David Green:
This is the BiggerPockets Podcast show 814.

Dave Meyer:
I think BlackRock is going to come along and develop something to do this. And oh, by the way, when you go to them to sell their house, they will buy your house first offer and they’ll say, “Well, if you sold it on the MLS, we predict this much, but if you sold it to us, we’ll give you 98% of that.” They’re going to be soaking up even more of the inventory and it’s going to be harder and harder and harder for your everyday person to be able to buy a house. And I feel like this lawsuit, we may look back in 10 or 20 years and say, “That was the beginning of the end.”

David Green:
What’s going on everyone? It’s David Green, your Host of the BiggerPockets Real Estate podcast. And if you didn’t know, it’s the biggest, the best and the baddest real estate podcast on the planet. Joining me today will be my co-host, Dave Meyer, and yes, you guessed it. That means we’re doing a bigger news show. These are my favorite shows to do. In a bigger news show, we bring you news from across the real estate world, the financial market, the economic market, and more so you can understand the environment that you’re investing in and most importantly, how to use information that is relevant, up-to-date and current to make your investing decisions. Dave, welcome to the show.

Dave Meyer:
Thank you. I’m glad to be back. I feel like it’s been a while since we’ve done these kind of shows and obviously a lot is happening, so we have a lot of good stuff to talk about today.

David Green:
(Singing).

Dave Meyer:
Who sings that song?

David Green:
(Singing).

Dave Meyer:
Is that Creed?

David Green:
Stained.

Dave Meyer:
Stained

David Green:
It has been a while since we’ve seen cashflow in real estate. It’s getting harder and harder. But nice Creed reference there.

Dave Meyer:
Thank you. Well, it was a wrong Creed reference.

David Green:
That’s what interest rates have been saying, “Can you take me higher?” And the Fed said, “Hold my beer. Watch as I do so.”

Dave Meyer:
That was a really good reference.

David Green:
In today’s show, you’re going to be hearing about deflation. Goldman Sachs forecast cyber attacks hitting the multiple listing service and lawsuits that could impact real estate agent commissions. I’ve been paying a lot of attention to that one personally and it could change the way that real estate is bought and sold in a very, very, very significant way. All that and more in today’s show. But before we get into it, today’s quick dip, make sure to check out the BiggerPockets blog at biggerpockets.com. One of the articles we’re going to talk about today is actually from the blog, so stay tuned. All right, Dave, you’re ready to get into this thing?

Dave Meyer:
Let’s do it.

David Green:
First headline, deflation could soon hit the United States as real estate and stock prices are at risk of crashing, economists say. As a side note, I’m going to start adding “economists say” to the end of every single thing that I say in life and just see how well that plays out.

Dave Meyer:
Do you think people will just assume you’re wrong every time you say that?

David Green:
I think it’s more like or you have no responsibility for what you say as long as you claim economists said it. No one ever says which economist or where did they say that? So if you’re working at a restaurant and you’re like, “What do you guys like more, the salmon or the trout?” They could say, “Well, economists say salmon’s a better option.”

Dave Meyer:
I always want to know what the economist orders at every restaurant I go to.

David Green:
So according to economists, the US economy could soon be at risk of deflation, according to the Weymouth Asset Management Company. That actually helps that. We’ve got Weymouth here.

Dave Meyer:
All right, they’re on the hook.

David Green:
Yes they are. We’ve got some accountability. Wobbling commercial property values and a correction of lofty stock valuations would drag prices lower. And inflation accelerated 3.3% on an annual basis in July, well below the pace of inflation recorded last year. Dave, I know that you, like me, pay attention to this type of stuff. What say you about this prediction?

Dave Meyer:
I’ll just start by saying no, I don’t think that the US is at risk of deflation, at least the way the government tracks it, like the consumer price index because the way the CPI works is it tracks goods and services, but it doesn’t track asset values like the stock market or housing prices. When we talk about, yes, there is, I think, a risk that the stock market will go down, there is a risk that the housing market will go down, but that won’t be reflected, at least, in the official consumer price index. The other thing is that goods and services, which are what the consumer price index actually does track, are incredibly sticky. There’s very few times in US history and really even globally where you see deflation in terms of a service like going to get your haircut. When was the last time you actually saw that go down in price? Yours has gone to zero, David, so I know that that is deflated, but-

David Green:
That’s the secret to how I save so much money. If everybody wants to know.

Dave Meyer:
Just shave your own head. It’s so easy. But in reality, services in particular are very sticky and so no, I don’t think that we’re at risk of deflation. I think the real thing that’s going on, which is good, is what people call disinflation, which is basically the slowing down of inflation. So my belief is that prices won’t go negative, but they’ll go up less quickly all.

David Green:
So before I comment on that, Dave, can you just explain briefly to our listeners your definition of deflation?

Dave Meyer:
Yes. So deflation is just basically when prices go down. And disinflation, which I was mentioning, is basically the slowing down of price growth. And I think there’s a really big and important difference there because deflation where price goes down, that sounds good to people, but it’s actually really bad for an economy because it disincentivizes people to spend. If you just think about it a little bit, like if you were assuming prices were going to go down, you probably wouldn’t buy anything this month. You would wait till next month or the following month or the month after that because there would be a discount. And that reduces consumer spending, it reduces business spending and that slows down economic growth. So inflation is bad, deflation is bad. What you want is slight inflation, is at least what as you would say, economists say.

David Green:
Economists say. That’s exactly right. And it makes all the sense in the world because it’s the same way with the market. If you had a perfectly even buyer and seller market, in general the fear that buyers have would outweigh the incentive that sellers have. And you would get a form of a stalemate where a buyer goes and puts a house in contract, they find a reason to back out because that fear makes it easy to back out. So what I’ve always believed is you want almost like a 49, 51%. You want it to be a little bit more of a seller’s market at any given time because now the buyer thinks, well, if I back out because there was a crack in the sidewalk or there was a roof tile that’s broken, someone else will get that house and I might not get one at all.
It actually helps to make you get over your indecisiveness, and I think the same thing works with the economy. If you think there’s a chance prices will go down, you’ll wear that same pair of underwear for another nine months longer than you should. You won’t spend money. That slows the velocity of money and as the velocity of money slows, we all become poor, in a sense. You’re not spending money so the person that you’re spending it on, they’re not getting it so that they can’t buy anything. And it’s kind of taking the oil out of a car engine. It doesn’t take long before the whole thing gridlocks, you agree?

Dave Meyer:
Oh, absolutely. I think that’s a very good analogy too. The same thing that you just described in the housing market is true of basically the entire economy. You want people to have the incentive to keep spending and like you said, velocity, recycling money through the economy. That leads to economic growth. So yes, I agree with you. I think that that’s probably what will happen eventually. Inflation is taking longer than I think anyone would’ve hoped to come down, and I think there’s still a bit to go, but we’re probably trending in that direction. But again, that’s talking about goods and services. Asset prices are not typically measured in the traditional inflation measurement.

David Green:
That is a great point you made earlier that I didn’t want to gloss over. It is very rare that you ever see the cost of a haircut go down or the cost of an oil change go down or it’s tire rotation or really any… Prices tend to work like a ratchet. It can click up or it can stay the same, but it doesn’t go the other direction. It only moves one way. And so that’s what scares me about when inflation is rampant is it doesn’t go up quickly and then correct itself. It just goes up quickly and stays there. And that can happen much easier with the cost of goods and services than it can with wage growth. Employers aren’t just going to be shilling out money like vendors can shill out price increases. So you almost never see the money you’re making keep up with the cost of living and the wider that gap gets, it tends to stay at that same level of wideness.
I’m not articulating that well, but I think you know what I’m saying and it actually creates poverty, which is what we’re trying to avoid. We want everybody to become wealthier, so we just want, like you said, a slower increase in inflation. A nice predictable two to 3% is enough to keep people spending money, not hoarding things, not leading to a scarcity mindset where you’ve got people putting stockpiles of toilet paper somewhere so no one else can get it and at the same time doesn’t make anybody broke. So let’s hope that this is the case, as economists say. Last question, if we were to see deflation, what do you think would actually need to happen to the economy before prices would come down?

Dave Meyer:
This is not my area of expertise, but I would imagine it would have to be just a massive increase in unemployment. Where we get to the point where so few people are spending money that there’s sort of this race to the bottom. Where the different services have to cut prices in order to attract the fewer dollars that are going around. But I don’t really know. We saw a huge uptick in unemployment around the great financial crisis and it didn’t really lead to any significant deflation, so I don’t really see it happening just because the history of the US economy shows that goods and services, like you said, are pretty darn sticky.

David Green:
There you go. Thank you, Dave. What do we got next?

Dave Meyer:
All right. That’s actually a great segue to our second headline, which comes from the BiggerPockets blog and the headline is, Is Slow Growth, The New Normal For Home Prices? Goldman Sachs and Their Economists Think So. So basically what they’re saying is that housing appreciation from the pandemic, not likely to come back. Low supply, it’s putting upward pressure on home prices and a lot of people are hesitant to sell and they basically think that because rates are likely to stay high, they think above 6% for a while, that the average home price growth will be about 1.3% for 2023 and about 1.7% for 2024. So pretty slow, almost basically flat growth for the housing market. What do you think about that prediction?

David Green:
It’s hard to see prices coming down, so prices are frequently ticking up. We’re used to seeing that. And if you understand the way that psychology plays a role in prices, I think it makes us a lot simpler to understand. People tend to look at this frequently from this perspective of pure logic that, well, if the cost of living’s going up and interest rates went up, the math says prices should come down, but people don’t make decisions on math. I’ve never met a seller of their home who listed it at $600,000, who saw that inflation came out at a certain level or unemployment was too high and they said, “Let’s drop it to 592.” That’s the appropriate response. They don’t make the decision to drop their price until emotionally they’re in so much pain because they can’t get anyone to buy it that they finally do and they never drop it from 600 to 400 and create a bidding war and get it back up to 580.
They always say, “Let’s go from 600 to 595 and see what happens.” Those three words, “See what happens,” are frequently spoken about in these situations. It doesn’t work though because buyers don’t care. It’s hard for the seller to think of it from the perspective of the buyer, and it’s hard from the buyer to think of it from the perspective of the seller. Sellers drop their prices when their house has been on the market 90 days and nobody wants it and they have no choice. And if you get any kind of stimulus that happens during that 90-day period, they usually don’t have to drop the price, especially when we’re in the situation we’re in now where there is not enough supply. All the good inventory is still getting a ton of demand. Investors want these homes. People that are tired of their rent increasing want these homes.
People that want a place to invest that they can beat inflation want these homes. People that don’t have $600,000 cash that want to leverage money from the bank, they want these homes. It’s still the bell of the ball. Everybody wants the real estate, so it’s hard to see prices coming down. When they do come down, they tend to crash. I’ve only seen in my lifetime, prices come down when there was an extreme difference in supply and demand. There was way more supply than demand. It’s not talked about, but in the 2010 era, there was a lot of new home construction that was being built way more than was needed. So builders are watching prices go up. The lay person who doesn’t understand the fundamentals of real estate is watching prices go up. Everyone’s buying homes and builders were like, “Shoot, let’s just build them and sell them like hotcakes.” And people are scooping them up. Poor construction quality, bad areas, not understanding the taxes of it.
But when the interest rates started to adjust, it wasn’t just that the homes became more expensive, it was also we had way more houses than we needed. Now the speculative buyers back out of the market, prices are crashing because there’s way too much supply there. That would have to happen. But like I said, prices don’t tend to tick down. They tend to tick upwards because they can’t fly upwards because of our appraisal system. If somebody sells their house, that same buyer that put on the market for 600, if someone’s willing to pay 800, but they’re using financing, the appraiser’s not going to let us sell for 800, he’s going to say 625. So they have to tick upwards and they don’t tick downwards. They tend to crash downward.
So it looks sort of like the stairway as they go up and then a slide as they go down and then a stairway as they go back up again. So if people are expecting prices to just continually slowly drop, it’s hard for me to see a scenario where that would happen. I think it’s more like what you mentioned in the last segment, the disinflation, that they will not be going up as fast, but in general, people feel more comfortable buying homes when they see prices going up and people feel more comfortable selling their home when the price is going up.

Dave Meyer:
I agree with this whole premise that the market will be relatively flat over the next few years. I could see that coming, whether they drop a little bit this year, a little bit next year, go up a little bit this year, next year. Obviously no one knows. But to me, this whole concept of where the market’s going over the next year comes down to the idea of affordability and houses have just become deeply unaffordable. They’re at a 30 or 40 year low, but there are different ways that affordability can improve itself, and I think a lot of people assume that the way that affordability is going to get better is by the housing market crashing because that is a way that affordability can improve. But we had a guest on the market recently who was talking about how another way for affordability to improve is just for the market to grow steadily and slowly while wages catch up over the next couple of years.
And I can see some validity to that logic where I think we’re in for this kind of stalemate for the foreseeable future where there’s going to be relatively low supply and relatively low demand. So I don’t see prices moving too far in one direction or another, but hopefully. We have seen now, two months in a row, where wage growth has outpaced inflation. That’s a very new trend, and so it’s uncertain, but if that improves, I do think that is a good hypothesis, at least, here by these economists that maybe the market’s relatively flat, wages get a little bit better over the next few years, but this guest that we had it on the market said it’s going to take till 2027. So it’s not like this is going to happen overnight, it’s probably going to take several years, even if this scenario plays out at all.

David Green:
There’s a lot of very smart people that are all still buying real estate. The people who analyze all the different financial options that are out there to put money into find the most growth, a lot of these big firms and funds are all getting into the space of real estate. So just because it’s not as good as it used to be does not mean that it is bad.

Dave Meyer:
Yes. No. And honestly, I think people are constantly surprised by this, but as an investor, a flat market is fine for me, I don’t see that as this real negative detriment. I would like it to outpace inflation. I would like to see something where home prices at least keep up with inflation, but I’m not counting on that as being the main profit driver for an investment, but I don’t want it to lose value against inflation.

David Green:
The fundamentals of real estate are actually almost designed to make it make sense even in a flat market. So the amortization of your loan, every loan a little bit more goes towards your principal reduction as opposed to the interest rate. That benefits you. Even if the growth is flat, you’re still making a little bit more every month than you did the year before. The leverage component of it. So you buy a $500,000 house, if inflation is at 5% and your house goes up by 5%, that would be about, a year ago, from 500 to 525. But you probably only put $100,000 down on that $500,000 home.
So that 5% increase in the home value of 25,000 in equity equals a 25% on the increase in the money that you put down. So even when real estate appears to be growing slowly or staying flat, it exponentially benefits the person who used leverage to buy the asset. And this is before you get into the tax advantages or the rent increases, the ability that you could have bought it below market or you could have added value to it. It’s just so better than all your other options. There’s nothing I could do if I buy Apple stock to make Apple perform better, but it is the case with real estate.

Dave Meyer:
Very well said. Housing prices are not your returns.

David Green:
All right, next article here. Real estate agents grapple with cyber attacks on Rapattoni. A ransomware attack has crippled Rapattoni, a Southern California data host for property listings. So for those that don’t know, Rapattoni is like the software that is used to power a lot of the MLSs across the country. So if you’re a realtor and you work in Tennessee versus Alabama versus California, your MLS doesn’t look exactly the same, but there are companies that make software that the MLSs will purchase and that’s what the agent is trained in when running their specific MLSs in their area. In California, it’s weird, I can be looking in the Bay Area and then I can move out to the Central Valley and it’s two completely different forms of software.

Dave Meyer:
That’s weird.

David Green:
I have five different MLSs I belong to and if they’re not made by Rapattoni, it’s a completely different learning curve, to have to learn all of the different ways. It’s not fun.
Bay Area real estate service information and clients fell victim, the hacker encrypts the victim’s data and demands a ransom for its release. Some agents are now unable to add a new property price, adjust or access latest property information. So this is similar to what we see happening with social media where if they can figure out your password, they can hack your Instagram and say, “Hey, those 400,000 followers that you have, you don’t have them any more unless you pay us what we want.” They can actually hold people’s Instagram’s ransom. Now this is happening with the MLS, so if you’re selling your home and you have a listing agreement with the broker, they put your house on the market and you want to update the information, you want to adjust the price, you want to add another property in there, they can’t do it unless these ransoms are paid. What do you think, Dave?

Dave Meyer:
Unfortunately these types of things are happening more and more and it always hurts when it happens in your own industry, but I guess I’m not super surprised. I don’t know Rapattoni that well, but the MLSs I’ve been exposed to don’t seem like the most sophisticated software technologies that I’ve seen, and unfortunately this has real impacts on the lives of these agents and people who are just trying to go about their business. So I don’t know. It’s hard. It’s something that I hope will get resolved but maybe will be the impetus for more real estate agents and the whole real estate industry to take cybersecurity a bit more seriously because unfortunately, that just seems like the reality is that everyone is at risk, as you said, whether it’s your Instagram account or your bank account or whatever. These are things that unfortunately are just a part of modern life right now.

David Green:
The threats are all from the technology element, and nobody would’ve thought before this happened that this was a thing that could happen. I know a lot of people are unaware of how significant wire fraud is, but as a Real Estate Agent, I’m acutely aware of this one. It’s like the most brilliant crime, if you’re the criminal, where you find out somebody is selling their house and you email them and say, “Hey, I’m the title company. Wire your funds to this wired number or bank and the person does and $100,000, $400,000, $800,000 is gone.” There’s no way to get it back. And it’s so simple. They could just send out a bunch of these emails. There’s no recourse. You don’t have to go meet anybody in person.
So when we’re selling houses as an Agent, it’s like double, triple, quadruple checking. This is your title officer, this is what their voice sounds like. They’re going to be calling you. Don’t wire the money until we’ve confirmed and they’ve confirmed that this is the right place to actually send it. And we were talking before we recorded about how easy it is to deepfake someone’s voice. That just got me thinking, oh man, how many people are going to be fooled by that in the beginning?

Dave Meyer:
Oh, it’s terrible. It’s so scary. Now, if I fund a deal, I invest a lot in passive deals, I’ll insist on doing a $1 wire transfer to them to make sure that it goes to the right person, even though you pay a little fee. Just to make sure because wire fraud is terrifying. There’s absolutely no recourse if something goes bad for you.

David Green:
There’s no insurance for that. No one’s covering it. It’s just gone.

Dave Meyer:
One of the questions I have about this is just about the MLS in general. In my opinion, I’m not an agent, so you have way more experience with this than I, but it seems like a very antiquated system and that the way that all of these, like you said, different MLSs work together and the data’s aggregated is perhaps not a great system. And so not that I am happy that this happened, but maybe this will help spark some innovation in the MLS industry because I think there’s a lot of room to improve there.

David Green:
Well, there’s some room to improve in the entire real estate market in general. It’s funny you say this because I was just at a Keller Williams event. I was speaking there and I’m in the investor world and I’m in the agent world, and so I see where both sides don’t see the other’s perspective. And I had this little paradigm shift where I realized a lot of agents do not want to work really, really hard to find that client, like a wholesaler will, because their commission’s going to be a lot less and it’s not a guarantee that they’re actually going to close that buyer. There’s a lot of work that goes for the agent after you find the client, now your job starts, now you have to do a whole bunch of stuff. You probably only close one to 3% of the buyers that you’re working with.
People don’t realize that when they wonder why is a buyer agent commission so high? Well, if they close 100% of people, it’d be a lot lower, but it’s not that way. Then they have all the regulation, they have all the paperwork, they have all the lawsuits they have to worry about. They have a ton of education on how the MLS works and what the rules are of the MLSs and what the rules are for all the documentation that has to be done and the compliance issues. It’s incredibly complicated to go through the process legally, of using a realtor, versus the wholesale side is kind of the wild west. You, in most cases, do whatever you want and if you did break a rule somewhere, there’s not a whole lot of people that ever find out about it. It’s very rare that there’s any kind of recourse.
And so trying to convince an agent that they have to have the lead generation skills of a wholesaler with a much smaller amount of money they’re going to make and all of the fear of what could go wrong and all the work, you can see why it’s hard to get a good real estate agent. And so I agree with you. There is a lot of things that need to change with the way the industry works, but I understand why it’s tough, and I think for people that are on the outside looking in, they can’t understand why it’s so complicated. But whenever there’s a lot of regulation like this, it makes it complicated. And now we add pirates hacking into this stinking software and holding people hostage.

Dave Meyer:
It’s terrible. Well, that is a good segue to our last headline today, which I’m very curious to hear your opinion on because this one affects you directly or could. The headline is, The Multi-Billion Dollar Lawsuit That Could Radically Reshape How We Buy and Sell Homes Forever. On On The Market, we just actually had an expert on this topic come and talk to us about it, and basically what’s going on is there’s two class action lawsuits that could impact how agent commissions are paid out. They are looking to “decouple how agents are paid,” so basically buyers and sellers would pay for their own representation. That’s not usually how it works. Now, typically, the seller’s agent collects the commission and then pays out the buyer’s agent, and so this could be a really important thing that will obviously impact agents, but could have all of these ripple effects in how buyers and sellers work in the housing market. So I’ll just leave it there because, David, this obviously is right in your wheelhouse. I’m curious to know what you think about it.

David Green:
So here’s how it works right now, and then I’ll explain what this lawsuit is trying to accomplish, and then if it passes, how things would change. The way it works now, the seller pays the commission for both agents in general. So the listing agents will go and negotiate the commission that they’re going to get for their side as well as the buyer’s side. And sellers do this because they’re trying to get as many buyers for their houses as they can. And if the buyers had to pay for their own commission, there would be a lot less people that are interested in buying homes. Now it actually comes at a price. You can’t get in the car and drive around and look at houses for four months and it’s free to you. You’re going to have to pay. The same reason that people don’t call lawyers and have long conversations with them like they do with real estate agents because they’d be billed for every hour. The industry would be a lot different.
But what will frequently happen when the market gets too hot, which is what we saw, it was out of balance. The sellers have had way, way, way too much leverage in general. It’s unhealthy when you get to 90, 10 in favor of the seller as opposed to the 51, 49 I mentioned earlier. As listing agents realize that when they go say, “Hey, it’s going to be a 6% commission,” which typically has been 3% to buyer, 3% to seller, that the people selling their home would say, “Well, I don’t want to pay 6%. I want to pay five. I want to pay four and a half.” That’s always the struggle that you get into. So if a listing agent said, “No, I don’t do that,” they would just go find a discount agent. They’d go find a person who’s willing to do it.
That person sucks. You get a terrible job. Nobody blames themselves and say, “That’s what I get for paying a low commission.” They blame the real estate agent, they blame the industry. They call and yell at the broker. It causes all kinds of problems. And then you had a lot of brokerages that formed that were like, “Well, we’re here because we’re cheap, not because we’re good.” Which brings down the reputation of real estate agents as a whole. And all the agents listening to this are all saying, “Amen, hallelujah,” in their cars because this is a struggle that a lot of them have. Well, instead of losing the deal to somebody else because that person will take a lower commission, they said, “Yes, I’ll do it at 5%.” And then they kept 3% for themselves and gave 2% to the buyer’s agent. Now the seller doesn’t care.
All they care about is if they get their house sold, they probably didn’t even pay attention to what was happening. Or if you took it at 4%, they would pay 3% to the listing agent and 1% to the buyer’s agent. Now, that used to be something that wouldn’t work because all of the buyer’s agents would see there’s a 1% commission on this house. I’m not going to recommend it to my client because I’m going to make a third of the money as if I showed them a different house. But when realtors sold their rights to the MLS to Zillow and Redfin and realtor.com and Trulia, now everybody can see the house regardless of what the commission is. And realtors didn’t want to tell their clients, “Hey, that’s a 1% commission. You’re going to have to pay me the other 2% yourself if you want to buy it.” Because then the client would say, “Fine, I’ll go use another realtor.”
And you get into the same thing or there’s always someone willing to do it cheaper, and you don’t think about the fact that the cheaper person usually is going to give you a worse experience and you probably lose money because this is such a high ticket purchase to be gambling with. This lawsuit is a bunch of sellers that got together, my understanding of it, and said, “We don’t think we ever should have had to pay the commission for the buyer’s agent.” Now, I’m sure this was a class action lawyer that went and got a bunch of people that sold their house and who’s not going to say, “Yes, I’ll take some free money. I sold a house in the last 10 years.” And they said, “We never should have had to pay the buyer’s agents. They should have paid their own. So now we’re suing every brokerage that sold our home, even though we agreed to this in our listing agreement…” A contract that was signed. Saying, we should be compensated for all the money we pay to buyer’s agents.
Now, if this passes, buyer’s agents will no longer be compensated by listing sides. Now let’s talk about what the future would look like if that was the case. If you have to pay for your own buyer, I think a lot of people are not going to pursue home buying as much as when you got free representation. That’s one of the big perks of when you’re scared of being a home buyer. You have theoretically this licensed professional with experience that will hold your hand and walk you through a complicated process and you don’t have to pay them. In fact, you don’t have to pay for a lot of the stuff that goes into buying a house. You’re probably putting 3.5%, 5% down if this is a primary residence. So the bank’s putting in way more money than you. The listing agent is paying the commission for your person.
You’re paying for a home inspection and appraisal and whatever closing costs you have on the loan, and a lot of the time those closing costs can be wrapped into the loan. So even though we feel like real estate is expensive, it is still highly leveraged in most cases. If buyers had to pay for their own agents, I think many of them wouldn’t, or they would pay a very small fee. You would see brokerages pop up and they’re like, “Hey, we’re going to use AI to draft up a contract for you. We’re going to ask you a series of questions. We’ll fill out the form, we’ll submit it on your behalf, and now it’s up to you to try to get that offer accepted,” which is not good when there’s 10 offers on every house or five offers on every house. So now you’re going to have to call the listing agent and represent yourself, more or less, because you’re not going to get a professional that’s good at doing this, that’s going to do it for $500.
And I think that’s putting a lot more leverage on the hands of the sellers. This is creating even more imbalance to where the sellers are going to gain even more power. It’s like commercial real estate. You don’t go get an agent to represent you buying a commercial property. The listing agent is the only agent involved in the transaction most of the time, and they are clearly there to represent the seller because that’s where their bread is getting buttered. The expectation is that if you are buying commercial real estate, you are doing this because you already know how it works. You do not need your handheld, you do not need a person to walk you through this transaction. It is a buyer beware scenario. It’s ridiculous to expect a residential home buyer to have that level of understanding and acumen when it comes to buying a home, especially if they’ve never done it.
That will put even more power in the hands of somebody like us who buys real estate all the time and understands what we’re doing. It makes it harder for the average Joe to buy wealth. That’s why I hate this potential outcome. It’s going to give more power to sellers. It’s going to give less power to the people we want buying real estate, which are the people that are just trying to get into the game and want a fair shot. I can see this just becoming really ugly and making it so that real estate ownership is something that only the elite privileged wealthy people are able to do because you’re going to need a lot of money just to pay for the person to help you buy it.

Dave Meyer:
It’s super interesting. I have a hard time wrapping my head around it because like you said, it could obviously give sellers more power. I wonder would it decrease the number of buyers, which would just, like you said, could increase the number of investors or I think one of the worst possible outcomes is that there’s just a lot of really bad buyer’s agents who will do it for almost no money, and I think that seems like a really bad potential outcome, and I certainly hope that’s not… It’s a huge financial decision and agent-

David Green:
It creates a race to the bottom. That’s my prediction is that probably 75% of buyer’s agents will not be needed. So everyone who holds a license as a real estate agent, they typically start their career with buying, man, 87% of them are out within the first five years. Of the 13% that make it past five years, maybe 10% of them get into the era where I do mostly listings. It’s incredibly hard to get good at selling homes, but that’s where your skills come into play. It’s much less emotional and it’s much more like, “Well, how good are you at doing this?” Which is why I prefer selling homes. My knowledge of real estate benefits my clients a lot more than when it’s a buyer and you’re not competing with the other side, you’re competing with the 10 other people trying to buy the house. You don’t have leverage there.
Well, you’re going to knock out most of the buyer’s agents, the few that remain are going to have to take it for peanuts. So you’re not going to be getting highly skilled, educated, qualified professionals that are really good. You’re going to get more or less an Uber driver. I’m willing to take you to the house, walk you through it, ask your questions, use the software at my office that tells me how to fill out an offer, submit it, and you’re on your own because you’re paying 495 for my services or whatever. And there’s nothing wrong with driving an Uber, but I don’t think that you have to be a Formula One race car driver to be good at driving an Uber. You don’t really need to have any skills other than the ability to use navigation. I think that will happen to the buyer side.
Now you have all these other agents that can’t make money buying houses, so what are they going to do? They’re all going to chase after sellers. Well, now that sellers have five times as many agents that are competing to sell their home, you’re going to see billboards everywhere. We sell homes for half a percent. We do a flat fee of just $800, and AI is going to wretch into this space and take all of the personal element of it out. It’s just going to be a race to the bottom, who can sell homes for the cheapest, which means that the buyers and sellers will be at the mercy of whoever is better at playing that game.

Dave Meyer:
And it’ll probably be some big technology company like that.

David Green:
That’s exactly… I think BlackRock is going to come along and develop something to do this. And oh, by the way, when you go to them to sell their house, they will buy your house first offer and they’ll say, “Well, if you sold it on the MLS, we predict this much, but if you sold it to us, we’ll give you 98% of that.” They’re going to be soaking up even more of the inventory, and it’s going to be harder and harder and harder for your everyday person to be able to buy a house. And I feel like this lawsuit, we may look back in 10 or 20 years and say that was the beginning of the end.

Dave Meyer:
Do you think it’ll pass though? Do you have any sense of that?

David Green:
I, at first, thought this was complete BS, on its face, I really thought that there’s no way this makes it this far because when you fill out a listing agreement with a listing agent, it very clearly says, “This is the total commission. This is the portion that goes to the buyer’s agent.” And if you just blankly sign something like that, I don’t think you can come back and say, “I didn’t realize I was paying for the commission of the buyer’s agent,” or I believe their argument’s even worse than that. It’s, “I never should have had to in the first place.” If you said, “Hey, did you pay more than you wanted to for that car, would you like to come back and sue them because they should never have sold you a car for that much money?” Everybody in the country is going to say, “Yes, I’ll take some free money. I’m mad. I had to pay that for a car.”
So I’m not surprised that sellers were all jumping on this bandwagon to try to get money back, but I’m shocked it went this far. I thought a judge would’ve thrown this out a long time ago saying, “Hey, you agreed to do that. If you didn’t like it, you could have said no. Here’s a contract that spells out, in black and white, you saying this is something you want to do.” So I can’t say if it’s going to pass or not. I’m getting more scared, the more time that goes by, it seems like it’s getting more and more legit.

Dave Meyer:
It’s super interesting. I have no idea, but just objectively, you do see these lawsuits every couple of years. Like that Rex Company was suing NIR. I think that one just got thrown out, but for a long time, people have been trying to change the way that real estate agents get paid, and it hasn’t happened. So this does seem to have gotten further than many lawsuits, but it’ll be interesting. I think the trial, they’re slated to start this fall, I think in October, so that’ll probably take months, but we’ll see what happens probably in the next six to nine months here.

David Green:
I think in general, anytime you remove the guardrails, like having an agent to help you, you put power in the hands of the people that don’t need the guardrails. The professionals at these huge hedge funds that do this in their sleep, the people like us that already own a lot of real estate, the people that have invested $80,000 a month into sending out letters and pay per click and text messaging to try to find deals before they ever even hit the MLSs, they’re gaining power. The more that we take it away from the traditional way, which is that real estate agents represent clients and people can go buy a house without being an expert in it. I like the idea of owning a home, being the average American’s way of building really big wealth, getting out of the rat race and getting ahead. So I’d rather see them regulate wholesaling more.
I’d rather see, “Hey, if you’re going to be dealing in exchanges of real estate like this, you need to have a form of a license,” or I don’t even think it would be bad to say that if you want to be a wholesaler, the house has to be on the MLS for 20 days before you can buy that thing because the seller of the home, like the 80-year-old grandma who doesn’t realize that $100,000 is not a lot of money anymore, like it was a long time ago, might’ve got $400,000 for her house if it was in the open market. I understand that there’s a lot of people that listen to this, that make their living and do very well running a wholesaling business, and I’m not trying to irritate them or upset them by talking about it, but if we are looking to protect the people that are not experts in real estate, having in a market where you’ll get offers on that house from the public is better for them.
And if you’re looking at the people that want to buy a house that are not experts in it, having an agent that can walk you through the process and explain what a contingency period is, what an inspection should look like, how the appraisals work, what your financing contingency is, what all the closing costs are, and who pays what and how they could be negotiated is better for the people that aren’t experts in this. So if this lawsuit passes, I foresee the way we look at buying real estate, get online, look at houses, find a cute one, go look at it with your realtor, write an offer. I just think a lot of that could change, and this could turn into more high-powered stock brokering, like the boiler room type environment where inventory never hits a place where the public can see it.

Dave Meyer:
That’s not something I think would work out well.

David Green:
Unless you’re already super wealthy, in which case you’d love it.

Dave Meyer:
All right. Well, on the show, I think we’ll have to keep on top of these lawsuits on the future Bigger News episodes because this obviously, like you said, it impacts you as an agent, who knows exactly what would happen, but it would absolutely impact everyone whose even tangentially related to the real estate industry. So this one’s a big one that we’ll keep an eye on.

David Green:
Absolutely. Dave, thanks for joining me today. Always a pleasure when we get to do Bigger News together.

Dave Meyer:
This was a lot of fun. A great conversation.

David Green:
Yes, sir. Dave, for people that want to find out more about you, where can they go?

Dave Meyer:
You can find me on BiggerPockets of course, or on Instagram where I’m @The Data Deli.

David Green:
You can find me at DavidGreen24.com or at David Green 24 at any of your social media. Send me a DM and let me know what you think and let us know, a comment, if you’re listening to this on YouTube, what did you think about today’s show? Are you concerned about the industry changing? Are you worried that more real estate is going to fall into the hands of big hedge funds, firms, global conglomerates that have been able to raise money at much cheaper interest rates than we can get loans for in buying it? Or do you think that this is all overblown and it’s going to be fine? Let us know. Dave, any last words before I let you get out of here?

Dave Meyer:
No. Thanks for having me. I’ll see you all for the next episode of Bigger News Soon.

David Green:
All right. This is Dave and Dave signing out.

Because you’re reading these words, chances are you’re an ideas person who shares your ideas through writing.

You write to attract new partners, new investors, new talent, new prospects, new clients. You write to educate, persuade, and inspire action.

You write because you believe in your ideas. You want your thoughts to reach others, make good things happen for you and your clients, and ultimately change the world.

This article on the topic of clarity—specifically content clarity—will help you attract what you want through your writing.

Our first stop will be the meaning of clarity. Then, we’ll explore why straightforward content is essential and look at five questions you can ask whenever you feel unsure about your writing or need deeper clarity. The questions will expose potential weaknesses in your content and guide you toward writing more straightforward text that resonates with your audience, builds awareness and trust, and, ultimately, wins sales.

First up—what does “clarity” mean?

What is clarity?

The word clarity comes from Middle English in the sense of glory or divine splendor.

With that etymology in mind, I like to think of clear ideas as glorious ideas, and clear writing as glorious writing. Clear thought leadership, then, shines in the minds of readers as if splendid, as if divine.

Hyperbole and etymology aside, according to Oxford Languages, clarity is the quality of being:

• Coherent and intelligible.
• Certain or definite.
• Transparent or pure.

An image from The Free Thesaurus provides a clear path to further insights.

Synonyms of clarity, denoted by green circles, include lucidity, explicitness, obviousness, and straightforwardness.

Antonyms often give as much or more insight into the meaning of words. Antonyms of clarity, denoted by red squares, include haziness, dullness, and imprecision.

Picture a hazy sky, waiting for a storm to blow away the particulates and pollution, revealing the cerulean heavens.

Imagine dull scissors that tear and mangle what you’re cutting and how much you wished you had a sharp pair to finish the job well—and in half the time.

That’s why you want your content to exhibit the qualities of clarity’s synonyms, never its antonyms.

There’s no one-step shortcut to clarity in your marketing content

Leaving the definitions behind, another crucial thing to note about clarity—particularly content clarity—is that it’s the sum of many elements:

• Conciseness—the content communicates without unnecessary words and ideas.
• Simplicity—ideas in the content are easy to understand.
• Familiarity—new ideas in the content relate to what readers know.
• Connection—the content tells readers, “I see you.”
• Precision, specificity—the content lacks vagueness.
• Honesty—the content says, “No tricks or half-truths here; this is who I am.”

Why is content clarity important?

We all know, intuitively, why clarity in the words we write and the content we produce is essential. That intuition is correct, but let’s make it conscious by putting it into words.

1. Content clarity wins in times of information overload

To readers, a lack of clarity is the same as information overload. In the old trade journal Direct Marketing, direct response copywriter Dean Rieck expressed why this is so.

“When a person does not understand something, information is nothing more than random data. Even short messages can overwhelm people if the meaning is not clear. In advertising, this is often caused by too many writers working on a single project—a sure way to muddle a message. It is also caused by regurgitating facts without understanding them, by not having a tangible purpose for the writing, and by striving to impress rather than communicate.”

2. Content clarity boosts credibility, leading to confidence

In an interview with WordRake, Ben Riggs, senior communications specialist at Kettering Health, had this to say about clarity and confidence:

“Clear communication—and the plain language that enables it—leads to confidence in readers. People make decisions primarily when they’re confident.”

I’ve found that true in my experience. Have you?

Imagine this scenario:

You’re interested in buying software and begin researching vendors. One vendor’s website lays out its features and functions clearly, seemingly answering your questions and eliminating your objections as you read.

After reading, you feel confident in the vendor. You might not choose them because you have more vendors to review and more due diligence.

But you noted that clarity. Or, rather, you didn’t notice a lack of clarity.

That’s what clear content accomplishes; it lets readers read on without disruption, stumbles, and questions. Confidence is the result.

If your content is unclear, that’s when readers take note.

3. Content clarity reduces cognitive load

Every topic inherently contains a certain level of complexity. When you teach or convey your subject, you’ll add more complexity—it’s unavoidable. But the more precise your thinking and writing, the less complexity you’ll add to your content, and the easier the reading will be.

A study in Communication Reports examined the link between clarity and cognitive load and found that clarity reduces that extra dose of cognitive load, allowing readers to process information more deeply.

Another thing to keep in mind is that readers can’t ask you questions while they’re reading your content. If they get confused or have a burning question, they’ll have to hold on to it—unless they call you immediately or your organization offers immediate chat. Like cognitive load, burning questions take up a lot of mental overhead, reducing clarity.

4. Content clarity fights the curse of knowledge

Knowing a lot about something can make it harder for you to understand what it’s like for someone who doesn’t know as much. This situation is known as the curse of knowledge or hindsight bias.

Hindsight bias arises when we speak or write about something we know well. It’s hard to put that knowledge aside and think like someone lacking the same background and expertise.

For instance, if I were to start speaking to you about how prescriptive grammar often violates organic grammar, you might scratch your head, wondering what I’m talking about—unless you’re a word nerd into such topics. In that case, you’d share my curse of knowledge, and lack of clarity wouldn’t be an issue.

I might write about the topic clearly, but readers may not pick up on that clarity if I fail to consider my audience.

5. Busy, picky readers prefer content clarity

Your readers are smart and busy.

Yes, they could certainly work hard to understand what you mean in your content, but who has the time?

Readers don’t want to re-read a piece three times, Google what you’ve written about, or draw diagrams to figure it out.

If your piece needs more clarity, busy readers will drop it fast in search of another source whose author did focus on clarity.

Questions to ask in pursuit of content clarity

If you’re struggling to write a piece or wondering whether your writing is clear, the good news is that you’re on the right track—you’re thinking about your readers.

Ponder these questions centered around the elements of clarity to get unstuck and clear about the clarity of your message.

1. Does your content connect you and your readers?

As experts, we sometimes get wrapped up in our heads and forget about the people we’re writing for. To add the clarity that comes from connection, try this simple exercise.

Imagine you’re at a coffee shop with your ideal customer. You’ve been telling them about your company and its products and services. Your ideal customer is leaning in. They’re fascinated and are waiting for you to say more.

Now, write, speaking directly to that customer. Use second person—pepper your content with the words “you” and “yours.” Doing so lets readers know you see and hear them.

You may also need to produce more formal content, like research reports, policy documents, and academic articles, without writing in the second person. In those cases, introductions and executive summaries are the places to create connections.

2. Can readers grasp the topic of your content quickly?

Imagine your readers as astronauts, used to NASA-style, state-of-the-art training that doesn’t mince or waste words. That’s the kind of clarity you’re aiming for.

To help your readers grasp your ideas quickly:

• Structure and organize your ideas well; pull out your table of contents and evaluate it independently.
• Add headings and subheadings that tell the full story to readers as they skim through.
• Use bullet points and lists to summarize key points or steps.
• Write in active voice and use straightforward words and sentences.
• Use images, charts, and infographics to break up and illustrate text.

Love or hate them, Buzzfeed helps readers grasp topics quickly through easy-to-read listicles.

The Economist helps readers understand complex topics using charts and data visualizations to complement in-depth articles.

3. How would you explain the big idea in your content to a child?

I realize that many people cringe at this advice. However, expert-written content is often full of jargon and $1 words. To write for clarity, substitute more understandable 25-cent words instead. For instance:

• Utilize ► Use.
• Ameliorate ► Improve.
• Disseminate ► Spread.
• Ascertain ► Find out.
• Endeavor ► Try.

Use simpler words and eliminate word baggage to improve clarity in your content

Copywriter Bob Bly once said that no one ever complained about his content being too easy to read. Those are my sentiments, exactly.

4. What baggage in your content gets in the way of clarity?

Baggage, in this sense, means unnecessary ideas and words. When you consider your content, examine every thought and expression to see if you need it to convey your idea.

Need guidance on what baggage to eliminate? I can’t help with idea baggage in this article, but I can help with unnecessary words. To get closer to clarity, scrub these words from your content when it makes sense to do so:

• Just
• Very
• I think
• I believe
• Kind, sort, type of
• Really
• Basically
• That
• Definitely
• Actually

5. Are there places in the content where explanations are vague?

Specificity is an element of clarity. To add specificity, shun vagueness and embrace precision. Here are several examples adapted from the San Jose State University Writing Center.

Example 1

• Vague: I failed the class for many reasons.
• Clear: I failed Engineering Statistics because the professor was visiting from Russia, and I struggled to understand him.

Example 2

• Vague: My daughter is in the orchestra.
• Clear: My daughter plays principal viola in the Asheville Symphony. (She’s still in college, but a mother can dream.)

Example 3

• Vague: The sales presentation flopped.
• Clear: The sales presentation flopped because it needed more convincing numbers to sway the CEOs at the Clarity Conference..

Asking those questions about your content will help you produce materials more likely to achieve your desired outcomes—influence, conversion, and sales.

In my next article, I’ll take you on a deeper dive by providing 10 techniques for bringing clarity to your content. Stay tuned.

Dave:
Hey everyone. Welcome to On The Market. I’m your host, Dave Meyer, and today we have an incredible guest for you. We have Anna Wong joining us. Anna is the Chief US Economist for Bloomberg, which, if you’re unfamiliar, is an enormous media company that covers investing and economics throughout the world. Prior to that, Anna was the Principal Economist at the Federal Reserve Board, she was the Chief International Economist at the White House Council of Economic Advisors, and she’s done incredible things all over the world of economics.
So if you’re one of those people who listen to the show because you are nerdy and wonky and really like understanding what is going on, not just in the US economy, but in the global economy, you are definitely going to want to listen to this episode. I will say that Anna is extremely intelligent and she gets into some complicated… Well, not complicated, just more advanced economic topics. So just a caveat there. But she does a very good job explaining everything that she’s thinking about and talking about.
So if you want to learn and get better, and better understand the global economy, I think you’re going to really, really appreciate this show. Just as a preview of what we talk about, we start basically just talking about the differences between a soft and hard landing. If you haven’t heard those terms, basically, when the Fed is going out there and talking about risk of recession, they think that there’s going to be a “soft landing,” which means that we’ll either avoid a recession or perhaps there’ll be a very, very mild recession.
On the other hand, a hard landing would be a more severe, more average type of recession where there’s significant job losses, declines in GDP, that kind of thing. So we start the conversation there. Anna, who has worked at the Fed and at the White House, has some really interesting thoughts and some very specific ideas about what’s going to tilt the economy one way or another.
And then after our discussion of the US economy, I couldn’t resist, I did have to ask her about the Chinese economy. Because we’ve been hearing for years about how real estate in China is dragging down their economy. And just in the middle of August, over the last couple of days, we’ve heard some increasingly concerning news about the Chinese economy, what’s going on there.
Actually, just yesterday, the Chinese government announced they were no longer going to release certain data sets because it really just wasn’t looking very good. And Anna has studied the Chinese economy for decades, and so she has a lot of really interesting thoughts on what’s going on in China and how it could potentially spill over into the US economy and specifically, honestly, a little bit into the real estate industry.
So that’s what we got for you today. I hope you guys enjoy it. We’re going to take a quick break, and then we’ll bring on Anna Wong, the Chief Economist for Bloomberg LP. Anna Wong, welcome to On The Market. Thank you for being here.

Anna:
Happy to be here, Dave.

Dave:
Can you start by telling our audience a little bit about yourself and how you got into economics?

Anna:
So I started being very interested in economics because of financial crisis back in early 2000s in college. And after that, I started working in DC for some former senior officials and the IMF and at the Federal Reserve. And in early 2000, it was a pretty exciting time to study global economics, partly because there was some very interesting phenomenon that was happening such as the global saving glut, and the dollar depreciation, and China accumulating international reserves via purchasing US treasuries and also predictions that maybe the US housing market was in a bubble and there will be a correction.
So when 2008 happened, I was in graduate school getting my PhD in economics from University of Chicago. After I got my graduate degree, I worked at the US Treasury on the international side of things. And there, I had covered G7 countries, I had been through the fiscal cliff in 2013 in the US and I also covered China in 2015 and 2016. And after Treasury, I went to work as a economist in the Federal Reserve Board where I also covered the Chinese economy. And I did that for a couple of years.
And during the trade war, I went to work for a year at the White House Council of Economic Advisors. So every year, the Federal Reserve would send an economist to the White House CEA. That’s historically been the case. So I was that economist from 2019 and 2020. And while I was really there to work on trade war, supply chain, resiliency, which actually started before the pandemic began, because of the trade war, there was already a lot of concerns about vulnerability of US supply chains.
So when the pandemic happened, I was also there to study, to forecast what would happen to the US economy if there were no fiscal stimulus and what is the appropriate size of the fiscal stimulus, and forecasting the collapse of the US economy in April 2020. And I will never forget that moment. It was very formative, that second part of my tenure at the White House during the pandemic.
And so that was why I became the Chief US Economist at Bloomberg because I thought this is the time to forecast and study the US economy, because it’s a time where if you have a view about where inflation’s heading, where GDP growth is heading, this is a very exciting time. Whereas in the previous 10 years, inflation just fluctuate around 1% to two point some big percent.
It’s just not as exciting as international side of things. So now as a Bloomberg Chief US Economist, I mainly focus on forecasting where inflation is going, where growth is going, whether there will be a recession and the Fed funds rate, where it would go. So that’s my job now.

Dave:
All right. Well, it sounds like we have someone extremely qualified to answer all of our questions that we have for you. So we feel lucky to have you here, Anna. And I want to talk about the Chinese economy in just a little bit because there’s been a lot of news coming out about it. And given that our show is so much about real estate and some of the trouble they’re having with real estate, we’re particularly interested.
But I’d love to just start at the highest level here given your experience at the Fed too. We’re hearing a lot from the Federal Reserve, Jerome Powell, a lot about a soft landing and if that’s possible. Could you just tell us a little bit about the concept of the soft landing, first of all? And what your views on the feasibility of it is?

Anna:
Yeah. I think the concept of soft landing is not very well-defined. It’s a nebulous concept. Because some people would interpret it as saying that there would be a recession, but it will be very mild where unemployment rate will still increase from today’s 3.5% to four-ish percent. But I think right now, most investors who are talking about soft landing are really of the mind that there won’t be a recession at all, and that inflation would come down painlessly where the labor market will continue to be tight.
I think that’s basically what people have implicitly in their mind. And in terms of the possibility of this, so Bloomberg Economics, my group, is still of the mind that there will be a recession, that getting inflation back to 2%, which is the Fed’s target, will be painful. And that a rise in unemployment rate to at least 4.5% is necessary to bring inflation back to 2%.
We are skeptical of the soft lending optimism for a couple of reasons. Number one, many people today cited resilient consumption. You saw the strong retail spending yesterday. Many people cite that as one reason of soft landing. Well, when we looked at the pattern of consumption over the past recessions in the last 50 years, it turns out that consumption always is resilient before a recession and even in a recession. In an average recession, consumption does not even drop off.
Consumption just maybe even tails off services consumption, in fact, on average, grow a trend even during a recession. So it’s just not the kind of indicator you want to derive comfort in because it has no forecastability of a recession. Second reason that people cited as why they’re optimistic, it’s just broadly speaking, economic indicators lately have been surprising on the upside. It turns out that two months before the Great Recession in 2007… So December 2007 is the beginning of that recession.
Two months before that economic data were all surprising on the high side as well. PMI was doing well and auto purchases was also solid, nonfarm payroll, just two months before that recession was going at 166,000 jobs added, just two months before it started to be negative. So currently, in the most recent jobs report, we saw that the economy added 187,000 jobs. And that number is likely to be smaller in the next month.
Because we have seen in the past couple of weeks bankruptcy of the trucking company, Yellow, and that already shaved off at least 20,000 from the headline. And also, we have been seeing a trend of downward revisions in these jobs number. And by looking at various benchmark series, our view is that the nonfarm payroll number is overstating the strength of the economy. And the disinflation trend, the low core inflation reading that we have been seeing lately is not due to painless reasons.
It is because the underlying job market and labor market is weakening more than these headline figures are suggesting. We are expecting consumer delinquencies to surge after October, and we’re already seeing small firms bankruptcy going up sharply. We are expecting by the end of the year, small firms bankruptcy would reach the level that you would last see in 2010, so would consumer delinquencies.
And in fact, I think the best economic indicators with proven forecasting ability for recession is the Federal Reserve, a survey of senior loan officers. And in that survey, the Fed asked senior loan officers in banks, “What are the plans for credit tightening in the second half of the year? What did they do in the past six months?”
And this is actually a causal channel of economic activity. Whereas consumption, resilient consumption, PMI, those are coincident indicators. But whereas lending, people can only spend if they can borrow. And lately this is what you’re seeing, consumption is propped up by borrowing. So the moment that it becomes harder for them to borrow or the cost of financing this borrowing becomes exorbitant, they will have to downshift their activity.
Similarly, on the corporate side, the mysterious things that has been why, on the corporate side, we see activity being very resilient is still very narrow corporate spreads. And usually, on a downturn, you will see widened corporate spreads. That’s because bankruptcies are happening and credit risk are worsened and there will be credit downgrades, things like that.
And we’re seeing the very, very beginning of that. And usually, when that happens, it’s a very non-linear process. One of the reasons that people have been citing as why we won’t have a problem like we did in previous recession this time on the corporate side, is that credit quality is very good. And looking at mortgage origination, you see the credit scores or consumers are very good, nowhere near what it was in 2006.
But what happens is that some of the pandemic policies, such as the student loan forbearance policies, have distorted credit scores. In fact, by some estimation, credit scores might be artificially inflated by 50 basis point. So if you look at the tranches of mortgage originations by credit scores, and you discount the lower 10th percentile, 20th percentile of mortgages by 50 basis point of credit score, in fact, credit quality is not that much better than 2006.
So I think that a lot of these things that are underneath the service will only bubble up to the service as you start seeing this snowball financial accelerator effect. And that’s why I just don’t think that the things that people have been citing for being optimistic about soft landing today, do not stand the test of history. So this is why we are still thinking that a recession will happen later this year.

Dave:
Great. Thank you. And you just answered one of my other questions. But just to summarize for everyone, it sounds like what a lot of prominent media outlets or other forecasters are relying on are variables that don’t necessarily have the right predictive qualities for a recession. And some of the data points that you just pointed to are in fact better examples of what we should be looking at if we’re trying to forecast a recession.
You said at the end of this year… And I want to just follow up on this conversation because it does seem from the other forecasts I read, people are split. The people who do believe there’s a recession, some say end of this year, some say in the beginning or middle of 2024. The Fed started raising interest rates. What is it now? 15, 18 months ago, something like that.
We know that it takes some time for these interest rate effects, rate hikes to ripple through the economy. But what do you expect to happen between now and the end of the year that’s going to go from this gray area that we’re in now to a bonafide recession?

Anna:
Yeah, a very good question, Dave. So resilience in the economy in the last two years. To be able to accurately forecast a recession, I think one needs to also have a good understanding of what is boosting the resilience in the last two years. And for us, we actually have been pushing against recession calls last year, Dave.
If you remember last year, there was a lot of people who were talking about recession at the end of last year, or in the middle of last year. But we were never in that camp. We have been consistently saying that the recession will be in Q3 of this year, Q4 or Q1 2024. And the reason why is precisely because of the lags that you just described of monetary policy.
So we estimated some models, and all those models would suggest that the peak impact of monetary policy would occur around the end of this year. So I think those are the tools that central bankers typically use, like top-down [inaudible] models. But we also look at this from a bottom-up perspective. Because there are some unique things propping up the economy these two years, one of which is that household to have built up this cash buffer from the fiscal stimulus, and also from savings during the last two years.
Because in the early part of the pandemic, they couldn’t spend if they have all this money. And also, from the stock market wealth effect, all that. And so we look at also income buckets, how much households have in excess savings. And what we see is that in terms of the runway, how many months that these cash buffers could support somebody’s normal spending habit without them needing a job or something like that.
It shows that by the end of this year, towards the end of this year is when probably the lower half of the population will be out of these buffers. So either they come back to the job market, and this is why labor supply has been increasing this year so far. It’s because of these people who were on the sidelines suddenly feel that desperation that they need this job because the cushion is gone.
So that’s one reason why, from a bottom-up analysis, we think that the second half of this year, around the end of this year, is the time. And second, I think from a natural experiment point of view, you also see the impact of these pandemic policies. One of which is that during the pandemic, the administration boosted the emergency allotment for people’s food stamp money and for a poor household.
And we’re talking about household in the perhaps lower 20 percentile by income bucket. And those people saw their food stamps allotment going from less than $100 to as much as $300. That’s a lot every month they got more. And there’s more pandemic policies such as childcare credit, and of course the three rounds of fiscal stimulus. But this SNAP program, this food stamp emergency allotment, it expired earlier this year at March of this year.
And immediately, you saw this plunge in demand for food. Not just trading down to cheaper food, but just plunge in demand in food. And you see evidence of that in the earnings call that is finishing up just around now from food company like General Mills, Tysons. They’re talking about a decrease in volumes of food demand. Because we saw early signs of that tremendous impact from this expiration of food stamp emergency allotment in plunging card box shipments.
That is actually one of former Fed Chairman, Alan Greenspan’s favorite barometer of the US economy, cardboard shipments and freight, railcar loadings. Both of them plunge at the same time. And it turns out that 30% of the demand for cardboard shipments came from food industry. And it turns out that one of the primary reason I think for that plunge is because of food demand plunge from this emergency allotment expiration.
And now, we are expecting to see the expiration household resuming student debt payment in October. And the average amount of a student loan borrower is about $300 per month in payments. So that basically subtracted $300 per month in spending power they could have in buying other stuff. And so that’s a tremendous amount that could shave off about nine billion per month in spending power for the US economy.
It’s a tremendous shock. Similar to the food stamp allotment program that also took away about $200 in spending power of a household. And this is what I meant by a natural experiment. You see these pandemic policies expire and bam, and then that’s where you get that plunge somewhere. So this is why I think that in October, once those payments resume, you’re going to definitely see consumers pulling back on consumption.
I mentioned earlier in this podcast that consumption is a poor predictor of recession. So if consumption is resilient, it doesn’t tell you about the chances of recession tomorrow. However, if consumption is not doing well, it definitely will tell you something about the recession probability tomorrow because consumption accounts for two thirds of the US economy.
And so that’s one non-linear shock that I’m expecting to see. And I think it will have ripple effects. Because I mentioned earlier that student loan forbearance policy inflated people’s credit scores. So the Biden administration extended the period of when credit agencies can dock people’s credit score if they are delinquent on their student loan by another year.
So after October, we won’t see credit scores deterioration yet from people who could not pay on the student loans. But I do think that on the margin, some people would be paying. And then you will see auto loans or other consumer loans, a credit card loans delinquency deteriorate. So while credit companies cannot dock a person for being delinquent on student loans, they could dock somebody for being delinquent on auto loans and credit card loans.
And all that means that we are going to see credit score deteriorate. And the pullback on consumption will also affect firms’ profitability, which also leads to more bankruptcies over time. And so I think we are going to see measures of various credit risk worsen starting in the fall and going into next year.

Dave:
Wow. Thank you for explaining that. I’ve just been wondering about timing because it does feel like we’re… For the last year and a half or so, we’re hearing a lot there’s going to be a recession. And it’s curious when the tipping point is going to be. But I appreciate that explanation on your thinking about timing.
You mentioned the unemployment rate of 4.5%. Just for context for everyone, I think we’re at about 3.6-ish percent right now. And this is in August of 2023. How bad do you think it’s going to get, Anna? Is this going to be a long-drawn-out thing, a short recession? They come in all sorts of flavors. What are you expecting?

Anna:
As Anna Karenina, the novel begins, “All unhappy families are unhappy in their own way just like recessions.” So the average recession being that unemployment rate have to go near 5%, at least almost 5%. But because the pandemic era has improved the balance sheet of… You have investment grade firms which are able to refinance some of their debt with the lower interest rate during the low interest rate period in the early part of the pandemic.
There are a lot of heterogeneity across credit risk. When I said that this recession would be prompted because of the worsening credit risk, I’m talking about on the consumption side, the poorer half of the country; on the corporate side, the less creditworthy path of the corporate world. But there are still pockets of resilience. And I think this is why, overall, this recession will be a mild one just because it’s not the kind of situation of 2008.
To have something of the magnitude of 2008, not only do you need vulnerability in the economy, and we do have vulnerability in the economy, you also need some amplifier, some propagation of those weak points. And in 2008, that propagation mechanism is the subprime mortgage and the packaging and tranches stripping the credit, each of the subprime into various tranches. And that leads to this and transparency of the credit quality of this assets you’re holding.
And when subprimes start getting into trouble, it is that fear of not knowing what you have in your hand, “Is it toxic? Is it not toxic?” And that everybody just pulls back. And you need that kind of propagation mechanism. And oftentimes, it’s unclear beforehand what it is because it is so hidden. Usually, you don’t know ahead of time. But as I said just now, suppose that if in fact that people’s credit scores were so inflated and their behavior, in fact, mimics somebody with much lower credit scores today, maybe the credit quality of a lot of assets on the consumer side today are mispriced.
Another potential shock today is, of course, a commercial real estate. Everybody has been talking about how it’s just a ticking time bomb related to the fact that a lot of commercial properties are vacant right now given the remote work trends that was started during the pandemic. So I cannot tell you exactly what would be the source of a potential amplifier of a downturn. But that this is why we are of the view that the baseline is still a mild recession, but with the caveat that I think, ex ante, it’s hard to say where that shock, that propagation mechanism is coming from.

Dave:
Yeah. It’s one of those things where it’s almost certainly not going to be the thing that you think it’s going to. If you hear about it so much that whenever it’s in the media enough that people maybe mitigate against it or-

Anna:
Yeah, exactly.

Dave:
I don’t know.

Anna:
Exactly.

Dave:
They focus on it when there’s a bigger creeping risk that no one’s really seeing.

Anna:
Exactly.

Dave:
You did, Anna, mention the commercial real estate market, but earlier mentioned something about mortgage quality and loan quality. And I’m curious if you have concerns or thoughts about the residential real estate market and any risk of foreclosures or defaults going up there?

Anna:
Well, Dave, I was looking at the mortgage origination in the residential market by different percentile of the credit scores. And my observation there was that on the lower 10 percentile, if you just take those numbers as given, you see that the average credit scores of the bottom 10 percentile by credit scores in mortgage origination, was about 60 or 70 points higher than before the 2008 crisis.
And a second observation is that that average credit scores of the bottom 10% and 20% has been deteriorating in the last three years in terms of mortgage origination. And those two things are pretty alarming to me, because why is mortgage origination deteriorating at a time where credit scores was inflated? And in those two years where credit quality was deteriorating in the mortgage origination, that was when credit scores was actually increasingly inflated. Not just inflated earlier on, but increasingly inflated.
So that tells me that in the last two or three years, the people who are buying, the higher the interest rate they’re getting on their mortgage, the likely that the average credit quality behind that mortgage is not as good as the one two years ago. And furthermore, if I adjust that credit score inflation by the amount that I think is feasible, 50 basis point, in fact, the average credit quality is not clearly better than 2006.
And in terms of foreclosure, now that’s a curious aspect of this housing market. What’s different today than back in 2006 is that we have significantly lower housing supply. And that has kept housing prices from falling too much. And there are many reasons why housing supply is not as high as before, but I think one reason is also that there’s been less foreclosure. And I think one of the reasons is also related to the administration policies from Freddie Mac, Fannie Mae, that I think there has been some remediation policies that has delayed and make it harder for foreclosures to happen.
And related to the pandemic also that there’s been policies that want to reduce the risk of homelessness on the part of people who are suffering. So from a humane perspective, I can see exactly why that would be the case for it. But from a housing supply perspective, that is one curious case. So I think underneath the surface, a lot of this resilience is perhaps just deferred and delayed because of actual policies, pandemic-related policies.

Dave:
Yeah, it’s interesting to see about the credit quality. I had never previously heard about the potentially elevated credit scores. That’s really interesting. Because I’ve definitely been reassured about the housing market based on some of those credit quality… And the fact that even a lot of these forbearance programs and foreclosure moratoriums did lapse more than a year ago, I think. And we’re still seeing pretty low foreclosures.
They are ticking up, but they’ve still been pretty low on a historic scale. And so I think that’s, to me, one of the more interesting things in the market to watch for in the next year or so is: will a potential recession, or really anything else, spur more foreclosures in the housing market over the next couple of years?
Anna, I wanted to shift a little bit out of the US, actually. We rarely talk about this on the show, but since we have an expert with your background, I would love to just talk a little bit about the Chinese economy. For the last year or so, we’ve heard a lot about how Chinese real estate has been a drag on their economy. From my understanding, a lot of asset values have gone down, and that’s depleted a lot of savings or net worth of a lot of citizens.
We also heard yesterday something pretty unique that the Chinese government will no longer be releasing youth unemployment data because it was growing so high. So it does seem like there’s a lot of economic turmoil coming out of China. So would love just your perspective on that. But I think for our audience, we’d love to know what impact will the Chinese economy, second-biggest economy in the world, have on perhaps the American economy?

Anna:
Yeah. Okay. On the Chinese economy, I think one of the driver of China’s growth has been real estate. And that’s related to multi-decade policies in China that suppressed investment options of Chinese household. So from Chinese households’ perspective, there were not many instruments that you could invest in, and that’s why it’s very typical for a household to over-weight on real estate. And this is why, in terms of a housing bubble, China does have a continuous problem there.
And every time the real estate market slows in China, you see significant impact on the economy. And economists have used more granular input-output tables to get at the direct and indirect impact of real estate sector on Chinese growth. And that number is actually massive. It’s a big number, and it’s much bigger than in US. If you think that in US, a housing market downturn would push the US into recession, in China, that’s several factor larger.
And in the past 20 years, every time you see that there’s a housing price cycle in China. And it’s very clear because you just need to look at the first-tier Chinese cities’ prices. Every time that happens, there’s hard landing fears in China and there’s capital flight away from China, the renminbi weakens.
And what makes the recent cycle, this current cycle pretty severe, is that it seems to be related to some scarring on the household side from the long pandemic policies of shutting down the economy. And so it seems like this time, this China shock, this is a serious China shock. So I would say it could be even worse than the 2015, 2016 hard landing shock.
Some of the indicators that had in the past been indicative of the Chinese economy is of course, as I mentioned, first-tier Chinese city housing prices. And in the past, whenever that has fallen, the government could stop publishing it. And in fact, whenever the government stopped publishing something, that’s when you know something’s not doing well.

Dave:
Yeah, no news is good news. No news is bad news.

Anna:
Yes. So number one. Number two is a thing called total social financing, TSF. And basically captures the credit impulse of the economy, and it’s just falling through the roof right now. It is worse than 2006. That’s in terms of level. That’s really bad.

Dave:
Wow.

Anna:
And I would say, as an economist, just as an economist focus on measurement issue from a statistical agency’s perspective, it’s actually easier oftentimes to collect price data than quantities data. So at times where all these economic indicators are sending mixed signals, I would focus on prices.
And some of the prices that you can observe here is, for example, Chinese PPI and US import prices from China because we also collect those data. You don’t necessarily need to rely on China’s data. You can see some of these data on the US side, and those are weakening very much. And deflationary spiral don’t come from nowhere. Similar, you can extend even the same analysis to the US economy in terms of our labor market.
A lot of people talk about labor market strength in the US. But you look at wages and you look at the jobs opening data. Is it possible that just a decrease of 34,000 jobs opening could lead to more than one percentage point decrease in wage growth? It’s that sort of stuff where if you believe more in the price data… Because it’s very easy to collect prices data in China’s case, prices of consumer discretionary.
In US cases, it’s very easy to collect prices on wages, but it’s harder to count the number of jobs, the number of jobs openings, the housing starts in US. And versus in China, it’s hard to count the exact unit of quantity. Whereas prices data, we have it everywhere.

Dave:
And you’re seeing deflationary data.

Anna:
Yes. So I think that the key indicators in China, the housing prices, PPI, and also using corresponding US data on counterparty data and also the total social financing data in China, those are pointing to some serious trouble on par or worse than 2015.
In terms of spillovers to the US though, when I was at the Federal Reserve, I wrote a paper on the spillovers from a China hard landing on US and global economy. And so you can think of it as the shock has three propagation channel. Number one, is through its impact on commodities. So China will lead to disinflation and deflation on various commodity prices such as iron ores and oil and zinc, copper, aluminum. China’s demand, historically, account for at least 40% of those commodities.
So number two, the second channel is through trade. So if we export less to China, then from a GDP accounting perspective, we have less growth. So these two channels are not so important for the US. Because in terms of our direct trade exposure to China, very small. Finally, the third channel, which is where it gets dicey, and this is the main channel of how a China hard landing could slow us down.
It is through the risk asset channel. So in terms of direct bank exposure to Chinese assets or even indirect US bank exposure to China related… So suppose we are highly exposed to UK bank, HSBC, which is very exposed to Hong Kong or China, that channel is not that important in terms of finance. It’s really the global risk asset channel. What happens if there’s a sudden hard landing in China, is that it would lead to global risk-off.
So you would see credit spread widened, sovereign spread widen. The dollar would appreciate. So my paper’s estimate is that if China falls four percentage point below expectations, then the dollar could appreciate by 6%. And usually, when the dollar appreciates, it tightens global financial conditions, it makes it harder for companies [inaudible] hire.
And VIX would also increase. If China’s GDP growth is four percentage point below expectations, our model expect to see about six percentage point increase in VIX. So that’s close to one standard deviation. Oil price would decrease by 40%. So it’s actually through that channel that pulls back people’s appetite to lend that could lead to problems in slowing US down.

Dave:
You gave us an idea about the US economy and timing. Do you think we’ll know anything about the extent of the Chinese economic situation and its potential impacts anytime soon?

Anna:
Well, Dave, as I was saying, when we encounter measurement problem, if the data is not available to you, what is available to you is actually what is happening to prices and the real world. And China does not have a monopoly to its own data. In fact, the US also measures a lot of counterparty data. We can say how much China is importing from us.
So if Germany’s export to China dropped, because Germany exports a lot of capital equipments to China, there’s a usual pattern of how China slowdown could affect the rest of the world. And you just need to tally up those signs to have a good gauge of how bad is the trouble with China.
So right now, we are also seeing people are debating on whether there’s a recession in Germany. And certainly the mood is very gloomy in Germany, which is another manufacturing powerhouse. That economy is very much tied to the Chinese economy. If they’re not doing well, I think it’s highly suggested that China is not doing well either.
So also, I would look at commodity prices where traditionally, Chinese demand account for the bulk of it, as I was saying, iron ore, zinc, aluminum. If those prices are falling dramatically, it does tell you that demand is slumping in China. So it’s pretty obvious, you can tell immediately.

Dave:
All right. Well, thank you so much, Anna. This has been extremely helpful. We appreciate you lending your expertise to us today here on On The Market. If people want to learn more about what you and your team are doing at Bloomberg and follow your analysis and writing, where can they do that?

Anna:
You will need a Bloomberg terminal. And once you have a Bloomberg terminal, you type in BECO, B-E-C-O GO. And there you can see all our insights and thematic pieces and reactions to data.

Dave:
All right, great. Well, Anna, thank you so much for joining us. Big thanks to Anna. I hope you all enjoyed that interview. Anna, clearly a very knowledgeable and smart person, knows a ton about the real estate market, knows a ton about the economy and I really appreciated what she was saying. I think there’s a lot of different conflicting data out there.
But what I really liked about Anna’s analysis is that she acknowledged that there’s a lot of conflicting data and said there are certain data sets, there are certain data series that just aren’t that good predictors of recession. Maybe they’re good at predicting something else, they’re important for some other reason, like consumption. She was talking about US consumption. It’s not a good predictor of recessions.
And so she and her team are able to distill what data points are important and which ones are not. I love that because I think as real estate investors, that’s something we also have to do, not just in broad macroeconomic terms, but also when you’re looking for property, you need to decide which data sets are important to you, which indicators, which numbers are really going to determine the performance of your deal.
And so I think learning from people like Anna about how to pick the right indicators, the right data sets is something that we could all learn and benefit from. All right. That’s what we got for you guys. Thank you all so much for listening, and we’ll see you for the next episode of On The Market.
On The Market is created by me, Dave Meyer and Kaylin Bennett. Produced by Kaylin Bennett, editing by Joel Esparza and Onyx Media. Research by Pooja Jindal, copywriting by Nate Weintraub. And a very special thanks to the entire BiggerPockets team. The content on the show, On The Market, are opinions only. All listeners should independently verify data points, opinions and investment strategies.

Uncertainty about the economy doesn’t do companies any favors. When business and consumer spending slows, leaders face tough decisions about which expenses to cut. And workers worry about whether those cuts will send them to the unemployment line. It’s not an unfounded fear, as 2023’s layoff announcements from big-name companies keep coming.

During this year’s first quarter, 136,000 employees got their pink slips. While tech giants have been in the news with headcount reductions, large banks, auto manufacturers and retail pharmacy chains are also letting people go. It’s decisions like these that make employees question whether leaders are on their side.

When times are tough, it’s convenient to slash the payroll. However, there’s more to running a lean operation than reducing staff down to a skeleton crew. With any cost-saving measures, you want to be attentive to your employees’ needs and enable your company’s long-term strategies. Here are some ways to achieve both.

Target Inefficient Processes

Yes, the salaries and benefits for the people on your payroll can be significant costs. But inefficient processes could be what’s truly costing your business in terms of lost productivity. You could be zeroing in on the wrong target and damaging employee morale by cutting your HR budget.

The phrase “work smarter, not harder” is about finding the most efficient way to accomplish your goals. Take a team of IT support techs as an example. From a high-level perspective, you notice their resolution times are too long. Yet it also appears they’re not devoting enough time to work-related tasks. Customers aren’t getting the service they deserve, while the company is apparently paying the team to twiddle their thumbs.

It might be tempting to call everyone into the office separately, asking them to explain what they do around here. You can take a different approach by focusing on the tools and processes the team has at their disposal.

In this case, support techs may be working with outdated software that doesn’t enable them to efficiently tackle the problems they see. The team feels their efforts are futile, so they compensate by slacking off. By identifying what’s driving the undesired results, you can implement more efficient tools and processes. This approach may take additional time upfront, but it demonstrates your willingness to address shortcomings human to human.

Be Strategic

To seem fair, leaders sometimes reduce costs across the board. They cut 10% of staff from all departments, for example, or tell every mid-level manager to stop ordering complimentary team lunches. These moves may save your company money in the short run, but they’re far from strategic. And they don’t always address long-term performance goals.

Gartner reports that only 43% of leaders achieve their savings targets during year one of a cost-reduction drive because of unrealistic objectives. Blanket cost cutting can actually set companies up for repeat failure since the measures don’t address the behaviors behind inefficient spending. You have to think about where the problems lie and the company’s ongoing strategy.

Say your sales numbers are down by 20%. However, you discover one product is behind the drop. There have been technical glitches over the past year, causing customers to lose faith. As a result, they’re discontinuing their use of your company’s other solutions.

Penalizing every business unit with equal cuts doesn’t make sense. It’s better to fix your problem child if your company’s strategy is to be a reliable market leader. The source of those technical glitches may be overlapping vendor relationships—you might simply have too many cooks in the kitchen. Streamlining the resources behind the product will do more to help your company meet its long-term objectives without alienating your staff.

Reskill Employees

AI may be here to stay, but there’s a sharp disconnect between how executives and individual contributors feel about it. Research shows 64% of executives think AI is exciting. Two-thirds of high-level leaders also believe AI will positively impact employees’ experiences. However, 46% of individual contributors think AI is scary, and 31% believe it will negatively impact them.

With AI’s capabilities increasing, employees fear bots will replace their jobs. Automating repetitive tasks may help companies implement lean processes. But relying on technology to completely take over for humans to save a buck is seen as cold. It discounts the contributions and talents of your staff. You’re writing them off in favor of cheaper and faster, but not necessarily better.

What leaders should instead is acknowledge where AI and humans can work together. It may mean automation does take over some of the tasks your staff currently performs. But instead of getting rid of people, reskill them to take on advanced responsibilities in areas of need. Chatbot software may handle insurance policyholders’ initial claim requests, but carriers can upskill employees to address claims with complex injuries.

Thoughtful Cost Cutting

Shaky economic conditions drive budget cuts as leaders worry about whether the balance sheet will even out. While dismissing the idea of cost cutting may be unrealistic, your decisions don’t have to demotivate your team. Targeting inefficient processes, aligning cuts with strategies and reskilling staff members will help you achieve “lean,” not “mean.”

David:
This is the BiggerPockets podcast show, 813.

Dana:
I was a recent college grad from UMass, and I had actually bought a little bit of real estate. I had a condo, I had a two family, but I was sort of just going through the motions. Had hired a real estate broker and he brought me into his office, and it was, I call it the corruption. And it was very much this matrix moment where he said, “You can take the red pill and see how far the rabbit hole goes, or you can take the blue pill and just kind of get out of this real estate thing and just keep going down the typical path.”

David:
What’s going on everyone? This is David Greene, your host of the BiggerPockets real estate podcast, here today with the Seeing Greene episode, and I brought back up. I’m joined today by my cohost, Rob Abasolo, as you can see, if you’re looking on YouTube, looking handsome and ever. As well as Dana Bull, who is featured on BiggerPockets podcast episode 187. We brought her back to give us a little bit of air support on the questions that you, our audience, has answered, and today’s show does not disappoint.
We’re about to get into questions that you asked and provide our answers that everybody can benefit from. Dana is a real estate agent, an investor. She basically has a strategy that was like, how can I get out of real estate investing, instead of how big can I get? Very interesting philosophy, and the answers that she provides are based on that philosophy. Rob, what are some things that you think investors should keep an eye out for in today’s episode?

Rob:
Is going to be a great episode. I can already tell you that. We’re going to talk about so many cool things from how big should your first investment be? Should you go all in? Should you maybe be a little bit conservative with your first investment? We’re going to talk about the logistics of adding to your property. We’re going to talk about seller financing. Today, we’re going to cover some pretty big topics that I know will change perspectives at home.

David:
Yeah. So, keep an eye out for that because we have a very good conversation about things to look for in different markets if you’re into long distance real estate investing, and things you might not have considered that can help you make that decision. And before we bring in Dana, today’s quick tip is brought to you by Batman. Don’t forget to make insurance part of your due diligence. For many years, insurance was such a small percentage of the overall monthly payment that it was sort of just something you tacked on, it wasn’t a big deal.
Across the country, insurance companies are going out of business. They’re fleeing certain states, and it’s getting much more expensive to find it. Rob and I recently had this problem with our Scottsdale property where my company was able to find us a policy, but it was much more expensive than what we were expecting. So, don’t consider insurance to be a small expense like it used to be. In some places, it’s doubling, tripling, or quadrupling. So, make sure you underwrite appropriately. Anything to add there, Rob?

Rob:
It hurts whenever your insurance rate doubles, triples, or quadruples. Can confirm.

David:
Yeah, because other things don’t. Property taxes don’t. If you have a fixed rate mortgage, that doesn’t double or triple, but insurance goes up in leaps and bounds. So, keep an eye on that, folks. All right, let’s bring in Dana and get to your questions.
Dana and Rob, thank you so much for joining me today. Quick recap of Dana. Her story is featured on BiggerPockets podcast episode 187. She thinks it’s a myth about how having a strong why is important.

Rob:
So Dana, tell us why is having an end goal more important than having a why when it comes to real estate investing?

Dana:
Well, I think one of the biggest unknowns for people is knowing when to stop. Real estate can be addicting, it can be fun, riding that roller coaster of emotions. And I just found that it was easier for me to come up with a plan, execute on that plan, and then give myself permission to be done and to move on to other things in life. So, I feel like you don’t always need to have a why, but you do need to have a will to be able to execute.

Rob:
I love it. We recently had a guest, Chad Carson, on the air, and he gave a very similar thing, right? Having an end goal, having a reason. Not just blindly stating it, right? Having a purpose, but not just having a super wide net cast out there, but actually having intention behind it. So, a lot of reminiscent things. And as I understand it, your original end goal was to hit $450,000 in gross rental income, and you hit that within five years. First of all, congratulations. That’s absolutely insane. Why did you pick that goal and how did you get there?

Dana:
Okay. So, let me tell you a little bit about how it all began. I was a recent college grad from UMass, and I had actually bought a little bit of real estate. I had a condo, I had a two family, but I was sort of just going through the motions. And I had hired a real estate broker who I met on Zillow. Zillow was this new platform at the time. And he brought me into his office and it was, I call it the corruption, and it was very much this matrix moment where he said, “You can take the red pill and see how far the rabbit hole goes, or you can take the blue pill and just kind of get out of this real estate thing and just keep going down the typical path.” And I was so curious. I didn’t have a why, but I was impressionable, and I frankly had nothing better to do at the time.
So, the next step was, my boyfriend and I, we were in Florida. After we had this conversation, we were all fired up. We were walking down the beach and we were just talking to each other, asking each other, “Should we go for it?” And we decided, yeah, let’s do it. So, we were out getting drinks at the restaurant bar, and we chicken scratched this plan. And we pulled the number, the original number was $400,000 gross, and we just pulled that out of thin air. And the rationale was, if we have a business that’s bringing in $400,000, we should be good. We should be set. We should be able to make that work. At some point, it actually creeped up to 450, but the original goal was $400,000.

David:
You don’t want to set your goal’s too low.

Dana:
Right.

Rob:
Let’s add another $50,000.

Dana:
Yeah, why not? Why not?

David:
Why shortchange ourselves?

Dana:
So, from there, we actually reverse engineered into it. The average rent at the time our market was $1,600 a month for a two bed, one bath. So now, I’m just taking $400,000, dividing it by $1,600 a month divided by 12 months in a year. So I need 21 units. 21. I can do that, right? And so then, I became obsessed with 21 units. It’s like, eat sleep, 21 units. The next step was, we came home from the trip in Florida and I created a business plan. And when I start talking about business plans, people, their eyes glaze over. But I think it is so helpful, even if you don’t feel like you’re super business savvy, my business plans are always just one page, and broke it down into where I’m at with real estate right now, the direction I need to go in, and then what are the goals, what are the next steps, what are my marching orders? And that’s how it started.

Rob:
Well, okay, so obviously big goal here of 400 to $450,000. At what point, because obviously that’s gross, right?

Dana:
Yes.

Rob:
Was there any moment where it sort of dawned on you that the actual profit of that $450,000 is different? Or was it just sort of big scary goal, doesn’t really matter, I just want to put something out there and I’ll figure it out as I go?

Dana:
Yeah, so that was actually the point of narrowing in on gross instead of net, because once I realized if I tied this to net, I would get so into the weeds with it. And for me, this is just all long-term. The idea is, I will be hopefully sitting pretty in 10, 20, 30 years. And that’s where my mindset was at the time, so that’s why it became more practical for me to narrow in on gross instead of net.

Rob:
Okay, so you were kind of thinking of it as, obviously you want the portfolio to make money, but even if it were breaking even theoretically, once it’s all paid off in 20 to 30 years, you’re effectively making $450,000 profit every single year.

Dana:
Right.

Rob:
Got it. Okay.

Dana:
Plus the benefits, the other benefits of investing, the write-offs. Boston, the Boston area is a huge appreciation play. So, with all my buildings, there needs to be cashflow. That’s a must. But what I’m really leaning into is appreciation. I just decided I’m not going to fight that. That’s the market where I live, that’s the market I’m knowledgeable in, so I want to lean into it as much as possible.

David:
Yeah, I think that’s the way that the savvy investors are adapting right now. First off, we want to highlight, appreciation is not the same as speculation. Those have become synonymous, and I think a lot of people get nervous whenever appreciation is mentioned because they assume that means hoping that the prices go up and you have no plan in place. There’s no cashflow, there’s no built-in equity, the loan to value is crazy. You’re just hoping that prices go up. That’s not what we’re talking about.
There actually is a mathematical approach to investing in real estate that will capitalize on how appreciation plays out. So, I think that’s wise. But even more wise is, why go against the grain? If your market is a cashflow market, you’re going to invest for cashflow. If your market is an appreciation market, you’re going to invest for appreciation. If there’s creative opportunities, you’re going to use that. So I think that’s wise that you just said, “Hey, why fight the flow just because everybody else talks about it a certain way? This is what my market’s good at, so I’ll take advantage of it.”

Rob:
So, what are some other mistakes you see people making today?

Dana:
So, a mistake that I made is compromising a bit on location. The location, location, location, we hear it all the time, but it’s hard to grasp. What does that really mean? And I think it’s all about understanding the context. So, if I were to buy a multifamily in some of the nicest neighborhoods of Boston, I’d be looking at $2 million entry price point, right? I can’t afford that. So, instead, I’m going to step out of that market, but I still want to purchase a property that is sort of premier for the location where I’m buying.
So, my strategy was built on buying properties in A and B locations in various towns. And I made the mistake of buying two properties in B minus locations. And the caliber is staggering. They’re my problem properties, just nonstop headaches. I don’t really understand what the correlation is, but it’s real. And now that I have 10 years worth of data, I don’t regret what I did, I don’t regret those purchases, I’m not going to sell them. But if I were to go for a second round, I would be very specific with my buy box, and I would only focus on the A location.

David:
Yeah, that is a mistake a lot of people make. When you look backwards 20 years and you say, “Hey, what properties performed the best?” Not just appreciation, but cashflow too. Rents go up way more in the best locations than they do in the shorter ones. And for some reason, we’ve gotten into what I think is an unhealthy habit of analyzing properties based on right now, year one, as soon as you buy it. We know that real estate is an organism that grows at different rates in different areas and different opportunities, but yet, we still only analyze a deal as tomorrow if I bought it, what would my cashflow be?
But we’re not going to own it for one day. We’re going to own it for a long period of time. So when you buy in these grade A areas, they can look like a poor investment when you compare it to some turnkey thing in the Midwest that has a 16% cash on cash return, and then 30 years later, it says a 16.5% cash on cash return, and those grade A areas have gone up 10 times in rent and you’re crushing it. So, I appreciate you sharing your wisdom on that.

Dana:
Yeah. The other thing that really blew my mind, and I learned this further into, about five years into my career, and I actually learned it through this property where I’m sitting right now for this recording. I’m sitting inside of a small cottage that was built in the late 1800s. It was a fishing shanty. So, this property, based on the assessment is, the overall real estate is worth about $500,000. The actual structure is $35,000. So, I just bought a minivan for $55,000, okay? I own a car that is more expensive than the structure.
All the value in this piece of real estate is tied up in the land. Just, it never really clicked until this slapped me in the face with owning this home. So now, when I’m working with clients, especially those who want to buy single family homes as investments, I really point this out and want them to be aware of the land value.

Rob:
Yeah. I mean, I think this is significant for a lot of reasons. I mean, it’s something that can be a plus or a minus, I’d say. But one reason to really think through that, I guess, to sum up what you’re saying, the real estate, the entire property, house, land, $500,000, the land is very valuable. The actual structure is just, it’s basically, I don’t want to say a tear down, but is insignificant compared to the land value, right? And that comes into play especially for cost segregations, depreciation, because you can only depreciate the actual improvements on a property. And so, if you go and you buy a property where the improvement is only worth 5% of the entire purchase price or the cost basis, then you actually won’t be able to depreciate very much on that property. Is that right?

Dana:
Yeah, that’s true.

David:
Well, we are going to take advantage of your insight, Dana, reading some questions from different listeners who have written into Seeing Greene, because they’ve got some problems and they want solutions. So, let’s dive into that. Question number one, this comes from Gabby in Los Angeles. So, as I start planning for my first investment property, I’ve been thinking about this question. Is it a better strategy to put all of my cashflow to get one best property I can afford or diversify into a few lower price properties?
So, this is the typical all my eggs in one basket or several smaller eggs over several smaller baskets. I wonder if it’s better for me to put 20% down in a $1.2 million-ish property in LA, or get three, $400K-ish property somewhere else? Or also get a lower price one first, then a more expensive one when I have some experience? What are some factors I should consider to make the best decision here?
Dana, what do you think so far?

Dana:
Oh my gosh, she took the words right out of my mouth with the putting all your eggs in one basket. I love this question and it comes up all the time in markets where, pricing markets. So, I probably tell this listener what they want to hear. These are both great options. I have two pieces of advice, two kind of overarching considerations. The first is, what do you want to buy? Because they both work, and I really sincerely mean this. I’m a advocate for buying properties that you are excited about, and I know most investors, they want to take the emotion out of it. And I just refuse. That’s a hill I will die on.
The reason being is that I truly feel the way to make significant wealth in real estate is to just hold onto it and to do whatever you need to do in order to hold onto it. So, if you end up buying a property that you’re not excited about when problems arise, you’re going to be very tempted to sell. When I was younger, my mom taught me something, which has nothing to do with real estate but also everything to do with real estate. When we go back to school shopping, she would make me try on all the clothes, and then she would evaluate, “Do these pants fit? Okay, they’re not too big, they’re not too small, they fit.” But then, the next question she would ask me is, “Do you love them?” And then she’d go a little bit deeper and she’d say, “How do they make you feel?”
And I’ve learned to apply that to everything that I purchase, especially real estate. So, this new investor is talking about putting 20% down on a $1.2 million property? That’s probably everything she has. So, I would encourage her to really think about what type of property is she going to be excited about. The other thing that I think this person needs, no matter which direction they take, is a jumpstart plan. So, some way to make this work. And Rob, you have a ton of experience here, but the first thing that I think about is probably a 12-month lease is not going to work on this $1.2 million place. It’s probably going to be negative cashflow. So, could she do a shorter term rental, a midterm rental, get those numbers up for the first few years? Because she’s going to need that to become confident and to also get the momentum going.

Rob:
Yeah, 100%. My LA property, I mean, it kind of happened accidentally, but it was a short-term rental. Actually, at one point, I had a short-term rental, midterm rental and long-term rental, all in the same property. But it was really nice to start off strong income-wise with the short-term rental, test out that property, see how I do, and then it did well. But then, when regulation hit, I converted it to a midterm rental and actually found that I really liked that strategy even more, and it was a great hybrid. And having done all three, I could experiment on that property and see, I could choose my own adventure basically. But I think it is really nice to have those contingency plans and see what are the different ways that you can make revenue from that same property.

Dana:
Right.

David:
So Rob, what’s your thoughts? Should somebody put all their eggs into one basket in one property or should they diversify over smaller ones?

Rob:
I don’t think anyone should put all their eggs into their first property. I think they should take a swing, but I don’t think they should swing for the fences, right? I think, real estate is a skill that you get better at, and I would rather, personally, scale accordingly. Learn how to do real estate before you get really, really crazy with it, right? So hit a couple base hits, load up the bases, and then go for the grand slam, right? That’s how I did it. Usually, if someone were approaching me with this exact same question, I’d honestly probably tell them to go somewhere in the six to $800,000 range. Don’t go so small that you actually can’t cashflow it, and then you find that it wasn’t worth it.
Similar to what you’re saying, Dana, we want to make sure that this property is something that you like. And if you’re only making $100 on it, I don’t really think it’s going to, I think a lot of people, especially for their first investment will say, “Well, I don’t know if this is worth my time.” So, I would definitely find that sweet spot in the middle. I would like to see this person sort of break it up into two purchases, and give them a bigger one maybe in that six to $800,000 range. Learn the ropes, learn how to do real estate, give themselves enough capital to get into that next property, if they really find that real estate is what they want to do.
What about you, Dave?

David:
I think, my advice to Gabby here is capital preservation. We only have so much time, we only have so much energy. We understand that, but it’s easy to forget how quickly you run out of capital, especially when you’re putting 20% down on every deal. So, the worst thing that can happen is you buy 3, 4, 5 bad deals. You go through the, “Oh, turnkey sounds easy, I’ll do that.” Works out bad. “Oh, this cheap area, I’ll go invest in there.” Turns out terrible, you don’t want to do it anymore. You finally figure out the right location, the right asset class, the right deal, how to find it, and you run out of money.
So as you’re learning, what I advise people to do is to try to keep as much of their capital as they can in the first couple of deals. No huge renovation or rehab projects where you seek hundreds of thousands of dollars into the deal. Don’t put 20 or 25% down just to try to buy cashflow because you’re obsessed with it. Try to do it with primary residence loan, 3.5% down, 5% down. Learn the basics, but keep as much of your capital as you can. Once you’ve done what both Dana and Rob said, you’re a little bit more comfortable with how this rhythm of investing works, now you have the money to really ramp up what you’re doing and you don’t run out of cash. So, start slow. Once you’ve got it down, then go big. Sound good to you guys?

Rob:
Yeah. My favorite part about this is that we’re all right. You know what I mean? All of these things are perfectly great answers. It definitely comes down to preference, and some people are just go-getters, and they’re like, “You know what? I’m ready to go. Let’s do this thing. I’m going to go big or go home.” And then some people are like, “Yeah, I sleep better at night knowing I have money in the bank, but I can take the small risk and see how it goes.” That’s totally fine too.

David:
All right. Our next question comes from Gregg Peterson, Gregg with two Gs, in Cape Coral, Florida. I was just in Fort Lauderdale, Florida not that long ago, and let tell you, you can cut the humidity with a knife. I’m planning to buy my first small multifamily within 90 to 100 days. I’m looking in Cape Coral, Florida. The one thing I hear constantly is to force equity build on or additions. Sounds like he’s been listening to me. I ran into a lot of listings that show potential, but how much of a headache is there for trying to legally add on or buy a property that has a non-legal addition already? This is good. There’s nothing that influencers like talking about more than legal issues, especially ones that could get people in trouble. So Dana, we brought you in to absorb all the liability. Rob and I aren’t going to say anything. Go.

Dana:
Rob, you want to take this one?

Rob:
Sure. Sure, sure. I’ll talk about it. Listen, I think that new construction and adding onto a property is an absolutely amazing way to build equity. I actually think that it is the best way to build equity. You can go and you can buy a property and you can rehab it. There’s a lot of risks, really, I mean, that goes into that because you don’t really know what’s behind the walls, right? But when you’re talking about new construction, there are no surprises. It’s not like you’re going to open up a wall and be like, “Oh my gosh, there’s mold here.” It all usually follows a pretty good plan and it just gives you so much equity once you’re done, because you’re basically building it at your cost, right?
Now, with that said, building is not something that is a cashflow play right now. It is an entire process, and if you’re talking about, let’s say, building an ADU, if you’re talking about building a new construction, if you’re talking about adding onto your property, could very, very easily be a 12 to 18 month process. And if you’re talking about a non-legal addition that you have to convert, I don’t even, I would never even tell someone to go that route because I don’t know enough about it, other than that it will probably be a very painful experience.
So with all that said, I think that if you have the time to wait and you don’t need the cashflow right now, and 12 to 18 months is not a big deal, then you should do it, because I think it’s a really great way to supercharge your cashflow on a property.

David:
What’s your thoughts on buying something that already has non-permitted additions in the property? Because that’s almost everything. Very few, in my experience as an agent, I don’t know if it’s the same for you, Dana, you hardly ever find ADUs or additions to houses where the people went and got permits because that’s just asking for your property taxes to get raised. So most people add onto their home but they don’t get it permitted. Is that a danger if you’re buying the property?

Dana:
This comes up all the time. Yeah.

David:
Well, we’ll start with Rob and then I’ll get Dana’s take on it.

Rob:
I’m iffy on it. I think it depends on how easy it would, because I think it’s going to be county by county, and then I’ve also had lenders that have kicked back that kind of stuff in the appraisal. Or, the one thing that really affected me not too long ago, maybe about a year ago, was that they valued the addition or the kind of other structure significantly less than the actual square footage of the home, so the house didn’t appraise and I fell out of escrow a week before. So, I’ve run into situations like that. So, usually, I’m more in the camp of start fresh and do it. But again, I think that’s going to be up to the individual investor. What about y’all?

David:
Dana?

Dana:
I agree to tread lightly. Where I see this is in the small multifamily space where you might have a two family property that’s zoned as a two family, building department has it as a two family, but it’s actively being used as a three family. And I always tell people, “Look, we have to analyze this and evaluate it as a two family, but this could be huge if we could get it approved.” And sometimes, there’s a pretty good chance. So, in my market, we can’t bank on it, but a lot of times it comes down to parking. So, does the property have adequate parking? Because in the Boston area, we don’t have enough housing, we just don’t have enough housing. So, it might not be a quick thing, but it is possible if you push on it. You just need to accept the risk that it may not pan out the way you hope.

Rob:
Yeah, like do you have the time and the budget for the upside and for the downside, I think is ultimately where I would land on that too.

Dana:
And also to your point, with financing, that is a huge snag. Usually they want the stove, I don’t know what it is with the stove, but you got to pull the stove out in order for the property to still go through financing.

David:
Yeah, I can tell you that’s why. It’s because one of the regulations that Fannie Mae and Freddie Mac have is that it can’t have more than one kitchen unless it’s zoned for multifamily. So, if it’s zoned for three units, you can have three kitchens. If it’s zoned for one, but the house is split into three pieces, it’s not a kitchen if it doesn’t have a stove. It can have a microwave, countertops, you can have as many fridges in your house as you want. They’re never going to come and say, “Who told you that you could have a second fridge?” Some garages have four fridges or freezers full of elk meat, if you’re a Joe Rogan fan.
But the stove is the big thing. So, you see, frequently, people take the stove out of the house. Now the appraiser will say, “This qualifies for financing because it’s not breaking a zoning regulation.” Then they just go put the stove right back in it. Nobody really ever talks about this, I just said it on the podcast. But this frequently happens, like stove removal. If someone can have a company that’s like, “We take your stove and we store it for seven days and bring it right back,” they’d have a really good business.

Rob:
Well, it’s really with the appraiser, right?

David:
Yeah, it’s the appraiser, and only for financing. That’s the other thing, because the person buying the house can’t get the loan if the appraiser says no because it’s the zoning laws. But people confuse that with the city is going to get all mad at you. Some cities don’t care at all. They could not care less that you have an extra kitchenette in your house or you’re renting it out. I will say this though, it really depends on what city you’re in. I’ve seen clients and I’ve had houses that no one takes a second look. When I got into short-term rental investing, this whole thing got turned over on its head. I have several properties in Florida that I bought and I did not add the units to them. I bought them with the units in them. And when I applied for the short-term rental permit, the city was angry about short-term rental investors.
They’re getting all kinds of angry phone calls from the neighbors who don’t want a short-term rental in their neighborhood. They came in and said, “I need to tear down the ADUs that are a part of the house.” One of them is literally a duplex on the same lot as the main house and they tried to say, “You have to tear down your duplex.” I didn’t build this duplex. It’s been there forever. All the other houses on the street also have ADUs. And I said, “Why do I have to do this, but all the other homes that you can clearly see driving down this alley, they have the same thing.” And the city told us, “Well, we don’t actually do anything until someone applies for a short-term rental permit. And when they do, we go in there and we make them tear them down. So, even though we know they have those ADUs, we’re not going to do anything to enforce it unless they apply for a short-term rental permit.”
So, it can be tricky, when in the past it wasn’t tricky. They weren’t looking to target people, but there’s certain scenarios that will bring it up as a red flag. Have you seen that, Dana, in your business as well?

Dana:
Yeah. So, the issue is the liability with an unpermitted unit, and then you can’t get a certificate of occupancy when you go and register it because most people are not registering their rental units. But eventually, you might get called in to do that. The other sticky point is, it becomes more difficult when the property is occupied. So now, how are you pulling out a stove, getting all this figured out while somebody’s living there, and then it’s triggering for the tenants. And they realize, “Oh, this place isn’t even legal? Does it have egresses?” All this kind of stuff. So, I would say, it’s pretty hard in my area to push it through just because it’s been there. It would need to go through all of the official, it would need to go through the official process for somebody, I think, to feel comfortable renting this moving forward.

David:
It’s a great big mess, isn’t it? We don’t have enough housing, so that makes housing super expensive, which sucks for tenants because we have to keep raising rents because we have to keep paying more for the houses. Then they make more regulations, so it’s harder to build more houses, so investors buy and then we try to add housing so that we can keep rents lower by increasing supply. Then the city comes in and charges us more, or makes us take away the existing housing that was already there, making rents even more expensive, all in name of protecting tenants. It is the most ridiculous, backwards, circular logic, and it’s happening in big cities near you, everywhere.

Rob:
Brought to you by your city. Yeah. This has all been, I’ve been trying not to shed a tear because I did have to pull the stove out for a cash-out refi many years ago for an appraiser while I had a tenant in there, who luckily was great and it was super easy to do. But, yeah.

David:
I love how you say you shed a tear because you pulled one stove out, while I’m literally having to destroy a duplex and turn it into a garage. It’s like, oh yeah, David had to-

Rob:
How insensitive of me, I’m sorry.

David:
… David’s arm had to be amputated. I can relate. I popped a pimple once and it was, it was so painful.

Rob:
I threw out my back, man. I’ve never recovered.

David:
I had to take a stove out for two days.

Rob:
I had to go rent a dolly,

David:
I had to rent a dolly. You threw your back out.

Rob:
You understand how much dolly rentals are? They’re $25.

David:
It’s because you do everything yourself. This is exactly why. Rob’s like, “Oh yeah, I had to fly to Tennessee and rent a dolly and take a U-Haul to move the stove because I couldn’t trust anyone else to do that right.” That’s funny. All right. Our next question here comes from James in Seattle. Do you think this is James Dainard who also is a James from Seattle? Is he sneaking into Seeing Greene?

Rob:
He’s asking for… He’s too nervous to text us for advice because he doesn’t want to seem green.

David:
He doesn’t want to seem green, that’s exactly right. I don’t want to admit I don’t know this. All right. From Jimmy Neutron himself. As a brand newbie considering markets outside of my hometown Seattle due to cost and competition, how do you decide to factor in future environmental impact on your investment? Okay, this isn’t James Dainard. He’s lost me right there. Florida and Texas look like great opportunities, but they’re under threat of hurricane and flooding, and insurance companies are going bankrupt or fleeing. Side note, that is actually a good point. We should talk about that later. Phoenix looks inviting, but they are out of drinking water. Insurance companies are refusing to insure California and Colorado due to wildfires, and Florida due to hurricane risk. BiggerPockets Ally Elle just wrote an article about this.
Do you try to keep your exit strategy short on markets like this, say, a five-year term, or avoid them entirely? Thanks for all the inspiring and sobering content. Listening to BiggerPockets has catapulted my confidence. Okay, this is a good question. Let me go sum up all the things he mentioned because I read a lot there for you, and then we’ll go to you, Dana. He’s trying to invest outside of Seattle because there’s so much competition, which is driving prices high, but he’s considered about the negative aspects like defensive investing here.
So, Florida and Texas would be good, but there’s threats of hurricanes and flooding. Insurance companies are leaving some of the top markets, which is true, like Florida and Texas. Phoenix is running out of drinking water, California and Colorado have issues with wildfires, and Florida has constant hurricanes. All true as well as all kinds of lizards everywhere, and alligators. It’s amazing how many people are moving to Florida with as wild as that place is. What are your thoughts, Dana, on when you’re picking a market, how much you should consider some of these environmental hazards?

Dana:
Oh, you should definitely consider it. This is coming from somebody who buys old properties. Knob-and-tube doesn’t scare me. Nothing scares me.

David:
Can you explain what knob-and-tube is for those of us that aren’t agents who have seen this destroy?

Dana:
Sure. So, knob-and-tube is old wiring. It’s risky.

David:
As far as electrical systems are concerned, it’s like an abacus.

Dana:
Yeah.

David:
Instead of a calculator.

Dana:
And I see it in properties all the time. That doesn’t scare me. We can fix that, we can fix property problems. Environmental threats, I think, are ultimately the biggest threat to your asset, to your real estate. I’ve been waving a red flag on this for a while with insurance. It’s definitely hitting me here. A couple months ago, I actually had to go out and procure all new policies because some of my policies were being dropped. Where I bump into this is with flooding, because I work in markets, coastal communities, and the FEMA flood maps are your friend.
You can Google FEMA flood map, search by address. It’s going to pull you to a website where you can type in an address and see how close you are to a flood zone. Pull up the GIS mapping, whether you’re in a flood zone, and this is a conversation I’m regularly having with people. It’s going to be a problem before it actually is a problem. And I won’t do it. I will not buy in a flood zone. The last four investments I’ve made are properties that are all perched up on hills, and I’m very specific about that because I want to, again, I’m a long-term investor. So if I am partnering with these properties for the next 30 years, I don’t want them to be underwater.

Rob:
It’s likely that, yeah, likely, if it’s in a flood zone, in 30 years from now, it will have faced at least a flood, in theory.

Dana:
Yeah. So, that’s how I feel. I know it’s doom and gloom and it does feel like, well, where can you invest where we don’t have this environmental threat? I guess I would position it, if it is a current known threat, why wouldn’t you avoid it? Why would you buy in a flood zone for an investment property? If you’re buying in a flood zone but it’s your primary residence, you’re going to get to wake up every day in your $3 million oceanfront home and enjoy the views. Okay, we can justify that potentially. But if this is really for investment purposes, maybe just try and find a property up on a cliff.

David:
What about mudslides? What about rainstorms?

Rob:
Yeah, I was going to say, that sounds like its own risk there too.

Dana:
On a cliff and back from the cliff, I don’t know where you’re going to find this property.

David:
What about lightning strikes? Have you considered that?

Dana:
So, that’s where it’s, it’s just, you have to assess your own risk tolerance, because yeah, we could pick apart so many markets. Yeah, Florida, we have hurricanes, we flooding. But flood, if it’s in a flood zone, it’s in a flood zone. It’s going to flood.

David:
That’s a pretty clear one, right? Absolutely. You know what my dream day would look like?

Rob:
Hanging out with me?

David:
Hanging out with you, but I get to just look at the negative side of everything you say. So you’re like, “Hey David, do you want to get Chipotle?” And like, “Oh, they charge extra for guac. It’s really not fair. They never give me enough cheese.” And you’re like, “Okay, what about Chinese food?” “Oh, I don’t like the MSG. If people just came to me and said, “Hey David, you should invest in real estate,” and I just got to come up with all the reasons it won’t work, like what we just did, God, that would be fun, because this is, I’m always on the other side of it all the time.

Dana:
Yeah.

David:
Like, “You should buy a house.” “Oh, but housing’s too expensive. Rates are too high.” “Okay, well your rents are going to go up too.” “Yeah, I would’ve bought before when rates were lower.” But when rates were lower, it was like every house got 20 offers. You couldn’t get anyone and they were complaining about that. You could just go back. Every single market had problems.
This is a funny thing I was just saying last night to my group. If prices dropped as much as we want them to, that means nobody wants to buy houses, right? So, if all these houses at $800,000 dropped to $300,000 and we’re like, “I’d buy all of them.” No, you wouldn’t, because the only reason they would drop that far if there was some serious massive problems with the industry. You couldn’t find tenants or insurance went up times 10. Something terrible has to happen for no one to want them, right? So, you keep getting these people that are, “I’m waiting for the next crash. I can’t wait.” Assuming that the crash is going to happen and real estate’s still going to be an attractive vehicle, and it will never, ever occur.

Rob:
Yeah. The moment it’s doomsday on their prices, everyone’s going to be like, “Oh, hey, you know what? Nevermind. Let’s just see how it goes for the next three months.”

David:
“This is a bad buck to invest in. It’s going to go down even more. Don’t catch a falling knife, blah, blah, blah.” They’re going to have a reason not to want to do it.

Rob:
Yeah, totally.

David:
So, I thought, Dana, you provided some good stuff there. What do you like about Boston? Is there a lack of environmental hazards that you feel comfortable investing there?

Dana:
Generally, yes. I would say that the rising sea levels is our big threat. But we have snowstorms, so it’s expensive. If you have parking, to make sure your driveways are plowed.

David:
Yes.

Rob:
Yeah, that’s a big one.

Dana:
We’ve been having freakier weather, for sure, more. We’ve had tornado warnings more commonly than in the past, so we are experiencing some change. Our winters are not as cold as they used to be as when I was a child, which is concerning. But yeah, I mean, in general, I’m with you, David. With real estate, it’s like we can pick apart and we can figure out why we shouldn’t do things, and I have a very high risk tolerance. This is my thing that gets me worked up is the environmental stuff. But yeah, overall, long-term, 30 years out from now, sure. I’m worried about it.

David:
Rob, you’re a local, or sorry, you’re a fellow out-of-state investor. You never read my book, but you did it anyways, which is cool. Not that I’m upset about you only have reading one book.

Rob:
I’ve listened to the podcast, which is kind of like-

David:
A functional equivalent. It saved you the $12 of getting the book?

Rob:
… Yeah, it’s the director’s cut of your book, the director’s commentary.

David:
Nice analogy. You have been hanging around me, man. That was very nicely done. But what do you think about when you’re picking these markets to invest in? And should we do an episode where all we do is find negative things about every single market? That could be a fun thing to do where you guys are like, “What about here?” And we just find everything we can wrong with it.

Rob:
Yeah. What about… Yeah, what Montana? It’s too beautiful. No.

David:
I don’t want a elk running through my house and trashing the whole thing, and I got to drive too far to get to a gas station, and Teslas would never be able to make it out there. That’d be funny.

Rob:
I don’t… I would say, honestly, the biggest thing that scares me is the insurance, especially in Florida. David, we have our Scottsdale property, which has been a bear with insurance on that too. Luxury properties are tough to get insured. So I think, that’s my first and foremost thing, because you sort of need that to be protected, from a liability standpoint. I kind of come from the mindset that everything is fixable, right? It doesn’t mean that I want to, but I have a beach house in Crystal Beach, and there will be a hurricane there again. I understand that. I know that.
It will likely need repairs, and that was sort of, that is my, both my personal home that I use whenever I want, and then I also rent it on Airbnb to help supplement the income. It’s fine. I understand the risk there. It’s very high, so I won’t get flooded. But I probably don’t, I don’t seek it out though. I’m not seeking out buying homes where natural disasters are, right? Probably not going to buy a house in Tornado Alley, per se.

David:
You don’t want to go into New Orleans and have another huge flood.

Rob:
Yeah, not really. It’s not really at the, it’s something I consider, but it’s not necessarily a deal breaker unless it’s clearly in the… If on Redfin it’s like, “Flood factor, 10 out of 10.” I’m like, “Yeah, probably not going to do that.” Right? But overall, everything else, I’m usually okay with if I really like the property or the deal.

David:
That’s really good. I love that I get to answer last because it’s like playing poker. You get to watch what everybody else’s bets were, and you always have the better position to be in, because I get to hear all your arguments and then sum them up and add one little thing on. Remember when we were interviewing Alex and Layla and he said, “I like to let Layla answer first because I could just take what she said, sum it up and add one extra piece.” And she was like, “Yeah, it sucks. I always have to be the…”

Dana:
Throw us under the rug.

David:
Yeah.

Dana:
Or your throat. Wait, what is that? What did I just say?

David:
Under the bus. You were saying sweep it under the rug and throw it under the bus, and you created a hybrid analogy there. I liked it.

Dana:
Well, let’s go with it. Let’s go with it.

David:
So, there’s two things that I would say when it comes to these concerns, which are valid. One, if you can develop the skill of quantifying risk, your crock brain that screams, “This is going to hurt me,” will quiet down. So, find some way to take the what if this happens and turn that into a number. Numbers aren’t as scary. The easiest way to do that is through insurance, because insurance people are way smarter than I will ever be. They’ve already quantified the risk of flood, the risk of hurricane, the risk of fire, the risk of earthquake, and they’ve turned that into a number that I can just use to protect myself.
So, like Rob said, luxury properties have more expensive insurance. That will cut into your overhead, so it needs to be priced into how you’re going to analyze the deal. But man, insurance is this awesome tool that I can use for all these, “Well, what if this happens?” Well, if I’m covered by insurance and I know how much it is, I can easily underwrite it and make the decision. The other thing is I’ve learned, changes will always happen. At some point, Arizona very well may run out of drinking water. So you got to ask yourself the question, what would happen if that happened? Would we all just say, “Well, there it goes. Time for everybody in the state of Arizona to go somewhere else.”

Rob:
Right.

David:
If you thought that buying the areas you think they’d go to, you’re going to get an influx of demand and you’re going to do well. But probably not. They’re probably going to find a different way to ship water from somewhere else. They’re probably going to change some rule to dig more wells to bring water up, or they’re going to put funding towards turning salt water into clean water, and we’re going to develop a technology, just like we did when we got scared of gas prices being high, and 10 years later, we have electric cars everywhere, right? When everyone’s talking about, “We’re going to run out of gas,” or, “It’s too expensive.” We’re like, “Okay, we’ll build electric cars.” We could do the same thing with drinking water. I don’t know exactly how it’d work out because I’m not that smart, but I do know it’s a problem that humans can solve.
That’s why I don’t freak out completely. I just think, if we do this, what would the result be? That’s one of the reasons I sort of understand economics when it comes to the housing market and why prices didn’t drop when everyone said they would. We shut down the country. We should have gone into a great depression, but we didn’t because we printed a bunch of money. Well, what would we expect the result to be? A lot of inflation. Things are going to become more expensive.
So, I adjusted my advice. Don’t quit your job right now. Things are going to get more expensive, and buy assets that rise with inflation, which real estate is one. The people who followed that, they did really well over the last five or six years. I think we’re going to consider to see it. If you could get into the mode of just saying, “How do I quantify the risk and what can I expect the reaction of humanity to be when these things happen?” You can make calculated decisions that aren’t that bad. But it stops you from getting into analysis paralysis, you guys agree with that?

Rob:
Alternatively, you could also buy assets that rise with the sea levels and only buy boats.

Dana:
There you go.

David:
House boats?

Rob:
Buy boats and rent them. House boats.

David:
It’s screaming real estate. It’s a houseboat.

Dana:
What’s the land value?

Rob:
Zero.

David:
Do you get the mineral rights?

Rob:
Exactly.

David:
Rob’s told two funny jokes today, man. He’s really stepped his game up here.

Rob:
Thank you. You told one, so you could still come out on top here.

David:
Dana, we got one more question, and Rob talked too long in the last one, so this is only going to you. While we have you here, do you have any insights on the current market that we haven’t talked about today?

Dana:
Yeah. So, there’s something that I feel like people aren’t talking about enough in general, which is this misalignment between what’s being built and what people actually want to buy. And if I were to get back into investing actively, this is where I would plug right in. It’s the fact that we’ve got the millennial buyers, they make up over 40% of buyers, and they want single family homes, these traditional homes. And what’s being built, I don’t know if this is just happening where I am or everywhere, but luxury townhouses. And I understand why, developers have to make their margins work.
But the result is, people are fighting over the little inventory for single family homes, the traditional properties. So, people ask me, once they hear that I stopped investing, they’re like, “Why?” They’re also confused why I never graduated into the commercial space, right? It’s very unusual for somebody to build their entire portfolio off of small multifamily homes. What’s ironic is, now that I’ve taken a step back, if I were to get back into it, I would actually go smaller than small multifamily. I would just go straight into single family homes because I do see this gap, and it’s significant.

David:
Awesome. I like that line that you said, there is a discrepancy between what people want and what is being built, which always creates opportunity in the market. So, I’ll wrap up by just asking you, Dana, if you were giving advice for people who can take advantage of the opportunity, the gap between what is wanted and what’s being provided, what would you tell?

Dana:
What would I tell them? Go for it.

David:
Yeah?

Dana:
Is that what the question was?

David:
Or specifics of where should they be looking based on what you see. Should people get into spec building? Should people be buying properties and converting them into something different? What should they convert them into?

Dana:
So, where I see the opportunity, and it’s this, at least I can speak to this market, the formula is location. Narrow in on the location. Quiet side, straight. Heck, I’ve just bought properties because they’re sunny, and I like the trees in the neighborhood, right? Finding that classic home, paying attention to something called neighborhood conformity. Are you familiar with this term?

David:
No.

Dana:
It’s where, sometimes we go down a street or we go down a neighborhood and we can’t really pinpoint what it is that we like about it. Oftentimes, it’s because the properties all play nice with each other and they’re a similar aesthetic. Maybe they’re all colonials, they’re all a mix of colonials and capes, and they play well. When you see a property that sort of sticks out like a sore thumb, that can be, I think, a higher risk investment. So this concept of neighborhood conformity is something I would pay close attention to if you’re buying a single family home.
And then the last bit is value add, and I know we sort of beat a dead horse with that one. But can you finish out a basement? Can you add livable square footage? Can you reconfigure the current layout to make it more functional for today’s living? All these sorts of ideas can create this power play.

David:
Awesome. Well, this is awesome. Dana, thank you for joining me on this Seeing Greene. We got to see green, and through the eyes of Dana and Rob today. Where can people find out more about you if they want to reach out?

Dana:
So, my website is just my name, danabull.com. I’m on Instagram. It’s a bit cringe-worthy, but you can check me out there. And I’m on LinkedIn.

David:
Wait, why is it cringe-worthy?

Dana:
I just don’t know what I’m doing. Social media is not my thing, but I’m sort of having fun with it.

David:
You’re talking to the person whose online handle is DavidGreene24, and Rob mercilessly calls me old and boring for having a handle. He thinks it should be like OfficialDavidGreene or DavidGreene_ [inaudible].

Rob:
TheRealDavidGreene.

David:
Yeah. He wants it to be like ThyRealDavidGreene or something, so I don’t think you’re as cringey as you think.

Dana:
The 24 works.

David:
DanaBull_Realtor. That’s awesome. Rob, where can people find out more about you?

Rob:
You can find me at Robuilt24 on Instagram, on YouTube, and on Threads. I’m going to add the 24 just for one day, just for you, in solidarity.

Dana:
How’s Threads?

Rob:
It’s the Instagram Twitter. You can find me at Robuilt. On YouTube, I make fun videos that teach you how to do this real estate thing every week.

David:
All right. Well, thank you Dana. If people want to follow me, they can do so here on BiggerPockets, or my social media is DavidGreene24 on Instagram, Facebook, TikTok, Twitter or YouTube. So, go check me out there. Great time with you, Dana. Thank you for coming back, and congratulations on your successful business and making real estate work for the life that you wanted for yourself. Very nice to see.

Rob:
So cool.

Dana:
Thank you.

David:
This is David Greene for Rob. No asky, no getty Abasolo. Signing off.

If this conference needs to change its trademark, it is not alone.

With the latest shake-up in college sports bringing two California teams, and one from Texas, into the Atlantic Coast Conference (“ACC”), the conference name is ridiculous. Everyone sees that. It goes even further than that. In fact, a brand new entity with the mark ACC would likely struggle to be registered in the U.S. Patent and Trademark Office based on this membership of schools. At the moment, it does not seem anyone is going to reasonably (I presume) try to challenge the ACC’s mark as being a “misdescriptive” one. It has a long history and people know who are there. Any new college conference (football gets much of the attention from these realignments, though other sports and academics get involved) called the “Atlantic Coast Conference” would seem to raise the expectation that this was comprised of teams generally near the Atlantic coast, in coastal states like the Carolinas, Florida, and Massachusetts. When you include California and Texas, you might have a problem.

Terms that are geographically misdescriptive are very difficult, and sometimes impossible, to protect under U.S. law. Unless people really did not think that Atlantic Coast Conference meant “Atlantic coast,” the conference could be shut out of formal trademark registration. Some specific formalities in the trademark rules, even if the organization showed that people fully understood who the “Atlantic Coast Conference” was, prohibit terms that misdescribe geography. Other terms which describe goods or services can be registered under some exception or because they have been in use so long that people know exactly who they are, descriptiveness be damned. When an organization has been in existence for so long, it can often overcome obstacles to registration. Where the problem is considered misleading geographic associations, some technicalities in the law flatly prevent registration.

For the ACC, it has a long history, and it would be difficult if not impossible for any after-the-fact challenge to their registered rights. (By the way, I am a long-time ACC season ticket holder, but that’s neither here nor there.) But if a business owner was to adopt and use a mark like this from scratch, and try to register it under similar circumstances, they would face some struggles. (I am going to ignore other technicalities, such as the fact that a couple of the existing conference members already are not in coastal states, namely Louisville and Pittsburgh.) There is a lot about trademark law which is very intuitive. Then, there are things like this.

Geography is not the only reason colleges need to start re-naming their athletic conferences. The marks use geographic terms from coast to coast, sacrificing distinctiveness. Tradition is important, true. And these leagues are so old and highly publicized that it is hard to argue that simple names really matter (yes, the name National Football League is not a big eye-opener, and they seem to do just fine). The ACC is not alone in this respect. There is the legendary Big 10 conference, home to 14 schools. They may not have the geographic problem, but it has been a long time since the “Big 10” was a big 10. Should they update the “Big 14?” Do fans know the Big 10 now identifies a league, and the number of members is irrelevant? What if someone were to make a legal argument that some competing product comes from a place with ten members, and would be distinguished from the Big 10 because everyone knows that the Big 10 is a 14-team league? Would that avoid conflict?

The conference has a logo, which is “B1G,” where they depict the “1G” in different letters to give the general impression of the number “10.” At least it is a trademark. Is it the word “Big?” Is it the “1G?” Is it the “10?” B1G has been used for a dozen years now, and right from the start, the conference cleverly told the Trademark Office that it had a detailed description of this mark, which is composed of the letter “B” and the number “1,” followed by a stylized letter “G,” “such that when read together, the letters and number spell ‘BIG’ and the stylized number ‘1’ and letter ‘G’ spell the number ‘10’” (not even an institution of higher education can “spell” a number, but who am I to quibble with academics). The conference has stuck with this description of the logo over the years for athletics, as well as a range of university activities including scientific endeavors; apparently there were no grammar competitions.

The Southeastern Conference had itself a nice little logo back in the 1930s, which it finally got around to registering 44 years later. The registration has since expired, but this original had the words “Southeastern Conference” surrounding a wheel-like design, with the letters “SEC” in the middle, and the names of each of the member schools at that time (Alabama, Auburn, Florida, Georgia, Kentucky, LSU, Mississippi, Mississippi, State, Tennessee, and Vanderbilt) as spokes of the wheel.

Now, the SEC logo is registered with the familiar three letters, surrounded by a circle format, which they adopted back in 1981. If every conference could copy the SEC, things would make much more sense. The Southeast Conference consists of all teams which are in the south or east. Not necessarily in the southeast, but let us not quibble. There is no misdescriptive number of teams. (Or is that why they have the biggest TV contract and greatest on-field success?)

The Pacific 10, or “Pac 10,” had a number of venerable trademark registrations and a logo. Alas, they had to abandon those once (stop me if this sounds familiar) they were no longer consisting of ten schools. Those Pac 10 trademarks went all the way back to 1928, by which time they had already grown to ten members. But the “Pac 10” trademark was effectively dead in 2010 when the conference became the “Pac 12,” which it has remained ever since. At least the Pac 10 had its own mark which it has been able to perpetuate, even as the name of the conference changed to PAC 12. The mark is “Conference Of Champions,” which it has been using since 1979. This permitted the conference to keep featuring this trademark, even as the number of teams and league name changed over that time. A trademark which survives changes in the business – it is a good concept, and advisable to every business. Protect a mark which works today, but which will also be durable as changes happen. As things look right now, with California and Stanford gone, the Pac 12 might be too. Who will own this trademark? Or will it be abandoned, hence destined to be picked up by entrepreneurs down the road who can try to eke out some goodwill from the past century.

So, will the ACC change its name? Sometimes there is a telltale sign when in anticipation of using a new mark, an entity files an application to register its mark in the Trademark Office. Nothing like that is on file as of today. The ACC did start using the mark “Bring Your A Game” around 2014, and has a registration for that mark still, but it seems to have been a specialized use. Will they change it to APCC (Atlantic/Pacific Coast Conference)? Or just the Coast Conference? Will they migrate to some entirely new name? History tells us none of that is likely to happen. Although if they want to get creative, remember that the “Pac 12 Conference Of Champions” may be up for bid. If California can be the Atlantic, then Boston and Miami might just as well be in the Pacific.

No one wants to change a working trademark, especially one with the long history of the ACC. But on the other hand, names have changed, even if the changes were small. The Big10. The Pac 10. The former Big 8, which since it merged with another conference became the Big 12 (naturally, comprised of at least 14 teams). It does create issues with which a trademark lawyer can work. Like, can you really say some knockoff of Big 12 stuff would be immediately confusing, if there is also the “Big 10” with 12 teams, and the “Big 12” with 14? (Also, institutions of higher learning should be able to count.)

Almost always, using famous marks as a guide can inspire when they are good, but when they exist on the back of longevity and perhaps brute force, perhaps it is better not to look to them for inspiration for your own business.

All of those above conferences are in a grouping of college football powerhouses called the “Power Five.” That leaves five other football conferences in the NCAA on the inspirationally named Football Bowl Subdivision. (Really, is anyone else seeing a trend here?) The FBS schools not in the Power Five are called the “Other Five.” – Nope. Just kidding. It is the “Group Of Five,” comprised of the American Athletic Conference, the Mountain West Conference, the Mid-American Conference, and the Sun Belt Conference – the last of which sadly probably wins the award for the most clever and strongest brand-name among these major college football conferences.

The other divisions outside the FBS are largely more of the same, with names like Big South, Great West, the in-between and sort-of geographic Big Sky Conference, and the more creative Ivy League, Patriot League, and Pioneer League. Ivy League is full of nuance for a variety of issues, and is often defined as the premier grouping of academic institutions in the country, and maybe anywhere. It turns out they may also be in the lead for distinctive conference names.

How much do fans – or universities – care about the conference names? Maybe we will find out.

Ashley:
This is Real Estate Rookie episode 318.
We all love seller financing, makes things way easier most of the time than going to a bank and doing conventional financing.

Tony:
Say, the house is worth $300,000. Say I agree to buy her property and it’s a $2,000 a month payment. Now, she’s only paying taxes on $24,000 a year versus the $300,000 per year, that she get if she sold the property.

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

Tony:
And welcome to the Real Estate Rookie Podcast where every week, twice a week, we give you the inspiration, motivation, and stories you need to hear to kickstart your investing journey.
And today we are back with another Rookie Reply, as always, we’re happy to answer questions from the rookie audience. And if you want to get your question featured on the show, head over to biggerpockets.com/reply and we just might choose your question for an episode.
So Ash, I guess really quick, give me an update. What’s going on in Ashley Kehr’s world today?

Ashley:
Well, for the first time ever, one of my real estate friends that I have met across the country, I’ve met a lot of real estate people. Someone is coming to visit me in Buffalo, New York.

Tony:
Going all the way to Canada to come hang out with Ashley for a couple of days, had to get his passport.

Ashley:
Yeah. Literally only for two days, but I’ll take it. So yeah, I’m super excited about that. He’s coming in this week and I’m going to show him some of my properties and hopefully do some fun stuff. And you just had your baby shower?

Tony:
We did. We had the baby shower. So Sarah’s due here just in a few short weeks now. I think we’re about seven weeks away, so time is ticking. So we had a house full of gifts the day after the baby shower, so we’re starting to build stuff and we got to get the nursery repainted, so-

Ashley:
You got to build an addition on just to fit all your stuff.

Tony:
Yeah. Just to fit all the stuff. And then my son actually started his sophomore year of high school today also, so just lots of stuff going on in the Robinson household this week when it comes to the kiddos, but exciting times. We’re happy for it.

Ashley:
Yeah. Awesome.
Well, on this week’s Rookie Reply, we have five great questions. We’re going to go through, a couple of them even pertain to partnerships. So if you guys haven’t already check out our new book Real Estate Partnerships, you can go to biggerpockets.com/partnerships and you guys can even get a discount if you use the code, Tony or Ashley.
Okay. So one of the questions that we talk about is seller financing. So if you’ve been wondering how to structure seller financing, what are some of the pros and cons, and what you should do as far as approaching a seller about seller financing? We kind of do a little mini breakdown of the tax advantages for a seller and also how to present the seller financing to the seller too.

Tony:
Yeah. We also talk a little bit about closing costs. What are typical closing costs in a real estate transaction? Who pays for what between the buyer and the seller? And we also talk about like, “Hey, just if I want to invest in real estate, what is kind of my roadmap of steps? What should I do first? What should I do second?” And we break that down. So overall, lots of good questions. Excited to get into those.
Before we jump over to the questions though, I would love to get a shout-out to someone that’d love to say 5-star review on Apple podcast. This person goes by the name of ScottyDude2314. But Scotty says, “Every time I run into a situation, I come back here, look for the episode that relates to that situation listed, take notes and execute. Thanks so much for y’all’s help. Closing on my first 12 plex this month.” And he says, “Constantly coming back for more knowledge.”
So ScottyDude appreciates you and kudos to you on getting that first 12-unit under contract. And just last piece, so Scotty makes an incredibly important point. We have hundreds of episodes of the Rookie podcast and I can almost guarantee that most situations you might find yourself in, has probably been solved and thoroughly discussed on some episode of the Rookie podcast.
So if you ever find yourself stuck, you’ve obviously got the BiggerPockets forms, the Facebook groups, but don’t sleep on the 317 episodes that came before this one, that have tons of information about your real estate journey. So be sure to check them out, use them as a resource and share it with someone that might benefit from it as well.

Ashley:
Okay. So today we have an Instagram shout-out to Artina Marie. So Artina, A-R-T-I-N-A, Marie, M-A-R-I-E. You can follow her on Instagram at her name, and she is a serial entrepreneur obsessed with passive income and sharing her real estate journey. So go and give her a follow and check out her Instagram and follow along her journey.
Okay, today’s question is asked by Nicole Marie. Remember, if you would like to submit a Rookie Reply question, you can go to biggerpockets.com/reply.
So Nicole’s question is, “What is the first step? My credit score is good. I have about $40,000 to put down. I want to BRRRR a rental property, but I’m stuck trying to figure out if I look for properties, meet with the real estate agent or get financing first. But then it’s like how do you get financing without a property to give them numbers for? I also can’t HELOC, do a home equity line of credit or live in it for FHA. So that limits me to conventional or some type of financing that allows the rehab budget in the loan. I’ve been reading a lot and I’m just confused how you start and take the first step.”
Okay, so the first thing, awesome, you have a great credit score and that you have some cash $40,000 to put down. That definitely opens up the doors for you to have available. And then you want to do BRRRR, a rental property. So remember BRRRR is buy, rehab, rent, refinance it, and repeat.
So the question is, “Do I start looking for properties, meet with a real estate agent or get the financing lined up first?” These are actually two things you can do simultaneously. If you do have your financing and your funding lined up, when you find a property and you’re ready to make an offer, it definitely makes it a lot smoother, easier process because especially if you’re in a hot market and you put in an offer, you’re going to have to put in your proof of funds or your proof of financing. How you are going to fund the purchase of this property, and sometimes those offers have to go in quick and being able to go through the pre-approval process may not be quick enough to actually get that for your offer letter.
So Tony, let’s kind of break down as far as her options for doing a loan. So she can’t live in it and get FHA, or she had mentioned a home equity line of credit, but you have to actually already own the property and to be able to get the line of credit on the property, you can’t get a line of credit to use it to purchase, unless that line of credit is on another property.
So in her current primary residence, if she was able to go and get a HELOC, she could take that money to go and purchase the property. But she’s going to say she can’t do that and she can’t get an FHA loan, so conventional or some other type of financing, but she wants to do the rehab budget in the loan.

Tony:
Yeah. I mean there’s tons of options out there. I mean, we’ve used a lot of private money to fund our rehabs. Ash, I know you’ve used similar and hard money, so those are always good options, Nicole as well in terms of how to make that piece work.
But Ash you mind if I just want to even take it one step back a little bit and just kind of give for all of our Rookies the framework of just in general, what are those sequence of steps look like? Because obviously we give a lot of content on the podcast and there’s tons of information on YouTube and social, but sometimes it’s hard to sequence those different pieces of content correctly. So you know what to do first and what to do next.
So when I think about a brand new investor, someone that hasn’t done anything yet, but they’re in that kind of early education phase. I think the first thing that you need to do is identify your investing strategy. Now Nicole, you’ve already seems like decided on that, that you want to borrow properties, that’s a good first step. But for everyone that’s listening, the first step is, “Do I want to do long-term buy and hold? Do I want to do short-term rentals? Do I want to flip? Do I want to wholesale? Do I want to do large syndications? Do I want to do self-storage?” Decide on your type of investing in your asset class first.
Once you’ve got that piece nailed down, the second step in my mind is to identify what your purchasing power is. So again, Nicole, you’ve kind of alluded to this a little bit already, but generally speaking, your purchasing power is made up of two things.
It’s the capital that you have available or at least access to invest, and then it’s what kind of loan product can you get approved for. So when you combine how much capital you have to put into an investment with the amount of debt you can get, that lets you know what type of property you can afford buying.
I think a mistake Ash, I see a lot of new investors make is they get all enamored with this certain type of investing strategy with a certain market. Then comes to find out they can only afford a fraction of what it costs to invest with that strategy in that market.
So I think identifying what your purchasing power is first before you do anything, can save you some wasted time because then, say that you look at your purchasing power and you’ve got half a million dollars in the bank and you’ve got the ability to get approved for a $5 million loan, that gives you a lot of options. On the flip side, if you’ve got $40,000 to invest and you can get approved for a $250,000 loan, okay, that’s going to dictate what kind of markets you can look at while you’re looking to invest.
So Nicole, you’ve already kind of taken that first step of identifying the 40K, but yes, I would 100% say understand the financing piece, so you don’t waste your time looking at properties as you can’t necessarily get approved for.
Once you’ve gotten your purchasing power, the third step is market selection. And I don’t think that Nicole in this post here, in this question, specifically talked about which market she’s looking to invest into, but I think that’s an incredibly important piece is the market selection to really be able to get good at finding deals in that specific market.
Because another mistake that we see a lot of investors make, Ash, is that when they first get started, they kind of have the shotgun approach where they’re just looking any and everywhere for properties. When ideally you want to be able to narrow it down to a small of, I guess a radius as you can. So your market selection, and then you can go into the deal flow and the due diligence piece.
But I just wanted to give that overview. I mean Ash, I don’t know, is that in line with kind of what you typically feel makes sense for Rookies also?

Ashley:
Yeah, definitely. I think we can kind of go into as to how she’s going to fund the rehab now. That was the next part of the question and looking for different ways and going through a bank to actually fund the rehab. So Tony, you did do this correct on one of your Louisiana houses?

Tony:
Yeah. So my first two or three long-term rentals out in Louisiana, we had a bank, it was a local credit union that funded both the purchase and the rehab of those properties. Now, there were stipulations or I guess boxes we had to check to be able to get approved for that kind of mortgage. Specifically the purchase price in the rehab had to be no more than like 72% of the after repair value, but I was able to get funding for both the purchase and the rehab.
So Nicole, there are banks out there that will give you that type of loan product. I think it’s just a matter of picking up the phone and calling as many small and local banks and credit unions in your chosen market to see which ones have an option that might be able to work for you.

Ashley:
So one thing that I was thinking of when I saw that there was $40,000 to put available in this, would obviously depend on the market that you’re into as far as how much would $40,000 get you, but you could use some of that money for the down payment. So that means you are going to be able to afford less property since you now have a smaller down payment and then use maybe the other half or a portion of that 40,000 to fund the rehab.
With the rehab, you can also structure it with your contractors or if you’re doing the work yourself, that you will cover materials yourself that you will purchase them, instead of having the contractor go and purchase and then bill you for the materials. And one of the advantages of doing that, is that you’re able to get 0% interest rate credit card.
So this is usually over a period of time, you have to be super diligent about credit card usage and maybe not have a history of collecting debt on your credit cards, but in this scenario you want to be able to go and get a credit card. We did this recently for a property and we did a credit card that was 12 months 0% interest. Over those 12 months, if you made the minimum payment on time for the 12 months, they actually extended it to a 0% for 18 months. We didn’t end up needing the 18 months anyways because the project had completed, we paid it off.
But having a long time just in case something does go wrong with your project, you’re not racking up this debt of material costs and then all of a sudden you have a 22% interest rate, that you’re paying on the credit cards. But going through and putting those on and then you would go and refinance the property and then pay off the credit cards would be that last step to get rid of it.
But it can be a huge advantage that you are getting your materials paid for at 0% and not borrowing any money from anyone. And that can be a huge chunk of your actual construction costs, your rehab costs, and then you would just have to come up with the cash to pay your contractors unless some of them do take credit card.
We do work with some vendors, like plumbing companies and stuff that they do actually. They’ll send an invoice to email, which is through QuickBooks and they actually have an option to pay by credit card too if we wanted to. So it really depends on the contractor and vendors you’re using, but that is definitely a tool you can use, is the 0% credit cards to cover a portion of that rehab cost too.

Tony:
Yeah. I think the other option is to, if you did want to bring someone else into the fold, like Nicole, let’s say that you have someone in your life that maybe has whatever, say your rehab budget is 50,000 bucks. Someone in your life that has $50,000 that’s just sitting in the bank account earning whatever single digit percentage, and you say that to this person, “Hey John Doe, I’m going to give you 12% annualized returns if you let me use this money.” Then you go out, you fund your rehab with that person’s capital and then at the end of the deal you refinance and you pay that person off.
So similar to the credit cards, but the benefit I think of the private money is that it is a little bit easier to use in all situations. So like most vendors, if you’ve got cash from your private money lender, then you’re going to be able to pay that person.
So again, we’ve used private money pretty extensively, actually exclusively for all of our rehab projects and it’s worked out I think well for both parties.

Ashley:
Okay. So our next question is from Rob Malloy. Okay, so Rob’s question is “I just read Ashley Kehr’s article on finding a partner and I had a couple questions about method number one. Ashley got a partner to purchase the duplex in cash. They split the cashflow 50/50 and she pays them five and a half percent interest over 15 year for the purchase price without bio option at any time. Why go this way? Is this more beneficial than financing through a bank to begin with? Reason I ask is that I’m looking at a duplex, both sides already rented and the numbers seem to work if I go with 15% down and I just manage the property myself, what would you do? Does partner make sense? Thanks for taking the time.”
Okay, so this scenario that Rob is talking about, is my first ever partnership with Evan and I had the limited belief at this point in time that you could not go to a bank to purchase an investment property. I just thought that you could only pay cash because the investor that I worked for, that’s what he did. So I didn’t even know there was an option to go to the bank. I would not do this scenario again.
Now, Tony and I have been talking about this a lot lately as to the value of having experience and knowledge and other types of sweat equity, that brings so much value to the table rather than just the money. And I didn’t value myself enough at this point where I gave 50/50 partnership. So they got 50% of the cashflow, we eventually sold the property so they got 50% of the profit of that property and then they got five and a half percent interest plus all their money back that they had invested into the purchase price. So sweet deal for my partner on that. The thing with this is that it got me started.
So this is an option for you and this is maybe your only option, then yes, if that gets you into a deal because me making that 50% of the cashflow was better than me making no money off of this property at all.
So in Rob’s situation, he’s saying he’s able to put 15% down and manage the property himself. So he must have found a bank that would allow him to do 15% down. As far as managing the property yourself, if you’re going to do that, make sure when you run the numbers, you’re still adding in for a property management company.
So research your areas, find out how much it would cost for a property manager in your area so that later on if you do decide you have the option to be able to go and hire a property management company and it’s not going to kill your cashflow.

Tony:
I think the only thing I’d add there, Ash, is that for Rob and for everyone that’s listening. Anytime you enter into a partnership, there should be a reason why. Ash and I talk about in the partnership book about your missing puzzle piece, so ideally you should be entering into a partnership because you’re partnering with someone that has a complimentary skillset ability resource to yourself. But if you have everything you need to do this first deal, then maybe it doesn’t make sense for you to partner.
So Rob, if you are in a position where you’ve already got the financing lined up, you’ve got the capital available, then maybe giving up 50% of your deal doesn’t make sense. So I think every person should be assessing their own unique kind of personal situation, trying to understand where you feel that you have maybe a shortcoming or where you’re lacking or whether it’s experience, money, time, whatever it is, and that’s when you want to partner. But if you can check all those boxes for a deal, then it might make sense to move forward by yourself.

Ashley:
Next question is from Brett Miller, “How common is it as a buyer purchasing a cash only property is expected to pay closing cost? Isn’t the seller supposed to pay closing or is that traditional financing typically?”
So this is a great question, because it really can go either way. Before we even talk about that, let’s break down what some of the closing costs even are when doing a property.

Tony:
Yeah, you read my mind. I was actually about to pull up my last closing disclosure here to look through what those closing costs were. So there typically are just like as an aside, there typically are more closing costs when you have financing, because lenders are going to require more paperwork and there’s more things that they need and they got to get paid.
So a lot of times there is more, but I’m just going to read through here and see what some of my closing costs were on this last flip that we recently sold. So I had taxes. So there are taxes that were due that I had to pay. Me as a seller, I had to pay those. There was my payoff to my private money lenders. I had mortgage security documents recorded with the county. So before I could get paid, I had to make sure that my private money lenders were paid back, their principal plus their interest.
I had my real estate commissions. Typically, a seller will cover the commissions for both the seller’s agent, so for their own agent and for the buyer’s agent. So for this flip that I sold, that’s what it was. Mine was a total of 5% in commission. So two and a half percent went to my agent. The other two and a half percent went to the buyer’s agent.
There’s a bunch of title cost. I probably spent, I don’t know, somewhere around 3000 bucks, maybe a little bit more on everything related to title and escrow. There’s some county taxes just for paperwork and things like that. Some additional kind of inspections for septic and natural hazard disclosures and things like that. That was actually everything that was on this closing disclosure.
So some of those things are going to be present no matter if you’re going with financing or if you’re going with cash. But we actually also gave the buyer a small credit because they had things on their end like an appraisal they still have to pay for. There are points they might have to pay to their lender to close this deal.
So sometimes as a seller you might also give credits to the buyer, which is what we did in this situation as well. But I feel like that’s a decent idea of what you could expect to see for closing costs on a property transaction like that.

Ashley:
Yeah, one thing too, depending on what state you’re in, you may have to pay attorney fees too at closing. So New York State, you have to use an attorney to close on a property and usually it’s the seller’s paying their own attorney and the buyer is paying their own attorney too. And sometimes that would just be added into the closing cost or your attorney can actually bill you separately, but that’s still going to cost you and that’s still money you need to have to come up with the closing costs too.

Tony:
So I guess to answer the question in a nutshell for Rhett, because again, he’s saying, “How common is it as a buyer to place some closing costs?” So the answer is yes. There’s still probably some closing costs you’ll incur. Definitely not as many as if you have a mortgage or a lender that’s kind of facilitating that transaction.
But you can also negotiate with the seller to say, “Hey, Mr. and Mrs. seller, I’m super interested in your property, but my one condition is that you cover all of my closing costs.” And depending on where we’re at in the market cycle, they might say yes. And like I said, the last flip that we sold, we covered all of that buyer’s closing costs because it still makes sense for us to sell the property that way. So don’t be afraid to ask Brett, I think to have those costs covered. And the worst I can say is no.

Ashley:
Okay, we have a seller finance question next, and this is by Bill Rogers. “So once you have a house under contract, how long until you are able to refinance? I know you don’t want to do it right away, especially with these rates, but isn’t that one of the ways you actually get sellers to do seller financing is for tax mitigation reasons? Is this something that would have to be written in the terms of the contract?”
Hey, so seller financing, we all love seller financing, makes things way easier most of the time than going to a bank and doing conventional financing. But the first question here is, how long until you are able to refinance? So in Bill’s situation, we’re going to assume he’s going and doing seller financing and then going to refinance out of the seller financing.
So you can set it up however you and the seller agree, but you want to make sure that you have enough time that it’s not too short of a time. So some banks require a seasoning purchase from when you purchase the property a seasoning period. So it can be six to 12 months from the date of purchase. So you don’t want to make your seller financing due, you are only doing it over the course of three or four months.
You want to make sure that you have enough time to go and do the refinance on the property, but really you could set it up for… Pace Morby, we’ve had him on the show, he talks a lot about seller financing and he’s done 40-year terms where he doesn’t, he’s paying the person for the next 40 years on the property and there is no rhyme or reason for him to go and refinance. It’s really all about how you set it up.
Maybe if you do get a great great interest rate with them or you have great terms where your payment is low enough that it works for the property. When you structure the seller finance deal, you want to create an amortization schedule. So the amortization schedule is going to show you the full amount you’re borrowing, the monthly payments, how much of that monthly payment is principal, how much of that monthly payment is interest, and then what the balance would be due if you were to pay it off.
So this is one way you can kind of negotiate with the seller too is like, “Hey, look, over the course of one year, I’m going to be paying you an extra $10,000 in interest that you wouldn’t get if I went to a bank.” So Bill had mentioned the tax mitigation reason, the tax advantage of doing seller financing for a seller, but there’s also ways that the seller actually makes more money because they can make the interest off of you too.
So he said something in here about how he doesn’t know if he would go right away, especially with these rates. So if you can get a great rate and great terms from the seller, there is no reason to go and refinance, but you want to make sure in your contract that you have that.
So what I do in several of the times that I have done seller financing is I will do instead of a balloon payment. So a balloon payment is saying that you’re going to do seller financing for 12 months and then the balance that is locked after you’ve made payments for 12 months is due in a balloon payment, paying that whole chunk. So that’s where you typically go and refinance with the bank.
What I have done is I try to push it out as long as possible, but I will do a loan callable date. So this would be in three years, the seller has the option to call the loan instead of a mandatory balloon payment. This is where the seller can say, “You know what? No, keep making payments. I’m not going to call the loan.” But anytime after that year three, they can call it, but they have to give me eight months written notice to be able to call the loan. And then I would have eight months to be, “Okay, I need to figure out how I’m going to go and refinance this and pay this off.” But eight months will give me plenty of time to do that.
So when you are writing up your contract with the seller, make sure you are putting in these kind of different exit strategies or things that work for you and the seller. And that’s where I really like to get face-to-face for seller financing, sit down and go through everything.
I will send a seller the contract and the amortization schedule. And as much information as I can, the night before I’m meeting with them to give them some time to review it, and then I will sit down with them the next day and walk through the whole thing, so that way I can pick their brain as much as possible as to, “Okay, you don’t agree to this, let’s figure out what we can change, what we can do.” And I try to get down to figure out what’s their real motivation, what do they really want, and then just try to negotiate and adjust the contract right then and there to make it work. So that’s the amazing thing with seller financing is you can set it up so many different ways.
One thing I would really try to avoid is prepayment penalties. And a lot of commercial lenders will do this for banks where they’ll say, “Okay, we’re doing this loan, but if you pay this loan off within the next five years, you’re going to owe us 2% of whatever the balance is as a fee for paying this loan off early, because we’re banking on making this money off the interest.
So if you can avoid that with sellers, then you can go and refinance at any time. And that keeps your options open, especially if you decide you want to go refinance because you want to tap into more equity to pull that out of the property. Or maybe rates do go a lot lower than what you’re paying in seller refinancing, so you can go ahead and refinance to the better rate too.

Tony:
Yeah. What a world-class breakdown Ash, on seller financing. I think the only part of the question that’s probably still lingering there, and I just want to clarify a little bit, is the tax mitigation piece.
So to explain what Bill’s talking about here. Again, he says, “Isn’t that one of the ways you actually get sellers to do seller financing as for tax mitigation reasons?” What he’s referring to here is that when, say that I’ll use Ashley myself as an example.
Say that Ashley owns a property and whatever, say she owns it free and clear and say, the house is worth $300,000. If Ashley goes out and sells that property, she’ll have a taxable event on the net proceeds of that sale, right? So again, say, whatever, say she makes $300,000 if she were to sell that property in full.
What some folks, now obviously there are some ways to get around that you could do like a 1031 exchange or something to that effect. But say she wanted to avoid that big taxable event for selling that property, yet she still wanted to tap into that equity. The reason that seller financing becomes attractive to folks in Ashley’s situation is because say I come to her and say, “Ashley, look, if you sell this property to John Doe, you’re going to have $300,000 taxable event that you have to worry about. If you sell or finance it to me, the only money that’ll be taxable is the payments that I’m making to you on a monthly basis.”
So instead of say, I agree to buy her property and it’s a $2,000 a month payment. Now she’s only paying taxes on $24,000 a year versus the $300,000 per year that she get if she sold the property. So for some people there is a tax incentive to not cash out on day one and instead take those payments over time. Now, I’m not a CPA, forgive me if I explain some of that incorrectly, but at least it gives you an idea. There’s a tax benefit to deferring that big lump sum payment and instead taking it in small chunks.

Ashley:
Yeah. And there’s also some great books on tax strategies for specifically real estate investors. If you go to the BiggerPockets bookstore, Amanda Hahn has written two really great books for BiggerPockets about tax strategies.
One’s just very basic knowledge we recommend for the rookie investors. And then there’s also an advanced tax strategies book. I think it’s Tax Strategies for the Savvy Real Estate Investor is what it’s called. But if you go to the BiggerPockets bookstore, you can find it on there.
Okay. And our last question today is from Denise Biddinger. This question is, “What’s the best way to structure a first time partnership?” And Tony, I know you have our book there if you want to hold it up.

Tony:
I do. So for those of you that don’t know, hopefully you know by now, but Ashley and I have co-authored a book published by BiggerPockets called Real Estate Partnerships: How to Access More Cash, Acquire Bigger Deals Than Achieve Higher Profits. And the book is available for you to purchase. So head over to biggerpockets.com/partnerships and you guys can get all the nitty-gritty about how Ash and I structure our partnerships and use partnerships and avoid partnership pitfalls, but there’s a lot about partnerships structures.
So I guess the first thing that I’ll say is that there is no right or wrong way to structure a partnership. At the end of the day, as long as you’re not breaking any laws, you and your partner can agree to whatever terms both or at least make the both of you happy. Now, there are some things I think to consider when you’re putting a partnership together and I’ll call out some of those.
I think the first thing I’ll say though, is that there’s also two types of partnerships and people kind of, I think usually just think of one, but you have debt partnerships and you have equity partnerships. In a debt partnership, there’s the money person and there’s the sweat equity person. So one person’s just going to loan the money, the other person’s going to do all the work, and the person who’s doing all the work, we’ll pay some kind of fixed return back to the person that’s lending the money.
I’d say the majority of partnerships that we see in it that a lot of the rookie investors do are actual equity partnerships. And within an equity partnership, there’s several ways to structure, I guess at least several levers you can kind of look at.
So the first thing you wanted to think about is the distribution of labor. Every project that you think about should have some sort of distribution of labor. It could be that one person’s going to do all the work. It could be that you guys are going to split it down the middle. It could be that one person’s going to do 75%, the other person’s going to do 25%. But you want to do your best to think about, how are we distributing labor between the both of us? And the reason this is important is because if one person is doing more work in that partnership, then ideally they should be compensated more for that.
If you guys are split everything down in the middle and the time commitment on the labor side is equal, then it makes sense to have your equity and profit distributions match that. But I think the first thing to consider is, “Hey, how are we divvying up the labor?” The second thing to consider is the actual capital. Are you both bringing capital? Is one person bringing the capital? Is it split down the middle? Was one person bringing 80%, the other person’s bringing 20%? How are you divvying up the capital that you needs to purchase this deal?
The second piece of the capital is the mortgage itself. If you’re going out and getting debt, are both of you going to carry the mortgage? Is one person going to carry the mortgage? How will the actual debt be structured? So you want to start thinking about all the different roles that each person will play inside of that partnership, and then try and assign a value to each one of those roles that each person is playing. And ideally, you want to get to some kind of structure that accurately represents the amount of effort and value that each person is putting towards the partnership.
Now, I’ll say a lot of my deals are just straight 50/50, right? We have partners that bring the capital, they carry the mortgage, we do everything else, and we split it down the middle. And it’s been a mutually beneficial arrangement for both of us. We have some deals where we brought a little bit of the capital and we charge a property management fee as opposed to taking a bigger equity stake.
So there’s a bunch of different levers you can pull, but I think the most important thing is identifying who’s doing what and trying to assign values. What are your thoughts on that Ash?

Ashley:
Yeah, and I think that’s actually the hardest thing, especially for rookie investors or even going into a different strategy where maybe it’s your first time doing the strategy and you don’t know exactly what effort or time it’s going to take for the roles that you are going to be performing for the property.
So one thing I would suggest is that when you are doing the operating agreement, maybe you could put in there some kind of clause where after one year it becomes, you have that discussion as to, “Okay, do we need to actually change things as to, now you’re going to be paid a hundred dollars per month for bookkeeping.” Or something like that.
I think leave your options open, so that in your partnership agreement there is room for change, especially if you’re going to be doing a buy and hold property where maybe you’re both doing a lot of the rules and responsibilities is to look at it every year and be like, “Okay, this is something I don’t want to do anymore. What can we do? What can we change for this?” But definitely sitting down and figuring out what your partner, what is fair, because there is no, as long as it’s legal, there is no wrong way to structure your partnership.
As we just went over, it was the second question that we went over today for Rookie Reply. My first partnership, and that was awful for me. I did all the work and I got the least amount of benefit from it, but it got me started, it got me in that deal. And honestly, that property wasn’t a ton of cashflow.
I mean, we ended up having, I had no money into the deal and I was making a hundred bucks a month or whatever. So it’s like, “Okay, if I got a little bit more equity, it’d be 20 more dollars a month.” But to have that opportunity to get into that first deal, that was what was important to me at the time, and I really wanted to prove myself and show my partner that I knew what I was doing. And the way for me to do that is to really put up more safeguards for him to get his money back, and the property and to have it be an advantage for him and the opportunity for him.
So I think just really look and understand what’s important to you, what do you really want out of this deal and the partnership that you’re going to do. And then go and talk to your partner and see what’s really important to them, and from there, you can structure it. There’s just so many different options you have. And if this is your first time partnering with this person, make sure that you’re setting it up, that you’re dating them.
Maybe you’re just doing a joint venture agreement and you’re not committing to an LLC where you’re going to buy 10 properties over the next year. You’re going to do one property and see how it goes, and then maybe you can branch off and add on from there, depending how that is.
But in the book, we do go over some case studies, and Tony has talked about before how he actually walked away from a flip he was doing with a partner, or it was a BRRRR, right? To be a short-term rental, not a flip. So he walked away from that long-term commitment with that partner just because it didn’t feel right. And having those kind of exit strategies in place I think are almost more important than the actual structure and the benefits of it.

Tony:
Yeah. Super important point, Ashley, and I’m glad you finished with that. I think the only other thing I’d add is, and you talk about this a lot as well, but it’s as you kind of think through what every person’s going to be doing, you have some options on how you compensate.
So for example, in one of our partnerships, we took a reduced equity stake of only 25%, but we also charged a property management fee of 15% of gross revenues. So we are compensating ourselves for the work that we’re doing in the property with that 15% management fee, which is a slight discount from what you see in that market. Most Airbnb, short-term rental hosts charging 20 to 25% at least. So we gave a slight discount to the property, but then we also retained 25% equity because we put up 25% of the capital.
So just think through like, “Hey, who’s going to be doing property management?” If there’s rehab, we should be managing that bookkeeping and accounting, finding the actual deals, analyzing those deals, managing the tenants, the guests or whoever. There’s a lot of different roles to go into that. And you can either say, “Hey, I’m going to compensate myself for doing this work by charging a property management fee.” Or, “I’m going to pay myself an hourly fee.” Or maybe it’s a fixed flat amount per month for doing the bookkeeping. But just try and think through what those look like and try and work that into your partnership.
I think the last thing I’ll add is when it comes to the capital side, two important things that you want to discuss, and this is me assuming I think in this question, she said, Denise said, “Hopefully finding a partner.” Because they don’t have the capital. So it sounds like you want someone to bring all the capital.
The other questions you’ll want to ask yourself, Denise, are what is your method for paying that person back if there is one? So we have some partnerships where there is no payback, right? It’s like, “Hey, you’re putting in your $50,000 and that’s your contribution to the partnership because I’m doing everything else.” We have one partnership where there is a mechanism for that partner to get paid back. And Ashley’s example of her first partnership, that partner essentially had a loan against their partnerships. So they got back a fixed amount every single month before any profits were distributed. So you could do it that way if you wanted to.
In our partnership, the capital recapture is what it’s called, only kicks in if we refinance or sell the property. So just think about like, “Hey, are we going to want to pay this person back the 50K?” You don’t have to, but it is something that’s kind of important to think through. And the last piece on the capital side is how would you handle potential shortfalls in revenue?
So one of our Louisiana properties, we had a massive shortfall because we had this crazy, you guys probably know the Shreveport story, but we had this crazy increase in our homeowner’s insurance, and then we tried to sell the house and we ended up finding foundation issues. So when things like that happen, is it the partner who contributed to the capital that’s going to be covering 100% of that cost? Will you split that 50/50? Will you split it 75/25? So just think about those little details as well to really hopefully avoid some of those more difficult conversations before they happen.

Ashley:
Well, thank you guys so much for joining us on this week’s Rookie Reply. Don’t forget to check out Tony and I’s new book at the BiggerPockets bookstore, that’s biggerpockets.com/partnerships.
Okay. I’m Ashley, @wealthfromrentals, and he’s Tony J. Robinson, @tonyjrobinson on Instagram, and we will be back on Wednesday with a guest.