One of the nation’s most powerful single-family landlords is getting into the home building business. CNBC’s Diana Olick joins ‘Squawk Box’ to report on the growing trend among public landlords and builders.

Scott:
All right. And before we bring in today’s guest, I wanted to issue a quick apology and say a quick, thank you to one of our Facebook group members, Carly Rechart. Carly called Mindy and me out, rightly so first spreading misinformation on last week’s episode of the Bigger Pockets Money Show podcast. We stated that Gaines in a 529 Plan would be forfeited if they’re not used for educational purposes. And that’s simply not true. The gains in a 529 Plan are simply subject to tax and, or a 10% penalty when they’re withdrawn and used for things outside of educational expenses or qualified educational expenses. So, they can be a powerful and flexible way to build wealth, save for college, pass money on to future generations and be used for other educational purposes. And there’s lots of other interesting tidbits about 529 Plans. They’re a useful tool in the tax advantaged investment stack for some people.

Carl:
Personally, I don’t use them. I may use them in the future, but I wanted to correct the misinformation that we stated last week. Certainly the gains are not forfeited. They’re just subject to tax and or penalty if, and only if they’re used for non-qualified expenses. So, thank you, Carly, and thank you to the many members of our Facebook group for calling us out. I apologize. We apologize for the misinformation. We have a responsibility to share truth and the correct information on this show. And we appreciate when we do get that feedback, so please keep it coming. And we will link to some resources on 529 Plans in the show notes here at biggerpockets.com/moneyshow308. Thank you so much.

Mindy:
Welcome to the Bigger Pockets Money podcast, show number 308, finance Friday edition, where Carl and I sit down to talk about lifestyle creep, being financially conscious, the shockingly low percentage of camp mustache attendees who use a budget and why tracking our spending in real time is the best choice for us.

Carl:
The tracking is where the real value comes in for us having to enter that and review it every once in a while to see where it goes. And I don’t know.

Mindy:
Well, here’s where I’m going to argue with you because having it set up the way that it is Mr. Waffles on Wednesday set that tracking spender up for me in the Excel sheet. So, that as soon as we go over whatever dollar figure we deemed was that category, the category turns red. And that is very helpful for me to see that in real time. Hello. Hello. Hello. My name is Mindy Jensen and joining me today is my husband, Carl, to talk about what a disaster, our May finances were.

Carl:
Wait, why were they a disaster?

Mindy:
Because we got lazy. We stopped tracking our spending in real time, we just stacked up receipts and then said we were going to do it later. And then we never did it later. And then we had to scramble to do it at the end of the month. And that didn’t work for us.

Carl:
Yeah. I don’t like that because when you’re forced to be accountable to the app on your phone and manually enter it, you really think more about all of your purchases like, ah, do I really need this box of [inaudible 00:03:15] from the grocery store?

Mindy:
No.

Carl:
I guess they don’t make those anymore.

Mindy:
You don’t need them.

Carl:
But yeah, I don’t need them.

Mindy:
They’re an unhealthy choice.

Carl:
Even if they did have them, they’re an unhealthy choice. But yeah. Having to pull off the phone and enter every purchase changes things. And some stuff you can’t help. Like gas is gas. You have to buy that. But I’m trying to think of a good example besides my poor example before. What’s an example of something that you would have to put in that you might reconsider because of the spending app?

Mindy:
Just frivolous things, like food is not something that I reconsider. Gas is not something that I even consider. I need gas. So, I buy it. But frivolous things like clothes and shoes. And like I have shoes, so I don’t need another pair of shoes. I want another pair of shoes. It’s needs versus wants that make me think about it before I put it into the spending tracker. This is our real life story. Yeah. So, we didn’t track our spending. I think on what May 2nd we’re like, oh, I’ll do it later. And then later turned into June 1st, which was … Look, we make a lot of purchases during the month and it can be a little bit tedious to grab your phone and open up the app and enter your spending into the tracker. But it’s so much more tedious to sit there at the end of the month and go through the credit card bills and be like, did I put that in?

Mindy:
No. Okay. Now I have to add it. And if you add it through the app, it’s way easier than if you add it through the computer or it tracks it in a different way. I don’t know. Ray told me to do it that way. But it’s just, it was a disaster. And you can tell if you look at our restaurant spending, it was way up because I didn’t even go into our spending tracker this month. I didn’t even look at how much we were spending because I knew I wasn’t tracking it. So, there was nothing to compare to as opposed to past months, I have it up on my computer all the time and I can just pop in there. Ooh, we’re getting close to our grocery spend this month. I’m going to try and really go through the pantry and shop at home instead of going to the grocery store to try and make it under.

Mindy:
But I have no idea how much I spent this month. So, I’ll just go to the grocery store because it’s easier. It’s not easier. I have to get in my car and go to the grocery store. But the grocery store has all the things and my pantry doesn’t.

Carl:
Yeah. I’m thinking about all this and I think the … So, you called one thing out and that was the restaurant spending. What do you think caused that? I have my own idea. I’m curious to know what your thought is. If it’s the same as mine.

Mindy:
Pure and simple laziness.

Carl:
Well, it’s laziness, but we’ve been working on the house as we have always been doing. And we were trying to wrap up a whole bunch of projects before the girls got out of school. And yeah, sometimes you’re going crazy for the whole day and you’re really trying to knock the stuff off. We try not to work on it when the girls are at home, we try to confine our two while they’re in class. So, yeah, we just got super busy and that’s an easy pressure release valve, I think. But it’s also kind of stupid and contradictory too, because we’re doing all this work on our house to save money. And then if we go out to eat that kind of mixes some of our savings. So, yeah, I put this on myself. I overdo it. Mindy’s [inaudible 00:06:39].

Mindy:
I put it on you too.

Carl:
Yeah. Okay. So, it’s my fault. I’ll take the hit.

Mindy:
I’ll blame you for everything, how about that?

Carl:
But you also mentioned frivolous clothes spending. I don’t know if anyone can see my shorts here. They’re pretty-

Mindy:
Stand up and show everybody your beautiful shorts.

Carl:
Yeah. They’re they’re in rough shape. So, I’m pining the clothes spending on you because clearly I don’t spend money on-

Mindy:
Well and that’s not even where we spent the money this month.

Carl:
Yeah. True.

Mindy:
We spent it on restaurants. We spent it on groceries that we didn’t think about. And going out to eat is not a time save. You have to get in the car and drive to the restaurant. You have to wait for your table. You have to wait for your food. You could make all of your stuff at home. You could have some sort of meal plan in place, which takes time to do, but you plan your meals out and then you’ve got food or all of the ingredients available. So, you can quickly make meals.

Mindy:
You can prep ahead of time so you’ve got freezer meals where you just pull it out of the freezer in the morning and let it thaw all day and pop it into the oven at night and have a delicious home cooked meal. But all of these things take planning ahead of time. And we have lived a very reactionary life instead of a proactive life where for the past several years where we are just reacting to what’s going on instead of trying to plan ahead and that’s not in every circumstance of our life, but in a lot of them and I would that to change.

Carl:
Yeah, you are correct. We took on this huge house project, which I think is bigger than we ever thought it would be. When we purchased it I know our scope expanded. We did things that we didn’t initially planned for. The way I think about it is, it’s very good for the finances, not so good for the life. I had a clever saying around that, but now I forgot what it is. Like money rich, life poor. I think that might have been it. But you have to have a, there has to be a trade off there. You can’t just be hell bent on trying to earn the next dollar. We have to live life in a, you said it perfect, a less reactionary manner. But we’re getting there.

Mindy:
Yeah. We have wrapped up our home projects on this house and for the summer we are taking the summer off. We’re not doing any house projects.

Carl:
Yeah. And we’re almost done with the house too. We have a master bath to do, and that’s pretty much it. One big major project left, the girls’ bath, but that’s pretty simple.

Mindy:
Oh, getting that stupid foil wallpaper off is going to be a nightmare. I’m considering just re drywalling the bathroom.

Carl:
It might peel right off. Who knows? We’ll see.

Mindy:
I know. It won’t. That’s not how foil wallpaper works.

Carl:
So, if we live here long enough, it’ll come back in style. So, I vote maybe we just leave it and then five years that bathroom’s going to look super nice and it’ll be in all those magazines and stuff. So, yeah.

Mindy:
Yeah. That’s not going to happen.

Carl:
We’ll just leave it.

Mindy:
Okay. So, let’s talk about our challenges this month. We didn’t track our spending. That was a big challenge. Our restaurant spending was a big challenge. Our household spending was ridiculous. You can see all of the spending that we did do at biggerpockets.com/mindy’sbudget. And you can see that our household spending went crazy. We went to Ikea and Target a bunch of times.

Mindy:
When your kids say, mom, let’s go to Target. Say no. That’s what you should do. And instead I said yes. And we went to Target a lot. We went to Ikea and bought big things. Those are one time purchases. We redid our older daughter’s bedroom. She has a bed. We bought her a bed. We bought her bookshelves. We painted. So, that was kind of a big undertaking. And that’s a one time expense. But household expenses’ kind of went nuts.

Carl:
It’s interesting, one thought about the Ikea thing is you can always find that stuff on Craigslist or Facebook Marketplace, if you look long enough. And sometimes it’s a little bit beat up or the people smoked or something like that. And I thought about that when she’s like, I want this specific item. I’m like, well, we could wait, but then we’re going to be on Facebook Marketplace every day. When it does come up, we got to go borrow our friends pickup truck. It might not be close when we get there. It might not be what we thought it was. So, in that case, I just decided to bite the bullet and go for it. We could ask her to be a little bit more flexible, but I don’t know. How do you feel about that?

Mindy:
It’s a one time purchase and I didn’t feel bad about making it.

Carl:
Yeah, it was a bookshelf and our other purchase was a solar pool cover. We have a pool in the backyard, which we did not want, but we got a great price on the house. Because people in Colorado do not want a house with a pool. And we actually the pool. It’s not that bad. It doesn’t take a part-time. But if we don’t have the pool cover, it stays very, very cool. So, unless you’re-

Mindy:
Freezing cold.

Carl:
Unless you’re like Wim Hof or you’re a polar bear and like swimming in very cold water, you have to buy this pool cover. And that thing was almost $300. So, that was a one time expense that we did not previously think about when we planned our spending.

Mindy:
That’s an interesting point. We didn’t think about it when we were planning our spending. And this goes back to the reactionary. We don’t really do a lot of forward planning, but we also don’t have the historical spending data to go off of because we haven’t been tracking our spending. So, I think if we had been tracking our spending and knew that the previous pool cover would only last two years, we could have predicted this. And some of this is going to be really, really granular. Like how much time do we want to spend thinking about how much money we’re spending versus just, oh, okay, well now we need a pool cover. So, we’re going to do it. The pool cover is $300 and we get one every two years. So, $150 a year for a pool cover. We can just budget for that in the future.

Carl:
Yeah. And actually I have two thoughts. Theoretically, this could have gone into the slush fund because that’s how I see that category as stuff this that we forgot about, but that we still have to buy on a routine basis. It’s an error in our thinking. But the other thing with this pool of cover, you mentioned every two years, the previous one only did last two years, but I got a cheaper one. Like a lower quality one. But it was still almost 200 bucks. This one was almost 300. But this one has an eight year warranty. And you could tell, you could tell this one is much better.

Mindy:
Oh yeah, it is. It is much thicker. Okay. Eight years, 300 divided by eight is much less than 300 divided by two.

Carl:
What is 300 divided by eight?

Mindy:
Shut up. I don’t know.

Carl:
It’s a little bit less than 48 times 40 is 320. I don’t know. 30. High 30s.

Mindy:
Okay. So, $30 a year is way better than $150 a year.

Carl:
Yeah. It’s going to be worth it. Our friends have a pool and they have a natural gas pool heater. It takes a lot of natural gas to heat up 10,000 gallons. And they’re like, why is our natural gas bill like 300 bucks in May more than it used to be. I’m like, well it’s in your backyard. There’s the answer. So, yeah, this is a better solution.

Mindy:
Okay. So, I just mentioned the B word, the budget word. And in my introduction I said the shockingly low number of people who attended camp mustache who use a budget. We just got back from camp mustache last weekend. And we were talking about budgeting because that’s what to do with these camps. And it’s a lot of fun. And we just, show of hands who uses a budget and two people raise their hand out of what, 40 attendees. And I thought that was very interesting that only two people out of all 40 people sit down and write out, I guess three, I didn’t count myself. So, three. Okay. Well that just went up, but sit down and write out every month how much they are going to spend in each category. And then we were talking about how many people, I think didn’t they ask afterwards how many people reconcile their spending afterwards or track it after the fact. And a lot more people, almost everybody raise their hand there.

Mindy:
So, I think that there’s a high percentage of people in the personal finance space who are conscious of their spending, but few people are sitting down and making the actual budget. And I thought that was very interesting because this exercise has showed me that when I am actively tracking my spending, I am actively spending less. I’m thinking about how much I’m spending, I’m looking at what I have spent, what I’ve entered into this spending tracker already for that month. And it’s not an obsessive amount. I have several tabs open on my computer and I just go to this tab and peek at it. Oh, grocery spending is, we’re really doing great on grocery spending this month there. Ooh, we’re not. Because we have basically five categories that we mess up every month. Household, which is ridiculous. Groceries, restaurant, gas. I think we may have figured out gasoline lately. But yeah, I need to track my spending in order to be conscious of where my money’s going.

Carl:
But I think the tracking is different from the budget. Like after this year, our budget, I don’t really think we budget. I think I would call it a loose estimate, loose [inaudible 00:16:42] it hasn’t been super accurate. But I think the track-

Mindy:
A guess.

Carl:
Yeah. The tracking is where the real value comes in for us having to enter that and review it every once in a while to see where it goes. And I don’t know.

Mindy:
Well, here’s where I’m going to argue with you because having it set up the way that it is Mr. Waffles on Wednesday set that tracking spender up for me in the Excel sheet. So, that as soon as we go over whatever dollar figure we deemed was that category, the category turns red. And that is very helpful for me to see that in real time. So, having the budget in there, I don’t want to spend $2,000 a month on groceries. I’m trying really hard to keep it under 750. I’m just not really doing a good job of that. I could try harder. I guess, I’m not really trying really hard. I’m thinking about it sometimes, but I feel bad when I go over.

Carl:
Yeah. We have an excessive amount of food waste in our household, which-

Mindy:
We do. Natalie Kolody said, “Take all of your produce. And instead of putting it in those drawers, put it front and center in the top of your refrigerator so you see it all the time, and then you will eat it all the time.” And in our refrigerator we have a bunch of sauces and things up at the top.

Carl:
Yeah.

Mindy:
We should rearrange the refrigerator.

Carl:
Yeah.

Mindy:
We need to be better at our food waste. That is true.

Carl:
When I was a single male, I would make one big thing and eat it for the next seven days. So, I would have four things in the entire refrigerator and I would … I don’t know. I’m not sure what the root cause of this is, but I wasted kind of zero amount of food. [inaudible 00:18:34] .

Mindy:
Wow. Wow. That sounds you’re blaming me.

Carl:
Well, I guess we have a little bit of a difference of opinion in that the rest of the members of my household do not enjoy leftovers. And if it was up to me, I would eat, I would cook once and then I’d eat leftovers. So, 99% of my meals would be leftovers. I think it’s a little bit more efficient and you get less waste that way, but no judgment. Well, I guess a little bit.

Mindy:
That sounds a whole lot of judgment.

Carl:
Yeah. Well you could judge me for wanting to eat leftovers every day. That’s that’s not really great either.

Mindy:
Yeah. You were eating pasta.

Carl:
I know.

Mindy:
You would make a giant vat of pasta and then just eat pasta the whole time.

Carl:
It was cheap. I had no money. In college you could eat for 10 bucks a week. It was amazing. Or not for your body. Okay. There is a happy medium there that we will search for.

Mindy:
There is. And we need to be more conscious about that. I think consciousness is the whole theme of this episode. Be money conscious, be conscious of what you’re wasting, be conscious of where your money’s going and we’re spending.

Carl:
Yeah, good.

Mindy:
Okay, well let’s talk about our wins.

Carl:
Yeah. We have a huge win, which is pretty cool.

Mindy:
Huge win. So, we have not had Umbrella insurance in the past and I was talking to my friend, Anna, and she said that she was getting an Umbrella Insurance policy. And at the same time I was thinking we really need one. So, I called up her insurance agent and I said, can you just give me a quote on this.

Carl:
Hold on, back up one second. What is an Umbrella Insurance policy? Is that something that ensures the umbrellas in your house? Like those rain protection devices?

Mindy:
An umbrella insurance policy is not for ensuring your umbrellas, you big weirdo.

Carl:
Well, they break all the time though. We really should have that.

Mindy:
We never even use umbrellas.

Carl:
Because they break. The wind comes and that’s the end of that.

Mindy:
We live in Colorado. It’s a desert.

Carl:
Yeah. Yeah. We don’t need them either. Okay. I hijacked the conversation.

Mindy:
You sure did. So, an umbrella insurance policy is like, it covers you, your household, your assets, when you are … It’s over and above your auto policy, your homeowner’s policy. Let’s say you get in a car accident and with me, I am at fault and you Google Mindy Jensen. You’re like, oh, Mindy Jensen is a personality. She’s known in the personal finance space. So, I’m not going to settle for her auto insurance policy. I’m going to go after her. And I now have an Umbrella Insurance policy that covers me in addition to my auto insurance policy or my homeowner’s insurance policy. Should my pit bull bite you, I don’t have a pit bull, so they’re not going to bite you. It’s just extra level of insurance.

Carl:
With that said again, please don’t sue us.

Mindy:
Yes, don’t sue me. But I have an insurance policy. So, they will take care of me now. But anyway. I called it the insurance agent and she said, well, let’s look at your auto policy. And we had the bare bones auto policy because we are very safe drivers. And auto insurance covers you when you are at fault. We had a homeowner’s insurance policy and she looked at both of them and said, “Oh, okay. So, our company can increase your coverage on your car insurance policy, because you really don’t have enough coverage.” And she explained several things to me and I said, “Okay, fine. What you’re saying makes sense.” The homeowner’s insurance policy was for when we bought this house a couple of years ago. And despite having an episode with Steve Longnecker about homeowner’s insurance policies and making sure you have enough coverage, I did not have enough coverage.

Mindy:
We increased our coverage almost twofold on the home and got an Umbrella Insurance policy. And we are paying less for all three policies with more coverage than we were paying for just the auto and the homeowner’s insurance. So, that is a huge win. I now have far more coverage than I used to and it’s costing me less. So, I like that more. If you have not re-quoted your car insurance, your homeowner’s insurance, or if you don’t have an Umbrella policy, you need to reach out to several insurance companies, get quotes and see how much money you can save. Because you probably can. Unfortunately, insurance companies do not have any loyalty to you and they will increase your rates every year. So, you don’t need to feel any sort of loyalty to them by staying with them if they’re not going to give you the same respect.

Carl:
Yeah. There’s a saying around that, insurance is the only business where loyalty is punished.

Mindy:
Oh, that’s a really good saying.

Carl:
Yeah, but I want to emphasize. We did increase our insurance, but we still don’t have our, like cars, we have old ancient cars, they have 200,000 miles on them, both of them. And we don’t have the, I don’t even know the terms. We don’t have the insurance that covers our cars. So, we elevated the insurance that covers other people should we cause an accident. But if we get into an accident with our cars, they’re worth nothing. They’re probably worth a negative amount. We’d have to pay someone to take our cars. [inaudible 00:24:12]. If you have kids, kids are little savages. Oh yeah. Don’t allow food in your cars if you’re-

Mindy:
Or crayons.

Carl:
Yeah. Oh, crayons. They melt. Window stickers. Our cars are rolling biological experiments. We probably have, we’ll either die younger or will live infinitely because a genetic mutation is caused by what’s going on in our cars. So, I still like to have the minimal insurance because what’s the whole point of insurance just to cover something you can’t afford to replace on your own. If one of our cars was lost, well, number one, we wouldn’t have to replace it. Because we have two, we barely need one. But if we did need to buy a car, we could do that. So, I prefer keeping the smallest amount of insurance we need.

Mindy:
Yes. But we increased the amount of medical coverage.

Carl:
Yeah. And that was very, I agree with you there. Because if you get into an accident and we injure someone else, it was small and yeah, that did need to be increased.

Mindy:
And the Umbrella Insurance policy has minimums on your other policies. So, you can’t have the bare minimum on your auto policy and have an Umbrella policy. So, we had to increase the auto policy and the homeowner’s policy a little bit just to be able to get the Umbrella policy. But again, we’re still paying less for now three insurance policies than we were paying for two insurance policies with less coverage.

Carl:
Yeah. I think all of this is under $2,000 a year.

Mindy:
Yeah.

Carl:
Homeowners insurance for a nice house, two cars and the Umbrella policy. So, that’s great. A lot of people-

Mindy:
It was 1,100 for homeowners and 560 for, yeah, it was like 1,500 or 1,600.

Carl:
Yeah. And that’s annual. I know people will pay over 2,000 just for insurance on one car. And that’s why we have not nice cars.

Mindy:
Beaters. Okay. Hey, did we make any big purchases that aren’t on our spending tracker this month?

Carl:
We did make a big purchase.

Mindy:
Oh, oh we didn’t do it in May though. We did it in June.

Carl:
Yeah. That could be a cliff hanger where we announced the big purchase.

Mindy:
We bought a house, another house. Yay. And it’s a dump, because that’s so on brand for us. We live in a neighborhood that is … How would you describe our neighborhood?

Carl:
It’s pretty nice. It’s an old school neighborhood. It was built 40 years ago. So, we’ve got big trees. It’s kind of, it’s built on a golf course, which I never really wanted to saying we live in a golf course neighborhood seems kind of offbrand and not in line with our values, but we’ve got a lot of good friends here who share the same values. So, we’ve got a really good community here, which is the whole reason we moved here. Yeah. But it happens to be on a golf course too, which is strange. We’re not golfers. We don’t even play tennis. What are another fancy sport? Polo. You did that for a while, right?

Mindy:
Oh, shut up.

Carl:
What was your horse’s name? Yeah, no horses.

Mindy:
So, we had an opportunity to buy a house, another house in this same neighborhood. And it is outdated, it needs some work. But it doesn’t need a ton of work. What we about that house is it has no stairs. Well it’s got a basement, but you don’t need to ever go down to the basement. So, it’s a ranch house and we could potentially retire in that house. The house that we’re in currently is a split level and has stairs everywhere. So, as we get into our 90s and 100s, stairs may become a little bit more difficult to navigate. And this house will be a really great home to retire in. And until we move in there, it’s not a great home to move into right now because our children are still at home. They are 15 and 12 and there’s not all that much space. So, it’s a smaller house than this one.

Mindy:
And this house that we’re in currently really fits our needs. So, we are going to, we closed on June 2nd. We are getting ready to do some rehab to it, starting in September, which will be documented on Bigger Pockets. So, you can see what a real rehab looks like. Not these frivolous rehabs, where everything is neatly wrapped up in 30 minutes. I anticipate some problems just because that’s how it goes with every other rehab. This one’s not going to be smooth as silk either. So, we need to redo the kitchen because their kitchen is this big, it’s the dumbest kitchen ever. And the doors to all of the bedrooms are currently sliding glass doors instead of actual solid doors. What are other, some of quirks on this house?

Carl:
Quirks. It as floors that need to be refinished, that’s not really a quirk. It’s got skylights that have issues.

Mindy:
Leaks.

Carl:
Yeah. They did a weird skylight design, which you’ll see when we do the video series. But yeah, it’s a quirky house. The layout is also a bit strange, but we knew this house has upside too. And we have multiple exit strategies. We might move in there. In the meantime, we might do a furnished rental. And if something changes in the fall, I think we could turn around and sell it and probably make a pretty good profit with probably a month of intense work. A month of 48 hour work weeks with you and I, and maybe another person. Aric with an A might help us, a friend. And you view audience members are local to Longmont and have some skills. We might hire a couple other people, because we’ve lived in [inaudible 00:30:09] our current house.

Mindy:
Oh, oh, oh, oh, oh, I’m sorry. We will hire other people. Not might.

Carl:
Yeah. We want to get through this one fast, current house that we’re sitting in right now is, what are we two and a half years into this and we’re still not done. It is monopolized much of my life. And I do not want that. So, this one is going to be a targeted strike. We’re going to go in there, tear everything out. We’re going to have everything ready to go and we’ll get this one flipped around fast. So, yeah. If anyone wants to help send us an email, do they know how to get ahold of you or me?

Mindy:
[email protected]

Carl:
Yeah. If you don’t have any skills, you can do demolition. There’s a need for everyone. We want, what’s the uncle Sam thing? We want you.

Mindy:
Yeah. I want you to come work on my house.

Carl:
Yeah. Fun.

Mindy:
Yeah. It’ll be super awesome fun. It’s the best thing ever. You could learn how to say bad words.

Carl:
Yeah. I think we’ll have more to say on that. Maybe we should do an … Well, I guess that’s what the video series for that’s for.

Mindy:
That’s what the video series is for. But I think that it’s disingenuous to buy a house and then not mention it. We are taking the summer off. That is still true. It is June, what’s today, June 5th, that we are recording this episode. And we are getting ready to go to Germany in two days, we’re going to Munich and Berlin for 10 days and this episode will air while we are out. Thank you for listening. We’re having a great time in Berlin, probably.

Carl:
Ooh. Maybe we should look at some German design aesthetics to inform us for how we should do this house. We could be all pretentious and have a minimalist thing with stainless steel and white everywhere. The house well one color in the whole thing.

Mindy:
No.

Carl:
Or even less than that.

Mindy:
It still has that stupid fireplace.

Carl:
I am going to get, I really want a cuckoo clock. I’m not a souvenir person, but I don’t know. There’s a special place in my heart for cuckoo clocks.

Mindy:
Is there a special place in the spending tracker for a cuckoo clock?

Carl:
Yeah, maybe the travel, slush fund.

Mindy:
Slush fund. If you look at our June projected spending, it is the highest of any month we have had so far. And that is, a lot of it is the travel. Most of it’s the travel. But that is again, something that’s easily cut out should the stock market tank like it has been for the last month. Which is, again, why we’re tracking our spending in such a granular way, because when there are things that we need to cut, it’s easy to look at where the money’s going and say, oh, well, we don’t have to do this going forward. We don’t have to do that going forward. We can cut out restaurants completely. We can cut out going to tap rooms with our friends and we can cut out parties and we can cut out all these different things.

Mindy:
So, the categories that we put in our spending tracker may not make a lot of sense to you as you look at them, but that’s okay. They don’t have to make sense to you. That’s the beauty of the Waffles on Wednesday Spending Tracker, which we will link to in today’s show notes, which are found at biggerpockets.com/blog/money-308. We have a new way of doing our show notes. But the Waffles on Wednesday spending tracker is a customizable spending tracker. So, you can do all of your spending in the ways that are important to you. So, you can see what categories are easy to cut back on or cut out entirely when you start tracking your spending.

Carl:
Cool. I have nothing to add.

Mindy:
Wow.

Carl:
That’s channeling Charlie Munger. You’re a Warren Buffet. That’s a compliment.

Mindy:
Oh yeah. Wow.

Carl:
I have nothing further to add. If you know who Charlie Munger is.

Mindy:
I have no comment. Is that what he says? I have nothing to add.

Carl:
I think so. Yeah.

Mindy:
It’s been a couple of years since we’ve been to that. We just missed it. Did you even know?

Carl:
Yeah, I knew. I read the letter. We’re talking about the Berkshire Hathaway Conference, Omaha [inaudible 00:34:14].

Mindy:
The Berkshire Hathaway annual meeting. Annual shareholders meeting.

Carl:
Yeah, the Woodstock of Capitalism. It’s pretty cool. You don’t look Warren Buffet though, which is good.

Mindy:
Well, thank you. What a amazing compliment that is. I really appreciate your kind words.

Carl:
I look more Charlie Munger than you look Warren Buffet. This has gone off the rails.

Mindy:
Boy it has. Okay. Well that’s a good place to end. All right. Well we appreciate you listening. We would love to hear comments from you, email me [email protected] Email Carl at, what’s your good email address?

Carl:
What is a good email address, mr1500, the numbers MR 1500, @1500days.com. 1500days.com, which is also the name of the blog. But yeah, seriously, if you’ve got construction skills, hit me up.

Mindy:
Okay. So, I didn’t even say that you are the comedic genius behind the dinosaurs and fart jokes at 1500days.com and the comedic genius behind the dinosaurs and fart jokes at milehighfivepodcast. Sorry, I should’ve said that in the beginning of the show.

Carl:
It’s all right.

Mindy:
And he’s my husband. And he does a lot of the work on this house that you can’t really see, because we’re just aimed in here, but-

Carl:
Put the shelf up.

Mindy:
You’ll see … Yeah, he put this shelf up. You will see him doing work on the new house, the strange house. I’m super excited to do this house.

Carl:
Yeah.

Mindy:
I get to help on this house too.

Carl:
We should put a link to it. We have our Instagram post where we did the little movie. Can we put a link to that in here?

Mindy:
Yes. We will put a link to that in the show notes. Again, show 308, biggerpockets.com/blog/money-308. So, you can see this quirky new house.

Carl:
Yeah. Cool.

Mindy:
Okay. So, thank you for listening from episode 308 of the Bigger Pockets Money podcast. He is Carl Jensen. I am Mindy Jensen saying, auf wiedersehen.

Carl:
How do you say goodbye in German? Was that it?

Mindy:
That was it.

Carl:
Oh, I thought it was Danke. Oh, is that thank you?

Mindy:
That’s thank you.

Carl:
I’m going to suck in Germany.

Mindy:
You really are.

Carl:
It’s going to be an international incident. I’m going to say the wrong thing and …

Mindy:
Okay. Bye.

Carl:
Bye. Danke.

Ashley:
This is Real Estate Rookie, episode 190. My name is Ashley Kehr, and I’m here with my co-host Tony Robinson.

Tony:
Welcome to the Real Estate Rookie podcast, where every week, twice a week, we give you the inspiration, information and amazing stories you need to hear to kickstart your real estate investing journey. My co-host, Ashley Kehr, what’s going on? What’s new in western New York these days?

Ashley:
Well, it’s per usual. My flight gets delayed and/or canceled, and so coming back from the Rookie Weekend in Denver, flight got delayed in our layover in Detroit, and I didn’t get home till about 2:00 a.m., and so, running on fumes today. The kids already missed three days of school to come to the event with me, so they had to get up at 6:30 this morning and get ready for school, and I’m sure they’ll crash tonight. But it was really nice getting to be able to have them come with me. But, yeah, we’re all pretty tired today.

Tony:
Yeah. But what’s unique about this delay, actually, is that it wasn’t weather. It wasn’t the bad weather in Michigan. It wasn’t the bad weather in New York. It was because they didn’t have a pilot.

Ashley:
Yeah.

Tony:
How do you book a whole airplane filled with people, but forget that you need a pilot?

Ashley:
Yeah. I don’t know if maybe the pilot canceled or what. I don’t even know the person that stands at the gate, the gate attendant, maybe, is called. I don’t know. But they kept making announcements updating us saying, “We’re just looking for a pilot. We’re very short staffed.” Then they were like, “We found a pilot who’s supposed to be having time off, but he is going to come, and he is about 10 minutes out.” And then he came, and everybody clapped.

Tony:
You just need to pack up and move to California with me. I never get my flights delayed. I’m never snowed in. My internet connection is pretty strong. It’s just like all signs points to Ashley coming to California.

Ashley:
Yeah. Well, we were trying to-

Tony:
And there’s dairy farms here.

Ashley:
Yeah. Well, we were talking about how many times we’ve been delayed, and Daryl was saying, my business partner, was saying how it’s always these two airports. I’m like, “Well, yeah, because there’s no other direct flights. There’s literally two or three airports you can fly direct to out of Buffalo.” So, yes, our layovers are always the same airport.

Tony:
Always here.

Ashley:
But, yeah. So, what’s new with you?

Tony:
What’s new? We’re still busy working on the resort out in Big Bear. As of right now, we’re supposed to be closing in about seven weeks.

Ashley:
Oh.

Tony:
We’re up against the gun. Things are moving fast. But fingers crossed that we kind of get everything done we need to. But I’m super, super excited for this project, and I still think there’s a lot of upside there, so me and the Alpha Geek Capital team are just hard at work trying to put that together.

Ashley:
Is your due diligence period over with?

Tony:
We have, I think, 10 days left in our due diligence. But we’ve gotten pretty much all of our inspections done. We did our phase one. We did the property inspection. We did the appraisal, termite inspection. So pretty much all the due diligence we wanted to do, we’ve we’ve pretty much completed. Luckily, no major red flags have come back yet.

Ashley:
Yeah. That’s what I wanted to kind of talk about on this Rookie Reply episode is due diligence in properties. Because you’re doing due diligence on your property in New York, too. Do you want to explain that one a little?

Tony:
Yeah. We actually pulled out of it because of our due diligence.

Ashley:
Oh, you did?

Tony:
I can share kind of what we-

Ashley:
Oh, I didn’t know that.

Tony:
Yeah.

Ashley:
Yeah.

Tony:
Yeah, we actually pulled out of it. We had a property under contract in western New York. Is that western New York or is that upstate New York, where we [inaudible 00:03:50] that property is at? What would you call that?

Ashley:
It depends where you live, because if you live in New York City, the whole state is called upstate New York. But I would say that was more central New York. Central New York is what I would say.

Tony:
Okay. All right. There you go. We had this beautiful property in central New York. It was a bed and breakfast, and it was built in 1922, so a very historic property in that town. We had it under contract. Our plan was to go in there, buy it, renovate it, turn it into an Airbnb. But, during our due diligence process, we flew out to New York, and we saw the property in person, talked to a lot of local people. We decided to pull out of it, and I’ll kind of explain why.
First was that we realized that we were already buying kind of at the max ARV, and our original goal was to purchase that property with either private money or hard money, do our renovations to kind of bring it up to 2022 standards, because it was very dated inside, and we just felt like it wouldn’t work super well as an Airbnb. Our goal was to buy it and renovate it and then refinance into some kind of long-term debt, but BRRRRs only work if you have enough spread between your purchase price and the after-repair value.
But this property was so unique, because it was a seven bedroom, eight bath property, and there just weren’t very many comps surrounding that property in that area. There were some that were kind of further away, but when we met with the realtors in person, they told us like, “Hey, honestly, where you’re at is probably the highest you’re going to be able to go.” So that was the first strike, was that we didn’t have any room to really push the ARV up.
The second thing we were saying, “Okay, even if we leave some money in the deal, it might still make sense.” But the other issue was finding good labor. Everywhere, everywhere, everywhere, right now, it’s really hard to find people to kind of take these projects on. We got a couple of recommendations. They all said, “Hey, come back to us in 12 to 24 months when all of our other projects have kind of cleared up.” And then they were saying like, “If you do find anybody that’s available right now, you should run away, because all the good contracting crews are pretty busy.”
So it was those two things, and then we found some other stuff in the inspection report. We tried to negotiate with the seller, and she wasn’t willing to negotiate. So there was just kind of all these things that got stacked on top of each other that we were kind of finding out during that due diligence process that made us realize that, “Okay, we like this area. We definitely want to move into that area with the property, but that specific house, we think it makes sense to pass on.”

Ashley:
Are you going to do any kind of direct mail or anything in that area to look for it, or just look at stuff that’s listed on the market, on MLS?

Tony:
We just started a direct mail campaign for here in California, where our Joshua Tree properties are, so we’re testing out there first. I think if we can really nail it in this local market, then we’re going to start using that same process to some outside markets, as well.
I was going to say, Ryan Dossey, who’s been on the podcast, right? I think he did a couple episodes before I came on. He’s got a company called Ballpoint Marketing, and he’s not paying me to say this, but it’s really, really a great product, because most postcards you send out, they’re typed, or you can tell that it came from a computer, but Ballpoint Marketing, he’s got some kind of robot that hand writes everything, so it looks like a handwritten letter. And our response rate on the first few postcards we sent out has been much higher than what we were doing with our other direct mail, so it’s worked out well for so far.

Ashley:
That’s what I use, too, and I was just thinking we should do an episode, maybe get him on again and walk through that process again. Yeah, we did ours right before Christmas. We did it for a lake house around two lakes that we want to get a short-term rental at for a lake house, and, of course, personal use. But we did it two days before Christmas, I think, and we were getting calls the day before Christmas Eve, when it hit everybody’s mailboxes.

Tony:
Crazy, right?

Ashley:
We were overwhelmed by it. But, yeah, it worked great. We ended up, actually, right now we’re negotiating on two properties from that campaign that was back in December of just us following up. And then that same round we did a round to campgrounds in the area, too. And that one we’re negotiating on a campground right now that came from that mail campaign. So yeah, we should definitely do a Rookie Reply or a full episode on direct mail.

Tony:
Direct mail works.

Ashley:
Yeah.

Tony:
Totally.

Ashley:
But, yeah, let’s do due diligence today, because I have a property, too, that also fell out of contract because it did not pass inspections, and we got out of the contract before our due diligence period was up.

Tony:
You have to tell us about it.

Ashley:
The property for me was 700 acres, two beautiful ponds, two lodges for wedding venues, a Barton restaurant, 80 RV hookups, 18 cabins. I mean, just amazing, one-of-a-kind property.

Tony:
So it was a really small property.

Ashley:
Yeah. We ended up getting it under contract for $3 million. With that under contract, it was basically “as is”. They weren’t going to make any repairs, but we still put in a due diligence period. I had used a broker on this deal. They had brought me the deal. But I have to say that-

Tony:
Ashley, can I stop you really quick?

Ashley:
Yeah.

Tony:
Because I want to highlight something, right? When you say “as is”, let’s break down what that means for the listeners. So when you agree to “as is”, what does that mean? What are the limitations you have as the buyer?

Ashley:
Basically, if I find anything in the inspection, they’re not going to fix it. I ran into this with the campground, right now, I’m trying to negotiate. When he countered me for a higher offer, I accepted that counteroffer, but I put that I now want a longer due diligence period.
He was like, “Well, this property is ‘as is’. If an outlet’s not working, I’m not going to fix it.” Blah, blah, blah. I had to explain, “I completely understand, but I can’t go into this property blind, and then all of a sudden I get a bill for $100,000 of repairs that needed to be done. I just need to make sure that there aren’t a ton of issues that aren’t coming up.” And I said, “At the lower price, I was willing to take that risk.” Because then I had a lot more capital to play with and could add in a large capital improvement in there.
So, yeah, just remember that if someone says “as is”, that doesn’t mean you have to buy it “as is”. You can go and do your due diligence on it and see what kind of costs are going to be associated with purchasing that property.

Tony:
Honestly, even “as is”, even though they won’t repair it, you can still ask for a credit. Because, I’ve had it done both ways, right? Some people they say, “‘As is’. I’m not going to fix anything. Don’t ask me for any more money.” But I’ve had other offers where even though it’s “as is”, I’ve still been able to negotiate credits to say, “Hey, this is a much bigger expense than what we were anticipating, so we need some kind of reduction in the purchase price. I don’t need you to fix it, but I just need a little bit of break there.” I just wanted to pause on that, because I know that term gets thrown around a lot, so we could break it down for the rookies.

Ashley:
Yeah, it definitely doesn’t hurt to ask to get that negotiated, even if they are saying “as is”, I would still … maybe they’re not even aware of the issue, and if you pull out of that contract and they go to another buyer, another buyer is probably going to find the same issue, and then it’s just going to happen again. That’s great advice to definitely try and ask for them to give you a discount on the price.
Okay, so this property, some of the things that we found out first going into it, first, it was a foreclosure property and there was back taxes owed on it. The county ended up taking possession of the property first, before the bank foreclosed on it, and it went up for tax auction. So the county sold it at tax auction, and the bank was the one that ended up buying the property. Because what someone else was bidding at, it wouldn’t even cover their whole loan that was owed to them, plus the back taxes, so the bank ended up buying the property.
Now they’re selling it through a broker, and they don’t know anything about the property. There’s no financials on the property, so already stepping into this, this was a very, very blind deal to go into. There was really no guidance. We actually hired a consultant who actually helped us build the financial pitch deck and the proforma for the property based off comps in the area as to what we could do with it, because there was no really financial history. So that was kind of a big red flag for us.
So, with that, kind of ties in the financing piece. When you purchase a property and there is no financial history or background on the property, it’s going to be very hard to have a bank finance it for you. A bank is going to want to see that this property has been generating revenue. Well, this property hadn’t been generating revenue for two years. It sat vacant. So, no bank wanted to touch it. We were going to have a private money lender and then raise the rest of the capital needed.
The second issue that came up was that we could not get title insurance on the property. This was something that our attorney found out for us during the due diligence period, that because it went up for auction and there was no title insurance purchased at that point in time, there was a three-year redemption period. We ended up having to go to a title attorney, an attorney who specializes in title issues, and he was the one that kind of discovered that for us, that it wouldn’t be until three years after the auction date that you could actually get title insurance on it. That means there’s still two more years before a bank would finance the property if we wanted to go and refinance.
But also, looking at it, what investor wants to invest in a property as the private lender or as a limited partner in a syndication deal where there’s no title insurance on the property? Especially when it was a very messy of a deal where the county took it over, the bank then bought it, and the bank was in the process of foreclosing. So, those were kind of the big issues.

Tony:
Yeah. Just to break down, the risk of that property not being able to get title insurance means that, say that someone else was on title or has some kind of stake in that property, after you purchase it, they could go back and say, “Hey, I actually owned 50% of this, and I need my money, or I need ownership, or X, Y, Z.” Now it becomes a very dicey situation. But if you have title insurance and someone says, “Hey, I was actually on title,” it’ll be the title, insurance policy that would pay that person out, as opposed to you, as the new owner.

Ashley:
Yeah. Yeah. Thank you for explaining that.

Tony:
Yeah, so a lot of risk if you don’t-

Ashley:
You’re doing a way better job of breaking things down for me.

Tony:
Well, I’m just saying, it’s a lot of risk there, right, if you were to buy that and you didn’t have that in place?

Ashley:
Yeah. That was kind of like the first thing for us. The second thing came up during the due diligence period. I want to highlight first is, when you’re doing the due diligence period, make sure that you’re looking at your financing options. What will work for the property and can you get financing on them? And not even for how you’re going to acquire the deal, how you’re going to purchase it, but if you plan on refinancing down the road, make sure that you can refinance. Go and start talking to banks and say, “What will you need from me to put a mortgage on this property in two years or so?” They may say, “Two years of tax returns on the property.” That means, actually, it’ll be over two years that you could actually go and refinance by the time your tax returns are done. So, go and ask all those questions. Also, what’s the loan to value? Different things like that. Just kind of get an idea of what it would be like to finance, so you can kind of work that into your deal.
The second thing besides the financing is talking to people that issue the permits that regulate the property, especially commercial property. You want to talk to the code enforcement officer. With this property, it had its own sewer treatment facility on it, and that was regulated by the DEC, the Department of Environmental Conservation, and they’re the ones that oversaw that.
Before we even contacted the code enforcement officer, he actually called my attorney and said, “I’ve heard a rumor this was selling, and I tracked it down. If it’s okay, I would like to have the purchaser call me.” He said, “I’m just curious what you’re doing with this property.” I said, “I’m going to turn it back into a campground and operate it.” He said, “Okay, well, I need to tell you some things about it.” I think this was very nice that he took the initiative before we even reached out to him.
But he just said that 50 of the RV sites that have full water, sewer hook-up to them, and electric, were never permitted. That means for the town, the county, to come back and issue me a building permit, if something doesn’t look right, they have to dig up all that infrastructure. There’s no site plans, no engineering plans were even handed in to the town or the county to put in all of this new infrastructure for these new RV site hookups. So that right there, I’m like, at 50 RV sites that are not permitted out of 80, that would be a huge expense for us if we did have to go back and redo it if there was something wrong and it wasn’t along with code or something like that. So, that was kind of like our second flag.
When you are talking with the DEC or with a code enforcement officer or whatever permit issuing agency is, we found out that in New York State, you can actually request a foil, F-O-I-L. And what it is, is you can get all of their information, all of their records on that property. I mean, this one for this campground site was, I mean, this huge thick folder. He actually said, “Why don’t you come into my office, because that would actually be faster than me just scanning all this in and emailing it, or copying every page and mailing it to you.” So check out what kind of options you have and what kind of information you can get, too, from the government agencies that have regulated and permitted these properties.

Tony:
Yeah, Ashley, I think going into the local town hall or wherever and get information on the property is super critical. We did that for our Big Bear property. We were just up there last week, and part of our stop was going into city hall and just saying, “Hey, we’re looking at buying this property. What can you tell us about it?”
When we were in New York, same thing. We went into the town hall there and said, “Hey, we’re looking at buying this property. Tell us what we need to do, what the steps are, et cetera.”
You get to go straight to the source and understand kind of what the potential risks are, what you need to do as a new buyer to make sure that you’re operating in a legal way, et cetera, et cetera. Yeah, there’s so much value that comes from just in person, talking to people, and getting information straight from the source.

Ashley:
Yeah. I think the only other thing that I would add to that is just talking to an attorney, too, about the property, especially if it is a commercial property, and seeing, what deals have you done like this? That was when I picked my attorney for this deal was an attorney I’d used before, but before I decided I was going with him on this deal, I said, “What’s your experience with properties like these?” He was able to tell me similar deals he had done, and able to guide me and help me in the due diligence period as the things I should look for, and things he had noticed with other properties that came up that he had helped close on, too, which was very helpful. And then, just kind of like Tony said, he had contractors come out, inspectors, and I think lining those all up and really knowing what you’re getting into and putting a dollar amount to it is very important.
And check the utilities. If you have well, you have septic, is it public utilities? One property I just purchased has propane tanks. Actually, there’s two buildings on it. One building has a propane tank and the other one doesn’t. It’s all wired, all hooked up, it has all the plumbing and everything for the gas, but there’s not actually a propane tank in the ground. Which isn’t a big deal for us. That’s something we easily can take care of. But imagine if you went into there not knowing that, and you’re like, “Oh, here we go. This is almost ready. I just have to finish this little cabin off a little bit, but oh, there’s no propane. I need a propane tank.” So, checking your utilities and making sure they’re all operational, or what you have to do to fix them.

Tony:
And just asking, “Hey, is this on septic or is it on city sewer? Is it on city water, or is it on well?” My mind is still blown by the well water concept, like the property in New York. They were like, “Yeah, there’s a well under here.” I was like, “So there’s just water underground, and that’s just coming into the property?” And he was like, “Yeah.” I was like, “So is it ever going to run out?” He was like, “Probably not.” Just knowing those things, I think, are super important, as well.

Ashley:
I can’t wait for you to come visit me sometime and have your first taste of well water at my house.

Tony:
Well water. Blow my mind.

Ashley:
Okay. Well, anything else you wanted to add to that?

Tony:
I think those are all the big things, Ash. I think that’s everything. I guess the last thing is just understand that the purpose of due diligence is to uncover as much about the property as you potentially can, so that way you can make an informed decision. You’re going to have to get up in the seller’s business sometimes. Right? You might need to ask for information that they’re not super keen on sharing. But at the end of the day, you have an obligation to yourself and to your business to turn over as many stones as you possibly can. And if you need to walk away, be prepared to walk away. Because the last thing you want to do is discover something during your due diligence that is a major red flag, but you’ve become so emotionally involved in the deal that you make the bad decision of moving forward anyway. Work with your data, work with the hard facts, and not so much your emotions, and that’s how you get the most out of your due diligence.

Ashley:
Tony, that hits home to me so much. The screen saver on my phone was the view from this property. My passcode on my phone, I should probably change it now, after this episode airs, was the address, the house number to this property. And that was just, I wanted this property so bad.
But, you know what? The opportunity cost of all that time wasted, even money wasted, I still have to pay my attorney. I still have to pay for, I had a drone footage done of it. I paid the maintenance guy to come. Just a lot of time and money wasted, but it’s an opportunity cost, because, or else I could have ended up with … we had already, I think had $300,000 of cap ex that needed to go into this property, and it could have been up to half a million as we started to find out more things. So, think of that as an opportunity cost instead of money wasted, but that emotional detachment is very important on a property, too.

Tony:
Cool. Well, glad you had the courage to walk away from it, Ash. Yeah.

Ashley:
You know what? The silver lining to it is this other property, this other campground we’re going after now, honestly, seems so easy after going through the due diligence of this other property. Just taking it over. It’s already operational. So I think it was a very good just-

Tony:
A stepping stone?

Ashley:
… learning curve for us, too. Yeah. And stepping stone. It’s making us take over this other campground, hopefully, if we can get a signed contract this week, a lot easier. But, okay.
Well, thank you guys so much for joining us. We will be back on Wednesday with a guest, and if you guys are loving the show and you have taken value, please leave us a review on your favorite podcast platform, and let us know how this podcast has impacted your life. I’m Ashley, @WealthFromRentals. He’s Tony, @TonyJRobinson. We’ll see you guys next time.

My friend, Ron, is a single-family developer on the East Coast. Ron has spent decades successfully developing subdivisions. He told me this shocking story the other day. 

He was planning to build 2,200 square foot homes on about 40 lots that he had developed, hoping to sell these homes in the range of $350,000. They were nothing special but near a beach, so that helped.

He saw a new house on the market in a subdivision across the street. It was only 1,500 square feet and sold for over $400,000 last spring, so he was very encouraged. He was surprised when it hit the market a few months later for $625,000. And it sold!

He was even more surprised when it hit the market again for $820,000 last month. It went pending quickly, and he told me the other day it actually sold for $20k over the asking price at $840,000. 

Remember, this is for a 1,500-square-foot house that isn’t beachfront. 

When it’s this easy, something might be wrong. 

Another friend of mine is an outstanding multifamily syndicator. He told me about a multifamily property that is particularly challenging for his team. 

Before I go on, I want to say he is one of the best multifamily syndicators I know. He’s got an excellent property management team, great marketing, great systems, and he usually doesn’t make mistakes with acquisitions. Well, this was one mistake. 

He told me his net operating income was barely covering his debt service. His debt service coverage ratio was dangerously low. Because he uses floating rate debt, his interest rate was in the 2% range. 

His property management team had done all they could but could not get the rent bumps they projected and the needed increases in net operating income. 

This was not a great investment. Then it became one. 

My friend got an offer 50% higher than he paid for this asset. The new buyer, probably a less experienced syndicator, has a floating interest rate at approximately more than double my friend’s, at roughly 5%. 

Think about this—how in the world is this going to work? How is it going to end for the investors? 

I don’t understand how the math works or how they got a loan, but that happens in times like this. In times that precede a market top (a bubble bursting), debt flows freely, and syndicators gobble up every bit they can.  

The only way this could even work, in my mind, is if the buyer got extremely low LTV debt and is hoping, praying, and counting on inflation to rescue him and his investors. 

But that’s not the point of this post. The point is that my friend got out of a terrible investment with a very nice profit. 

Once again, when it’s this easy, something might be wrong.

Charlie Munger, the legendary curmudgeon investing partner of Warren Buffett and Vice-Chairman of Berkshire Hathaway, said, “It’s not supposed to be easy. Anyone who finds it easy is stupid.” 

If Warren and Charlie invested in real estate, I think they would be selling right now. That is unless they could locate assets with significant intrinsic value that could be harvested. I’ve written on this, and my firm has staked our future on it: “There Are Still Deals Out There (for Now)—Here’s Where to Find Them.”

This is not limited to just these two examples. I hear examples like this all the time. I mean all the time. 

And it is not limited to a few asset classes. I’m hearing stories like this in multifamily, single-family, self-storage, mobile home parks, and more. 

This type of behavior almost always precedes the top of the market and a bubble that eventually bursts. 

I will admit it’s possible that massive inflation could save many of these speculators. But do you really want to count on that? I mean, do you really want to be in a position and put your investors in a position where things outside of your control have to go your way to make things work? 

If you are collecting fees and will get paid regardless, you may be tempted to charge forward. But I am pleading with you to reconsider that for the sake of your future, your reputation, and especially on behalf of all the people who are counting on you. 

This is not the time to play double or nothing. When the market is at unprecedented levels, then the margin of safety is the smallest (and, in this case, perhaps negative). 

This is the time to avoid risk and wait for blood to run in the streets (from others’ mistakes). If you keep playing double or nothing, you will eventually land on nothing. Then what will you have left to double? 

Speculators sometimes end up driving a Maserati and living in a mansion. But some of them wind up delivering pizzas. There is nothing wrong with delivering pizzas, but I am guessing you are involved in the BiggerPockets community because you want more. 

We all know that low risk leads to low returns. Correspondingly, we assume that high risk leads to high returns. But that’s not true. High risk leads to the potential for higher returns. And also the potential for low returns or total loss. 

Don’t gamble with your wealth. And certainly, don’t gamble with others’ wealth. They deserve better than that. So do you and your family. 

I was talking with another investor recently and used a term I assumed he would be familiar with. He wasn’t, which led me to realize that a simple but very effective tool for decision-making was likely to be overlooked by many others as well.

The tool/concept is called expected value (EV), and I’m most familiar with this concept because I spent my youth playing way too much high-stakes poker. 

In poker, EV is one of the most common tools used to determine an optimal decision (fold, call, raise, etc.) in the middle of a hand, especially in big situations where all the chips are on the line.

But, EV can be applied to a wide range of decisions, including decisions related to our investments. 

How Does Expected Value Work?

Let’s look at how EV works, using a straightforward example from the poker world.

We’re sitting in a poker game. It’s the end of the hand, and there’s $400 in the pot, and the other player in the hand bets $100, making the pot $500, requiring you to put in $100 to see a show-down.

You have a decision to make: Do you call the $100 bet or not?

While I could give you all the details of the hand—what cards you have, how the betting played out, whether the other player looks nervous. The only piece of information you need to make an optimal decision about whether to call is what you estimate the likelihood of you having the best hand (and therefore winning the pot).

To determine the expected value for a decision, you multiply the probability of each possible outcome by the value of that outcome and then add up the results.

In this case, there are three possible outcomes:

1. You have the best hand and win
2. You have the worst hand and lose
3. You have the same hand (we’ll ignore this)

Let’s say that you believe there’s a 25% chance that you have the best hand and a 75% chance of having the worst hand. In other words, you will most likely lose, regardless of what you do. 

But what about the expected value?

There’s a 25% chance of the first scenario above happening (you having the best hand and win), and if it does, you’ll win $500 (the amount in the pot). There’s a 75% chance of the second scenario happening (you have the worst hand and lose), and if it does, you’ll lose $100 (the amount you need to spend to call the bet).

To determine the EV, we multiply the probability by the outcome for each scenario and add them up:

EV = (25% * $500) + (75% * -$100)

EV = ($125) + (-$75)

EV = $50

The Expected Value is $50. What does this mean?

It means that, while we have no idea if we’ll win $500 or lose $100 this hand, if we were to play out this exact situation a million times, we should expect to win, on average, $50 per situation.

A good poker player knows that while there is a 75% chance of losing this hand and going broke. Over the long term, taking that risk every time it comes up will ultimately make money. 

In fact, if a poker player finds themselves in this exact situation 100 times, they should expect to earn 100 * $50 = $5,000 across all these situations.

A positive expected value investment/decision is one that you should always consider making. A negative EV investment/decision is one that you should always consider passing on. 

Had the expected value for the poker situation above been negative, a fold would have been the right move.

How Expected Value Applies to Other Investment Decisions

We can apply the same logic to other types of decisions and different types of investments.

For example, it’s typical for house flippers who do a high volume of deals to consider “self-insuring” their properties. This means they don’t get insurance for the flips and assume the risk/cost themselves.

But is it smart to self-insure your flips? Let’s make some assumptions and run an EV equation.

Let’s assume:

• A typical insurance policy for a house flip will cost $1,000
• 1 in 50 flips (2%) will have a small ($10,000) claim
• 1 in 200 flips (.5%) will have a big ($100,000) claim
• The rest of the flips (97.5%) will have no insurance claim

Should we pay the $1,000 in insurance for each of our flips? Or self-insure?

Let’s take a look at the EV for self-insuring. We’ll start with the possible outcomes and the value of each:

• 97.5% of the time, there would be no claim. Therefore, no out-of-pocket cost.
• 2% of the time, there would be a small claim of $10,000 that we’d have to pay out-of-pocket.
• .5% of the time, there would be a large claim of $100,000 that we’d have to pay out-of-pocket.

EV = (97.5% * $0) + (2% * $10,000) + (.5% * $100,000)

EV = $0 + $200 + $500 

EV = $700

The EV on self-insuring is $700. That means, on average, we’d spend $700 per project paying for things that would have otherwise been covered by insurance.

In other words, if we were to do 100 flips, we could expect that we’d save about $300 per flip by self-insuring. Or $30,000 across all 100 flips! 

Final Thoughts

While this is highly simplified, and you’ll have to use the numbers that make sense for your flips (both insurance costs and likely claims), you can see why many house flippers who are doing large volumes of flips choose to self-insure.

There are thousands of scenarios you’ll run into, both with your investments and daily life, where expected value calculations allow you to make much better decisions than just “going with your gut”.

Disclaimers about expected value

• Yes, there was another option in the poker example (raising). We’re ignoring that one.
• Yes, this discussion ignores variance. Sometimes, lower variance is more important than higher EV.
• Yes, you need to consider other things besides EV, especially when it comes to catastrophic risk (risk of losing everything).
• Yes, this requires that you are good at estimating the probability of each outcome and the value for each outcome, which can be difficult.

Prepare for a market shift

Modify your investing tactics—not only to survive an economic downturn, but to also thrive! Take any recession in stride and never be intimidated by a market shift again with Recession-Proof Real Estate Investing.

Ryan Schneider, Anywhere Real Estate CEO, joins ‘Squawk on the Street’ to discuss why the company decided to rebrand, how the business is changing and if the rising rate environment is affecting all income brackets when buying a home.

Mark Zandi, Moody’s Analytics chief economist, joins ‘Power Lunch’ to discuss his take on the housing market after Wednesday’s mortgage demand data, his predictions for different housing market stability metrics and more.

If you haven’t noticed, real estate is the most expensive it’s ever been. For newcomers and experienced investors, it’s been a lot harder to find good deals at affordable prices.

Luckily, real estate investing provides enough strategies that you can get around the barrier of entry by executing a tactic known as “house hacking”. Let’s talk about what that means.

What is House Hacking?

House hacking is where you leverage the home you live in by renting out some portion of the property to generate income and offset your monthly mortgage payment. 

For most people, a monthly mortgage or rent payment is their biggest expense. If you could reduce or eliminate your monthly housing payment, you would inevitably have more financial independence, extra passive income for the lifestyle you want, and more cash to set aside for your next real estate investment. 

In reality, house hacking is an actual life hack that forces your largest expense to work for you. It’s also one of the easiest ways to become a landlord.

Why Now is the Best Time To Start House Hacking

Just think of the headlines in real estate over the past two years: “historically low-interest rates”, “unprecedented appreciation”, “historic low inventory”, and “record inflation”. The list goes on. 

We face surging inflation as we enter the aftermath of these unprecedented and historic runs. To combat it, the Fed has raised interest rates, and in conjunction, the 30-year fixed mortgage rate has already jumped from an average of mid-3% to over 5% in a few months.

Here’s how that affects people’s wallets:

Let’s use a $500,000 home as an example.

Based on the 2% rise in interest, the monthly payment has increased by over $500! $500 extra each month can make a real impact on your budget. Based on the Fed’s indications, rates could continue to increase. People have also lost significant purchasing power because of the increased rates. 

As the market fights against first-time home buyers and eager investors trying to get in, house hacking is an advantageous weapon in your arsenal.

Who is House Hacking For?

Technically, anyone can take advantage of the benefits of house hacking, but it isn’t for the faint of heart. It can be uncomfortable. You may have to share parts of your house that you previously enjoyed to yourself, or it may take a significant up-front financial investment. 

While anybody can house hack, here are some categories of people who stand to gain the most by putting it into practice.

Those looking to save and earn more from their homes

Studies show that up to 64% of Americans live paycheck to paycheck. It’s even higher depending on the income bracket. 

Amongst these groups, a large portion of their paycheck goes towards housing costs. If the average American can lower or eliminate that housing cost, it can change their entire financial picture. Utilizing a house hacking strategy is a life-changing opportunity that affords the ability to save and have increased disposable income for individuals and families.

Those searching for financial independence

There is a large group of people that make decent money and have a comfortable life, but that comes at the expense of their time. Most of our lifestyles, homes, cars, and healthcare costs are all predicated on doing what someone else wants us to do and being where they require us to be for 40+ hours a week. Many of us work the job we do because we have to, not because we want to.

For example, I knew personally that to earn some degree of financial independence, house hacking was the right move. My wife and I downsized by renting out our comfortable four-bedroom home, invested our savings into another house, and flipped half of it into an Airbnb to eliminate the housing costs and get us one step closer to financial freedom. 

It’s not stress-free, but there’s a substantial economic impact that will pay dividends for years to come. House hacking is an accelerant for those searching for financial independence.

The young and hungry

Hands down, the person who stands to gain the most from house hacking is a younger person looking to acquire more real estate sooner. 

Generally, someone starting out in the workforce isn’t making a ton of money and may already have some significant debt with student loans. 

It’s hard to save with lower wages, debt payments, and rent payments. If someone in this situation can get into home ownership and utilize house hacking to have lower costs than what they would pay in rent, they win! 

They begin to leverage an asset, and real estate does its magic. Equity grows, cash-flow increases, the home appreciates, and they can save more to buy the next property sooner.

Ways to House Hack

1. Rent to roommates

This is the simplest and easiest way to house hack. Purchase a home and rent out some of the rooms to friends or even people you don’t know. Why pay a landlord when you can be the landlord? 

I have a buyer in Denver who is a recent college grad trying to achieve this exact scenario. Rather than rent a room himself for $800-$1,000/month, or rent an apartment for $1,500-$2,000/month, he’s decided to buy real estate early and offset his costs through house hacking. 

We are currently looking at 3-4 bedroom houses where he can rent out other rooms. Only $1000/month will come out of his pocket to own an appreciating, updated 3-4 bedroom home in Denver when he’s all done.

2. Start a short-term rental 

Another lucrative way to house hack is by setting up a short-term rental (STR) through popular platforms like Airbnb and VRBO.

In my case, this is the strategy I use for house hacking. We purchased our second home in Denver with the goal of completely mitigating our mortgage. Our separate-entry guest suite with one bedroom, one bathroom, and living space consistently pays us more than our mortgage payment. 

3. Buy a multifamily home

Many refer to this model as the “OG” of house hacking. Buy a duplex, triplex, or quadplex, live in one of the units and rent out the others. This allows an investor to get into multifamily investing for the least amount of money. 

Generally, a multifamily investment takes a 25% down payment. You can get in for as low as 15% down if it is a primary residence. 

In one move, you can purchase multiple units that can bring enough income to eliminate your out-of-pocket mortgage payment.

4. Build a “hackable” space

Many homeowners really love their homes, dislike the idea of moving, and don’t want to give up any space they already use. Those same people who have enjoyed living in their homes for a while have probably experienced unprecedented and historic appreciation over the past few years, giving them a ton of equity at their disposal.

I have friends who are in this exact dilemma. They want to get ahead by investing in real estate and find the extra income and financial independence that comes with house hacking, but they love their home and don’t want to move or give up any of their amenities. 

What’s their solution? 

Leveraging their equity with a home equity line of credit (HELOC) to build an addition to their house to create a short-term rental space. 

We ran the numbers, and the income they stand to make from their Airbnb will pay for their mortgage payment plus the HELOC payment.

Final Thoughts

There are various house hackable spaces and ideas at hand for homeowners. Finishing out a basement, building an ADU, or even putting up an airstream in the backyard could make extra cash. 

All of these ideas are subject to your city’s zoning and regulations, but the concept remains the same, there are ways to win by house hacking your home.

You’ll hear a lot of investors talk about house hacking time and time again because it works. It’s not the most flashy of investments. It can be uncomfortable and possibly invade your privacy. But house hacking has the power to radically reorganize your financial situation and reorient your mindset to making real estate work for your behalf.

That alone makes it worth it.

Let’s face it, being a real estate or rental property owner is like trying to navigate a minefield. At every point, you must double-check federal and state laws to ensure you don’t cross boundaries on your own property. The various housing laws that exist always protect the interest of the tenants over that of the landlords.

So, it may seem that landlords have few, if any, rights. However, specific landlord-tenant laws protect a landlord’s rights. This article discusses some of these rights and how they protect your interests as a property rental owner. 

First, there is one important question to discuss: How did landlord-tenant laws shift in favor of tenants, rather than the landlord, who invested a lot of money in a house or apartment?

Reasons for Revising Housing Laws 

Changes to housing law legislation resulted from a growing awareness of the welfare of tenants. Unfortunately, this was primarily due to the unfair treatment of tenants in the past. The term slumlord came to mean a landlord who tried to maximize profit but failed to upkeep the property. As a result, the government set out to protect tenant interests by enacting rent control laws to defend them from oppressive landlords.

Also, in modern times, tenants are mobile, often moving from city to city, region to region, to suit their needs. As a result, past tenancy agreement laws might not be relevant or practical nowadays. For example, tenants used to repair and upgrade rented apartments. This was usually because they stayed in those locations longer than they do now.

The implied warranty clause means that rental units must be “fit for purpose.” This means that the property is up to standard and fit for human habitation. Landlords must ensure heating, hot water, waste disposal, and plumbing work. Of course, once the tenant moves in, they are responsible for caring for the place. However, the landlords still have responsibilities to ensure essential maintenance and repairs are carried out.

So, any damage caused by the tenant is their responsibility. Either the tenant repairs the damage, it gets taken from their security deposit, or it becomes a lease violation.

What Are My Rights as a Landlord? 

Landlords have rights, even though they sometimes seem like the bare minimum. Let’s briefly discuss some of those rights.

1. The right to tell a tenant how clean to keep the house

A landlord has the right to ensure a certain level of cleanliness in the rental unit. It’s within a landlord’s right to require that tenants remove garbage regularly, clean pet mess, and prevent unhygienic conditions from attracting pests and vermin. This is why it’s a good idea to have a cleanliness clause in the rental agreement. 

Of course, it’s not within a landlord’s jurisdiction to say how often to vacuum the carpets or clean the bathtub. However, you have a right to tell a tenant to keep the house clean. 

2. Landlord rights when a tenant destroys property

As a landlord, you have the right to inspect the property if you suspect a tenant is trashing the place. Of course, you must give proper notice in line with state laws. During a thorough inspection, you can document the evidence and take pictures. You can then decide on the best action to take. 

Destroying property is a lease agreement violation. Therefore you have the right to start an eviction action. This involves serving the delinquent tenant with a “cure or quit” notice in writing. If the tenant hasn’t repaired the damage after a reasonable amount of time, you can file for eviction. After the tenant vacates the property, you have the right to withhold part of all of the security deposit to pay for repairs. 

3. The right to screen tenants

The landlord reserves the right to screen potential tenants before signing lease agreements with them. While screening, the landlord confirms the character of the prospective tenant. Then, they decide whether they will sign the rental agreement. 

However, it is not permissible to base a decision on any discriminatory criteria. So, it is vital to check what the Fair Housing Act says about discriminating against any tenant seeking accommodation.

A landlord has the right to assess potential tenants based on the following criteria:

• A physical interview or meeting to assess the prospective tenant’s suitability.
• Check their identity.
• Check their credit score and history.
• Get references from previous landlords and employers.
• Verify whether they have a criminal record. However, state laws may prohibit this check. 

4. Right to collect rent and security deposits.

The landlord has the right to set the rental price and security deposits. However, state laws may limit the amount of security deposit you can charge. 

The tenant must pay the security deposit and a month’s rent in advance upon signing the rental agreement. The rent, in this case, refers to all the fees stated in the lease agreement. These fees include utility bills (if stated), taxes on the property, and fees for keeping a pet.

Landlords have the right to request a security deposit in line with state laws. This money is a kind of insurance against damage or unpaid rent. The landlord can use the security deposit to pay for costs to repair damage caused by a tenant. 

However, at the end of the lease agreement, a landlord generally must return the security deposit to the tenant. 

5. Right to evict tenants for lease violations

Tenants have obligations to the landlord while using their property. They include:

• Obligation to pay rent: In this context, rent refers to all forms of payment stipulated in the lease agreement. Therefore, the tenant must pay these fees as they are required. Non-payment of rent is a lease violation. 
• Not altering the property’s structure: The tenant can only modify the property if the lease agreement allows for this. For instance, they might repaint walls and install shelves only if the lease allows it. However, it is not acceptable to increase a room’s size by removing walls or making structural alterations. Also, a tenant must not cause damage to the property.
• Illegal activities: A tenant must not use the property for unlawful activity.

Violation of any of these rules or failure to comply with them gives landlords the right to serve an eviction notice to “cure or quit.”

For example, suppose a tenant fails to pay rent. In that case, the landlord has the right to start an eviction process. This would involve proving to a judge that the tenant is in violation of the lease agreement. Then, if the tenant fails to make the rent payment in full in the specified time, they can be evicted. 

6. Right to access the property

Landlords can access their property even after renting it out. The main clause in this is that they must give prior notice to the tenants before coming. Most states in the U.S. demand a 24-hour notice, while some ask even higher. If the landlord violates this clause, the tenants can sue them for privacy invasion.

However, in emergency cases, the landlord can come in without a notice to secure his property from losses. 

7. Right to make a “moving-out” inspection

The landlords have the right to inspect the property whenever the tenant notifies them of their desire to leave the property. Once they receive the notice, they can inspect the property for any damage that is more than just regular “wear and tear.” 

Regular “wear and tear” is superficial damage to the property due to day-to-day living. However, it doesn’t include severe damage to the property, fixtures, or fittings. For example, there is a difference between surface scratches on a baseboard and a large hole in drywall. 

Conclusion

Landlord-tenant laws in the U.S. indeed tend to favor tenants. However, it’s vital to remember that landlords have specific rights to collect rent on time, make regular inspections, and evict a tenant for a lease violation.

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