Undoubtedly, active real estate investors have heard about raising private money for real estate projects. Blogs, podcasts, books, and other media share tactics to successfully find this capital and have it fund your real estate investments using other people’s money (OPM). 

This magical pool of private capital is much like a secret society with no storefronts, no advertising, and no easy way to search for these lucrative sources of OPM to help you fund your next project. However, what isn’t discussed as often is how to “be the bank” as a private money lender, an often-overlooked source of passive income in real estate. You might be surprised by how easily private money lending can fit into your investing goals and lifestyle.

Most assume private money lending is a niche market reserved for retirement plans and older retired people with millions in loose change. However, private money lending—the act of being the “other” person in other people’s money—is actually a diversification strategy employed by experienced and novice real estate investors alike. There are a few scenarios we commonly see for active investors who are also private lenders, all of which fit nicely into an existing real estate portfolio.

Lend Private Money Instead of Flipping Yourself

The first scenario we will cover is flipping. This flashy HGTV style of investing often involves a lot of time and capital to acquire and renovate a property. As the market changes or possible life events require an active flipper to pause for a period of time, flippers often utilize private money lending to earn some interest income while they take a break between projects. 

This capital, which otherwise might sit in a low-interest savings account, is instead used to help fund another investor’s flip project. Flipping will always be an active income source, but why not take a break and earn some passive cash flow by becoming a lender on a project instead? Similarly, an active investor may use a retirement account to fund other investor projects since they cannot lend the money to themselves. Borrowers pay interest to your future self in that case!

As an active flipper grows, they may choose to “graduate” from such a time-consuming activity as flipping altogether and pursue more passive income routes. Private money lending can be one of those strategies! The lack of strict time commitments attracts these maturing active flippers as they search for more relaxed cashflow approaches. As an active flipper, you might be under very tight deadlines, dealing with contractors at the job site, difficulty getting materials, or even finding more problems with the project than initially thought. 

A phone call can come in anytime with a potential (and sometimes literal) fire to be put out. In private money lending, rarely is there an emergency moment that must be addressed immediately. This allows an active investor to regain the one asset no one can buy more of: time. When active investors start transitioning to private lending, they still underwrite the project the way they would if they were to purchase the flip themselves. The bonus this time is that they get to sit back and watch the interest income stream in monthly without the hassle of dealing with project budgets, sub-contractors, and supply chain issues. 

Lending Money Instead of Managing Rental Properties

Investors who typically use the BRRRR method to acquire and stabilize buy and hold investments are increasingly concerned about how rising interest rates might affect their ability to refinance and maintain cash flow, much less get most or all of their capital back out of the deal. Instead of rolling the dice in a fluctuating market, rental property owners may choose to lend out their capital to other active investors while they wait and see what interest rates will do in the long term. Rising interest rates are good for lenders, and private money lenders are no different!

Don’t think the benefits are just for the active and scaling investor. Landlords who aren’t interested in growing their portfolios can choose to unlock the equity in their investment properties. You can do this through cash-out refinances or a home equity line of credit (HELOC), arbitraging the funds into private money loans and earning a spread on the interest. In other words, if a HELOC is worth $100,000 at a variable interest rate of around 5%, and then you lend those funds out to an investor at 10%, you will earn the difference between these two rates. In this case, 5%.

Landlords approaching retirement age and making plans for their families may also turn to private lending to continue cash flow from real estate without having heirs take on the burden of rental units. If market conditions make selling these rentals attractive, landlords may choose to transition that capital into private money lending to keep the income stream they acquired through rental units. Some landlords may own properties in multiple states and want to downsize to make managing the portfolio easier with fewer vendors needed and less complication with income taxes. These opportunities to pivot make a great segway into private money lending!

Private Lending Can Be a Strong Starting Alternative to Wholesaling

While this is a more sophisticated approach to private money lending using “borrowed” capital, private lending isn’t just for experienced investors. In fact, private lending can be a preferred entry point into real estate for many investors gun shy on the idea of wholesaling. All too often, wholesaling is touted as the best and fastest way to get into real estate with little to no money. 

While that may be true for some of the brave souls out there willing to undertake all the actions needed in this multi-disciplined sector of real estate, the fact is that many newbies are often discouraged by how many skills and competencies they must learn to truly be successful in wholesaling. In addition, similar to active flipping, wholesaling requires a near-constant connection with your cell phone as motivated sellers don’t generally make appointments ahead of time to discuss a deal. 

Cold calling, door knocking, and negotiating with reluctant sellers can be overwhelming and lead some new investors to seek other entry points into real estate investing. Armed with a “small” amount of cash—perhaps not enough to truly start a flip on their own—investors act as the bank for other investors so they can earn interest income and learn how to underwrite deals along the way. 

The Benefits of Learning About Private Lending

Having covered who may consider private lending, there are also numerous benefits to learning more about private lending and incorporating this passive income opportunity into your real estate investment strategy. First, the lender gets to set the rules. The lender can choose how much to charge in interest rates (within state and federal regulations) and the terms and conditions of the loan. Private lenders can walk into any deal knowing ahead of time what they will be making, which likely isn’t possible with other methods of investing in real estate. Many private lenders choose short-term loans offering CD-like liquidity without the ultra-low interest rates currently offered on those types of depository investments. Each time the capital is turned over, it is another opportunity to earn origination points and any associated fees with the loan.

Additionally, the underwriting associated with being the creditor, or lender, on an investment project is similar to the due diligence of the active investor. For novice real estate investors, this is a relatively safe way to learn the ropes while a lot of the heavy lifting is done by your more experienced borrower. Experienced investors looking to get into more passive investing strategies are already familiar with underwriting projects, so the transition from flipper or landlord to lender is smooth. 

Private money lending is also a team sport. Active investors may be used to “going it alone,” often shouldering the responsibility entirely for the progression of the project. On the other hand, the lender has multiple professionals to help advise and protect the capital in the loan. 

Private money lenders have legal help in drawing up documents for the loan, a title representative to do a title search and assure clear title, a hazard insurance broker to help review insurance quotes from the borrower, and even other private lenders in their network to help balance out their risks and rewards in the loan. If a private lender builds a solid virtual team, many simply become the reviewer of information instead of the collector, which is even better.

Perhaps one of the best benefits of private money lending is that it can be done anywhere at any time. A business in a backpack, if you will. 

This isn’t just financial freedom but more of a lifestyle choice. Those seeking more time back in their busy lives but want to make their money work for them in real estate-backed private money lending while living their best life. Most people pursue real estate investing for financial freedom, but most of the time, what they are really seeking is time freedom or even geographical freedom. Their “why” often revolves around wanting to do what they want, where they want, not necessarily having $10,000 per month coming in as income. For those who value time freedom over anything else, building a private lending practice from anywhere in the world is easy! 

Conclusion

To learn more, check out our latest book coming out July 28, 2022, called Lend to Live: Earn Hassle-free Passive Income in Real Estate with Private Money Lending. 

Even if you don’t feel private money lending is a path you want to explore, learning more about how it’s done safely and securely, from the lender’s point of view, can help you raise private capital. Private lenders will want to work with borrowers concerned with and know how to mitigate the risks associated with being the creditor on the loan. The more acumen you can display to potential private debt partners and share how you can protect their investment through safe and secure lending practices, the more confident the lender will be in working with you. 

Armed with the knowledge of how to do private lending, you can share your real estate knowledge with others in your network, potentially making some your own private lender!

Dave:
Hey, everyone. Welcome to On The Market. I’m Dave Meyer. In today’s bonus episode, we are going to be talking about a topic that I’ve wanted to explore in depth for quite a while, which is the state of the short term rental market. If you know anything about this industry, you know that it has been absolutely booming over the last couple of years, but as we enter into uncertain economic times and face a potential recession, the question is, “Can short term rentals maintain this growth and what should you do as an investor to best capitalize on current market conditions?” Before we get into today’s topic, I do want to make a quick programming note. Hopefully you’ve been following On The Market since the beginning. We really appreciate it, but maybe if you’re new here, you might also have noticed that we usually only have one podcast per week, but recently we’ve actually started doing these bonus episodes like the one you’re listening to right now.
The reason we’re doing that is because when our producer Kaylin and I get together to meet about what topics we want to cover, there’s just too many topics. There’s so much going on in the economy and news and in the investing industry, that we want to be able to share more with you. So we decided to not limit ourselves and that when there is enough information, we are going to be putting out two episodes per week. We’re not going to be doing this every single week right now, but you should be checking back on your feed on Fridays to see when we do have bonus episodes. I do think we’re going to have them more often than not. So most weeks we are going to have two episodes now, one on Monday and one on Friday. Definitely make sure to keep an eye on your feed, because you don’t want to miss any of the great content that we’ll be putting out. Let’s get into our short term rental topic today, but first, let’s take a quick break.
All right. The short term rental industry. This is such a popular topic. I’m really excited to get into this today with all of you. This is something that keeps coming up over and over again. What’s going to happen in the short term rental market, particularly if there is a recession? If you follow this podcast or follow me on social media, you know I’ve been openly musing about what might happen, and rather than just talking about it, I decided to dive into the data and get to the bottom of what is happening in the short term rental market, and that’s what we’re going to talk about today. Before we get into the data, let’s just quickly remind everyone, if you’re not familiar, what a short term rental is.
It’s basically when you own an Airbnb or a Vrbo, you typically buy a single family residence. It can be a small multifamily. You furnish it and you rent it out. The reason people do this is because it has tremendous cash flow potential. As opposed to a traditional rental property, you can get way more revenue per night on a short term rental. Of course, you don’t necessarily have every single night booked. You can have occupancy problems, which we’ll talk about tonight, but the potential for revenue on a short term rental is typically way higher than if you rented the same home out as a traditional rental. That is why it has become an incredibly popular strategy over the last couple of years. I myself own one short term rental. I bought it in late 2018. It’s been doing really well for me. I’m not some super expert here. I’ve not done this five or 10 times. Rob Abasolo or Tony Robinson, way more experienced here than I am, but I do have experience running and managing and buying a short term rental.
I know a lot of people with short term rentals, so I do understand the industry and let’s be honest, first and foremost, I am a data analyst and I do understand the data that is coming out about the short term rental industry, so let’s just dive into that. As with most things economics, it sounds boring, but it boils down to supply and demand. I’m going to break down the data at first just by that. First let’s look at demand. As of May 2022, demand in the U.S. is extremely strong. The total nights that were stayed in any short term rentals in May 2022 was up 18% over 2021 and was up 26% over 2019. So we’re seeing a huge amount of demand for short term rentals, and I think it’s worth mentioning that I am getting this data from AirDNA. They’re a great data provider. I’ve used them for years. I have no affiliation with them, but they put out great data. You can go on their website and check that out.
So demand looking strong in terms of total nights. It’s also looking good in terms of new bookings. The difference here is… The first thing I said is total nights. That’s again, how many nights are stayed in all STRs and then the next stat is new bookings, which is how many new vacations essentially were booked in May, and that was up 2.6% over last year. I know 2.6% doesn’t sound like a ton, especially when total nights were up 18%, but it’s important to note that in normal times, that’s what things grow like. We’ve gotten accustom over the last few years to things growing up double digits year over year, all the time. That’s not really that normal. So 2.6% is not amazing. It’s not what we’re seeing in the rest of the industry, but it’s still up, and it’s notable because it’s a reversal of where we were in March and April.
I’ve been following this data a bit and in March and April, I was a bit concerned to see that new bookings were down in March and April over 2021 levels. Demand was falling a little bit. We weren’t seeing as many new bookings, but in May that reversed, and now we are seeing positive year over year demand. So that is all of this. All of the demand data is really strong for short term rentals right now. That is great news for anyone who’s currently an investor, or if you’re thinking about getting into this industry, you can rest assured that right now, May 2022, demand super strong for short term rentals.
The story to me though is more on the supply side, because as of May, there was 1.3 million available listings, and that is up 25% year over year, which is massive, massive growth. Take note of that. 25% year over year. That means that supply is growing faster than demand, and that has negative revenue implications. If you understand supply and demand, you know that if supply is going up faster than demand, that means that the demand is going to get spread out across supply. There were 84,000 new listings on Airbnb and Vrbo in May, and so even though demand was up, that demand was spread out amongst more properties. 84,000 more properties. That has led to the single most notable data point that I want you to remember from this episode, and that is that occupancy was down 8.6%.
This makes sense. Demand is up, which is great, but supply is also up even more than demand to the point where occupancy is starting to fall. I don’t want to be alarmist, but I do think this is a really notable shift in market dynamics that everyone who’s interested in this industry should be paying attention to. If you own a short term rental, there are basically two variables that dictate your revenue. One is your average daily rate. That’s the amount you charge. Like if you go to a hotel, you pay 200 bucks a night, that’s their average daily rate. Every short term rental also has an average daily rate. That is super important to short term rental investors. The second thing is occupancy, because you need to… If there are 30 days in a month and you get 50% of them filled, then you have 15 nights. You multiply that by your average daily rate, and that is how much revenue you have.
So, if occupancy is going down, that means that your revenue is probably going down. Now that’s important, and that’s why I want you to pay attention to this, but on the other side, it is worth mentioning that the other part of the equation, the average daily rate, which I just mentioned is up 4.6%. That is good, but it’s not up enough to counteract that occupancy in my opinion. 4.6% for an average daily rate in normal times would be great. Don’t get me wrong. In normal times that would be an excellent increase year over year, but remember inflation is 8.6%. So, the average daily rate is not keeping pace with inflation, and it is notable that this 4.6% increase year over year is the slowest rate of increase since April 2020.
So basically since pre pandemic levels, we are starting to see the pace of increase for ADR start to go down and occupancy is going down. Now don’t panic. Demand is up. Things are still looking really good, but I just want to… My job here, and what I’m trying to do here, is to tell you the whole state of the industry, and this is what’s happening. Demand is up. Supply is growing faster and occupancy is starting to fall. Again, this is a snapshot in time. This is just May 2022, but something you should keep an eye on.
The next thing I want to talk about with regard to the short term rental industry is tourism and hotels in general. Because while we’re mostly here talking about real estate investing, you really can’t compare short term rental market to the flipping market, or even some ways you can’t really even compare it to the traditional rental market, because demand is really more measured against the traditional tourism market. It’s measured against hotels. Let’s just quickly… I found some data. Let’s just talk about what’s going on in the tourism industry as whole to help contextualize what’s going on in the short term rental industry. In May, according to Hospitality Net, hotel occupancy went up 4.1% year over year. We just talked about short term rentals going down 8.6% in May. Hotels had occupancy go up 4.1%. CoStar, which is a big data firm, and they track this, they said that hotels have passed the very important benchmark of 60% occupancy. Record number of hotels are going above 60% occupancy rate in June. That means hotels are doing really well, but remember they got absolutely crushed over the last couple of years.
In my opinion, this is notable. We should be paying attention to the fact that hotel occupancy is growing when short term rentals are going down, but I also think that this is sort of natural and this is just my opinion. This isn’t really supported by data, but I just believe that over the last couple of years, it has been especially poised for short term rentals, because no one wanted to go to hotels. People were trapped in their house. They were afraid. The bars were closed. The restaurants were closed. There was no gyms, there was no pools, so people I think naturally went to short term rentals because it offered a better situation for pandemic era traveling. Now, as we see the world opening back up, I think it’s natural to see a reversion. More people are going to start going to hotels, because amenities are open. They’re back. Short term rentals have gotten more expensive and maybe there’s just a rebalancing here.
But again, something to keep an eye on, is is this a trend that’s going to continue? Is short term rental demand going to keep declining and hotels, are they going to start to keep seeing a higher percentage of travel nights as compared to short term rentals? That is just… I wanted to take a quick look at tourism, because I do think if you’re in this industry, you should be paying attention to hotels, because that… You are competing against other short term rentals, but you’re also competing against hotels, so you need to pay attention to the data and information that’s coming out in the hospitality industry, because that is one of your main competitors. The thing here is though, if demand for travel is going up across the board, then it’s not a zero sum game. You can have hotel occupancy rise and you can have short term rental occupancy and revenue rise at the same time as long as overall demand is increasing, which brings up a point, “Is that going to happen?”
Let’s transition now over the… The first couple minutes of the show, we’ve been talking about what is happening, what we know has happened with data. And now let’s look forward and see what might happen in the short term rental industry, especially with what might happen in a recession. Again, I want to break this down into supply and demand. Let’s look at what might happen with demand. Super hard to forecast far into the future, but I wanted to just see what’s happening this summer. This comes out in July, but we only have data back until May as of this recording. I want to see what’s going to happen this summer.
The information is overwhelmingly positive for the entire tourism industry. 73% of Americans have summer plans to travel, and that is up from 53% last year. That is a huge increase. That is almost a 50% increase. The other really notable thing is, almost 50% more people plan to travel this summer and they plan to spend $300 more on that vacation. That’s about a 10% increase. Even though inflation is about 8.6%, they’re planning to spend 10% more. That means even in inflation adjusted dollars, people are planning to spend more on their vacation and more people are going to spend. So total dollars going into the tourism industry and into the lodging industry, so short term rentals and hotels, looking real, real good for the summer right now. On the other side, I do want to just point out that there is some pullback here and that… Of the people who aren’t traveling, a lot of them are saying they’re not going to travel because they can’t afford it.
Last year, 43% said they’re not going to travel, because they can’t afford it. This year it’s 57% say that the reason they’re not going on a summer vacation, is because they cannot afford it. To me, this is probably the very unfortunate impact of all of this inflation. People’s discretionary income is being eaten up by increases in gas costs or food prices or whatever else they need to spend money on, and they have less money to go on vacation, and just the cost of lodging and vacation is a lot more expensive. That is unfortunate, and it is something to note that more and more people are not traveling because it’s more expensive, but generally speaking, demand looks very good, at least for the next couple of months. What happens beyond that is really hard to say, because honestly we don’t know if we’re going to go into a recession.
Personally, this is just speculation, it’s my guess. I do think we’re going to go into a recession. I’ve seen that a lot of forecasters say that we are about 75, 80% chance that we go into a recession. I’m going to do a whole episode about what that even means, because I know people panic when they hear recession and think housing crisis, they think back to 2008 and financial crisis. That’s not necessarily what happens in a recession. In fact, that’s not what usually happens, but I just want to say that I do think we are probably going to see a recession, at least in the traditional definition, which is two consecutive quarters of GDP declines. Now, if we go into a recession, it is hard to know what will happen, but Tony Robinson, who is the host of the BiggerPockets Rookie show did some research and found that… He looked back at the great recession and he saw that in 2008, vacation spending actually dropped 3%, which is way less than I thought it was going to be.
I thought it was going to be 10 or 15%, but there’s only 3% in 2008. 2009, we were still in a recession. It did drop 9%, which is a considerable amount. If you are a short term rental owner and your revenue dropped nine or 10%, you would feel that probably. Given that the great recession was the worst economic climate since the great depression, that’s not all that bad. To me, the worst case scenario is not that travel spending will go down all that much. Of course, it could be different this time around, but just want to provide some historical context. Thank you to Tony for providing that information. That’s where I see demand going at least for the next couple months, which is really the only thing we can forecast. Everything’s so murky, looking past three months out is really difficult.
Three months out things look really good, past that it’s hard to tell. It depends what the economy as a whole does, but Tony provides some great data that showed that worst case scenario is probably not that bad. The other side is, will supply keep increasing. Remember the thing that drove down occupancy in May, was that supply was going up so quickly. I think there is a chance supply could keep growing, but I think it’s going to slow down and I think it’s going to slow down a lot. I think that’s because of the reason the whole housing market is slowing down. Less homes are selling right now. Less homes are trading, which means fewer are probably going to get converted from either a traditional rental or a primary residence into a short term rental. I just think people have less risk appetite right now. Unless you’re a professional investor, some of you probably are, less people are likely going to be doing it.
I think there’s going to be less amateurs getting into the business. One thing… I don’t have a lot of data about supply. It’s hard to know. This is just speculations based on the larger housing market. One thing I do just want to call out and something for everyone to think about, is in a recession will some short term rental owners convert back to long-term rentals, because as I said, the reason people love short term rentals right now is the cash flow potential is great, but it’s riskier. You have no guarantee that you’re going to get a certain amount of bookings on any given month at any given night. With a long term rental, you get less revenue, but it’s pretty guaranteed if you get good tenants. I’m curious if some short term rentals are going to convert back to long term rentals, which could be good for them. Depending on your financial situation, you’d have to make that decision.
But I think it’s really interesting because if that happens, that could lower supply and that would help out all the people who stay in the short term rental industry. That is just a dynamic I’ve been thinking about. I don’t know what’s going to happen there, but again, I just want to raise that and talk about that. That’s where I think it’s going to go. Demand is really strong right now. I think the market looks really good for short term rentals at least for the next three months. Things to keep an eye on, will supply keep increasing and will occupancy keep going down? That’s where I would focus if I was interested. I am interested in short term rental market, but if I were you, thinking about what to do with your own portfolio, whether or not to jump into this market, those are the two metrics I would really be following.
Before we move on, or before we end this episode, I do want to talk about one other thing, which is about vacation home demand. I know this isn’t exactly the same as short term rentals, but I think that… You’ll see what I’m getting at, but basically second home demand… This is more like not investors. Normal people, wealthy people, who have enough money to afford their primary residence and a second home. The demand for second homes absolutely went wild at the beginning of the pandemic. It actually shot up to about 90% over pre pandemic levels in March 2021. Almost double the amount of people were looking for second homes and this makes sense, right? I mean, I think this was fueled by a bunch of things, but just to name a few, super low interest rates that fueled the whole housing market.
Then we had the stock market and crypto markets going crazy, so people had a lot of cash with which to do whatever they wanted and some people just wanted to buy a second home. Next was work from home. If you could afford a lake house and you could work from your lake house, don’t you think you would want to do that? I certainly would. People were probably doing that and if you could afford it, people were thinking about a second home. And the last thing, this is hard to quantify, but people couldn’t go on traditional vacations, so there was people who wanted to travel and couldn’t travel internationally. Maybe you go buy a lake house, you buy a beach house, buy a mountain house because you want to be able to get out of your home, get out of the city, whatever and travel.
People really, really wanted second homes. Now, fast forward a year to May 2022 and demand for second homes has gone back down so far that it’s now below pre pandemic levels. Not by a lot, 4% below pre pandemic levels, but for obvious reasons. I mean, stock and crypto markets have tanked. Interest rates and affordability… Interest rates are going up. Affordability is going down. These are dynamics we’re seeing across the whole housing market, obviously going to hit second home demand first in my opinion, because when it gets less affordable, people are going to focus on the things they actually need. You don’t need a second home. And so demand to me makes sense that it’s going to go down. I also think it’s worth mentioning and it’s often really overlooked, that during the pandemic, some regulations came out from the government that added fees to mortgages for second homes, and it makes them actually even more expensive.
Mortgages are getting more expensive, because interest rates are going up, but second home mortgages are also getting more expensive, because the government added fees and for a $400,000 property, those fees can be about 13 grand. That’s 3% of the purchase price. That’s considerable amount of money, right? It’s getting less and less affordable, less and less attractive to buy that second home. Guys, I don’t think this means that the whole market is going to crash. I think actually at this point in the economic cycle, we are at peak economic activity right now. In my opinion, we are probably going to go into a recession over the next couple of months. I think that’s the most probable thing. Again, I don’t know, but that’s what I think is most likely, and at this point in the economic cycle, demand for second homes being down makes total sense to me.
I don’t think that is an indicator that the broader housing market is going to crash, but I do think that this means that in some markets we are going to start to see declines. The reason I’m bringing this up, is because we’ve been talking about short term rentals. Now I’m talking about second homes. The markets where a lot of second homes are, are also the markets where a lot of short term rentals are. These are vacation hotspots. The places people want to buy second homes are the same places that people want to go on vacation and therefore good places for investors to buy short term rentals. If I had to guess, and I am speculating here, but I think that there is a good chance we see vacation hotspots, particularly high price vacation hotspots, start to see prices retract over the next couple of months.
I don’t think there’s going to be a crash, again, but I do think in some beach towns, maybe in some lake properties, maybe in some mountain towns, we start to see these prices come down. I think that means there could be buying opportunities. If prices start to come down and there is less competition, there’s less demand for people who are in real estate for the long term, which you should be. Real estate is not a get rich quick scheme, it is a long term investment strategy. This could be a good time to consider buying if you can find a deal that pencils out and makes good cash flow and all of that. My particular short term rental is in a ski town in Colorado. It does extremely well on a cash flow basis, but I believe that the valuation… It’s gone up almost 90%, the value, in four years.
I think it’s going to come back down and that’s okay to me. I’m not planning to sell it, so it’s just a paper loss. I know that it’s still generating good cash flow, but I think that if you are holding it or thinking about selling it, there is a good chance that these prices come down, three, five, maybe even up to 10% in certain markets, but I don’t think it’s going to be crazy. That’s just my read of the situation. I could be completely wrong about that, but that’s how I’m personally thinking about it and just encourage people to keep an eye on it. If you want to get into the short term rental industry and demand remains strong, but prices start to come down, that could be a great time to look for buying opportunities.
All right, everyone. That is what I got for you today. Just to summarize what we have talked about here. Current state of the short term rental market is strong. Demand is doing really well, but supply is starting to increase faster than demand and we’re seeing occupancy go down. That’s the number one thing you should keep an eye on. Tourism, overall, looking really good for the summer, but unclear what happens after that. We need to see if we go into a recession and if people start losing their jobs, if the unemployment rate goes up, I do expect demand to drop off, but not in some crazy way. As Tony’s research showed us, it’s not going to be some disaster, but it could decline five, 10% at worst in a recession. Lastly, I do think that there is buying opportunities in some high priced vacation hotspots, because I do expect that prices could come down in some really popular beach areas or mountain areas.
It’s all going to depend on the market. The Smokies have a huge amount of demand. I don’t expect it to go down there, but there are places maybe in Florida or the Northwest or on the beach that might start to see some declines, and that can mean good buying opportunities. Overall, as a short term rental investor, I think the long term prospects are still really good, but you should keep an eye on the things that we mentioned today. If you all have any questions about this data or anything else, you can reach out to me on Instagram. My handle is @thedatadeli. I would love to hear what you think about this information and what you think about these bonus episodes, because this is something new that we’re doing, and I would love your feedback about what you like. If there’s something we could do better, that would be a super big help to us. Another big help, is if you do like this episode, to give us a five star review on either Spotify or Apple. Thank you all so much for listening. We will be back on Monday with our regularly scheduled episode.
On the Market is created by me, Dave Meyer and Kaylin Bennett. Produced by Kaylin Bennett. Editing by Joel Esparza 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.

For months, I, along with many prominent housing market analysts, have been forecasting a big shift in the housing market at some point in 2022. 

For most of the last two years, we’ve been in an unbalanced housing market that strongly favors sellers. Bidding wars, offers over asking, and waived contingencies have become the norm. But as interest rates rise, affordability declines, and fears of a recession loom, buyers are gaining back some power in the housing market. 

As the dynamics of the market change, appreciation rates should cool dramatically and become flat or even negative. But real estate is local, and I believe the most likely scenario over the coming months is that some markets will decline while others will continue to grow, albeit at a far more modest pace than over the last several years. 

The question then becomes, which markets are at risk of decline, and which will see prices stay steady or even grow? In this article, I will explore data to determine the short-term strength of individual housing markets in the U.S. to help you identify opportunities and make informed investing decisions.

Below you’ll find a complete analysis and a downloadable city-level spreadsheet. 

The Big Picture 

Before we get into the localized data, let’s look at June’s housing market data on the national level as it helps provide context for the regional differences. 

First and foremost, things haven’t changed too much in terms of prices and appreciation rates just yet. The median home price for the week ending July 3 was still up about 12.5% year-over-year. That’s down from last summer’s peak when appreciation rates were around 20%, but this level of growth would be unprecedented in any pre-pandemic period. 

Although prices haven’t come down on a national level just yet, it is worth noting that price drops are up almost 4% YoY and are much higher than at any point since at least 2019. 

A quick note on price drops: They’re worth tracking, but I don’t put much weight on this data point. Price drops often reflect the behavior of overzealous sellers rather than a lack of demand. Following two years of unprecedented seller power, I’d expect an increase in price drops in almost every market—even the strong ones. Huge increases in price drops worry me (Austin, TX has seen a nearly 500% increase in price drops YoY), but seeing double-digit increases doesn’t concern me as much. 

That being said, price drops can be a lead indicator for shifts in the market but should be considered alongside other indicators. 

As I’ve written before, the main trend shifts that need to occur for housing prices to moderate or decline is that both active listings and days on market (DOM) need to increase. You can read all about why I believe this here, but in short, active listings and days on market are good measurements of the balance between supply and demand in the housing market. When inventory and DOM are low, it’s a seller’s market, and prices generally rise. When inventory and DOM rise, buyers gain power, and prices flatten or decline. 

As you can see in this chart provided by Realtor.com, active listings are starting to tick up nationally and are up about 19% over June 2021. To be clear, active listings are still dramatically below where they were pre-pandemic. Still, we’re no longer in the declining inventory (on a year-over-year basis) era that lasted from April 2020 to May 2022. 

June 2022 was the first month we’ve seen year-over-year gains in active listings for more than two years. 

On the other hand, days on market (DOM) is still near all-time lows and is about half of what it was in 2019. This means at a national level, there is still strong demand for housing. If demand had evaporated, listings would be sitting on the market longer, but they’re not. 

Note that in both of these charts, some of the recent increases are due to seasonality. You’ll notice that active listings and DOM typically rise over the summer and decline in the winter, and you need to account for that. We’re looking for when DOM sees year-over-year gains, which hasn’t happened yet. 

All told, on the national level, the housing market seems like it’s starting to shift, but modestly. DOM is still low, signaling sufficient demand, leading to prices remaining up a whopping 12.5% year-over-year. For prices to moderate or decline, DOM and active listings need to get much closer to pre-pandemic levels, and we’re not even close to that yet. 

So, why then do I believe the housing correction has started? When you look at the data for individual housing markets, it tells a much more nuanced story. 

Regional Housing Markets 

As is often said in this industry, real estate is local. Recent housing market data makes that very apparent. 

To showcase the differences, let’s look at a few of the recent boom’s biggest winners: Boise, ID, and Asheville, NC. 

Boise was perhaps the hottest housing market over the last several years, with prices increasing 59% from June 2019 to June 2022. Those are incredible gains, but to me, Boise is at risk of losing a small amount of those gains. 

Remember, my hypothesis is that markets where active listings and days on market are near pre-pandemic levels are at the greatest risk of a correction. For Boise, not only have active listings risen 130% year-over-year, they are actually 8% above pre-pandemic levels (which I measure as June 2019 compared to June 2022)! There are only a handful of markets where this is true, and Boise is the most notable. 

DOM is up 4% year-over-year but is still down 13% from before the pandemic. But if you combine those two data points with a big increase in new listings and huge increases in price drops, this looks like a housing market in transition to me. 

Does this mean that Boise will see a crash in prices? No. That could happen, but I think the more likely scenario is a balanced market where buyers actually have some power. This is just an informed guess, but I do expect we’ll see price declines in Boise at some point in the coming year or so, but probably only single-digit declines. What’s more certain to me is that buyers will be able to negotiate, and better deals will emerge in markets like Boise. 

To contrast Boise, let’s look at another recent boom town, Asheville, North Carolina. 

Asheville’s appreciation since 2019 was 41% (more modest than Boise but still enormous) and has been up nearly 20% in just the past year. 

But looking at the lead indicators for Asheville, the story is different from Boise. Rather than skyrocketing, active listings are down 11% year-over-year! Days on market are also down 8% year-over-year, and price drops are up only 18% YoY. To me, this shows a housing market that is very strong and is unlikely to see a big change in prices. Sellers still have the power here. 

As you can see from these two examples, different housing markets point in different directions. I picked two well-known hot markets for this example, but you can see these discrepancies across the board. Reno, Austin, and Phoenix look like they’re transitioning, while Miami, Richmond, and Tallahassee still look like strong seller’s markets. 

You need to look at data for each individual market. Lucky for you, I’ve put together a spreadsheet with data from Realtor.com’s Residential Listings Database to help you see what is happening in your market. You can download that below.

Conclusion

On a national level, the housing market is still doing very well. Prices are up double-digits year-over-year, inventory is starting to tick up, but days on market remain extremely low. 

But when you read between the lines and examine some reliable lead indicators for the housing market, you can see that it’s in transition. Sellers are losing their iron grip on the market, and buyers are gaining power. Homebuyers and investors are better positioned to negotiate and find deals. 

On a localized basis, these shifts in trends are even more pronounced. Some markets seem very strong and will likely keep growing (but more modestly), while other markets seem like they could be heading for price corrections in the coming months. To be an informed investor, you must understand your local market. To me, the most important things to look at are active listings (or other inventory measurements) and days on market. You can Google those in your local area or download my spreadsheet that compares June 2022 numbers to both June 2021 and June 2019 for hundreds of markets. 

Remember, the metrics I am covering here are lead indicators for the short-term prospects of the city in question. To look at the long-term potential, you should look at macroeconomic data like population growth, income growth, and construction. 

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What are you seeing in your local market? Is the dynamic between buyer and seller starting to change? Let me know in the comments below. 

Most landlords and rental property owners say that collecting rent is their biggest pain point. A missed rent payment can disrupt your cash flow and even make you miss crucial payments. Therefore, any tool that helps renters pay rent on time every month will benefit your rental business. 

One way to stabilize rental income is by promoting recurring rent payments. This payment method can help ensure tenants are never late with the rent and you get paid on time. However, getting your tenant to set up an automatic payment can be challenging. 

Typically, recurring payments are impossible if tenants pay rent in cash or send a paper check. Of course, some landlords collect postdated rent checks in advance as a sort of recurring payment. However, this doesn’t guarantee the tenant will have funds to cover the check when cashed several months later. 

Using an online payment method for rent payments is the best way to promote recurring payments. Usually, there are two choices—tenants can set up a direct deposit with their bank or use a rent payment app. 

What Does a Recurring Payment Mean?

A recurring payment is defined as a service to withdraw funds from a bank account, debit card, or credit card regularly. Also called recurring billing, this automatic payment method helps pay regular bills like rent, subscriptions, or utilities. Recurring payments are a feature of many property management apps.

The Benefits of Recurring Payments for Rent Payment

Recurring billing has several benefits for tenants. For example, regular automatic payments save tenants a lot of time. All they must do to pay rent every month is enter the payment information once and forget about it. The rent money is then withdrawn on the specified day each month. 

Recurring rent payments eliminate the need to write and mail a rent check or remember to complete an online transaction. As a result, they are hands-down the most convenient way for tenants to pay rent on time.

How Recurring Rent Payments Can Increase Rental Income

Landlords get a significant benefit from consistent rental payments. But how does getting tenants to set up automatic rent payments increase rental income if you’re not charging more for rent? Here are a few ways.

Fewer late or missed payments

Recurring rent payments are excellent for your cash flow as there are fewer missed payments. This, in turn, saves you time and money from having to chase late payments. Additionally, you cut down on administrative tasks of calculating and charging late rent.

Minimize payment processing times

Automated regular rent payments eliminate the time and effort associated with manual billing and processing rent checks. All you need to do is provide tenants with a suitable app for rent payments to set up recurring billings. Then, the rent money arrives in your bank account regularly each month. 

Reduce the risk of fraud

Because recurring payments all happen online, you reduce the risk of fraud. For example, paying rent by cash or check is relatively risky, even though it’s still a popular rent payment method. But online payment systems that use the Payment Card Industry Data Security Standard (PCI DSS) are the most secure forms of payment.

Digital Payment Apps for Rent and Recurring Payments

So, the all-important question is — which is the best way for tenants to pay rent using recurring payments? First, let’s look at several ways to collect rent online using peer-to-peer payment and rent collection apps. 

Venmo recurring payments

Venmo is a popular app for sending money to friends and paying bills online. However, you cannot set up recurring payments with the digital wallet. The closest tenants get to making a regular payment is to add their landlord to the list of trusted sellers. However, they still must remember to make the payment every month.

Recurring payments on PayPal to collect rent

PayPal has a recurring payment service that landlords can provide tenants. However, this requires setting up a button on a website for tenants to set up automatic payments. Although this seems like a great idea, it’s good to remember that using PayPal to collect rent can incur hefty fees for landlords.  

Recurring rent payments with Zelle

Zelle works like a banking app and is helpful for bank-to-bank transfers. However, Zelle doesn’t offer recurring payments because the option depends on the tenant’s bank or credit union. Additionally, not all banks support Zelle for business payments.

Rent payment apps that support recurring rent payments

The most efficient way to boost rental income by promoting recurring payments is to use a dedicated rent payment app. Many apps for landlords give tenants control over automatic payments or provide them with the choice of making a one-time payment. They also give tenants options to pay rent by various methods—credit card, debit card, or ACH bank transfer. 

It’s also worth noting that the best online rent payment systems come at no cost to the landlord or tenant. So, unlike popular money transfer apps, landlords don’t incur transaction fees for incoming payments. 

Using a trusted property management app has additional benefits than just recurring payments. For example, rent collection apps for landlords have payment controls that allow landlords to block a partial rent payment. This vital feature is crucial when trying to evict a tenant for non-payment of rent. Also, rent collection apps typically let roommates split the rent, calculate late fees automatically, and report rent payments to credit bureaus.

Conclusion

Recurring rent payments make it easier for your tenants to pay rent every month. However, landlords who promote regular automatic payments find their rental income increases. This is because they have fewer missed payments, spend less time processing rent checks, and have better customer relationships.

Build a stable financial foundation

Are you tied to a nine-to-five workweek? Would you like to “retire” from wage-paying work within ten years? Are you in your 20s or 30s and would like to be financially free?The sort of free that ensures you spend the best part of your day and week, and the best years of your life, doing what you want?

One of the most valuable tools rental property investors have in the U.S. is the 30-year fixed-rate mortgage. Surprisingly, this style of mortgage is very much an outlier compared to what’s typically offered in other countries. Most countries tend to offer adjustable, variable, flexible, or renegotiable rate mortgages, all of which pose an inherent risk with the potential of an unexpected interest rate hike during ownership of the property.

Not only are fixed-rate mortgages excellent for letting investors skip those unexpected rate hikes down the road, but there have been notable periods where the interest rates on these mortgages have been remarkably low, making the cost of borrowing money almost trivial. 

But what happens when those interest rates increase, potentially to levels we aren’t used to seeing? Suddenly monthly mortgage payments are noticeably higher, which hits our cash flow returns. Does it mean it’s time to slow down or stop investing in rental properties? How do you counter higher interest rates on your mortgage to stay profitable with your rental property?

The best way to decide this is by understanding how rental properties make money, the factors you can control in a rental property and its profits, and knowing what to look for in a prospective rental property to help set you up for the greatest chance of successful returns, despite a higher mortgage payment.

Rental Properties are Long-Term Investments

One of the biggest things you should remember with rental properties is that they are, in fact, long-term investments. Sure, some people may see a quick equity profit through improvements or value-adds, and some may land deals with significant cash flow from the start. Still, as a general rule, you must remember that rental properties see the most profit over the long haul.

Often when we analyze a rental property’s finances, we only see the cash flow number that’s right in front of us. It’s easy to forget that the projected cash flow is simply what’s projected today. That number doesn’t account for rent increases over time (while keeping a fixed mortgage payment), appreciation, demand, and inflation. All of those factors will continuously change, hopefully for the better. 

How a Rental Property Makes Money

Before learning about real estate investing, you may have known that rental properties can be very profitable but not necessarily understand exactly how they can be so profitable.

The five ways that rental properties can make money are:

1. Cash flow
2. Appreciation
3. Tax benefits
4. Equity built via mortgage paydown
5. Hedging against inflation

When you understand the details of each of these profit centers, you will not only become savvier about the power of holding a rental property for the long-term instead of the short-term, but you’ll also begin to realize that the expense of an interest rate that’s a couple of points higher than what you’re used to likely doesn’t hold a candle to the profit potential over the lifetime of the rental property.

You may already be saying, “But those other profit centers are speculative, and cash flow is still important, and the higher mortgage expense increases my risk by lowering my cash flow.” Yes, and that can very well be true. But what you want to do in this situation is two things:

1. Learn to balance the profit centers. If cash flow is down, which happens with a higher interest rate, look for other profit centers with potential. Maybe you’re buying in a gentrifying high-demand area, so you could speculate that appreciation potential is very high. Or perhaps you’re investing during a time of extremely high inflation. What could you do in that situation? Think of it like a bar graph with a bar for each profit center. If one is down, are any of the others up? If they’re all down, that’s a problem. If some are higher than usual, do those balance them? All of it depends on your unique situation.
2. Put a big focus on location and demand. Just as with that example, one of the keys is investing in properties that will lend their hand to the appreciation bar especially, as well as inflation and rent demand. As long as people desire the property they own, the greater the profit potential from the profit centers will be, and the more they will continue to increase over time.

When you understand how rental properties make money, you can begin to wear the investor hat rather than the consumer hat. It’s the consumer hat that causes people to think that increased interest rates are deal-breakers, whereas people who truly understand how rental properties profit will not only learn to see how to look past the interest rates but also give them perspectives on how to compensate for it.

Rent Increases

As already pointed out, a rental property’s projected cash flow is based on today’s rents, not tomorrow’s. Rents increase for two reasons: appreciation and inflation. 

Guess what doesn’t increase over time and is not affected by appreciation or inflation? Your mortgage payment when you have a fixed-rate mortgage. 

This means your cash flow spread will continue to grow over the life of your rental property as you continue to increase rents.

Your expenses, such as property tax and insurance, may increase over time, but they’re unlikely to increase at a rate anywhere near what rents will increase. Overall, you’ll see that rents will continue to pull farther and farther away from your fixed-rate mortgage expense, and your profits should continue to grow exponentially.

Forcing Profit Increases and Lowering Expenses

While I’ve been emphasizing the long-term, there are proactive things you can do to create more equity faster. Let’s go over them.

Improving the property

The more desirable your property, the more value it will generate and the more demand it will drive. While many profit centers will kick in on their own over time and increase the property’s value and rents, you can also do things to your property to increase desirability and force those profit increases more quickly. 

The most basic way of improving a property is by rehabbing it. When you upgrade a property, making it nicer and more attractive, you not only increase the overall value of that property, but you can also ask for higher rents. You’re merely speeding along those profits past what the higher interest rate is costing you.

Refinancing your mortgage

Don’t forget that you may not be tied to that higher interest rate forever. Mortgage interest rates fluctuate, just as property and rents do. If the interest rate drops lower than what you originally signed up for, you can refinance the property at that lower interest rate. Of course, it’s not a guarantee the rates will drop, but if they ever do, you can make that move and increase your cash flow.

Picking the right location

If you’ll notice, this isn’t the first time the location of a rental property has been brought up. As mentioned before about buying in a path of demand to ensure appreciation potential, you can also make even more strategic moves when you learn how to analyze neighborhoods and identify areas with an extremely high chance of appreciation. Forces like gentrification, population growth, and job growth can increase values.

Of course, banking specifically on gentrification, as with any appreciation, is speculation. You not only want to learn how to identify areas that may experience gentrification, but you also should have a contingency plan in case gentrification doesn’t occur. You wouldn’t want all your eggs in one profit center basket if that basket were to tip over. But if you buy at the right time (which often means you have to move quickly and not spend forever hesitating, or you may lose the deal), gentrification can certainly force more profits.

Going Up Against Inflation

While inflation impacts most areas of our lives negatively, the one place it can help is with rental properties. Your fixed-rate mortgage expense stays the same for the loan term, despite what happens to the dollar’s value. You pay back the loan in yesterday’s dollars, not tomorrow’s.

Look at inflation as compared to the interest rate of the mortgage. Many experts argue that the mortgage interest you pay over the term of a 30-year fixed mortgage is less than the expense of paying for the same property in cash with today’s dollars because of inflation. 

When the inflation rate is higher than the interest rate on your mortgage, your profits will continue to outrun the expense of that mortgage.

Keys to Remember

It would be easy to read this article and believe that if you hang onto a rental property for a long time, it will be very profitable because no matter what your expenses are today, everything will catch up and shift into a profit. 

That isn’t going to be true for all properties. Not all rental properties will be profitable, and many factors can challenge the various profit centers. It’s especially important to remember that speculation doesn’t always pan out, and you should avoid speculation more often than not. 

The intention of this article isn’t to mislead you into thinking that any property will make for a profitable property, but it’s instead to show you how to look at and analyze potential rental properties with the understanding that a higher interest rate won’t eat as much of your income up as you think.

It’s also important to be educated. For instance, what you believe is a high-interest rate may be “normal.” We’ve gotten used to seeing historically low-interest rates. We’ve been spoiled, and it misleads us into thinking that we can only be profitable if we have stupidly low-interest rates on our mortgages.

Lastly, if the interest rate continues to stress you, consider putting more money down on the loan so your payment will be decreased. Plus, you may even land a slightly lower interest rate as you increase your down payment.

If you’ve invested during periods of higher interest rates, what’s the most creative financing structure you’ve used on your rental properties with those rates, and how did it turn out 10 or 20 years down the road of owning your property? Let us know in the comments!

Build a stable financial foundation

Are you tied to a nine-to-five workweek? Would you like to “retire” from wage-paying work within ten years? Are you in your 20s or 30s and would like to be financially free?The sort of free that ensures you spend the best part of your day and week, and the best years of your life, doing what you want?

David:
This is the BiggerPockets Podcast show 633. Look, if you love real estate and you don’t like your job, you don’t have to quit your job to invest full time in real estate. You can, but you can also quit your job to take a job in real estate. And then you can be investing more often with better resources and more support. Take a job that supplements your investing and makes it easier for you to do. You don’t just have to quit your job and go full time into real estate investing. I’d love to see more people like you, your partner, and your family in the BiggerPockets community who are helping others build wealth through real estate and building their own at the same time.
What’s going on everyone. This is David Greene, your host of the BiggerPockets Real Estate Podcast, here today with a Seeing Greene edition. In today’s show, you the audience of BiggerPockets will submit questions, and I will do my best to answer them for everybody to hear. Today’s show we get into some really cool stuff, including questions about how much reserve should someone have for their first property, when they should focus on building a business versus investing in real estate to grow wealth.
And if low cash flow on a BRRRR deal is a good thing or a bad thing. All that and more in today’s show. If you would like to be featured on the BiggerPockets Podcast, here’s all you have to do. Go to biggerpockets.com/david and submit your video question for me to answer on the show. I’ve actually met people that I hired from this format. The girl that I have that is now my asset manager of my rental portfolio was found on this show. And I was so impressed with her that I reached out and ended up hiring her. And that can lead to today’s quick tip. If you would like to work for BiggerPockets, you can, a lot of people don’t realize this, go to biggerpockets.com/careers, and you can actually apply to work there. Our show’s producer got his job that way.
And the dude is a godsend. I wouldn’t be able to make shows like this if he didn’t make this whole thing happen. A lot of people think this is David Greene’s show. Absolutely not. I’m the face you see, and the voice you hear, but they’re the ones that make everything happen. And you can get more involved in real estate, as we also talk about on today’s podcast, one of the ways to ramp up your investing career is to make your money through something that is involved in real estate so you stay around it and develop a competitive advantage. I’m also going to be hiring more people, specifically someone that can manage short term rentals from a remote location in the country. So I’m buying them all across the country and I need someone with a lot of experience that can manage them for me, that is looking for a job that I can pay to run my portfolio.
If you’d like to work for me in that capacity, join The David Greene Team, join The One Brokerage, just go to davidgreene24.com/careers, and you can apply there as well. Look, we’re living in a world where everything is shifting and changing very fast. It’s very likely that jobs are going to be laying people off if we continue down the path we are into a recession. It’s also very likely that more opportunities to build wealth are going to be making themselves known than we’ve seen in a very long time. Don’t let fear paralyze you and get worried about losing your job. Be proactive and start looking for the next thing where you can take your skills, help somebody else grow their business and make yourself more money, and get in the right environment where you can hit your investing goals. I hope that everybody strongly considers what I’m saying here. Because if you’re listening to this podcast, you probably love real estate and you’d be much happier if you could be around it more. I know that’s the way it is for me. All right. Without any more ado, let’s get to today’s show.

Jennifer:
Hi David. This is Jennifer Sokalski from New Jersey. My partner and I, he’s walking around over here, we are both real estate agents and we have been for a little over three years now and we are just now really starting to up our game. We are building a huge business. We’re growing very fast. We are currently obsessed with this More Money, Less Hustle by Jess Lenouvel. We actually have a whole bunch of them because I’m giving them out to my mastermind group.
So my question is, our focus right now is very heavily on our real estate business and growing that, and making that so that it can really become a team, like a team that grows with us. And my question is, when do we really get into investing? Because we’ve been looking at it and researching it for a couple of years now, but it never seems to be the right time because we have to build our business and we’re afraid of splitting ourselves in two directions. So is there a time sometimes when people should not invest and maybe wait to get that started if they’re working on something else that they’re really into? Thank you.

David:
Thank you Jennifer. This is a great question. I’m probably going to take a little bit longer to answer this one, because there’s a lot to cover and it’s good stuff. First off, to the question of, are there times where it’s okay not to focus on investing and build your business? Well, of course the obvious answer is yes, nobody has to focus on investing. But I think what you’re really getting at is, from a financial perspective, does it make sense to not focus on investing? And on this podcast, we talk mostly about how to build wealth through owning real estate. So from that perspective, I can understand the questionable, is there ever a time where that’s not okay? Because I keep hearing all the experts say, you got to buy real estate to build wealth. So let me share with you a little bit of story in my own journey.
I have had several periods of my life where I bought a lot of rental properties and then other periods of time in my life where I didn’t buy any rental properties. Now, when people hear this, they’re always trying to figure out what the secret sauce is. Why has David stopped buying? Does he know something we don’t know? Is the market going to crash? Is there something coming down the pipe that he’s not telling us? It’s not that at all. It’s almost always because of what’s going on in my personal life. So sometimes I will get so busy with businesses, particularly when you’re trying to scale, you’ve got a bunch of new hires. You’re trying to teach them. You’ve got a bunch of clients that came to you and say, we need to buy houses. This happened to me early in my career when I was starting The David Greene Team. I had just hired my first assistant Krista.
I had left being a cop. I went full time into real estate sales and my clients were flooding me. I had tons of people coming that wanted to buy houses and sell homes, and they were relying on me to get this done. So I was doing the BRRRR method at that time, I’d been buying a lot of properties in Jacksonville, Florida. I was up to five a month at one point, but on a slow month I was still buying two properties. Then I got to manage the rehabs and I got to get all the utilities turned on, and all the work that goes into it. Well, I had to stop when I got more clients on The David Greene Team. So it made sense for me personally to stop investing so I could get the business going. Well, I started to do a lot of business. I became a top producing real estate agent.
I hired more agents. I grew the team. Then I had to train all those people. Years went by and I didn’t buy real estate. And in fact, it was in some of the best time ever to buy it that I didn’t buy real estate. This is when the market was climbing and climbing, and climbing. Now, do I look back and regret that I didn’t buy more real estate? Of course. But if I’m honest with myself, I don’t think I could have bought real estate, at least not in a responsible way, and ran the business that was growing at an exponential rate. And when I look at the money that I made by helping clients buying and sell houses, and the residual income that now comes from the work I did before, it’s much more than I would’ve made simply from having equity growth and cash flow investing in real estate.
You see, business is one of the few things that I know of that you can make more money than in real estate. It just takes more time. Real estate is more passive than business is. So let’s tie this all together to your question. If your business is going well, there are times where I would say, yes, it’s okay not to focus on growing a real estate portfolio. And I’ve actually thought about this a lot. So some people will come and they’ll say, hey, I’m a full-time investor. I’m buying this many properties. And I’ll sit down with them and I’ll talk with them and I’ll see, well, how much equity growth did they have that year? How much cash flow did they make that year? Adjust that for the tax benefits that come to the real estate. And I come up with a number that I see that they added to their net worth by being a full-time investor. In every scenario that I’ve come across so far, that’s less money than I made in the businesses that I’m running.
Now, we’re both full-time workers. So I’m running full-time businesses, they’re doing full-time real estate, but in those cases I still came out on top. So if you’re in a situation like that, yes, building your business will usually be more profitable if it’s going well than investing in real estate. But you don’t want to miss out completely on the passive benefits of real estate ownership. So here’s my advice to you. Under the assumption that your business is doing very well, that you are growing, you’re making good money. There’s good cash flow coming in and you are saving that money to invest in real estate at some point. You need to be buying a primary residence at least for yourself, at least once a year. That means that you should be putting a low down payment on a house, in a good neighborhood, that you think is a good deal, that has a value add opportunity.
Something that you can fix it up while you’re living there. Something that has a garage that can be converted. Something that can be functioning in some way to benefit you, that you’re not held to a timeline of getting it fixed up and ready to go right away, that you can work around your schedule. Now, you didn’t say it in the video, but I did see in the notes here, you’ve done this before. You just did a live and flip. Do a live and flip every year, but you don’t necessarily have to sell it, buy it, move into it, fix it up while you’re there. Get your next one, move into that one, fix it up while you’re there. I call this the sneaky rental tactic. Because when you move out of the house you bought with a primary residence loan, you turn it into a rental property.
You ended up with a rental that you put 5% down or 10% down, or 3.5% Down. So if you work this method, you’ll keep making money, but you won’t miss out completely on real estate opportunities. The other piece of advice I’ll give you, because you said specifically that you’re a real estate agent. There’s some agent on your team that can function as a form of a project manager or a property manager. So as you’re training your team, you’re selling your houses, you’re hiring new agents. You’re getting deals closed. You’re keeping clients happy. You’re putting out fires. Identify who you have on your team that if you put something in contract and gave them a list of what needs to be done, they could make sure the deal closed. They could make sure you knew when the money needed to be wired.
They could order your home inspection. They could represent you as the agent in the deal. And then once it closes, they could get it set up as a rental property. So you’ve got some synergy here. You’ve got your real estate team and then real estate investing. And these worlds can be combined pretty easy. That’s kind of what I’ve done. I’ve taken the real estate agents and the loan officers, and the home insurers, and my own investing, and our clients, and I brought it all into the same ecosystem. So that 80% of the work is the same. It’s only the last 20% that changes a little bit. And I think you can do the same thing. Now, what you’re going to be focused on is 80/90% business, 10/20% investing, but you have some investing still going on. At a certain point, the business will start to take care of itself and you’ll shift from 80% business, 20% real estate to 70/30 to 60/40, to 50/50, and then 40/60.
And that’s the way that the business cycle tends to work out. So you don’t want to ever stop buying real estate, but you just don’t do it as often. And that principle is true for everybody listening to this. I don’t think it’s healthy to say, is this a market to buy or is this a market to sell? Because it’s rarely ever that simple. I buy in every market and I would sell in any market. I just do more buying in some markets and more selling in other markets, or more holding in other markets. And that’s kind of what we’re entering into now. So I bought properties last year. I bought properties the year before, but I didn’t buy a ton. Now that we’re seeing the market softening, I’ve put 11, no 12 properties now, because I just got a text right before I started recording that another one went into contract, in the last 30 days.
So in this market, I’m seeing it as a great buying opportunity. Now, I’m not paying asking price, of course. I’m getting stuff under market value because I know that the market may continue to dip. But my point is, I ramp up my buying in certain seasons in life and I just sold a bunch of properties so that I could buy these ones. Same principle goes to you. So thank you for submitting this question. I love that you’re asking it. I would love for more people listening to this podcast to start or join a real estate related business. Look, if you love real estate and you don’t like your job, you don’t have to quit your job to invest full time in real estate. You can, but you can also quit your job to take a job in real estate and then you can be investing more often with better resources and more support.
Take a job that supplements your investing and makes it easier for you to do. You don’t just have to quit your job and go full time into real estate investing. I’d love to see more people like you, your partner and your family in the BiggerPockets community who are helping others build wealth through real estate and building their own at the same time. The next question comes from Rob Foley in the Four Corners area. Rob says, I have successfully BRRRRd about 10 different single family homes. After the refi on several of my houses, using the BRRRR calculator, I’m seeing that the cash flow is not that great. Maybe $100 to $200 a month max, but they were great deals where I pulled 30 to 40K of forced appreciation out at refinance. How should I view these properties now? As a very successful tool that grew my business or as a poor use of my capital that should be sold?
Portfolio snapshot. I have 12 single family homes, one mobile home park with seven pads and a duplex, five acres to be developed into mobile home park pads and I’m in the middle of my first 1031. Okay Rob. If I understand you correctly, you’re saying that after you pulled 30 to $50,000 out of the deal, more than you put in, it still cash flowed $100 to $200 a month. And you’re asking me, was this bad. This is not just good. This is astronomically good. Would you buy a home if you put zero money down and it cash flowed $100 a month, and it was going to go up in value while you paid off the loan? Just about everybody would say yes. So if it makes sense at zero money down, why would it not make sense if someone was going to give you 30 to $50,000 to get cash flow?
Now, the only reason that I could think that this is even a question in your mind is because the cash flow seems small as it’s only $100 to $200 a month. And I want to address that idea first. This is a symptom of what happens when people become cash flow obsessed. In 2010, a lot of homes went into foreclosure that were bought in 2001 through 2008. These homes went into foreclosure because the people buying them did not cash flow. That started this trend of saying, cash flow, cash flow, cash flow, because that was the right ingredient in the recipe to keep people healthy. This was the medicine that our market needed. Stop buying homes based on speculation and start buying homes based on numbers. And I agreed. I was one of those people that was constantly talking about cash flow and I still talk about cash flow.
I still buy properties that cash flow. I still run numbers to make sure they cash flow. But what I don’t do is zoom in only on cash flow and ignore all the rest of real estate. And I think because this is going around in our industry, it’s causing you to have second guesses about your decisions. The cash flow is only $100 to 200 a month. That’s not a huge number. Pulling 30 to $50,000 more capital out of the deal that you put in, and this does not include the equity that stayed in the house. So on top of that 30 to 50K, let’s call it 40K to make it average, you also have 20% to 25% equity in the house you didn’t have before. Your net worth is probably going up on every deal by most people’s salary that they make in a year.
And you’re not being taxed on this. And then on top of that, to sprinkle a little bit of sugar on top, you’re getting $100 to $200 a month. Rob, you are absolutely crushing it and there’s no other adjective to describe how good these deals are. You should keep doing this over and over, and over. It’s the cash flow thing that’s throwing you off. Let me bring an outside perspective. Let’s say you do this on four deals and you pull an average of 40 grand out per deal. That’s $160,000 in cash that you’ve taken out that you didn’t have before. And we’re not even talking about the equity in the properties. And you take that 160,000 in cash and you go buy another one of these homes in cash. Well, that one may cash flow $1200 to $1,400 a month. You let those first four homes that only made $100 to 200 a month buy you a home that cash flows $1,200 a month.
Does this still seem like a bad deal? The reason it doesn’t jump out is when we only look at one element of real estate investing. When you look at all the components put together, the appreciation, the forced equity, the market equity, the loan pay down, the money that you’re pulling out, the capital that you’re bringing in that you can now go buy new houses with, the cash flow, the tax benefits. That’s where you can see clearly what the right moves to make in your portfolio are. And with the portfolio that you have, these mobile home park pads you have, the property to be developed, you have to start thinking big picture. So my advice to you Rob is to stop talking about your deals to newbies. This is where this comes from, because they’re all going to ask the same question. What’s the cash flow?
What’s the cash flow? And that’s normal. Most newbies ask that question because that’s how they don’t lose money in real estate. And it’s also how you get out of the job you probably don’t like, which is where most newbies start. They don’t love working a job and they think real estate’s going to be their savior to get them out of it. Start talking about these deals to more sophisticated investors, people that have a more balanced portfolio. And then you start to make the connections that I don’t look at cash flow and they don’t look at cash flow as being attached to a property.
It is the overall cash flow of your entire portfolio. It is the overall equity of the entire portfolio. And you can start seeing where you can move pieces around to maximize efficiency and minimize risk. I just want to tell you, Rob, you’re absolutely crushing it. Don’t stop. Keep doing this as much as you can. If you’re getting cash flow and you’re pulling that money out, keep a healthy amount in reserves to prepare for a downturn. But man, if you’re pulling 40 grand out of every single property, that’s reserves that’s going to last you for a long time on every one of these deals. So congratulations.

Matthew:
David, great deals aren’t found, great deals are made green. I appreciate you taking my question. David, my question is, how can I prove to a hard money lender the ARV of a home that I’m going to convert to a short term rental? I have it under contract for 257,000. It’s only appraising at 220,000 because appraisers here of course don’t give any value to my short term rental business. And they also haven’t even caught up with normal market values. So they’re only given 220 on the appraisal, even though I feel that this home is worth at least $350,000 as a short term rental. With furnishings, management, decoration, I projected that it will yield $4,500 a month in net operating income. And so I plan to buy it and hold it. The cash flows will be amazing, but I’m having to bring a ton of cash to the closing table if I go with a conventional lender, because I need to bring 20% down plus cover the appraisal gap, and this is going to be before I furnish the home.
So I’m looking to go with a hard money lender instead to improve my cash on cash. I’ll pay extra interest, that’s okay. I just would rather bring more like $14,000 to the closing table instead of 85,000. So I want to convince this hard money lender that the ARV of this home will be $350,000. Get them to fund 75% of that ARV. So I’m bringing much, much, much less to the closing table. But back to the heart of the matter, how can ARVs for STRs be determined?

David:
All right. Matthew, thank you for your question. I see exactly what you’re getting at. You’re trying to get the appraiser to see it from your perspective and your perspective is based on the revenue that this property would produce as a short term rental. There’s a few issues with the way you’re going about it that are just going to make your job harder and I want to clarify those, because you’re always going to be in an uphill battle in real estate if you take this approach. First off, when we’re talking about what a property is worth, that is actually a subjective phrase. There’s a lot of ways of evaluating what something is worth. What you’re saying here is that it’s worth $350,000 because it will bring in $4,500 a month when I use it as a short-term rental. To you, it is worth that. The appraiser is operating under a different objective set of circumstances.
The appraiser is looking at this thing saying, I don’t really care what it brings in as a short-term rental. I’m not allowed to care. What I want to know is, how does it compare to the other houses around it? And the comps I’m seeing of previously sold properties are selling for 220,000. So that’s the value he’s going to give the property or she’s going to give the property. The issue is that you’re using a commercial standard to evaluate this property and they’re using a residential standard to evaluate the property. But because they’re the one working for the hard money lender, you actually have to go by their criteria. Now, if you can convince the hard money lender to understand that the property’s going to bring in more cash so that you can make the debt service, you have a shot here, but that isn’t going to help your down payment scenario.
They’re still going to say the property’s worth 220,000. Because to an appraiser, it’s worth 220,000, to a person who’s going to buy that house to live in, it’s worth 220,000. To you, it’s worth 350,000. Now, this is a problem investors often fall into because we always do our underwriting assuming that we’re going to be taking a loan on a property. If you were paying cash for this thing, I would agree. It is worth 350,000 if that’s what it can make and no one would stop you for paying cash for it for 350. But what would you say if a seller came to you and said, hey, the comp showed 220, but I want you to pay 350 because you could use it as a short term rental? You’re probably going to turn around and say, well, it’s worth that to me, but on the market, it’s only worth 220.
So I’m going to buy your house for 220 even though it’s worth 350. The seller may want you to see it from their perspective, but when you’re the buyer, you want to get it at the price that is better for you. The same is going on with the appraiser. The same is going on with the hard money lender. My advice would be, stop fighting this uphill battle. They’re not going to see it the way that you’re seeing it. That hard money lender is going to give it the lowest value possible because that’s how they minimize their risk when they’re giving the loan. The appraiser is going to give it the value that the comp show because that’s how they minimize their risk when they’re trying to keep their job and not get sued. And you’re going to give it the highest value possible because that’s how you’re going to maximize your profit.
The problem here is that all of your interests are not aligned. So I would look for a different hard money lender, give them the pitch and see if they actually bite on it. And if you can’t make that work, you’re going to have to borrow the money from someone else. So someone that you can sway in this situation is a private money lender who will be open to hearing your logic that this property is worth $350,000 because of what it will cash flow. That private money lender is not an appraiser that’s held to a certain code of ethics and not a hard money lender that’s held to a certain set of criteria for approving loans. You can sway that person to see what you’re trying to say. You can get the extra money for the house from them to buy it, and then you can refinance out.
Now, when you refinance out, you can use a loan like I’m using. I get approved based on the income that the property is bringing in so I don’t have to go through the headache of showing all the different businesses I have and all the different income for those businesses. So I’m buying properties right now. I think I mentioned earlier in the show, I’ve got 12 in a contract. All of those are getting approved based off of the short term rental they’re going to bring in because my brokerage is able to do that. So when you get to that point that you’re ready to refinance, that’s what you want to look for, is a lender that will let you use the short-term rental income to approve you for the refinance loan. And then maybe you get approved for up to $350,000. All right. We’ve had some great questions so far, and I want to thank everybody for submitting them.
Make sure to like, comment and subscribe on our YouTube channel because we love these comments and we read them daily. At this segment of the show, I like to pick out a couple of the comments from our YouTubers and see what they’re saying and read them to you on the show. The first question comes from Jenny Lee. I love this new format of David’s tax, marriage and legal advice brokerage. That’s funny. In all seriousness, I love the long form in-depth explanations to these brilliant video questions. Keep up the great work. Well, thank you for saying that Jenny, but to be fair, I’m only able to give a brilliant answer if I get a brilliant question. So I need all of you to continue submitting really good questions to me here for the show. You can do that by going to biggerpockets.com/david and feel free to put in something funny, something quirky, something entertaining, not just the pure question, because that makes the, I think the pastor of my church once said that if you put a little bit of sugar on it, it makes the medicine go down easier.
That was also probably Mary Poppins’ quote. Now, that I think about it, my pastor was quoting Mary Poppins. That’s slightly less cool than I was thinking. Next comment is from Kyle Kotecha. David, this was excellent. In regards to a mentor, you’re exactly correct. People ask me what I would do if everything was taken from me. I always say that I would find what industry I want to be in and have a business in. I would find the best person for that and go provide massive value to them. Thank you for that Kyle. This is in regards to one of the shows where someone was asking how to find a mentor and I gave some advice on the best way to go about doing that. Next question or comment is from Misha Henderson. I love these shows. David, thank you for the great and consistent information you provide on every show.
I’ve learned so much over the last year since I started listening to your show. I’m a pro member and I hope to gather the nerves to ask a video question one day soon. Misha, you’re way overthinking this. Go ahead and submit your question. I will give you a little piece of advice though. If you all listening are thinking about submitting a question because I want you to. I got this comment on my Instagram from Watershed Property Services. They said, in all caps, please, on the Seeing Greene episodes, if the person cannot articulate a question in under three rambling minutes, don’t include it on the show. It’s so painful to listen to their stream of consciousness struggle session. But what if this, and also maybe that, but don’t want to forget about the other … Thank you. First off, I said dot, dot, dot, and I believe the technical term is ellipsis.
I think that’s what those three dots are called. Not positive on that. Maybe one of you can leave a comment in the question. So let me know if I’m right. Second, I thought that comment was really funny because what they’re getting at is when somebody submits a video that they didn’t think through what they were going to say before they started recording. Look, I want you to send me your comments and your questions, and I like your videos, but if you make one and you stumble through it, just rerecord it again. Here’s a little bit of advice. Whenever I’m going to record something, I take bullet notes of what I want to say, then as I’m recording it, I look down at those bullet notes if I get lost, and I say, oh yeah, this is what I wanted to get out. Little bit of advice to make a better video when you send it in.
And then for those of you that still end up with a lengthier video, we do have a new video editor who’s going to be editing these down. I just thought that that comment was funny and I appreciate you guys submitting that. Our last comment comes from Phil. Phil says, I really do like this format. It could be even better if you can find experts in different areas of the country or different facets of real estate to tag team with every couple of weeks. Phil, listen, next week, I think I’m going to take you up on that idea. So stay tuned and make sure you subscribe to this podcast so you get notified when it comes out.
If you’re listening on your podcast app, take a little bit of time to give us a rating and an honest review in the Apple Podcast. Those help a ton. We’re action oriented, and we want your constructive feedback. We want to get better and stay relevant. So drop us a line and let us know what you think, what we could do to improve the show, just like Phil said, or what you love. Please continue to comment and subscribe on YouTube also, and then leave us your rating or review wherever you’re listening. All right, let’s take another video question.

Logan:
Hey David, my name’s Logan. I live here in Columbus, Ohio area. The house that we are in currently, my wife and I, we owe about $60,000 in the mortgage. And the house is probably worth right now as is 110,000. But I’m pretty confident, I have a little bit of construction background so I’m pretty confident that if we put $30,000 into the house to fix it up, comparable homes in the area are selling for around 200,000 on the low end. So I guess my question is, should we try to take the aggressive route and get hard money or private money, or whatever we can to fix up the house now to get that $200,000 appraisal for what it’s worth? Or should we take the conservative route, which is what we’re doing right now and just trying to save up money slowly until we can use our own money to do it?
If we used our own money it would probably take us another year to get that $30,000 that we’re going to need. So I’m just a little bit worried that with inflation and I’ve heard you talk about the price of things, everything going up, that by the time it would take us to raise that $30,000, maybe a contractor is then trying to charge more because materials are going up and stuff like that. And then we’d be kind of out of luck. Our long term goal is to fix up this house that we’re living in, refinance out of it once it’s all fixed up. And then move into a house hack, maybe a duplex, or maybe a house where we can turn into a duplex or something like that, and then rent out the current house that we’re in, because it’s in a great area. It’s a three bedroom, two baths, very desirable town. So thank you so much.

David:
All right. Thank you for that question Logan. I’m going to go into real estate agent mode and treat you as if you are my client. And I’m going to tell you exactly what I think you should do. First off, you said you owe 60, you think it’s worth 110. It might be worth a little bit more than that. Get a HELOC on that property. You could reach out to me. I can have my brokerage do it for you. Or you could find a local bank credit union or a mortgage broker in your area. But get a HELOC, you have more than enough equity to pull out the $30,000 you’re saying that you need. Tell them that the purpose of the HELOC is to do a home improvement and they’re more likely to approve you. Take that $30,000 and do the work yourself since you have a construction background or get your buddies to do it for you at a possibly discounted rate.
If you have advantages that you can take advantage of, do it. Get your house fixed up. Now it’s worth $200,000. You can refinance it into a new loan or you can pay the HELOC off slowly over time. Depending on where rates are, we should cross that bridge when we come to it. I don’t want to see you do a cash out refi to pay off your HELOC if you’re going to lose the great rate you have on the first 60,000 to get a much higher rate. But if rates are only a little bit more, it’ll be cheaper for you to refinance it and pay off that HELOC. Then you mentioned that your goal is to move out and house hack. Well, the good news is you can then get preapproved for another loan and go buy your next property. Do a duplex, do a triplex, do a fourplex, do a house with a floor plan that could be functioning that way.
Do a house that you can add an ADU, maybe convert the garage. You’ve got a construction background, so you’ve got to a edge over your competitors in making that happen. Move into the new house, putting a very low down payment on that house. If you can get an FHA loan or a five or 10% down loan, if we can help you with that, that’s what I’d have you do. Rent out the one that you just left. Also consider making a conversion out of your garage if you live in an area where people want to live. If it doesn’t have a high rental demand, don’t do that. But if it does, you can sort of make your first house that we’re talking about here, function as a duplex, because you can convert the garage into an ADU or maybe another part of the property into an ADU. Now, with the new house, do the same thing with that one that you did on the first one. Buy something that needs some work, buy something that you could add value to. Buy something that you can live in and rent out the other parts of it.
Move out of that house once you do it, doing exactly the same thing that you did on the first one and do this again. Look, real estate investing does not need to be complicated. I know we get to talk about these cool, fancy, shiny bells and whistles, subject to mortgages and wrap around mortgages, and wholesaling, and off market opportunities. It doesn’t have to work that way. Use the skills that you’ve got. I was pretty good at numbers and I was pretty good at seeing opportunities. So I was able to build houses and help people as a real estate agent. You’re good at construction. Use that to your advantage. Buy a house every year doing what we’re talking about. In 10 years, you will have 10 homes. And this first house that we were talking about will probably be significantly paid down on the loan side.
Odds are, after year three, four or five, you’re not just going to buy one house every year. You’re going to have more cash than what you had before. You’re going to have equity in these properties that you can access and you’ll be able to do one house every year to live in and one or two investment properties. So at the end of the 10 years, you probably have more like 18 to 20 homes. If you take this long term turtle versus the hare, slow and steady approach, it’s almost impossible to lose with real estate. The people that lose money in it are the ones that come shooting out of the gate, like the rabbit, and try to do too much too fast before their experience. It’s like giving the keys to a Ferrari to a 16 year old that hasn’t learned how to drive. They’re going to run it off the cliff.
What you want to do is start very slow until you get comfortable with the car, the mechanics, the principles, how things work and then progressively increase your speed. You’re in a great position Logan. I really appreciate the question that you’re asking. I’m excited for you. I hope that you are excited and I hope that getting this featured on the BiggerPockets Podcast made your day. All right. The next question comes from Kaya in Atlanta, the ATL. First, I want to thank you for all the knowledge that you share. I’ve recently upgraded to the BiggerPockets pro membership, and I’ve purchased a couple of your books to continue to expand my knowledge in real estate investment. Side note Kaya, I would recommend reading them before bed because I’m told they’re super boring and will help you go to sleep. I have two questions for you today that I’d love your advice on and or next steps.
Number one, I recently purchased a single family home in East Point, Georgia that has a detached garage that was never fully finished on the inside. The structure is in place. It even looks like at one point it had electricity and was potentially used as a workshop and it has a new roof with wood beams. I wanted to convert it into an ADU and then rent that out as a short term rental because the structure’s already in place and I’d rather use it to generate income and hopefully add to my property value than to park my car there. I was given a quote from my contractor of around 20K to convert it into a 600 square foot studio apartment. Wow. I’m just going to interrupt here. That seems like an incredibly low quote. Either this contractor is really helping you out or this studio that you’re talking about, the garage, is more converted than what you think and they only have some finishing touches.
I don’t currently have any savings. However, my mom agreed to invest 10K and the rest I plan to fund using my business credit cards. My question is, is this a good move? It seems like a lowish cost for the conversion. I would agree. And was told by an Airbnb expert that it could probably bring in over 3K because it’s 10 minutes from the airport, close to a lot of movie production studios, et cetera. Is there anything I should keep in mind throughout this process? All right. Let’s start with part one and then we’ll get to part two. I really like the idea of converting it if you can do so for only 20K. I don’t love the idea of you using $10,000 of credit card money to make this happen as a newer investor that’s not that experienced.
You got to find some other way to fund this deal than just that. Do you have equity in your current home that you could take out and use as cash to pay this contractor? Could you sell a piece of your equity to another investor and get their cash to use for the garage conversion and then pay them back? Could you borrow money from an experienced investor that could step in if you make mistakes and fix you, pay them interest on that money and let them act as a sort of project manager to make sure everything gets done well? I say this because that 20 grand to convert a garage, it almost feels too good to be true and I want to make sure you’re not being taken advantage of. And if you don’t have any cash, that means you don’t have any reserves. You’re already in a bad spot.
I want to see you saving money Kaya. I don’t want to see you making it worse by taking on debt through high interest rate means like a credit card to then go put this thing together with the hopes that you’re going to make $3,000 a month when you’re inexperience and haven’t done this before. You need to get another person who’s in that space that is familiar with rehabs, that understands short term rentals to work with you on this. But if you’ve got a potential $3,000 a month and you could get a mentor to come in and you split that with them and they get $1,500 a month for a couple years to walk you through how to do this, or they can earn some interest on their money to help you. I don’t think it’s going to be too hard to find somebody.
All right. In the second part of her question, Kaya here explains that she originally wanted to live in a condo or a town home for safety reasons, because she wanted to be around other people, but she bought this house because she felt it was a stronger investment. While it is a stronger investment and has some really good upside, Kaya doesn’t feel as comfortable living in the house as her primary residence.
So she’s curious if she can move out of this house because she hasn’t lived there for a year and the best way to go about doing it. All right, Kaya. Here’s my understanding. No one can force you to stay in the property. If you don’t feel safe there and you want to move out, you can absolutely rent it out to somebody else. You could also buy another home that you intend to live in as your primary residence with the low down payment loan options, because you don’t have a lot of money. So if you can figure out a way to get enough cash for a 3.5% down payment and you don’t already have an FHA loan, you can go buy another property that you live safe in. Move into that, put a renter in the house you have now.
Assuming is going to cash flow. Start saving money and maybe use some of that money to do the garage conversion. You’ve got some options here. It sounds like you’re a little afraid and kind of tied down and very nervous. I don’t think you need to be. You can move out of the house you’re in. You can buy another house with a low down payment option. You might have to wait the year before they’re going to be eligible for that. So that’s something to talk to your mortgage broker about. Can I get another primary residence loan? Can I get an exception to get another one because I don’t feel safe in my house? You can use it as a rental. So make sure you run the numbers to know that’s going to cash flow if you move out.
You can move out and then you could convert the garage into an ADU later. You may convert the garage into an ADU and move into that one where you live and then rent out the main house for even more money on Airbnb. Or we could go back to what we said before, where you buy another property, you house hack it, you save on your mortgage and then you use the money you save to convert the garage. Either way, you’ve got a lot of options. The cool thing is, you bought a house close to the airport where there’s a lot of rental demand. You just have to figure out how you’re going to get access to capital. All right. We have time for one more question. This comes from Tyler.

Tyler:
Hey David. My name is Tyler and I live in Broomfield, Colorado. I’m looking to purchase my first house hack and I’ve reached a point where I can afford to get into a property and use half of it as an Airbnb. But if I do, I would be starting off with less than three months of reserves for the house, plus three months of reserves for personal expenses, assuming the house is pretty turnkey. My question for you is this. What is a healthy target for reserves for a first time house hacker? If I don’t purchase a property soon, my alternative is to resign my lease at my apartment until I can save up enough cash to launch with more reserves. Thank you.

David:
All right, Tyler, keeping it short and sweet. There is no right answer for how much reserves you need. As I’ve said before in different shows, it depends how much money’s coming in. So if you’re someone who makes a lot of money and saves a lot of money, you can dip down to lower reserves relatively safely, because you’ll replenish your money. If you’re someone on a fixed income who doesn’t make a lot of money or has a hard time saving, you need to keep more in reserves to be safe. The general number that we start with is six months of reserves to make your mortgage payment as well as enough to make payments for yourself in case you ever lose your job or ran out of income. From there, adjust up or down, depending on how much disposable income that you have every single month. But I would also consider if you want to buy a house and you know you don’t have as much reserves as you like.
Can you talk to a family member and say, if I ran into a jam and needed 10 or 20 grand, do you have that money in savings I could access and pay you back? It doesn’t necessarily have to be reserves you’re holding in your bank. If your mom, your dad, your aunt, your uncle, someone that you trust, a grandparent, does have the money, and you said, look, in the case of a perfect storm, if something terrible happened, would I be able to borrow money from you? If that’s a yes, it’s not as important that you have the money in reserves for yourself. Now, you don’t want to make that sort of the rule that you go to every time. You want to use this sparingly and you want to be able to build up your own reserve. So you seem like a young guy, I would highly encourage you to start working overtime, start working a second job, start doing something else to work hard to build up those reserves.
That’s what I did and that’s what gave me the confidence to be investing in real estate when everybody told me not to. I knew that I had enough money saved up and I could go make more money if I needed. That in the worst case scenario, I would be okay. It’s one of the reasons that I still work today. I want to keep buying real estate and I don’t want to worry about what if something goes wrong. So I still have money coming in from the work I do and the businesses that I run. There’s also not a ton of urgency for you to buy a house right now, because at the time of this recording, the market is softening a little bit. We’re not seeing a market crash, but we are seeing that home prices are coming down. Their homes are not selling as fast. Sellers are finally getting some concessions.
They’re getting some closing cost credits, they’re able to buy down their rate. They’re able to keep more money in the bank and they’re offering at less than asking on many, many homes. This is something that The David Greene Team is doing really well. We’re getting under asking price and concessions for a lot of our clients that we haven’t been able to do in years. And on the homes that I’m buying, I’m buying them far below market value because sellers don’t really have an option when buyers aren’t buying as much. So instead of signing a year long lease at the current place you’re at, which is going to sort of lock you in there, talk to your landlord and ask them, hey, can I sign a three month lease, a six month lease? Can I go month to month? Even if you got to pay 100 bucks a month more, something like that, you’re better off to have flexibility.
So when the right deal comes across you, you can move on it rather than thinking, I’m stuck here for the next 12 months because I just signed a lease. If for some reason your landlord won’t work with you at all, see if there’s someone else you can move in with. Can you put your stuff in storage and stay with someone else while you take your time to see what the market does? I’d hate to see you miss out on a really good time to buy that could be getting even better as more time passes because you locked yourself into a lease that shuts you down and makes you think you can’t buy more real estate. Thank you for your question Tyler. Really appreciate it and good luck. Let me know how it turns out. All right. That was our show for today. Thanks again for taking the time to send me your questions.
I love it. If you would like to send me your question, maybe you were inspired by what you heard. Please go to biggerpockets.com/david and you could submit it there. We have had a great response from our audience and I encourage you to keep sending me these questions. I love doing this. So please submit more. If you enjoyed this episode, please be sure to like and subscribe to our YouTube channel so we can get this video in front of more eyes to help out our community.
And if you haven’t already done so, go to biggerpockets.com, which is actually a website where this podcast comes from, where we have tons of tools, resources, and people that will help you on your investing journey. If for some reason you were too shy to ask me a question on the show, you could find me on social media @davidgreene24, or you can message me through the biggerpockets.com messaging system and I will get to that whenever I can. Thank you guys for your time, for your attention and for your love. I love you right back and watch another one of these videos if you’ve got a second.

Ashley:
This is Real Estate Rookie Episode 198.

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

Tony:
And welcome to the Real Estate Rookie Podcast where every week, twice a week, we bring you the inspiration, information, and answers to your questions to help you kickstart your real estate investing journey. And today we’ve got a really cool question coming in from the Real Estate Rookie Facebook group, and if you guys are not in the Real estate Rookie Facebook group, make sure you join. It is honestly one of the most active, the most engaged Facebook groups that I’ve seen for real estate investing.

Tony:
Today’s question comes from Montes Receivus, so Montes, hopefully I said your last name the right way, but Monte’s question is, “So my friend just encountered this situation I’ve never heard of before. My buddy placed an offer substantially above asking price, and the seller, before accepting the offer, asked my friend if he would be willing to pay the difference if the appraisal came in lower than the offer price. Very ballsy question. Has anyone encountered the situation before, and what would be the best response, if any?” So Ash, what are your thoughts on this?

Ashley:
Yeah, so an appraisal, it’s so tricky, and Tony, I’ve heard you mention this before about how it’s more of an art than a science, and I think that’s such a great advice because you can’t say for sure exactly what a property is going to appraise for even if you look at the comps or you look at what income it is bringing in. So this buddy, what they’re saying could happen, it definitely could happen where there could be a difference in the appraisal. So a couple things I do are do as much research as you can ahead of time as to try your best to estimate what the actual appraisal is going to be. So one thing I do is pull up the comps. I use Prop Stream. You can go to your county GIS mapping system and look at properties. You can also just go to a MLS listing website like Realtor or Zillow and pull up the comps from there. And then go ahead and look at what are some differences between those comps, too. Maybe one property has a garage, one doesn’t, kind of take those into your measurements there.

Ashley:
Then when you meet the appraiser, bring all the information you have. So if there was a new roof put on, there was upgrades done to the property, bring that with you. Maybe if you own property down the road, or you know somebody who does, and they had an appraisal done, and it works in your favor, bring a copy of that appraisal. So it goes both ways. Some appraisers will take as much information as you can give them and say, “Oh wow, thank you. This is going to make my job so much easier.” Some will be like, “Nope. No thanks. I don’t want to even look at it.” But might as well be prepared if it’s somebody that’s going to take the information that you want. As far as the appraisal coming back lower than you want it to, I don’t personally have any experience, and that’s why I’m going to turn it over to Tony. So my little tips were just to help you get prepared for the appraisal, and now Tony’s going to actually help you with what happens when the appraisal does not come back how you want it.

Tony:
Yeah. And Ashley, all fantastic points. I appreciate you sharing that with the listeners, and Montes, to kind of go back to your initial question as well, it actually isn’t that crazy for a seller to ask that of a buyer. So it is common that if there’s kind of this bidding war situation going on, that the purchase price exceeds what the property will appraise for, and there’s a name for that. It’s called the appraisal gap. And we saw a lot of this happening over the last 12 months as the market went bonkers, and there was multiple offers, multiple bidding, people bidding on the same property. You saw a lot where the properties were getting placed under contract for a price that was potentially significantly higher than what the property would appraise for. So in a market like this, Montes, it is common. It’s not that crazy the seller to ask that from the seller.

Tony:
And a lot of buyers, when they’re submitting offers in a competitive market, they’ll even include in their initial offer what appraisal gap they feel that they’d be willing to, they’d be willing to go up to, but say that you feel that the appraisal just came in low, right? Not necessarily that you went way over what it was valued at. If you feel that it came in low, you can challenge an appraisal. Okay? We have you successfully challenged a few appraisals, and what we were able to point out was some discrepancies in the report that the appraiser put together. So for example, one that we just did, the appraiser had the square footage off by, I think, almost 200 square feet, right? And that makes a difference in what the value of the property is. The comps that the appraiser chose, we found other more similar properties, better comps, and the same mile radius that the appraiser used that he just overlooked for whatever reason.

Tony:
So find holes in the appraiser’s report that you can point to say, “Hey, here’s an inconsistency here. Or here’s an inconsistency here. Or here’s a better appraisal comp here, or here is some information that was incorrect.” And if you can push back, sometimes the appraiser will admit and make those changes, other times I’ve had it to where you can actually get a second appraisal ordered, and then if all else fails, maybe it’s just about finding a different lender, right? If the lender isn’t willing to jump through those hoops to help you fight that appraisal, you can always go out, find a different lender, they’ll be able to reorder another appraiser. They’ll be able to order another appraisal from another appraiser which will help you hopefully get a better opinion of the value of the property. So that’s what we’ve done in the past to help us get around some of these appraisal gaps that we’ve seen. But all else fails, you might, Montes, your friend might just have to come out of pocket to actually cover the difference between the purchase price and the appraisal price.

Ashley:
Yeah. And I think the thing to take away from this episode is to at least try to dispute that appraisal if that does happen, where there is that gap, the difference. Do what you can to try to get a new appraisal or have the appraiser re-look at his configuration and what he computed as the appraised value.

Ashley:
Well, thank you guys so much for joining us for this episode of Real Estate Rookie. You guys can send us a DM on Instagram or leave a message in the Real Estate Rookie Facebook group. And if you guys are enjoying the show, please leave us a five star review on your favorite podcast platform.

Ashley:
I’m Ashley at Wealth from Rentals and he’s Tony at Tony J. Robinson. Thank you guys so much for listening.

Mindy Jensen:
Welcome to the Bigger Pockets Money podcast, show number 316, Finance Friday edition, where Carl and I recap our big June spending. I have started to notice inflation at the grocery store. I don’t really notice inflation for clothing and shoes because I shop at the thrift store mainly. And I don’t really notice inflation for a lot of other things. I just don’t buy a lot of things.

Mindy Jensen:
But for food, I’m starting to notice that at the grocery store and I’d like to think I have a pretty good handle on our food budget and on food prices in general. And it seems like they are going up and up. And that can be scary if you’re paycheck to paycheck. Hello, hello. Hello. My name is Mindy Jensen and joining me today is my co-host, Carl. You might know him from 1500days.com or the Mile High Five podcast, but I’ve known him as Mr. Mindy Jensen for the last 20 plus years.

Carl Jensen:
This is the first time I’ve ever heard you refer to me as Mr. Mindy Jensen.

Mindy Jensen:
Oh, I say that all the time.

Carl Jensen:
Really? Oh, I’m okay with it. I mean, you bring home most of the bacon so you can call me whatever you want.

Mindy Jensen:
Oh good.

Carl Jensen:
Just no bad words, at least not in front of the kids.

Mindy Jensen:
Oh, I would never.

Carl Jensen:
Okay. Thanks.

Mindy Jensen:
In front of the kids. Carl and I are here to make financial independence less scary, less just for somebody else, to introduce you to every money story, because we truly believe financial freedom is attainable for everyone, no matter when or where you are starting.

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

Mindy Jensen:
Wow. That was smooth as silk.

Carl Jensen:
Yeah.

Mindy Jensen:
Usually Scott reads those words and he has been doing it for 300 episodes. So he has that memorized now, but that’s okay. You did a great job. Thank you, sweetheart. So Carl and I are here to talk about our June spending, which was the most expensive month that we have ever had. We spent, let’s open up our spending tracker, which you can follow along with every single month, every single day, if you’re really all that interested, at biggerpockets.com/mindysbudget. And I say Mindy’s budget, because I work at Bigger Pockets and you don’t. So we spent a whopping $11,995.70 this month, all in one month, which is a lot for us.

Carl Jensen:
Yeah. That hurts a little bit. But let’s flip over and say where most of that spending came from. Let’s see, we go …

Mindy Jensen:
It’s right here.

Carl Jensen:
Oh, okay.

Mindy Jensen:
Mindy highlighted it for you.

Carl Jensen:
Oh geez. Yeah. I can’t do anything.

Mindy Jensen:
Are you new?

Carl Jensen:
I need glasses. Yeah. I pretty much am new.

Mindy Jensen:
Get your classes then.

Carl Jensen:
$8,437.15 cents were travel expenses, which is quite shocking. And we had a slippery slope situation where our child decided to go on this school trip to Germany. We said, “Fine, if you want to go on this, we’ll pay for half. You have to cover the other half.” And then I started thinking, I’ve never been there. I’d really love to go to Germany. So let’s go over there and meet her, which is fine. We can shop for flights and get all that stuff and try to find budget accommodations and do all that stuff ahead of time.

Carl Jensen:
But it turns out, this tour company who will go unnamed, but they’re a big tour company, doesn’t book the tickets until like weeks before the actual trip. Keep in mind, this is an international flight and they booked it less than a month before the trip. So we were forced to book our stuff a month before the trip. So I think we paid a premium. Most of that 8,000.

Mindy Jensen:
You think we paid a premium? Let me confirm that for you.

Carl Jensen:
Yeah. I don’t know. I don’t frequently price flights to Frankfurt. It sounds like a tongue twister. Say flights to Frankfurt 10 times fast. What’s another German F-word? [foreign language], that’s a Volkswagen thing. Yeah. Yeah. So anyway, the flights were like, for the three of us. And then we had to buy another one for the daughter because of this other debacle with the store company. So we had to buy three round ship flights and a single flight home back from her. And that was weird, it was cheaper to buy her a round trip flight to go from Frankfurt to Denver and then back to Frankfurt and then to just ditch the second half than it was to buy one flight. So yeah, we ended up buying three and a half flights and I think that was close to $6,000, right?

Mindy Jensen:
That was over $6,000.

Carl Jensen:
Painful.

Mindy Jensen:
And what makes it so painful is that we couldn’t even fly or we couldn’t even shop for airlines. They didn’t tell us if they were going to fly Luftansa or if they were going to fly United or American or any number of other airlines. We couldn’t even start accumulating flight points. They just said, we will get to you when we get to you basically. So we weren’t able to really accumulate any points anywhere that would have worked out. I suppose we could have, going back now, we probably could have gotten those Chase Ultimate Rewards points and done a one-to-one transfer. That actually might have been a really good choice.

Mindy Jensen:
If anybody knows about the Chase Ultimate Rewards points, would that have been good? Because we did end up flying Lufthansa, which is a lovely airline. Everything worked out really, really well with the airline once we were there. We flew during some pretty awful domestic flight cancellation weekends. So we’re really thankful that we didn’t have any of those. We did go direct Denver to Frankfurt, without any sort of layovers or stops at all, which was my favorite way to travel. All in all, we had a good time.

Carl Jensen:
Wait, is it Frankfurt or Frankfurt, how I’ve been saying it?

Mindy Jensen:
Well, I’m American, so I say Frankfurt, because that’s how we roll.

Carl Jensen:
You’re mostly German though.

Mindy Jensen:
I’ve actually only been in Germany like 10 whole days, which occurred in June 2020.

Carl Jensen:
Okay.

Mindy Jensen:
It’s the first time I’ve ever set foot in the motherland.

Carl Jensen:
I do know, we have multiple German listeners and they will correct you because I think I’m right.

Mindy Jensen:
Okay. Well, if you want to correct me, you can send it to Carl, [email protected]

Carl Jensen:
Okay. So something we have never talked about, I’m going to ask you this right now, do you regret the trip?

Mindy Jensen:
I do not regret the trip. I wish we had more time to plan. And I say that like, we didn’t have a year and a half to plan the stupid trip. I wish I would have planned it a little bit better and maybe got a bunch of airline miles on Luftansa and United and American. And I mean, you can always use them someplace else or maybe you can’t, maybe we’ll just go back there. I wish we would’ve done it a little differently, but I’m glad that we went. It was a lot of fun.

Carl Jensen:
Yeah. I regret nothing. It was such a good trip … We saw-

Mindy Jensen:
Oh, thanks for setting me up like that, and then you, “I regret nothing.”

Carl Jensen:
No, no. I think there’s a lesson in here. We’ll tell you real quick what we did and why I don’t think we should regret it. We went to Berlin, that was four days. Then we rented a car. We drove as fast as our little Skoda could go. If you want to haul butt down the autobahn, a Skoda is not a good choice. We had that thing [inaudible] at like, what, 160 or 180 kilometers an hour, I think 110 miles per hour, which is not fast on the fast parts of the Autobahn.

Mindy Jensen:
No.

Carl Jensen:
So we took that thing to Munich after that for another like three nights. And then we came back, we stopped in Rothenburg on the way back and that’s it. I wish we would’ve had more time at both places, but especially in Munich. So back to my original question, I asked if you regretted spending that kind of money and you said no, and I don’t say no-

Mindy Jensen:
Oh, you didn’t ask if I regretted spending that money, you asked if I had any regrets.

Carl Jensen:
Okay. I guess that was my question then. Let’s go back to it then. Do you regret?

Mindy Jensen:
And that makes sense, this is a money podcast.

Carl Jensen:
It’s kind of the same thing. Do you regret the trip because we spent that much money on it or do you regret the money part of it?

Mindy Jensen:
I don’t regret the money. I wish we would’ve been able to save some money. I mean, how many times do we sit here and talk, both of us collectively, on our blog, on our podcasts, on our respective podcasts, we talk about money and saving money and saving money where you can. And we didn’t really have that opportunity. Although I think we could have saved more money if we would’ve tried a little bit harder.

Carl Jensen:
Yeah.

Mindy Jensen:
There’s a lot of information out there about how to earn miles and points and sitting down here talking to you about this was the first time it popped into my head, those Chase Ultimate Rewards, which are really fabulous rewards points. And we have the ability to get new Chase cards fairly frequently. I don’t think we’ve opened up a new one in the last 24 months. They have this five out of 24 rule. You could only open up five Chase credit cards in the last 24 months, I think. I’m pretty sure that’s still the same rule, but I don’t know, maybe it’s not. If you know for sure that, that’s changed, feel free to send us a note or comment in the Facebook group at facebook.com/groups/bpmoney. Would love to hear the updated.

Mindy Jensen:
If you have any tips for travel, saving money for travel, last minute tips when you have a specific deadline, a specific location that you’re going, a specific date like we had, if you have any off the wall tips, that’d be great too. But no, I don’t regret our trip and spending that much money. I mean $8,437 in one category that is not car is a lot, but let’s talk about what exactly that 8437 is.

Mindy Jensen:
That is the airfare, the hotels that weren’t booked on miles, which we do have boatloads of. That was all of our food, all of the restaurants, all of everything that would normally go into different categories. We put that all in travel. And the reason we did that and we did it consciously is because we would not have had those expenses at that level, if we had been at home. So groceries are more expensive because we’re not going to a real grocery store.

Mindy Jensen:
We’re going to a tiny little grocery store because we don’t speak the language, which is another, that’s a regret. We should have learned some German. We don’t speak the language and we don’t know where these other grocery stores are, so we just go to the little convenience stores and convenience stores always have higher prices. We went to restaurants, we went to, what’s the big brew house, brow house?

Carl Jensen:
Hofbrauhaus.

Mindy Jensen:
Hofbrauhaus, thank you. I always forget that. We went to the Hofbrauhaus and we got a great big beer. Well, did you post that picture of me holding two giant beers? I looked like such a lush.

Carl Jensen:
I did.

Mindy Jensen:
Yeah. Thank you. That’s great. You’re awesome.

Carl Jensen:
They’re light beers.

Mindy Jensen:
We drank a lot of beer in Germany. It was delicious. And I didn’t categorize that into different spending categories because we wouldn’t have been going out so much. We wouldn’t have been spending that much money if we had been at home. So we lumped it all into travel. And again, the reason we have so many different categories in our spending tracker is because if we had to, we could cut out travel altogether. Let’s say the stock market takes a big dump, like a 25% dip. Theoretically, of course, that would never happen the first quarter, the first half of 2022. Is it down 25% or just 22%?

Carl Jensen:
I think it’s like 22.

Mindy Jensen:
Yeah.

Carl Jensen:
It’s definitely a bear market.

Mindy Jensen:
Yeah.

Carl Jensen:
Over 20%.

Mindy Jensen:
Don’t get crazy. Don’t say 25. It’s only 22 and we’re recording this on July 4. I don’t know what the market’s going to do by the time this releases on July 7. However, the market has taken a big dump and there are a lot of categories we could cut out and get back into our normal spending threshold. So let’s look at some of, we did some math before we started this. Oops, let’s scroll down.

Mindy Jensen:
So we are in, this is the end of June that we are sharing numbers for. And the total spending that we have done thus far in 2022 is $46,484.79. Now, when we first extrapolated our FI number, what did we say that was going to be?

Carl Jensen:
40,000.

Mindy Jensen:
$40,000 for the whole year. And here is us going $6,000 over in six months, so that’s a lot. We looked at some of our expense lines and the biggest one that we could very easily cut out is travel. We have spent $17,000 in travel this year, and this is the first year after a pandemic, so we want to get out and see things. And yes, I’m not saying the pandemic is over. The pandemic is still going on, but we have been able to travel more this year than we have in the last two years. That’s a very easy cut, but that’s $17,000.

Mindy Jensen:
So without the travel expense, we’ve spent $29,424. Okay, well, we planned on 40,000, so that’s still at six months, we should be at $20,000, but we planned on $40,000 with no mortgage payments. How much have we paid in mortgage? Well, lucky you should ask that question. I anticipated that and I did the math and we have done $7,938 in mortgage payments. So without travel and without mortgage payments, the amount that we have spent this year in six months is $21,486.71.

Mindy Jensen:
So now we’re only $1,400 or actually you round that up to 1500, that number comes up all the time. It’s crazy how frequently the number 1500 pops up in our lives. We are $1,500 over our anticipated spending over the course of six months, which feels pretty good because we haven’t had to tighten our belts. We go out to dinner frequently. We go out to tap rooms with friends. We spend way too much on groceries and we live a pretty good life, without feeling like we are restricting ourselves. I mean, that’s what I think, what do you think?

Carl Jensen:
Yeah. I think that’s-

Mindy Jensen:
[inaudible] plant words in your mind.

Carl Jensen:
Yeah. I think that’s absolutely true. And this is something I say, I think every time I record. Every time we record, I say this. Sorry, I sound like a broken record, but we’re frugal for the things we don’t care about so we can spend on the stuff we do care about. The travels important to us. When we went to Munich and Berlin, we stayed close to the city center so we never had to get into a car. We walked everywhere or took bicycles and we paid a little bit extra for that convenience, but it was well worth it, because I don’t like to get in a car if I don’t have to. So it was great, but we’re pretty frugal. I’m about to order 20 tons of rocks to put in our yard and I’m going to move all of those myself, because I think it’s great exercise.

Mindy Jensen:
You heard it here. I don’t have to move any of those rocks. He’s going to move them all himself. I love that.

Carl Jensen:
Well, did I say me?

Mindy Jensen:
Yes.

Carl Jensen:
We, we, we.

Mindy Jensen:
No, no, no. They’re not going to cut that out. They said, you said you were going to do that all by yourself.

Carl Jensen:
There’s no I in rock.

Mindy Jensen:
There’s no I in team.

Carl Jensen:
I guess there’s no we in rock either, but yeah. But I don’t mind because I get a bunch of exercise from it. What are some other things we take care of our own lawn. I know some people absolutely hate mowing their lawn, but I really hate blowing their line button. I don’t mind it so much. I could put on my noise canceling headphones and catch up on the Bigger Pockets Money podcast.

Mindy Jensen:
Yeah. What is this episode? 316. So what do you have? 313 episodes to go.

Carl Jensen:
Yeah, I think so. I’ve listened to a couple. It’s pretty good. I like it. It’s too close. Yeah. What else? We do our own car maintenance. I don’t really like that, that much, but it’s faster to change the oil than it is to go to one of those places and sometimes, they screw it up. I cut my own hair, which looks so, so great.

Mindy Jensen:
Yeah.

Carl Jensen:
So I’ve paid like zero for haircuts for the past 10 years, at least. Right.

Mindy Jensen:
So, oh, it’s been longer than that. We’ve been cutting your hair. I, we, that’s a team effort.

Carl Jensen:
Yeah. So if you think of that, 100 times 20 bucks, that’s $2,000.

Mindy Jensen:
100 times 20, what are you 100 times 20 for?

Carl Jensen:
100 haircuts times 20 bucks with a tip and all that. At least 100 haircuts probably. No, a lot more.

Mindy Jensen:
Over what time period?

Carl Jensen:
Like one haircut a month for 10 years. That’s actually 120 haircuts.

Mindy Jensen:
You’ve been cutting your hair for like 20 years.

Carl Jensen:
Okay. So bump that up. That’s all our airfare. My haircuts bought us our airfare or most of it to Germany. But yeah, I think there’s something in that. I think you need to, at least our models to carefully consider where we spend so we can not spend on the things that we … I just totally messed it up. So we can spend on the things we really care about, but then save money on things that we don’t care so much about.

Mindy Jensen:
Well, let’s look at the things that we don’t care so much about. Oh, I don’t really want to because we haven’t really done this line at all. We need to work on that a little bit more.

Carl Jensen:
No, we have done. Here’s one entry right there. We’re looking at charitable-

Mindy Jensen:
And one over here, charitable contributions needs to be increased significantly.

Carl Jensen:
Yeah. We do, do some. I think we gave some money to Ukraine. We forgot to put that on there. Yeah. And we’ll certainly do more. I think our goal in life is probably to give in much bigger amounts. This is a whole other conversation, but I always think right now it’s the most spendy part of our lives. We have two children, but in like 10 years, they’ll be out of the house, I hope. They’ll be out of school, I hope. And then we can live super cheap and then we can give more of our money away.

Carl Jensen:
Now I still feel, we’ve done well, but still a little bit of shakiness and unease due to financial insecurity. So we’ll give and we’ll give big, but it’s probably a little bit further down the road. I’m not going to wait till I die, like Warren Buffet though. It’d be cool to see your money in action while you live, but we’ve gotten way off topic.

Mindy Jensen:
We have, but that’s something that we need to start discussing. We don’t need to discuss that right now and hash that out as people listen to us awkwardly discuss this. We’re going to stop that. But we will discuss this after the lights go down. Let’s look at our spending. If you look at our June spending, we only hit four red categories. And one of them was utilities by a dollar, which doesn’t even count. One of them was school. I don’t remember what I bought for $27, but it was a school expense that I had allocated zero to because it’s June and I didn’t think we’d actually be spending any money on school. So I think I just need to have $100 in the budget for school for every month. And then sometimes we hit it and sometimes we don’t.

Mindy Jensen:
Gifts, what gifts did we buy this past? We bought a lot of gifts in June. I can’t remember why, but we went $173 over the gift giving budget. And oh goodness, last month we went, we really need to up our gift giving budget because we have really gone over.

Carl Jensen:
In May, we had a family member graduate from school and we took the family out to dinner. So I put that in the gift category. That’s where that came from.

Mindy Jensen:
That’s right and I didn’t think of that when I was making my budget. That’s a learning opportunity and a research opportunity for everybody who is listening, who wants to make their own budget. Think ahead. I don’t know if you know this, but my projected is just a guess for a while. Because we haven’t been tracking our spending for so long, I don’t really have a good guess, a good gauge as to where my money is, where my money will be going this month. So I am now guessing based on, or estimating, let’s call it an estimation and not a guess.

Mindy Jensen:
I’m estimating based on the previous month. And that’s right, May was expensive. June was expensive. I think that maybe for gift giving, we need to bump that up to about $150 a month and see what happens, except for Christmas, which will be more.

Carl Jensen:
Yeah, it’s it feels good to be generous. I don’t mind spending money in that category at all. I think one of the gifts was we sent something to J. Money, Budgets Are Sexy. Congratulations, J. on buying it back.

Mindy Jensen:
Oh yeah. Budgets Are Sexy is now re-owned by J. Money.

Carl Jensen:
Yeah.

Mindy Jensen:
What else do we have? That’s right, I did send that. Our household budget, I think $200 a month in random household expenses is going to be our sweet spot. It feels like we have finally figured that out. Although I’m looking back, $1000, $2,000, we bought a couch. What did we buy in May? I don’t even remember. That’s kind of sad. What did I buy? I don’t even remember. And yet, I blew my budget way out of the water by $1000. Now I have to go back and research that.

Mindy Jensen:
We didn’t have any entertainment last month, but we were in Germany, so that was all entertainment. And again, that went into the travel expenses. So a lot of these numbers, the category numbers in June are artificially low because we were in Germany for 10 days. What else do we have? Healthcare is going to be ongoing until we figure that out. We are going to have that about $400 and I’m happy to come in a little bit lower. But overall, we had pegged it at 13,600 and we came in at 12,000-ish, just under 12,000. So we’re $1,600 below budget this month and it feels good to have a green month instead of a red month.

Carl Jensen:
Yeah.

Mindy Jensen:
Next month, I have us pegged at 9,200. I think I’m going to bump that up to 9,500.

Carl Jensen:
And it looks like a lot of this is coming from travel. We have one more big trip plan. We’re just going crazy. We’re going to be on an Oregon for some time.

Mindy Jensen:
We?

Carl Jensen:
Yeah, we.

Mindy Jensen:
We? I’m going to be here in Colorado.

Carl Jensen:
Yeah. After this, well, you’re coming out to California for a little bit.

Mindy Jensen:
Yes. Yes.

Carl Jensen:
So there is that, but then after that, we’re going to calm down. We’re not going anywhere for Thanksgiving. We’ll probably stay here for the rest of the holidays. We’re going to travel out to you for the Bigger BP Con. Is that what you all call it?

Mindy Jensen:
San Diego, BP Con, October 2 through 4. You can find more information about the Bigger Pockets Conference at biggerpockets.com/events.

Carl Jensen:
So I think we should talk about what goals we have for the second half of the year. What have we learned the first half?

Mindy Jensen:
We have learned that we don’t know how to make a budget.

Carl Jensen:
Yeah, but I think, for me at least, I think the keeping track is more important than the budget. The keeping track and especially the reflection part, like what we do now, this is probably our money date. I know certain couples do money dates where they’ll meet on a weekly or maybe monthly basis to review their numbers. And that’s exactly what we’re doing here. We’re just doing it in front of everyone. I don’t actually like budgets because that puts constrictions on your spending. You should spend thoughtfully, but that’s where what we’re doing comes in. We can review and consider if all our spending was thoughtful spending.

Mindy Jensen:
Ooh, I’m going to disagree with you and say, I like a budget because I open up this spending tracker frequently. I have this open on my computer all the time. So you can follow along at biggerpockets.com/mindysbudget. I am speaking specifically of the second tab, the 2022 budget. I keep this opened every day and I will look at it. I’ll just check in to see how we’re doing. And I will see that in the month of July, I have already spent $40 on groceries. Okay, that’s no big deal. I have $709 left or I will see that I have already spent, oh that’s fitness, $250 of our $300 fitness budget was on a bicycle for our daughter. We’ve spent a lot of money on our travel budget.

Mindy Jensen:
We have two trips to take and we only have $1,200 left on that budget. I’d like to be a little more conscious about our spending on food when we are on those trips. So instead of going out to dinner every single night, maybe we go out to dinner every other night and we make sure we have breakfast and lunch in the Airbnb or hotel, wherever we’re staying.

Carl Jensen:
Yeah, I agree. Can I go to a Taco Time when I go on my road trip?

Mindy Jensen:
Okay. What’s Taco Time?

Carl Jensen:
It’s a taco restaurant. They’ve got a deep fried taco or a deep fried burrito. I think we call those chimichangas but they call it something else. I’m not going to have that one.

Mindy Jensen:
[inaudible] heart attack.

Carl Jensen:
I value my cardiovascular system, so I don’t abuse it too much.

Mindy Jensen:
What else do we have? Oh, parties. Well, that party number’s going to go way up because we’re having a 4th of July party today and I didn’t put that expense in yet.

Carl Jensen:
Yeah. Going to be crazy.

Mindy Jensen:
So I like to keep track of this. We’ve already spent almost half of our clothing and shoe budget this month. So I want to make sure that we keep that under the 250 mark, which means that maybe I don’t go to the thrift store with the girls whenever they ask.

Carl Jensen:
Yeah.

Mindy Jensen:
Even though it’s the thrift store, we’re still going. In fact, I think I didn’t put the Kohl’s charge from yesterday in there, which means that there’s more money that we’ve already spent. So it’s very helpful for me to see this. When I don’t see this, I don’t think about it. When I see this, I think about it and I think to myself, oh, maybe I don’t need to charge that item. Maybe I don’t need another pair of shoes. Maybe I can wait another month for a new pair of workout pants.

Mindy Jensen:
I would like to know what about these monthly money budget dates are helpful to you and what you would like to hear from us in the next recap, because we’ve just been doing what we want to talk about, but we want to make sure that you’re hearing what you want to hear. Do you have any questions about our budget or how we come up with any of the things that we’re doing or any other questions that you would like to know about making a budget, making a spreadsheet?

Carl Jensen:
Yeah, I agree. I think it’d be super fun to answer a reader question or two.

Mindy Jensen:
Yeah. Any questions you have about our finances? You think we’re missing a category? I think we’re pretty good on categories, although we don’t have the umbrella insurance category in here. That’s going to add another $100 a month, $75 a month.

Carl Jensen:
Wait, how much is it?

Mindy Jensen:
It was like, was that $900 a year?

Carl Jensen:
No, I don’t think it was that much. I thought it was pretty small. We should go back.

Mindy Jensen:
I should look that up.

Carl Jensen:
Yeah. It wasn’t that.

Mindy Jensen:
Was it $900 for all of it?

Carl Jensen:
Yeah. For all of it.

Mindy Jensen:
For all of it, yeah, so, that’s okay.

Carl Jensen:
Yeah. We have a cheap old cars. Our auto insurance is like 800 a year or something like that. Right?

Mindy Jensen:
No. Auto insurance is like $300 a year. Homeowner’s insurance is $600 a year.

Carl Jensen:
That’s it? Wow.

Mindy Jensen:
Well, and the umbrella’s in there somewhere. I can’t remember what it was.

Carl Jensen:
Okay. Wow. Yay to crappy cars.

Mindy Jensen:
Or maybe homeowners is 900. I don’t know. I should look this up. Maybe it was $600 every six months before and now it’s 900 for the year.

Carl Jensen:
Okay. Anyway, shout out to the Mazda people. That thing will not die.

Mindy Jensen:
Yeah. Mazda five.

Carl Jensen:
Yeah, it’s a Mazda five, which is like, it’s a mini minivan or as Mindy likes it call it, the Mindy van.

Mindy Jensen:
It’s the Mindy van. Yes. If your name is Mindy and you drive a minivan, you should change the name to a Mindy van.

Carl Jensen:
It’s pretty awesome.

Mindy Jensen:
It is great. Is there anything else you want to talk about?

Carl Jensen:
I don’t think so. For the second half of the year, I would just like to keep watching things. It’s become a little bit, I don’t say scary, but yeah, this is the first time since I quit by job, since we started our journey. We started talking about financial independence, October 2012 and we had a little bit of a correction when COVID happened, but that one was very short. The feds jumped right into prop things up. V shaped recovery, hit the bottom, bounced back up like a rubber ball.

Carl Jensen:
This one has already gone on longer. And I think it will go on for a little bit longer as well. We might be in for some more, I don’t even want to say pain. I hope it’s not painful for y’all. But do you have any thoughts on that? Does that change the way we think about things? I’ve been noticing inflation too. I always notice gas prices. Everyone notices that, but I went to the store to buy some other stuff and the diet Mountain Dew was way more, so I’ve cut way back.

Mindy Jensen:
You should cut way back because it’s Mountain Dew.

Carl Jensen:
I know, it sucks. It is the diet, but it’s still bad for you.

Mindy Jensen:
I have started to notice inflation at the grocery store. I don’t really notice inflation for clothing and shoes because I shop at the thrift store mainly. And I don’t really notice inflation for a lot of other things. I just don’t buy a lot of things. But for food, I’m starting to notice that at the grocery store and I’d like to think I have a pretty good handle on our food budget and on food prices in general. And it seems like they are going up and up. And that can be scary if you’re paycheck to paycheck.

Mindy Jensen:
Having a meatless Monday, meatless Tuesday, meatless Wednesday to try and combat that, so you’re not spending so much money on the big expensive things. Go to budgetbYtes.com, B-U-D-G-E-T-B-Y-T-E-S and get all sorts of really inexpensive meals there, inexpensive recipes. We had Beth on the podcast just a few months ago or just a few weeks ago. And she had some really great tips. Cheese and nuts are really expensive sources of protein, but eggs are an inexpensive source of protein.

Carl Jensen:
We could buy our own chicken.

Mindy Jensen:
You could buy our own chickens and eat the eggs. And then when the chickens don’t make any more eggs, then you eat the chicken.

Carl Jensen:
Whoa. I don’t want to be involved in that part.

Mindy Jensen:
I don’t want to either. Plus our HOA doesn’t allow us to have chickens.

Carl Jensen:
Yeah. The kids would probably need the chicken. It would become a family pet. And then yeah, the chicken-

Mindy Jensen:
Can you imagine the hassle they would give us if … So, yeah. I’m starting to notice it, but I keep hearing that things are going to change. So we’ll see.

Carl Jensen:
Yeah. Yeah.

Mindy Jensen:
I’m not really concerned. And I really hope that this doesn’t come back to bite me in the butt. I have a job. We have saved. We hit our FI number and then you didn’t want to quit, so you worked another couple of years, we doubled our FI number and it has continued to grow even after you left your job. And according to the 4% rule, we have far more than we need. The 4% rule failed for 4% of the time, which is interesting. And that’s not why it’s called the 4% rule. But the 4% at the time that it failed was when the person, the retiree retired into a period of extreme inflation.

Mindy Jensen:
So if you were planning on retiring now, if you did retire and all of a sudden we are hitting inflation, keep track of your spending. Use my spending tracker copy and paste and change my numbers to whatever you want and keep track of your funds. You’re not going to go from perfectly fine to absolutely destitute overnight. You should have some warning, but you will have the warning if you’re paying attention.

Carl Jensen:
Yeah. And right now is the best time ever to be looking for a job too, super low unemployment.

Mindy Jensen:
Are you going to go get a job?

Carl Jensen:
I don’t think so. Is Bigger Pockets hiring?

Mindy Jensen:
Yes. Bigger Pockets is hiring. Go to biggerpockets.com/careers and you can see all the current job openings that we have.

Carl Jensen:
Are they paying me for my keynote at BP Con? I think they’re going to call it the Carl note, instead of keynote.

Mindy Jensen:
No, you’re not speaking at BP Con. Sorry.

Carl Jensen:
It’s okay.

Mindy Jensen:
Speaker submissions are closed.

Carl Jensen:
Ah, okay. I’ll try next year.

Mindy Jensen:
Okay. Good luck. Okay. Do you have anything else you want to talk about?

Carl Jensen:
That’s all.

Mindy Jensen:
Okay. Should we get out of here?

Carl Jensen:
Let’s go.

Mindy Jensen:
From episode 316 of the Bigger Pockets Money podcast, he is Carl Jensen and I am Mindy Jensen, saying, see you later, alligator, right back to the basics.

Carl Jensen:
Thank you.