David:
This is the BiggerPockets Podcast, show 605.

Christian:
Now I’m learning accounting. I have the right person to teach it to me. I have a CPA, it took me a while to find, but I have the right CPA who makes me go through the steps and learn it before he’ll file anything. While it’s a pain, I’m understanding it. And next year, when I get here, I’m not going to have an accounting problem. I’m going to have a whole new set of problems. And that is what I’m targeting every time. When I’m stuck, I need to make sure I’m not stuck on an old problem.

David:
What’s going on everyone? My name is David Green, and I am your host of the BiggerPockets Real Estate Podcast. The podcast where we teach you how to build wealth through real estate and improve your life through the financial freedom that it can provide. We do that by bringing on different guests that have walked this journey before you to teach you what they did and maybe left some bread crumbs along behind the way so you could follow their path. We also bring in experts in the industry to teach you things like tax savings, bookkeeping, renovation tips, how to find deals, how to find on market deals, how to use an agent, how to get lending, all the pieces that you need to build your wealth through real estate investing. I am joined today by my co-host the amazing Rob Abasolo, who joins me in my interview with Christian Osgood, the partner of Cody Davis, who we interviewed on episode 554 and had a very popular episode.
Now, Cody and Christian are both young men that are somewhat new to the game of real estate, but have had a lot of success by finding off market deals and structuring them wisely through building relationships. This is pretty much a can’t fail approach. If you’ve been trying to find deals and can’t find them, if you’ve been nervous about paying too much for a deal, well, these guys are finding deals, naming their price, and working with the sellers to make it work. It’s harder work, but it is definitely something that has a much higher upside and today’s interview with Christian was fantastic. I loved this conversation. Rob, what were some of your favorite parts?

Rob:
You know, I think it was really nice to find out that you’re never really ready to scale. I think we all try to put all the systems in place and build out the teams and spreadsheets this and all the … I mean, I think kind of what we learned from Christian was that they relatively had a good structure in place, but the only way they could really scale was by throwing themselves into a deal. And he talks about that because his first two deals were two units and then his third deal was a 38 unit building. So I think that right there, he had to learn a lot on the ground. And so we talk about that. We talk about his different partnerships. We talk about networking with people and really getting to know them and knowing their heart and knowing their story and leading with that to close deals versus leading with, Hey, do you want to sell me your property? And they’ve had a lot of success doing that.

David:
A ton of it. And then they also have learned that everything is figureoutable or as they say in today’s show, everything is Googleable. And that leads us to today’s quick tip. You can use Google Maps to find just about any property that exists and then find the owner afterwards using that. Rob, have you ever done this yourself?

Rob:
I haven’t. No. Yeah, it was actually ridiculously simple. I was like, can you just, can you walk me through this? And then he told us the steps and I was like, okay, I guess it’s as easy as it sounds. Just Google it.

David:
That’s it. So make sure you listen to the full episode today so you can learn how to just Google it yourself. All right. I want to make a reminder if you like this show, go back and listen to episode 554, where we interviewed Christian’s partner, Cody, who has an inspiring story. These two are working a method that anybody can use. There’s a lot of good advice here about the right way to contact people, how to make sure that they’re talking more than you, and you’re bringing more value than you’re asking for from them. We get into some of the mistakes that they made in their scaling quickly, so you can avoid those same mistakes, as well as a really good blueprint. Any last words, Rob, before we bring in Christian?

Rob:
You know, I think my favorite part of the show was he talked about a very honest and big mistake that they had in their business, and it was a very vulnerable moment. I was like, man, I wish a lot of people opened up like that, because there’s a lot to learn from these moments. So stay tuned for that.

David:
Yes. And we’re going to be doing more of that. I’m coming after you. You come on the podcast, you’re going to share the good, you’re also going to have to share the bad and the ugly. All right. Without further ado, let’s bring in Christian. Christian Osgood, welcome to the BiggerPockets Podcast.

Christian:
Hey, thanks for having me.

David:
Yes. I think this was probably set in stone from the time that we interviewed Cody. That episode was very, very popular. If you didn’t hear our episode with Cody Davis, go check out 554. And Cody is what 21, 22 years old? How old is he now?

Christian:
He’s 22 now.

David:
22. Okay. He’s grown up quite a bit.

Christian:
He’s done it. He’s old.

David:
He’s buying multi-family properties and he was crushing it and it was a very inspiring show, and you are his other half, as I understand.

Christian:
Yep. On the business side, I am his partner on a majority of the deals that he’s done and we’ve done pretty much this whole venture together for the last 13 months or so.

David:
You’re significantly taller than Cody, right?

Christian:
I am. That is always difficult on the YouTube channel or any filming we have to be really conscious of is Cody actually showing up on the camera?

David:
I ask, because I think I saw on your Instagram, like I think I’m following Cody and he was posting pictures with someone who looked like Groot standing next to Rocket Raccoon. And now I’m seeing this is Groot.

Rob:
Let’s get this man in apple box.

Christian:
There we go. I am Groot.

David:
So let’s start off tell us. Yeah, that’s a perfect reply to what I just said. That could be the intro to this show. So start off telling us how do you and Cody sort of divvy up the responsibilities of what you’re doing? What skill sets do you each bring? How’s your partnership look, and then we’ll dive more into your portfolio.

Christian:
Yeah. Well, important thing is we can both do what the other can do. We have overlapping skills, however, we have different specialties. The way we’ve designated it is Cody brings in as much fish as he can while I build a bigger boat. Cody brings in a lot of fish. So that’s a lot of ship building. We can both sell. We can both raise capital. We can both negotiate deals. However, Cody probably does about 75, 80% of that. I do a lot of the backend accounting, getting the right systems. It turns out when you buy a lot of real estate really fast, there’s a lot of bills to pay. You have to keep track of those things. I have a little better memory for that piece than Cody. Cody is great at driving fast. My job is to make sure that we have the capacity to haul in everything that Cody brings.

David:
That is so well said. In fact, every business venture that I started, I typically operated like the Cody and I needed a Christian, and the times I did not do well was I didn’t have a person in place that could keep up with the mess that I created, frankly. Like I got all these fish, I dumped them in the boat and somebody else has to figure out what to do with them before they rot, they go stinky, someone slips on them. And so I really think that’s like, if you’re going to start a business or a partnership, what you’re describing right now is the first thing everybody needs to work out is if we are successful in getting opportunities, if they’re a real estate agent, that’s leads, people that want to buy or sell homes. If you’re a real estate investor it’s properties, we might want to buy.
That’s the hardest part is you got to fill up a pipeline full of leads and opportunities that you want to be doing something with. Well, the next piece is who is going to clean up this mess, track the accounting, follow up with the contractors, know where money’s coming in and out, help you understanding if you’re even profitable. So I love that you’re acknowledging that, because I think this is where sometimes you get two Christians where both people just want to have everything be nice and clean, but they don’t go get any leads, so you never get anywhere. And sometimes you have kind of how Brandon and I work, where we both just create big messes and that there’s nobody left to clean it up. So tell me a little bit, like how did you guys come to this understanding that this is the way that work was going to be split up?

Christian:
Well, it happened organically. I guess, sticking with the ship metaphor, what we’re going to do is when you have a partnership, you want to make sure the ship is sailing in the same direction. It’s the most important piece. So we have the same goal. We’ve agreed where we’re headed. That was the first thing that we did. That came into existence at the 10X Growth Con. I actually accidentally roomed with him. Someone had a spare ticket, they ended up not going. They had already booked a hotel room. So the two of us connected there over three days. When you’re in that environment, it’s all, hey, 10X let’s set huge goals. So we set this massive goal of, well, I’ve always wanted to hit 30 units by 30. At that time I had two units and I was 29. So it seemed like a little bit of a stretch, but we set that goal together.
Cody was really looking to expand and grow his portfolio to a hundred units, which we’re going to hit here in the next few months. And so we connected on those points and then everything else is just organic. Our first piece was we got to find a piece of real estate to buy. He got me into my second duplex. Then we bought a 38 together, which was an effective way to get to 30 units, huge fan of skipping, or not skipping, but not adding extra steps. So if you want to get to 30 units, the easiest way is to buy more than 30 units. So we started doing that and just a natural progression. As we started doing business, we found Cody brought in a few more deals, I was better at cleaning up the back end and it just kind of evolved into what it is today.

David:
Okay.

Rob:
Sorry. So just to clarify, you went to a conference, someone’s like, hey, I got an extra ticket, here’s a caveat, you got to sleep in a room with a stranger. So you guys were bunking and then, one of y’all were like let’s scale. And then the other person’s like, yeah, sounds good. And then you guys came together as a partnership?

Christian:
Yep. That’s been pretty consistently the entire partnership. Sometimes we’ll find a deal and Cody will throw it in front of me. And I feel like we’re already operating at capacity. He’s like, I love this deal. You want to do it? And I usually say, okay. And if I don’t, Cody goes well with, or without you I’m doing it. And I was like, well, I don’t want to be left out. So let’s do it. There’s certain balances between, hey, do you want to get it perfect or do you want to get it done? And my policy is strive for perfection, but at the end of the day, you just have to get it done, get yourself a new set of problems. So a year ago I had a duplex and not enough real estate. Now I have enough real estate to get started and I’m having to learn how to master accounting and get through all the legal and the pieces that come with that.

David:
This is so good. I mean, you might be what you’re describing as the case study for the right way to scale. So I just had a meeting with my real estate team yesterday and it’s sort of the end of the first quarter so we were talking about what we’re going to do going into quarter two. And I have a lot of newer agents. They’ve been an agent for 12 months or less. And our system has mostly been built on somebody comes to me, they get assigned to a senior real estate agent who’s going to oversee their deal. And then that senior agent leverages out the junior agents to go show the houses, call the listing agents, research property, sort of the senior agent’s the one that communicates with the client and the junior agent’s the one that kind of learns the game by doing all of the work.
And what I’ve been finding is that the junior agents are just very hesitant to go tell anyone they’re a real estate agent. They just want to stay in this very comfortable lane, and they keep saying, I don’t know what I’m doing. I don’t know what I’m doing. You’ve been an agent for 12 months. You know more than almost every other agent in this office, because you’ve worked with like 50 clients in the 12 months that you’ve been here instead of the average realtor might do one or two. But it’s this idea, what we found is that they have this belief that they don’t have all the answers and so they can’t go take action yet. They need to know first exactly what to do before they go tell somebody, Hey, I want to sell your house or I want to help you buy a house or they go hold an open house.
And my advice was, that’s not how you learn. You learn by going and saying, I want to sell your house. And then when you run into something you don’t know what to do you look at the resources you have around you and you talk to your broker and you talk to another agent in the office, you come talk to us and you learn. And then the next time you come across a problem, you have a little bit more confidence to take it on. That really, good entrepreneurs and business people are just problem solvers. That’s it. And you can’t get every single answer that you would ever need. It sounds like that’s sort of how you and Cody are doing things.

Christian:
Yeah. I think we’re programmed to think that way. We go through school, you go through first grade to get to second, second to get to third, you graduate high school hoping to get a high enough GPA for college. You get a first job. It scales to the second. That’s the scripted system for everyone. And so we’re trained to add steps to get where we want to go. I see a lot of people say, hey, I want to be a real estate investor so I went out and I got my broker’s license, and then I worked there for a few years and then I became an appraiser cause I wanted to value properties, and then I became a lender because I wanted to borrow money. The fastest way to become an investor is to go and buy real estate, and you have to learn to get there. So information’s important and if you want that, fortunately you have BiggerPockets. But at some point you need to transition from information to actual practice. The application is more important than the information.

David:
Rob, what say you?

Rob:
Yeah man, I actually kind of want to establish here, well, first of all, I assume that if this relationship is working and the partnership is working, you each like the tasks or the job responsibilities of each side, is that right? Or is there ever kind of any dissonance on things in that you and him don’t want to do?

Christian:
Yes. Well, one thing there’s no such thing as an even partnership, like people are just different. When you have different roles, there’s going to be different workloads. So there’s always going to be some level of dissonance you have to resolve. I’m pretty sure neither Cody or I wants to sit on hold and pay bills. That’s just not a task that anyone enjoys. However, I’m going to remember each and every one we have for the properties better than Cody. I would rather have Cody out bringing in new business and forming those relationships. He’s an amazing storyteller. So when he gets in front of clients, I just know he’s going to land that pitch nine out of 10 times, where I’ll do it seven out of 10. So we’re not always doing what we like to do, but we’re doing what we’re best at. And at the end of the day, we’re moving forward at a very, very fast pace. Not everyone’s done what we’ve done in a short period of time. And I love being able to do that. So when things are difficult or things are out of whack, we have excellent communication, so we know how the other one feels at all times. And at the end of the day, it’s about getting it done. And that’s what we do.

Rob:
That’s really nice, man. So let’s kind of lay this out tactically, because you say you kind of handle the back end and then he’s on the front end, which I think makes sense to me, but to kind of give some good definition here, let’s say Christian, my dad’s got this 30 unit apartment complex. We want to get out of the business. I’ve got this deal for you, and I hand it over to you as a sale, right? We lock it up. How do each of you work in that specific deal?

Christian:
Well, we’ll look at the pieces that we have. If there’s something on the front where someone’s obviously going to be more relatable than the other, we’ll take that sales call. So if it’s someone like we find out, hey they started really young, they did a lot of creative financing, I’m going to put Cody in that position every time because Cody’s the most relatable and his story is absolutely incredible. I don’t know a lot of people who’ve done what he’s done by 22. If I talk to someone who’s started very conventionally, they had a nine to five for a long time, it depends on the story, but if I feel that I’m really going to connect with that person, I might reach out. But again, we typically send Cody because Cody’s going to be the one to land those. In that relationship, we would take a look at the deal. My first thing I always want to do when we’re talking deal is I just want to meet. One of us is going to go out and get dinner, get coffee. We’re going to get to learn who they are, what their goals are, what they want to accomplish. And most importantly the why behind that. And once we have those pieces, we can strategize on how we need to progress.

Rob:
Okay. So you talk a lot about learning the accounting and all that kind of stuff. What is your background? Is it in accounting specifically or have you just been sort of been tossed into the accounting deep end and you’re just kind of learning everything as you go?

Christian:
Definitely the latter. We have a policy of we can’t have the same problems this year that we had last year, that’s how you know you’re stagnant. If I look at 2021 Christian, I go, wow, I don’t have the real estate I want to have. Well accounting for real estate doesn’t matter until you have the properties, right? So we scaled from two units to 71 units. Well now I better know how to account. Quick recommendation for everyone, if you’re buying a lot of real estate for the first time, don’t close it all in November and December, you don’t have a whole lot of timeline to learn the accounting, but we came in, we solved the first problem. I don’t have the real estate I need to achieve my goals. With that problem gone, we had a, hey, I’m not a master of the legal docs.
Well, we had to do a whole lot of that in creative financing and partnership structures. And we got really, really good at it. Now I’m learning accounting. I have the right person to teach it to me. I have a CPA. It took me a while to find, but I have the right CPA who makes me go through the steps and learn it before he’ll file anything. While it’s a pain, I’m understanding it, and next year when I get here, I’m not going to have an accounting problem. I’m going to have a whole new set of problems. And that is what I’m targeting every time. When I’m stuck, I need to make sure I’m not stuck on an old problem.

David:
Man. This is gold.

Rob:
Yeah, yeah, yeah. You’re looking for, I’ve never really heard anyone excited for the next set of problems, which is really funny because you’re just trying to solve today’s problems. And then you’re like, all right. My goal is next year to have a whole nother set of problems. That’s a pretty rare thing to say, I think.

Christian:
Well, that’s how you know you’re moving forward. If your problems aren’t old problems, new problems are good. That’s how you benchmark success. At least that’s how I’ve done it.

David:
I think there’s some magic in what you’re saying right now, to be honest, like this should be one of our better shows because this is what everyone who’s struggling needs to hear. I’ve often wondered why an incredibly intelligent person can go to work for another company and fall into a rut, let’s say if they get hired to be a CPA for another company, if they’re hired to be a CPA, they probably have a mindset and a skillset and they’re already kind of geared towards looking at the world that way. So they have an inherent advantage in how successful they should become. And very rarely do they ever progress through the ranks and go start their own business or become an executive in that company. Most humans, when they go work for someone else, just fall to a rut.
It’s almost like a mindset that encourages you to do as little work as possible, as slow as possible, as easily as possible. Don’t think creatively. Don’t look for ways to make things better, and just stay in that rut and wait for someone else to give you an opportunity. Wait for the boss to come say, I’m going to give you a raise and then, oh, I’ll give my best now. It’s just, there’s something about human nature. I rarely ever go into a Subway restaurant and have the sandwich maker that’s crushing it. Who’s like man, I at the bottom of the totem pole and I hate it and I just got to get my way to the top so I’m going to do the best job I could. Right?
It’s not normal. We don’t see that very often. It’s very rare. But then I also come across the business owner of the Subway and it could be a Subway restaurant, it could be any kind of business, but it’s often somebody who came from another country who had no skills who did not speak the language nearly as well as people here, who had none of the advantages was not educated, doesn’t understand the culture. By all means they should be failing. They should be at a disadvantage. And that person is the most successful one in that company.
And they’re doing things like managing people, making a schedule, ordering the food, doing the payroll, understanding profit margins, doing the marketing, solving the problems, like all of these different things that we typically hire out individually in a company, when someone owns the business, they do it all themselves and magically, they figure it out, like what you’re saying, right? So I come to the conclusion that I believe it’s the degree of responsibility that a human being is willing to take on over their own success or the success of their endeavor that determines how successful they’ll be like you, by your own ambition were not an account. You don’t keep books. That’s not something you had ever done before, but because your company needed that to be done, you rise the occasion and you figured it out.
Rob had a story where one of his children had accidentally snorted play dough right up their nose. And Rob became an ER nurse in that moment, right? Like he came up with the idea of how they were going to get it out. He executed it, it worked out, nobody trained Rob how to do that. He wasn’t like, I’m not going to move forward with having a kid until I know every single scenario there could be. It’s literally the act of taking on the responsibility of raising the kid or starting the business that puts you in the mindset that the solutions start to be made clear. And I’m going to hand it back to you to get your opinion on that. But this is what we’re getting at when we talk about the mindset, are you approaching it? Like it is my job to make as many problems as I can and solve them as well as I can. Or are you approaching it like it is somebody else’s job to take away all my fear, to give me every answer that could ever be there before I start.

Christian:
Yeah. And I think a lot of people have had that moment. For me, I think about high school in science class where you’re paired with all the smart kids and at some point someone might have had a point where it’s, hey, I don’t really feel like learning this right now, so I’m kind of going to let everyone do the work, and I’m just going to play team coordinator. You do this job, you do this job and you don’t do anything. And at the end of the day, that’s the wrong practice. You nothing gets produced if there aren’t producers. At the end of the day, you have to go out and accomplish what you need accomplished. I completely believe in finding the right people, in getting employees, in scaling and creating jobs.
You should have all these roles, but if you’ve never done it, you don’t have a knowledge base, it’s really hard to manage people and lead people if you just don’t know what you’re doing. I think there’s a ton of value in going out and actually learning the accounting myself so that when I hire a bookkeeper and an accountant, when we can scale to that level, I have a basic idea of what they’re doing, and if they leave my company, I’m not totally hosed. Like you just need to learn how to run your business if you want to run a business. I’m not free of time yet. Turns out when you buy a lot of real estate low to no money down, it’s actually a ton of work. So this is not passive income, or at least it’s a ton of work to get passive. But as you’re scaling, you just need to have the ability to know exactly where you’re headed, why you’re headed there, and then just go and knock it out.

Rob:
Yeah. I don’t think you can really ever be really fully prepared to scale. Like obviously there’s a good understanding that you want of the problem, but at a certain point you also have to just believe that you can kind of get through a lot of those problems. It sounds like you sort of went through that. It’s the classic, I guess the adage of like a fish that’s in a very small tank is going to just grow to the size of that tank, right? It’s not really going to get big, but if you give it a really big tank, it’s going to get bigger and flourish, and that seems to be what happened with you, because you said you were in two units and then your next deal was 30 units like a 30 unit apartment. Is that right?

Christian:
My third deal. I started with two. Cody got me into a deal for another two units right across the street from them, which I did hard money, 101% financed, and then did a refinance. That was my first foray into some level of creativity and rehab. Then deal number three, 38-plex Moses Lake. I would not have had the confidence to do that if I didn’t buy the first two deals, but that was scaling pretty rapidly to go from December 2020 at my first duplex to here I am today with 71 units. That was quite a sprint to get where we’re at.

Rob:
Well that’s exactly what I’m talking about. That really proves my point even more. You had two units, your next deal was two units, and so you’ve sort of mastered the art of owning and managing two units, right? And so logically next step is, hey, maybe we graduate to a four, maybe a six, hey, let’s get crazy. And maybe an eight unit and you say, no, let’s do a 38 unit and you jump into that deal. That is a tank that is much larger than what you are currently swimming in and you figured it out. So can you tell us more about the mechanics of that? Because you said 101% financed, how did that deal come across? And was this really the, kind of where your relationship and your partnership started to flourish? Because I imagine that all the problems you were excited about really probably started with this deal.

Christian:
Yeah. So that second deal is the duplex 101% financed, then that gave me confidence to use some creativity, get out of the conventional box. So deal number three to 38, I’d already communicated my goal to Cody on, I want to get to 30 units by 30. And unit count isn’t really a relevant goal, it was just my goal. And once I’ve committed, I’m like, okay, we got to hit it. My options are, I have two duplexes, so I can find 13 more duplexes and keep doing what I’m doing or I can grow and expand. The 38-plex was a stellar opportunity. It was seller financed. And Cody did a lot of the negotiations through just meeting the seller. He identified what they really needed, this property was on market for 13 years at the same price on and off. No one’s figured out how to make it work.
Cody got in front of them and just found out they had a set number that they were looking for on monthly payments. So we came up with a custom amortization schedule that got them the $10,000 a month they needed. And we were off to the races. The seller financed 15% down and we had to learn a new skill. About three weeks before closing, Cody and I looked at each other and went, huh, we should probably raise the $300,000 down we need for this since we don’t have it and none of us have ever done this. And so we had three weeks to learn, okay, how do you make $300,000 appear for the right deal with the right amount of upside? And in four phone calls, we made it happen, and now we know how to do it.

David:
Let’s unpack that for a second. Because as someone listening, you’re going to hear, okay, well I hear you telling me, I should just go make it happen, but I don’t know what that looks like. So let’s try to paint a picture for what happened on those four phone calls, what words were used, what objections were received, walk us through what that was like.

Christian:
So in every deal we are 100% relationship based. In lieu of asking for deals or dialing for dollars, we call owners of multifamily. There’s no list or target. I don’t care if they’ve owned it for one year. I don’t care if they’ve owned it for 30. I don’t care if they’re out of state, any of that low-hanging fruit. All I need to know is that owners know other owners, and if I want to be in this market, I need to know the players. So we just call owners of multifamily property and we get to know them, who they are, where they’re headed and why they’re going there. I communicate succinctly the same pieces about myself, the relatability, the goal and the significance behind what I’m doing. So now we all have a relationship.
It’s the same exact thing when you’re raising capital, I know what pieces people have, so when I make that phone call, I’ve already met with them. We didn’t talk about a deal. I talked to them about what’s happened in their life, what their target is and why they have that target. So for that we call and the phone call starts, hey, based on what you told me, I have an opportunity and I wanted to run an idea past you. And it goes from there. And it’s just an extension of a conversation we’ve already had. And if you’re getting started, that’s the only thing that I think you need to focus on, this is a contact sport. You need more contacts. Don’t worry about the deals, worry about the relationships. And only the relationships. There’ll be a time to be transactional. And if you’re getting started, you’re not there yet.

David:
So let’s role play that.

Christian:
Yeah.

David:
I will be the person who could be a potential investor and you’ve got the deal. So you’re calling me.

Christian:
All right.

Rob:
I’ll be the phone ring, ring, ring, ring.

David:
Hello?

Christian:
Hey David. It’s Christian. How are you, man?

David:
I’m good. Thanks for calling Christian. What’s on your mind?

Christian:
Yeah. Well I wanted to touch base with you. Based on our last conversation, you had mentioned that you’re really, really trying to get more units to your name, and you’re looking for a deal that has both cashflow and upside. I had a unique deal come across my desk, I want to run an idea past you.

David:
Okay. Would this be something you’re bringing to me to buy? Or is this something you’re going to buy?

Christian:
This is something I would actually like to buy with you. I would back this with equity. This would be a deal that we would do together. I found a stellar opportunity. It’s in central Washington where the rest of my portfolio is. My other partner is Cody Davis, who you remember meeting with him. He has a lot more units than I do out here, but this is the single biggest opportunity that we’ve come up with and based on our last conversation, I’d like you to be a part of it.

David:
Okay. Can you sum up what you like so much about this deal?

Christian:
Well, first of all, it’s a seller financable opportunity, which is how we’ve leveraged low down to quickly multiply money. We’re only going to need 15% down to close it. The upside on this is seven figure upside and I am absolutely sure that we can reach this in the timeline we’ve been given. We have five years to do about one year worth of renovation. Cash flow is a little light day one, but we’re going to compensate with a equity bump on the back end. So we’ll offer you two to one on your money in five years, so you put in 100, pay you 200, and as it’s cash flow, you get your percentage cash flow.

David:
All right. Now I don’t quite understand what you’re going to do to add value. Are you saying that they just need to be renovated and made nicer?

Christian:
So first of all, it’s 38 units that today is bringing in about seven and a half thousand dollars. This is ad acquisition. We bought this thing, day one was like a three cap deal.

David:
Okay.

Christian:
Terrible performance, has been mismanaged. Conveniently, we have a property management company. We’ve done this, so we know what we need to do on the rental bumps. In addition, there’s a contractor that I’ve already used on my little duplex. He did a phenomenal job. We took rents on that property from $700 a month to $1,400 a month. They’re beautiful units. We get the highest rent per square foot in Moses Lake. We know how to renovate. We know how to manage. Cody’s already raised rent on 30 units over the last few years in the same market. This is exactly what we’ve done to create value on every other property. It’s just a larger scale.

David:
Okay. So you’re saying that it’s being mismanaged, the rents are not as high as they could be, and you think you can change that.

Christian:
Yes. This property, we started, the septic tanks were trash. Water heaters were either not working or leaking everywhere, there’s a homeless camp on the site. I mean, this had everything wrong with it, but there were all pieces that we’ve dealt with similar stuff on other properties. This was definitely a stretch for us to get, but this pushed us to the next level. We knew we had the requisite experience to make it happen. We just needed the right people to believe in us, to prove concept and make it happen.

David:
So is the plan to bump rents, increase the value, and then refinance in five years?

Christian:
Yep. The first thing we do is we show energy on the property. So we have a whole bunch of bad appliances, we brought all the appliances in at the same time and start bringing them into units. Immediately started renovating all the vacants. They had a ton of non pays, who they just hadn’t made any effort on. After we put energy in the property, we started fixing things up. We repaired electric problems. We replaced appliances. A majority of the non-pay just started paying. We posted notice and asked them to pay and just started receiving rents. We moved in the first six months, we brought the income from $7,000 a month to a little over $20,000 a month in less than half a year.

David:
Okay. So how can I be sure that I’m going to get my money back?

Christian:
Well, we have enough equity in the property day one. I mean, day one, we bought it for two million. It was still, there’s no way you could buy a property like this, that many units, for less than 2.8 million today. I value it a little over three, but we back it with equity of the property, on this particular deal, we had three investors come in, each brought a hundred thousand to the table and we gave them each a 20% equity stake in the property.

Rob:
Honey, honey, that sounds like a really great deal. I think you should invest.

Christian:
What we recently ended up doing on this, you always go in with a clear plan of how you’re buying everyone out. That said, typically equity is going to be a lot more expensive than debt. We recently cashed out one of the investors. He wanted to move his equity into another project that he wanted to invest in. So we moved our pieces, we got him cashed out early, and then we converted the equity from the other two owners into debt through a note. So we basically bought them out with a new note and we pay them out of the new cash flow. So now Cody and I own a hundred percent of the building between the two of us, we’re 50-50.

David:
Gotcha. Okay. And then how are you coming up with the actual people that you’re going to call and propose this to?

Christian:
Google Maps. 100%. I have no software. I have no list. I have no skip tracing. Turns out every single off market property exists on Google Maps because every property’s on Google Maps. First thing we do is we start with location and then we ask two questions. When I have the market I want to buy in, how do I own it, and how do I never lose it? If I can answer those two questions, we can acquire absolutely anything and know that we’re never going to lose it. We can hold it through good times, through bad times, we buy on cash flow for equity growth. The location’s going to help us grow the money and multiply the money. Cash flow makes sure that we can keep it forever.

Rob:
So can you clarify when you say you find it all on Google Maps? Like, what do you mean by that? Do you mean you, let’s say Houston, for example, you’re looking there and then do you just start zooming around and saying, oh, that looks like a multi-family deal or how does that work? What’s that process?

Christian:
That’s exactly it. I look at the roofs. I go, hey, that looks like a 12-plex. I’m going to go zoom in and I’ll drop my little guy on street view and look at it. I’m like, wow, I’d love to own that building. Right now, we have a lot of wholesalers and other people who just grind the phones in the market who are calling saying, hey, can I offer on your property? I have a deal for you. Do you know what your property’s worth? I don’t do any of that. We call and we just ask for a meeting. So I’ll take Moses Lake as an example, because that’s where we started.
When I owned a duplex, I was going to call people with a 12-plex or with a 38-plex. And the phone call looked like, Hey, I just bought a property in your market. I’m a new investor. I have a couple duplexes. I’ve come to the realization that I can’t scale buying two units at a time to where I want to be. Saw your 12-plex here, I was curious how you got started. And then you just listen to them talk. I follow the 80-20 rule as close as I can. They should do 80% of the talking and I should do 20, but I’ve practiced this so I can communicate my pieces, my significance and my goal. I can communicate those really simply, really effectively without a lot of words. So when I’m talking to them, I listen to their story, we have them back and forth. And then I ask to meet them for coffee. It’s never about a transaction, the coffee, I’m going to expand on what they’ve done and how they’ve done it. That’s how Cody and I learned how to do all the creative financing.
There’s two guys in particular, central Washington, we called them, no idea how to buy their big buildings. We just know that they’ve accomplished something we haven’t. After a few phone calls and about a year of work, one of them finally picked us up, put us in a truck, drove us around all of Moses Lake told us exactly how they bought stuff low and no money down, seller financing, and one of my favorite deals we’ve ever done was three side by side duplexes. We did that deal with them, seller financed, 10% down, because we built that relationship instead of going after a transaction. They probably would’ve sold us a duplex 20% down because we have a relationship they’re now invested in having us succeed and they’re willing to get much more creative. But we all do that with Google Maps. I just, I shop the market, I click on the roof. It’s a property that I like, something I would like to own. I call them and I just try to build a relationship.

Rob:
Okay. So to click into that a little bit, you find that property, then you just go and skip trace them or use kind of softwares or services at that point?

Christian:
Nope. Google again. You could find pretty much everyone’s number on Google. We threw a little thing like eight minutes on how we do this on our YouTube page, Cody and Christian multifamily strategy, how to find every owner ever. But most of these are going to be held by LLCs. Not all of them, but LLC, you can drop it into a site like open corporate, which is free. See who owns that LLC. You can usually Google their name in their city and find a phone number. And then you just don’t overthink it. You pick it up, you dial and you let them know your pieces. This is who I am. This is why I’m calling. I want to know how you got started, and start talking, but I have never paid for skip tracing software. We’ve never paid for leads. And I know most of the players in my market and as we expand markets, we do the same thing. I have a bunch of other people who have asked for help getting started, who Cody and I have done some coaching with. It works in every market in the US. Click on a property, find the LLC that owns it, call the owner, Google their name. It’s that simple. Works for people on every level. I’ve talked to people with thousands and thousands of units and their number is just a Googleable event. Googleable. That is a word now.

Rob:
Googleable. Yeah. So it sounds like you’re effectively just a master networker. Like networking is really what got to this point. And you kind of mentioned something a little earlier where you said the 80-20 rule where they talk 80% of the time you talk 20% of the time. Why is that?

Christian:
Well, one, people love to talk about themselves. So you’re giving them room to talk. But when you’re building a relationship, I don’t know why the heck they would listen to you. If you just call them and start just talking about yourself, which is what most people do the first time they make these calls, we call it feature dumping. You’ve practiced all this in your head. You just dump everything in your head onto them. Hey, this is who I am. And this is how old I am. And I have a duplex and I want to be like you and I don’t know how you did financing. Did you ever do seller financing? Everyone does that on their first call, and at some point you just have to get through that. But the 80-20 rule just helps you remember, you can benchmark, okay, am I doing too much talking here?
If they start sharing pieces of their story with you and they really get into their story, you’re starting to build a relationship, and once that gets enough momentum, that’s where you know you need to wrap up the call, close it and basically end with thank you so much for sharing. You’ve done something that I never knew was possible. I appreciate you sharing your steps. I’m going to be in town next week, can I buy you coffee and learn more about how you do this? And if you really want a great closing question, hey, I’m newer to this. I haven’t done what you’ve done yet. How would you recommend I get started? Those are non transactional questions, but that’s how you build a relationship that’s going to get you opportunities that no one else can get.

Rob:
That’s awesome, man. So where this all comes full circle is that me and David are practicing the 80-20 rule on you.

Christian:
Yes. This is the time where I get talk because you guys were nice enough to ask me to come on. But yeah, if I had either of you on our channel, I’d be doing the same thing. I’d be asking questions and my goal is to get you talking and gets you excited about a story, because it’s really fun to share the journey that you’ve been on. Everyone has a story to tell. Your job in that first phone call, it doesn’t matter if they’re going to sell you the property or not. If they are invested in you and you’ve communicated your goal, people are going to want to help you reach there. Especially if you have a great why behind it, people are going to invest in you and they’re going to get creative to help you get to the next level. Whether they have a deal, they have someone else with capital or they have friends who have the deal. If you don’t focus about the deal, the deal comes. My old sales coaches would slap me in the face, but we do all of our transactions by not asking for the sale.

Rob:
You know, I think why this is very powerful and just the genuine kind of authentic side of this is that if you really think about why this works, most real estate investors don’t get to talk about this stuff with their friends and family. Like most of my network, my friends, family, closest friend, best friend, they don’t care at all. Anything I do, they’re like, dude, we get it. You Airbnb, shut up. You know? And so if you contact these different real estate investors and you’re interested in their story, they’re probably dealing with the same thing where their network probably doesn’t really care about their real estate business. And so it’s a very rare opportunity for them to get to speak to someone that’s like, oh my gosh, I’m very interested in what you do. And it helps them feel better about doing it because they don’t ever get to talk about this stuff. I mean that’s how it feels to me. I’m not really sure if that’s true across the board, obviously this is very anecdotal, but we could all probably relate to that in some capacity.

Christian:
It’s a smaller field than we realize, in that small mid-size multifamily, even the larger multifamily, there’s not that many players. So when you get to know the other people and you get to engage and share your story with someone who actually cares and understands and wants to learn what you did, it’s really fun to share. I love doing it. I over talk. I know that’s my weakness, but turns out that’s a weakness that most people in real estate have. We love to share. We love to tell stories. We’re really engaged. We’re entrepreneurial. So you get a lot of luck in that call. When I have friends make that call for the first time. It is so fun when they call you back and they go, oh my gosh, that worked, we’re meeting for coffee, what do we do next? I’m like, yeah, it works. People want to share what they’ve done and talk about their story. And it’s a small enough community where it’s not a difficult call to make and to land that first meeting.

David:
All right. So let’s get into some of the fun stuff here.

Christian:
All right.

David:
Tell me about some of the mistakes that you guys made, things that took a left turn, maybe some quicksand that you found yourself in, and what you did to get out of it.

Christian:
I have an excellent one for this. Most painful lesson we learned, Cody and I talk all the time about how it’s relationship, relationship, relationship, know your partners, know their pieces, know their why. We egregiously missed the mark on someone’s why. We got who they are and they communicated their goals, but we ignored their significance, this was actually on that 38-plex. I talked to him before this call, he said, I could share this story. The only investor who ever asked to be cashed out early, he had another opportunity. However, the reason he really wanted out is we got a message from saying, hey, you’ve failed to hear me and my goals, I don’t want to place capital with you guys anymore. And it was a shock, because we put him in our biggest deal, most cashflow, most upside, this was a phenomenal opportunity. And we wanted him to be a part of it.
Every time we’ve met with him, he’s talked about a few things. He’s a little older. So he is like, hey, I haven’t built portfolio to the size I want, I want unit count and I want to see some cash flow. And this thing will be a cash flow monster when we’re finishing the rental bumps and getting the property stabilized. It already cash flows decently. It’s going to get insane over the next year. So we put them in the best deal ever. We’d communicate on what’s happening with the property and what we’re doing. And every time we met, I thought he was happy. Turns out what he really wanted to do. He never had kids. He wanted to be part of the team. He wanted to contribute. He wanted to coordinate contractors. He wanted to be hands on in the field. At the end of the day, he wanted to feel needed.
And looking back through all the nights that we played the cashflow board game together, had dinner together, it came up in every conversation. He talked about cashflow, he talked about unit account, but he talked about wanting to do more for the team and we focused too much on making him money. So at the end of the day, he just got frustrated. It was, you’re not hearing what I want to do. He missed out on another opportunity because he was involved in this opportunity, and it’s the only client we’ve ever lost. We’re still friends. We still play cash flow. It ended well, we did get him cashed out, but we had a five year note where someone wanted to get out in six months because we missed the reason behind it. And the lesson there, you have to return money to people. You have to make money to raise capital. It’s super important. That being said, no one’s reason is money. There’s a deeper reason for every person. And if you want to play this game at the highest level, you need to learn their why behind everything and it goes beyond money.

David:
Have you thought about going back to that person and saying, hey, I have a great deal, but I can’t take it down myself. I really need your help with this aspect of the deal. Would you want to partner with us?

Christian:
We’ve thought about it. And I am undecided on what the best thing to do there is since we have precedent of having to pull money, it is a consideration. It is not off the table to do another deal and to try to do it right. I would probably do a smaller deal and rebuild that trust. For the time being, he was very, very gracious and he’s good at keeping business and friendship separate. So we’re still friends. He’s still helping me out with a house project. We’re still going to play board games together. I’m probably going to let it cool down a little bit on the investment side, but I am very open to trying that again. We’re going to do it completely differently.

Rob:
So Daniel, if you’re listening to this, Christian is ready. He’s ready to have you back. No, I’m just kidding. That’s not his name. I just made that up. Unless it is and that’d be so awkward.

Christian:
That would be incredible. It’s not Daniel, but we’re open to trying it again. Absolutely. Relationships, we have to do a better job of identifying the why and I’m open to having that conversation again. But the main thing is really identify what you’re doing with someone. If you know who they are, where they’re going and why they’re going there and you know, the real reasons why, you’re always going to be able to raise the capital. You’re always going to be able to find the deal. You’re going to be able to close. You’re going to be able to keep those relationships strong all the way through. That was not fun, having to come up with money to cash someone out six figures when I was illiquid, we had to move a lot of pieces to make it happen. But at the end of the day, we’re always going to take care of our clients. We did make it happen. Everything’s good.
We actually went and called every investor that we have. And we checked in with them. We thanked them. We let them know what their contribution meant for us moving forward. And we asked them how they want to participate. There were a few people were like, wow, this has been hands off. I love that it’s hands off. Just let me know when the next opportunity comes up. I asked some other people who responded with, oh, my gosh, I was waiting for this call. This goes such a long way that you asked me how I’m feeling. I actually would love to participate in the capital raise for the next deal. While it’s not something that we always need, it’s fun to let other people participate, make sure that you hit their targets. And so it was a lesson we learned, we applied it immediately. I always say, get a new set of problems. We had a big problem there. The problem is resolved and we’re not going to make that mistake with anyone ever again.

David:
Well, that’s really good.

Rob:
Let me just say, dude, thank you. That is like very honest. That is a very honest lesson that we can all learn from. I’m already thinking in my head. I’m like, who can I call back and say, hey, I’m sorry. No, that’s really great, man. It’s really honest and vulnerable for you to come out and say that because a lot of the people who come on to BiggerPockets and it is the success stories and hey, everything went well, no one really harps on something like this. And seems like you guys are going to really change a lot of how you interact with potential investors and partners from it. So in the end it’s going to be one of the greatest experiences you’ve ever had, probably.

Christian:
Yep. And as a consequence to going quickly, like you’re, you’re going to have difficult times, stuff will get hard. You just have to learn. And again, you come back and you build a bigger boat and you go back at it again.

David:
It’s really good. What about a mistake from an operational standpoint that you can share?

Christian:
Operational standpoint …

David:
Miscalculating cash flow, renovations that went poorly?

Rob:
Legal paperwork that might have missed? I think your article [inaudible 00:48:15].

Christian:
Oh boy. Oh boy. Yeah. I won’t go into the details too deep on this one. But like I, when we got the 38 structuring everything as equity instead of debt was a mistake. However, we didn’t know how else to do it. So looking back, I’m like, well, we got it done. It wasn’t perfect, but it was as good as we knew how to make it. So operationally, technically it was a mistake. Also, I wouldn’t be where I am if we didn’t do it anyway. A big one was property management. We put property management under one company. The company went under and the communication was horrible. It was a ton of work to get set up and correct all the books. And, oh my gosh, it was just months of pain. Cody and I actually opted to start our own property management company out of that. Our options were find a new vendor or just do it ourselves. I conveniently had someone in my network who was perfect, her name’s Hannah Caldwell. She runs our property management and she is phenomenal. So we had the pieces to do that. But operationally, I didn’t spend time vetting that property manager. That was just a lot of pain. I wouldn’t do that again.

Rob:
I mean, your property managers are the lifeblood of your business, right? Especially once when you get 71 units. So yeah, I think that’s one of the things that you don’t really know until you know how to vet your property managers because really property managers, they kind of run stuff. So it’s a learning experience on how to navigate those people because no two property managers are the same. I mean, not at all. Everyone’s very different on how they run businesses.

Christian:
I got a bonus answer to that question too. Before you close, check your septic tanks. We had a massive septic problem with less than a week after we closed. We closed that thing. We were just told, yeah, the septic tanks are fine, they’ve been pumped. They haven’t there’s poo coming through showers. It was awful. Add that to your due diligence. If you have septic, take a look at it before you close, because that sucked.

David:
You’ve got me going back in time and thinking about every unexpected problem. A huge proportion of them are related to septic things. Always man-

Rob:
We call that doo diligence. D-O-O diligence.

David:
Doo doo diligence. Yeah. Like the lines coming out of the, even single family homes into, to tie into the city sewer are often time needing to be looked at or needing to be scoped. You get literal tree branches and roots that can go through these things, puncture them and leak. You have septic tanks themselves that have been corroded and they’re leaking into the area. Like there’s so many ways that septic can go wrong, but it’s not something they talk about on HGTV. So nobody ever thinks about it.

Rob:
Well, they do talk about it on dirty jobs though.

Christian:
Yeah. If you want to be a good operator, you got to be number one in number two.

David:
There it is. That’s [inaudible 00:51:14]. Very well, Christian. All right, well, I’m going to move on onto the next segment of our show. It is called the deal deep dive. In this segment of the show, we will dive deep into one specific deal that you’ve done. Do you have one in mind? Christian?

Christian:
Yeah. Cody shared a lot on the 38 unit. Now if you haven’t seen his video yet, go back and watch it, because he did incredible. A really fun one because it’s really critical how the relationships came together was the three triplex deal, seller finance, side by side.

David:
Okay.

Christian:
We did that, I believe we closed that December of last year.

David:
So we will fire some questions off about that one. So the first kind of question is what property is it? It is a three triplex deal.

Christian:
Three duplex. Three twos. I sometimes mis say that’s hard. Three twos, six units, three duplexes.

David:
This was what you were talking about when you said that the owners that you knew were driving around, they sold you these on the 10%. Okay?

Christian:
Yes they did.

David:
Rob, next question.

Rob:
How did you find said deal?

Christian:
Well, we built the relationship, we met with those owners a little while back after a lot of calls and a lot of learning how to frame that call. One of the calls Cody actually made was, hey, it’s Cody. I’m the guy who called you a few months ago and botched the call. They’re like, oh, I remember you.
So we finally built that relationship. I closed the duplex that they were actually the listing agent on. That was the second duplex I ever purchased. That was how I started in that relationship. But we came in after close. They finally agreed to meet with us. First thing they did was pop us in the truck, drive around and we looked at a bunch of their portfolio. They have hundreds of units, almost no debt. They’re in their early seventies. And they just talked about, hey, this is how I structured this deal. This is how I structured this. They taught us how they bought a duplex. Then placed the second lien on it as a down payment on a larger building. So they taught us how to buy deal zero down once you build some equity, but they taught us all these different strategies and drove us around.
Those were one of the properties we passed and he mentioned in the car, yeah, we have a couple partners on this that would probably like to be cashed out. This could be a good deal for us. And then we moved on. We don’t make it transactional. So we didn’t bring that up again until a couple months later when we were in office, I was like, hey, you mentioned you had some partners who wanted to be cashed out. Where are you guys at with that? And they proposed, well, how about you guys put an offer in front of us and we’ll play the bank.

David:
Okay. So what did you end up paying for the property?

Christian:
So for the properties, we paid 900,000, so 300 a duplex, seller financed, 10% down. Those guys typically will do 20 or more and you could call them and probably do a deal because we had the relationship and they know we know how to structure these because they taught us how to structure it. They allowed us to play with 10% down, which was a huge advantage.

David:
Okay. So we would normally say, how’d you negotiate it? You just explained that right there. How’d you fund it? You put 10% down of your own money and did seller financing. Did you do seller financing for 10%, so it was half the down payment, or did you do seller financing for the whole thing other than the 10%?

Christian:
Whole thing, so it was 90% seller financed.

David:
Okay.

Christian:
But I didn’t use any of my own money on the 10%.

David:
Where did that come from?

Christian:
So this was from a client, this goes back to learning everyone’s story. So the sellers, we learned what they’re trying to do. We know they’re trying to convert their portfolio over the next 10 years into passive income through notes. So I offered to be their buyer on everything and we’ll start taking on those transactions as we go. The person who funded it, I met him a while back. He had just flipped a property and he was just asking for advice on how to move forward. He had lost money on flips, he’d made money on flips and he is like, you know what? I just kind of want to place this money in syndications or other real estate and just see it double every five years. And we got really deep into that. He has a great job at Microsoft, he doesn’t need the cash flow. He just wants to double every five years.
This deal was under market rent. It was about a market purchase, we might have got a little discount on it, but we knew we had upside in rents. Didn’t have a lot of day one cash flow. We had a lot of upside on future valuation. So when I called him, I had my normal call. Hey, based on our last conversation, had an opportunity, came up, wanted to discuss it with you. We wrote a note that says he funds the entire down payment, $90,000, we get cash flow for the next five years on this as we raise rents, no distributions, no interest, that’s just a hundred percent of it, we paid nothing and we get to cash it for five years. In exchange, at the end of that, we will take his 90 and we’ll pay him 180, which it will do in cash flow, and will probably also do in appreciation. So we’re can refinance and pay him, or we can just sideline money and pay them. But at the end of the day, zero down deal, the properties will buy the property for us, and his collateral is in the event we don’t cash him out, he gets all three duplexes, but at five years ago dollars, and we’re improving him and raising rents. So his collateral is probably better than his buyout.

Rob:
That’s amazing. Well, congratulations on a good deal. I mean, what lessons would you say you’ve learned from this deal?

Christian:
Well, I learned, like I’ve said through this whole call, relationships are everything. We couldn’t have done that if we didn’t know what people’s goals were and what their why was, because that’s a really unique structure. You don’t usually just do a deal and structure it all on the back end of, hey, we’re just going to pay you out one time in five years. That opportunity is not always available. We also learned that a little bit of creativity can take a 10% down deal and make it a zero down deal, and you can cash flow zero down. I’m not a math wizard, I leave that to Cody, but I can afford a lot of real estate for $0.

Rob:
Yeah, but you are on the accounting side of it. So I think he might throw it back to you.

Christian:
Cody looks over the numbers. I make sure we categorize everything in the right slot and everything gets filed. When it comes to doing the math, Cody is a legitimate genius. He is faster at doing math in his head than anyone I’ve ever met. That being said, I account for said math and make sure that everything actually does balance at the end of the day.

David:
All right. Well that sounds fantastic. We’re going to move on to the next segment of the show. It is the world famous, famous for. In this segment of the show, we are going to ask you the same four questions we ask every guest and get your perspective on them. Question number one, what is your favorite real estate book?

Christian:
Favorite real estate book is actually a BiggerPockets book. It’s Brandon’s book The Book on Rental Property Investing. That is the first book I ever read on real estate. I love it because while the application’s more important than the information, that book gives such a broad spectrum of stuff on just about everything. I read that and that was the point I realized, oh my gosh, I can totally do this. That book got me started. If you’re looking for just a broad entry point, that book changed my life.

Rob:
Great. Question number two, favorite business book?

Christian:
Favorite business book. It’s not directly business, but 10X Rule, Grant Cardone, the mindset applied to business has allowed us to do everything that we do. Love the guy or hate the guy, the content of that book is exactly what you need if you want to scale really quickly and scale effectively, it’s all about eliminating the distraction, setting high enough goals, and then smashing those goals way out of the park. That book has taken our business to a whole different level, and that conference is where Cody and I really connected. So for a lot of reasons, 10X Rule is my favorite book to grow your business.

Rob:
Super fair, man. That’s sounds like it was the beginning of a beautiful relationship, the beginning of a beautiful bromance.

Christian:
Yes.

Rob:
Question number three here, what hobbies do you have outside of getting seller finance deals and crushing it in the real estate game?

Christian:
Well, I got a couple guitars behind me. I haven’t played them as much as I would like to this last year, to scale from two to 71 units and leave the nine to five, I’m professionally unemployed right now, it is a heck of a lot of work. So I can honestly say my hobby right now is real estate. Like that is all I do. I talk real estate, my wife will tell you this too. I talk real estate. I think real estate. I think deals. I think systems. I’m having fun, doing what we do. However, once we get a little bigger, we get stabilized and I have a few less projects, I’ll be right back to playing guitar and will probably add to that wall significantly.

David:
All right. Awesome. In your opinion, what sets apart successful investors from those who give up, fail, or never get started?

Christian:
You don’t define the why behind what you’re doing. It’s pretty easy to set a goal and there’s a lot of attainable goals out there. For a lot of people, they’d love to have $10,000 a month, passive income. They’d like to have 20,000 a month. Whatever your goal is, it’s easy to set a goal. It’s not hard to set a timeline on it, but to actually achieve it, you need to have a big enough why behind what you’re doing. For me, one, I want to retire my wife. She works in the school district and she has a really rough school district here in the Seattle area. I want to give her the option to retire. I’m not going to force her to, but I want her to have that option where she gets to go to work. She doesn’t have to go to work.
I also have lived here for 30 years in Seattle. It’s gray, it’s cold. The food’s not very good. The people aren’t that nice. I would like to move somewhere warmer, and I would like to own my time when I do that. Those goals for me are absolutely big enough for us to get huge in scale. Cody and I have a shared goal of we want to share this with a lot of people, there’s a ton of ways out of the nine to five, this is a way that has worked really well for us. The creative financing, I haven’t seen enough people share enough depth on it. So the big why behind the massive scaling and the going fast is I want to share this with as many people as humanly possible. I don’t believe in the gurus who talk about stuff and don’t do anything. So I want to do something incredible. I want to scale the unscalable so I can show other people how to do it.

Rob:
That’s awesome, man. Thank you. I appreciate that. We can tell you’re very passionate about it. So last thing here, Christian, can you tell us where people can find out more about you? Where can people invest with you? Where people learn more about creative financing, a la the Christian method?

Christian:
Well, Cody and I have a YouTube channel where we try to put everything. There’s some people who hold stuff back. We put everything we have on there. Any strategy, we teach you how to look up owners, we use the example of how to find our actual cell number. I mean, I actually share everything. That’s Cody and Christian Multifamily Strategy. You can follow us on YouTube. We post three times a week. Midweek we do whiteboard Wednesdays where we just take five questions from people and answer there. That is an excellent place to get information on how we did what we did. If you want to go deeper, our website, themultifamilystrategy, we have a course, it’s brand new, launched on May 1st, that you can follow the link and find out exactly how we did what we did and create your own multifamily strategy and your path to success. Either one is fantastic. You can follow us on YouTube or follows us there, themultifamilystrategy.com.

Rob:
Awesome. David, what about you? If people want to invest with you, if people want to learn all about your real estate nuggets, where can they find out more about you?

David:
Got lots of nuggets, man, this is McNugget right here. So you could go to investwithdavidgreen.com if you want to invest with me, that’s pretty simple website to navigate. You can follow me online at David Green 24, see what I’m up to. I actually hired a new marketing company. So I’m doing the cool stuff that all the young guys like you, Christian, are doing, TikTok, weird little emojis in the videos, cute stuff, something I never thought that I would ever be doing. So please let me know what you think about how my content looks right now. And please help me to know that my screaming insecurities that this is a terrible idea are unwarranted and people actually like what’s being seen. Christian, I’d like to get your opinion on that as well. Check out my page and tell me what you think.

Christian:
I’ll take a look. What I found with the whole Instagram TikTok thing, you could follow me at Instagram by the way at Christian Osgood, but the content that does the best is the dumbest content. And I hate that. I hate putting out stupid stuff. That being said, if I can reach a million people on TikTok and 1% of them click to my YouTube page, and I know we have excellent content there, it’s worth the reach that it does. But I consider that the garbage part of the funnel, everyone who really wants to learn or cares what we did can trickle down to YouTube where we actually have great content, just like you, David. You have some of the best content on the internet within BiggerPockets. People should watch you there so that they watch you here. Because anything that gets clicked on is invariably my stupidest video does the best. And if I put excellent content, 12 people watch it and like it.

David:
I know.

Christian:
We do a dumb thing where Cody’s wearing a hoodie and says a couple stupid things, quarter million views in like an hour. I don’t get it at all.

David:
It’s a problem. You try to use it as a hook to get people’s attention and then say like, now actually go eat real food over here that’s going to help build you wealth and make you money. Not like just fast food that people can get right off the bat. So if you’re listening to this and you’re addicted to fast food, well, I guess you’re listening to this, you’re not addicted to fast food. So you are doing good. Rob, how about you? Where can we find out more about you?

Rob:
Oh, you can always find me on the YouTubes. Smash that subscribe button. Leave me a comment. Let me know something you learned from my videos over at Rob Built. You can find me on Instagram at Rob Built as well. TikTok at Rob Builto. Hey, if you’d like, if you’d like, just if you want, don’t feel like you have to, but if you want to just head over to Twitter and follow me too, Rob Built channel.

David:
I’ll take a moment to be serious here. Here is what I would like everyone to understand. If you are standing on the edge and you feel like I don’t want to take the leap, I don’t know where I’m going to end up. There are many options that don’t involve you just buying a property and hoping that it works out, especially when the market’s hot and the stakes are higher, because you are going to have to make decisions quicker than you ever did before, unless you’re doing what Christian and Cody do, where you get off deal stuff, off market stuff, and you can make personal relationships. The normal buyer, this is a very challenging time to try to move forward. You’re going to pay more than what you wanted to pay. There’s going to be a degree of value add that has to happen in almost any deal. You have to have a vision for how you’re going to make that property better. The days of look at it, analyze it, see the return you want and buy it are largely over, in most cases.
So do something to make this journey easier for yourself. Get connected with someone else who is doing deals, invest in a deal with someone else and just get your foot in the water. See how it feels. Get used to what the world of real estate looks like. It will help make those fears go away. Get around other people, make more friends that are in real estate that talk about it all the time. Hang out with real estate agents, hang out with real estate investors. Be curious about what they’re doing and kind of like peek behind the curtain and realize it’s not rocket science, just feels like that when you’re on the other end. Don’t think it’s got to be all or nothing. I don’t know what I’m doing, I’m just going to go buy a property. Get yourself immersed into this world. A lot of mystery will go away. Would you two each kind of agree with that advice?

Rob:
Oh yeah, definitely.

Christian:
Absolutely. Absolutely. You just got to get out there and do it. That is the end of the day, nothing replaces actually buying real estate. If you want to be an investor, there’s only one way to do it. Buy something.

David:
Yep. There you go. Get in the position where you can handle that. House hacking’s a great way to go about that. You need to buy a house anyways. You might as well start there. Get some momentum, realize that, oh, I just have to track income, track expenses, see what works, see what doesn’t work, and then go buy another property after that. So, Christian, thank you very much. I just want to highlight to everybody again, reach out to us, contact us, try to figure out how you can get more into our world so you get exposed more to real estate. Follow Christian on Instagram at, is it Christian Osgood?

Christian:
Yep.

David:
Follow Rob at Rob Built, and follow me at David Green 24, and follow BiggerPockets everywhere because they have tons of content that you don’t realize is out there. There’s interviews like this. There’s more interviews on YouTube that are much shorter, hard hitting, get to that point, also maybe more entertaining. There’s some fun stuff that’s out there. So check out BiggerPockets on YouTube, follow their channel and learn as you go. Christian, thank you very much. It was great to meet you. Please give Cody our best.

Christian:
Yes sir.

David:
This is David Green for Rob doo doo diligence Abasolo, signing off. We might have just created a thing. That might get some traction.

Rob:
Doo doo diligence, baby.

© 2022 CNBC LLC. All Rights Reserved. A Division of NBCUniversal

Data is a real-time snapshot *Data is delayed at least 15 minutes. Global Business and Financial News, Stock Quotes, and Market Data and Analysis.

Data also provided by

According to a recent study by TransUnion, renters in their 20s and 30s want their landlords to report rent payments to the major credit bureaus. The main reason: Gen Z renters wish to build their credit health faster.

Rent reporting has a positive impact on the industry in general. There are plenty of benefits to landlords—not just tenants—of reporting rent to TransUnion, Experian, or Equifax. For example, landlords who report rent payments to credit reporting agencies find that tenants are more likely to pay rent on time. It also improves transparency in the rental industry, especially when you interview prospective tenants. 

Survey Shows Gen Z Tenants Want Rent Reported

According to the TransUnion study published in April 2022, 27% of property managers aware of rental credit reporting were doing it.

In total, the survey included responses from 350 rental property managers and 2,039 tenants regarding including rental payment history in the credit report. 

Here are some interesting facts and figures:

• 72% of landlords say rent payment reporting is straightforward.
• Two-thirds of the landlords who do not report rent to credit bureaus state that it’s not easy to do.
• 70% of respondents said they would consider reporting rent if it meant fewer late rent payments, fewer defaults, and a lower risk of eviction.
• Nearly 50% of landlords said that rent reporting attracts more financially responsible tenants.

Why do Gen Z tenants want rent reported to credit bureaus? Here are some interesting insights from the survey:

• Only 15% of tenants, in total, have their rent payments reported. 
• Nearly 30% of Gen Z renters have their rent payments reported.
• 60% of those under the age of 30 are interested in reporting rent.
• 70% of renters who have had their rent payments reported saw their credit score increase significantly.
• 77% of renters said they would be more likely to make rent payments on time, knowing how it could impact their credit history.

According to Maitri Johnson of TransUnion, the rent reporting is a win-win for renters and rental property managers.

“With a strong push from Gen Z renters, who make up a significant portion of the renter base today, we’ll likely see reporting become an industry standard—and as a result, a critical mass of renters who can elevate their standards of living through greater access to credit.”

“Ultimately, rent payment reporting is helping more people gain access to credit that can positively change their lives,” Johnson states. “Greater financial inclusion is good for the industry and good for consumers, and I’m excited to see it gain traction.”

So, if you’re a landlord or rental property owner, there are many reasons to consider reporting rent. One reason is that rent reporting is relatively rare—73% of landlords don’t do it. This means you can set yourself apart from the competition. 

Find financial freedom through rentals

If you’re considering using rental properties to build wealth, this book is a must-read. With nearly 400 pages of in-depth advice for building wealth through rental properties, The Book on Rental Property Investing imparts the practical and exciting strategies that investors use to build cash flow and wealth.

How to Report Rent Payments to Credit Bureaus

Tenants can’t report rent payments to credit bureaus themselves. Therefore, landlords can report rent using a property management app, or tenants can use a third-party rent reporting service. For example, landlords can report payment information directly to TransUnion. 

There are several independent platforms for tenants, including Rent Reporters, CreditBoost, Level Credit, or Rental Kharma. Most of these services have a one-time fee to enroll. However, landlords will need to verify the payment. 

Another way tenants can ensure rent payments count toward their credit score is by using a credit card. Then, each month they can make a credit card payment to their landlord.

Related: Why landlords should report rent to credit bureaus.

Does Not Paying Rent Affect Credit Score?

Tenants realize that missing a monthly rent payment will affect their average credit score, like being late with any other bill. However, some rent reporting platforms only report on-time rent payments. Therefore, a tenant’s credit score may not take a hit if they pay rent late. 

Reasons for Landlords to Report Rent Payments to a Credit Bureau

Most renters are interested in rent payment reporting, making it a compelling reason to offer this service. In addition, rent reporting helps prevent late or missed rental payments. Therefore, landlords can improve their quality of service by including rent reporting in the rental agreements. 

Collect rent from tenants on time

The most noteworthy benefit of rent reporting for landlords is on-time payments. Collecting rent is the most significant pain point for landlords. So, anything that can encourage on-time payments is something positive. 

Studies have shown that seven in ten renters would make on-time payments if their property manager reported rent. Data released by TransUnion show that this figure increases to eight in ten for Gen Z renters. This means you attract more reliable renters and reduce the risk of having to evict a tenant.

Related: How much does it cost to evict a tenant?

Fill vacancies faster

Offering rent reporting as a service in the rental process sets you apart from the competition. For example, suppose there are two identical apartments, but one landlord offers rent reporting to the three credit bureaus. In that case, it’s a no-brainer for the tenant to decide on which apartment to rent.

According to some reports, 70% of rental applicants would choose the apartment that offers rental payment reporting over an identical one with the service. Therefore, rent reporting can mean happier tenants and fewer vacancies. 

Rent reporting encourages tenants to pay rent online

Providing rental payment reporting is one of the best ways to get tenants to pay rent online. Of course, the easiest way to do this is to use a dedicated rental payment app that incorporates rent reporting. But using an app for rent payments has more advantages. For example, tenants can set up recurring payments, and landlords can block a partial payment.

Even though tenants can use digital payment apps like PayPal, Zelle, and Venmo to pay rent online, these platforms have significant disadvantages. First and foremost is that there is no way to report rent. So, if you are using a digital wallet for rent collection, it may be best to consider an alternative.

Tenants can boost their credit score

Many tenants love the idea of reporting rent payments to credit bureaus. After all, monthly rent is likely one of your tenants’ largest recurring expenses. So, just how much can rent reports improve credit history? 

According to Yahoo! Money, factoring rent payments into a credit report could shoot up a score by 60 points. This could mean that a tenant could go from being a lending risk with poor credit to a near-prime score in no time—and without changing spending or lending habits. 

A high credit score means your tenants have more leverage—therefore, it’s easier to pay rent. For example, Multi-Housing News says renters with a high credit rating could pay around 10% less for financing. In addition, they can secure better terms for interest rates on credit cards.

Conclusion

Gen Z renters will keep the trend going and demand that landlords report rent to credit reporting agencies. So offering rent reporting not only makes excellent business sense. But it’s a great way to improve landlord-tenant relationships and make the rental process as simple as possible.

David Greene:
This is the BiggerPockets podcast show, 604.

Rick Shargra:
There’s really no indicator that we’re sitting in a bubble, although it’s understandable people think that because we’ve had, I believe, 122 consecutive months now where home prices were higher than they were the prior year, which ism I believe the longest run in history. So I do think market corrections could happen across the country in certain markets and certain price tiers. Do I think we’re going to have a bubble bursting? No, but the truth of the matter is nobody really knows we’re in a bubble until it bursts.

David Greene:
What’s going on, everyone? I am David Greene, your host of the BiggerPockets Real Estate podcast, the best real estate podcast in the world. Here at BiggerPockets, we are committed to helping you find financial freedom through real estate. We do that in a number of ways, one of which is on this podcast, bringing in people who have found that freedom, people who have made mistakes as well as industry experts that can help you on that journey. Today’s guest is fantastic. We have Rick Shargra. Rick is the executive vice president of market intelligence for ATTOM, a market leading provider of real estate and property data, including tax, mortgage, deed, foreclosure, natural hazard, environmental risk and neighborhood data. Rick has over to 20 years of experience in the real estate and mortgage industries, and is one of the country’s most frequently quoted sources on real estate, mortgage and foreclosure trends. He joins us today to talk about what the heck is going on in this crazy market. I am joined today by my counterpart, the always fun, always intelligent, and always aware, Mr. Dave Meyer. Dave, how are you today?

Dave Meyer:
I’m doing great. Congratulations on 600, man. It’s the first-time I’ve been here since you hit the milestone.

David Greene:
Yeah, we stepped up production quite a bit. 600 happened pretty quickly after 500.

Dave Meyer:
Seriously, it felt like it went really quickly, but the shows have still been amazing. Even with the increased production, amazing how you and Rob and everyone else just bringing value to the listeners every single week or several times a week.

David Greene:
Well, thank you. We’re trying to. Speaking of additional shows that we’re making, BiggerPockets is creating a ton of new content and that leads us to today’s quick tip. Dave, what do you have for us for today’s quick tip?

Dave Meyer:
Well, my quick tip to check out BiggerPockets newest podcast called On The Market, which is hosted by yours truly. We’ve been doing this show for, what is it, six or eight months now? BiggerNews, trying to bring you all of the recent trends and data and news that really impacts the lives and strategies of real estate investors, and we want to scale that. So once a week, now you can find it on Spotify or Apple, or we have a whole YouTube channel as well. You can get the information that helps you formulate your strategy for 2022, helps you get an advantage in any type of market, and we keep it fun. We keep it light. It’s not this dense news show, so definitely come check it out if you want to stay on top of everything that impacts the real estate investing world. I think you’re really going to like it.

David Greene:
Yeah. At BiggerPockets, we are creating an entire family full of smart people to help you build your wealth, so do check out that show and make sure you check out more of these shows. Every time you finish a video, hopefully, you have time to watch another one, because we’re putting out more and more content. A quick public service announcement from us at BiggerPockets. There’s a lot of scamming going on. We will never, any of us on this platform, will never message you and try to sell you on cryptocurrency on Forex. We don’t have a WhatsApp.

David Greene:
We are not asking for you to give us your money via social media or online portals, so please, if anyone reaches out, they’ve copied our pictures, they’ve made a screen name that looks like us, but it’s not us. Don’t send them any money. The same goes for any of us individually at BiggerPockets, as well as the company, BiggerPockets as a whole. Before you consider sending anybody money, make sure that you’ve absolutely verified who you’re talking to is the right person. All right. Without wasting any more time, we are going to get into today’s show. It should start off a little fun and then we’ll be bringing in the guest. Dave, anything else you want to add before we get into it?

Dave Meyer:
No. I’m really looking forward to this show. Rick has been someone I’ve followed for actually quite a long time, because as he’s a leading voice on real estate data, and I think you’re going to learn a lot from the show.

David Greene:
All right. Let’s do it.

Dave Meyer:
All right, David. As we just mentioned, we are going to play a quick game. It’s just called “quick takes” and I want to get your quick reactions to three different headlines I am going to read you.

David Greene:
Did you say quick three times in a row, because I am known for being long-winded.

Dave Meyer:
No, but maybe I subliminally was trying to get you to go quicker, because I know Eric will come on and tell us we’re being too slow if we don’t do this block in five to 10 minutes, but quickly give me your reaction to this. According to Redfin, the amount of market competition actually went down from February to March, and anyone who’s listening to this, a lot of this market data comes a month in arrears, so we’re talking about March data, even though we’re just ended April. It went down from 67% of all homes facing stiff competition. Multiple offers in February dropped just slightly to 65% in March. Do you think this is the beginning of a trend, or is this something you think is just a blip or an anomaly?

David Greene:
Not the beginning of a trend, it is a blip, not an anomaly. I will quickly explain this happens all the time, and that’s because of what I call “flock of bird syndrome.” Most people when they’re investing in anything, when they’re doing something scary, they like to move with the crowd. So what we find is the psychology of buyers in real estate and have often said, “Buyers drive markets. “The psychology of buyers plays a very big role in how things work out. So when people see a lot of other people making money somewhere, they tend to think, “Oh, I should go do that too. It feels safer.” It’s like crossing the river with all the other gazelles so the crocodile doesn’t get you. The problem is often by the time you see other people making money, sometimes the money’s already made. So the way it works is, well, there’s been Gazelle’s in the rivers for a long time. All the crocodile’s are now there waiting for you, so that’s the worst time, time to go in.

David Greene:
I’ve seen this phenomena happen several times in the past, every time there is a significant change in the norm. So in 2017, 2018, I can’t remember where it was, but we saw rates go up three quarters of a percent, 1%, out of nowhere, and Tara Yarbrough was telling me a lot of flippers lost money during that time because buyers froze. They were just like, “I don’t know what’s going on. I don’t want to move,” and then a couple of months go by, everybody, “Oh, I guess that’s the new normal.” They all start buying at the same time the flock of birds goes that way. We saw this happen with the shelter in place. Everyone froze, “Not going to buy real estate. I don’t know what’s going to happen.” At a certain point, they’re like, “Well, I still need a house. Nothing’s changing. I better jump in.” This is too totally expected. I told everyone on my team expect to slow down for a month or two as buyers are like, “Wow, rates went up. This is a shock. Let’s freeze and think.” When people are like, “Well I guess that’s what rates are,” they’re all going to start buying again.

Dave Meyer:
All right. We need some gazelles to cross the river. I don’t know how I feel about this. I personally get it. I think it is interesting to see what’s going to happen with rates and what’s going to see, so I’m not surprised to hear you think that people are just freezing. I have to say, man, I hope you’re wrong though, I would love to see the market get a little less competitive.

David Greene:
Oh, me too. [crosstalk 00:07:31]

Dave Meyer:
I think it’s really-

David Greene:
Yes.

Dave Meyer:
… unhealthy where we’re at. I totally respect your opinion, but I hope you are incorrect about this.

David Greene:
I hope I’m incorrect too. I would love to see the market slow down. When you’re listing a house, the way it used to work is you look at the comparable sales. You find the highest you could possibly get and you find an average one and you would try to convince your client to sell somewhere between the maximum they could possibly receive, the highest comparable and an average one. Well, now you take the highest comparable there is, you throw tens and tens of thousands of dollars on top of it. You throw another couple 10,000 as a cherry on top, and that’s what the seller wants for their house. So everything getting listed is always the new neighborhood record. What I think may happen is instead of us listing for way more than what the comps show, maybe we get back to listing at what the comps actually show and have some reason to come back into the way home prices are valued.

Dave Meyer:
All right, great, and we’re on time. Second question for you. We all know that housing inventory is extremely low. We’re going to talk about this with Rick in the next section as well. One of the main things you constantly hear about as a potential solution is upzoning, allowing people to build an ADU or to build a duplex or second home on their property. Zillow actually did a recent survey to see if home buyers were actually interested in this, because there’s this whole, “Not in my backyard,” NIMBY syndrome where people say they want it, but they don’t actually want it. But a clear majority of homeowners surveyed, 73% voice support for at least one or more modest densification options, so almost or three quarters of Americans believe in this, you can’t get three quarters of Americans to believe in and agree on anything. Do you think this will actually make a difference, and do you think we will start to see more upzoning in the next few years?

David Greene:
I think yes, if this continues, you’ll start to see it happening more often, but I think the pendulum will swing back the other way when that’s over. So you’ll start to see that more people do this and then more investors make money, and then the NIMBYs get jealous that they’re not the ones making money, and then that some new tax will be created, the ADU tax, or if you have something on your home, like a house hacking tax, that’s what I’m afraid of that may come. But in the short term, yes, I do think more local municipalities will create zoning, less restrictions and more easing of use so that people can start putting more ways for people to live in their own property.

Dave Meyer:
Excellent. That was very quick. Well done. Okay. For our last story, Fannie Mae just released a big economic survey and there was all this information in there about mortgage rates, borrowers’ appetite. You should check it out if you’re interested in this kind of stuff, but the thing that really stood out to me is that they are now forecasting a recession in 2023. Do you think we’re heading for a recession?

David Greene:
No. I think it’s more likely that we could be in a recession and we won’t feel it because prices of everything keep going up, so I think the economy in general is functioning like carbon monoxide. You don’t know you’re getting sick until it hits very, very hard. So I’ve said this before wages are not increasing as fast as the price of food and gasoline and things that we need to get by. So in that sense, it will function like a recession, even though the price of assets keeps going up. Even if you’re getting three, four, 5% raises at work, you think you’re getting a raise. You’re not, if inflation’s at eight, nine, 10%. Even at 7%, you’re still losing money, so I think what we have to accept with creating all the extra currency that’s circulating throughout our economy is you can be in a recession and not feel it’s much more like carbon monoxide, which is why you have to be listening to podcasts like this one where you’re getting this information, because it’s not like smoke that you can’t miss when there’s a fire. It’s much more silent scary.

Dave Meyer:
Yeah. I hope we’re not heading for a recession, but I’ve read and talked to a few people recently that talk about the Fed’s interest raising interest rates and they’re going to do it aggressively. Two people, both the chief economics correspondent for The Wall Street Journal, who I interviewed on On The Market and Janet Yellen, both used the words, “Getting lucky for the fed, being able to successfully engineer this soft landing that they’re hoping to do.” So I hope we get lucky, but the world’s not feeling very lucky these days to me, so I’m not feeling optimistic.

Dave Meyer:
But I just want to caution people that when you do read these things as well, like when we hear recession, the most recent real recession was the biggest recession in U.S. history. It was the biggest economic downturn since the depression, really. So even if there is a recession just to be out there, it doesn’t necessarily mean it’s going to be years long. It doesn’t necessarily going to have to be really bad. It could be two quarters of half-a-percent GDP drop. We just don’t know, but I think it’s really interesting that a lot of economists are starting to see that. Those are all the questions I got for you. I think we made it under the allotted time.

David Greene:
Yeah? It’s a new year, a new me. Right? All right. Well thank you for that, Dave. Let’s grab Rick, bring him in here and see what he thinks about the real estate market and economy as a whole. Rick, Shargra welcome to the BiggerPockets podcast.

Rick Shargra:
Great to be here. Thanks for having me.

Dave Meyer:
Rick, thanks for joining us, really appreciate it. Could we start by having you just explain to our listeners what your position is? It sounds really cool. I really like your job title, and what you do on a day-to-day basis.

Rick Shargra:
Yeah. I’m the Executive Vice President of Market Intelligence for ATTOM, a data solutions company. It’s the first-time in my career that my name and the word intelligence have been linked together, so I’m very happy about that. But my job is mostly to be out talking about these real estate market housing market trends, leveraging our data to do that. I get to go out and speak at industry events, do these kind of podcasts, meet with the press. Also, I talk to some of our customers and prospects about their data needs, their use cases, how they’re leveraging this to run their businesses, so it’s a little bit business development, but a whole lot of applied data analytics in housing and commercial real estate trends. It’s the culmination of a 20-year accidental voyage into the real estate and mortgage industries that I never set out to do, but have been fortunate and blessed to have been able to experience.

Dave Meyer:
I’m sure no one ever asked you this in all of your media appearances, but could you just tell us what is going on in the housing market and what your read is of all of the information and data that you are privileged to take a look at every single day?

Rick Shargra:
Yeah. Yeah. It’s a really different conversation than we might have had a few months ago. I’m of the opinion at this point that while we still have strong demand, we are beginning to see a bit of a softening in the housing market. Prices continue to go up, but we’ve now had nine consecutive months of existing home sales that are lower than they were the prior year. We’ve had a similar number of months where pending home sales, another metric we track, are down on a year-over-year basis purchase loan applications that the Mortgage Bankers Association tracks our lagging behind both 2020 and 2021, and we’re seeing consumer confidence at the lowest level it’s been in decades. Now that’s been affected partly by COVID and every time there’s the rumor of a new wave, we see a hit to consumer confidence, but it’s also being affected by an inflation.

Rick Shargra:
It’s being affected by the war in Ukraine, so consumers need to feel confident about entering into a long term financial commitment. They need to buy a house. Oh, by the way, with home prices going up 17% year-over-year and interest rates now being double what they were a year ago, the average monthly payment for somebody buying a house is about 26, 27% more than it was for the same property a year ago. So all of that stuff is conspiring, we believe, to start slowing demand down a little bit. Realtors I talk to joke about it somewhat. They say, “Now we’re not getting 30 bids on a house we’re only getting 20,” but you can see inventory levels starting to tick up a little bit from historic lows. You can see days on market starting to extend a little bit, so it really does look like the market is going to normalize a little bit as we move throughout the rest of 2022.

David Greene:
Yeah. I want to ask you your opinion on something. This is the stance I’ve always taken, because I’m a real estate broker myself and we sell houses. In certain markets when there’s not a ton of demand, I do think rising interest rates and other economic factors could have an impact on prices as well as availability, but in others like where I am in the California, San Francisco Bay Area, other hot markets, it’s not unusual for us to see 10 to 12 offers on a decent house, not even the very best house, even the stuff priced at the high end.

David Greene:
So if something happened that affected interest rates to where half of the buyers got knocked out of the market, we might see just half of those offers, like five to six instead of 10 to 12, which is still plenty of competition to bid way over asking price and force someone to come in really heavy to get that house, and you to have 80% of the people looking are losers every time they write an offer. Is that the perspective that you’re taking on this as well? Do people need to understand that the lack of inventory and the amount of demand is so hot that something as small as interest rate hike isn’t going to lead to the drop in prices they’re expecting?

Rick Shargra:
Yeah. Great point, and there’s a couple of things to talk about here. One is that you’re absolutely right, real estate is ultimately a local game. So what you see in the Bay Area is different than what you’re going to see in Des Moines, Iowa. It’s different than what you’re going to see in Richmond, Virginia. The second thing to point out is that the market you are talking about is not the market or the tier of pricing within that market where those interest rates are going to be particularly material. If you’re looking at the Bay Area where the median price of a home is, I don’t know, 1.2, 1.3 million, excuse me, at the high end of that market, you’re typically not dealing with somebody who’s going to be all that worked up over a point or two on a mortgage, so local conditions will dictate this. You’re also right in that five or six people bidding instead of 10 or 12 still pretty much guarantees you a good price at the end of the day as a seller, so that’s the dichotomy we’re seeing.

Rick Shargra:
We are seeing signs that demand is slowing down, but there’s still enough demand that prices continue to go up, and that’ll be the case until we start to see enough inventory coming back to the market where you don’t have to be one of those five or six or 10 or 12 bidders on an individual property. So I believe we’re not in a housing bubble, I believe we’re not likely to see a market crash, not at all likely to see a market crash, but I wouldn’t be surprised if over the course of the year, we might not see some individual market corrections and your area, particularly at the high end of the market could be one. Pacific Northwest could be one. Markets like Austin, Boise, which had price increases that were unprecedented last year, we could see a little bit of a price correction in some of those markets. But everybody has to look at this in terms of what’s happening in their local market, as opposed to the kind of national numbers that we often talk about.

Dave Meyer:
Rick, I’m not much of a crash guy either. I haven’t believed that, but could you share with our audience some of the reasons and some of the fundamentals that support your opinion about the fact that you don’t see a crash coming?

Rick Shargra:
Yeah. A lot of people really try and equate what’s going on today in terms of prices and demand to what we saw, the mid-2000s, 2006, ’07 leading up to the crash in 2008, market conditions could not be any more different if you wrote them up on purpose. In 2008, we had an oversupply of homes available for sale. We had a 12-month supply of homes On The Market. The builders never got the memo, they just kept building after the market condition changed. That was followed by a flood of foreclosures entering the market, which added even more inventory, and now the builders were competing against their own properties from a year prior that were twice as big and half as expensive. It was a nightmare, really hard to get a loan back then because the lenders had basically shut down.

Rick Shargra:
The people who were going into foreclosure we people that were not only buying overpriced houses, but they were doing it on speculation. A very high percentage of them had adjustable rate mortgages. The only way they could afford the house was with a teaser rate. As soon as that rate adjusted their interest payments doubled and suddenly they couldn’t afford those properties anymore. It was a real nightmare. There was a story in our local paper here in Orange County, California about a cleaning lady who was making about $40,000 a year and had eight properties in Santa Ana, and all eight of them, amazingly enough, were in foreclosure. You wondered what the loan officer on the seventh or eighth loan must have been thinking before they approved that loan. Anyway, market conditions, fast forward to where we are today, we have a about a one-and-a-half to two-month supply of properties available for sale. That’s about a third of what we would normally have in a healthy market.

Rick Shargra:
The builders have not been building for a decade, so they’re trying to catch up. They’re having trouble building new inventory because of supply chain disruption. They can’t get appliances, roofing materials, windows, and so it’s taking them longer to bring properties to market. We have demand that’s demographically based, so this is not false demand. The biggest cohort of millennials who are the biggest generation in U.S. history are between the ages of 29 and 32. The average age of a first-time home buyer is 33. Even with interest rates being at 5%, they’re still lower than the six, seven and 8% loans that we saw back in 2008. The other thing to keep in mind is that first-time home buyer percentage is actually fairly low this time, and that’s your riskiest loan. During the build up to The Great Recession, first-time home buyer rates were in the high 40s, 45, 46, 47%. The most recent numbers I’ve seen on first-time home buyers in today’s market is about 26%.

Rick Shargra:
That means most of the sales are in the move up market, and people are tapping into the huge amount of equity they’ve built up to make fairly large down payments on their next property, which is keeping their monthly mortgage payments lower. That’s one of the metrics you look at to determine bubble is, what’s going on with mortgage payments as people are buying new homes? Another is the spread between rental prices and mortgage payments and rental prices have been going up as fast as home prices have. Again, none of the predictors that we would’ve looked at leading up to 2008 seem to be in place. Market dynamics are all different. The quality of the borrowers is extraordinary. In fact, the delinquency rates are the lowest they’ve been since the mortgage banker started tracking those numbers in the 1970s, and the economy is supporting it too.

Rick Shargra:
We’re creating jobs. Unemployment rates are very low, and usually that’s what I would look at as a trigger. If we see unemployment rates go up, typically, your delinquency rates go up. If your delinquency rates go up, your foreclosure rates go up. We’re still dealing with historically low rates of foreclosure, so there’s really no indicator that we’re sitting in a bubble, although it’s understandable people think that because we’ve had, I believe, 122 consecutive months now where home prices were higher than they were the prior year, which is I believe the longest run in history. So I do think market corrections could happen across the country in certain markets at certain price tiers. Do I think we’re going to have a bubble bursting? No, but the truth of the matter is, nobody really knows we’re in a bubble until it bursts.

David Greene:
Yeah. I love the point you made that this looks like how it looked in 2009, 2010, or maybe actually say the run up to that, so 2000 through 2005 or ’06, but the fundamentals are vastly different. For those on the outside looking in who just see the symptoms, you’re like, “Oh, that looks like the same symptoms as when I had a cold.” But for those of us that live in this world where we’re doctors, we’re like, “This is not the same virus. This is not the same kind of cold, even though the symptoms are the same,” and I get a lot of almost anger when we say, “Yeah, the market is still fundamentally strong.

David Greene:
People are getting 30-year fixed rate loans that they can afford. Their job is very secure. Rents are going up. There’s a lot of money flowing into real estate that makes it a desirable asset,” and they just don’t want to hear that. What they want to hear is there’s a crash. So I’m always trying to figure out how do you connect with those people who want to believe we’re going to have a crash, while at the same time recognizing, who knows? It could be. One thing that I’ve not heard spoken of wanting, oh, go ahead. I’ll let you say that. I’ll ask you my question next.

Rick Shargra:
No, just, I couldn’t agree with you more. I actually get really frustrated and my encouragement to anybody who’s watching or listening to this conversation is, anybody who’s selling you a guarantee of a crash is doing that because they’re trying to sell you something. I spent 24 minutes of my life that I will never get back watching a video that a colleague sent me as proof that there was a crash coming, and I wanted reach into the computer and ring the guy’s neck because he was-

David Greene:
I know feeling.

Rick Shargra:
He was misrepresenting the data. He was coming to false conclusions. Every forecast he was making, I could have refuted very, very easily, but there’s a lot of this misinformation out there, and people really have to be careful what they sign up for. There was a guy who was predicting millions and millions of foreclosures a year ago, and I had people sending me that because yeah, since the beginning of the pandemic, I’ve been out saying we’re not going to see another tsunami of foreclosures. People just knit together really lose math, and it ought to be criminal because they’re charging thousands of dollars for courseware and training programs that are really going to just suck people drive of their money without returning any potential benefits. So it’s a pet peeve of mine and the press gets caught up in it to predicting millions of foreclosures, tens of millions of evictions, and now we’re going to have a housing crash-

David Greene:
Mm-hmm (affirmative).

Rick Shargra:
I guess you never go broke with a negative headline, but I’m sorry, it’s a pet peeve.

David Greene:
That’s my point. That’s what I want everyone listening to this to understand. Think about the last time you got angry at someone that said, “Don’t buy, a crash is coming.” The people that said that four years ago, five years ago, are you mad at them now that you lost out on five years of … ? No, it never happens. But if one person says you should buy and the market drops, you hate them with the fury of a thousand suns. It’s always the safe bet to go for the person who says, “There’s a crash that’s coming, you should wait,” and so that’s why so many of them do that, and they play into the fear. You said it, the media, every article, “Interest rates rise, is a recession looming? Tons of inventory will be flooding in the market.” Everyone likes to see that, and so that’s why media prints it. They’re not printing it because they believe it, they’re printing it because you will click on that, because that’s what people want to hear.

David Greene:
So we have to think about where we’re getting our information from that’s, and Rick, what I love is you’re giving data to support your opinion. It’s not, “Well, I’m just angry the housing prices would go up, so I’m going to find some way to vent that anger and say that they’re going to be going down.” Your theory on foreclosures is the same thing that I’ve been telling people for so long. To be honest with you, I’m going to let you share it. But when I would share it with someone and they would act surprised, I often thought, “How did you not see this?” It’s not hidden, it’s that they wanted to believe foreclosures were coming. So the obvious answer that’s right in front of them that no one’s going into foreclosure got tons of equity in their home, when market’s this hot, you’re getting equity while you’re in escrow. Even if you couldn’t make your payment, you’re going to make a whole bunch of money selling your house, because how fast it’s rising. Like “How did you not recognize that?”

David Greene:
But it’s this blinders that we put on where we want to believe there’s a crash coming, because it is hard to get a deal. It is frustrating. There is a ton of in the real estate space right now. Before we get into the foreclosure thing, I wanted to get your opinion on a question I haven’t heard asked very often. I remember in the last bubble, much of the wealth being created that was flooding into the real estate market was from the real estate market. It was home flippers. It was real estate agents that were crushed it, it was loan officers that were making ridiculous amounts of money, giving away all these loans. It was people that worked in the real estate space, making a ton of money and then they would invest it back into real estate, or they would go buy a boat, an RV. There were all these HELOCs where you could pull money out of stuff.

David Greene:
So it was this house of cards that the minute you couldn’t make money, when homes lost their value, the people making money by selling homes lost their money and the whole thing imploded on itself. But now what I see is more money coming out of tech, more money coming out of entrepreneur ventures like crypto investing and the NFT craze that we’re seeing. There’s people that are literally being millionaires because they bought the right cryptocurrency, and it’s a silly way to be making money. It’s not sustainable, but it is happening. Then you see money flowing from the overall wealth of the economy, the stimulus that we’ve created, where it’s just made so many people wealthy without them having to earn it the old fashioned way.

David Greene:
You got to find a place to park that money that feels safe, and smart people recognize real estate is a better long-term bet than buying some NFT that you’re hoping goes somewhere, or investing in a cryptocurrency that you hope becomes something better. What I’m getting at is it seems like where the money is coming from that’s going into real estate is coming from more sustainable places. You’ve got institutional capital, you’ve got hedge funds, you’ve got smart people parking their money into these areas where people are migrating to. Do you think that is another sign that the fundamentals are stronger, or do you think there’s something I’m missing there?

Rick Shargra:
No, I think that’s very well said. There was a lot of internal momentum, if you will, during, during that build up to the housing bust and the flippers then were not the flippers today. Actually, those flippers were more similar to what we saw with Zillow offers in the last year where it was an arbitrage model, “I’m going to pay full value or even too much for a property and count on increasing market prices to be able to make my margins.” Our data shows that the average gross margin on a flip was right around $60,000 nationally.

Rick Shargra:
Obviously, it’s going to vary market to market. We saw a heightened amount of flipping activity, but these flippers are making their money by going in and repairing a property and then being able to sell at a higher price because they’ve added value. If you’re flipping in an arbitrage model, your risk is much, much higher. Zillow lost $300 million in a quarter by mispricing houses and having to sell them for less than they paid. That was what we saw in the 2005 to 2008 flipping model, so when those profits started to derive, you saw the whole house of cards start to crumble. You’re absolutely right.

David Greene:
Yeah.

Rick Shargra:
A lot more institutional money coming in today. A lot more, I would say, cautious and thoughtful money coming in from individual investors. A lot more focus on longer term investments from people buying these properties. We published the RealtyTrac website, which has foreclosure data on it. Mostly individual investors use it and we surveyed them. Over the last year, we’ve seen the percentage of people doing single family rental investments continue to grow and actually begin to outpace the fix and flip percentages. So something like 60% of the investors we surveyed last time we’re claiming to be rental property owners, as opposed to flippers. To me, that’s a more long-term, conservative approach to investing, and I think we’re seeing a little bit more of that. So again, very different model and there’s a lot more capital being generated in other parts of the economy beyond real estate that had been supporting the real estate growth that we’ve seen.

David Greene:
The last point I want to make before I turn it over to Dave is I think in that 2000 through 2006 crazy, ridiculous rush we had, what people were banking on was speculation. They were speculating that the home would continue to increase in price. They had one extra strategy, which was, “I will buy low and sell high.” They did not understand cash flow. They did not understand the fundamentals of owning, managing, investing in real estate. Like you said, they weren’t improving the property. It was buy a brand new home from a home builder, wait six months and sell it to make $100,000.

Rick Shargra:
Yep.

David Greene:
That concept of speculation got somehow married synonymously to appreciation. So now when people hear the word “appreciation,” they assume that means speculation, right? Like one exit strategy, all your eggs in one basket, if one thing goes wrong, you lose the whole deal, but I’ve never seen it like that. I think appreciation applies to both rents and the value of the home, and you make money in real estate from it appreciating, but that doesn’t mean you do it foolishly. It still needs the cash flow. You still have to have enough money to hold it long term. I just noticed that a lot of the same people they get angry about, “There is a crash coming!” they get angry at the word appreciation. The minute they hear it clicks like, “Oh, that’s speculation. That’s bad.”

David Greene:
I got warned about that a long time ago. Have you seen that as well? At one point, HELOCs were synonymous with bad investment decision. Like a HELOC means you’re losing your house. We’ve finally gotten far enough away from it that people don’t automatically think HELOC means a death sentence to your family’s finances, but it feels like that same idea of buying a house and waiting long term for it to go up in value is getting labeled the same way that speculation was when people were trying to day trade real estate.

Rick Shargra:
Well, actually the last thing you said is probably the most accurate metaphor for what we saw. These were people that were literally trying to day trade real estate and that’s the wrong asset class to do day trading on. You’re just not going to see your values appreciate. Again, a company as big as Zillow, a multi-billion dollar company with multi-billion dollar valuation that’s been in the real estate market, that made its bones with a product called the Zestimate that’s supposed to give you at least an approximation of home value, and they managed to lose 300 million in a quarter by doing that kind of arbitrage, so it’s not a good play. I know a lot of flippers. They’re still very successful at what they do. We’ve seen actually an uptick in flipping activity in our data, but it’s people that know what they’re doing. It’s people that know how to price property. They’re going in and they are buying low and they’re fixing things up and they’re selling high, but again, a lot of the value that they generate is because they’re going in and making huge physical improvements in a property.

Rick Shargra:
They can just do it cost effectively and in a way that pencils out at the end of the day. Again, I think the investors in today’s market are a lot more thoughtful. They’re a lot more educated, I hope, and we’re not seeing lenders take on the reckless risk that we saw lenders take on 10, 15 years ago. That’s been the other big part of the difference is lenders have always been expected to provide the adult supervision at the party, and during that housing boom it was like they went away and left the kids home for the weekend and tossed them the keys to the liquor cabinet right before they left, and then we were all surprised at the outcome, so very different lending market. The CFPBs had a lot to do with that, putting restrictions in place, but even the commercial lenders, the people who specialize in bridge loans and investor loans have really tightened things up. So a lot of the risk that was inherent in those old models just doesn’t exist in today’s lending market.

Dave Meyer:
Rick, I want to get back to something you mentioned earlier. We’ve talked a lot about why the fundamentals are very different from the two thousands and why you don’t believe if there is a crash. You have said, though, that you think there could be market corrections in individual markets. Just for the record, based on our diatribe about people calling crashes a correction and a crash are not the same thing. A correction is a modest decline in prices that is usually part of a norm economic cycle. So can you just tell us a little bit about why you think, counter to what you just said that you don’t think there’s going to be a crash, what are you seeing that suggests that there could be some market corrections out there, and if you’re an investor, what to look out for in those markets, you think there might be corrections in?

Rick Shargra:
The latter question is harder to answer than the former. I’ll be honest with you, this is an arbitrary definition on my part, but I look at a correction as something in the neighborhood of a five to 10% price drop, and it will then recover. You mentioned normal economic cycles. There’s a lot of people involved, or wanting to get involved in real estate today who candidly haven’t been around long enough to see what looks like a normal housing cycle, and those cycles follow a predictable pattern. You see demand increase, as demand increases, you see more sales; as sales increase, you see prices go up, and then at some point prices get to a certain level where people look at it and go, “No, that’s too much money,” and then demand slows down and prices come back down with it, and you have those normal cycles. I believe we’re starting to see a little bit of in certain markets across the country, as we hit, what I call an “affordability wall; the combination of home prices going up, of interest rates going up, there’s a certain borrower.

Rick Shargra:
Who’s going to look up and say either, “I no longer qualify.” “I can’t afford that property,” or, “That’s just too much for me to be comfortable with right now. I’m going to take a step back and see what happens, or I’m going to look farther away from that property. I’m going to look at a smaller property and scale back.” Ultimately, that has an impact on demand. Lower demand ultimately has an impact on pricing. If you look back, and I did this, I don’t know I was doing this, but about a week ago, I happened to be looking back at 100 years of home prices. It’s funny when the 30-year fixed rate loan became legal in 1954 for existing homes, most people probably don’t know that before that you couldn’t get a 30-year fixed rate loan, is when we started to see prices take off, because now you could amortize your costs over a much longer period of time. If you look at that, we’ve only ever had one cycle where prices fell significantly in 100 years, and that was during the crash leading up to The Great Recession.

Rick Shargra:
If you remove the drop and the significant increase we had during that period of time, we’re right about where the historic trends say we should be in terms of home prices, but even though prices historically have always gone up, it doesn’t mean they go up consistently. There are going to be times in markets where prices up for a while and then market conditions change and they come back up. Would I be surprised to see parts of the Bay Area where home prices have been off the charts, or parts of the Pacific Northwest, where we’ve had incredible competition for housing over the last few years, or markets like Austin, or some markets in Florida see a little bit of a price decline, particularly at the higher ends where there’s not as much competition? No, I wouldn’t be at all surprised to see that. Do I think it’s the foreboding of a huge crash to follow? Not at all, really, but local investors need to become experts on their local markets.

Rick Shargra:
You want to look for things like population growth or decline. You want to look for things like job growth or decline. You want to look for things like wage increases. Are they keeping pace with, with local prices, with inflation? Inflation is the wild card, by the way. That’s really the X factor here. I believe that persistently high rates of inflation will hit people harder on the margins, so your low end of the market, particularly your FHA borrower is going to have a hard time affording to buy a house because they’re having a hard time affording to buy gas and food. That will have an impact going up the food chain to a certain extent where people are going to have to take a step back and see when they can get their finances in order, because everything is costing them eight, 10, 20% more than it did a year ago. Again, normal cycles, don’t see a crash, but local conditions will vary, but you really have to become the local market expert, much more than I can be a local market expert on 3,140 counties across the country all at once.

David Greene:
I’m so glad you mentioned what you just did, because rates going up will affect the FHA buyers significantly. They probably we’re barely able to afford houses in their area, rates jump a point or two, they can’t buy a house at all.

Rick Shargra:
Yeah.

David Greene:
Rates do not affect a person in my position.

Rick Shargra:
Right.

David Greene:
Right? So the house becomes a little less affordable. The cash flow is a little bit less. Maybe I have to put more money down, it is still vastly superior to anything else that I can invest in-

Rick Shargra:
Yeah.

David Greene:
… so I’m going to keep buying. That’s what I want to come across is that while this may make it harder for the average blue collar, mom-and-pop investor trying to claw their way out of their W2 position, which is our audience, that’s who we’re trying to help, this does not make things harder for Blackstone that can go borrow money at one-and-a-half percent, and has a 10, 20, 30 year horizon. It doesn’t matter to them if they make a little bit less money in years, one or two, and that’s who your competition is now, these iBuyer programs with tons of money flooding into them. I wish that this rate hike would cause a decrease in prices. As an investor, I would welcome that. It’s really hard to find property, but it’s not going to. They can go up a lot. For someone doing a 1031 exchange, they made $800,000 and they got to put it somewhere, okay. So they make less of a return, is that you, Dave, you got 800 grand you’re trying to figure out where to park?

Dave Meyer:
Yeah. Yeah. I am trying to park some 1031 money right now.

David Greene:
That’s been fueling a lot of the run up in prices is, it’s this self-sustaining ecosystem where, we have a city in where I live called Modesto, California, and it’s not the nicest area. It’s like maybe an hour-and-a-half away from the Bay Area. But if someone sold their house in San Jose for $800,000 and they got to park that money, and if they can’t, they’re going to pay 300 grand in taxes, they will gladly pay 50 to a 100,000 more than market value for that fourplex in Modesto. You have all these Modesto investors that are like, “Man, I can’t get a return. What kind of an idiot’s paying that much money?” They don’t see the big picture. They don’t see that idiot is saving $300,000 by buying that property or buying in the nicer areas because they know in five years it’s going to get ahead. I like that you’re mentioning this macroeconomic understanding and inflation-

Rick Shargra:
Yeah, and-

David Greene:
… it’s ripped. Go ahead.

Rick Shargra:
… and cash is king. So I think for investors who do have cash, market can conditions are absolutely tilting in your favor right now. We know that somewhere between 16 and 70% of investor purchases are funded with cash, because you don’t really care if mortgage rates go up a point or two, because you’re not financing.

David Greene:
Yeah.

Rick Shargra:
Even if you’re doing a bridge loan and rates are ticking up a little bit on those, it’s a very short term phenomenon. You can usually built that into your prices and pencil it out. But what you’re also talking about is interesting to me, because it’s one of the reasons home prices have risen as rapidly as they have, because we are seeing people not just invest in properties in Modesto, but we’re seeing people move from high-price markets to low-price markets. I call it the Boise factor.

David Greene:
Mm-hmm (affirmative).

Rick Shargra:
Boise, Idaho had property values on sales go up 45% last year. Now I will guarantee you there’s nothing happening in the Boise economy to organically drive prices up 45%, but somebody sold-

David Greene:
Unless you call Californians moving there organic-

Rick Shargra:
That’s organic, and that’s exactly what’s happening, driving the locals crazy because they’re they can’t afford to buy a house now. I’m scared to death what’s going to happen when the tax assessor gets around to adjusting prices.

David Greene:
Oh, man.

Rick Shargra:
You don’t even think about this.

David Greene:
That’s true [crosstalk 00:46:28].

Rick Shargra:
But what’s driven partly by this work-from-home phenomena that COVID led to. Sorry, David, go ahead.

Dave Meyer:
No, I was going to say actually on our other show, On The Market, we were just talking about this, that Idaho just became the least affordable state in the entire country, surpassing Washington and California for this exact phenomenon. People are going there. It’s not actually leading to an improvement in the local economy to the point where wages are going up for people, but the cost of living is absolutely exploding there.

Rick Shargra:
You sold a house in Silicon Valley, you walked away with $800,000 and you bought a house twice as big and Boise for 400,000, and you really don’t care that you paid 40% over list because you have the money, right? It’s a phenomenon that doesn’t have a long life expectancy. I do think in some of those markets, that’s one, St. George’s Utah of all places. Phoenix, we saw similar patterns in markets like that and they’re due to settle down. We probably could see some price adjustments in those kind of markets, but people ask me, “What are the next hot markets?” I always ask for a show of hands, “Who had Boise and St. George’s Utah on your bingo cards last year, because you’re the person I want to ask about what the next hot market is.” I had neither of them.

David Greene:
Well, this is why this is a good conversation to have, because if you’re buying a property that will support itself through cash flow, it’s not risky speculation to try to determine, “Where do I think demand is going to go?” So I do think about this. We just bought a property, my co-host of the regular podcast, Rob and I, in Scottsdale, Arizona, and I was very big on that because so many people in California are constantly talking about not liking it here, wanting to go to a place with different demographics, different political bend and different home prices. If you’re wealthy in California, that’s where you want to go. You want to go to Scottsdale. So I can see how like when Boise is too much, well you’re in the desert, so you have to understand that’s a completely different scenario. But in general, the people, like New Yorkers, they don’t want to be in New York right now.

Rick Shargra:
No.

David Greene:
They’re all going to South Beach.

Rick Shargra:
Yep.

David Greene:
Right? There’s probably going to be a trend. The people in New York moving into Florida, that will be their version of Boise because the taxes are better and they can still work from wherever they are. If you’re trying to figure out, “Where’s a market I can get to before everyone else does?” I do think that’s the game you got to play, because if you just want to say, “Oh, let me just go to a city and find a house on Zillow and buy it,” good luck. It’s very, very difficult. So you have to understand the psychology of the people that are moving, figure out where they would want to be and then get there before everyone else does, and hen get a very strong, fundamentally sound deal that you could afford to keep for the long term. It’s definitely made investing a lot more complicated than it was in the good old days-

Rick Shargra:
Oh, yeah.

David Greene:
… when we were like, “Send out some letters. Someone will reply offer to buy their house.” We were all getting hung up on, “Oh, but the roof needs $4,000 of repairs. I don’t want to have to deal with that,” and now we’re looking at it like, “Man, why are we stuck on those details when we see what it’s turned into now?”

Rick Shargra:
You’re happy to find a house you can buy.

David Greene:
Yeah, that’s right. There’s 12 other people that want it. It’s the Hunger Games. You got to hope you’re the one left at the end,

Dave Meyer:
Rick, before we go, I want to come back to something, you, David and I were actually chatting about before the show, but you had some really interesting insights into the foreclosure market and how investors should navigate that. Could you tell us a bit about that?

Rick Shargra:
Yeah. Unfortunately, my foreclosure background goes all the way to my beginnings of my career in the real estate and mortgage industries. I spent 10 years with RealtyTrac, during the foreclosure crisis and we were publishing the largest database of foreclosure information at the time. I can tell you that during that cycle, there were a couple of very unique things going on. One was that 33% of all homeowners across the country had negative equity in their properties, not just foreclosure borrowers, all homeowners, so that’s how far home prices had fallen. Virtually everybody in foreclosure was upside down. Because of that, they couldn’t sell their home unless they got a short sale approved, which was an incredible hassle for people.

Rick Shargra:
Although we did see short sales go up a bit during that cycle, very little was selling at the auctions, because the lenders were trying to get the full amount of debt back on a purchase, and investors simply weren’t biting because prices were too high, so a huge percentage, much, much higher percentage than normal of properties going into foreclosure ultimately, went back to the banks, or went back to the lenders and they became REO assets. So people that were successfully buying and flipping or buying and renting foreclosure properties during that cycle waited for the repossession. They knew the bank was going to be hanging onto these properties for a while. A little known fact is, a lender doesn’t have to take the law loss on a property they foreclosed on until they resell it. So in a lot of cases, the banks were simply hanging onto these properties to defer their losses, because they were under such incredible financial duress during that period, and the best deals were typically found in those REO assets. This market, again, could not possibly be any more different than that market.

Rick Shargra:
There’s a record amount of homeowner equity across the country, $27 trillion of homeowner equity, just a ridiculously high number. To David’s earlier point, I think we’re going to start to see a return of cash out REFIS, and even some HELOCs as people start to tap into that equity, largely for home improvement, because they’re not going to move because they don’t want to buy a more expensive house with a more expensive mortgage. Anyway, this cycle, according to our numbers at ATTOM, about 90% of borrowers in foreclosure have positive equity in their homes. There is no reason for those borrowers to lose a home and lose more of that money to a foreclosure auction when they can sell it in a huge seller’s market. So for any investor who’s looking to participate in the foreclosure market this time, you need to find those borrowers, those homeowners, in the earliest stage of foreclosure possible and reach out directly to them, or work with a realtor who specializes in working with distressed homeowners, and have the realtor reach out to that homeowner and try and execute a deal before that foreclosure auction.

Rick Shargra:
The other thing I will tell you, and I spent five years working for auction.com back in the day is that the auction companies are reporting record sell through rates at the foreclosure auctions. Normally, 30 to 35% of property sells in an auction. Today, that number is between 65 and 70%. So if you think about the fact that most homeowners in distress should be able to sell a house before the auction, 70% of the properties getting to auction or selling at the auction, that doesn’t leave very many properties going back to the lenders. So your strategy as an investor, this cycle has to strike way, way earlier in the food chain in before that REO takes place, before that repossession takes place and there will still be deals out there, but you’re going to have to get to them much, much earlier.

David Greene:
That’s a great point. I’m glad that you shared it. It’s very easy to look at it at a shallow level and say, “Oh, foreclosures are coming. I’m just going to wait.” But in a market like this, it doesn’t go to foreclosure, they sell it, unless they just are ignorant and they don’t understand. Then it goes to the courthouse steps and then a non-ignorant person buys it. You’re not seeing inventory sneak all the way to the very end like before. I looked at it like back then the market was saturated with homes. You said it perfectly, there was too much supply. It was like, imagine soil that is just completely saturated with water. You pour a bucket of water on that, and there’s nowhere for it to go. It just floods over and there’s too much of it. Well now it’s like pouring a bucket of water onto the sand at the beach.

Rick Shargra:
Yeah.

David Greene:
It doesn’t matter what type of water it is. It’s so thirsty. We have such a demand for inventory that it just sucks up right off the bat, and so waiting for that overflow to run to you to get a great deal isn’t the same strategy. Really, the only answer I can see is we need to build more houses. We need to make it easier for builders and developers to create more inventory in the places that people are moving to. Outside of that, it’s difficult to see how real estate is going to stumble for a very, very long time, so we just have to be creative.

David Greene:
As people listening to shows like this that are getting the inside scoop on what they can do to be successful, Rick, I really appreciate you being here to share some of this information with us because it’s the facts that matter. It doesn’t matter how angry you are or you want to believe there’s a recession coming, or somebody on YouTube is ranting about the next time, and if you don’t know what you’re listening to, you hear that you’re like, “Yeah, I’m going to wait,” and four years go by and prices are twice what they are right now. It just seems incredible, and you’ve lost a lot of money. Like we said, nobody gets angry at that person.

Rick Shargra:
That’s the person they should be the angriest at. Now the numbers are the numbers, and there’s an old cliche in real estate, which you’ve probably heard before, which is that the best time to buy a house was 15 years ago, and the second best time is today.

David Greene:
Mm-hmm (affirmative).

Rick Shargra:
If you have a long enough outlook on this, or if you’re not looking to do that arbitrage model and buy today and sell tomorrow and hope for the best, typically, for most people real estate’s a pretty good investment, if you know what you’re doing.

David Greene:
There you go. Dave, any last words?

Dave Meyer:
No. Thank you so much, Rick. We’re definitely going to have to have you back either on BiggerNews once a month or on our other show, On The Market. You’re a wealth of knowledge and appreciate your really analytical and data-focused approach to helping everyone understand the housing market.

Rick Shargra:
I appreciate it. I enjoyed the conversation and yeah, let’s do it again soon.

David Greene:
Thank you very much, Rick. This was awesome. All right, and that was our show with Rick. Man, that guy is just a gem. What a wealth of knowledge and insight. What did you think, Dave?

Dave Meyer:
I loved it. I think he provides a really well-reasoned, sober analysis of the housing market, because there’s so much going on, and it’s understandable, really to who be confused about what’s going on, but that’s why we do these shows, to bring on people who are experts and who have the data and the experience to help us interpret it. I learned a lot from Rick. I think he has a very good read, similar to how I see the housing market personally. I hope everyone got a lot out of it. What do you think?

David Greene:
Yeah. I feel like it’s so hard to know who to believe, especially, so you’ve got the increase in social media, the increase in content being made on platforms like YouTube and TikTok. You’ve got a lot of thirsty gurus that are out there trying to get attention and they’ll say whatever it is, it grabs your attention. It is very common to hear some people say, “Buy other rails that you can,” and others to say, “Don’t touch it. You’re headed to a crash.” It’s in absolute polar opposites, and you don’t know what’s to believe. So in an environment where you have all of this confusion, my advice is you ground yourself in facts. numbers can’t lie to you. Numbers are not sensational. They don’t scream and say, “Watch me, click me, follow me.” They don’t ask for your money, and so that’s what I trust. When you find a person like Rick, who based their information off of numbers, I feel much more comfortable, and that’s why we wanted to bring him in front of the audience today.

Dave Meyer:
Absolutely, and that is exactly what On The Market our new podcast is all about. It’s about presenting you this information in an unbiased, logical way so you can understand what is going on without all of the sensationalism out there. I like that you called them thirsty gurus. I think that is a very funny way to refer to gurus because they’re a thirsty bunch.

David Greene:
I just made it up right now, actually, so sometimes my own-

Dave Meyer:
I like it.

David Greene:
… genius only comes out in a spontaneous creative moment. This happens when they make sure the green M&Ms are not in my bowl.

Dave Meyer:
This is why, the green M&Ms slow you down?

David Greene:
Well, there’s an old theory about it, there was a group like Van Halen or something where they were considered divas because they didn’t want green M&Ms in their bowl. I was pretending like I was a diva there.

Dave Meyer:
Oh, oh no, not a diva. You’re a man of the people.

David Greene:
Thank you for that. So are you, and if the people want to fall more of you, the man, where can they find you?

Dave Meyer:
I am most active on Instagram where I am @thedatadeli. I know it’s an absurd handle, but I really like data and I like sandwiches, so I’m sticking with it.

David Greene:
You’ve married two beautiful things together, and you threw alliteration in there. It’s incredibly profound how you’re able to do that.

Dave Meyer:
Yeah. Well, do you know Kaylee who works on the publishing team at BiggerPockets?

David Greene:
Mm-hmm (affirmative).

Dave Meyer:
She came up with it. She came up with it in two seconds. She was like, “You love data, and you love sandwiches, datadeli, obviously.”

David Greene:
Man, at BiggerPockets we got a bench deeper than the Golden State Warriors. The talent just oozes from everywhere. If anybody wants to follow me, hear more about what I’m thinking, maybe you’re like, “Man, I really wish David Greene could have talked more, but Dave Meyer forced him to give very short answers and I wish he could expand,” well one-

Dave Meyer:
Yeah, blame it on me. It was always my fault.

David Greene:
It’s our producer trying to make sure you guys have a good show because you complain when we go too long, so it makes sense. But if you wanted to hear more, go to the comments on YouTube and say, “I wish you guys would’ve expanded on this point,” or, “I wish I could have heard more of this,” or, “I wish you would’ve asked this question,” and I will do my very best to get you the information that you’re looking for. You could follow me online everywhere on social media at DavidGreene24, there E at the end of Greene. You can also message me on BiggerPockets, or you can find me on YouTube at David Greene Real Estate.

David Greene:
The point is we want to give you all the information we possibly can at BiggerPockets. We want to flood you with value, and if we can’t do it on this hour to hour-and-a-half podcast, there’s other mediums where we can still get you what you need. So give us a follow, let us know what you thought and make sure you’re also BiggerPockets. Please share this podcast with anybody that you love. Subscribe to it when you hear when a new episode comes out and keep following us because we just get better with age. All right, I’ll get us out of here. This is David Greene, for Dave, not the thirsty guru, Meyer signing off.

Dave Meyer:
I need to get something that attaches to my chest so when I move, the mic moves with me-

David Greene:
Oh, yeah. Like a gimbal for yourself.

Dave Meyer:
Yeah. I move around a lot. [crosstalk 01:01:10]

David Greene:
You’re like Axle Rose from Guns ‘N Roses doing this snake when you’re recording.

Dave Meyer:
Yeah.

Dave Meyer:
(singing)

David Greene:
Yeah. That’s really good, actually.

Ken Zener, KeyBanc research analyst, joins ‘Power Lunch’ to discuss the affect of tightening cycles on the housing market, how much further homebuilder stocks could fall and more.

Mindy:
Welcome to the BiggerPockets Money podcast show number 297, where we talk to Robert Farrington, a college investor, about paying for college.

Robert:
So there’s all these pie slices that you could have bigger slices of some, smaller slices of others, but they all go to paying for college. And my ideal for you would be to minimize the student loan slices and maximize all these other slices before you get there. Of course, everyone’s passed a little different but there’s a lot of ways to get there.

Mindy:
Hello. Hello. Hello. My name is Mindy Jensen and joining me today is David [Perrey 00:00:31]. David, what’s up?

David:
Not much, just learning about college.

Mindy:
This was such a fun episode. I’m so excited to jump into it. David and I are here to make financial independence less scary. That’s just for somebody else to introduce you to every money story because we truly believe financial freedom is attainable for everyone, no matter when or where you are starting.

David:
Whether you want to retire early and travel the world, go on to make big time investments in assets like real estate or start your own business, we’ll help you reach your financial goals and get money out of the way so that you can launch yourself towards your dreams.

Mindy:
David, I love Robert Farrington and I’m so excited that he is back here today. I very selfishly had a ton of questions for him about paying for college because my daughter is a freshman in high school. She will or will not be going to college, who knows? It’s up in the air right now. But if she is going to college, I want to be able to pay for it in a way that doesn’t cost me a ton of money. And he had a lot of really great tips today. I’m so glad that we had him on.

David:
Well, and for me being in the military world and a veteran, we don’t really have to spend time learning about how to pay for school and everything, because we’ve got all these awesome tuition and GI bill benefits. So it’s one aspect of the financial spectrum that I’m not super educated in at all. So I learned a ton through this, including the fact that I chose the wrong investment vehicle for school, for my kids. So, hey, it is what it is.

Mindy:
But now you can not further compound the… I don’t want to say bad decision because it’s still a good decision, you’re still putting money away for your kids, but you’re not going to put any more money into that account. There’s other opportunities now for you to choose from. So that’s great.

David:
Absolutely.

Mindy:
Today we are joined by Robert Farrington. Again, we went 266 Robert Farrington less episodes. He came on episode 267 to talk about the pause in the student loan repayment. Almost immediately after we recorded that episode, they changed all the rules again. So we decided we should have Robert Farrington back to talk about his area of expertise, which is paying for college and college loans and student debt and all the things that are associated with going to college. So, Robert Farrington, welcome back to the BiggerPockets Money podcast.

Robert:
Hey, thanks so much for having me back. I’m honored that I made the cut to come back again. So this is great.

David:
It was close.

Mindy:
Many short episodes later.

David:
I mean….

Mindy:
It wasn’t close at all. He was great last time. Actually, let’s talk about that really quick, the student loan repayment. That was paused until March 30th, May 30th? I can’t keep up. It’s so hard to remember.

Robert:
May 1st right now, as of today but by the time we record this, because that’s what happens after we record a show, it will likely be extended again. And the word on the street is it will be extended again, probably until the end of the year.

Mindy:
This episode is releasing on May 2nd so we are recording a little bit earlier. I’m not sure exactly when they’re going to announce the student loan repayment moratorium extension, but I bet they will, because they always do right after we record so look for that. And again, if they don’t, make your payments… So, okay. How smooth was that?

Robert:
That’s some solid advice right there. I like it.

David:
I made that exact point in my Facebook group the other day. And of course, you don’t always get met with the… sometimes you get met with some resistance with that statement. But what I was trying to imply is, look, hey, if you make your payments, while this might happen, then at least you’re setting yourself up for success. Because if you bank on it happening and it doesn’t, you’re just hanging yourself out to dry.

Mindy:
Yeah. And in episode 267, when Robert last joined us, he gave some tips for what you need to do to prepare yourself to start your payments over. Again, remember a lot of these payments have been completely withdrawn, all your information is gone. Maybe you’ve moved because it’s been two years since you had to make a payment so just… you want to make sure that all of your information is updated. And Robert gave a lot of really, really great advice. So again, if you have student loans and you are coming up on this end of the repayment moratorium, you need to listen to episode 267 for all the great advice that Robert shared there. But today, we’re looking forward, we’re looking at paying for college and we’re looking at the cost of college in general. So a couple of weeks ago on Twitter, there was an article that’s called: Here’s what I wish someone told me before I racked up $180,000 in student loan debt by Dominick Bagnato.
And I’m not going to read the whole article to you. You can read it yourself, but there’s a part in the beginning. It says it is a singular detailed anecdote of one 37 year old’s journey through his student debt. It is meant to inform any reader who is interested in the student loan debt conversation about its personal realities and it is especially meant to be read by an audience of 17 year olds and their parents who may be making decisions about college right now. Because so many of us have been told that we need to go to college, but hardly any of us has been given an example of the true cost of that choice. Many people barely considered the decision of whether or not to go to college at all, before launching into the decision of which college to attend. Even then, the true financial costs and eventual life costs are rarely ever explained.
So Robert, I want to look at that last bit for a moment. Many people barely consider the decision of whether or not to go to college at all before launching into the decision of which college to attend. I grew up in the 80s. I know you guys are shocked, because I look so young, but I grew up in the 80s. And when I was in high school, you graduated from high school and then you took the summer off and went to college. That was it. There were no other options. High school then college, it wasn’t an option to not go to college. We didn’t talk about trade schools. We didn’t talk about military. We didn’t talk about anything, high school college to the end. And for so many years before I graduated and even after I graduated, that was the same story that people were being told. So what are some considerations for when people shouldn’t go to college?

Robert:
Well, I think you hit it on the head. I kind of view it as a pendulum and I think the 80s were the start of the outward swing, where everyone had to go to college. It’s also when you saw a decline in trades of… Every high school used to have an auto shop and a wood shop and all these things and then all those things started getting replaced with technology and because every kid had to go to school. Well, our high school district nearby here in San Diego actually just announced they’re bringing back auto shop. And so I think that pendulum is starting to swing back a little bit in terms of the extreme of everyone going to college because, you’re right, not everyone needs to go to college. But, I want to put an asterisks there because the data still says, even through today, that the average college graduate with a bachelor’s degree earns anywhere from $300,000 to a million dollars more, over their lifetime, so we’re talking over 40 years of working after college than a non-high school graduate.
The question is what is the net present value of $300,000 to a million dollars? Because you get to a number and if you spend more than that number, it’s going to be a negative ROI on your college degree. And there’s also the personal factor in that. Some people really just want to work outside and not have a desk job, that is how they wired as a person, right? And so maybe there’s alternatives there. But the problem is we don’t expose our kids to it like we used to expose them. Kids don’t know that you could go work for the power company and make $200,000 a year, but yet can, going out and being a line men and climbing the pole, you can make a hundred to 200,000 bucks a year and that is a solid income.
But we don’t tell our young adults that today, right. Everyone has to go to college, that’s the only way you make money and it’s just not true. So do people need to go to college? Yeah, I think 40 to 60% of high school graduates probably should go to college, but then I think a good chunk of them probably don’t need to and there’s other options, the trades, starting their own business, joining the military. I bet David loves that one, but there’s a lot of options in that, there’s that other 40% that I think would benefit from doing something else, not racking up the student loans, not racking up a bunch of debt and going out and earning.

Mindy:
I love that you put a number on it, 40 to 60% of high school graduates don’t need to be going to college. I think that’s… First of all, I love that you said that and I’m so shocked that you would say that because when I was growing up, it was a hundred percent. So it’s weird to hear somebody acknowledge that not everybody should go to college. And I know that I’ve said it before too, but it’s nice to have somebody to agree with me.

David:
So I’m glad that you mentioned the trades and I’ll say from an investor standpoint, I hope that the pendulum is swinging because where we are right now, people are all worried about materials and costs and whatever, but I’ll tell you, for renovations, I mean, good luck finding a master electrician or a master plumber. So I have an electrician right now on a job site and he has been slacking and we’re going to end up having to let him go. We can’t find another permit to replace him or electrician to replace him on the permits. It’s like we’re kind of stuck and so there’s a massive shortage. And even here in Missouri, I mean, the amount of money I just paid a plumber for a two day job, that guy’s making great, great money, more than I am and for plumbing.

Robert:
Well, and you’re spot on. I recently had a plumber as well and it was the youngest plumber I’ve ever had. He was in his late twenties, right? And I’m like, why did you do this? He’s like, well, I never wanted to go to college. I liked working with my hands. He’s like, I got a job with a big plumbing house. They paid for all my apprenticeship, showed me how to do it. I worked with them so I was zero debt. He’s like, I was 22 years old and he’s like, I was making 80,000 bucks a year at 22 and then I just kept getting experience. And then soon I was doing gigs on the side and working on Saturdays outside the job. And then he is like, then I started my own company and he is like, it’s great. But he has no debt and is making good money. Now, is he saving it? I don’t know. But at the same time, he has that potential to earn and he’s debt free and it’s a great gig, right? And there’s a huge demand for it.

Mindy:
Enormous demand. And you hit the nail on the head. He signed with a big plumbing company who can’t find anybody, so they paid for him to learn how to do this.

Robert:
Yep.

Mindy:
He’s in plumbing college, no cost to him. 100% scholarship.

Robert:
And I think that’s the thing. The question to me isn’t necessarily, do you need to stop learning after high school? The answer is no, you need to keep learning and bettering yourself and getting an education. The question is, do you need to pay a fortune to do it? Because there’s a lot of alternatives today, whether it’s the trades and apprenticeships and that kind of thing or a coding academy, if you’re into tech or whatever, right? There’s so many different ways now that you can learn how to do things. Shoot, you could probably watch YouTube videos, become a freelancer and do other things like that as well. There’s a lot of options. Now, what’s right for you is going to vary, right? Because there’s also some people whose personality is like, I need to be in a seat in a classroom because that’s how I learn and I can respect that. But there’s also people that need to learn from being hands on, that can do other things and can self teach and different things like that.

David:
And I think people need to… I used this phrase before we started talking, people need to look at the decision to go to college as more of a business decision than a hobby decision. And so the plumbing thing ties in perfectly with that. If you look at it from a strictly business perspective, this guy is taking a job where he has no risk because he is getting paid to go through this apprenticeship, that they are paying for. He has no risk out of pocket, no cost, no nothing, with a pretty much guaranteed job on the other end because they just paid you for all this so they’re going to hire you. Versus… And there are definitely degrees like that, right? If you make it through as an architect, a lawyer, a doctor, you make it through any of those schools, engineer, whatever, there’s a really good chance that you are going to get employment on the other end.
But there are also degrees that you can take that are fun or they are exciting or they’re something you’re passionate about, but there’s not necessarily a guarantee for income on the other side. And not to say that you can’t do very well, you can do what you love, you can travel, you can do whatever but when you’re taking on a hundred, $200,000 in debt and you don’t know what the end… what the opportunity is on the other side, that’s a massive risk and you’ve got to make sure the up side’s there. Otherwise, it’s just a bad business investment, right? It’s…

Robert:
And that’s how I like to frame this. I do like to frame the how do you pay for college discussion in terms of ROI, return on investment, right? So if you know that you’re going to make 300 to a million dollars more over your lifetime, the net present value of that number is anywhere from $30,000 to $80,000 and that’s just the math, right? So if you’re going to make a million dollars more over 40 years, your net present value with interest rates and you do all the calculations, don’t spend more than $80,000 or else it’s going to be a negative ROI. Now, that’s not to say that there’s a lot of fringe benefits to college education, right? But I do think a lot of those are overvalued, right? So you hear this thing of your network and the experiences and it’s who you know and… I’ll give that to you.
If you’re going to Harvard and you’re going to rub elbows with all of the future supreme court justices or whatever, there’s probably some value to that. But if you’re also that person, you’re probably not borrowing that money to do it too. So, there’s a big trade off on that front. If you’re going to actually borrow the money and you’re going to do that, you need to think in an ROI mindset. But I also don’t want to dismiss anyone from taking on any individual career. But I do think it’s important people to think creatively about how you get there. So for example, maybe you need to go to community college for two years, which is free in almost half of the states in the United States, right? So you can go to community college for free. I mean, you got to pay for books but the tuition and stuff is free and then transfer to a four year school.
And so you can maybe knock out a degree for 10,000, 15,000 bucks now and now you’re almost guaranteed an ROI on your education. So the question is, how do you want to do it, right? I don’t want to dismiss anyone. If you want to be an art history major or whatnot, go for it. But on the flip side, you need to think creatively, potentially on how you get there so that you don’t screw yourself up financially. Because the worst thing I see for people is… I always like to think of the outcome, right? So let’s just say you graduate in this degree you love and you went to film school, like the guy in the article that you mentioned, but you’re going to hate your financial life for the next 15 to 20 years after you graduate as a result of that choice. Now, do you want that or would you rather take a little weird approach for two years when you’re 18 to 20 and then enjoy your twenties and thirties in doing a career you like, right?

Mindy:
Yeah. I think it’s really unfortunate that we ask 17 year olds and 18 year olds to make these life decisions and to saddle themselves with these life altering debts that they will be paying for 15 and 20 years or declare… Well, you can’t even get rid of them with bankruptcy, can you? But it’ll mess up your credit.

Robert:
Rarely.

Mindy:
It messes up your credit if you don’t pay them, right?

Robert:
Well, it’s not even that… Of course, it messes up your credit.

Mindy:
Yeah.

Robert:
And yes, it’s rare to declare bankruptcy and if you’re able to, it’s typically because you have a lot of other issues going on, such as a disability or other things. So maybe your life didn’t work out the way it should have, but there’s probably other extenuating factors.

Mindy:
Okay. So, I mean, it’s hard to get rid of these loans other than paying them off or getting them paid off through other means. And it’s really frustrating to see that these kids are… I was 17 when I graduated high school. I chose fashion design as my major. Everybody who has listened to this already knows. They know that I don’t enjoy… I don’t care about fashion. Right now I’m wearing old clothes from my husband, which are comfy and it’s cold outside.

David:
For the record, he’s very fashionable and they were fashionable for him, right? Nobody is questioning [Carl 00:17:11].

Mindy:
Nobody is ever looking if it’s any fashionable. He looks like a bum all the time.

David:
Oh, my spirit animal.

Mindy:
I mean, I love him, but yes. So it’s not my passion at all. I chose it because it was interesting at the time. And if I hadn’t had parents who had been saving for my college, maybe I would’ve chosen a different path because I would’ve had to pay for it myself. But also maybe I would’ve continued and then had to pay for it myself, I don’t know. It’s just I’m very fortunate that they had the money for me to choose. I wish that they would’ve been a little bit more forceful, do something that isn’t dumb because it was really a bad choice for me. And I have said this before and I’ve gotten emails from people who are like, I love my fashion design degree. I’m like, then it’s your passion and that’s great. It wasn’t my passion. It’s almost like if David chose fashion design, it’s not David’s passion either.
I mean, of course, you can’t tell by the snazzy way he’s dressed today, but it’s just… there’s a lot of things that I could have studied that would’ve been better off for me. I mean, I ended up in a great position, but I could have been a lot better. And I wanted to get this in really quick before we moved on, episode 251, we spoke with Preston Cooper who did an exhaustive study, 30,000 degrees he reviewed, is college worth the cost? This 30,000 variable study says sometimes. And he said that-

David:
Yep.

Mindy:
Studying engineering, it doesn’t matter what college you go to, it doesn’t matter what kind of engineering, always worth studying. And studying psychology, almost exclusively a bad decision.

Robert:
Yep. I love that study. I love what Preston does over there. And it’s solid data. So think about what you want to do, Mindy, because I also think, what do employers look for? So all of us here have hired somebody, all of us here are looking for answers. Warren Buffet just said this last week, I’m sure we can find the interview, but he is like, the number one thing I look for is communication skills. And number two is problem solving skills. I don’t really care how you figure it out, but if you can’t talk to me and you can’t solve my problems, I’m not going to hire you.

Mindy:
And that’s a lot of employers.

David:
I couldn’t even tell you. I have two W2 and a 1099 that work in this office. I don’t even know if any of them have a degree, didn’t even ask, don’t care.

Mindy:
Elon Musk, when he was building SpaceX, he had some… his core people and he’s like, oh, we need somebody to do this and one of his engineers said, oh, I’ve got a friend, but he doesn’t have a college degree. He’s like, I don’t care. I just need somebody to accomplish this and a lot of the SpaceX guys have… I’m sorry, a lot of the SpaceX employees have college degrees but also a lot of them don’t, they’re just passionate about this thing and they can get it done so what does it matter?

Robert:
Well, and I also think a lot of young adults, especially when they’re 17 and making this decision, don’t realize how fast the value of that piece of paper, that your degree is, declines in the workplace. So when you’re a senior in college, the value of your degree is the highest it will ever be. You’re using it to get your first job after college, people care, whatnot. Two years later, no one cares. Your second job after college, no one’s asking you about college. They’re asking you what you did at your job to get your next job. And here’s the scarier part is, if you didn’t get a job within the first year after you graduate college, that piece of paper is probably a weight on your ankles, because people are like, you got a college degree and you haven’t gotten a job a year after graduation. What’s going on? Why is this happening? Right? So I mean, that value just falls like a rock, very quickly.
And then by the time you’re in your thirties, no one’s ever going to care and ask you where you went to college, it’s all on your experiences and your jobs and what you’re going to do and what you’re going to bring to the table.

David:
And so it’s… I don’t want to call the student loan world predatory, but-

Mindy:
I will.

David:
If you think about it context, right? If you were a bank, Mindy, and I was 17 and I had no credit and I had no income, but I was like, you know what? I’m probably going to make $150,000 in four years. Can I get a mortgage?

Mindy:
No.

David:
Can I get a car loan? Can I get a credit card?

Mindy:
You can get a credit card.

David:
But you can… I mean, maybe. Yeah, a prepaid.

Robert:
A $300 limit, they’ll give you 300 bucks.

David:
But they will flex for this and people… And not just student loan companies or whatever, but the entire industry pushes. I’ll tell you, I actually, at some point if I ever get really emotional and feel like being mushy gushy on a show, I wrote a five paragraph essay when I joined the military. Basically to be like, would you please leave me alone? I made a decision. It’s okay. The world’s not going to end if I don’t go to college because of the pressure that I was feeling my senior year of like, what’s wrong with Dave? Why is he… And the amount of pressure you put on people to go this one direction and then you’ve got these companies who are lending to this person who has no business getting a loan.

Mindy:
Well, but look at this [crosstalk 00:22:20] you can’t… This loan doesn’t go away. If I give you a mortgage and you don’t pay the mortgage, I take the house back. Your mortgage is now gone and I can sell the house. If I do the same-

David:
And seven years later, my credit’s good.

Mindy:
If I do the same thing with the car, I can repossess your car. I can’t repossess your credit, your college degree and you can’t ever get rid of this loan.

Robert:
Well, because remember guys, so the collateral of a student loan is your future earnings. So why do you get this loan? Well, because they know the data says that you will earn more after graduation. And if you don’t pay these student loans, the collateral is I’m going to garnish your wages, I’m going to take your tax return, I’m going to take your social security if you let this roll that long. In some states, if you have a private loan, I’m going to sue you. I’m going to take your house. I’m going to put a lien on it. They can collect on your earnings. And if you don’t make a whole bunch because you didn’t graduate college and you didn’t materialize out this life, it becomes even more problematic, right? You get stuck in this vicious cycle of debt collection, wage garnishment, yada yada. And so if you want to talk about student loan relief, generally, those are the people that probably need the relief because you get stuck in a vicious cycle that you can never escape. But for most borrowers, it can be positive too.
Because when you want to talk about this example, if you said, hey, I’m going to make a million dollars more in my lifetime, it only takes $50,000. That’s actually a good investment. So student loans necessarily, aren’t a bad thing, but just like any other debt, it’s an investment and you want to try to minimize the amount you borrow. You want to maximize your equity in the investment, which is your earnings over time and you got to think about it. And so there’s ways to offset the student loans you borrow, because I’ll also say even today, over 30% of graduates graduate college debt free. So and this is from a four year institution. It’s not like everybody has student loan debt. There’s still a good third of borrowers or third of graduates that don’t have student loans. The average amount of student loans in America at graduation is roughly $30,000.
So on average, most people should be okay with their student loans because in most jobs, $30,000 of student loan debt, low monthly payment, $200, $300, it’s not going to cripple you. Where you see it all because our media loves to hype the extremes is the extremes, right? So it’s the people that don’t graduate and have student loans. It’s people that have massive amounts of student loans. It’s the people whose life courses don’t work out like they say or the guy in the article that borrowed $130,000 of private student loans to go to film school. There’s these extreme outcomes that get the attention on social media, the mainstream media whereas I would put out that 80% of student loan borrowers are just fine, everything’s working out like it’s supposed to. If you asked them, can I get rid of my student loans? Of course, they’re going to say yes. It’s no different than if I said, hey, can you get rid of my mortgage? Yeah, you can. But it’s not going to change the outcome of everything, right?

Mindy:
Okay. That’s interesting. I’m glad you brought that up. I didn’t realize that 33% of grads graduate without student loan debt. And is that people… parents paying for college or them working through college or scholarships and things like that?

Robert:
All of the above. And so, there’s a lot of ways to pay for college. And I like to view it like a pie and you have all these slices of the pie, right? So you might have your own savings as a student. Your parents might have saved some money for you in a college savings account or whatnot. Your parents are probably still working when you’re in college and maybe they’re putting a little bit to it. You are probably working in college and you can put a little bit to it, right? And then you get scholarships and grants and then you get to student loans, right? And so there’s all these pie slices that you can have bigger slices of some, smaller slices of others but they all go to paying for college. And my ideal for you would be to minimize the student loan slices and maximize all these other slices before you get there. Of course, everyone’s passed a little different but there’s a lot of ways to get there.

Mindy:
So in episode 64, Zach Gautier came on and shared basically a laundry list of ways you can pay for college. And I don’t want to rehash that now, but I do want to recommend that if you have kids that are going to go to college almost at any time, listen to that episode, there’s tips in there for things you can do when your kid’s in elementary school and middle school and things to consider during high school that can give your kids a considerable leg up on scholarships and even how to earn college credits during high school, many times for free. So basically if you have kids of any age, that episode is worthless and again, that’s episode 64 of the BiggerPockets Money podcast. This episode is geared more towards the high school age kids and their parents, people who are getting ready to pay for college. David, my co-host today went a different route for paying for college. David, from military to millionaire group, how did you pay for college, David?

David:
I didn’t, the military did. Someone else did. I mean, so that was one of the main reasons I joined the military. I didn’t know what I wanted to go to school for and I didn’t have money. So I figured in my head, well, if I don’t know what I want to learn and I don’t like school anyway and I don’t have any money, I probably shouldn’t do this right now. And so I was like, well, I’m going to travel the world. And so I joined the military. And to just briefly touch on why that’s such a great idea. So the military, they pay for college two ways, right? They have tuition assistance while you’re in and so you can earn tuition assistance to continue going to school. In fact, they incentivize it. It actually looks really good for promotion, for you to have an associate’s degree.
I have an associate’s degree, didn’t pay a penny, never paid a cent…. Well, I take that back. I paid for one course because I deployed and I failed out of the class because I left the country and I forgot to close out the school or the class. But I got that all reimbursed once I got it all figured out. So I never paid for anything, got my associate’s degree, never went any further than that because I still didn’t like school and got financially free and realized I don’t need to go to school anymore. But I have friends who earned all the way up to a master’s degree through tuition assistance while in the military, enlisted officer, whatever it doesn’t matter. And then you still have, regardless of what you do with tuition assistance, that does not touch your GI bill.
And so you still have the ability to pay for a four year degree at a state level school or a certain percentage for private school and however that breaks out plus housing allowance plus whatever. And the real benefit there is that you can transfer that to your kids. So if you get to eight years in the military and you reenlist again, at that reenlistment, you can transfer 1% to each kid and to your spouse and whatever. And then you can tweak those percentages forever after that. And so you could then say, okay, well, now I want to slide this one up to a hundred percent because the other kid didn’t go to school or slide them up to 50 and 50 and they each get half paid or… And then even, it extrapolates even more out of that if you get VA disability, if you reach a hundred percent, there’s chapter 35 benefits where a lot of states will pay for your kids’ school for being a disabled veteran.

Robert:
And you say, also beyond the tuition, you can get base housing allowance, so you can get some stipends to live. You can get a book stipend. I think if you live in a rural area too, they’ll move you to the nearest college for 500 bucks, they’ll even pay to move you. There’s a lot of benefits with that GI bill that you can also pass on to your children like you said, but you’ve got to do it right. Right, David?

David:
Yeah. And that housing allowance correlates to where you live. Now, if you do remote, it’s a flat fee no matter where. But if you live in that place and physically go to school… So I had a friend, I say friend, a guy that I enlisted when I was a recruiter who’s now a friend. He went to school in Denver. He’s from Missouri. He went to school in Denver because he thought Denver would be a cool place to live. And the housing allowance made it so that he left Denver with a four year degree, no debt and he had a place to live off his housing allowance the entire time because his housing allowance was so much more there than it is here and then he moved back here. He was like, all right, cool, that was a fun four years.

Robert:
Yeah. Solid benefit. So again, there’s another way to pay for college and think about it. And again, you can either go your college yourself or if you’re lucky enough to have a parent, make sure your parent transfers that GI bill the right way so that you get that. Or if you’re in the military and you have young kids and you’re thinking about getting out, you need to do it before you mess that up.

David:
Yeah. It has to be done right at a four year reenlistment unless you’re commissioned and then you can do it at any time, as long as you have four years remaining on your contract or obligation.

Mindy:
And do you have information about that on your site, David?

David:
Probably.

Mindy:
Wow.

David:
I think so.

Mindy:
Okay. Thanks. [crosstalk 00:30:54]

Robert:
Well, Mindy, we definitely do. We’ll get it to you in the show notes so there you go.

David:
College has never been one of my main vocal points because everybody in the military has it paid for so they don’t have to talk about it too much because it’s like, eh, it’s paid for, all right, move on.

Mindy:
Okay. Well, I am trying to share this with people who aren’t in the military so luckily, Robert Farrington has you covered. Thank you Robert, from the collegeinvestor.com and we will include show notes. We will include links in our show notes, which can be found at biggerpockets.com/moneyshow297. Okay. I have a whole bunch more questions for you, Robert.

Robert:
Let’s do it.

Mindy:
Some of these are rather selfish because they are for me because I have a 15 year old daughter, she’s a freshman right now. So we do have some time, but we don’t have a lot of time because she’s a freshman already. I have currently saved as much for my daughter’s education, as you have saved for my daughter’s education, as much as David has saved for my daughter’s education, which is to say-

Robert:
She’s loaded now.

David:
How do you know how much I saved?

Robert:
Yeah.

Mindy:
Which is to say zero. I know that you both have contributed $0 to my daughter’s college education as have I. I am financially independent so I am not worried about paying for her college. She is a very good student. I am not worried about scholarships available for her and grants and things like that. But I would rather not put $115,000 into the pockets of the college if somebody else would do it for me. So should someone be saving for college? And when should somebody make the decision to save for college or not save for college?

Robert:
Well, so first off, I like to go with the Yes model and I call it the yes model because the Y is you. And I don’t think anyone should save for their kids until they save for themselves first. So take care of yourself first. It’s like the airplane, right? You got to put the oxygen mask on yourself first, before you put it on your children. And there’s a lot of ways to pay for college, we went through a bunch of them, you have the whole other podcast episode of it. There’s so many ways to do it, but if you don’t save for yourself, you’re just going to hurt your kids later on. You’re going to be a burden for them. You think you’re doing all this wonderful stuff of putting them through college and maybe taking out loans in your own name to pay for your kids, see it all the time and these parents do that.
And then, lo and behold, they’re 64 and they’re like, I can’t retire. We’re going to have to move in with our kids because we didn’t save any money, things get ugly so take care of yourself first. Then if you want to save for college, look at education savings accounts. For example, a 529 plan is a great way to save for college, even with your older kids, because a lot of states offer tax credits and tax deductions to contribute to them. So if you were just going to write a check to your college, I would write a check to the 529 plan, get your state tax deduction and then write the check to the college, so from the 529 plan. So, don’t dismiss a 529 plan even if you have older children. Yes, the goal of the plan is right to save early, let the money grow tax free, compound and pay for college.
But there’s still benefits for you if you have kids approaching paying for college. Part two of that is I love 529 plan gifting. And what I mean by this is, let all of your friends and family help you save for your kids college. So I’m a minimalist. I hate when the kids have birthdays, especially younger kids, your older kids, probably less so than mine, but they get 30 presents and it’s really annoying. And they play with one of them, maybe two and the rest of them just get tossed to the wayside, it’s a waste of money, everything is dumb about it. And so one of the things that we’ve done and actually all of our friends groups have done the same thing, is we don’t do any gifts. In lieu of gifts, we donate to everyone’s 529 plans. So don’t go to Target and spend 25 bucks on a Lego set, send $25 to the kids’ gift and just show up at the birthday party because honestly that’s all the kids want.
They just want to run around with their friends and bounce in a bounce house. They don’t need all the crap and the crap can actually go to their college. And honestly, by doing this every year, they get about 500 bucks a year from aunt, uncle, cousin, friends, whatnot. And then that just grows tax free all the way there. And so there’s a lot of services that do this, we like [Backer 00:35:23]. A lot of the 529 plans have finally started getting up to par and doing this themselves, you don’t need to use a service. But there’s ways to gift and it’s a wonderful way to do it in lieu of actual presents. Because the kid will still get an actual present. I promise you, mom and dad, sibling will still get them something, but they don’t need 30 things, right? So that’s another way. And then, yes, there’s grants and scholarships and other things as you get closer but I think, Mindy, you wanted to say something?

Mindy:
I did. I want to talk… go back to that 529 plan where you have older kids and you still get a tax deduction. So let’s play pretend.

Robert:
Yes.

Mindy:
My daughter is in the ambiguous stage of college education right now and she’s like, I totally want to go to college. And then the next week she’s like, I don’t need a college degree. I could just go be a body piercer. And I’m like, Ooh, let’s go back a week. Not that I don’t want to support her hopes and dreams but maybe we could not make this decision at 15.

Robert:
Well, here’s the thing is, so a 529 plan on the flip side, doesn’t have to just be used for a four year college tuition. It can actually be used for trade schools, apprenticeship… So she wants to go be a body piercer, that’s cool. She probably has to do some kind of trade school or a beauty school or something to get that licensing, right? I’m just making this up but there really is a school for this kind of thing. And again, that can be used with 529 plan money to pay for that. And you can also pay for it with a tax free, potentially depending on your state. I’m in California, California does not like their residents to save for college. They do not offer any tax breaks, but Colorado, I think, Mindy, you’re in Colorado, right? Am I right? And so Colorado offers a 20% tax credit up to 500 bucks, it looks like to… Colorado, one of the most generous tax deductions with no limit. So up 20% of the amount you contribute to your 529 plan in the State of Colorado so there you go.

Mindy:
Explain what that means like I don’t know what that means.

Robert:
So you can get 20% of the amount you contribute to your daughter’s 529 plan as a state tax deduction on your state tax bill.

David:
Wow.

Mindy:
So is that for my Colorado 529-

Robert:
529 plan.

Mindy:
Now, do I have to use the 529 plan in Colorado for a Colorado school? Or can I use it for anywhere?

Robert:
You can use it for anywhere.

Mindy:
Oh.

Robert:
So, if she wants to go to Penn State or whatever it happens to be, you just write the check out of your plan to pay for that and you got your Colorado state tax break. There’s no federal tax breaks for it, but there’s state tax breaks, depending on your state.

Mindy:
Oh, I see.

Robert:
About 30 states offer it.

Mindy:
If only I had a tax break.

David:
It’s like money laundering but your kid gets a degree.

Robert:
Exactly. And so 529 plans, they get a little bit of flack because people are like, well, what if my kid doesn’t go to college, right? There’s ways to access the funds but there is potentially a 10% penalty for non qualifying withdrawals. But that list of what qualifies keeps growing and growing and growing every year. So like I said, you can use it for K to 12 education now, you can use it for student loan repayment, you can use it for trade schools, apprenticeships. You could switch the beneficiary to yourself and you could take one of those cruises around the world where you learn on the cruise. I mean, there’s so many different things you can do these days. Go ahead, David. Sorry.

David:
Oh no, I was just… For Mindy to let her know I… If you do a non-qualified withdrawal, right, you get slapped with a 10% penalty. In Mindy’s situation, would that be slapped with a 10% penalty plus you repay the 20% that you saved in state taxes or is it like, hey, I put a hundred thousand dollars in this 529. I got a 20K tax credit and oh, now I got to pay a $10,000 penalty. I’m still on top.

Robert:
Yes. So it varies on your state. So Colorado’s penalty is a recapture of any state tax deduction you received on the earnings, right? You do pay a 10% penalty on anything on the federal level. So yeah, it can be bad, but like I said, there’s a lot of options to go around it in terms of creating… You can change the beneficiary on the plan, you could use it for your next… your younger siblings, you can gift it to somebody else. You could hold onto it, let the money grow and change it to your grandchildren and basically set up an education trust effectively, that you can use this money over time. And there’s so many options with it. So it’s like, yes, there are some drawbacks, a hundred percent, everything has some trade offs. But on the flip side, the list of ways that you can use it keep growing and the options to use it keep growing.

Mindy:
Well, I think that’s a very valuable tip for people who are like me and didn’t save anything for their kids, but still want to help their kids out. I mean, that was a very generous gift that my parents gave me by paying for my college. So if I can pay for my children’s college or at least part of it, I would like to do that. And then if I can pay into a 529 plan, does it have to sit there for any length of time? Or can I put it in there and then write a check?

Robert:
It depends on the state. So some states do have a one year waiting period, other states don’t. And I don’t know the nuances of your state’s plan, but check with your state’s plan and see what those nuances are but some states will let you just put the money in and literally just turn around and send the money out. Some states do have a one year waiting period on that transaction so you might have to use it for their sophomore year of college, if you’re listening to this now and you’re a little bit behind, but hey, every little bit can help and you can save a little bit in taxes and maybe have that money grow a little bit as well.

Mindy:
Yeah, no, that’s a great tip. Okay. So you said yes. Y-E and we didn’t get to S yet.

Robert:
S is just regular savings, right? So you have these tax deferred accounts, like a 529 plan, a [Coverdell 00:41:03] savings account. Some people like a Roth IRA to save for college, I’m not necessarily a fan but it’s a valid option. But then there’s just regular savings. So S is just regular savings. And this is valuable because honestly, there are a lot of other random costs associated with going to school, traveling to school, moving there. So travel’s not a qualified education expense so if your kid goes to an out of state school, you got to figure out plane tickets, right? There’s just random things that are always associated with this. They want to go to Cancun for spring break next summer, right? Who knows? But this is what kids do. So just having regular savings is an important part of it as well. And that doesn’t have to be your own savings, right? That could be, you can make the kids save. You can do other ways, but having some cash outside of an education savings account, even if you do save in one, is still a valuable option.

David:
I like it. So you mentioned Roth IRAs and some other stuff. What about just normal index funds? Do you see any pro or con to that, other than-

Robert:
Yes. But again, who owns it? So you can have a UGMA, which is a uniform transfer to minor, uniform gift to minor act account. So they’re beneficial, but you could run into some [kiddie 00:42:14] tax issues. So right after they make 2000 bucks a year in earnings, you’re going to have to start paying the kiddie tax, which is going to be at your tax rate and it gets complicated. And so that’s where it’s again, not a bad thing, right? And it’s also going to totally cost them on any type of financial aid they’re going to get, because anything that’s in the child’s name as an asset is the highest value of it. And they basically… I mean the effective way they calculate it is they expect you to pull all that out and liquidate it. Retirement assets do not count on the FAFSA, the free application for federal student aid.
That’s why people like the Roth IRA, but there’s other drawbacks that comes with the Roth IRA like how do you get money into the Roth IRA, right? Very hard to get money into a minor’s account, right? Because what? Are they going to model for you or whatever, all these jokes that people do to get their kids money into a Roth IRA. Or if it’s the parents’ Roth IRA, I hate seeing it because you’re going to take money out prime growth years. Your kid’s in college when you’re probably in your late forties and fifties. And that’s when you need your Roth to compound and grow and then you don’t want to be pulling money out of that to pay for your kid’s school. So there’s some drawbacks there. And plus the distributions from it now count as just regular income on the student. So if you pull that out, there’s no… On the FAFSA, it counts as regular income and it’s just going to totally trash their financial aid. So it might work for their freshman year on the first year you withdraw from the Roth IRA.
But for any future years, if they qualified for any financial aid, you can just basically kiss it goodbye.

David:
Okay. So hypothetically and asking for a friend and all the other cliche caveats that you make when you’re clearly making admission of having done something yourself and don’t want anyone to know, if you had rolled all of the… Oh, what should my name at payment so we got through the pandemic into UTMAs for your kids. Would there be a place that you should roll that, that would be better in this scenario? I’ve got…

Robert:
Okay, it’s not a bad thing, right? But you just realize you’re going to start paying tax on it. It’s a taxable, a brokerage account. And it’s going to probably be taxed at your income level, which doesn’t really necessarily benefit your kids, right? Because of the kiddie tax. So the question is, what are your goals, right? So maybe you put some of that into a 529 plan for them, right? And save that. I mean, I’m always a fan of you could do and, doesn’t have to be this either or thing. You can have some 529, some taxable… If they work a little bit, put some into their Roth IRA as well. I don’t know if you have them doing some work for you, but there’s the potential for that and there’s just a lot of options.
So I’m a big believer in the and. Realize though, we’re having this discussion. So you’re probably not going to qualify for a lot of merit financial aid. And I think a lot of people get very hung up on that point. It’s like, how do I get the most financial aid possible? Well, it’s like if we’re having these conversations of how do we maximize a 529 and a UGMA and all these things, you’re probably not in a financial situation that’s going to earn you much merit aid. On the flip side, you should still be applying for the FAFSA every year because that’s how you unlock student loans, if you want to get those. Part two is there might be a lot of… Sorry. I was saying merit aid, I meant need based aid, but there’s a lot of merit aid out there so your kid can go apply for scholarships, apply for grants that they might qualify for, just based on their ability to write an essay or volunteer in their community or because you work at a certain organization, there’s a lot of potential there for that type of aid. There you go.

David:
Because you’re going to give me your GI bill.

Robert:
Or you give me your GI bill and whatnot, but even then, there might be stuff outside of it. What if your kid wants to go to a private school? I think the GI is $23,000-

David:
Yeah, it won’t cover it all.

Robert:
A year for private school, which is amazing, but it won’t cover it all, right? So…

David:
Well, thank you.

Robert:
Yeah.

David:
For helping my friend.

Mindy:
Okay. I have a question because either we didn’t recover this last time or I didn’t remember. You said retirement accounts don’t count toward FAFSA. My retirement accounts as her mother-

Robert:
Right.

Mindy:
And her retirement accounts as a child don’t count towards FAFSA so-

Robert:
So when you list it all out, it doesn’t count as anything that’s going to be required to be used as on the FAFSA form. Correct.

Mindy:
When you’re saying retirement account, you’re talking about 401k, Roth IRA, Roth-

Robert:
IRA.

Mindy:
Roth accounts.

Robert:
All of them.

Mindy:
Okay.

Robert:
Traditional and Roth. Yes.

Mindy:
401k, IRA, the TSP from the military?

Robert:
Correct.

Mindy:
What about the 457 plan?

Robert:
Yep. Uh-huh (affirmative). Any other retirement… any qualified retirement account does not have to be reported on the FAFSA as an asset.

Mindy:
Well, that is very delightful news because that’s where, I think, 50% of my holdings are in my 401(k) and I’ve been worried. I mean, this is such a good problem to have, but I’m going to be having RMDs when I’m 72, just based on the balances now.

Robert:
Right.

Mindy:
And not being able to get-

Robert:
Sure.

Mindy:
Any sort of financial aid wouldn’t kill me…

David:
But financial aid is nice.

Mindy:
Yeah. Financial aid is nice. I will take any dollar that I can get. Now, FAFSA has nothing to do with scholarships.

Robert:
Well, it can’t-

Mindy:
Or merit?

Robert:
It can, so yeah.

Mindy:
Merit scholarships

Robert:
Need based.

Mindy:
FAFSA’s need based.

Robert:
So not for merit based. FAFSA is going to unlock need based scholarships for you. And it depends. So the need based scholarships are going to be what’s awarded by the school or potentially your state. Some states offer scholarships to low income students, different things and all of that gets unlocked by the FAFSA. So you fill out the FAFSA, it goes to your school’s financial aid office and depending on how much your expected family contribution is, which is the very bottom number that’s calculated, which effectively is, if you have a lot of money, you’re not going to get much. If you have a little bit of money, you’re unlocking more potential for aid and that aid can include scholarships and grants that are need based. But there is still a lot of merit based options and merit based ones are the ones you apply for just because they exist. And they don’t really have anything to do with how much money you have.

Mindy:
Is there any point where filling out a FAFSA is just a waste of time?

Robert:
No, everyone should fill out the FAFSA every year, starting the year before you go to school all the way through graduation. Because at the end of the day, it unlocks federal student loans. You can’t get a federal student loan without applying for the FAFSA. And so in a worst case scenario, let’s say everything hits the fan and your life doesn’t pan out, and you lose all your scholarships and whatnot, by having the FAFSA end, you can apply for that federal student loan at the last minute if you need to, or even halfway through the school year if you need to, and that way you can at least finish your school, but I’ve seen it happen. Even these kids go on athletic scholarships, right? And then they get injured and then they lose it for the second half of their year. And that’s where having the FAFSA and things can come in handy. So always fill out the FAFSA. It’s annoying because it’s another form you have to fill out, but it’s super beneficial and it doesn’t really take that long.

Mindy:
Does it cost any money to apply for the FAFSA or fill it out or whatever?

Robert:
No. So the FAFSA stands for free-

Mindy:
Oh.

Robert:
Application for federal student aid. I love it.

Mindy:
Okay. Well.

Robert:
But I will tell you that there are a lot… it’s not a bad question because there are a lot of scams and things out there and people will prey on you. I can fill out this… I can get you a student loan and it’s like, there’s no application fee, you just fill out the FAFSA, it’s online, it’s quick and easy. It does ask for a lot of information. I will tell you, if you’re a parent listening to this, it might be weird but you do have to share your income and your assets and things like that with your teenager, that you might not have done before. So I’m a big believer in having these conversations early. None of this should be a surprise at this point in time, your kids should know how much you make, how much you have and they should know how much is going to be paid towards their college. But if you haven’t, you’re going to show them when they fill out the FAFSA so it’s going to be a conversation you’re going to be having.

Mindy:
Okay. Yeah. I was surprised to learn that you have to pay to apply to college. I didn’t realize… I mean, it makes sense because somebody’s got to go through the applications, but Colorado has free application day every year and that is the day to put your applications in because then you don’t have to pay. I mean it’s 250 bucks to apply to go to a college, right?

Robert:
It varies, so that’s very high. Usually it’s $25 to $50.

Mindy:
Oh, okay.

Robert:
And this is where it could be a problem, right? And so I’m really anti application fees for college because it does hurt low income students, right? If you’re already low income having to pay… You want to apply to six colleges, right? Which is kind of a recommended amount. Well, if it’s a $50 application fee, that’s $300. And if you’re a low income student, yeah, there’s typically waivers and other things that you can get, but it’s just another barrier to entry and it’s so silly because these application fees literally earn these schools no money. And they already have so much money that they’re building amazing aquatic centers with lazy rivers but yet we have to nickel and dime these kids to just apply to your school. I don’t understand.

David:
I want to go to that school.

Robert:
Just float on the lazy river while you [crosstalk 00:51:45]. Yeah.

Mindy:
Definitely, lazy river.

David:
[inaudible 00:51:47] is exactly what would do if I went to school.

Mindy:
Okay. Let’s get back to talking about colleges and how to pay for them. What are some options besides student loans? You’ve mentioned grants and you’ve mentioned… Well, you mentioned scholarships. We’ve talked about loans. What is the difference between a grant and a loan and a scholarship?

Robert:
Okay. So a grant is given to you because the program exists. And so typically grants are a Pell grant, right? You are low income, your financial aid office, you’re automatically qualified for Pell grant because you’ve filled out the FAFSA, that’s all that’s required. About half of states also offer a similar type grant. So California does offer a Cal grant. And this is another grant that, if you’re a low income student, you just get it by filling out the FAFSA and it goes to your school’s financial aid office, it’s just free money. A scholarship is very similar except you typically have to apply for it. So it’s free money except there’s usually an application process or some other qualifying criteria to it. Many schools will offer scholarships, but they’re donated and they’re usually used on behalf of something, right? So this is for the student that does this.
Or if you’re applying to an engineering major, you get this. Every school has got different scholarships and then there’s also just the scholarships that you apply to, that are out in your community. And these are the ones that are merit based. So I love scholarships because they are they’re relatively easy to get. I won’t say they’re so easy, but they’re relatively easy to get and it’s just free money. And a lot of it goes unclaimed. There was a study by Fast web a few years back that said $6 billion in scholarships go unclaimed every year. Isn’t that just shocking to you? And I see it. So I don’t know about you guys, but I run a scholarship on the College Investor called the side hustling student scholarship and I give 2500 bucks to an entrepreneurial student. And my only requirement is that you write me a thousand word essay about how you’re entrepreneurial.
I don’t really care what you do, sell stuff on eBay… A couple years ago it was a girl that went to sing national anthems at the County fair and I mean, but she sent these cool pictures of her doing it and she was getting paid for it and it was awesome. I love the stories, but I get maybe 80 applications a year and I will tell you that 50% of applicants don’t even follow the directions and I just delete their applications right away. And so you’re really in competition with 40 people maybe to get 2500 bucks. And everyone that I’ve talked to that runs a scholarship says the same thing. It’s shocking how few people actually do the work to get the scholarship. And so you might think it’s impossible to get scholarships, but your odds of actually getting one are one in five, one in 10, they’re very good. And so it just becomes a numbers game, right? If you apply to 10 scholarships, you’re probably going to get one or two of them, but nobody does the work.

David:
Right. I’ll validate this from the other side. My wife is a high school counselor and she runs the scholarship section… There used to be the senior counselor always doing the scholarships, got overwhelming so she does scholarships every year now for the school. And every year, same thing. It’s like, oh, scholarships were due three days ago. Why are you sending me this now? And it’s like, yeah, yeah, they’re there.

Robert:
They’re there. It’s able to do it, but you do have to put the work. You got to follow the directions. You got to write that essay. And so the harder part I think is finding these scholarships and so you need to go on Google and search for them. You need to check with organizations, check with your parents’ company, a lot of large companies offer scholarships to their employees’ kids, are you part of any local groups or organizations or nonprofits, especially the larger nonprofits in your community. Is your family part of a union? A lot of the unions offer scholarships to their union members’ children. So there’s so many out there, but you do have to spend the time and do the work to get those scholarships. And they’re out there and they’re possible.

Mindy:
Do grants and scholarships have application fees typically?

Robert:
They should never. So grants, no, it all is done through your school’s financial aid office. Scholarships should never have application fees. However, some of these scholarship search sites and stuff sometimes make you pay to be a member and stuff and I’m totally against it. And I don’t think you should ever pay to apply to scholarships. And typically if the scholarship is on these search sites that make you pay, you can also usually apply not going through the site. You just got to find the company or organization that is running the scholarship and they typically have it on their website as well and there’s no cost involved. So there are some companies that do try to take advantage of it, but you should never pay for either.

Mindy:
Okay, good. I’m glad I asked that. Are there any services that can help you write your essay or get you started on the path to your scholarship application process?

David:
Virtual assistance.

Robert:
Yes. I mean, there’s definitely companies out there that help you with these essays. I’m mixed on it. I don’t think there’s going to be any more value that this company can offer than you can do yourself. On the flip side, maybe you do hire a virtual assistant, like David said, to help you edit your essay because I see a lot of crappy essays. The story’s good, but could someone go through and put some paragraphs in there instead of a wall of text, right? [crosstalk 00:57:15] Maybe have someone… Yeah, have someone help you spruce it up, I think is a wise thing. And if you don’t have a family member or a friend or a teacher or a guidance counselor that can help you, yeah, maybe you pay a virtual assistant or something to help you. But I’m 98%, you just can do it yourself or have your network of friends and family or your school.
Literally, this is what your school is supposed to do if you’re in high school, they have people at the office, the guidance counselors, things like this is their job. They’re here to help you get into college, use them.

Mindy:
Okay. So when is my daughter applying for college? She’s a freshman right now. She’s just finishing up freshman year.

Robert:
Mm-hmm (affirmative).

Mindy:
When is she starting to apply for scholarships?

Robert:
Now, for many merit ones. So you’d be surprised on what’s out there and you can start stacking your scholarship dollars early. And I’m a huge fan. If you can find these in your community, start searching for them, apply to them. You don’t need to have such an urgency about it, but if you can start putting $2,000 away every year, right now, it can go a long way to help, right? I’m kind of a view of scholarship time and work time. So as a freshman, she’s probably just a year away from being able to work a lot in the summer. Because I don’t know about your state, but California is 16 is kind of where you have to be, to get a job at like a Big-box store or anything like that. So if she’s only 15, this year should be the scholarship year. Let’s spend the hours of the summer finding and applying for those. And then next year, balance it out.
I get some actual full-time employment during the summer, my go hustle and then a little less time applying for scholarships, but taking some of that, the money she earned and saving that away as well, is hugely beneficial. Not just the money, but the skillset as well, I think goes a lot farther as well.

Mindy:
Yeah. She’s working for a friend. She makes jewelry and she makes something like $15 an hour at age 15 when she’s not really able to go out and get another… she could probably work in a retail position, but we’re at the tail of the COVID. I don’t really want her to work in a retail position right now.

Robert:
Well, and I just think, I mean in our area and granted everything’s a market base, but the starting pay of a cashier at Target right now is $18 an hour in our area. If you want to go work at Chick-fil-A, it’s $21 an hour to work at Chick-fil-A. If I was a high school sophomore right now, I would just be crushing it and doing that because that’s a lot of money when you’re young, because you can put away, even if you’re working 20 hours a week, that’s a substantial amount. And even if you blow half of that on the dumb stuff you do when you’re 15 or 16, you still got a nice amount left over to pay for college and do other things.

Mindy:
That’s true. Yeah. I forgot that they’re paying a lot more than the $3.35 an hour that minimum wage was when I was working at Dairy Queen.

Robert:
And then I would also say, a lot of people dismiss this, but a lot of bigger companies also offer the same kind of benefits that David was talking about in the military, tuition assistance programs and things like that. So if you work for Target, Walmart, Amazon, these companies and you keep working… Starbucks, I think does it as well, you can leverage those companies’ tuition assistance programs to help you pay. So if that’s your part-time job in high school and college, shoot, you could be leveraging some dollars there to help offset your college costs.

Mindy:
That is a really great tip. I didn’t realize that they gave tuition assistance. Now, does tuition assistance mean you still have to work here while you’re going to college?

Robert:
That’s what tuition assistance is, yes.

Mindy:
Okay.

Robert:
So there’s tuition assistance programs and there’s student loan assistance programs. So the tuition assistance programs that a lot of these companies are offering is you’re working for us and we’ll give you money to your college while you’re working for us. Some companies now are offering student loan assistance where it’s like, you’ve already graduated, you have some debt and they’ll help you pay off your student loans, while you’re working for us. Some companies offer both, but if you’re looking for a part time job in college, and you have a choice of where I’m going to work, I’ll go to Target or Walmart or Amazon because they will give me up to 5,000 bucks a year to my college, even if I’m only working 20 hours a week and that’s a huge benefit.

Mindy:
Yeah. That’s great. $5,000. I mean, that’s free… Now, is that free $5,000 or is that $5,000 and then they take taxes out?

Robert:
Tax free.

Mindy:
Oh nice.

Robert:
Yep.

Mindy:
Nice. And when you said start now and stack scholarships, are scholarships sending her a check? They’re not sending it to the college that she’s designating?

Robert:
It’s both. So you can just take the check. Some scholarships will send it to your school, but if you don’t have a school yet and you’re younger, they’ll just send it to you. I will put the asterisks there that more scholarships than not are going to be taxable for you. And so a lot of people don’t realize that you will get a 1099 and these scholarships will be taxable. And the amount of scholarships that are taxable are about 48 to 50% of all scholarship dollars are technically taxable. And because that’s what’s actually reported to the IRS, I would probably venture that more are supposed to be taxable and people don’t know and or don’t report it.

Mindy:
Okay. So is it taxable to my daughter, not me?

Robert:
Correct. She earned it, it’s her money, so yes, it would be taxable to her.

Mindy:
Okay. And if she’s not making enough money to pay taxes, then she doesn’t pay taxes?

Robert:
Correct.

Mindy:
Okay. I like that. I like this a lot. Wow. I learned a ton. Robert, this was so helpful. David, do you have any other questions for Robert? I feel like I’ve hogged him the whole time.

David:
No, I mean, this is great. Student loans, as I had mentioned, is not something that’s my wheelhouse expertise so I was just taking it in, asking a couple questions and living it up. This is… Man, I mean, every time we hang out… I became a fan of Robert’s. I told him I was going to throw this out there or I wasn’t going to throw this out there, but I was looking up whole life insurance research and I stumbled across the College Investor. And Robert wrote one of my favorite articles ever on the pros of term over whole and I loved it. And so we were talking about it before you jumped on, before we started recording and Robert does such a great job of breaking things down to… I mean, his blog is just full of great articles and great content with great breakdowns and the fact that he was able to just, on the top of his head, explain net present value, so much knowledge there so definitely tap into it.

Robert:
I’ll say too, while we’re talking about it, if you’re out there and you have someone telling you that a whole life insurance or permanent life insurance is a good way to save for college, please run away because it is not a good way to save for college, but I see it all the time because they’ll always fear monger you on all these alternatives. We already talked about the pros and cons, right? There are cons to a 529 plan and there are cons to a Roth IRA. And so then these sneaky salesmen come in and they’re like, oh, well, I got this amazing thing here and it’s not amazing because you have lower returns, more fees, you’re paying for insurance and you’re technically getting a loan out of your dang insurance policy to pay for this, it’s all dumb. Just don’t do it.

David:
Well, the best life insurance is being financially free.

Robert:
Just don’t die. No.

David:
I think, was it [crosstalk 01:04:47]?

Robert:
That’s it.

Mindy:
Well, yeah, I don’t want to die either.

David:
I think [crosstalk 01:04:48] personal neighbor. He said, I’m self-insured or the best life insurance is self-insured, meaning you’ve got a few money.

Robert:
Yeah.

David:
Like, Eh.

Robert:
Exactly. And there’s a purpose for it and saving for college is not that purpose. So it’s kind of [inaudible 01:05:06] but I guarantee you that there’s someone out there that’s listening to this podcast that has been pitched on it because I see it on social media a lot. And it’s not a great alternative to the other ways to save.

Mindy:
Yeah, no, I think we covered a lot to do. This was super fun. Robert, is there anything that we forgot to ask you or that you would like to add before we let you go?

Robert:
No, I think it’s just really hammering home the point of thinking about it as an ROI. And so on the student side, is what’s your goals? What’s your dreams? What do you want to do? Keep it loose, but don’t necessarily spend a whole lot to get to your end goal, right? Because when you’re 17, 18, you don’t know what you’re going to be when you grow up. We’re kidding ourselves here when we think that of our young adults. They have some ideas but things change. They learn as they go. So if you spend less, you’ll have a better outcome when you change it all up. And now if you’re the parent listening to this, realize that college is not the end all be all to everything when it comes to this. And just because someone said in your family that they should go to some elite private school, there’s a mathematical cost to that.
And unless you’re cutting that check, you shouldn’t put that on your kid, that force them into something that’s going to really jeopardize their finances for the next 10 to 20 years of their life, because that’s what happens when they borrow and they get these student loans and then they’re indentured servants to their loans for a long period of time, trying to pay it off, when they could be enjoying their life. We kind of ragged on that article a little bit that you brought up at the beginning of the show, but he did make some good points. If you’re struggling with debt, whether it’s student loan debt or any other kind of debt, it does delay buying your first house and it does delay you starting a family and it does delay all these things. And as a parent, you probably don’t want that for your children. You want to, just like you’ve done for the first 18 years of their life, you’re trying to give them the best.
Don’t suddenly set them up to fail for the next 18 years, right? You want to make sure that they’re set up for the best there as well. And spending a fortune on school might not be the best way to do that for them.

Mindy:
Thank you, Robert. Thank you for your time today. No, this is great. I love the reminder to people that college is great, for the right person, for the right student, but college isn’t the right choice for everybody. Way back on episode 44, we talked to Tinian Crawford, Captain DIY on Twitter, who I love dearly. He’s an electrician. He went to college, he got his associates degree, which is a two year degree in just six short years because college was not the route for him. And now he’s living his best life. He’s doing electrician work. He actually worked at a college for a while, which I thought was kind of funny, but now he is out on his own. And he’s like, I’m booked solid, from now until the end of my calendar. And as soon as I open up more time, I’m booked solid. And it’s a great choice for him. He makes the money that he wants to make. And college was not the right choice for him. And college is not the right choice for a lot of people and trades… Oh my goodness, you can make so much money in the trades.
And when you do, when you’re an electrician in Missouri, David needs you or just do it yourself, David, it’s not that hard.

David:
Yeah. I can’t find them. It’s not that the electricity is hard, it’s that the signing for a permit without being a master electrician is… I can’t do it.

Mindy:
There.

Robert:
That’s it.

Mindy:
I just signed it for you.

David:
If I could forge those docs, trust me. I’ll be… All you got to do is… Anyway.

Mindy:
I would never suggest you forge documents, David, you should always go by the book.

David:
You just got to go buy some plumbers crack sign jeans and you’re good. That’s how you wanted to wrap up the show.

Mindy:
That’s exactly how I wanted to wrap up the show. Thank you. That’s how Robert wanted to wrap up the show too. He was really, really generous with his time and now we’re ending on a plumber joke.

Robert:
It’s all good. No, go be a plumber seriously.

Mindy:
Yeah. I could seriously be a plumber, that is-

David:
But we’re not ending yet.

Mindy:
Well, actually we are because we don’t really… This isn’t really a money story so we didn’t really do the famous four.

Robert:
I feel like I did the famous four last time, didn’t I do the last song a month ago?

Mindy:
Robert. Okay. Ask him that one.

David:
What’s your favorite joke to tell at parties?

Robert:
I don’t know but I just came back from Disney World. So I’m going to tell you my favorite joke to tell my daughter, because that’s what I got on the top of my head right now, is why can’t you give Elsa a balloon? Because she will let it go.

David:
Awesome.

Robert:
There you go. That’s what you get to end it with, now you know, David.

Mindy:
No, I have a good student loan joke. Post Malone has started his own student loan company. It’s called Post Malone’s postpone Malones. Oh that was-

Robert:
Postpone Malones, love it.

Mindy:
I’d like to take a moment to say thank you student loans for getting me through college. I don’t think I’ll ever be able to repay you.

Robert:
There you go. Yes.

Mindy:
But I [inaudible 01:10:06].

David:
That sounds like a Hugh joke.

Mindy:
It does sound like a Hugh joke. Hugh Carnahan. He tells terrible jokes.

David:
He’s a friend of mine. He always posts in the BiggerPockets Facebook groups these ridiculous… you’re just like…

Mindy:
Horribly bad jokes. Hugh, you’re terrible.

David:
Did you Google worst financial puns and then you’re like, I’ve got content for a month.

Mindy:
Okay. From episode 297 of the BiggerPockets Money podcast, he is the inimitable Robert Farrington. The other guy is David Perrey and I am Mindy Jensen saying, give a hoot, don’t pollute.