David:
This is the BiggerPockets Podcast, show 619.

Laurence:
I think we might, and this is another prediction and I’m not an economist, but this is just my own personal belief. I think there’s a decent chance we’d go through a period of stagflation. So normally you’d raise interest rates to stop inflation, but I think in this case inflation’s going to keep going up, which makes affordability and cost of living also go up, but it’s less affordable so we might hit a recession even though there’s tremendous growth in prices. And that could cause a period of stagflation. So you could see some spiraling out of control in this way.

David:
What’s going on, everyone? This is David Greene, your host of the BiggerPockets Real Estate Podcast, the best real estate investing podcast bar none. Today, my co-host Dave Meyer and I will be interviewing Laurence Jankelow, the co-founder of Avail and the VP of Rentals at Realtor.com. Laurence is passionate about helping landlords do their jobs better and make more money in real estate. And Dave and I have a fascinating interview with him where he shares how he uses technology to help do a better job with investing in real estate, which areas he invests in, which asset classes he likes. We get into some really good stuff. Dave, what were some of your favorite parts of today’s show?

Dave:
I think Laurence provides some really practical, tactical advice on how to be a better property manager, particularly in an uncertain economy, which we’re seeing right now. But a lot of people talk about property management, whether you should sell [inaudible 00:01:30], or if you should hire a professional property management company. But don’t talk about the actual logistics, nuts and bolts of what you should be doing, particularly as a new property manager. I know I had a lot of very embarrassing and painful lessons when I was first self-managing and I think he gave some great advice on how to avoid some of those common pitfalls.

David:
Yeah, that’s a very good point. We got pretty deep into what to look for in a tenant, what to avoid, how important choosing the right tenant actually is. And it’s not talked about enough in real estate. Today’s quick tip – go to check out biggerpockets.com/podcasts. At BiggerPockets, we have now put together a landing page where you can see all of the podcasts that we offer on specific topics, as well as learn a little bit more about the host and what you can expect from every show. So head over to biggerpockets.com/podcast, click on The Real Estate Show to learn about me, click on the On the Market icon to learn more about Dave and see what BiggerPockets has to offer you that you might not be aware of.
Dave, my friend, so I got to admit, I have had my head completely zoomed in and focused on running the David Greene team, running The One Brokerage and in the middle of a 1031, trying to find replacement properties. And I’ve been so focused on the individual details of making this happen that I haven’t been able to pay as much attention to the market in general as I would like. But sometimes knowing what’s happening in the market in general is actually more helpful than paying attention to a specific property because the market tends to move as a whole. So would you be so kind as to kind of filling me in on what you’ve been seeing, what you’ve been noticing? What’s the talk in the real estate world today?

Dave:
Yeah, absolutely. I would love to. I think there are two topics that are really top of mind for me. And the first is inventory and just general inventory dynamic. I’m sure you’re saying this in all of your businesses, but to me it seems like the housing market is starting to have this sort of epic tug of war. And on one side we have demand and it’s just how many people want to buy homes. And that with rising interest rate is showing signs of softening. It’s definitely not tanking. But I follow things like the Mortgage Bankers Association survey and they track how many mortgage applications people are putting in every month. And those are down about 10% year over year. But so far there hasn’t been a decline in housing prices and housing prices are still going up double digits year over year because of the other side of this tug of war, which is inventory.
So even if demand starts to slip as it has been, if inventory remains as low as it has been for so long, housing prices really can’t go anywhere. You have to see inventory increase before the market can moderate. And so far, we just haven’t seen that yet. In fact, if you look at new listings on a seasonally adjusted basis, which is the way you have to look at these things, you can’t just say like, “Oh, listings went up from March to April.” Of course it does. That happens every single year. But if you look at this on a year over year basis, new listings are actually going down right now.
We just saw some new data came out that said construction permits were down 3%. Foreclosures, which a lot of people have been thinking are going to lead to a glut of inventory, they’re at record lows. They’ve been going down for seven consecutive quarters. So right now in the tug of war, I’m seeing demand, even though it’s down, is still far surpassing inventory. And that’s just how I’m reading it right now. That of course could change. And I think it will start to moderate and change. But to me, that’s the thing that I’m really focusing on to try and see where this market’s going. What do you think about all that?

David:
I think you’re spot on. You’re looking at the right things. One thought that I had when it comes to the, because really in a market where demand is steady or rising, it’s supply that’s the variable that controls the price. And that supply side perspective of economics will really help someone understand what’s happening with real estate. And I was thinking about how housing was something that used to be tied to how many people needed a place to live. That was the only reason that real estate existed. So you either owned a house or you rented a house from somebody that owned it. It was pretty simple to figure out how much supply was needed in a given market. And people didn’t move around the country nearly as much as they do now because they were tied to a location because of work and family support systems.
And it’s really technology that has created the ability for people to have like you, you’re living in Amsterdam right now and still doing your same job and still living your life. It’s just become easier to be a human with technological advances. So all of the things we used to need, like you needed a family member that could watch your kid or could help bring the cup of sugar over if you ran out of money. Well, it’s easier to connect with people when you move into new places. And obviously the work environment changing has played a role in this too. So people can leave areas much more quickly and easily than they could before, which makes it harder to regulate supply. How many houses do we need in Fargo, North Dakota once people realize I don’t have to live in Fargo anymore. And the other piece is that now housing is not just a place where people need to live. It has now become a business.
So with people traveling through short term rentals, one house, you could have a house that you don’t need as far as just how many people need a place to live in this city, but it makes a ton of money from people traveling to visit that city. And then you can start to get a hundred houses more than what you need that still make economic sense because people are traveling to use them. So now that the short term rental concept of vacationing and staying in someone’s home instead of a hotel, combined with how much more frequently people can move around easily has made it a lot trickier to figure out how much supply is actually needed. And I think that causes builders to be nervous about building homes because they don’t want to build and then there’s no one to buy.
It’s harder to tell. It makes it more difficult for the government to figure out what incentives to offer to get people to build homes. It makes it more nerve wracking for someone who isn’t familiar with real estate to go buy a house in the first place. And it gives an advantage to the big, the investor who has experience or institutional capital that’s playing the long game to sort of weather the storm of some of those risks that a normal person wouldn’t. And so it’s much more complicated to solve these problems than the last 200 years that we experienced.

Dave:
That’s a really good point. I think that the migration that’s going on over the last two years, and it’s slowing down a little bit, but not that much, still up well above pre pandemic levels, is creating this like reshuffling of supply and demand. And no one exactly knows what’s going to happen. And if I can plug on the market, actually I think given when this recording comes out, the next one that will be coming out is going to be a conversation with an economist from Redfin who actually modeled out all of the migration from the coast to the Sunbelt and how that’s changing the dynamics of the housing market. If anyone here is interested in those migration patterns and how they might be impacting your market, you should definitely check that out.
The second thing that I’m looking at right now is a recession. I think you we’re hearing it across every media outlet right now that we’re heading towards a recession and the signals of recessions are sort of confusing right now. If you’ve heard of the yield curve, which is a really reliable predictor of recessions, that inverted slightly, which isn’t exactly a recession trigger, but it’s starting to point that way.
There’s something called the lead economic indicators, which tends to predict recessions six to eight months ahead of time and it’s basically been flat, but it’s starting to decline. And so there are some concerning signs, particularly with the Fed continuing to raise interest rates that we could be heading for a recession. I just want to say that recession, technically all that means is GDP contracting for two consecutive quarters. That doesn’t necessarily mean that there’s going to be crashes in the housing market or the stock market. Those are independent things. But just, I think it’s worth noting that there are a lot of red flags coming up for a recession right now and I’m curious to hear your thoughts on this.

David:
All right. So this is me having to get out a crystal ball, which I always want to give a disclaimer, don’t make your decisions just based on my crystal ball, which looks a lot like my head. But I will share what I’m thinking-

Dave:
Very shiny.

David:
Yes, exactly. I think, and I mentioned this before, that we are going to have a economy where at the upper end of wealthy people, they’re doing very well. Those that are owning assets, those assets are going to continue to increase in value because inflation’s going to push their value higher. Those at the lower end of the spectrum are actually going to lose wealth. They’re going to be squeezed. I don’t think it’s like a tide where everyone rises and everyone falls. You’re going to see a division where the people that are in a position of advantage, where they own assets are going to do very well. The people who don’t are going to get squeezed. And this is not uncommon to many things in the world. If you’re a basketball player right now in the NBA and you’re this really slow, seven foot tall kind of useless guy that used to be really valuable in the NBA when shot blocking and everyone is trying to get close to the rim and you could be strong and tough and get rebounds.
Those were the people everyone wanted. Well now it’s the little guys with high levels of skill that with the current rule set where you can’t touch people, you can’t knock them around. They’re doing better. This is just how life goes. There’s shifts in who is in a position of advantage and who’s not. I think we are likely going to see the people at the lower end of the scale, unfortunately, be squeezed very hard as food prices are going to continue to increase, as gas prices are going to continue to increase depending on what happens in the Eastern part of the world, where supply chains could be further disrupted, now we’d have to start making things in America, which makes them way more expensive than what we think is normal. So paying $14 for a t-shirt is something we got used to. If you’re making that in America, it’s going to be much more than $14.
That’s unfortunately going to affect the people that make the least amount of money. I would expect to see in some case, depending on, I don’t know when it’s going to happen, but I do think there will be a recession in that sense, but I don’t think it’s going to necessarily crush assets. I don’t think you’re going to see a ton of wealthy people being super affected by this. They’ll probably end up making more money, which is usually what happens with wealthy people when we head into recessions.
Now, the other thing I’ll say is I think that we have printed so much money that there’s actually a bunch of it sitting on the sidelines waiting to jump in. So cryptocurrencies are down, the stock market is down. There’s a lot of traditional measures of value that we look at and it’s like, “Oh, we’re going bad, Bitcoin dropped whatever.” That could change in a day. I think there’s so much money sitting on the sidelines that if it rushes in, all of a sudden it was down to Bitcoin has record highs, it’s so easy to see and many different kinds of crypto. So it’s not enough just to look at what’s happening right now, you have to understand how much money is playing in the market and how much is sitting on the sidelines to wait and see what’s going to happen.
And with talks of recession, wealthy people tend to withdraw their money out of the market, hold it in cash and wait to see where the opportunity is before they rush back in. I think that raising rates is a smart move if we’re trying to stop inflation. I think it’s too little too late. I think this is like a semi truck going down a hill and the brakes are out and it’s barreling down. That’s why we’re seeing asset prices continue to rise so quickly. I think that rising rates is like just stepping on the brake pedal and you’re barely making an impact.
It’s going to affect people, unfortunately that are least likely to be able to handle it. That’s the best description I can give is to don’t look at it like the entire economy is going to move up or down as a whole. There are segments of the economy that are going to behave differently, much like this type of player in this NBA is going to do better than a different type.

Dave:
That’s a very interesting take. And I think, unfortunately, you’re right that this is going to disproportionately impact those on the lower end of the socioeconomic spectrum. It just seems that we’re going to see layoffs. That’s basically usually happens with a recession, and you also see inflation causing a situation where money is stretched further and further, even if people do retain their jobs. I do just also want to stress that although there is a lot of fear, rightfully so around a recession, recessions are a normal part of the economic cycle. And as an investor or as someone who’s just trying to manage their personal finances, there are things that you can do to prepare yourself for a recession. Just as an example, if you’re an investor, keep a bigger cushion. There might be an increased chance that you lose your job. Hopefully you don’t.
But if you’re going to make an investment, maybe you keep 12 months of reserves where you used to keep six. Examples like that. And recently just actually I was talking to, you know Jay Scott, right? We just had him on, On the Market. He wrote the book on recession proof real estate investing, which is a great book. It’s filled with tons of practical tips for how to prepare for this type of thing. And you can also check out my conversation with him On the Market. It just came out yesterday about that. But I just think that it doesn’t necessarily, like you said, have to be all or nothing, but there are things to keep in mind and you want to operate a little bit differently with the increased market risk that we’re seeing right now. And it could be year away, could be two years away. No one really knows, but I think it’s prudent to at least inform yourself on what you can do as an investor to do as well as you can in a potential recession.

David:
Yeah. And that’s one of the reasons that I’ve been giving advice that this doesn’t apply to everyone, but when everything was going great, the whole dream of quit your job, just live off of your real estate income, it made more sense to a larger degree of people. With this much uncertainty with not knowing what’s going to happen, we have ample time to prepare. It doesn’t mean that nobody should be quitting their job and going full time in real estate, but less of the people that have that opportunity should be doing so. I think that if you’re worried about a layoff, which you should be if there’s a recession coming, because like you said, that typically happens, now is it time to be improving your skillset. Can you learn how to be good at different things? Now is when you should double down on the value that you bring as far as your work ethic to your employer, what you’re capable of doing.
Not what a lot of gurus have been telling people is, “Hey, take my course, learn how to do real estate and then you don’t need to worry about a skill set in life. Your real estate is going to take care of everything for you.” In essence, now is not the time to become less valuable or weaker. Now is the time to start preparing to become more valuable and stronger so that when that does come, you’re not knocked over. I look at it like there’s a huge wave that’s coming, I want to brace myself and be ready for it. I don’t want to be looking the other direction, thinking everything is fine.

Dave:
Yeah, I completely, completely agree. And I actually think if you look, the economy right now is a little confusing because there are these red flags, but there are opportunities right now. And I think the biggest opportunity is if you want to change industries and find a job that’s more personally fulfilling to you or has more income, this is one of the best times, at least in my lifetime and I think in American history to try and find a new job. Workers have a lot of leverage right now. And as David was saying, that can really set you up for the long term. You can improve your debt to income ratio. You can have more money with which to invest in a couple of months. And that could really set you up. Of course, it’s not the dream of financial freedom, but given where the market is right now, I do agree that can make a lot more sense.

David:
Well, on the topic of a recession coming and cutting expenses and pinching pennies a little bit, there are many investors that will find themselves managing their own properties to try to keep their profit margins higher because property management is going to become tougher to afford quite frankly, when asset prices continue to increase.
So today we are going to be interviewing expert on this topic, Laurence Jankelow who is passionate about using technology to help make real estate investors lives easier.

Dave:
Okay, let’s bring in Laurence.

David:
Lawrence Jankelow, welcome to the BiggerPockets Podcast.

Laurence:
Thanks David. It’s a pleasure being here.

David:
Yeah, so can you tell us a little bit about your resume, what your company Avail does and then how you got started in real estate?

Laurence:
Yeah, totally. Well, I’ll start with how I got started in real estate I think first. I’m a do it yourself landlord, got started in 2010, purchased a three unit residential brownstone walk up here in Chicago from a friend I used to work with at Goldman thinking, “Hey, passive income, who wouldn’t want it?” Took the dive. I think you quickly realize once you have one passive income’s not really all that passive. And so that was my entrance into real estate, but at that time trying to manage an investment banking job and this passive income proved to be a little too hard. And so decided along with a buddy, “Hey, this isn’t how it should be for landlords and armchair investors.”
So left Goldman to build a startup that really aimed at helping landlords manage their rental properties called Avail. And essentially it takes a lot of the operational pieces of running your business as a landlord and makes it all mostly automated. So finding and screening tenants, collecting rent online, submitting and collecting maintenance tickets online, all of those things, it just does it for you.

David:
So you basically solved your own problems and then said, “Hey, I fixed this, now I’m going to offer this to other people.”

Laurence:
Yeah. In some ways you have to. No one was catering to small landlords in 2010, 2012. 2012 is when we started the business. But I struggled for two years managing the rental property myself. And you’ll find that there’s really no software back then and still even today outside of a handful that is geared towards such a small landlord, mostly because the economics aren’t there, like it’s too risky of a business. It’s really hard to find us. We’re super fragmented. And so the only way to come about it is to solve your own problem and go from there.

David:
And then how did you get started investing in real estate yourself? What was it that pulled you in? Did you have a friend that told you about it? Did you just read an article and get interested?

Laurence:
Yeah. Maybe it’s embarrassing or cliche, but read Rich Dad, Poor Dad in college and always had aspired and you realizing, “Hey, you got to have a little bit of money.” So after about six years of working in the real world had enough to buy that first business. And that’s I think how most people kind of enter it is you have this dream of what it’s supposed to be and then you buy it and you start getting a little bit of income coming in, you’re like, “Wow, this is great.” And then you want to expand it. So today I’ve got just over 20 units that started with just the humble three units in a single building. And I wouldn’t change it for anything other than maybe trying to get it earlier.

Dave:
Laurence, you mentioned that one of the reasons for starting Avail is that you were struggling with your own rental property management. I think most of us have also been there, but I’m curious, what specific issues were you encountering that felt insurmountable or necessitated you to start your own business to solve?

Laurence:
Yeah, for me, it started with just posting the listing on Craigslist, which people still do today crazy enough. And the way Craigslist operated then is you’d post a listing and it would be at the top for about eight seconds and then it would drop to the bottom. And then the next day, 24 hours and one second later you could go and post the next one. And it didn’t make sense. And then you’d get these leads and you can’t tell if they’re quality or not, which, spoiler alert, on Craigslist they’re not. And then you try to figure out, “Well, how do I know if these are good or not?” And there’s no access for some person who only has one or two or three units to actually get a credit score, background check, there’s no capabilities for those things. So I find that access to information and data that a professional would have was impossible.
Those were really the two starting points for me that we said, “Hey, we’re going to go build this.” And that’s how we started. And in Chicago, it’s really tough finding VCs that want to invest in you, particularly in 2012. And it’s really tough finding engineering talent. So my co-founder actually rolled up our sleeves and taught ourselves to code. I wrote the first 600,000 plus lines of code. And when you’re doing that yourself, you really make it what it should be and what it should be for landlords like me. So that was the first two problems we solved was listing syndication and tenant screening.

Dave:
How have you seen, starting and managing properties in 2010, I imagine was pretty different than how it is now. So what are some of the big changes that you’ve seen in the property management industry over the last 12 years?

Laurence:
Yeah, well, certainly the pandemic changed a lot. In 2010, if I’m remembering correctly, it just felt a little more even keeled between landlords and renters. I remember doing showings and it was a lot more of a barter and a trade, trying to make sure you landed those renters and, “Hey, here’s all these features and I’ll give you $200 towards moving” or whatever it is, you have to make some concessions a little bit then. And now it’s completely gone the other way around.
I get 20 or 30 visitors to a property and I can only take one. And so it’s completely changed and that’s forcing rents to go up. It’s forcing people to compete with each other. People are not getting places. It’s a lot more favorite towards the landlord now than it used to be. That’s maybe the biggest change, and the technology’s come about quite a bit. So back then it was common to find renters on Craigslist. It was common to receive a check in the mail and now it’s not that common to not have some technology behind you.

David:
So Laurence, obviously we are in very complicated market right now. There is a shortage of inventory, prices continue to go up, demand seems very strong, but now rates are going up at the same time that inflation is occurring. What I kind of see happening is that price of the assets is rising with inflation, but the ability for a tenant to pay the higher rents that are going up may not be in certain markets because their food, their gas, all the things they have to pay for are going up just proportionately to what they are able to make at work. We kind of have this stretch where I feel like the top of the market is getting hotter, but the downside is also growing in risk also because your tenant’s having a harder time paying their rent.
From your perspective on all of this, what do you think is the biggest challenge that real estate investors are facing with this very unique market we’re in right now?

Laurence:
The data’s going to show that renters pay their rent for the most part. I don’t know that getting your rent is going to be the biggest issue, but maybe it’s going to start coming in a little later than you normally would’ve as they try to make ends meet. I think the bigger issue is for those who are trying to grow their portfolio, they’re going to find it extremely difficult to find deals that they wanted because prices are going up still, even though inflation is going… It’s in line with inflation so it makes sense that it’s going up, but interest rates should have brought prices down and they’re not. It’s going to be hard to find those deals. And of course your cost now of ownership is tougher. And then you’ll find that if you want to liquidate or get out of your portfolio counter to everything, also prices because they’re up, you’re going to find it harder to liquidate and get out of what you want if you needed to.
We’ll find that I think transaction volume will come down a lot and that hasn’t happened yet. That’s more of a prediction. We’ll see if that comes out. At the same time for renters, I think we might, and this is another prediction and I’m not an economist but this is just my own personal belief. I think there’s a decent chance we’d go through a period of stagflation. So normally you’d raise interest rates to stop inflation, but I think in this case, inflation’s going to keep going up, which makes affordability and cost of living also go up, but it’s less affordable. So we might hit a recession, even though there is tremendous growth in prices and that could cause a period of stagflation. You could see some spiraling out of control in this way.

David:
I think that’s a really solid point to highlight because there’s errors that are made in real estate I think where people just make assumptions that they shouldn’t. I notice this happened with the phrase HELOC for a long time was just synonymous with bad business decision because HELOCs led to a lot of foreclosures. I’ll hear the phrase appreciation tied to speculation, which they’re not the same thing, but people will do that. There’s another concept that every recession will lead to a crash in home prices, that the two are tied together. And I don’t believe that’s the case. In fact, I think in three out of the last four recessions home prices continue to rise. Dave, you’re shaking your head. Am I wrong here?

Dave:
No, no, you’re exactly right. That’s exactly right. The last recession is obviously freshest on people’s mind and that was a dramatic decline in home prices, but there are plenty of examples over the last several decades where home prices did increase during recessions.

David:
And that’s because the last recession was caused by the market crashing. You almost can’t even tie them together because you’re you think recession leads to home prices. Well, the last time it was home prices crashing led to a recession. Those that are sitting there saying, “Hey, home prices are going to drop because we’re raising rates, that’s going to lead to a recession.” It doesn’t make logical sense if you understand the way that the economy works, because most people that own real estate already had a lot of money. They’re the ones that weather recessions. They’re in a position to do better.
Do you mind just sharing your opinion on that idea and what you are thinking when it comes to if we do head into recession, how you’re going to handle your finances?

Laurence:
Yeah. And I’ll admit it’s been a while since I’ve dusted off an economics textbook here, but in the most basic sense, it’s all driven by supply and demand. So I agree with both of you, it’s not necessarily a given that during a recession that housing prices come down. Historically there has been a correlation because when there’s a recession, people have less money than that makes demand come down.
I think what’s happening now is exactly what Dave said. People have a lot of money built up and it’s just sitting there. They have money that they want to do something with. And a lot of that’s just been accumulation over the pandemic because they haven’t gone on vacation or whatnot. And at the same time, supply is still at a low. And so when supply is low and demand is the same or even growing, you would expect that prices for housing is still going to increase and therefore not come down. And I think that’s what we’re seeing despite interest rates going up.

Dave:
Laurence, what are you seeing in the data about rent growth? Over the last year, it’s preceded at basically a breakneck unprecedented rate. Recently I’ve seen rates over 30% in certain markets, rent growing. It feels to me to be unsustainable, but I’m curious what you’re seeing with rent growth and if you think this could continue or perhaps even slide backwards on the other end of the spectrum.

Laurence:
Yeah. Nationwide we’re seeing rents are up 17% year over year, which is an astronomical number and over the last two years even higher. Most landlords, I think, Avails showing from our surveys that 75% of landlords are planning on raising the rent, tenants are telling us that on average their rent’s gone up $200 or more over the last year. Rents are going up. We’re seeing that. And I that’s going to cause, it could go one of two paths. It could cause renters to have turnover and start to look to move, look for cheaper alternatives; could be leaving some of those more expensive cities. We’re seeing a lot of folks move to more of the Sunbelt area, just because those are generally less expensive than some of the larger metros on the coasts. Or the alternative is you might find that renters don’t move.
Now I know these are complete opposites and it’s tough to move when you know your rent that the next place for an equivalent size unit is going to go up dramatically. What happens especially for DIY landlords or the smaller landlords is they don’t really raise rent on tenants who are renewing or they don’t raise it as much as they would for new renters. So you might see this bifurcation of renters who really stay to avoid those things. And then you’ll see the other side where they’re really trying to find a cheaper alternative and don’t know which way is going to push higher. But we’ll see over the next coming months. This summer will be a big telling point.

Dave:
It’s interesting what you said about smaller landlords not raising rent on existing tenants. I know that’s something I’ve always believed in is if you have a good relationship with a good tenant, why would you stretch that? Is that something that’s backed up with data that you’ve seen at Avail? Or is that just an observation of yours?

Laurence:
Yeah, both. Although I don’t have the data in front of me, so I can’t quite quote it, but we are seeing that change this year from the historical patterns too. Real estate taxes have been going up. I think everywhere in the United States costs of ownership for landlords are going up. So I think this year, and we’ll see it come out over the summer, might be maybe one of the first years where you see even DIY landlords or the smaller landlords skew towards raising rents on renewing tenants at a higher rate than we’ve seen in the past.

David:
Yeah, so that was part of my question is I’m wondering, do you see a future where it’s difficult to raise rents on tenants even though the asset price is going up because their ability to repay is being decreased by the money that they have left over at the end of the month because of inflation on your average daily things you have to pay for?

Laurence:
Yeah, it’s always… Frankly as a human being trying to work my own tenants and telling them, “Hey, I’m going to have to raise rents.” And then if you’re doing it in person, you can kind of see the looks on their faces of shock and it’s a scary proposition for them. So it makes it difficult on an emotional level to raise rent. It’s not like I want to. If I could keep making the same return I was before, then I wouldn’t raise rents. And I think a lot of folks, especially for the smaller landlords, they don’t realize how little landlords actually make. I think they all think we’re these super rich money makers who can just absorb it, but we actually don’t. I think on the average landlord might make a hundred bucks on a rental property a month.
It’s really not a lot. And any change in cost, now all of a sudden you’re losing money. So we have to stay in line and it’s difficult for renters, it’s difficult for us. Inflation causes problems for everybody. And those problems are felt in the shorter term more so than the longer term. Over periods of time, things kind of reach an equilibrium. You can adjust your own vendors that you’re using to find cheaper alternatives. But in the short term, you really don’t have a lot of options other than to raise rent.

David:
Do you see do it yourself landlording as far as managing your own properties and fixing some of the stuff yourself as sort of a path that many people are going to have to take to make the numbers work as they continue to get tighter and tighter?

Laurence:
Yeah, that’s an interesting, I don’t know if that’s a prediction on your end or not, or if you’re looking for me to make that prediction, but yeah, I could see that. We historically advocated for being a do it yourself landlord for our own audience. One, because you learn the business better. But two, because if you don’t, you’re paying those fees, you just don’t make money. For most landlords paying a property manager to find a tenant for you and collect rent for you puts you in the red and then it didn’t make sense to buy their rental property in the beginning. You should just get out of that business. I think you could see a change here where more and more landlords have to manage it themselves than previously.

David:
Yeah, I can see. I was just looking at short term rental property in Scottsdale this weekend. And even with the properties at best case scenario crushing it as far as revenue. Putting almost a million dollars down on some of these things, the numbers were barely breaking even. And part of that was because management fees at like 20%, they could be like $80,000 a year. And I was thinking the only way this works is if I don’t pay a manager 20%. That started my mind down to, “Well, what would this take?” And I quickly was like, “Oh, I don’t want anything to do with that. That’s that seems so much work to get this thing going, especially with a short term rental.”
But I’m sure if I thought that other people have got to be thinking the same thing. The margins are getting tighter. Where can I cut costs? There’s going to be people that are thinking property management is the place to cut. So what advice do you have if somebody is going down that road for how they can prepare themselves for how to do this well, what they’re really getting into some tools they could use, kind of speak to that person.

Laurence:
Yeah. If you’re going down this path and you’re, hey, all of these expenses are growing on you, you want to start paying attention to that. Most people in real estate will appeal their property taxes every chance they get, try to keep them lower. So if your audience is listening and haven’t done that, they should 100% do that. Sometimes whatever assessor’s office is looking at these things doesn’t really know the value, they just know it’s gone up and sometimes they just do it more than it should. And so you can appeal those. I would look if you have a property manager at renegotiating with that manager to reduce the fee or remove the manager. I think that’s a good avenue to go. If you just aren’t in state or you just can’t find a time to be on site, then maybe you have less option there.
So I would call and ask to go, if you’re paying 10% of rents, push it down to 5% or find a manager who’s willing to do that. I think not that managers are commodity, but in some ways you just don’t have a choice. I would also be thinking about how you’re buying all of the supplies you’re using for your rental. If you have just one unit, you can’t really get any kind of economies of scale, but if you’ve got a whole bunch of others, then try to keep it to be the same paint so that you can use the same paint in one place versus another, try to think about all of the tools that can just be shared across all of your properties and whatnot. Those things can help. And like I said, most landlords only make a couple hundred bucks so that can go a long way in getting you where you need to go.

Dave:
So Laurence, given this confusing environment we’re in, are you seeing a shift in the types of properties that people are renting or where rent is growing the fastest or just any of those dynamics?

Laurence:
Yeah. Two I think trends that are noticeable. One is folks are looking for slightly larger places, even though affordability has gotten tougher. So we’re seeing an increase proportionally for folks looking for two bedrooms over one bedrooms and three bedrooms over two bedrooms is increasing a little bit. Mostly driven by the pandemic and the idea of, hey, people are working from home a lot more, afraid of maybe another lockdown and you need the space and whatnot. So that’s one trend.
The other trend we’re seeing is a lot of folks moving towards the Sunbelt, a little more and away from the coasts, potentially away from some of the areas that might have some natural disasters or are super expensive. So we’re seeing those kinds of trends.

Dave:
That’s really interesting. I’m curious if the rental market is also mimicking the housing market in a shift towards the suburbs. Because after 2008, the suburbs got absolutely hammered in terms of housing prices, disproportionately to more urban areas. And then since the pandemic, suburb housing prices have been leading the way. Is the same thing happening with rents?

Laurence:
Yeah, you’re seeing that a little bit in condos and in more congested places. The prices on those are coming down or at least not going up as much as you would see on a single family home in the suburbs. People are looking for a little more breathing room and so that’s happening at the same time. And then those condo buildings are still aging, so the assessments are still going up, they become less affordable for folks. So both in terms of wanting more space to live in and from an affordability perspective, we’re seeing single family homes just do better than condos.

Dave:
Yeah, I think that makes sense given all the other dynamics and shifts in buyer preferences right now and renter preferences.

David:
When it comes to what type of buyer you think is best to be getting into condos and who should be sticking to single families, what’s your avatar of where you think that the individual investors should, or what does that investor look like that should be getting into condos versus single family homes?

Laurence:
Oh, I don’t know. Maybe I have a very narrow mindset on investing. I’m the kind of investor that likes to see cash flow. I generally advocate for folks looking for deals that are going to make them cash, whether their metric is a cash on cash number or they’re looking at some sort of net operating income. I think you’re going to find it easier when you’re dealing with some sort of individual property, so a non condo, for instance, a three flat, a four flat, even a single family home.
I think you can make those numbers work better than you can in a condo and have a little more control. And then a lot of condos have bylaws and association rules that can prevent renters or the type of renting or how often they can come in and out. So there is a risk to your business in that way. So not that you shouldn’t ever be an investor in a condo, but if you’re looking for cash flow, that’s probably not the best investment. There is potentially always the case for appreciation on those, but with where we’re seeing trends and even with what Dave said around how folks are moving to the suburbs, maybe condos might not be the best investment right now.

David:
Well, I’ll also say if someone doesn’t have experience with condos, how do I want to put this? When you’re buying a single family home in general, in a specific market, you’re looking at mostly the same things for every house. What does the inspection look like? The rents are not too hard to find. There’s not as many variables when you’re looking at single family homes.
The second you get into condos, it becomes remarkably complicated. Those bylaws are different for every single one of them. Sometimes the property itself has a lot of deferred maintenance and you’re going to get hit with assessments. They do have restrictions on how many people can be renting out units in there. It becomes exponentially more likely that you are going to have something that you did not see coming up when you’re buying into a condo, which is mostly the people that invest in those are really, really good at investing. They know what to look for.
If you’re not a big fan of jumping asset classes, what do you look for in a specific market that you think is attractive when it comes to where investors can be putting their attention?

Laurence:
Yeah, well, no, I love having multiple asset classes, so between real estate and non-real estate. But again, I tend to focus on things that produce cash. There are certainly parts of the United States where investing in real estate’s going to get you more cash and is less about appreciation. I take Chicago for instance, I just know the most about Chicago. That’s where I live. You can invest in an area of Chicago, maybe for instance Andersonville, which is maybe less well known as like a neighborhood like Lincoln Park. And therefore you’re going to get a better cash on cash or a better cash flow, but maybe not a better long term appreciation of the asset class itself or asset value. Whereas Lincoln Park would be the exact opposites. It’s already very built out, your cap rate or cash on cash is going to be a lot lower, but because it’s such a sought after area, you might find that appreciation is higher.
If you’re the kind of investor who’s looking to build net worth over the long periods of time and don’t care about the cash coming in today, then maybe that kind of area is better for you as your wealth might grow faster. You just won’t see the cash from it as quickly. You could take that approach into any city and choose neighborhoods in that way, or you could take it more holistically based on cities themselves. You could say Chicago is kind of already that built up city and you might want to move to a less built up, move your money to a less built out city. But for most investors, especially if they’re getting started, the easiest path is to do it where they live, where they can see it, get a feel for it, be there in case they need to, and they can find parts of their neighborhood where it makes sense.

Dave:
I was going to say, Laurence, you seem to be suggesting a very simple and practical approach to getting started, which I always like which is investing close to where you live, managing the property yourself. That’s how I got started, I think how most people get started. If someone is able to do that successfully and find a small multi or single family, what are some of the common pitfalls you see with DIY landlords when they’re first getting started? And do you have any tips for trying to avoid those pitfalls?

Laurence:
Sure. This definitely goes into the realm of opinion for what it’s worth. There’s a couple, there’s this idea of, “Hey, am I going to be strict with how I have my budget? Am I not going to be strict? How strict should I be?” And I think some landlords will misinterpret that. I think you want to have a budget and you want to be strict with it. But a lot of landlords will take that as an excuse to be cheap or have deferred maintenance. And in the end, that’s going to hurt you in a big way. So yes to budget, but don’t interpret that budget means don’t pay for things when they need repair. Your best bet is normally going to be preventive maintenance. That’s going to be less costly. Even some of the simple things like changing air filters is preventive maintenance, but some landlords don’t want to spend the 20 bucks to replace an air filter.
They think it’s only breathing quality, which is so important. But it extends the lifetime of the HVAC system by years. You can’t be cheap, but you do have to be wise with where you’re spending money. I think that’s a big pitfall. I’d say another pitfall is not thinking of your tenants as customers. They are customers. They’re not just people that… Sometimes you get the sense of you feel like you’re better than them or not better than them because they’re renting from you. And that’s the worst possible approach to come in. They’re your customers. You have to be doing things that make them want to live there and make them treat the property well. For all my tenants, I’ll usually use some sort of welcome basket on the kitchen counter for them when they move in. It’s usually nothing more than toilet paper and maybe some cleaning supplies, stuff that they forget to have, but that sets us both off on that right path and how we work together.
And then they’ll take better care of the property because of that. And that translates over time. And so there’s those things there. I don’t know if there’s a question in there around how do you go from one, your first purchase to multiple because there’s a lot of pitfalls in there thinking around, “Hey, the second property is identical to the first and I’ll do all of the same things.” That can sometimes backfire. You do have to kind of make sure you’re really looking at your investments as two separate businesses in a way, and you have to individualize them in that way.

Dave:
That’s great advice. I think that is probably the most common one is learning that you really get what you pay for. And if you go with cheap contractors, you’re going to hire two contractors and you’ll just hire the expensive one second after you already hired the first one. And I love what you said about treating your tenants as customers. That’s exactly right. The property that you’re offering is a product and this is a business and it’s your job to make your customer happy. And I think a lot of people don’t view it that way. I definitely respect that opinion. Before we get out of here, I also wanted to ask since you have so much knowledge about this, do you have any best practices or pitfalls with tenant screening that you can share with our listeners?

Laurence:
Yeah. When we started, we had seen, started Avail, we had seen an article, I think it was in USA Today that said, “Hey, 60% of landlords don’t screen their tenants.” That’s the number one pitfall, I would say. You should screen your tenants in some manner or the other. I think what happens is a lot of landlords get scared that they won’t fill a vacancy and they’ll just take the first renter that they see or they won’t dig in a little deeper thinking that, “Hey, the renter’s going to bounce and go to another place.” But I think in the end, you’d rather have a vacancy than a bad tenant because a bad tenant is going to have all of the negatives of the vacancy. You’re not going to be making your money or you’re collecting your rent, but they’re also going to just trash the place or have the potential to trash the place.
And although a bad renter can sometimes be seeded because you’re a bad landlord and you don’t know how to build a relationship with them. Oftentimes there are things that you would find in doing whatever screening reports. So checking with prior landlords, did they pay their rent on time? How did they treat the place? Looking at their credit score. How they treat other creditors is likely how they might treat you, just even looking to see how much debt they have. Can they afford the rental? Sometimes landlords will look at income to rent, but they won’t look at how much debt that income is taking up to. And so you might miss that and you might think, “Hey, they have three times the income to rent,” but when you factor in debt, they don’t. And so that’s something to look at. Depending on where you live and what laws there are in your state, I would suggest also criminal and eviction checks.
I think eviction being the most serious. Once someone’s been evicted a couple times, it’s probably a trend that’s going to continue to happen. And then of course you want to make sure you feel comfortable approaching the renter should something happen. I tend to try to avoid super violent criminal history and be flexible with things that aren’t. I’m not going to balk at someone having a speeding ticket necessarily. It’s got nothing to do with them and their capability of paying their rent. There’s lots of things in that realm where you first screen them and then just be flexible in your approach and thinking.

David:
I think choosing tenants is an extremely underrated element of successful real estate investing. If you think about the advice that you’re often given, invest in a good area, what you’re really saying is put yourself in a position where you’re likely to find a better tenant. It’s not the area, it’s the person who’s going to be renting from you. You could rent in any neighborhood anywhere. If you have a good tenant, it’s going to work out for you.
In fact, that’s often how people start or why they start looking into markets with lower price points because the price to rent ratio is higher. It just becomes more difficult to find the tenant that’s going to pay consistently and not ruin your house. If you’re going to be self-managing, the ability, the skill to choose the right tenant will absolutely have a huge impact on the success that you have with real estate investing. When it comes to technology within real estate, can you just share your opinion on where you think that’s going, what different technological advances will have an impact on the way that we manage rental property?

Laurence:
Yeah. Not to plug Avail, which is my company, but some sort of landlord platform is pretty critical in running your business. And there are others out there other than Avail, but you need to have something. That’s the one I recommend. And I think we’re going down the path where everybody will have one of those. Right now, it’s pretty uncommon for a landlord to use technology. So there’s this wide gap to bridge because the folks who don’t use technology aren’t going to do as well and they’re going to start doing worse than the folks who do use technology. If you’re one of those listening and you’re not using some sort of landlord platform, just go out and Google landlord tools or landlord software or Avail and start using something. I think there’s also technology around making showings a lot easier, better.
Those are still typically done in person, even if you’re using something like Avail. And with the pandemic, there’s been a lot of new technology that’s come around for virtual showings, for 3D tours, for floor plans. Some of those things the price has been outside of the realm for someone who’s got three units or something like that. But there are a bunch of providers who are bringing very affordable tools that allow you to do a 3D tour or something like that virtually that are coming about. And I think that’s a trend that we’ll continue to see.
I think we’re also starting to see software tools that are also geared towards helping renters more than they have in the past. So whether it’s helping renters report their on time rent payments, or helping renters better manage how they save for a down payment or how they become first time home buyers, all of those things are coming out. And I know at both Avail and Realtor, we’re focused on trying to figure out, “Hey, how do we bridge that gap between renters becoming first time home buyers? How do we help them communicate better with their landlords?” All of those things. And so I think that’s going to be a huge change in how real estate’s going to be done.

Dave:
Laurence, one last question, particularly on the technology side before we go, I’m assuming you’re familiar with the idea of Web3 and hearing about a lot of the direction that real estate is going with NFTs and crypto. Do you have any thoughts on where that side of things is heading right now?

Laurence:
Yeah, to be Frank, I don’t have as much of a background on some of those areas as I should. But the advice I would give for most landlords is what we talked about earlier, which is try to keep it simple for now. I think if you’re wanting to participate in some of those NFTs or think about blockchain or those things, it may still be too early for most people to consider. And I would follow the path of what’s going to get me the metrics I need to be successful and focus on finding good deals, finding good renters and being a responsible landlord. And then as you get experience, if you start to say, “Hey, I need this deeper technology to make my process better, or out eke this little last bit of return somehow” then maybe incorporate that into how you’re doing things. But for most folks, I think it’s probably a little still premature.

Dave:
I’m with you for the record. I think there is some really interesting things going on there, but is it actually at a point where it helps your business? I haven’t seen any examples of how it’s truly adding value to a small landlord’s ability to generate a solid return and to provide a good product.

Laurence:
Yeah, I have one renter who pays in Bitcoin every month, which is fine. It’s more of a nuisance than anything else for me as a landlord. I acquiesce because it makes it easier for them. It’s a pretty expensive rental. It’s nearly $5,000 a month, which is… In the scheme of it, it’s pretty pricey rental. And so I kind of allow it, but for me, it means I get it into Coinbase, I’ve got to immediately convert it to US dollars and I don’t want to take the risk. I don’t want to conflate my investment in real estate and the cash flow it generates with the speculative investment of Bitcoin or digital currency valuations. And so I always have to separate those two and treat them as two separate investments. It’s more of a pain for me than an opportunity.

Dave:
Just logistically, is the price fixed? Is there a floating exchange rate between USDs and Bitcoin and he adjusts the amount of Bitcoin based on the dollar price or the other way around?

Laurence:
Yeah, I’m not sure what it looks like when you go into Coinbase to schedule your payments or whatnot, whether you’re scheduling it in dollars and it converts in real time to Bitcoin, or if he’s doing the conversion on his own. But when it comes to me, it’s Bitcoin and then I have it automatically converted to US dollars right away. I think it’s important for landlords to do that, or for any investor to do that. I’m not suggesting people don’t invest and I’ll use air quotes on invest in crypto. It’s just, you should separate the two investments. They have two separate thesises. They have two separate metrics and how you want to analyze them. I don’t think we should conflate the investment of rentals with the investment of cryptocurrencies. I would take the cash in dollars and then if I find, “Hey, I think crypto’s a good investment,” I would then do a separate transaction for those things.

David:
There’s something I find very interesting about every single investment asset class opportunity that I don’t hear people talking about, just sort of the BiggerPockets audience. I’m going to let you guys in on a concept to think about, and then Laurence, I want to get your opinion on it. When we talk about Bitcoin, cryptocurrency, real estate, art, NFTs, stocks, everything, the value of it is expressed in terms of the dollar. So when something goes up or down, we have to take its value, convert it into a dollar and express how well it did in relation to a dollar. So it’s all tied to this central currency.
You can’t say this house is worth this many Bitcoin or this many shares of Apple stock or whatever. We have to have a baseline that we compare it to. But as we printed so much money, the value of the dollar has gone down. And now it’s very difficult to know how much value, and I’m using the word value as opposed to worth or money because I’m trying to separate it from the dollar because we typically express value in terms of dollars. What’s your thoughts on how confusing this is to leading people to believe they’re actually building wealth when they may not be, or some asset classes appearing like they’re doing better than they really are?

Laurence:
There’s almost a like a history lesson of going off like the gold standard but I’ll spare us. I tend to think of investments as something different than speculation. I don’t believe an investment is gambling and some people will. They’ll say, “Hey, investing in the stock market is gambling or buying a rental property is gambling.” But I don’t believe that to be the case.
I think investing is something about taking earnings or cash flow, figuring out what that cash over a period of time is worth to you today. And you can’t do that with something like cryptocurrency because there is no cash flow that’s occurring. There’s no inputs and outputs happening there. So for that reason alone, you can’t necessarily consider it an investment. I would consider it to be speculation and that’s fine.
Maybe in a good allocation strategy, maybe you leave 5% of your portfolio for some crazy thing like that. I think of art as the same way, as speculation because it doesn’t produce income, I can’t really discount that cash flow to what it’s worth today. But stocks and income properties are investments. And I think even though the dollar can fluctuate in value, relative to those investments, you have a sense of, are you making money? Is it appreciating or not? The value of your rental is nothing more than some multiple on the rents. And depending on what area you’re in, the multiple is a little different, but you can broadly think about it as like a 12 times multiple on rent is how much the property’s worth 12 times annual rent.
And you can look at that and say, “Hey, my investments improving over time or not improving over time.” And it all comes down to you increasing rents over time. And the same thing is true of stocks. You hope that the earnings increase each year so that the multiple on earnings has an impact and now what your investment was, which goes up. And that all of that should be irrelevant to what happens with the dollar because those earnings change in lockstep with the dollar as it changes.

David:
All right. Well, thank you, Laurence. This has been a fascinating interview where we’ve gotten actually some really good nuanced detail about many different types of real estate investing. I want to thank you for taking some time to do this with us. Before we get out of here, David, do you have any last words or any last questions that you’d like to address?

Dave:
No. Thank you, Laurence. This has been really enlightening. I appreciate your deep knowledge and data driven approach to providing answers to our listeners here.

Laurence:
Well, David, Dave, thank you so much for having me. Don’t fact check me too hard. If you find anything inaccurate in there, we’ll talk about in a separate time. Appreciate being on this show.

David:
All right, Laurence, last question for you, where can people find out more about you?

Laurence:
I love interacting with people on a one-on-one basis so they can certainly learn more about Avail or Realtor.com on our website. So Avail.co or Realtor.com. But if people want to talk with me, I love receiving emails. I respond to them. They can reach me at [email protected] Would love to engage with folks.

David:
Awesome. Dave Meyer, where can people find out more about you?

Dave:
You can find me on Instagram where I am @thedatadeli.

David:
Yeah, and if you have not been following Dave, please go do so. His page is blowing up. On YouTube your videos are crushing it. I don’t know if it’s your handsome face, if it’s your well articulated delivery, but you’re like that sandwich that someone put together and everyone is addicted to it and you’re selling like hot cakes.

Dave:
Comparing me to a sandwich is the best compliment I’ve ever gotten, David. You’re going to make me blush.

David:
In fact, we might even have to stop calling it hot cakes. We’re going to have to say you’re selling like Dave cakes, because that’s how fast you’re actually selling.

Dave:
Well, thank you. I appreciate that. And hopefully people do come check out the new YouTube channel because I am on the main BiggerPockets channel, but also I’m going to be transitioning more to the, On the Market YouTube channel where we’re going to be doing a lot more data news, current event type shows. We have all sorts of great content coming out there. So make sure to check that out.

David:
There you go. And Laurence, thank you for fighting the good fight of trying to make landlord’s jobs easier and make it more successful to invest in this awesome asset class. We are sort of under fire from hedge funds and institutional capital and municipalities that don’t like real estate investors and politicians that don’t like real estate investors. There’s a lot of different people that are making it more difficult to do what we love doing. So anytime we get somebody on our side helping to push the ball forward, I really appreciate that.

Laurence:
Well, thanks again for having me.

David:
All right, I’ll get us out of here. This is David Greene for Dave “Dave Cakes” Meyer, signing off.

Dave:
Hey, everyone, welcome to On the Market. We have a different kind of show for you today that I am very excited for. First I am going to be chatting with J scott, author of Recession Proof Real Estate Investing, who’s going to give us a background on the current economic climate, the current economic cycle, where we are, where we might be going, and how we got here. Then we are going to turn the conversation over to our panel. We have Jamil, Kathy, and James here to talk about practical steps you can take to prepare for a potential recession. And then at the end, we answer some user questions about how they can handle a pending recession. It is my great pleasure to welcome the one and only J scott to On the Market. J, thanks so much for being here.

J:
Yeah, the one and only. I’m the only one stupid enough to have a one letter first name. So I’ll take, I’ll take the one and only,

Dave:
No, we are so excited to have you here. You literally wrote the book on recession proof investing and are one of the greatest… If anyone listening doesn’t know J from the Bigger Pockets forums or his many books, is one of the greatest analytical minds in real estate investing that I’ve ever encountered and super excited to have him here to talk about sort of a scary topic, but hopefully we can work through some of the fear, J, and you can help us understand how the current economic cycle and current economic situation we’re in exists in the context of the business cycle and what our listeners can do about this confusing economic time. So with that, let’s just get started. Where are we right now and how did we get here? Can you just drop some knowledge on us?

J:
Yeah, so let me step back a little bit, because a lot of economics… First of all, everybody thinks they know what they’re talking about, including the economists. And most of them are just guessing. Now some guesses are better than other guesses. People that really understand what’s going on can see the trends and look at the history and make better guesses than people who are just randomly guessing. But anything we talk about in this discussion, let’s be clear, I’m guessing. I mean, I could be talking about data and historic stuff, I’m not guessing, but any predictions I make or trends that I see coming, nobody really has any idea. So I just want to get that out of the way that I don’t want anybody to go take their 401k and put it on red because I like red.
Okay, so where are we? Let’s start with a little bit of history. When we talk about the economy, the economy works cyclically. It goes up, it goes down. I think a lot of people who are new to investing since 2008, a lot of people in their 20s and 30s, they probably don’t really remember recessions. They saw 2008, they saw 2008 was absolutely horrendous, but they’ve been conditioned to think that 2008 was an anomaly. We went a hundred years since the great depression, the market went up for a hundred years, and then 2008 happened, everything collapsed. And that’s actually not the way things work. Typically we see these cycles of boom and bust, not as bad as 2008, but still downturns every five, six, seven years. And we’ve seen that for the last 150 years.
So what typically drives these cycles is on the upside of the cycle, things are going well, people are making lots of money. Businesses are doing well. Basically everything we saw from 2014 to 2020, till COVID. Businesses are doing well, people are making a lot of money. They’re happy. Unemployment is low. And because everybody’s doing so well, what are they doing? They’re going out and they’re spending money. They’re spending money on travel. They’re spending money on luxury goods. They’re spending money on cars. They’re spending money on restaurants. And when you start spending lots of money, all the businesses that are providing these things that money is being spent on, they need to grow. Restaurants need to hire more staff and car companies need to build more manufacturing plants, and Amazon needs more warehouses and people. And all of these things cost money. So the businesses go out and they take out loans so that they can build more warehouses or buy more equipment, or they have to compete for labor so they have to spend more money to get more waiters and waitresses in the restaurant. And all of these things cost money.
Businesses, they don’t mind spending money, but they’re not going to eat that cost. They’re going to pass that cost on to consumers. So when the businesses pass those costs onto consumers, that’s called inflation, and lots of different definitions for inflation. But let’s start with the basic. Prices going up is inflation. So businesses doing well leads to inflation because they have to buy stuff and hire people. Prices go up. When prices go up, this is where are things are okay for a while. Prices go up a little bit, that’s good. Prices tend to go up. But when prices go up too much, like we’ve seen over the last couple years, when we get too high inflation, the government starts to get concerned, because if prices go up too much, people can’t afford food, people can’t afford to travel, people can’t afford baby formula, people can’t afford new cars, and that’s always a bad thing. So the government doesn’t like when we have too much inflation.
So when things really heat up in the market and we have too much inflation, the Federal Reserve steps in. One of the things the Federal Reserve can do is they can raise and lower interest rates. They will raise interest rates to slow down inflation. And the reason raising interest rates slows down inflation is because if interest rates are higher, it encourages Americans to do two things. One, it encourages us to spend less money. It costs more to get a mortgage for a house because rates are higher. It costs more to buy a car because loan rates are higher. It costs more to borrow on a credit card because credit card rates are higher. So we borrow less money because it’s more expensive. Also when rates are higher, savings account rates go up. We can get more by putting our money in the bank. So people save more money.
So by raising interest rates, the Fed encourages people to stop spending and start saving. And when people stop spending and start saving, well, what’s going to happen? The economy’s going to slow down and these businesses are going to see less profit and they’re going to have less demand for restaurants and travel and cars and all these things. And then when things slow down, now the businesses, they’ve hired all these people, they have all this debt that they use to grow, and now businesses get in trouble, businesses slow down, so they have to start laying people off because suddenly there aren’t as many people eating in the restaurant, so they have to lay off the waiters and waitresses. Or fewer people are buying books, so Amazon shuts down a warehouse. Or fewer people are buying cars, so Toyota has to shut down a manufacturing plant.
That’s basically what leads to a recession. The businesses are laying off people. They’re cutting hours. They’re cutting wages. Now suddenly consumers don’t have as much money, they don’t have as many hours at work, they can’t pay their bills, they can’t pay their mortgage. That’s the recession. We basically ride that down to the point where the government realizes, “Nope, we need to do something about this.” So what do they do? They lower interest rates. When they lower interest rates, just opposite of raising it, that encourages people to start spending again because they can get cheap debt and they no longer can get a lot of money by having their money in a savings account, so they start spending and the spending takes us up the upside of that curve again, where everything is good and the economy grows. And that’s the cycle that we’ve seen 33 or 34 times over the last 150 years.
Now, back to your question, where are we today? So the last time we had a major recession, technically we had one in 2020 during COVID. So first quarter of 2020, second quarter of 2020, economy was basically shut down. Technically that was a recession. But the last real recession that we had that was prolonged was 2008. And if you remember I said typically these things happen every five, six, seven years. Never in the history of this country. Have we gone nine, 10, 11 years without a recession, or at least not in the last 150 years since we’ve been tracking this. So the fact that between 2008 and 2020 we didn’t have a recession was pretty unprecedented. And a lot of people were predicting that in 2018, 19, even leading into 2020 that we were probably in for a recession just based on the fact that the market was heating up, the economy was heating up and it had been so long since the last one.
So here comes COVID. COVID comes along, basically the economy crashes, everybody’s thinking, “Okay, this is going to be an apocalypse,” where every people are out of work, businesses are shut down, nobody’s leaving their house. So what does the government do in spring summer of 2020? They say, “Okay, we need to fix this. We need to get people spending money no matter what it takes.” So again, they did the one thing that they’re really good at. They lowered interest rates. Suddenly people could get lots of cheap debt. I mean basically near 0% interest rates meant really cheap mortgage rates, really cheap credit card rates, really cheap everything. So that was number one. They lowered interest rates so that people were encouraged to start spending their money. Number two, they did the other thing they’re really good at is they started printing lots of money. They started putting a ton of money out in the economy so that everybody was richer. Businesses were richer. Consumers were richer. Everybody had more money to spend.
When people have money. People aren’t really good at saving money, especially, again, with really low interest rates, they spend it. So all this free money that got put out into the economy went right back into the economy. Now, people who are on the lower end of the economic spectrum, they were using that money to pay their mortgages, they were using that money to buy food, they were using that money to buy clothes. They didn’t need to use that money to pay for gas for their car because they weren’t going anywhere. Basically they were saving a bunch of money and they were using the rest of it for the things they really needed. But then there were the rest of the Americans, the 1%, the 5%, the 10%, the people that already had their clothes and their food and their housing covered. Now they have all this extra money. What are they going to do with it?
They’re going to invest it. So all this money we’re talking three trillion, four trillion dollars went from the government to the people, and the people that didn’t need that money desperately to live took that money, and where did they put it? They put it in the stock market, they put it in crypto, they put it in housing, they put it in other hard assets. So now we see all of these crazy bubbles in the market. And I don’t like that term bubble because we don’t really know something’s a bubble till after it pops, but I think it’s safe to say that what we’ve seen with the stock market, the real estate market, crypto, I mean, it’s certainly as close to a bubble as you can get. So basically today we’re at this point, or recently we were at this point where real estate is an all time high and affordability is an at an all time low. The stock market, all time high, the crypto market all, time high. Anything that people can take their money and stick it into a speculative asset or an investment is pretty much at an all time high.
So that’s where we were as of a couple months ago. And that’s how we got here. Now, there’s one other thing that we should point out. One of the big things that everybody’s been talking about in hearing about is inflation, and the number that the government’s throwing around is right now 8.3% inflation. A lot of people think the number’s higher than that. It probably is higher than that. I think it’s always been calculated in a way that disguises the real number, but regardless 8.3, 9.3, 15.3, whatever the number is, inflation’s really high right now. A lot of people are wondering why is inflation so high right now? Some people are going to blame Trump. Some people are going to blame Biden. Some people are going to blame Russia. Some people are going to blame whoever. There’s plenty of blame to go around.
But the real reason why we’re seeing so much inflation right now, there’s two reasons. Number one, after COVID, we still didn’t figure out all of our supply chain issues. We’re still having problems getting products from there to here, whether there is California to Georgia, or China to the US, or wherever to wherever. We still have these supply chain issues. We have a lot of manufacturers that haven’t fully ramped up. We have a lot of raw material providers that haven’t fully gotten their pipelines fixed. So it’s really hard to get all the things that the high demand is asking for. It’s hard to get furniture. It’s hard to get cars. It’s hard to get computer chips. It’s hard to get everything. So when supplies are constrained, simple supply and demand, lots of demand for something, very little supply for something, the prices, inflation, is going to go up. So that’s the supply side.
But there’s also a demand side issue here. So I know people say, “Yeah, we saw the same thing back in 2008.” The government printed trillions of dollars and people had lots of money to spend, but we didn’t see high inflation. Inflation was like at 2 or 3% between 2010 and 2021. So what’s the difference between what we saw in 2008 and what we’re now seeing in 2021 and 2022 with respect to inflation? The big difference there, and this is the analogy I like to use, and I’m not advocating drugs, I’m not a drug user, but it’s a good analogy. The way the government infused money into the system back in 2008 is the equivalent of getting high on secondhand smoke. They trickled that money into the system in a way that we didn’t even realize it was there, but it was still effective. And what they did was they took a whole bunch of money, trillions of dollars, they handed it to the banks and they said to the banks, “Go make more loans. Go make loans to businesses, go make loans to consumers, get the money out there.”
But it still had to go through the banks, it had to go through these intermediaries. And in a lot of cases, the banks aren’t efficient. They took years to spend that money. In a lot of cases the money stayed in the banks’ repositories or reserves forever and the banks never spent that money. So that money eventually made it into the economy, but it was relatively slowly, it was relatively inefficiently, so we didn’t have this big infusion of cash all at once. When COVID happened, the government realized that wasn’t going to work. We can’t slowly infuse this money into the economy by sticking it into the banks and telling the banks to lend. We need to get this directly into the veins or arteries of the economy. And instead of the secondhand smoke, we need to be injecting this directly into our veins. So basically instead of handing the money to the bank, what we did was we took that money and we sent checks to every American. We created this PPP loan stuff where businesses could basically fill out a form and get ridiculous amounts of money.
Lots of things. I mean, there were bailouts, both corporate bailouts and smaller business bailouts. The Fed, instead of just buying bonds, and I don’t want to get too technical, but basically they were buying equities, meaning they were directly handing cash to businesses. We infused this money not slowly but directly into the veins of the economy, and we got basically our heart beating really, really fast, our blood pressure went up and that was inflation. That’s the demand side inflation. And that’s the difference between 2008 and 2020. It’s not a different president, it’s not a different Fed, it’s not a different this, a different that. It’s how we had to inject the money into the economy in order to keep things from collapsing. And because we had to direct it so directly into the economy, literally sending checks to every American, we were able to stimulate the economy very quickly, but also very powerfully, and we didn’t let off the gas soon enough, and here we are, we’re in an economy that’s overheating, our heart’s beating too fast, our blood pressure’s too high and things are in a pretty bad situation.

Dave:
Well, this is exactly why we wanted to bring you on, J. You just gave us an economics lesson in like 15 minutes or 10 minutes, which is great. But if I could just summarize what you’re saying, it sounds like we’re in part of a normal economic cycle, but it’s sort of just been elongated in this weird way, where normally we expect to see a economics cycle last five to seven years, but coming out of the great recession, you would’ve expected to see a slow down 2015, 2016, and then we were sort of approaching the point where people were thinking like, “eh, probability wise, it’s about time to get a recession.” And then this black swan event comes, we inject all this money into the economy, at a perfect time where supply is constrained, which is the perfect storm for inflation. You have increased demand, decreased supply. That’s inflation all day.
And now we’re in this situation where we have really inflated asset prices. But in my opinion people are feeling like… Starting to think the party might be over soon. It’s starting to feel like, to use your analogy, the drugs might be wearing off a little bit. So I’m curious where you think we are right now. That was a great background, but what does this mean for the current economic situation, particularly as it pertains to investors?

J:
Let me latch onto one of the things you said, which is the drugs are wearing off. I think, unfortunately, it’s just the opposite. The drugs aren’t wearing off, and inflation, I think, is the indication that the drugs aren’t wearing off. They’re in our bloodstream and they’re taking effect, and we want them to wear off. We would love for this inflation to subside naturally, but this is where we need to bring in the medics and we need to take inventive action and we need to inject. What is that needle that they jab into your heart?

Dave:
Yeah, it’s like the epinephrine.

J:
Yeah. And literally that’s what they’re doing. That is what the Fed is doing right now.

Dave:
Isn’t that what they’re doing with raising rates. So that’s what I mean by like the drugs are wearing off is we’re seeing… I mean, crypto’s down 50% off its high, you see the NASDAQ as of this recording, I don’t know what it’s today, is 20% off its high or something like that. So it feels like while we’re… I think you’re entirely right that the sign that the drugs are out of our system is that inflation reaches that 2 to 4% range that we’re normally seeing, but it does feel like… To me, at least, it feels like we’re trending in that direction, or do you think we have a long way to go?

J:
So the conventional wisdom is that in order to reduce high inflation, you need to increase the interest rates. We talk about the thing called the federal funds rate, and that’s the lowest rate there is, that’s the rate that the Fed controls, it’s the rate that basically banks can borrow money from the government. Right now it’s at about 1%. It was near 0%. The conventional wisdom is in order to control inflation, that interest rate needs to be higher than the inflation rate. So right now, that interest rate’s at 1%, the inflation rates at 8.3 or 8.4%. So in theory, we need to raise the federal funds rate to the point that it’s over the inflation rate. Now it’s not that bad. I mean, we don’t need to raise it eight points to get to eight and a half percent.
Because as you raise the federal funds rate, you’re going to be slowing down the economy. So at the same time you’re raising the Federal funds rate. The inflation rate should be coming down, it’s taking effect, and there’s going to be some equilibrium there. There’s going to be some point where the inflation rate drops to the same point that the federal funds rate comes up and they cross over each other, and then hopefully inflation goes down to normal levels. Nobody really knows where that is. Is that 2%, is that 3%, is that 5%? So what the Fed is doing now is they’re saying, “Okay, every month or two we’re just going to raise rates. Hopefully inflation’s going to come down and we’ll see at what point we have to raise rates so that inflation comes down to normal levels,” and their definition of normal is 2 to 3%.
So when somebody asks me how high do you think they’re going to raise rates? We don’t know. They don’t know. I think it really depends on how inflation and the economy reacts to the raising of rates. Now here’s something that… I don’t want to get complicated, but I think this is really important. A lot of people talk about this idea of stagflation, this idea of basically a situation, and this is the worst case situation for an economy, it’s a situation where you have high inflation, but you also have recession. So high unemployment and just lots of bad economic conditions, but also inflation. I talked about how we typically raise interest rates to slow the economy down. If the economy’s bad, well, at least inflation’s low. But if you don’t do all of this correctly, you can get in a situation where the economy goes to hell and inflation is still high.
And this is what Japan saw from 1991 to 2005. Literally there was a decade, two decades that Japan, their entire economy was… If anybody’s interested, look up the term lost decades. And Japan went from being one of the economic superpowers in the late 80s to basically barely functioning for 20 years because they had stagflation. So how do we avoid the situation where we have persistent inflation and recession? The best way to avoid that is not to raise rates too slowly. If you raise rates too slowly, you get in a situation where you can start to spiral downward.
So I think the Fed realizes that there’s a risk in raising rates too slowly, and that’s the reason why we saw a quarter point two months ago, a half point last month, I have a feeling we’re going to see a half point again at the next Fed meeting. I wouldn’t be surprised if we see a half point after that. A lot of people are thinking, “Whoa, whoa, why are we doing things so quickly and so drastically? Let’s take our time so we don’t collapse the economy.” But I think the Fed realizes that if they do things too slowly, that they run the risk of getting into this stagflationary environment that could be much, much worse and much, much longer lasting than just a regular recession.

Dave:
Before we get out of here, I have two things to say. First, if you want to read J’s excellent, excellent book called Recession Proof Real Estate Investing… Do you have it there? You could show it off. Recession Proof Real Estate Investing. We have a 20% discount off any format. You go to biggerpockets.com/recessionbook. That’s biggerpockets.com/recessionbook. And the code is MARKETPROOF. We will put this in the show notes, or if you’re on YouTube, we’ll put it in the description below. That is one book deal. And as J mentioned, J and I co-authored a book together that is coming out.

J:
You wrote it. I just put my name on it.

Dave:
That is absolutely not true. This book was entirely your idea, and we have been working on it for, God, it feels like a decade. I don’t know. We have been working on this book for so long. But it is coming out this fall, and it is all about the fundamentals. How to understand how to be a good investor, how to understand the numbers behind any good real estate deal. So definitely check that out. J, you are such a wealth of knowledge. It is so great to have you on, and we’ll obviously have to have you back right before our book comes out to talk about some of those fundamentals.

J:
Yeah, and now that I’ve gone through like the 18 hour overview of how the economy works, next time we can just keep things light and fun.

Dave:
Yeah, let’s talk some deals next time. I want to hear what you’re up to. Well thanks, J. We will see you again real soon. We always appreciate your time.

J:
Thanks, Dave. This was a lot of fun.

Dave:
Thank you so much to J Scott, the one and only author of Recession Proof Real Estate Investing, for joining us. I now am going to turn this over to our esteemed panel. We have Kathy Feki, James Daynard, and Jamil Damji joining me today to take this from what J was talking about, which was a very helpful historical context and lesson about how we arrived in the current situation, and let’s turn this to a more practical conversation about how our listeners can prepare themselves for a recession. Of course, we don’t know exactly what will happen. Personally I think we’re heading to a recession, at least technically. Don’t know how bad it will be, we don’t know how long it’ll be, but eventually one day or another, we are going to get there. So even if it’s not for another couple of months or another couple of years, this information is still really practical. James, I’m going to start with you. I’d love to hear what you took away from this interview and how you’re thinking about preparing yourself and your portfolio for a recession.

James:
So the two things that we’re doing right now as we’re preparing for the new market, A, is access to capital. We are talking to every lender that we’ve been working with, and we’re finding out where their appetite is and where they are going to be most aggressive on where they want to lend. That tells us what kind of liquidity we need to keep on reserves, and then what’s our cost basis. As we look at our pro formas. And speaking of pro formas, that’s the other key thing that we are doing right now is we are patting everything.
So on construction, I do think inflation’s going to continue to increase. Instead of adding 10% to our construction pro formas, we’re adding 20% because we want to make sure that our walk-in margins are protected and that we have the right numbers in there. In addition to everything that we’re looking at, if it’s value add and we have a transitionary period from stabilization during the renovation, we’re adding about another half point to the current rates. So we’re at 6.5% right now on investor rates, we’re actually putting 7% in our pro formas just so we don’t get caught on the back end.

Dave:
That’s great advice. I think the pro forma’s particularly relevant to pretty much any strategy. If you could just pad your numbers right now, that makes a lot of sense given all the uncertainty. Did want to ask you, what are you hearing from your lenders? Are they still ready to lend or is credit going to tighten in the next couple months compared according to what you’re hearing?

James:
The business banks are actually… Our local banks are being pretty aggressive. I mean, one thing is they have made a ton of money these last 24 months, and they’re sitting on a lot of capital right now, and they do want to deploy it. And the moral relationships you’re building, they’re still being pretty loose with what they’re… They’re actually looking at new ventures rather than what they’ve always been lending on. They’re expanding their products right now. So rates are better in the commercial world. They’re about at point cheaper than the residential. And in addition to, the lenders are getting more creative, because they don’t want to sit on the sidelines with their money either. I mean, inflation’s also affecting them, so they’re being a little bit… Surprisingly more aggressive than I thought.

Dave:
That’s good to hear because one of the major reasons the 2008 crash was so prolonged is that credit tightened so dramatically that it took a really long time for investors or builders to get any lending. So I’m hopeful that even if there is a recession that we won’t see that severe tightening of credit that would really impede any sort of economic recovery. Kathy let’s turn to you. What are you doing to prepare yourself for a potential recession?

Kathy:
Oh my gosh, I’m going to sound so boring. We’re doing what we’ve always done. We are following jobs. I know. I wish it were creative and wow like these guys, but we’re following where the employers are going. There was a lot of lessons learned over the last couple of years and businesses learned where they can keep their businesses open, and many of those businesses are moving. So there’s never been… I don’t want to say never been. This is an incredibly exciting time to follow the jobs and follow the demographics and get there before the crowds. There’s always going to be ebbs and flows, recessions or lack of. I’m at a single family rental conference right now in Miami beach with hedge funds from all over the world. It’s never been so packed with so much money. Walk down the aisles and they’re trying to give you millions of dollars to buy homes. Problem as there aren’t any to buy it. It’s kind of wild.
And when you see the business suits in Miami beach, where I am right now, and know that so many of these bankers are moving to this area. So it’s become an international city. So much activity moving to Florida. You just have to see, it’s almost like hungry hippo, the game that’s happening right now. It’s like, “Oh, the hippo’s here and now he’s here and now…” Things are moving and you’ve got to pay attention. And if you follow it, you can really benefit from what’s happening in these growing areas, just like the last 50 years, just follow the trends, follow the demographics. That’s what we’re doing.

Dave:
So are you worried at all that in a potential recession, we might see increased unemployment? That’s almost guaranteed in a recession. Maybe there would be declines in rent or increases in vacancy. Are you concerned that will impact your business at all?

Kathy:
It just depends on where you’re invested. So right now would be a really good time to sell your lesser performing assets, because there’s probably a buyer out there for them. You might own something that you haven’t really paid attention to, but you should. Look and see what’s happening in that area and determine if this is still going to make sense over the next few years. And if it isn’t, then get into an area where it might be making more sense. Again, I’m at this conference with New York hedge fund managers who are… It was standing room only. It was thousands of people and they’re trying to buy real estate. And there was a panel of the biggest lenders who lended these guys saying, “We don’t see a recession.” Well one guy said maybe 2023, but you’re going to have to kill a lot of jobs to get there, and it’s not going to happen this year most likely.
Again, anything can happen. I mean, there’s things that can happen. We learned that two years ago. There could be a surprise. But at this time, for the Fed to try to kill 11 million jobs by raising rates, it’s not happening yet. One guy on the stage thought 2023, but it would be mild. Again, nobody knows. Nobody knows. But what they are betting on is that right now there’s 870,000… And again, I’m just talking about single family homes, there’s all kinds of ways to invest. And there’s all kinds of recessions and recessions can happen in different asset classes, and it may or may not be real estate, but I’m just going to focus on single family homes right now. There’s 870,000, approximately an inventory. Well, the peak of 2007, there was 3.7 million in inventory. Very different scenario right now. You can’t compare today to 10 years ago or 20… Everything has changed.
But what we know is that we have massive demand, gigantic population that is forming households, and there’s a fourth of what the inventory was 10 years ago for these people. So the consensus of these hedge fund managers was that it probably rents are going to continue to rise because the difference between a mortgage payment and the rent is growing. As the home prices rise and as mortgage rates rise, it’s becoming harder and harder to own a home. That means more renters and more renters fighting over the same properties. They think that rents will continue to rise.

Dave:
I do want to come back to this idea of rebalancing your portfolio and maybe selling off some things that maybe you don’t want to hold for the long term right now. But before we do that, I want to get Jamil’s opinion here, because I have a feeling he’s going to take a different view. Jamil, what are you doing to prepare for a potential recession?

Jamil:
You’re right. I am going to prepare for a potential recession, but I’ve always been preparing for a potential recession because I am fundamentally a trader. I trade homes. That’s what I do. When I got away from trading homes… This is my second time at bat. I went through the first cycle from 2002 to 2008. I made millions of dollars. I got creamed and I got creamed because I was holding. I was holding leverage. I was holding debt. I put myself in a situation where I couldn’t unravel. I didn’t have stacks of cash. I wasn’t prepared. I’m not in that situation this time. I’ve been prepared and I’ve been preparing for this since we got back to it. And that’s just sticking to the fundamentals of understanding value.
First, know what things are worth. Everybody who’s out there who’s been buying on speculation, that is not going to help you. That is not going to help you. But secondly, let’s look at the fundamentals of supply and demand. Listen to what Kathy’s saying. It’s very telling, the mood in which she’s she’s describing right now. You have all these hedge fund managers, you have all the suits hanging out in Miami. She’s describing this very, very aggressive front of Wall Street coming in and making and taking huge bets at housing. Why? Why are they doing that? And I’ll tell you exactly why. These people don’t play. They know when they’re at a table and they know what the dealer’s holding. And the dealer’s holding no inventory, no houses, because they’ve been buying it all.
So when I saw live over the weekend where a woman went out to rent a property in New York and there were a hundred people there and there was outrage because one $3,000 a month apartment had hundreds of applicants to try to rent it. When I see things like that happening, I can tell you that demand is not going away. We do not have enough inventory right now, so there’s… Stick to the fundamentals of understanding value, know how to trade, don’t hold too much. But thinking that we’re going to have this massive influx of inventory on the market is wishful, absolutely wishful.

Dave:
Totally, I sort of agree. If you actually look at new listings on a seasonally adjusted basis, it’s going the wrong direction. It’s going down. And just for people who are listening to this, if you’re seeing numbers and people saying that inventory is going up, because it went up from March to April, that happens every single year, that is called seasonality. And if you want to understand the data better, you can adjust that for seasonality. You can do this on Redfin or Zillow, they do it for you. And look at it then, because that shows you what’s supposed to happen in March to April and how it’s comparing to previous years, just as a heads up. Jamil, J Scott in his book, which I just reread, kind of timely, has put something in his discussion of peak market phase, which is, I think, where we are right now in just terms of the market cycle. He said wholesale instead of flip. Since you’re in both of those industries, pretty deep, do you agree or disagree with that advice?

Jamil:
100% agree. We are turning down our flipping activity and we’re wholesaling a lot more. If we do flip a property, when we do flip a property, because of course I’m in the world of entertainment for flipping as well, so it’s not just as a business. So these have to make sense, but why I love wholesale so much is it lets me identify the real gems, the real diamonds, the places where I can’t get hit. So when I can find these really beautiful opportunities, I flip those, I wholesale everything else. So J’s 1000% right. The way that he’s thinking, it’s moving in the same lines is how I’ve been preparing and how I think the rest of the audience needs to prepare it. Learn the fundamentals of wholesale and you can’t get burnt.

James:
Can I jump in on that, because obviously I like flipping. I’m still a flipper. I’m a wholesaler as well. But one thing that I’ve done, what that I’ve learned I’ve done really well in over the last 18 years is go where people don’t want to go. And I have noticed the general sentiment is be cautious, maybe wholesale, maybe pull your liquidity out. That creates a massive opportunity for flippers. I agree, you don’t want to buy flips that you are buying for the last 12 to 24 months, but you do want to buy the ones that are heavily discounted. Investor fatigue is a real thing and people are starting to pull out of the market and it is creating some excellent buys. In addition to wholesaling is, I agree with Jamil 100%, it is a great way to have low risk when you’re going into any sort of transitional market.
But at the same time, if the demand’s not there on the investor side, for certain types of product, your wholesale fees do get beat up a little bit at that time. You can’t charge as much to that next investor. So for me, I’m actually doubling down to get ready to flip a lot more because I like to invest where everybody is afraid to invest in. Yes, construction costs are hard to manage. Well then I got to figure it out. I can just add it into my pro forma. Flipping could be riskier. Yes, I will buy it cheaper, then. The next wholesale deal that comes through, I’m going to expect a way better margin. So I still am an active… I mean, we just bought six flips in the last two weeks, and I do think that market’s going into a trouble sometime, but we also paid 10% less than we were paying the last 24 months. I just renegotiated a deal down $120,000 during feasibility on a single family house because I said, “Hey, the data, I don’t like it anymore. Here’s where I’m at.” And the seller took it.

Dave:
Would the seller have taken that six months ago?

James:
Oh, absolutely not. Because it was in Bellevue. In Bellevue, you couldn’t… I mean the lots were trading for 1.35, and I have this house for 1.15, and because every builder got nervous, they all pulled out of the market rapidly because they had bought too many lots over the last five months. They would be very aggressive. So created this… I mean I just paid $220,000 cheaper than someone was paying 35 days ago. So as people pull out, there’s a huge opportunity. I like to buy on the dip and I’m starting to see a little bit of a dip there.

Jamil:
But are we at a dip, James? That’s the thing. Are we at the dip or are we just at the little piece after the peak? Is that a dip or is that a slip?

James:
We’re in the dip, but I think we have a further dip, too. I actually think there’s a lot of inventory coming to market. I have a different perception from maybe what you guys have because the emotional standpoint in the psyche, you can’t factor your pro forma into the data. What I do know is investors have a weak stomach a lot of times. I mean, we saw that in March of COVID. What happened? All these hedge funds that are buying all these houses, they weren’t buying in March, were they? They all shut their doors down, banks shut their doors down, hard money lenders shut their doors down. They have no stomach. We went and bought 15 homes. We just suggested our margins, so even right now, that home that I just contracted in Bellevue, we’re not paying a little bit less, we are paying nearly 20% less in a 35 day period. So as long as my margin makes sense, I can still flip that property. And honestly I’ll probably do very well in that house, but just adjust your margins. If you’re nervous, just buy cheaper.

Kathy:
Oh James, you guys, I have to jump in because I couldn’t agree more. Right now there is so much fear. As there should be, every headline is saying there’s a recession coming. This is a great time to negotiate. This is a great time to get a good deal. We are finally able to get some inventory from people who are really scared of what’s coming because they maybe haven’t researched the fundamentals of what’s really happening. They’re just reading the headlines. That’s the whole point of this show is to go behind the headlines and really give the data because the world is not paying attention to the fundamentals and the facts.
And the facts are we… Absolutely, the Federal Reserve is trying to increase inventory as it should. There isn’t enough. And by raising rates, there will be, in hopes of doubling the current inventory. That’s where we need to be at 870,000 homes on the market. You need to double it. We’re going to see that. But there’s a whole lot of people who are afraid of that because they’re going to see the headlines that say increased inventory, which is a good thing. It’s a really good thing for buyers. So if people are scared to buy, that’s good for you and me. We’re finally, finally getting deals again.

Dave:
I want to come to… So I actually had this question that we were going to save to the crowdsource section, but since it just came up, I will ask, and Jamil, I’ll start with you because you were starting to hit on this. This came from the On the Markets forum, On the Market forums on Bigger Pockets, which you should all check out if you have not been there yet. Some great conversations going on there. And this comes from Connor Olson, who asked, “Is it possible to be in an economic recession and not see that affect housing prices? Maybe supply will be so low that prices will keep going up.” And I just want to re reiterate before you turn this over to Jamil that the technical definition of recession is that GDP contracts two consecutive quarters. So the question is, could we hit that technical definition of a recession, but not see housing prices decline? Jamil, what do you think?

Jamil:
1000%. History shows us that they’re not directly related. We’ve had recessions where you have an increase in housing and… The last recession was devastating on housing, of course, but look at what got us to that. What Kathy was saying. There was an excess of like three and a half, four million homes. That was insanity. People owned three, four, five houses that shouldn’t have even owned one. That’s what caused us to have that meltdown in the first place, but I do not believe that just because we move into a recession that it’s going to hit housing. Look, stock market’s already getting creamed. Crypto’s getting creamed. So many people are absolutely feeling this already. It’s just that in real estate right now, we’re sort of pivoting, because we’re like, “Wait, it hasn’t got bad yet. What’s happening. Is everything okay? We’re fine. We’re not wet.”
And I don’t think we’re going to get wet. I think it’s going to get harder for us to make money because, again, you’ve got the 9,000 pound gorilla hanging out in Miami right now with Kathy. And the 9,000 pound gorilla is out there right now waving cash, waving cash. Do you not think that 9,000 pound gorilla was well thought out? That the reason why they’re doing what they’re doing right now with billions of dollars in spending and research? Guys, come on.

James:
These big hedge fund guys, we’ve done a lot of business with them, too, over the years, and they’re great buyers and they have a great business model, but at the end they are the 9,000 pound gorilla, but the Fed is mother nature and they will always win. No matter what, the Fed is going to control what happens, and I think they’ve been actually very clear about what they’re going to do. They’re not really hiding it. And Powell, the last time he spoke, he’s like, “Yeah, rates are going to go up.” I mean, they’re basically saying that they are purposely going to jam us into a recession. And that gorilla’s going to get wet. And the thing about the Fed in even that correlation with mother nature is you can prepare, it doesn’t matter. I can have a tornado come through right now, and as long as I got my cellar and I prepare correctly and have my food supply, I’m going to weather the storm and make it right out of that storm at that point.
But at the end of the day, money controls everything, and the Fed controls those hedge funds pockets. And if their pockets start to get a little bit more difficult, they’re going to tighten up. And again, I’m going back to the point of all those big buyers were not big buyers in March of 2018. I was laughing how quickly people shut their doors. Granted, it was a scary time, but at the end of the day, the assets were still the assets, and if they thought it was going to melt down then, we could have a meltdown now. So as soon as they have any feeling of meltdown, they pull back instantly.
And that’s why actually going back to what I was talking about with the bank market, go meet with lots of lenders right now, go talk to banks, because banks are telling me one thing today, but I have to have an arsenal banks because that’s one thing I did learn in 2008. They pulled their money back and I could not get any more of it. So talk to your lenders, put the arsenals on your banks because what they’re saying today will change tomorrow. And just have constant communication.

Kathy:
I just got to answer that question if you can have housing boom during a recession. And my answer to that is yes and no, and there isn’t a housing market. There’s a bunch of little pockets of houses all around a very, very big country. So in 2005 we were selling in a bubblelicious market. Remember one that didn’t make sense in California where prices… No average person could afford the average price. It was just crazy loans that allowed that. We sold those, and we 10-31 exchanged to Dallas where we bought right, they cash flowed, we knew there was growth, there was job growth, there was population growth, but the homes were very affordable and there was infrastructure growth. Remember that, job growth, population growth, infrastructure growth. Those properties rode through the worst housing recession since the great depression without feeling it. Because again, we bought right, in the path of progress, in affordable market, with high paid jobs.
So you could say how did anyone survive 2009? Well, if you prepared for it properly, it wasn’t that hard. You just had to get in the right current. And the current was where does it still make sense today? So it’s the same thing. There’s going to be real estate markets that get affected for sure. Right now we’ve got problems with tech stocks. And a lot of cities that have bubbled up are based on tech companies. So there’s going to be layoffs there. So some areas, maybe Austin, I don’t know, you’re Austin one last time, but right now those tech companies are hurting a little bit. There could be layoffs. There could be an impact on real estate. We don’t know. But I’m going to be careful and cautious about being in tech cities right now. And I’m going to be in markets that are more diversified. That was, again, a big lesson we learned in 2008. Be in a market that has lots of different employers so that if wind goes down, there’s plenty there to keep the market held up.

Jamil:
So is now the time to sell the castle in Malibu?

Kathy:
It could be, but I can’t. I can’t. I wish I could live somewhere else, but I can’t. And if you could find me a place where I could surf and mountain bike and rock climb and hike and… Fine, I’ll go there. But find it first.

Jamil:
It’s lifestyle. I get it. I get it.

Dave:
So earlier, Kathy, you had said something about selling things that aren’t performing, and I’ve been talking to a lot of people recently about this idea of rebalancing your portfolio, maybe by selling things that you don’t want to hold onto for more than a year or two, or maybe moving to a lower price market. Kathy, do you have any advice, like practical things about how people can go about do that? What type of markets… You just gave some good advice to that, but what types of loan products should they be looking for or what types of portfolio dynamics would you recommend in this market?

Kathy:
One of the things that I saw that I’m seeing people do right now is refinance with portfolio lenders. These are private lenders that aren’t as regulated as the the Fannie, Freddie backed loans. So you’ve got international investors looking for yield. If they stay in, I don’t know, European treasuries or… Right now Europe is heading towards recession. There’s a lot of money looking for yield. And one of the places they’re looking is lending to Americans. So you’ve got some of these funds, lending funds that are just enormous, and I’m not kidding when I say I’m walking down aisles here at this conference and there… I had one guy come up and say, “We’ll give you a 10 million credit line. Just fill this out.” It’s private money. It’s private money now. I’m not going to take it because it’s 8%. That one I’m not going to take.
So what’s the answer. Look and find out what kind of loans there are. I still think you should max out… Again, this is buy and hold one to four units. I’d max out my 10 loans that I can get from Fannie and Freddie, because it’s still pretty low. And I might get on a 7 or 10 year arm. I don’t normally do that. I like my 30 year fixed rate, but I’m still fairly comfortable with a 7 to 10 year arm. It’s fixed for those 7 or 10 years, whatever you get, and the rates are quite a bit lower. So I still think it’s great to max those out. If you’re married and you’re both working, you might each be able to get 10 of those. Again, if you’re buying that many and then you can go to the portfolio lenders that tend to be a little bit higher.
But what is weird is that some aren’t. Some of these private lenders are less than the Fannie, Freddie conventional loans. I do know some people and I’ll make sure that we have this in the show notes… I know a guy where you could… He created a website or an app where you can just type in the kind of loan you’re looking for and it’ll pop up the lenders that will do it.

Dave:
Oh, that’s great. That would be very helpful. So we’ll throw that in the show notes. I think one of the interesting dynamics is that people assume that… A lot of people, I should say, seem to think that if there is a dip in housing prices, it’s just the same exact market conditions, but with cheaper prices. But I think, James, what you were saying is lending gets harder, people get gun shy. But Jamil, I’m curious what you think. Are you seeing anything that points to better buying conditions ahead or do you think right now is the best it’s going to be for a while?

Jamil:
It’s a great question, Dave, because we transact at such a high volume across the country in wholesale. I can tell you month after month, if we see dips and what price points we’re seeing spikes or dips in, and I think there’s absolutely been a small pause for some of the higher priced inventory that we would wholesale. So I think that what that’s going to do is it’s going to create some downward pressure on sellers, it’s going to create downward pressure on wholesalers and our assignment fees are going to get chopped up a little bit and we’re going to have to start providing better value to investors. So absolutely, I think James is right in what he’s saying. I think Kathy’s correct in what she’s saying. I think we’re going to have some really select opportunities moving in the next little while, and I think understanding how to communicate that to sellers and real estate agents that you’re working with is an important thing.
Look, if a house hasn’t traded in one of the most historically heated real estate markets in the United States history, and it’s been sitting for the last six months on the MLS, there’s an opportunity there for you. There’s an opportunity to have a real conversation with someone to get value. And I think that, yes, there’s going to be real conversations, real deals to be had. And I believe that there will still be a plethora of investors who are ready to take the plunge and buy something that they find value in, as long as you’re sticking to the fundamentals of your numbers. Don’t be buying things thinking that, “Oh my God, this is going to be a great Airbnb.” This only cash flows as an Airbnb, you’re in trouble.
So be cognizant. Be cognizant of how things are going to pan out for you. But yes, buying opportunities are coming around the corner. They’re already here. Just like James. He just renegotiated 20% on his lot. That’s going to be the norm. Renegotiations are coming around. Real conversations with sellers are coming around the corner. Real conversations with agents are coming around the corner. Now is the time to really get down to the basics and start learning how to comp.

Kathy:
I want to mention that the Federal Reserve is not federal and it doesn’t have reserves. It is a private company. It’s a banking system. It’s the banks. It’s the biggest banks. They learned a lot. The big banks learned a lot in 2007, 2008. They’re not going to repeat that, guys. If you think that we’re going to go through another 2009 and have banks just give their assets away for nothing, you’re wrong. Because in 2009, those of us who were buying were taking advantage of that. It was very quick that the banks learned, “Oh, maybe this isn’t so good to give it all away.” And they started to keep those properties and fix them up, and even some went in the rental business. Or they sold them off to their buddies on Wall Street. They’ve learned. The Federal Reserve is a group of banks. Do you think they want to fail? They’re not going to fail.

Dave:
All right. This has been excellent advice from the three of you. Thank you so much. It seems that each of you have a slightly different take, different opinions on what might happen with housing prices. But generally the theme that I’m hearing is a return to fundamentals, to make sure, if you are investing right now, to really understand the value of what you’re buying, as Jamil said, to understand the fundamentals and make sure that you are buying things, not on speculation, but based on their true intrinsic value. Things that you might want to hold on for a longer period of time. And personally, this is just my advice, is not to take on any excessive risk right now. But that being said, there still are deals to be had, and if the numbers work, they work. So with that, let’s take a quick break, and after this, we will come back and give some advice to one of our crowd who is a little fearful of a recession. We’ll be back right after this.
Okay, for our crowdsourced section today, we are going to return to the Bigger Pockets forums, where we have a question from Michael Sellers who said, “Any advice for someone who feels stuck between, one, not wanting to take on a highly leveraged 203K loan,” and for anyone who doesn’t know what that is, it is a loan product that allows you to buy a house and wraps some of your rehab costs into the loan. “With so many logistical factors pointing to a recession, and two, not wanting to fall into the cliche of waiting for the correction to take action.” So Michael’s clearly feeling both sides of this debate.
He says, “This would be my first purchase and would involve a few months of renovation and construction after closing. In general, I have a pretty risk tolerant attitude, but with all the geopolitical turmoil and domestic inflation and interest rate spiking, being highly leveraged doesn’t seem like the best idea despite it being many people’s only option to break into markets they are otherwise priced out of.” All right, we only have a few minutes left in this show, but James, would love to hear quickly what your advice for Michael would be.

James:
Yeah, it really depends on what kind of asset you’re trying to buy, whether it’s a rental or a fix and flip with that 203K loan. If you’re a newer investor and you’re leveraging heavy on a fixed and flip, pad your margins. Add more in your construction budget. Make sure you have reserves too, because to get more funds from that 203K loan won’t happen. So put extra money aside just for cost overruns, and then just run your… Buy cheaper. If you’re nervous, buy cheaper. I mean, if someone’s going to sell me something that’s 60% of value right now, I’ll go buy it. I don’t care what’s going to happen in the market. And the other thing to do is to make sure, as you’re looking at things, that your rents are going to cover. You’re only over leveraged if your asset can’t pay for it. So if your asset can pay for it, you’re not overleveraging. So verify your rents, make sure it covers the cost and you’ll be fine.

Dave:
Jamil, what do you think?

Jamil:
Oh, I love everything James just said, because that’s the meat and potatoes here right now, guys. Make sure you’re buying right. Really, really, really look at the numbers, really make sure that you’ve understood where the comparables are, where you can force appreciation. And if that forced appreciation is just going to get you back to zero, great. Great. That’s okay. You worked hard, you sweated and you didn’t get anything for it. Oh, well. Guess what, you still have the asset and that will eventually work out well for you. But as long as you’re buying right. Like James said, you buy at 60 cents on the dollar right now and then you go and force some appreciation by adding value to the property, and all of a sudden we have a dip and you’re not over leveraged, you’re just perfectly leveraged. So that’s how you got to be buying, that’s how you’ve got to be playing. Get smart about it. Really, really run your numbers. That was great advice, James.

Dave:
Kathy, last word. What is your advice to Michael?

Kathy:
There’s no problem with the vehicle. It’s like saying, “Is this Ferrari dangerous or not?” Well, if you give it to a 16 year old, yeah, it’s dangerous. If you give it to a race car driver, no problem. So it’s not the vehicle at all. It’s who’s behind it. Just make sure that you know how to drive.

Jamil:
Don’t be a 16 year old behind a Ferrari.

Dave:
I think that’s really good advice because right now, if you are taking on your first major rehab, you’re hearing James, who’s been doing this, who’s done hundreds or thousands of deals, who is cautioning to really pad construction costs, renovation costs. So make sure that you are cautious on that, Michael, if you are going to take on this renovation as your first deal. All right, James, Kathy, Jamil, thank you all so much for being here as always. It is always a pleasure. If you’re listening to this, we would really appreciate if you like this show to give us a five star review on either Apple or Spotify. It does us a huge favor. We really appreciate, want to get up on those charts.
I will see you all again next week, when we are going to have an excellent show with Taylor Marr from Redfin, who’s going to be talking all about migration patterns and how they are impacting local housing markets. We’ll see you then. On the Market is created by me, Dave Meyer, and Kalin Bennett. Produced by Kalin Bennett. Editing by Joel Ascarza and Onyx Media. Copywriting by Nate Weintraub, and a very special thanks to the entire Bigger Pockets team. The content on the show On the Market are opinions only. All listeners should independently verify data points, opinions, and investment strategies.

David:
This is the BiggerPockets Podcast show 618.
So how can you do both? Well, you can start off by house hacking. Put 3.5% down, 5% down on a single family home, that puts the seed in the ground for at least one property. And you can do that every single year. You can then put a lot of your time, attention, energy into growing the business and taking the money that comes from that business and reinvesting it until you don’t need to reinvest the money anymore, where you can then take it and reinvest it into real estate.
What’s up everyone? My name is David Greene and I’m your host of the BiggerPockets Real Estate Podcast. If you’re ever wondering why we say things like this and show, it’s because Josh Dorkin, the founder of BiggerPockets, started doing the podcast like that and I just can’t help myself but do it because I listened to Josh for so long. Josh, shout out to you if you happen to be listening to this. Hope you’re doing great out there in Hawaii, you’re getting plenty of sun and things are going well for you.
If this is your first time listening to the podcast, we at BiggerPockets are here to bring you as much information as we can about how you can build wealth through real estate. Today’s show is a slightly different format than what we normally do. It’s called Seeing Greene. That’s why the light behind me is green. In today’s format, people like you submit questions about their real estate careers, specific problems that they’re having, areas they’re getting stuck, or just overall wisdom that they feel like would help them in their journey, and I do my best to answer them.
If you guys would like to be featured on the show, I’d love that. Please go to biggerpockets.com/david and ask your question there for me to answer. And if you’re not listening to this on YouTube, I’m not paid by YouTube to say this, but I will say, I just got the YouTube premium thing where it plays in the background when you close the app. Game changer. Absolutely love it. No regrets about, I think, the $15 I have to pay every month. So consider doing that because you can leave comments about our show as well as subscribe and get notified when BiggerPockets has new shows coming out.
In today’s show, we cover topics like how much of a property you should be fixing up or how much money you should be dumping into a property where the return starts to become marginalized. We talk about how to prioritize owning a business and building your real estate portfolio. Which one should you be putting your money and your time into? We also get into how to evaluate the return on equity of a property. So at what point is your property not earning you enough cash flow for how much equity it has? And how you should move that money around and more. If you guys listen all the way till the end of the show, you’re going to hear the debate about if I should be wearing t-shirts or if I should be wearing collar shirts when I do these. So please chime in on that as well.
Today’s quick dip is, listen to Episode 620. It’s going to be coming at two episodes after this, where I interview Ed Mylett. We talk about this concept of collective psychology, which is a tendency that human beings have to want to follow the crowd and do what everybody else is doing. But the best investors and the best business people do the opposite. They zig when others zag. In this market with interest rates going up, with the Russia-Ukraine situation, with all these fears of inflation, many people make bad decisions out of fear and there’s a lot of fear going around.
Inflation, in my opinion, is a reason that you should be buying real estate. But as people are seeing inflation happening, many of them are thinking they want to get out of the market for some reason. You’re having a hard time finding deals, I’m sure. There’s not as much inventory out there. So right now is a time to look for sellers who are getting scared, who are nervous or who are following the collective psychology of the group that says you should sell because we don’t know what to do. You might be able to find yourself a great deal by focusing on the emotional state of the seller, not just the asset itself as you see it online.
Hopefully that works out for somebody. If you’re able to pick something up in this market that you think is a great deal, I want to know about it. Tell me in the comments what you got and how so everybody else can learn. All right, without any further ado, let’s get to today’s show.

Shane:
Hey David, I’m looking to begin investing with the goal of having enough wealth and cash flow built up to be able to support running other businesses. Specifically, I want to start a farming business sooner rather than later. I’m concerned that I won’t have enough capital to scale both my real estate and the farming business simultaneously. And I am afraid that picking one business over the other would delay the other one significantly. As somebody with multiple businesses and enterprises and looking to start more, I’m wondering how you decide where to dedicate your resources, your time, energy and capital next, going forward. And specifically wondering if you have any advice about how I specifically can build my bridges effectively and efficiently. Thanks.

David:
Hey Shane. Wow, that was a very good question. I could probably spend the entire episode just answering that. So I’m going to have to try to keep this short. You’re telling me that you want to invest in real estate, but you also want to invest in a business and you don’t think you have enough capital to do both and you want to make sure that you don’t delay either one. Here’s a few things to think about. Businesses tend to generate more cash flow and they tend to have more risk as well as more time and energy put into them, meaning they’re less passive. Real estate tends to generate wealth passively or more passively than a business does, but it doesn’t always do it from a cash flow perspective. And when I say that, I mean the money that that asset is putting into your bank account every single month is what we’re going to call cash flow.
It’s typical when you’re first getting started to buy a single family home, a small multi-family to make a couple hundred bucks a month of cash flow, which is frankly not very much money at all if what you’re looking to do is try to fund a lifestyle or a business. Now, real estate does very well over the long term when it appreciates and you pay down the loan. Cash flow, in my opinion, is best used to make sure you don’t lose a property. It’s a defensive metric. You’re meant to use the cash flow to make sure you can make the payment. And then holding it for a long time is what builds wealth. If you understand the strengths of both asset classes, real estate is very good long term. Business is going to be better short term.
So if you’re looking to create a business, you’re going to want to have to go out there and generate some revenue, put some contracts together, find some way for that business to make money. Then you’re going to hire people. You’re going to train them. You’re going to manage them. You’re going to oversee your clientele. You’re going to have to learn how to keep the books. You’re going to do a lot of work. But if you do it well, it should produce more income. Then real estate is going to be building you wealth sort of slowly and on the side. Think of it like planting a tree. You put the seed in the ground and it slowly starts growing. You don’t have to spend a lot of time worrying about that tree. In the very beginning when it first starts growing, you got to pay a lot of attention to it. Make sure that nothing goes wrong just like with real estate. But once it’s established, for the most part, you’re not thinking about it.
Business is more like crops. You’re putting a lot of effort into tilling the soil. You’re planting lots of seeds, knowing that many of them aren’t going to grow. You’re going to have to take weeds away and stop predators from coming in and ruining your crop. You’re going to have to make sure it gets fertilized. What I’m getting at is there’s a lot of work that goes into planning and harvesting a crop. It’s not passive income. So how can you do both? Well, you can start off by house hacking. Put 3.5% down, 5% down on a single family home, that puts the seed in the ground for at least one property. And you can do that every single year. You can then put a lot of your time, attention, energy into growing the business and taking the money that comes from that business and reinvesting it until you don’t need to reinvest the money anymore where you can then take it and reinvest it into real estate.
That’s really how my whole situation works. I have businesses that I run because I don’t want to depend on real estate to generate the cash flow to buy more real estate. It doesn’t work great for that. Does it generate cash flow? Sure. But I can set up a portfolio that might generate $40,000, $50,000, $60,000 a month in cash flow. Or I can set up a business that generates that month with way less effort. Way, way less effort. So I like to look at the strengths and weaknesses of both. And that’s what I think that you should be doing, especially if your business is somehow connected to real estate. You mentioned farming. Can you figure out a way to buy a property that has a structure and improvement on it that you can use a 30-year fixed rate to get that house and it comes with a lot of land that you can then work your business with? Now you’ve got synergy between the two things and there’s a lot less effort.
If you can’t do that, you still want to look at growing your business to set off a lot of cash flow, saving that cash flow, reinvesting it into real estate. As time passes, that real estate will appreciate in value. You can sell it or you can do a cash out refinance to pull money out of it to either buy more real estate or invest back into the business. And you want to just kind of create this system of going back and forth between the two. Hope that helps. Best of luck to you and make sure that you let us know how it goes.
All right, next question comes from Josh Heeb in Columbus, Indiana. “With the appreciation we have seen in real estate, return on equity has dropped significantly on a lot of properties. At what point does it make sense to consider selling and redeploying that capital? What other factors should it investor consider other than thoughts on return on equity?”
Josh, love the question. This is how smart business people think. You’re on the right path. For those that have never heard of this idea of return on equity, it’s very similar to return on investment. So when you’re calculating your ROI or your return on investment, you’re basically saying “How much money is this asset going to generate?” And then I divide that by how much money I have to put into the deal to make it work. So you have income divided by your expenses like down payment and maybe any other cost like closing costs, improvement, stuff like that, your rehab. And you get a number. That number that you come up with tells you what percentage of your initial investment you’re going to get back every year. So a 10% return on investment just means that every year I get back 10% of what I put into the deal.
Now, what Josh is referring to here is when a property appreciates very quickly, it can look like your ROI is going up because every year you’re making more money than you were making the year before. So you had a 10% return, then a 12% return, then a 14% return because your rents have steadily been going up every single year. But it’s very easy to assume that the money that you put into the deal is still how you should be looking at your investment. It’s not anymore. If you put $50,000 down on this house you bought, but it’s appreciated so now you have $300,000 of equity, it doesn’t make sense to look at the money that you put in the 50,000 five years ago or 10 years ago.
Now you have to say, “This asset is worth 300,000,” or “I have that much equity in it.” So if you take what the cash flow of that property is, and you divide it by 300,000, you’re going to get a way smaller number than if you just divide it by your initial investment. So what I recommend people do when they have an asset that’s appreciating is to look at how much cash flow am I getting for the equity that I have in the house, not for the initial investment that I made in the beginning. And Josh, when you’re asking me at what point does it make sense to redeploy the capital that you initially put into that property, it’s when you want more cash flow or you want to make sure your equity is working harder.
So let me give you an example. If you had $50,000 you put into this property and you’re getting a 10% return on that money, that’s $5,000 a year at a 10% ROI. If that has gone to 300,000 like I mentioned, you have six times as much money as the 50,000 that you put in. But if you’re still only making $5,000 a year, you could be making six times that if you could get a 10% return on the 300,000 that you’ve invested, which would be $30,000 a year instead of $5,000. So that’s when I think people should start looking. And when you have significant equity in a property, you need to be asking yourself, “Is this actually working hard for me, or is my return on equity very low?”
A few other factors to consider because it’s not only about cash flow. If you own an asset in an area that’s appreciating very rapidly and you believe it’s going to continue appreciating, yes, you could sell it and redeploy it to get a higher ROI somewhere else and you could make more cash flow, but you might lose money over the long term because you could be investing into a market with less appreciation. So one thing to consider is, do I think I can get the same appreciation or better if I move this equity from this property into a different one, or from this market into a different one?
I like to look for that. I’m okay to sell a property that’s appreciating to get more cash flow if where I’m going is going to be appreciating at the same rate or better. That’s one of the awesome parts about long distance investing, is you can find the market that you think is going to do better and you can buy assets there while selling them in markets that have sort of cooled off. You can sort of ride the train. Oh, there’s not as much people moving into this area. Let me take it out, put it over here and ride the next level up.
Another thing to consider is the headache factor. If you sell this property and you move the equity somewhere else, is that new property going to because you a lot more time and energy to manage than the one that you had? And the last thing I would say to consider is closing costs. Selling a property is not free. There’s going to be closing costs that are involved with the property. So when that’s the case, if you think, “Hey, I’d like to move the money or I’d like to get out the equity, but I want to keep the house,” consider a cash out refinance. That’s where you would take money out of the property by getting a new loan on it. Take that equity, go put in a new market.
That’s exactly what I just did. I had my first four California properties that I ever bought when I first started investing. They’ve appreciated a ton. My return on equity has become very, very small. But I don’t want to sell them because I believe that the area they’re in is going to continue to appreciate in both value and in rents. So instead, I did a cash out refinance, pulled out about a million bucks from those properties and then put that into two new properties and areas that I also think are going to grow where there’s a value add. If I thought that those California properties were not going to continue appreciating, I would’ve sold them instead of refinancing.
Thank you for that question. Let me know if there’s anything else I can answer by leaving something in the comments and I’ll see if there’s anything that I didn’t address that I can get to.

DJ:
How are you doing? My name is DJ Dubono and I am from the upstate New York market in the capital region. My partner and I just founded our first LLC for real estate investing. My question is, what is the best way to find potential JB Partners and what are some good screening questions to ask to kind of filter through those JB Partners?

David:
Thank you for that, DJ. All right. This is a very subjective question so different people can give you different advice when it comes to picking a partner. The first thing I’ll say is, ask yourself what your motives are. Do I want to partner because it brings emotional security? Or do I want to partner because it makes business sense? In general, I tend to shy away from partnering with somebody for the emotional security that it brings. It always sounds good in the beginning. It always gets complicated later as two people or two groups of people, or maybe several groups of people are all moving in different directions and it becomes very difficult to keep everybody happy with each other and meeting expectations.
So if I’m looking for a partner, I’m looking someone for a complimentary skill set to my own, something they’re bringing that I don’t have. So that could be a brain that works differently than my brain works. It could be resources they have access to that I don’t that I can use. It could be they have a team in place and I can use a team they already have. It could be connections that they have. It could be access to deal flow. There’s a lot of different things that somebody can bring to the table, but they’re typically going to be an experienced investor if that’s the case. So to answer your question of what questions should I be asking, if you’re looking for someone that has a complimentary skill set like I’m recommending, you should be asking how many deals they’ve already done.
And this is the rub. The people who want to partner are typically doing it because they’re afraid to do it on their own, meaning they haven’t already been doing it. They don’t have as much to offer because they’re new. The people you want to be partnering with are someone who are bringing something to the table, but they’re not emotionally scared because they’ve been doing it. And that’s why I say don’t do it for the emotional reasons. You end up getting a partner who doesn’t have a track record, isn’t bringing anything to the table, doesn’t have resources that you can use that would make your enterprise more successful. Instead, I really recommend that you focus on what do they have that would make this business better. And then you ask yourself the same question. What are you bringing to the table that would make it better for them? And look for a situation that’s a win-win for each of you from a practical perspective, not an emotional one.
All right. We’ve had some great questions so far. I love the people that are… You guys are submitting better and better questions every single time we do one of these. If you’d like to submit a question of your own, I’d love you to please go to biggerpockets.com/david where you can do just that. At this segment of this show, we answer comments from YouTube that people have left on previous shows. Sometimes they’re funny. Sometimes they’re insightful. Sometimes they point out something that I didn’t even realize that I missed. So I like to share those with you guys. And I want to highly encourage you if you’re listening to this right now, go to the YouTube and leave a comment for me about what you liked, what you didn’t like, what you thought was funny, what you wish I would’ve asked, whatever we can do to make this show better.
The first question comes from Jenny Lee. “Hey David, I love this show and format. Every morning that I’m able, I watch an episode on YouTube and feel my real estate brain getting smarter. I appreciate the content and how you talk through your thought process.”
Side note, thank you, Jenny. That is actually something I intentionally tried to do on the shows. I could just give people the answer when they say something like, earlier in this show somebody said, “What do you look for in a partner? Or should I buy real estate? Or should I buy a business?” And I could just give you the answer, but if I don’t explain the thought process, then you guys won’t know how I came to the conclusion. You won’t be able to trust it and you won’t be able to solve problems on your own. So I appreciate you noticing that.
“I’m currently reading your book Long-Distance Real Estate Investing, and it’s a well written GAME CHANGER. All caps.” Thank you. “The colored shirt look nice today. The T-shirts are awesome too though.” That’s because I’ve asked questions on previous episodes of how you guys think I should dress. “I’m a bay area local, and I know the East Bay’s weather is about to get real dry, winding and hot. So it’s a good thing you can totally get away with dressing California casual. One of my favorite parts about this podcast is how you always keep it real. It was awesome you even solicited feedback about your fit. My vote is that you keep on slaying in whatever you’re most comfortable wearing.”
Thank you, Jenny. You said a lot of nice things and a pretty lengthy response, but you avoided answering the question of, if you think that t-shirts are better or collared shirts. So the debate remains. Do you guys think that I should be doing these dressed in a more professional manner or a more laid back manner? What do you think is better for the podcast and what makes it easier for you to trust the advice?
Jenny, thank you. You’re a Bay Area local, make sure you reach out to me. I’m on Instagram and everywhere else, @davidgreene24. I want to get you connected to… Anyone else who is interested in attending a meetup or who lives in California, you can go to davidgeenemeetups.com and register to be notified there.
Next comment comes from Sandra. “T-shirt David” with a smiley face. “I really dig the question from Nicole. I’m also interested in the loan side of real estate learning policy and fine print and regulations. To set up efficient systems is my jam. Thank you, BP.” All right. So check one off for the t-shirt column.
And from Cynthia Ibarra. “Hi David, I loved your show. You guys are the best. I would like to see more about second home mortgages. Thank you.” Well, if you guys would like more information about loans, about mortgages, I’m happy to talk about it. I own The One Brokerage, and so I’ve learned a lot about it with my partner, Christian. Submit us questions asking us how this industry works, what happens with loans, what affects interest rates, what you should be looking for. I may bring Christian on the podcast in the future to talk about kind of some of the stuff that he buys, that we buy together, and how the loan game works. So if that’s what you’re interested in, let us know in the comments and leave me a question about it at biggerpockets.com/david.

Michael:
Hi David. Thanks for taking my question. I’m a new investor. I joined BiggerPockets at the beginning of October 2021 and took the 90-day challenge. I closed on my first rental just before new year’s. Besides getting over my own issues as a first time investor, a quick shout out to my rockstar agent, Nick Harris at FIRE team Realty. You can find them on BiggerPockets. I found financing to be my next biggest hurdle. I’m self-employed in the IT field. I make good money for my area, but on paper it looks like a different story. Because of that, my loan terms were less than favorable. So my question is, should I put more focus on improving my financeability? And yes, that is a word. I checked. And if so, what are some of the things that I should look at doing? Or should I simply factor having to pay a higher rate and deal with less favorable terms into my underwriting? Thanks, David. I really like the direction of the channel and I love seeing all of the new content.

David:
Thank you for that, Michael. I’ve got a couple different ways I’m going to address your question because I think it’s very good. First off, it sounds like what you’re describing is because you’re self-employed you can’t use the income that you’re making the same as a W2 person would. So the very best loans that a person can possibly get, which are typically Fannie Mae, Freddie Mac, what we call conventional financing, in the mortgage world are not available to you. If you had a W2 job, they would be. So you’re saying you’re getting less favorable financing terms. It’s important to know it is less favorable than the best terms anybody could ever get. But in our world, that tends to be where we set our baseline is these Fannie Mae, Freddie Mac government subsidized loans, which are the best that anyone could do becomes what we expect, and anything higher interest rate than that or more closing costs automatically is like, “Oh, that stings. I’m not able to do what I wanted to” or “I’m not able to get the rate other people would get.”
You’re probably being offered debt service loans or other loans that use your income that is being claimed on your taxes after several years to get qualified. And you can get qualified. You can still get 30-year fixed rate loans. You’re just usually taking a hit on your interest rate because they’re a little less safe for the lender who’s giving you the loan. The thought with the lender is that, “Hey, this person in a self-employed position is more likely to lose their job or not make the same income. They’re not getting the same security that comes from an employer.”
It’s not like they’re trying to punish people because they don’t have a W2 job. Just a W2 job is considered in that industry with all the data and the metrics they have of whose most likely to default to be the safest bet. It’s the same reason that when your credit score starts to get worse, your interest rate starts to go a little bit higher. It makes you slightly higher risk to the lender. And because the lender doesn’t know you personally, and they can’t know everybody personally that ever applies for the loan, they have to come up with metrics like this to make decisions.
Here’s something I’d think about if I was you. If you’re only looking at how to get a better rate, you’re going to change your entire life to fit that goal. And I’ve said this before, I’ve never heard a successful investor at the end of their career say, “You know, I made all my money by getting the very best interest rates.” It just isn’t as big of a thing when it comes to overall wealth building as it feels in the moment when we’re competitive and we’re trying to get the best rate that we possibly can. But you have to use your higher rate, so instead it’s only going to be $300 a month for you.
Will that $100 a month improve your quality of life more than keeping a job where you’re self-employed? Would you be happier to stop being self-employed, go work for somebody else, have to live under their rules, their regulations on their timetable, conform to company policy? All the reasons you don’t want to work in that industry because you like being self-employed. Would that $100 a month mean more to you than the freedom that you have and the job that you’re at? Because I think we have to remember the goal of investing in real estate is not to build up as much passive income as we can on a spreadsheet so we can tell everybody that we make more than they do.
The goal of real estate investing is not to get your net worth as high as you possibly can get it so you can tell people that you’re better than them. The goal of real estate investing is to fuel the life you want to live. And if the life that you want to live is one where you are self-employed, you own your own business, you can build your own business, you can run your own company, keep doing that and just lose the $100 a month on the property when you buy it. Inflation’s going to make rents go up and that’s not even going to be a thing you think about in the future.
Another thing you’re probably not considering. What if you just put more effort into the business you have so that you made more money? You probably have a lot more influence over making money at your job or at the business that you own than you do in real estate where you’re dependent on rents to go up. So I want to challenge you to look into, what if you hired someone new and leveraged off some of what you’re doing and you went and did more lead generating to get more business? In your business that made you more money. You could get a much higher return on your time than just fighting over an interest rate that might be a percent higher.
Keep in mind, real estate investing is meant to fuel the life that we want to have, not just our egos. And interest rates are typically something that our egos care about the most. Now I can also understand sometimes the deal doesn’t work if the interest rate is a little bit higher. But honestly, if the deal’s that tight, that a point higher on the interest rate makes it not work at all, probably not a deal you should buy. Realistically, it probably just means you cash flow a little bit less in year one or in year two, but in year 10, it’s not going to matter. Thank you very much for the question. I hope my answer gives you a little bit of insight into your situation. Appreciate you.
Next question comes from Arthur in Raleigh, North Carolina. “Dear David, thank you for sharing your expertise. I’m an investor from Raleigh. I have concerns that my property manager in South Carolina is possibly receiving rental income and not sending it to me. I own a triplex in a small town there which has been owned for some time and a second triplex which was purchased recently in Charleston. For the months of December and January, I received nothing from either property. On February 1st, I received a check which appears to be only from the Charleston triplex and I am guessing is for the month of January. As of mid-February, I have not received anything. South Carolina law seems to require that a property manager sent copies of leases, yet I have not received any lease for either. Since these are rental properties owned at a long distance, what could be done to verify that the rent in consent is correct and not understated? Also, how could I verify that a repair bill is not being inflated or entirely made up? Thank you.”
All right, Arthur, let’s dive into this. The first thing just from the vibe I’m getting from your message here is you may be non-confrontational and you don’t want to talk to your property manager about it. The reason I’m saying that is nothing was included in your message that says, “I talked to the property manager and they said this.” So what you’re going to have to do is get them on the phone and say, “Why am I not getting rent checks? What’s going on?” They have to have some kind of answer.
Now I have to give you some hypothetical scenarios about what it could be other than they’re just stealing from you, which may end up being the case as well. Maybe they’re going to tell you that they haven’t collected rent from the tenants. If that’s the case, there’s nothing to give you. That’s probably what the answer is going to be. The only way I can think of that you could verify that the tenants haven’t collected rent would be if you actually asked the tenants yourself, “Have you paid rent?” Now, if the tenants have not been paying rent, your property manager should be starting the process of an eviction.
Every state has different laws, but there’s typically like a three day notice or a 30 day notice that rent was not paid. That’s something that they’re legally required to do. They usually post that on the door. They tell the tenant, “Hey, if you don’t pay in full by this amount, you’re going to have the eviction process started.” That should be going on if they’re not collecting rent. So you should getting updates from them of what they’re doing to start that process and continue that process on your behalf.
As far as getting copies of leases, yeah, you definitely should have that. Did they give you an answer as to why they’re not giving them? That’s another thing that you need to tell them “I want copies of leases.” If this is a company that doesn’t have leases or isn’t setting them to you and they’re not responding to you and telling you why the tenant is not paying their rent, you need to do a little bit of research on this company and find out how reputable they are. Do they have other people whose properties they manage? Is this a real estate agent who is using their license to manage properties and has no idea what they’re doing? Is this a person that got super busy in life and just stopped paying attention and they’re just avoiding you?
Something’s fishy here. A reputable company would not… They wouldn’t be operating this way because their reputation’s going to take a huge hit and no one would use them. So we’re going to have to figure out, “Can you get them on the phone? Can you talk to them and find out what is happening here?” And then after that, you need to be sending emails to them so you have something documented in case you have to take a lawsuit to them for mismanaging your property and breaking their fiduciary duty to you. You have kind of like something evidence a judge can look at.
This is really good advice for everybody out there. When you’re dealing with something and you have a conversation with someone on the phone, I have to tell my real estate this all the time, is they will tell a client on the phone… This is the case with a property, they’ll disclose something but then there’s no email. And they’ll come to me later and say, “Hey, so and so is upset.” And I told them, this was the case and I’ll say, “Well, if you don’t have a paper trail or an electronic paper trail, you didn’t tell them anything. It doesn’t matter what you said. Text messages are okay, but those are still not as good as like something that’s written down or something that’s emailed.”
So send your concerns to them in an email. And if they reply to it, that’s even better for you because it’s evidence that you can show that they saw what you sent. If they just completely ghost you and you’re not hearing anything, you do need to reach out to a lawyer and share with them “This is what I’ve done. Here’s the agreement that I set up. Here’s what I signed with this company.” Maybe you wired them some money in the beginning or transferred it to them. And you’re going to have to start the legal process yourself. But I would advise you, don’t try to figure out what is going on with them if you haven’t just asked them. Be straight up, ask them what’s going on. They’re likely to tell you why you haven’t been getting those rent checks. And then give us an update on what you found out. That would be great if you could leave that in the comments. Thank you very much for this.

Garrette:
Hey David, my name is Garrett. Love your show. I am an investor in the Chicago land area. I have one triplex under my belt. My question for you is how you go about picking which repairs are the most important and finding which ones that you want to fix right away versus maybe holding off for a little while or just completely putting aside and not worrying about. I’m finding myself having a lot of the bills rack up, because I want to fix everything. The roof needs repair. The basement’s leaking so I’m getting it waterproofed. A lot of the windows aren’t sealed or they’re cracked and warped, so new windows. All this stuff is starting to rack up. I’m not sure if I really need to fix all of it. So before I get myself investing too much of my own money into this property, how do you go about picking those ones and knowing what’s going to pay you back later down the line when you decide to sell? Thank you.

David:
Garrette, good question here. Man, you gave me some juicy stuff to get into. I’m going to like this. I’m going to start off with a practical response to your question and then I’m going to get into some deeper, more emotional stuff. So let’s talk about, from a practical perspective, you kind of ended your question by saying, “What’s going to give me the highest return on my money back?” This might be controversial. I’m just going to say in my experience in general, no repairs get you money back. It’s more like if you want to sell your house, the buyer’s going to expect certain things to be done. And if they’re not done, they’re going to ask you for a credit to get it fixed. But I’ve never seen the credit that a buyer gets on a house to be more than what it would cost if you had done the repairs. It’s almost always better if you give a credit instead of make repairs that don’t have to be done.
Now we’re not talking about backed up plumbing, foundation issues. What I’m really getting at here is that every single house that you’ve ever seen driving in your car, walked inside, have been in, owned, someone else owned, every property that exists has something wrong with it. There is an inspector that can find not just one thing, but many things wrong with every single property. The mindset that I need to go in there and make it perfect isn’t actually practical. Many of these problems have existed, and I’m calling them problems because they’re pointed out in a report, for 25, 30, 50 years and things have been okay.
I want to just reframe this question I wanted to ask you. If you own a car, things start to break in the car, okay? The vents that control the airflow sometimes become kind of wobbly and they fall down, they don’t stay up. In my car, you have the little center console, it has little piece that you can pull up to put something in and then push back down to rest your hand on. Well, sometimes it doesn’t click in place when I put it down and I got to jiggle with a little bit to get in there, right? Does it affect my experience driving the car? Hardly nothing. However, if someone inspected my car, they would point that out and many other things. And if I thought it is my job to repair everything on that report, I’d be dumping tons of money into a car that isn’t giving me a better experience.
Real estate can work the same way. Do you need to replace the windows? Well, that depends. Is the dry rot so bad that the windows aren’t working or it’s becoming like a safety thing or a draft is coming in? Probably yes. Is it just like a seal that’s broken in the window? Because I see that a lot. Like anytime you notice that home windows are fogged up, typically that’s because it’s a dual pane window and in between the two panes, they put a gas that helps to keep… It’s like an insulation. Well, if one of the seals breaks on those two panes, the gas can leak out and condensation gets in and that’s what makes windows foggy. Does it mean that they don’t insulate as well as they were originally designed? Yes. Does it mean that you need to spend $40,000 to replace every single window in the entire house? No. It just means it’s a little less energy efficient than it was before.
Now, that’s different than when the framing of the window has been completely corrupted by dry rot and it’s falling apart. That’s what I’m really trying to get at here. Don’t look at it like “I need to fix everything.” Ask yourself, “Well, what’s the purpose of fixing it? Electrical issues that are safety hazards, a leaking roof? Absolutely. At some point, you’re going to have to fix those things, especially if it’s a safety issue. So please hear me say I’m not referring to that. I’m referring to the fact that if you get a roof inspection, there’s a guarantee they will find a broken tile, a piece of wood that could be replaced, something that they’re going to say “This could be a little bit better.” That does not mean those things actually have to be replaced.
Now that’s the practical answer that I’m going to give you. I want to dive deeper into this and ask you, is there a reason you think you have to fix everything because there’s a comfort you get from having a blank slate? Are you one of those people that likes to make a checklist and have every single thing done on it? Do you like to be at what we call email inbox zero where you don’t have any emails that are unread? Are you that person that if you have one notification on your phone, that little red dot, you have to clear it because it feels wrong? If that’s the case, this is probably why your feelings are telling you that you need to do every single thing in the inspection report and fix the house.
You don’t have to live like that. What would be better is if you ask yourself why you’re thinking that way. There’s probably some form of safety that you think you get when you make everything perfect. And that’s not how the world works. So if you can come and kind of reconcile with why you feel like you need to have every single thing done, your experience with real estate investing and ownership will get a lot better because a lot of the anxiety you’re feeling is what you’re putting on yourself thinking you have to fix everything.
So I’ll sum this up by saying safety, health and safety issues, hazards like that, absolutely need to be fixed. If it’s something where someone could be hurt or injured, yes, that needs to be done. If it’s something that just shows up on an inspection report, “Okay, I’ve seen lots of stuff, you have a five burner stove and one of the burners isn’t working,” well, how many tents are needing to use all four burners at exactly the same time? Okay? There are things that you say, “Hey, at some point I might want to replace that or fix that, but it doesn’t have to be done right now.” And know that when you do fix it, you’re probably not getting any of that money back. It’s just coming right out of your cash flow and you’re not going to be improving the value of the property by fixing the small appliance. In fact, you’re going to have to fix it again, because that’s what happens is things like this break.
So grout issues and tile, you’re going to see like sometimes baseboards. You get a report that says that they could be fixed or repaired. I like to pay a lot of attention to anything that’s near water. So stuff near a shower I want to repair, because if I don’t, water can get in between sealants that have become loose and then the floor boards underneath can start to get rot from water. That can be really expensive. But that’s different than just like a faucet somewhere that’s not working super great or a light bulb that could be changed. So look at the nature of what is being asked of you. And if you can look at the practical reason of why it would need to be fixed, I think you’ll get some clarity.
All right. Our next question comes from Derek Rankin. “Hey David, I’m registered for BPCON22 and I have a couple important questions. Number one, will there be open mats for rolling?” That’s a jujitsu question. And should I bring my Gi with me? Also a jujitsu question? I’m a newbie to Brazilian jujitsu and love to learn new techniques. I look forward to seeing you there.”
Well, Derek, I don’t know that BiggerPocket’s going to have a jujitsu area set up because quite frankly that sounds like an absolute legal nightmare with tons of people wanting to jump in there and throw themselves into the ring and getting hurt and then potentially suing BiggerPockets. So I wouldn’t be holding my breath for that. In general, jujitsu is something that you definitely want to do in a supervised manner with instructors in an environment that is being controlled. So at the gym that I go to where it’s called an Academy, they don’t even let you spar with somebody until you’ve got your first stripe, which typically comes after like three to six months or so of going to class learning techniques and learning how to not hurt people.
If anybody lives near me geographically and you like to come train where I do, reach out to me and let me know. I will be happy to get you set up. And if you don’t live near me geographically, go get your tickets to BiggerPockets Conference 2022. It’s going to be in San Diego, one of the best places around as far as weather amenities and beauty. We’re going to have a great time. Every year, BiggerPockets gets better and better with putting this conference together. I don’t see how anyone could possibly regret it. So if you don’t live near me, get your tickets. I’d love to see you there. But please don’t come tackle me or start a fight or do anything crazy like that. Let’s keep it all reasonably healthy. And then if you would like to get into that, go through the appropriate channels.
The next question comes from Preston Garcia in Rochester, New York. “Hey David, I’m looking to get several buy and hold rentals in Cleveland. My agent is investor-friendly and send me deals daily. I want to use private lenders for the down payments of the properties, and in exchange pay them back with interest. However, not many people want to lend out that money for three to seven years depending on the market to receive their money back. In other words, not many people want to private lend for long term. It seems like the best option going that route is if there’s already a decent amount of equity I could refinance after the six month seasonal phase. These are for debt service loans. And I’m mainly looking at the only other alternative that I can think of is to have them become equity partners. Should I keep looking around for private lenders that are okay with lending for three to seven years and use them as equity partners or something else?”
Okay. You’ve made a great observation here, Preston. Nobody wants to lend out money for three to seven years unless the interest rate is higher than you’re going to want to pay. This is one of the reasons that home ownership is made possible for most Americans because the government is giving you a 30 year period of time to pay things back and they’re doing everything they can to keep interest rates low. Now I know that the Fed has been raising rates, so rates have been going higher. But they would be much higher than whatever they are if this was open market capitalism. I just want you to think about that. If you had to lend your money to someone else for 30 years, would you do it for a 3% or 4% interest rate? Would you even do it for a 5% or 6% interest rate? There’s no way that I would. The only reason this happens is because our financing is subsidized by the government in this country.
So you’re probably making the mistake of looking to private people with an expectation similar to what you’d get from a lending institution that’s going to sell this as a mortgage backed security once the loan is originated. And you’ve already answered your own question. Your best bet, if you want someone’s money for that long, is to give them equity in the deal. They’re probably not just going to want interest. And the interest you’d have to pay them would make it so the deal isn’t going to cash flow for you.
So giving away equity would be a much better bet. Now you’re not going to do this for your whole career. You’re just going to do it until you get your own money. You don’t have to borrow it. If you buy a couple properties, if you do it wisely, if you hang onto them, they’re going to grow in equity. At a certain point, you can sell them, get the other person their money back plus whatever their share of the equity was. But now you’ve got capital that you can now use to get into the game without having to borrow money from somebody else. So you’re absolutely right. I would look at giving away equity in the deal, and then I would refinance it when I could to get your money back, or to get your capital to get started and get them their money back.
All right, that’s what we have for today. What a cool collection of questions that people were asking. I mean, we had a little bit of everything there from sort of, should I do a business or should I buy real estate, to how should I borrow money when it comes to real estate investing, to how can I get the best loan possible. I really appreciate your attention and the time that you’ve been able to spend with me and the fact that you are loyal to BiggerPockets and me to get your real estate investing information, because I know there’s a ton of stuff out there.
I also want to let you guys know, this show is only possible if you actually submit questions that I can answer. So all of you that want to DM me on Instagram to ask a specific question about real estate, probably not the best bet. I’m not going to get to it there. But if you go to biggerpockets.com/david and ask your question, you are much more likely to get the answer that you’d like. If you guys would like to follow me on social media, see what I’m up to, communicate with me that way, you could find me @davidgreene24 on Instagram, LinkedIn, Facebook, Twitter, pretty much everything. On Snapchat I am officialdavidgreene. There’s an E at the end of Greene. And then you can follow my YouTube, it’s David Greene Real Estate, so youtube.com/davidgreenerealestate. I’m making content over there as well.
Thank you guys. Make sure that you subscribe, like, and share this episode on YouTube if you’re not watching over there. It’s cool, because you get to see me. I do little things with my hand. You see the light that’s behind my head. It’s a different color when we’re doing Seeing Greene than when we’re doing the regular podcast. You can also see the people that are asking questions and see what they look like. It’s just more of an immersive experience so you feel like you’re involved in the conversation, not just listening from the outside. And why is that important? Because you’re only going to build wealth in this world if you can take action. You got to go do something. Learning about weightlifting doesn’t get you stronger. Learning about jujitsu doesn’t get you better. And learning about real estate doesn’t make you money. It’s taking what you learn and doing something with it.
So that being said, check out another one of our episodes or go to biggerpockets.com and kind of cruise around. Check out the forums. Check out the blog. Go to biggerpockets.com/store and see some of the books that we have for you there to get more information that you can put into action. Love you guys. I will see you on the next one.

Mindy:
Welcome to the BiggerPockets Money Podcast Show number 306 Finance Friday Edition, where we interview Chelsea and Wade and talk about budgeting with variable income.

Chelsea:
I own my own business because I want to have the flexibility and the autonomy and the freedom to do whatever I want. And that’s sort of my personality anyway, is I don’t really want people to tell me what to do. Having the flexibility to do that is really cool, because I can work three days a week and do the amount of number of sessions that I want versus somebody telling me, “I need you to do 35 sessions a week,” and then me just walking around as a burnt out zombie.

Mindy:
Hello, hello, hello. My name is Mindy Jensen and with me as always is my Obi Wan Keknowitall host, Scott Trench/

Scott:
Ooh, the force is strong with our recommendations in this episode, Mindy.

Mindy:
That came from our Facebook group. Somebody suggested that and I love it. Okay, Scott and I are here to make financial independence less scary, less just for somebody else to introduce you to every money story, because we truly believe financial freedom is attainable for everyone, no matter when or where you’re starting.

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

Mindy:
Scott, I am super excited to talk to Chelsea and Wade today because they have a problem that a lot of people have. They have variable income, widely variable income, and it can sometimes be difficult to budget when your income is up one month and down one month, or down two months in a row, or down even three months in a row. You can start to feel like, I’m not really doing it right. Today, we talk to them and give them some ideas for how to handle their variable income.

Scott:
Yep, love it. I think it was a great discussion. They’re doing a lot of things really right, and I hope that it’s an interesting perspective on what life is like in building wealth from a self-employed perspective with two spouses who are self-employed.

Mindy:
Yes. Before we bring them in, let me satisfy my attorney by saying the contents of this podcast are informational in nature and are not legal or tax advice. And neither Scott, nor I, nor BiggerPockets is engaged in the provision of legal, tax, or any other advice. You should seek your own advice from professional advisors, including lawyers and accountants, regarding the legal tax and financial implications of any financial decision you contemplate. I don’t think I would be a very good auctioneer, do you, Scott?

Scott:
No, but I think you satisfied our attorney.

Mindy:
I did. Chelsea and Wade are on the path to financial independence, but they have widely variable, monthly income, anywhere between $5,000 a month and $26,000 a month. Coupled with ever changing monthly expenses, they’ve been having difficulty creating a budget. And on top of that, they’re both self-employed making insurance another wrinkle to iron out. Wade and Chelsea, welcome to the BiggerPockets Money Podcast. I’m so excited to talk to you guys today.

Chelsea:
Thank you so much for having us. This is a dream come true.

Mindy:
Well, let’s get into this because we have a lot to unpack. What is your income and where does it go?

Chelsea:
Okay, so we are both self-employed, like you said, and I’m a professional counselor with a private practice. My income varies, but it’s more consistent than his. Last year I brought home $51,000 and that came out to about like 4,000 a month.

Scott:
And that’s net income after tax.

Chelsea:
Yes.

Scott:
Hitting your bank account.

Chelsea:
Mm-hmm (affirmative).

Scott:
Great.

Wade:
Yeah. My income varies a lot more, because I’m a filmmaker. I do projects where sometimes I’ll make like $26,000 in a month and sometimes I will make $0 in a month. It also gets a little more complicated on the business side because I have a really high gross income. Last year, my business gross was like $225,000, but that’s because I’m paying lots of contractors. It may look like I’m making a lot of money, but after expenses and contractors, my income for my net is much lower.

Scott:
Awesome. What does that kind of come out to annualized?

Wade:
My net income is $86,000 for my business.

Scott:
And that’s again after tax.

Wade:
After tax, yes.

Scott:
Awesome. Okay, great. That’s not bad. It’s about 137,000 in total annual income.

Wade:
Yep.

Scott:
Any other sources of income throughout the year?

Wade:
Nope. Nope. Not right now.

Scott:
Great. What about expenses? Where’s that money going?

Chelsea:
Okay. We’ll kind of go through everything. Our mortgage insurance taxes comes out to $1,684 a month. Utilities range from 250 to 350 a month. Groceries are 850. Eating out, 120. Household products like cleaning stuff, sometimes kids stuff is in there too, 300. Gym, 170. Gas, around 300. That varies too. Subscriptions like Netflix, 27. Health insurance, 488.

Chelsea:
Because we don’t have traditional health insurance, we pay for a lot of extra medical things out of pocket, so that can really vary from like zero to sometimes 700 or more a month. Car insurance is a hundred. Life insurance is 31. We budget for entertainment around 200 a month, miscellaneous, 200, kids stuff, 200. These vary a lot. Childcare, we aren’t currently paying for childcare, but we will be in the summer. That’s looking like it’ll be around 850 a month for the summer.

Chelsea:
But then both our kids will be in school, so we won’t pay during the school year for childcare. We give $500 a month. We save $300 a month for our kids’ college. Then we each have a spending money of $50 a month. And then we have a dog and she requires most of the time very little, but around $45 a month.

Wade:
Total, that is $6,000.

Chelsea:
Around 6,000, yeah.

Wade:
Yeah, around 6,000 is our monthly expenses.

Scott:
Awesome. That seems like a super reasonable budget from my seat, from that with maybe a little room, but not much from a cut perspective. Is that kind of how you’re feeling about it?

Chelsea:
Yeah, absolutely. I have been tracking our spending with Mindy’s recommendations since October-ish. We’ve always kind of had a budget or more. It’s been like an outline of like, this is what we’re kind of planning. But because our income is variable and there’s lots going on, it’s sort of like this is the best guess. We just kind of go for it.

Scott:
Well, let’s go through your assets and liabilities. Can you walk us through where you’re putting that money?

Wade:
Yeah. Chelsea has a Roth IRA. She’s got 10,000 in there. Her SEP IRA has 26,000. I have a Roth that’s five, and then a SEP that is 7,500. Total retirement savings right now is 48,000, and that is… That’s our retirement. And then you can go through the others.

Chelsea:
And then right now we have two kids. We have a four year old and a seven year old, and we have about 6,000 saved for college. It’s about 3,000 each right now. We have an emergency fund of 30,000. We have other cash savings in a savings account, just a general savings account, of 34,000. And then we have our current home equity at 140,000. We also have money in our separate business accounts, but that’s for like…

Chelsea:
Some of it’s going to go to pay us, but some of it’s going to go to the business. I don’t know how you want to do that.

Wade:
It’s mainly business savings, or it’s for cash flow for business.

Chelsea:
For paying ourselves.

Wade:
Our total net worth is around 300,000.

Scott:
Awesome. Essentially half of that’s in your home equity, another third is in cash, and the rest is in various retirement accounts is how to think about that.

Wade:
Yep.

Chelsea:
Yep.

Mindy:
Does that 300,000 include the business account money?

Chelsea:
Right now, yes.

Wade:
Yes, that does. Right now, Chelsea has about 11,000 in business savings, and then I have right now about 40,000 in business savings. That does kind of equal more to the 300,000.

Scott:
You said you had 225,000 in revenue for your business last year, and then you had like 130,000 in expenses between contractors and taxes?

Wade:
Mm-hmm (affirmative). Yep.

Scott:
Okay. Yeah, that seems super reasonable there. What are your goals and how can we help you?

Chelsea:
We just wanted to chat with you guys a little bit about if you had any suggestions on our variable income situation. We have come a long way with that, and we’ve actually gotten the opportunity to achieve a lot of goals while we have been on this journey, because Wade’s income has been variable for most of our marriage for the last 12 years. I’ve been in school for a lot of that. It’s really within the last five years that I finally started making money, which has helped us achieve paying off debt.

Chelsea:
We paid off $50,000 in student loans. We saved up a ton of money last year to put a down payment down on a house for us. We have like a lot of good momentum going, but we just want some help with kind of… If you have any suggestions on the variable income. And then we’re really long-term looking to be financially independent. We would like to start moving into real estate and specifically investing into short-term rental real estate so we can have some residual income.

Scott:
How long did you say you’ve been both generating income at this level?

Chelsea:
At this level, probably three years.

Scott:
Okay, great. You’re not going to have any problem from a debt perspective. You might have to talk to a couple of lenders who are going to be more comfortable with self-employed folks, but you’ll have enough income history with both of your professions to be able to qualify on that front. Well, just kind of like looking at this, great job. You’ve got a great situation. You’ve got a really strong financial foundation. You’ve got $300,000 in net worth.

Scott:
You have no consumer debt, it sounds like, aside from your mortgage on this. You’ve got a huge cash position and are beginning to invest. You have a very good start from an investment standpoint in these things. I love the fact that you have a lot of cash. You may have slightly too much cash. We can think about that from there, but it makes a lot of sense to do that when you’re self-employed and to have separate business and personal items there.

Scott:
You generate 50 or 60 or $70,000 per year, although it is lumpy, seasonal, or perhaps periodic, I’m not sure which is the right term to describe your income. But I mean, this is a great position here. Like the fundamentals, I think, are all super strong as an outside observer about what you’re currently doing right now.

Chelsea:
Thank you. I really appreciate that.

Scott:
Where would you like to start with the next steps here?

Mindy:
I want to start. I’m going to look at this as Chelsea brings in 4,000 a month and Wade is bringing in on average 7,000 a month. That’s $11,000 a month with approximately a $6,000 a month spend. That’s a $5,000 a month delta that you have. That’s great. We don’t spend enough time celebrating. Yay! That’s fantastic that you guys are spending so much less than what you are bringing in. But on those months when you’re only bringing in $5,000, it’s not going to feel like that.

Mindy:
If there’s several months like that in a row, it can feel like there’s this huge deficit when… Then Wade brings in the, boom, here’s 26,000. Yay! That’s great. I would suggest if I was in this situation, I would have a savings account or a bucket where I put extra money from these $26,000 months, where there’s extra funds over and above what you’re spending that you know you will need for the lead months and have money in there available for when there’s not enough.

Mindy:
Go back through your spending and your income statements and look and see is that three months a year that you have less income than what you’re spending, or is it more like six months and then you get this one giant month? That’s a research opportunity for you guys to look into where you’re going to feel comfortable having that extra bucket. You do have this $34,000 in other cash savings. Does that have an earmark, or is that just a random bucket for whatever comes up?

Wade:
That is the money that we’re saving for a short-term rental. Our goal is to basically put as much money into that as possible so that we can have a down payment for a short-term rental in the next year. That is our goal to be able to purchase some real estate in the next year. That is why that number is pretty high.

Mindy:
And then the emergency fund, like on a month where you’re coming in lower than you’re spending, where is that money coming from?

Wade:
It’s the emergency fund. I mean, typically that $30,000 savings account is our emergency fund. If we have a low month, we take money out of that 30,000 to pay for personal expenses. And then when we have a bigger month, we recoup it and then put it back so it stays at 30 as best as we can.

Mindy:
Does that feel mentally comfortable to have that emergency fund ebbing and flowing like that? Or would it feel better mentally to have this bucket where the emergency fund is $30,000 and then the light income this month fund is $10,000 because you know you’re going to put more in when you need it, but that’s not coming out of your specific emergency fund. A lot of this personal finance stuff is a mental game where you have to just kind of convince yourself that this is how it’s going to be.

Mindy:
Sometimes you can’t, so you have to allow it to be the way that your mind wants it best. I mean, that’s so like floofy to say, but if your mind is having a hard time wrapping around the fact that you can pull from your emergency fund, maybe having an income bucket will allow you to be okay with it. Does that make sense?

Chelsea:
Yeah, absolutely.

Mindy:
That’s something to consider. Take some out of the emergency fund and put it into your income bucket, or maybe you’ve got a $26,000 a month coming up and then you can fill up that little extra emergency bucket, because you’re not doing bad at all. You’re doing really great. Number one, you’ve got a great average income and you’re spending far less than that.

Mindy:
But again, three months in a row of less than average income is going to not make it feel like you’re doing all that great. That’s that mental game that your mind can’t like… Sometimes you can’t see the forest for the trees.

Scott:
I mean, look, there’s lots of right ways to do your cash. Yours is among the most right I’ve ever seen. I love this. You have a lot of variable expenses in your business account, Wade. You have 40,000 bucks. Chelsea, you have it sounds like probably much less. You have 11,000 bucks in that business account. Those seem like reasonable numbers. I’m sure you arrived at that through similar logic. You have 30,000 as your number for emergency reserve.

Scott:
You’re probably feeling really uncomfortable if that ever dips below like 15, and it probably never does is what would be my guess. You’re just like pull a little bit out, replenish it. That’s the point. That’s exactly how you do it. And then everything else goes into… You’ve already made your determination. Your prioritization is short-term mental. It’s not index funds. It’s not your 401(k)s. You’ve already determined that. That’s why everything else is going to the investment for that.

Scott:
I think it’s perfect, and I think your next step is you can fiddle with that if you need to, but it’s a great system. I love it. And now you’ve got the surplus going, ready to be invested into real estate in your short-term rental. Can we hear about what you’re thinking from the short-term side?

Chelsea:
Yeah. Something I wanted to say about that. Currently, I am also investing into retirement and so is Wade. I feel that we are in our early thirties and we are just starting our “traditional retirement savings.” This was something I wanted to ask you guys. We feel like we just started. I’m like, do we need to be… Right now I put in about $1,000 a month into either a Roth IRA or the SEP IRA. I don’t know. How much do you put in?

Wade:
It depends. Right now I’m putting most of my extra money towards the savings towards the short-term rental. But when we don’t have a big goal, I do about 20% of my net income will go towards my retirement accounts. That’s kind of what I’ve been doing for the last six months or I guess last year.

Wade:
What Chelsea’s saying is like we’re trying to figure out, do we try to come at this goal of a short-term rental in a more balanced perspective of still putting money towards our retirement accounts, our index funds essentially, and save up as best as we can for the short-term rental, or do we go like all in and put in all of our extra cash towards saving for the short-term rental so that we can buy it sooner than later?

Scott:
Well, I think that… As long as you get the money in, in the calendar year into your retirement vehicles, it shouldn’t… It’s kind of six of one, half a dozen of the other, as my mom used to say. It’s the same thing. I think it doesn’t quite matter there. I think it’s whatever you feel is the one that’s going to get you to your goals faster, which my instincts based on what we’ve talked about just this far is going to be the short-term rental. Let’s think about it.

Scott:
Over the course of 2022, if things go the same as last year, you’re going to generate 60,000 additional dollars or let’s call it 45, 40,000 additional dollars, because we’re now at the end of April with this, right? That’s going to be $74,000 that you can add to your other cash savings to buy the short-term rental. How much do you need from a down payment to buy that property?

Wade:
We’re still kind of in the research phase right now. We’ve thought about probably a property around 600 or 700,000. In order to get to like the 10%, we’re going to need 60 to $80,000 in cash. But with closing expenses and all there is with the short-term rental, maybe a little bit more, so maybe like 90 is probably more realistic of what we would really want.

Chelsea:
And just to clarify, we’re looking to buy a short-term rental in a traditional sort of short-term rental market, like Smoky Mountains or Florida, Joshua Tree. We’re kind of looking at some of these more traditional places and willing to put quite a bit down so that we can see more residual income every month from it.

Scott:
Okay. Well, you are in position to do that right now. Your cash position would allow for that if you were to pull that from these other places. You’re probably uncomfortable with doing that, which I think is great. It’s a great mentality to have with the way you manage your cash, but you have $110,000 in cash right now to buy that short-term rental.

Scott:
One way to reframe that would be to bucket all of your cash together into one lump and say, “What is the lump amount that would make me feel comfortable with my overall cash position to move towards that?” The other option is keep doing what you’re doing and pile on that amount. You know that you’ll get there within 12 months, you’ll be able to generate about $60,000 and be probably at the minimum threshold to comfortably buy that investment with your outside cash position. I see Mindy shaking her head here.

Mindy:
That gives me the heebie-jeebies to suggest that because that’s every single penny that they have thrown into one investment, and then there’s not really a buffer.

Scott:
I’m not saying they should do that. I’m saying that they could do that, right? It’s their conservative nature that is going to put them in there, probably appropriately to some degree. It doesn’t have to be a year from now. You could look at your situation and say it is reasonably responsible for you guys to have $50,000 in cash across all of your cash accounts based on the numbers you provided us instead of $110,000 in cash, right, across all of those different accounts.

Scott:
To run your life out of one big bucket, because there’s nothing preventing you at the end of the day from taking a distribution from your businesses or committing capital back into your business, right? You literally just move the money from one bank to the next if you want to do it in order to take care of that. That’s more what I’m saying is you can do that right away and you can probably still contribute something to your retirement accounts this year because of the surplus cash that you currently have and the cash flow that you’re going to generate.

Scott:
I think this is one of those cases where you have to prioritize to some degree. You can’t probably max out your contributions to I guess your SEP IRAs and your Roths this year, but you can do some good damage there and still probably accumulate… Put yourself in position to buy that short-term rental by the end of the year, I would think.

Chelsea:
Yeah. That’s what kind of we were thinking too is by the end of the year.

Wade:
I guess another question I have for you guys too is, do you think it’s like smart for us to try to purchase a home that’s a little bit more money, that has the potential to have higher earnings, or do we be more conservative and purchase a home maybe in the 400 range, but has way less earning potential? Is it worth that risk of spending more for more money?

Scott:
Well, I think you invest for ROI, right? And in your case, that’s just a matter of delaying by a few months if you think to stock up more cash, right? You save up 400 versus 600, that’s a third bigger, so you need to save a third more cash in order to put that down to generate that. As long as you’re not going to be crushed by the mortgage payment, which you have to underwrite too, but I like investing for ROI.

Scott:
I’d rather have one investment that produces a great return that’s a little bigger than a smaller investment that produces less net return, less ROI, less IRR.

Chelsea:
Yeah, that was kind of our thought too.

Mindy:
My thought with regards to demand is I have a really, really big family, like enormously big family, and there aren’t that many properties that we can all fit into comfortably. There’s like six in America that can fit us all and they’re always booked up because there’s only… I’m talking they sleep 60 people, where it’s a huge house that sleeps 60 people. Those are always booked up. Yes, it’s going to cost like a lot more than $600,000, but there’s a huge demand because there’s no supply.

Mindy:
That’s something to consider. I mean, obviously not a 60 sleeper, but maybe there’s people that are looking for 14 or 20 sleepers that you can… A little bit more initially may yield a lot more… A lot less vacancy because somebody is always looking for that. Oh, well, I’ll just reschedule my vacation for when this is available. I know that’s how we scheduled our vacation is when they actually had a weekend that was available for us.

Mindy:
I wouldn’t have thought that there were a lot of demand for big properties like that.

Scott:
I think it’ll 100% vary by market, right? If you’re interested in investing anywhere in the country, there’s no reason why you can’t find a similar ROI at 400,000 price point as 600,000 price point. If there are specific markets that you’re studying and know really well, that may well be the case and that may splay your decision there.

Scott:
For example, I wonder aloud right now like the best way to generate ROI in like Denver, Colorado would be to buy a million dollar property with an ADU and a single family house on it and live in the ADU and Airbnb at the single family house, because you can’t Airbnb property in Denver, unless you live in the property as your primary residence. Probably very few people who can actually purchase a million dollar single family residents are willing to do that.

Scott:
Therefore, there’s going to be very limited competition and lots of demand for that property. There may be something like that that gives you an advantage in whatever market you’re in. For Mindy’s point, bigger, better, nicer property, more amenities. I think you’re thinking about it great.

Mindy:
Another thing to think about is the taxes. You’re looking at Florida. Are the Smoky Mountains in Tennessee or Kentucky? I get those two…

Wade:
Tennessee is the area that we’re looking at. Tennessee, yeah.

Mindy:
I get those states confused. Florida, Tennessee, and California, not knowing anything about any of these, I know California’s going to have super high taxes. I know they’re going to have income taxes. I know they’re going to have, if you do an LLC in California, they’re going to have LLC taxes. Not doing any research at all, that’s going to be at the bottom of my list simply for the taxes. It doesn’t matter if you live there or not, I believe. Florida is very tax friendly. I think they have lower taxes.

Mindy:
I know that Smoky Mountains is the number one most visited national park in the country because it’s so close to like two-thirds of the population of the country or something like that. That’s a really great market. They had a fire a few years ago that like wiped out all of everything. They don’t have a ton of property. They’ve been rebuilding, but their rules are more relaxed I believe with regards to rental properties like this. I think it took out a lot of hotels too, but it’s been long enough that I can’t really remember now.

Mindy:
Of these three areas, I like the Smoky Mountains best. I would reach out to a real estate agent and just ask like, “What can I expect from a property in this area? What am I looking to pay? What is my vacancy rate going to be? And what are my taxes going to be?” If I can make the same amount of money in Florida as I can Smoky Mountains, but for half the price, then maybe Florida’s looking better.

Mindy:
If I have less occupancy in Florida, then maybe Smoky Mountains looks better. I’m sorry to throw California under the bus. I love it.

Scott:
Where do you live right now?

Chelsea:
We in Western, Colorado.

Scott:
We’re in Colorado.

Chelsea:
Oh, Grand Junction. Grand Junction.

Scott:
Grand Junction. Why not consider the areas local to Grand Junction like Palisade? Why go out of state?

Chelsea:
We’ve definitely thought about that. We’re just kind of doing… Kind of in the beginning of this journey too with even just reading general things about having a short-term rental. I just don’t know the market of short-term rental here very well, but I know that tons of people actually obviously come to Palisade for the wineries and tons of people come to Fruita for the mountain biking.

Chelsea:
There’s definitely need here, I think, but it would be a good, like Mindy says, research opportunity to look into, because that could be a really great route to go, especially maybe for our first property. Because it’s local, we maybe have that comfort that we could just zoom over if we needed to kind of thing.

Mindy:
Don’t they have world class fishing and elk hunting over near Fruita and Craig and like all that area? I was talking to somebody who was saying that there’s a need for that as well. That’s not my thing, so I don’t know. But somebody else…

Wade:
Definitely on the Colorado River there’s lots of fly fishing that’s hugely popular. More towards the mountainous areas, like the hunting lodges are super popular for sure. In Fruita, like in like the city like Grand Junction and then there’s Palisade and Fruita, there’s not a ton of like hunting tourists that come to the town. In Fruita, there’s the bike riders and then hikers, outdoorsy people, and then Palisade is the wine. There’s lots of wineries. There is definitely lots of potential where we live.

Wade:
The hard part is there’s not a whole lot of houses available. It’s just that the market’s super hot right now. Everybody wants to buy stuff. When we bought our house last year, we sold our old home and I think we had 10 offers in the matter of like 24 hours. We got like $30,000 over asking price. In Colorado, in general, it’s just a really hot market. I think that’s why we’re like, do we want to like try to buy in this crazy market right now. But in a sense, it’s kind of like that everywhere really.

Scott:
I think that’s how I would think about it. It’s going to be like the whole nation has got issues around those types of things. What it comes down to is I think in terms of ROI, right? The major advantage to investing 20 minutes, 30 minutes away from where you live is going to be the ability for you to self-manage the property in the early days and learn a bunch of those things instead of paying that fee to somebody else. And that’s not going to be a 10% management fee for a short-term rental.

Scott:
It’s going to be 18% or a significantly higher one. And that’s not including the cleaning fee, by the way. This is not saying you’re going to go and clean the prop… Although you can do that as well to save money, but that’s the… The management costs will be significant for a lot of these short-term rentals. If you can at least get started with that, you’re going to be able to…

Scott:
By the way, just trying to self-manage something in the Rocky Mountains, you don’t know if there’s like certain times of year that have actually really high tourist activity in the Rocky Mountains because of this event that happens at this point in the year or whatever. You do know that for Palisade, so you’re going to be able to put in place the right pricing at those times of the year. Oh, this is my heavy demand time where I need to make all my money, and this is the light demand time where I’m going to make less.

Scott:
I want to pounce on a long-term… Someone who wants to stay there for three months in this part of the year, or whatever that is. Those will be advantages that you’ll get, especially in the early years, I think from investing locally as a bias as opposed to somewhere you don’t know as well, because you don’t live in there. It all comes down to ROI. If it’s close, the tie goes, in my opinion, to something that’s highly local to you. If it’s not close, then you go out of state. That would be how I bias you to think.

Chelsea:
Yeah, we also have Moab like an hour away and a lot of people go to Moab. There’s a lot of opportunity.

Mindy:
Moab’s kind of expensive too.

Scott:
Who’d we talk to that wanted to build huts next to Moab?

Mindy:
Oh yeah, I can’t remember. We thought about that, like build a tiny house somewhere.

Scott:
I think there’s a lot of stuff in your back door that is maybe not your back door, but I think lots of people around the country are probably thinking like, “Well, Colorado is a great place for short-term rentals for a whole bunch of reasons,” even as you guys are thinking about going somewhere else. Something to think about. I would at least explore it. If it doesn’t work out, go somewhere else.

Scott:
What I am gathering at the strategic level is you’re still early into this journey and you probably have six more months of research and self-education to do before buying your first property. What that might do is you’re probably going to accumulate that cash that’s going to put you in position to buy that within the next six to 12 months, regardless of whether you max out your retirement accounts or not.

Scott:
If you’re not sure, and you’re still in the research phase, maybe you do bias more towards the retirement accounts and those types of things for this year or for the next couple of months, and then kind of get more aggressive about stockpiling the cash when you have much more clarity on what you want to do from a real estate investment standpoint. That’d be maybe one takeaway from this conversation that might be worth considering.

Wade:
Yeah, I think that’s good. Like you were saying, not quite at the point where we have all of our ducks in a row as far as our education. We’ve been researching the Smoky Mountains and like Destin, Florida, Emerald Coast area quite a bit. We know a lot about that, and we’ve looked at kind of just online, just looked at properties and what the ROI would be and that kind of stuff, but we have not really looked around us at all. I think that is a really good suggestion for sure.

Scott:
I think there will be… If you’re going to find an inefficiency or, another way of putting that, a good deal, it’s probably going to be local to you as well. There will be something that, “Oh, this is exactly what the market needs and I need to make these changes and that’s how I’ll do it.” That’s going to be a lot harder in Destin for you, unless you’re from there, for example. I know that market particularly well for some reason.

Chelsea:
Yeah, cool.

Scott:
All right. Are there any other areas that we want to explore here and talk about?

Chelsea:
Yeah. There was one more area of regarding our kids’ college fund. I haven’t really heard a lot of talk about this, so I think this would be a great conversation to have. I’m not sure that our kids will go to college. Times are changing. Things are changing. You can do so much now without going to college. Wade didn’t go to college. I went to a ridiculous amount of college.

Chelsea:
I think we need to kind of figure out a direction to go with this because we’ve kind of just been putting some money in a college savings thinking, okay, we want to save something for our kids, but we don’t really know what to do. I think ideally I would like to save in an account that’s more flexible than a college account, even if it doesn’t have the super, super tax benefits to it, just so that we can utilize that money how we need to at that point for them.

Chelsea:
I don’t know. Do you guys have any thoughts on this for saving for kids?

Wade:
And our kids are seven and four.

Mindy:
I have lots of thoughts on this. I have two kids. They are 15 and 12, so way closer to college age than yours are. You have saved $6,000 for your kids, and that is $6,000 more than I have saved for my kids for college. I do believe that my kids are going to go to college, at least the older one, but that’s not for sure, for sure because you never know what your kids are going to do.

Mindy:
I didn’t want to save in a 529 plan because if I put in $10,000 and then she doesn’t go to college, but it has grown to $29,000 over the course of her life, I only have $10,000 for me. If I want to pull it back out, all I get is what I put in. I don’t get all those gains. I don’t know where they go, but they don’t go to meet. They don’t go to her. I could reallocate that to her little sister if she was going to go. I could give it to a niece or a nephew, but I don’t get them back.

Mindy:
Whereas if I put that money into an investment account, all of that money is mine, or I can use it for her college, or I can put her through wedding planner school or film school or whatever she wants to do. I can use that money how I choose, or she can say, “I’m leaving the house that I’m never going to talk to you again, and then it’s still my money.” That’s a horrible situation to be in, but I don’t want to give that control to somebody else. Because you have $6,000 in there, I would just opt to leave it…

Mindy:
If I was in your position, I would opt to leave it, and I would open up an after tax brokerage account in my name, not in the child’s name, and put money into there for their college or just put money in there and use it for college when it comes up or use it however you want because it’s your money. Now, that is going to… Because it’s an after tax brokerage account, that’s going to count against your income or assets for FAFSA, but that’s a problem for 10 years down the road.

Scott:
I completely agree with Mindy I think at the highest level in principle there. I’ll add in that I speculate that college education costs are going to come down in real dollars relative to inflation over the next 10, 15, 20 years. The reasons why I think that will happen first have to do with the amount of student loan debt out there. Either one political party is going to come in and forgive a large amount of that debt.

Scott:
After that happens, you’d think that there will be new restrictions on new access to debt to fund college, which will reduce ease of which people can get loans and therefore bring costs down, demand down, right? Another party may not do that and there will be a reform of student loan debt at some point in the future regardless, if some of those events happen. I think there’s going to be a student loan restructuring at some point in the next decade or two that will impact college affordability.

Scott:
We are also becoming more and more, I think, cognizant as a society about the ROI of college and how it may not be necessary for a lot of things. I think it will be less of a you’re going to college and more of a calculated decision depending on your career field. I think for those reasons it may be a risk that folks are over saving for college, not in the short-term, not in three to five years, but maybe in 10 to 15 years perhaps. That’s a speculation.

Scott:
I don’t know if that’s right, but that’s what I’m going to speculate on personally for my family. And then second, I think that if you do want to pay for college, a better way to pay for college… Well, a way to do that in conjunction with what I just said is just build wealth in general in real estate or stock accounts or whatever it is that you’re investing in.

Scott:
And then use that wealth to provide benefits for your family like private school if your kid ever needs that for some reason, for a special reason, or a college, or a trip around the world, or tuba lessons if they’re superstar at that, whatever it is. That I think is a more beneficial way to just build general flexibility. The 529 plan does not offer that for the most part. I probably won’t contribute much at all to a 529 plan with a possible exception of I know my kid’s going to college.

Scott:
I’m two years away from college. I’ve got a pretty good, clear idea of what college is going to cost, and I’m going to take advantage of that plan in the short-term here to put that money in and take it right back out for college in a few years. I might do that at the ending stages if I’m getting really close to college. That would be how I think about the 529 plan and saving it for college at a high level.

Chelsea:
Yeah, I really like that.

Mindy:
And just a couple of weeks ago, we released an episode with Robert Farrington from thecollegeinvestor.com episode 297, where we talk about paying for college and saving for college in lots of different avenues. I think it was episode 41 or 44 with Zach Gautier where we talked about different ways to pay for college as well. Both of those are really great episodes to listen to.

Mindy:
And we had episode 251 with Preston Cooper, where he talked about the ROI of a college degree, something to consider before you put yourself or your children through college. He was just back last week on episode 293, or a few weeks ago on episode 293, talking about the ROI of a graduate degree. Things to consider as you’re getting closer to college age.

Mindy:
I mean, that’s not imminent for you, but those are just different ways to save. In both of those episodes, there’s longer term and shorter term ways to save for college.

Chelsea:
Cool. I like that.

Scott:
It would just be a shame to have a lot of money in the 529 plan and then not use it for that. That’s not the worst problem in the world. There’s other ways to deal with it. You can just be like, if I’m going to build a couple hundred thousand dollars in wealth over the next 10 years via investment vehicles, like short-term rentals, I’d rather just be able to use that for whatever the heck I want, including college, and take a little bit of a tax hit or less tax advantage situation than have it all kind of locked up in there and then have to get creative in terms of dealing with it once it’s in the plan.

Chelsea:
Yeah, I agree. Absolutely.

Mindy:
Is there anything else you wanted to talk about?

Chelsea:
Yeah. I was curious about if you guys had any thoughts on the health insurance situation. I know that that was something you mentioned in the intro, Mindy. Maybe you had some ideas about that. Currently we do not have health insurance and we have a medical sharing plan, as well as a membership to a general family doctor that we pay for monthly.

Chelsea:
We have had some health issues actually come up in our family within the last year, where it’s looking like we are going to need some sort of traditional ongoing insurance. We have some kids that need some speech therapy and occupational therapy and meds and regular therapy and all the things. It is looking like more of a traditional plan is going to be something we will be moving towards within the next year or two.

Mindy:
I was going to say, when I first saw this in your notes, I was reminded of a recent bankruptcy by Sharity Ministries, which was formerly known as Trinity Healthcare. They basically just said, “We can’t afford all of this, so we’re shutting down.” The healthcare system in America is broken and needs to be fixed, but the health sharing… I have friends who really love health shares, and I have friends who have been stuck with big bills because the health sharing decided not to pay it.

Mindy:
I don’t like traditional insurance, but I think that’s going to be the best way to go about it. I don’t know if a health savings account and a high deductible plan is going to be best for you. Somebody was listening to the show a few months ago and said that in almost every case, a health sharing plan is better than a traditional plan when you take into account the premiums and the premium deductible and the fact that the health sharing account can grow. That’s another reason-

Scott:
You mean HSA plan.

Mindy:
An HSA, yes. I’m sorry.

Scott:
Health savings, yeah.

Mindy:
Yeah, health savings plan. Yes. Thank you, Scott. That’s what I was thinking.

Scott:
I’d agree with that. You guys have a great cash position, so there’s no… You don’t want to get crushed by a huge medical bill with that, but you can have a high deductible, I think, given your cash position and probably will be able to arbitrage that, although that will depend on the specifics of your personal situation. Let me zoom back out for a second here though and say this why do you guys work in your own businesses instead of one of you taking a job that pays similar?

Scott:
What’s the rationale for that? There could be further reason. There’s a lot of advantages. I just want to hear you guys think through it.

Wade:
Yeah, I think that’s a great question. Yeah, for sure. I’ve run my own business for about 12 years, so I don’t really know what it’s like, honestly, to work for a staff position. I have a lot of benefits to running my own business where I can make my own schedule. I don’t have to answer to somebody. I don’t feel like I have a glass ceiling above me as far as my income goes. And just my personality. I like to work on various projects a lot.

Wade:
I feel like if I work on the same thing over and over again, I get bored and I don’t put a ton of my creative energy into it. I would say that for me, I just really like the benefits of having my own business more than having the security of a staff position. That’s for me.

Chelsea:
For me, I could easily go out and get a job with the degree that I have for an agency doing mental health counseling. That would be very easy to do. That’s a lot though. Working in mental health is a very hard job. I own my own business because I want to have the flexibility and the autonomy and the freedom to do whatever I want. That’s sort of my personality anyway, is I don’t really want people to tell me what to do.

Chelsea:
Having the flexibility to do that is really cool, because I can work three days a week and do the amount of number of sessions that I want versus somebody telling me, “I need you to do 35 sessions a week,” and then me just walking around as a burnt out zombie. It would be really hard. That’s kind of why.

Scott:
I think that’s great. I will just say that’s another one I would just challenge you to at least explore, right? Corporate life maybe isn’t so bad as what you’re making it out to be in some of these cases with it. You might be able to negotiate some flexibility, for example, or find a position that gives you some of those benefits and that would solve your healthcare problem to a large degree if one of you guys were to consider that.

Scott:
Not a deal breaker. You clearly are working around that right now with things, but you will have expensive options from a self-employed perspective, the same challenges that people who are just financially free or full-time real estate investors or full-time agents will face from an expense standpoint.

Chelsea:
Yeah, I think that’s a good point to really think about. Because with the even trying to go into real estate, it is harder for us to get a loan because we are self-employed. Even if we do have the years of income to back it up, it’s still a lengthier and more difficult process. At least it was when we were buying our two primary residences that we’ve bought before. So that.

Chelsea:
And then I think looking at the specifics of if I were to make… Because it would probably be me. If I were to make a certain amount of money working for somebody else, how much money that would be with the healthcare already taken care of in a sense. I know I’d have to pay some versus how much we’re going to have to pay out of pocket for healthcare.

Scott:
I think there will be a decision to make there. Absolutely, you will have to make your employer much more money than you cost, which is the deal with that. But it could be that it brings in more income, provides similar flexibility, and gives you healthcare options depending on how that goes. It may provide financing opportunities. If those trade-offs are unacceptable from a time perspective, you guys are going to get rich one way or the other.

Scott:
You spend a lot less than you earn and have a really strong position. But just something to think about as we’re doing that is maybe revisit that assumption and at least explore it because it would make a lot of these issues easier in the short run.

Chelsea:
Yeah, absolutely.

Wade:
Yeah, it makes sense.

Mindy:
That’s kind of what I was thinking too, Scott. I’m glad you brought it up because now you’re the bad guy.

Scott:
We’re supposed to tell you how to quit your job, right, on the show? Is that how that works?

Mindy:
Yeah, exactly.

Scott:
Instead of go get a job.

Mindy:
Yeah.

Chelsea:
But I wonder if there could be flexibility to that, because just because I work for somebody doesn’t mean I could also not own my own business on the side. The goal for me actually is to not be a therapist when our kids graduate from high school and to move into more of maybe like an online business or a coaching type position so that there’s even more flexibility, because I anticipate Wade probably traveling a lot more at that point once his career starts moving and he doesn’t have to be home all the time because we have kids.

Scott:
Something to think about, I will tell you at BiggerPockets, some of our team members work 32 hours a week or 30 hours a week or whatever with that. There will be some rules like, if you’re not full-time, we can’t give you the full benefits. There’s some legal things and all that stuff. You’ll probably have to meet some minimum cutoffs in order to qualify for certain benefits with that, but there may be plenty of flexibility and opportunities out there, depending on what you’re interested in.

Mindy:
This was a lot of fun. I had a great time talking to you guys. I think you’ve got a lot of opportunities available.

Scott:
We want to keep going until you’re you’re feeling good.

Chelsea:
Do you have questions?

Wade:
No.

Chelsea:
Do you guys have questions for us?

Scott:
No, I think we got a great snapshot of your position. It sounds like you had a great journey to get here. You’ve got a very disciplined budget, consistent income in spite of the being self-employed. That speaks to a lot of discipline and hustle over a long period of time. It appears to me that you’ve come into this like position of having this surplus and having some of the options to begin exploring more serious investments, I’ll call it, in a very recent past and really have all your ducks in a row at this point.

Scott:
And now it’s kind of a directional thing. Do I want to go into short terms? Do I want to go into long-term investing in my 401(k)? Those types of things. I think there’s an art to that. There’s not really a right answer. I think we got through a good amount of that. I think you’ve got big assumptions. The challenge is the self-employment always the right path. Certainly it’s working for you guys, but it could be reassessed to make it easier.

Scott:
If one of you were to get a job, that would solve some of your problems here, or at least go a long way towards that. And then I think that the college savings, we gave our opinion on that. We don’t really have a right answer. I love the way you manage your cash for the most part. I think it’s a really smart way given your current situation. If one of you were to get a job, that would change because you would not likely need to have quite as much cash either in your businesses or in your personal reserve.

Mindy:
Okay. Well, thank you so much for your time today, Wade and Chelsea, and we will talk to you soon.

Chelsea:
All right. Thank you.

Mindy:
That was Chelsea and Wade, and I think they have a lot of things going for them. First of all, we didn’t celebrate enough that they’re literally spending like 50% of their income. It just may not seem like it when they’re in the middle of the month or two or three in a row where they have less than what they’re thinking about spending.

Scott:
I mean, they’ve crushed it. This is something that we see now fairly frequently on the Money Show where we’ve got a couple who’s really mastered the basics of money, have a good framework in place, and are just kind of popping up after several years of having paid off debt and built this stable financial position. They’re like, “What do I do now?” That’s a great thing. It’s exciting because you’ve paid off that debt. You’ve got the cash position. You’re starting to do the retirement accounts.

Scott:
The surplus is there, and now the ocean of opportunities is exploding in front of you and it’s overwhelming. Do I go into real estate? Do I do this with my business? Do I invest in this avenue? Do I invest in this one? Because the path has opened up so much because of the good habits that you’ve put in place. I think that’s really fun, because it’s kind of hard to see that other side while you’re in the grind of paying off the debt, for example, which it seems like they popped up out of fairly recently the last couple years.

Scott:
That’s exciting and fun. And now it’s about kind of forming a plan and prioritizing that and being comfortable with the choices. Those choices can involve investing in 401(k)s or self-directed IRAs or SEP IRAs, depending on whether you’re self-employed or employed, investing in real estate, investing in stocks, yada, yada. It’s just about what you want and how you’re going to back into that.

Mindy:
I really liked your suggestion to look a little bit more local for their first property. I thought that was a great idea. I think that there’s going to be a lot of opportunity that maybe they don’t really… They hadn’t considered just because it’s so close and our market is expensive, but it’s also really desirable. There’s people that are coming here all the time to take advantage of what we’ve got here.

Mindy:
When your property is an hour away, you’re not necessarily going to drive to it all the time, but you could drive to it if you had to. It’s a lot easier to drive an hour than it is to hop on a plane to go to Florida to check out your property.

Scott:
Yeah. My wife and I vacation in Palisade, which is like right where they go, and we stay at an Airbnb. We spend lots of money there and think it’s a great experience. It’s just kind of funny to me. Oh, great. I’m going to go out of state to the Rocky Mountain. I’ve never been to the Rocky Mountain. What was it? The Smoky Mountains to vacation before. Maybe I’ll go there someday, but that’s like a… It’s just like, oh, this is in our back door. People come from all over to go hang out where you live at various times in the year.

Mindy:
Yeah, I like that idea. I hope they look into it a lot more. Scott, should we get out of here?

Scott:
Let’s do it.

Mindy:
You know what? Before we do, I want to invite people to apply to be on the show. If you would like us to review your finances, please apply at biggerpockets.com/financereview. And if you would like to tell your money story, apply at biggerpockets.com/guest. Okay, now, from episode 306 of the BiggerPockets Money Podcast, he is Scott Trench and I am Mindy Jensen saying grab your pillow, armadillo.

Ashley:
This is Real Estate Rookie, episode 188. My name is Ashley Kehr and I’m here with my co-host Tony Robinson.
I know, but honestly, I feel like we never even got to see each other that much, even though we were, yeah, confined into a hotel resort for three days and barely got to see each other, but we just attended the first ever Real Estate Rookie boot camp weekend in Denver, Colorado. And we got to meet over 300 rookie investors that maybe had one or two deals.
Some people actually had quite a few deals under their belt already, but a ton of newbies, rookie investors that haven’t done a deal yet. We were really excited that they took that step, took that action to come and learn and get that motivation to get that first deal done.

Tony:
Yeah. Many of you know BiggerPockets recently started launching these boot camps, which are essentially online courses. And I ran the short-term rental boot camp. Ashley ran the rookie bootcamp. And what Ashley did was she took the concept of her bootcamp and turned it into an in-person event. Like she said, it was really catered towards folks that were at the beginning of their journey and man, what an amazing event it was.
And as we were going through that, Ashley and I said, “Well, it might be cool to really talk about the power of networking and coming to some of these events and what benefit you get as a new investor.” Ashley, I know you talk about this a lot and you shared this story a little bit over the weekend, but I guess you talk about the impact that networking has had on you because you came. You’re an investor in New York, near Buffalo, you felt there weren’t a lot of investors around you. Just give that story that you shared from the bootcamp weekend.

Ashley:
Yeah, I was lonely. When I started investing, it was only because I worked for an investor. And so, I partnered with his son, who was basically like, “I don’t have time to do anything. You do it.” And I took care of everything and he just didn’t really care to engage much in conversation about real estate, 24/7, like I did.
And then, a couple years later I found my next partner. It was me and him talking about real estate. And I finally found BiggerPockets. And from there, just diving into the forums. And then, BiggerPockets had their first conference. Well, actually it was technically their second conference. I think they had one a long, long time ago and then didn’t have another one until 2019. And it was that conference where I met a ton of people.
And since then, they’ve become my best friends. My best friends are littered across the country. And it feels like we see each other every single month because we’re attending an event or just getting together for something special for someone in our group. But I don’t think that I would be where I am today without this network of people. I would lose motivation. I would lose inspiration. I wouldn’t have the tools and resources if I didn’t have the network of my friends to help me and guide me, give me advice.
And also, I’ve been able to get opportunities because of my friends and hopefully, I’ve provided them opportunities in return. When I was in 2019, I attended that first BiggerPockets conference. And then in 2021, I attended a Maui mastermind event. And since then, just meeting these group of people has really made an impact on my life and even more excited about real estate.

Tony:
And I think the networking piece, Ashley, is so important, especially at the beginning phases of your journey, because a lot of times you stumble into real estate and you stumble into it by yourself. And it’s not necessarily because your best friend is interested or because your siblings or your parents or whoever. It’s because you read some article, you had some idea and you start going down this rabbit hole.
And before you know it, you’ve consumed all these books and you’ve listened to these podcasts. And you’re all juiced up about becoming a real estate investor, but you have no one to talk to about it with. Your friends are driven crazy already. If you’re married, your spouse is overhearing you talk about real estate investing and you kind of need someone to connect with.
I think early in your journey, going to, whether events like the Rookie Bootcamp weekend, bigger events like BPCON, or even smaller events like in your local area, going to local meetups or REIA Meetings or whatever it is, just find a way to get with other people that are doing what it is you want to do, because you get so much value from having those kinds of conversations.
And I’ve shared this on the podcast before, but a really pivotal change in my life occurred at a meetup. I’ve talked about him before, but his name is Alex Sabio. And Alex and I met at a local meetup here in SoCal. And he was the person that eventually convinced me to buy my first short-term rental. And I think, man, had I not met Alex at that meetup, how different would my life be today? You never know where one relationship, one connection can take you.

Ashley:
Yeah. I completely agree with that. And I took my business partner, Darrell, with me to this rookie weekend. And it was his first ever conference of any kind, any type. And he is so pumped up, so jazzed up. Just in the airport on the way home, he’s looking up all this stuff he learned or people he talked to. And so, he’s like, “Man, I really did get so motivated by that.” And he’s like, “When’s the next one? Where do we go to the next one?”

Tony:
Totally.

Ashley:
I think that’s really awesome is if you get that opportunity to go to a networking event. Even if it is just a local meetup, then that’s even better because you’re meeting people that are directly in your market and get that market knowledge from them too, and share ideas.
Going to a networking event, just some tips I have. Along with meeting people is, if there’s somebody you want to talk to, so maybe it’s one of the speakers, something like that, have your questions prepared ahead of time. What do you want to get out of that conversation with that person? Because it’s very easy to go up and just be like, “Hey, how are you? I love your podcast or I listened to you on YouTube,” well, something like that. And then, “Okay, yep. Nice to meet you.” And then walk away. Or think of something, but prepare yourself, so that when you do go into that conversation and just be like, “No, I have a quick question for you, a couple quick questions.”
And then have them prepared so that you’re not just stumbling or frantic, because that’s something I always struggled with. Even Brandon Turner, the first couple times I met him. I’m like, “I don’t even know what to ask him. I feel like I can’t waste my conversation with him. What do I say to get value out of that conversation and take advantage of that opportunity?”
Steve Rosenberg had met with this person that does a lot of motivational speaking and a big coach and very successful person. And he was told, “You get five minutes with them.” He sat down with them and the guy’s like, “Five minutes, go ask me your questions, no small talk.” And Steve’s just like, “Blah, blah, blah.” And the guy at the end was like, “I say that to you because your time is just as valuable as mine. And I know you only got five minutes with me, so that’s why I wanted to cut right into the chase.”
I think having questions prepared and knowing what you want to get out of the networking too, and the conversations or even what are you looking for? Who do you want to talk to too? Planning that ahead of time too.

Tony:
That’s just such a good point, Ashley, because someone literally came up to me at the bootcamp weekend and said that, “Hey, Tony, big fan. Really enjoy everything you do on the podcast.” And then I was like, “Oh, thank you so much. And then he was just kind of smiling.” And I was like, “Can I answer anything for you?” He’s like, I don’t really know what to say. I just wanted to come talk to you.” And then 10 minutes later, he ended up coming back to me and said, “Hey, I actually do have a question for you.” I love the idea of come in prepared to maximize that time.
I think the other thing that I’d encourage folks to do when you’re going to some of these networking events, two big things. First is try and get out of your comfort zone. It’s really easy to go to these events. And especially if you’re going with someone that you know, to just stick with your click of people.
And it happens in most conferences, if it’s a multiple day conference, wherever you sit on day one, you’re probably going to end up sitting there on day two again. And you’re going to be sitting around the same people. Really try and mix up where you’re sitting or who you’re talking to because the goal of these events are to meet other people. If you’re going with a friend, try and separate every now and again, try and sit in different parts of the room throughout different parts of the day. That way, you’re exposing yourself to more people. That’s the first thing, is try and get outside of your comfort zone.
The second thing is, I know not everyone is really good at doing that. Just the idea of going to these networking events is scary enough, but having to actually talk to someone might be too terrifying. For me, whenever I go to some of these events and I don’t really know anyone in the room, if I’m walking in to a meetup and there’s already a group of people talking, I’ll just walk up and say, “Hey, do you mind if I join you guys?”
Not once has someone told me, “No.” I’ve never been told, “No, you can’t join us.” Everyone’s usually like, “Yeah, of course. Come on in.” And then I’ll just ask, “Hey, so where are you at in your investing journey?” And it’s an easy way to break the ice. And you guys can start talking, getting to know each other, but it’s that easy. “Hey, mind if I join you. Where are you at in your investing journey?” Those two questions are a great way to break the ice.

Ashley:
That’s a great point as to, okay, getting to somewhere. And, okay, where do I stand? Where do I go? Who do I talk to? But one thing that I used to do when I was going to local meetups or I was attending a conference, I would find somebody online that was going to that same event. And I would just message them, start a little conversation. Just like, “Oh, I saw you were going to this.” And then I had a face. I had somebody when I got there to look for and that I already kind of knew. And that was my strategy, I guess, so that I didn’t end up just awkwardly standing there.
I remember the worst was when a meetup was held at a bar in the city. And so I walk in. I’m like, I don’t know which group of people this is. I asked the hostess, I think. And she’s like, “Oh, I think that’s the real estate like meetup thing is upstairs.” I go upstairs and there’s all these people and dressed in corporate clothes, a suit and tie and girls in dresses and heels.
And I’m like, “There’s no way this is real estate investors.” And so, I look around and I realized the restaurant actually had two locations and I was at the wrong location. And so, I ended up going to their other location. But yeah, that was so uncomfortable for me that moment, not knowing who to go. If you can find somebody online who is attending.
BiggerPockets, you can add… Meetups are advertised on there all the time and you can actually see who’s going. People click the attend button. All I have to do is message a couple of those people and be, “Hey, I saw you were attending this meetup. I’m going to be there too.” And maybe give them a little bit about yourself. And just say, “I wanted to introduce myself before meeting and I look forward to seeing you at the event.”

Tony:
Yeah. Our friend Tyler Madden talked about that too, about making relationships online before getting there in person. And what an easy way, a low risk way to break the ice beforehand, say. I love, love, love that advice. But at the end of the day, for all the rookies that are listening, what’s most important is that you start building that network, whether online, whether in-person. Or however you want to do it, but just start surrounding yourself with people who have the same dreams, ambitions, and aspirations as you.

Ashley:
Yeah. Okay. Any other takeaway? Oh, one thing that I do want to add to this is when going to a live event is especially, if it’s like a couple day conference, or even if it’s just one meetup, take a break during the conference. Or even if it’s just every night. And write down the people you met, how they had an impact on you, what you learned, what you want to implement, what you want to take action on. Because the conference is such a whirlwind that, by the time you get home, it’s like, “Oh wait, what did I learn? What was I going to do? How do I implement these things?”

Tony:
Sure.

Ashley:
I think going back and recapping, because it’s going to be someone had to explain this to me. And so me remembering people’s names as a fire hose, just shooting at my face all day with people’s names. That’s the real estate contents that’s coming at you. And even if you’re just going to a local meetup, when you get into your car, write down, “Okay, these are the people I met. This is what they do. Here are my connections I made. And this is what I learned. This is what I want to research more,” or something like that to, taking those notes.

Tony:
Yeah. One thing, yeah, what I would do. And I haven’t been to a really big conference in a while where I didn’t know a lot of folks there. But one of the things that I would do when I go to some of these big meetups is when I would meet someone and I get their phone number, I take a selfie with him. That way… Because even if you save the name, sometimes you forget the faces of who’s who, but if you have a selfie with you and that person, next time you see him like, “Oh shoot. Yeah, I remember that face.” And so, it’s a little bit easier to make that connection on who’s who.

Ashley:
Yeah. There was also a guy that attended the event this weekend, who was an extremely successful real estate investor from the Denver area. And he just wanted to come and be around all the rookies and get inspiration and motivation from all the excitement.
And so, he said that one thing he noticed was that nobody has business cards. And he said, “I completely understand that because they don’t really have a business yet. They don’t have their first deal. They don’t have an investment property, they don’t have a business.”
And he said, but he’s like, “I would recommend that go and get them printed anyways. It doesn’t have to be a business card. It can just be your contact information.” And he said, “That would be so nice for them to give out when you attend these events.” And I thought that was a great tip is being able to give the cards out. And I know a lot of people today use the QR codes too. So that you just show someone your QR code and then it automatically imports into their phone, which is pretty convenient too.

Tony:
Yeah. Yeah. I love. I’m not much of a business card guy. Even people hand them to me, a lot of times, I end up just losing them. I like the idea of the QR code.

Ashley:
The QR code.

Tony:
So I can scan and it’s in there right away. Yeah.

Ashley:
Yeah. Okay. Well, thank you, guys, so much for listening. And for those of you that attended the rookie weekend, I hope you had a great time. I know, I sure did. And I got to talk to so many people and it really was inspirational and motivational to me.
One little exercise that we did do at the end was have everyone write a letter to themselves in three months, giving themselves encouragement support and also, talking about what they have accomplished in the next three months. Those letters are going to be sent back out to the people that attended the rookie conference.
I brought an extra suitcase, just to bring them all home with me, and then I’m going to mail them back to them at the end of August. If you want to participate in this exercise, just go ahead and write yourself a letter. We did it dated for August 1st. And write yourself a letter, giving yourself some encouragement and say, “Wow, in the past three months, you bought your first rental property. You paid off some debt.” Or whatever it is that you want to accomplish in the next three months, write yourself a letter like you did accomplish it. And then, you can just stick it in a drawer, set yourself a little calendar reminder to pull it back out and open it up in three months.
Okay. Well, thank you guys for listening. I’m Ashley at Wealth from Rentals and he’s Tony at Tony J. Robinson. Don’t forget to like and subscribe to our YouTube channel, Real Estate Rookie. And please leave us a five star review on your favorite podcast platform. We’ll see you guys next time.

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