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David:
This is the BiggerPockets Podcast Show 886. What’s going on everyone? Welcome to the BiggerPockets Podcast. I am your host, David Greene, joined today by Henry Washington and Dave Meyer. Gentlemen, what’s going on?

Henry:
Hey, hey, what’s going on, David? So when I record with both of you, is it like, “Who’s David and who’s Dave?”

Dave:
I’m Mr. Meyer. Please, call me Mr. Meyer for the rest of the episode.

Henry:
Well, I won’t be doing that, but we do have a great episode for you today. And you know when Dave Meyer is here that we’re going to be talking something about data or numbers or economics or foreign policy or something else nerdy.

Dave:
I feel like I’m getting typecast a little bit, like there’s this always that actor who’s always the really boring, weird uncle or something like that. I’m just only always, even in my private life, just talking about economics all the time.

David:
That is you, Dave. But see, that’s not fair because you’re actually a very cool guy, and we’re going to be picking your brain as we do a show about how to pick a market.

Dave:
Yeah, well, I guess some of the typecasting is fair. I do do this for a living, so I think that’s fair. But I am also a real estate investor, so I will take some credit there. But we are going to be talking about one of my favorite topics, something I spend a lot of time doing, which is figuring out what markets work for what strategies, and we’re going to jump into that today. And actually for this episode, I created something cool. It’s the first time we’ve ever done this, but I created a little worksheet that you can use to follow along. You can just go to biggerpockets.com/resources and get it for free. And it has all sorts of different market research tips, like what data you should be looking at and little areas where you can write it down and keep track of it. So, if you want to do that either while you’re listening or later, go get that for free at biggerpockets.com/resources.

David:
All right, make sure you check that out and let’s get into the show. All right, Dave, the first book that I wrote for BiggerPockets was called Long-Distance Real Estate Investing. So I frequently get the question of, “David, how do I choose a market?” Now, the book focused on the systems that you need to buy real estate in any market, but I do briefly cover things that I look for in a market. What are some metrics that you think investors should be looking for when determining what market to invest in?

Dave:
So I think when you talk about picking a market, there’s actually three different steps. The first one, we probably won’t get into too much today, but that’s really just figuring out what your priorities are. Because as we’re going to talk about today, there are different kinds of markets that are good for appreciation, some are good for cashflow, some balance them. And so before you actually dig into data and start looking at numbers and stuff, you have to figure out what your objective is, and that’s going to help you figure out what markets are best for you. So that’s like the first step. The second step is what I call building a short list, which is going from all of the possible markets in the country to a list of maybe five, maybe 10 if you want to be really ambitious, because you obviously can’t research every market in depth.
And so I recommend you either use a list that we provide on BiggerPockets or talk to other investors about where they’re investing and come up with just a short list of 5 to 10 markets that you’re going to do a deep dive into. And then you can move on to step three, which is the market research and what we’re going to get into today. But once you get to that market research phase, I think that there’s two different areas you want to explore. First is what I would call market fundamentals, which is like the background information about the economy, about what’s generally happening in this area beyond just real estate. And then the second part is looking into real estate specific stuff, like how much prices are, what rent is, the rent-to-price ratio and all of that. So does that make sense as a framework for picking a market?

David:
Yeah. So we’re going to be getting into population growth and migration patterns. Median home prices, that’s a pretty big thing that you want to think about because price rent ratio was so important when looking for cash flow. Inventory available ’cause you don’t want to be in a market that’s too hot where you can’t even get anything, or at least you want to know that’s what you’re stepping into. The price rent ratio itself and unemployment rates, et cetera. All right, so first question, everyone wants to know where do we find this data?

Dave:
So let’s first talk about market fundamentals. This is like the macro economic type of stuff and I recommend people first and foremost start on an aggregator website. There are a lot of different websites out there, most of them are free. That will pull together just various government data and various public sources. The one I like the most is called FRED. It’s the Federal Reserve Bank of St. Louis. They aggregate tons of data. It’s completely for free, but there’s also various different census. There’s something called Census Reporter you can check out, and those will have all the information on a market specific level about population growth, job growth and all that.

Henry:
And I think people want to do this research and then get overwhelmed by what it takes to aggregate it. And hearing you say it is one thing, but what’s the learning curve or the necessary skillset one would need? Can anybody hop on this website and put together data in a way that makes sense and it’s fairly easy?

Dave:
Yeah, it is really actually quite easy, especially in some of these aggregator websites. If you go to Census Reporter, for example, you could just type in the name of a city and it’ll pull up stuff like the population growth, medium household growth, unemployment rate. And also the other way to do this is plug these questions either into Google or into ChatGPT. ChatGPT can easily grab a lot of this data for you. So, if you wanted to say like, “What is the home ownership rate in Philadelphia?” ChatGPT will be able to do that relatively easy for you. I think actually the harder part is just knowing what numbers to get and to organize it, which is why we put together that worksheet, by the way, which you can download, is because people hear me name seven different things and then they forget. So it’s helpful to just have a checklist and a place to write down the individual metrics that you find on the internet.

Henry:
And what do you think about resources that a lot of investors use to just research areas in their backyard, like bestplaces.net? Do you find that that has accurate data? ‘Cause some of that already comes a little bit aggregated and you could just put in a couple of cities, and it’ll give you some of that information.

Dave:
Totally. Yeah. A lot of those websites are good. I don’t know, I’ve been on Best Places. I don’t know anything particular about their specific data, so I can’t comment on that. But those websites generally are pretty good. They’re all using basically the same data. And so, if you find a UI, like an interface, that you find easy to use and easily to interpret, use that. And there are a lot of good places where you can do that kind of thing. Just like Henry’s saying, personally, I like finding the source of the data, one, because then it’s more accurate if you can find the primary source. And the second thing is, I like to make my own comparisons. So I think it’s easier for me if I go on the FRED website, I can say, “What’s the unemployment rate in Dallas compared to San Antonio?” And I can see them on one chart when I’m trying to compare two markets.

Henry:
And the last thing I’ll add to this conversation in terms of research tools is, most large language model AIs have access to the internet. And you can very simply ask a question to AI about these metrics, “Give me a comparison of population growth in XYZ City versus ABC City.” And usually you can get pretty good results just from a quick AI search.

Dave:
That’s a hundred percent right. And I think that’s true for the stats and also some of the more subjective things. So within market fundamentals, we talked about population growth, household income, those are important, but sometimes one of the ones that’s harder sometimes is what are the biggest industries or what are the biggest employers in a city? So asking ChatGPT or something like that, that question can be really helpful. Or what are the best public schools in the Dallas metro area? Is a good question to ask a large language model. And one of the ones I like the most is, this is ambiguous, but is a metric I personally care a lot about when I look at markets, is what is the regulatory environment like? Are there any landlord tenant relationships or laws that I should know about? Are there any bans or restrictions on short-term rentals that I should know about? ChatGPT does a pretty good job identifying those things.

David:
Or what is their history of exercising eminent domain, which was never a thing I had to think about, but our buddy Henry here is dealing with a hostile takeover for the city of one of his own rentals. Apparently, that’s something that you got to think about. It’s coming from every angle.

Henry:
All right. Now, that we know what to look at and where to find the data, how do you use that information to make smart real estate decisions? And what is the most commonly overlooked risk factor you should avoid in a market? We’ll get into that after the break.

David:
And welcome back everybody. Henry Washington and I are here with Dave Meyer, the data nerd himself, and we’re talking about how to choose a market in 2024. All right, Dave, I think one of the issues that new investors get wrong is they ask the wrong question. Typically people will say, “Where will I get the most cash flow or where are the cheapest properties?” Because that can sometimes go hand in hand, at least it can on a spreadsheet, but it doesn’t always work out that way in practice. I prefer to ask questions of, how population and migration are playing a role in that individual market? What do you think about that strategy? How much should investors be looking at where people and jobs are moving?

Dave:
Ultimately, market analysis comes down to the same thing everything in economics do, which is supply and demand. And so that’s ultimately what you’re trying to get to. When you look at population growth, when you look at job growth, when you look at median age, these are questions that impact supply and demand. And that’s why, I think Henry mentioned earlier, people get overwhelmed, but if you can remember that all of these metrics are really just trying to figure out how many people want houses and how many homes are going to be for sale, that’s really what you’re trying to understand because that’s going to determine the direction of home prices and it will also determine rent and vacancy rates and all of the things that we care about as real estate investors. And so one of the most fundamental elements of demand, which is half the equation, is how many people live in a particular city and which direction that’s going in?
I hope you all can understand that if you’re living in a city that is growing, demand is going to go up. For very likely, they’re obviously caveats. But if you are living in a market that is declining in terms of population or household formation, then you might see a softer real estate market. And so in softer real estate markets, you often see higher cashflow. And this is why there has historically been a trade-off between markets that offer great cashflow and markets that offer great appreciation because the supply and demand dynamics are different. Actually, one of the first projects I did when I started making content for BiggerPockets about this stuff was looking at the historical relationship between appreciation and cash on cash for the entire country.
And what I found is that the markets that have the best cashflow have the worst appreciation. And vice versa, the markets that have the best appreciation have the worst cashflow. Now there’s a lot in the middle that offer some appreciation and some cashflow, but the extremes are the outliers for appreciation are negative outliers for a cashflow. And so that’s why I think it’s really important what you said, David, is that if you want cashflow, that’s fine, but you have to understand that you’re making a trade-off. And that’s why market analysis is so important is because it is very rare to find an exceptional cashflow market that also has exceptional appreciation potential.

David:
Now, another thing to consider when we’re looking at what type of people and how many people are moving into an area and what the industry is, is that’s going to be the tenant pool that you’re choosing from. If you’ve got an area where you don’t really have anybody moving into it, the same people have lived there for generations and generations, there’s not a lot of economic opportunity, you’re definitely going to get a tenant with a different set of ambitions than maybe when you’ve got fresh blood moving in, people graduating college and moving into a city to take a job there versus the type of area where maybe someone moves to because they want to raise a family. How much of a factor do you think that should play in choosing the market? Because as an investor, the type of tenant we get is going to have a very big impact on the type of experience we have investing?

Dave:
Yeah, I think it’s within a market that’s really important. It’s hard to, I think, categorize entire markets that way because sometimes it’s like, if you go into a market that is really struggling economically, then yeah, I think that’s very important. I think for most markets there’s a trade-off. And you have to decide within that market, do you want to be in a class A neighborhood? Do you want to be in a class B neighborhood, a class C neighborhood? Because that will really impact how much rent you can command, what vacancy rates there are, and any potential for rent not being paid or anything like that. So I do think that’s super important. And generally speaking, my opinion is that, and this is opinion, this is not fact, but my opinion is that places where the economy is growing and is likely to continue to grow offer the least risk for real estate investors, that might not mean that they have the best possible upside, but if you are one of those people who wants to mitigate risk, looking for strong economic growth is a very good way to do that.

Henry:
Yeah, I agree with you from that perspective. Economic growth is huge because if you’ve got economic growth and population growth, I think you’re on the right track in terms of putting your money in a market where you think it would be safe. But there are a couple metrics that I look at, as well, that I’m interested to see what your thoughts on them are. We touched on them a little bit early on in the show, and that being inventory and vacancy. So vacancy can be looked at a couple of ways, right? So you can look at vacancy, if a market has a very low vacancy, what that suggests is that you’re probably going to get higher rents because there’s less properties to rent and you’re probably going to have maybe not less turnover, but the time to find a tenant should be shorter than in a market that has a higher vacancy. And if the vacancy’s higher, it’s the opposite, right? You’ll probably get lower rents, but I think the secret sauce is somewhere in the middle, right? Where’s your head on this?

Dave:
Yeah, that’s a really good point. I think it boils back down to what your objectives are as an investor. For me, I think that one of the key components when I look for a market personally is how quickly you’re going to be able to fill your units. Because I think people really obsess over how much rent they can get and raising those rents. But if you miss one month of rent, that’s probably going to eat up your annual rent increases and more. And so I’ve talked to a lot of people about this, it’s like you’re going to kick someone out and raise rent 50 bucks and get a month. If your rent is 1200 bucks raising it 50 bucks a month, it’s going to get you 600 bucks a year. But if you miss one month of rent because of that, you’re losing $1,200 a year.

David:
Two years behind.

Dave:
Yeah, exactly. So I think vacancy is one of the most overlooked things. And I just think it’s really important to get a good feel for the market for these things, ’cause you can be in a market where there’s high vacancy rates, but if you’re buying quality assets, then you’re still going to be able to lease it. I think where that really comes into play is when you’re buying low quality buildings, low quality apartments where if things start to soften up and there’s more vacancy, that generally pushes rents down everywhere. And that means tenants, they’re still going to live somewhere, but they’re going to take that opportunity usually to move up in terms of quality, and they’re going to go up to maybe from a C neighborhood to a B neighborhood. And that is one of the reasons why I personally don’t like buying rentals that are really ran down is because you are at the whim of the macro economy and if things turn poor, you’re probably going to be on the short end of the stick.

David:
Little throwback, quick tip for everybody here. Much better to put somebody in your unit at a cheaper rent, like Dave said, to cut down on the vacancy and then raise rents once they’re in there because it’s a massive inconvenience to have to pack up all your stuff and move somewhere else to save a hundred bucks a month when the rent goes up than it is to try to get the top rent in the very beginning when they could be picky, not move into your unit and move into somebody else’s that is cheaper. Learn where you have leverage and where you don’t. And no one to hold them and no one to fold them.
Now, this whole idea of price-to-rent ratio, or as you called rent to price, is a big thing that investors need to be aware of because typically as investors, we’re going to be buying for cash flow, or at least we want there to be some hope of cash flow when we’re buying a property. The BRRRR method isn’t a great method if you end up pulling all your money out of a house that’s bleeding money every single month. So the end goal is always to have something that cash flows. And if the price of the property gets to be too high, rents typically don’t keep up and you’re not going to get cash flow. So what are some percentages that an investor should be targeting in today’s market?

Dave:
So just so everyone knows, the rent-to-price ratio is basically just a way of comparing the price of a property to the amount of rent that you can generate from that property. And generally speaking, the higher the rent-to-price ratio, the better. Now, 10, 12 years ago right after the great recession, there was something called the 1% rule that came out that said that to get a good cash selling property, you need to have a rent-to-price ratio over 1%. Now, there are still deals and there are still markets that offer 1% rule, but I think it is better and healthier for investors to recognize that that was actually a very unique time, not that it’s the normal one.
But 1% rule and being able to find markets who are 1% rule is very rare historically. And so we’re in an era where the average rent-to-price ratio across the country is closer to 0.6%. And so if you think about it that way, and you look at a market where it’s 0.7% or 0.8%, that is above average cash flow potential for a market. And I think what’s really important here is when I’m talking about a market at an average, if I’m saying that the average in Detroit is 0.8%, then that means by rule that there are deals that are better than 0.8% and there are deals that are worse than 0.8%. That’s how averages work.
And so that means your job as the investor is to go find the deal that is better than 0.8% so you can find the ones that are cash flowing better than the others. So that’s generally how I advise people is go look for markets where it has above average cash flow potential. So you’re not going to be looking at Los Angeles or New York City or something like that, but if you can find a place where the average for the whole metro area is like 0.6% or 0.7%, there are going to be pockets in that market that offer cash flow and you as the investor, your job is to go find them.

David:
Now, here’s some ways that you can make the price-to-rent ratio metric work in your favor. It’s not always about picking the cheapest market. Let’s say you find a market where homes are priced higher than the median home price across the country, maybe they’re 500, $600,000 houses where you’re not very likely to get close to the 1% rule. You’re not going to be buying a $500,000 house that rents for $5,000 a month, at least not as a single family home. But what if that property has a basement and an ADU, and you have three income streams that you can bring in that all add up to being close to $5,000 a month? You’ve now found a property that gets close to the price-to-rent ratio that you’re looking for that is also in the better neighborhood where you’re also going to get more appreciation and better tenants.
The same thing applies to small multifamily. Maybe it’s a triplex or a fourplex. You’ve got more to rent, or the people that take advantage of the rent by the room strategy. So if you just rented the house out on its own, maybe it gets $2,200 a month, but if you can find a property with six bedrooms and you can rent all of them out for $700, now you’re at $4,200 a month, which is significantly more. This is how investors that are savvy figure out how to use metrics like the price-to-rent ratio and make them work as opposed to just doing what worked in 2012, which was look at all the houses that were out there, 80% of them had a price and rent ratio that was favorable and making it work.

Henry:
Yep, I 100% agree, David. I 100% agree, David. I often tell people, if you can’t find the deal in your market, there is likely an opportunity where you can make a deal in your market. And so looking at rent by the room, looking at midterm rental strategies, looking at ADU strategies is a great way. Another thing you could potentially do is take your existing home and make it a multifamily. There are easy ways to make a single family a multifamily. Now, obviously you need to make sure that your zoning laws in your area are going to allow for it.
But there are ways you can take a three bed, two bath, single family home in an expensive market and make it a duplex that has a one bedroom studio on one side and a two bed, one bath house on the other, especially if it’s a split wing house where the primary bedroom is on one side of the house and then the other two bedrooms and living room and bathroom are on the other side of the house because then you can just close off the primary bedroom, add a one wall kitchen in there, you’ve already got plumbing, you’ve got water access, and so you can take a single and make a duplex.
Now, I know it sounds easier right now than it probably is, but it’s just as easy as calling down to the local city or municipality that that property is in and making sure a, that it’s zoned properly and getting some quotes from a contractor on being able to do the work. And you can essentially take something that might cost you $500,000 and then another $20,000 to $50,000 in renovations and now you can get the rent that would put this above or at the 1% rule.

David:
Awesome. Dave, Henry, we’ve covered some valuable info so far, like population trends to look at and how to think about the rent-to-price ratio. But we are about to get into one of the most crucial questions on investors’ minds today, how do you assess a market for cashflow versus appreciation? Stick with us. We’ll be right back after this quick break.

Henry:
Welcome back everybody. Dave Meyer is here schooling us all on how to choose a market in 2024.

David:
All right. Now, speaking about cashflow, let’s walk into the age old debate, the hornet’s nest of the BiggerPockets forums where everybody gets so worked up. Should investors be looking for cashflow or appreciation because the market you choose are is typically going to be suited to one more than the other. Henry, I’m going to throw this one to you first. What is your philosophy on which is better or which type of investors should be starting with which strategy?

Henry:
Man, I’m going to give the political answer, right? It goes back to what Dave was saying in the beginning of the show. You have to understand what your goals are. What are you trying to accomplish? What I may be trying to accomplish is different than what a brand new investor may be trying to accomplish. And if that brand new investor is, if their goal is, “I need to generate enough monthly income, so that I can leave my job, so that I can go do this other thing that I have a passion for doing,” well, then that sounds like you’re going to need some cashflow. And so you might want to focus on a more cashflow intensive market.
If your goal is maybe somebody like Dave who’s like, “Look, I love my job. I make a great salary. I enjoy real estate, I don’t necessarily need to make thousands of dollars a month off of my cashflow. What I need is to build long-term wealth through equity and appreciation, and get the tax benefits that come with owning rental properties to offset not just my rental property income, but my W-2 income because W-2 earners are one of the highest taxed people on the planet.” So that’s a completely different strategy, which would say investing in a more appreciation-friendly market would make sense. So that’s my general thoughts.

Dave:
I agree with Henry because, I mean, I basically wrote an entire book and took two years of my life trying to answer this question once and for all, which is that you need to think about your own personal strategy before anyone can answer this for you. So I’ll just say that, like Henry said, there are different approaches for different people. I’ll give you a couple of examples. I think most people who are earlier in their investing career should wait appreciation higher than cashflow. If you don’t intend to retire for 10 or 20 years, then you probably don’t need as much cashflow and appreciation gives you an opportunity to take some bigger swings and try and make some more wealth. And as you approach retirement, whether that’s early retirement or traditional retirement age, it probably makes sense to shift your focus more towards cashflow. So I think that’s just a general rule of thumb.
My personal approach is to look for properties that at least break even. I don’t want to come out of pocket, if it does a month or two, I don’t really care, but I look for a minimal cash on cash return. It doesn’t have to be great. That’s not what I’m doing for, but I want to get a property that will sustain itself in an area that is likely to appreciate and that has some value add opportunity like Henry was talking about. If I can buy something that off the shelf, breaks even, and then if I make improvements to the property, then it gets me a seven, eight, 9% cash on cash return, that to me is a winning strategy.

David:
All right. Now, certain markets are going to be more favorable for cashflow, others are going to be better for appreciation. What are some of the fundamentals that each of you think an investor should be noticing in choosing a market that would lead them to believe, “Hey, this is more likely to have properties that are going to be worth more in the future and this is a property that’s more likely to have a higher volume of cash flowing properties”?

Dave:
So in the beginning I said that my market research, basically I break it down into two different areas. One is market fundamentals, one is housing market data. I think for cash flow, it really comes down to housing market data. If you want to know cash flow, it’s like how much rent can you charge? What is the price of the house? What are your property taxes? What are your insurance? It’s really just straight math. The reason that appreciation is hard to predict is ’cause it’s not objective like cash flow. It’s just a little bit more subjective. And I think that’s why you need to also be looking at these market fundamentals. You want to look at long-term trends like, one, how many people are moving to the area? How well paid are those people? How many houses are being built in those areas? Because again, property appreciation sounds crazy. It just comes down to supply and demand. So if you can figure out shortcuts to measuring supply, measuring demand, that’s going to give you a good indication of which markets are going to appreciate the most.

David:
Henry, what about you?

Henry:
Yeah, for me, if I’m looking for cash flow, then what I’m going to look for is a market where the average rents are higher maybe than the national average or are going up at a higher rate. And then I’m going to look for if I can find a market that also has a median home price that’s at the average or lower than the average. So if I can see a market, it’s got high rents, but I can buy a house for lower than the national average, I’m going to just go out on a limb and say, “I’m probably going to get the cash flow that I’m looking for there.” And if I was looking for appreciation, I’m going to look, just like Dave said, I’m going to look more at the economics of that market and the population growth. So I’m going to look for a market that’s had population growth, positive population growth for at least the last five years.
And then if it’s got the population growth that I’m looking for, I’m then going to look at the economics. What is driving the jobs in that market? What industries? And I’m going to be looking for industries that are up and coming based on what’s happening in the world right now. So things that I would be looking for are fintech jobs, technology jobs in general, government jobs, and healthcare jobs because these industries aren’t going anywhere. They’re improving. Technology is improving them. And they’re high paying jobs typically. So, if I’ve got people moving into an area where there are new companies or companies that are hiring in technology positions and they’re paying a hefty wage, then you may be looking at a market that’s going to get you some appreciation over time.

David:
Right on. That’s a really good way to look at this. Some of the things that I look at when trying to figure out what are the strengths or weaknesses of a market, you can start with just median home price. If the homes are priced higher than the national average, that usually means that wages are going to be higher in that area, which means more people will want to buy homes, which means it’s not going to be a strong market for finding renters and it’s going to have a harder time getting cash flow. So the price of the home itself is one way that you can tell if it’s higher price, it’s probably going to be an appreciation market and if it’s lower price, it’s probably going to be closer to a cash flow market. Another thing to think about is the supply and demand dynamics here.
It’s really simple when you boil down and you understand the fundamentals. If the demand is growing but so is the supply, like let’s say that businesses all started to move into Topeka Kansas or something, they’ll just build more houses. So you’re never going to see a ton of appreciation in an area where they could just add supply. But if you find an area where jobs are moving into and you don’t have the ability to grow supply where it’s constricted, you are going to find that is a high appreciation market. Look at the highest appreciation markets the last decade or so, it’s been Austin, Texas, San Francisco, California, Seattle, Washington, Miami, Florida. All of these were cities that had a restricted amount of land where they could even build, but jobs move into there with high wages, which forced appreciation and made it not cash flow strong.
I think the mistake that investors make is they hear where everybody else is buying and then they just go, “Okay, I’m going to go by there.” And then like a bunch of locusts, they all settle on the same market and then you just hope that the fundamentals of that market were good. When you hear other people are buying somewhere, that should make you want to look into the market more and study it, not necessarily just piggyback onto what everybody else did. I’ve seen a lot of mistakes get made when people bought properties because it was the flavor of the month. Dave, Henry, any other tips that you can give for investors that are trying to figure out what market would work for them?

Henry:
Yeah, I think you touched on something pretty important there where you don’t want to rely on the research of someone else.

David:
Especially not me.

Henry:
I agree with you for the most part, but I think what was really essential there is that you said, “Hey, you can take their advice, and then that should trigger you to go do your own research.” Because along the lines of that, we do have to acknowledge there are large companies who have entire real estate teams, whose sole job it is to analyze these markets from a real estate perspective to determine if their company should go there. And so you can essentially follow the whales, but you’re right, it should trigger you to go and do your own research. And so I like doing things like looking at markets where there are minor league baseball teams. They do a lot of market dynamics to determine, are there people who want to live here who make enough to want to spend money on going to ball games?
And they typically put these teams in places where they feel like they’re going to be successful. And so if you find a company like that, who has demographics who might be that same demographic who’s going to rent your place, it is totally okay to piggyback off of where are they looking for properties, but that should trigger you to go dive in deeper and do your own research. Just because they’re moving there doesn’t mean you’re going to have success as a real estate investor. But even large companies do this. Even large companies don’t just, they say, “Hey, I hear so-and-so company is building a new place over here. Maybe we should dive into that market.” And then they do their own research from there.

David:
Dave, give us some advice for what an investor who says, “Tell me how to do my own research. What should I be doing? Where should I go? What should I be reading? And does BiggerPockets have anything that can help me out in this area?”

Dave:
Yeah, of course. So you should definitely check out this spreadsheet. We’ve talked about a lot of different things. It’s not a spreadsheet, it’s a worksheet. But we’ve talked about a lot of different metrics. And if you want them all just in a simple place where you can go and just go one by one and look at this, use ChatGPT, use Google, you can just get this completely for free. And I think the other thing is, we are going to be doing, stay tuned for this, it’s going to be in late February. I’m actually going to be doing a workshop on this, where I’m actually going to show people step-by-step, I’m going to screen share basically and show you how to do this thing one at a time.
But just with everything in real estate, the number one thing is just to start doing it. Go look up a couple of stats right now and see that it’s not that hard. If you sit around and wonder the perfect way to do it, you’re never going to make a lot of progress. But if you just start exploring a little bit, use your computer and Google, you’re going to be getting better at it all the time.

David:
All right, one last question before I get you two gentlemen out of here. Landlord-friendly states and laws. What are things that investors should look for or what are things that they should look to avoid? Dave, let’s start with you.

Dave:
I think, most of all, what landlord-friendly means is sort of subjective. So I think different people interpret certain laws as positive, some people interpret laws as negative. I just really think the most important thing is that you understand what you’re getting yourself into. So certain places might have restrictions on rent growth or might have really difficult evictions, stuff like that. Sometimes it’s really detrimental, sometimes it’s not so bad. But I really think you should spend some time either going to Arria, talking to your agent, or just looking on the local government website, the rules. I invest a lot in Denver and they have really good resources both for tenants and for landlords to look this stuff up, which I think is great. Tenants should know what they’re getting themselves into, in my opinion. and any property owner should know what they’re getting themselves into, and I think you can interpret for yourself what is landlord friendly and what is not. The more important thing is you know what you’re doing.

Henry:
I agree. I would look at this after you have figured out some of these other metrics and dynamics. If you’ve got it dialed down to two to three markets based on everything that we’ve talked about today, call a couple real estate attorneys in each of those markets and just ask them, “Hey, what’s it like when you have to do an eviction? What does it cost? How long does it take? Tell me the worst case scenario and then tell me the best case scenario.” And with that bit of information you will understand for yourself if that’s something you can stomach or not and how that might impact your financials if you had to actually evict somebody in those markets.

David:
Really good point. Here’s the last thing that I want to add, a little cherry on the top of this episode. When you make your decision based on states that have landlord-friendly laws, you’re making an entire investment strategy based off the worst case scenario in a real estate investment. When you’re dealing with a literal eviction, a tenant that won’t leave, remember that is different than a tenant that stops paying their rent and just leaves the place voluntarily. That sucks when that happens, but it’s not an eviction. Eviction is your worst case scenario. You’re planning your whole strategy around something you hope never happens, right?
It doesn’t happen a ton. So I try to invest in areas where I can be picky about my tenant and choose a tenant that has the most to lose. So if they lose their job, if they come across hard times, if something terrible happens and they send all of their money to some Nigerian prince or they get caught up in a crypto scam from one of the fake David Greene or Henry Washington profiles that are ripping people off, they just leave voluntarily because they don’t want to see their credit score destroyed by an eviction. You can avoid needing the laws to be in your favor by picking an area and a location in a neighborhood where people are going to have more to lose.
All right. That’s all I have to say on that topic and I had a great time with you two gentlemen today. Hopefully everybody learned more about how to choose the market to invest in so that they can start taking practical steps towards saving that down payment, finding the right property, and building that wealth today. If you’d like to know more about Henry Washington or Dave Meyer or myself, you can find our information in the show notes. So please do go look those up and give us a follow. And if you’d like to know more on this specific topic, my advice would be you check out the BiggerPockets forums where we have tons of questions on this very same thing with lots of information for you to check out. That being said, I’m going to let you guys get out of here. This is David Greene for Henry Washington and Dave “the Oscar” Meyer, signing off.

This article is presented by Steadily. Read our editorial guidelines for more information.

Running a rental business comes with its fair share of headaches, but one upside is that just about every rental activity associated with buying, maintaining, and operating a rental property is tax-deductible. We’ll walk through a checklist so you remember to keep track of your actual expenses and get the maximum tax benefit. 

At the end of the day, the logic is that you should only have to pay taxes on your profits, which is your rental income minus all of your expenses. That’s the number that will be entered on Schedule E when you file your taxes. 

Common Tax Breaks for Real Estate Investors 

For many real estate investors, mortgages play a crucial role in turning that dream into reality. When it comes to seeking tax deductions, mortgage interest emerges as a valuable tax incentive. Mortgage interest becomes deductible when secured by the home, distinguishing it from cases involving personal loans. This secured debt allows the home to serve as collateral for repayment. 

To qualify for tax deductions, your property can be a primary or secondary residence or even a rental property with a mortgage. However, there are exceptions, such as the limitation of the interest deduction to $750,000 for married individuals filing jointly and $375,000 for those filing separately. Meeting specific conditions, including filing the appropriate forms, itemizing deductions, and ensuring the mortgage is a secured debt tied to the home, is crucial for claiming the deduction. Consult your mortgage company, which typically provides IRS Form 1098 detailing the interest paid in a given year. 

Property taxes 

Property taxes, often a significant expense, can be offset through deductions on personal income tax returns. The Tax Cuts and Jobs Act of 2017 capped state and local tax deductions at $10,000 ($5,000 for married couples filing separately). This deduction extends to various property-related expenses, including city-imposed hospitality or occupancy taxes on short-term rental properties like those listed on platforms such as Airbnb or VRBO. 

Identifying deductible property taxes involves distinguishing between eligible properties, including primary and vacation homes, and nondeductible payments, such as unpaid taxes, those on rental or commercial properties, transfer sales taxes, costs related to home renovations, and utility bills. Choosing between standard and itemized deductions depends on personal circumstances, and it’s advisable to select the option that provides the greatest tax benefit. 

Asset depreciation 

Business expenses are typically deductible in the year incurred, but for long-term assets, a depreciation schedule is followed. Categories and useful life periods are outlined in IRS Publication 946 and 527. 

Depreciation applies to items like appliances, furniture, vehicles, buildings, and more. While landlords may find depreciation rules inconvenient, understanding these rules can prevent surprises when claiming deductions. 

Insurance premiums 

Insurance premiums, including mortgage insurance, are often overlooked deductions. Landlords can deduct the entire insurance premium for rental properties, whether held personally or in an LLC. This deduction extends to umbrella insurance policies, flood insurance, and even a proportional amount of homeowners insurance for primary residences with tenants. 

Repairs 

Unlike long-term assets subject to depreciation, repairs are fully tax-deductible. The distinction lies in whether the expense constitutes an improvement to the property. Routine repairs, like painting, basic landscaping, or replacing fixtures, do not trigger depreciation concerns. Major renovations aimed at increasing property value, however, fall into the “improvement” category. 

Cleaning and maintenance 

Operating expenses related to employee and contractor wages, as well as materials for cleaning and maintenance, are fully deductible for landlords. 

Utilities 

Utilities are deductible if not reimbursed by tenants. While landlords may cover some utilities, deductions are limited to the actual expenses incurred, excluding amounts reimbursed by tenants.

Property managers 

Fees paid to property managers, whether full-time professionals or part-time assistants are tax-deductible. Outsourcing property management tasks offers both convenience and financial benefits. 

Legal and professional fees 

Fees paid for tax professionals, legal services related to contract reviews, and memberships in professional organizations are deductible when used for legitimate business purposes. 

Advertising 

Fees associated with advertising, such as posting on platforms like Craigslist and Zillow, are deductible. 

Commissions and referrals 

Business-related expenses, including referral fees for finding tenants and commissions paid to current tenants, can be deducted. 

Travel and transportation 

Landlords can deduct travel expenses using either the standard mileage rate or actual expenses. Keeping accurate records of distances traveled and associated costs is crucial to maximizing deductions. Deductible expenses may include meals, taxis, airfare, and hotels. 

Office expenses 

For those claiming a home office deduction, maintaining proper documentation and justifying business use is essential. Renting an external office space simplifies this deduction process. 

Reporting rental income and expenses 

Landlords can use Form 1040 or 1040-SR Schedule E, Part 1 to report rental income and expenses. For more than three rental properties, separate Schedules E should be included for each property.

Final Thoughts

Rental property owners can benefit from various tax deductions, but attention to documentation and timing is crucial. You should be sure to validate any tax strategies and documents with an accountant and ensure you are adhering to tax law. 

Accurate recordkeeping, including receipts, bills, and checks, is vital for substantiating rental income and expense claims. Filing on time ensures alignment with current legal frameworks, and choosing between standard and itemized deductions depends on individual circumstances. By understanding and utilizing these tax advantages, property owners can maximize their financial benefits within the bounds of applicable regulations.

This article is presented by Steadily

Steadily is America’s best-rated rental property insurance provider. Get coverage online in minutes for all property types and all policy durations, including short-term rentals. Visit Steadily.com to get a free quote today.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.

Mindy:
Hello, my dear listeners and welcome to the BiggerPockets Money podcast. My name is Mindy Jensen, and with me as always is my weird in his own way co-host, Scott Trench.

Scott:
Thanks, Mindy, I guess. I certainly am interested in creative finance. Hi, Mindy. We are here to make financial independence less scary, less just for somebody else to introduce you to every money story, because we truly believe financial freedom is attainable for everyone, no matter when or where you’re starting. Today, we talk to Paco de Leon, author of Finance for the People and host of the podcast, Weird Finance. Paco’s work centers on artists, creatives, and freelancers. And on today’s episode, she’s going to share with us her insight and tips on how artists and creatives of all types can shed the belief systems that have kept them behind and build new practices and work a system to get them financial success.

Mindy:
Paco really gives insight into the mindset shift it takes for creatives to make in order to be able to reach financial success. And this episode is not just for people who view themselves as creatives, but also for anyone who is a freelancer, anyone who does not want the 9:00 to 5:00 work model, or really anyone who has limiting beliefs around money that have kept them behind.

Scott:
Yeah, and a lot of these creatives, it seems, struggle with two fundamental problems. One is the belief that pursuing wealth is a worthwhile goal. There’s often an aversion to some of the capitalist constructs that we take for granted here on the BiggerPockets Money Podcast. And then second, once we’ve overcome that limiting belief or aversion to building wealth, there’s a playbook that creatives need to follow that’s different than the playbook that W2 employees might follow, because they’re not receiving a steady paycheck. They might have project-based work. And so, you’re going to really get a lot of value out of this if you’re in any one of those camps. If you know anyone in any of those camps, I think you’re get a really good perspective on how challenging it can be for some folks to accept value of building wealth, and then to actually master the playbook.

Mindy:
Let’s bring in Paco de Leon. Paco de Leon, from the Weird Finance podcast. Welcome to the BiggerPockets Money podcast. I’m so excited to talk to you today.

Paco:
Thank you so much for having me on. I’m excited to chat with you folks as well.

Mindy:
So Paco, you studied finance, and work in finance, but you identify as an artist and a creative, which are two very, very separate things. How do you reconcile these two different parts of yourself?

Paco:
Well, philosophically, I sometimes think that not everything reconciles. So I’ll start with that. Sometimes, things just feel like they don’t fit. But, I will also say that I don’t think that being an artist or a creative person, and also understanding the abstract world of money, and finance, and accounting, I don’t think that those are mutually exclusive things. I think you need to have a wild, and robust, and vivid imagination to try to understand financial concepts, because they are quite abstract. If you think about the concept of interest, inflation, inflation is a good one, that one, we can all feel it. You can’t really touch it, but we all understand how it’s impacting our lives. And, those are the same brain activity that is required for imagining a story, or imagining a drawing in your mind’s eye. It’s the same activity going on. So, I don’t think that they conflict, but I will say that I know that I have a high tolerance for boring things in life. I have a high tolerance for tedium, and that is what I think accounting is ultimately.

Scott:
I think you’re an exception here where… At least there’s a stereotype of creatives not being good with money. I love your framework of saying, “No, they’re actually using the same brain and the same thought processes, both for storytelling, art, and finance.” But, in your experience, is that stereotype often true, that creatives are not good with finance? And if so, why?

Paco:
So, I think, a lot of creatives might buy into this idea that they’ve been sold and that they’ve been told that this world is not for you, that there’s complicated math, or just if you think about the images that are reflected back to us from the world of finance up until very recently, you go to a financial planner’s website and it’s a closeup picture of a super nice watch and a sailboat. And, the images alone, I think, project a world that a lot of creative people feel like, “That’s just not for me.” It’s very serious and it’s very stuffy. I think there’s a lot of jargon that happens. And, I’ve been in those rooms. I worked in a wealth management firm. And I have before thought like, “Oh, what the world wants of me when I’m playing this role is to seem super smart and to say big words, so that I prove to the client that I’m smart.”
And, creative people, at least in my experience, they’re scared of that. It feels intimidating. Even if you have issues with authority, then there’s another layer of intimidation because that person sitting across from you is authoritative. They’re using words that scare you. So I think the world just feels like it’s not built for them. And, yeah, they’ve been sold this idea that, “I don’t know if you’re good at drawing. You’re bad at math.” But, again, my partner is an interior designer and she tells herself, “I’m not good at this stuff.” But, she can understand space and scale. She can understand the depth of something. She can understand the world in meters. Or, yeah, she understands math. I think, it’s just not applied in a way that is palatable for creative professionals.

Mindy:
With so much confusion over money just with everybody. This is not just for creatives, this is for everybody, I wonder if it’s sometimes easier for people to just say, “Oh, that’s not for me.” Than it is to dive into it. I mean, I’ve certainly done that.

Paco:
I definitely think that we’re experiencing a moment in the world where it feels a lot easier to blame a lot of externalities than to find where you have agency. Of course, there’s things outside of our control that are always going to have an impact on our lives. I’m not saying that that doesn’t exist. But, in every moment, we can figure out how are we going to reframe this? How are we going to think about this? How are we going to find those little slivers of agency where we can exercise our power? And, yeah, I feel like, I definitely have encountered a lot of folks where they just think they can’t do it. And, sometimes part of my job is to just say, “Hey, let’s take a deep breath and figure out why you think you can’t do it. What stories are there. And, can we rewrite the stories if you really believe that? Where can we find examples where you have done something that feels outside of your wheelhouse in the math finance area and you’ve done well? And let’s try to follow that trend.”

Mindy:
So, you studied finance. What does your childhood look like that led you to studying finance? Did you guys talk about money growing up?

Paco:
No. I am a lazy person. Around when my time was starting to run out in college and I needed to pick something, it was 2006, right, so we’re right in the peak housing bubble. And so, what I started to observe was there’s these salespeople and these sales positions in the world of finance and they don’t seem to have to work hard like a lawyer, or a doctor, or a professor, and they make a lot of money. And I thought, “Well, I’m probably smart enough to do that job where you sit down, and it’s air-conditioned, and you look at the computer, and talk to people, and do math stuff.”

Scott:
No blood.

Paco:
Exactly, exactly. It seems easy, sell somebody something, this idea of, “I’ll take your money and make more money. And then, I could go home at a reasonable hour, and still play in my band, and be an artist, and do all this stuff.” So, I was really assessing where can I be the laziest with the maximum return? And also, what is a good fallback or what is practical? I didn’t want my parents to be worried if I got a liberal arts degree, or went to study music, or something. I felt like, “Yeah, they’re probably going to worry about me, so let me do something that’s going to not let them worry and feels practical.” So, that’s the lens. It was not a real strategy, frankly. But, I’m glad I chose the path. I think it’s unfolded in a beautiful way for me.

Scott:
Wonderful answer. Thank you for sharing that. Can you give us a little bit about your career, and what you started out doing, and how you got to what you currently do?

Paco:
Yeah, it’s a funny beginning, because I was the first person in my family to go to college. So there’s so many unknown unknowns. And I thought, “I’m just going to lock in this degree and everything’s going to work out.” And so, I’m getting my degree. And then, I’m like, “Oh, I should probably not have Jamba Juice as my only job on my resume. I should probably, I don’t know, try to get some finance job.” So, I stumble upon a job from a big bank and it’s called credit manager. And I’m like, “Okay. Well, I don’t know what that is. Sounds fancy. Let’s apply for it.” It’s a big cattle call. And, there’s a big line at a call center. I’m like, “Hmm, I don’t know what this is.”
Next thing I know, I’m doing a role playing exercise with one of the managers and I’m interviewing for a debt collector job. I didn’t think I would get it. Got the job, was there for two years, collected on auto loans for two years of the last years of college. Everybody, whenever I say that, they look at me like, “Oh, you poor thing. That must’ve been horrible.” It was truly one of the best jobs I’ve ever had, because I was not a hardcore collector, and I was working for a bank, so I was only collecting on the debt that the bank owned. I wasn’t at some agency where the debt had been sold off. So it wasn’t hardcore collections in that sense, one.
And then, two, I sat on the phone for four hours a day, five days a week for two years asking strangers to pay the bank money back. And after that, I was like, “I could talk to anyone, anywhere, any place about money, because I have done the most awkward thing you can do.” Call somebody at dinner and say, “Hey man, sorry, you’re 35 days past due on your Honda Civic. Could you make a payment?”
So that was my first job. And then, I left truly right as the infrastructure was starting to crumble during the housing crash, I didn’t know that was what was happening. But in retrospect, as soon as that started to fall apart, I graduated, jumped ship. I tricked this small boutique business consulting and management firm here in Los Angeles into hiring me, the summer of 2008 with a finance degree. Can’t believe it. Just can’t believe it.

Scott:
Is that your version of saying you successfully interviewed, and applied for, and got a job?

Paco:
Yeah, yeah. I absolutely somehow still got a job in the summer of 2008.

Scott:
That’s because you’re saying, “I love calling people at eight o’clock at night to collect them their auto loans.” And, I bet you, everyone was like, “You’re hired. 2008, this is it.”

Paco:
Okay. I didn’t love it at the time. It, for sure, was just a job. It’s one of those things, like hindsight is 2020, where I’m like, oh, my job now, as a financial planner, running a bookkeeping agency, just trying to help people with their money, that job was so, so, so integral, because all of the awkwardness was just washed away those first two years. I didn’t even have a degree yet, and I was like, “I’m pretty sure I could talk to anyone about money after this.” So, 2008… Sorry, this is such a long story, this is probably not what you bargained for.

Scott:
This is great. No, you take your time. This is wonderful.

Paco:
2008, I’m working for this boutique small business management firm. It’s basically bookkeeping and accounting for a book of clients. And then, the boss does some consulting. It is all creative businesses. So, in this job I am learning QuickBooks, I’m learning bookkeeping. My boss sends me to do another accounting 101 class at UCLA extension. I’m like, “This is great.” So, I’m running the books for a bunch of creative firms. And then, I’m interacting with creative people. So, the big lesson here I learned, creative people are just scared to death of doing the wrong thing. And I’ll give you one example where I had one owner of this interior design firm. She was writing a check to pay herself from the business account or something like that. And she was paralyzed. She was scared about writing the wrong thing on the check. So, 22-year-old me is sitting there with this 45-year-old woman who owns this company and helping her write this check, right?
So that’s where I was like, “Okay, creative people, I love them. These are my people. But, they’re scared. Something’s going on here. This woman’s freaked out about writing a check.” After that, I got laid off from that job. I’ll tell you, my career has been a bunch of times getting laid off and almost getting fired. And it’s because I have an entrepreneurial spirit, I’ll tell you that much. But then, after that, I go into financial planning and wealth management. It’s a boutique firm again in Los Angeles, they’re managing just north of a billion dollars. And that’s where I’m working with a lot of Hollywood people. I’m sitting at the table across from two Harvard graduates. One is a VP of Paramount, the other one is a VP of some other studio. And I’m just getting schooled. I’m learning how deals are made. I’m learning how people are negotiating contracts. I’m learning how you save $50,000 on a tax bill.
And then, first I’m like, “Oh, this is shiny.” My ego is like, “Hey, kid, look at you. You’re smart. You made it. You’re legit.” And then, after time, I was like, “Man, what about the artists? We never get to help the people that actually need help, right? We’re only helping people with millions of dollars. We’re only helping artists after they’ve made the money.” And around that time, my friends start asking me things like, “Hey, what’s a bond?” Or like, “Hey, dude, my grandma gave me 10 grand. What should I do with it?” Or like, “Oh crap, it’s April 15th at 9:00 PM, can you come over and help me with my tax return?” And I’m like, “Bro, not an accountant, but I’ll sit down with you.” So, it was this parallel thing happening, where I’m getting all this professional experience, again, just showing up. And then, my artist community is starting to recognize, “I think you know stuff about money kid.” And those eventually start to converge.
One day, I find myself unemployed and I don’t know what to do. I think I’m going to go to law school. I know that’s not the right path. And, it’s a very LA story. I’m meditating every day and I’m asking my intuition, I’m asking the universe, “What should I do? What should I do? What should I do?” And, the thing that keeps bubbling up is, “Oh, maybe try to help creatives with their finances.” And so, I formed this company, The Hell Yeah Group, and the great hypothesis that I had, right, the question I was trying to answer is, “Is there a way to serve the creative community in a way that makes sense? They don’t have to already be rich and feels good for me?” Right?
And so, I started a bookkeeping agency. And so far, that has been the service-based business that makes money, that helps people. And then, that allows me to then do weird stuff, like write a book called Finance for the People, do a podcast called Weird Finance, make a bunch of free content online, and hang out with Mindy and Scott on a Tuesday afternoon just shooting the shit.

Scott:
You, I think, said you were broke around this time. So, was there a paradox here where you were getting better and better at learning the ins and outs of finance in general, but your personal finances were not growing at the same time congruently with it?

Paco:
Yeah, Scott, I was a broke financial planner. The people who I’d be sitting across the table from, right, they’re Harvard graduates, $5 million net worth. And, that morning I had ridden my bike seven and a half miles to get to work. Did a bird bath in the lobby of the office building. And, I was growing lettuce in a garden to save $2 at Trader Joe’s, which I’m going to tell you what, not a great budgeting strategy. Not a great strategy for cutting down your expenses. But yeah, I was not making a lot of money in those jobs and I didn’t recognize that maybe I could talk to my boss and negotiate higher pay. I just accepted the default. And, I think one of the things that was holding me back, outside of things that were systemic, like the wage gap internally, I just felt like, “This is what I’m worth. And, I can’t possibly ask for more, and I ought to just be grateful for what I have.”
So there was a lot of internal work that I needed to do to figure out, “Why do I have these ideas about my own self-worth?” Or, “Why do I feel like I’m not valuable compared to other people when I am helping move the needle, I am helping increase revenue?” So, that’s where I started to learn, “Oh, you could know everything about why you should put 10, 20, 30% into a 401k. You could know about the 50, 30, 20 budgeting rule. You could know the academics with finances, but there’s so much internally sometimes that your…” There’s internal discoveries, I think, that you can make that can help you propel or reach your financial goals. And sometimes, you got to be in a tough spot, I think, before you could recognize that there’s even something holding you back.

Scott:
So what was this pivot point? How did you go from Produce Inc to producing?

Paco:
Ooh.

Scott:
Yes, I knew that you were going to love that one. But, what was the catalyst that changed your mindset around this and got you going?

Paco:
This is a little controversial, but I’ll tell the story. So, remember how I told you I had the bookkeeping experience. When I went to go work for the financial planning firm, my boss was like, “Hey, kid, you are bookkeeping. So why don’t you do my books?” So I was doing my boss’s books. And, we had a deal where he was like, “Okay, if I make over half a million dollars, then you’re going to get 10% of everything.” Right? So, we had a profit sharing. And that was really what saved me was the bonus at the end of the year. But it was 11 months of struggling. And then, that one month I got the bonus. But one day, I was doing his bookkeeping. And, I knew how much he paid himself the whole time. But, a couple years in, I was like, “But how much does he pay himself relative to me?” And so, I did the math, because he was paying himself $23,000 a month and I was getting 36,000 a year. And so, I did the math and it was 13 cents for every dollar or something stark like that.
I’m not saying I deserved a dollar for every dollar, he’s taking a risk, it’s his business. But that I felt punched in the gut when I did that math and made it relative. And so, for me, and I know it’s not black and white anymore, but in that moment I thought, “Oh, this is a game. And you will either be exploited or you exploit.” Right? You’re either employer or employee. And in that moment I thought, “I think I can probably get people to pay me more if I go off on my own.” And so, that’s when I went to the dark side, and was like, “I’m going to figure out how to start my own business, and leverage my skills, and maybe reach an audience that I know I can inherently reach.” So that’s when the seed was planted, but it was a lot of time, months after, maybe even a year after that, I think, when I finally did something about it.

Scott:
So I’m going to ask a biased question here, and you check that bias and throw it out here, but you’ve used the words now exploit, dark side, leverage in the context of starting a business, is that mindset common in the creative world? And, is there a defense mechanism that you’re employing there with some of those clients to help them get money? Is that just a part of the interaction you have on a regular basis with your clients in having to couch some of these things in those terms?

Paco:
Yeah. I use that language as well to show that I’m cognizant of the fact that the system that I am participating in, it is inherently exploitative. There’s things I could do, Scott, I could set up a co-op, but I’m actively choosing not to. Right? There’s a lot of things that I could do. So, yeah, I think a lot of people reckon with this. And earlier, Mindy, when you’re like, “How do you reconcile things?” This is a beautiful example of sometimes things, you don’t reconcile them, you recognize that they’re… Can I say a bad word on here? I know I already said one bad word. Okay. You recognize that things are fucked up and you maybe participate in that way.
But, what you do is maybe you find other ways to offset your participation. And I’ve done that, right? I put out a lot of free stuff and I help people who can never afford to pay me. I feel like writing finance for the people is a community service. Yes, I was paid for it. But, my God, it takes years to write a book and it’s truly a labor of love, because it’s really not that much money at the end of the day when you think about everything that goes into it. And I really felt like I needed to put this out there. So, am I dodging your question or am I answering it?

Scott:
Well, you certainly answered the question for you, which I think is awesome. I guess, the other part of my question was, is this something that you find common among creatives that you work with? Is almost an aversion like, “Hey, accumulating wealth is unpleasant, because of what it represents about our society”? Is that something that you contend with your clients regularly?

Paco:
One of the things that I see with the mindset thing when it comes to entrepreneurship is that a lot of creative people are much more willing to be a freelancer when it’s just them selling their time, not having to leverage another person’s time, and energy, and care, and effort, and labor. They’re much more comfortable with that. But, oftentimes, what happens is you start to see the limits of freelancing, where it’s just you, right? You can only trade your time for money, or you can only take on so many projects. So, if you’re trying to accomplish a certain level of wealth, you’re going to be bound by constraints as a freelancer, that’s the reality. You could sell a product that’s one way to scale. Or, oftentimes, what I see a lot of people do is create an agency. Then we start to see some of these layers of, “How do I not be evil?” Is the question.
Then, we see that on the investment side, and certainly we see that on the real estate side for sure. The investment side, I have a great example. The most common thing people ask me when it comes to reconciling these feelings in the investment world is, “What is your recommendation for investing in companies or in funds that they’re not evil, they’re not doing bad things to the planet, and funds that are not holding bad companies?” And the answer is always, this is very complicated. Sure, there are funds that exist that are “socially responsible.” I’m not going to get into the weeds about green-washing and all that stuff. Sure, that exists.
But, the thing that we need to understand is that the mechanism for extracting profits from companies where the people who are creating the labor, they create the value and they don’t get to extract the profits, right, that trickles up to the shareholders. That is inherently exploitative. But, I still don’t think that conscientious objection is the way to go. I think that this is the system that we’re in, that if you want to have power and make a difference, then you must get the money, that is part of it. You must have money in order to direct change, to have power, and that is an unfortunate… Not an unfortunate, it’s just that this is the game that we’re playing. This is the game that we’re continuously choosing to opt into every single day.

Mindy:
Switching gears slightly, you have an agency that does bookkeeping for creatives. What are some of the common problems around money that you’ve found that creatives run into?

Paco:
Different businesses at different levels are going to have different problems. So I would say, when you’re first starting out, the first problem is figuring out if people are going to pay you for the thing you think they’re going to pay you for. Right? Are you solving an actual problem, one? And then, if you are, will people solve that problem for you? So, one funny example I like to throw out there is, on the one hand, it might be hard to get people to pay you to do something. But on the other hand, there are companies out there where the service is a guy will drive to your house in a van, and then he will clean up all of your dog’s poop in the backyard because you don’t want to. That’s bizarre that that’s a service, because I would rather keep the money in my pocket and go pick up the dog poop. But, things like that exist, right?
So, I think it’s all about finding the right solution for the people who are willing to pay. And I think once you understand that framework, it will be a lot easier to make money. And the other framework I like people to think about is, yeah, when people have pain, they will pay you to take the pain away. That’s the world that we live in. I have a tooth right now that’s bothering me, and I’m going to wait until it bothers me a little bit more frequently. I’m going to wait until the pain is too much, because I don’t know, maybe I’m a bad person, and I should pay attention sooner. But, that’s just how I am. It’s like, when the pain gets to me enough, that’s when I’m like, “Fine, here’s my money.” When you think about business in that context, I think it makes it a lot easier to find out like, “Okay, whose problems can I solve?”
I will say some timely things that a lot of people deal with is waiting until the very last minute to file their taxes, and then recognizing, “Oh no, I did nothing. I didn’t do any bookkeeping at all for the prior year.” And so, right around this time, I get emails from people and the panic is palpable through the words on the screen about how worried they are. Everybody thinks they’re going to go to jail. So yeah, not really understanding their place in the market and who’s going to pay for the solutions that they provide.
Another big thing that I see a lot of freelancers deal with is making money for the first time and not saving for taxes, getting sticker shock with the tax bill. Yeah. So that’s a tough one. There’s a really easy remedy for that. And, all you have to do is open up a sales tax savings account, and then for every dollar that you earn, you save between 10 and 30%. Check with your accountant, whatever they recommend. 10% is probably going to be okay, 20% is better, 30%, maybe you’ll end up with too much, but then you’ll have cash come tax time, and you can put that into a IRA or you can reinvest it into the business. It’s not a bad thing to have extra cash on hand. I would say, those are some of the most common issues that creative entrepreneurs and freelancers deal with.

Mindy:
Paco, I’ve heard you say assets are either bought or created. Can you explain what you mean by this?

Paco:
Yeah, I use that in the context to help people understand how to build wealth, right? Because building wealth at the end of the day is having assets. So the way that you get assets is you either make them, like creating a business is a really great example. I guess, you could build a house from the ground up and that would be an asset, not my cup of tea, but if it’s yours, go for it, or buying them, right? So, we go to work, and we get a paycheck, and we use a portion of our paycheck to scoop up assets. And the way that the great majority of us are going to do that is through a tool, like your 401k account, your IRA, or if you have a brokerage account. So you’re buying assets, right? You’re buying stocks, or oftentimes funds that hold stocks, and that is how you are buying assets every time you get paid. And, it’s really boring, but that’s the path to wealth, folks.

Scott:
We talk to a lot of W2 earners on this podcast. Right? And, there’s a lot of different ways to get to financial independence and to build wealth. The one that I think is heavily weighted and discussed here is, “Hey, you save up a percentage of your paycheck. Get those raises. Keep your lifestyle static and let the wealth build up here.” There are themes that go along with that, like, “You don’t need to have that big of an emergency reserve if you’re going to be employed for 20 years.” Right? “You don’t need to have a lot of cash. You can invest in long-term assets that aren’t really liquid there.” I imagine with artists and creatives, there’s more irregular cash flow for many folks there and a different overall financial strategy is needed to build wealth, and be sustainable, be safe, be conservative. What do you typically see as a pattern for these folks?

Paco:
It is really hard as a creative to manage your finances when you have lumpy cashflow. That’s definitely one of the biggest issues that a lot of project-based creative people deal with. And so, that’s why I am such a champion when it comes to… You really need to think about your freelance practice as a business. What are the processes that you have happening and how can you repeat them on a regular basis, so that you can always have options? And, for what that looks like really is options for different clients and different projects to be working on. So I think that’s definitely something that if I had the answer to figuring out how to help creatives manage the most volatile piece, I think I could be president, right? Then, I would have a crystal ball, I would know everything. But, that’s the name of the game. That is the hardest part. And I don’t have it figured out yet.
And even myself, the way my business is set up is, I run this boring, straightforward fee for service business, and then that allows me the latitude to then do project-based work. That’s really not lucrative at the end of the day, but it’s fun, and it goes back into the business in a good way, like having a book, having a podcast, those are forms of content marketing and advertisements. But, yeah, that’s something I’ve been thinking about a lot lately is because we’re no longer in this zero interest rate environment, right, there’s no longer the TikTok creator fund. There seems to be a lot less money being thrown at creative projects than there were 3, 5, 7 years ago. And then, anecdotally, some of the creators that I’ve spoken to lately said 2023 was a tough year for them. Brand deals have dried up. They’re not making as much money. I’ve heard podcasting was a rough year for a lot of my fellow podcasters.
So yeah, one of the things I’m thinking about as we’re out of this 0% interest rate environment is things that were super un-sexy 3, 5, 7 years ago, which is a pretty classic, boring, straightforward service based business or a boring business. They’re getting sexy again. And, that’s where I’m wanting to orient people’s gaze like, “Hey guys, maybe do this steady thing that you can rely on and count on. And let that be the thing that funds your creative projects.”

Scott:
There’ll always be a lot of people who want Scooby-Doo. What was the other one you came up with? Full credit to Mindy for that one.

Mindy:
That’s an actual company Carl and I dabbled in. We considered doing this and we were going to call our company the Rocky Mountain Turd Wranglers.

Scott:
Nice. Yeah, I love that advice, and I think we’ve talked to Cody Sanchez here on the BiggerPockets Money podcast. I know Alex Hormoze has been on the BiggerPockets podcast. And that’s just such a great place to go exploring if you are interested in building wealth at this point in time and you are willing and able to put in those hours to free up the time for these creative outlets. And that brings me to a question I have for you is you started off our discussion by talking about how you’re innately lazy and that’s your goal. What would you be doing if you didn’t need to work at all? You’ve mentioned a band several… What is the goal for you? How would you love to spend your day if you become financially free?

Paco:
Honestly, it would look a lot like how I spend it already, and I feel very grateful and very lucky that I have been working on this business for nearly 10 years, and it’s grown, and it’s freed up my time, and I have opportunities to work on projects that I find interesting. I do have a running joke with my partner, and it’s always like, “Yeah, I just can’t wait until I don’t have to work anymore.” This is a very LA thing. “I’ll go DJ a yoga class or something silly like that.” I’m not really going to DJ a yoga class. But, I think what I would do is I would just make weirder and weirder art with my friends, because I wouldn’t have to be concerned about the market constraints. So, I’d probably make a lot more music. And, probably, I don’t know, make a cartoon. I’d probably dabble in various art forms with my friends. That’s what I’d do.

Scott:
I love it. So your thesis is, start a services based business, because there’s lots of good opportunity there, and then use that to fund your creative outlets in weirder and weirder art, and you drink your own Kool-Aid, and do exactly that with your day-to-day and love it.

Paco:
Exactly. You’ll get to DJ every yoga class and it’ll be great.

Scott:
All right. So, you mentioned yoga. I know you have a closely related meditation practice that you work on. Can you tell us a little bit about that, and if there’s any linkage to your money story?

Paco:
Yeah, I’ve been meditating for a decade now. I have a pretty regular practice. I fall off when I go on vacation every time. I just don’t meditate on vacation. But whenever I get home, I always begin again. And, the thing that meditation has given me is it’s allowed me to work on my attachment to things, which I think is really important when you’re running a business. And I think that’s really important when you do public facing things, because we’re all at the hands of what the market is doing, and what the market will do, and what the audience wants, and what the algorithm wants. And, I think the more that you can exercise letting go of outcomes and just falling deeply and profoundly in love with the everyday process of showing up and doing the thing, whatever it is, then you’ll feel freer, one. And two, I think that is what is required for success ultimately.
So, in a weird way, I do feel like meditation has played a gigantic role in any of the success I’ve seen. But, a huge part of that is ultimately letting go of it. And, I think once you let go of it, the pressure is gone, you just love showing up every day. There’s a Buddhist phrase that’s like, before enlightenment, you have to chop wood and carry water. After enlightenment, you have to chop wood and carry water. Which basically means, your life is going to be the same and you’re just going to just fall in love with the process because that’s all we ever have, this moment right now.

Mindy:
I like that a lot. That’s so true. Once you do something, you’re still going to have… I think that applies to financial independence too, Scott. Before you reach financial independence, you’re still going to have to chop wood and carry water. After you reach financial independence, you’re still going to have to chop wood and carry water. Paco, I love this. I love you. I have had such a good time with you today. Can you please share with our listeners where they can find you?

Paco:
Yeah. If you want to listen to my podcast, it’s called Weird Finance, and it is available wherever you’re listening to this podcast. Also, you should sign up for my weekly email newsletter called The Nerd Letter, and that’s the best way that we can stay in touch and I’ll send you an email every week. You just go to thehellyeahgroup.com, and you sign on up, and I’ll see you in your inbox.

Scott:
Thank you so much for sharing such a wonderful breadth of thoughts today, and really giving us an insight into the world of creatives and finance. Really appreciate it and your perspective was really unique and powerful for us.

Paco:
Thank you guys for having me on and just letting me be my full weird self. I appreciate it.

Mindy:
This was so much fun, Paco. Thank you so much, and we will talk to you soon.

Paco:
Take care.

Mindy:
Scott, that was Paco de Leon and that was a fantastic episode. What did you think?

Scott:
I thought she was fantastic. I am really walking away with new perspective that in the creative community there is likely a significant amount of the population that’s averse to the concept of building wealth and perhaps even capitalism from a moral standpoint, because I just take it for granted that that’s the system we live in and that we’re here to help people build wealth. I haven’t empathized with that enough, and I think that Paco is so perfectly equipped to understand those challenges and that mindset in that community, and I think she’s doing really good work in there. So, there’s a two-part problem. It’s one, alignment with the concept of building wealth and getting over or past that roadblock for a lot of creatives. And then, two, the playbook that they need in order to build wealth, which is going to be different and need to have different tools at their disposal than the folks that are pursuing financial freedom through a traditional W2 corporate ladder path.

Mindy:
You’re right, Scott, they’re going to have to get, pardon my pun, creative with their financial freedom and their financial mindset, because they don’t typically have the tools that are available to a W2 employee, but that doesn’t mean that they can’t build wealth and provide for their future. Again, I feel like you, Scott, they need to get creative. All right, Scott, should we get out of here?

Scott:
Let’s do it.

Mindy:
That wraps up this episode of the BiggerPockets Money podcast. He is Scott Trench and I am Mindy Jensen saying, see you later, excavator. Shout out to listener Scott for that one.

Scott:
If you enjoyed today’s episode, please give us a five star review on Spotify or Apple. And if you’re looking for even more money content, feel free to visit our YouTube channel at youtube.com/biggerpocketsmoney.

Mindy:
BiggerPockets Money was created by Mindy Jensen and Scott Trench, produced by Kaylin Bennett, editing by Exodus Media, copywriting by Nate Weintraub. Lastly, a big thank you to the BiggerPockets team for making this show possible.

In a recent CNBC article, it was revealed that more than half of Americans earning over $100,000 a year live paycheck to paycheck. This eye-opening statistic highlights a fundamental truth: The road to wealth isn’t solely about income but depends significantly on transforming financial habits. 

In this guide, we’ll debunk the oppressive notion of budgeting, offering a transformative process to fix money leaks, cultivate strategic spending habits, and execute consistently for financial improvement.

Budgeting Is Dead—What to Do Instead

If the word “budget” sends a shiver down your spine, you’re not alone. According to a recent Lending Club report dated September 2023, over 60% of Americans steer clear of financial planning because, well, the “B-word” is just too daunting. 

But fear not because I want to introduce you to the revolutionary concept of “budgeting is dead.” Here are the steps to follow instead.

Step 1: Tracking your income and expenses

So, you want financial mastery without the stifling confines of a traditional budget? Well, it’s all about tracking, not budgeting. As the wise ones say, “What gets measured, gets done.” Committing to regular income and expense tracking is the foundational step for the “budgeting is dead” process—a process that will help you master your financial landscape without feeling like you’re straitjacketed by an old-school budget.

Step 2: Getting leverage

If you’re not a spreadsheet wizard or time is your most precious commodity, let technology do the heavy lifting. Platforms like Simplifi.com, Empower.com, or You Need a Budget (YNAB.com) turn financial tracking into a breeze. Say goodbye to complexity that could kill your momentum.

Step 3: Uncover where your money is really going

Picture your finances as a boat sailing toward your goals. Now that you are regularly tracking your income and expenses, you now know how your boat is constructed. Maybe it’s made of the finest metal and is impenetrable. Maybe it’s more like a leaking life raft that is quickly taking on water. 

No matter which boat you think you have, commit to doing this step at least once a year to eliminate any “holes” that could cause your boat to leak. In this step, you need to categorize each expense as Destructive, Lifestyle, Protective, and Productive. 

• Destructive expenses lead to debt and poverty: think of addictive habits, compulsive spending (eating out, shopping, etc.), and unnecessary fees (credit card fees, late fees).
• Lifestyle expenses don’t contribute to building assets: think of nonessential spending that doesn’t enhance your life, like subscriptions (magazines, wine club, razor club, movies) and other excessive spending.
• Protective expenses help maintain wealth: think of expenses that help you optimize and/or protect your wealth.
• Productive expenses enhance both current and future life: think of career building, business building, and investment activities that yield more income than you spend.

Step 4: Taking decisive action

With a clear understanding of your spending habits, now it’s time to take a proactive approach to wealth creation. Here’s how:

• Eliminate destructive expenses like a bad habit (because they are). Get professional help if needed.
• Reduce lifestyle expenses by identifying low-hanging fruit and eliminating nonessential spending.
• Negotiate/renegotiate protective expenses to get the most value for your money.
• Monitor productive expenses, ensuring spending aligns with income during different wealth creation phases.

Final Thoughts

Even big earners can find themselves doing the paycheck hustle. So, let’s ditch the one-size-fits-all budget and embrace a more strategic spending approach.

Sure, it might seem like a deep dive into your financial soul, but remember, this isn’t a one-off thing; it’s a habit to cultivate regularly. Consistent, persistent action will be your ticket to financial success.

Ready to break up with budgeting and make financial mastery your new BFF? You got this!

Protect your wealth legacy with an ironclad generational wealth plan

Taxes, insurance, interest, fees, bills…how can you acquire wealth, let alone pass it down, when there are major pitfalls at every turn? In Money for Tomorrow, Whitney will help you build an ironclad wealth plan so you can safeguard your hard-earned wealth and pass it on for generations to come.  

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.

Commercial real estate has had a few rough years, and it seems like things won’t be getting better anytime soon. The sector is set for a potential rise in defaults, as higher interest rates have increased the costs of refinancing. 

And with $2.8 trillion due between now and 2028, more landlords could be feeling the crunch. According to data firm Trepp, commercial debt maturities are expected to balloon in the next few years. While many loans were extended or refinanced, the clock is slowly ticking for the CRE sector as those extensions are coming due. 

Worst Commercial Slump in the Last 50 Years

The CRE market has been struggling to regain its footing since the start of the pandemic, especially in office space. When the pandemic hit, many office spaces emptied, forcing landlords to make deals to delay payments until things recovered.

Unfortunately for those invested in the office arena, remote and hybrid working is now becoming the norm, with many businesses downsizing their office space or even becoming fully remote.

Now that the CRE debt is coming due, landlords are starting to squirm. Because of how commercial mortgages are structured, when the debt matures, the principal must be paid off in full or refinanced.

This has led to one of the steepest commercial real estate price declines in the last 50 years, a group of economists at the International Monetary Fund (IMF) found. This can largely be attributed to higher interest rates, steep monetary policy tightening, and stricter bank lending standards, according to the IMF.

While the office sector has been the hardest hit, the entire market has felt the sting over the last few years thanks to a souring CRE market. Vacancy rates in multifamily homes have increased, and rent growth is expected to decline in the coming year, according to CBRE. Industrial spaces are also showing signs of weakening. 

The only potential bright spot in CRE is the retail sector, as robust consumer spending and suburban migration has driven demand for outdoor shopping centers. 

Interest Rates Aren’t Going Down Fast Enough 

While interest rates have gone down a bit, it might not be enough. According to The Wall Street Journal, many borrowers are refinancing at rates higher than when they first took out loans. 

The Federal Reserve is under pressure to cut rates, with some economists expecting a cut by the end of the year to 3.75%-4% and continued cuts by the first half of 2026 until the rate hits 1.75%-2%. However, that might not be fast enough for the CRE sector. Fitch Ratings expects delinquency rates in commercial real estate to increase to 4.5% this year, while regulators are worried about the spillover effects.

In its 2023 annual report, the Financial Stability Oversight Council (FSOC) cited exposure to commercial real estate as a concern for financial institutions and said that they need to better understand the risk. Nearly 50% of CRE’s outstanding debt is held by banks.

“As losses from a CRE loan portfolio accumulate, they can spill over into the broader financial system. Sales of financially distressed properties can… lead to a broader downward CRE valuation spiral,” FSOC said in its report. 

The Bottom Line for Real Estate Investors

Commercial real estate investors should buckle in and get ready for a bumpy ride over the next few years. That said, although the CRE space is under pressure, there’s still some time for landlords to negotiate. Still, with CRE sales also under pressure, that’s devalued properties, making it hard for lenders and borrowers to agree on how much the property should be worth.

With banks becoming more risk averse around CRE and under more regulatory scrutiny, that could open opportunities for non-bank lenders such as private credit to step in. And for some savvy investors, the stress in the CRE market could provide opportunities.

In other words, there could be opportunities for investors to find distressed properties for a great value, provided they’re prepared to weather some uncertainty in the next few years. However, uncovering these bargains will require a lot of due diligence to avoid falling for value traps.

Real estate investors should make sure to heavily scrutinize every opportunity that presents itself. While there will certainly be some opportunities to revitalize properties, not all cheap properties will be worth the long-term price.

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