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Dave:
Hey, everyone. Welcome to the BiggerPockets Podcast. I’m your host today, Dave Meyer, joined by one of the OG original BiggerPockets members, podcast hosts, all sorts of things. Mr. J Scott, himself. J, thank you for joining us today.

J:
Thanks for having me back. I feel like it’s been a minute since I’ve talked to you guys.

Dave:
I know it’s been way too long. How far back do you go with BiggerPockets?

J:
2008. Six months before I flipped my first house, I found BiggerPockets ’cause I did a Google search for how to flip houses. So yeah, I think it was something like March or April of 2008.

Dave:
That’s incredible. I bet half of our listeners right now didn’t even know that BiggerPockets was around in 2008. Not to date you, J-

J:
Oh, I’m old.

Dave:
… but just to explain that we have a lot of experience at BiggerPockets. We’ve actually been around for about 20 years, which is incredible, and J has been one of the most influential investors and participants in our community. So we do have a great show that I’m very excited to have J on for because we’re going to be answering questions, some of our audience and some of the Internet’s biggest questions about the economy, about the real estate market-

J:
Hold on. Hold on, I thought we were talking about Taylor Swift and the football game that’s coming up. I’m not prepared for an economic discussion.

Dave:
Well, we could sneak one of those questions in there. Do you have strong opinions on what’s going to happen there?

J:
I don’t. I don’t. It just seems like that’s all anybody’s talking about these days. It doesn’t feel like anybody’s talking about economics or real estate anymore. All I hear about is football and Taylor Swift.

Dave:
Well, there’s some escapism going on where everyone’s just tired of talking about the economy or what’s going on, but it is so important, we have to be talking about what’s going on with the news and the housing market if we’re going to make good at investing decisions. So unfortunately, J, actually, I’m going to stick to the script and make you answer some real questions that are going to be useful to our audience. So let’s just jump right into our first question here: housing crash. This is the number one thing being searched right now on Google about housing, about the economy, and we want to know what you think, J. Are you on the housing crash side of things? When I say housing crash, let’s talk specifically about residential ’cause I know you invest both in residential and commercial real estate.

J:
So here’s the thing. First of all, when we talk about housing crash, too many people, I think, conflate this idea of the economy and the housing market, and they’re two very different things. So when I hear the question, “Are we going to have a housing crash?” Sometimes people actually are asking, “Are we going to see an economic market crash?” Because they assume it’s the same thing, but historically, they’re two very different things. Let me ask you a question, Dave. Going back to let’s say, 1900, how many housing crashes have we seen in this country?

Dave:
Crashes? I want to say just one, but maybe two, ’cause most of the data I look at is from the ’40s on. So I don’t know if there was one during the Depression, but I’m pretty confident since then there’s only been one.

J:
Yeah, there wasn’t one during the Depression, and the only housing crash we’ve seen in this country was in 2008. We saw a little blip in the late ’80s with this thing called the savings and loan crisis, which was another recession that was tied to real estate. But for the most part, every recession we’ve had in this country, and we’ve had 35 recessions over the last 160 years, every recession we’ve had has been non-real estate caused. Typically speaking, when you have a recession that’s not caused by some foundational issue with real estate, real estate’s not affected. Now, 2008 was obviously a big exception. 2008 was a real estate crisis, and it was a real estate-caused recession, and we saw a housing crash.
But the problem there is that I think there’s something called recency bias that where a lot of us are falling prey to. It’s the last big recession we remember, and so we assume that the next recession and the one after that and the one after that are going to be similar to the one we remember the best, which was the last one. But the reality is 2008 was very out of the ordinary. It was the only time we’ve seen housing crash in the last 120 years. So I think the likelihood of a housing crash anytime soon, and it’s not just because of historical reasons, and we can talk about other reasons, I think it’s very unlikely that regardless of what the economy does over the next couple of years, I think it’s very unlikely we see a housing crash or even a major housing softening.

Dave:
Well, see, J, this is why we bring you on here. You have so many good stats and an excellent opinion on this, and I completely agree with you about this. I was calling it a year or two ago this housing market trauma that I think my generation, I’m a millennial, had and a lot of people around my age grew up during this era when the housing market was a disaster for most people, and they feel like that that might happen again. Of course, there’s always a chance. But as J has provided us with some really helpful context, that is not the normal situation in a broader economic downturn. I am curious what you think about this, ’cause part of me thinks there’s this recency bias, but there’s also this desire for the housing market to crash by a lot of people. For people who might not be investors are own property currently, I think a lot of people look at prices now and the relative unaffordability and are hoping or rooting for a housing market crash, even though it sounds like you think that might not be likely.

J:
Yeah. There are a lot of people in this country that are really unhappy with the direction of the economy and their personal finances. I think inflation at 9% a year-and-a-half ago really threw people and put people in a pretty bad situation. We talk a lot about the wealth gap in this country. There’s a big gap between those who have money, those who have hard assets, real estate and stocks. 10% of this country are millionaires, but the other 90% are struggling, and there’s a big gap between the two. Those who are struggling, they don’t want to be struggling. They remember 10 years ago when there was a crash after 2008, and all the people that had lots of money started buying up houses and buying up stocks and buying up all the hard assets, and they want to go back to that time.
They want to have a chance to participate in that. Unfortunately, I don’t think we’re going to see that type of opportunity again anytime soon. Yeah, there’s a lot of frustration out there. It’s also, I’ve talked a lot about this over the last couple of weeks, there’s a big disconnect between economic data. The economy is looking really good purely from a data standpoint, but economic sentiment or public sentiment is just the opposite. There are a lot of people who don’t feel like things are good. People don’t feel like the economy’s moving in the right direction. They don’t feel like their personal finances are moving in the right direction. So there’s this big disconnect between what the data’s telling us and how people are feeling. So yeah, it’s a tough time out there right now.

Dave:
Okay, so I do want to dig into that disconnect that you just mentioned a second ago, and we’re going to get right into that after the break, along with some of the other hottest questions in real estate like, when will mortgage rates come down? Will affordability ever improve, and what is the single biggest economic risk right now? Stay tuned. Welcome back to BiggerNews. I’m here with J Scott hashing out some of the most debated economic questions in real estate right now. If you remember, right before the break, J pointed out that there’s a big disconnect between what the economic data is telling us versus how people, the American people actually feel. So let’s dig into that. That’s a great topic. Let’s jump into that a little bit because I see the same thing.
When you look at traditional measures of the economy, things like GDP, it grew in Q4, and it actually started to accelerate at the end of Q4. We also see labor market has been up and down a little bit the last few months, but generally, it’s just unemployment rate is very low in a historical context. There are many different ways to measure the labor market, but many of them point to strength. So when you look at these old school or traditional ways of looking at the economy, it looks great, but you see people are frustrated. They have a lot of pessimism about the economy. I’m curious, do you think it’s because that gap in wealth that you mentioned? Because when you look at GDP, that’s basically a measurement of how big the pie is growing, but it doesn’t really tell you anything about how that pie is being divided up between people in the United States.

J:
Well, this is a weird thing because yes, we have really poor public sentiment right now. People feeling stressed and strapped and not happy with their personal finances, but at the same time, they’re spending money. You look at holiday shopping, we were up 14% year-over-year for holiday shopping this year. People are spending money. Despite the fact that college loan repayments restarted, so people you would think would be more strapped there. The cost to rent right now, 52% more expensive to rent than own right now, so you would think people are feeling strapped paying their rent. Food costs have obviously gone through the roof. Even though inflation has come down, we’re still seeing higher than typical food inflation. So that thing, when people go to the grocery store once or twice a week, they’re getting hit pretty hard.
So you would think it would impact people’s spending habits, but the fact that we saw GDP grow at 3.9%, the fact that we saw year-over-year holiday spending up 14%, that tells me that people aren’t really feeling it. I’m thinking that part of the issue, or part of the reason for that is number one, we are seeing that credit cards are getting maxed out. Savings is at the lowest rate in history right now, so people are running out of money. But at the same time, the average homeowner has $200,000 worth of equity in their home that they can tap, not even including that 20% that the lender requires them to keep in. So people can tap home equity if they need to.
The stock market is at all time highs. So anybody that owns stock has the ability to cash out some of their stock holdings, and they have access to cash. Anybody that holds Bitcoin or gold or other hard assets, those things are going through the roof, so people can sell their assets. They have access to cash and they can just keep this gravy train rolling. So I think as long as the economy is moving along and asset prices are going up, people are going to find access to cash one way or the other, and they’re going to keep spending. So it’s just a question of is this musical chairs as the music going to stop at some point, and we’re going to see everything come crashing down?

Dave:
I’ve been surprised personally, J, with some of the things that you mentioned. Back in September when student loans resumed, I was like, “Okay, things have to start slowing down,” or you periodically get these reports from the Fed or other sources that say that all the excess savings from the pandemic from stimulus checks, that has all been depleted, but it keeps going. Obviously the credit card stuff is concerning, but I personally felt like the writing was on the wall six months ago. But it continues to go on, and I continue to be surprised.
So I think that is one of the things I’m going to keep a close eye on throughout this year is just what is going on with consumer spending, because that makes up 70% of the U.S. economy. So as long as people keep spending, as J said, that bodes well, at least for the traditional ways of measuring the economy like GDP. Now, I do want to get back to the housing market a little bit. You mentioned that you don’t think the housing market is going to crash. Can you just talk to us a little bit about some of the fundamentals of the housing market and why you think the housing market is poised to at least remain relatively stable in the coming years?

J:
Yeah. So it all boils down to supply and demand. Just like everything else in the economy, if you look at supply and demand trends and supply and demand pressures, you get an idea of where prices are likely to head. It shouldn’t surprise anybody that we in the single-family world are seeing high demand and low supply right now. Anytime you have high demand and low supply, prices tend to go up or at least they stabilize. So historically, we generally see about 1.6 million properties on the market at any given time in this country. We’re at about half that right now, so there aren’t a lot of properties out there to buy. Supply is low. At the same time, heading out of the Great Recession, 10 years ago we were at about 5 million units underserved. There was demand for about 5 million more housing units than we had.
Well, we’ve been building units at about the same rate as demand has been increasing for units. So based on that, we can assume that we’re still about 5 million units short in this country on housing. New homes, we completed what, 700,000 last year I think it was, or maybe we sold 700,000? So that’s still like seven years worth of inventory that we need to sell to catch up to the demand in new housing. So long story short, low supply, high demand, not enough building basically means that prices are going to be propped up. Case-Shiller data for November just came out a couple of days ago, and that data is always a few months behind. But data for November basically indicated that we saw a 5% year-over-year increase in housing prices, and housing prices are once again at all time highs. So things aren’t slowing down yet.
I suspect they will at some point, but again, I don’t think there’s going to be a crash because I think that this low supply and what’s driving low supply, people might ask. Well, it’s the fact that millions of homeowners, 85% of homeowners or something like that, maybe it was 87% have fixed-rate mortgages at under 5%. Something like seventy-something percent have under 4%. So homeowners aren’t going to sell their houses right now and get rid of these great mortgages just to go out and buy something else that’s overpriced and have to get a mortgage at 6 or 7%. So I think this low supply is likely to persist. I think the demand both from people who are paying 50% more to rent and now want to buy, investors who want to buy more property, large institutions like BlackRock and others, hedge funds that want to buy, there’s going to be a lot of demand out there. So I don’t see prices coming down anytime soon, even if we do see a softening economy.

Dave:
That’s a great way of framing it. I think for our listeners, it’s really important to remember that housing crashes don’t happen in a bubble. It really does come down to supply and demand, and you can analyze each side of those. As J said, when you talk about supply, it’s very, very low right now. So if you think that there’s going to be a housing crash or you want to know if there’s going to be a housing crash, you have to ask yourself where would supply come from? Where is it going to materialize from? And I don’t see it. Construction is actually doing decently right now, but it would take years at this decent clip to eliminate the shortage you talked about.
You mentioned the lock-in effect, and that’s constraining supply. It’s also worth mentioning that inventory was already going down even before the pandemic because people have been staying in their homes longer. Lastly, I know a lot of people, especially on YouTube, talk about foreclosures coming in and starting to add supply, but there’s just no evidence of that. You might see a headline that it’s up double from where it was in 2021, great. It’s still about 1/3 of where it was before the pandemic and it’s at 1/9 of what it was during the great financial crisis. So I don’t see it. I hope I’m wrong because I do think it would help the housing market if there was more inventory, but I just don’t see where it’s coming from.

J:
At this point, it looks like there’s only one thing that’s going to drive more supply, more inventory, and that’s mortgage rates coming down, interest rates coming down, because at that point, people feel more comfortable selling their houses and buying something else because they know they can trade their 4% mortgage for a 5% mortgage or a 5 1/2% or a 4 1/2% mortgage. So people are going to be more comfortable doing that. But what’s the other thing that happens, if interest rates come down?

Dave:
Demand goes up.

J:
Demand’s going to go up. So even if we fix the supply problem, the way we fix it is likely going to create more demand. So I’m not saying that nothing could impact the market, but I think it would take some major economic shock. It would take a black swan event or it would take some major economic softening, the labor market imploding and unemployment spiking, something like that before we really saw any major increase in supply. There’s no indication that we’re anywhere near that. So I think we’re going to see prices about where they are for the next several years.

Dave:
That’s really important to note that there’s always a possibility of what’s, quote, unquote called, “black swan events.” Basically, it’s something J and I and no one out there can really predict. These are things like the Russian invasion of Ukraine or COVID, things that just come out of nowhere and no pundits or people who are informed about the economy can really forecast those types of things, so of course, those are always there. But just reading the data on the supply side, I totally agree with you. Just to play devil’s advocate for a minute here, even if you couldn’t increase supply, you could change supply and dynamics in the market if demand really fell, if people just didn’t want to buy homes in the same way. I do feel like you hear these things that if housing affordability is at 40-year lows, and so do you have any fear or thoughts that maybe we see a real drop-off in the number of people who want to buy homes, and maybe that would change the dynamics of the market a bit?

J:
I suspect that we will see that trend, but I think that’s a 5, 10, 15-year trend. I don’t think that’s something that’s going to hit us in the next year or two or three because, again, really, it’s pretty simple. Right now, it costs 50% more to rent than to own, and nobody in their right mind is going to trade their 3% mortgage to pay rent at 50% more. So I do see this becoming a, quote, unquote, “renter nation” over the next 10 years, but again, I don’t see that being a short-term thing. I think that’s going to be a consequence of the market fixing itself. I don’t think that’s going to be a driver of the market fixing itself.

Dave:
So the one thing you mentioned that could change the market, and I think it’s really important to mention that when we say, quote, unquote, “the market,” most people think we’re only talking about prices, and that is a very important part of any market. But when you look at an economic market, there’s also quantity, the amount of homes that are sold. That’s super low right now, just so everyone knows, we’re at, I think, 40, 50% below where we were during the peak during COVID, so that’s come down a lot. One of the things that you mentioned could potentially change, in my mind at least, both sides of the market, both the number of sales and where prices go is if mortgage rates come down. So J, I can’t let you get out of here without a forecast or at least some prognosticating on what is going to happen with mortgage rates in the next year. So what are your thoughts?

J:
So I think they’ll come down. It doesn’t take a genius to make that prediction. I think most people are predicting that. The reason for that is as of December, the Federal Reserve, the Fed basically reverse course said, “We are done, our hiking cycle for interest rates for the federal funds rate.” At this point, the next move will probably be down. When the government starts to lower that federal funds rate, that core short-term interest rate, that’s going to have an impact on other markets like the mortgage market and mortgage interest rates. So the market is pricing in that core federal funds rate could likely drop from where is it? It’s at like 5 to 5 1/4 right now to somewhere between 3.75 and 4% by December.
So 40% of investors are betting their money that the federal fund rate’s going to be down around 4% by the end of this year. So that’s about a point-and-a-half less than where it is now. Does that mean we’re going to see a point-and-a-half less in mortgage rates? Probably not, because that’s spread between the federal funds rate and mortgage rates right now is smaller than normal, so that spread will probably expand a little bit. But I think a point-and-a quarter drop in federal funds rate will likely translate to about 3/4 of a point in a drop in mortgage rates. So if we’re right now at about 6.6, 6.7, 6.8%, 3/4 of a point puts us around 6%.
So if I had to bet, I would guess that by the end of this year we’re somewhere between 5 3/4 and 6% mortgage rates, which is a decent drop, but it still doesn’t put us anywhere close to that 2, 3, 4% that we were seeing a couple of years ago. It will open up the market a little bit. There will be some people selling. You mentioned foreclosures increasing. It turns out that the bulk of the foreclosures that we’re seeing are houses that were bought in the last two years. So there’ll be an opportunity for people that bought in the last couple of years who are struggling to get out. So yeah, I do see mortgage rates coming down, but if I had to bet, I would say 5 3/4 to 6% by the end of the year.

Dave:
I hope you’re right, and I do think that’s general consensus. I think for most of the year, it will probably be in the sixes, and it will trend to downwards over time. I do think personally that it’s not going to be a linear thing. You see that it’s relatively volatile right now. It went down in December, it’s back up in January, but I think the long-term trend is going to be downward, and that is beneficial. You mentioned it’s going to open things up a little bit. How do you see this playing out in the residential housing market throughout 2024, just given your belief that rates will come down relatively slowly?

J:
I think it’s going to have probably pretty close to the same effect on demand as it does on supply. So I think rates coming down is going to encourage some people to sell, and it’s going to encourage some people to buy, and I think those forces will pretty much even each other out. In some markets, we may see prices continue to rise a little bit. In some markets we may see prices start to fall a little bit. But I think across the country we’re going to see that same average, what’s 3% per year is the average of home price appreciation over the last 100 and something years. So I think we’ll be in that 3 to 5% appreciation range for much of the country if I had to guess. Here’s the other thing to keep in mind. You mentioned that this isn’t going to be linear. This is going to be an interesting year.
We have an election coming up in November, and historically the Fed does not like to make moves right around the election. They don’t want to be perceived as being partisan and trying to help one candidate or another, and so I think it’s very unlikely. In fact, I think there’s only two times in modern history where the Fed has moved interest rates within a couple of months of the election. So I think it’s very unlikely that we’ll see any interest rate movement between July and November, which is a significant portion of the year when you consider that we’re unlikely to see any movement between now and March. So that basically gives us March, April, May, June, and then December. So we have about half the year where we could see interest rate movements. So if we do see any movements, it’ll probably be big movements in that small period of time as opposed to linearly over the entire year.

Dave:
That’s really interesting. I had not heard that before. It makes sense that the Fed doesn’t want to be perceived as partisan, so that’s definitely something to keep an eye out for. It makes you wonder if there’s going to be a frenzy of… it’s already the busy time for home buying, what did you say, April through June, basically? So that’s the busiest peak of home buying activity and might be the most significant movement in interest rates. So we might see a frenzy in Q2 then.

J:
Yeah, and we can take that one step further. While the Fed doesn’t like to seem partisan leading up to an election, there is evidence that they tend to be in favor of supporting the incumbent, regardless of whether it’s a Democrat or a Republican. They like to see that the economy is doing well in an election year. So what we’ve seen historically, again, not right before the election, but typically, the few months prior to an election or the few months prior to prior to the election, we see the Fed make moves that tend to favor the economy and to favor the incumbent.
So I wouldn’t be surprised if we see a drop in rates in the March, April, May timeframe, even if the economy isn’t necessarily indicating that’s necessary. I think that’s something that Jerome Powell was preparing us for in December when he came out and said, “Hey, we’re open to dropping interest rates if we need to.” After two years of basically saying, “We’re going to keep rates higher for longer,” he suddenly reversed course and prepared everybody for us to start considering dropping rates. So I think that that just could be just a signal that they’re going to be a little bit more dovish in the first half of this year than they otherwise would be.

Dave:
Okay. So we are getting into some of the good stuff here, and we are about to cover a recent economic change that will impact lending and the biggest economic risk to investors right after the break. Welcome back, everyone. J Scott and I are in the thick of it talking about the most pressing issues in real estate right now. Before the break, we got J’s predictions on interest rates and what we can expect from the Fed in 2024. While we’re on the topic of the Fed, and man, I pray for the day we don’t follow the Fed as closely as we’ve had to the last couple of years, but they recently made an announcement in a different part of their directive here and announced that the Bank Term Funding Program is ending on March 11th. J, can you just tell us a little bit about what this program is and what this means for the financial system?

J:
Yeah, so last March, there was this big regional bank called Silicon Valley Bank. Anybody that wasn’t paying attention, basically-

Dave:
It feels so long ago-

J:
Right.

Dave:
… there’s so much has happened since then. I can’t believe that was only a year ago.

J:
It was less than a year ago. Crazy.

Dave:
Yeah.

J:
But basically, this bank, they bought a whole lot of Treasury bonds and based on the movement of those Treasury bonds, the value of those bonds fell considerably. The bank was in a bad financial situation or it was looking like they could be. So a lot of, not investors, but depositors in that bank started to take their money out. A lot of those depositors were venture capitalists and startup tech firms that had literally millions of dollars in the bank. So some ridiculous amount of money closer to $50 billion was at risk of flowing out of that bank over a couple of days, and the bank essentially became insolvent.
The state of California basically took the bank into receivership, and the federal government said, “We need to make sure that this isn’t a broader issue that contaminates other parts of the banking sector.” So they set up this thing called the Bank Term Funding Program, where they told banks, “If you’re in this situation where you bought too many Treasury bonds and movement in bonds has caused you to lose a lot of money, come to us and we’ll give you a loan against those bonds to ensure that you have lots of cash on hand, and you’re not facing this crisis.” They set up this thing called the Bank Term Funding Program, which was a way of loaning money to these banks that said they needed it. Between March of last year and June of last year, banks basically went to the fund and said, “We need a $100 billion.”

Dave:
Oh, just that?

J:
Yep, 100 billion. A lot of it was in the first couple weeks, but over the first three months, 100 billion was borrowed from this fund. For the next six months through November, December, essentially nothing was borrowed. Basically, banks indicated that they were in a pretty good position, they didn’t need to borrow money from the government, and they were very favorable loan terms, by the way. But banks basically indicated, “We don’t need to borrow.” Then in December, the Fed started talking about, or the Treasury started talking about getting rid of this program. It was supposed to be a one-year term, which means the program would end in March. Right around the time they started talking about getting rid of the program, suddenly banks started borrowing again. Banks went back to the program and said, “I need money. I need money, I need money,” and it went from 100 billion borrowed to 170 billion over the course of about a month.
The most likely scenario here was that banks realized that they were getting near the end of having the ability to borrow cheap money from the government, and so not because they needed the money. If they needed the money, they probably would’ve gone and gotten it sooner, but because they saw an opportunity to get this cheap money, they went and they took another 70 billion. So a lot of people are looking and saying, “Well, obviously this program is still needed because another 70 billion was borrowed over the last two months. Banks are still in need.” But the more likely scenario is that banks were just taking advantage of this cheap money, and that’s the reason they borrowed, and there haven’t really been any banks that have needed the money since last June.
So I don’t see them phasing out this program as of March to be a big deal. The Fed has also said that anybody that’s borrowed money doesn’t need to pay it back right away, they can pay it back over years, so there’s no risk to the banks that have already borrowed. More importantly, even if they were to get rid of this program on March 11th, I think the date is, if on March 12th there was a bank that was in trouble, I have a feeling the Fed would step in and say, “Okay, we’re going to bail you out.” So I don’t think there’s a lot of risk here. I think it’s something that’s going to be talked about over the next two months a good bit. But I think at the end of the day, it’s going to be a non-event. The government’s already indicated they’re going to bail out anybody that’s in trouble, so anybody big enough that’s in trouble. So I don’t see this being any real issue anywhere.

Dave:
In a way, you can see it as a sign of strength. If the Fed is feeling confident enough, as you said, they’ll bail out people who need it. If they’re saying basically people don’t need it, hopefully, that means that the acute issues with the financial system last year with Silicon Valley Bank and a couple of the follow-ons after that is alleviated, and now there’s a little bit more confidence in the banking system. So that’s great news.

J:
Yeah, and those banks that had trouble last year, they were in a very specific sector. They were in the tech sector. Their profile of borrower and depositor was very different than the typical bank, and that led to a lot of the issues, not so much an issue with the underlying banking system.

Dave:
All right, J, last question before we let you get out of here. Is there one economic issue or risk that’s keeping you up at night, or what are you most worried about are going to be following the most closely this year?

J:
I’ve been saying this for a good six or nine months now, but I think the biggest risk to our economy is the cost of debt for small and medium-sized businesses. There are a lot of businesses out there that need debt to run. They rely on bank loans or SBA loans, or maybe they need equity. They get money from venture capitalists if they’re in the tech space, and a lot of businesses are running negative. They don’t make a profit. They rely on this debt to grow and get them to the point where they become profitable, but they aren’t profitable yet. A few years ago, they were able to borrow this money at 3%, 4%. In the case of venture capital, they were able to get investment money whenever they needed it. Typically, these loans or these investments are on a two to three year runway, meaning that in two to three years, they either need to be refinanced or recapitalized or companies need to go out and get new investment because they’re going to run out of money.
Here we are two to three years after interest rates started to go up, and a lot of these small and medium-sized businesses are now facing a situation where they need to refinance their debt or they need to get new debt, or they need to get new investment. It turns out the cost of capital right now, for obvious reasons, because interest rates have gone up 5%, the cost of that debt has gone up tremendously. So small businesses that were borrowing at 3 or 4% three years ago now need to borrow at 6 or 7%, and business owners can’t afford this. So to borrow at those rates, they need to cut costs, they need to lay people off, they need to scale down their operations. What we’ve seen is that bankruptcies have gone through the roof over the last year, and on the horizon, there are a whole lot more bankruptcies looming. So I think this risk to small businesses is probably the biggest risk to the economy over the next 12 to 24 months until interest rates start to come down.

Dave:
This is a really under reported issue it feels like, ’cause you hear these huge things where it’s like, “Oh, tech, UPS yesterday laid off 12,000 people.” That’s a huge deal. But when you look at who is employed and where, most people work for small businesses, you see these high-profile things. But the American economy in so many ways is based off of small business. So if as you say, a lot of these companies are facing bankruptcy or challenges that is maybe going to keep me up more at night than it has been over the last couple of months.

J:
Yeah, and it’s not just the small and medium-sized businesses, I think they’re the ones that are most at risk. But even companies like Target and Walmart, they finance their operations by issuing bonds. They raise money by issuing bonds. A couple of years ago, they could raise a billion dollars by issuing bonds at 3%. Well, nobody’s going to buy bonds at 3% anymore because you can get U.S. bonds at four and 5% these days. So if Walmart or Target wanted to go out and raise a bunch of money to finance their operations and to continue to grow, they’re going to have to issue bonds at 6 or 7%. That’s a huge difference in their bottom line how much they’re paying an interest.
So if they can’t expand operations as quickly as they were, as much as they were, that’s going to impact their business. That’s going to impact GDP. That’s going to impact their hiring. That’s going to impact how much they can pay in additional wages, and that’s going to reverberate through the economy. So it’s not just small and medium-sized businesses that are going to struggle. I think they’re the ones at biggest risk, but I think even big businesses, we’re going to start to see wage growth slowing. I think we’re going to start to see more layoffs. I think we’re going to see less growth over the next year or two, again, until interest rates start to come down.

Dave:
Well, J, thank you so much for being here. I really appreciate your time. If you guys didn’t know this, J and I actually wrote a book together. It’s called Real Estate By the Numbers. It teaches you how to be an expert at deal analysis. If you want to learn more from J and myself, you can check that out on the BiggerPockets website. Otherwise, J, where can people connect with you?

J:
Yeah, jscott.com. So go there and that links out to everything you might want to know about me.

Dave:
All right. Well, thank you all so much for listening to this episode of BiggerNews. We hope this discussion and insight into what’s going on in the housing market and the economy helps you make informed decisions about your real estate investing portfolio and really what you do with your money generally speaking. If this is helpful to you, we appreciate your feedback and a positive review. We always love knowing what types of episodes you like most here on the BiggerPockets Podcast. Thanks again for listening, and we will see you very soon for the next episode of the podcast.

Ashley:
This is Real Estate Rookie, episode 362. Today we are doing a Rookie Reply to answer your questions. We have questions about getting an evergreen loan and learning what that actually is. We are going to talk about making the best use of your rental property with exterior backyard upgrades, and how to determine that those will be the best upgrades for your property in your market. We’re also going to touch on a HELOC, and also what to do if your credit is not that great, and how to start investing before fixing your credit. I’m your host, Ashley Kehr, and I’m here with your other host, Tony J Robinson.

Tony:
Welcome to the Real Estate Rookie Podcast where every week, twice a week we’re bringing you the inspiration, motivation, and stories you need to hear to kickstart your investing journey. And like Ashley said, today we’ve got a slate of amazing questions lined up for you.

Ashley:
We’re going to talk about a HELOC, a home equity line of credit. We have great questions coming in today. And the HELOC, we’re going to describe exactly what that is and what questions to ask a lender when you’re considering getting a HELOC. The next thing we’re going to touch on is an evergreen loan. Have you ever heard of this type of loan? We’re also going to talk about what the difference is between an evergreen loan and what a HELOC is, and there’s also some similarities.
Then we’re going to go into improvements that can pay off big by increasing your rent on your property or your daily rate on a short-term rental property. But at first we’re going to talk about the bad credit, but you may have a sizable down payment. So with this question, we’re going to navigate how to go through this tricky scenario and help you decide where to start in your investing journey if you have this issue.
Okay, our first question today is from Ivy C. “I’m new to the real estate game and looking to invest. I have 15,000 in cash, but bad credit. Is there an avenue that I should look into while my credit is being fixed?” What a great question as to, you have part of the puzzle piece, but you’re missing another piece to actually go to a bank and to get a loan.
When I first started real estate investing, I had this limited mindset that I could only purchase properties in cash. I didn’t even know that you could go to a bank and to finance a property. Fortunately, there are multiple different ways to actually purchase a property, so if there is something you are missing, like good credit or cash, or experience, or whatever it may be, there are multiple options to actually get you into a deal. So Tony, what would be your first recommendation to do with that 15,000?

Tony:
Yeah, I think one of the first things we should touch on, Ashley, is just how does bad credit impact rookies as they’re looking to buy that first investment property? I wouldn’t say, depending on how bad, bad is, bad is somewhat subjective, but depending on where your score is at, a lower score doesn’t necessarily stop you, but it will make it more expensive, right? The higher your credit score, typically you’re going to get a better interest rate, potentially you’re going to qualify for a lower down payment, so just the cost of the debt is going to be cheaper if you’ve got good credit.
The lower your credit score gets, typically the higher your interest rate is going to be. They might tack on additional closing costs, fees, things like that. Your down payment might not be able to get as low as someone with a stronger credit score, depending on what kind of credit score you have. And then there are some banks that might just not want to work with you at all. You might just be unbankable depending on how low that credit score gets. I think the first thing is just trying to make sure that folks understand why a good credit score is important as a rookie.
Now, I guess the second piece, and tying into your question here, Ash, before we even answer this question, I think we should ask Ivy, did you fix what led to the bad credit? Because if that issue is still lingering, whether it was poor habits or maybe, I don’t know, there was some big financial issue and you haven’t solved that yet, maybe you lost your job, whatever it may be, did you fix that issue first? Because if you didn’t, I would be nervous to step into buying that rental property that’s maybe several hundred thousand dollars, and not having any type of financial security in case things go wrong. I don’t know, what are your thoughts on that first step, Ash?

Ashley:
Yeah, definitely. I think looking at what happened with your credit. So if you are behind on payments, obviously use that 15,000 to help you get caught up. If you have overused your credit card… Credit card utilization is a big thing that actually impacts your credit. So if you have completely maxed out your credit cards, maybe using some of that money to buy that down, having a strong personal financial foundation will help you be a better investor. Because you are going to buy your property and you’re going to have to manage the finances on that property. If you can’t even manage your own, this is a great stepping stone to make sure you have your own finances in order before you go ahead.
With me personally, I had student loan debt, I had farm equipment debt, and I started investing. Even though I had that. I had great credit, I was paying those, but I actually used my cashflow to pay those loans off. So I don’t want us to sound like Dave Ramsey where, “Oh, you have to fix your credit, you have to pay off all your debt, then you can invest because.” Because no, you can help pay down your debt or different things to help you, do simultaneously while you’re investing, but credit should be something that you should be working on as you’re investing. But there is that issue for the reason that your credit was impacted, see if that 15,000 would be more valuable to correcting that issue and making sure, going forward, it’s not going to be an issue again, that you’ll be able to stabilize it.
What do you think? What would be the first thing that comes to mind if you have 15,000, you don’t really have the option to go to the bank and get conventional lending because you’re not approved, or in some circumstances they could offer you something different that just are not great terms, not a great interest rate, not a great repayment plan. So what’s the first thing that comes to mind, Tony?

Tony:
I think the first thing I’d want to know from Ivy is what exactly is the goal for investing? Are you looking for consistent monthly cashflow, Ivy? Are you looking for just a big chunk of cash? Do you want long-term appreciation? Are you looking for certain tax benefits? What is the goal that you have behind investing in real estate? I think that would dictate, in a major way, what steps, I guess make the most sense for you.
Let me give an example. Say Ivy, that your goal was maybe long-term appreciation, and let’s say you live in a market maybe like California, right? Maybe you’re not in Los Angeles, but you’re in the suburbs where I am. For you, if the goal is appreciation, then maybe you want to go out and buy a single family home that you’re going to live in, knowing that okay, 15 years or 10 years down the road, I’m going to sell this or refinance this, or do something else. I’m going to move out of this house so it becomes an investment vehicle.
Now you’ve got 10 years. Worth of equity built up into that home and now you can go in with maybe some kind of FHA or first time home buyer, some kind of low down payment loan product to get into that property, knowing that you don’t really need anything from it for the next 10 years. On the flip side, let’s say that your goal is cashflow, like, “Hey, I want a cashflow today, I want the additional income.” Then maybe you’re going out and you’re looking for a small multifamily, where you’re going to be able to take that 15,000, put it towards some of your down payment. Maybe some repairs in the other unit or two units, and now you’re using that to kickstart your investing journey. I think a lot of it comes down to what is the goal that you’ve got, Ivy? And then trying to identify the best strategy based on that goal.

Ashley:
I think one thing too, with that 15,000, there’s an opportunity to partner with someone, maybe somebody who does have good credit or maybe has some cash, but not enough, but together you do have enough cash to purchase a property. Maybe you’re paying for the rehab and they’re paying for the property. So an opportunity for a partnership could definitely be a stepping stone, is finding that right person where all of what you guys can bring to the table fits together to make that deal happen.
Also, you could be a private money lender with that 15,000, obviously depending on the market, things like that. But for me, 15,000 could cover a simple rehab on a property where you could be the private money lender for the rehab portion of the property, at least too. That could be a way to get your money working for you while you fix your credit to go and buy your own property if you don’t want to partner with somebody.

Tony:
Yeah, I think the last piece too, is think about what types of real estate investing don’t necessarily look at your credit score? We had Nate Robbins on episode 326 and he gave a phenomenal breakdown for rookies to listen to you when it comes to finding and sourcing off market deals. And you could do that for way less than $15,000. Like Nate, I’m pretty sure did it for free, right? He drove around, drove for dollars, found a list of properties, called those owners, and used that list to start generating revenue by wholesaling those to other investors. So if the credit is a big obstacle, start looking at types of real estate activities, investing, that don’t require credit scores to get started.

Ashley:
Okay. Well that wraps it up there for that question. We’re going to take a short break and we are going to be back and we are going to be talking about getting a HELOC on your primary residence. HELOC is a home equity line of credit. So if you’ve been wondering if this is something you should do, sit tight, we’ll be right back after a word from our sponsor.
Okay, we just finished wrapping up a question about investing while you have bad credit, and we are going to move on to our next question from Diane E. So Diane’s question is, “I’ve decided to get a HELOC on my primary home to fund my first property. What are some questions to ask when calling banks? Anything specific I need to know about the process? Do I call every bank possible?”
Okay, I think first let’s break that down there as to this is on her primary home, so this is where Diane is living now, this isn’t an investment property. You can definitely get a line of credit on investment property, but they are two totally different loan products and there’s different information, different questions. So for this one, we’re going to focus on the HELOC, the home equity line of credit for your primary residence.
Looks like Diane is looking to get this HELOC, to use those funds to invest into a rental property or into real estate somehow. She’s wondering what questions to call when asking banks and how to find the best HELOC product that there is. Okay. I actually did type out a couple of questions here, Tony, that came top of mind to me. The first thing though that I wanted to respond to, is do I call every bank possible? I think we should address that before we even get into the questions because first of all, we love small, local banks.
So any bank you already have a relationship with, and by relationship is you have a checking account with them, you have a credit card with them, whatever that may be. Maybe you have a job where you do loans for someone or you have some kind of interaction at a bank, you’re making bank deposits there for your job, or whatever it may be. Definitely add those to the list and then look in your area for other small, local banks that you can contact.
But my recommendation instead of calling them would actually be to email them. You can go on the websites, you can look at the loan officer of the closest bank branch to you. This way you can write out your questions. You can write out what you’re trying to do, which would be to pull money out of your property without actually refinancing, because maybe they actually have a different option for you than doing a home equity line of credit. So leave it open-ended where you’re not telling them exactly what you want. Then this way you can write it out and you can just copy and paste it and send it out to all of them.
Then you also have their responses in writing, so you can go ahead and it’s much easier to compare than keeping track of phone calls. You got your three kids running around, you got dinner on the stove and you’re trying to fold laundry, and you get the loan officer calling you and saying, “Hey, I’m responding,” and blah, blah, blah. And then you’re like, I don’t even know what bank they were calling from at the end of the phone call. So I like to have it all in writing.
And then also you can keep track of who’s returning your call in a timely manner. You want a loan officer who’s going to be responsive because then your loan is just going to move faster. That’s why I prefer the email process, and it’s so much easier than taking the time to call everyone and waiting for those return calls to come in if you don’t get them on the first try. Tony, anything to add to that before we go through the list of questions?

Tony:
No, I totally love that approach, Ash, of sending out the emails. I feel like you definitely leverage your time the best way. But I would say also if you’re close enough, Diane, I do like to go inside to the branches as well because I don’t know, sometimes I just feel like if you’re close enough, you can have that conversation face-to-face. People are just a little bit more… I don’t know, it becomes a little bit more conversational. Maybe things come up that wouldn’t have come up during that email thread. But Ashley, I think before we dive into your questions, maybe let’s just define exactly what a HELOC is for those rookies that maybe aren’t super familiar with that phrase.
So HELOC, it’s H-E-L-O-C, all capital letters, and it stands for home equity line of credit. So when you’re trying to tap into the equity of your home, you’ve pretty much got three different options. You can sell your property, right? And that’s going to unlock all of the equity that you have minus closing costs. You can refinance your property where you’re replacing your original mortgage with a new mortgage, and then you get to keep the difference between those two mortgage amounts. Or you can get a home equity line of credit where you’re keeping your original mortgage in place, but you’re basically getting a second mortgage that’s really focused just on that equity piece. For a lot of people who have, especially if you bought in 2020, in that timeframe, you got a below 3% interest rate, maybe you don’t want to refinance, HELOCs are a good way to still tap into that equity.
Now one thing I want to say, Ash, before we jump into your questions here is that you hear people like Grant Cardone say that your primary home isn’t an investment, but I know countless people who have used HELOCs just like Diane is talking about, to go out and fund their first real estate investment. Or I met a couple where they had one primary home, they had fixed it up themselves, pull out a bunch of equity with a HELOC, and they just bird a bunch of homes in the Midwest. Over and over and over again, all without one chunk of cash from that HELOC. And they built up a double digit portfolio in the Midwest only with the money from their HELOC.
So if you use it the right way, it definitely is a smart option. I didn’t mean to go off the rails here, I just wanted to define that phrase for folks who maybe aren’t familiar with it.

Ashley:
No, I think that was great. Definitely a great little breakdown there, what a HELOC is and how powerful of a tool it is. Because even if some people do say your home, your primary residence is not an investment, it is still an asset than a liability. So some of the questions I had written out is, first of all, how long is the line of credit good for? So is it good for five years, 10 years? How long until the bank says, “We’re closing down your line of credit and if you want to reopen it, we have to go through the same steps, run your credit again, we have to do a new appraisal,” things like that? So is there an expiration date on the line of credit?
The next thing is do they charge for an appraisal? Usually with the conventional mortgages or all mortgages, you are on the hook for that closing cost, for paying the appraisal, but oftentimes for a line of credit, the bank will actually cover that cost for you, and there are little to none closing costs to actually get a line of credit. That’s one question to ask, is do they cover the appraisal costs? And also what are your closing costs that you will be responsible for during the process?
Then does another appraisal need to be done at a certain point in time? So is your line of credit good for however long? And then do you have to have a second appraisal at a certain point, to make sure that your property has maintained the value that they’re lending? Also, how do you withdraw the funds? Will you be getting a checkbook where you can just write a check whenever? For a couple of my line of credits, it’s actually inconvenient. One of them I have to fill out a form and then I have to email it to the loan officer and then they’ll deposit it into my account. That can take 24 to 48 hours before that actually happens. Then for another one, I just email the loan officer and he deposits it into the account. I don’t have to fill out a certain form or anything, but still it’s not as convenient as actually writing a check and having it on demand.
The next thing would be, is the line of credit callable? That goes with is there an expiration date, or at a certain time period, do the loan actually go into an amortization period? So say you’ve had the line of credit for two years, you withdrew a hundred thousand dollars and you’ve just been paying the interest. After a certain amount of time, does the bank actually step in and say, “We’re going to amortize the 100,000 you owe over 15 years, and now you’re paying principal and the interest too?” So finding out when that is or does it just go into perpetuity that you don’t have to pay, and it’s going to be interest only forever until you die and then your kids actually owe the whole balance.

Tony:
Those are all really, really good questions, Ash. I’ve never done a HELOC on my primary residence before, so I haven’t personally gone through that process. But if I were, and I’m curious what your thoughts are here, if I were to use a HELOC, I feel like my preference would be to use it for a short-term investment versus a long-term investment. Because when you have a HELOC, you have the option, you could use it for a down payment on a property. That investment property you’re going to have for 30 years, whatever it may be, and you could just use that HELOC for that down payment.
Now you have to factor in not only paying your mortgage on that investment property, but now also repaying the HELOC on a monthly basis, which could eat into the margins that you have on that deal. The other option is you can do with my couple friend that I talked about, that re-leveraged their HELOC over and over again, where you use it on a short-term basis. Where you’re going out and you’re basically burying properties, right?
You’re buying them, either with a combination of hard money or maybe your HELOC covers the entire purchase plus the rehab. You rehab the property, you refinance, and then when you refinance, you just pay back your HELOC so the balance is back down to zero. Then you find the next property, you start that whole process all over again. But now you’re only leveraging the HELOC for maybe three to six months as opposed to locking it into a property that you’re going to have for 30 years. What’s your take on that, Ash? I mean, do you like it for long-term use or do you prefer to use it for the short-term stuff as well?

Ashley:
I 100% like it for the short-term use, and that’s what I do. It’s usually to purchase the property in cash because it’s so much easier than having to get money from somewhere else. Because it’s literally me just saying, “Yes, here’s the money. I’m buying this property.” And then also for the rehab, we usually never, ever get private money for rehab. We usually use that from the line of credits, and then we don’t have to do draws from hard money or anything like that, and it’s just so much more convenient to use our own money for that. So in the short term, and then when we go refinance, we’re paying that back, paying off the line of credit, and then it sits and it waits for us to purchase the next property.
One thing I have seen people do with this is they will use the line of credit for their down payment. So if they’re going and they’re purchasing a property using bank financing and they have to put a down payment on, and they’re doing a 30 year fixed rate, it’s not like they’re planning on refinancing. They do have a plan in place to rapidly pay off that down payment. So where they’re going, they’re not looking for any cashflow upfront, like they’re expecting that over this next six months, the next year. They know from their W2 job and from the little cashflow from this investment property, they’re going to be able to pay off that line of credit for their down payment in six months, in a year, and then they will have cashflow on the property and that line of credit will be paid off.
That is something I’ve seen people do because it expedites them investing. Instead of them waiting six months or waiting a year to actually save for the full down payment, they’re accessing the line of credit, knowing that they’re going to be making those big lump chunk payments to their line of credit over that time period. But the important part is to know, to make sure that you can afford to pay back your line of credit because the line of credit payments are interest only, usually. So those are very low, and that’s not your payment. You need to pay that principal back.
And just letting that principal sit there, even though you can pay the interest only for three, four years, or however long your line of credit is for, you want to make sure that you start paying down that principal and you have a plan in place if you are going to use the funds for a down payment.
What we just talked about is actually going to relate a little bit into our next question about evergreen loans. So if you haven’t heard of this or you want to know more information, stick around because when we come back after this short break, we’re going to talk about evergreen loans, and also how to add value add to the backyard of your rental property.
We are back from our short break and we have a question from Charlotte L. Charlotte’s question is, “The banker suggested an evergreen loan to assist with purchasing additional properties. Never heard of that type of loan until then. I searched online to learn more, but would like to know the pros and cons some of you may have experienced with this type of a loan.” This is why I love having open-ended conversations with loan officers. Instead of saying, “This is exactly what I want,” is giving them the opportunity to present to you these things you didn’t even know existed, and learning about them.
When we touch on an evergreen loan, some of the similarities you will notice will just be like a line of credit, as we just went over in our last question, the home equity line of credit. The difference with an evergreen loan is that it operates similar to a line of credit, but it is forever revolving and it has no expiration date on it until you, the borrower, or the lender decides to close down the loan. Think of a credit card as an example. You open your credit card and that balance is just on there, revolving. Or if you pay it off every month your… What’s the word I’m looking for? How much your…

Tony:
Your spending limit?

Ashley:
Your spending limit. Spending limit, there we go.

Tony:
Everyone knows this is the universal sign for a spending limit if you’re watching on YouTube.

Ashley:
So with your spending limit, it’s continuously revolving. If you spend $300 in one month and your spending limit is 10 grand, you know that you pay that off that month and next month you still have that 10 grand and it’s forever revolving. That’s an example of how it works. So an evergreen loan is something you could get from the bank to purchase a property where they’re giving you the line of credit where you can make interest only payments on it, you can pay off some of the principal, you can pay a little of the principal as time goes on. And then it’s up to you to actually close the loan if you’re not going to be using it anymore.
Where a line of credit, as we touched on, can have an expiration date where it can say, “Okay, in two years you have to reapply for your line of credit. Or if you haven’t paid the balance off at year three, we’re going to actually turn it into an amortization schedule where you’re going to have to pay the loan back over 15 years,” of whatever the balance is on the line of credit at that time.

Tony:
All great points, Ashley. I think the only thing that I would add too for the evergreen loan is that… And I’m sure it might vary from lender to lender, but it sounds like majority of the time this isn’t going to be necessarily tied to the equity of your primary residence. So as with the last question with Diane, she was putting up the equity in her primary home to get this debt. With the evergreen loan, again it might vary, but it’s looking at you and your bankability, your credit worthiness, and it’s using that to, I guess to secure the loan, and not necessarily your home.
The other thing too, just maybe to consider Charlotte, is since it’s not secured by a hard asset like real estate, typically those types of debts, those types of loans are a little bit more expensive so you might want to shop to understand what the rates are, what kind of interest are you paying? Is it single digits or is it twenties? So just making sure you understand what the cost of the debt is, given that it’s not backed by real estate.

Ashley:
Okay, our next question is from Luke P, “What are the best value adds, if any, to a backyard for a buy and hold duplex? Have you found it worthwhile, with a return through increased rent or appreciation, to add a deck or a patio? TIA.” Thanks in advance. Okay, so Tony, let’s start with short-term rentals. What are you doing to add value? Because I have been to one of your summits and Sarah got the whole room chanting over this one value ad that you guys do, so I know you definitely have backyard ideas.

Tony:
Yeah. But before I even jump into that, I think Luke, one of the biggest things I can share with you is to use data to help make this decision. Look at comps in your area, like you said, both for homes that have recently sold and for properties that are currently for rent. And just start comparing what are the things that those listings have that mine don’t, that I should probably consider adding to my property? When you make that comparison, it starts to become super clear when you look at 10, 20, 30 different properties like okay, in the backyard, the majority of these homes for rent have, I don’t know, a swing set for the kids. Or the majority of these properties have a shed for tool storage, whatever it may be. But you’ll start to see trends as you look at comparable properties in your market, and that’s a really strong indicator of what people want and what they’re willing to pay for.
Now, in terms of what we do for our properties, short-term rentals, I think are a slightly different beast than traditional long-term rentals because a lot of the revenue potential for short-term rental is tied to the experience of the guest. So there are big things we’ve done, there are little things we’ve done. And I’m going to share some things both backyard and non-backyard, but I think what you really want to look for, Luke, is what are those things that have high impact, but hopefully low cost?
We rehabbed a home last summer, and when we bought the home, it was a one bedroom, one bath property, but it was a massive one bedroom. This lady had knocked down the walls between two of the bedrooms to make just one massive master suite. And then she knocked down the walls for what was the third bedroom, to make it like a loft office type area. So on paper with a county, it was still a three bedroom, but physically it was a one bed with an office.
So when we came back in, obviously from an appraisal standpoint, a one bed with an office is going to appraise for significantly less than a three bedroom. So we went in, we re-stood up all three bedrooms again, and then we added a second bathroom. So we took what was, when you walked in, what was essentially a one, one, we turned it into a three, two. That allowed us to really increase the value of that home, both from the appraisal standpoint and from the actual rental revenue, because now we’ve got three bedrooms and two baths as opposed to one and one.
What we’re doing in the backyard for that property is a good example as well. We noticed that for a lot of properties in Joshua Tree, pools are a desired amenity, but they’re not all that common because they’re expensive to install, they take a lot of time, and there’s a higher barrier of entry for installing an in-ground pool than there is for doing a hot tub or doing an above ground pool. So when we bought this property, we said, “Okay, what can we do to really make ourselves stand out?” And we landed on the pool. Because we looked at all the other top performing three bedrooms in that market, and the vast majority had in-ground pools.
That was our cue to say, “Okay, we need to do the same thing.” So we started construction on that maybe two months ago, and hopefully we’re going to be done by the end of this month, but we’re hoping that’ll really help take this listing to the next level. So that’s I don’t know, long-winded, Luke, but that’s approach. Use your comps, look for those high impact, low cost ideas as well.

Ashley:
As far as long-term rentals, the couple of things that come to mind, well, the first thing is a shed. So having a place that residents can store their outside things like kids’ toys, tires, tools, shelves, whatever things that they don’t want in their house that they have from maybe the last property, maybe they owned a house and have some belongings they want to bring with them, or lawn furniture, whatever. Having a shed is a huge value add, and what you can do is you can actually increase the rent. Like say, “If you would like to use the shed, it’s $25 a month.” Paying $25 a month for a shed is way cheaper than them having to drive to a storage facility, put their stuff in there, they’re going to pay way more and it’s not going to be convenient. And having items that are convenient for your residents will definitely increase the value. And storage, storage, storage is always great.
So putting a shed on and make sure you check with your town and make sure if you have to get a permit for a shed. But you can buy really cheap sheds, just like plastic ones at Home Depot, Lowe’s. Or you can actually go, like around here we get a lot of Amish-built sheds that are also really affordable, but they’re made out of wood and sturdier, and you can put those on the property too.
Then building a garage, this is obviously way more of an expense than putting a shed on, but having a garage, you can charge extra for the garage, they can park their car in there and they can also store items in there. So right now two of the apartment complexes that I manage, they each have garages that come with them, and there is a huge waiting list for garages. And you have to pay extra for the garage, but that is one item that residents really want.
Because especially if you’re living in… It’s not a single family home, it’s two to four units or a larger, you have common areas with other residents. Where if you’re in a single family house, okay if you store stuff on this side of the house or you store stuff in the entryway or the back of the house or on the porch, you’re the only person living there. But when it’s a shared property with other residents, you can’t just throw your stuff in the common area. So there’s more of a need, especially in Luke’s example of having a duplex, for those separate storage places.
Then the other thing I put down was he had asked specifically about having a deck or a patio on the back, and I definitely think this is a value add. But I would go with a patio because a patio is less maintenance, where a deck, wear and tear over the time, you have to stain it or maintain the wood somehow. And a deck, you have to have it built out structurally, you have to get a permit. Where with a patio, oftentimes you don’t even need a permit, you could put down pavers, you can have a small concrete pad filled. So I would definitely go with a patio over a deck because it gives the same value where they can put a table outside on it, a grill, things like that.
You really can’t charge extra for those amenities. There probably is somebody that does, like, “Hey, you can’t use your back deck unless you pay extra,” so that’s why I like the shed better. But definitely do, I would like the patio over the deck just because I’ve seen the maintenance that a deck can have over a patio. And the patio, you’ll just have to seal it every couple of years or so.

Tony:
Ash, have you found like, okay, we need to have this amenity or this value add at every single property? Like now it’s just a staple? We’ve had some of those for our short-term rentals. What is that for you? Is it the shed that you’re like, “Okay, every single listing needs that?” Or yeah, have you identified anything like that?

Ashley:
It’s off street parking. It is so hard to rent out a property that doesn’t have off street parking, in the areas that I’m investing at least. Street parking is just not desirable to anyone, and I can’t blame them. But also, it can be difficult to have a property with a shared driveway where there’s room for three to four cars, but you’re parked tail end to tail end.
We had this issue before at one property where the downstairs person and upstairs person worked opposite shifts, and they’d be banging on the door for the guy to move his car and things like that. So as a landlord, you don’t want to have those issues. You want to prevent as many tenant disputes as you possibly can. But that could actually be another value add if you do have a large backyard, is adding another parking space.

Tony:
That’s true.

Ashley:
Because parking is always a huge value add, and most families nowadays have more than one car or two cars, sometimes three cars. So yeah, parking is definitely a huge value add that I see, that with every property is definitely a benefit to have.

Tony:
Yeah, I never would’ve thought of parking, but when I lived in apartments for a little while after college, some units didn’t have garages, so even just the paid parking stalls. So say that you, in that scenario, maybe you only had two stalls for a four unit. It’s the person who wants to pay more that gets those parking spots as well, right. So yeah, I guess lots of different ways to add some value. Luke, we just gave you a lot of ideas, man, so you got a lot to go play with now.

Ashley:
Okay, well thank you guys so much for joining us for this week’s Rookie Reply. I’m Ashley, and he’s Tony. If you have a question that you would like to submit, please go to biggerpockets.com/reply and we’ll catch you guys on our next episode.

Pranjul Bhandari, chief India economist at the bank, says that’s because “incomes haven’t fallen that much, as was feared a couple of months ago.”

Drawing from my background in regulatory compliance for global financial institutions, I have developed an appreciation for the intent of regulations that strive to safeguard public interests. 

Regulations are not limited to finance—as you may be aware, short-term rental (STR) laws are a hot topic. As cities aim to refine STR laws to suit their unique community needs, the landscape and laws continue to evolve. 

In this article, I will share my experiences and offer actionable advice for navigating these changing regulatory environments.

1. Maintain Flexibility in Your Income Strategy

STR laws are not just set at the city level but also by homeowners associations (HOAs). This was a key lesson from my early foray into STRs. 

My first STR was in an HOA community. I was all set up and thriving—and then the HOA unexpectedly updated their rules, prohibiting leases of less than 12 months. This led me to adapt quickly, transitioning my STR into a long-term rental that was still profitable.

This shift highlighted for me the critical need for flexibility in real estate strategies. When analyzing deals, it’s important to consider properties that can adapt to both STR and long-term rental models. 

While finding a property that can profitably function as both an STR and a long-term rental isn’t always feasible, it’s essential to assess your willingness to take on certain levels of risk. In my experience, I lean toward STRs located outside of HOA communities to avoid the risk associated with potential bylaw changes. 

2. Educating Homeowners: The Key to Harmonious STR Hosting and Equitable Lawmaking

Homeowners’ concerns about STRs are not limited to immediate issues like noise and parking disturbances. There’s also a growing concern regarding the impact of STRs on the broader community, such as potentially increasing rental rates and reducing housing availability for locals. 

These concerns, whether widespread or localized, deserve serious attention and dialogue. Effective management of these issues requires STR hosts to engage proactively and thoughtfully with their communities. Open communication with neighbors is crucial, not just to address immediate nuisances but also to participate in discussions about the economic and social implications of STRs.

Working with homeowners and the community, STR hosts can help develop balanced and fair STR regulations. 

3. Strategically Adapting Your STR Portfolio to New Laws

Enforcement of STR laws has been known to vary significantly by city. This variability puts the onus on the STR owner to decide how you choose to operate with new information and regulations. Adhering to new laws as soon as they are enacted is often considered the safest, most responsible approach for any business to ensure compliance and minimize legal and financial risks. 

That being said, when faced with new laws, you have two primary options: adapt immediately to the changes or take a “wait-and-see” approach if you anticipate further amendments. One example of the latter is if new laws come out and you think your city will add a grandfather clause in the next iteration.

Deciding whether to comply immediately or to observe for potential evolution in the laws involves assessing both risks and potential benefits. Your decision should align with your risk tolerance, values, and the unique circumstances of your properties.

Final Thoughts

Successful STR management hinges on adaptability and informed decision-making. Staying current with evolving regulations and assessing how they impact your strategy is very important. 

By balancing compliance with strategic flexibility, STR owners can navigate the complexities of the market while maintaining profitable, responsible operations.

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Rob:
This is the BiggerPockets Podcast show 883. Hey everyone. I’m here with my good friend Henry Washington for a very, very powerful investor story today.

Henry:
Man, that’s right, Rob. We are here talking to Terrica Smith. Terrica is single-handedly solving affordable housing in Louisiana while turning a profit. This is one of the best episodes that I’ve ever been a part of. It is an understatement. Terrica is an investor who started out with nothing in terms of resources, in terms of finances, in terms of understanding what real estate investing is. We hear all the time that affordable housing is this puzzle that no one knows how to solve, and she’s literally doing it right now in her backyard and started at ground zero where a lot of new investors find themselves right now without money and without knowledge. And so if you are in that boat where you know I want to do something extremely powerful with real estate and I just don’t feel like I have the resources to be able to do that, this is the show for you because this is somebody who was in your shoes and is now changing her community and it’s now changing the lives of the people within her community and building wealth while doing it.

Rob:
And she’s solving affordable housing for Louisiana and actually turning a profit, which just makes this whole story all that more inspiring. So you’re going to definitely want to stick around until the very end. I know you’re going to love it. And without further ado, let’s bring in Terrica.
Terrica, to start the show, can you tell us a little bit about your upbringing in New Orleans?

Terrica:
Oh yeah, absolutely. So for those who don’t know, my name is Terrica Lynn Smith. I’m a real estate developer and coaching. So I actually got started in real estate back in 2005, and that was the year of Hurricane Katrina. We were trapped in the city and honestly thought I was going to die. I thought it was the end of the world during that time. And so I had two kids at that particular point in my life and I knew that I did not want to leave them here without a mother. I also didn’t want to lose our lives because we didn’t have any money. So it was a life-changing moment for me being trapped in the city. And I said, “If I can get out this city, then I’m going to work and not rely on the government ever again in my life.”
And that’s what I did. We relocated to a foreign city called Lafayette, Louisiana. I didn’t know nobody, didn’t have no referrals. I had nothing. I started with nothing and I ended up at CENTURY 21, and I got started selling real estate. I think the key point of that though is I didn’t just go get my real estate license. I knew absolutely nothing about real estate at this time. I just knew I was trapped in the city for a few days and I did not want to experience that again. I wanted to be able to fly out the next time a natural disaster happens. And so because I knew that and I knew because I didn’t have no money, I couldn’t leave the city, I was one of those people who was poor in New Orleans at the time. I had to do something to be able to better my life for my children.

Rob:
So you mentioned you didn’t really know much about real estate or anything like that. What were you doing? Tell us a little bit about some of the careers or some of the jobs you had growing up.

Terrica:
Well, I was homeless at 17, so I didn’t really have no career. I didn’t go to college and have no fancy degrees or anything like that. At that point in time in my life, I was working at a temp service during Hurricane Katrina and I would hold stop signs at the construction sites early in the morning to be able to let people know when to stop and slow down and do different things like that. So I absolutely knew nothing about real estate, but before Hurricane Katrina, I actually traveled the road selling magazines going door to door. I would ask people what they did for a living, and these people would always say that they were in real estate. So the term real estate always stuck inside my head because I never knew what it was. I always thought it was buildings. I never knew it was actual dirt.
So after Hurricane Katrina and being trapped in the city, when I realized I needed to find something to be able to make money, I remembered all those people doors I was knocking upon and they lived in these big beautiful homes and they all said they were in real estate. And so for me, that’s why I ended up going into real estate because of the simple fact I was a door knocker and that’s really how I got my start in real estate.

Henry:
I think that’s super cool. There’s a lot of people who get their start in real estate because they, through whatever profession they have, see people closing real estate deals and they end up on that. I’ve talked to people like title agents, they’re closing transactions all day long and they’re all of a sudden they’re like, “I want to be receiving some of these checks. How do I do that?” And then the same thing, people see real estate agents, they know they get commissions and that’s kind of what gets them in. It’s interesting too that you were knocking on doors because as real estate investors, that’s still something we have to do and we’re getting started sometimes.
So I wanted to kind of clarify, you said you were trapped in the city during Hurricane Katrina. I just want to clarify for the audience what you mean by that. You don’t mean trapped in the city in terms of like you couldn’t get out because traffic was bad. You mean you were trapped in the city because you just financially didn’t have any way to leave? Is that what you’re saying?

Terrica:
Right. Both. So when I say trapped in the city, I mean that, one, we did not have no money to be able to leave ahead of time to be able to evacuate when they told us to evacuate. If you don’t have much money and you’re living on welfare, that is a lot of money when you have to up and leave and you have that small amount of income. So not only that, it took us three days to be able to get to a city called Breaux Bridge, Louisiana, which is only two hours away from New Orleans. That’s how bad traffic was, and that’s how long it was taking people to be able to evacuate because people was running out of gas, the gas stations wasn’t opening. So we stayed trapped in the city literally in the same area until we was able to get assistance with the police, the army, and all those different people that came in to help us evacuate. But we literally was trapped in the city.

Henry:
Okay. So essentially, what you’re saying is, because of the conditions and your financial situation, there was no other options for you. And then you kind of put two and two together and said, “I know all these people that have this money are in real estate and I never want to put myself or my family in a position where I can’t get away from trouble like this if I need to due to my own financial circumstances,” so you said “I’m going to get into real estate because of those situations”?

Terrica:
Absolutely. Let me tell you this. They were asking for our city council and all these different people and they were like, “Yo, they flew out already.” So it just planted a seed when I heard that, right? So we asking for help from our leaders, but they not there. They already gone. So it’s like, “Okay, well I don’t want to be here next time something like this happened.” So it just really resonated to know, yo, people really did leave. And if we would’ve had money to be able to leave, we wouldn’t be in this situation. And so it was a big eye open for me.
You never know what you need until you really need it. And at that time, if we had the resources to be able to evacuate… And I’m talking just a few hundred dollars, I’m not talking thousands of dollars. If we had a few extra a hundred dollars, we could have left and evacuated and stayed at a hotel again. For those who don’t know what evacuation is, you got to literally leave your house. You got to go and stay at a hotel room, you got to be able to afford the hotel room. You got to afford the food when going to that. So it’s not just oh, up and leave and go by a cousin or a relative. It’s also counting the cost of that as well.

Rob:
Absolutely. It’s hard. I think it’s hard for anybody to move so you put in any kind of financial constraints or stress and it’s super, super difficult. So thank you so much for sharing that with us, Terrica. I want to move along a little bit in your story because eventually you do end up getting into real estate. Did you know getting into real estate when you were doing this, did you know what it would become? Did you have an idea? Were you like, “This is my way out”? Or were you like, “I’m going to try this and see how it goes”?

Terrica:
Rob, I was poor with a negative bank account, okay? Let me just be clear. I just needed some money at the time. I didn’t join real estate because I was going to be Warren Buffett or Donald Trump. I joined because I needed some zeros in my bank account and I seen people with big houses and it looked like they put zeros in their bank account with real estate. I failed that exam seven times. I could not pass that exam. I did not know what a mortgage was, a lien was, an encroachment, an encumbrance. I knew no real estate terms. So for me to literally know nothing, be the dumbest one in the classroom, asking the most simplest questions to those who got family who’s been owning real estate, it is unheard of, right? So I had no clue that I would be a leading woman in my area, pioneering smart girl. I just didn’t know that. My mind didn’t comprehend that. It comprehended I needed a few more zeros at that time. So I started where I was.

Rob:
Cool. And give us a little bit of clarification. When did you go to real estate school? Give us what was that timeframe relative to Hurricane Katrina? Yeah, give us some context there.

Terrica:
That’s a great question, Rob. So I got started in real estate. So Katrina was in August of ’05. So right after Hurricane Katrina, we got relocated to a place called Lafayette, Louisiana. By December, I was already going to real estate school. I was sitting in the class trying to figure out what the heck real estate was and just trying to figure out how to pass exam. In early ’06, I got my license and I finally passed it. Got my license and I became a real estate agent during that time.

Rob:
Got it. Okay. And you said you took that test a few times?

Terrica:
Seven.

Rob:
Okay, seven times.

Terrica:
Let’s not dismiss that seven, okay?

Rob:
Okay. Okay. I love that by the way. Most people would not do that. So that just honestly just goes to show your tenacity and how much you wanted this. You pass. I’m sure that’s a really big day for you. And you get into your first year of being a real estate agent. What was that like?

Terrica:
I made a whopping $5,000 my first year. I could have made more money working at McDonald’s is what my exact thought was. I’ll never forget that moment. I just knew when I passed that exam hearing… I just knew that I was going to be rich. I just was like, “Oh my gosh. I got the paper that everybody had been getting to get these big houses.” And my first year I was a WOB. I call that walking around broke, okay? I did horrible my first year. But, I didn’t give up. I went back to my roots. I found my niche in real estate. I door knocked for business. You know what I’m saying? I door knocked to sell magazines. I door knocked to get my real estate doors and I went on to be CENTURY 21 Rookie of the Year Top Producing Agent, and then they honored me with the Centurion Award and different things like that. So my second year was a lot better. I did over a million dollars in sales.

Rob:
Wow, okay. Yeah, that’s a big jump.

Henry:
When you said WOB, walking around broke?

Terrica:
Walking around broke. That’s right. I was a WOB.

Henry:
Man, it made me chuckle because I’m like, “I think there’s a few real estate investors online right now look like who look like they got it, but they’re wobbing around too.”

Terrica:
Yeah, that’s it.

Henry:
But no. So you talked a little bit about 5,000 the first year and then the second year, Rookie of The Year, and all these awards. So obviously, a lot went into how you go from one to the other. But you said to yourself, I could have made more working at McDonald’s. What made you stick with this plan that didn’t work like you thought it would in the first year versus just going ahead and saying, “You know what? I’m going to go get a different job.” What drove that decision for you?

Terrica:
So I always tell people this, “I’m street strong. It take a lot to break you, girl, okay?” I’ve been through hell and back. I feel like you literally got to kill me to take me out this game. And so I refuse to go down. I refuse to be defeated. I didn’t get this far just to get this far. And I knew that if I went and took that test seven times and I eventually passed, I can eventually pick up how this is supposed to go into real estate and start making money from it. So I was always very conscious of my mindset and the way I thought about things because the moment I say I’m done with something, the moment I don’t want to do something, I’m done and I’m not doing it. So I had to be very careful not to let those words come out my mouth because I would’ve walked away if I would’ve been like, “Oh, I give up,” or “I quit.”
I made $5,000 this year. This is horrible. But when you see people around you doing 1, 2, 3, 5, $10 million, you’re like, they’re no different than me. And I’ve always told myself that I’m no different than the next person, other than they just kept on going to the next opportunity. If I stop here, I won’t get to my next opportunity. So I think that’s what was different for me.

Henry:
There’s a lot of value in what you just said. There’s a lot of lessons for new investors in what you just said because what you expressed is really the mindset that people need to have when they’re not just approaching real estate, but any new business venture. It ain’t supposed to be easy. It’s not supposed to be easy. The only thing in my opinion that sets apart successful investors from those who haven’t found success yet, it’s not that the successful people found the super secret sauce or super secret bag of money nobody else found or the super secret deal source nobody else found. It’s just that they didn’t quit. They didn’t quit when it got hard. They didn’t quit when they didn’t make any money. They didn’t quit when they spent money and didn’t get a return. They didn’t quit when a tenant destroyed their property. They didn’t quit when the deal fell apart at the closing table. It’s the tenacity.
When people say you have to have the right mindset, I think a lot of the times it kind of just goes in people’s one ear and out the other. There is so much gold in this story already. We’re about to learn how Terrica has used that grit and tenacity to learn how to turn any deal into a yes and build a massive portfolio right after this break.

Rob:
And we’re back. We’re here with Terrica Smith who is sharing her astounding story on how she got into real estate on the heels of one of the hardest times in her life. She committed to real estate hard. She took the real estate exams seven times to get her license. We’re about to see how that tenacity paid off throughout her journey.

Henry:
That’s huge. Not allowing yourself to say, “Hey, this isn’t going to work,” or “Hey, I’m done with this.” Even playing it in your mind can really change the actions that you take, so I love that. I think that’s valuable lessons for people.

Rob:
I mean, I think pretty much what it comes down to is like, we all suck when we get started at something and the really successful people are just willing to be bad at something for a lot longer. And that’s really the big difference in this world. I think people look around at real estate investors and they say, “Oh, they’re all smarter than me.” But it’s like, what are the chances that every single successful real estate investors actually smarter than you? And it’s like zero. They’re all just regular people that who are willing to be bad at something for a long time until they’re good.
Terrica, I don’t want to gloss over this whole thing. I mean, you said the first year you made 5,000 bucks. It sounds like this is rough math here, but that means you sold roughly 150K worth of homes that first year. Then the second year you said you did about a million dollars in sales, which rough math here would say you almost 10X your revenue or your closed sales. So what was that? What happened? What was the big moment there that was like, “Oh, okay, I’m just going to 10X the amount of output that I’m doing this year.”

Terrica:
I’ve always been big on research and education. I have self-taught myself a lot of things. Literally, it’s by giving myself access to information. And I remember the big change for me was buying this CD. It was like a comeback CD. It was literally being able to get over every single objection that a seller and/or a buyer would face you with. I would listen to that. It was like how I read my Bible from sunup to sundown. Soon as I get in the car, I get out the car. If I’m in the shower, I have the cassette playing in the bathroom. I’m constantly doing it and I’m constantly role playing. So now when I get on the phone, I need enough tenacity to be able to get prepared for these notes I’m about to get, because I already know Ms. Jones is about to tell me no. I already know I’m about to get 10 of them nos, right? So I got to prepare myself to be able to get to the yes with all of those notes. And for me, once I had that mindset, I was like, “Yo, that’s really cool.”
The second thing was when I door knocked, I ended up getting my own subdivision from a lady because she was impressed with me door knocking. She wanted to know why should she go with me versus going with the top agent that she was going to go with, and I said, “Well, I can tell you. Number one, I have time, okay? I got way more time than anybody. I’m out here knocking on doors trying to get your business. Okay, your realtor’s not knocking on doors. That’s the first thing. The second thing is, you’re not going to be a number to me. You’re going to remember me.” So I made my relationships more personable with the sellers. I treated them as if they were actually a friend of mine and that their property was the only property in the world for me, and it landed me my first subdivision. So-

Rob:
Hold on really fast, Terrica. What do you mean by that? When you say it landed you your own subdivision, is it one of those subdivisions where a lot of them are pre-built and you’re just the exclusive agent?

Terrica:
Yes. At that point in time, yes. This was a lady who she had, I think it was like 60 lots or something like that. And so she literally allowed me to be the listing agent for that community. Every single property she built, I was the listing agent to be able to sell those homes back there.

Rob:
Wow.

Henry:
Whoa.

Terrica:
Yes. So that went for me. And this is important for those that’s on here, that’s in real estate, I went to a foreign place. I knew nobody, I was not a Thibodeau or Recio or a B [inaudible 00:18:52]. I didn’t have a popular last name. I didn’t have no referrals in the pipeline. I literally just started with what I was good at. And some of us have superpowers that we just don’t access, but I think if we start accessing the superpowers that we have, we’ll realize our talents is more than enough.

Henry:
So what a cool… Well, first of all, the story’s amazing, but you knock on the door and you kind of have, this lady kind of gives you your moment, right? She said, “Okay, tell me why you.” There’s not many people that can point to a very specific moment that probably changed their life. But that 30-second elevator pitch moment right there was probably extremely life-changing for you because it seems like, and I’m speculating here, but it sounds like you being the listing agent for this developer probably gave you a lot of insights and education into the other side of the real estate world on the investor side. Is that kind of how you transitioned?

Terrica:
Well, yeah, absolutely. So this is a funny story that goes into this, right? So of course it gave me name recognition in the area. When you have a whole subdivision, of course people are going to see your names. Real estate is its own world, so everybody know everybody in real estate who’s doing something. If you ain’t doing that, nobody know you, right?
Well, long story short, I had started working with investors only. I realized there was a niche for investors that agents wasn’t really working with. And so I would start working with investors. I remember sitting at the closing table with one of my investors, and I literally would do all of the work on these projects for them. Meaning, I would find a property, I would bring the contractors in to fix up the property, I would oversee the contractors, pick out the paint colors. I would do everything, list it, sell it, everything, right? I was sitting at the closing table one day and the attorney gave me the folder, the closing folder, which was supposed to have my commission check in it as a realtor.
Now I should be grateful because I have investors that’s let me come in or whatever, and they’re buying it with me, they’re selling it with me. I should be very grateful. Well, they end up giving me that investor folder. And when I seen those zeros in his folder, I couldn’t unsee what I see. I was like, “Yo.”
Now mind you, I said, “Oh, I’m sitting at the wrong end of the table. I need to be on that end where they’re getting the big zeros and doing the least amount of work.” So I had a conversation with all my investors at that time and I said, “Hey, I’m going to work for you guys, but we’re going to split it 50/50 and I’m not putting up no money. I’m not putting up no money. I’m going to do all the work, I’m going to do everything I’ve been doing, but you got to split it with me 50/50.” I lost all my investors except one. One investor stayed with me. Me and him did about 10 homes following. And then he started telling all his friends about me. And guess what? When his friends came to the table, they knew if they was going to work with me, it was going to be a 50/50 deal and I wasn’t putting up no money.

Rob:
Okay, all right, so let’s go back because I love this. So you’re basically saying, “I want to use OPM. I want to use other people’s money to fund my real estate journey,” I suppose. So you go, you’re a listing agent and you’re starting to talk to investors. And basically you come in, I don’t want to say making demands, but you come in with your terms. You say, “Hey, I want this.” And you had a group, I think you said, of 10 or so investors. Most of them said, “Yeah, those terms don’t work for us. Thanks, but no thanks.” They all left. And then one person was like, “Actually, I’m good with this.” And then that was kind of the beginning of working with someone to fuel the empires of that. Did I hear that correctly?

Terrica:
Yeah. It was way more than 10 investors. I lost all my investors except one. But that one investor went on to do 10 deals with me, and that got the attention with his other friends.

Henry:
And the draw for the investor was you were the workhorse. You were finding them the property, managing the build, the renovation, the contractors. All they had to do was show up and get paid essentially.

Terrica:
That’s it.

Henry:
Okay.

Rob:
I like this. Were you negotiable at all on this or were you like, “This is what I want”?

Henry:
Rob, Rob, have you been on this interview? Do you think she was negotiating?

Terrica:
Rob, let me just tell you something. I mentioned earlier, right? I said, I’m street strong. One thing I know how to do is make it out of a struggle. So if I had to struggle back from the beginning with zero to get to where I’m at, I was willing to do it. And pretty much I did. I only had one buddy that stayed with me. Shout out to him. We still rock together to this day.

Rob:
Well, I ask because most of the time we’re like, “Hey, this is what I want.” And when someone’s like, “No thanks,” it’s always like, “Oh, okay, well, I mean, what do you want? And then maybe I can come down a little bit.” But you didn’t take.

Henry:
I love it. It is sticking to your guns. This guy did 10 deals with you. Of those 10 deals, it was a 50/50 split for you and him, but he didn’t have to do any work. And so you said you did 10 deals, but you guys are still working together now. Is the relationship different? What?

Terrica:
Oh, it’s much different. Yeah, it’s much different because I’m a developer now, so…

Rob:
You make him do the work.

Terrica:
I think I’d impasse him on what he’s comfortable with doing. But yeah, no, we still work. I mean, we still hang out. We go out and eat. We do things like that. But I’m pretty aggressive in this market. I like filet mignon. So that mean I like to eat good in this market. He still does a lot of the fix and flips. And from here at everyone, I feel bored in developments, I go dabble over there. We go make it like old times. But for the most part, we’re just really good friends.

Rob:
Okay. So you keep revealing just massive aspects of your story that I’m like, “Hold on, wait.” So you’re working with these investors, you do the work, you split it 50/50, and then there comes a moment in this, I guess, transition of doing renovations and flips where you’re like, “I want to start developing.” Tell us a little bit about that. What was that moment or that change in your career?

Terrica:
So what happened was-

Henry:
Wait, let me guess. Every transition in her career, it’s because she saw somebody was making more zeros and she said, “I’m going to go figure out how to be better than you at that and get them zeros.”

Terrica:
That’s right. That’s right. So I was at a builders meeting and I was sitting on the UDC board, which is the Urban Development Committee. That’s a committee where all of the builders and developers and everybody like that join together. They give input on ways that they can get different developers to come into the areas and things like that. And so I was sitting there and one builder was talking about the new home he was going to build. Now mind you, I never thought about building new homes. At this point in time I’m just a fix and flipper. He was saying how he was buying lots and he was just putting them up in different communities and I’m like, “Wait, you’re building new homes in older communities? I never even thought of that.”
So I went and partnered with a builder. What that partnership looked like was, I found the lots and I paid for the lots and then I had the builder come in and we would build on those lots together and we would split the profit 50/50. The reason why I did that was because I needed to understand how to build new construction. I knew nothing about it. And being in a fix and flip, depending on the type of home, you’re pretty much rebuilding it anyway. So I knew that I could possibly do it, but I wanted to make sure that I had some type of experience from someone with experience. And so I partnered with a builder. We built four homes in an existing community. We sold those homes before we even finished building them. And I’m like, “Yo, this is some really great money.”
So then I was like, “Okay, if I can do this, then I’m sure I can be a developer.” But I didn’t know how to be a developer until one of my friends at a dinner said, “Hey, I’m putting my grandchildren name on the street sign” and I’m like, “What? You can put people name on the street signs. I didn’t even know that was a thing.” I didn’t know people sit down and have conversations about that, right? It’s about being in the right room and having the right access to the right information you start learning these things. So me being who I am, I’m like, “I want my children name on the street sign too.” So I go and I develop a community, it’s called Madeline Cove, and then I put my son name on the street sign.
Now, I didn’t just become a developer. What I did was I actually worked with the builder. We built a few more properties, and then I eventually ended up in a few more development partnerships with other builders who wanted to be developers. So I was able to witness on the back end that operation, and then I was like, “Okay, I felt confident enough to be able to go do my own development.” And that’s how I was able to start Madeline Cove and put my children name on street signs.

Henry:
First of all, I think you’re just a good storyteller because within these stories, there’s so many great lessons for people if they’re wanting to get into real estate or into development. I think one of the lessons that we’re hearing here is you didn’t just say, “I’m going to go be a developer and jump off the cliff” because there’s a lot of risk in being a developer, right? Especially if you have to go acquire the land and you don’t know what that land has use for or if you can even do what you want to do and the cost of it. There’s so many variables and so much money gets spent with development before a 2X4 is ever put in the ground. And so what you did that was super smart was you said, “I’m going to go partner with somebody who knows how to do this and I’m going to structure it in a way that’s beneficial to that partner and myself so that I get a lesson while I make money.”
I always stress to people, if you’re going to get into something that’s not your bread and butter, there are people who are good at it, and there are ways that you can set yourself up to partner with those people or be successful. You need to bring them the thing that they don’t have. I wanted to do a self-storage deal. I wanted to do one so bad, and I thought the only way I’m going to do a self-storage deal is I got to go find a self-storage deal. Because if I get a self-storage deal, I know I can find a guy who does self-storage to come be a 50/50 partner with me. And that’s exactly how I did my first self-storage deal. I got a lead and it just so happened to be a lead on a self-storage facility that this guy had been trying to market to.
And so once I got the lead, I called him and I was like, “Hey, I think this is a good deal. How do we take it down? And if we do, do you want to be 50/50 partners?” And that ended up netting us our first storage deal. So I think that there’s a valuable lesson there. Find someone who’s doing it and bring them some value and you can get a deal. And then you worked with this developer, you built this relationship, you did a few projects until you felt like, “Okay, I know how to go do this,” and then you went and found your neighborhood to put your family’s name on. Is that what I’m hearing?

Terrica:
That’s absolutely correct.

Henry:
It gives me goosebumps.

Terrica:
Yeah, it’s amazing. So can I ask a little bit about the details of working with the developer? I think you mentioned you found someone, you said, “Hey, let’s split this 50/50.” How does that work? Do they have a fund or do they have a commercial line of credit with the bank and then they fund it all through there and they’re basically on the hook for that commercial loan financially? And then yeah, basically after all that loan is paid back and you make your sale, you’re just splitting profits from there. Is it that easy or is it even more complex than that?

Terrica:
No, it’s not even complex. So I think it all depends on the builder/developer, whatever, whichever route you want to go. For us, we had a relationship with a local bank. So this is how development goes, whenever we find a partial of land and we do the subdivide and we do all of our civil, we are already pre-selling lots. So by the time we get to 50% sold in our community, before we even do shovel, before we even shovel ready, we’re already 50% sold, we go to the bank and we pledge that book of business with the bank.
And they see the LOIs, the letter of commitments we have, letter of intent, but the letter of commitments we have from other builders in the area who has agreed to purchase these lots from us. And then they give us the finance and for the hard costs to be able to get started with the infrastructure. And then of course, you got your lot allocation with the bank where they’re going to have a certain portion that’s due on each lot. Every time you close, you got to pay down your loan on it. And then from there, we’re able to split the profits.
Now how you come in as a partner, for me, I’m adding value is I’m going to do all the city council meetings. I’m going to go to all the civil. Most developers, they want to do that anyway, but if they have somebody that’s going to be in the weeds with them, it’s a great partnership opportunity. And so I’m also going to put in whatever the bank requires for that 20% down. I’m going to come in, I got to bring in my 10% of the portion if I want to be an equal partner in that deal. And that usually looked like me bringing in other investors on the back end of under me creating some type of GPLP situation to be able to get my 10% if it’s a multimillion dollar development.

Rob:
For anybody at home that may not know that is, that’s general partner and limited partner.

Terrica:
Thank you, Rob. Thank you, Rob. Yeah, and so we put those together. And then from there we’re able to go and acquire it and split the profits at the end whenever we sell the property.

Rob:
Very cool. Very cool. Okay. This is really amazing, by the way. I mean, I think you know. This is such a cool story. Obviously, you’re crushing it. You go into the development world. I’d imagine it’s a little competitive. So what was sort of your angle or what was your idea for making your neighborhood different or your subdivision different from some of the competition in New Orleans?

Terrica:
So just so we cleared, this community is in a few hours away from New Orleans. People be trying to dagger you on the internet. But anyways-

Rob:
Yeah, I do know, unfortunately.

Terrica:
Yeah. So I’m big on prevent and gentrification and I’m big on community projects and allowing people that come from situations such as myself, low income, Section 8, affordable housing subsidy. I’m big on catering to that audience. So Rob, I see no competition in my lane. There’s nobody in the United States that can compete. And I say this aggressively. Now, this is national builders. If they want to come on down to this level, I think it’ll be a party for 80% of Americans, right? But there’s nobody building homes less than $200,000 in this marketplace today, but me. So I am okay with making 40,000 to $60,000 on a real estate deal. New construction home, brand new, three bedrooms, two baths. I’m talking a garage. I’m not even putting these people in carports. Granite countertops, energy, fish and windows, architectural shingles. It’s a really nice home that we’re building for the people. There’s nobody who can compete with that.
And so whenever I’m bringing these communities to these neighborhoods, I’m door knocking back to my roots, back to my superpower. If you put me in front of you, Rob, I can sell your furniture back to you when I go to your house. That’s how good I am. I really believe that. So because I know who I am when I go and knock on these people doors and I’m addressing their pain points and I’m letting them know, “I’m not coming in here to push you out your neighborhood. I’m coming in here to include you in your neighborhood. What is it that you would like to see in the neighborhood?”
“Oh, we’ll like to see the violence calm down.”
“Okay, great. How about we create an opportunity where, one, we create some type of recreational activity where kids have a place to go and play.” Maybe we have a bookstore in the area because bookstores don’t go into the hood, period. So maybe I create bookstores that go into these neighborhoods that don’t normally get bookstores. Maybe I create a coffee shop where kids can go sit down, study and want to learn. Maybe I create these environments that these neighborhoods wouldn’t normally see, and now you’re able to address the pain points of what some of these people have.
Another pain point they have is that they don’t feel like people are here now. Their voices are not heard. So I’m like, “Not only do I hear you, I am here physically. I’m from where you from. I come from where you come from.” So I’m not afraid of these gang bangers and all these other people that may scare people in the area. I’m not scared of them. I’ll just look at the drug dealer. I don’t care. I’ll stand up to him, period.
So because I have that tenacity about me and because I’m that hometown girl and because I’m not an outreach developer, people in the community, they rock with me more. We went door to door explaining to everyone what we was doing, passing out flyers, but also just doing neighborhood cookouts, community events, making them know that, “Hey, we’re here for you guys. We want this to be for you.” And my audience, the people who I build home for, the people who I’m selling homes for is the cafeteria workers in the hospital. I’m focused on that median income of anywhere from 30,000 a year to about 60,000 to 70,000 a year. That’s who I’m focused on building homes for, because that’s kind of like what the middle class in the south is making. So if I can focus on providing homeownership to those individuals who’s been working at the same job for 10 to 15 years, then I feel like there’s no competition in my lane, Rob. I hope that answered that question.

Rob:
It did. It absolutely did.

Henry:
I’m just going to be frank. This is why I wanted to have you on here telling this story, because all we hear right now is there’s no affordable housing. There’s no way to build affordable housing. We can’t solve this problem. No one wants to solve this problem. And you’ve essentially laid out a blueprint for how people can solve this problem. So I think what you’re proving is that, yeah, this problem can be solved, right? This problem is being solved. What it’s taking is for somebody to get down and go meet people where they’re at. And I think that’s what sets you apart from everybody else, is nobody else is willing to do that.
And you are building homes and improving communities without displacing the people within that community. And so many times we see people come in and build these beautiful homes and these beautiful neighborhoods and these beautiful amenities, but they’re not for the people in that neighborhood. They price them at a price point where the people in that neighborhood can’t have access to those amenities. And you’re doing the exact opposite. You’re building these beautiful communities, but building it in a way that allows the people within that community to have access, and I want to commend you for that. I think that that’s incredible. More people need to see that it is currently happening and can be done and can be profitable.

Rob:
That’s huge. I think a lot of people get super scared to go into the affordable housing side of things because they think that there’s no money to be made. But you said that these are, I mean, each build is a relatively profitable build?

Terrica:
That’s right. And I don’t use the government money. So a lot of people associate affordable housing with subsidy. I don’t use government money. This is my own money that we use to go to the bank. I’m using traditional funding just like anybody else. So I’m not getting no tax credits, I’m not getting any of that. This is literally us working with Home Depot and working with the Lowe’s around the world and getting corporate discounts and being able to sit down and have these hours at a time meeting to drive the pricing down, price per square foot so we can build them at the price that these people need. And also not just focusing on building homes. It’s more than that, right? There’s a food desert, there’s a healthcare desert.
In the area that I’m building it, if a railroad train is passing, there’s no healthcare. That means you can’t get to an emergency room if a train is passing. So we’re more focused on bringing those type of opportunities back into these communities where these people don’t have transportation. They rely on public transportation. So if we can provide food, housing, and medical, I think that that’s a start to getting our community back to where it needs to be.

Henry:
This is incredibly powerful and there’s a lot more depth to explore here. Now that we’ve uncovered how Terrica is single-handedly tackling the affordability crisis, let’s dive into how she opens up opportunities for other investors in her region. Plus, we’ll discuss the insightful advice she offers to new investors. Right after the break.
One thing you mentioned was that you go door to door and you talk to the people in the community and you ask them what they want. Obviously, I think strategically that helps you know what to build. But are you also doing that because is it a way you get approvals for the things that you need from the city based on what the community members are asking for?

Terrica:
I do it because they be having my back, Henry. I’m not going to lie. People be stealing in these neighborhoods and robbing you blind. You know what I’m saying? So I’d be needing a few people to have my back in this neighborhood. So if they know Terrica is in here and I’m trying to help them, and I’m trying to keep them in an environment that they’re used to, that they’ve been there for generations, but I’m just trying to uplift them and bring them better product in their community, then I need for them to have my back. But also if they have a particular pain point, like for instance, they want children to be able to have a basketball court or things like that, I do put those into my designs because that is so important for them and it helps them know that I’m a woman of my word and that I’m going to be true to what they’re asking. Absolutely.

Henry:
Irritates me, every time I go into a community and I see somebody build a park and not put a basketball court because then I know you ain’t built that park for the people that’s there. You’re trying to push the people that’s there out. If I see a new park go up with a basketball court, I’m like, “That’s for my people right there.”

Terrica:
Yes. Yes.

Henry:
I love it.

Rob:
So let me ask you, Terrica, because you’re building and you’re developing a lot of new homes, what does that do to the equity of existing homes? Does that help them? Does that hurt them? Does it build up the entire community? How does that look from a grander view?

Terrica:
Oh, that’s such a great question, Rob. So where I build that, nobody want to come at right now anyway, unless they want to come bulldoze everything down in the area and then just start fresh. So everything that I do, like where I’m building at, before I started building, home values have not increased in over 10 years. Could you imagine not having appreciation in your house in over 10 years, right?
So we took a property, these homes didn’t sell for more than 30,000 to $40,000 in this area. Now they’re selling at about $85,000 because of our new construction homes that we’re building in proximity. Not only are those home values increasing, now we’re increasing the property value in those areas so you just can’t come and steal it from nobody anymore. You got to pay what it’s worth. And so now with us having homes that’s being built at 175,000, 180,000, everything of under 200,000, now people are like, “Yo.” First, the bank didn’t even want to give us no money, Rob. I didn’t tell you that. They was like, “Yo, nobody’s going to buy over there.” So the first 12 homes we had to build out of our own pocket without the bank. Now they’re throwing money at us because we can’t keep them on the ground. It’s a high need for, it’s a high demand. So that’s why I say we don’t have no competition because nobody can build and do what we’re doing right now. They can, they just don’t want to.

Henry:
And I believe that somebody listening to this is going to be inspired. I believe that you are going to light a fire under somebody who’s going to hear like, “Oh my goodness, this is what I need to be doing for my community. This is what I need to be doing in the community around where I live.” And so what advice or what would you say to those people who are new and they want to implement a strategy like what you’re doing in 2024?

Terrica:
I would say this, get around people who’s doing exactly what you want to do. This is to me… I mean I can be biased, but I think BiggerPockets is the number one podcast in the world on real estate information. I don’t know of another podcast in the world that gives as much resources as this podcast. And it’s not to fluff y’all feathers because I’m on here. It’s true.

Henry:
No, go ahead.

Terrica:
Right. It’s true, right? And so being in rooms like this, listening to conversations like this, going to BiggerPockets and looking at the fix and flip calculator, looking at the multifamily, all of the resources and tools, if there’s an article on anything real estate, I bet you your last dollar, it’s on BiggerPockets. And so, just becoming a sponge with all of the information and the resources that are already given to you, I think people dismiss that. They dismiss all of calculators that you guys give just for free. I’m like, “Yo, I’d be charging for this. I don’t get this away for free.” So you know what I’m saying? So to know that it’s a platform out there that’s a hub of information that’s given this, I would say start there.
The second thing I would say is get a coach or a mentor. If you hear my story, I had to learn it through someone else, and I was okay with paying for what I needed to learn. I was okay with paying to take my real estate exam seven times. So I think it’s important to know that you have to be willing to make some type of investment in yourself to be able to get where you want to go and not be afraid to make that investment. And then I would say the most important thing is to believe in yourself. Everybody’s going to tell you it’s crazy. They’re going to say it don’t make sense. They’re not going to understand it. But I think I go to the bank more than anybody in my family, and now they can appreciate advice from me when it comes out my mouth.

Rob:
That’s amazing. Well, Terrica, we so appreciate this. This is what I always dub as an instant classic. I think a lot of people are going to listen to this and they’re going to be super inspired to take action today. And for anyone that was at home that if you’re in need of some of these tools and resources, you can always head over to biggerpockets.com. There’s a little tab there that’s called tools. If you click on that, it’ll take you to all of our calculators. And if you want to connect with Terrica or Henry or myself, all of our contact information, all of our good stuff for connecting on the internet will be in the show notes at the bottom of this podcast. Thank you again so much, Terrica. We greatly enjoyed having you on.

Terrica:
Thanks for having me.

Rob:
Yes, of course. And we’ll catch everyone on the next episode of BiggerPockets.

‘Big Short’ traders Danny Moses, Steve Eisman, Vincent Daniel and Porter Collins join ‘Fast Money’ to talk their portrayal in the movie, Big Tech, real estate, the Federal Reserve and more.

David:
This is the BiggerPockets Podcast show 882. What’s going on everyone? Guess what? We got a green light special for you. If you haven’t seen one of these shows before you’re in for a treat. Today we have a Seeing Greene show where I take questions from you, our listener base, and I answer them for everybody else to hear so we can all build well together. Today’s show is awesome. What to do with $20,000 if you’re in college and looking to start investing? How to get started later in life in a market where finding cash flow is harder than ever? And more in today’s Seeing Greene.
And if you’re new to the show I’m David Greene. I’m a former law enforcement officer who saved up a bunch of money working overtime and working in restaurants, bought some rental properties, then bought a bunch more, learned how to use the Burr method, bought out of state, built a pretty big portfolio, got a real estate license, got a brokers license, run real estate teams, run mortgage companies. I’ve basically been immersed in all things real estate. And my guess is you have to and that’s why you’re here. In these shows, I take my experience in real estate and I share it answering the questions that people have where they’re stuck in their journey or they want to accelerate their success. Our first question comes from Tomi, a frequent question asker, who wants to know about valuing a lower mortgage rate when purchasing a property subject to.

Tomi:
Hey, David, this is Tomi in San Antonio. I was wondering, when do you think it’s a good time to go with the builder’s contract in order to get their incentives on a new build considering our high interest rate environment? I would love your info. Thanks again for all the knowledge. Following you has been awesome. Take care.

David:
And thank you, Tomi. What a great question. And thank you for always asking such good questions on Seeing Greene, we’ve had you on before, you’re always bringing up such good points. And if you would like your great question answered on Seeing Greene head over to biggerpockets.com/david where you can submit it there. And if you like these shows and you’re excited to hear what we are getting into today, please leave us a comment on YouTube and let us know what you think about Seeing Greene.
All right. So Tomi your question was, how much value should I ascribe to a lower interest rate? And I love the way you’re asking that because I can see what your mind’s doing. You’re trying to transpose the deal terms into something that fits on a spreadsheet. Your mind is looking for some clarity here. You’re like all right, normally a house is worth $500,000, and you’re looking at the interest rate as one of the factors that makes it worth a hypothetical $500,000.
So you’re saying, well, if it’s worth $500,000 at 7% and it’s … If it goes down to 5% it should be worth more because you’d theoretically be getting more cash flow. The problem is real estate values are not as easy to predict as what we would like them to be. I mean, if we’re getting honest here, the whole idea of what a house is worth is actually subjective. No one likes subjectivity. So we’ve created this idea of appraisals or different ways to value real estate like cap rates and NOI for commercial property because we want to have some baseline understanding of what a property is worth, but you want to know what it’s really worth, what somebody’s willing to pay for it. And that’s why marketing is so prevalent within the world of real estate because if you can make somebody want something they will pay more for it.
Now, we still do use a comparable sales approach because banks are going to be lending on properties and they want to make sure that you’re not buying it for significantly more than they could sell it to somebody else. Meaning, they want to make sure you don’t value it significantly more than what the rest of the market might. Now here’s the bad news. You can’t say, “Well, I’d pay this much money more for a lower interest rate.” But what you can do is compare the property with the lower interest rate that you could get in a subject to deal to the other properties that are available for you and the prices they’re at. That’s a much better way of looking at it, okay? I have this option, option A, and then I have all these options over here on the market, options B, C, D, and E.
Does that deal with the lower interest rate cash flow significantly more than the deals that have the higher rates? Is it in a market where you think that the value is going to go up significantly? So is the lower rate going to allow you to hold it longer so that it will be worth more later? Or is it a market where values are not going to be going up much, you’re not going to get much appreciation there? So getting the lower rate is going to get you some more cash flow in the beginning but that’s all you’re ever going to get. These are the questions you’re going to have to ask Tomi. Unfortunately, you’re not going to be able to say, for every 1% it goes down I add 5% to the purchase price of what I’m willing to pay for the house.
Here’s my two cents. I don’t think you should pay more for a house because you’re getting a lower interest rate, I think that that’s a marketing tactic that people use. They go in there and they pay more than what they could sell the house to somebody else for and they say, “Well, it was worth it because I got this lower rate,” and they look at it like they’re buying the rate. The problem is you can’t get rid of the house if something goes wrong. You’re not going to be able to sell it to someone else or you’re going to lose money. It’s also a very shortsighted approach that says, “I’m going to pay X amount of money for cash flow.” So if I’m getting a lower rate I’m buying cash flow. The problem is the mortgage rate affects one of the expenses of your home which would be your principal and your interest.
And even though it seems like the biggest expense because it’s the most consistent, it’s really not. The killers of real estate are rarely ever going to be the interest rate, they’re going to be the maintenance, the capital expenditures, the vacancy, the way that you operate the property. One tenant that trashes your property and leaves, and you keep a $2,000 deposit but you got to spend $6,500 to repaint, do new flooring, fix the drywall, get rid of whatever smells they caused, fix all the landscaping, get rid of all the trash they left there, it could be the equivalent of 15 years of the interest that you think you save getting the better interest rate. So let’s all avoid getting into the starry-eyed rate talk and thinking that that’s the only expense you’re going to have. These are the ways that we need to be analyzing real estate deals and, unfortunately, it doesn’t all fit on a spreadsheet.
However, I love the way you’re thinking, Tomi. Your brain is working like an investors is, you’re on the right journey. Keep asking questions like that and eventually, the algorithm in your mind will develop itself to where you’ll know if it’s a good deal or not. All right, we’re going to take a quick minute to hear a word from today’s show sponsors. But after that, we are going to be getting into a question that is very close to something that I experienced myself. They’ve got a property with $265,000 of equity in Jacksonville, Florida, where I had a pretty sizable portfolio at one point, and they want to know what to do. So stick around because we’re going to be back after this short break where we are going to hear from someone who has a portfolio similar to mine.
And welcome back everybody, I missed you. I’ve been waiting this whole time for you to finally listen to that ad and I’m so glad that you’re back here. Our next question comes from Summer Wheatley in Florida. Wait, no, I got that wrong, it’s actually Summer Berkeley. I don’t know what Summer Wheatley’s up to. If anybody else knows if she ever made it to the dance with Napoleon let me know in the comments how we think that that went. All right. Summer says, “I live near Jacksonville. I have one owner-occupied-single-family home that I’d like to sell with about $265,000 in equity. I want to deploy that equity into a bigger income-producing property. What are your thoughts, David? Would I have any issues getting a commercial loan since it’s usually based on the operating income and my credit is as high as credit can be? Plus I have lots of cash reserves as well as experience in this business?”
Well, first off, Summer, congratulations on being the most popular girl in Napoleon’s high school. And congratulations on having all this cash saved up and a lot of equity in your property. This is a great problem to have and I’m happy to help you here. Summer also mentions that she wants to move from a family-friendly area where she lives now to more of a beach nightlife area as she’s a single person and wants to upgrade her living situation. And that she would like to pay cash for Airbnb-type property or a commercial property, but is also willing to get a loan if that would make more sense.
All right, Summer, so here’s what I would do if I was you. First off, I’d split up the goal of finding a commercial property that I could operate like a hotel or an Airbnb, that you asked about with the lending, and my goal of moving to an area that I want to live. It’s very difficult when you try to combine or stack goals together. For instance, if you say, “I want to buy a property in a high appreciating area that has a ton of equity in it, and I want to buy it below market value, and I want it to be move-in ready, and I want it to cash flow really, really high, and I want it to have a cute kitchen” you’re just going to be looking forever, you’re not going to find that.
Now, if you said, “I want to buy a property that has a lot of equity and I can buy it below market value stop,” you might be able to find one of those. Or I want to find a property that has a cute kitchen that I would like to live in, you might be able to find one of those. Or I want to find a cash flow property. But you’re probably not going to find them all in the same deal. You’re better off to separate those different things and say, “I want to find a property with a lot of equity to flip, then I want to put those profits into a property that cash flows. And then I want to use the cash flow to help supplement the mortgage of a house that I want to live in.” You see what I’m saying? When you try to stack everything into the same deal you end up just staying house single forever. But when you’re willing to say, “Okay, I’m looking for different things and different opportunities,” and then you combine them all into one portfolio, you’re much more likely to be successful.
So let’s talk about what you can do in this case to find an area that you want to live in but it doesn’t break the bank. You should house hack. You should look for a property in an area that you want to live where other people also want to live. And you should look for a specific floor plan that would work for you to either rent the rooms out to other people … Maybe there’s a master bedroom on one side of the house that you can stay in, and then there’s other bedrooms on a different floor or a different story where other people could stay in. Maybe you find a house with an ADU that you live in. Or, you live in the main house and you rent out that ADU on Airbnb. A lot of the Airbnb restrictions in areas don’t apply to primary residences so you can get around some of that red tape if you take that road.
So now we’ve solved your first problem. You’re living in an area that you want to live and the cost of it is being supplemented by rental income. That takes a lot of pressure off of you and now you can focus on something that you could find which would be a cash-flowing commercial property. There’s probably going to be more opportunities in this space than almost anywhere else because the commercial markets have been trashed. Interest rates skyrocketing, balloon payments that are going to be due on commercial properties. There’s been a lot, a lot, lot of fluxx within that market. And there’s been a lot of people that have lost a lot of money when they were operating the property well but their note came due or their investors had to be paid off. And at the time they needed to refinance or sell, things didn’t work out.
It’s like musical chairs. When you’re walking around the chairs … If you’re in front of a chair when the music stops you’re good. That’s like having favorable interest rates when your note comes due. But if you happen to catch the bad luck of not being by a chair when the music stops, that would be rates being too high to refinance or sell, you’re stuck. Even if you are playing the game the right way sometimes things work against you when you’re in commercial properties. So I like this as an opportunity for you.
Now, when it comes to getting the loan you’re exactly right, you’re typically going to get approved based off of a little bit of your credit score but it’s going to more be the net operating income of the property which means the lender’s going to want to know well, how much money does the property generate? This is typically figured out by looking at all the leases that are in place and adding them up and that’s your income, and then looking at all the expenses that are going to be in place.
Now when you’re going to get financing for a commercial property, like what you mentioned, it’s usually a little bit trickier than if you’re trying to get it for a residential property because not as many people offer them. So I’m a loan broker. You could come to me and I would say, “Hey, you want to buy a house? Let’s look at all these different lenders we have and find the one with the best rate, the best terms, and the best service.”
But with commercial properties, you can do that it’s just way harder. A lot of these loans are done directly meaning you go to this specific bank and they tell you what they’re willing to offer. And it can be complicated. You’ve got different balloon payments, you’ve got recourse and non-recourse loans, you’ve got interest rates. A lot of these interest rates are adjustable. The minute it becomes adjustable there’s a lot of different ways that they can adjust. It’s not the same as getting a 30-year fixed rate loan like in residential real estate where you don’t have to be an expert. You do have to be an expert if you’re going to be getting into commercial financing, or you have to know an expert that can help you through this.
So while the gist of it is yeah, they’re going to look at the income that the property makes and underwrite it based off of that, and your credit will be involved. If it’s a recourse loan, it’s very easy to not understand the loan documents that the bank is coming up with and they’re not written to protect you. I just want everyone to hear this. When you’re buying a house that’s Fannie Mae or Freddie Mac backed, there are tons of protections built into that because these are insured by the federal government and they want to look after their tax-paying citizens. But that is not the case with these commercial loans that are not insured and you don’t have protections. And many of them have tiny little provisions that you would never see coming where you could technically be in default and they can foreclose on you even if you didn’t realize you did anything wrong.
I’m basically getting at the point that I’d love to see you take the equity that you’ve got and get deeper into investing. But I don’t want you to wander into that territory thinking that commercial works the same as residential, that the financing works the same, or that you’re going to combine your dream of living in an area with great nightlife, and a wonderful location, and great weather with cash flowing opportunity. Maybe 100 years ago, maybe 50 years ago when nobody really knew how real estate worked, and you could go in there and you could buy a commercial property and it’d probably have some residential spot above where you could live in the same building that you just bought. I don’t see very many opportunities out there like that now, and the ones that are often being chased down by big conglomerations, corporations, equity funds. There’s a lot of demand to find these kinds of properties so know who you’re going to be competing with.
All right. Just to sum that up for you there, Summer. Remember, commercials very different than residential. The financing is very different. Make sure you have an experienced person read through the loan paperwork and you understand all the deals if you’re going to get into the commercial property. And don’t try to combine all of your goals in the same property, split them up into different properties and put them all into a portfolio, what I call portfolio architecture, and architect your dream life.
All right, we’re going to be getting into the next segment of Seeing Greene where we share comments from YouTube, from you, our listener base, which I love doing, as well as some of the reviews that you’ve left for the show. Remember, I want to see your comments too and I’d love to have you featured on an episode of Seeing Greene. You can do so by going down if you’re watching this on YouTube right now, and leaving a comment as you listen, or by going to wherever you listen to your podcast and leaving us a review. Those help a ton so please do it.
All right, let’s get into our first comment. This comes from episode 869 from Hellermann Industries. I love affordable housing and high-price markets right now. First-time home buyers are always active and not concerned about leaving their golden rate behind. Pick a strong market with strong fundamentals and appreciation and buy under the median price point. Your flips will have a solid audience. And small multifamily housing makes killer rentals right now because renters are getting priced out of full-sized homes. That’s a pretty insightful comment there, Hellermann, well done. This is the kind of stuff I like to see on Seeing Greene. Apparently, all of you listening to this are smarter than the average bear.
All right, our first Apple Review says, “Five-star values, hosts, and content. I’ve been listening for two and a half years and I’m so thankful for all I’ve learned and the connections I’ve made from this podcast. It’s the perfect blend of inspiring stories, investing fundamentals, real estate strategy, and up-to-date information on the market. I am now an investor myself.” This comes from Courtney Cozens via Apple podcast. And I happen to know Courtney if you weren’t aware. Many of you that are listening to Seeing Greene actually become friends of mine. I recently had Courtney interview me on my Instagram talking about how I became an agent, how I built a team, what my experience was like in law enforcement, working in restaurants. A lot of the stuff that’s in my book, Pillars of Wealth. Go give Courtney Cozens a follow and like her comment.
And our next comment says, “Trailer trash to trailer cash. Been following you guys since the beginning. If I can change my life in this business anyone can. Love this podcast.” From CD Kid Cat. That’s pretty cool. And it rhymed, trailer trash to trailer cash. I wonder how Eminem has never worked that into one of his verses. I haven’t heard that yet but I feel like it’s staring him in the face. If anybody here knows Eminem make sure that you let him know that he has missed a potential goldmine to put on one of his songs.
All right. I appreciate and love all of the engagement that y’all are giving us in the comments. Let me know what you think about today’s show and the advice that I’ve given so far, as well as what you’d like to hear on a Future Seeing Greene show so that we can grab that and throw it into our production process. If you’d like to be featured on the show you can do so by heading to biggerpockets.com/david and submitting your video question. All right. We’re going to take a quick break and then we’re going to be back with a question about what to do with 20K and what to do as an investor stuck in your 50s. All right. Our next question comes from William Warshaw.

William:
Hey, David, my name is William Warshaw, I’m from Los Angeles, California. I’m 19 years old and I’m in my dorm room so bear with me. I have 20 grand saved up and I just simply need help taking action in LA, Southern California. 20 grand’s not going to get you much. It’s going to be hard even with an FHA loan. Should I go long distance here? It’s, obviously, very scary going long distance. I’m halfway through your book. Or should I do something like Airbnb arbitrage? I know how you guys feel about that but I feel like I could build my capital even though the short-term aspect is a lot more demanding as a college student. What do you guys think I should do here? Give me options. Let me know what you would do in my situation. Big fan of the podcast. Thanks.

David:
All right. Thanks, William, that’s great, man. If you guys weren’t watching this on YouTube you should be. William looks like a combination of Justin Bieber and Shawn Mendez got together and turned their hats backward. If you ever wanted to see the personification of Southern California check out Old William here. All right, William, here’s the first thing I want to say. Congrats on saving up 20 grand. First thing I want you to do, don’t lose it. Don’t go spending it on anything stupid. Don’t go invested into cryptocurrencies that you don’t understand. Don’t go buy an NFT, and don’t go start some online trading corporation or something that you think is going to make you a bunch of money. Second, congratulations on going to college and not just putting all of your efforts into becoming an online influencer, but I need to know a little bit more about what you’re studying in college so I can give you some advice on if I think that that’s a good idea or not.
Third, you’ve got 20 grand, why can’t you get more my man? You’re doing good. When I graduated college, and I’m not trying to compare me to you I’m just saying it’s possible, I graduated with my school paid off, no student debt, my car paid for in cash, and over $100,000 in the bank. I did that by working in restaurants and just staying late every single night. Perfecting my craft of being a waiter working as hard as I possibly could and saving all my money. You’re in school, you’re going to have to finish school. Do you want to finish school with 20 grand or do you want to finish school with 50 grand? Do you want to finish school with 20 grand or do you want to finish school with 100,000 grand? What are you doing for work right now that you can improve?
Remember, wealth building is not just about buying real estate though that is, obviously, an important component to it. It’s also about saving your money and making more money. William, I’d love to see you have the goal of buying a house, your first house hack, that you could rent to other people with as many bedrooms as you could get, maybe even bunk beds so that your friends could be paying you rent, and staying in this property or renting out to other college students that don’t want to live in the dorms, and I want you to make that the carrot that you pursue.
If you want to be a homeowner, and you want to buy your first house, I want to see you working more hours at a good job. If you’re working at some pizza joint, or if you’re doing DoorDash, there’s nothing wrong with it but there’s also nothing right with it. Find a job that challenges you. Find a job that every day you have to go to work and actually pray before you go in there, I hope I don’t make any mistakes because it’s that hard. It’s very good for a young man to be in a position where you’re doing something challenging, and difficult, and having to sharpen your sword of the skills that you’re providing in that workspace and pushing yourself. Too many people think that if you’re a young kid in college you’re not capable of anything but putting pepperoni on a pizza. It’s not true. Again, there’s nothing wrong if that’s what you’re doing, but if your goals are to be a millionaire through real estate there’s also nothing right with it. So push yourself, get a better job.
Now, the goal should be when you get out of college you want to buy a house but the money isn’t going to be your only problem, the financing is going to be a problem too. You’re going to have to show a debt-to-income ratio that a lender is going to be comfortable giving you a loan to. You’re going to have to show a debt-to-income ratio that’s going to satisfy a lender’s requirements which means you’re going to have to keep your debt low, you’re going to have to make more money. You see how making money just keeps working its way into this equation of real estate investing. We talk a lot about finding deals, acquiring deals, and though that is a way to make money it’s much harder. So put some focus towards your career, what you can do to bring value to the marketplace, and how you can build your skills.
And then in the meantime, start analyzing house hacks. Run three-bedroom properties, four-bedroom properties, five-bedroom properties, run duplexes, run triplexes. Find an agent that’s going to work with you, and have them send you deals to look at, and run the numbers of what the expenses would be, and what the income would be and look for patterns. What you’re looking for is a pattern that five-bedroom properties cash flow but you know you need at least three bedrooms, but you know need at least three bathrooms, you want to make sure that there’s plenty of parking. You want to get to the point that you know rent’s too low on this side of town to make it work but over here it could work. That way when you graduate, and you get the job, and you’re pre-approved to buy a house you’ve already got the information that you’re going to need to find the perfect one to start with.
Now, as far as how much money you want to have saved when you get out of college here’s what I would tell you. Look at what the average houses are going to cost that would work for a house hack, let’s say it’s $800,000. Assume you’re going to have to put 5% down on a conventional loan to get that house, that’s 40 grand. You’re going to need $10,000 for closing costs, and another five to $10,000 to improve the property. That’s going to put you right around 55 to $60,000. Now, you’re also going to need some money in the bank for reserves so add another 15 to 20 to that. And ideally, you want to be graduating college with 75 to $80,000 before you think about buying your first property.
With that money, you want to be able to invest it in something that gets you a return but my advice to you is avoid risk. It’s more important that you keep it than that you grow it, okay? So go find yourself a certificate of deposit in a bank, I think I saw one for around 5% the other day, put it in there, collect your 5%, it makes it harder for you to take the money out and spend it on something dumb, and just keep putting the money that you make into that account to earn you some money until you graduate, you’re ready to buy the house.
All right. And our last question of the show comes from Cleven in Las Vegas. “Hi, David, we’ve tried to find rental properties for a year but cannot figure out how to get positive cash flow based on the current mortgage rates. We’re in our mid-50s and we moved to Vegas in 2022 after selling our house in New York where we capitalized on some gains. However, both my wife and my jobs became insecure recently. I don’t know if we should stop looking until the market gets more stable, and so do our jobs, or we should continue looking before the markets get crazy again. Thank you.” Oh boy, Cleven, this is a problem that most people are having right now so first off don’t feel bad.
Largely, cash flow did go away when the mortgage rates went up. The good news was that houses weren’t selling for as much over asking prices as they used to be but there’s always going to be a pick-your-poison element to real estate investing. We complained about the fact that you had to overbid on these properties, even though they cash flowed, now we complain about the fact they don’t cash flow. If something changes we’re going to be complaining about that. Properties will cash flow but under different conditions, you’re going to have to put more money down. So if you’re putting more capital into the deal you’re going to watch your ROI go down even though your cash flow is going to go up.
And my two cents on this is that if you have to stick a lot more capital into a deal to make it cash flow so that it’s safe, you need to have significantly more upside which means you need to be investing in an area that is likely to get more appreciation, or getting a deal that you bought for less than what it’s worth by a significant amount. So it’s one thing to think about there. You can still get cash flow but you’re going to have to put down more than 20%. So if you’re looking to invest in Vegas, my advice would be to find the neighborhoods or the areas that you think are going to appreciate more than their competition. I call this market appreciation equity. It’s the idea that not all markets appreciate at the same level.
The other thing that you could do is look for a different primary residence for you and your wife that has an element of it that could be rented out. Can you find a property that’s got a guest house, that’s got a basement that you guys can live in and rent out the rest of it? I know that’s not ideal, I know it’s not what you want to do. But if cash flow really is impossible to find, the other way that you can build wealth is by saving on your expenses.
Can you eliminate your mortgage or cut it down by a significant amount and save the difference? Remember, $2,000 a month saved off of your mortgage is the same as $2,000 a month in cash flow. It’s actually better because cash flow is taxed while savings are not. It’s very easy as investors to forget that saving money is just as powerful as making money. And you really don’t need to be super focused on cash flow until you’ve already reduced your budget by as much as you possibly can. So those are two things that you can work on while the market is currently in this stalemate.
Now, I just want to remind you, if we do get lower rates and you think you’re getting cash flow again you’re going to have to be ready to jump in fast because all the other investors are going to realize the same thing. And like locust, they’re all going to converge on these markets and bid the prices up to where guess what? They no longer cash flow. Easy cash flow is a thing of the past. I don’t think we’re going to see it again maybe ever. Cash flow is now going to be something that you have to work really hard to find or something that you have to work really hard to create, or something that you have to wait to materialize on its own through rising rents. But remember that there are other ways that you can make money through real estate so focus on those.
All right, that was our last question for today’s Seeing Greene. And I’m so glad you’re here we haven’t done one of these for a while and I’m really glad that we did. Remember, I want to have you featured on this show so head to bigger biggerpockets.com/david and submit your questions there. And comment on YouTube and let us know what you thought of today’s show, what you wish that I would’ve said, and what your favorite part of it was. Thanks, everybody. You can find my information in the show notes if you want to follow me and leave me a message. You can also find my books at biggerpockets.com/store if you want to read those. And leave me a comment there, I’d love you for that also. We will see you on the next one.