Abhishek Lodha of Lodha Group says the Indian property market is at the start of a “long-term upcycle.”

Dave:
Hey, everyone. Welcome to On the Market. I’m Dave Meyer, your host, and I am here with two BiggerPockets and investing legends. We’ve got Henry Washington who’s here a lot. Henry, how’s it going?

Henry:
What’s up, buddy? Glad to be here.

Dave:
Thank you. Thank you for being here. And we also are bringing back, I think you are our first two-time guest, J Scott. What’s going on, J?

J:
I am doing great and I am thrilled to be your first two-time guest. I can’t wait. And hopefully, I’ll be your first three-time and four-time and five-time also.

Henry:
Whoo. Whoo.

Dave:
All right. Wow, I like it. Yeah. I mean, I think your episode about investing in a recession might be one of our best, if not our best episode of all time. So if you haven’t listened to that already, you should check that out. J has written a book about recession, investing in all sorts of market cycles, particularly useful in this type of economic environment. But J, can you tell people why you’re here joining us today?

J:
Yeah. I’m here today because you wanted me to be here because you and I are getting ready to release a book, our next book for BiggerPockets, and you were too ashamed to self-promote and announce it yourself. So you brought me on to announce it so you wouldn’t have to look bad.

Dave:
That’s exactly right.

J:
So we’re here to talk about a lot of… Or I’m here to talk about a lot of things, but would definitely want to mention that you and I, Dave, are releasing a book called Real Estate by the Numbers. It’s coming out in a couple days, I think October 13th, from BiggerPockets. It’s now available for pre-order. And basically, it’s all about how we can better think like investors. So how we can think more strategically, how we can employ investing concepts that really successful investors use, all the math that goes on behind the scenes that we need to underwrite deals, and how we should be thinking about investing from the most basic level, like underwriting deals, to how we should be thinking about structuring our business and structuring our portfolio basically to be a more successful, more profitable investor.

Dave:
That’s perfectly right, and thank you for taking the responsibility of the shameless plug. We got to do it, but I do want to mention that it is available for pre-order for two more days. And if you do pre-order it, there are benefits. J and I are both giving away coaching calls. We’re going to be hosting a webinar that you can attend. It’s a live Q&A. There’s a couple other benefits. And you can use a discount code, DAVE, to get 10% off. Or J, I think, do you have a code also?

J:
Yeah, JSCOTT.

Dave:
Okay, or you could either use the code Dave, D-A-V-E, or J-S-C-O-T-T, JSCOTT for 10% off. So you should check that out. So it’s a great book. I think you should read it. I think Henry actually even wrote a little blurb about how much he loved the book on it.

Henry:
Yes. You know what’s funny is if I were to direct somebody, if somebody came to me and said, “Hey, Henry, I really need to know about what are the best rules of thumb or financial equations, or how do I get really good with numbers? Who do you know at BiggerPockets that could help me with that?” My 1000% answer would’ve been like, “Oh, you got to talk to Dave and J Scott. Talk to those two people. Those are the ones who can really break down the numbers for you.” And so the fact that you actually wrote a book called Real Estate by the Numbers, it’s almost like, it’s like a meme. Like, “Of course, Dave and J Scott wrote a book Real Estate by the Numbers. That is 1000% who they are.” So I think people should take advantage of that because you want people to speak on the things that they are passionate about and that they know the best. And if I know anything about the two of you, it’s that you’re passionate about data, the numbers, and real estate. So that’s super exciting.

Dave:
Well, thank you, Henry.

J:
Thank you, Henry. I don’t want to spend the whole episode talking about the book. There are so many more important things to talk about, but I do want to point out that Dave and I, we worked for several years on this book. This is my fifth and by far the hardest book that I’ve ever worked on. And no way I would’ve accomplished it at all, let alone it be as good as it is without Dave. So we put a lot of time and effort and blood, sweat, and tears into this one. But at the end of the day, I am more excited about this book launch than any of the other four that I did because I really think this book is going to help more investors over the next 10, 20, 50 years than anything we’ve ever written.

Dave:
All right. Well, we will get into the meat of this episode because we want to hear about what J is doing with investing. But I am also excited because I now have physical proof to all my teachers and guidance counselors who said I’d never graduate college or do anything with my life, that I have done something with my life. So there.

J:
I like how he says he has physical proof and he just holds up an invisible…

Dave:
Yeah, it doesn’t even exist. I’m just holding up nothing. But in a couple of weeks, I will. This is what they meant, J, when they said I’d never amount to anything.

J:
It was all a dream.

Dave:
All right. Well, let’s take a quick break, but then we are going to talk to J all about his investing and what he’s doing in this very confusing economy, and we will be right back.

Speaker 4:
(singing)

Dave:
Okay. So J, tell us about your read of the economy. And what are you doing in your investing business right now to adjust to these very confusing market conditions?

J:
Yeah, I wish I had a better answer than what I’m about to give, but I think right now is very much… I’m not stopping investing. There’s no reason to ever stop investing if the right deals are coming along, but I’m certainly being a little bit more introspective, and sitting on the sidelines a little bit and waiting to see where things go probably not for too much longer. I think we’ll have a good bit more clarity in the next month or two. So everybody knows that we’re experiencing some high inflation and that’s leading the Federal Reserve to raise interest rates to slow down that inflation, which is leading to higher mortgage rates. And now, debt is more expensive. It’s harder to get a loan, or it’s not hard to get a loan, but it’s harder to get a cheap loan to buy your real estate.
And so nobody really has any idea of how high interest rates are going to go. And so we’re in an uncertain time right now. But what I will say is that even though some other asset classes, I mean, the stock market has struggled a little bit recently and crypto is down like 80%, and other asset classes that I look at are down a good bit, real estate has stayed pretty strong. Now, certainly there’s a few markets around the country that things got so hot over the last couple years, places like Seattle, San Francisco, Boise, Idaho, New York City, where things are starting to slow down a little bit and we’re seeing prices actually decrease in a few markets. But for the most part, in most markets… And I know it’s going to be a couple weeks before this episode’s released, hopefully nothing’s happened in those two weeks that make this statement look idiotic. But for the most part, most markets have been pretty resilient.
And so what we’re seeing is there aren’t a lot of sales. Sellers aren’t really lowering their prices and buyers aren’t necessarily willing to come up to the high prices right now. So what we’re seeing is a drop off in sales. We’re seeing increased inventory in a lot of these markets and we’re seeing lower transaction volume, but the nice thing is we’re not seeing desperate sellers. We’re not seeing a real… I mean, foreclosures are up a good bit percentage wise, but they were so low that even the big jump percentage wise doesn’t translate to big numbers. So foreclosures are still relatively low. Lots of people locked in long-term, really low fixed-rate debt a couple years ago. So I don’t see right now a whole lot of desperate sellers, which means prices are going to stay relatively strong.
Now, the downside is, as real estate investors, we don’t mind if prices drop because we just dollar cost average and buy more real estate, but what I expect over the next at least six to 12 months is that we’re going to see just a stagnating market. We’re going to see prices that don’t really go up, don’t really go down, we’re going to see sellers that aren’t really willing to budge off their prices because they don’t have to, we’re going to see buyers that aren’t really willing to come up to the seller’s prices just because they don’t know where things are going. And so I think it’s going to be a quiet six to 12 months, despite the fact that we could be facing a big recession in the economy and other parts of the economy could be getting much worse. So it’s interesting that we’re facing a lot of economic headwinds, but real estate could really just be boring for the next six to 12 months.

Henry:
Yeah, man, that’s super interesting. I share your perspective. I think things are just going to stay where they are. I don’t see much of a drop coming in prices in most markets. Like you said, some markets are going to see somewhat of a drop, but we’ve got this… What did Jamil call it? We’ve got this standoff happening in real estate until there’s some change that has an actual major effect. One thing you did mention that I want to ask you about is you did say that you’re not stopping investing, but also have been waiting on the sideline. And so can we define that for people? Because I think there’s a lot of investors out there who feel like they should be waiting on the sideline. And I think us as investors, when we say that, we’re really meaning like, “I may not be as actively aggressively searching for something to pour my money into, but I’ve still got my eyes out there. And if something comes along, we’re going to jump on it.” So what does that really mean to you?

J:
Well, here’s the big thing, I can stay active and we can all stay active in real estate without buying or selling anything. So I’m actually using this time to investigate some new asset classes. So there’s some asset classes that I think are likely to do well during a downturn. So over the next year or two or three. There are a couple asset classes that I’m starting to look at and we can talk about those. But just at a high level, I’m using this opportunity, one, like you said, I’m not stopping investing. I’m still looking for deals. I’m not finding as many deals. I’m not finding as many opportunities, but if a good deal comes along, I’m going to jump on it. But at the same time, I’m using this slow down to do research, to learn how to underwrite other asset classes, to build relationships with operators in other asset classes.
When I say other asset classes, I don’t mean outside of real estate. I mean instead of focusing on multifamily, which is what I’ve been focused on the last few years, I’m starting to investigate other commercial niches, and I’m still buying some single-family stuff. But I’m trying to see where the market is going, where the economy is going in the specific locations where I’m investing and seeing what opportunities might exist outside of the core asset class, again, for me, multifamily, that I’ve been in. And what I like to tell people, is that you don’t necessarily ever have to stop investing. You may have to move to a different location, or if you want to stay in the location, you may have to find a different niche, or different asset class, or different business model.
But if you’re good at being flexible and you’re good at pivoting… And this is why… And to go back to the fact that the book Dave and I wrote is so important, it’s really important that you’re able to evaluate deals in different ways. We all probably know how to underwrite if we flip houses. We all know the equation to evaluate a house flip. And if we hold a rental, a lot of us know the equations and the formulas for how to evaluate a single-family buy-and-hold. But the reality is every deal is going to be analyzed differently. Every asset class is going to be analyzed differently. And there are lots of different ways to look at deals and look at markets, and there are lots of different reasons we invest in real estate.
And so using this time to really educate yourself on how to look at deals from different perspectives, and how to maximize the returns on deals with other things other than maybe cash flow, or other than maybe just equity growth. There’s a lot of things that we can be learning and doing right now to really find these needles in a haystack, and to find other asset classes that might be more advantageous given where the market’s headed and where the market currently is. And so what I’m spending a lot of time doing is, one, I’m not stopping looking for deals, but I’m really trying to get familiar with other asset classes, and other business models, and other niches that I can leverage to really grow my portfolio in a market that’s about to change.

Dave:
J, can you remind everyone what your primary niche is currently? And then talk a little bit about some of the niches that you think are going to work short term, or maybe some of the niches and opportunities you are excited about on the longer term perspective as well.

J:
Yeah. So long term, I’m excited about everything. Honestly, I mean, we’ve talked about this before. Go back and listen to the last episode we did of this podcast that I was on. But the reality is that historically speaking, recessions don’t last that long. And so if the Fed started raising interest rates six months ago on average between the time the Fed starts raising interest rates and starts dropping interest rates, is about two years, just over two years. The longest it’s ever been is about three years. So if history is going to repeat itself, which it normally does, we can expect that in the next year and a half to two and a half years, we’re going to see interest rates starting to come down again. So if you’re a house flipper, if you’re a buy-and-hold investor, whatever you do, most likely in the next two to three years, it’s going to be a great time to do it again. The market’s going to have recovered and interest rates are going to come down. Everything’s going to be good.
That’s longer term. From a shorter term perspective, the next 6, 12, 18 months, what I like about real estate is that there’s a segment of real estate called commercial real estate where values of properties are based on the income those properties produce. So if I go and buy a single-family home… I live in a house right now. The house that I live in, the value of that house is going to be impacted by the value of all the other houses around me. So if somebody goes to sell… If I go to sell my house right now, I’m going to look at what my neighbor sold his house for last month, or what the guy down the street sold his house for three weeks ago, or whatever. I’m going to find other houses that are similar to mine, what we call comparables or comps. And whatever they’re selling for, that’s probably what my house is worth.
In the commercial real estate world, and when I say commercial, I mean anything that you use that generates income that’s bigger. So multifamily, or self-storage, or mobile home parks, or office space, whatever it is, the value of that real estate isn’t based on what the building next door sold for, or what the complex across the street sold for. The value of that building, or the value of that real estate is based on the income it’s producing. And if it makes more income next year than it did this year, the value is probably going to go up. And so the reason I really like commercial real estate right now is because even though values may drop on a comp basis, even though single-family values may go down or stagnate over the next 6, 12, 18 months, in the commercial space, as long as rents are going up, we’re going to see values going up for the most part. Now, there’s another component there, but for the most part, if rents are going up, values tend to go up.
And so the question we need to ask ourselves is, “What are those asset classes where we expect income to go up?” So multifamily, that’s the niche that I’m in. I own a bunch of apartment complexes and what we’ve seen over the last couple of years is this trend away from home ownership and this trend towards renting. More people are renting, wages are going up, people are moving to certain population centers. So if you’re in the right market with good population growth and good wage growth and good employment growth, you’re going to see that rents are going up. And so I really like multifamily in a lot of these markets because I know that rents are going to go up, which means values in my properties are going to go up. And so any asset classes where you think income is going to go up over the next couple years, that’s a good place to be.
Historically, during recessions, people move from bigger houses to smaller houses, but they don’t like to sell their stuff. What do they do with their stuff? They put it in storage. So historically, self-storage is counter-cyclical to the broader economy. If the broader economy is doing worse, self-storage is doing really well because people need a place to put their stuff when they downsize. So I really like self-storage right now. Mobile home parks, mobile home parks tend to do pretty well during a recession because it’s the lowest common denominator for housing. And so a lot of people that have to move out of their house or out of their apartment, a lot of them will look for a mobile home. And so typically, mobile homes do pretty well during recessions.
Other asset classes that I like right now are industrial and warehouse. So we’re seeing this shift away from in-person retail. People aren’t walking into stores and malls as much anymore. This isn’t a revelation. Everybody knows this. They’re ordering off of Amazon, or they’re ordering off of other online retailers, and these retailers need to be able to ship in 24 or 48 hours. And so they’re opening warehouses all around the country to make basically their fulfillment and delivery systems more efficient. So lots of big companies like Amazon are buying warehouses all over the country, as well as smaller online retailers doing the same thing. And so what we’re seeing is demand for these light industrial warehouse lots and warehouses has been going through the roof. And so I really like that because I think that trend is going to continue.
Now, there are other asset classes in commercial where I think income is likely to go down; office space. So we saw a ton of office space open up after COVID, simply because everybody was working from home. And a lot of companies have recognized that this work-from-home thing is actually working okay for them. Not saying everybody. Some companies are starting to tell their employees to come back to work, but for a lot of companies, they’ve recognized that this work-from-home movement is a great way to save costs for the company. And so they have all this office space that they may have leased for a year or two years or three years or five years, but at some point, that lease is going to come due over the next couple years and they’re not going to renew. And the landlord, whoever’s holding the building, is going to have trouble leasing this office space. So office space, I have a feeling, is going to be one of those asset classes that’s going to start to contract over the next year or the next couple years.
Retail. So retail tends to not do well during recessions. People don’t go out and shop as much. Certain types of retail do well. If you own an anchor store like a grocery store or the big store on the corner of the shopping center, that might do well. But in general, retail and strip malls and mall space isn’t going to do well during a recession. So I’m staying away from retail. So this is basically what I mean by there are going to be opportunities out there, but you really have to understand how the market works, you have to understand how the economy works, and you have to understand how the two work together, how the economy impacts the real estate market in certain asset classes. And so I’m starting to do research on those asset classes that I think are likely to do well over the next couple years, as well as starting to build relationships with other operators who are working in those asset classes so that I can either learn from them, I can partner with them, I can invest with them, whatever it is.

Henry:
That’s super interesting because we have taken some time this year to do almost exactly the same thing. And so I purchased my first commercial office complex this year, and also we’re looking at a trailer park. And so all that to say, not to toot my own horn, but I’m agreeing with the point that you’re making, is that there are other niches and there are niches that are going to be better suited to the economic conditions. It’s an echo to what you said in the beginning. There’s always room to be an investor. It’s just about what you invest in, what price points you enter at, and then what your return on that investment is.
A good deal, is a good deal, is a deal. And we say a good deal is based on what you’re getting it for in that current market condition. And so you can get a good deal in any market condition. So I love that you’re looking into those things. And I hope that encourages some people to think, not necessarily outside the box, but just be smart about, in sports, we call it take what the defense is giving you. And so you look around at your environment, at what the defense or what the country or what the economic status is giving you, and then you look for the opportunities there. So that’s awesome.

J:
Yeah. And another thing to keep in mind, I think one of the reasons I like real estate right now, I love real estate right now, is because I think the long-term growth trends are astronomical. One of the big concerns that the Federal Reserve has now, for anybody that’s listened to some of the recent press conferences or read some of the things that Jerome Powell, Federal Reserve has released over the last couple months, is this concern for housing. And they’re not concerned about housing because they want us real estate investors to continue to do well and make money. They don’t care about that. They’re concerned about housing because they know that if we don’t continue to create more housing, that we’re going to have affordability problems, that we’re going to have a housing crisis where people can’t afford to live. Basically, the Fed is telling us, “We need housing to do well because we need builders to keep building, and we need people to keep providing housing for all the people that can’t afford a place to live or a place to buy.”
And so I have a feeling, and not just a feeling, but the data supports this as well, that there’s going to be a whole lot of housing, millions of units literally somewhere in the three to five million units that are needed over the next five years to support all of the people that are looking for housing, and all of the people that can’t necessarily afford to buy and are looking for rental housing. And so if you’re a landlord, if you’re a developer, if you’re a multifamily investor, this is going to be a fantastic place to be over the next five or 10 years. So what I would suggest to anybody is if you’re flipping houses right now, start investigating how to buy single-family rentals because there’s going to be a great opportunity and it’s going to be a very powerful asset class over the next few years. If you’re already buying single-family rentals, start looking into multifamily and looking into going bigger. Because again, it’s not that difficult to do bigger in the residential space. And so start thinking about how you can scale up your business.
If you’re in multifamily or if you’re a single-family landlord, start thinking about development because there’s probably going to be some good opportunities. I’m not saying this month or even this year, but over the next several years, there could be some great opportunities for you to be doing either ground-up development or infill development, which means basically buying a house, knocking it down and rebuilding it. And so learning these new skills now while everything’s slowed down and boring is going to be a great way for you to be making a lot of money come two years from now or three years from now or five years from now.
I see too many real estate investors that are so focused on what they’re doing day in and day out that they’re not thinking about, “How am I going to be able to make a lot of money two or three or five years down the road?” Well, now is the time. If you’re not doing a lot of deals, now is the time to be reading, and learning, and studying, and building relationships that you can leverage a couple years down the road when the market’s really going to need more rental housing.

Dave:
I love that, J. It’s such a good synopsis of the long-term prospects for real estate investing. There’s just a supply shortage in the market. There’s going to be so many ways to profit from that over the next couple years. And not just profit from it, but provide housing for people that need it. You are providing value to society and you could benefit from it personally too. To me, I agree. That gets me super excited about real estate investing over the next couple years.
A couple of the asset classes you talk about, to me, at least when I was getting started, felt a little daunting, retail. Henry, you’re just buying office spaces. What would you say to people who are ready to get into the market now, or maybe they’re in one of those markets that have already settled down or maybe is going to keep growing over the next few years? Do you think now is a good… Would you caution people away from single-family rentals right now if they can find good deals? Or do you still think those are possible to be profitable in the next year or so?

J:
Well, let me start with the first part of that first. Yeah, people are definitely scared of these bigger asset classes. I know that when I started, I used to think that people that owned apartment complexes were special people. It wasn’t people like you and me. I grew up living in an apartment complex, probably literally one of the largest department complexes in the country. It was something like 1600 units. And so my idea of an apartment complex is, “You’ve got this multi-billion-dollar company that buys these things and that’s who owns apartment complexes.”
And what I’ve realized over the last couple years is, “No, there are a lot of mom and pop investors like me and you and Henry and other people who are buying up apartment complexes or buying office space or buying retail space.” We’re not talking about necessarily having to go in and buy a billion-dollar shopping mall or having to go to New York and buy a skyscraper for office space. Henry, tell us a little bit about the office space you built or that you bought, and break it down for us in a way that makes it sound like it’s really not that daunting. I imagine it probably wasn’t once you broke it down.

Henry:
Yeah, no, the way I approached it is the way I’d probably advise someone who’s new to commercial real estate investing. I had a general interest in wanting to understand it better. And so the way I went about doing that was obviously on my own research, but I put intention around networking with people who already do it and are good at it. And so I was able to then create a friendship with someone who thrives in this space, and then we started looking for deals together. And then as deals would come across, we would analyze them, and then we would make… Just like in residential real estate, we would analyze the deal, we would figure out what we think the value is based on the income that it’s making, and then we would figure out what we think the value could be based on the income that it would be making if everything was at market rates and in good condition, and then we made our offer.
And when we made our offer, the financing worked almost the same as how it does when I buy my residential properties. The only difference was the evaluation was based on the money it brings in. And so we put the deal under contract, we went and looked at the property, we did an inspection on the property, it had an appraisal. And then we bought the property, we then met with the tenants, and we either are renewing leases at market rates or we are going to bring in new tenants at market rates. The only major differences between this deal and what I do in the residential space was these new leases are going to be on triple-net leases, which is not something we can get in residential, but it’s super sweet if we could. And then the evaluation and the value of it is based on the income that it brings in. Those are really the only two things that were different.
And so as I got into doing it, first of all, I partnered with somebody who’s an expert. So that way, when I do my analysis and when I looked at something, I could be looking at it through the wrong lens because I’ve never done it before. So I had that sounding board to bounce things off of. And then so I partnered with somebody, I brought value to the table, and then I learned along the way and I’m still learning. And what I’ve learned was that it’s not much different than the process I’ve been doing with residential minus a few things, but the values are higher and the income is higher. And so that’s what I would tell people. It’s daunting until you surround yourself with people who are doing it and then it just seems like the thing to do.

J:
Yeah. And I think you hit a couple really important things there. And Dave, I have not forgotten your main question and I will come back to it.

Dave:
Go on. You could ignore me. Don’t worry about that. Henry’s got more interesting things to say anyway.

J:
Yeah, but the way he described it is the same way you would describe buying a single-family rental. Basically, you have to find the deal, and then you have to underwrite the deal or analyze the deal and figure out, “Do the numbers work?” And then you have to figure out how to make the money part, the financing part work, and then you have to manage it on the back end. And so at the end of the day, these are the same steps we take, whether you’re buying a hundred-thousand-dollar single-family house or a hundred-million-dollar skyscraper. And so I just want people to start thinking from the perspective of yeah, the nuts and bolts change.
You need to learn how to underwrite different types of deals. Finding these deals are going to be completely different than finding single-family deals. And structuring the loans and the money you put in is going to be different. And then managing it on the back end is going to be different, but it’s the same four steps. It’s finding, underwriting, capital stacks or financing it, and then managing it. And so really, I would encourage everybody out there, don’t not think big. If you want to be doing single-family, that’s fantastic. I did single-family for 10 years. I love single-family, but don’t stay in single-family just because you’re scared to move out of it. If you want to stay in it, great, but don’t think you can’t do other things.
Now, getting back to your original question, Dave, do I think single-family is still a good asset class to be in? Absolutely. Here’s the thing, there’s more single-family houses out there than any amount of commercial real estate in the country. So opportunity is obviously larger. And here’s the other thing, real estate in general, single-family real estate in general is one of the best hedges against inflation on the planet. And we’re all concerned about inflation. I think we’re not going to see 7, 8, 9, 10% inflation like we have the last few months. But I think there’s a really good chance that over the next five or 10 years, we see inflation a little bit higher than it’s been the last 10 years. Last 10 years, it’s been under 2%. Most likely over the next 10 years, it’s probably going to average two and a half, 3%.
And so what is real estate… Why is real estate good when you see a lot of inflation around you? Well, number one, if you look over the last hundred years, real estate in general, single-family real estate in general in most places tends to track inflation in terms of home values. So we like to think over the last couple years, home values are going up 5, 10, 15, 20% a year. That normally doesn’t happen. But if inflation’s at three or 4%, home values are likely to go up at least three or 4% per year. Secondarily, the best part of real estate is you can get loans against it. You can get the bank to give you money and they’ll give you money at this low interest rate.
These days, it might be 6, 7, 7.5%, but still, you can refi it in a couple years if rates go down, but the best thing is your mortgage payment never changes. In 20 years when your income is doubled because of inflation and everything, all the money you’re making has gone up because of inflation, that mortgage payment’s going to be exactly the same. I mean, I know people that got loans on real estate 20, 25 years ago. They’re almost done paying it off and their mortgage payment is like three, four, $500 a month because they locked in debt 30 years ago when everything was so cheap. And when I say three, four, $500 a month, that sounds like little, but back then, that was a lot of money because we didn’t have 20 years of inflation.
So yeah, I love single-family real estate and there’s never going to be a bad… As long as we see inflation… And we’ve had inflation pretty much throughout this country’s history. As long as we have inflation, single-family real estate’s going to be a great place to be. And so obviously, you need to know how to underwrite your deals, you need to know how to analyze your deals and look at the numbers. And right now, you might want to be a little bit more conservative than you have been in the past, and you want to be more cognizant of the location that you’re buying. Buy in places where populations are growing, people are moving, employers are coming in, laws tend to be landlord friendly. As long as you’re focused on those things, you’re not going to make a mistake buying real estate that you’re going to hold for the next 10 or 20 years.

Dave:
I love what both of you’re saying because you’re reinforcing the idea that if you learn the principles and concepts behind analyzing deals, it applies to single-family rentals, it applies to multifamily, it applies to trailer parks, self-storage, office space. It’s almost like if someone wrote a book that taught you how to analyze those deals and to learn all those formulas, that that would be super helpful. So that’s me giving you a shameless plug for J and my book. We have two of them now. We’ll give you one more shameless plug. We won’t do more than three.

J:
But here’s the thing, it’s not just about the numbers and the formulas. It’s understanding that for any deal you do, you have to ask the right questions. And Dave and I came up with this idea back when we started writing the book a few years ago, that instead of just throwing a bunch of formulas out there and saying, “Here, learn the math,” basically, we decide to write a book to teach you how to think about how to do these investments. And we wrote a book that starts… Every chapter starts with a bunch of questions, “Here’s the questions you need to be asking for these types of investments and here’s how to answer them.”
And so it doesn’t just teach you to fill in the blanks or put numbers in a spreadsheet. It teaches you how to ask the right questions and be thinking about investments because I have investing situations every day that come up where I don’t know what formula to use. I can’t just stick the numbers in a formula because I don’t know a formula. I give an example in the book where I had this house that I was selling a couple years ago, and I listed it for sale and I got two really quick offers. And the first offer was full price, full list price, cash, close in two weeks.
The second offer was from another investor who really wanted the property, but he didn’t have the money because he had another deal that was closing, and he told me he was closing seven months from now. And basically, he said, “I’ll pay you. I’ll close on the property. I’ll buy your property today, but I can’t pay you for seven months. You’ll have to wait seven months. And I paid cash so I could do that, I could hold the note, I could do what’s called seller financing.” And he said, “I’ll pay you in seven months. I’ll buy it now, but I’ll pay you in seven months.” And he said, “I’ll pay you more than list price.”
And so I needed to figure out how much more do I need to be selling this property for in seven months so that it’s a better deal for me than selling it for full list price today? And so once I knew the right question to ask, and that was the question I needed to ask, “How much is a property going to be worth in seven months to me? Or how much do I need to sell a property for in seven months for it to be worth it not to get the money for seven months?” And once I realized that’s the question to ask, well, then I can figure out what formula or what concepts to use to plug the numbers in and figure out that number was.
And at the end of the day, this was a real deal I did. I went back to the guy. I figured out how much more I would need in seven months to make me actually get the same amount of money and then I bumped it up 10,000. I went to him and I said, “Here’s how much I need.” And he said, “Okay.” And I knew that I was actually getting a better deal waiting seven months for my money. And so again, that’s not something where I could just have said, “Okay, stick it into this formula and get an answer.” I need to understand the concepts behind, in this case, something called time value of money. If I wasn’t going to get my money for seven months, how much more do I need to get to make myself whole?

Dave:
Well, learning about the time value of money legitimately changed my life more than almost anything. Once you understand and can incorporate that concept into your everyday thinking, your spending, your investing, it’s really honestly life changing. Henry, I’m curious, are there any formulas, investing tricks, or concepts that you have come across in your career that have just opened your eyes that really changed your perspective on investing or money in general?

Henry:
Yeah, yeah. So for me, I’m mainly single and small multi. And so my whole business is based off of the 70% rule of thumb. For me, that’s my measuring stick to, “Is this even worth my time?” Because what it did was when I was first starting out, I would have to go look at every single house, and then you do the dance of, “Do they want retail? Do they not want retail?” And you waste a lot of time. Now, when you’re new, I actually encourage you to do that. The more houses you can walk into and evaluate and make offers on, the more experience you’re going to get. But as you close more deals, that time that you’re putting into that is better used on deals that are actually going to produce the income. And so I had to figure out a way to still evaluate property and scale, still make the amount of offers I need to make, but not have to physically go put myself inside of every property before I knew that.
And so I know everybody understands, or most people have a general understanding of what the 70% rule is, but understanding it and then putting it into practice in a way that’s going to benefit you financially are two different things. And so for me, everything gets run through that filter before I’ll even go put my time into looking at that property and making an offer. And I’m not saying that that rule is a hard and fast rule, but what I needed was something for me to say, “Hey, this is probably worth your time,” or, “This is less likely to be worth your time,” so that I could spend my time on the ones that fit better. And so for me, I evaluate everything through that lens. If I’m talking to a seller and I can get them to tell me what they want and it doesn’t seem like it’s going to fit at a 30% discount, then we don’t even waste the time. It directs the conversation that I have.

Dave:
Can you just quickly though explain to anyone who doesn’t know what the 70% rule of thumb is?

Henry:
Yeah, absolutely. So as an investor, if you’re going to make money on a property, typically either as a rental or make profit as a flip, it’s that you need to be buying a house at a 30% discount or buying it at 70% of its value minus the repairs that it’s going to take to fix that property. And when I started just running it through… And I mean, you get enough where you’re just running it through it in my head. But yeah, typically, if I’m talking to somebody and I know their house in that neighborhood is worth a hundred-thousand dollars, I get it, there’s no house worth a hundred thousand dollars. I can hear you all already.
But just for numbers’ sake, if I’m talking to somebody and I know that their house is probably worth a hundred-thousand dollars and they want 95 for it, then that’s a lead that is less important to me than one that’s worth a hundred and they’ve already said they’d entertain an offer of less than 70. And so it helps me prioritize where I’m going to go to first and then prioritize who I’m going to make offers to first.

Dave:
I love that. Yeah, it’s a great way. Yeah, just allows you… These kinds of rules of thumbs, these concepts allow you to scale your business a lot faster than you would when you’re running everything single deal through a calculator, treating every lead equally, spending a lot of time just in random houses. I felt really old when I bought a deal that I had been in twice. It had been in the market and sold and then I came back to it. And it’s because when I first started, I would go to every open house. I was like, “Whatever, whoever will show me a house, I will go,” but you quickly learn that that is not sustainable. Well, thank you both. We do have to start wrapping this up, but this has been super helpful. J, is there anything else you think our audience should know about investing in this current climate? Or any words of wisdom for people who are trying to get in right now?

Henry:
Yeah, I’m going to use… Anybody that’s listened to me speak more than two or three times has probably heard me say this, but for anybody out there that hasn’t heard it or that just needs the reinforcement, anybody out there that’s looking to get that first deal, I don’t believe there are any secrets in real estate. Go to BiggerPockets. It’s all out there. But if I had to pick that one idea that’s the closest to a secret in real estate, it’s this, I’ve met two types of real estate investors in my life. 95% of the people, of the real estate investors I meet have never ever done a deal. They want to do a deal, they’re trying to do a deal, they’re thinking about doing a deal, but they haven’t yet done a deal. That’s 95% of the investors I meet. The other 5% of investors I meet are people who have done three deals or five deals or 10 deals or 50 or a hundred deals.
There’s one type of investor I hardly ever meet, if ever, and that’s an investor who has done one deal. And there’s a reason for that. There’s a reason for that because if you can do one deal, if you do one deal, you’re going to do a second, and you’re going to do a third, and you’re going to do a fifth, and you’re going to do a 10th. It’s so hard to get that first deal. But anybody that does recognizes the second one becomes so much easier because all the pieces fall into place and the third one becomes so much easier after that, and the fifth one and the 10th one, they all get easier.
So if you’re one of those people that’s on zero deals right now, just remember if you can get to one deal, you will do 3, 5, 10, 50, a hundred deals. You just cannot stop until you get to that first deal. Don’t give up until you get to that first deal. And once you do, you’re going to realize, “Wow, this really isn’t that hard, and now I understand, and all the pieces have fallen in place, and everything’s going to get easier.” So for anybody out there that needs a little bit of motivation, don’t think about how hard it’s going to be to do 10 deals because it won’t be. It’s hard to do one deal. And as long as you don’t give up before you do that first deal, the rest of this business is easy.

Dave:
I love that. I’m feeling inspired now, J. That is good. I totally agree. That’s a good point. I don’t know anyone who’s been in the game, who did a deal five years ago and was like, “Eh, I had enough. I’m good.”

J:
Exactly.

Dave:
Well, J and Henry, thank you so much. Again, if you want to check out the book that J and I wrote together, it is available right now for pre-order. If you use the code, either JSCOTT or DAVE, you’ll get 10% off and a chance to win coaching calls with either J or myself. And hope you check it out. I think you’ll really like it. J, where can people connect with you if they want to do that?

J:
Yeah, absolutely. So anybody who wants to connect with me, go to www.connectwithjscott.com. And that’ll link you out to everything you need to know and also let you get in touch with me directly if you want to.

Dave:
And Henry, I know that everyone who has an Instagram account already follows you. Your Instagram is so, so popular, but if there’s three people out there who don’t know yet, where should people connect with you?

J:
Yeah, best place, Instagram. I’m @thehenrywashington on Instagram.

Dave:
All right. Thank you both for being here, and thank you everyone for listening. We’ll see you next time for On The Market. On The Market is created by me, Dave Meyer and Kailyn Bennett, produced by Kailyn Bennett, editing by Joel Ascarza and Onyx Media, Copywriting by Nate Weintraub, and a very special thanks to the entire BiggerPockets team. The content on the show On The Market are opinions only. All listeners should independently verify data points, opinions, and investment strategies.

David:
This is the BiggerPockets podcast, Show 672. If you chase cash flow, it takes a long time to build financial independence. You typically get a couple of hundred bucks per unit for every good deal that you buy. If we all live to be 900 years old, I think that would be a great reliable and steadfast strategy, but we don’t. You also have less control over building cash flow. You can’t automatically force cash flow in a property unless you convert it from a long-term into a short-term rental, you raise rents that were kept artificially low by the landlord before you. There’s a handful of situations where you can create more cash flow for your properties, but it’s not a lot. What’s going on everyone? This is David Greene here in Scottsdale, Arizona with the desert behind me, bringing you a show from the sanctuary that I bought with Rob.
I got a little retreat going on where I’m teaching people how to invest in real estate. We’re having a blast, and I get to make some content for you guys while we’re here. Now, this is a great time because I’ve got all this stuff on my head because I’ve been teaching people. You’ll notice my voice is a little bit hoarse. I’ve been doing a lot of talking and giving it everything I have all day long to give as much value as possible, and today is no exception. Today, we have a Seeing Greene episode where listeners like you submit questions, and I do my best to answer them in a way that will help them grow their wealth. It’s part of education knowledge, it’s part of motivation, and it’s part of giving you direction for what you can do to get from the place you are to the place you want to be.
Some of the topics that we cover today is, can you buy a house with someone else, and how much of the down payment are you allowed to contribute? Should you start flipping houses at 23 years old, and if so, what should you be learning? And one of my favorite topics, I had something great happen, what do I do with it? We have a listener who’s got a bunch of equity in a property that they bought, managed well, made good decisions on, and now they’re trying to figure out, should I keep this property? Should I refinance this property and reinvest the money or should I sell it? And if so, where should I put the money? I have a really fun time answering the question of what you should be looking at, and how you should be analyzing opportunity when you have a property with a lot of equity as well as opportunities to buy more property.
And again, I’m just going to say it, these rising interest rates are not a lot of fun, but they lead to a lot of fun because rising interest rates lead to decreased demand which leads to investors like us having a better shot at landing better deals. And in today’s show, I go into a good framework to operate by with understanding supply and demand and individual markets, how it affects them so you can pick the right one. If this all sounds crazy and cool and new to you, that means you haven’t read my book, Long-Distance Real Estate Investing, so I would encourage you even as a new investor to check that out because it talks about a lot of the principles of what you want to look for in a market as well as the systems that I use to buy properties everywhere. Today’s quick tip, get around people that are different than you, and more importantly, that think different than you.
If you get around people that think the same as you, you’re going to have the same life tomorrow that you have right now. Changes in life and improvements in life come from getting around people with a different mindset. You want to be around wealthier people, happier people, more honest people, fitter people, better overall quality of life people. You’ve got to get out of the areas that you’re comfortable. It will feel uncomfortable when you go do that, but it’s worth it. It feels uncomfortable every time you start working out again. Every job you ever took started uncomfortable when you first had it, but it usually made you more money than the job you had before and that is why you took it. So today’s quick tip is to get around people that are more successful in whatever way you can.
At the retreat today, I’m getting to learn a lot of new people that are getting to learn how I think, but you can do this on the BiggerPockets forums. You can do this at a local meetup. You can do this by just talking about BiggerPockets to other people that you come across in life and sharing it with them, and seeing if it resonates with them and possibly making a new friend. But just remember after you listen to this, if you leave thinking the same way that you thought before, you’re going to have the same life that you had before you listened to it. All right, let’s bring in our first question.

Brantly:
What’s up, David? My name is Brantly, I’m an investor and a real estate developer in Rexburg, Idaho. My question is hopefully simple, I’m going to break it down. So I’ve got a 16 unit apartment complex here in Rexburg, Idaho, a fantastic college town. It’s close to Yellowstone National Park, so that brings traffic this way as well. I’m trying to figure out if I should hold it or if I should sell it or refinance it. So we bought it from 1.5 million. It’s roughly worth 2.7, I would say, so I’ve got about 1.2 million in equity which based on the cash flow, it’s bringing in a measly 3% return on equity which I know is pretty low.
So I’m trying to figure out if A, I should just be grateful for what I have, that I hit the jackpot on it. B, refinance, but I’m worried about interest rates, and I’m worried that I would be in negative cash flow if I did that. Or C, sell it and then redeploy the money. I’m confident in my ability to find other options for it and to find more equity, more cash flow with redeploying that money, so help me out here. I love the show. Keep up the great work. Thanks, David.

David:
Hey there, Brantly. First off, I want to commend you for knowing the terms on return on investment and return on equity, and looking at your investment from a financial perspective. That’s exactly what you should be doing. Now, let’s talk about whether you should hold it or whether you should sell it. There’s actually a method that goes into this that you can use. The first question you want to ask is, do I want to hold this property? Is this something that I would want to keep? Because there’s something about it you really like, some reason to think that some new industry is going to be moving in soon, and you’re going to make more money, something like that because not every property is a property you want to hold for a long time. Now, here’s what gets in the way. A lot of the time we get emotionally attached to our properties, they start to feel like our children.
You’ve poured time into them, you’ve literally invested into them, you’ve thought about them, you’ve worried about them, you’ve solved their problems, and you’re like, “This is my baby. I don’t want to let it go,” but that’s not a good habit to get into. You can’t look at properties as your baby. They’re not people. Properties exist to serve you, and if this property isn’t serving you, it’s okay to let it go. Now, the question you have to answer is, “Should I refinance it and redeploy or should I sell and redeploy?” Here’s a few things that I like to tell people when they’re faced with this problem. I’ve already mentioned the first one, “Do I want to keep the property? Do I really like it? Is it an area that I think that there is more value that’s going to come to this property?” The second thing is, “What are my options elsewhere? Can I get an ROI and another property? Are there deals to be had?”
Now, in today’s market, we’ve got some better deals than I’ve ever seen in a very, very long time. I like buying in this market. So that’s something that I’m optimistic about, and I think you should be too. The next piece is, “Can I break my emotional connection with this property and sell it?” Now, if you’re only getting a 3% return on your equity, it should not be hard to beat that with more properties. And you also mentioned that you bought this property with partners, so you’re going to have to get their input on this as well. What I remember you saying about the area and the property itself is that it’s in a college town of Colorado where you’ve got people visiting a national park. So a third option you could look into is moving it from a long-term rental into possibly a short or a midterm rental and you can increase your revenue that way as well, basically finding the highest and best use for that property to increase your revenue.
If you really like Rexly, Colorado, it would be okay to hold it and refinance it and redeploy the money, but you’ve got to talk to your partners first. This isn’t a market that I would say, definitely sell. There are some markets where I say, definitely sell if the population isn’t growing very quickly, if industry is not moving into that area, if there isn’t a very clear and well defined path to appreciation in holding that asset, sell it let another new investor get in and take that over and move into a higher echelon of investing where the stakes are higher, but that’s okay because your skills are higher as well. If you feel like that market is slow and not growing, I would say move your money. The Southeast is growing rapidly as the population moves into that area.
Certain areas like Idaho, Arizona, Florida, Tennessee and Texas are exploding right now. As people move there, they need places to live. You seem like a pretty smart guy, so I would recommend that you look into where businesses are moving, try to get ahead of a very big plant, and then provide housing to the workers. That would be the advice I’d give you if you’re going to sell and move it somewhere else. If you end up keeping it, I don’t think that’s a bad area. I don’t really think you can go wrong either way. And congratulations on getting this asset that has over a million dollars in equity. That is fantastic, and I love you sharing this with the BiggerPockets community. Thanks for your question. Let us know what you decide.
All right, our next question comes from Mike Higgins. “I’ve got a good problem. I openly share my lessons learned and financials with all who ask, and this has sparked a lot of interest from friends and family and a willingness to become an investor, but not an equity partner. I’ve already identified an off market property with two duplexes on the same plot of land in the vicinity of my last duplex. Therefore, I am confident in my financial analysis forecast. My goal is to invest in this property using only private money funding. You should know I have listened to recent podcasts with Amy Missouri, and it was helpful. So what’s my problem? I need help understanding and explaining the best practice in the flow of funds that go from an investor’s account to an escrow account to using the money to buy the property. Where do the investors send the money or what type of account? Is this account part of an LLC or another type of entity? How is the account managed or controlled in such a way to ensure investors feel safe that the money is secure?”
All right, Mike, I don’t do a ton of this because as a lot of people know, I don’t partner on a lot of deals, but I have done it a few times, so let me take my best stab at answering that question. I’m going to give a caveat out here. There’s probably some people listening who could even give you better advice than me because they have done this. So this is a great question to go to the BiggerPockets forums and ask there because I bet you there’s a lot of people with more experience than even me when it comes to borrowing money and then deploying it in the right way. If you’re doing a partnership where there’s equity involved, you would typically have an LLC created or some form of legal entity, and every partner would have a percentage ownership of that entity. So if you’re 50/50 partners, you create a legal entity, you make yourself 50/50 partners of that, if there’s three of you, maybe you go 33 and a third for every person.
Or maybe there’s one partner who’s bringing in less money than the others, so they get 20% and the other two split the other 40%. But it’s easy to split ownership of an LLC, it’s a little more difficult to do it of the actual property which is why people tend to create a LLC, and then own the property in the name of that LLC when they’re going to be equity partners. But you said something different, you said you don’t want equity partners. So if your friends and family are willing to become partners with you but they want to be debt partners, now what you’re talking is them letting you borrow money and you pay them interest on that, and their investment is secured by the property that you’re going to buy. So what they’re going to be worried about is, “If I let this person borrow my money, if I give it to Mike, how am I going to make sure that I could get it back if something goes wrong?”
So what you want to do is have a title company at a lien to the property with their information attached to it so that if they don’t get paid back, they would technically be able to foreclose on you to get that money back. This can all be written up by an attorney. You just have someone draw up a legal document that says, “This person is letting me borrow this much money at this interest, amortized this way over this period of time, and they will have a lien on the property.” Any title company around if you tell them you want to do this will know exactly what to do. It’s not very tricky. This is another case of people that say, “I have to understand everything about what I’m trying to do before I go do it.” Now, you’ve just got to ask the right people to be involved that will tell you how to go through this process.
You can set it up so that you have a bank account attached to an entity that you already own that’s going to own the property or the duplexes that you’re buying, and then have them send you the money into that account. But again, their biggest concern is going to be making sure that a lien is put on the property with their name on it so that if they don’t get paid back, they can get access to that property to sell it to get their money back. It’s the lien on the property that the investors have that lets them know that their investment is secure, not necessarily the type of account they put their money into or if you have an escrow account set up.
Technically, their money doesn’t have to go into the actual escrow and into the deal. You could get their money sent somewhere else to you, have that money and then close the deal with your own money. If they’re letting you borrow 50,000, it doesn’t really matter if you put your 50,000 in, and then reimburse yourself with their 50,000 or if you use their 50,000 to close on the deal. What does matter is that they get a lien against the property, and you have a title company, and likely an attorney draw up the documents that spells out the terms of the loan. Thank you for the question, and I hope it goes well with those duplexes.

Al:
Hey, David. I hope all is going well. My question to you is centered around investing in this high interest rate market that we’re in. A little context about myself, I’m single. I live in the New York City Triplex here in The Bronx with my father. I work a W-2. My father is retired. The property that we live in was purchased in around 2006, 2007 for 650, and it’s since then appreciated to 1.1 mill. The house cash flows, we live in it, all expenses paid, big advantage.
As a result of this advantage, I’ve been able to accumulate a down payment over the number of years hoping to find another property, another gem like this one down the line, but due to high interest rates and home price is not really dropping, I believe I’ve been priced out. So I’ve been looking at cash flow markets like the Midwest or upstate New York. I’m thinking of potentially buying in cash. The thing is I would love to add leverage to my portfolio, but I don’t want to run the risk of over leveraging myself due to these high interest rates. So I guess, my question to you is, if you were starting out, and you had around a quarter million, how would you invest it in this market? Look forward to hearing your answer. Thanks.

David:
Okay, Al. Here’s where I’m going to challenge you. I heard you say, how would you go about investing in this current high interest rate market for investment properties that typically require 25% down? And you say this would rule out house hacking because you care for your father. Few things, I don’t know if you’re looking at it the wrong way, but I just want to challenge you and let everybody else here because I think the questions that we ask determine the result that we get. By the way, I bet Brandon Turner himself would love what I just said right there. You said, “How would I go investing in this high interest rate market?” I’m reading that as you are implying that it sucks that rates are high, but I’ve got to say, I’m having more fun investing than I ever have in my entire career. This has been a blast for me, and the only thing that changed that made it possible for me to do this is the higher interest rates.
I want to take a quick minute to explain how interest rates affect real estate because many people think they know, but they don’t really know. Conventional wisdom or maybe common knowledge I would say, suggests that as rates go up, prices go down as there is this inverse relationship between rates and values, and that is true, but kind of. While there is an inverse relationship, it’s not directly connected. There are situations where rates can go up, but prices don’t go down, and that happens when supply and demand are off. I think a better way to look at it is that interest rates affect demand. The higher rate goes, the lower demand goes. You can see a direct relationship between the two and it is inverse. Rates go up, demand goes down, rates go down, demand goes up, and that’s because when rates go down, the house becomes more affordable, so of course, you wanted it more, and when rates go up, the opposite happens.
Now, let’s talk about supply and demand. If they are even when rates go up and demand goes down, you would theoretically have more supply than demand. You would have to reduce the price of that supply which would increase the demand for the asset, and then they would come even again. But in many markets throughout the country, we don’t have even supply and demand. We have not enough supply and way too much demand, and even though rates are going up and it’s pushing demand down, it’s not getting all the way down to where supply is. Other markets in the country, we had too much supply even further demand that was there, and so in those markets we didn’t see prices going up anyways. In this current high interest rate market, a better way to look at it is that there is less demand, meaning you have less competition for the same assets.
Now, in an environment like that, my advice is you buy the best assets. If you could go get it and there’s less competition, but we don’t really know, what if prices come down even more because rates could go up even higher. Well, to hedge your bet against the market going down, get into the better neighborhoods, get into the better assets, get into the stuff that you never could have bought before because someone was going to snatch it up right away. I’m not a old man, but I’ve been around the game for a little bit now, and I’ve seen a couple different market cycles, and here’s something I remember from the last nasty one. In 2010 when prices crashed, they did not crash evenly across the board. The best neighborhoods, the best cities, the best real estate had a little bit of a dip. It didn’t collapse.
The worst areas, the déclassé neighborhoods, the places where there wasn’t natural demand, a demand was kind of artificial based on the market, those areas were decimated. If you’re from Northern California like me, think about Stockton, California. It got hammered. Now, think about Walnut Creek, California, needle barely moved. So whatever your market is, understand that when the market could drop more, you actually want to get into the better homes which are typically higher price but they’re safe. After our market is crashed, that’s when I would go invest into some of these other areas that aren’t as desirable because they’ve got nowhere to go but up. So it’s the first piece of advice I’m going to give you. We don’t know what’s happening in today’s market. We don’t know if rates will keep going up, and therefore prices could keep going down, but demand will keep going down if that happens, so buy better assets.
What do I mean by better? It doesn’t just mean they are more expensive, but often they are more expensive. It means better locations, better schools, better amenities, better views, better neighborhoods, bigger lots, pools, better floor plans, better constructed homes. We’re talking about this stuff that people that have money would prefer to buy, not the stuff that’s entry level that someone who doesn’t have as much money just has to accept. The next thing I’m going to say, your broker told you that you got to put 25% down, but caring for your father shouldn’t automatically mean that’s true. There might be more to the story than what I’m reading here, but I would advise you to talk to a different broker and say, “I want to live in this investment property. My father’s going to live with me as I care for him,” but I don’t think that will automatically disqualify you from getting a primary residence loan.
And if you’re worried about putting 25% down, find a place that you can live in that you can also rent out which would be house hacking. Do that for a year or the period of time that you can, and then move out, let a tenant move in, and repeat this again. You can go from butting down 25% to somewhere in the five to 10% range depending on the type of property that you buy. You want financial independence, here’s my personal advice. If you chase cash flow, it takes a long time to build financial independence. You typically get a couple of hundred bucks per unit for every good deal that you buy. If we all live to be 900 years old, I think that would be a great reliable and steadfast strategy, but we don’t. You also have less control over building cash flow. You can’t automatically force cash flow in a property unless you convert it from a long-term into a short-term rental, you raise rents that were kept artificially low by the landlord before you.
There’s a handful of situations where you can create more cash flow for your properties, but it’s not a lot. What you do have a lot of control over is creating equity. You can buy equity, you can build equity, you can force equity by improving a property. You can get into the right market where appreciation is more likely to happen, and oftentimes with appreciating values comes what? Appreciating rents. That’s another way that you put the odds in your favor to grow more cash flow. So don’t just think about getting cash flow right off the bat, especially if you’re going to stick all your money into one deal and it’s hard to get it out. Think about how you can improve the value of the property that will result in equity being created. Think about how you can buy in the best markets where people and business are moving to. That will result in equity growing over time.
Once you’ve done this several times over several properties successfully, you can move that equity into a higher cash flowing asset. You can literally house hack putting five to 10% down on several different properties, 1031 all of them into one commercial property that gets really good cash flow, and get a commercial loan and then go back to buying properties the house hacking way, and just keep turning these little green houses into big red hotels over time. Last piece I’m going to leave you with is, just remember these higher interest rates have made it possible to get some of the best assets and define the more motivated sellers. You never found them before because as soon as our house hit the market, somebody else snatched it up because there was 10 people trying to get it. Be grateful for the fact that we’re in market where rates have gone higher, demand has gone down, and we can actually get some real estate and just be extra careful about how you run your numbers. Thanks, Al, and good luck to you.
All right, thank you everyone for submitting these questions so far. At this stage in the show, I’m going to read you the comments from YouTube, and I would love it if you would leave me a comment on YouTube as well. Tell me what you liked about the show. Tell me what your questions are. Let me know what you thought was funny. Tell me what you want to see more of, if you haven’t noticed I’ve got the desert behind me. I’m out here in Scottsdale at the sanctuary that Rob and I bought, putting on an event and recording the Seeing Greene for you guys. Do you like it when I’m on location to different places? Do you want me to post more videos of where I am? Would you like to see these recordings with different backgrounds and different spots? Tell me what you think would make the show cooler, and we will do our best to put it in there.
By the way, make sure you give a shout out to Eric Knutson at BiggerPockets, who got me a brand new microphone while I’m out recording because I think I sound fantastic. All right, our first comment comes from Assassin Dude, “Yes, to Deal Deep Dive episodes. It would be great to have them as a recurring episode type. I find it very educating to walk through real examples.” Do you know Assassin Dude, also known as AD in the streets? We’ve been toying with this idea of having me walk through properties, some that I’m buying, some that I don’t buy, and then making episodes of why I liked it, why I didn’t like it, what I looked at, what made me chase it or what didn’t. If enough other people come on YouTube and they say, “Yeah, we want to see an episode where David’s walking through a property, we can see the deal and then he can break down what he liked or didn’t like about it,” I’ll make sure we do more of those.
Next question comes from Inzora 100, “Deal Deep Dive for sure, 1031 as well. I sold the property for a $98,000 profit. I’m looking for the strategy to best leverage that and reduce tax liability.” Well, Inzora, you should go to BiggerPockets.com/david, and submit the information about this so that I can give you advice on how you can reduce that tax liability and increase the cash flow as well as your future upside on that property and build some wealth my man.
And our last comment comes from Benjamin Pape, “Thank you so much for taking my question, David. You earned me some bragging rights at work.” I love that man. Everybody at your job should see you featured on the BiggerPockets podcasts if you are a loyal listener and you’re listening to this right now. At your local meetup, you should be able to show the clip of you talking to me, asking a great question and getting it answered. How can you do that? You go to BiggerPockets.com/david and submit your question there as well as commenting on the YouTube page so that I can read your comment on one of these shows, and you can get bragging rights that way as well. All right, let’s take another video question.

Jace:
Hey, David. My question for you is around co-balling. I invest in the Salt Lake City market and have three rentals. My wife doesn’t really want to move a fourth time to get the fourth rental, and that means we’d need to put 20% down which is currently out of reach. However, I have a younger brother who I could co-invest with and he could move into the property for one year, so we’d only need to put 5% down. And here in Salt Lake City there’s a lot of properties with basement rental potential, and that’s what I’ve done with the previous ones is living in the upstairs while renting out the basement.
So if he could live upstairs for one year and rent out the basement, then he could pay for his portion of the mortgage and then get the remainder to pay towards the mortgage from the tenant below, and then after the first year he could move out. My first question is do you see any lenders having a problem with this, if I’ve provided almost all of the 5% down payment while my brother lives in it? And my second question is how do you recommend structuring the ownership split between my brother and I? I would provide the down payment. He would cover his portion of the mortgage, and we’d split the cost of the repairs. Thanks for all you do.

David:
All right, Jace. I like how you’re thinking here. You’re not asking the question of should I do it or should I not do it? You’re asking the question of how can I do it? And your questions are leading you down a good path. Now, let’s talk a little bit about what some of your options are. What I hear you saying is that you can’t buy a house because your wife isn’t on board with you moving your primary, so you’d have to put 25% down to get an investment property, but your brother is willing to buy a primary residence, and you’re trying to think about how you can use him to get the house. If your brother’s the one buying the house, and he’s the one getting the loan in his name, this could work. You could have yourself added to title after it closes. In most cases, that would probably be fine.
The problem is that you’re wanting to provide the down payment, but you want your brother to buy the house, and here’s how the lending standards are probably going to go down. They need the down payment from the person who’s getting approved for the loan, so if your brother can’t get approved for that loan or you wanted to be the person on the loan, this isn’t going to work. Now, one possible thing that you could do is you could have your brother buy the house in his name, and then you could gift him the down payment, but I don’t know if you can gift an entire down payment. I’d have to have one of the guys on my team look into what the guidelines are for that, and if you can get a full down payment gifted from somebody else. If you can’t, your brother’s going to have to have some of that money himself.
What you’re talking about is tricky because it sounds like what you’re saying is you want your brother to buy a house but with your money. Now, you’re correct in seeing that each person needs to contribute something to this deal, but where you’re wrong is when you’re thinking about borrowing money from a lender, and then having your brother be the person who is on the loan, meaning he was approved to make these payments, but you giving the money for the deal. That’s going to be very tricky to work, and on a primary residence it probably won’t go down the way you’re describing, so can we get your brother to get approved for a loan himself? You should reach out to us and see if that could work. Or if you’ve got a broker you’re working with, reach out to them. Assuming you can figure out a way to get the house, let’s talk about your strategy of if you’re going to split the mortgage with him because he’s basically paying rent to live there and split the expenses.
Your brother’s not bringing much to this deal other than the possibility to get the loan. Cutting him on the equity just because he’s paying rent which is the same rent that somebody else would be paying if they live there doesn’t really benefit you financially, and splitting the expenses with him could benefit you financially because a tenant’s not going to do that with you, but I don’t know that it’s as big enough benefit to be worth it. It sounds like you’re trying to get around the 25% down to buy an investment property. My advice to you, and I’m not in your position, is to try to find a property that your wife does not mind moving into. Not every house hack has to be a rent out the rooms to people you don’t know situation.
Can you get a nice house that has a basement and an ADU and you can rent out those, and you can live in the main house, and your wife never has to see the tenants or share a living space with them? Could you guys live in the basement and rent out the ADU and the main house? Same thing, you have your own living quarters. You’re probably going to have an easier time trying to get her on board with what you’re trying to do than to get your brother to buy a house with money that you give him. If your brother can get qualified for the loan, that would work. If your mom or dad can get qualified for the loan, that could work. Or if you could find another partner that could do this, that could work. The thing is the loan’s going to be in their name, and you’re going to have to get added to the title afterwards, that if you could make it work that way, I think this could be a strategy that could work. Thank you for your question.
All right, our next question comes from Dane in Omaha, “When we do a BRRRR, and you start the refinance process, we always use 20 to 25 year commercial loans which are a five year adjustable rate mortgage with an 80% loan to value.” Okay, so first off, what Dane is saying here is, when he does a BRRRR he gets a five year adjustable rate mortgage, meaning for five years that he has the loan, the interest rate is the same for all five years, then it can actually increase at that point, and usually by a certain amount every year, and then the 80% LTV means he’s having to put 20% down on the property. “I see a lot of people talking about DSCR loans. Do you have an opinion on which product is more appropriate, time and place for both?” Thank you for that, Dane.
Not only do I have an opinion, I think we do better DSCR loans than anybody in the country. We do a ton of them, so I know a lot about these. Here’s what’s cool about a DSCR loan. I know it’s confusing, and people are talking about it like it’s this crazy cool strategy. It’s really not. It’s very boring. A DSCR loan is just a way of saying we’ve always valued commercial real estate by the income it provides. So when I’ve gone to buy commercial real estate, the bank doesn’t even ask, “Well, David, how much money do you make? How many expenses do you have?” All they say is, “How much money does the property make, and how much expenses does the property have? Because once we know that, we can figure out the NOI, and when we know the NOI, we know what the property’s worth, and then we can determine if we’re going to give you a loan to buy it.”
You see, when you’re buying a commercial property, the bank just wants you to be the operator. They’re not lending the money based on your ability to make or save money. It’s a more financially sound underwriting process which is why they use it for big buildings. Nobody goes and buys a 400 unit apartment complex for $30 million and gets approved based on their ability to repay that loan. There’s not a whole lot of humans in the world that can repay a loan of $30 million based on their own personal debt to income ratio. The DSCR product is just taking the commercial underwriting of what does the property make and applying it to residential real estate because we are using it as a business, we are using it as an investment. We are intending for that property to earn income, so it makes sense that the person giving us the loan will look at the deal the same way.
The cool thing about the DSCR loans that we do is that they are still a 30 year fixed rate term. You don’t have to worry about this adjustable rate mortgage that typically comes with commercial property. You don’t have to worry about inflation taking your interest rate and making it skyrocket, and if you happen to not be operating the property well, your cash flow can get diminished. They’re actually safer than the commercial option, and that’s why I like them more. Time and a place for both, only if you think it’s better to get an adjustable rate mortgage. If you don’t love the adjustable rate mortgage which, in general I try to avoid it unless it’s clearly way better, I’d go with the DSCR loan at the 30 year fixed rate so that you can lock things in and you can always refinance it if rates do come down in the future.
Question six comes from Christian in Chicago, “As I am 23, I only invested in stocks currently, and looking for which property to buy. What is a good amount to have in cash for me to be able to flip a home? I keep seeing many people talk about creating a business structure to flip homes. Is that a good route to take? I’m also open to other tips as I’m going to be a new home investor.” All right, Christian, let’s break this down a little bit. I appreciate you reaching out. You’re asking some good questions, but there’s a lot of questions you’re not asking, and I’m going to focus on those in this answer. It’s not just about how much cash you need to have on hand to flip a home. It’s much more about how familiar you are with the market you’re flipping the home in, and how well you can manage the operation of said home flip.
There’s two things that destroy most home flippers, and ironically that the same things that hurt most BRRRR deals. The first is that the value that you intended to sell the home for goes down, either you misestimated what it would be or the market shifted on you during the renovation. The second is that the construction gets out of hand. If your contractor rips you off, if there’s more wrong with the house than you thought, if there was a bait and switch where they told you what it would cost, and then they came back and asked for more. If they’re not experienced, if their crew quits in the middle of the job or if they’re just lazy, the whole thing can balloon out of hand, and you can put a lot more money into that deal than what you originally expected. So flipping houses is something that I would typically recommend for someone that has experience, knowledge or a background in construction.
Now, after you’ve invested in real estate for a while, you will gain those things, and then house flipping becomes a more viable option. But for you at 23 just getting started, it’s very difficult to acquire those resources that I just described, and learn how to flip at the same time and try not to lose all your money. I don’t know you, so I can’t deter you from doing this, but I can say what it sounds like as this is a very risky endeavor. Now, I would ask the question, “Well, why do you want to flip homes as a 23 year old who’s never invested in real estate and only invested in stocks?” Probably because you’re thinking you don’t have that much cash, and you heard people say, “If you don’t have money, go flip houses and you can make it. If you don’t have money, go wholesale and you can make it.”
And I’m going to be blunt with you, frankly, I think that’s bad advice. It’s just easy to tell a person that doesn’t have money, “Well, go use these strategies of real estate investing and you can make money with them because they’re not long-term investment strategies. They’re short-term income producing activities.” On paper, that’s true. The problem is they’re also part of the riskiest and some of the hardest ways to make money in real estate. It’s much easier to buy a property, wait a long time and it’s going to go up in value if you wait long enough, the cash flow’s going to go up, and it’s hard to lose. That’s why I typically encourage everyone to buy more properties like house hacking, a great way to build yourself equity over a three to a five year period of time. Get some capital that will supercharge your business much less risky, which is why I tell people to go do it.
Flipping houses, very risky. I flip houses, and still at times I get caught off guard by stuff that I just didn’t think could have gone wrong including the price of materials going up or my contractor having issues in their personal life, stopping how well the deal gets put together. You can have neighbors in the city complain about it, and that can slow everything down, and it can take four to six months of extra time to get things done where you’re holding costs which could be anywhere between two to $10,000 on most deals, accumulate every single month. I don’t want to make this all about horror stories, but I do want to say, if you don’t have very much money and you don’t know much about real estate, stop looking at flipping and wholesaling as the best way to go. And every wholesaler and flipper listening to this is giving me an amen and a hallelujah to what I’m saying because they know just how hard it is to do what they do.
Here’s my advice, if I’m right and you don’t have a ton of knowledge about real estate investing, and you don’t have a ton of money saved up. First off, ask yourself the tough question of why you don’t have a lot of money. You are 23 years old, you haven’t given yourself very much time to be able to save money. You probably don’t make great money at the job you have. Those are two things that you can change by continuing to save money over time, and by continuing to focus on making more money, by bringing more value to your employer or to a different employer, you can actually start to accumulate more capital. While you’re doing that, you can buy properties that accumulate capital for you. That would be house hacking. This is where you buy a house with anywhere from three and a half to five to 10% down in a gray area.
You find something under market value that you can rent out to other people. You earn some cash flow from the rents that you get from them as well as the value of your property increasing. Once you’ve built up equity, you can move that equity out of the home and into your bank account and then go invest it. If you really think about it, capital is what we call value when it’s in your bank account, and equity is what we call value when it’s in a property, but you can move them back and forth. Now, I did not mean to crush your dreams there. What I really wanted to do is set some more reasonable expectations because I’m trying to figure out from your question what might be going through your head. I’m assuming that you’re hearing a lot of people saying the stuff that I said. You’re interested in real estate investing, and you keep hearing people say, “It’s a great investment opportunity, you’ve got to get into it.”
In many cases they’re right, but there’s different ways of doing this. Flipping is a short return that is very risky and takes a lot of work. Buying a primary residence and house hacking it and waiting for a long period of time is delayed gratification, a long-term requires less work and is also much safer, so I’d like to see you start with the safer route before you get into the more risky stuff. Now, nothing says you should stop learning about flipping while you follow my advice. So here’s some information that I could give you where you can increase your knowledge so that the podcaster that you’re hearing like this, and the mentors that you are out there finding will be giving you information that makes more sense. I’ve written some books that you should check out, reading The BRRRR book would probably be one of the better ones because it’s like flipping, but instead of selling the house at the end, you keep it, put renters in it, and let it build equity for you over time.
So that book is called Buy, Rehab, Rent, Refinance, Repeat. If you just search BRRRR David Greene, you can find that one. Also, BP has some really cool personalities that do this for a living that you can learn from, two of the greats are James Dainard and Terrell Yaba. Both of them are in the Seattle area where there are high price points, and they can make a great profit flipping. And there’s also many others on the BiggerPockets forums where you can go and find local Chicago meetups or meet other local Chicago flippers and learn from them. I appreciate you saying that you’re open to other tips as you are a new home investor, I would highly recommend learning about house hacking. I wrote a couple of articles for Forbes talking about it. If you just type in house hacking into the BiggerPockets forums, there is a ton of information.
I tell people all the time, you’ve got to be doing this. I wrote a book called Long-Distance Real Estate Investing about buying properties in other states. I wrote a book called The BRRRR Strategy which is about buying properties, fixing them up and getting your money back out. Even though I’m a huge proponent for both of those, I’m an even bigger proponent for house hacking. Every single person should be buying one house a year for themselves as a primary residence as a house hack, and then anything else you do like long-distance investing or the BRRRR strategy should be in addition to house hacking in the best location you can possibly get in. Last piece of advice, if you really want to flip, here’s a great way you can get into it with training wheels. Find a fixer upper property that’s really ugly and been sitting on the market a long time.
Buy it as a primary residence with a low down payment, move into it and house hack it. Either fix it up yourself or pay a contractor to come fix the house up while you live there. You get all the benefits of a flip, we call this a live and flip, without the risk of trying to get it done while you’re holding costs are super high. Sell that house or rent it out, repeat. The next thing next year you can go a little bit bigger and a little bit better, and grow your wealth safely, slowly, but in a fun way that’s sure to be rewarding for you over the long-term.

Matthew:
David, you have more analogies than Jim Carey has faces Green. Thank you so much for taking my question. David, it’s a simple question which is, I’m trying to set a 10 vision for my real estate portfolio, and to a degree, even just a 10 year vision for my life. But how do I make sure that I’m setting goals that are large enough? I’m afraid that because I’m shortsighted and can’t see 10 years into the future that I might be setting goals that are too small, and thus I might be chasing the wrong goals. Can you help me have better goals? I appreciate you, David.

David:
All right, Matthew Vanhorn. You know we have a Dave Vanhorn in the BiggerPockets community. He’s an awesome guy. I love talking to Dave Every chance I get. Super smart, very humble, and always giving back. So guys, go check out Dave Vanhorn, and send him a message saying that David Greene says he’s awesome. I’m sure he’d appreciate it. He is the note expert in this space. I’m wondering if you might be related to him and don’t know him, Matthew. All right, the question of, am I setting too big or too small of a goal? I like it. You’re asking a good question. Here’s the problem with the question, you’ll probably never be able to answer it. A lot of people hear this, and they hear someone say, set bigger goals, and they make a vision board, and they put a jet on there, and they say, “I want to have a private jet.”
And then they get a bunch of sports cars and they say, “I don’t want one Ferrari, I want 10 Ferraris, one in every color.” And then they get the biggest house that they can possibly find, and they put on the vision board and they go, “You know what? I actually need two of those houses.” And it goes on and on like this where they just say, “If I set my goal big enough, it’s just going to happen,” and goals do not just happen. The universe does not just bring you things and hand them to you. What happens when you set a goal is, your subconscious hears you say it and goes, “Oh, that’s what Matthew wants. Let me figure out a way to make that happen.” Now, oftentimes the goals we’re setting in our subconscious are actually more negative and fear based. So the goal would be, “Don’t look dumb, don’t lose money, don’t do something that I’m uncomfortable with.”
And your subconscious here’s that and says, “Oh, you would be really uncomfortable going to that meetup and learning from that person. Let’s not go today. Let’s watch Dancing with the Stars instead. Oh, you could lose money on that deal that you’re thinking about right now. We don’t want to lose money. Let’s find a reason to look at that deal and say it doesn’t qualify,” and on and on. Your subconscious listens to what you’re telling it and then does its job of making that happen. If you’ve ever said, I want to go work out, but secretly what you were thinking is, “I don’t want to get hurt at the gym,” or, “I don’t want to go to the gym and look stupid.” Your subconscious heard that, and when it’s time to go to the gym it goes, “You know what? Why don’t you eat a bowl of ice cream instead, you’ll feel just as good.”
Creating goals like you’re talking about, is just a way for you to program your subconscious, and if you program it to go by yachts and sports cars and private jets and these big goals, they’re probably never going to happen because you don’t have the means to actually get there. So here’s what I’m getting at, set a goal for yourself that is reasonable, that you can attain, and get comfortable with the fact that goals will always change. Very few people know when they start the journey what they’re going to want in the end. You can have some of the wealthiest, most successful, amazing people that set huge goals and hit them, and then their goal changes. They go from, “I want to make a billion dollars, I want to give to charity and help the most people. I want to influence the most people.”
Tony Robbins has a big goal of wanting to feed, I don’t know what it is, just tons and tons of people for Thanksgiving. He didn’t have that goal, I don’t think when he first started. If he did, it wasn’t the focus of his business. He had to go make money and learn how to be good at what he did. So here’s a couple of goals I think you should set for yourself, pursue excellence. In fact, I’ve started saying pursue excellence, not cash flow because cash flow will be the result of excellent work. As a real estate investor, if you become excellent at anything you do, money is going to follow you, and here’s how I know this. Think about what you want when you go somewhere. There’s a difference in the experience if you go to Jack in the Box versus Chick-fil-A. Why is that? Well, Chick-fil-A set a culture of excellence that they want everyone to follow. They are constantly raising the bar and raising the standard of what they want from people, and we have a better experience when we go to a Chick-fil-A.
Imagine, you go talk to a CPA and you say, “Hey, give me some strategies to save money using real estate on my taxes,” and they haven’t set a standard of excellence for themselves. Well, they probably give you some run around or tell you why it won’t work or it can’t work, and then bill you for that conversation. And every one of us who’s sitting here knows exactly what those conversations are like. Don’t get mad at a CPA. Don’t get mad at that individual person. Don’t get mad at the tax code. Get mad at the concept of shirking excellence because what you really want is a CPA who is chasing excellence, and as a result of that can help you, as a result of helping you, you make more money, as a result of you making more money they get paid more, and everybody wins.
This is what excellence does, is it raises everyone’s standard of living up, and my opinion is there’s not enough people that are chasing excellence. So if you’d say to yourself, “Well, I want to buy one house a year. What if I’d set the goal to buy two, I could have bought more.” It just isn’t realistic because it doesn’t work out like that. Set yourself the goal of, I’m going to buy as many properties as I can do safely. That could be one that could be 10, you don’t know. It could start off as one, and you start going to meetups, and then you meet an agent, and then that agent has a good contractor, and then that contractor has a good lender. And the next thing you know, you’ve got an awesome Core 4, and you’re so good at doing what you’re doing that you go, “Holy cow, I could scale.”
And then you go to that same meetup and start raising money, and within two years you’re buying a ton of properties. There’s no way that you could have known that was going to happen when you set your goal. And another circumstance you might go to the same meetup and not meet anybody there, and have to go to a different one and a different one and a different one until finally you meet those people, and that can be two and a half years of time. If you’re chasing excellence, it doesn’t matter. So here’s my personal philosophy, and this is going to be in a book that I’m going to be writing for BiggerPockets if God willing, I’m able to get it written. There’s three things you focus on to building wealth, and therefore your goal should be centered around these three things. Number one, is saving money. You want to live frugally, you want to live responsibly.
You don’t want lifestyle creep to cut into your life. So if you start making money, now you start spending money, you make more money, you spend more money, you’re always doing better as far as what you’re making, but you never actually get ahead because getting ahead is a difference between what you made and what you spent. So you want to focus on defense first which involves self-discipline and delayed gratification. You’ve got to find different ways to be happy than just spending money to make yourself feel good. Gary Keller had a really good comment. He told his son, “Son, the experience at the beach is the same for a billionaire as it is for the person that’s broke.” There’s so many things in life we can do that are fun that don’t cost money, and we don’t have money just focused on those things. Going hiking, going trail running, going to the beach, having really good conversations with genuine people, serving others, helping people that in ways you never got help.
All of these things feel really good and they cost nothing. Next step, focus on making money. Not enough people think about this. They just have a job and they say, “That’s my job,” and they don’t think about it anymore. If you’re at a job that is not challenging you, you go out and you cut grass every day for a landscaper. Chase excellence, try to cut that grass as good as you possibly can. Learn how to do it in the most efficient way possible. Look at the difference between going around the perimeter of the lawn, and just going back and forth across the lawn and see which one’s faster, which one you can do quicker and which one’s easier on the lawn mower. Make it a game to see how fast you can mow a lawn. The point isn’t to get really good at mowing lawns. The point is to get really good at solving problems and finding patterns because when you get really good at mowing lawns, and you’re chasing excellence, you get bored, and when you get bored, you start looking for the next opportunity.
And then instead of mowing lawns, you’re going to start wanting to teach the new people at the landscaping company how they can do the same thing. And now you need new skills, now you have new goals. I’ve got to learn how to train, I’ve got to learn how to manage. I’ve got to learn how to teach, and I start creating systems and models and training opportunities, and I start learning how to connect with other people. That’s a pretty valuable skill. Now, you can go start your own landscaping company, and you can be hiring and training the employees instead of doing it for someone else. Once that happens, you learn how to market. You learn how to grow the number of customers that are coming in, how to market to hire more people. And the next thing you know, you went from, “I just cut grass,” to, “I am a business person that runs a big successful landscaping company,” and that will probably open doors into finding really good deals.
Your neighbors that you talk to, the clients that you talk to are going to have neighbors that are going to be selling their house. They may ask you to go cut the grass of a house that someone would’ve found when they were driving for dollars. You might be able to buy that investment property. The universe rewards when we chase excellence, so continue to look for different ways that you can make more money by bringing more value. And then the third way that we build wealth is by investing the difference between what we made and what we kept. It’s really that simple. You don’t need to pay a hundred thousand dollars to take a course. You don’t need to look at 500 properties every single day hoping that the magical one will fall out of the sky.
If you are well capitalized and you are well educated, you will find the best assets, and then they tend to snowball and steamroll. You buy some really good properties this year, four years later they’ve grown a lot. You paid the loan down, they’ve gone up in value. You’ve got equity, you cash out or refi, that buys your next three. Five years later, those three, you’re ready to do the same thing, and you start to see exponential increases over time. But Matthew, you will rarely ever succeed past the level of success that you’re comfortable with. There’s no way you’re going to get to 30 or 40 properties if you’re still mentally at the point of, “I just cut grass.” You wouldn’t even be able to manage those 40 properties that you want to have. I guess, what I’m talking about is a shift in mindset from, “Real estate will help me escape the life that I don’t like,” to, “Real estate is a great way to build wealth, but it will challenge me, and I always have to be growing and trying to hit my potential.”
So rather than waiting to get a bunch of properties and then stepping it up, ask yourself, in what ways can you step up now? That is a goal that will never let you down. Every single day, you can get out of bed and the world is going to throw challenges at you, and you can ask yourself, “What can I do to be the best servant, the smartest person, the wisest person, the hardest worker, all of these virtues that will lead to success.” You don’t know the way that the universe is going to reward you for what you do, but you do know that you need to be become the quality of person to be able to handle the reward that comes. So my advice when people ask about goal setting is, don’t say I’m going to buy a 500 unit apartment complex. If you were given one of those right now, you would just run it in the ground and lose it.
Set the goal of I need to become the kind of person that can handle the wealth that I want, and I feel like the advice that I gave you will help you on that path. And then don’t leave anything on the table at the end of the day, work as hard as you can. Give everything that you can, learn as much as you can. Try to be perfect, chase excellence as much as possible, and you will find that these opportunities will find you. All right, and that is our show for today. I hope you all don’t mind me giving advice that’s not always directly tactically related to real estate investing, but does involve the character traits and the qualities that you will need to be a real estate investor. In today’s show, we got into how you can buy a house with somebody else using primary residence loans.
We had a great conversation there with Matthew about what you can do to set goals that require you to become excellent. Somebody made a very funny analogy saying that I have more analogies than Jim Carey has faces, which was pretty funny because in The Mask, Jim Carey’s face was green and that’s my last name and more. Look, to everyone listening, I really want you to be aware. We don’t know what’s going to happen in the market, but this is one of the best times to buy houses I have seen in a long time. As long as you are making more money, pushing yourself individually to hit your own potential, get out of your comfort zone in as many ways as possible. Avoid feeding your vices and the worst parts of yourself that will take all the money away from you that you have, continue to grow more wealth, make more money, save more of that money, and then invest it wisely.
You don’t have to worry about what the market does, and I’m such a fan of this because you can’t control the market, you can only control you. Last piece of advice I want to give everybody here, go to BiggerPockets.com/store and check out The Richest Man in Babylon. I wrote the Forward for the book that BiggerPockets has republished, but the book is incredible. It changed my life when I read it. Josh Docan loves it as well. It’s one of the first things that we bonded over. You can get a lot of value out of that book, especially if you’re a younger person like Christian here who wants to be a house flipper. Learn the fundamentals in that book, and then if you should buy something or if you shouldn’t, the decisions you’ve got to make become much more clear when you’ve embraced those principles. Thank you very much for being here with me today.
Thank you for letting me challenge you. Thank you for letting me push you out of your comfort zone a little bit as you heard this today, as I’m sure many of you were listening to these answers, and thought, “Ooh, I could probably do better in that area of my life too.” Get excited about that because that’s what’s going to lead you to more success. Thank you for your attention and taking this journey with me, and letting me be the person that helps grow your real estate investing knowledge. I’d love it if you leave me a comment, like this, share this and subscribe to the BiggerPockets YouTube channel. You can find me online everywhere @davidgreene24, Instagram, Twitter, LinkedIn, Facebook, all those places, and then on YouTube @davidgreenerealestate. I will see you on the next show.

Don Peebles, founder, chairman and CEO of the Peebles Corporation, joins ‘The Exchange’ to discuss how real rates for mortgages are slowing new home purchases, how changes in housing trends impacting the rental market and considerations for property developers amid the current rate environment.

Ashley:
This is Real Estate Rookie.

Dave:
More good deals will come on the market over the next couple of years, but you do have to contend with some risks of declining value and high interest rates. I think that’s just because over the last couple of years there’s been super high competition and that makes it really hard for investors to land under market deals. Now the markets are shifting a little bit away from probably one of, if not the strongest sellers market in history, to one that is a little bit more balanced. And so that could create some more opportunity for people.

Ashley:
My name is Ashley Kehr and I’m here with my cohost Tony Robinson.

Tony:
Welcome to the Real Estate Rookie Podcast, where every week, twice a week, we bring you the inspiration, information, and motivation you need to kickstart your investing journey. We often like to start these episodes by shouting out on some folks who have lend us some reviews. This week’s review comes from the Skids85. The skid says, “This podcast has great tidbits for rookie investors. Anyone looking to start in real estate investing will find nuggets of valuable information throughout the podcast. And if you couple this podcast with the original BiggerPockets Real Estate Podcast and all of the BP books, it’ll give you the courage to dive into investing, which is what it did for me after five short months. The rookie replies are shorter, but I love them because that’s what all the good information is.”
The skids, we appreciate you, brother. And if you haven’t yet, please you’ll leave an honest rating and review for the podcast because it helps us reach more folks and that’s our goal here. So Ash, how about we skip the boring banter for today? I think the guests were bringing on… They’re too boring enough guys so we don’t need to add to that, huh?

Ashley:
You know what Tony? I was hoping that you would say that line because I was still debating in my head, “Was our producer joking when he said that we could say that?”

Tony:
No. Ashley and I are joking. We got two absolute studs on the podcast today and I think that’s why Ashley and I are excited to get into the content. We’ve got J. Scott and Dave Meyer. You guys probably know Dave from the recently released On The Market podcast. J, he ran the BiggerPockets Business podcast. He’s written four, now five books for BiggerPockets. These are literally two of the absolute smartest guys I’ve ever met when it comes to real estate investing. I’m so excited we got to share their knowledge with you guys in the podcast today.

Ashley:
And by boring, we mean there’s no stories of bears coming on to your Airbnb or exciting things like that, the click bait things in. This is basically what you need to know. As a real estate investor, they wrote this book about running the numbers and how to analyze a deal efficiently and effectively, everything that you need to know. I think the book is like 450 pages long with all this data. It took them several years to write it because they really got down into the nitty gritty of it. It’s not only you have the BiggerPockets calculator reports, which are great, but it’s more than just plugging in the numbers. It’s understanding why you’re plugging in that number and what that number means and what outcome you want from that. So they break it down into four different ways that you can generate money off of your investment. We’re not going to tell yo. You have to listen and listen to all four.

Tony:
Yeah. I asked them two questions that I think most new investors are probably thinking as well, the first one is, is now still a good time to invest if you’re a new investor. And you get to hear both of their explanations or answers to that question. The second question I asked them is like, “Okay, what is a good cash-on-cash return or investment metric I should be using?” So these are two questions that Ashley and I get all the time. Both the answers that Dave and J. gave, I think, were phenomenal and you guys are going to get a lot of value from hearing it.

Ashley:
Make sure you check out J. and Dave’s new book Real Estate by the Numbers, available at the BiggerPockets bookstore. They’ll tell you guys about all the benefits you get if you purchase it directly from the bookstore, maybe even a call with them. So listen for that. And then at the end of the episode, they give you a discount code. We are super excited to see who you guys like better because there might be a little competition at the end of this.

Tony:
Guys, I am so, so, so excited for today’s episode. You two are literally probably two of the smartest people that I know when it comes to real estate investing in the economy and just all the data points that folks should be looking at when they’re thinking about investing in real estate. This is honestly probably the episode I’m most excited for. So Dave, we’ll start with you. Can you just give a quick background on who you are and kind of what we’re talking about here today?

Dave:
Sure. So I work at BiggerPockets full time. I’m the vice president of data and analytics where I handle a lot of our internal data analysis and business intelligence, but also get to spend time studying the housing market and trying to understand what’s going on in different markets and different opportunities that exist for the BiggerPockets audience. And in that effort, I am also the host of BiggerPockets newest podcast, which is called On The Market and is focused on just that, examining trends, data, news that impact the lives of real estate investors.

Tony:
Dave, we also had you on the Rookie podcast. I can’t quite recall which episode it was, but folks can go back and listen to that episode because I think it was one of our top performing episodes because people love when we talk about the economy and it just shows the kind of wealth of knowledge that you are, man. So excited to be chatting with you.
Our next guest, we’ve got two guests for you guys today, I just want to give a brief introduction because this man’s resume is quite impressive. But he’s written two books I think already for BiggerPockets, a book on flipping houses. Four books. So I’ve read two of them. You can tell us what the other ones are. He was on number 10 on the Real Estate podcast. He was on episode number 10. He’s been on multiple podcast episodes since then. A successful house flipper, now a successful real estate syndicator, apartment syndicator. I’m just super, super, I think, humbled and happy to have this guy on the podcast. So J, tell the folks, I guess, what I might have missed.

J:
No, it’s okay. So I found BiggerPockets back in 2008 when I started flipping houses. I was flipping my first house and doing an internet search for how to learn how to do it and found BiggerPockets and started becoming involved in BiggerPockets. And so a lot of people think I work for BiggerPockets, I don’t, but I’ve been so intimately involved with BiggerPockets over the last 15 years sometimes it feels like I do.
And so yeah, I’ve written four books. I think The Book on Flipping Houses, Estimating Rehab Costs, also The Book on Negotiating Real Estate that I wrote with Mark Ferguson and my wife Carol Scott, two amazing investors. And then my most recent book up until now called Real Estate… Wow, I don’t even remember the name. It’s called Recession-Proof Real Estate Investing, which is a book all about economic cycles and how they impact real estate investors. I was also the host of the BiggerPockets Business podcast for a couple years where my wife and I talked with literally over a hundred different entrepreneurs and business owners about all things business. And that’s still out there for anybody that’s interested in that topic and want to learn more about business and entrepreneurship. Check out the BiggerPockets Business podcast.

Ashley:
Well, J. and Dave, we have you guys on here for a reason because you have written another book. It is Real Estate by the Number. So do one of you want to give us a brief description of what this book is about?

J:
Sure. So Dave and I have been working on this book for a really long time. The goal of the book, and I think I’m proud to say I think we’ve accomplished the goal, but the goal of the book was very much to dive into and delve into all aspects of the math and the concepts and the strategic thought that goes into real estate investing. In fact, I think if we were to rename the book today, we’d probably call it Think Like An Investor, because that’s really what the book’s all about, how to change your mindset and really learn how successful investors think, again, from a concept standpoint, from a strategy standpoint and also from a math standpoint. And so it’s a long book, it’s over 400 pages. I think it’s the longest book BiggerPockets has published. We’ve been working on it for many years. But it’s something I think Dave and I are very proud of.

Ashley:
I can’t wait to read it because I think too, for rookies and even experience investors, it’s like going back to the basics of is it a good deal, is it a bad deal, should I do this deal. Well, run the numbers. That’s very, very common where I think people are looking for somebody to give them the answer if they’re making a good investment where if you run the numbers and you know how to properly do that, then you’ll be able to figure that out on yourself.

Dave:
Yeah, I just want to add to that this book I do think does make sense for rookies, even if you’re thinking math is not your thing or that this sounds complicated. J. and I, it took us so many years because we’ve gone through painstaking efforts to make sure that this is applicable to anyone. Whether you haven’t bought your first property yet or you’re an experienced syndicator at this point, we want to make sure that everyone, whether you’re a rookie or experienced, can analyze deals like professional. And as J. said, I think we’ve accomplished that.

Ashley:
One thing too, I’ve noticed if you go out and buy calculator reports or the BiggerPockets’ reports that they do to analyze deals, all of them will vary. They’ll have different formulas or ratios that they calculate for you or different inputs for them. So instead of going out and buying all these calculator reports, I would think it would make sense to buy your guys’ book and kind of develop your own from it. Can you go through that as to once you have this book, how do you put it to use?

J:
Yeah, well I mean I would start with, again, for anybody that might be a little bit math phobic, I’m an engineer by education, so I like the math, and I know Dave is a numbers guy. But here’s the cool thing. If you take this book and you literally cut out all the math, you cut out all the formulas, you cut out anything math related from the book, you’re still left with… What do you think, Dave? 250 pages of concepts and stories and narratives and examples of just deals that Dave and I have done throughout our careers. Then you add in the other 150, 200 pages and then that’s all the math behind it and you get everything. But even if you don’t care about the math and you don’t want the math stuff, I think anybody, now I’m not even going to say including, but especially new investors, if you want to know how successful and experienced investors think, this book is going to really going to help you achieve that.

Dave:
Ashley, I think one of the things that is tempting because the BiggerPockets’ calculators are extremely useful and helpful to people, especially rookies, is that you have to understand the concepts and what the numbers deeply mean. Of course you know that a 7% cash-on-cash return is not as good as a 9% cash-on-cash return. But when you actually go through the process of learning how to calculate these things, it adds new meaning and I think it allows you to make more confident decisions.

J:
Here’s the other thing. We often talk about getting the right answers and figuring out if something’s a good deal. And so we start with this assumption that we know what questions we’re supposed to be asking so that when we get the answer we know that that answer is meaningful to us. Dave and I actually approached this book from the other side. We approached this book not from the perspective of you asked the question, we’re going to give you the answer. We approached this book from the perspective of, let us help you ask better questions.
And in fact, I don’t remember, there’s like 40 chapters in the book. Each chapter starts with, “Here’s a list of questions that this chapter is going to be answering so you know the right questions to be asking.” And because I find a lot of new investors, they happen upon a deal and they get into a situation and they think, “Okay, I need to know if this deal makes sense, did the numbers make sense?” but they don’t know how to formulate the right questions to be asking to look at the deal.
So for example, a seller finance deal. You’re not going to evaluate a seller finance deal the same way you’re going to evaluate just a regular purchase or a note or a commercial property or a deal where… I give an example in the book of a deal I did where I’m going to sell a house and I list the house and I get two offers. This was a true story. I got two offers. One was a full price offer, basically quick close from a cash buyer. The other one was another investor who had a deal that was closing seven months later and basically said to me, “I really want your house but I can’t afford it for seven months because I have another deal closing. I’ll get a bunch of cash in seven months. So I’m happy to close on the deal now, but I kind of don’t want to pay you for seven months.”
I own the house for cash so I could afford to basically just not take the money for seven months. But then I had to ask myself the question, “How much more should I be selling it for if I’m not going to be selling this house for another seven months where it still makes sense? How much more would I have to ask him to pay where his offer is now as good or better than the guy that was willing to pay me in two weeks full price cash?” The nice thing is when you know how to ask the right questions, when you know how to ask the question, “How much is this house going to be worth if sold in seven months compared to if it’s sold in two weeks?”, when you know to ask the question the right way, then you can start evaluating the answer in the right way. And so I think a lot of new investors, they’re not always sure what the right questions are. And so we start with the questions and then we jump to the answers. And so it kind of hits both sides of the equation.

Ashley:
J, in that scenario, would you go and would you look at, “Okay, what would my money look like in a year?” So if you got the money in the two weeks and you went and invested it into something else, what would your return be in a year from that pile of money? Or if you waited in seven months and gotten it, what would you actually do when you’re asking that question as how would you run the numbers on that exact situation?

J:
Yeah. I don’t want to go into any of the math because a lot of us don’t care about the math right now, but the concept behind it like you just said is immensely important in real estate. It’s called the time value of money. It’s basically this concept that a dollar that I get today is worth more than a dollar I get a year from now or seven months from now. Because if I get it today, what am I going to do with it? I’m going to invest it. And in seven or eight or nine or 12 months, it’s going to be worth more than a dollar. And so I need to figure out that dollar that I’m not getting today, how much more would it have been worth in seven months if I had gotten it? And that’s the amount more that I’m going to need to get for that property to make it worth it to wait seven months to get the money.

Tony:
We’re like five, I don’t know, 10 minutes into this episode already and you guys have dropped an immense amount of knowledge, which is why I was so excited to chat with you guys. But I want to ask one question that I’m sure a lot of rookies are asking and then we can get into the meat of the episode. But there’s a lot of information floating around that I think has some new investors afraid to get started. There’s the two quarters of the GDP getting smaller, which some people makes us feel that we’re in a recession. There’s the climbing interest rates, which we all have reason to believe might continue to climb. So I guess my question to you guys, and Dave we’ll start with you, if I’m a new investor, an aspiring investor, I have no deals, is now still a good time to get started?

Dave:
Oh, you’re hitting on our most beloved topic that everyone loves talking about right now. I think it’s hard to say categorically whether it’s a good time or not. I think it comes down to individual investors and goals. And J. actually and I, talk a lot about this in the book, is a big part of being a successful investor is identifying what types of deals are good for you personally. So there might be times… Like say for example you’re a house hacker. I think in almost any market conditions, house hacking is usually a pretty good idea because if you’re comparing that to paying rent and rent is super expensive right now, it’s really great. I don’t flip houses, but I’ll just say I’m not going to start flipping houses right now. I think that there are different strategies that people should be taking depending on their personalized situation.
I know that’s sort of punting on the answer, but I’ll just say that my guess is that more good deals will come on the market over the next couple of years, but you do have to contend with some risks of declining value and high interest rates. I think that’s just because over the last couple of years there’s been super high competition and that makes it really hard for investors to land under market deals. Now the markets are shifting a little bit away from probably one of, if not the strongest seller’s market in history, to one that is a little bit more balanced. And so that could create some more opportunity for people.

Tony:
And J, what are your thoughts?

J:
Yeah, I 100% agree with Dave. There are lots of factors at play. Keep in mind that when we say real estate investing, if I say that to a hundred people, I’m going to get a hundred different thoughts of what that means. If you’re flipping houses, that’s a very different strategy than if you’re buying notes, which is a very different strategy than if you’re buying RV parks, which is a very different strategy than if you’re house hacking. And so there’re literally dozens, dozens of strategies out there and not all of them are going to work as well at different points in the market cycle. Some are going to work better during a recession or equally well during a recession. Some are going to work really poorly during a recession. Likewise, different strategies are going to work differently in different areas.
So what we’ve seen over the last couple years, not only is the market changing, but also the demographics and populations have changed in the US. People are moving from certain areas to other areas because we have a lot more remote work and people have the opportunity to go where they want. And so we’re seeing certain areas that are still seeing huge population growth. We’re seeing other areas that are seeing population decline. And during even the best market in history, I don’t want to flip houses in a place where we’re seeing population decline.
So even going back to 2015 when it was a great time to flip houses, it wasn’t a great time to flip houses someplace where people were moving out of. And so you can’t just look at the economy, you can’t just look at any one or two factors. You have to look at all of these factors. You have to look at the economy and you have to look at population growth and you have to look at employment trends and you have to look at the specific strategy that you’re looking to employ. And then you kind of put all of this stuff together and you ask the right questions about specific deals and then you determine does this deal make sense. And so again, like David said, I’m not looking to punt on the answer, but it really is, it depends. It depends on what you’re trying to do, where, when and how.

Ashley:
Okay, so even if you’re… Whatever strategy you’re doing, running the numbers, the reason you’re doing that is because you want to generate revenue, you want to make a profit or you want to have a good investment for down the road. What are some of the ways that you talk about in your book that you can generate money from making this investment into real estate and how does that kind of factor in when analyzing the deal?

J:
Yeah. So first let me step back and just say this one other thing. For anybody that’s out there that’s listening, this is the Rookie Show. So a lot of people that are listening are probably either just getting started or getting ready to get started in real estate. Something to keep in mind when we talk about the economy is that things move in cycles. And so, well, we may be headed into a recession, some people would say we’re in a recession. Historically, recessions last 12 to 18 months. So even if now isn’t the best time for you to be doing whatever strategy it is you want to do in whatever location you happen to be in, there’s a good chance that in 12 months or 18 months or 24 months, it could be a really good time. So it’s always a good time to be learning.
So even if now isn’t the right time to be flipping houses in New York City or whatever it is, now is a great time to learn about how to flip houses in New York City because in a year it may be a great time to be doing it again. So let me start with that.
But going back to your question of how do you make money in real estate, this is actually a really interesting question that we don’t talk about enough. A lot of us, especially when we’re new investors, we tend to look at real estate returns one dimensionally. If we’re somebody who is working a 9:00 to 5:00 job and looking to escape that 9:00 to 5:00 job, it may be that all we care about is cash flow. We want to make as much money every month as possible so that we can quit our job as quickly as possible and we can replace our income with our cash flow from our real estate. Other people aren’t in that situation. Other people might be thinking, “I love my 9:00 to 5:00 job. I’m going to be working for another 30 years. All I care about is that I build up enough net worth enough equity over the next 20 or 30 years so that when I retire, when I’m 50 or 60, I have plenty of cash that I can invest and get cash flow then.”
Other people are thinking they don’t care about either of those things. They care about the fact that they have a high paying W2 job right now, or they’re making a lot of money from some investments right now and they want tax benefits. Real estate’s a great way to get tax benefits. So there are all different reasons why we may be want wanting to invest in real estate, and the reason you invest may not be the reason I invest.
And so when we look at how real estate actually generates money for us, generally it falls into four categories. So number one is cash flow, and that’s exactly what we’re saying. That’s the monthly income or the quarterly income or the annual income that your cash flow is going to pay you when you invest in it. Number two is this thing called appreciation. And I know we think about appreciation as like if we invest today, the market’s going to go up 10% tomorrow and we’re going to have a whole bunch more money. There’s actually a couple different ways that we see appreciation in real estate. It’s not just waiting for the market to go up and we can talk about that. But number two is appreciation.
Number three is this thing, the fancy word is amortization. The layman’s term is principal paydown. If I get a loan on a property, I’m paying that loan every month. I’m paying my bank every month on that loan. Part of the money that I’m paying is interest. And so interest kind of goes away, it’s an expense. But part of the money I pay on my loan every month is actually paying down the balance of the loan. And so on day zero, I might take out $150,000 loan. In 30 years after I’ve made my final payment, that loan is now zero. I’ve made $150,000 by paying off that loan. It didn’t really make 150,000 and I still paid it, but presumably my tenants paid it. And so over time I’m paying down the loan and I’m accruing equity. I’m building up equity in the property. So this principal paydown or amortization is the third way that we typically see real estate make money.
And then the fourth way I mentioned it is tax benefits. So real estate provides tax benefits that you really can’t get from any other investment on the planet. Some amazing tax benefits. And when you know how to think about taxes and you know how to think about the benefits of real estate investing, you can find ways of basically offsetting income that you’re making today through those tax benefits, which is really as good as it’s cash in your pocket today. So cash flow, appreciation, principal paydown, and tax benefits. Those are the four ways that real estate makes money for us. And anything else, I mean there are lots of other things people can suggest, but that’s really going to probably fit into one of those four categories.

Tony:
J, what an amazing breakdown. I’m so glad that we kind of covered those four different categories because I think a lot of folks, especially those that are getting started, like you said, they just kind of look at real estate investing as this one dimensional kind of return that they should be looking at. But you really gave all these different categories that they can look at. So if we can, I want to just dive into each one of these in a bit more detail. So you had cash flow, appreciation, principal paydown, and then tax benefits. So Dave, I guess I’ll start with you first and we can go to you afterwards J, but let’s talk about flow. What exactly do we mean when we say cash flow? What kind of metrics should I be looking at when it comes to cash flow? And in your mind maybe who is it, what kind of investors should maybe value cash flow over some of the other types of investments?

Dave:
Yeah. Cash flow is a great place to start because I think most real estate investors get into real estate investing because they want to generate cash flow. I don’t know about you, Tony and Ashley, but that’s certainly where I was coming from when I first got started. Basically I was just hoping I produced more cash than I spent each month. And that was sort of the extent of my knowledge of these four different things. Like I knew of the other ones, but that’s really what I was hoping for when I got started. But cash flow is wonderful because it basically can end supplement or eventually replace your W2 income and it provides something that you can live on. If you’re investing in the right way, then it is a very reliable source of income and it could be used for whatever you want, either reinvesting or for covering your regular expenses.
Cash flow is relatively simple to calculate. We give some ways to do that in the book. But basically you add up all of your income, you subtract all of your expenses and after that you have your cash flow. You can also calculate easily. Once you have that, once you know that and how much you’ve invested into the deal, you can calculate what’s probably, I don’t know, I’m just assuming this is the most popular metric in real estate investing, which is cash-on-cash return. And that basically is a great measurement for how efficiently your investment is producing cash flow for you, because it’s great. I hear a lot of investors say like, “I did this deal. It’s producing $300 a month of cash flow. Is that a good deal?” Well yeah, if you invested 10 grand, it’s a great deal. If you invested 300 grand, not such a good deal. So you have to be able to calculate both the absolute number of cash that you’re getting in your bank account every month and be able to calculate how efficiently your investments are generating cash flow for you.

Ashley:
Before you go on there, can you just tell us, define cash-on-cash return is, so what the formula is, how somebody can figure that out.

Dave:
Sure. Yeah. So you just basically take your annual cash flow and you divide it by the amount you invested into that property. And so for each person, that’s going to be a little bit different. For most people getting started, it’s going to be your down payment, maybe some closing costs. And if there’s any maintenance that you did right at the beginning, that came out of your pocket, not like your mortgage, basically the cash that you took put into the property. So you take the annual cash flow, divide it by all of your expenses, that’s going to get you your cash-on-cash return. In the book we also talk about how you can advance your thinking about cash-on-cash return over the course of your investment using a metric called return on equity. But we won’t get into that nerdy here.

Tony:
One follow up question. J, I’ll point this to you first, and Dave we can go back to you. What is a good cash-on-cash return? In today’s market, say I’m buying maybe like a long term single family house, what’s a good cash-on-cash return?

J:
It’s a great question. It’s a question we get all the time. Let me step back before I answer that question. But as Dave said, it’s really important when we think about cash-on-cash return, it’s an indication of how efficient our investment is generating cash. So if I invest a hundred dollars in a deal, and obviously not real estate because it’s only a hundred dollars, but let’s say I invest a hundred dollars in something and I get back $10 at the end of the year, I then invest a hundred dollars in something else and I get $11 back at the end of the year. The second thing that I invested in is doing a better job of it’s more efficiently returning me cash on the money I invested. 10%, 11%, it’s just numbers. But the important thing is, the more money I’m getting back means that the money I invested is working harder for me. Obviously, we always want our money to work harder for us, we want it to be more efficient.
But here’s the other nuance that we really need to keep in mind, and too many newer investors don’t think about this. Returns are correlated with risk. And if I told you I could give you an investment that generates 50% returns or an investment that generates 20% returns, which one’s better? Well, you may want to just jump to, “Of course 50% is better.” But in the real world, returns are correlated to risk. A deal that returns 50% or projected to return 50% is typically going to have a lot more risk associated with it than a deal that’s projected to return 20%. So that 50% return deal, you might have a much higher risk of losing all your money or you might have a much higher risk of making zero return or losing a little bit or making a little bit. Your chances of actually making 50% return is going to be lower than your chances of actually making a 20% return with the deal that projects to return 20%.
So anytime you see returns, always think about it from the lens of how much risk is involved and what is the specific risk, what kind of risk is it. Is it a binary risk? So if I told you that we have a deal where there’s a 50% return projection and another deal where there’s a 50% return projection, even though the risk might be the same, it may not be the same type of risk. For one, the risk could be, yeah, there’s a good chance you’re going to lose all of your money, but there’s also a good chance that you’re going to make a hundred times your money, or a small chance you’re going to make a hundred times your money.

Ashley:
Well, J, I have a question too. Do you think, is time put into the deal kind of considered into that too as to like, okay, you can look at the cash-on-cash return, you only put 10 grand into the deal, you’re getting a 20% cash-on-cash return, but you also didn’t hire anyone to do the labor for the rehab. So is that another thing besides just risk, is taking into consideration the time that you’re putting into the deal too?

J:
Yeah, absolutely. This is where this idea of hourly return comes in. And so yes, one deal might generate 10% cash-on-cash return, another deal might generate 8% cash-on-cash return. Is the 10% better? Well, no. If I spent 10 times as many hours doing that deal and generating that return, that 10% might be a whole lot worse than the 8% return if that 8% return is completely passive.
And so, certainly in addition to risk, we need to be looking at things like what is the amount of time we spent and what is our hourly return. And this is why it gets back to the fact that there’s not just any single metric that we want to look at. Certainly there are some metrics that are more important than others, especially depending on our goals. But we need to be able to think about things multidimensionally from different aspects. And you have to be able to put all these things together so at the end of the day you can say, “Okay, I have two investments. Which one is better?” And generally the answer is we don’t know until we answer a whole lot of other questions about what our goals are, what we’re trying to achieve and what the risks are.

Tony:
J, I think so often, new investors, they just want the answer given to them around these different decisions that they need to make in their businesses, which I get it, right? Because it’s scary, you’re investing maybe your life savings, you’re buying this several hundred thousand dollars investment, it’s your first time doing this, you want some reassurances that you’re doing the right thing. But like you said, it’s hard for Tony or for Ashley or for J, or for Dave to know all the intricate details of that person’s life, their goals, their personalities, their skills, their abilities to be able to tell them, “Yes, this is the right deal for you.”
I’m glad we’re talking about these four different categories because like you said, if someone’s focus is appreciation, maybe them buying a deal that only cash flows 6% makes sense for them because they know 10 years from now that building will doubled in value. But for the person that’s focused on cash flow, maybe they want a 15% cash-on-cash return and they don’t care about appreciation. So everyone’s personality, situations, et cetera will dictate something different. So Dave, I just want to kick it back to you. Any other comments on that on the cash-on-cash return piece?

Dave:
Well, hopefully you’re picking up on the trend. If you try and pin J. and I down to answer any question directly, we’re going to say it depends. But it really does. It really is. You said it really well, Tony, that we all wish someone could just tell us what to do, but ultimately financial decisions are deeply personal. And they should be. You should have your own set of goals and ideas about what you want.
I’ll give you a quick example. In March or April, I sold a rental property and I wanted to do a 1031 exchange and I had an intention to buy a small multifamily. I just couldn’t find a deal that penciled. As you guys might know, I live in Europe, so it was really hard for me to go look for deals. And so I was looking at syndications, but I couldn’t find one in a market I understood. And so I didn’t have time to understand a new market. I wound up doing a deal that took about 5% cash-on-cash return, which is lower than a lot of people would accept and it’s lower than other syndications that I was looking at. But it was in a market I really understood, I felt like there was very little risk. My primary objective with the 1031 exchange was to preserve my capital and to defer my taxes.
And so I was able to accomplish all those things. Did I take a less cash-on-cash return? Yeah, but as J. said, I think I took a lot less risk too. And with this set of money that I had, my goal was long term preservation of capital. And so I think I made a good decision there, where someone have made a totally different decision. Someone might have taken that money and rolled the dice and been willing to take on more risk than I was because they wanted a 12% cash-on-cash return. So I think you guys said it really well, but I just wanted to hammer home the idea that you have to really factor in everything and personalize these decisions to your specific circumstance.

J:
Yeah. And keep in mind, I mean, going back to this whole risk profile thing, there are investments out there that have zero risk. If you want to invest in treasury bonds, like government bonds, you can do that. You can make 2 or 3% per year on your money. Now, a lot of us would sit here and say, “We’re real estate investors. I’m not willing to make an investment that only generates 2 or 3% per year, even if there’s zero risk.” But there are trillions of dollars worth of investors out there who are very happy to invest for 2 or 3% at zero risk. Their goals are very different than ours or yours. The fact that maybe they’re retired and they have enough money that 2 or 3% is great, but they want zero chance of losing that money.
So again, every everybody’s goals are going to be different. Everybody’s risk tolerance is going to be different. If you want super low risk deals, then you’re going to have to accept super low returns. If you want super high risk, if you want the potential to make tremendous amounts of money, you’re going to have to accept super high risk deals. And then there’s everything in between. So you really need to figure out where you are on that risk/reward spectrum to determine the types of deals that you should be doing.

Ashley:
And J, for our next one, appreciation. Can you go through and define appreciation and then what metrics are tied to appreciation that you talk about in the book? Then also, who’s the ideal rookie listener that actually should value appreciation maybe even compared to cash flow?

J:
Yeah. Again, cash flow is the money that our deals are giving us every month for investing in them. We’re basically getting/spending money or investing money every month or every quarter, every year after we invest. Appreciation is kind of just the opposite of that. That’s the money that builds up in the investment that we’re not actually getting back. So for example, just the simplest example, if I buy a house for a hundred thousand dollars today and in 10 years I sell that house and it’s worth $200,000, that’s appreciation. The value of that property went up a hundred thousand dollars over 10 years. There are two types of appreciation that we typically talk about.
The first is this thing called natural appreciation. This is the idea that just holding real estate over time, it’s going to go up in value. Why? Because it always has. Realistically speaking, real estate tends to go up in value over time. We’ve seen it for 150 years, it’ll likely continue. That said, a lot of people, they don’t have a true understanding of how much real estate tends to go up over time, especially for younger investors. If you started investing in 2008 or ’09 or ’10 and you’ve only seen what’s happened with real estate over the last 10 years, or worse yet, if you started investing two or three years ago and you’ve seen what happened with real estate values over the past two years, you probably think real estate tends to go up 5% a year or 10% a year or even 20% a year.
But the reality is, over the past hundred or so years, on average in most places in the US, real estate has tracked inflation. So if inflation has been somewhere between 2 and 3%, real estate values have tended to go up 2 or 3% per year. Not bad, but it’s not something that’s going to make you rich. Basically, your real estate is going to keep you from losing money to inflation. So that’s the first aspect of appreciation. Just overtime the market is going to tend to go up in value. Our houses are going to tend to go up in value and you’re going to make money typically at least enough to cover inflation, hopefully a little bit more.
But the real value of appreciation in real estate is what we call forced appreciation. And this is the idea that as real estate investors, a lot of us have the ability to buy real estate that’s undervalued and we have the ability to increase the value through the work that we do. And so when we talk about that work, it’s really in two areas. Number one, we can do physical renovations on the property, we can improve the property. So when we think about flipping a house, we buy a house for a hundred thousand dollars. By the time we sell it, it’s worth $250,000 let’s say. That’s appreciation. We’ve added value through renovations that we can then capture when we sell the house.
The other way we can capture appreciation is through management improvements. So number one is you make a whole lot of money by improving the physical aspect of the house. Number two is you actually lower the cost of holding that house. So if you’re a landlord and you can buy a property and you can make it a whole lot less expensive to hold, you can appeal your taxes or you can get your insurance costs down or you can get your other holding costs down, you’ve now increased the value of that property. So as good real estate investors, yes, we love the natural appreciation, we love that 2 or 3% per year that we’re going to get that’s going to offset inflation, but we should also love the idea of we can increase the value of a property through renovations and management improvements. And then once we increased the value, we then have the ability to capture that increase in value either by selling the property for a profit or refinancing the property and pulling out some of that value that we’ve added.

Tony:
Dave, let me ask you a follow up question here and then we’ll go back to you, J. What kind of rookie investor is the focus on appreciation best for? What kind of questions should I be asking myself to determine if focusing on appreciation is the right kind of, I guess, wealth tool for me to focus on?

Dave:
Well, to echo what J. said, I think for rookies really the key is to focus on forced depreciation. And particularly in this type of market cycle that we’re in right now, I just think that’s even more important. For most rookies, I would recommend being very cognizant about the amount of work that goes into forcing appreciation and making sure that you take on an appropriate amount of effort, risk, and capital that needs to go into a renovation.
When I was getting started, I did a lot of what you call a cosmetic value add, where you’re painting, you’re updating the appliances, maybe you’re putting in some vinyl flooring to make it look better. That to me is a little bit more manageable especially if you’re handy yourself or a good trades person. I wouldn’t be looking for places with foundation issues or who need a new roof if this is your first time out there. If you’re a contractor, if you have experience in construction, maybe you could. But for me that’s just my personal advice. People can take that on as much as possible. But for your first deal, I think those types of cosmetic value ads really can be achievable and are relatively low risk.
Another thing that I’ve done pretty successfully a few times now is, repurposing space is a great way to force at least rent appreciation and some value appreciation. For example, if you take a place that has a lot of living space but only has two bedrooms, can you add a third bedroom? Can you add a fourth bedroom given the existing structure so that you’re not building new walls and taking on a lot of construction risk? You’re just sort of repurposing the space in a more manageable type of value add situation that can add value to the property and can increase your cash flow as well.

J:
I think Dave and I both ignored the question. Tony, you and Ashley both asked the same question, we both kind of ignored the answer. So let me try to cover the answer that we ignored. Who is the right person that should be thinking about appreciation? Generally, you’re going to think about appreciation when you have a longer term wealth horizon, when you’re thinking about building wealth over time. Somebody that wants cash flow is somebody that needs the income every month, maybe somebody who’s looking to quit their job and wants to replace their income. Somebody that’s looking for appreciation is looking for a bucket of cash at some point. That could be a bucket of cash in three months by flipping a property. It could be a bucket of cash in 30 years when you sell your rental property. But typically the person that’s looking for appreciation is the person that’s looking for that bucket of cash, which I talk about how real estate has tremendous tax benefits.
Sometimes it doesn’t when you’re getting buckets of cash. But in general, if you’re looking to increase your net worth over time, appreciation is one of the best ways to do that. Let me also answer a question that you sort of asked. I used to work for eBay. At the time the CEO, a woman named Meg Whitman, used to say to the company, she had a really popular quote that she would always say, which was “Embrace the end.” Too often we think about do we want A or do want B without thinking of “Is there a way for us to get A and B, or A and B, and C and D?”
And in this case, when I say cash flow is right for this type of investor and appreciation is right for this type of investor, what I would encourage every investor to do is think about what’s most right for you, but don’t exclude those other things. So maybe your primary goal is flow, but still think about how you can get appreciation at the same time. Because even though cash flow today is great, you’re going to want that bucket of cash when you sell the property in 20 years and you’re looking to retire. So embrace the end and don’t just think about these returns as which one is most important or what’s the only one I want. Think about maybe which one’s most important, but how do I get the others as well.

Tony:
J, I’m so glad you mentioned that and it reminds me of you and I were having lunch in Maui. And when I asked you about why you switched from flipping houses to apartment syndication, that was kind of what you mentioned to me, is that when you looked at flipping, it was these big chunks of cash but there wasn’t that consistent cash flow. There wasn’t the necessarily appreciation long term. But it’s like when you went to apartment syndication, you kind of got the best of both worlds where you’re able to generate these big cash flows and oftentimes these big chunks of cash, refinancing and the fees that come along with putting those things together. And then when you go to sell, raising the value of an apartment complex is significantly bigger than one single family home.
When I think about why I started investing in Airbnbs, it was really the same thing. I felt like when you talk about risk adjusted returns and accessibility to a new investor, I feel like Airbnbs and short term rentals were the best asset class to do that because you don’t need to raise funds typically like you would for a syndication, but you get these much bigger cash flows than you do from long term rentals, but necessarily it’s not the same as flipping because it’s not as risky about like, if the market turns today, I’m not going to be stuck holding this property that I’m going to lose money on. So I mean, I just love that point of thinking of all the different ways you can combine some of these things together to get the best end product for yourself.

J:
Yep. Sometimes appreciation can be a tricky thing. It isn’t always obvious. Like when we want appreciation there, there’s cases, and we talk about this in the book, where appreciation might hurt you. So for example, let’s say I buy a rental property for a hundred thousand dollars and I can rent that property out for X dollars a month. I also have the option of doing a renovation on that property and now I can rent it out for more money per month. Should I be doing that renovation so that I get more money? Well, it’s a difficult question because depending on how much I spend and how much more money I put in, that’s going to affect my cash flow.
So the decisions I make around appreciation, I could potentially do a huge renovation. I could knock the house down and rebuild it and now make that a hundred thousand dollars house worth a million dollars potentially. But that’s not necessarily a good idea. If the rent’s only going to go from a thousand a month to 2,000 a month. I’ve created a ton of appreciation, but now I’ve reduced my cash-on-cash return, that other metric that we talked about with respect to cash flow. So all of these things play off of each other.
And so maybe appreciation, maybe doing a renovation on the property is a smart thing to do before I sell, but maybe it’s not a good thing to do now. Maybe it’s a good thing to do five years from now or 10 years from now. And so we constantly have to be looking at all of these different scenarios. And again, it goes back to asking the right questions and not just saying more appreciation is good, more cash flow is good. Yeah, in a lot of cases it is, but in other cases now might not be the right time or it might not be the right thing to do for this particular property, for this situation, for my particular goals.

Tony:
So we’ve hit two of the kind of ways that real estate can generate wealth and profits. I want to focus on those last two. So principal paydown. Dave, I’ll start with you. If you can, same as the other two, define what principal paydown is and what metrics I guess we should be looking at to kind of measure how well a property does with that specific metric.

Dave:
Sure. Yeah. So principal paydown is basically a way of generating returns that exists for pretty much any long term investment. Basically when you take out a mortgage, you pay back the bank every single month. There are two components of that payment. It stays the same every month, but every month you’re sending the bank principal, which is basically repaying the amount that you borrowed slowly over time. And then there’s interest, which is the bank’s profit. Unfortunately with interest, that’s just gone. As J. was saying earlier, that’s just the bank takes that, you don’t get anything back. But when you pay down your loan, that means that you owe the bank progressively less and less and less. And over time when you go to sell it, you may owe the bank half of what you used to owe them, or hopefully maybe you pay it off over 30 years and then you don’t own the bank anything at all.
The beauty of this is that it’s not you who’s paying the bank back, it’s your tenants who are paying the bank back. You are taking part of their rent and paying the bank back with them. And so over time, basically they are allowing you to owe the bank less. And when you go to sell your property, you’re going to realize that gain. And unlike cash flow, it’s not something you realize immediately. It’s much more like appreciation that we were just talking about that you see the benefits of loan paydown when you actually go to either refinance your loan and pull some cash out or go and ultimately sell your property.

J:
I like to think of the principal paydown sort of like cash flow. So every month if we’ve done things right with our property, we get this cash flow, we get this profit that goes into our pocket. Principal paydown, it’s not quite as good as cash flow. We don’t actually get money every month that goes into our pocket. But what we are getting every month is equity. We’re getting value added to the property when we resell it or refinance it. And so we can evaluate this principal paydown in a lot of ways the same way we evaluate a cash flow. So Dave talked earlier about the metric that we use for cash flow as this thing called cash-on-cash return. So for every dollar that we get out of the property, that dollar is working for us. Or for every dollar, excuse me, that we put into the property, that dollar is working for us and is allowing us to get money out of the property. And the more money we get out compared to the amount we put in, the higher our cash-on-cash return is.
We can do the same analysis. We can do the same kind of calculation on principal paydown. So if at the end of the year we have a property that we paid a hundred thousand dollars for and we paid down $5,000 of our loan balance after a year, we’ve basically earned $5,000 out of that a hundred thousand dollars we invested. We’ve now made 5%, not cash-on-cash return because it’s not cash that we’re getting, but what I like to call 5% equity on cash returns. So we’re getting 5% of whatever we invested back in equity. Now, how do we capture that? Well, since it’s a lower amount of our loan, we capture that by either selling the property, in which case it costs less to pay off the loan than the total loan that we took out, and that goes into our pocket. Or we refinance the property. We can actually take more money out of the property based on the amount that we’ve paid down in the loan.
So this idea of equity on cash return is very similar to cash-on-cash return. And when I look at a rental property, I’m going to look at my cash-on-cash return. So let’s say I put a hundred thousand dollars into the property. Let’s say I get $5,000 in cash flow at the end of the first year. 5,000 divided by a hundred thousand dollars investment, that’s 5% cash-on-cash. But then when I realize that I’ve paid down $5,000 in that loan the first year, that’s another $5,000 that I’d gained in equity. So 5% equity on cash return. When I add those two together, I’ve now made the equivalent of 10% return on my investment. Now obviously again, the equity on cash I can’t actually capture that unless I resell or refinance, but I’m going to do that eventually. So I can look at my return now as 10% return, not just 5% if I were just looking at the cash-on-cash.
A lot of people ignore the fact that they’re building up equity every year by paying down their loan. But this can be a huge part of the total returns that you’re generating. And if you ignore this, then your returns are going to look a lot smaller than what they actually are.

Tony:
J, I’m so glad you mentioned that. It kind of gets my mind spinning here a little bit, but we talked about metrics for each one of these individually, right? Metrics for cash flow, metrics for appreciation, for principal paydown. Is there one master metric that I can use to combine all four of these things together to say, “Okay, cool. This is the one”?

J:
There isn’t. Unfortunately, I wish there was some grand unification metric, like this one formula that you can plug all your numbers in and it comes out and it tells you this is how much money you’re making. But at the end of the day, again, each of these four ways of making money in real estate are going to have different benefits and drawbacks for different individual investors. And so you need to know what’s important to you, and then you need to analyze those metrics. If you really have no care in the world about tax benefits, well, you can ignore that and you can just look at the other three. But most of us care about all four of these.
And so what we do is, in the last part of the book… There’s several different parts of the book. The last part of the book kind of puts everything together and analyzes and looks at a couple different types of deals. And at the end of the day, it really boils down to, you need to run the numbers for cash flow, you need to run the numbers for appreciation, you need to run the numbers for principal paydown, you need to run the numbers for tax benefits and then put all of those numbers together in a way that you can see a holistic view of the investment itself.

Ashley:
Dave, let’s start with you for the last one, the tax benefits. So how are you generating money from the tax benefits of investing in real estate?

Dave:
Well, let me just start by saying that I think taxes are probably the last thing most investors start thinking about. I know when I first got started, I really wasn’t even thinking about this. If you’re a rookie, you’re like, “I just want to generate money first and I’ll figure about taxes and hanging onto it later.” I definitely fell into that camp. And I think as you mature as an investor, you realize how important taxes are, because the more money you can keep, the more money you can reinvest. And if you’re familiar with the concept of compound interest, which we talk a lot about in the book, basically if you’re able to keep more money into your investment machine, that means you can generate more and more returns and you can defer your taxes for longer and longer. And maybe in some cases you can defer them all together.
And so basically, similar to some of the other concepts that we’ve been talking about here, taxes are obviously, they’re not putting more money in your pocket every single week, but if you can strategically use real estate to optimize your tax mix, you wind up having a lot more money to invest into your deals that can generate you more appreciation, more cash flow, and more loan paydown over the course of your investing career.

J:
Here’s something a lot of people don’t think about. They think, “How do I lower the amount of taxes I ever have to pay?” But it’s just as important to be thinking about, “How do I put off paying taxes for as long as possible?” I talked earlier about this concept of time value of money. A dollar today is worth more than a dollar 10 years from now because I can invest that dollar today. Well, likewise, having to pay a dollar in taxes, not today but five or 10 years from now, allows me to keep that money, not pay it to the government and invest it for the next 10 years so I can earn more on it before I actually have to give it away to the government.
So a lot of what we talk about when we talk about tax benefits of real estate, it’s not necessarily that you’re going to pay lower taxes throughout your entire life. You will actually, and there are a lot of tax benefits there. But a lot of the things that we tend to think about less is how do we just push off paying our taxes till next year or the year after or five years down the road so that we can take that money and we can invest it in the meantime and make a whole lot more money before we have to give any of it to the government.
And so real estate kind of gives us these two benefits. One, it gives us the ability, one, to pay less total tax over our lifetime of the investment. But two, more importantly it gives us the ability in a lot of cases to defer those taxes for a long time. And we can do that through a couple ways. Number one, we have this thing called depreciation. And basically what that means is just like anything else we buy for our business, and real estate is a business expense, that thing is going to wear out over time. If you buy a car for your business, the government says, “Yeah, your car’s going to wear out about 20% per year for five years,” and they’re actually going to let you take a tax deduction for 20% of the car’s value every year for five years. I’m making that up, I think it’s five years. But it’s some amount of time. And you can take a deduction every year for your car.
Likewise, if you buy a printer, you can take a deduction because the government knows your printer’s eventually going to go obsolete. Or if you buy basically anything, a piece of office furniture or a computer, basically the government allows you to take a deduction against that every year as a tax benefit. Same way with real estate. So the physical real estate that you buy is going to deteriorate over time. Your properties, you basically need to maintain them and upkeep them. So the government’s going to allow you to take a deduction against the value of your property over time.
For a residential property, a single family house, you can take that over 39 years. So if you buy a property that the physical structure is worth a hundred thousand dollars, the government’s basically going to allow you to deduct $2,500 a year over 40 years, 39 years actually. And that’s a tax deduction that you get every year. You eventually have to pay it back. When you sell the property, you’re going to have to pay it back, but you can defer taxes for as many years as you hold it. And remember, deferring taxes is good because time value of money.
So depreciation is number one. Number two, we have this thing called a 1031 exchange, which allows you to take an investment property, a rental property or a commercial property, and it allows you to sell that property for another similar property under certain circumstances and not have to pay taxes on that sale. You can then basically hold off paying taxes until you sell that second property, or you can do a 1031 exchange on the second property and defer paying taxes potentially until you die. So between depreciation and 1031 exchanges, there are two great ways to basically put off having to pay taxes on your property for potentially years or even decades. There are plenty of other ways, but those are the two big ones.

Ashley:
J, a kind of a follow up to that is, what rookie investor would make this, I guess, route of investing their priority? Who would choose this one as, “This is the way I’m going to generate money off of my investment.”?

J:
Yeah, so there are a couple things to answer in that question. Number one, if you’re buying rental property, you’re getting depreciation. A lot of us, if we buy a single family rental, we’re going to pay close to zero taxes these days on that rental property simply for the depreciation that the government gives us. We have to take that… Well, we don’t have to take it, but we’re going to have to pay it back at the end so we might as well take it every year. So what we typically find is, if we buy a rental property, we may not be saving taxes on all the other things in our life, but we’re going to typically save taxes on that particular property. And for a lot of my single family rental properties, the income I earn from the rent that I collect, I pay close to zero taxes on that every year. So if I buy 20 rental properties, I may pay close to zero taxes across those 20 rental properties.
Now, in some cases, I may even get more tax benefits than I made in income on those properties and now I might be able to use that income to offset income I’m making from other places. I might be able to offset income I’m making from a consulting job I’m doing or from stock income that I’m making or from a W2 job. And so it has nothing to do with whether you’re a rookie investor or you’re a seasoned investor, it really depends on the type of properties you’re buying. If you’re flipping properties, you’re not going to get any tax benefits. Flipping properties is… If you’re getting into real estate for tax benefits, don’t flip properties. I’ve paid more in taxes then most people should have in a lifetime because I flipped so many properties.
But if you’re buying investment properties, if you’re buying rentals or you’re buying commercial property, you’re automatically going to get some of these tax benefits. And then if you’re smart about the way that you get rid of your properties when you sell them or exchange them, you have the ability to push off paying taxes. So it’s not a question of who should be focused on the tax benefits, I’ll get into that question in a second, but all of us, if we’re buying rental properties or commercial properties, we have the ability to take advantage of those tax benefits even if we don’t try. So that’s number one.
Then we get into the question of who should be investing primarily for the tax benefits. There are a couple people. One, if you are a real estate professional, which means you spend most of your time in real estate but you make a lot of money doing other stuff, you can then take the tax benefits you’re generating from real estate and you can apply it to all the other stuff.
So just to give an example, and I don’t say this to brag or to kind of mention numbers, but the reality is I work in apartment complexes now. We buy and sell apartment complexes. This year I’m going to have over a million dollars in tax benefits that I can use for any income that I might generate. Literally, if I make a million dollars from selling books or a million dollars from consulting or a million dollars in the stock market, I can take up this million dollars in tax benefits I’m getting from real estate and I can offset all that other income, and I can literally pay zero tax this year thanks to what I’m doing in real estate no matter where my income might be coming from. So for me, if I’m making a lot of money selling books, or if I’m making a lot of money consulting, or if I’m making a lot of money flipping houses, the fact that I’m doing apartment complexes and have a million dollars in tax write offs, I basically pay zero tax on anything.
Now, again, I’m not going to pay zero tax forever. I’m just deferring that. At some point I’m going to sell these apartment complexes, at which point the government’s going to say, “Okay, now you owe us all the taxes that you saved on.” But at that point, I’m going to buy more apartment complexes and do the same thing with the income I made from those. And so I’m able to kind of push my tax burden down the road. Hopefully I can push it down the road until the day I die, at which point it’s my kids’ problem. But more importantly, if I die, a lot of it is just going to go away because a state tax allows me to kind of generate a certain amount of net worth before I have to pay any taxes.
So somebody that’s a high net worth earner that’s working primarily in real estate, they may be looking for tax benefits. But even if that’s not you, even if you’re just a new investor that doesn’t make any other income and you’re just buying your first rental property, you’re going to be able to benefit from the tax benefits if no other place than just in that rental property that you’re buying. You might make $10,000 on that rental property just in income this year, and you might pay close to $0 in taxes. That’s a huge savings.

Ashley:
And even for rookie investors, if you don’t even have your first deal yet, it’s great to start your tax planning. BiggerPockets does have a book for this by Amanda Han, it’s The Book on Tax Strategies. It goes through basically a lot of what J. just talked about and kind of breaks it down for you if you want to learn more about it. And then that’s where you can take it to your accountant or your CPA, but better yet to find somebody who’s going to tell you to do these things during your tax planning instead of having to figure it out on your own.
But speaking of books, Dave and J, can you tell everyone where they can find your new book?

Dave:
Yeah, you can find it on the BiggerPockets store or you can go to numbersbook.com. Either one will take you to the BiggerPockets’ store where you can find the book. We just wanted to let everyone know, if you order now, it is still during the pre-order period. And if you buy it now, you have the opportunity to attend a webinar that J. and I will be hosting to talk about the state of the economy. We’ll also be giving away coaching calls. So if you buy the book, you might be able to win a coaching call from either J. or myself, and you can use the free code, DAVE, for a discount of 10%. Or I think you can use the name J. as well.

J:
I think JSCOTT or DAVE, if you put that into the coupon code, you get to save 10%. Whole bunch of other bonus materials as well that haven’t been announced yet, but you’ll see them if you go over to the bookstore. But yeah, a lot of bonus content. The book is called, I don’t know if we’ve even mentioned the name, but the book is called Real Estate by the Numbers. And like Dave said, if you want to get it, you can go to the BiggerPockets bookstore, biggerpockets.com/store, or you can go to numbersbook.com, which will take you right over there.

Ashley:
And where can everybody find out more information about each of you? Dave?

Dave:
Yeah, so either on BiggerPockets or Instagram where I’m @thedatadeli, or check out the On The Market podcast.

J:
Yep. And for me, obviously, BiggerPockets. Or you can go to www.connectwithjscott.com and that’ll kind of link you out to everything I have going on.

Ashley:
Well, thank you guys so much for joining us today on the Real Estate Rookie Podcast. I’m Ashley, @wealthfromrentals, and he’s Tony, @tonyjrobinson. And we’ll be back on Wednesday with another episode.

Dave:
Hey everyone. Welcome to On The Market. I’m your host, Dave Meyer. Joined today by Kathy Fettke. Kathy, what’s going on?

Kathy:
Oh, so happy to be here again and see you.

Dave:
Thank you. Well, today we have a guest who you recommended and is your friend. How do you know Chris?

Kathy:
He’s one of the property managers through Real Wealth that we recommend to our members there. And he’s helped our members buy properties for years. We’ve seen the struggles. We’ve seen prices go up and people get angry about that. So we’re constantly trying to educate and let people know what’s really going on in the new build-to-rent world because it has had a lot of challenges.

Dave:
Yeah. Chris, who is, like you said, a property manager, a builder, entirely focuses on build-to-rent, super knowledgeable, articulate guy. I don’t invest and build-to-rent currently or new homes, but I learned a ton today. What do you think our audience should be listening for in our conversation with Chris?

Kathy:
Well, again, if you are somebody who’s in a contract to buy a new home already, you really need to read your contract and see what your rights are because people didn’t really think they had to do that before. One of the big benefits of buying a new home as a rental is that you’re locked into a price and it’s probably going to close a year later or six months later, and the price might be higher when you close. We just did that. We bought a town home and it’s gone up $400,000 since we went into contract. Fortunately, my contract was bullet proof and they couldn’t raise the prices on me. But many contracts today are different because builders don’t know what the end price is going to be and then you might not be able to close. So that would be the most important thing to pay attention to is if you’re going to buy a new home or if you’re in the process of buying one, make sure you understand your rights or the rights that you may not have in your contract.

Dave:
Yeah, that’s excellent advice. I really loved learning from Chris just why buy for rent is taking off and why it’s such an appealing option for some of the larger investors. And from our conversation, it seems like build-to-rent is potentially an option for smaller investors than I sort previously assumed. And Chris has some advice if you want to get into this particular niche on how you can do that. So with no further ado, well actually a little bit of further ado, we do have to take a break, but right after that, we are going to welcome Chris Funk, the president and CEO of Southern Impression Homes.
Chris Funk, president and CEO of Southern Impression Homes. Welcome to On the Market. Thank you so much for being here.

Chris:
Well, thanks so much for having me. Appreciate it.

Dave:
Well, we’d love to hear all about your business and what you’re thinking and doing in today’s market, but we’d love to just start by understanding your history and involvement in the real estate investing industry.

Chris:
Well, our history began back in late 2009 when it was a different place and a different time in the real estate world right after the last crash. We were buying foreclosed homes at the courthouse steps. Like many real estate investors today, that’s where they started their careers. And so we were buying renovating and leasing homes. So we’ve always had a focus on rental real estate. And through that process, we started a property management company. We started a building company and then ultimately a title insurance company here all in the state of Florida.
And at some point, we went from being renovators and fixed and flip sort of folks to build-for-rent. As the market started to increase in price over the years, we started to see that we could take advantage of the fact that we could get new product at the same price as old product and have a lot less maintenance related to that product because it’s new. So from about 2015 and ’16, we made that conversion until today we’re 100% built-to-rent and we actually don’t do any renovations in rentals anymore. So no more REO-to-rent for us.

Dave:
That’s incredible. Sounds like you’ve done a little bit of everything. Could you just tell us a little bit about the scale? How much build-to-rent are you doing right now?

Chris:
Sure. So this year we’re going to finish right around 800 units of build-to-rent. That’s down from where we wanted to be. Our plan was 1,100 units this year, but as we’ve all seen with the shortage of materials and the supply chain issues, we weren’t able to hit our goals. But still pretty respectable number. Now, we’ve also, in addition to that, put about 600 lots on the ground that we’ve sold to other builders, National Home Builders, properties that we don’t construct. Those are kind of our two main business models right now in addition to, of course, the management of the finished properties.

Kathy:
Chris, are you building homes on one-off lots? Or are you building full build-to-rent subdivisions?

Chris:
A combination of both. So right now we have a mixture of about 6,000 lots in our pipeline. And of that, about 3,000 of those are what you would consider traditional subdivisions where you see 150 houses being built typically by the same builder, a couple builders, track home sort of style. That’s about half of our pipeline. The other half is infill, which is scattered lots in our various markets. So there might be an existing community that there were a couple of lots left over that nobody ever built on and we would buy those. There’s some other areas like Palm Coast and Ocala where there’s quite a few more infill lots available due to the way that developers used to develop in those markets many years ago, and they would sell off lots to individuals from up north that maybe thought they were going to retire down to Florida but they never retired or they never built their home. So all these individual people own these lots that never got built on.
So we have a pretty robust acquisition strategy to find these individual lot owners so that we’re able to make that nice product mix between traditional subdivisions and infill. And then in our traditional subdivision side of things, that even segments out further where we have traditional single family home subdivisions, but we also provide a product that’s a quadruplex and duplex product that provides more of an investment vehicle as opposed to just single family homes, which are both investment and for sale to retail home buyers. Not by us, but they might be at a later point in time. So the quadruplex product is also about half and half between infill lots and new construction communities.

Kathy:
Yeah. When built-to-rent came into play in a big way, what was that? Four years ago, five years ago would you say?

Chris:
Yeah, I think that’s when it really started to take hold. Yes.

Kathy:
Yeah. And as you know, because we’ve had lots of conversations, I was always really concerned about a community of single family homes that was all rentals. So just tell me a little bit about the risks to that model and what you’ve seen play out in reality.

Chris:
Sure. It really depends on the buyer type. So we see a lot of institutional investors that only want to own a whole community of rental properties. And in that case, that’s more of a management style that they want to have. They want to know that they own the whole community, that there’s nobody else there and that they can treat it like a horizontal apartment complex. Whereas our model has primarily been selling some lots to national home builders that sell to retail clients and then we would build rental properties in and amongst those communities to sell to our clients, because we don’t sell to any retail home buyers, we only sell to investors looking for rental properties.
So what that does when you have that mix, and particularly the single family properties because it can be both a home buyer product and an investment product, it really gives a lot of upward momentum to the sale price for the investor that buys it. So typically as builders build their way through a community, meaning retail home builders, the price goes up as they go through the phases. So we have a community in Panther Creek here in Jacksonville, Florida that’s an 800 lot community. We’re building 50 or 60 lots for rental properties, the rest we’ve sold to National Home Builders. And every phase that they go through they raise the price. So it really helps boost up the values for the folks that are buying from us.

Dave:
Kathy and Chris, both of you, you said that build-to-rent got popular around four or five years ago. Were there specific market conditions that made build-to-rent become more attractive around that time period?

Kathy:
Absolutely. Right, Chris?

Chris:
Yeah.

Kathy:
I mean first and foremost it was really hard to find existing homes. And then like Chris said, they were about the same price as a new home. So why would you buy an old one, an old cranky one when you could get a new fresh one?

Chris:
Exactly. Exactly.

Dave:
I’m curious because something I’ve always thought, I mean it makes so much sense, Chris, you said earlier, right? If they’re close in price, the maintenance is lower, you have a nice product that’s really appealing to your perspective tenants, I probably falsely always assumed that build-to-rent only worked at subdivision scale like what Kathy was asking about. But it seems that you’ve been able to achieve that on infills and individual one-off lot. Is that because you have the scale of a large building company or is this something that small investors can also achieve financially even if they’re sort of outsourcing they’re building?

Chris:
Yeah, I think I’ve got kind of two answers to that. One of it depends on where that investor lives, first of all, and how they’re going to manage those properties. So one of the things that we really see sets us apart and that our clients really like, and I think why we’ve seen so much success in the build-to-rent market with Main Street investors, individual investors, is because it comes from a full service standpoint. Meaning we build the homes and then we immediately hand it over to our property management company that manages the homes. So we have scale to that effect where we manage a couple thousand houses at this point in time. So the clients that are buying from us are able to really get that institutional style management on a one-off basis where they might not be able to get that if they bought two, three houses and they’re trying to manage them themselves.
If you’re trying to manage a property yourself, you’re the leasing agent, you are the maintenance technician, you are the property manager and the complaint department and everything wrapped into one. Whereas we have 160 employees on our payroll right now, each one of them has a specialty in one of those segments. So we’re able to provide that institutional type management to folks that may only own one or two houses, but their houses get treated the exact same way as a large institutional buyers would. Which is again, that’s really part of our goal and our business model, is to supply that type of product to Main Street investors versus all the institutional Wall Street guys being able to get all the product and make all the money.

Kathy:
Yeah, I mean again Chris, I’ve known you a long time and we talked about taking on these subdivisions. And my fear was that if you have so many different owners, landlords in one subdivision, somebody might mess up. They might be in a situation where they need to rapid sell. They’re going to lower rents, they’re going to lower prices and then that starts to spread throughout the community. Back in 2009 when I was buying foreclosures too, I went to one of those communities and that’s where my fear stemmed from. I went to one where a group like mine, like Real Wealth but a different one, not us, went in and sold out the entire community to individual investors. And then when the market tanked, then literally I’m walking through the subdivision and it was for sale signs, like hundreds of them. It was awful. So suddenly this investor group, all these individuals are competing against each other trying to rent, trying to sell, not getting anywhere on any of it.
So maybe that particular area, and it was El Paso, Texas, so not a growth market like Florida for sure. So it could have just been market related, but that’s always been my fear. I get if an institutional company’s coming in and they’re buying the whole thing out and they’re managing it like an apartment but it just happens to be homes, that’s controllable. But how do you control it when you have so many individuals that could potentially be in competition with each other when it comes to rent and to sell?

Chris:
Sure. Again, two things on that. One is just how we manage it internally and one is just kind of a general market condition. So how we manage internally is when we sell a property in the community, it comes with a two year property management agreement. So at least for the first two years our property management company is stabilizing the community at the rents that we anticipated that we’ve underwritten. So there’s not a competing nature because it’s all one property management company leasing the properties. So everybody’s on the same page, incentives are 100% aligned. Now I will tell you, even here in Jacksonville and Florida back in 2008, 2009, the scenario that you mentioned very well could have happened here.

Kathy:
That’s true.

Chris:
I did not get in until 2009.

Kathy:
You got to pick up the pieces.

Chris:
Right. I’m not 100% sure what happened. But what I’ll tell you, and I’ve done a lot of research on this today. As you can imagine with a very large lot pipeline, one of the things that’s given me a lot of comfort to have that pipeline, because as a developer we need to be planning three, four years into the future with our product lines because it just takes so long to get these entitled and developed. So when we are looking at it, we’re really looking from that time period in that 2008, 2009 time period, what did the inventory look like? Inventory went up from 2009, ’10, ’11. ’11 was about the peak of inventory.
And so when we look at those numbers, I say, what does it look like today? Because what really caused that scenario was the fact that lenders were lending to anybody and everybody. So everybody wanted to become a landlord that, A, shouldn’t have been qualified to buy the house to begin with, but then, B, they was just so much overbuilding in the market that there were these properties that created all of these issues where people were competing with each other, which it’s just a downward spiral where there’s no stabilization.
In today’s market, we have such a shortage of housing. So we have about a third of the inventory on the market from a for sale standpoint today than we did in 2011. When you look back at the numbers, I’m very familiar with the Duval County numbers. That’s our home office here. It’s in Jacksonville. In this five county area around Jacksonville, in 2005… So remember, the peak of inventory was 2011. In 2005, there were 18,000 permits pooled in this market. This year we’re only on track for 16,000 permits. So we’re almost two decades later. So huge population growth. Probably over 20% population growth in that time period and we’re still pulling less permits today than we did at the peak back in 2005. And we see further inventory issues arising as we go along just due to the fact that development has become harder and harder to do and there’s less and less lot inventory coming online. So all of that’s to say not that there couldn’t ever be one of those issues again, but right now we just don’t see an overbuilding in the market that we saw back in 2005 to 2008.

Kathy:
And what’s so cool is that you get a view of both sides. Most builders have absolutely no clue about the rental side of things. But you’re able to gauge that. So how has the rental demand been over the last few months when… Or I would say just this year, but specifically the last few months when rents have gone up so high that it’s becoming really challenging for people to pay?

Chris:
Absolutely. It’s the good and the bad, right? I mean with inflation, as a landlord, as a property owner, you’ve locked in your basis. So you’re now a fan of inflation. For your tenant, not so much. So we’ve really seen some turnover in properties as rents have gone up and we’ve seen new tenants coming in at much higher prices. So when we’re speaking with our property owners, that’s really a decision to make. The rent could be 200 or $300 more on a unit in the market today than it was when the property was rented a year ago, a year and a half ago, two years ago. But you have a potential of a turnover over cost and whatnot if the tenant does not accept that rental increase. So it’s been a lot of conversation with our investors to say, “Hey, this is what we think we can get in the market. Would you like us to increase the property to that amount? Would you like to keep the existing tenant?” And in most cases, people are looking to increase those rents. That’s why everybody’s in real estate. You expect it to go up over time.
Real estate prices and rents have… You look it at a chart, they’re always up into the right. They have been for as long as they’ve been keeping score of those things. But it has put a little bit of a strain on the leasing staff. You really have to make sure that you’re vetting folks at these higher prices. When you’re giving an increase that’s 200, $300, does that tenant still qualify for the new increase, even if it’s an existing tenant? So it certainly brings its own set of challenges as we’ve seen rents escalate really more than they ever have in this given time period in history.

Dave:
Chris, you were talking about all this data that you look at with inventory and population growth. Can you just tell our audience a little bit about what the key factors and variables that you look at when you’re deciding which lots to pursue and what types of developments you’re pursuing strategically based on that data that you’re looking at?

Chris:
Absolutely. So Kathy mentioned it earlier, but our number one key component is, is there net-in migration coming to the area that we’re buying lots in? So if we’re going to be putting new housing inventory on the grounds, we want to make sure that there’s new people coming to that market to fill that gap. Fortunately, we live in Florida so you’re hard pressed to find a town or city or county in Florida that is not growing. We’ve been the beneficiary of a lot of COVID related relocation and we’re thankful for all these folks coming to town. So that’s the number one key component.
But then, quickly there behind that, we’re looking at the median household income in the market. Our goal has always been to provide housing that meets the widest range of tenants within a market. And so we look at, can the average person in a market afford three times the monthly rent? So if you annualize the rent, multiply by three, is the normal household making at or around that median household income? Because then we’re hitting the widest range of the market from a tenant base.
And so those are really the two biggest factors that drive our decisions. The others dig a little bit deeper. What are the jobs in the area? How many jobs are in the area? We pull a lot of this data from ESRI. I’m not sure if you’re familiar with ESRI, but it’s really the driving data behind CoStar and LoopNet, those sort of big data services. It really has a lot of granular information. Jobs and new jobs in the areas is a big one, college degrees versus not, or technical degrees within a particular community are a couple other things that we look at. And net worth. What is the net worth in each of these areas?

Dave:
Do you try and forecast out three or four years? Just out of curiosity. Because you were saying that as a developer you’re planning several years out. Are you just looking at data now and presuming these trends are going to continue or how do you think that far into the future?

Chris:
It is very, very tough.

Dave:
Glad we’re all the same page about that.

Chris:
We first try to make sure, does it make sense in today’s world? And then we look at what’s happening. So last year we saw rents go up over 20% on average. Certainly, that is not sustainable, that there’s just no way that continue to happen. So we have much, much lower expectations of rental growth in what we’ve seen. We still think that we’re going to see plenty of rental growth this year and we’ll reevaluate at the end of this year and see where things are trending. But we’re looking more at what are rents today when we’re making these decisions on property purchases. And if rents are able to go up over time, then fantastic. We’ve seen a lot of our clients go under contract and think the house is going to rent for $1,400 a month. By the time they close on it’s $1,550, $1,600 a month. So those are some really big pickups, but they’re not guaranteed. There’s no guarantees in real estate, that’s for sure. So we really try to stay on the conservative side of that approach.

Kathy:
So on the really challenging side of being a builder over the last two years as what you mentioned earlier, you shut down the world, keep people in their houses, you don’t have production. And then you turn the lights back on, everybody gets to go outside and do things, and the world isn’t ready for that. So obviously the builders felt the brunt of that in not being able to get the most basic of things. The things you wouldn’t even thought would be an issue, starting of course with lumber. That’s never, as far as I know, been an issue. Today it’s concrete. What are some of the big surprises you’ve had to face over the last couple of years?

Chris:
How long do you have? This has been a rough couple of years from a building perspective. Man, it’s been literally everything. You mentioned that the biggest one right out of the gate was lumber. Lumber was just skyrocketed and it went up. It doubled and we thought, “Well, it can’t go up anymore.” And then it tripled and it’s, “Sneeze Louise. It was impossible.” I mean we’ve seen such massive 30, 40, 50% increases in build costs in these markets in these time periods. It’s been incredibly hard to budget and to try and produce a product and give a price with the way it’s been.
If I was sharing my screen, I would share with you one of these reports that you were asking about, Dave. It’s the St. Louis Fed puts out a producer pricing index for inputs to housing. Oh my gosh, I mean for 20 years it was flat, flat, flat, flat, flat, and then all of a sudden it just went straight up. I mean, the last two years has been literally a straight up turn in the cost of materials. But lumber, again, to answer your question more specifically, lumber was the big one in the beginning. And then everything else started to pile on. As things got to be in short supply, it became more of instead of vendors bidding for our business, “Hey, this is what we can do the work for” and us negotiating a price down, it was really as a builder, we were bidding up prices to see if we could actually get them to show up at the job site because there were way more people wanting to build homes than there were vendors to do the various parts.
So we’ve seen shortages from everything from AC duct to garage door springs, to windows, doors, appliances for a while were a biggie. Oh geez, radiant ducts for fire rated systems in our quadruplexes. I mean, we finally found some of those and we bought a semi full of them. So we bought a couple thousand of them at once because we didn’t want to let them go. But that’s just perpetuating the problem, right? That’s just making it worse because there’s probably somebody else out there that needs them today and we have a truckload full of them. So it’s really been tough.
And I will tell you here over the last couple of months we’ve started to see some leveling out, I would say, at least in pricing in some of our markets. In some markets it’s still incredibly difficult. Southwest Florida, it’s hard to even find truckloads of dirt to fill the lots down there, let alone find concrete and block in those markets today. But we’ve seen Palm Coast, Jacksonville, Ocala, we’re starting to see our build times come down, which means that the materials are a little more readily available than they have been in the past.
Block is still an issue right now. That’s kind of our big, no pun intended, that’s our big stumbling block at the moment, is blocking concrete. But we start to see those coming around. When I look at the averages of what we are paying to build a home today, it’s still taking up slightly but not nearly as drastically as it has been over the last two years. So we look at our eight week average. Our eight week average right now is trending up about a thousand dollars. The total bill cost is about a thousand dollars per unit more than the average of the last eight weeks. I mean, in any given month during the last two years, that easily could have been 5,000 or $10,000 per unit. I mean, we’re down a several multiples of what we’ve been experiencing.
We still haven’t seen any decreases in pricing, which is a little frustrating honestly. As a builder, we see lumber prices coming down. But as lumber has come down, drywall’s gone up. Concrete’s gone up. Paint’s gone up. Every other input has really eroded any of the savings that we would’ve thought we would’ve seen from lumber. But to put a silver lining on it, it does seem to be flattening.

Kathy:
What have you had to change in your contracts? Your contracts with subs, with trades, with buyers. Because think of the builders who didn’t write the right contracts at the beginning and they’re stuck in these prices and can’t raise the prices and they’re just losing money. I mean, how have you changed the wording in your contract?

Chris:
Yeah. Well, and you’ve seen a lot of builders go out of business for that fact. Everybody thinks that this is such a great environment. A lot of people have been buying houses, but a lot of people have been losing money on houses too from a builder perspective. So to answer your vendor question, our vendor contracts have changed drastically because a lot of our vendors, we can’t even get to sign contracts anymore. I think those tides might be turning or might be starting to turn. But for the past two years, nobody would commit to a price. They’d say, “Hey, we think that we’ll have the material for you and we’ll let you know what it’s going to cost when we get it.” And so we’re really starting these houses without great budgets. We know what we think it should cost, but we’re really at the mercy. If AC units are in short supply and the vendor comes and says, “Hey, I got 12 guys that want one AC unit, how much are you willing to pay for it?” Those are some of the conversations that we’ve been forced to have.
And even right now, trusses for instance. They’re still in short supply. So even though lumbers come down, truss prices haven’t come down hardly at all because the truss manufacturers are going, “Well hey, you still can’t get them so we’re going to keep charging the price not because it’s what the material costs, it’s because nobody else has them.” So from a vendor perspective, it’s been difficult. We’ve really gone away from a lot of contracts because they’re not honoring them and/or they won’t sign them.
So from our perspective on when we’re selling home side, we’ve had to institute causes into our agreements that say, “Hey, this is the price right now, but when we go to build your home, if the price has increased, we’ll tell you what the increase is and then you have the option to terminate the contract or move forward at the increased price.” When we were seeing such delays to materials coming in, we really had to institute those sort of measures because we didn’t know when we were going to be able to start a house. And that was 2020, 2021 and early part of 2022.
I am happy to announce though, as of June, we were able to get caught up enough on production to eliminate the need for that. Those causes are still in our contracts, but the cause states that we’ll give you a price increase when the slab is poured. So since June we’ve been able to wait until the slab is poured so we have a much better visibility in pricing before we sell a home. So we are, knock on wood, hopefully out of the woods, on at least new contracts on those. We’ve still got a few working their way through the pipeline that are going to need some price increases but there’s a light at the end of the tunnel.

Kathy:
Does it still make sense for those investors? Again, most of your buyers are investors, whether they’re institutional or individual and they knew they were going into this with the idea that prices could go up. But have rents gone up equivalently and does it still make sense? Or have cash flows reduced dramatically?

Chris:
Well, we’ve seen two different things on that as well. For new product that we’re selling, as lot prices have gone up over time, we’re definitely seeing a compression in cash flow just simply because the interest rates have gone up so much here recently. Still positive cash flow on… The vast majority of the product that we build has positive cash flow. But to answer your question related to the people who have had price increases, the good news for those folks is we typically bought those lots at a lower basis. So even though there’s a price increase due to material increases, there’s not a full price increase to current market rates. So they’re still walking into a fair amount of equity in those properties, which is a great thing. But to your point, the rents have also gone up significantly over that time period as well. So really in a lot of cases, they’re the same or maybe slightly better in some cases, or maybe slightly worse in some cases, but very similar because we’ve seen such rent growth.
The real wild card is interest rates. What are interest rates compared to what they were when they contracted? What are interest rates today and what are they going to be in six months from now? I think as we sit here today, we’re probably going to be seeing another Fed rate hike. From my perspective, what I see in the world, I think we’ve already overcorrected, which tells me at some point in the future here, probably sometime next year, we’re going to start to see either leveling or maybe even backing off of some of those rates. So for me, in my portfolio, I’m looking at it from a perspective of locking in my basis now, because as I mentioned, the build cost isn’t going down. So locking in that basis and hoping for better interest rates in years to come.

Dave:
Chris, I’m sure you have a lot of friends and colleagues who are building around the country. I’m just curious what you’re hearing from them as well because at least what I see at the data is that construction starts and permits are trending down and people are not building as much. Is that what you’re hearing as well?

Chris:
We’ve seen the same data. Duval County permits are significantly lower. In all markets we’ve seen significantly lower permit levels. But what we haven’t seen because I think there’s a lot of properties still under construction, and that’s why we have not seen any real decreases in that pricing. So we’re hopeful that it’s to come. I talked to a lot of other builders throughout the country. We all keep thinking that we’re going to see some decrease, but it keeps not happening. So I don’t know if we’re just wishful thinking. Because some of this pricing gets very sticky. I mean, the material suppliers have now made commitments based on margins at higher price of goods that are paying their staff a lot more. So in some ways, it’s hard for the pricing to come back because we’ve all seen so much inflation over the last two years that we know we’re not going to get it all back. We’re never, never, ever, ever going to go back to pricing that we had pre COVID. That’s not ever going to happen.
We’re hoping for some sort of reprieve just as things stabilize and the supply chain straighten themselves out. But it always… Like I said earlier with the lumber, the lumber’s gone down, but we’ve had two or three other big things go up. So I’m reluctant to say that we’re going to see any sort of price decreases. I think from an inventory standpoint, I think we’re going to see a peak of inventory in Q4, maybe Q1 of 2023. So end of 2022, beginning of 2023.
But being a lot developer that sells homes to retail home builders, so all the National Home Builders, those guys are pulling way back on their starts. They all got burned in 2008, ’07 and ’08 badly so they have a big knee-jerk reaction to what we’re seeing in the world. So they’re saying, “Hey. Psst. Stop. Starts, mothball development projects,” which is going to in turn mean that we might have some increased inventory for a few months. But as that gets gobbled up, we’re going to be back to maybe even more of a severe shortage than we are today because really the building and development world/sector had really just started to catch its stride in being able to produce enough lots in homes to support the demand. And we were still at a major shortage, but we were starting to see that momentum to where we would have an equilibrium. Everybody putting the brakes on has really put a big damper in that. So yeah, we’ll see what happens, but right now I see a lot of people mothballing projects.

Kathy:
Even the build-to-rent institutional purchasers, are they slowing down?

Chris:
So the built-to-rent folks are not slowing down nearly as much, because as you can see with the retail home builders, not only are they pulling back on what they’re building so they’re going to have less supply ultimately, you have a lot less people that’ll qualify. So if you had somebody that was going to qualify at 3% for a retail home, they may not qualify at 6%, and probably don’t. Certainly not for the same home. So unless they’re going to move down in housing type, they’re probably not buying a home. So we have a lot more folks that are trending back towards rentals than really we had even anticipated previously. So the Institutional, again, some of the folks that we do work with, they’re still buying development projects. We’re just about to sign a contract with an Institutional to sell them another a hundred lots in one of our communities. So we see those guys still plowing ahead, but they feel the wind is at their back from a rental perspective. They’ve been waiting for this moment.

Dave:
Well Chris, this has been super helpful. You are obviously a wealth of knowledge and I’m just fascinated about this build-for-rent and think that it’s a really helpful lesson for everyone who’s listening to this, just learning from your experience here. But is there anything else that you think our audience of aspiring and active real estate investors should be considering about today’s current market conditions as they go and build their portfolios?

Chris:
Well, I’ll jump in with a couple of mine and I’m sure Kathy has some. One of the biggest things that we’ve seen change for our clients, our Main Street clients today, is they don’t have access to the institutional capital that these institutional buyers do. And so we’ve had to get creative with financing to help folks and figure out how to offset some of these higher interest rates. Everybody looks at that 6% rate that they hear on the news. That’s only one component. So we’ve seen a lot of lenders out there get very competitive. The lending market is rather disjointed at the moment. You see some lenders really hedging and putting big margins on their loans and then others are getting very aggressive and even offering rate by down solutions to clients to really bring that payment down. So we still see a lot of our clients doing Fannie and Freddie loans and buying the rate down to create that cash flow for the hold, for the investment that they’re buying.
We’ve also seen a lot of our clients move to some of these interest-only loans. So we’ve seen some very interesting product, 5/1 ARMs, everybody has a bit of a stigma of ARMs because that was one of the things that caused the problems back in 2005 and ’06. But ARMs done the right way for investor clients are great. That’s what these institutional guys are doing. They’re not getting 30 year fixed loans, they’re doing these adjustable mortgages that have some period of fixed rate. So I personally have been doing a lot of five year fixed rates. I found a product that’s non recourse, it’s five year fixed rate. At the end of five years it can adjust, but there’s caps on how much it can adjust. And at the end of the five years, it doesn’t balloon, it fully amortizes. So it’s still a 30 year loan, so you’re never stuck with that big balloon payment, you may get stuck with a higher interest rate.
But my thought is for my personal portfolio, I believe rates are going to go down in the next five years. I think they’re going to go down in the next 12 months, but I certainly believe they’re going to be lower in the next five years. So I anticipate that I’ll refinance out of those and into longer term debt. So I think for investors out there, particularly Main Street investors, don’t get stuck on the rate today. The beauty of real estate is you can refinance that property as often as you want to or need to maximize the return and the investment in that project.

Kathy:
Yeah. Another loan that at least in our developments people are choosing is the construction-to-perm loan, because it is scary to go into a contract and have no idea what rates are going to be like when the project’s finished and you got to close or else you lose your deposit. So I really like the, just get one loan, it covers construction, it converts to whatever your terms are, 5, 7, 10, or 30 year once the building is finished. So I’m taking those as well. I think it offers a lot of security.

Chris:
I 100% agree.

Kathy:
Sometimes, Chris, I don’t know if you do this, but if the buyer is then buying the lot and getting their own construction loan, oftentimes that means you can get the price a little lower because the builder’s not taking on that cost of debt.

Chris:
Yeah, absolutely. Debt is a… That’s big number in the home building game. That’s one of our biggest line items, is the finance cost. Individual line items anyway. So yeah, I think that’s a great way to go about it. We’ve done that on some of our personal building holds as well. I think all of these are things that we didn’t talk about a year ago. You know what I mean? And Kathy and I talk a lot, but there was no need to talk about it then. As the markets changed, now you need to think of these creative solutions. The option is, think of a creative solution to do business or just sit on the sidelines and do nothing and see what happens. Either one’s scary.

Dave:
Yeah, it wasn’t really hard when there was 3%, 30 year fixed rate mortgages to decide what loan product to go after as an investor. But as they say, the people who are going to get creative and find these solutions, like the ones you guys are pointing out here, are the ones who are going to get the best opportunities in this market. And from all the people we talked to on the show, it does seem like there are opportunities if you are willing to do that extra leg work and think through some solutions that you weren’t thinking through a year ago, just like the two of you.

Kathy:
100%. One thing about real estate having been in it for so long, is it’s always changing. When I first started, new homes were the thing. It was the same kind of thing. I could get amazing cash flow on a new home, so why would I buy an old one? And then all of a sudden everything fell apart and you could get existing homes for almost nothing. So of course we pivoted and did that and we’re buying foreclosures from banks and REOs. And then those all got bought out, I was like, “What do we do now? There’s no inventory. I guess we got to build again.” So it’s always changing. And if you’ve been in the game long enough, you’ll be changing too or else you won’t be playing the game.

Chris:
True. So true.

Dave:
Well Chris, thank you so much for joining us. If anyone who’s listening wants to connect with you, what’s the best place they can do that?

Chris:
Oh, we’d love them to come check us out at southernimpressionhomes.com. There’s a lot about our product and inventory on the website. There’s ways to interact with our team right there. Happy to connect that way. So just fill out one of the forms and somebody will be in contact almost immediately.

Dave:
All right, Chris Funk, thank you so much for joining us here On The Market.

Chris:
Appreciate you having me.

Dave:
That was awesome. Kathy, you have the coolest friends. Thank you for bringing Chris. How do I get cool friends like you?

Kathy:
Oh, well we search the country for them, I guess.

Dave:
Honestly, I’m actually curious, how do you meet so many people? Is it just networking and going to conferences? How do develop such a great network of other real estate investors and people who have helped you in your journey?

Kathy:
I do speak at a lot of conferences. I have had the Real Wealth show for, oh my gosh, 20 years so I’ve interviewed a lot of people. But our company is also based on finding really good builders and property managers and teams nationwide to help our members at Real Wealth buy stuff. So that’s my job, I got to find cool people.

Dave:
Well, you’re good at it.

Kathy:
Thank you.

Dave:
What did you learn from Chris today? I know you talked to him all the time, but was there anything in particular you got out of this conversation?

Kathy:
Just a reminder of how difficult it’s been. Obviously, we have three or four subdivisions. We finally sold off a couple of them, so that’s good.

Dave:
Nice.

Kathy:
But I’m not hands on obviously the way he is. And to hear all the challenges… And on my side I hear the investor complaints. So my job is to get everyone communicating. And so I figured there were some BiggerPockets people who also are frustrated with their builder. A lot of the comments we get from our buyers is, “Oh, they’re just trying to rip us off. They’re just trying to raise the prices because they can and they’re keeping all these profits.” And so I’ll put together the webinars and say, “Open your books. What’s going on? What are you paying for things? What’s your profit?” Generally, profit margins on new homes are really small anyway. They’re 5 to 10%. Generally, you make all your profit at the very, very, very end. And in our subdivisions, we still have to create… 30% of our subdivisions need to be affordable for the teachers and the firefighters and the police. There’s no negotiating on those. We’re locked-in in Park City, we’re locked-in on $400,000 properties that cost us 800,000 to build. But it’s an agreement, we have to do it.
So anyway, bottom line is I want investors to really understand that it’s not always the greedy builder that’s trying to rip you off. It’s just the way things are. It’s just inflation. Not just inflation, but it’s a severely unhealthy version of inflation that it also includes complete lack of supplies. It’s one thing to have things be expensive, it’s another thing to not be able to find what you need at all.

Dave:
Yeah, it’s crazy. That chart he was talking about, the Producer Price Index for home building is a crazy thing to look at if you’re at home and you just want to understand what Kathy and Chris are talking about. The new home industry actually has really good data, generally speaking, that just like an average person can look up if you just want to understand broad macroeconomic trends. So if you want to understand what Kathy’s talking about, go check that out for yourself. I think this whole industry is just really fascinating. The whole build-to-rent model just makes a lot of sense. And I know that there’s a lot of cries out there or headlines in the media that make it say like, “Oh this is the beginning of a renter nation.” The data honestly doesn’t really bear that out at all.

Kathy:
Yeah, doesn’t support that. I know.

Dave:
Yeah. Yeah.

Kathy:
I’ve been on CNBC. I’ve been-

Dave:
Home ownership rate is the same. It’s the same.

Kathy:
They’ve been saying that for 10 years and I would go on these big stations on, again, CNBC and Fox and ABC and say, “No, no, no, no, it’s not that different.” It’s always in the 60%. Like 62% home ownership. The highest was, I think, we got to 69. There are still a lot of homeowners out there.

Dave:
Totally.

Kathy:
Right.

Dave:
And to me, if I were a renter… I actually am a renter. I rent in Amsterdam. But if I were a renter in the United States, a build-to-rent like subdivision and getting single family home sounds like a good option. So to me it sounds like if this is a profitable endeavor for builders and investors and it’s allowing people to live in a product that they really like, it just seems like a really interesting trend that is likely going to continue for the next couple of years and something that investors should be considering. Because I always assumed it was just at the subdivision level, not that people were doing build-for-rent in terms of infill. But I guess to Chris’s point, you have to have the systems to manage those efficiently to actually generate the cash flow.

Kathy:
Yeah, ours has always been infill or we would negotiate with builders for our clients that will take 10% of your inventory. But most subdivisions don’t want more than 10% of the homes to be rentals because it can change the vibe be if they’re individuals, because some people might self manage, some might hire a horrible property manager and it can bring down the value of the other homes around it if it’s not well cared for. So I would say that the number one thing that investors should keep in mind, because there’s going to be a lot of builders looking their wounds right now, it is a good time to be able to probably get a good deal on new homes. But do keep in mind, ask, “How many other renters do we have? Who are you selling to?”
And most importantly, I’ve met a lot of people who’ve come to me and they want us to promote them and sell their stuff to investors. I won’t say any names, but there’s one guy who’s got 800 homes in his subdivision that he’s selling one off to investors who are not like Chris. Now, Chris is going to manage those subdivisions, but this other guy, he’s just building them, doesn’t have property management and he’s selling 800 rentals to different buyers. That is not going to end well. So always ask, in my opinion. Think about it, one person faces a hardship, they need to fire sell their property or they need to just get anyone in there, they bring in the local drug dealer and it just could really spread like wildfire very quickly.

Dave:
Oh yeah, yeah. Sorry. I was glad you asked that question because I’ve always stayed away from investing in subdivisions because it just seems like there could just be a quick race to the bottom. If there’s an increase in vacancy in the market and all of a sudden your neighbor needs cash more than you do and they drop their rents 200 and then the neighbor next door drop, there’s no way to differentiate. Your product is exactly the same. And so the only way you compete is on price. And if someone else is willing to go lower than you, you just get screwed. So I was really glad you asked that question. That honestly just sounds like a nightmare, just selling those individual units one at a time to individual landlords. That is not a situation I would want to get myself into.

Kathy:
Be very careful out there. Yeah, because there’s always going to be greed and there’s going to be desperate sellers, desperate builders that will just sell to anyone. So that would be my first question. How many investors do you have in here? And then you might have trouble getting financing if it’s all investor. I mean, that was my other question to this guy. How on earth or are these people going to get loans when the lender finds out that’s basically an apartment?

Dave:
Mm-hmm. Yeah, it’s a condo basically.

Kathy:
Mm-hmm.

Dave:
Yeah, that’s a good thing to look out for. But I do agree with you that right now is probably a better opportunity than most times to look at new construction. I’ve never bought it, but I’ve been looking at it because the premium now is about 8% nationwide. And in some markets it’s lower. It is extremely close in terms of the price of existing homes and new homes. Depending on where you are, that could allow you to get a brand new product at a similar price to what you would pay for an existing home. So like Chris said, the prices just aren’t that different and you get a better product. So I would recommend people look at it. It’s traditionally not the best way for investors to make money, but right now it could be.

Kathy:
Oh, I think so. I mean, I think I’ve mentioned we are launching another single family rental fund in the Texas area. We’re really focused on buying new homes that builders, like Chris said, they are going out of business and we can help them, save them, but also buy these either half finished homes or lots that they couldn’t complete. And that’ll be part of our rental fund.

Dave:
Great. And I just watched your YouTube video about it.

Kathy:
Oh, cool.

Dave:
Yeah, it was very good. So if anyone else wants to, check that out, Kathy’s Real Wealth Network. Well, Kathy, thank you so much for joining as always. And thank you for bringing Chris who was an awesome guest. I appreciate you recommending him.

Kathy:
Thank you. I learned a lot too.

Dave:
All right. Well, thank you all for listening and we’ll see you next time for On The Market.
On The Market is created by me, Dave Meyer and Kalin Bennett. Produced by Kalin Bennett, editing by Joel Ascarza and OnyxMedia, copywriting by Nate Weintraub. And a very special thanks to the entire BiggerPockets team. The content on the show On The Market are opinions only. All listeners should independently verify data points, opinions, and investment strategies.