiar with working in the corporate world. You guys are always going to be thinking, “What could go wrong? If we put our money in this, if we take this road, how could that work out?” I see the wheels are turning as we’re talking.
So when we come back and have the next talk, I’d like for you to come say, “David, I looked at converting one of my units and I realized I don’t know this, or this could work, or it’s much easier than I thought.” I want to hear the feedback you have when you consider doing it with an existing unit.

Wendy:
Okay.

David:
Also, we’re talking to Wendy, but anybody can do this with their portfolio. If they’re thinking about, “I want to become a short-term rental investor,” you don’t have to buy a short term rental. Definitely don’t have to go to Scottsdale and buy one like Rob and I did. You can just take something you’ve got, convert it to a short term rental and see if it works. And if it doesn’t, maybe you lost a little bit of money, but it’s okay. It’s a paper cut. It’s not an arterial bleed. That’s what we’re trying to avoid in real estate investing.

Rob:
Well, that, and if you already own a home, go sleep at your parents’ house or at your brother’s house or in your car-

David:
Rent your house out.

Rob:
Yeah. Exactly. Rent your house out and go somewhere else. Go camping for the weekend and find out if it works. There are a lot of ways to do an initial stress test.

David:
All right, Ms. St. Clair, thank you very much. We’ll talk to you soon.
All right. Danny is a software engineer by day and a superhero by night, I mean, he owns several multi-family properties in the Sacramento area, which in my opinion makes him a superhero because I’m a California kid, and he’s chasing a life of financial freedom for himself and his daughter, which is very superhero-esque of you, Danny. You’re also wearing flannel. That reminds me of Brandon Turner. So you’re A okay in my book. Your struggle of the week is that you mentioned in your update, you’re having a hard time pushing out of your comfort zone to make new connections. Tell us a little more about that. How’s that been going?

Danny:
Yeah. So I’m a pretty massive introvert, so reaching out to people and meeting new people is a challenge for me. I go through and I’ve reached out on BiggerPockets. I try to work my network, but definitely, I think I’d rather read a whole book than reach out to a couple people. And even though that reach out may just take a few minutes, just mentally, it’s one of those things where I’m super comfortable kind of being introverted more than extroverted.

David:
All right. I’m going to throw it to Rob in a second here, but before I do, I’m not going to give you practical advice. I’m going to give you something coming out of left field. It’s very clear to see that your introversion… I’m super introverted myself, okay? You don’t know it because when I get in the podcast, I flip this little switch behind my ear and I turn into Disneyland David. This is not it. Rob’s been around me in person. He’s like, “What happened to you?” He’s like… It’s completely different when I’m in my natural state. I’m a huge introvert. I’m analytical. I read people. I look at things deeply, and I don’t let you see what the heck is going on between my ears. And it’s very unnerving when people see me in real life. So I can relate to what you’re doing.
It is true that you have to force yourself out of your comfort zone, but rather than saying, “Just go talk to people,” that’s the practical advice everyone always gives, I’m going to encourage you to do something that is outside of your comfort zone that has nothing to do with talking to people. I want you to get comfortable being uncomfortable, but not by… I don’t know. I’m not going to take a claustrophobic and be like, “Get inside a coffin and sit there for four hours, and when you come out, you’ll be fine.” No, you won’t. You’ll come out like a vegetable. I want you to work out in a different way than you used to work it out. Okay? If you’re a weightlifter, I want you to go for a run. If you’re a runner, I want you to go lift weights. I want you to consider signing up for a beginner’s martial arts class that’s just super introductory level. I don’t want you to go into UFC gym and rolling around with some 22-year-old psychopaths, okay?
I want you to read, if you’re used to Audible and listen to Audible, if you’re used to reading. I want you to find something that’s the opposite of how you are normally doing things and start very slow. This is not throw yourself into the deep end and just figure it out. Okay? I want you to get a little bit of exposure to using a different part of your brain or perceiving a situation differently than you normally do, and I want you to do your very best to make a habit out of doing that. If it’s 15 minutes a day of reading, when you don’t normally like to read. As an introvert, you probably don’t mind reading, right?
If it’s one thing that I started forcing myself to do is when I would go to Walmart or Safeway or a fast food restaurant or anything, I would look at the name tag of the person, and I would say, “Thank you, Bob. Thank you, Jennifer.” And when you say someone’s name like that, they’d get, “What?” They catches them off guard, and it almost forces a conversation. I would force myself to be into those types of scenarios that broke me out of my typical, I’m just going to observe you and not show anything of myself. So does that sound like something that you can commit to doing before we get into your actual situation?

Danny:
Yeah, I think I can do that. Even though you said it wasn’t necessarily practical, I think you’ve given some really good tips there and kind of ways that I can do that. So yeah, I can do that. I can commit to that.

David:
Yeah, you probably don’t post on social media what you’re doing or where you’re going. Is that fair to say?

Danny:
Absolutely.

David:
Okay. Can I get you to put a post on Instagram or make an Instagram, if you don’t have one, and not just say, “This is me and my sandwich”? Do something. Put a video of you talking before you go into the gym or anything that you can think of that is not something that you would normally do, just do it in a very small dose.

Danny:
Okay. Makes sense. I’ve been thinking about the online presence, especially as I’m trying to scale and I’ve got these other properties. I have all this collection of photos before and after, and kind of some stuff documented that I really should… I feel like I should be putting out there to kind of build the brand anyway, so that might align well with it.

David:
And every situation you can in life, do something a little bit different. All right, Rob, what do you think?

Rob:
Well, Dan, I just want to point out to you that you are in good company, man. I mean, it’s like introverts, extroverts. It’s a 5050 breakdown. I don’t know what the actual breakdown is officially. I’m sure that data is recorded somewhere, but we have so many listeners in the BiggerPockets community that also struggle with this, that also struggle with getting in their comfort zones.
So maybe even consider making a post about it. Do we have a BiggerPockets Facebook group? There’s the forums, go make a post that’s like, “Hey guys, I’m naturally introverted. I have a tough time putting myself out there in real estate. Do I have any other introverts in the group? What have you done to overcome this?” I’ll try to give some advice here. It’s tough because I’m more of an extrovert, but I think probably trying to surround yourself with people that understand you is going to maybe have a bigger impact than you think.
I remember when I started my YouTube channel and it started to grow, I had nobody that I could talk to about my struggles or about anything that I was going through. I couldn’t celebrate with certain… I couldn’t talk about struggles or celebrations, really. I mean, no one really understood what I was going through. And I remember when I met other YouTubers, I went to a conference and I remember talking to other YouTubers and I was like, “Man, this thing happened.” And they’re like, “That happens to me all the time.” And I was like, “Oh my gosh.” I felt so heard and so comfortable with people that were facing what I was facing.
And it’s the same thing. I had that, and then a month after that, I went to an entrepreneurial conference. It was Cody Sanchez’s conference, and it was a room full of entrepreneurs. And I started talking to them and talking about my struggles and how it’s tough to balance life and business and being a family man and having kids, and they’re like, “Me too.” And so I felt heard. And so it actually allowed me to grow a lot more in both the entrepreneurial space and the content creation space, meeting other people that struggle with what I struggle with, and celebrate what I celebrate.
So I think it actually might be beneficial to try to meet other introverts that struggle with it, because you could probably swap some war stories on that and be like, “Yeah, I struggle with this too.” So I would try to connect with other people. That would be one. David’s advice to you about going and basically putting yourself in situations like martial arts or whatever, I like that too. I will say that I’m naturally extroverted, but I used to do improv and I hated doing improv in front of my peers. I was always really embarrassed to do that.
And so every Wednesday there was a jam we called it, where you could go and you could basically do improv on stage in front of a whole group of people that you didn’t know. And I didn’t tell my friends about it. I didn’t tell anybody about it. I would just go and show up because no one knew who I was, and that the pressure was off when I knew that no one knew who I was. And so I think this advice of going and trying something new where you’re in a group of people that don’t know who you are will probably relieve you, right? Because if you were trying to be extroverted at work, you got the pressure of your peers “judging you,” quote unquote, right? But when it’s a group of people you don’t know, stakes are a lot lower.
And that’s my advice on that, those two things. Try something new with a group of people that you don’t know. Try to basically surround yourself or connect with people that are also in your boat from a kind of getting out of your comfort zone, introversion standpoint. And I think doing those two things will be very helpful for you.
Oh, yes. I remember, one more thing. Sorry. I have a question actually, from a technicality standpoint, from an introversion thing. If I remember correctly, the way that you sort of recharge is by being alone in a group of people… alone away from people. Isn’t that how your batteries recharge? Is that right?

Danny:
Yeah, largely. It’s like I went to [inaudible 00:44:37] this year and then going out there and speaking to a lot of people and then going back to my hotel room in between breaks and kind of recharging was the way I did it. Yeah.

Rob:
So I was going to suggest that maybe don’t put yourself out of your comfort zone when your battery is drained. So always do these new things like joining martial art, whatever those things are where you’re sort of in a new group of people who don’t know who you are, make sure to do that after you’re fully charged and you’re ready to do that. Because if you go after work, when you’re just mentally drained and then you try to put yourself out of your comfort zone and meet new people, I don’t think that’s going to go well for you. I can’t imagine that it would. So make sure that anytime that you push yourself out of your comfort zone, set yourself up by success, by basically letting your batteries charge up and then go for it.

Danny:
Yeah, that’s good advice there because definitely, especially being a full-time work, I can see myself trying to push it toward the end of the day and do that stuff, but it may not work out well if I just jump right into it.

David:
Yeah, human beings, I’ve noticed, me included, I will just do the same thing that doesn’t work harder over and over and over than try a new thing. It’s very, very hard to get out of doing our normal thing, but we have the life we have right now because of the person we are right now. You’re not going to have a different life unless you become a different person. And part of the journey of real estate is actually becoming a different and better version of you. So now that we’ve shaken up your social life and given you some personal development advice, tell us, what was your homework?

Danny:
So my homework actually had a lot to do with what we just talked about, but Rob, you had assigned me finding some investors, in the Sacramento area, try to get contractor referrals, talk to agents. And you had this really cool tip around finding contractors using construction sites. And Dave, you had talked about… you connected me with Johnny, one of your agents who’s awesome, and just kind of think about Rob’s advice, and how do I apply it at other places.

David:
Yeah, we might be able to take you by one of my properties. Actually, now think about it, there’s several of them that are in construction and you could probably see that might help a little bit too. I’ll have to follow up with Johnny, or if you could tell Johnny to remind me, I’d love you for that. All right. So that was the homework that we had. Give me something that you learned from it and give me something that you feel like maybe was left to be desired.

Danny:
So what did I learn? So I went through and I did do some BiggerPockets reach outs. It was a little hard to find folks, and maybe I just wasn’t really using the search very well. Finding folks in that, that are outside of that small multi-family. It seems like, especially in the Sacramento area, that’s the bulk of the members out there. So that was a little bit of a challenge.
There were some meetups that I had been to over the pandemic virtually that I remember some names from. So I’ve reached out there and I’m going to go connect with them in person in the coming week or so. So I think that worked out well. The construction site, so when I actually did, I went out to Sacramento as part of this, kind of went through, and pulled a list of properties and kind of go visit my properties and see how things are going. And so I happened to pick a really rainy day, so I went around and kind of walked some properties. But in terms of construction sites, I wasn’t able to find anything. Maybe everybody was off that day or staying home from the rain.

David:
All right, Rob, what are you thinking?

Rob:
I just heard Pace Morby say this phrase not too long ago, which is if you haven’t called once, you haven’t called twice. And I think what that means is sometimes you got to just keep trying it because it’s like the method, theoretically a sound. We know people have had success doing this. So sometimes, yeah, you may drive around, not find a construction site. You may try to reach out to people that didn’t give you that recommendation, but doesn’t mean that you can’t try again. I mean, I think all of real estate in general is a numbers game. It’s reps, right? Yeah. Very rarely does stuff work out the first time. It does for some people like David Greene, but for me, I got to keep trying because I fail over and over and over again. But for some people like David, just naturally happens because he’s the king. He’s the gold king over there, the golden Greene.

David:
So gold, it’s green.

Rob:
So gold, it’s green.

David:
Danny, as you’re hearing this, I’m sure that has to feel discouraging and many other people listening are going to be thinking the same thing. I wanted financial freedom. I didn’t want to become a professional networker that has to call a hundred people a day. If I had to do that, it’s not worth it. I’ll just stay in the job I’m at. It’s okay to admit those are things that we think and we feel, all right?
What I want to get at here is that Pace is a human being who is wired to like talking. He is a good talker. It’s why he became a well-known person in our space. Rob is, like he said, extroverted. He enjoys talking. He enjoys meeting people. He can talk to a potted plant, but he’s constantly like, “Dude, why don’t you open up more? Why don’t you talk more? People think you’re rude? They’re intimidated by you.” It’s my personality, right? He’s easier for Rob to do some of this stuff than it would be for me, or for you, or for some other humans.

Rob:
I mean, I didn’t say that. I didn’t say that exactly.

David:
No, he wouldn’t because he’s too nice, right? He’s extroverted, but I understood what he was getting at. That’s where it was going, but he’s right. That’s what I’m trying to say. The point here is that it’s not going to feel this horrible for you forever. As your personality changes and adapts and grows, the weights get lighter. Maybe I shouldn’t say it… The weights don’t get lighter, we get stronger, and they feel lighter. It doesn’t suck forever, and that’s why I’m giving you the advice to start breaking out of your comfort zone in other ways, because this is what it’s going to take to be successful as a real estate investor in our area. And you don’t want it to just suck. You don’t want to be like, “What it takes to be successful is miserable. All I can do is eat kale every single day.”
No, there’s a point where kale doesn’t taste that bad, and you can put salad dressing on it. And then there’s like other things you can introduce into your diet so that it’s not just kale all the time, but when you’re used to donuts every day, the thought of eating healthy is miserable. It doesn’t stay that way. It gets easier. And so I just want to encourage you and everyone who’s in this position where we’re saying, “You got to call twice, not just once,” these calls don’t suck forever. At a certain point, you will adapt, I promise you. And it will even start to, in a crazy way, become fun.

Rob:
Yeah, that’s good, David.

Danny:
Got to get those reps in.

David:
Yeah, but start slow.

Rob:
Sure. Yeah. But just the analogy of, yeah, the weight doesn’t get lighter, you just get stronger. That pretty much is how it is. I mean, I’ve just recently started making cold calls again. And I think another thing for me that I’m learning is like you’re never above anything. I have teams. I have systems. I’ve got… I’m success. I’ve happy with where I’m at in life, but I’m still cold calling.
I actually met with the landlord yesterday. I walked to his apartment complex and I pitched him on a rental arbitrage deal, and that’s not something I would’ve done one or two months ago, but it’s something that I’m doing now because I want to learn that to teach people and stuff like that. So for me, I was able to say, “Okay, I was naturally a little nervous to do it because I’m like, ‘I’m going to suck at this.’ I haven’t really pitched myself in a long time, but I know that by doing it over and over and over again, it gets easier,” and it is. I already feel pretty good at it because it’s like a skill that you can learn pretty quickly if you dedicate time to it.

David:
There we go. Okay, Danny, your most important next step is going to be different than some of the other people, because I don’t think that there’s practical steps that you need to be taking as the same as with Wendy and with Philip. I think yours are going to be more, like I said, at least from my side, I want you to do something out of your comfort zone, but not wild and crazy. Okay? I don’t want you to go walk on hot coals or get in a pit full of poisonous snakes and force yourself to keep your heart rate low. I want you to consistently do small things. So if this was a weight room, don’t get in there and try to bench press 200 pounds, go to the gym and work out every muscle group one time. You’re going to be sore, so don’t blow it out, and don’t look for results right away.
You’re just looking for a habit you’re trying to build, which will lead to momentum, and that momentum that we are creating is going to be what crushes through the obstacles that are in front of you. If you try to go too big, you’re going to get discouraged and you’re going to quit the whole thing, and that’s how anybody would be. If you go to the gym on your first day and you blow it out, you’re so sore the next day, you never want to go back and you don’t, right?
So your homework from my point is I want you to come back and I would love it if you had a list of four or five things that you said, “I hated it. I didn’t want to do it. It’s not what I like to do, but I made myself do it and here’s what I learned.”

Danny:
Sounds good. I will commit to that.

Rob:
Even tinier step here, man, just really just a very easy softball that you can throw here. Just try to start a conversation with your cashier or anyone that you interact with that you typically wouldn’t, right? Go to Trader Joe’s. Everybody that works at the cash register at Trader Joe’s will chat with you about their childhood if you ask them any question. Go put yourself in a situation like that. Ask them how their day is going, what they got going on this weekend, and I promise, they’ll probably honestly pull the conversation out of you.

Danny:
I like it. Dave, you mentioned, you had a switch. I shaved my head and I still haven’t found that switch, but you thinking the reps here will make that grow out of there?

David:
It sort of makes its way to the surface over time. First, you shave, then you wait, and it rises to the surface, and then yes, the reps will absolutely reveal. Sometimes, I had to lose a little bit of head fat to reveal where that button was, but I had to get in there and talk to people to burn those calories.
I’m not exaggerating to you, Danny. I was so bad that when I was holding open houses as a new agent, I had to bring Krista with me and she would go introduce herself to the person and then say, “This is David. He’s the listing agent.” And I would shake their hand, and then I had a little bit of momentum that I could be like, “I’m David, what is your name?” And then I just hope to God the conversation went somewhere because I just couldn’t jumpstart it.
And I was a cop for eight years. I could bust into houses and scream at people or go approach a person out of nowhere. I could make conversation with someone stalling for time, waiting for backup to arrive because it was really dangerous. But something about that salesy environment, I was like, hated it, right? I just closed off and it was very, very, very difficult. So I just made tiny improvements. I brought Krista, and then after the third or fourth open house, she went with me and I shook her hand. This is embarrassing. I sound like… It’s just terrible. But this was the reality.
When I would have to call people from the open house, I wouldn’t know what to say. So I had another agent sit there and whisper in my ear, like Romeo and Juliet, “Ask them if they liked the house,” and I would, “Did you like the house?” And then they would reply and she would whisper it. They would have to wait for me to reply back.
That’s what it took for me to build the momentum. And now like Rob said, I could call somebody up and just start a conversation. And I’m actually, I teach people how to control conversations through psychological tactics because I had to learn all of that. So there’s absolutely hope. It will not suck this way forever. I don’t talk about it very often because most of the podcasts are not about me, but I absolutely relate to where you’re at. And there’s so many people that listen to this and they’re like… It’s like they’re at the gym. They want to go work out, but they’re too scared and nervous, so they’re looking in the window at the people working out like, “Someday, I wish that could be me.” And they’re doing that with real estate investing or real estate sales or networking or the meetup that they want to go to, but they’re too shy.
Just find some way to bring someone with you or just get in the gym and walk around and then leave, even if you don’t ever touch the metaphorical machine. It’s okay to start slow. The goal is build momentum, not just get a tangible result right off the bat. All right?
So thank you very much, Danny. We’re going to be following up with you soon. Stay encouraged about what you’re doing. You made some good progress. Make sure that you tell Johnny that you want to go see one of my properties and maybe I’ll meet you in person when I go out and check on how the progress is going.

Danny:
That’d be great. Thank you both.

David:
All right.

Rob:
You got it.

David:
And that was our last guest. Rob, what’d you think about today’s show?

Rob:
Really good, man. A very large spectrum of SOTWs, struggles of the week. SOTA was what I was calling them. That’s the new term that I brand it, but it’s really nice. Everybody can be going through a very similar journey, but through very different struggles. And I think it’s really nice to kind of work through all that because yeah, man, it’s just new. Real estate is so cool because it creates very unique situations that you haven’t heard about, that everyone’s got a very different story that they’re going through. So yeah, it’s really nice to catch up with everybody.

David:
And I want to give a shout-out to all of the people that were guests today that volunteered to take this very public journey in front of us and the entire BiggerPockets audience. It takes some more courage than people might think.
And it reminds me of one of my favorite poems that’s hanging in my office. It’s Teddy Roosevelt’s, the Man in the Arena. And I’m going to close out by reading that. It is not the critic who counts, not the man who points out how the strong man stumbles or where the doer of deeds could have done them better. The credit belongs to the man who is actually in the arena, whose face is marred by dust and sweat and blood who strives valiantly, who errs, who come short again and again because there is no effort without error and shortcoming, but who does actually strive to do the deeds, who knows great enthusiasms, the great devotions who spends himself in a worthy cause, who at the best knows in the end, the triumph of high achievement, and who at worst, if he fails, at least fails while daring greatly so that his place shall never be with those cold and timid souls who knew neither victory nor defeat.
For each of our guests today, they are the man in the arena. They are taking this public journey and out there trying to do it. And I commend them for not sitting back and just being critical of others or saying, “There is no chance.” And I am proud to be a part of this journey with them. This is David Greene for Rob, my safe space, Abasolo, signing off.

Jack Schrupp started a whole foods-based protein powder company from his kitchen, somewhat by accident. Last year, he had over $2 million in sales.

A teacher, with an affinity for athletics, particularly skiing, Schrupp had always been interested in his diet and health. Yet when he started reading the ingredient lists on protein powders, he was disappointed to see that they were made with preservatives, stabilizers, and inexpensive ingredients that were not healthy for this gut.

“I don’t have any chronic gut issues, but when I would have a protein shake, I just didn’t feel good afterwards. I tried both vegan and non-vegan options…and still got stomach aches or felt really bloated,” he says from his New England home. So he started making his own experimental batches in his kitchen.

“I’ll admit, they didn’t taste the best at first, but they worked, and it was a few simple ingredients that I had literally ground up myself.”

In 2020, Schrupp began Drink Wholesome, selling his protein powder mixes online, while still working a full-time job as a teacher at a boarding school. Yet the pandemic changed things for him; he could no longer do the in-person tastings he was planning on to get the word out about the company. “I thought I’d go to sporting events, races and give out samples. But that wasn’t happening anytime soon.”

So he focused on digital, primarily his website. While sales were slow at first, within a few months, the wholesome ingredients caught the eye of customers looking for gut-friendly options that were easier to digest. As word started to spread that his concoctions were lighter on the system, and thus, a better option for those battling conditions which limited their food options, he saw an uptick in sales. “At that point, I was just selling to family and friends and then I started getting orders from strangers and it sounds weird, but that was the best thing, people who didn’t know me were buying it.”

Schrupp started to ramp up his inventory, using the cash flow from sales to buy more ingredients, expand his manufacturing, and eventually introduce new products — meal replacement drinks, in addition to protein powders, which helped a similar set of consumers looking to supplement their diet with an easy-to-digest formula.

With a focus on clean, straightforward ingredients, Schrupp sources many of the essentials from American suppliers and growers: oats, almonds, eggs, peanuts, and chickpeas. And he’s opted for actual foods, not natural flavorings. So there’s real vanilla beans in his mixes. “It’s crazy expensive, but you can’t match that flavor,” he says.

All of the ingredients, which rarely exceed 5, are listed on the front of the bag in big bold letters. It’s a clear deviation from the typical ingredient list hidden on the back. When asked why other brands haven’t taken this approach, Schrupp says, “It’s expensive. Mine is definitely a more premium product.”

Using less expensive fillers and core ingredients, such as pea protein or whey, he says can help bring down costs. But those can often be the very reason why some people cannot stomach protein shakes.

“Let’s be real. You should be getting most of your nutrients from real food, not supplements. But if you need more protein in your diet, or a convenient way of getting it, that’s when you should be using a protein powder mix. Not the other way around,” he notes.

Schrupp’s growth has come with the usual challenges: with egg prices skyrocketing this year, he saw his costs triple overnight. Or when shipping costs were sky-high during the pandemic, he had to be a bit more prudent about where he looked to source international ingredients from. But he’s been able to weather the storm. In fact, he had just over $20,000 in sales in 2020 when he launched; but in 2022, it’s now over $2 million.

It’s reached that point when Schrupp will have to give up his day job this year, and focus solely on the business. “I’ll be the first full-time employee on the books,” he says, laughing. So far, he’s built the company by using a variety of contractors. His products are packaged by a facility that works with a New England-based granola company as well. He hires individuals for specific tasks. It’s an old-fashioned approach to building the business from the ground up, and based on sales, rather than flooding it with investment.

Beyond just selling protein powder mixes, he’s opening up the dialogue on nutrition—even amongst the athletic circles he works and plays in. “Many athletes know that protein is good for you, but they’re not thinking about the source of that protein. In today’s world of highly processed food, it’s not just about getting in good fats and proteins, it’s about which ones you’re turning to daily. Think about it, if you’re having that supplement or protein shake everyday, you’re putting in more and more of those preservatives in your gut. That’s not good over a long period of time,” he explains.

“Keep it real, foods.” he says empathetically.

Ashley:
This is Real Estate Rookie Episode 255.

Amanda:
So there is a point where we are looking at, am I doing house hacking, am I doing short-term, or long-term, or a mobile home park? Those different investments have different tax consequences, and therefore different tax strategies. So before meeting with your tax person for the first time, you do want to have a fairly decent idea of what it is you want to do? What is my investment goals, how many rentals, what states do I want to be investing in? Because those kind of things play a very important factor for the starting point of what your plan is going to be on how to save on taxes.

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 I want to start today’s episode by shouting out someone by the username of Relatos, and this person left us a five-star review on Apple Podcasts with the title of, “Best Boring Banter Ever!” With an exclamation mark. This person says, “I love listening to you guys, you definitely cater to the rookie investor, making it easy to digest what you teach, asking your guests great questions for both the novice and the pro. Keep up the boring banter and Ashley’s laugh.” So Ashley, you’re getting some love from the Rookie audience about that wonderful laugh of yours. How’s that make you feel?

Ashley:
I feel like somebody I knew wrote that, because they’re so used to crying from all the hurtful comments.

Tony:
People love it, people love it, there you go. And the boring banter.

Ashley:
Well, thank you so much. We appreciate that you guys, so much.

Tony:
And if you guys haven’t yet, please do leave us an honest written review on Apple Podcasts. We’ve gotten so many coming in over the last couple of weeks here, it’s been fantastic. But the more reviews we get, the more folks we can help, and helping folks is always the goal of the Real Estate Rookie Podcast. I know this episode comes out at the end of January, but this is actually the first episode that we’ve recorded of 2023. So, 2022 is officially in the rear view, we’re now in 2023. And I’m excited for this year, I’m excited for some changes in our business and how things are going to grow. What about you? How are you feeling for 2023?

Ashley:
Good, excited. I mean, it’s definitely going to be different than the last two years, just with the market changing, interest rates going up. Everybody’s pivoting, changing their strategy. So there’s some that are super-excited about what’s going to be coming this year, and then I feel like there’s others that are sweating bullets and actually really nervous what’s going to be happening this year. So I think a lot of people are taking advantage of how to change, adjust and pivot their investing strategy right now to kind of take advantage of the situation and not be somebody that’s going to be struggling during the next year with however the market goes.

Tony:
You know what might be a cool show, Ash? And for our producers that are listening, is if we got, me and you, Dave Myer, and maybe like a panel of people who specialize in different asset classes. So maybe we’ll bring on like A. J. Osborne to talk about stuff, to talk about self-storage, James Ander to talk about flipping, obviously I can talk about like short-term rentals, and even the long-term rental side. And maybe we just kind of, from the data that Dave’s got like, “Which one of these asset classes is going to do worse or better as we go through this X market cycle?” That could be a cool show to talk about.

Ashley:
Yeah, yeah, that would be really cool. Almost kind of like a debate, where we’re each advocating for how our strategy can work. But not even just at a debate, but showing how we’re pivoting our current strategies to adjust to the market. So if somebody wants to change to pivot to that strategy, or stay focused on that, some of the things that we’re each doing based on that asset class. Yeah, that would be really cool. And I’m pretty sure our producers don’t listen to the show, so we’ll have to tell them after. So, how was your New Year’s, Tony? I saw that you were in New York City. We’ve got to do a little boring banter.

Tony:
Yeah, yeah, no. New Year’s was cool, yeah. We spent New Year’s Eve and New Year’s Day in New York City. Sarah and I went back in 2012, and we did the whole Time Square thing where we camped out all day, waiting for her to see the ball drop. Didn’t want to do that this time around, plus we had our son with us, so we were just like at a cool little arcade in Time Square for New Year’s Eve. So it was cool, super-busy, but still I love New York City. But I think three days there is probably the most that I can handle, just with all the people, and the noise, and the honking, and the sirens, and all the other stuff. But, it was good. We saw all the big sites, Central Park, we did the 9/11 Memorial…
The Memorial Museum for 9/11 is probably one of the coolest things I’ve been to, and I’ve been to it twice now. And I was in, I don’t know, junior high, elementary school when 9/11 happened, so I didn’t really understand the weight of that whole experience. But going to that museum, and hearing the stories, and seeing the… They have voicemails that people were recording when they were on the plane about to crash, and just everything in that museum was super-touching, and I was glad my son got to see it as well to kind of understand the impact of that moment. So, lots of great things in New York City.

Ashley:
Yeah, I’ve only been to the Monument, I’ve never been to the actual museum. But yeah, I’ll have to definitely check it out.

Tony:
Yeah, I highly recommend it, yeah.

Ashley:
Yeah. I did the New Year’s Eve thing when I was in college, and the same thing. You were packed, and you were cattle, and these-

Tony:
This little block, yeah.

Ashley:
… crowds were sectioned off. You can buy a $50 pizza, you can’t go to the bathroom. And then as soon as the ball drops everybody just runs, and it’s just garbage everywhere. And I just remember we were like, “There’s an Applebee’s. Okay everybody, we’re going to book it there. We’ll meet you there,” and everybody just took off and ran just to eat something. But yeah, for me it’s like one of those things, like you do it once and never do it again, yeah.

Tony:
Everyone, yeah.

Ashley:
Yeah. So this year we took the kids and we went to a ski resort, and so we did… That they had the fireworks, we went snowboarding, they do like a torch parade with the skiers down the hill before midnight. They had like a family party where they had a DJ and they had a dance contest, so we were so proud of the kids because they each did the dance contest, and they were telling us how nervous they were and everything, going up to do it. And they were well-deserved to be nervous, because there was like six and seven-year-old girls doing back flips and all these things. And we were like, “Our boys are still going to go out there and do a dance?” And there’s these girls doing acrobats out there. But we were just so proud of them for getting over those nerves, and going in there, and trying it out. But yeah, it was a lot of fun.

Tony:
Where was that at, where’d you guys go? Was it in New York?

Ashley:
Yeah, yeah, it’s Holiday Valley, so it’s the second-closest ski resort to us, yeah.

Tony:
Oh, cool.

Ashley:
It’s in a really nice town, [inaudible 00:06:48], which has a actually really nice short-term rental market, they actually-

Tony:
I remember you talking about that place.

Ashley:
Yeah, they stopped doing short-term rentals directly in the village of it now, just because there was so many that the actual occupancy of people who lived there full-time was so low, so they actually stopped doing short-term rentals right in the village. So it’s only in the town that you can actually have them, and so it’s definitely been like a changing market there for short-term rentals.

Tony:
Yeah, and we’re seeing that all across the board in a lot of different cities as well, where regulations are starting to tighten up a little bit. Which isn’t a bad thing, but part of the process.

Ashley:
Yeah. One of the projects I’m working on this year is a property I bought that’s about 10 minutes outside of this town, [inaudible 00:07:33]. And when they stopped doing the short-term rentals in the village it just added to our property value because we can still do it where we are, and we’re on the outskirts enough but still so close. We actually had somebody that stayed in one of my other short-term rentals, and this one’s 20 minutes away from this town, and they were staying just to go skiing at this resort, so…

Tony:
Well, we’ve got a good episode for you today right? We have the world-famous, none other than Amanda Han. If you guys don’t know Amanda Han, she is like the Obi-Wan Kenobi, or I don’t know, who else is like… She’s like the, I don’t know, who’s someone that’s like super knowledgeable? I don’t know, I’m struggling with my metaphors.

Ashley:
First of all, she is the nicest and most friendliest person you will ever meet. You are just like automatically attracted to her just because she’s so nice, and bubbly, and yeah. So that’s like the first thing, like-

Tony:
But she’s like, wicked smart.

Ashley:
Yes, full of knowledge.

Tony:
Yeah, she’s like a savant when it comes to everything related to tax strategy. So she’s written not one, but two books for Bigger Pockets on tax strategy, the first one is Tax Strategies for the Savvy Real Estate Investor, and the second one is The Advanced Tax Strategies for Real Estate Investors. And both of those books are really good kind of foundational building blocks if you want to learn about ways that real estate can help you from a tax perspective. But we brought Amanda on today to talk about a whole slew of topics, ranging from when should you start looking for a tax planner, tax strategist for your business, the difference between someone doing tax prep and tax strategy, and so many other things. I don’t know, what was your favorite part of the conversation Ash?

Ashley:
Well first of all, those books that you mentioned, highly recommend. I have them both, I’ve read them both, I give them out to a ton of people. But we do actually give a discount code out, so if you guys are interested make sure you listen to the episode for that discount code too. I think my favorite thing was talking about actually setting up your LLCs too, because you may not think that would be something you’d talk to your CPA about. Maybe that’s something more you talk to an attorney about. But she’ll go through reasons why you should consult your CPA, and I think there’s a joint offer there between an attorney and a CPA as to how you should set up that legal structure for your entity. So, that was kind of my favorite part of the episode.

Tony:
Yeah, I enjoyed that. I think my favorite part was when she ranked the different investment strategies from like best tax treatment, versus worst tax treatment. So if you’re on the fence about which way you want to go, listen to that part of the episode, it might help you decide the strategy that’s right for you.

Ashley:
Amanda, thank you so much for joining us, and welcome back to the show. We always love having you on. Can you start off with telling us a little bit about yourself and why you’re on the show today?

Amanda:
Yeah, yeah, I’m so excited to be here, to be back on the Rookie Podcast. So my name’s Amanda Han, I am a CPA and real estate investor myself. So not unlike a lot of the Rookie investors I still have a daytime job, my daytime job happens to be working at my firm, Keystone CPA, where we help investors nationwide on how to use tax planning to save on taxes. And by night I’m a real estate investor, again. I like a lot of you guys, wait until the kids fall asleep so I can sneak in some time to work on my real estate stuff.

Ashley:
Amanda, before we even get into the CPA part, and your daytime job, and all of the tax benefits of real estate investing, can you tell us just a little bit about your own real estate investing journey and maybe some of the strategies you have used?

Amanda:
Yeah, yeah. Well, I started investing in real estate in kind of like my mid-20s, and not unlike a lot of people my impetus to doing it was I read Robert Kiyosaki’s Rich Dad book. And at the time what was interesting was I was actually a CPA working with investors, but I just never thought I could do it. It was almost just like something that other people did, people who had a lot of money and experience and all that. But really seeing the tax benefits of what a lot of my clients that were making a ton of money, but not paying a lot in taxes was when my husband Matt and I decided we were going to get into real estate investing. And I just remember it was very horrific for me to sign the paperwork to buy my first rental property, again, which was this thing of like, why would I be able to do it?
Is it something that I can’t do? But I think for me that was like the hardest investment. Thereafter, every investment thereafter that has been just easier and easier, so never looked back.

Ashley:
So it seems that you definitely have some experience as an investor. What is your take on how beneficial that can be when you are looking for a CPA?

Amanda:
Gosh, well I think it’s very important when you’re working with not just a CPA, any kind of advisor right? So CPA is your attorney, your real estate agent, right? So your team, you just want them to invest personally in real estate. Because as real estate investors, we have kind of a different lingo that we use when we talk about stuff. Especially for bigger pockets people, the Burr strategy, or subject twos. And you just don’t want to be the person to be teaching your tax advisor what is going on in the real estate, you want them to understand the transactions in real estate because that’s the baseline for them being able to know what you’re doing, and then be able to help you with the planning and the strategy surrounding those transactions. So yeah, I think it’s very important.

Tony:
And Amanda, I don’t know if you know this, but you’re actually the reason, or at least a big part of the reason why I invest in short-term rentals. So our mutual friend Alex Savio was a client of yours, and you encouraged him for some of the tax benefit to come along with short-term rentals, to look at that asset class. He took your advice, bought a cabin in the Smoky Mountains. And then after he got his contract under a cabin he came to me and said, “Tony, you should buy a short-term rental.” And I said, “All right, cool. If you’re doing it, I guess I’m going to do it too.” So had it not been for your advice, I would have no short-term rentals at this point. I don’t know if I’ve ever shared that with you before.

Amanda:
Yeah, you know, it’s funny, but no, I didn’t know that. Until recently, when I was at your short-term rental summit, and I think everybody was there together, I heard that story. And I love it, it’s such an amazing story, to know that I was a tiny bit in kind of helping to help you guys build your portfolio. And that’s why I really love being on like podcasts like this, just, you never know who’s listening, and you never know who’s going to take action and implement like that tiny, tiny little golden nugget, and then grow their wealth and grow their friends’ wealth.

Ashley:
Amanda, before we get too far into the show, I want to make sure that we’re capturing our full audience. So this is the Rookie show, and maybe people are listening that don’t have a deal yet. And I don’t want them to tune out. What are some of the reasons they should listen to this episode? How important is it for you to know about these things, this tax strategy before you even start investing, or as you’re starting out, even if you have one, two, three properties?

Amanda:
You know, actually I think when it comes to tax planning, the best time to do planning is actually before you buy rental properties, or before you buy a lot of rental properties. And I’m sure we’ll talk a little bit about legal entity in a minute later today, but… And the reason for that is, as with anything, when you’re putting together the plan for a rookie investor, what am I going to be doing? Is it short-term rentals, is it long-term, is it house hacking? The different types of investments have different strategies. And so as soon as you know, “What’s my plan? What am I going to invest in, how many properties this year, or next year?” Then that’s a good time to educate yourself in terms of, “What are the possible ways I can use my investments to save on taxes?”
If you start planning too late, let’s say after I have five, six, seven rental properties, unfortunately I see this way too often, where people end up in the wrong entity structure, or just the wrong way to do things. And sometimes if you make a mistake earlier on, it could be very costly and sometimes even impossible to fix some of those issues. So yeah, the earlier you understand some of these benefits, the better it is.

Tony:
Yeah, and I can speak from firsthand experience the challenges that come along with waiting too long to get some of that professional help. So Amanda, one thing I want to circle back to because you mentioned this, is that you focus on tax strategy and tax planning. Can you just define for us the difference? What is the difference between what you do as someone who focuses on tax strategy, versus tax preparation, and how do those two different kind of people play into when folks start looking at those different aspects of tax?

Amanda:
Yeah. Well, I think one of the most common mistakes that investors make, and that’s not just rookies, that’s even very experienced people, is not understanding that there’s even a difference between tax planning and tax return filing. So tax return filing, I think that’s what a lot of people are thinking right now when they’re listening to our podcast. So tax return filing is when you’re taking your paperwork, a recap of what already happened last year, and you’re having a tax person put the right numbers on the right forms. That’s really it, they’re reporting what did or didn’t happen, and they’re going to tell you how much you owe in taxes, that’s really it. But tax planning is when you’re doing the right things throughout the year, so that by next April you can pay the least amount of tax, or get the biggest refund.
And so again, even though a lot of people right now are thinking, “Oh, I’m going to get my tax return file from last year,” what you’re doing is really just reporting what happened last year. But really what you should be doing is taking a look ahead at this upcoming year and saying, “Okay, what are some of the things I should be doing so that I can not just make more money, but save more money?” You know, or save more of the money that I just made. So I think that’s a huge difference in the two.

Ashley:
Well, let’s get into it. How are some of the ways a rookie investor can save money by purchasing their first investment property? And I’m not sure the best way that you want to kind of go through this, but do we want to go… You know, some of the top reasons for each strategy, or just things overall in general? But just, let’s start there as to, how can investing in real estate kind of benefit anybody? What are some of those tax strategies?

Amanda:
Yeah, it’s a really good question, because I think… I mean, we all know like wealthy individuals make a ton of money and don’t pay a lot in taxes. And so you read about those people, Elon Musk, Donald Trump. But I think for a lot of investors, especially for rookie investors starting out, it’s kind of like, “Wow, that’s great for them. But how does that relate to me?” And what I love about real estate is that that’s an asset class that encompasses a lot of the strategies that these super-wealthy people use. So if we go over some examples, so how do wealthy people make a lot of money but pay no taxes? Because they build businesses, or they buy things that go up in value, but they don’t have to pay taxes on that.
So that’s the same thing for real estate, if you buy a property for $100,000 and a couple years from now it’s worth $150,000, we’re not paying taxes on that appreciation. Versus comparing that to like a W2 income, if you make $50,000 of income [inaudible 00:19:03] you’re paying a good amount of taxes on that. And so that’s one of the reasons that real estate is really beneficial, because it allows you to grow your wealth without having to pay a ton in taxes.

Tony:
So yeah, there’s obviously a ton of benefits that come along with investing in real estate. But every strategy kind of has its own I guess ability to help you reduce your taxable income, like some strategies are better for taxes, others are not so great. So if you think about like the big buckets of investing in real estate, you have long-term rentals, short-term rentals, flipping, wholesaling, maybe at a higher level like commercial real estate in terms of syndications and stuff like that. If you had to kind of rank from maybe least tax preference to like highest tax preference, how would those strategies stack up?

Amanda:
Well I mean, I think the preference will differ from investor to investor, because every person has a different profile. Someone might be still working full-time, someone else might already be doing real estate full-time. But we’ll just take a kind of… The scenario of someone who is still working full-time at a job, because a rookie investor just starting out in real estate may be one property this year. From that perspective I would say for me personally, I heavily lean towards short-term rentals. A little bit about what you brought up earlier Tony. And the reason for that is for short-term rental properties, if you create a tax loss, and tax loss meaning that we’re maximizing write-offs or doing clever things with depreciation, not actually losing money.
So we strategically create losses, it’s a lot easier for us to use that, not just offset income from the rental property itself, but also offsetting income from our W2 job as well. And so the short-term rental, out of all the different ones that you named, that’s kind of the lowest-hanging fruit where it’s very possible for people to have a high W2 job but still be able to utilize a lot of those tax benefits by doing real estate on the side. For long-term rentals I think that’s probably next, and by long-term rentals we also combine single family, multi-family, commercial property, those are all typically long-term rental properties. That’s generally the second bucket, because we can still use all those depreciation and expensing and all that to offset the income.
But if you’re someone with higher income you just might not be able to use it to offset W2 taxes. I mean, it’s obviously possible to do with planning, but again, not as easy as the short-term. And then the third bucket is kind of what you mentioned, more the active real estate, so flipping, wholesaling, maybe getting real estate commissions. That’s kind of the third, or least preferred bucket, because when you’re doing those kind of transactions typically you pay higher taxes on that earned income. And especially for flippers and wholesalers, we don’t really get the benefit of rental real estate in terms of depreciation. Because after we’re done with the rehab, we’re just selling it immediately, so we’re not really getting depreciation like we would with rental real estate.

Ashley:
And Amanda, let’s talk about how this is all legal, these tax benefits. You hear sometimes in the news about, “Oh, this person or this corporation, they didn’t pay any taxes, they did this awful thing by cheating on their taxes somehow.” But these are all legal tax benefits, and if somebody else is taking advantage of them why aren’t you guys? Go ahead, this is at your disposal, this is for anybody to take advantage of these tax benefits to reduce your taxable income.

Amanda:
Yeah, and I think not only is it legal, it’s actually encouraged. And the reason the government gives us a lot of these benefits is because they want to encourage certain actions. So they want for investors specifically, they want us to be providing housing, because the government doesn’t want to do all their… They don’t have time to do all that, so that’s why they give us the incentives. Right now with, write off some depreciation, we’re getting bonus depreciation. And again, that’s another one of those that came out when they were trying to stimulate the economy, they’re trying to stimulate investors and business owners to spend money, make improvements on properties, and in exchange for incentivizing you to do those things is why the government gives us these different tax breaks. So yeah, definitely all our legal strategies, we don’t want to head towards the illegal side of things right? That’s not what we’re here to do.

Tony:
So Amanda, I think there’s this balance that especially new investors have to strike between showing the… Because you talked about the benefits of showing paper losses, and how it could allow you to pay zero to little taxes. But the flip side of that is that if you’re showing all these paper losses, it also makes you less bankable when you’re trying to go out and get that next loan. So as a new investor, how do you kind of balance trying to reduce your taxable income while still showing enough to help you get approved for that next mortgage?

Amanda:
Yeah, that’s a great question. And that’s one we hear a lot from investor clients that we work with. So I think there’s two main things, one is that if you’re doing things correctly there is a way to achieve both. Meaning you’re writing off, or you’re maximizing your write-offs so that you can get the tax savings, but at the same time it’s not eliminating your ability to borrow and use leverage to grow your real estate. So one of the major benefits of being a real estate investor is we get to write off depreciation, and that’s just a paper loss… We take the building of the property, we write it off over time. If you’re working with a good mortgage broker or a lender, they’re going to be able to explain that to their underwriters.
And so that’s a perfect example of something that’s tax-deductible for you to help reduce taxes, but is not hurting you when it comes to looking at your debt-to-income ratio. A couple other things on a similar note would be like, we always encourage investor clients, if you’re using your car for your real estate or if you have a home office, to make sure you’re claiming those. Because these are personal expenses that we all have already, but we’re just shifting it into a tax-deductible bucket when we’re a real estate investor. And those are two other things that, the lender’s already factoring in your rent or your mortgage payment. And so the fact that you are now deducting it as a rental expense, they shouldn’t be double-counting that against your income.
So there’s always little, different things like that where it helps to benefit you from a tax perspective, but doesn’t hurt you. But I will have to say, I mean we work… I think the vast majority of our clients are real estate investors, and I rarely come across someone who said, “You know Amanda, I really can no longer grow my portfolio because of loan issues.” I think I definitely see it more where if you have the right deals, you can find the money right? It doesn’t have to be bank financing, lots of other ways to achieve that goal of using leverage.

Tony:
So Amanda, we talked a little bit about deductions and reducing your taxable income. So just, if we can… Two questions here, first if we can just break it down, like the basic definition, what is a tax deduction? Is it just free money that the government is giving us, or what exactly is a deduction? And then if you can, what are some of the common deductions that a new real estate investor should be looking to take as they build their portfolio?

Ashley:
Yeah, so there is like this misconception that when you write something off you don’t pay for it, that the government pays for it. But yeah, so Amanda, if you can go in and kind of talk about what a deduction is, what a write off is, and what it means, and how it actually works.

Amanda:
Yeah, yeah, I love that. And so yeah, so a deduction or a write-off is the same thing for tax purposes. It’s a business expense that you’re using to offset the income that’s generated from that specific business. So we’ll use rental properties as an example, I made $100 of rental income, but I had $20 worth of expenses, right? And so $20 is my write-off, so instead of paying taxes on $100 of rental income I get to subtract 20, so now I’m only paying taxes on $80 of rental income. But you’re right Ashley, I think people are kind of confused sometimes and say, “Okay, well if I write off $20 that means I didn’t actually use my $20 to pay for the item.” But no, you still did, you still use it to pay.
The true cash from the tax saving is going to depend on what your tax rate is going to be. So let’s say you’re an investor and you spend $100 on Bigger Pockets membership for example, and your tax rate is 50%. So you write off $100, but then you apply your tax rate of 50% against this so you’ve saved $50 in cash. So that’s the way it works in terms of tax write-offs. Now there’s also tax credits, like if you are putting in solar for your car, or certain… Solar for your investment properties, or if you’re buying a new car and there’s electric vehicle credit, tax credits are actually dollar for dollar. So if someone says, “If you buy this car, you get $7,500 in credit,” that is actually $7,500 of cash in terms of like a refund or reducing your taxes. So, there is a difference between write-offs versus credits.

Tony:
But then Amanda, there are some things, like you talked about depreciation, that are paper losses, but not necessarily money you actually have to spend. Can you elaborate on those a little bit as well?

Amanda:
Yeah, for sure. So depreciation basically is what the… The government allows us to take a write-off over time for the purchase price of our building. So for example if I bought a building for $100,000, normally I can write it off over 27 and a half years. And there’s things that could be done where we can accelerate it, where we’re writing off much faster than waiting the entire 27 and a half years. But what a lot of people kind of get confused on is, what is the starting point for my write-off? So in my example I said we bought a building for $100, now regardless of whether you bought that building all cash, or if you did 20% downpayment, or if you did a subject two deal where you put like no money down, your depreciation is going to be exactly the same in all scenarios. We’re still looking at the purchase price.
So in other words, especially for new investors, I guess all investors, the more leverage that you’re comfortable to use in investing in real estate, the higher the potential tax benefit. Because our depreciation’s always based on purchase price, irrespective of how much downpayment you’ve put on a property.

Tony:
So Amanda, just to clarify, we have like two different types of… I guess really three different types of like tax benefits here. There’s the deduction you get for spending money, but you don’t get that full value dollar realized when you’re doing your taxes. You have tax credits, which is a dollar for dollar match, but you’re still spending that money. And you have this other bucket of things like depreciation, where you’re not actually spending that money but you’re still getting a tax benefit from doing it. So those are kind of the three big buckets, if I’m understanding that correctly.

Amanda:
Yeah. I mean, so depreciation just means that, you know, you don’t have to spend the cash today, right? You’re using leverage. I think we can also think about it in terms of deductions in general. So let’s say for example that I wanted to buy Ashley’s new book that just came out, but I don’t have money, I don’t have cash to buy it. And so what I did is I’m going to buy the book, but I’m going to charge it on my credit card. I could still take a deduction for it, just, even though I didn’t pay cash for it I can still write it off, because I charged it on my card, it’s an expense that I’m committed to… At some point I’m going to pay off the credit card. So yeah, when it comes to taxes it doesn’t always have to equate to cash spent. It’s more of, once I’ve incurred this expense. So that could be charging it on a credit card.

Ashley:
Amanda, besides buying Bigger Pockets books to educate yourself, what are some common tax deductions for rookie investors? Besides the property utilities insurance, should they be tracking their mileage when they drive to the properties? Things like that.

Amanda:
Yeah. I mean, I think for investors, all people but especially rookie, this is an area that where we see the biggest missed opportunity, where people are always looking at just the property stuff. Like you said, interest, and insurance, and things like that. But really there’s all kinds of things that could be tax-deductible. I think the best practice I always tell people is that when you’re about to spend money on something that’s somewhat significant, always ask yourself, “Is this something that’s going to help me improve my real estate portfolio or my wealth building? Is this something that’s ordinary and necessary for me as a real estate investor?” So yeah, it’s more than just the books or things like that, or definitely your mileage, your home office if you’re traveling to go to conferences.
It’s the flight, it’s the hotel, it’s the dinner and the drinks when you are networking with other investors. So really, just making it a habit. I know not everyone is like me and always thinking about taxes, but just make it a good habit. When you’re spending money, just kind of ask yourself a little bit, “Is this something that potentially could be a deduction?” Because here’s why it’s important, if you don’t track those expenses when you’re not asking yourself that question, then your tax person doesn’t even know you spend it. Unlikely they know, unless if they went to the conference with you. But you’re kind of that first line of defense to be tracking those expenses, and what’s the worst that could happen?
When it’s tax time your tax person might say, “Oh, actually no, that massage that Ashley had by herself was not a tax deduction.” But that’s fine, at least you’ve tracked it, it could have been.

Ashley:
So I have to get a couple’s massage with Tony in order for it to be a tax deduction and we’ll discuss business.

Tony:
Yeah, we’ll talk business.

Amanda:
Yeah, you can do some podcasts from there. I know it was Brandon Turner always talks about how he gets his inspirations when he’s getting massages. So yeah, that could work.

Ashley:
Okay producers, I know you’re listening. The next time me and Tony are in-person we’re going to do a couple’s massage while we record. Amanda, one thing I wanted to ask you about is the home office deduction. How does that work? Like, how do you actually deduct a home office?

Amanda:
Yeah. So a home office, basically it’s the IRS allowing you to take the business use part of your home as a deduction. So normally when we have our home, if you’re renting a house, or you purchase your primary home, we can only deduct mortgage interest and property taxes. Everything else, like internet, utilities, house cleaning, securities, those are personal expenses, we don’t really get a benefit for it. But as a real estate investor, if you have a room or a part of your home where you’re using for your real estate, that could potentially be a legitimate home office. And when you have a home office, well what happened is when it’s time to do your tax returns your tax preparer will help you determine a business percentage of the home that’s tax deductible.
So if I spent $1,000 on my utilities or internet for the year, but my home, 10% of it is my business office, then you might get like $100 of tax deduction on your utilities or internet use. And so again, it’s a low-hanging fruit because we all have home expenses. So if you can set your home up where you have a legitimate office, then you could be shifting some of these personal expenses into business deductions. A misconception that people think home office is only for people who own their home, but it actually works really great for renters too. So if you’re a newbie investor, you don’t own your home yet, you’re just renting, you can deduct part of your rent expense as your home office too.

Tony:
Amanda, now, one question from me, obviously there’s so many… Actually let me ask you, maybe you know the answer to this question. The IRS tax code, do you know how many pages, ballpark, it is?

Amanda:
I don’t, I know it’s like thousands of pages. And that’s just the code, right? And then there’s the regulations and all that that explains the tax code.

Tony:
So there’s so many different pieces to getting your tax strategy right, and I think as a new investor it can feel almost overwhelming when you start thinking about like, “Oh my God, am I doing this, am I doing this, am I doing that, am I doing that?” So if I’m a rookie investor and I’m having that first conversation with my tax strategist, what kind of information should I have ready for that person so that they can educate me on the deductions that are right for my unique situation?

Amanda:
Yeah, I think this is such a great question, because the goal, or my goal is never for an investor to become a CPA, right? We can get into the nitty gritty of depreciation, and the calculating the home office and all that. But really that’s not the intent, the intent for an investor is just to really understand, what are some of the things I need to do during the year, what are the systems I put in place? What expenses should I be tracking, how should I be tracking them? And that’s pretty much it, if you know what you should be doing and then you have the right tax advisors, they’ll be able to take the data, or the information you have, and then helping you to create the ideal outcome of your tax returns.
So for newer investors, I think it’s just understanding the basics of what I need. For very rookie investors, I think one of the issues that I see as an advisor, sometimes people will come to us and say, “Oh, I’m ready to do planning,” you want to know what is your investment strategy first. So there is a point where if you’re looking at, “Am I doing house hacking, am I doing short-term, or long-term, or a mobile home park,” those different investments have different tax consequences, and therefore different tax strategy. So before meeting with your tax person for the first time, you do want to have a fairly decent idea of what it is you want to do, what is my investment goal, how many rentals, what states do I want to be investing in? Because those kind of things play a very important factor for the starting point of what your plan is going to be on how to save on taxes.

Ashley:
So Amanda, we talked about different ways to track your expenses, and you may be able to save the receipts from your Lowes purchase of the new hardware you got for the cabinets, or you’re saving the copy of your insurance policy, showing the premium. But what’s the best way to track all of these expenses? And then even the expenses where you’re not getting really receipts from like your mileage, or even if you’re taking the home deduction, is there a good way to kind of keep track of how much you’re using your home office and what percentage of your utilities, things like that. Is there any great software that you recommend for a rookie investor?

Amanda:
Yeah, I think in terms of the how to track it, the system, I’m a huge systems person. I know everyone’s really busy, and so creating a system on tracking those expenses is really key. Because if you have the right system it’s something that you’ll be using throughout the year, right? I mean for me as a tax advisor, I don’t have a preference in terms of what an investor should be using. I think it’s going to be very specific to the investor themselves, so a lot of people like to use apps to track their stuff. You know, QuickBooks has apps, Stessa is another good one. So those different software and apps are really great, they can be geared towards real estate investors where a lot of these could be automated, you don’t have to do a lot of data entry.
But we also have investors who just don’t really like technology, they don’t really want to learn how to use yet another software, memorize another login. And so for people like that, especially for rookie investors, Excel or Google Sheets, something like that is also really sufficient too, as long as it’s something that you’re comfortable with and you’re using consistently throughout the year. For car expenses I really like MileIQ, it’s one that I use, it’s pretty user-friendly. But yeah, there’s different apps out there that you can utilize. For anyone who’s tracking like the real estate hours, if they’re trying to qualify for a real estate professional, or they’re using like short-term rental loopholes, a really great app is called REPS Tracker, R-E-P-S Tracker.
It was actually created by a client of mine who was a physician, and because I was tracking that in Excel. And she told me, “You know Amanda, Excel’s not good enough. Someone needs to create an app for it.”

Tony:
Amanda, can we just really quickly, because we’ve talked about this phrase a little bit. But can you define REPS? Like, what is REPS, and how can a rookie investor utilize that strategy in their investment business?

Amanda:
Yeah. So REPS stands for real estate professional status, and it is… Real estate professional is important for people who make over $150,000 a year, and are investing in long-term rental properties. Reason being that if you’re of higher income, and you invest in long-term rentals, even if you’re able to strategically create tax losses through write-offs and depreciation, things like that, your losses can only offset taxes from other passive income. So other rental properties, or anything else that’s passive to you. In other words, it’s not being used right now to offset taxes from your W2 income. So this is the limitation that… Kind of a current limitation that investors are concerned with.
So to be a real estate professional means that you or your spouse is spending at least 750 hours in real estate, and that you spend more time in real estate than your jobs. So if you’re working full-time at 2,000 hours a year, you can’t really be a real estate professional unless you spend more than 2,000 hours a year in your real estate. So, that’s why it’s important to track hours. And you know, and this kind of goes back earlier Tony, when you were asking what is the different buckets, what’s the order of preference, and that’s when I said short-term rental is the preferred bucket. Because for short-term rental properties, we don’t have to be a real estate professional to use the losses. In other words, we don’t care how many hours you’re spending at your job, we don’t have to have 2,000 hours.
You just have to have some material participation hours for your short-term rentals. So yeah, we can talk for eight hours on the whole real estate professional stuff, but that’s kind of the gist of it. And again, why it’s important, if you’re trying to go with one of these loopholes or strategies, that you’re not just tracking expenses but you’re also tracking your hours as well.

Ashley:
So, would this work for a married couple filing jointly if maybe the wife has a high-income W2, and then the husband is the stay-at-home dad, is it beneficial for him to actually take on the workload of their real estate business? And then with them filing jointly they’ll get that tax benefit of her high income along with the real estate professional status of his?

Amanda:
Yeah, yeah, exactly. That’s exactly the profile that would make sense, you’ve got one high-income person, you’ve got someone else who’s not working full-time, and having that second person be the main person in charge of your real estate activities and your investments and things like that. So this is where when you hear stories about, “Oh, I made $500,000 last year and I paid no tax,” odds are they’re talking about some kind of profile like this. And not just the same person making 500,000 and doing real estate full-time, right.

Tony:
So Amanda, with all of this information out there, and it’s mind-boggling to me how many different things you have to keep track of as a CPA. So I have the upmost respect for you and your ability to kind of keep tabs on all that. But if I’m a new investor, what steps can I take to I guess protect myself from getting the wrong information.

Amanda:
Gosh. You know, it’s interesting, especially with social media now right? There’s so much information and content out there, and I put out content myself too on social media. But I always try to tell people like, “Hey, content is content, but you want to make sure you’re talking to your own tax advisor to see if this strategy or this idea actually applies to your specific scenario.” So a strategy that works for Tony may or may not work for Ashley, right? And so it’s just making sure that you are speaking with someone who knows about you and what you have going on. So then the next question is, how do I find that person who is well-versed in real estate, or can help me in real estate? And I think nine times out of 10 when investors are interviewing tax preparers or CPAs, the question they ask is, “Do you work with real estate investors,” right?
That’s a easy question to ask. And probably 10 out of 10 times the answer’s going to be, “Yes, I work with real estate investors,” because everybody has at least one real estate investor client. So it’s not really a powerful question, I think a more powerful question is to kind of have them talk about real estate. Earlier we talked about the real estate lingo, so you can ask them. For example, “What do you think about subject two deals? How do you treat those for tax purposes?” And let them talk. I mean, maybe you don’t really know if they have the right answer or not, but at least you know whether they even understand what is a subject two deal. Or you can ask, “What are your other rookie investor clients doing, where are they investing, what are you seeing is successful with your other investor clients?”
And just really let them talk, and I think you’ll quickly be able to see how in-depth of a real estate conversation they can get into to see if they actually are someone who works with a lot of investors.

Ashley:
So Amanda, we talked a lot about different tax strategies, things like that. And in the beginning you had mentioned putting together the actual structure of the entities. So, could you maybe talk a little bit more in-depth about that, and as rookie investors what’s the best way to start? We hear all the time, “Put it into your personal name so you get that long, 30-year, fixed low interest rate,” or, “Put it in an LLC.” Should you do a corporation, do you have a holding company? There’s all these different ways. Do you put it into a trust? All these things. So what would be your recommendation for just somebody starting out, or does it really depend on what they have going on outside of just buying their first property?

Amanda:
Yeah. I mean, I have to go with the unpopular answer of it depends, because it really does. And I think that if you’re ever talking to someone and they say… Like if you go to like a conference and someone is saying, “Everybody needs to have a Wyoming LLC with a corporation,” definitely stay away from that, because there’s never a one-size-fits-all strategy, especially when it comes to legal entities. But kind of a couple high-level points, if you’re talking about rental real estate it’s going to be in your personal name or in an LLC, okay? It’s not going to be in any kind of corporation, and the reason is because there’s a lot of downsides to owning rentals in a corporation. On the other hand, if you’re someone who’s an active investor, meaning like flipping, wholesaling, real estate commissions, property management, then those are times where it could make sense and you could save taxes by being in a corporation.
But the vast majority of rental investors, and especially rookie investors, the LCC’s going to be the way to go because you can likely maximize all of the various write-offs we talked about today, regardless of whether you own the property in your personal name or inside of an LLC, okay? So the LLC is really just there for asset protection purposes, not for tax reasons. And a lot of newbie investors come to me and say, “Oh my gosh, I heard you on the podcast talking about writing off books, and this and that, but I don’t have an entity yet.” So it’s really important to understand, you don’t have to have a legal entity to be writing off these expenses, you just have to be in the business of investing in real estate.
And that could simply mean owning a rental property in your personal name, starting out just with the simplest, buy a property in my name, renting it out. Or even like house hacking, that you are in the business of real estate. So, don’t necessarily need to have an entity.

Tony:
So Amanda, I just want to recap what you just said, because I want to make sure it doesn’t go over the heads of our listeners. But what you’re saying is, you do not need an entity, an LLC, an S-corp, any of that to take advantage of the tax benefits that come along with investing in real estate? So the property could be in Tony’s name, the mortgage could be in Tony’s name, all of the expenses could flow through an account that’s in Tony’s name, and I could still have the tax benefits that come along with investing in real estate?

Amanda:
Yeah, exactly, exactly. And I think one thing especially for rookie investors is, even if you decided to have an LLC for your first one, or two, or three rental properties, the caution is don’t go overboard with legal entities. I unfortunately meet investors who spend 10 to $30,000 in legal fees forming all these very complicated, extravagant entities. A lot of times it’s not needed, especially if you’re just starting out. And it could get very costly in terms of the annual fees, different bank accounts and bookkeeping, and tax returns. So, be careful of getting too complicated too quickly.

Tony:
Amanda, just one followup question on that. What could be the reason that an investor would need more than one entity? Like, in what scenario does it actually make sense for them to do that?

Amanda:
So if we’re talking about rental real estate specifically, it would be from an asset protection perspective. So it could be a case where your attorneys says, “Okay, well you have two rental properties. One you have a lot of equity, the other one you have very little equity but high risk.” You know, there’s a pool, there’s stairs, your tenants have babies. So, maybe you want to have them in two different entities so that you’re bifurcating kind of the different risks associated with it. But you know, the reason you’d have multiple would be because your attorney feels like you need that level of asset protection, and not just because Robert Kiyosaki has these crazy structures, and therefore I must have that to be successful.

Tony:
So from a tax benefit, or from a tax perspective, there typically isn’t a whole lot of reasons you should have multiple different LLCs?

Amanda:
Yeah, yeah. I mean, we do want to separate out our investments from our active income, so again, if you’re someone who’s flipping and wholesaling you have an entity for that, then you have rental real estate, you have a different set of entities just to keep them separated. But yeah, tax-wise, specifically looking at taxes there’s not a reason to have a bunch of entities holding a bunch of different properties. For me, I think with anything else in real estate or business in general, I always take a look at it from the cost/benefit perspective. What is it going to cost me to have X number of entities, and what is the benefit that I’m getting from it? Whether it’s saving on taxes, or being able to sleep at night a little bit better, to then decide how many entities do I really want to not just form, but maintain, right? People love forming entities and picking out cool names, but you have to maintain those entities and bank accounts, and it’s just a lot of stuff.

Ashley:
I think one thing too, just to add to that, it’s not really for a tax reason. But also if you have different partners, you’re going to have different LLCs too, you’re going to… That would be a major reason to open up different LLCs, is if you’re taking on different partners. Because it would be almost impossible to have one LLC, but have a property me and Tony own 50-50, and then me and Darryl own 50-50, another property within the same LLC. So that would be just another obvious reason to have a separate LLC too, outside of the liability and the tax implications too.

Amanda:
Yeah, definitely. And we do see that sometimes with rookie investors who are scaling quickly, where they’ll have different deals with different partners. And that’s also a good sign that you should be working with a tax advisor too on, are there better ways to simplify the structures, or are there better ways to scale without having like six different partners and six different entities with just six properties too? But yeah, that’s a great point.

Tony:
Cool, all right Amanda. Well Ash, should we head into our questions? Is there anything else you want to hear from Amanda first?

Ashley:
No, I think we should definitely go into… We have a Facebook question today, instead of a Rookie voicemail. So Amanda, today’s question comes from the Real Estate Rookie Facebook group. This question is, “My husband and I are new investors, but I come from a family with a past in real estate investing. My grandfather, now deceased, had many rentals and eventually set up trust funds for several apartment complexes and storage unit sites with my uncle as the trustees, and my siblings and I as the beneficiaries. None of us have really taken the dive into all of this to see how to maximize the portfolio, we’ve just been enjoying passive income for years. My question is, once a property no longer has the tax depreciation, what options do you have to continue getting the maximum tax benefits of real estate investing?
“Sell the property, use equity to invest in something with a higher price tag? I am very curious as to how we can leverage equity to purchase more deals, especially since the 27 years of tax depreciation is up. One apartment building he bought over 40 years ago.”

Amanda:
Well, first off what a lucky person to inherit such a wonderful asset. And I think for all of us as investors, that’s where we hope to be, to leave our legacy to kids and grandkids in that manner. But yeah, that’s one of the best ways… And we talked earlier about the super-wealthy people, how they get the tax benefits, and we can do the same as real estate investors. So this is a really great example, right? This property has a good amount of equity. Now you could probably sell the property, and depending on how it’s structured, how it’s in the trust, or coming out of the trust, potential ways to do a 1031 exchange to defer the taxes on the gain, and then also reinvest that money into bigger and better properties, and create new depreciation, new write-offs, which sounds like it’s their goal.
But if you didn’t want to do that, tapping into equity is one of my favorite strategies. So if there was a million dollar, or $2 million of equity in this property, you can get financing to tap into that equity. The money you take out, you don’t have to pay taxes on it. So if you took out 600,000 or $800,000, you’re not paying taxes on that currently. So you take the $600,000 as a downpayment, and then you can buy another, a million, 2 million, 3 million dollars’ worth of real estate. That’s a huge amount of new depreciation and write-off that you get, and you still continue to hold onto the original property, right? Still appreciating, and maybe a little bit less cash flow because now we have debt.
But it’s still going to be appreciating too, so I love the possibility of being able to tap into that equity tax-free, and then using the new money to grow and build your portfolio even fasteR.

Ashley:
Amanda, let me ask you, how does it work then as to who actually gets the loan on this? So the trust would actually get the loan on the property, but then would the beneficiaries, or would it be the trustee? Who would actually sign as a personal guarantor, or would they have to go and get a mortgage where they’re not personally guaranteeing anything?

Amanda:
There’s various different ways to do it. I imagine probably… It’s going to be dependent on how the structure’s set up, and also whether they want to continue holding the properties in the trust. Or at some point, maybe they want to distribute the assets out of the trust so that the beneficiaries are just owning it individually or collectively in some sort of other entity too. But yeah, in terms of who’s going to sign, who’s going to be guarantors on it, I mean, I imagine it could be everybody, but I think that’s a better question maybe for like a lender to address.

Ashley:
Yeah, I was just curious of that. I don’t have a trust or anything, but I’ve worked with another investor who does, and it’s actually become like more of a headache for him than actually beneficial, I feel like. So that was just a question I had.

Amanda:
Yeah, and we do see that a lot too. That’s why I was saying sometimes the best option is to unwind the trust, just to take it out of the trust, because there are limitations. And the word trust is very generic, we don’t really know what kind of trust. There’s so many different types of trust that exist out there, some are easier to unwind and others not as easy to do.

Ashley:
Okay, well thank you so much for answering that question.

Tony:
Yeah, that was a great response. And I feel like we could keep this conversation going forever, like there’s so many things in the world of tax prep and strategy that… Yeah, there’s so many things, but you provided so much value, Amanda. So I want to finish things out by going into our rookie exam, these are the three most important questions you will ever be asked in your life, Amanda. So are you ready for the real estate rookie exam?

Amanda:
Yes, scared but ready.

Tony:
Question number one, what’s one actionable thing rookies should do after listening to this episode?

Amanda:
One actionable thing that they should do is follow me on social media, Amanda Han CPA. I try to put out good content every day, and so yeah, I think that little snippets of information, so that it’s not too overwhelming.

Tony:
And Amanda, you’ve been blowing up on Instagram, so kudos to you. I think you were at like what, 1,000 followers a few months ago. Now you’re at like, what, 10, 11,000, somewhere around there? So you’ve been doing a great job on social. Guys, make sure you do give her a follow.

Amanda:
Oh, thank you, yeah. It’s been fun, it’s been fun to share little tidbits and tips here and there.

Ashley:
Amanda, what is one tool, software, app or system in your business that you use today?

Amanda:
I use a ton, I use a ton for taxes and things like that. But I started using Zapier, I don’t know if you spell… I don’t even know if you pronounce it Zapier or Zapier, if you guys know, but it’s an automation tool that automates like a lot of stuff in our firm. From marketing, to administrative, I don’t really use it for real estate specifically right now, but I do use it for marketing and I really like that.

Tony:
Yeah, Zapier is great, and it has so many connections to so many different things. I even want to say that it has like some kind of accounting stuff built into it as well, but don’t quote me on that. But yeah, Zapier’s a great tool. All right, last question Amanda. Where do you plan on being in five years?

Amanda:
In five years, gosh. It’s interesting, because I really love what I do, my role, our firm, Keystone CPA. It sounds so strange to say, but I hope I’m doing the same thing that I’m doing now five years from now. Investing-wise, I think I want to be more passive. I mean, I’m somewhat passive now, I have a portfolio. My husband and I, we have a portfolio of properties that we somewhat self-manage. But we are trying to grow more into the… Put more of our money in the passive side of things. I’m a huge believer in leverage, in real estate we talk about leveraging when it comes to debt, good debt. But my new thing now is leveraging the expertise of other people, so other investors who are bigger, better, smarter than me, and just having them help me grow my portfolio.

Ashley:
Amanda, thank you so much for coming onto the show with us. Besides your Instagram account, where else can people reach out to you and find out some more information about you?

Amanda:
Yeah, I think Keystone CPA is our firm name, so keystonecpa.com is our website. I think that’s the best place to find me. We have a lot of great, free downloadable resources. So we talked a little bit today about real estate professional, and the short-term rental loophole, and legal entities. So if you’re a rookie investor and some of these kind of was the first time you’re hearing about it, definitely check out our website and download our free tax savings toolkit to get more information on that.

Tony:
Amanda, you also have two amazing books under the Bigger Pockets umbrella. Would you mind dropping those for us as well?

Amanda:
Oh yes, here it is behind me. So, Tax Strategies for the Savvy Real Estate Investor, and then our second book is the book on advanced tax strategies. And so for any of you who haven’t read it, I promise you it’s not what you think when you hear about a tax savings book. It is filled with stories, success stories and also kind of nightmare stories about what happens when you do tax planning correctly, versus when you do it incorrectly. So yeah, definitely check it out.

Tony:
Yeah, and it’s a great foundational book. Like if you were intrigued by some of these strategies that we talked about on the podcast today, but you also feel kind of overwhelmed by the idea that there’s so much more for you to learn, those two books are a great first place for you guys to get started. Before we close things out, I just wanted to give a quick shout out to this week’s rookie rock star. This week’s rock star is Raleigh Anthony Salazar, and Raleigh says, “It’s done, I bought my first true rental property, and I did it out of state. Back in July I cashed out and refinanced my live-in [inaudible 01:01:48], that is currently my primary residence for now. I put about 90K into my pocket, so I started looking for opportunities to invest.
“Living in the Pacific Northwest, I wanted to find better options so I looked into the Midwest.” And Raleigh says, “It would be possible without connections I made in the Real Estate Rookie Facebook Group,” so just another plug, if you guys have not yet joined the Real Estate Rookie Facebook Group make sure you do. But to wrap it up really quickly, Raleigh said, “Bought this property for $100,000 at 25% down, three bed, one and a half bath,” and is now looking to put in a lease for about $1,100 per month. And there’ll be cash flow in just over 100 bucks every single month, so Raleigh, congrats to you for getting that first deal done, and we’re super excited to see where it goes.

Ashley:
Amanda, thank you so much for joining us onto the show, we really appreciated having you. And if anybody would like to purchase the book on tax strategies for the savvy real estate investor, you can go to the Bigger Pockets bookstore and you can use code ASHLEY or code TONY to get 10% off. So Amanda, thank you very much. I’m [email protected], and he’s [email protected], and we will be back on Saturday with a Rookie reply.

Speaker 4:
(singing)

Howard Lutnick, CEO and chairman of Cantor Fitzgerald, joins ‘Closing Bell’ to discuss money moving towards commercial real estate, the projected path for rate hikes, and how to invest in public sector REITS.

By John Rampton, founder of Palo Alto, California-based Calendar, a company helping your calendar be much more productive.

The working world’s obsession with hustle culture may finally be ending. This shift in career aspirations means that there’s an opportunity—no, a necessity—to cultivate happy, healthy and thriving workplaces in 2023.

For business leaders, this perspective shift offers an opportunity to leverage best management practices alongside your company’s purpose. In the new year, consider these happiness-inducing leadership strategies to help change the way your organization feels about work.

1. Bring Your ‘Why’ To The Forefront

As a company, your “why” is at the very core of what you do. But even among the most committed professionals, the drumbeat of daily tasks can distract from your overall purpose. Combat the draining effect of day-to-day minutiae by integrating the why of what you do into every facet of your work.

Take a cue from tech firms like Amazon and place an empty chair in your meeting rooms to signify your customer or client. This silent reminder of who you’re doing what you do for can lead to more thoughtful conversations and decisions.

Use personas to think through your clients’ journeys, assigning real or stock imagery to depict them and their needs. This visual aid can help your employees better connect with their impact, even if they aren’t client-facing. When your employees better understand how their work makes a difference, they experience greater satisfaction and tend to be happier and more productive at work.

2. Invest In Your Employees’ Growth And Development—No Strings Attached

Traditionally, employers have provided a standard package of benefits to their employees. The usual health insurance and paid time off might be complemented by education reimbursements. Although free education is a generous offer, the strings attached could make this sweetheart deal turn sour.

To boost employee happiness, avoid presenting education benefits as a quid pro quo scenario. Instead of dictating plans of instruction, modify your education reimbursement program to provide a set annual amount for learning and development. Free up your employees’ options, allowing them to choose what to study versus requiring courses to be narrowly role-focused. Who knows? Enabling your marketing manager to take an art history class might prove even more valuable than an SEO certification course would have.

Collaborate with your management team to determine how your education benefits can boost employee engagement and retention. Review recent engagement surveys to identify concerns that your management team can strive to resolve. One such issue might be the time required outside of work to complete course requirements. If your workload demands can support it, update your policies to allow employees to learn during work hours. Providing support in both funding and time can improve course completion rates, boost employee satisfaction and enhance on-the-job results.

3. Develop Clear Career Trajectories And Organizational Goals

If there’s one happiness killer at work, it’s lack of clarity. When project plans, individual goals and decision-making criteria are unclear, it can put your employees on the fast lane to dissatisfaction. Be honest with yourself as you assess how your organization performs in these areas. If your assessment yields anything less than happiness-inducing transparency, a change may be in order.

First, review your employees’ career progression plans, and if you don’t have them, create a framework now. Each role on your org chart should have a growth plan that helps employees move forward. This can include skills mastery, goal achievement or next steps on the career ladder. Each employee should know what success looks like and how to earn a promotion, should they want to.

The same principle applies to setting goals, which can often vary across departments. Implement a S.M.A.R.T. goal system, in which goals are specific, measurable, attainable, relevant and timely. The combination of specificity, time-boundedness and measurability creates greater accountability for leaders and employees, establishing a playbook for success. Together, these improvements can boost employee happiness, especially regarding individual growth and team achievement.

Transparency And Collaboration

One trait of stale and out-of-touch leadership teams is a disconnect between seniority levels. Even if a CEO has risen through the ranks, it’s easy to forget the concerns of frontline workers. Counteract this possibility by building opportunities for feedback and collaboration between all levels of management.

Whether your chosen method is companywide surveys, manager-employee one-on-ones or some other tactic, establish channels for equitable input. By doing so, you’ll earn greater buy-in and build trust. Together, your organization can identify what success looks like, how to implement changes and how to create the happy, healthy workplace you’ve dreamed of.

David:
This is the BiggerPockets podcast show 718.

Dave:
If you’re in a market where wages are not going up, there is just a psychological limit to what people are going to pay for rent. It can only be X percentage. Usually, it’s 30% of their income can go for rent, and so I totally agree that in a hybrid or an appreciating city, rent growth will go up. I don’t know if that necessarily means they’ll ever reach the cash flow that these cash flowing cities tend to support, but personally, I think that that’s the better bet because you’re not betting on just cash flow or just appreciation or just rent growth.
You’re getting a little bit of everything. You don’t know which of the three might perform the best, but whatever happens, you benefit.

David:
What’s going on, everyone? This is David Greene, your host of the BiggerPockets Real Estate podcast here today with one of my favorite co-hosts, none other than Biggerpockets’ own VP of analytics, Dave Meyer with a fantastic show for you. First off, Dave, how are you today?

Dave:
I’m doing great. I had a real fun time recording this episode. I think people have a lot to look forward to.

David:
You are doing great, because if you guys listen all the way to the end of the show, you’re going to see exactly why this was a fantastic show about a very difficult topic that all of our competition is avoiding, because they don’t want to talk about what’s going to happen in 2023 other than screaming. The sky is falling, or pretend like nothing’s happening, and just give me your money so I can teach you how to invest in real estate. Here, we’re not about that life.

Dave:
Absolutely not, and maybe we should have talked about this at the show, but I think people are avoiding the concept of risk. They see there is risk in the market, and that’s true. I believe there is risk in the market, but risk is the counterbalance to reward. So, you have to understand risks so that you can reap the reward and opportunities that are out there. I think at the show, we really talked about that. We talked very specifically about what the risks are and some of the ways that you can mitigate risks and take advantage of opportunities that might present themselves over the coming year.

David:
That’s exactly right. So if you’ve been curious, if you’ve been frustrated, if you’ve been just wanting to understand what the heck is going on in the housing market right now, this is a show that will bring a ton of clarity to you. If you listen all the way to the end, we’re actually going to get into three strategies that we both believe will work regardless of what the market does in these uncertain times in 2023. Before we get into today’s show, I have a quick tip for you. Go to biggerpockets.com/report, and download the report Dave ROE.
A lot of the information from today’s show was coming out of that, and you can get it for free if you’re a BiggerPockets member. Dave, anything you want to say before we jump in?

Dave:
No, go check out the report. I spent a lot of time on it.

David:
Go support Dave, and leave us a comment in the YouTube video telling us what you thought of this report. Show him some love. If you like this show, please leave us a five-star review wherever you’re listening to podcasts. Guys, honestly, this is very, very important. We are currently the top real estate show in the entire world. We want to stay that way, but we cannot do it without your help. So whether it’s Apple Podcast, Spotify, Stitcher, wherever you listen to podcast, please take a quick second, and let the world know how much you like this podcast so we can stay number one. All right, let’s get into the interview.
Dave, you wrote a report about the real estate market. Tell us a little bit about that.

Dave:
I did. It’s a full comprehensive state of real estate investing for 2023. I wrote it because there’s just so much going on right now. We’re not and haven’t been in a normal housing market for the last several years. I start the report by going through all the different factors and variables that are going to impact the housing market right now, and then talk about some of the best strategies that you can use in 2023 to take advantage of what I personally think are going to be opportunities in the coming year, and just pose some questions about the 2023 market because we all obviously like to make forecasts, and guess what’s going to happen, but there are some just unanswered questions that I think are going to be the X factor for the 2023 housing market that we just don’t really know how it’s going to play out just yet.

David:
I’d say in my short career investing in real estate… Well, I say short. Compared to some people, it’s long, but I’m not an old man yet. This is the most complicated market I would say that I’ve ever seen. It’s got a lot more competing factors that influence what we’re seeing. Is that similar to what you’ve noticed, and is some of that covered in the report?

Dave:
Absolutely. When you look at the housing market back in time for the last 80 years or wherever we have pretty good reliable data for, the housing market is usually fairly predictable. It moves in cycles, but for, let’s say, seven or eight out of every 10 years, it goes up 2% to 4%, somewhat just above the pace of inflation. It’s pretty steady state and not that exciting. For the last 15 years or so, things have gotten a little more interesting, and it’s been a little bit more boomer bust over the last couple of years.
For the last three years in particular, as everyone listening to this probably knows, it’s become insane. It doesn’t mean that people are necessarily acting irrationally, or that we’re totally unhinged from fundamentals. In my mind, what’s happened over the last couple years is the variables and the factors that always impact the housing market have all aligned in this perfect storm to push housing prices up. Now, we’re sort of starting to see that unwind and go back to a more balanced and honestly more normal housing market.

David:
That seems crazy. It seems really negative. We’re having this overcorrection, but I think when you consider the insanity we had over the last eight years in how hot the market was, and you put it within context of that, I don’t think this is as big of an overcorrection as people are saying, but it certainly feels like it when you compare it to 20% increases in price being the norm in certain cities. Now, you mentioned that there are some levers of the housing market that affect the way that it performs. Can you tell me what you mean by that?

Dave:
Sure. I think generally, there are different variables, and these are mostly macroeconomic indicators that impact housing prices more than others. There’s thousands of things, and every individual housing market does perform differently. But when you talk about the national level housing market, it really all comes down to a few things. People often want to honestly even oversimplify it, and say, “Mortgage rates are going up, so prices go down.” Fortunately, it’s not that simple. There are more indicators. There are more things that really matter, and it shouldn’t be surprising.
These levers are things like supply and demand. Obviously, pricing always in an economic sense come down to supply and demand, but if you extrapolate that out a little bit more, we need to really look at things like affordability, inventory, the housing shortage in the United States, inflation of course, and things like mortgage rates. Those to me were the major things that were impacting the market in ’22, and will continue to impact in ’23, but just in a slightly different way because the way these variables are interacting with each other has changed.

David:
Now, we came out of one of the biggest recessions in our country’s history right before we had this explosion. So from your take, what impact did that great recession play in the home builder space over the last 10 years?

Dave:
I mean, from pretty much everyone’s estimation, the U.S. has a huge shortage in housing units. The predictions vary significantly somewhere between three and a half and seven million housing units. When you talk about economics, this just means a shortage of supply, right? There isn’t enough housing units in the United States for people, and this is largely attributed to what happened during and in the aftermath of the great financial recession. Basically, tons of builders just went out of business in 2008. It was rough out there, and people were looking for jobs. Businesses closed.
People who worked in construction wound up going into other industries, and so we see, if you look at the graph, and I put this in the report, it’s pretty startling the graph. You could just see that construction just fell off a cliff from 2008 to 2010. We’ve slowly been building our way back up, and it’s now at a pretty good level. But that eight years, or, like you said, from 2010 to 2018, we were well below the building rates that we should be at. So, that created these conditions where there weren’t enough homes.
That coincided with the time starting around 2020 when millennials, which are now the biggest demographic group in the entire United States, hit their peak home-buying age. We have these confluence of factors where there’s a ton of people who want homes, and millennials who are starting families, starting to have kids, and not enough homes. That is a perfect scenario for prices to go up. That’s just an example of how these different macroeconomic forces work together or did through the pandemic work together to push prices up.

David:
Now, if you want to hear more about the stuff Dave’s talking about, and the nitty gritty details that make this so exciting, you can download the report for free at biggerpockets.com/report, and see this data for yourself. Now, we’re going to continue talking about what’s in the report, but if you actually want to stop the podcast, and check this out or get it after the podcast is over, please head over to biggerpockets.com/report. Now, I think what you’re mentioning about supply and the issues in supply plays, in my opinion, maybe it’s the biggest lever in this whole drama of real estate prices and trying to understand them.
I was just talking about this yesterday when someone said like, “Well, David, if rates keep going up, do you see prices plummeting?” I said, “I don’t see them plummeting, because they’re such a constricted supply.” If you’re a homeowner and you’ve got a 3% interest rate, and you could sell your house and get a 7% interest rate, unless you have to move, you’re probably not going to do it, especially with your house being worth less now than what it was before. You’re going to wait. So because we’re not seeing a bunch of supply flood the market, we’re not seeing this crash in prices, and that’s what we saw during the last time we had a crash.
There was so much supply. There was way more properties than people could afford to buy or even wanted to buy, which is what led to the big decrease in prices. That’s, I think, what’s confusing to people that are like, “What? We’re going in a recession. Shouldn’t prices be dropping like they did last time?” What’s your take on comparing the environment we’re in now to the last time we saw real estate crashed?

Dave:
That’s a great point, and there’s a lot to that. I’ll just say about supply first that there are two good indicators of supply. One is this long-term indicator, and it’s what I mentioned before, that there just aren’t enough housing units in the U.S. To me, I am biased, because I’m a real estate investor. That’s the thing that points to long-term appreciation for real estate. Regardless of what happens in 2023 or 2024, because we don’t know what’s going to happen, to me, the fact that there are a lot of people who want houses, and there aren’t a lot of houses, that bodes well for real estate pricing over the next five to 10 years.
When you’re talking about what’s happening in the short term, I like to look at a metric called inventory, which is basically how many homes are on the market right now. To your point, it’s not exploding. It’s definitely up from where we were in 2020 and 2021, but not in the way where it’s signaling a crash. Just to explain this to everyone listening, inventory, I think, is one of if not the best indicator of the short-term performance of the housing market, because it measures supply and demand. It’s not just how many houses are put up for sale. That’s something known as new listings.
Inventory is a measure of how many homes are put up for sale, and how quickly they’re coming off the market. So when you see inventories start to spike, that signals a significant shift towards a buyer’s market, where prices are probably going to go down. We have seen that in the last six months that inventory is going up. But actually, David, I was just looking this week. I don’t know if you know this guy, Mike Simonson. He’s from Altos Research. He’s a big real estate guy. Inventory fell last week. It’s going down now, so it’s not like inventory is skyrocketing, and all of a sudden, we’re seeing things stay on market way longer than they were pre-pandemic.
They’re just going back to pre-pandemic levels. As of right now, things could change over the next six months. But as of right now, we’re recording this in January of 2023. Things are pretty stable in terms of inventory, and that is a big difference from what happened in 2008. I’ll also mention that the main biggest difference between now and 2008 is credit standards. This is not my area of expertise, but I read a lot about this. Basically, banks are not allowed to give out the crazy risky loans that they did back in 2008.
People are not defaulting right now. People are paying their mortgages on time, and that really puts a backstop in prices, because what really causes a market to just bottom out like crazy is forced selling. When people are forced to sell, because they cannot make their payments, that’s what sends the market into a tailspin. Right now, there is no sign that that is happening.

David:
That’s important to note. I was using the analogy yesterday when I was talking to my sales leaders that were asking the same questions. My take on it is we’re a semi-truck coming down a hill. Now, everyone knows you’re not supposed to just use your brakes when you’re driving down a hill, because your brake pads get worn out. You’re supposed to shift to a lower gear. But if this was a real recession, we wouldn’t be going downhill. We would be going flat. If the economy was struggling, people could not buy houses. They could not make their payments. They were suffering. With the job market, you’d see for selling.
We’re in a market where we are artificially slowing things down by raising rates. It’s like using your brakes when you’re going down this hill. If we take our foot off of that brake, you’d see home prices go up. You’d see transactions happening in greater numbers. You’d see days on market start to go back down. It is important to note this is not a recession based on fundamental problems in our economy right now, at least. Who knows if ChatGPT changes all that. We all lose our jobs, but I’ve said something crazy. This is absolutely something that the government has chosen to do for the sake of trying to slow down the inflation and rising home prices.
Now, that is something that real estate investors need to be aware of, the decision the Fed makes, the decision the government makes. These macroeconomic factors play a huge role in what your investment is worth or what the cash flow numbers are going to look like when you buy it. Tell me a little bit about what types of markets are created as a result of the swings of low or high inventory that you mentioned.

Dave:
Basically, inventory, I think, is really good to look at in your local market, because it’s behaving really different in different markets. Often and in the report, I use different examples, but I think generally speaking, places in the Midwest and in the Northeast are doing relatively “well.” Everyone has a definition of well. Some people want to see the housing market crash. I’ll just say that prices are stable in the Chicago, Philadelphia, Boston, Indianapolis. If you look at them, and you want to understand what’s happening in your market, if inventory is staying flat and is still below pre-pandemic levels, you could probably expect that the housing market in that area is going to either be relatively flat or maybe modestly even grow over the next year.
When you start to see inventory levels spike above pre-pandemic levels, that, to me, is a signal that prices are probably going to go down in that market. You see this frankly in a lot of the boom towns from the pandemic like Boise, Reno, Austin, Denver, where I invest. These markets are seeing more of a correction, because they just went up too high. They’ve just reached a level, and this is another important indicator of affordability that is just not sustainable, people who their salaries, their wages cannot sustain the prices that we’ve seen in some of these boom towns.
I really recommend if people want to look at their individual markets, and figure out what’s happening, looking at inventory and days on market are two really easy ways that you can start to understand like, “Are you in a seller’s market? Are you in a buyer’s market?” Just for clarity, because I think people actually confuse this a lot, buyer’s market means often that it’s a good time to buy. I know that’s confusing because people see prices going down, but that means you have more leverage traditionally. Buyers’ market means buyers have the power. Seller’s market means sellers have the power.
So, we are leaving a time on a national scale where sellers had all the power, right?we sell this every… I mean, you’d probably deal with this every day, David. Sellers could basically be like, “I want everything, no concessions, your firstborn child. Give me your car and your wedding ring,” and people were doing it. Now, it’s a different scenario where buyers can be a little bit more selective and negotiate. Again, days on market inventory, good ways to tell where if your market’s in a balanced market, a seller’s market or a buyer’s market.

David:
That is a great point. I think something that sets our podcasts apart from other ones is we don’t just rely on the fear factor to get clicks. Now, it’s easy to tell people, “During a seller’s market, you shouldn’t buy because the seller has all the power. Just don’t buy.” But the reason it’s a seller’s market is usually because prices are increasing so fast, or rents are increasing so fast, or your alternative options to real estate are so bleak that this is clearly the best option. So, more of your competition floods there. That creates the seller’s market.
Then conversely, it’s easy to jump in and say, “Well, it’s a buyer’s market, or sorry, prices are dropping, so you shouldn’t be buying. You should wait for the bottom, even though it’s a buyer’s market. This could be a better time to buy, and so you have to be aware of both markets. There’s a strategy that works in either one, and there’s pros and cons. Buying in a seller’s market is very difficult. You’re going to give up a lot of things that you nor… Sometimes an inspection you have to give up. However, you’re getting the upside of the asset exploding in price.
In a buyer’s market, you may be buying into a time where prices could go lower. Theoretically, we never know where the bottom is, but you’re gaining due diligence periods, sellers paying a lot of closing costs, getting cream of the crop inventory that you couldn’t even get your hands on before unless you had 1.2 million in cash to go compete. There are pluses and minuses to both, and we really are trying to bring the full picture here rather than just making some title that says, “Buy now or wait. The crash of the century is coming.” Then we’ve seen that stuff for eight years. It never came.

Dave:
They’ll be right one day if they keep saying it. They’ll be right one day.

David:
That’s a good point. A broken clock is right twice a day. Isn’t that how it goes?

Dave:
Exactly.

David:
Your take on this is what I think people should be looking at as opposed to just, “Tell me what to do. Is this buy, or is this sell?” It’s understand the factors that are influencing price, and then the right decision will usually make itself known. We’ve covered the supply side talking about inventory, monitoring inventory, understanding this is why prices aren’t plummeting right now is there isn’t a lot of supply, but the demand side’s important too. Real estate is interesting, because the demand is a little more complicated than it would be in something else like maybe Pokemon cards.
Can you tell me a little bit about demand and how that works within real estate specifically?

Dave:
Demand in real estate is composed of two things. I think people often think demand is just how many people want to buy a home. It’s not. It’s how many people want to buy a home, and how many people can afford to buy a home. Those are two… They both influence demand, but they behave in different ways. I think the biggest example, David, we are both millennials. I think for years, you see these pundits on TV being like, “Millennials don’t want to buy homes. They’re not buying homes.” It’s like their data doesn’t show that. It shows that they couldn’t afford to buy homes, and then the second they could afford to buy homes brought on by low interest rates in the pandemic, they jumped into the housing market like crazy.
So, demand is not as simple as people don’t want to buy homes. I think that the major things that are driving demand and will, I said it already, is that millennials are reaching peak family formation years. This is a strong thing. People really underestimate, I think, the impact of demographics, but it’s super, super important. We’re seeing the largest generation in the country enter their peak home-buying age, so that is going to increase demand. Like I just said, with low interest rates from 2020 to mid 2022, people are going crazy into this market.
Now, that demographic demand will probably last another three to five years if you just look at the demographics of the U.S., but what has changed and the biggest factor that has changed from mid 2022 until now is that affordability factor. The second half of demand is how many people can afford to buy a home. With mortgage rates going up as quickly as they have, that is just completely eroded affordability. We have seen basically the housing market react to this single factor more than anything else, because if people can’t afford to buy a home, that pulls all the demand out of the market, and that really tempers prices, or can even send prices going down backwards.
That’s really what’s happened with demand. Frankly, maybe I’m getting ahead here, my opinion about what’s going to happen in the housing market over the next year, two years, three years, is all about affordability and if it recovers. It really comes down to, in my opinion, will affordability improve? That’s when the housing market will bottom and start to grow again.

David:
This is such a powerful nuance point that you’re making. Demand has two heads when it comes to real estate. You got to be willing, and you have to be able. Conventionally, able has been the problem. Even if you wanted to buy a house, you just couldn’t because the prices were going up faster than you could keep up, or you didn’t want to be competing with 11 other offers, or waving your contingencies, so you just said, “Hey, I’m out. I’m not going to do this.” When you’re in a really, really bad market is when the willing side is gone.
People don’t want to buy a house. That was what we saw in 2010. A lot of people were unable to buy a house, but many of them could. They just didn’t want to. I remember in 2010, no one actually looked at real estate like buying an asset. This is hard if someone wasn’t around back then. They looked at it like tying themselves to a 30-year anchor called a mortgage. If you said, “I bought a house,” I’d be like, “Oh my God, you have to make that payment for the next 30 years. Why would you do that?” This is funny, Dave, because my first house, my mortgage was $900. That was still considered a death sentence. Why would you ever want to just tie yourself to $900?
Nobody was willing to buy homes, and there was so much supply that caused that plummet in prices. This is what we’re monitoring when we’re looking at what’s the market doing is how much supply is out there, which we’ve covered, and then how much demand is out there. There’s two components to it. It’s you got to be willing to buy a house, and you got to be able to buy a house as opposed to many other things that don’t involve financing, like the Pokemon card example I gave. It’s just, “Are you willing to buy it, right?” Most people can afford to pay $30.
I don’t really know much about Pokémon cards. Then I bought my nephew some for Christmas, and he was super excited about it. It’s not a thing where you have to be able to buy them with real estate.

Dave:
So much of being able to buy real estate is out of our control, because most people use leverage, use debt to finance real estate. So, the rate on a mortgage really impacts what you can afford, and that was positively impacting people during the pandemic, because people could all of a sudden afford way more. Now that we’re back to… Actually, it’s high compared to where we were, but we’re right about the historical average of mortgage rates. Now that we’re back to a more normal mortgage rate in historical terms, that’s negatively impacted affordability.
When you talk about buying a Pokémon card or fine wine or whatever else, you’re just using equity. You’re not usually leveraging those purchases, so it’s really up to you like, “Do you have that money in your bank account? Then you can go buy it.” There are other examples of leveraged assets, but real estate is probably the biggest example of a leveraged asset, and it really is. That’s why real estate is really sensitive to interest rates is because it really, really impacts how able you are to buy investment properties or primary residents.

David:
Now, when it comes to rates and the Fed, can you tell us a little bit about how these decisions are made, and then how that ultimately ends up affecting affordability?

Dave:
Oh boy, my favorite topic. Basically, as we all know, inflation is really high. That is a huge problem for the economy. It erodes our spending power. Everyone hates it. Real estate investors hate it a little bit less, because real estate is a fantastic hedge against inflation, but it still sucks for everyone. The Fed is basically making decisions to try and combat inflation. They do that by increasing the federal funds rate. That’s the only thing that they can control. It’s wonky, but it’s basically the rate at which banks lend to each other.
The idea behind raising the federal funds rate is that if it becomes more expensive to borrow money, less people do it. When there’s less people borrowing money, less money is circulating around the economy. That’s also known as the monetary supply, and so they’re trying to reduce the monetary supply because we’ve seen it go crazy. Over the last couple years, there’s a measure of monetary supply called the M2. Basically, we’ve seen that explode, and that happened for a few reasons. One was because of low interest rates, but the other was because of money printing. We have introduced a lot of new money into the system, and so they’re not able to pull that money out of the system.
What they can do is raise interest rates, and try and get it from circulating around the economy less. If less people are borrowing money, the money stays in the bank, or it stays in your savings account, or you do less with it. That helps cool down inflation at least in traditional terms. That’s what the Fed is trying to do. Obviously, as of early January 2023, inflation is still super high, but the trend looks like it’s starting to come down. Now, the federal funds rate does not directly control mortgage rates, but it does influence mortgage rates. So, we’ve seen mortgage rates go from…
The beginning of 2022, they’re, I think, below or right around 3%. Now as of this recording, they’re at about 6.2%, so they’ve more than doubled. That significantly increases the amount of… That significantly decreases affordability, I should say. We’ve seen a time when at the beginning of the pandemic, affordability was at almost record highs. People could afford anything to a point where now, affordability is at a 40-year low. This is the least affordable real estate has been since the 1980s, and the implications of that are obvious. If you can’t afford it, you’re not going to buy it, so there’s less demand in the market.

David:
That is really, really good. Now, to recap here, so far, we have covered the housing market levers, what makes prices go up or down, supply and inventory and how you can be tracking those, demand and ability, the nuance of what affects demand as well as mortgage rates and inflation, which are all ingredients in the cake of the real estate market, I should say, that you monitor. You add more flour. You add more eggs. You add more sugar. You’re going to get a different tasting cake. This is what we’re all trying to understand when we’re trying to predict how things are going.
Now, before we move on to what works in an uncertain market like this one, my last question for you is that what needs to happen for affordability to become rebalanced again to where investing in real estate is something that people can be excited about and actually possible?

Dave:
First of all, I still think real estate investing is possible and excited. You have to be a little creative, which we’ll talk about in just a second. I think what’s happened is basically for two years, every single variable, all the levers that we’ve talked about were just pointing in one direction for prices, and that was up. Now, we’re at a point where we’ve need to rebalance, and things have changed. Affordability has declined to the point where prices are likely, in my opinion, going to go down a little bit in 2023. What needs to change for affordability is one of three things.
Affordability is a factor of three different things. One is housing prices of course, and so if prices go down, that improves affordability. The second thing is wage growth. If people make more money, things start to become more affordable. We’re already seeing wage growth start to decline, and I don’t think that’s going to be a major factor in the housing market. The third is mortgage rates, rights? If mortgage rates go down, affordability will go back up. Those are the major factors at least I’m going to be looking at for the next couple of months.
Mortgage rates already come down off their peak. They could go back up again, but back in October, November, they’re in the low sevens. Now they’re in the low sixes. Affordability is already starting to improve a little bit. That’s probably the thing. If you’re going to look at one thing to understand the housing market in 2023, affordability is the thing I would recommend.

David:
affordability is, as you mentioned, a combination of the price versus the mortgage payment. It’s not as simple as just one or the other.

Dave:
Exactly.

David:
Just funny because when rates were going down, everyone was complaining about how homes were unaffordable, because people could afford to pay more for them, so prices kept going. Then when prices finally came down, people complained that interest rates are too high, but they’re both two sides of the same coin. You can’t usually have one without the other, just like supply and demand. All right, let’s move on to three things that work in an uncertain market like this one. What’s your first piece of advice for strategies that people can take advantage, or where they can make money even when we’re not sure what’s going to happen with the market?

Dave:
Well, one of the things I’m most excited about, and I’m actually looking to make an investment in the next couple weeks here on, is private lending. When you’re in a high-interest rate environment, that’s the bank who is charging those high interest rates. So, if you can become the bank, that is a pretty exciting proposition. There are probably a lot of flippers out there who want money. There’s probably syndicators who need bridge loans. There’s people who need mortgages, and so there are opportunities to be a private lender. I am not an expert in this. David, I don’t know if Dave Van Horn, the third Dave. Maybe we should have him on one time.

David:
Three D.

Dave:
He’s a real expert in this. I forget what his book’s called, Note Investing. BiggerPockets has a book. Check that out. I think private lending is a really interesting option right now, because if debt is expensive, that’s bad for the borrower, but it’s sometimes good for the lender. That’s something I’m at least looking into at 2023. Have you ever done private lending?

David:
I have a couple notes through Dave’s company actually, the PPR Note Company I believe it’s called. It’s a similar concept like what you’re saying. That principle applies for private lending, but it also goes into just saving. You got punished for saving the last eight years or so. Inflation was way higher than what you could get on your money in the bank. That helps fuel the rise in asset prices because you’re like, “Well, I got $100,000 sitting in the bank, earning me half a percent while inflation’s at God knows what it is, probably realistically 20% to 30% if you look at food prices and gas and real estate and stuff like that.”
I got to put it somewhere. Where am I going to put it? Well, I’m probably going to put it into real estate, because that’s what’s going up the most, right? But when we see rates go higher, even though it does slow down, the asset prices going up. Man, there was a time, I remember, when I was working in restaurants where I was making 6.5% of my money that I would put in the bank, and that wasn’t even in a CD. So, strategies like private lending, just saving your money at a certain point become possible when we finally get rates up to healthier levels.

Dave:
I actually just wrote a blog about this in BiggerPockets that I think we’re reaching a point where savings rates are attractive again. In my high-yield savings account, I can get almost 4% right now. I know inflation, it comes out tomorrow, but as of last month, I think it was at 7.1%, right? People are like, “The 7.1% is higher than 4%.” Yes, that’s true, but 7.1% is backward looking. That’s what happened last year. If you look at the monthly rate, it’s averaging about 0.2% over the last five months. So, if you extrapolate that out, and no one knows what’s going to happen, but if you just extrapolate that out, you can imagine inflation a year from now might be somewhere between 2% and 3%.
So if you’re earning 4% on your money for the first time in years, your savings rate can actually earn you not a great return, but at least more money than inflation is eating away. Personally, at least I’m putting the money… I’m looking for opportunities in real estate, but I’m taking the money I have, putting them in either a money market or a high-yield savings account, because at least you can earn 1% to 2% real returns on your money as opposed to the last few years where if you put your money in a savings account, you were losing 6% or 7% at the minimum.

David:
You didn’t even have this as an option when rates were super low, and it was fueling this big run that we had. Now, with no investing specifically, you do make a profit on the interest that comes in from the note, but it’s negligible compared to how much money you make when the note pays off early. Typically, what you’re doing is you’re buying a discounted note in these cases. I bought a note. Let’s say maybe I paid $50,000, and the note balance was $75,000 or $80,000, and I get my $300, $400 a month coming in from that note, so there’s a return on the money that I paid.
It’s amortized, so you’re going to get more than what you put out, but you really win when that person sells or refinances their property, and you get paid back the $80,000 when you only had spent a smaller percentage for the note. The hard part is unlike real estate, you don’t have control. It’s not like an asset. I can go in there, and I can buy, and I can fix it up to make it worth more. I choose at what point in the market I’m going to sell it. You’re at the mercy of the other person, so the strategy is just to have all of these little notes that are out there. Unlike a jack in the box, you don’t know when it’s going to pop, but at a certain point, it’s going to.
Then boom, you have a note pop off. You make a profit. You either go buy a bigger note that gets more cash flow, or you go invest into something different, which is something that I had planned on doing a lot more of when I bought it. Then we saw what happened with the housing market. It was like, “Oh no, all steam ahead, get me irons in the fire as I can as this market is increasing.” I think that’s great advice, different strategies surrounding real estate, but not necessarily just owning it. The second thing I see that you mentioned are hybrid cities. Let’s start with what do you mean by hybrid?

Dave:
If you look back historically, different housing markets perform really differently. Traditionally, pre-pandemic, what you saw is that certain markets were great for cash flow, but they didn’t really appreciate much. Other markets were great for appreciation, but they didn’t cash flow that much. Those are the two ends of the spectrum, but there are some that get modest appreciation and modest cash flow, which personally I am really just interested. I think that’s the best conser… It’s conservative in a way that you have good cash flow, solid cash flow, not amazing cash flow, but solid cash flow so that you can always pay your mortgage.
There’s no risk of default. You can hold on. There’s nothing. No risk there. But at the same time, it’s appreciation, so you still get some of the upside opportunity that you get in markets like California or Seattle. It’s not quite that much, but you get a little bit of each. I think those markets are going to do particularly well, because a lot of these hybrid markets tend to be more affordable cities. My theme in a lot of what I’m talking about today is affordability is dominating the housing market. I think, markets that are more affordable are going to perform well relative to other markets over the next couple of years.
I think some of these hybrid cities are really interesting. I just want to caution people who have gotten into real estate in the last few years that what we’ve seen over the last few years is so atypical in so many ways, but what I’m talking about right now is appreciation. We’ve seen every market appreciation, big markets, small markets, rural markets, urban markets, suburban markets, everything. Why not? That is not normal. Normally, some markets go up. Other markets stay flat. Some markets go down.
I personally believe we’re going to return to that dynamic over the long run. I don’t know if it’s going to be this month or next year, but I think that is normal for the housing market. I think we’re going to get back to that. So, I would look at markets that we’re seeing some cash show and some appreciation pre pandemic. These are tertiary cities like Birmingham, Alabama or Madison, Wisconsin or places like this that have strong demand population growth, but still offer cash flow. I think they’re going to outperform other markets for the next couple years. That’s just my opinion, but that’s what I’m looking at.

David:
If somebody wants to identify cities like this, what data should they be looking for?

Dave:
I think the number one thing is if you want to look at cash flow, you can look at a metric called the rent to price ratio. You just divide monthly rent by the purchase price. If it’s anywhere near 1%, you’re doing really well. You’ve probably heard of the 1% rule. I think it’s a little outdated personally, and that expecting a deal that meets the 1% rule is probably going to cause you more harm than good, because you’re going to wait around forever looking for a mythical unicorn. Not that it can’t exist, but like I was just talking about, those 1% deals often occur in markets that don’t appreciate. I think to me, that’s not worth it.
I would rather see something that’s a rent to price ratio of 0.7 or 0.8, but is an appreciating market. That’s what I mean by a hybrid city. Rent to price ratio is good. Then for appreciation, it’s difficult to predict, but the most important things are very simple, population growth. Is there going to be demand, or more people moving there than leaving? Two, economic growth, you can look at this in terms of wage growth or job growth, but if people are moving there, and they’re getting paid more and more, asset prices are going to go up.

David:
We often talk about appreciation and cash flow as if they’re opposing forces like Yin and Yang. Are you a appreciation investor, or are you a cash flow investor? But in practical terms, for those of us that own real estate, we realize that they’re not actually mutually exclusive, that many times, you see cash flow appreciates as rents go up. What are your thoughts on the idea that certain markets will have rent increases, just like the value of the asset will increase?

Dave:
I personally… I agree. There are great markets that have 1% cash flow. I wouldn’t invest in them, because personally, I work full-time. I’m not reliant on my cash flow for my lifestyle entirely. But also, it’s just too risky to me, because those markets tend to have declining populations or not great economic growth. That’s, to me, risky. I know people say cash flow is a good hedge against risk, but I think some… But if your vast value is going down, then I don’t think cash flow is going to make up for that. I think that’s super important.
I personally would caution people against assuming rents are going to go up at least this year or the next year. I just think that we had what they call in finance or economics a bit of a pull forward, where it’s like rent prices usually go up a couple percentage points a year. They went crazy the last few years, and that might have just taken all the rent growth for the next two or three years, and just pulled it forward into 2021 or 2022, for example.

David:
Very possible.

Dave:
My recommendation is to underwrite a deal assuming that cash flow is not going to go up for the next year or two. If it happens, which it might, that’s just gravy on top, but I think the conservative thing to do is to presume that cash flow is probably going to be pretty mellow… I mean, rent growth, excuse me, is probably going to be pretty mellow for the next couple of years. But if you’re holding onto it for five years, seven years, then I would probably forecast some rent growth for sure.

David:
Well, when you’re making a decision on where to buy, do you think it’s reasonable to expect a hybrid city’s rents to increase more than a cash flow market, Midwest non-appreciating market?

Dave:
Oh yeah, 100%. I mean, if you’re seeing a city that has economic growth, I mean just look at wage growth. If wages are going up, if good jobs are coming to that city, those are some of the best indicators.

David:
People are able to pay more because there’s demand within the rental market, just like there is within the home ownership market. Same idea.

Dave:
Exactly. If you’re in a market where wages are not going up, there’s no legal limit, but there is just a psychological limit to what people are going to pay for rent. It can only be X percentage. Usually, it’s 30% of their income can go for rent. If you’re way above that, and if wages aren’t growing, then it doesn’t support rent growth. So, I totally agree that in a hybrid or an appreciating city, rent growth will go up. I don’t know if that necessarily means you’ll ever reach the cash flow that these cash flowing cities tend to support.
But personally, I think that that’s the better bet because you’re not betting on just cash flow or just appreciation or just rent growth. You’re getting a little bit of everything, and you don’t know which of the three might perform the best. But whatever happens, you benefit from it.

David:
Well, that’s what I wanted to highlight for the people who are maybe newer investors, that are inexperienced in some of these cash flow markets where turnkey companies tend to operate, and the gurus that are selling you a course, they’re usually, “Cash flow, quit your job. Get a girlfriend. Don’t be a loser. You need cash flow, and they’ll fix all your problems.” Then they push you into some of those markets that rents hardly ever go up. For the last 10 years, they’ve been the same. Versus if you had invested in maybe Denver 10 years ago, it might have been modest cash flow when you bought it, but 10 years of rent growth, and it’s doing really, really well.
We don’t want to say assume it’s going to go up, but you can absolutely put yourself in a position where it is more likely to go up by going into one of these markets that is having wage growth, companies moving in, population growth without completely betting the whole farm on investing in some wild appreciating market that you’re bleeding money. There is a responsible way to do it. I think that’s a really good sound advice that you’re giving here.

Dave:
I mean, this is probably a whole other show, but God, man, you know how many rentals it takes to become financially free? I know a lot of real estate investors are like, “Oh yeah, just quit your job. Buy three rentals, and be financially free.” It’s just absolute nonsense. The way to think about it is the way you earn money and cash flow in investing is you need X dollars invested at Y rate of return to equal Z cash flow.

David:
Just like we look at every other financial investment vehicle when we’re like, “How much do you need in your 401k at what return to retire?”

Dave:
Exactly, and so you can choose to be a cash flow investor and say, “I’m going to have $100,000 invested at 11% cash on cash return.” Great, that’s making you $11,000 a year. I can’t live on that. If you want to build for the long term, and you say, “I’m going to make a 6% cash on cash return, but through appreciation and working at a good job, I’m going to have $2 million invested at a 6% cash on cash return,” then you’re making $120,000 a year. I think people just get obsessed with this cash on cash return idea without thinking about the amount of principal you put into your investments is equally if not more important than the cash on cash return. That’s just my rant.

David:
We won’t go too far down that road, but I will tease people, which is this little idea. This is one of the reasons that I encourage people into things like the BRRRR method or buying and appreciating markets, because your property can create capital for you much like you earned at your job that you were working. You can have two sources of capital being created. We just call it equity when it’s within a property. We call it capital when it’s in our bank account, but it’s the same energy. You start your career off using methods like that, and then later in your career, you transition into higher cash flowing markets that are a little bit more stable, and then you do exactly what you just described.
This is some pretty deep cool stuff that we’re getting into when we just plan on talking about the market.

Dave:
I like this conversation. This is fun.

David:
All right, last topic I want to ask you about is buying deep. What do you mean by buying deep?

Dave:
I mean, buying deep just means buying below market value. I don’t know about you, David, but for the first eight years of my real estate investing career, I never even offered at the asking price. I would always offer less than the asking price. Only in recent years did it become normal for you to offer above asking price, and still pray.

David:
So true. You hear agents say things like they paid full ask, and I laugh like, “That’s a deal out here.” Full ask doesn’t mean anything, but they’re operating from the old paradigm where nobody pay the asking price.

Dave:
Totally. In the beginning, you would always try and nickel and dime the seller a little bit, see whatever you can get. I think we’re back to an environment where that’s possible. Not in every market, not every asset class, but we are in a market where you can buy below asking. I think it’s just a good way to hedge. If you think your market might go down 5%, try and find a property that’s 5% below. I invest in Denver, and it’s already gone down almost 10% in Denver. It’s one of those leaders of the market in terms of price declines.
I think it might go down another 5%. So when I make an offer right now, I’m going to offer 5% below asking. That way if it goes down, I’m okay. It gives me a little bit of cushion. That’s what I mean by buying deep. It’s just going below asking price to give yourself a little bit of cushion. I’ll also say I really think timing the market is hard, and if it’s between 1% and 2%, don’t worry about it too much. I bought my first property in 2010. The housing market bottomed in 2011, 18 months after I bought or something like that.
Do you think I’ve ever once thought about that, that my property went down 1% before it started to come back up? Not once. People tell me how jealous they are that I bought in 2010. What they don’t see is that my property value actually went down 1% or 2% before it started growing like it did over the last couple months. I think buying deep is really important, but I wouldn’t obsess about trying to get it exactly to the bottom of the market. It’s literally impossible to do. But if you think the market’s going to go down 5% or 10%, try and get some concessions out of the seller to make yourself more comfortable.

David:
That is incredibly sound advice. When I bought my first property, it was the end of 2009, so I wasn’t even at 2010. Then it went down more. I was like, “I’m so dumb. I should have waited.” Everyone was like, “Why’d you buy real estate?” In my head, I pictured it going all the way down to zero. Then a year later, it started going up, and then it exploded. It’s funny. I paid 195 for that house that probably dropped to 185, and I was kicking myself. Now, it’s worth 525 or so. It just doesn’t matter.

Dave:
Exactly.

David:
This doesn’t matter, right? It’s your ego trying to be smarter than you are, and you’re making it. That was a property that I was under contract at 215, and I went in there to get some seller concessions, and got it at 195. That is exactly what people should be doing in this buyer’s market. If the house has been on the market three days, it’s getting tons of interest. Maybe you don’t get to use the strategy, but I look for houses with high days on market, poor listing photos. I literally teach people how to target stuff in the MLS that’s been passed up by other people, write very aggressive offers, and then gauge based on the counter offer how serious that seller is and how we can put a deal together.
In the 1031 exchange that I wrapped up a couple months ago, I think I bought 17 or 18 properties, but only 12 or 13 of them were through the exchange. From those 12 or 13, I made over a million dollars in equity based on the appraise price versus what I paid. It was just this strategy of, “I’m on the MLS. I’m not doing anything crazy,” but I’m not going after the house with the beautiful listing photos professionally taken by a really good realtor. I’m looking for the people that paid a 1% commission to their realtor. They took some pictures with their iPhone seven.
It looks terrible. It’s been sitting there for a long time. I mean, literally, Dave, some of them had upside down uploads. The bathroom pictures were uploaded upside down that you can tell Zillow’s, “Four people have looked at this, and no one has saved it.”

Dave:
Those are the ones you want.

David:
That’s exactly right. So buying deep, I refer to as buying equity. Same idea. Don’t just think you have to pay asking price like you used to. Explore. Write a really low offer, and wait and see. I tell people, “An offer should be like a jab. If they accept your first offer in this market, you probably wrote too high.” You shouldn’t be knocking people out with an offer. It’s a jab, and you wait and see how did you defend? Are you weak? I won’t go too deep into it, but one of the deals in particular was listed for 1.6 million, had dropped its price all the way down to 1.2 million.
I went in and wrote an offer at $1 million 50 with about $50,000 in closing costs. It was about 1 million even. He countered me accepting my deal, but just he didn’t agree to the $50,000 closing cost difference. I knew if he countered me that hard, he wants to sell this house. I’ve got all the leverage here. I’m going to get this deal. I ended up holding out, and he still came back and said, “Fine, I’ll give you the closing cost too.” Now, if he had countered me at maybe $10,000 off of his 1.2, I would just let it go. That’s not a motivated buyer.
You could never use strategies like this the last eight years. They just did not exist. That’s a great point. If you’re worried the market’s going to keep dropping, just go in there and write a more aggressive offer than you normally would have, and cover yourself that way.

Dave:
You got nothing to lose. I think people are like, “Oh my God, they’re going to reject it.” It’s like, “So what?” Obviously, you don’t want to just be doing stuff that makes no sense, but if you think your offer is fair and reasonable, might as well try. See if they agree.

David:
Then the other thing, the piece of advice I’ll give people is don’t assume that one punch is going to knock someone out. Many of these properties we’re talking about, I wrote an offer. They said no. I had my realtor go back a week or two later, and it was maybe. A week or two later after that, it was like, “Let’s play ball.” Then that started the actual negotiation. Sellers are freaking out just like buyers are freaking out. Everybody’s freaking out in this market, and you just want to find the right kind of freak to match up with your interests.
Dave, I’m going to lead us to wrapping this thing up by asking you for the one thing that we’re always hesitant to do, but everybody wants to know, what are your predictions for 2023?

Dave:
It’s really hard, but the thing I feel confident about is that we’re probably going to see a continuation of the current market conditions through at least the first half of 2023. I just think right now, there’s just still so much uncertainty. Are we going to see a recession? How bad is it going to get? Is unemployment going to go up? What’s the Fed going to do? There’s just too many questions right now, and until there’s some confidence about those big economic questions, I think we’re going to see, like you said, people freaking out a little bit and not really having stability enough for the market to find its footing.
The second half of the year, I think, is really the X factor. I think there are different scenarios that can play out. I’ll give you three different scenarios. The first is if there’s a global recession, which most economists believe there will be people… I won’t get into the details of this, but if there’s a global recession that tends to put downward pressure on mortgage rates, people flock to U.S. government bonds that pushes down yields, mortgage rates track yields, and so you see a scenario where mortgage rates could go down more than they are now. If mortgage rates go down even more than they are now, I personally believe the housing market is probably going to bottom a year from now, the end of 2023, beginning of 2024, and start to grow again.
The other scenario is the Fed miraculously achieves a soft landing, and mortgage rates could go down. That’s another scenario where I see the market bottoming towards the end of 2023, early ’24, or inflation keeps going up, unemployment goes crazy, but the mortgage rates for some reason don’t go down. Then in that scenario, if mortgage rates stay above 6.5%, above 7% for a long time, I think we’re probably in for a two-year correction. All of ’23 and ’24 will be like this. In that case, we might see double digit declines in the national housing market, but it’s still hard to say.
I think, two of the three scenarios in my mind point to a one-year correction where we’re going to see single digit price declines. I’ve said I think it’s going to be somewhere between 3% and 8% negative on a national level if mortgage rates stay high. I’ve said this. It’s all about affordability. So if affordability doesn’t improve, the mortgage rates stay high. Through the second half of this year, that’s when I think we’ll see 10%, 15% national declines, and not bottoming to the end of ’24, maybe even early ’25.

David:
That is a remarkably well thought-out and articulated answer for someone who did not want to give a prediction, so thank you. Thank you for that. I like how you’re providing the information you’re basing it off of rather than just throwing something out there. Because as the information changes, so will the prediction. Something people have to remember, these things are not set in stone.

Dave:
Totally. People are like, “You said this, and you didn’t factor in this.” It’s like, “I’m not a fortune teller.” I’m just like, “I’m looking at this information. Here’s how I’m interpreting it.” I don’t know what’s going to happen, but I think those three scenarios, I don’t know the probability of each of them, but I think that it really will come down to mortgage rates and affordability, and when we see it bottom. I will just say… Can I just say one more thing about it is that traditionally in recessions, they say that housing is the first in and the first out, where because mortgage rates go up, and real estate is a leveraged asset, prices tend to decline first. That’s what creates the recession.
We’re seeing that right now, right? Rates went up. Housing is in a recession, and so we’re starting to see that start to ripple throughout the rest of the economy. But like I said, when mortgage… When we enter official recession or whatever, mortgage rates tend to come down. That gets people to jump back into the housing market. That creates a huge amount of economic activity, and it pulls us out of a recession. It’s just interesting to see that recession’s not good for anyone. I’m not rooting for that, but if you see it, it often is the first step, and the housing markets start to recover. So, it’s another thing to just look that.

David:
It’s why you can’t time the bottom, because you don’t know when that’s going to happen. By the time you see that show up in the data, it’s already started, and the bottom’s already on the way up.

Dave:
It’s already happened.

David:
Great point. All right, so we’ve got a pretty good market prediction for 2023. We have a very solid understanding of the things that affect real estate prices. That would be the levers that people pull on to make prices go up and down, supply, and you can measure that by inventory, and then demand, which is a double-headed monster of both being willing to buy a property and able to buy a property. We’ve talked about mortgage rates and inflation and all of the complexity that that’s created in this insane but beautiful market that we like to invest in. We’ve also talked about ways that you can make money in 2023 regardless of what the market does.
Private lending and buying notes is one way that people can expect to make money in real estate. Looking for these hybrid cities where you’re not… You don’t have asymmetric risk in either direction of a cash flowing property that never increases in rent or in value, as well as a speculative market that you’re just hoping goes up and lose control over, and buying deep, understanding that this is a buyer’s market, and that means you have the control. So, you’re a fool if you don’t use it. Use the control to try to go out there, and get the very best deal that you can rather than just worrying about things you cannot control like when the market is going to bottom out.
Dave, thank you very much for joining me. I love it when you come for these things, and we can help make some sense out of the emotional insanity that we typically feel when people don’t know what to expect. Is there any last words you’d like to leave our listeners with before I let you get out of here?

Dave:
No, this has been a lot of fun. But if you want other recommendations about how to make money in 2023, or to understand this in full detail, I encourage everyone to download the report I wrote. It’s free. You could just do that at biggerpockets.com/report.

David:
All right, biggerpockets.com/report. Check it out. If you thought Dave sounded smart, wait till you read them. He looks even smarter when you’re reading there. Then you wrote a book with J Scott on a similar topic to this. Can you plug that real quick before we go?

Dave:
Sure. J and I, if you don’t know, J is a prolific excellent investor. He and I wrote a book called Real Estate by the Numbers. It is all about the math and numbers and formulas that you need to become an excellent real estate investor. I know if people think that sounds intimidating, it’s not. The math behind real estate investing is not super hard. You just need to understand some simple frameworks, and that’s what we outlined it. The whole point of it is to help you analyze deals like an expert. So, if you want to be able to analyze deals conservatively, especially in 2023, and understand what assumptions to make, that stuff, you should check it out.

David:
Yes, go check that out as well. If you’re a nerd, or you want to be as smart as a nerd without being a nerd, this is the book for you. All right, Dave, thank you very much for joining me today. I’m going to let you get out of here, and get about doing some more research to help the BiggerPockets community understanding what’s going on in the market. This is David Greene for Dave, the gentleman’s renegade, Meyer signing off.
I’m a professional. Just watch. Watch how good I am at saying things.

Dave:
He’s Ron Burgundy. He’ll read anything you put on the teleprompter.