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By Nellie Akalp

The franchise model of doing business streamlines the entrepreneurial process. By operating as a franchisee, you can become a business owner without much of the preliminary groundwork involved in building a company’s infrastructure and systems from scratch.

But even though a franchise location is associated with a larger brand, its owners hold responsibility for forming a business entity and managing all of the operations and administration at their site.

In this article, I’ll discuss some of the nuances of starting and operating a franchise entity.

Franchisee vs. franchisor: What’s the difference?

First, let’s clarify some of the terminology I’ll refer to throughout this post:

• What’s a franchisor? A franchisor is a business that sells the right to others to open stores or sell products or services using its brand, expertise, and intellectual property.
• What’s a franchisee? A franchisee is an individual or business entity licensed to operate their privately owned business (a franchise) under an agreement with a franchisor.

For example, McDonald’s is a franchisor; the owner of the McDonald’s location in your town is a franchisee.

Franchising and forming a business entity

Forming a legal business entity supplies liability protection to business owners and may provide some tax advantages. The underlying purpose for setting up a franchisor’s entity is slightly different from why it’s important to set up an entity for a franchise location.

Franchisor entity

A franchisor forms an entity to sell rights to franchisees to open and operate a franchise location using the franchisor’s brand, intellectual property, and expertise. An independent legal and accounting entity, the franchisor entity protects its owners and the main business from the debts and legal liabilities of franchisees.

Consider this hypothetical example: Subway is a franchisor. Suppose someone wants to sue the business after slipping and falling on a wet floor at a franchisee’s location. The individual would sue the local franchise business, and the main franchising entity would be protected.

Often, franchisors choose the Limited Liability Company structure for their entity. Technically, a franchisor entity can be formed in any state. However, it’s wise for franchisors to discuss their options with an attorney and tax professional before deciding.

Franchisee entity

A franchisee entity is one set up by a franchisee when purchasing the rights to operate a local franchise. Many franchisors will require the franchisee to set up their entity before drafting contracts or a Franchise Disclosure Document (FDD), so the paperwork can be put in the entity’s name. Franchisee entities are usually LLCs. Many franchisors will not allow a corporation to purchase a franchise because the issuance of stock would have significant legal and tax implications.

A franchisee should almost always register its entity in the state where it has its physical presence, regardless of whe re the owner’s residence is. The physical location of the franchise will require permits, licenses, lease agreements, etc., and therefore the business must be registered in that jurisdiction to obtain them.

Naming a franchise entity

Many franchisors create an entity under a name that implies its purpose of selling franchises—for example, Your Company Franchising Inc. or Your Company Franchise Sales, Inc. This makes it easy to differentiate entities.

As for franchisees, they may use the franchise’s brand name for marketing purposes by establishing a DBA (a fictitious name). However, their legal entity’s name must not include the name of the franchise being purchased (because the franchisor has trademark rights to that entity name).

For example, franchisees would avoid registering their legal entities as Smith Subway, LLC or Smith’s Burger King, but might instead set up DBAs like “Subway Store #1234” or “Burger King Woodland Hills.” Franchisors usually have a specific way franchisees should format their DBAs.

More from AllBusiness.com:

What about multi-unit franchises?

A multi-unit franchise is when one franchisee purchases multiple locations. Typically, the franchisor will want each unit set up as its own separate legal entity with separate DBAs and permits.

In some cases, franchisees can start a parent company that holds all their entities beneath it to keep things simple. However, this only works if the franchises are all owned by the same people.

Entity requirements for franchised businesses

In addition to the contractual obligations to franchisors, franchisees must comply with federal, state, and local requirements when setting up their business entity:

• File formation paperwork with the state to establish the LLC or corporation.
• Obtain an EIN (employer identification number).
• File a DBA (doing business as) to establish a fictitious name for the franchise location.
• Create an LLC operating agreement (or corporate bylaws).
• Register for payroll tax and other employment-related taxes.
• Complete sales tax registration (usually does not apply to service-based franchises).
• Filing for any required business licenses and permits to operate legally at their location.

Becoming a franchisee

Are you curious about what it takes to start and operate a franchise? Here are resources to help as you assess the feasibility and explore the possibilities:

Starting a franchise business lets you enter the world of entrepreneurship with built-in brand awareness and established systems and processes. That doesn’t mean it’s entirely “plug and play,” though! Make sure you get the legal and accounting guidance you need to ensure it’s the right fit for you.

About the Author

Nellie Akalp is a passionate entrepreneur, business expert, professional speaker, author, and mother of four. She is the founder and CEO of CorpNet.com, a trusted resource and service provider for business incorporation, LLC filings, and corporate compliance services in all 50 states.

How would you describe the housing market right now? Is it up? Flat? Down? Crashing? Each option is a little bit correct and a little bit wrong. That’s because these days, there is almost no way to describe the housing situation in the United States on a national level. To understand what is happening and to make solid investing decisions in 2023, you need to be looking at regional trends and individual market metrics. 

To shed some light on the differences in market behavior, I dug into the 295 largest housing markets in the country and wrote up the most interesting trends and findings from my research. 

Sales Price

Of the 295 markets studied, 200 of them are up or flat year-over-year. This is true, even though on a national level, housing prices are down about 3%. Meaning although about two-thirds of markets are still up YoY, the depth of declines and size of the markets seeing negative price growth is dragging down the national average. 

For the most part, the pandemic-era craziness is over, but there are actually still 37 markets with double-digit growth. Macon, Georgia, is up 28%, with many of the other red-hot markets coming in the Midwest. Springfield, Ohio; Saginaw, Michigan; and a few places in Wisconsin still have growth of over 20%. 

Of course, there are markets that are seeing big declines as well. Austin leads the way with -14% growth, followed by Sacramento and Boise at -12%, and other major markets like Seattle, Phoenix, Los Angeles, and Denver are all seeing some of the worst corrections. 

What stood out to me when looking at sales prices is how pronounced regional differences are. For the most part, western states are seeing big declines, while markets in the Midwest and Northeast are doing fine. The South is mostly growing still, but there are some markets in decline there too. To help visualize some of these regional differences, I selected markets (somewhat at random) from each region.

As you can clearly see, Boise has seen steep declines but has started to level off. Madison and Orlando are relatively flat, and Rochester is still on an upward trend (even though seasonality makes it look like it’s declined for a few months, it’s up YoY).

Inventory

The prevailing logic over the last year is that inventory was going to rise considerably with higher interest rates, and in some ways, this is true. Of the 295 markets studied, 183 had inventory up YoY. Some markets have truly skyrocketed, with markets like The Villages, Florida; Austin, Texas; and Spokane, Washington, all seeing inventory more than double. 

This seems like an alarming statistic because rising inventory can precede steep price declines, but year-over-year data might be misleading us. Inventory was extremely low during the pandemic, so I looked at current-day inventory and compared it to the same months in 2019. What I found was that only 20 markets have inventory higher than pre-pandemic levels. This is extremely low! Even with higher interest rates, there are only a handful of markets in the entire country with inventory levels that have fully rebounded. 

What’s even more remarkable to me is how low inventory has stayed in other markets. In Muncie, Indiana, for example, inventory is only 21% of what it was in 2019. Meaning for every five houses for sale in 2019, there is now just one. When you look regionally, low inventory levels are primarily concentrated in New England. Massachusetts, New Hampshire, Vermont, and Connecticut all have several markets with desperately low inventory. 

Even in Boise, which has seen a steep correction, inventory fell in line with seasonal patterns this Winter and is not accelerating out of control. 

New Listings 

One of the main reasons inventory remains so low is the lack of new listings. Of the 295 markets, only 16 have seen growth in the number of new listings in the last year. This is as close to a national trend as it gets in the housing market right now. Surprisingly, those 16 markets are primarily concentrated in Florida and Texas. 

In certain markets, sellers are in revolt. Burlington, Vermont, has seen a 68% decline in new listings this year, as has Truckee, California. Other areas with ultra-low new listings are in New England. That makes sense—declining new listings and low inventory tend to be closely correlated.

If you want to know why the housing market isn’t crashing on a national level, this is one of the main reasons. There is very little to buy, which is offsetting the decline in demand that has come with rising interest rates. 

Days on Market

Days on market (DOM) is an excellent indicator because it helps us understand the balance of supply and demand in a market. In markets where there is excessive supply, DOM goes up. In markets where there is excessive demand, DOM goes down. Balanced markets stay flat. 

What we see right now is that 246 markets have rising DOM. Even though inventory has remained low—properties are sitting on the market longer in most parts of the country. But how much longer varies dramatically. 

In Boise, the average days on the market went from 13 one year ago to 88 today. That is an increase of nearly 600%! No wonder prices are falling in Boise. The chart above does a great job of showing what’s happening right now. Markets that boomed, like Boise and Orlando, are reverting. Meanwhile, the more “boring” markets like Rochester and Madison are holding almost perfectly steady, as they have for years. This is generally true for many major metros in the Midwest and Northeast. 

Sale-to-List Ratio

The last metric I looked at is the Sale-to-List ratio, which measures, on average, how much below or above the asking price properties are selling for. Despite dropping demand, there are still 49 markets in the U.S. that are averaging above-list sales. Of all markets, Rochester, New York, leads the way with the average home selling for about 107% of the list price. Madison is also above 100%, which again is no shock given the supply and demand dynamics. 

For the other 246 markets, however, buyers are getting discounts on the sale price. I’ve been talking about the concept of “buying deep” for months (buying under the asking price), and it seems that in 84% of markets, this is happening. In Key West, Florida, buyers are buying at 95% of the list price, Austin is 96%, and in New Orleans, it’s about 97%. 

To me, this is a perfect example of why it’s so important to understand local market dynamics. If you see that inventory is rising and you’re in a buyer’s market, you can offer less than the asking price—and as the data shows, you’ll probably get it! However, if you’re in a strong seller’s market, you may still have to write competitive offers and won’t have the luxury of being as patient as you might like. 

Conclusion

Hopefully, this analysis has shown you that trying to describe “the housing market” is not possible right now. Every region and every individual market is behaving differently. There are markets still in the grips of the pandemic boom with massive growth and low inventory. And there are markets seeing steep corrections. 

How you invest in 2023 should largely depend on the dynamics of your local market. Some markets will support flipping right now, while others are better for rentals, and some maybe shouldn’t be touched altogether. As an investor, I encourage you to stay on top of the metrics I outlined in the post above and use them to help you make investing decisions. 

What are you seeing in your local market, and how are you adjusting your investing tactics accordingly? Let me know in the comments below!

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

While historically family-owned, the parking industry is today largely dominated by two players: SP Plus (SP+) and ABM. But the industry is facing some challenges. Aside from the rise of e-commerce and ride-hailing, a post pandemic world where workers are rarely driving into urban areas is forcing the industry to pivot and expand its services, as well as heavily invest in technology. It remains to be seen if those strategic decisions will pay off.

A robust content creation strategy is no longer just a nice-to-have for your business. Without great content and a high-ranking internet presence, your business practically doesn’t exist.

Content is both an important facet of your company’s reputation and a critical factor in achieving its business goals. Your content educates your readers, engages your audience and establishes you as an authoritative subject matter source. If you’re not already set up for content success, here are some ways to give your brand the content makeover it needs.

1. Be Everywhere and Be Useful

You can’t just rely on weekly subscription-based emails anymore. Your company needs a comprehensive strategy that bridges multiple channels and covers all angles. Your website should have a blog that’s updated regularly—at least once weekly. You also need well-researched white papers and studies to demonstrate your industry expertise. Use data and infographics to illustrate your points. Round out your written content and visuals with videos, podcasts and webinars.

And don’t just use your content to talk up your company. Think about what will make readers want to come to your site. Feature actionable advice that your readers will turn to, time and again, for help. Where possible—and appropriate—consider timely newsjacking pieces that link your company’s offerings to current events. These pieces should showcase why your product or service is more relevant than ever.

2. Find Your Audience

Before you get too far into content creation, think about whom you want to appeal to. Who are your readers, and what can they stand to gain by immersing themselves in your content? If you offer a B2B technology solution, maybe your blog can provide actionable tips for small business owners. If you sell beauty products, consider common skincare complaints and position yourself as a solution. Whatever the product, think of your content as helpful advice, not advertising.

Finding your audience doesn’t just mean knowing your target demographics. It also means meeting your potential customers where they are. Do you need to be on Instagram? TikTok? The hottest new beauty blog? Figure out where you should post your content, especially on social media, so your most likely readers will stumble upon it.

3. Explore New Content Solutions

If you’re feeling out of your depth in deciding how to meet the content needs of your organization, you may want to think about partnering with an experienced content solutions provider. They can assist with services like preparing technical and software documentation and developing employee and customer training. They can also help pair you with scalable technology solutions or transition to a new type of content management system.

Some content creation solutions providers, like Contiem, can do an audit of all your content needs and walk you through each stage of revamping your entire content ecosystem — whether that’s creating, managing, or delivering the quality content your business needs to succeed. When you’re struggling to gain traction, the right provider can take a close look at your content and figure out what is and isn’t working. And then they can set you on the right path.

4. Boost Your Search Results

To be truly successful in the content world, you have to stay on top of search engine optimization. Plugins like Yoast SEO can boost your Google rankings by helping you optimize your keyword distribution, assess your content’s readability and more. Use alt tags and metadata wisely, and make sure your links are current and flow naturally within the sentence structure. Pin your links to relevant keywords, avoid overlinking and don’t force links or keywords in where they don’t make sense.

In short: don’t go crazy. It’s no longer so easy to trick the search engines into doing your bidding. The most important thing is that your content be relevant, interesting and updated regularly. For optimal traffic and rankings, you should post on your site or blog about two to four times a week. But don’t just post garbage (see point 1). Make your content pertinent and educational so your readers will keep coming back for more.

5. Analyze and Iterate

Once you’ve got your content up and running, you’ll require a system for tracking what’s effective and what’s not. Which channels and types of posts are performing well, and which can you spend less time on? A host of tools and tips are available for measuring content engagement and effectiveness. Use Google Analytics and other services to keep an eye on your metrics.

You should be monitoring not just how many people visit your site, but who they are and how long they stay. You’ll also want to note how many visits actually turn into conversions. Track the number of people who like your content enough to share it with their circle. In addition, consider who’s choosing not just to read your content, but to subscribe to updates. Lastly, look at your costs and figure out what to cut or invest more in.

Great Content Serves a Need

It bears repeating that the most important component of a good content strategy is usefulness. Your customers don’t read your content because they want to be advertised at. They come to you because they believe your content has something to offer them. Think about what causes you to remember a great piece of content or makes you want to share it with friends or co-workers. The best content centers the reader and builds trust in you as someone who can make their life easier.

David:
This is the BiggerPockets Podcast, episode 762. I don’t know that I’d say it’s apparent that the dollar will no longer be the world’s reserve currency, but it is moving in that direction and I’ve been talking about this for years. So we’ve known that inflation’s going to be a problem since before COVID, especially during COVID. We’ve known that we’ve printed so much of our money and America’s position within the global market has weakened to the point that other countries don’t feel like they have to keep the dollar as the reserve currency. If the world stops using the dollar as the reserve currency, there is a very high chance that money that is in other countries is going to flood back into our country.
What’s going on everyone? It is David Green, your host of the BiggerPockets Real Estate podcast here today with a Seeing Green episode where I do my best to bring the heat to teach you more about real estate, to answer your questions and to expand your knowledge base when it comes to real estate investing, and I think we hit it out of the park today.
Today’s show is fantastic. We talk about what to do when your STR or short term rental is no longer cash flowing and it’s time to move on to a new deal. We get into when you should use the BRRRR methods, specifically when you’re using HELOC money, as well as some other issues regarding HELOC money and the best use for it, how the dollar may impact real estate vesting in America, what’s likely to happen if the US dollar loses its position as the reserve currency of the country, which we’ve been talking about on the podcast for a while. All that and more on a fantastic show.
All right, before we get to our first question, today’s quick dip is find the expert and let them do the work for you. Learn to leverage your community. So many of you’re asking great questions and you’re coming here, but what I then do is want to connect you with the expert that can answer it even better.
We at BiggerPockets, have a lot of ways that we can help you with that you can listen to our regular podcast where we bring in experts in different fields, from bookkeeping to construction to appraisals to subject to financing, everything that you could ever want. Contact those people. You could also use the agent finder under the tools on the biggerpocketss.com website to connect with a lender, with an agent, with a multifamily specialist, whatever you’re looking for. You could check out biggerpockets.com/bootcamps to take a course from a person who will teach you on a specific strategy or you could reach out to me and I’ll put you in touch with my team, my people and the people that I use. But whoever it is, however you’re doing this, make sure you’re talking to the expert and not trying to figure this out yourselves. I wouldn’t recommend anybody represent themselves in court. And in the same way, I wouldn’t recommend that anybody try to learn the jobs of other people involved in the real estate transaction. Focus on what you do best and let them do what they do best.
All right, let’s get to our first question. I’m excited.

Josh:
Hey David, my name’s Josh. I’ve done about a half dozen deals now in the Grand Rapids and Lansing area of Michigan. So I’m getting my feet wet and doing okay. And my question revolves around, I’m doing my first BRRRR and it’s actually working out pretty good. I purchased property for 42,000. I’ve got 55 into the rehab, all said and done, closing costs and everything. And I just had a desktop appraisal done because it’s not quite finished yet. I had a desktop appraisal done and it came back at 140, so I should be able to refi at 75% LTV and take all my money out, which is great.
The issue is that typically when I evaluate properties, whether or not I want to buy them, I look at my cash on cash for the first 12 months, but then after that point, I transition to evaluating properties based on return on equity once they’re in my portfolio. This property, because of interest rates is only going to cash flow about $150 a month, which is fine because I’m leaving nothing behind. So it’s an infinite cash on cash even though it’s a little lower monthly cash flow than I would like typically, but it’s a play and that’ll grow.
But the issue now is that I’ve got $40,000 in equity and I’m only making $150 in cash flow a month. That’s a really low return on equity on day one. So from a ongoing evaluation standpoint, it looks like I should sell the property and flip it instead of keeping it as a BRRRR. So my question is with interest rates where they are, is it ever the right choice to BRRRR or flip? Or I guess if you’re looking at return on equity, is it ever the right choice to BRRRR instead of flipping, or should I just be flipping? Or how do you look to evaluate? Because my return on equity’s going to be really low, but I do want the long-term benefits of another long-term rental in my portfolio. So I’m just a little curious about how you would evaluate these and what your advice would be for a BRRRR property with a low return on equity because it’s a BRRRR property. So thanks a lot, appreciate the podcast

David:
Josh, my man, such a good question and such a good position to find yourself in. This is just going to highlight so many good teaching points. You just won on The Price Is Right, and you have to choose between a Ferrari or Lamborghini. That’s the situation that you’re in. You’ve got 100% of your initial capital back out of the bur, but you’re recognizing with the equity that’s left in the deal after the refinance, the $150 a month is not an incredibly high cash flow.
Let’s go your two options. You could sell it and get the equity back out of the deal, put it into something else, or you could hold it. Benefits of holding well, you don’t need to get money out of that deal because you’ve already got your initial money out so you still can buy more real estate. This isn’t stopping you from buying more real estate. Holding this property over the long term will lead to appreciation and likely rent increases. How to capitalize on that? Is it in an area that rents are likely to keep going up every single year and the property’s likely to appreciate every year? If it’s not in one of those areas, if it’s in a stale market that just doesn’t grow, rents don’t increase, we might lean a little bit more towards selling and getting the equity out and putting it into something else. If it’s an area where growth, I’d lean more towards holding.
Now let’s look at the benefits of selling that property. You would get a little bit more equity out of it likely if you sold because you’re going to be leaving, that’s something about BRRRR is you get all of your money out, but there is still value left in the deal. For the people who argue BRRRR is risky because it’s increasing leverage. It’s not. When you refinance it, say 75% loan of value or 80% loan of value, that is no different than if you put 20% or 25% down on a house. Just because you get 100% of your capital out does not mean you get 100% of the equity out of the deal. You’re still leaving it in there. But if you sell, you’re also going to have closing costs, you’re going to have realtor commissions, you’re going to have expenses associated with it. So for more expensive properties, the portion of closing costs is a smaller proportion of the overall money you’re getting out. On inexpensive properties, your closing costs are a higher percentage of the money you’re getting out, so it usually makes more sense to try to avoid selling or even refinancing in some cases cheaper real estate, whereas more expensive real estate, you have the benefit of if you have to sell, you’re getting more money back than what you’re paying in the closing costs.
Another expense you’ll have if you choose to sell are capital gains. You’re probably going to have to do a 1031 if you want to roll over your gains so you don’t pay taxes because those can be significant on deals like this. Whereas if you hold it, you can avoid that. So once you’ve considered all of this information, you’re in a little bit of a better position to decide if keeping makes more sense than selling. If you sell, you’re going to have taxes. You’re also going to have closing costs, may not get as much of that equity back out of the deal as what you’re hoping to unless you do a 1031 exchange. And if you do a 1031 exchange, you got to have the next deal lined up. Those can be tricky.
Most of the time, Josh, you’re probably going to be better off holding it, keeping equity in the property, getting your infinite return, that 150 bucks a month and moving on to the next deal. The only time I would say you’re better off to sell and not keep, has nothing to do with the BRRRR just has to do with location. In the same sense that I would look at my portfolio and say, I’m going to keep the properties that are in good locations. I’m going to sell the properties that are in inferior locations. You’re in the same boat. I’d look at it the same way. Thanks for your question though, and great job.
All right. Our next question comes from Joe and Florida. “How are you evaluating your portfolio and future investing strategy now that is becoming more apparent that the dollar will no longer be the world’s reserve currency?” Oh boy, Joe, you’re asking the questions I love, but this scare me.
I don’t know that I’d say it’s apparent that the dollar will no longer be the world’s reserve currency, but it is moving in that direction and I’ve been talking about this for years. If you listen to this podcast, you hear the stuff that they’re going to talk about on the news before they start talking about it on the news, and that’s because most people don’t look at what’s going on under the hood of their car until the light comes on, the check engine light, the check oil light, whatever it is. We’re sharing with you guys from BiggerPockets what we see happening under the hood before the light comes on.
So we’ve known that inflation’s going to be a problem since before COVID, especially during COVID, we’ve known that we’ve printed so much of our money and America’s position within the global market has weakened to the point that other countries don’t feel like they have to keep the dollar as the reserve currency. I will come right out and say, I don’t know what’s going to happen, but I will share my opinion on what I’m planning on happening because you’re asking about my opinion and my portfolio.
If the world stops using the dollar as the reserve currency, there is a very high chance that money that is in other countries is going to flood back into our country. That means we will have even more inflation than what we have. Just because we’re feeling inflation, most people don’t pay attention to what’s going on until the symptoms come, but you can’t measure your sickness by the symptom. You have to know what’s going on inside your body. It’s pretty bad. We printed a lot of money so that we could avoid recessions in the past and there will be a price to pay for that and it will come from the weakening and potentially destruction of the US dollar.
Now there’s things that are working in our favor. Other countries have done the same thing. They’ve printed too much of their money, but we see what happened. Look at Venezuela, look at a lot of other countries that have had serious, serious problems with inflation, which creates affordability issues, which leads to poverty and at BiggerPockets is we’re trying to prevent poverty from happening. So the short answer is that’s why I say we need to buy real estate. That’s why I’m buying real estate. If we get massive inflation, the property I bought for $1 million will stop sounding like it’s that much money because everything’s going to cost $5 million at some point. The things that we think are expensive right now won’t be expensive, and I just guys just think about this.
At one point in our lives, my parents were paying rent that was like $250 a month, and that felt very expensive, but it was because at that time I could buy something of value with the quarter. We used to have, when I was a kid, coins actually were kind of important. I can’t remember the last time I needed a coin. Their just a pain in the butt. At some point we’re just going to get rid of coins. We hardly ever use them. Okay? At some point a million dollars sounded like a lot of money. It still sounds like a lot of money. It’s not nearly what it was. And there will come a point in history where we look at a million dollars and think why is millionaire a word? All of the book titles that have millionaire in them aren’t going to be very important. If any of you that are the younger listeners have wondered why we talk about six figure jobs, that’s a badge of honor. You’re confused by that. Well, when I was a kid’s six figure jobs meant you were really, it was like the equivalent of making $250,000 a year to be able to make a hundred thousand dollars.
This is what inflation does. That process will be sped up if dollars come back into our country or if we can no longer just keep printing money. That’s a secondary issue. If the dollar’s not the world reserve currency, we can’t just keep making more and more of it and having other countries hold it. What would happen is we would have to actually create more products in America.
So not that Seeing Green is meant to be an economic show, but that does affect real estate. So if you think about generally speaking, we import goods from other countries. So other countries make cars, medicine, clothes, everything. I’m wearing a shirt right now that was made in America, but that’s very rare. Most of them don’t come from America. We import useful things from other country and what do we give them in exchange? Dollars. Now, dollar has value because it’s the world’s reserve currency, and so it’s considered the safest form of currency, but if that stops happening, they’re not going to want our dollars. They’re not going to send us their cars, their clothes, our medicine, the things that we need, our supplies, they’re not going to trade that for dollars. They’re going to insist on something better, more of those dollars which creates inflation or something of value in return.
If that happens, we’re going to have to make more stuff in America, which means it will be more expensive. We have labor laws here, we have regulations, we have working conditions that have to be met. We have people that expect a higher wage. I think everyone can agree with me that in general it’s been hard finding people in America to want to work. COVID showed what that was like. You’ve been to a restaurant, they all have signs that say, “We’re sorry for low staffing. We are trying to hire, if you know anyone who wants a job, have them apply.” We can’t hire anybody. It’s becoming very difficult to get American’s to work, which means if we have to produce our own goods, we’re going to have to pay a lot more for those than when we’re importing them from a country like China or India that has a labor force that is willing to work for less.
So what does this mean? It’s not good news. It means everything’s likely to get more expensive, and that’s why I’m encouraging people to buy real estate. Real estate will collect income that is in proportion to whatever happens with inflation, so rents can go up when inflation goes up, the value of the property will go up as inflation goes up. It’s another source of income when everything becomes less affordable. Don’t know. Don’t have no idea if that’s the way it’s actually going to play out. Nobody does, but that’s my take on it. That’s what my concern is and that’s why I’m out here sounding the alarm that if you can own a home instead of renting, you should.
All right, our next clip comes from Quadre in California.

Quadre:
Hello David, and thank you for taking my question. My main question was I recently received a $200,000 HELOC on a property that I currently rent out in Wildomar, California, and I was thinking about taking that money and trying to invest it in properties in the Midwest. My main question is pretty much a two-part question is how should I go about that? One, should I use the money to buy a property cash, or would it be better for me to purchase properties with a 25%, 20, 25% down payment and go about acquiring properties that way? Thank you.

David:
All right, Quadre, thank you for that. Congratulations on the HELOC. Let’s break down your options. If you go pay cash for a property with the HELOC, I just want to differentiate because your mind will play tricks on you. You’re not actually paying cash for a property. That property still has debt associated with it, although the lien is not on it. The lien is on the investment property that you took the HELOC out on.
Now, think about what rates are right now. Your HELOC rate could be 8, 9, 10, 11, 12% depending on the situation because it is investment property. That’s the equivalent of getting an adjustable rate mortgage on the new property at 10, 11, 12%. I don’t know exactly where your rate is, and that means it can go up. Okay, so if you’re going to go buy that property, it’d probably be very hard to find one that cash flows with a mortgage at above 10, 11, 12%. So don’t get caught thinking that you’re analyzing the second property as if it doesn’t have debt because they’re going to look like they cash flow, but they’re not actually going to cash flow if you add the debt, at least it’s a great deal. Okay? Everything I’m about to say, throw out the window if it’s a great deal. We’re assuming this is just a standard base hit deal We’re talking about.
If you go buy a property and you use the HELOC for 25% of it, you end up paying the higher rate interest, say 10, 11, 12% for 25% of the mortgage and get a lower interest rate, say something in the sixes or maybe low sevens for 75% of it, which would make the property cheaper, but it will increase your risk. You’re now going to have a lot more financing on this property, okay?
I would need you to bring me a specific deal for me to be able to tell you if you should use the HELOC or the loan or a hybrid, and we don’t have that, so I can’t give you that specific advice, but I can give you general advice. In this market for most people in most cases, I like using HELOCs for short-term purposes, much more in the down payments on new property. I like flipping, starting a business, investing money in some way that’s going to get you a return. I like a wholesaler using a HELOC to spend money, 10 grand, 20 grand to send letters that’s going to turn into revenue when it comes back and they wholesale it much more than I like them using it to buy a cash flowing asset because those are very, very hard to acquire and find right now. So just something to keep in mind. And if you want me to give you more specific advice, just submit another question and be like, here’s the deal I’m looking at. Do I want to do it this way or that way? I’d be able to give you better advice with that information.
All right. In this segment of the show, we talk about YouTube comments from previous shows. I love getting into this because they get to hear directly from you the audience. First off, if you’d like to be featured on the show, head to biggerpockets.com/david, submit your question just like our other awesome guests have done. And if you don’t want to do that, head over to YouTube and leave us a comment on today’s show and I just might read it on a future episode. Want to increase the likelihood that your comment or question will get featured on Seeing Green? Make it good, make it funny, make it engaging, make it interesting. We look for the best ones to put on the show.
These comments come from episode 750. The first is from Zach Pate. “Building the foundation is so crucial, something I tried to put a lot of emphasis on prior to jumping into real estate. By skipping this, it’s like trying to build a house on sand. It will never hold up.” Wow, you just went full-blown Confucius on us right there, Zach. That’s powerful.
And I’m going to step into the role of broccoli. Okay? Seeing Green. I’m going to give you your green. No one likes it. No one likes vegetables. I don’t like them either. In fact, you didn’t ask, but I’ll tell you a little thing about me. When I do eat vegetables, I almost have to combine it with some kind of meat. I had asparagus today. I just don’t like vegetables, so what I did was I mixed it with the protein that I was eating. Little quick tip about David Green there, vegetables are not my favorite, but if I eat them with something I do like I can stomach them.
So I’m trying to take that principle of how I eat vegetables and feed it to you guys in the podcast that I do. I’m trying to give you what you need to hear, but mix it in with something that you want to hear to make it a little more palatable. When it comes to building wealth, when it comes to becoming a millionaire, when it comes to whatever your goals are, it’s not going to be what you see on people’s social media reels. They’re going to take the full dinner and they’re going to highlight the ice cream sundae and show you that to get you to come to the restaurant. They’re not going to show you that in order to get the sundae, you actually have to eat a lot of vegetables first, but wealthy people know this.
The people that are making really, really, really good money in real estate are not living passive lives. They are working a lot, a lot. And sometimes it’s okay to say, I don’t want that much money because I don’t want that much work or risk associated with it. The foundation is everything. You’re going to a build a foundation by having the right habits. The book I’m working on for BiggerPockets right now is called Pillars of Wealth. I’ll give you guys a URL for that. When we have a pre-order for it and it basically breaks this down. You have to be good at saving money and budgeting, you have to be good at making money, I call that offense, and then you have to be good at investing. You need to be good at all three. If you don’t have all three, you don’t have a foundation and you’re going to build something very quickly that’s going to collapse when the market changes, so thank you for that, Zach.
Our next comment comes from Lillian Luna Garcia. “Hi David. I have a question. I have listened to the BiggerPockets episodes for over a year, and I’ve recently got my first deal. I closed at the end of January. I wanted a fourplex but was not penciling in, so I got a duplex in Riverside, California County.” Hopefully you use one of our agents. I’d love that. “I’m house sacking and I’m remodeling the first unit to rent it out. The back house has a large garage and I want to make it into ADU of one bedroom, one bath, move into that, then fix the other unit to make it a two bedroom, one bath. However, I have to use my credit card to pay for my investment. Do you have a better strategy I can be using to speed up my project? I’m currently doing one unit at a time, paying off my credit card than doing the next unit. My goal is to make my duplex into the fourplex I originally wanted. Any advice helps. Thank you.”
All right, Lillian. First off, if you had used a David Green team agent, tell your agent that you want to talk to me about this and because you used us, I will answer this for you directly, but for everybody else to hear the advice that I would give you, I’m hoping you don’t have to use a credit card. I’m not thrilled with that option unless it’s your last, last, last resort or if you make really good money and have a really safe job, maybe you can take that risk. One thing you could do is finish the first part of it using private money, okay? So find a person out there who’s getting no return on their money, offer them a 6% return, a 7% return, and make interest only payments to them for a couple of years and use their money to do these remodels. Okay? That’s the first thing you could do.
Then when the remodel is done, you could refinance it, get your money back out, pay off that note, or just keep paying the 6% or 8% interest. Whatever you negotiated, that would be much cheaper than a credit card, would be the first thing I’d look for. Make sure you give yourself longer than a year. You’re going to want a couple of years in case something happens. Other than that, Lillian, you’re thinking the right way. You couldn’t find the fourplex, so you bought the duplex and you made it into a fourplex. This is not just looking for a great deal, this is making a great deal.
And our next comment comes from Casey Brightwell. “Awesome podcast. I’ve been listening now on and off for about a month. Great advice.” Thank you for that, Casey, and from EJC. “David, you speak often about the need to increase the velocity of money to build wealth. I’m starting to look at my 401(k) as stored energy that I’d like to put into motion to accelerate my wealth building journey.” Wow, this is a disciple of David right here. Way to go. I love the way you’re talking. “I took a loan out on my 401(k) when I bought my primary residence years ago, so an additional loan is not an option. I also looked into an in-service withdrawal, which I’ve heard some plans allow for an investor to roll into real estate. My retirement plan does not allow me to do this. I’m curious what your thoughts would be on taking a withdrawal that would result in penalties and an increased tax burden for the given year in which the withdrawal is taken. I’ve gotten hundreds of thousands of dollars locked into my 401(k) and that money doesn’t seem to be performing as well compared to my real estate portfolio. I’d like to continue to build my real estate empire and I almost think that the penalties will be a wash in the long run. What are your thoughts?” This is a super good question.
All right, so first off, if the penalties are evened out by the gains you make in real estate, yes, that can be something to be done, but there’s not a guarantee they will be, so we’re going to tread really lightly when it comes to doing anything that would incur penalties or a tax burden or in involve you risking retirement funds. Something that I was thinking when you were describing this is, are you able to take this retirement plan and roll it over into a self-directed IRA? We have a show coming up with an expert in this area, being lookout for Karin Hall and The Power of Investing in Realty and Alternative Assets With Your Retirement Account, should be episode 770.
That could change everything. If you could just take it from the form of energy it’s in, turn it into a self-directed IRA, which is a different storage of energy that has more flexibility for getting the energy in and out of it, otherwise the money in and out of it, that could answer your question there. If you can’t and you’re going to do it with penalties, only do it for a screaming deal. I’m going to say that again, only do it for a screaming deal. Do not do this for a base hit or a decent deal. When we say it’s okay to get base hits or we want to look for base hits, that’s assuming we have cash that we’re putting into them that is useless as far as increasing its value just sitting in the bank, losing money to inflation, you’re better off to put that into a deal. If you’re putting money into a deal that’s going to cost you money because you’re taking it out of your retirement account, it needs to be better than a single, right? Maybe it has to be a double, triple, double and a half, something like that.
All right, I hope you’re liking today’s show. If so, please go into YouTube and leave me a comment and tell me what you’ve liked about it, what you like about Seeing Green, what you think about my vegetable eating confession that I gave you guys and what you’d like to see more of on the show. Also, if you’re listening to this on Spotify, be look out for the polls. If you’re listening to the show, head over to Spotify and leave us a comment. We want to get better and stay relevant, so drop us a line and share your thoughts and fill out the polls that Spotify asks you about what you like about the show.
Our next question is a video question from Harold Blanco in Springfield, Massachusetts.

Harold:
Hey, David, how are you? My name is Harold Blanco. I’m calling from Springfield, Massachusetts, and I have a couple of questions about lending actually. The first one is the lending requirements, what are the lending requirements for a person that is a self-employed or has a owner of a small business? As you can see behind me, that’s Paula’s Barn Inc Child Care, my wife and I, we run a childcare business out of our house. And I’m looking into buy another house to house hack because this house is childcare. It’s a business more than anything else, but both my wife and I, we work here and this is our business, this how we get our income. And I would like to know what are the requirements, especially for this time that it’s so difficult when the interest rate so high and maybe banks are not lending as comfortable as they used to. Also, I have another question about lending. Does having an IRS debt or debt with an IRS have any influence on the getting a mortgage loan? Thank you and I hope you have a wonderful day.

David:
Thank you, Harold. This is a good question and it also is a good opportunity for me to make a teaching point. Questions on the specifics of a certain trade, like tax questions, mortgage questions, contract questions for real estate, sometimes even construction questions or bookkeeping questions. We do want you bringing those to me here, but I just want you to know I will never be able to give a solid of an answer as a good person in that trade. Now, part of the value I can bring you guys is if you reach out to me, I can connect you with the person who is going to be good. I can connect you with my CPA, I can connect you with my bookkeeper, I can connect you with a loan officer that I know is good at this. Because I can give an answer, but it will never be as good as the person who’s swinging a hammer every single day when you want to ask about floor choice, right? I sound like I know more about construction than someone who doesn’t get into it. I don’t know anything about construction compared to the people that are in it every day.
Very similar to jujitsu. You guys are waiting for a jujitsu analogy. Wait no longer. I am really, really, really good at jujitsu and fighting against people who don’t know and don’t know how to fight. The minute that I get against somebody who does train, I am terrible, okay? 15 year olds could whoop me. And there’s something to be learned about that in life. We’re often comparing the people that we look at to ourselves who know nothing and like, whoa, that person’s great. But in their world, are they great? Are they one of the better people at their academy? Are they one of the better people in their world?
So Harold, when it comes to self-employed lending, it is a completely different set of rules just like you mentioned, some income counts, some income doesn’t count. Some debt, like the stuff that goes to the government counts, sometimes it doesn’t. You’re going to have sometimes child support or alimony payments or back taxes. Most of the time our loan officers will check with the individual lender and say, in your loan program, can they use this income? How many years of income do you need to see from their childcare business before you feel good crediting them that income? And how much of it will you credit? How many years of taxes does this need to be claimed on? And the reason I can’t tell you right off the bat, this is the way it works, is every lender has different requirements.
Now, a good mortgage broker’s job is to go do what you are asking for you. You tell them, here’s what I got. They take what you got, and they go look for the person that will accept it. We call this 1099 approvals or self-employed. They’re definitely trickier. They take more time. This is why, especially if you’re self-employed, you don’t want to wait till you get a deal on contract and then run to a lender and be like, “Can you get me a loan?” You don’t understand what you’re asking for. It’s very difficult. W2 loans tend to be much easier to give. So reach out to me directly, I’ll put you in touch with one of the one brokerage guys. They can answer these questions and for everybody else who’s thinking the same thing, it feels safe to get the information. How does this work? But the answers change. Just like if you learn construction codes, those codes change, the rules change, the way that things are done often change. You actually have to have a contractor that’s aware of what the shifting regulations are.
So a little quick tip for everybody that’s listening here, send me your questions, but know that it’s better to be directed to the expert in this field that can tell you like a CPA that knows a tax code that’s changing. Then make decisions based off information you heard on a podcast two years ago, things like bonus depreciation changes with what can be taken, things like the full-time real estate professional status change. You might have been listening to a podcast from a year ago and we said, if you’re W2, you can’t take bonus depreciation against other forms of income, but now there’s the short term rental loophole they call it, that you could use. So you always want to talk to the person directly. Just let us at BiggerPockets, put you in touch with who those people are. Thank you, Harold and fingers crossed for you and your wife’s business man. I love, love, love small business owners. Way to go.
All right. Now, I was going to move on from this question, but I actually took a minute to talk to my partner in the One Brokerage, the company broker Christian Bachelder, and got his take on this as if we had contacted him ourselves, and I will tell you guys what Christian said. “First and foremost, it’s important to understand there are multiple ways to qualify.” I mentioned that to you guys as well. “If this is specifically referring to conforming guidelines, which I’m assuming it is, which means if this is for a Fannie Mae, Freddie Mac, conventional type of loan, any self-employed, our business income typically needs to be seasoned for two years on tax return for conforming loans. That’s a general rule.” Which is why you hear people say you need to show two years of income, two years of income. You hear that a lot. That’s because that’s one of the conforming loan rules.
“We take the average of the net income, not the gross, and add back depreciation, then divide that number by 12 to get monthly income.” Many of you, your heads are already, I don’t understand all that. He’s using a bunch of big words, which is why I tell you to contact a mortgage broker and let us figure it out for you. “That’s what we use to calculate a debt to income ratio, which is what we use to get the pre-approval. If the borrower has been in the business for more than five years, it’s possible to qualify with only one year of tax returns instead of averaging out the two years.” So if you have five years of experience in the industry, sometimes you can use last year’s income, not two years of income.
“There’s also non-conforming products that you can qualify based on deposits in your bank account. These are called bank statement financing,” I’ve used these loans myself because it’s a pain in the butt to show them all my different income streams and sources and have it all verified, “That are very forgiving to self-employed borrowers who do not report their taxes perfectly. Second, and regarding IRS having the debt you have influence your debt’s income, it does. The monthly payments, if you’re on an assignment plan that has more than 10 months remaining will be added to your debt’s income ratio just as any other liability would be.” So we would factor that into it for you, give you a pre-approval based on that.
Now, had you contacted us, what we would’ve probably said is, or you can skip all of that, not worry about qualifying off of your income at all, use a debt service coverage ratio loan that we can qualify you based off the income the property makes and you can skip all your debt to the IRS and all of the income and all of the taxes and all the things, Harold, that I think you don’t want coming up, which supports the fact that I’m saying you should contact the person directly and let them solve your problem for you. That’s what a good person does, is they solve your problem for you.
All right. Our next question comes from Jesse Dylan in Central Massachusetts. “Hi David. I’m about to sell one of my properties for the first time. I’ve owned it for less than a year, but isn’t performing nearly as well as I expected it to despite tons of analysis and pivoting.” Can’t say that I’ve never been there. “It’s a single family house that I bought as a short-term rental, and it doesn’t work as a long-term rental or a medium term rental rookie mistake.” Yeah, but way to go take an ownership of that, Jesse.
“It’s far from breaking even. Otherwise, I just write it out as it’s in a fine high cost, high appreciation state. Not a good feeling to have made a bad investment, but I’ll at least be breaking even and I learned a lot.” Good attitude about this so far. “I should walk away with 95K, but would have to buy something for 525K plus to do a 1031 exchange. Finding good deal that’ll work with less than 20% down on a time crunch seems impossible right now, especially because I’d want to get into a two or three family close by, so I couldn’t use a vacation home loan again. I’m considering not doing the 1031, using the money how I want. Then figuring out how to offset the $14,000 tax burden. I could add another unit to another property and cash out refi when rates are lower, buy another two or three family with 20% down around 400 K nearby, invest passively in someone else’s deal, buy a camper to medium term rental on my house hack property. The options are overwhelming. If cash flow is my primary goal. What are your thoughts?”
All right, let’s break this down into different components of your question. First off, if you’re selling it and and you’re going to have a gain after everything that’s going wrong, that’s pretty good, but I thought you said you’re breaking even. So I don’t know where the $14,000 tax burden comes from if you’re breaking even on this, you might not have a tax burden unless you 1031 into this deal from a previous deal. And when you say $14,000 burden, does that mean your gain is $14,000 because you’d only be paying a percentage of the gain, which would be insignificant, or does that mean your gain is like 80,000, 70,000 and so the percentage you have to pay is 14,000? I need a little clarity there. Because even paying 14,000 in taxes isn’t end of the world if you’re getting $95,000 back.
Another thing you could consider. When we had Tom Wheelwright on a previous Seeing Green episode who helped me out here, we talked about how you don’t always have to do a 1031 to shelter the gains. Sometimes you can take the gains on a 1031 buy real estate, do a cost segregation study, get bonus depreciation that you take up front, and that is enough to offset the gain that you made when you sold the property so you don’t owe taxes. So that’s another thing you could look into if you have a CPA you can talk to, if you don’t, let me know. I’ll connect you with one of my folks.
Now, if assuming we are past the tax issue and now we’re talking about what do I do with the money, you brought up a lot of good options, but here’s what I’m picking up from your question. There seems to be, and I’m totally reading into this because you just wrote it out on a document, but there seems to be a lot of urgency in what you’re saying here. You have all these different options. Do I want to invest passively in someone else’s deal? Buy another property and do a cash-out refi when rates are lower? Buy another multifamily property? Buy a camper to put in the back of a deal I already have to get a little bit more money coming in? I don’t think you need to be filling any urgency at all right now, Jesse. You’re good. You got into a deal. You realize it was harder than you thought. You bought it right, which is super important, so now you can get out with without a loss or with a very minimal loss, you got a good education. Don’t feel like you got to jump back into something and run full ahead of steam into this.
Now, if I break down why people do that, why I’ve done that, why this happens in life, it’s almost always because we are unhappy with our life right now. We don’t like our job, we don’t like our relationship status, we don’t like our car. We don’t like something about our lives and we think real estate is going to fix it, and so we get into this irrational exuberance, just I have to get in there and I have to go buy another property to make everything better. You don’t. Take stock of your life as a whole. If you’re not happy with certain parts of it, they might have nothing to do with real estate and fixing those problems will help you not make emotional decisions when it comes to real estate and instead you make financially sound decisions when it comes to real estate.
So with that $95,000, I would consider looking for a different house hack, a second one, okay? Can you buy another property in a better area, that’s a better property, that has more units, put 5% down and take the house you’re living in right now and rent that out, would the numbers work there? That’d be the first option. I’d also keep some money in the bank. It’s not the end of the world to have some reserves when we don’t really know what’s going on with our economy, with our country, with where America sits as a whole with the next election that’s coming up. This is the most uncertainty I’ve ever seen in the market. I like the idea of sitting on some cash right now and waiting for a great, great deal.
All right. I hope that helps. If my answer has got you thinking of new things, Jesse, please submit another question. Let me follow up with this on a future episode. I’d love for us all to be tracking your journey. And if you want to know more about Jesse’s story and see the cool person behind the question on Seeing Green, please check out the Real Estate Rookie Show, episode 231, but don’t listen until you’re done with this one, okay? You’re in class right now and you’re not excused.
All right. Our next question comes from Derek in Knoxville, Tennessee, an exploding market. “Hi, David. I’m 24 years old.” That’s a good number right there. I like 24. “And I just moved to the West Knoxville area. I’m trying to invest in a house hack in West Knoxville, which is the nicest neighborhood, and I have a full-time job in marketing. I like it and it pays decent. I also picked up a part-time job on the weekends at an apartment complex as a leasing agent, but it doesn’t pay very well. What are some of their fields related to real estate that I can venture into without a high barrier to entry while still working my full-time marketing job?”
Okay, let’s see here. You got a thing for marketing, which is always confusing to me when people say that they work in marketing. I never know what marketing means. Does that mean that you make flyers? Does that mean that you come up with SEO? Side note for everybody who’s in marketing or everyone who says, I’m in marketing, make sure your next statement is telling everyone what that actually means. This is just one of my pet peeves because I can’t give you a great answer because I don’t know what skills you have, right? If you told me you were an electrician or that you were a bookkeeper, I’d have a very good understanding of what advice I could give you, but marketing is just so vague and means so many things.
Let’s work under the assumption that Derek here is very good at getting eyeballs on whatever he’s responsible for. I’m guessing that’s why he’s working in the apartment complex as a leasing agent, because he’s good with people. He’s a very charismatic person, he’s friendly. He likes human beings. That’s also why he likes marketing. Look for people that need marketing, and that’s going to be a real estate wholesaler or a person who’s looking for creative financing or even a flipper. All of those people in real estate need marketing skills to find them off market opportunities. They can’t just go to the MLS and look for the deal, they have to go out into the world and get deals to find them. So if you have solid marketing skills and you want to work in real estate, that’d be a great opportunity is find a person who’s already flipping a lot of houses, a person who’s doing wholesaling deals because you’re going to learn from being around them, and you’re also going to actually have value that you can bring to their company by getting motivated sellers on the hook to hand it off to them.
Now, I want to ask you Seeing Green listeners, do you like the topic that we just covered? Are you interested in hearing more about real estate adjacent opportunities? Not a full-time investor, but not a different W2 job. Do you want to hear more about ways you can make money in real estate that don’t just involve owning the property? If so, leave me a comment on YouTube and we will work that into future Seeing Green episodes.
All right, we have time for one more question. This one comes from Anthony Wilson in the DC area.

Anthony:
Hey, David, Anthony here. Live in the DC area. I recently bought a quad-plex in the Detroit area, is my home area as an investment. I’m having a hard time renting out a few of the units because they’re two bedrooms, but the rooms are very small, so I’m wondering, should I take the wall down and make it a one bedroom that’ll be a decent size and maybe that’ll attract a better quality tenant, or should I keep fighting through with the two small rooms? One of them can probably just be a nursery or an office. I’d love to hear your feedback. Also, I’m looking to house hack for myself within the next year to get a place. Wasn’t sure about staying in the DC market, but I might be here for a while now, so I’m going to go ahead and do it. Love to hear your insight on both of these issues. Thanks.

David:
Wow, that’s a really good question, Anthony. We don’t get this very often. Should I convert my two small bedrooms into one big one? First question I would want to ask, where are you getting the intel the bedrooms are too small, so tenants don’t like it? Is that from a property manager? Is that your intuition or the tenant reps saying, I won’t rent your house because the units are too small?
Let’s assume that the intel is legit, that it’s coming directly from tenants. One thing I would consider before tearing down the wall is renting out as a medium-term rental or a short-term rental where people aren’t as likely to care about the bedroom being small because they don’t live there. They’re just needing it to sleep in basically. If you rent this out to traveling nurses or traveling professionals, they’re there to work. They’re there to work as much as they can, make as much money as they can. They just need a place to sleep, and this is better than a hotel room. Those people won’t care about a small bedroom. The person that cares about a small bedroom is going to be the family who is going to be using this for a living, and they have all their stuff that they want to put somewhere. Their kids need a place to play. So understanding your tenant base will really help make the decision on if you should tear down that wall or not.
Assuming that you can’t do the medium term rental or short-term rental and you you’re going to have to tear down that wall, I would still look for a way to use the space more creatively. If I was going to make one bigger bedroom, I would include a nook in there for an office space or a play area, something that was more than just a place to put a bed, right? Like the nursery that you mentioned. I like that.
Now regarding the second part of your question is house hacking in the DC area. I would recommend you to look into Section 8 Housing. Dr. Joe Osmo has been featured on the BiggerPockets Podcast several times. He’s also popular in the forums. He is known for doing very good with his Section 8 method because rents in DC for the Section 8 tenants are proportionally higher than what the cost of the home is or disproportionately higher. So you get a very solid price to rent ratio using that strategy in your area. So if I was going to house hack, I would look for a property that has as many bedrooms as I could possibly get that fit within the guidelines of the Section 8 program. I would live in one unit bedroom. I would rent out the others however you’re going to do it. After a year, I would now have a great Section 8 property that I could move out of that I only had to put 5% down or three and a half percent down to get.
You see where I’m getting at here? Don’t just look at the first year you own the property, buy it for the long term and take advantage of that. It’s the best advice I could give you in the DC area when it comes to house hacking. Sorry to hear about the problem of the bedroom being too small. I’d love to see you. Just to recap, try to rinse it out as a medium or a short-term rental before you tear the wall down and lose the bedroom.
All right, everybody. That is our show for today. This has been Seeing Green. I remember to turn the green light on. I wore a green colored shirt here or a green themed shirt. I talked about broccoli. I talked about vegetables, a lot of green, and hopefully I taught you all how to make a little bit more green through real estate.
If you’re listening to this on a podcast app, please take a second to give us a five star review, those help a ton. And if you want to know more about me, follow me, see what the heck I’m up to, you can check me out at davidgreen24.com or your favorite social media @davidgreen24. I recently posted a very short video on my Instagram that showed my legs, and I got quite a few DMs of people saying, I did not know you had legs, and I definitely didn’t know that they looked like that. So if you want to see what my legs look like or decide like, does David even wear pants because we’ve never seen anything from the waist down on any of these shows, you could do it on my social media.
Lastly, keep in mind that not only do we do the podcast, but we also have videos on the BiggerPockets YouTube channel. So subscribe to that. Leave us some comments when you watch them. And keep an eye for BiggerPockets webinars. We do those from time to time where we teach you guys information for free on specific topics like how to get your first, second, or third rental property, how to use the BRRRR method to grow and scale your portfolio, long distance real estate investing, how to get your next property in the next 90 days, how to make this next coming up year, the best year you’ve ever had. We have a lot of different topics on these webinars, analyzing Properties. We show you exactly how to run the numbers on them when we take real estate from being scary and make it much more simple. So keep an eye out on actually biggerpockets.com to see when those will be and sign up for those. And if you have a minute, watch another BiggerPockets video. I’d love to teach you some more. If not, I will see you guys next week. Thank you so much for watching. Please share this episode with someone that you love and know that I love you guys. Thanks for giving us your attention. I will see you on the next one.

Berkshire Hathaway Chairman and CEO Warren Buffett and Vice Chairman Charlie Munger preside over the 2023 Berkshire Hathaway annual meeting. The two discuss the U.S. property market and commercial real estate.

Griffin Parry detects a sea change in the way software-as-service companies charge their customers. As he sees it, increasing numbers of vendors regard pricing as a strategic lever as they compete for business in a crowded marketplace. In particular, instead of charging fixed subscriptions based on an agreed number of users, they are adopting more flexible usage-based pricing models. “The problem,” he says, “Is that usage-based pricing is difficult to do.”

Parry – along with partner John Griffin – is co-founder of M3ter, a London-based startup specializing in usage-based pricing. Launched in 2022, the company has just raised $14 million in Series A funding to expand its operations in the U.S. and introduce new analytics-based decisioning features.

And you could see this is a bold move. The concept of usage-based pricing has gained traction over the past couple of years M3ter is not the only platform provider in the pricing game. But Parry sees a rising tide of demand and an appetite for workable solutions and that creates opportunities for specialist startups.

Market Tailwinds

In a report published in September 2022, consultancy Bain & Company noted that charging based on usage rather than subscription was “fueling some of the fastest-growing and highest-value SaaS companies,” Snowflake, Datadog and Twilio were among those cited in the report.

It’s a simple enough concept. Traditionally, software-as-service has been sold on a subscription model, with the price staying fixed, unless the plan is changed. The usage-based approach model allows users more flexibility. This might mean cutting down on costs if usage drops or, conversely, the ability to scale up their use of the software – and pay a bit more – when required.

Now that sounds pretty straightforward. After all, it’s a model we may well be accustomed to as consumers when we pay for metered water, electricity or phone calls. So why is this a growth market, providing opportunities for startups such as M3ter?

Parry says there are some helpful tailwinds in the market.

Product Led Growth

“The rise of product-led growth is helping,” he says. Over the past few years, it’s become easier – although by no means that easy – for vendors of all sizes to sell to enterprise customers by finding corners of the organization that are willing to try out a product, often on a free-trial or freemium basis. The idea is that once some people start using it, others within organizations will follow. A usage-based approach to pricing can be helpful, not least because it allows end users to scale up usage relatively easily.

Then there is the macro-economic situation. We are living through difficult economic times. Buyers of software products are looking more closely at pricing. In particular, they are looking for pricing models to suit their needs.

But here’s the question. Given that usage-based pricing is not in itself a new concept and that aforementioned utilities are among those who have been doing it for years, why don’t SaaS companies simply build their own billing systems?

Pain Points

Parry acknowledges that there is more than one way to create a usage-based offer. “You can build your own platform or do it using a spreadsheet,” he says. “And in the past companies have had to do it for themselves.”

But, he argues, it’s not easy to get right. When running a previous company – Gamespark – Parry says he and co-owner John Griffin dabbled with usage-based pricing but it was difficult to do. When the company was sold to Amazon, he worked at AWS (Amazon Web Services). Again, he says he saw difficulties implementing a usage-focused approach.

One of the major challenges, he says, is to ensure that everyone has the usage data. That includes, not only billing departments but also customer facing staff. “Anyone who speaks to customers needs to have the data at their fingertips,” he says. It also needs to be transparent for customers. Unless they know why they are being charged a certain amount, they may not be happy. So any system needs to combine usage and price data and distribute it to whoever wants and needs it. “If you make errors, you get revenue leakage and a poor customer experience.”

Strategic Pricing

There are of course non-technical challenges around pricing. It may well be the case, a vendor can charge on a usage basis, but is that actually what the bulk of customers want? A subscription-based approach may be a bit of a blunt instrument, but it is predictable. Finance department personnel can sleep easy knowing that costs aren’t going to jump because of a spike in users.

Bain’s report found 80 percent of users saying usage pricing delivers services that are better aligned in price terms to the value they receive. But it is important to get the model right. That could be simple as pay-as-you-go or a model that moves the end user through tiers of payment depending on activity.

For his part, Parry acknowledges that he is not an expert in strategic pricing. The role of M3ter and its competitors is to provide their customers with the means to align pricing with the demands and requirements of users. Customers include Stedi, Sift and Clickhouse.

The Data opportunity

Parry also sees a data opportunity. Part of the Series A money will be spent on adding analytics features. As he sees it, the customer usage data can be deployed to underpin a huge amount of automated decision making around pricing.

Usage-based pricing is on the up. Parry says that in 2020, 34 percent of software companies used the model. Today it’s 61 percent. Uptake has been in part driven by the economic environment which has forced both users and vendors to focus on the cost equation. However, when the world economy improves, he believes the trend will continue.

For startup companies working in the software arena, the concept may help them with their product-led growth strategies. It also creates a growing market for flexible pricing enablers.

Ashley:
This is Real Estate Rookie episode 284.

Tony:
I really focused in on not just one city, but I was looking at specific zip codes within that city. Within those zip codes, I knew the street boundaries that I wanted to stay within to make sure I was super laser focused on one little niche. That allowed me to get much, much better, much faster, and much more accurate at analyzing deals in those markets, because instead of looking at this big, large set of potential properties, it was this smaller micro set that was easier to digest.

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

Tony:
Welcome to the Real Estate Rookie Podcast, where every week, twice a week, we bring you the inspiration, motivation, and stories you need to hear to kickstart your investing journey. I love the rookie replies because it takes… Obviously, we’ve got amazing guests on all the other episodes, but it’s cool to hear what our Rookie audience is thinking about, and what’s stopping them from getting started or keeping going, and being able to dive into those questions head on.

Ashley:
So today’s question, we talk about a lot of different things for our Rookie replies. If you guys want to have your question submitted on here, you can always leave us a voicemail at 188-85-rookie. You can write your question in the Real Estate Rookie Facebook group, or you can send myself or Tony a DM at Wealth from Rentals or at Tony J. Robinson on Instagram, and we may play your question on the show. The first thing we’re going to do today, the question is our first deal diary, as Tony had called it. We break down the first deals that we ever did. We talk about partnerships, and then we also talk about closing off-market versus on-market deals. What’s the different paperwork you have to do? How do the processes vary?

Tony:
Then our last one here is actually about Short-Term Rentals, my bread and butter, and the liability that comes along with that and how to protect yourself, and get things set up the right way, so lots of good questions. Before we keep rolling here, I just want to give a quick shout out to someone by the username of Mrs. placidChaos. I’d love to say five star review, and the review says, “Real estate is something I’ve wanted to invest in for several years now, but I’ve been intimidated by the thought that I couldn’t financially make it happen, but this podcast has shown me so many different avenues that can be taken, and I’m confident I’ll have my first property before the end of the year.”
We are confident that you will as well, Mrs. placidChaos. If you’re listening to the Rookie Show, and you’re part of the rookie community, and you haven’t yet left us an honest reading review on Apple Podcast or Spotify, please do. The more views we get, the more folks we can reach, and the more folks we can reach, the more folks we can help.

Ashley:
With that, let’s jump into our Rookie Reply questions.

Tony:
All right, so jumping into our first question, this one comes from Sean Gallagher. Sean’s question is, “I’m new to investing, and was wondering what your first deal was. If you don’t mind, also tell me how did you analyze the deal to determine if it’s good or not?” So first, deal diaries is what we’re doing on this question, Ash. Why don’t you go first? Give us the details of that first deal.

Ashley:
My first deal was the first property I ever looked at. When I decided I want to be a real estate investor, there was one property that I saw on the MLS first, and so I contacted the agent that had listed it, and set up a time to go see it. She said, “I just want you to know there are a lot of foundation issues and flooding that has happened on this property, and that’s why it’s been sitting on the market.” That right there gave me cold feet, and I was like, “You know what? Nevermind. I don’t want to see it.” Then that’s when I actually contacted my parents’ friend who was a real estate agent, and said, “This is what I want to do.”
So, I found a duplex in a market that I knew, because I was already a property manager there, and went and looked at it. I called the person who had already agreed to be my money partner. They wanted to start investing in real estate too, but didn’t have the time, didn’t have any knowledge about it. So, we both went together to look at the property. I ran the numbers, and when I say I ran the numbers, it was a pencil and a piece of paper and me being like, “Okay, I know I can rent each apartment for $700 per month. My water bill is going to be this, because I contacted the village to ask approximately what the water bill would be.”
I got some of the utility cost from the seller. I had my agent ask for that. Then I tried to think of any other expense, property taxes, insurance, and I was like, “Okay, this will work.” My payment was going to be to my actual partner. He was going to pay cash for the property, and then he would receive a mortgage payment from our LLC, so we were paying him directly, and we weren’t paying a bank, which… Then he got 50% of the cash flow, so 5.5% on the capital he put into the property, and he was getting it fully paid back, amortized over 15 years plus the 5.5%, 50% of the cash flow. He was actually making out pretty good.

Tony:
Yeah, it’s a good deal.

Ashley:
I would never do that deal now, but it got me started. He put a lot of trust in me. He took his life savings, and dumped it into that property, so we created an LLC together. Once we got that property under contract, we started an LLC where we were 50/50 on the LLC. Then we went to close on the property. I put in a little money for the rehab. It needed a split unit for AC and heat in the upstairs, so I ended up paying out of pocket for that, and then I think maybe the flooring I paid for. Then we had a couple other… We put new cabinets in, things like that, where he put in the money for that. Then that was just money put into the deal that we didn’t actually pay ourselves back for.
We eventually sold the house, and made a good profit on it. The property did cash flow. I did make one mistake on that property, and that was I did not account for snowplowing. This property was outside of Buffalo, New York, and snowplowing is definitely something you need to pay for, or even if you have a tenant do it. So, I ended up, I think, discounting the lower tenant’s rent. I can’t even remember the amount, but they were in charge of shoveling the driveway since the driveway was used by both tenants of the duplex. That definitely hurt the cash flow a little bit.
It definitely wasn’t a deal breaker, but… That was my first deal. It was definitely not my best deal, but after I got that first one, we closed on our second one, I think, maybe three months later. It was just from there, just really that propeller-

Tony:
Snowballs.

Ashley:
Yeah.

Tony:
When did you close on that first deal, Ashley? What month? What year?

Ashley:
It was September 2014.

Tony:
2014. Man, I didn’t know it was in 2014. I didn’t realize that. That’s awesome. Then do you remember what the cashflow numbers were on that deal? How much were you making while you guys owned it?

Ashley:
Oh God. When we first started out, it was only a couple hundred dollars we were getting in cashflow, because we were basically leveraging the whole thing. We paid, I think, 72,000 for it, and the mortgage was for 72,000 because we were paying my other partner back, so it was 100% leverage by him. I would never do that with a bank or whatever, but it was very minimal cashflow. Then we did the rehab and the upstairs, and then over the years, we were able to increase the rents. We didn’t have a ton of capital expenditures on that property at all, but the lifetime we held it, we actually sold it in… 2020, I think, is when we sold it, and we ended up selling it for 130,000, I think.

Tony:
That’s pretty good.

Ashley:
That property was definitely a great play for appreciation.

Tony:
Did You ever refi, or did you keep it with that debt to the partner?

Ashley:
After we bought that property in February of 2015, we bought our second property, and that one, we used his cash again to purchase. Then when we bought our third property, we went and did a portfolio loan putting those two properties under one mortgage. We used that debt then to go and buy our third property. So, we had a mortgage on them, but we were still paying the partner. It was just… We just kept rolling over like that. The mortgage on property C, that ended up paying for the property D, and it just went through the line. That’s how we had acquired our units at that time.

Tony:
So you’re almost like… I mean, you were BRRRRing basically, right?

Ashley:
Yeah.

Tony:
The true BRRRR where you’re paying cash for it up front, and then refinancing and using that capital too.

Ashley:
Yeah. So basically, we’re just reusing and over… That same capital, we just kept reusing over and over again. So, we’ve actually kept that loan going, and so throughout the years as the cashflow has done well on the properties, my partner would go to Vegas or different things like that. He would take some of that cashflow out, because we’ve always just held it in there, or it would be he wanted to buy something expensive or whatever, and I would pay part of his mortgage off like, “Here’s 20,000. We’re just going to take it off the mortgage over for you.”
I looked the other day, and there’s less than a year left on that mortgage, because we’ve just accelerated the mortgage paydown on that. He is so bummed that he’s not going to be getting that mortgage payment anymore.

Tony:
He’s like, “Slow down. Slow down. Slow down.”

Ashley:
But I’m like, “You do understand. You’re still… We end up getting more cash flow now, because we don’t have your mortgage payment.”

Tony:
That’s awesome. Well, it sounds like a solid first deal. My first deal was back in October 2019. It was a single family house in Shreveport, Louisiana. Not Freeport, not Shreveports, but Shreveport.

Ashley:
I’ll still never remember.

Tony:
You’ll never remember. I actually broke down the numbers in pretty excruciating detail back in episode 10 of the Rookie podcast when I was on as a guest, but I’ll give you the cliff notes version here. So essentially, I found a bank in Shreveport that had a really cool loan product, where if you found a property where the purchase price and the rehab costs were no more than, I think, it was like 72.5% of the after repair value, they would fund the entire purchase and the rehab with a year-long note interest only, and then they would do the backend refinance to put you on permanent debt. So, I did that. I found a property. It was on the MLS listed for $100,000.
I locked it up, got under contract. We closed on it, spent another 60 or so thousand dollars to renovate the property, and then we refied it out, and appraised for $230,000. So, I was just was under that 72.5% on the refi, and I was basically into that deal for literally $0 out of pocket, and it was pretty cool. Then I found a property manager out there. I lived in California. The property was in Louisiana, so I found a property manager that got it leased up for me. I don’t remember what we were renting it for anymore. I had the property for a year, and I ended up selling it, but I want to say the cash was pretty minimal.
It was $150 a month, I think, I was making after accounting for property management, some of the other fees. But again, it was $150 on $0 invested. So even though the actual dollar amount wasn’t all that high, it was an infinite return, because I put no money into the deal. I did that same deal with that bank on two properties there in Louisiana.

Ashley:
Tell us the rest of the story on that first one. So, what happened with it?

Tony:
I mean, so that first deal actually turned out really well. It was the second deal in Shreveport where we had the flood.

Ashley:
We have many, many episodes talking about that second property.

Tony:
That’s second property.

Ashley:
But For the first one, what happened?

Tony:
I mean, so I held the property for a year. We had one tenant in there the whole time. There’s a military basin in that city, and it was a military family that was there on assignment. They ended up getting orders to deploy somewhere else. So, they gave us notice. After that year, we’d already transitioned into the short-term rentals. I was like, “Ah, I think I’m just going to take my money, and sell the property.” So, we ended up selling it, I think, for… It wasn’t 230, even though it appraised for that much. I think we sold it for 215 or something like that.
I still got the check when I sold it, plus all the cashflow, plus the tax benefits. It was honestly a really good… I got on base with that first property, and it was a really good proof of concept for me that I could actually buy real estate, and collect money.

Ashley:
So if you are doing that same thing, and say you’re starting over but in today’s market, do you think you’d be able to find that same loan product, and make that same deal work?

Tony:
I don’t know, because I actually contacted that bank. It wasn’t even until I asked him about the loan products. I think I needed some paperwork or something for my taxes, and I was just chatting with the person at the bank. They’re like, “Oh, actually, since COVID, we stopped doing that type of loan product.” I don’t even know if they offered that anymore. But if they did, I would’ve 100% go after that deal, because it’s such a low risk way to get into it. What was really cool was that the bank, they funded the entire purchase, but they also funded the rehab, but they funded the rehab in draws. So, it was four different draws that they allowed for the contractor to take.
The way that it would work is they did an appraisal before. Then they looked at the bid that the contractor gave me, and said, “Based on the current condition of the property, and if you combine this with the bids the contractor gave you, here’s what we think the property will be worth after you’re done.” So, they almost validated my ARV for me. Then during the construction process, before they would release a draw, they would send an inspector out to the job site to confirm that the work that the contractor said he was doing was actually done.
So, it was this second layer of like… It was almost like training wheels for my first deal, because I had this bank who had a vested interest in making sure that the project went well, who was… They were validating my numbers. They were inspecting the contractor’s work. They were managing all the draw payments. They made it super, super easy for me. So if I could go back and do it again, I probably would.

Ashley:
One thing I did learn about that, I met with this hard moneylender in Texas one time, and just he broke down everything about how hard money works and operates in all these different things, but they did the same thing, where they would have somebody inspect the property, and he kept pushing it and selling it. He’s like, “This is a huge advantage to you,” and it was. But the person that I was there with, he’s like, “Ashley, keep in mind they’re charging you for this service. They’re charging you to send an inspector out. They’re charging you all these fees for them to oversee the project. They’re charging you a fee for a draw.”
I don’t know if it was exactly the same for your bank, but that’s definitely something to be cautious of. That shouldn’t be the only reason you’re going to that bank to do that hard money, or to do that loan because of having that resource as an advantage. You may be able to pay a contractor or a real estate agent, or somebody else to be that oversight for you too, where it may be cheaper, more affordable.

Tony:
That’s a great point. I think I was in a unique position, because they were just a local credit union, so they weren’t a hard moneylender who needed to make their points on fees and all these other things. This is a person who’s nine-to-five employee. They’re just running out at their job, and the inspections and everything didn’t come with any additional cost, because for them, they just wanted to make sure they were protecting the asset. So, it was a fantastic way for me to get started. Honestly, like I said, if that loan product still exists, I might go back to that city to buy another one. It wouldn’t be in a flood zone, but I might go back to that city just to keep that ball rolling.

Ashley:
I think my advice for somebody listening that maybe can’t do the deal that Tony just did, because they can’t find that loan product, is to go back to episode 280, which would’ve been, I think, two weeks ago, we did a Pace Morby. We had him on for a Rookie Reply, and he breaks down creative financing, how to do subject two, and how to do seller financing. I think that is a great alternative in today’s market to be able to get some zero-money-down deal by using those two strategies.

Tony:
Ash, we should also answer the second part of Sean’s question is how did you analyze the deal to determine if it’s good or not? I think Ash and I both have similar… Well, maybe not for your first deal, Ash. I know maybe yours is a little bit different, but for me, that first deal, I was already well entrenched in the bigger pockets community as just like a consumer. So, I was already listening to the OG podcast. I had read several of the BiggerPockets books. I was a pro member with my calculator, and I used the BP calculator to analyze every single property that I was looking at.
I think this was before BP had the BP Insights. So, I was using tools like Rentometer. I was looking on Craigslist and Facebook marketplace, and just trying to analyze what the potential rental revenue would be. I used those numbers to plug them into the BP calculator. Then I actually met with the local property manager, the one that I ended up hiring. I had them give me numbers on potential expenses for a property of that size. That gave me a lot of confidence. I feel like what helped me a ton as well, Sean, was that I really focused in on not just one city, but I was looking at specific zip codes within that city.
Within those zip codes, I knew the street boundaries that I wanted to stay within to make sure I was really just super laser focused on one little niche. That allowed me to get much, much better, much faster, and much more accurate at analyzing deals in those markets, because instead of looking at this big, large set of potential properties, it was this smaller micro set that was easier to digest.

Ashley:
Mine is different actually. I didn’t… I bought that property the end of 2014, and I did not discover BiggerPockets until 2017. For me, my only knowledge of analyzing a deal was because I was managing a 40-unit apartment complex in that same town. I had also previously worked as an accountant. I was an intern at an accounting firm all throughout college. I had graduated with an accounting and finance degree, and so I had a basic understanding or maybe more than basic understanding of financials, of the profit and loss statement, how to calculate cash flow for any business. So, I basically just took what I knew from accounting, and I looked, “Okay, what’s my income? What are my expenses?”
Then to determine what my cash flow would actually be is, “Okay, what’s going to be my principal mortgage payment? Any other loans I’m going to need to be paid back?” That was the only way I knew how to analyze. As the property manager of that 40-unit apartment complex, I saw other expenses that may come up, what the property taxes were like for that town, just different things. So basically, experience from my accounting job and experience from being a property manager is I just figured it out how to analyze the deal.
Obviously, now, I don’t analyze deals that way. I realize there’s a lot more that goes into it, but at that time, I didn’t know what cash on cash return was. I didn’t know what ROI was. I didn’t know what price to rent ratio was. I was just, “Is this going to cash flow?” That was basically it. That was my only metric, I guess, if the property would be a good investment or not.

Tony:
But you got to start somewhere, right? That first deal is one that got you going. Obviously, everyone listening to this podcast has the benefit of already being exposed to everything that BP has to offer, so leverage the podcast, leverage the calculators, leverage the community, leverage the books, leverage the YouTube channel. That’s really going to give you the confidence to move forward and analyze correctly. Sean, hopefully that gets you started off on the right foot. Man, we’re excited to hopefully see you get that first deal closed, and you either be a rookie rockstar maybe a guest on the podcast one day.
All right, so next question here. Aaron J. Nygaard is the person asking this question. I’ve only heard the last name Nygaard one other time. Have you ever seen the show Fargo, Ashley?

Ashley:
No, I haven’t. I have at least heard of it. I’m pretty sure that you and I have never ever watched the same show or movie except for Tommy Boy, only because I except made you.

Tony:
Except the Tommy Boy because you forced me. Fargo is… I think it was on FX. I watched it on Hulu. You can watch the whole first season, but it… I’m not going to spill the beans, but it’s literally probably one of my most favorite shows that I’ve watched recently.

Ashley:
Oh, really?

Tony:
The main character, his last name is… His name is Lester Nygaard. Anyway, not what today’s question is about, but Aaron Nygaard, he says, “What paperwork do I need to close an off-market deal, and why? If there are cash offers, can it all be done between me and the seller? Do you typically ask for an inspection period? Any help with these questions would be great. Thanks.” Ash, I think we’ve both purchased properties both on markets and off market. So, I guess, what paperwork do you typically use to set up your deals when you’re going off? Actually, I guess we should take a step back, and just define…
Pace actually did this when we interviewed him on whatever episode that was. I think it’s maybe important for folks to understand what the difference is between on market and off market. So when you talk on market, those are properties that are typically listed by real estate agents that are on the MLS. So when you open up your phone on Zillow or Redfin or wherever, and you see all of those properties that are listed there, those are on-market properties. The vast majority of which have been listed by real estate agents. Off-market deals are properties that are not found on sites like Zillow, Redfin, et cetera, or are not listed on the MLS. Instead, there’s some direct connection between the buyer and the seller.
It could be that she was a buyer. Maybe it’s a neighbor of yours who’s selling their property next door, and the two of you are just having a conversation. Maybe you’re using a third party like a wholesaler, and the wholesaler is a person that’s found the seller. Now, they’re connecting you, the buyer, with the seller. But typically, it means that the properties are not listed publicly anywhere, and there’s no real estate agents involved typically. That’s the difference between on market and off market. The challenge with off market is that because there is no real estate agent, there is no one there to really guide the transaction to make sure that everything’s done correctly, so that’s the challenge.
Ash, what is your experience typically on the off-market stuff?

Ashley:
I think it’s also we should discuss… Depending on what state you’re in, there’s different ways to close on a property too. In New York State where I’m from, you have to have an attorney to close on a property. In California where Tony is, you do not have to. You can go directly to the title company. In New York State, the attorney is the facilitator between you and the title company along with you and the seller’s attorney. So for me, when I am purchasing an on-market deal, I have my real estate agent drop the contract. If I am purchasing an off-market deal, I have my attorney, usually her assistant, drop the contract.
So, she uses the same exact contract that a real estate agent would use, and fills it in for me. I just send an email with the information, so the property address, the seller’s name, what LLC I want to put the property in, the mailing address I’m going to use, what my offer is, any terms on the property. Then my attorney’s assistant will go in and fill in all of that information, send it to me to look over, and then I usually DocuSign it. Then that’s when I can present it to the seller, or send it over to the seller to sign. From there, I give my attorney the executed documents to sign documents. The seller gives their attorney those documents.
We have also put on the contract as to who each of our attorneys are. Then from there, the attorneys pretty much take over. They order the title work. They handle escrow, and they basically make sure each party is doing their part. Do I need proof of funds? Do I need a commitment letter from the bank after a certain date? Then they set up the closing date, and do the closing. That’s the difference for me when doing on market as off market is I’m just using a different facilitator in a sense, and I’m really not… I’m still pretty hands off in each situation. The big difference I see is if I do an off-market deal, is it just me, the negotiation with the seller, and being able to talk to the seller directly?
I actually think it’s a huge advantage than having to tell my agent to tell their agent to tell the seller. I feel like sometimes it’s playing telephone as to doing that. But whether I’m doing on market or off market, usually, after the real estate contract has attorney approval in either situation and assigned and both attorneys approve, any situations that may come up before the property actually closes, I have found that it’s best to have my attorney negotiate with their attorney to figure out a resolution for that instead of having my agent and their agent figure something out, or go back to the negotiation table or anything.
For example, if I have an inspection done, here are the things that I want fixed. I’ll usually send it to my attorney to just say, “Can we ask for five grand off because these are the things that are result of the inspection, whatever.” Then they ask their attorney and things like that. So, I do try to keep it to one person instead of having my attorney and my agent trying to figure things out throughout the closing process.

Tony:
Ash, what’s the typical cost if for your attorney? What fees do they charge on a usual transaction?

Ashley:
Usually, around $1,200 is what I’m paying right now to close on a property, and that includes the title work. I think my… The title insurance on that too, so I don’t know exactly offhand what is the actual attorney fee on it.

Tony:
That’s about what we pay our escrow company. Our process is super similar to you, but instead of using an attorney, we have a really good relationship with an escrow company that we like to use here in California. Whenever we have an off-market deal saying, “We just send them the details of the transaction, who the buyer is,” if we’re selling the property or who the… vice versa, just the details of both parties. They draft up all of the agreements, the documents. Typically, it’s the same what we would get from a licensed agent here in California as well, because California has a California version of a purchase and sell agreement.
They draft it all up. They send out all the DocuSigns. They collect all the earnest money deposits. They’re coordinating with title to get all the title work done and make sure everything’s clean and clear there. They almost act as almost like a transaction coordinator, but for me personally for each deal that we do. I would encourage anyone that’s listening, if you are doing an off-market transaction, even if you’re not using a real estate agent, still find that qualified third party, whether it’s an attorney if you’re in a New York, or escrow company like how we use, or a title company, whatever it may be.
Find that company to help facilitate that transaction, and that’s how you can make sure that you’re checking all of the right boxes.

Ashley:
One thing I do want to mention too, as far as the process, if you’re buying commercial property, you most likely won’t use the contract that real estate agents use like the statewide contract where real estate agents are just filling in the blanks. Usually in my situation, I use a commercial broker for commercial properties. Even though I’m using him, he doesn’t usually put together the contract. He will, but I usually have my attorney create the contract, because it’s usually so specific as to what’s included, what’s not included, and different things like that.
That’s also something to be cautious of where usually on the commercial side, there’s not just that general generic contract where you’re just plug and play the information. So, keep that in mind too if you’re buying commercial property.

Tony:
Super valid point. There’s just one other part of Aaron’s question here. He says, “Do you you typically ask for an inspection period?” Aaron, typically, all of the things that you would have in a regular real estate purchase and sell agreement, you should also include when you’re going off market. Obviously, it’s really whatever you and the seller agree to, but you can include all those same things. So if you need an inspection contingency, if you want a financing contingency, whatever other things you want to include in that contract, you’re more than welcome to.
You aren’t limited to doing that just because it’s an off-market transaction. So even for us, if we’re buying something off market, depending on who the seller is or what the situation is, we typically still do include an inspection period, because we want to make sure that we’re protecting ourselves, and buying this asset. We do have some wholesalers that we buy from where the EMDs are non-refundable on day one, but in those situations, we still want to make sure that we get eyes on the property before we put that EMD up to make sure that we’re not walking into any unforeseen issues. But yes, you can totally, and you should, include an inspection period when you’re going off market as well.

Ashley:
For me, I haven’t done an inspection in a long time, but I recently put an offer in on a property that I didn’t get unfortunately, but it was the first time I put an inspection in a long time just because it was outdated, but it was very well taken care of. It just didn’t look like it needed extensive rehab where properties have banned the last couple years have needed extensive rehab, and the market was just so competitive that I would skip the inspection on those, because I knew that I was going to be redoing everything anyways. It just gave me a leg up. I feel like the market is shifting, where you have that ability now to put that inspection period back in, and still be competitive in the market. But also, I think it very much varies on what kind of property you’re going in and purchasing too.
When I flip the house in Seattle, Washington, one thing I learned there is if there is something wrong with the sewer line that goes from the main to the house, for some reason, there’s… I can’t remember exactly if it’s a permit issue, or if it’s something, but it has something to do with the cost of repairing that septic. So if Tony sold me a house in Seattle, and there ended up being something wrong with that sewer line, it would cost me a lot more to fix it than it would if Tony, as the current homeowner, went in to fix it. I can’t remember exactly what that detail is, but you guys can ask James Dainer, because he’s the one that I learned it from. He’ll be able to rattle it off the top of his head the specifics.

Tony:
I wonder if it had something to do with maybe the assessed tax value of the property or something like when a property changes hands, they reassess it. Maybe that’s how… I don’t know. I’m shooting in the dark here.

Ashley:
Well, I’m pretty sure it was the direct cost, the cost too, so I don’t know if it was like you had to get a more expensive permit, or you actually had to get a permit where if you were the current owner, and you had already owned the property for so long or something, I don’t remember, but it’s just like those are little things you would never think of. So every single property, he does a sewer scope. He scopes that line, and what he does is he’ll just say, “Okay.” He’ll negotiate with the seller, and maybe one option is it’s going to cost five grand for this to be replaced.
We will actually add five grand onto the purchase price if you go ahead and just do this repair before we close and pay for it, because it’s going to cost us more. So, it’s worth it for us to just pay you to get it done.

Tony:
Cool. Well, let’s move on to our next question here. This one comes from Michael Bafudo. Michael’s question is, “Just went into contract on our first STR.” Congratulations, Michael. “But we went into it as a second home. Wondering if I should take out renter’s insurance or regular homeowners. If I take out renter’s insurance, will it mess up my mortgage? If so… I take out regular homeowners. Does it cover renters in it anyways? Thanks.” Michael, this is a great question. Renter’s insurance is…
Ashley, you can probably speak to this better than I can, but if I’m understanding the question correctly, Michael, renter’s insurance is typically what you make your tenants take out when they move into your property, not necessarily what you as the owner needs to take out on behalf of your tenants. I know every apartment I’ve lived in, and even the long-term rentals that we did have, we had our tenants get their own renter’s insurance, which covered the goods of theirs that were inside of that property. Now, what we do for all of our short-term rentals is we notify the insurance company that it is going to be used as a short-term rental. Even if you have a second home mortgage, you can still do that, because the short-term rental or the second home loan still allows you to rent out that property when you’re not using it for personal use.
So, we still let our insurance companies know that it’s being used as a short-term rental. They add some additional coverage to make sure that it accounts for the increased risk that comes along with having short-term rental occupancy. But in addition to that, what we also do is we got an additional umbrella policy to help with any potential liability that might come from that property. There are two resources I’m going to give you, Michael, to help with the insurance piece. One company is called Steadily. They’re an insurance broker in the short-term rental space. We’ve heard really great reviews from folks in the space about being able to get pretty competitive short-term rental focused insurance policies through Steadily.
Then another company is called Proper Insurance. They specialize in short-term rental home insurance. They offer some additional things like revenue protection. So if you have an instance where your property goes down for some reason, they can recoup your revenue for you, but they also have liability protection for short-term rental host. That’s my initial take. Ash, I don’t know, what are your thoughts for Michael here?

Ashley:
You said it exactly like you’ll have to get the homeowner’s insurance, because first of all, your mortgage is going to require it. If you don’t have a mortgage on the property, you don’t have to have insurance on it, I guess. You can be self-insured. I have actually bought a couple duplexes where the owner’s like, “Oh, I don’t have insurance on it. I’m self-insured.” So, you do have that option, but if you do have a mortgage on the property, the lender is going to require you to show proof of the insurance, and that it is paid every year, and you keep that policy in place.
They may have requirements too as to what kind of insurance you need to have, what kind of limits, what kind of coverage you actually need. As far as the short-term rental, I think, Tony, you couldn’t have explained it better, is going to talk to an agent or a broker who is experienced in putting insurance on short-term rentals. Where I have seen it is that you have your homeowner’s insurance, or maybe it is just an investment property for you. It’s not even a primary home or a second home. It’s just an investment property where you go and get a landlord policy with almost a short-term renter rider agreement that’s added on to your policy. That’s an extra cost.
That’s one way I’ve seen it written up too, but highly recommend having some coverage. For the LLCs, I don’t have that umbrella coverage, but for anything that is in my personal name, I do have umbrella policies on those to go above and beyond any policy or any coverage that my regular homeowner’s insurance coverage may not cover.

Tony:
Yes. You hit the nail on the head. The reason why we did that is because the majority of our short-term rentals are titles held in our personal name. So, we needed that extra layer of protection, because we don’t have that LLC on title to separate everything there, so makes us sleep a little bit easier at night with that additional umbrella. But, have you ever actually had a claim against any of your insurance policies at any of your properties?

Ashley:
No, knock on wood, I haven’t. Good thing I’m sitting at a wood table. But no, I have never had to make a claim. I did have to at the 40-unit apartment complex that I started out managing. We had severe water damage from an ice storm where ice built up on the roof, and then the ice started to melt, but the water had nowhere to go but into the roof and into the eaves. Then it caused $100,000 worth of damage for, I think, it was maybe eight apartments total that were all along this wall. It was an extensive project. We called a home remediation company where they come in. They rip out the drywall. They dry out the…
Basically, you’re down to the studs. They dry it out, and then they go back and rebuild the walls. What we did was we had hired somebody. I can’t think of what the name is, but it’s some kind of… It’s not an insurance broker, but what he does is he’ll come in, and he’ll try and get you more money from the insurance company, so loss rents. If we have to put people up at a hotel, make sure that you’re getting the maximum benefit from your policy. So, the insurance company originally offered to write a check for this to cover it, and we had him come in and actually get us more money from the insurance company, and then we had to pay him a percentage of what he got us over what we had originally got.
I can’t think of what his job title was called, but if you do find yourself in a situation where maybe your policy isn’t going to be covering what you thought it was going to be, it may be worth hiring someone like this, and giving them a cut because it’s better to get a little bit more than no more at all.

Tony:
Ashley, what was the episode where we had the asset protection guide?

Ashley:
I can’t believe I don’t know this offhand, because I give it out all the time.

Tony:
All the time.

Ashley:
I’ll look real quick.

Tony:
Look it over. Look. I’ll share really quickly. We actually haven’t had any claims against any of our insurance policies either, thank God, but I always do get somewhat nervous because obviously with the short-term rental space, we get people coming in and out. We have hot tubs at the majority of our properties. We have now an indoor pool at one of our properties, and those by themselves are just high-risk things to have. I’m just always nervous of those things. That’s why we wanted to make sure that we’re really beefing it up. Did you find it?

Ashley:
Yeah, it’s episode 106, Brian Bradley. He’s a asset protection attorney. He did two episodes with us, so I think it was 105 and 106 or 106 and 107. It was just such a wealth of information. We had to break them up into two episodes there.

Tony:
So if you want to be scared out of potentially ever buying your first long term or short-term rental, then definitely listen to those episodes. All right. Well, I feel like we got through a lot today already, right?

Ashley:
Yeah. This is good. Thank you guys so much for joining us for this week’s Rookie Reply. My name is Ashley at Wealth from Rentals, and he’s Tony at Tony J. Robinson. We will be back on Wednesday with a guest.

Tom Shapiro, GTIS president, joins ‘Closing Bell: Overtime’ to discuss the banking crisis fallout impact on commercial real estate.

Every year, new graduates enter the workforce—each entering a different job market than the one before them. Navigating such a large change successfully can be difficult on one’s own, which is why it helps to consider the advice of those who have walked the same path before and who are achieving their goals.

Here, 12 members of Young Entrepreneur Council consider their own journeys and offer up their best advice to new grads entering the workforce and looking to launch their own successful careers.

1. Know That Passion Will Take You Far

Your degree does not define your limits, nor does it dictate your success. The biggest thing I’ve learned in business ownership is that you can be successful in any area where you have passion. With the growing interconnectivity of the world, if you have a unique idea backed by passion, it is relatively easy to find highly skilled people to build your business. Ideas are the new currency. – Alexis Austin, Right Law Group

2. Prioritize Building Your Network

New grads should prioritize building a strong professional network through industry events, alumni connections and professional associations. A strong network can offer valuable mentorship, job leads and collaboration opportunities, helping launch their careers by providing new experiences and connections. – Nic DeAngelo, Saint Investment – Real Estate Funds

3. Define What Success Means For You

Define what success means for you and the lifestyle that you seek. This can help you set personalized goals and priorities, ensuring that your career trajectory aligns with your values, passions and aspirations. By defining your version of success, you can better evaluate job offers, career moves and networking opportunities, leading to a more fulfilling and purpose-driven professional life. – Alfredo Atanacio, Uassist.ME

4. Learn How To Solve Problems

Learn how to provide value in any situation by offering solutions instead of discussing problems. Anyone can learn this skill by practicing mental models such as the Eisenhower Matrix and Occam’s razor. For example, you can list problems you see in a work setting, break down what’s urgent and then solve accordingly and quickly. Be the first to identify and solve. – Libby Rothschild, Dietitian Boss

5. Always Wake Up Feeling Excited And Grateful

I would tell new grads: I was in your shoes 16 years ago as I graduated pharmacy school and started my residency. I would love to remind you all to wake up every day feeling excited and grateful for what you have. As you are launching your career, make decisions based on where you want to be instead of making decisions based on where you currently are. What do you want your life to look like in 2028? – Dr. Christine Manukyan, STORRIE Institute™

6. Stay Eager To Learn

College gave you a baseline for learning; the workforce will give you actual practice. One of the perks for companies hiring recent graduates is that you’re malleable. They can offer you training opportunities, try to steer you clear of forming “bad habits” and set you up for career growth as long as you put in the work. Keep a good attitude and stay open—your leadership notices. – Greg Ashton, GROW

7. Reflect On Your Perfect Job And Go Find It

Take a moment alone to sit with a pen and paper and write out the perfect job for yourself. Be as detailed as you please. Don’t hold yourself to your sense of what is realistic because, as a new grad, you don’t know every option the world holds. Describe your day, your compensation, the impact of your work, the type of people you work with and everything that matters to you. Then, go find it! – Tyler Bray, TK Trailer Parts

8. Take Initiative

Don’t wait for opportunities to come to you; seek them out and create them for yourself. Whether it’s taking on additional responsibilities, seeking out mentors or networking with professionals in your field, be willing to put in the work and take calculated risks to achieve your goals. Be open to learning from your mistakes and adjusting your course as needed. – Kelly Kercher, K3 Technology

9. Embrace The Unknown

Embrace the unknown! As new grads enter the workforce, being open to new experiences, challenges and opportunities will help them learn, grow and adapt in a dynamic work environment. It’s a mindset that fosters resilience, innovation and continuous learning, setting them up for a successful career launch. – Sujay Pawar, CartFlows

10. Trust Your Instincts

Trust your instincts about job offerings that seem to have red flags. While you sometimes have to settle for positions that are less than satisfactory, sometimes companies are taking advantage of your lack of experience to underpay or violate expectations of candidacy. Never hesitate to ask for help from trusted mentors in your life to review any contracts or terms. – Duran Inci, Optimum7

11. Prioritize Self-Care

One piece of advice I would give new grads entering the workforce is to prioritize self-care. Launching a career can be stressful and overwhelming, and it’s important to take time for yourself to recharge and avoid burnout. This can mean different things for different people, whether it’s taking breaks throughout the day, practicing mindfulness or finding a physical activity you enjoy. – Pratik Chaskar, Spectra

12. Be Open To All Opportunities

Be open to opportunities that may not seem like your ideal fit. You are not likely to land your dream job on day one. Being receptive to different roles that you come across is going to help you find the right position. You never really know what life is going to throw at you, but the more receptive you are to opportunities, the further you will go. – Jennifer A Barnes, Optima Office, Inc.