Blog

Dave:
Hey, everyone. Welcome to On The Market. I’m your host, Dave Meyer. Today, I have an excellent interview on tap for you. Andy Walden, who is the vice president of enterprise research and strategy at ICE, is going to be joining us again on the show. Andy was first on On The Market, I think it was back in May or June, and he was working for a company that, at that point, was called the Black Knight. They have since been acquired by a company called ICE, or I-C-E, and so you might hear both of those during the course of our conversation. But Andy and his team are experts on all things in the housing market, but what they really focus on is what is going on in the lending market. As we all know, we are all subject to the whims of interest rates these days.
Andy has some insights for us about what is going on with foreclosures, purchase originations, where he thinks rates are going, how different parts of the country are going to be affected. He just released this amazing Mortgage Monitor report, which we’ll put a link to in the show notes. I am super excited to talk to him about it, because there’s just chock-full of insights that are extremely actionable for real estate investors just like you and I. With no further ado, we’re going to welcome on Andy Walden from ICE.
Andy Walden, welcome back to On The Market. Thanks for joining us.

Andy:
You bet. Thank you for having me again.

Dave:
For those of our listeners who didn’t listen to your first appearance on this show, can you tell us a little bit about yourself and what you do at ICE?

Andy:
Yeah. I am the vice president of enterprise research and strategy at ICE, and so effectively, what that means is I get my little hands in all of the data that we have available to us, whether it’s housing market data, or mortgage performance, or anything around the mortgage life cycle, really getting to play into all those different data sets. Now, in being acquired by ICE, we have even more data at our fingertips. We’re more heavily in the origination space. We’ve got some rate lock data that can tell us what borrowers are doing out there in the market, so really excited to get to share some of that data today.

Dave:
Well, I’m very excited. I was looking through your mortgage report, which we’re going to be talking about a lot today, and I was very jealous that you have access to all this data. There’s just so much information that’s extremely pertinent to the housing market, and everything that’s going on with housing right now. With that said, can you just tell us a little bit about the October ’23 mortgage report and what’s contained in it?

Andy:
Yeah. We did a little bit of everything, and we try every month to put, as you mentioned, the most pertinent data in there, so we’ll go everywhere from mortgage performance to mortgage originations. We’ll get into the housing market very specifically, and look what’s going on at a macro level, and look into specific geographies in terms of what’s going on. I think in terms of nuance, this month, we had some data around the Super Bowl mortgages. They’re becoming a bigger and bigger topic of conversation. We looked at the market from a mortgage lender standpoint, obviously, a very challenging market right now. We gave some pointers around where we see the market going throughout 2023 and ’24, how to best capitalize, how to understand who’s transacting in the market, why are they transacting in the market, and then as I mentioned, a lot around the housing market, and the dynamics going on right now, which are very interesting.

Dave:
What are some of the most important takeaways that you think our audience of small to medium-sized real estate investors should know about?

Andy:
Yeah. I think a couple different things, right? One is when you look at the mortgage performance landscape, it remains extremely strong, right? Folks that are looking into that foreclosure arena, or looking for any distress coming out of the mortgage market, it’s about as low as we’ve ever seen it. That being said, we’re nearing this inflection point. We’re seeing some signals from the market that we may be reaching kind of a cycle low in terms of mortgage delinquencies, and mortgage performance. Just if you look at those annualized rates of improvement, they’re starting to slow down, and flatten out a little bit.
But we’re seeing delinquencies one percentage point below both their pre-pandemic, and their pre-great financial crisis era, which may not sound like a lot, but that’s roughly 25% fewer delinquencies than they traditionally are even in good times. So performance overall is very, very strong. If you look at it from the housing market, I think that’s probably where a lot of your listeners are focused in, it was an extremely hot August, right? We got our ICE Home Price Index data in for the month of August. Very strong numbers across the board, right? We saw the fourth consecutive month, where we’ve hit a record high in terms of home prices in the US, home prices up two and a half percent from where they peaked out late last year. And then that headline annual home price growth rate that we all look at, where home prices versus where they were a year ago, we’ve gone from 20% in 2021 to effectively flat in May, as the Fed raised rates and tried to compress that market.
But then we’re seeing this reacceleration. We’re back up to nearly 4% annualized home price growth again, and poised for some additional push based on some of the baked in home price growth that we’ve already seen this year. That’s what we’re seeing through August. And then if you look at what’s going on in the weeks since with mortgage rates, they’re up to seven and a half percent according to our ICE conforming 30-year Fixed Rate Index, which has pulled 6% of the buying power out of the market, since those August closings went under contract, right? We’re looking for maybe yet another inflection in the housing market, as we move late into this year. A lot going on in the report, a lot going on in the mortgage and housing markets right now.

Dave:
You actually beat me to one of my questions, Andy, which was about how much buying power has been removed from the market, because obviously, we see this dynamic in the housing market where supply has stayed really low, and even though demand has deteriorated over the course of the year. Since they’ve both fell relatively proportionately, we see housing prices somewhat stable, as you said. In August, they were up a bit, but now seeing rates just skyrocketing even more than they had. Just curious, how do you come up with that number, and can you just tell us a little bit more about the implications of that, that 6% of the buying power has been removed just in the last few weeks?

Andy:
Yeah. Let’s talk about the numbers in and of themselves, right? When we look at home affordability in general, we’re really triangulating three things. We’re triangulating income, we’re triangulating home prices and interest rates, and we’re looking at what share of income is needed at any given point in time for the median earner to buy the median home. That’s how we assess affordability, and we do it at the national level. We do it across all of the major markets across the country as well. Nationally, we go all the way back into the 1970s to draw comparisons, because what we found was, during the pandemic, we were reaching outside of normal bounds. We were seeing the lowest levels of affordability that we had ever seen in more recent data sets, and so we were having to go all the way back into the ’70s, into the Volcker era, to find something more comparable to what we’re seeing today, right?
That’s how we come up with those affordability numbers. When you look at that, what you see is that we’re nearing 40%, right? It takes 40% of the median earner’s gross, not net, we’re not talking paycheck, we’re talking gross monthly income to afford just the principal and the interest payment on the median home purchase. The worst that it’s been since the early 1980s, obviously, very unaffordable. And the only time we’ve seen affordability at these levels was when interest rates were above 12%, right? We’re seeing those similar levels of affordability today at 7.5%, just because of how much home price growth has outpaced income growth in recent years, so a massive challenge out there in the market. When you look at how that’s impacting demand and borrower behavior, we’re now seeing, if you look at mortgage applications, they’re 45% below pre-pandemic levels. That’s the lowest that they’ve been versus “normal,” right? If there is ever a normal in the housing market, that’s the lowest that we’ve seen them so far. You’re certainly seeing these rising interest rates start to impact how many borrowers are out there shopping in the market.

Dave:
All right, great. Well, thank you. That’s extremely helpful. Do you have any thoughts on if mortgages go up to let’s just say 8%, another 50 basis points, is that going to be another 6%? Does it get worse as the numbers get higher?

Andy:
Yeah. It’s pretty even over time, right? The rule of thumb is kind of a 10 to 12% reduction in buying power for every percent rise in interest rates, and so you can cut that in half for a half a percent rise in rates. Again, our Conforming 30 or Fixed Rate Index was 7.5% yesterday, meaning that if you look at the market yesterday, the average rate locked in by a buyer using a conforming loan was 7.5%. Again, if you go up to 8%, another 6% reduction in buying power, and vice versa if rates were to fall, and so you are seeing it constrained. When we look at it in the light of the August data that’s been most recently released, those ones went under contract in July, right? We’ve already seen that 6% decline in buying power from when the latest housing market data is coming out, suggesting we could see further cooling here over the next couple of months, so certainly something that we’ll be watching very, very closely.

Dave:
That talks a little bit about the demand side, but when you look at the supply side, to me at least, I have a hard time seeing how that moves a lot in the next couple of years, right? If this lock in effect is real and rates are going up, then it’s going to only get worse. Construction is doing its thing, but it’s not going to come in and save supply anytime soon. A lot of things people point to or ask about is foreclosures. But you said earlier that delinquency rates, at least according to the most recent Mortgage Monitor report, are lower than they were in 2019. Can you just tell us a little bit more about the state of delinquencies, and if you expect things to change anytime in the future?

Andy:
Yeah. We do expect them to go up, right? Current state of delinquencies, you hit it, right? They’re extremely low right now. We talked about that a little bit earlier. If you look at serious delinquencies, and the risk of foreclosure, and typically, foreclosures account for roughly three to 5% of all home sales, they’re well below that right now. Even in a normal market, you’re talking about relatively slow, or relatively low volumes of inventory out there, but they’re well below long-run averages. When you look at serious delinquencies, and look at remaining protections on those loans, you’re still seeing a lot of servicers that are rolling some of those forbearance plans forward, or rolling those forbearance programs forward to help borrowers that are struggling in today’s market. 70% of all serious delinquencies of the very low-level of serious delinquencies that are out there in the market right now are still protected from foreclosure by loss mitigation, forbearance, bankruptcy, those types of things, and so you’re just seeing very, very little inflow into foreclosure, and serious delinquencies themselves are the lowest that they’ve been since 2006.
I mean, you’re absolutely right. When we look at it from an inventory perspective, we’re looking for all of these little nooks and crannies, right? New builds, how can they help? How can potentially, if we saw some rise in defaults, could that actually help the market from a housing market perspective? There just aren’t a whole lot of answers right now to the supply problems. We’re still, as we sit here, we’ve been seeing inventory edge slightly higher the last couple of months. We’re still at roughly half of what we should have, in terms of for-sale inventory out there in the market. As you mentioned, that’s keeping prices very, very sticky.

Dave:
I have a question that might be stupid, so please bear with me right now. But I’m curious if the relationship between delinquencies and foreclosures have changed over time, or if that’s possible, because obviously everyone compares the current situation to what happened during the financial crisis, where a lot of people had negative equity, and if you were delinquent, then you were probably going to get foreclosed on, there was a short sales, all these negative outcomes. Right Now, all the data shows that people are equity rich, and so I’m curious if there’s any logic to this idea that even if delinquencies go up, foreclosures might not go up, because people could just sell on the open market. That could still help the inventory, but it wouldn’t be through a foreclosure.

Andy:
I mean, you’re absolutely right. It happens for a couple of different reasons. One of them you talked about is equity, and you’re right, they are as equity rich as they’ve ever been. We’re nearing the levels of equity that we saw last summer, before housing prices began to correct, so homeowners are very, very strong from an equity standpoint. The other reason is, I look at servicers like Bachmann a little bit, right? Servicers have all these tools in their tool belt, or whatever you want to call it, to help homeowners, and they’ve really built those over the last two decades, right? The first time was the great financial crisis, and we learned a lot about loan modifications, and what worked and what didn’t work, and they’ve got all of those programs set up, and ready to deploy when borrowers become delinquent. The second one was during the COVID pandemic, and forbearance became the big talking point, the big program that was rolled out there for folks that had short-term losses of income, right?
We have all of these programs, and all of these tools in our servicing tool belts now, that we’re ready to deploy, right? They’ve been battle-tested, they’re ready to go, they’re set up in servicing systems. We can roll out loss mitigation plans relatively easily, if folks have longer term loss of income. For short-term loss of income, forbearances have become very, very popular recently. We have a lot of tools there to help homeowners avoid foreclosure, and avoid that distressed inflow, even in the case that they become delinquent. It doesn’t mean it’ll be non-existent, but the roll rates from delinquency to foreclosure are certainly lower than they have been historically.

Dave:
Okay, great. Well, I’m glad my hypothesis beared out. But yeah, I think it’s important that… I was reading an article, I forget where it was, just talking about the banks learned their lesson from what happened during the great financial crisis, and how they lost a lot of money that they may not need to have lost, if they had these tools in their tool belt, as you said, because they were just foreclosing. Everyone was just panicking and just trying to like they wanted to get them off their books, whereas if they rolled out some of these forbearance programs, or loan modifications, they probably would’ve done a lot better. I think this isn’t just out of the kindness of their own heart, but the banks have a financial incentive to modify and work with borrowers, if there is some sort of delinquency.

Andy:
Yeah. We’ve learned a lot on both sides, right? We’ve been talking about servicing, and how we better service mortgages to reduce default, and that’s ingrained in servicing systems. We certainly have it in our MSP platform, most certainly. But on the origination side of the house, we’ve learned a lot of lessons there too, right? If you have an adjustable rate mortgage, make sure the borrower can pay their fully indexed rate, right? Same goes for buy downs that are taking place, same goes for credit quality. You’re seeing extremely high credit quality mortgages being originated in recent years. When you look at the outstanding stock of mortgages, mortgage payments are very low.
Folks have locked in very low interest rates right now. They’re very strong holistically from a DTI perspective, from an equity perspective, ARM share of active mortgages is a fifth of what it was back in 2006-07. in many ways, when you look at where we stand today versus the great financial crisis, the mortgage and housing market is structured very, very differently. It’s much more solid, and I wouldn’t expect to see anything near an outcome you saw from the great financial crisis era, just because of the improvements that were put in place across the board from origination all the way down through servicing systems.

Dave:
Well, that is encouraging. Hopefully, you are correct. You mentioned origination, and I just wanted to get a sense from you about what is going on in the origination market now, with rates continuing to climb, is volume just continuing to deteriorate or what’s happening?

Andy:
Yeah. I wouldn’t say deteriorate, because it’s already been relatively low, and refinances have hit about as low as they can get, knock on wood. But, I mean, there is a small baseline level of refinance activity out there that’s really cash-out lending, perhaps surprisingly, is what’s really left out there in the refinance space. It’s a very unique set of borrowers, right? It’s odd, because the average borrower refinancing right now is raising their interest rate by 2.3%, which seems absurd. Why would somebody give up a 5% interest rate, refinance into a seven and a quarter? It’s because those borrowers are really centered around getting the equity out of their home, withdrawing some of that equity, and so you’re seeing these very low-balance borrowers that are willing to give up a historically low rate on a low sum to withdraw a large chunk of equity at a relatively reasonable rate compared to what you can get on second-lien products, right?
There’s some of that activity going on, and so if you’re looking at this from a mortgage lender, you need to be very acutely understanding of what’s going on in today’s market, who’s transacting, why they’re transacting. But then it’s very heavily centered around the purchase market, right? This is the most purchase-dominant mortgage lending has been in the last 30 years. We’re seeing months where it’s 88% purchase lending. That’s really where lenders are focused is driving that remaining purchase volume out there in the market.

Dave:
What are the characteristics of the purchase loans? Is it home buyers?

Andy:
Yeah. Absolutely. Home buyers, it’s higher credit score borrowers, right? There’s a lot of economic uncertainty, there’s uncertainty across the board, and so you’re seeing lenders that are very risk-adverse right now, and so it’s higher credit score mortgages, it’s moving a little bit more towards the FHA space than it has been in recent years. When you look at how hot the market got in 2021, or in 2020, a lot of those would’ve been FHA buyers, had to move into conventional mortgages, because there were 10 offers on the table, and the first ones that were getting swept onto the floor were FHA loans, and so you saw it more centered around GSE lending back then. Right now, I would say a little cooler, right, relatively speaking? You’re seeing those FHA offers that are being accepted a little bit higher pace. You’re seeing a relatively strong first-time home buyer population out there, and so it’s a more FHA paper than what we’ve seen in recent years.

Dave:
I think that’s probably a relief to some people, right? Like you were saying, the FHA was just not really a viable option during the frenzy of the last couple of years. For a lot of people, that is the best or only lending option out there, so hopefully that is helping some people who weren’t able to compete, even though it’s less affordable, at least you can compete against, it’s a less competitive environment for you to bid into for a home.

Andy:
Yeah. Blessing and a curse, right? The reason that it’s less competitive is, because it’s less affordable as well. You’re dealing with affordability challenges, but less competition out there in the market, certainly.

Dave:
What we’re talking about here, I should have done this at the top. Sorry, everyone. These are just residential mortgages, right? This doesn’t include commercial loans.

Andy:
That’s exactly right. Yeah. We’re looking at folks buying single-family residences, buying condos out there, buying one to four unit properties across the US.

Dave:
Does any of your data indicate what is going on with investor behavior?

Andy:
It does, right? Investor is going to be a little bit more difficult to tease out, but when you look at investor activity, especially in recent years, they’ve ebbed and flowed along with the market. You saw them move in, when we all knew that inflation was going to become strong, they were trying to put their money into assets rather than holding it into cash, because everyone knew cash was going to get devalued in an inflationary environment, and so you saw them push into the market in 2020, 2021. They’ve backed off along with overall volumes declining in recent years, but they make up a larger share, because they’re a little bit less affected by interest rate movement, because you have more cash behavior there in that investor space. They make up a little bit larger share, but they have been ebbing, and flowing in and out of the market similar to other folks, only to a little bit stronger degree early on, and a little bit lesser degree more lately.

Dave:
Got it. Thank you. You said earlier that assumable mortgages are one of the things that are growing in popularity. Can you tell us more about that?

Andy:
Yeah. For folks that aren’t familiar with what an assumable mortgage is, it’s effectively, if I sell you my home, not only can you have my home, but you can assume my mortgage along with it. Now, the reason that that’s attractive is, if I have a three and a half to 4% interest rate on my home, you can get an interest rate three point half to 4% below what you could get out there in the market right now. At face value, they seem very, very attractive in today’s market where folks have locked in very, very low interest rates and you’re looking at getting a 7.5% interest rate if you just go directly to a lender today, right? Again, face value, these look like very attractive options, and they’re relatively common. There are about 12 million assumable mortgages, so FHA, VA, USDA mortgages are assumable out there. It’s about 12 million, so that means one in four, roughly, mortgaged homes in the US as an assumable mortgage-

Dave:
Wow.

Andy:
… which also sounds like, hey, there’s a ton of opportunity. A little over seven million of those have a rate of below 4%, so 14% of mortgage homes, you could assume the mortgage, and get a 4% rate or better, right? It seems like a ton of opportunity, and it’s certainly a growing segment, and a growing opportunity out there in the market. There are a few reasons why it hasn’t taken off as much as maybe you’d expect in hearing those numbers. One of them is two thirds of those that are assumable below 4% have been taken out in the last three and a half years, meaning folks just bought their home recently, or they just refinanced, and they want to hold onto that low rate, right? They’re expecting to live there for a while.
Reason number two is, it’s attractive to a potential buyer. It’s attractive to that existing homeowner as well, right? They don’t want to give up a sub 4% interest rate for the same reason that you want a sub 4% interest rate as a buyer. And then the third reason is more around home prices, and home price growth, right? If you look at those 12 million assumable mortgages out there, average home value is about $375,000. The mortgage is only about $225,000, right? You’re going to need to bring an extra $150,000 to assume the average home either in cash-

Dave:
Wow.

Andy:
… or via secondary financing at a higher interest rate. A lot of folks, assuming these mortgages, we’re talking FHA, VA homes, they’re in more first-time home buyer communities, folks shopping in those specific places don’t have $150,000 in cash to bring to the table, or that secondary financing offset some of the savings you were going to get with that assumable loan. Certainly attractive out there in some situations, but there are some reasons why you’re not seeing it completely take off, and everybody selling their mortgage, or turning over their mortgage along with their home.

Dave:
Just so everyone listening knows, because most of these people are investors who aren’t owner-occupied, assumable mortgages really are only available for owner occupants. If you were considering house hacking in a duplex, or quadplex, this is a feasible option. But if you wanted a traditional rental property, you would have to go a different creative finance route, but you couldn’t use an assumable mortgage. Andy, I got you here. Curious about, we’re fresh into Q4, curious, we’re seeing some seasonal declines, where do you think we’re heading through the end of the year?

Andy:
I think you’re going to have to watch housing metrics very, very closely for the tail end of this year, and here’s why, right? If you look at how hot the housing market has been so far in 2023, and there have been months where we’ve been 60% above normal growth in terms of housing, there’s a lot of baked in reacceleration that’s going to take place out there. If you’re looking at annual home price growth rates, I mentioned nationally, they’re up 3.8% through August. They were effectively flat in May. If we didn’t see any more growth, and we just followed a traditional seasonal pattern, you’re going to see that annual home price growth rate rise from 3.8 to 5%, through the tail end of this year.

Dave:
Wow.

Andy:
There’s some baked in reacceleration out there in the market that’s going to carry the housing market higher. The reason that I say you need to watch very closely, is that may be countered by some slowing out there in the market from the recent rise in interest rates, right? Keep in mind, and I think I may have mentioned this earlier, but the August home price numbers that you’re seeing out there, those August closings went under contract in July. Interest rates were more than a half a percent below where they were today, and so you’re seeing a different affordability environment, as we sit here in October, than when these latest housing market numbers when those homes were put under contract, right?
There’s going to be a lot of tea-leaf reading here in housing market numbers over the next few months to say, what if this was baked in reacceleration that we already had caked in before we got to these latest home price rises, and how much actual shift are we seeing in the market from this rising interest rate environment that could slow us down over the tail end of this year? You have to watch those housing market numbers very, very closely, understand what month you’re looking at, understand when they went under contract, because I do expect some inflection out there in the market, based on this latest interest rate increase. You’re already seeing it in mortgage applications, right?
Even when you look at seasonally adjusted numbers, we’re now at the deepest deficit that we’ve seen so far in the pandemic in terms of buyer demand out there. That could cool off not only volumes, transaction volumes, but could cool off prices as well. You’re just going to have to dissect that cooling from the already baked-in reacceleration that that’s caked into some of these upcoming numbers.

Dave:
That’s interesting. Just so make sure everyone understands this, we talked about on the show that year-over-year housing data is really important to look at versus month-over-month, because of the seasonality in the housing market. But to your point, Andy, there’s something known as the base effect that goes on, sometimes, when you’re looking at year-over-year data. Whereas if last year we had this anomalous high-growth, which is what happened last year, usually, the housing market doesn’t grow in Q4, but it did last year, that it may look like, or excuse me, sorry, it shrunk last year in Q4. It’s going to look like we had significant year-over-year growth in Q4, even if there is a loss of momentum, it might not necessarily be reflected in that data. I think that’s really important and a good reason for everyone, as Andy said, to keep an eye on metrics very closely over this year.

Andy:
You’re right. Traditionally you’d want to look at year-over-year versus month-over-month. One way that we’ve been looking at it, and I really like right now, is month-over-month seasonally adjusted numbers, right? They take that seasonal component out, because you’ll get very confused if you look at the housing market, and look month-over-month and don’t seasonally adjust.

Dave:
Right. Yeah.

Andy:
You’re going to be seeing a different trend every six months, right? Look at the seasonally adjusted month-over-month numbers, and those will give you indications for where those annual growth rates are going to go, and then you can take out the downward effect, if you want to, last year, right? A seasonally adjusted month-over-month is really important in today’s market, and that’s going to be one of the key metrics to watch, as we move towards the tail end of this year.

Dave:
Awesome. Now, in your mortgage report, there is a lot of… In the Mortgage Monitor report, there’s some great data about what’s going on regionally. I’m just curious, what are some of the big trends that you’re seeing? Because over the last year, we’ve seen, I guess, a return to somewhat normalcy, and that different markets are performing differently, whereas during the pandemic, everything was just straight up. Do you see that pattern continuing, or do you think mortgage rates are going to dictate the direction of every market, regardless of region?

Andy:
I think mortgage rates are going to dictate direction, but you’re going to see some regional differences, undoubtedly, right? Maybe we just hop across the country, and talk about what we’re seeing in region, from region to region. I mean, the Upper Midwest, and Northeast have been, and continue to be among the hottest markets in the country. The reason behind that is affordability well below long run averages, but still strong compared to the rest of the country. More importantly, you’ve got massive inventory deficits in the Upper Midwest, and Northeast, so regardless of the metric, right? We were talking about which metric you should look at, earlier. Take any metric you want to, take month-over-month, take year-over-year, take where we’re at today versus peak values next year.
The Northeastern part of the country, and Upper Midwest are going to be at the top of the list in terms of home price growth, right? Those are the strongest, and we expect to remain the strongest in the near term. When you get over into the West, it’s really interesting, and again, this is where you see some differences, and you really have to be aware of which metric you’re looking at. The West saw some of these strongest corrections, where we can lump pandemic boom towns in there, if you want to, Phoenix, and Boise, and Austin, and those guys. We saw some of these strongest corrections late last year, one, because those are the most unaffordable markets, not only compared to the rest of the country, those are the most unaffordable markets compared to their own long-run averages.
When interest rates rose last year, those are the markets where you saw inventory return back to pre-pandemic levels, and they were the few markets that did it. Anytime, we’ve seen a market get anywhere close to those pre-pandemic levels, we’ve seen prices start to correct, right? Those are markets that came down significantly last year, and they were the coolest markets, with the exception of Austin which continues to correct. If you look at what happened in August, the fastest month-over-month growth was in San Jose, Phoenix, Seattle, Las Vegas, which was really surprising to me, when we looked at those numbers. Those are markets that are still down 4% last year. But all of a sudden, sellers have somewhat backed away, inventory deficits are returning in those markets, and you’re seeing the housing markets reheat again, right?
I think it tells us a couple of different things. One, as we’ve move through the next couple of years, expect a lot of inflection going on in the housing market. You’re going to see some ebbs, and flows. When you’ve got a 50% deficit of inventory, and a 45% deficit right now in demand, if either one of those moves in any direction, you could see sharp upward, and downward swings in the housing market. Those pandemic-boom markets are extremely volatile right now. We saw the fastest 10% drops in prices we’ve ever seen in the housing market last year, in some of those markets. And then now, you look at month-over-month seasonally adjusted, and they’re seeing some of the sharpest rises. A lot of nuance going on around the country, when you look at it on a region by region, or market by market basis.

Dave:
Well, I’m glad to hear. It gives people a reason to listen to this podcast, as long as there’s a lot of economic volatility. Even though we don’t like, it’s good for my employment status. But, Andy, this has been super helpful, and very informative. Is there anything else you think from your Mortgage Monitor report, or anything else that you think our audience of investors should know right now?

Andy:
No. I mean, I think we’ve covered most of it. I think that the key thing, and again, this goes back to your employment, right? I mean, it’s really watching what’s going on a month-over-month basis. I think there are some folks that you started to see the housing market bottom out, and start to pick up steam here this year, and it was, “Oh, we’re back to normal, and the worst of it’s over, and this is it, and we’re ready to move forward.” I don’t think so, personally, right? If you look at the underlying numbers, and I touched on this a second ago, if you look at how unbalanced both sides are, you could still see a lot of volatility, and it’s going to be years before we see what’s “a normal housing market” ready for just normal, sustained three to 4% growth over the long run, so expect the unexpected, expect volatility out of the housing market.
We’re still in a very unbalanced position, and you could see shifts in either direction, and a lot of it’s going to be driven by, one, what happens with interest rates, and how sticky the broader economy and inflation is, and how that puts pressure on mortgage interest rates out there in the market. And then, two, that demand side, and we were talking about that earlier, right? Where does that… Sorry, I said demand, I meant supply side. Where does that inventory ultimately come from, right? Are builders able to eventually help us build out of this? When do sellers become willing to sell again, and do we see any distressed inventory? I mean, those are going to be the key components on that side.

Dave:
Awesome. Great. Well, that is an excellent advice for our listeners. Andy, if people want to check out your Mortgage Monitor report, which is awesome, everyone, if you have an interest in this type of stuff, definitely check it out, or anything else that you’re doing at ICE, where should they check that out?

Andy:
Yeah. They can access that a few different ways. We’ll add a link to the latest report in the show notes, where they can just click that, and go directly to that latest report. We also have a full archive on our website at blackknight.com that you can go out there, and access some of our historical reports as well. If there’s anything you want to see beyond that, you want info on our home price index, or anything like that, you can email us at mor[email protected], and we can communicate that way as well.

Dave:
Great. Thank you. Just again, everyone, it is in the show notes, or description, depending on where you’re checking us out. Andy Walden, thank you so much. It is always a pleasure. We appreciate your time.

Andy:
You bet. Thank you for having me, appreciate it.

Dave:
On The Market was created by me, Dave Meyer, and Kaylin Bennett. The show is produced by Kaylin Bennett, with editing by Exodus Media. Copywriting is by Calico content, and we want to extend a big thank you to everyone at BiggerPockets for making this show possible.

Paul Donovan, chief economist at UBS Global Wealth Management , joins ‘The Exchange’ to discuss variable rate mortgages pushing up the CPI, the effort to exclude asset prices in the CPI, and the direction of inflation trending downwards.

Picture this: You’re a content marketer at a fast-growing technology services firm. Your desk is littered with studies, notes from your last few marketing campaigns, and a cold cup of coffee. You’ve been staring at your screen for too long. The blinking cursor mocks you. You’re in the thick of writing a consideration-stage ebook to inspire and educate buyers on a new vertical you’re targeting. Your goal? To position your company as an authority and build trust with prospective customers.

The topic is complex, and the publication deadline is drawing near. Although you’re not a subject matter expert (SME), you took on the project with confidence. After all, you’re a great researcher and writer. And you have a roster of in-house SMEs and satisfied customers who can lend their insights.

Only—you don’t.

Silent Slack, sales, and SMEs: Where are the experts?

You pop into various Slack channels, looking for experts, prospects, and customers to speak with. You especially want to talk to people who’ve actually felt the pains your company aims to resolve. But the silent response is disheartening. There seems to be no one to talk to other than the sales reps, most of whom are as lost as you.

You ask to sit in on demos and sales calls so you can learn the language of prospects. Sorry: No can do. Even your company’s lead SME, who’s always generous with his time, says his boss doesn’t want him to meet with you anymore due to “cost factors.”

Sound familiar? As a writer, this lack of access is maddening. How are you supposed to write with expertise and authority when you’re in what I call the “marketing cage,” a stifling enclosure that separates you from the people and insights that could add depth to your work? You’re literally left to your own devices, scraping together the same tired, old information from secondary sources and filling in gaps with educated guesses.

I call this sad state of affairs “writing by the MSU approach”—the Making Shit Up approach.

A wake-up call: The 2023 Trust in Marketing Index

I suspect that the scenario I just described—an amalgam of work experiences over the years—is why Informa Tech’s 2023 Trust in Marketing Index survey found that 71% of B2B technology buyers are disappointed with the value of gated content. (I bet they’re equally disappointed with ungated content, likely even thinner and weaker than most gated pieces.)

Marketing’s grade? D-minus

The Trust in Marketing Index measures the state of the relationship between B2B technology decision-makers and marketers. This year’s inaugural score was a measly 61 out of 100. That’s a “D minus” on the “A to F” letter-grade scale. I cried when a college professor gave me a “C” on a paper. A grade of “D minus” would have crushed me.

What’s worse is that the stakes are huge. Without trust, everything we content marketers work for—lead generation, customer retention, and business growth—starts to crumble. Our target accounts? They’re looking elsewhere, at our competitors, where content marketers have broken free from the cage and are producing content that delights rather than disappoints.

5 trust busters in B2B marketing content

Imagine a decision-maker, let’s call her Sarah, who reads a piece of your content and finds it riddled with outdated statistics and a thinly veiled sales pitch. She abandons the asset and begins questioning your brand’s authority and expertise. Her skepticism grows when she runs across similarly disappointing content from your brand on social media. And when your targeted ad appears in her LinkedIn feed or a sales email lands in her inbox, she’s already predisposed to dismiss it. You’ve lost a potential lead and an advocate who could have amplified your content within her network.

As you can see, a lack of trust doesn’t just jeopardize a single touchpoint. It eats away at the foundational relationship you need to drive sales, loyalty, and advocacy. Lack of trust is a corrosive force that undermines your marketing goals at every stage—from awareness and consideration to decision and retention.

The Trust Index survey pointed to five issues that—alone or together—create disconnects and lead your audience to question your content and your brand’s credibility and expertise.

1. The generic content conundrum—speaking to no one

Content that speaks to everyone speaks to no one, a sentiment echoed by 42% of survey decision-makers who said most B2B marketing content is too general. It’s a pitfall content marketers—especially those confined to the marketing cage—know all too well. When cut off from SMEs and happy customers, you must resort to generic industry jargon and broad strokes that add little value. After all, you have to get something into market.

Consider a hypothetical software company that specializes in supply chain management solutions. Its content writer, isolated from customers’ real-world challenges, produces a blog post titled “5 Ways to Improve Your Supply Chain.” The post is filled with vague advice like “optimize your logistics” and “streamline your procurement process” but fails to dive into the specifics of how to actually achieve those goals. While the post may technically cover the topic promised by the title, it lacks depth and actionable insights.

Now, imagine you’re a supply chain manager looking to reduce supplier lead times. You stumble upon a social media post promoting the article. The title looks appealing, so you click in—and are immediately disappointed. The article is a fluff piece that doesn’t address your pain points; it offers nothing more than what you already know. The result? You close the browser tab, probably never to return, taking your potential business to the company’s competitors.

Sadly, the software company missed an opportunity to engage because of generic content. Worse, the generic content also risks damaging the company’s reputation for thought leadership—a double whammy no brand can afford, especially when trust is the currency of B2B sales today.

2. The same-old-content syndrome—recycling but not reinventing

Although the internet is a treasure trove for information seekers, it’s also a landfill of repetitiveness. Even before generative AI quadrupled the size of the landfill, a shocking number of articles and whitepapers read as though they were cut from the same cloth. I can’t tell you how many times I’ve held my head in my hands and groaned in frustration while conducting research for a piece of content. If you’re relying on the same recycled stats and arguments everyone else is using, you’re actively contributing to the sea of generic content that alienates decision-makers.

Imagine John, a CTO at a growing tech startup. He’s after a cybersecurity solution that can scale with his company. As he sifts through articles, white papers, and blog posts on the space, he notices a theme: Most of the pieces parrot the same “Top 5 Cybersecurity Threats” or offer the same “7 Best Practices for Cybersecurity.” John wants insights to help him make informed decisions, but instead, he gets an echo chamber of recycled ideas. Feeling frustrated and a bit cynical, John starts to think that if these companies can’t offer unique insights in their content, how innovative could their solutions be? He becomes skeptical, not just of the content he’s reading but also of the brands producing it. The ultimate casualty is trust—John is no longer sure whom to trust and, by extension, where to take his business.

The same-old-content syndrome is a trust buster of the highest order. It diminishes your brand’s perceived expertise and fuels skepticism that can spill over into how prospects view your products and services. And in an environment where it’s hard to differentiate, publishing same-old content is doubly detrimental.

3. The gated content problem—high stakes beyond the gate

When it comes to gated content, the stakes are even higher. When potential customers fill out a form or sign up for a newsletter, they expect the content behind the gate to offer substantial value, something worth exchanging personal information for. Yet according to the Trust Index survey, 71% of decision-makers are often or sometimes disappointed with the quality of B2B gated content. If that’s the case for gated material, it’s unnerving to think about how ungated content—often more generic and less detailed—might fare in the same survey.

Imagine that Emily, a procurement manager, is actively researching enterprise resource planning (ERP) solutions. She comes across an ebook called “Unlocking the Future of ERP” on your website. Intrigued, she fills out a form to download the content. What she finds, however, is a skimpy 10-page document rife with buzzwords like “scalability” and “efficiency” but lacking concrete examples, case studies, or actionable insights. She feels cheated. “I gave away my contact details for this?” she thinks, shaking her head.

The problem isn’t over when Emily trashes the ebook. She’s now wary of your brand, questioning the value of engaging further. The next time she comes across any of your content—gated or not—she’s likely to pass. Even worse, Emily may share her negative experience within her professional network, further eroding your brand’s trust and reputation.

The gated content problem isn’t just about a single ebook, whitepaper, or webinar. It’s about how buyers perceive your brand’s ability to deliver value. Unequal value exchanges—like filling out a lengthy form in exchange for a thin ebook—cast a shadow of doubt that can extend to every interaction a potential customer has with your brand, making it much harder to rebuild lost trust.

4. The stale information dilemma—Outdated insights lead nowhere

In the Trust Index survey, 33% of decision-makers said that encountering outdated information reduces or completely eliminates their trust in a B2B brand. Completely eliminates—that’s harsh! Although being in the marketing cage limits access to fresh insights and expertise, it’s no excuse for delivering stale content.

Consider Shauna, a healthcare manager looking for a new electronic health record (EHR) system for her medical facility. She stumbles upon your company’s whitepaper that promises to reveal the “Latest Trends in EHR Technology.” Eager to inform her decision-making process, Shauna downloads the document, only to discover that the “latest trends” are from two years ago and have been widely covered elsewhere.

In an industry like healthcare, where compliance changes and tech advancements happen fast, the lapse is more than a minor inconvenience; it’s a red flag. Shauna wonders: “If their content is outdated, what will their EHR solutions be like?” The question lingers, affecting her view of your content and perception of your products and services.

Presenting outdated content is like a self-inflicted wound. Buyers who encounter the issue may not stop by ignoring future content from your brand; they might also share their negative experiences with peers, further amplifying the trust deficit. It’s a downward spiral that starts with outdated content and, in a fast-paced market, can lead to broader questions about your brand’s credibility and relevance.

5. The sales pitch turn-off—undermining trust with disguised agendas

Buyers are bombarded with marketing messages at every turn, so the last thing they want is a hard sell masquerading as valuable content. For 29% of decision-makers taking the Trust Index survey, encountering content that leads with a sales pitch is a deal-breaker that can instantly sever the trust bridge.

Imagine Lisa, a director of operations at a manufacturing company. She’s grappling with efficiency issues on the production floor and is actively seeking solutions. Hoping for valuable insights, she clicks on an article titled “How to Boost Manufacturing Efficiency.” Instead, she gets a pitch for your company’s efficiency software within the first few paragraphs.

Her initial interest turns to immediate disillusionment. What could have been an educational experience now feels like an ambush. Lisa feels deceived, and that sense of betrayal extends beyond the article. The next time she encounters your brand—in a sponsored post, a webinar invite, or a product demo—she brings that skepticism. She’s hesitant to click, hesitant to engage, and unlikely to buy.

When you disguise sales pitches as genuine content, you tell your audience that you’re more interested in ringing the sales gong than solving real-world challenges and enriching lives. Because trust is precarious, the sales pitch turn-off can be the final straw that moves a potential customer from consideration to outright dismissal.

What’s next? It’s not all doom and gloom…

Those five trust busters highlighted in the Trust Index survey show how shaky trust is today. But it’s not all doom and gloom. There is light at the end of the tunnel. The survey also revealed trust boosters and steps your brand can take to build or rebuild trust. I’ll share those findings with you in my next article.

Stay tuned!

David Greene:
This is the BiggerPockets Podcast Show 834. Using a HELOC right now is not a bad idea if you could pay it back off. Flipping a house, making a loan, doing a BRRRR, that kind of stuff makes sense. But if you’re doing this for the down payment of a house and you’re locked in and it goes the wrong way, the economy getting worse, tenants having a hard time paying their rent, now you’re getting double squeeze and it could go pretty bad pretty quickly, even when you did nothing wrong, just the market turning against you.
What’s going on, everyone? This is David Greene, your host of the BiggerPockets Real Estate Podcast, the biggest, the best, the baddest real estate podcast in the world every week, bringing you the how-tos, answers, secrets, and strategies that you need to be successful in today’s ever-changing market. Today, we have a Seeing Greene episode. I know that the consistent green light that is usually behind me is not here. That’s because I’m traveling.
I actually came out to Florida a little bit earlier to promote the book Pillars of Wealth on the Valuetainment Podcast, as well as be ready for BPCON, which is right around the corner in Orlando. I’ll be driving there from my rental in Fort Lauderdale where I am now, and I brought some backup. Rob is joining me, looking handsome as ever, to take your questions about real estate and give our perspective, the Greene perspective, on how they can be solved, and today’s episode is awesome.
Before we get to it, we have a quick tip. My quick tip is take care of your short-term rentals when you’re staying in them. I walked into my rental to record the podcast today before the cleaners came, and I’ve noticed that there are fake eyelashes all over the place. They actually look ironically like caterpillars. And in Florida, there are caterpillars everywhere.
And one of them was moving and I thought it was one of the fake eyelashes moving and jumped out of my shoes as I thought that an eyelash had been possessed by a demonic entity, only to find out that it just looked a lot like a caterpillar. Rob, do you have any crazy Airbnb stories that you can share for today’s quick tip of things you’ve seen in these properties?

Rob Abasolo:
Yeah, I think just go stay at your property and bring a screwdriver and tighten furniture. Every time I go stay at a property, I’m like, dang, this chair was about to fall apart. One more person sitting on this and I’d have a lawsuit on my hand. So I would say empower your cleaners with a screwdriver at the very least and encourage them to tighten things up, because things get a little loose there whenever guests are just jumping around everywhere, not taking care of your stuff as they would take care of their own.

David Greene:
Ah yes, I refer to this as Ikea roulette. All right, in today’s show, you are going to love it. We get into what to do when you’re new and have a growing family and your property may make sense as a rental. A few scenarios with paid off properties, how to leverage them, if we should take debt out, how to get them performing optimally, scaling issues, is the market one where you should be scaling aggressively or is a more measured approach, more popular, as well as a two star review that you’re not going to want to miss. All that and more in today’s Seeing Greene. All right, let’s get to our first question.

Rob Abasolo:
Welcome, Tim. So what’s on your mind?

Tim Alhanati:
Hey, guys. Yeah, thanks for having me on. So I live in Orange County, California and I’ve been starting to listen to the podcast a little bit recently. I’m really new into the real estate investing world. My wife and I own our house, probably about 300K in equity, and we’ll eventually want to move out. We’re expecting our first child.
And once the second one comes, we’re going to be a little bit crammed and definitely want to get into the investing world, whether it’s in the SoCal area or starting into long distance investing, whether it’s better to get into the long-term rental space or short-term. A few different questions that I’m pondering based on being early into it.

David Greene:
Okay. Tim, are you an analytical man?

Tim Alhanati:
Yes, I’m a numbers guy, absolutely.

David Greene:
Not a surprise. I could tell from what you’re talking about. Okay, so you’ve got a little bit of equity in your primary home and you’re considering tapping into that with a HELOC, right?

Tim Alhanati:
Yes, I’ve looked into it. Yep.

David Greene:
And your comfort level is probably much more geared closer to long-term investing. Short-term is something that probably scares you a little bit, but you hear people talk about it, so you’re willing to give it a chance?

Tim Alhanati:
Nail on my head. Absolutely.

David Greene:
Okay, and then have you considered just renting out the town home and buying something with the low down payment as a house hack when the baby comes, or do the HOAs of the town home make it not cash flow?

Tim Alhanati:
No, it would cash flow a little bit. I’ve run the numbers a little bit. It would cash flow. I mean, luckily we bought it four years ago. The mortgage was pretty low. We got a low rate, and I think the market rent would be pretty good. So I think it’d probably be about 3,300 or so. I think we pay about 2,100 including the PMI and escrow and all that. So I mean, we have a little bit of capital right now to help out with a new house down payment, but obviously living in Southern California, it’s a little tough.

David Greene:
All right, Rob, I’m going to let you start. What do you think?

Rob Abasolo:
Yeah, so my question first and foremost is, are you doing this right now in this point in your life because you need money, or are you doing this right now because you just want to get into real estate?

Tim Alhanati:
Good question. Not really in need of money as far as any sort of money crunch, but definitely wanting to get into it as soon as possible just to always thinking 10 years from now, I’m glad I got into the real estate market, just more of a wealth building.

Rob Abasolo:
Great. Okay, so if that’s the case, just based on the fact knowing a little bit about you, knowing how much money… You said you have a little bit of capital. You want to get into it. I might actually push you a little bit more towards the long-term rental side for a couple of reasons. You said you’re analytical. I think it’s pretty easy to comp out what you’re going to make on a long-term rental. I think it’s a relatively standard process for doing that. I think you can be pretty calculated with that.
Not that you can’t with short-term rentals, you totally can. Short-term rentals are just more volatile, and you’re going to have some high seasons. You’re going to have some low seasons. It’s not going to be consistent. And so if you’re just looking for something where, “Hey, I want to get in, I’m cool to play the long game,” long-term rentals are definitely going to be that. They’re not going to be super high cash flow most of the time. There’s exceptions to that rule. You’ll make a little bit of money every single month.
And in 10 years, I think that’s definitely something where you’re going to say, “Well, hey, I’m glad I did that 10 years ago. I didn’t make a ton of cashflow, but 10 years later my appreciation is super, super high.” So I think I might push you a little bit towards there, especially considering that you’re in Southern California. And I think if you’re going to go the long distance route and if you’re open to that, you might just have a little bit more stabilization on the long-term side of things.
I don’t think you’re going to be able to get a cash flowing long-term rental in SoCal. Maybe a short-term, but that will require more money, I think. What about you, Dave? What do you think?

David Greene:
I’m thinking more about Tim’s personality than the actual market right now, and I don’t think we talk about this enough within real estate investing, right? We tend to speak about it as if it’s stock trading. So with stocks it’s like, well, what’s the best company? What’s the best strategy? Because who David is as a person doesn’t matter. I’m just pushing a button on my computer, on my phone. But real estate investing is more hands-on. There’s more creativity. There’s more problem solving. There’s more organizational skills.
It’s more like piloting an aircraft, like a fighter jet, than it is to just putting something on autopilot and letting it go. The skills of the pilot matter, as well as the type of the plane they’re flying. They sort of create this hybrid of success, and so your skills as a fighter pilot are going to play into this. If you’re more analytical, if you’re a little more risk averse, you want something that’s a little more predictable, I think you do well as a short-term rental investor actually, because the smarter that you are, the more creative that you are, the better your work ethic, the more likely you are to succeed.
I’ve been going through a really rough patch for about a year and a half right now with all of business and all of my rentals and all the people I have working with me, trying to move these pieces around to get everything to fit. What I found is that a lot of the problems with business and real estate come from the belief it should be passive. And frankly, that’s the way that real estate investing has been marketed for a long time. So the more passive that you want something to be, the more headaches you’re going to get from it.
It’s always, I delegated it. I have my org chart. Someone is supposed to be in charge of this. What do you know? That person doesn’t do a good job. The whole thing falls apart, and Rob’s on the phone while we’re in the middle of recording a show trying to get a hot tub delivered on one of his decks. And I’m making fun of him because I say someone should be doing it, but Rob has figured out that it needs to get done right and I’m the only one that I trust to do it. So Tim, I’m going to come back to you. First off, are you okay accepting real estate is not going to be as passive as maybe you’ve been told?

Tim Alhanati:
Yeah, yeah. I think honestly, even with my current job, I mean, I stick to the hours and I’m lucky that I don’t have to work longer hours than I would. Normal 40 hour a week. I’m willing to take the time outside of that and spend time doing it.

David Greene:
So if you’re willing to put the time and you have the skillset, which it sounds like you do, you will get a better return on your time in the short-term rental space. Because as a traditional rental, like all those ones I have, my skills as an investor, once you buy the property, there’s not a whole lot you do. You got what you got, right? Your ability to look at that property and try to manage it will really only help you when you’re trying to save money on repairs. That’s about the only time.
You don’t do anything to increase your revenue. You can’t make the property taxes go down. With the short-term rental, you have a lot more control over the expenses and the income, which results in a better NOI, which gives you better profit margin, which opens up doors to hire more people. So I would like to see you get in that space. Now, I don’t know if I would like to see you go there right away. All right? If you moved out and you house hacked, which I think you’d be more comfortable doing, could you do a short-term rental on that town home or are those prohibited?

Tim Alhanati:
No, I don’t think so. I haven’t looked into it. I’ve actually also thought of doing a midterm even for that one.

David Greene:
That you can do.

Tim Alhanati:
Yeah.

David Greene:
Yeah, that’s what I do in California. They’re 30-day rentals. Not everywhere’s the same, but most of the municipalities in California will not let you do an Airbnb unless it’s your primary.

Tim Alhanati:
I think the one I have right now is a little versatile. I think I could honestly go either way with it.

David Greene:
That’d be great. I would like to see you house hack. Put 5% down on something else. Get as big of a house as cheap as you can, as ugly as you can, so you can add as much equity, as many bedrooms, as many units, whatever you can do to make that thing a good rental property later. And then just take your time. No pressure. Do you like a live and flip type of a situation? When you’re ready, live in part of it with your growing family, rent out another part of it to somebody else. Turn that town home into a short-term rental or a medium-term rental.
And if it goes bad, your fallback plan is to make it into a traditional rental, which you already know will cash flow. I like this plan because it lets you screw everything up and then figure out what went wrong and fix it without a catastrophe. You’re not putting 25% down and a hundred grand on a rehab and just closing your eyes and hoping for the best with this deal. You’re getting exposed to what is going to go into real estate investing without making it a huge capital risk. Rob, you see me hosing that?

Rob Abasolo:
No, I like it. Look at us switching sides over here for once.

David Greene:
I saw the look on Rob’s face when I said short-term rental. He’s like, what?

Rob Abasolo:
I was like. And also one thing I wanted to touch on, David, he mentioned using his HELOC as maybe part of the down payment or towards the down payment. What do you think about that?

David Greene:
I’m not against it in all cases. I’m more against it now than I was a year ago. HELOCs are adjustable-rate mortgages, which means we tend to analyze properties based on what they are right now. I need to come up with a name for this, like right now itis or something. People always analyze a property with what’s the rent right now? What does Rentometer say? What is the mortgage right now? Well, rents change where your expenses usually don’t, okay? But with an adjustable-rate mortgage, your expense changes too.
The model of looking at it on a spreadsheet only tells you the minute that you close on the deal, what you can expect to get is likely rates are going to keep climbing. I just did a video about this on my YouTube yesterday that we don’t know, but the mortgage-backed security market is getting a little bit fickle. They’re like, I don’t know if we want to keep buying all these mortgage notes right now because they think we could be heading into a recession. So they have to raise the mortgage interest rate to get people to buy them.
And if that continues, it’s going to create pressure that rates are going to keep going up. That’s not really tied to the Fed rate like people think. It’s tied to the demand in the market. So using a HELOC right now is not a bad idea if you could pay it back off. Flipping a house, making a loan, doing a BRRRR, that kind of stuff makes sense.

Rob Abasolo:
Somewhere you can get out of it pretty quickly, right?

David Greene:
Yeah. But if you’re doing this for the down payment of a house and you’re locked in and it goes the wrong way and you start to hit trouble with the economy getting worse, tenants having a hard time paying their rent, now you’re getting double squeeze and it could go pretty bad pretty quickly, even when you did nothing wrong, just the market turning against you.
That’s one of the reasons I didn’t say out loud, but I was thinking I’d like to see you get into a house hack because you can put less money down. You don’t have to tie into that HELOC. You can keep that powder dry.

Rob Abasolo:
I agree with all of that. I just want to clarify though, HELOC being a home equity line of credit, so you’re basically using that equity in your house to fund the next one. Is it an adjustable-rate HELOC? Because some are fixed. I have a fixed one from a few years ago, and I think that makes a pretty big difference. Tim, is it fixed or is it adjustable?

Tim Alhanati:
I haven’t done anything with it specifically. I was just curious. Most likely variable.

Rob Abasolo:
Okay. Yeah, if it’s variable, I think David’s spot on. If it’s fixed, I mean, you can calculate it, right? Even if it’s a high interest. If that delta between using that to cancel out your PMI is worth it, then obviously data would say to do that. Just keep in mind that when you use your home equity line of credit, that will count towards your debt to income ratio, so that may lower your purchasing power on whatever property you buy.

Tim Alhanati:
Yeah, that’s new information I found out recently.

Rob Abasolo:
Yeah, yeah.

David Greene:
Very good point there, Rob. And I love that you brought that up because for everybody listening, if you’re going to get a HELOC, now you know to ask the question, do you have a fixed rate HELOC option? All right, Tim, we’re going to be getting to our next question. But before we do, where can our audience find you?

Tim Alhanati:
I’m on Instagram. I’m @TimAlhanati. Pretty easy.

David Greene:
@T-I-M-A-L-H-A-N-A-T-I. It wasn’t as easy as you made it sound.

Tim Alhanati:
It’s a tough one. It’s a tough one.

David Greene:
I’m @timvanderschlakenhadsenfuchi. Very easy.

Rob Abasolo:
Wow, what a riff. I love it.

David Greene:
All right, thanks, Tim. Let us know how it goes and reach out to me if I can help you in any way. Okay?

Tim Alhanati:
Sounds good. Bye.

David Greene:
And thank you, Tim, for joining us today. Remember, everyone get your questions in at biggerpockets.com/david to be featured on the show. We hope that you are enjoying the shared conversation so far. Rob and I certainly have, and thank you for spending your time with us. Please make sure to like, comment, and subscribe on YouTube, as well as leave us a review wherever you listen to your podcast. We actually wanted to read one of the reviews that someone left us for all of you to hear with a specific way that you can help us out after hearing this.
So this was a two-star review that came in from GJOVI33 who said, “We will tell you all the best secrets,” with an exclamation point, and then in “behind our paywall. Buy our masterclass to learn more.” I can understand the frustration with that. I don’t see how it has anything to do with BiggerPockets.

Rob Abasolo:
Right, right.

David Greene:
BiggerPockets doesn’t really offer paid courses. Bootcamps is the only thing I think, and they’re pretty dang cheap.

Rob Abasolo:
Right. They’re super cheap, and then we have BP Pro, which again is mega cheap and optional. And you get, honestly, I think most of the content on the website for free. So the podcast is free. I think what happened was his username is GJOVI33. He must be Bon’s brother, and I think he’s just got a chip on his shoulder that he never…

David Greene:
Because he was never the Bon Jovi that made it?

Rob Abasolo:
He was never the Bon Jovi. He was the G Jovi in his family, and I think he was just… Yeah, he’s just out to get it. He’s out to let us have it kind of thing, you know.

David Greene:
Well, Rob and I believe in turning lemons into lemonade, and here’s how you can help us with our lemonade stand. If we get more of you to leave a five star review to overwhelm this two star review, this can actually be a net positive. So please head over, leave us a good review, an accurate and thorough review. This doesn’t make any sense that this person’s upset that you have to buy a masterclass. Definitely not a BiggerPockets thing. But enough of that, moving into the YouTube comments that y’all have left on previous Seeing Greene episodes from FlorianWu7256.
“It was actually super interesting to watch both of Rob and David’s different perspectives and conclusions. Our individual opinions are influenced by our own life goals and life experiences made me even more open-minded. Thank you.” And from Riz Keysetya, “Great episode, David. I have question. I bought multifamily investment properties using a DSCR loan. My question is, can I move into the property since this property is an investment property? Please advise. Thank you.”
Okay, in most DSCR loans, I don’t know about your specific loan, your loan documents would say so, but in the vast majority of them, all the ones I’ve seen, you cannot move into the property if it is an investment property. Now, what I can’t say for sure is if you are prohibited from moving in it or if you are stating when you bought it that you are not going to move in it and it was not purchased with the intention of moving into it. So you would need to check with a loan officer that originated that loan, if that was us at the One Brokerage.
Send an email to your loan officer to ask this question. We’ll get you an answer. But if you got it from someone else, you’re going to need to go ask them. Most DSCR loans, they make you say that this is not something that you’re buying to live in because they’re using the income from the property to approve you for the mortgage and you’re not going to be able to generate income if you’re living in the unit. Does that make sense, Rob?

Rob Abasolo:
Yeah, it does. It does. I would bet more than likely that you cannot live in there.

David Greene:
The only question is I don’t know if there’s a law that says you’re not allowed to do it, or if you just said, “I am not intending on living in it when you bought it,” and you swore that you weren’t at the time.

Rob Abasolo:
Right. Well, that’s very true. For sure there’s usually documentation that you sign that’s basically like a, “Hey, I promise I will not live in this investment property.” Just read your loan docs when you sign them. I know, crazy concept. But nowadays, I probably spend a little more time at the closing table than I used to a few years ago.

David Greene:
All right, our next comment comes from episode 825. LOL. I love the three star from Debbie Part. It made me laugh. This is where Rob and I, or this is where we read a three star review from somebody else that wasn’t super thrilled with the podcast. Hey, we bring you the good, the bad, and the ugly. Which of those three would you qualify for, Rob?

Rob Abasolo:
I’m good with just being the middle there. I think I’m going to go the good. Oh, shoot. Sorry, I don’t know why I was thinking good, better, best. Maybe I’m just always optimistic.

David Greene:
Yes, you are. I think that’s what we learned about you.

Rob Abasolo:
I think I’m going to go good then. I’m going to be arrogant on this one. I’m going to say good.

David Greene:
All right, Rob, put on your earmuffs before I read this one. Our next quote comes from Alexandra Padilla. “Loved having you both on a Seeing Greene episode. I say you keep it going. Rob was my original catalyst into short-term glamping rentals, and you, David, have been my catalyst to become a full-time real estate professional. Having you both together is a big bonus. I vote to continue to bring Rob on. Thank you both for all the knowledge and real encouragement just to do something to keep moving forward. You guys rock. By the way, I love bald men. So sexy.”
Folks, this is a groundbreaking moment in the world of BiggerPockets. This might be my first compliment from a female in YouTube comment history ever. It is a running joke that I will frequently get comments from somebody, like if I’ve been working out and my arms look bigger, or the lighting was really good, always from dudes. I have a huge dude fan base. Never once has a woman said something. Let’s hope that Alexandra Padilla is a real profile and not something that a dude made.
Rob, I’m happy to have you here with me for this. How do you feel seeing my first ever compliment from a possible female fan calling me… Well, maybe she’s not even saying I’m sexy. She’s just saying bald men are sexy. But indirectly, I’m still going to take it.

Rob Abasolo:
Can I take off my ear muffs? I haven’t been listening.

David Greene:
Good point.

Rob Abasolo:
Okay, yes. I’m just reading up on this, catching up. Look, man, I’m really happy for you. I’m really proud of you. I think this is a big moment for you. I think there’s a moment where things change for people, and this is your moment, man. I think, Alexandra, if you’re here, if you’re listening to this, reach out. Reach out to David on Instagram or reach out to me. I’m happy to make the connection and good day to you.

David Greene:
And if you are someone who’s been listening to this podcast, chasing your dreams, trying to hit financial freedom, let this be a moment of encouragement for you. I’m going to share this victory with all of you. Because if I can get a compliment from a female on my physical appearance on this podcast, anyone can do anything. All right, and our last comment here comes again from Apple Podcast. This one from Justice Short, who gave us a five star review, labeled grateful.

Rob Abasolo:
Just as short as who?

David Greene:
What’s that?

Rob Abasolo:
Just as short as who?

David Greene:
Oh, that’s funny.

Rob Abasolo:
Do you think that’s what they’re going for?

David Greene:
Rob, Justice.

Rob Abasolo:
Justice Short.

David Greene:
Yeah, not just as.

Rob Abasolo:
I used to know a guy named Justin Time. No, no. Justin Case. Real guy.

David Greene:
Yeah, that’s a funny name.

Rob Abasolo:
Yeah, sorry. Carry on.

David Greene:
Extremely grateful for this podcast. I loved it when Brandon was the host, but honestly, love it even more with David as the host and Rob as the co-host. This podcast offers everything any real estate investor could look for, from mindset to economics and practical advice to grow your portfolio. Appreciate you for all that you do and continuing to make me laugh with you all along the way. Now, that is a pretty nice review. How does that make you feel, Rob?

Rob Abasolo:
That is heartwarming. Yeah, I’m just like, who makes her laugh more, me or you? Both. Is it the dynamic?

David Greene:
See what happens? One compliment and all of a sudden it’s a competition with you now. I called you handsome Rob the whole time, and one person calls me sexy and you’re like, “Wait a minute, what about me?”

Rob Abasolo:
Yeah, exactly. I got to get fed some of the compliments too. Justice Short, let us know. Let us know in excruciating detail which jokes have made you laugh.

David Greene:
Excruciating detail. That is funny. All right, and just to keep it real, it is very difficult to make a podcast that focuses on practical advice, overall principles and philosophy, keeping it entertaining, keeping it moving quickly, and try to make people laugh. So thank you candidly, Justice Short, for the observation you left and the review. And again, if you like this, please go leave us a review wherever you listen to your podcast. They help us a ton.

Rob Abasolo:
They really do.

David Greene:
All right, our next question comes from JR Matthews in Boston, Massachusetts.

JR Matthews:
Hi, David. My name is JR Matthews. I live in Boston, Massachusetts. I’m standing on the deck of a waterfront two family that I’m house hacking with my beautiful wife, Crystal. I was able to get this house as a result of following the systems I’ve learned from your podcast and books. I have five small multifamily homes and I want to scale. I’m running into trouble getting a HELOC due to DTI. I don’t want to cash-out refi and lose my rates below 4%, and I’m not crazy about selling any of the properties.
Should I keep hunting for a HELOC, sell the properties and 1031 into something better, or find a deal that’s good enough to make a cash-out refi worth losing the low rates? If I live to the average age for men in the US, I have 12,775 days left to make an incredible life, so I’m itching to make some moves here. Would love any advice you have to offer. Thank you guys so much for what you do.

David Greene:
All right, Rob, this is an interesting dilemma and one I hear on Seeing Greene often. I know you’re not always with me on these shows, but welcome to the club. Here’s what’s basically going down. I have something good going for me and I don’t want to mess it up, but I also want to scale. It looks like this is a capital problem.
Now, most of the time we take equity, we turn it into capital. We reinvest it. We do that through a HELOC, a cash-out refinance, or selling the property. JR here says, “I don’t really want to do any of those three things. I feel stuck. What should I do?” What do you have for him?

Rob Abasolo:
Well, he’s got something that a lot of people don’t have, and that is multifamily experience. So I would say a lot of people would look at his portfolio and say, “Hey, he’s got my dream life. He’s got my dream portfolio. I would do anything to work with this person.” I might consider opening up the conversation of just finding a partner, finding a partner that wants to learn what he’s doing and maybe he can guide that partner in the purchase, maybe put a little bit of capital in the game so he’s got some skin in the game.
But maybe work out a sweat equity versus capital type of thing and work with a partner/investor, because it sounds like he doesn’t want to do the other three things. Ultimately, I would say the three things he doesn’t want to do are all things that are necessary to continue to scale. So he either has to make a compromise on that side or be willing to split equity with somebody else and move into the partnership investor type of scenario. What do you think?

David Greene:
I love that you gave the practical approach because I really wanted to give the philosophical/mindset approach and now I get to. This is really one of the huge motivations for why I wrote the new book Pillars of Wealth because this problem is a frequent one that we get in real estate investing. For the last 10 years, largely it’s been the hottest market that real estate has ever had. And so the strategies that we would recommend were just scale, scale, scale. Pull equity out of stuff you did before.
Reinvest it into new stuff. Of course, you could have lost, but the odds of losing were so much smaller because the value of property was going up. The rents every year were going up. Rates were only going down. I mean, you had every single tailwind that you could possibly get, making it so that being aggressive was in your favor. It’s not a market where being aggressive is in your favor as much. That does not mean, should I buy real estate or should I not buy real estate? It’s not a polarizing thing.
It’s a spectrum. It’s just harder to buy real estate. So you should buy, but just be more careful. And what I don’t like about this is he’s giving up a sure thing for something that’s much less likely to be a sure thing. In Pillars I talk about you need a three pillared approach to building wealth. One of those pillars is investing, of which we talk about real estate investing. So I don’t really need to bring that up because everybody listening to this already gets it.
There’s other people in the financial independence, retire early space or maybe the business space, the people that are listening to Alex Hormozi, they want to make a ton of money, they need to hear about real estate investing. They don’t realize it’s a pillar. Our audience knows. Our audience needs to hear about the other two pillars, the art and skill of saving money and the art and skill of making money. And what I really like to see from JR here is to let the frustration that it’s hard to buy more real estate become the fuel or the carrot that causes him to make some different life changes.
Can JR make some cuts in his own budget? Can he budget money a little bit better and save more? Can JR maybe pivot a little bit here? Your favorite word there.

Rob Abasolo:
Pivot.

David Greene:
Pivot. Start a business, work some more overtime, get a raise, get a second job. Just take some risks in his financial life where he gets out of the W-2 cage and gets into the 1099 free-range, right? That is something I’d like to see a lot more people do Instagram they want to improve their financial position. I want them to keep investing in real estate. I want you to get away from only investing in real estate.
The healthiest investors I know make money, save money, and invest the difference. And this question seems to be geared around, how do I scale without saving more money or making more money, and that’s what makes me nervous. What do you think about that, Rob?

Rob Abasolo:
No, totally right. One of the pieces of context here that we know on our end is he said that all properties are cash flowing around one to $3,000 a month. So let’s take the average of that being $2,000, he’s got five properties, so he’s making about $10,000 of cashflow. I mean, that’s not nothing, right? If he had came to me and said, “Oh, I have no money at all,” that’s like a whole nother conversation. But I think if he’s very diligent in saving $10,000 a month, a year from now he’s got 120K that he could theoretically roll into the next purchase.

David Greene:
That’s a great point. That would be focusing on the defense side. From the offensive side about making more money, that could happen within the investing pillar. So maybe these are traditional rentals that are all cash flowing like that. But if he moved them to midterm rentals or even short-term rentals, what if he could double the revenue that he’s making at half the time it would take to save up the down payment for the next multifamily property?
He doesn’t have to go learn a whole new asset class, lose his interest rates, try to 1031 into something that’s risky. Just take the offensive pillars and apply them to the investing that he’s already doing.

Rob Abasolo:
Yeah, I think we get into this conversation of how can you make more money with your current portfolio? And that’s a really good question. It’s like, can he convert anything to mid and short-term rentals and maybe just amp up that one to $3,000 of cashflow per property to maybe two to $4,000. Even doing that would be pretty significant.

David Greene:
Yeah, and it’s better to make more money within your investment portfolio than it is to make it outside of it, because the money that you make within your investment portfolio is sheltered by the depreciation of the portfolio. So the taxes you pay on that money is significantly less when it’s sheltered by depreciation versus if you just go get another W-2 job. Your income goes up, so does your tax rate. All right, moving on to the next question here.
It’s from Gary Schwimmer in California. I had to hear any of the senior condo from my parents in Deerfield Beach, Florida. I own the condo outright and only pay the HOA fees and property saxes. I have left it empty for several years basically due to not knowing how to be a landlord. I’m especially skeptical since this would be long distance. At a loss at what to do with this property. Do you have any suggestions?

Rob Abasolo:
Easy. I love this one. He’s got a good problem. Most people are like, “I don’t have money, or I don’t have a property.” He’s like, “I’ve got a property. It’s empty. What do I do?”

David Greene:
I mean, anything he does is better than what he’s doing. That’s another thing. You can’t mess this up.

Rob Abasolo:
So there’s this concept that I call reverse arbitrage. And for those of you that don’t know, rental arbitrage is the idea where you go and you rent a property from a landlord. You’ve got to pitch to them on it. You got to get their consent. You rent that property and then re-list it on Airbnb. You can make decent money doing that. But reverse arbitrage is when you’re the landlord who is open to leasing your property to an Airbnb host, and that’s exactly what he could do. He could say, “All right, listen, I don’t want to be a landlord,” so he could just rent it to someone that want…
Airbnb can be a little tough for people that don’t have a ton of money to get into, but arbitrage allows you to get in for like eight to $12,000. So there’s a whole pool of people that would beg him like, “Oh my gosh, please, can I rent your place? Can I list it on Airbnb?” And as long as he was okay with that concept, which I don’t see why he wouldn’t be, then he could actually make really good money on that property without really having to do anything. He wouldn’t need a property manager.
The co-host or the arbitrage person is basically going to manage the property for him and is going to pay him a little bit more than market rate. So that’s my suggestion.

David Greene:
I love it. And if you’re going to take that route, a little bit of advice for you, my man, Gary, the person that you let rent this out as an Airbnb is going to be taking a risk. They are going to be looking for people to use that property and making the same or more than the rent that they’re paying you. If they fail at their job, there’s a very real possibility that they will not pay you the rent that you’re owed. If you’re going to take that route, choose someone that has something to lose. You don’t want to do this for a person that has bad credit and no money.
Because if they fail at renting it out on Airbnb, they’re going to have no problem just not paying you. You want to find a person that has something to lose, who doesn’t want you to sue them, who doesn’t want to be held accountable and responsible for the least that they agreed to pay you the money. The more they have to lose, the less likely they are to skip on your payment. So don’t assume that all people you could do this with are the same.

Rob Abasolo:
True. One positive thing is he’s not used to making money already. So if the person doesn’t pay him, nothing really changed.

David Greene:
It’s a beautiful thing of being at rock bottom. You can’t get any worse. This is the most excited I’ve been for a Seeing Greene question the entire time when I’ve done it.

Rob Abasolo:
I know. It’s like a true softball for us. All right, one final thing. I can already feel the comments like, “Oh, Rob, arbitrage sucks.” Listen, it’s a good entry point for people that need to get in. But another entry point is you can actually get a little bit of that upside too, Gary, and you can actually instead of offering it up as a reverse arbitrage situation, you can find a co-host, find someone who is willing to co-host for you. You will have to pay for the furniture. You’ll have to pay for the setup, which can cost you anywhere from 10 to 20 grand, depending on your space.
Have someone else manage it for you. They’ll charge a 20% fee or a 15 to 25% fee to do so. And in that case, you get both the stable income every month and the upside, if they really, really come in and crush it, which in Deerfield Beach, I mean, I’m sure you would probably do okay out there during the summer season.

David Greene:
Yeah, and funny story, I’m actually in Fort Lauderdale right now recording at my Airbnb that has not been cleaned yet from the guests that were here before. Try my hardest not to touch anything, and it’s like less than eight miles away from Deerfield Beach, where Gary’s condo is located. So let’s see if I get in touch with Gary before I leave here and go check the place out for him.

Rob Abasolo:
So you can rent it out.

David Greene:
That’s exactly right. I need a place to stay while my place is being cleaned.

Rob Abasolo:
I do want to say that all the advice we just gave is contingent that the HOA allows it, because he says he does pay HOA fees. Normally HOA scare me, but considering he’s in a beach town, typically a lot of condos in the Florida area, they do allow the short-term rental stuff. So it may not be an issue, but definitely read your bylaws on that one.

David Greene:
Moving on, our last question comes from Rayna in Georgia. Rayna says, “Hey, David, I just bought my childhood home and it is paid in full, but it needs repairs. How can I leverage this home given the condition and no mortgage?” Rob, what say you?

Rob Abasolo:
Hmm. Well, I think first and foremost, she needs to get it rental ready no matter what. I think the paid in full thing, we’ve had a couple people on Seeing Greene lately that have this. That’s a gift. All right? A lot of investors would go out there and be like, “Leverage. Leverage. Take out a cash-out refi. Go reinvest it.” I actually think once you reach that point where something is paid off, it is a gift. It is a cash flow gift. So I would say try to be very scrappy with getting it rental ready and just put it up on the market and rent it and cash flow every single month.
There are different levels of rentals you can do from pad split to long-term rentals, to medium-term rentals, to short-term rentals. You can do pretty much anything you want, and the best part is that there’s very little risk considering that you own it outright. And it’s not like you’re going to be missing the mortgage payments. You will still have to pay taxes and utilities and everything like that. But you are, in my opinion, in the least riskiest version of real estate as it stands. What do you think?

David Greene:
Well, I think that they’re asking, how do I get money out of the property to make these repairs? Is that the way you understood the question? How can I leverage this home given the condition and no mortgage? Or you think they mean, how can I use this home given the condition and no mortgage by leverage?

Rob Abasolo:
Well, yeah, I think she’s saying, “I’ve got this asset. How can I leverage it in my benefit?”

David Greene:
Well, it depends how bad the repairs are. If they’re just basic repairs that need to be done and you can still generate some kind of rental income from it, you can rent it out to somebody in whatever way you do, traditional, midterm, short-term, whatever it is, and then use the money that comes in that you’ve generated to pay for the repairs so that the property pays for them themselves.
The tricky thing would be if it’s in such disrepair that you can’t collect any rental income from a tenant, where the only tenant you can find to live in it isn’t going to pay the rent. So what do you think from that perspective, Rob, if it’s in such bad shape that it’s not something that could generate revenue?

Rob Abasolo:
I mean, I would say she could possibly consider a HELOC, and I just don’t want her to go into a full on six-figure renovation, but she could consider a small HELOC that she uses to renovate it and get it rental ready and then rent it, and then just make the delta between her HELOC payment, her home equity line of credit payment, and the rental rate that she gets.

David Greene:
Yeah, that’s a great point. I think you could pay HELOC on the property for a small amount to make the repairs and then pay off the HELOC with the money that came in from it. But I would say, Rayna, don’t do anything big. If you’re new to real estate investing, you haven’t done a ton, it says here in my notes you have one duplex in Florida and a single family in Birmingham, so maybe you have some experience, but don’t go crazy in a market like this and dump a ton of money into that house when we don’t know what’s going to happen to the value of real estate or the ability to be able to rent it out.
There’s a story going around in the news right now of somebody that has a house in Brentwood, California in Southern California with a tenant that’s been in it for over a year that is refusing to leave unless they get $100,000. So we’re starting to, unfortunately, see more and more of these tenants holding landlords hostage based on technicalities in the law.
So if you’re not super experienced with real estate, I’d hate to see somebody get into a situation like that. But like you said, Rob, this is a gift. It’s a great situation to be in because the risk of making mistakes is so low when there’s no mortgage.

Rob Abasolo:
Yeah.

David Greene:
All right, that’s all we have for today. Thank you so much everybody for joining Rob and I on Seeing Greene. I hope that you see things from my perspective a little bit better, and that Rob’s perspective added a little bit of color to green. I feel like it was a little bit more forest green that just David Greene today with you here.

Rob Abasolo:
That’s right. That’s my favorite color, forest green. Any ornamentation I can add to the Greene factors honestly makes me a happy man.

David Greene:
Thank you, man. What’s your favorite color, by the way?

Rob Abasolo:
It is green.

David Greene:
It is green.

Rob Abasolo:
I don’t tell you that because I don’t think you need to know that information, but it is green.

David Greene:
I bet you say that to all the people when you’re co-hosting the podcast with them. I hope that’s the same thing that you tell Pace.

Rob Abasolo:
When Brandon told me that, I told him my favorite color was Turner.

David Greene:
That’s funny.

Rob Abasolo:
And he was like, “What?” And I was like, huh?

David Greene:
My favorite color is you. This is David Greene for Rob “The Shameless Gadfly” Abasolo signing off.

At the start of October, share prices for Metro Bank plummeted after reports that the lender was preparing to raise up to £600 million in capital to help boost its balance and continue achieving its business goals.

To do this, Metro Bank considered various debt and equity solutions including selling shares, bonds and some assets such as a portion of its mortgage book.

Less than two weeks after the share drop, Metro Bank announced they had secured a package of £925million. That number includes a £325 million capital raise from new and existing investors and £600 million from debt refinancing. Spaldy investments Limited, owned by Colombian billionaire Jaime Gilinski Bacal, led the equity raise by contributing £102 million and will become the controlling shareholder of Metro Bank.

The challenger bank opened in 2010 and was the first bank to open in the UK in over 100 years.

What Does This Have To Do With Small Businesses?

Raising money to meet business objectives can be a necessary task for any size organization.

Crowdfunding is a good option for start-ups, as there are much lower barriers to entry compared to accessing traditional bank loans. Plus, just running a campaign helps with marketing a business.

Types Of Funding

Rewards, debt, equity and donations are the main forms of funding. For small businesses that aren’t yet established, rewards and donations are the simplest to receive.

Have 5 to 6 creative reward packages for different amounts of funds that people give. If the business is product-based, then offering some kind of limited edition product, or launch event invite are ideas for rewards. Service-based businesses could offer a consultation, discount on services or priority bookings to investors.

Donations are exactly that. Money that supporters give to your cause without the expectation of something in return.

Things To Consider

If you are raising funds to launch a business, once a campaign is in the public, your idea is not protected.

Some platforms won’t release any funds if the campaign doesn’t reach its target, so it’s wise to start with a smaller goal initially. Once that goal is close to being hit, then the amount of the total goal can be increased.

Also, you should think about:

• Why do you want to crowdfund?
• What will it do for the business?
• Why should anyone care?
• How much do you want to raise?
• How will the money be spent?

Which Platform To Use?

GoFundMe, Kickstarter and Seeder are some of the more well-known platforms. However, there are over 90 crowdfunding platforms in the UK crowdfunding market. Use this directory to help you find the most suitable one for your business.

Tips For A Successful Campaign

• Have a strong online presence for your brand. This means all social media and websites have clear messaging and are up to date.
• Before launching, create a buzz in your networks. Ask for their support in advance, so that when your campaign goes live there is already momentum.
• Create a video pitch to add to your campaign. This should be a compelling 1 to 3 minute video that includes your founder story and tells people why they should invest. This is a great sales tool and doesn’t have to be done by a videographer. Having a phone video is better than having nothing at all.
• Have a solid marketing plan. Decide where and with whom you will share your campaign. Do you know any journalists who can help get your campaign seen? Will you run ads?
• During your campaign work on it for at least one hour a day posting updates, getting more press, and talking to people about it.
• If there is one person you would love to have on board because of their connections or expertise, think about how you can get them in your corner and then take action to do just that.

As with all financial decisions, seek advice from trusted advisors and accountants.

Ashley:
This is Real Estate Rookie episode 332. How much should I charge for a security deposit? The first thing that you need to do is know what you are allowed to charge per your state laws. A really, really great resource is Avail.co. It will actually tell you what your state laws are.
Does this only cover damages for the security deposit? So, that’s what you would put into your lease agreement. And one thing I highly recommend is putting into the lease agreement what somebody will be charged. So, actually, itemizing like here is your checklist of things of how we want the apartment to come back from us. My name is Ashley Kehr and I’m here with my co-host, Tony Robinson.

Tony:
And welcome to the Real Estate Rookie Podcast where every week, twice a week, we bring you the inspiration, motivation, and stories you need to hear to kickstart your investing journey. Today we’ve got a Rookie Reply, which means we’re taking questions from our Rookie audience. I say today’s episode is a little Ashley heavy because we’re talking a lot about tenants and long-term rentals. We talk a little bit about LLC structures and HELOCs, but lots of good information we’re going to get into for you guys today. Yeah.

Ashley:
Yeah. We also talk about what attorney you should use from which state when you’re dealing with deeding properties, transferring title or creating your LLC and putting your properties under the LLC. So, lots of great questions today. If you have a question that hasn’t been answered yet and you want answered, please go to biggerpockets.com/reply.

Tony:
All right. Now, I want to give a shout-out to someone by the username of Dela Rogue. This person says, “Exposure to realistic real estate. The show is great for people like me who work a full-time job, but want to learn more about investing. Real estate investing seemed overwhelming at first, but Ashley and Tony listening to them every single week helped me get comfortable with all the terms being thrown around and investing in general. I’m on the BiggerPockets forums now and learning as much as I can before I execute my first deal.
Thanks for all the tips guys.” So, for all of our Rookie’s that are listening, we’d love to hear from you. Tell us your story by leaving us a review on Apple Podcast, Spotify, wherever it is that you’re listening. But the more reviews we get, the more it helps the show grow and the more the show grows, the more we can inspire folks just like Dela Rogue. So, do us a favor, leave that review.

Ashley:
Now, let’s get in to your questions.

Tony:
All right. Guys, so today’s first question comes from Gamba Lume Jessin. Gamba Lume, I hope I got the first name right there. But Gamba Lume’s question is, “Hi, team, me again. Question, if rent is payable in advance by the first day of the month and the tenant doesn’t do so and five days later they want to move out, do you demand rent for the month along with the late fees?” So, Ash, it’s probably more of a you question. All of my “tenant’s payment” before they step foot of my property.
So, I don’t have to deal with this as much. But how do you handle folks that want to leave? My assumption is that they still got to give you 30 days’ notice. Typically, that’s what’s going to be in your lease is you can’t just say, “Hey, I’m moving tomorrow.” But yeah, I guess curious Ashley to hear how you handle those kind of situations.

Ashley:
Okay. So, for this in your lease agreement, there should be some clause that states if you don’t give 30-day notice and you just randomly decide to move out that your security deposit is completely forfeited. With this, yes, I would still, if they didn’t give proper notice according to their lease agreement, they would still owe. In lease agreements you can see clauses too where somebody will put in that if you move out before your lease ends or you don’t give proper notice, you are liable to pay the rent on that property until somebody else moves in.
And as the landlord, you have to actively try to market and get somebody into the property. The hard part is trying to collect from that person no matter what your lease agreement says about them terminating the lease early or not giving proper notice, it is very hard to collect from that person. So, yes, you can still charge them for that month’s rent unless you get somebody into the property right away. So, say maybe day 10 you get somebody in, you could charge them for the first 10 days. But then, since you already have somebody else in the property, unless it specifically says in your lease agreement that if they move out early, they have to pay a full month’s rent and you retain their security deposit or whatever that may be.
That has to be written out in your lease agreement. In this example, let’s say there is no clause about moving out early or not giving proper notice. In this one, I would try to charge the tenants for moving, vacating early and see what would happen if they would actually pay it. One thing you can do is you can… and a lot of property management software is putting this into their systems now, where you can actually send a tenant’s information out for collections. And they’ll be able to… from there, the collection agency takes it and they call and they collect and you may get the money, you may not.
But also the collections agency takes a large percentage. They also have very regiment rules as to was actually eligible for collection. So, in the circumstance they may say in your lease agreement, it doesn’t say what the rule is for somebody terminating early. And we don’t think that this is something we can actually collect on by law.

Tony:
Ash, let me ask you this question. I actually don’t know the answer to this. But if you had your tenants banking information on file checking, routing information or debit card, credit card, if they violated your lease in some way, could you just automatically bill their card? Is that like a thing that long-term landlords do?

Sonia:
The property management company that I used to use, they actually would take the tenant’s information for their auto withdrawal and they would set up on their end. So, they would have the full account information whether there’s credit card or a bank account. The software that I use, I do not see any of that that is completely in the residence control. But one issue when I let the other property management company go and took back over when we switched everyone over the property management company never turned off everybody’s online payments. So, people’s account had paid us the new property manager, but also then they got the money taken out of their bank account because the property management company never shut off those payments.
And it actually was a huge ordeal. Obviously people were really upset because they just double paid for their rent and it’s like, “Okay, how is it getting back?” And then, it was a nightmare just figuring out, okay, who already paid the property management company and who didn’t and things like that. But I don’t like the responsibility or the aspect of me actually having that person’s account information. I like it that it’s a third party software that has security in place, cybersecurity in place where that information is protected.
So, just like with tenant screening, if you are actually going to do your own tenant screening where you’re going to collect to the person’s social security number, you’re going to do all these different things. A lot of software company will actually do a check on you as in they send someone to your office to make sure you have a lock on your door, you have a filing cabinet with a lock that your computer is encrypted, all these different things just for you to collect somebody’s social security number. So, with all of the internet things that go on and all of the scams and everything today, I would suggest if you can avoid.
And this is one of those situations where you can use software and you can avoid actually collecting your tenant’s bank information or credit card information and somebody scams them, it could make you reliable because they say, “Well, you don’t have any kind of protection. Somebody could easily hack into your computer and get that information off of it,” things like that. But Tony, I did have a question for you though, which it’s more towards medium term rentals, but it’s through Airbnb. So, there’s been a couple of times where I’ve had somebody saying for a long time, like three months say for example. And so, Airbnb will collect one month at a time.
So, if somebody books longer than one month, they don’t collect the full amount. People can set up payment plans almost where they’re in the property for a month and then month two, Airbnb will pull another payment from their credit card on file. I’ve gotten the notification that the Airbnb cannot collect from this person. And it doesn’t say what it is, but it’s always been rectified within 24 hours. I get the email saying the person has paid, but have you ever had anything like that happen or not?
Because it’s mostly short-term rentals. And what would be your suggestion of what to do in that circumstance? If you do have somebody from Airbnb in the property, they’ve rented it for three months, month two comes and they don’t pay and they shut off their credit card or whatever and Airbnb can’t pull from it anymore.

Tony:
Yeah. We’ve never had that issue because all of our properties are traditional, true short-term where folks are at most during the holidays we might have someone say 7 or 10 days, but never anything beyond 30. If I were in that situation where I had an Airbnb guest whose payment failed, I mean obviously, I try and reach out to them first. But if for whatever reason I couldn’t get in contact with them, I feel like my next steps would be to try and get them to physically leave the property. So, I might try and call the sheriffs, I might try and call the local PD, whoever I can to assist in getting them to get out.
But then, it gets dicey and depending on what state you’re in on, if they’ve been there long enough, say that they’re on whatever, a 90-day medium-term rental stay, even like a six month and you’re on month four, when they stop paying, then you kind of get dicey around like, “Hey, what are your options?” So, my first move would be to try and get them to leave the property physically and then if I can, I guess you got to start an eviction process or something.

Ashley:
Yeah. Yeah. Maybe then they’ll start throwing out squatter laws.

Tony:
Yeah. And that’s why. I mean we’ve had to call the sheriffs I think once or twice to help get people out on the short-term rental side. Typically, by the time when we tell them, “Hey, we just called the sheriffs, it’s time for you to go.” Usually they just leave on their own. But we’ve never actually had to physically remove someone from one of our properties before.
So, fingers crossed I never have to. But yeah, I’d be, I guess guessing a little bit on what I’d be doing in that situation.

Ashley:
Yeah. So, with that, was that during their stay and you had them leave early because they were in a party or was it because it was past their checkout and they weren’t leaving?

Tony:
One of each, right? So, we had one guest, I think I told the stories like these two crackheads, like actual literal drug users. I don’t say crackheads in a funny way, but they were actually doing crack cocaine in our property. But we had to call them because we knew who they were, we wanted them to leave. And then, the second time was someone that just stayed exceptionally late and they weren’t super responsive.
And then, “Oh, I’m sorry, we overslept,” or something like that. So, those are the two situations. Never for a party. Most of our properties are smaller, especially the ones in Joshua Tree, so they’re not even meant for a party. And then, our cabins in Tennessee, I don’t know, it’s mostly families and grandparents and grandkids. So, we’ve never really had to deal with parties too much.

Ashley:
Okay. Our next question is from Alfonso. “If I take out a HELOC on my primary residence, but I don’t access any funds yet and just have it open, what happens if I decide to move? If I choose to access my line of credit, does the lender ask if it’s still my primary residence? Will the lender close the account?
Can someone clarify? Thanks in advance.” This is a great question. And our friend Tyler Madden, who’s been on the podcast before has actually talked about how he did this with his primary residence. He was getting ready to purchase a new house and so he went and got a HELOC on his primary residence that he was going to keep a rental property.
And he did this before he closed on his new house. And he actually used the same mortgage broker. I have a friend who’s in a situation where they have a duplex or house hacking and they are buying a new primary. And they need the cash from the duplex to put towards their down payment. I told them about what Tyler did as to he actually just got the line of credit and they could draw off the line of credit and they could use that for their down payment on the next property.
Tyler had said he used the same mortgage broker to do his line of credit and to do his new mortgage. So, this broker was fully aware that it wasn’t going to be his primary anymore, but it was right there in that time, which was completely legal to go and get a line of credit. And so, they worked out the closing. So, he closed on the line of credit before he closed on the mortgage of his new property. And having that kind of timeline is important.
And so, I have a line of credit, but they’re all on investment properties. I’ve never actually done one on my primary residence. As far as I know when you pull off a line of credit, it’s usually like a form you fill out that you just send into whoever your loan officer is and say, “I want to take $20,000 and please put it into this bank account.” And then, you sign it or you get a checkbook, you get a regular checkbook and you can literally write money or write checks from your line of credit instead of a bank account. So, you could always ask for that option too when you go and get the HELOC.
And then, there’s nobody asking you if you have a renewal term, like say your HELOC is up in three years and they go to renew it, they may ask you then if that is still your primary when they go to actually renew the line of credit.

Tony:
Yeah. And so, a HELOC is what you’ll hear is some people refer to it as a second mortgage. So, in the same way that when I look up county records for a specific property, you can see who has a lien, who has a mortgage for that property, right? Like Bank of America has a loan against 123 Main Street for Tony Robinson. When you go out and get a HELOC, and I’m almost certain that this is correct, they’ll also technically put a lien on your property as well. So, say that you do go to sell Alfonso and the same way that your title or escrow company or whatever kind of entity you’re using in the state that you’re in, they’ll go and check to see what are all of the liens against this property.
They’ll see your primary residence and then they’ll see your… I’m sorry, they’ll see your first mortgage that you used to purchase the property. Then, they’ll also see your second mortgage or your home equity line of credit. So, they’ll pay off both of those with the proceeds from the sell before they release any funds to you. So, it couldn’t be like, “Hey, I’m going to go out and get this HELOC against my primary, then I’m going to turn around and sell it.” And then, the bank that gave the HELOC wouldn’t be aware of that.
Your title escrow company will make sure that it gets paid off. So, that’s how it works in the backend. And that’s the whole reason why you use these third parties like title and escrow to make sure all the paperwork is good. Because say that you tried to do this outside of title and escrow, there’d be no paper trail of this lien against the property. So, the banks are going to want to make sure that they’re protected.
They’ll have some kind of mortgage security document that you’re signing that ties the debt they gave you to the actual property. So, to answer that first part of the question, if you sold the property, your HELOC should get paid off during that sale process and then you walk away with any proceeds there afterwards.

Ashley:
Our next question is from Graylin Herd. “Hey, Rookies, I hope everyone is doing great. I’m closing in on renting my first property. And with the current state of the world, it’s stressing me out what I should charge as my security deposit and clauses I should implement to protect me as an owner. Everything in my property will be brand new and I put a lot of hard work and money into it.
What you charge for security deposits and does this only cover damages? Are you charging your charge first and the last month’s rent at the beginning of the lease? And if so, this is separate from the security deposit, correct? What service do you use to run background and credit checks on applicants? I have heard rent prep and my rental are good.
Thoughts? Thanks for help in advance.” Okay. So, let’s go back to the beginning and let’s start there. How much should I charge for a security deposit? The first thing that you need to do is know what you are allowed to charge per your state laws.
A really, really great resource is Avail.co. Okay. They’re actually a property management software and they have, if you go to, I think it’s tools and resources, I’m trying to look right now. It will actually tell you what your state laws are for each state. So, you click on your state and then you can go through and see if there is a security deposit law, if there is you have to charge a certain amount or not.
So, in New York State, you can only charge equal to one month’s rent. So, if they’re renting the unit for 750, you can only charge 750. You can’t charge any more than that. You also in New York State cannot charge for last month’s rent. So, that’s another thing that you should look for in your landlord laws.
So, here in New York State, when somebody moves in, you can charge them the first month’s rent because they’re moving right in and then you can charge them security deposit equal to one month’s rent. You cannot charge anything more and you cannot charge last month’s rent. Okay. You can charge for pet fees, different things like that upfront that are non-refundable. So, we do a $300 non-refundable pet fee at move-in, if you are bringing in a cat or a dog to the property.

Tony:
Let me just ask a few questions on that piece. Right. So, you said that you charge a $300 pet fee. How did you land on 300?

Ashley:
When I started as a property manager, it was 200 and for the first ever building that I managed, that’s what they did. And then, it was another $10 per month. And I quickly realized that was not really enough to cover some of the wear and tear that pets did and that people were actually willing to pay more. So, over the years it’s just increased to 300. So, it’s $300 no matter how many pets you have.
So, if you have a cat and a dog, it’s $300 and then it’s $30 per month per a pet. So, if you have two dogs, it’s 60. If you have two dogs, one cat, it’s 90, but we do cap it at three pets. And then, for some properties it’s even less than that. And then, also you have to know what the town codes are too. Your town may even cap how many pets that somebody can actually have living in a household too.

Tony:
Is there any level of competitive research that you’re doing to gauge either the pet deposit or even just the general security deposits? Or are you just going based off your knowledge of your own properties?

Ashley:
Well, the security deposit, no matter what for everybody in New York State has to be one month’s rent.

Tony:
Oh, so it can’t be less or more?

Ashley:
I mean it could be less, but I’ve never ever seen anybody charging less ever. That is 100% like the going rate is one month’s rent. Yeah. And then, as far as the pet fees, I haven’t done a ton of research on that to be honest. But we’ve never had anybody say, “No, never mind, we’re not going to rent it.”
But every once in a while look at what’s listed in the area. And I mean recently it’s actually very hard to find listings in the area because apartments are just going so fast. But usually around the 200 to 300 mark is what I’ve seen in there. I mean before I’ve seen even $500, but then there’s no monthly additional fee too. So, there’s a change in what the upfront fee is and then what the monthly fee is.
And a lot of times it’s easier to have a higher monthly fee because that first upfront fee, sometimes it’s hard for somebody to come up with the first month’s rent, the security deposit, and that large chunk of money for the pet fee too.

Tony:
Got you.

Ashley:
Okay. So, let’s see. The next question was does this only cover damages for the security deposit? So, that’s what you would put into your lease agreement. And one thing I highly recommend is putting into the lease agreement what somebody will be charged. So, actually itemizing like here is your checklist of things of how we want the apartment to come back from us… come back to us when you move out.
So, it’s broom swept, it’s the fridge is cleaned out, the oven is clean, there’s no holes in the walls. And then, you start putting, if we need to pay our cleaner to clean the oven, it’s a $20 charge. If we have to have somebody clean the fridge, it’s $10. You itemize what those cleaning charges will be and do the same for any repairs that are the tenant’s responsibility. So, if there’s a hole in the drywall, what’s going to be the charge for something like that?
If the faucet is ripped off or there’s other damage that can be done, there’s tears in the rug. I once had a tenant that cut a piece of the rug out of the closet and then put it where his dog had ripped up the carpet. We wouldn’t notice that he put a patch in the carpet.

Tony:
You got to give him points of being creative though. That’s funny.

Ashley:
So, try to itemize everything specifically that they’ll be charged for. Going back to New York State. So, New York State, you actually have to offer your tenants a pre-move-out inspection two weeks before they actually are moving out of the property. So, they give their 30-day notice, you send them a letter saying, “Hey, you are entitled to a two-week pre-move-out inspection. You can opt out of it if you don’t want it, but it’s here.”
And the purpose of it is so that you can show tenants, you’ll be charged for this, you’ll be charged for this. And it gives them two weeks to go ahead and repair it themselves. And I say that with the air quotes or to hire a contractor to go ahead and do the repairs before their move-out inspection. So, one downside to that is tenants will go and try to make the repairs themselves and it just ends up being even worse than what it was. But this is something by law you have to offer to let them know.
And then, other times it turns out great, the apartment is turnkey and ready to go when they move out and you can get it rented right away. So, to wrap it up, make sure you’re itemizing what the charges for a security deposit could be as far as using it for them to cover rent that was unpaid. Be very careful with how you word that in your lease agreement because you don’t want a tenant to give a notice that they’re moving out in 30 days and they just say, “You know what? We’re not paying less rent month. Just put the security deposit towards it.” Well, now you don’t have a security deposit to cover any damage.
So, usually in our leases we put the security deposit cannot be used as last month’s rent. And then, obviously, if they don’t pay and the apartment is perfect condition, we will apply the security deposit to that last month’s rent. But you want to make sure you have that security deposit available for damages. So, try to get them to pay any rent that they are… that’s due before they move out. Okay. Next part of this question, Tony, I feel like these are all geared towards me.

Tony:
Yeah.

Ashley:
What service do you use to run background and credit checks on applicants? So, pretty much any property management software will have this integrated into their software that you can use. TenantReports.com is one that’s separate from any kind of property management software. So, you can just go in there and you could use that to screen your tenants. But then, if you use AppFolio, Buildium, Avail.co, Rent Ready, they all have background and credit screening services built right into them that you can use.
As far as the rent prep and my rental I’ve never used those ones, so I’m not sure. But I’m sure they’re all pretty similar too.

Tony:
Yeah. And that’s just one thing to add, right? I know in California. This is from the very brief period of time that I worked at a property management company here after college. There were even I think limitations on what kind of things could disqualify someone versus something else. I guess is there any information that you can use in someone’s credit report, background check, et cetera, to disqualify them from being a tenant?
Or are there certain things that are protected that you can’t use? How does it work in New York? And I’m sure it varies from state to state.

Ashley:
Yeah. It does vary from state to state. In New York State, you can’t deny someone because they have an eviction on the record. That can’t be the sole reason, which sounds ridiculous. I know. But yeah, there’s definitely different things.
And then, there’s also Fair Housing Laws across the board where you can’t deny someone that maybe they have the same exact everything, but one person has a 700 credit score and the other person has a 550 and you end up going with the person that’s 550. Okay. Then, the next time, which I don’t know why you would do that, but just say you do that person that’s 550. Then, the next time you rent as the similar unit, whatever, maybe it’s the upstairs or something, you deny someone who has the 550 or whatever. You have to be very consistent as to what your criteria is.
So, we have a checklist and it’s baked right into our software where this is our minimum credit score. This is our minimum debt to income. You have to make at least three times of what the rent is for the month. So, having that all listed out to protect you from Fair Housing Laws that you are being very fair and not discriminating when you’re screening tenants. And that would be the biggest issue.
There are so many free resources to know what your landlord laws are, the Avail.co I mentioned earlier, but also if you go to your local housing authority. So, even if you just Google Buffalo New York Housing Authority, some will come up. So, homeny.gov is one that’s in New York State. Belmonthousing.org is the actual Section 8 voucher association for Buffalo.
So, a lot of times they have free classes, they have handbooks or the classes are like $10 or very low cost. And since COVID they do a lot of them virtual. Now, you don’t even have to go to them in person, but they’re a wealth of knowledge. They’re usually an hour long and you just get like, “Here’s what you need to know to be a landlord in your state.”

Tony:
Yeah. When I worked at that property, they were an all-in-one house anyway. They were one of the largest department complex owners in this little pocket of California that I’m in. And during our initial training process, they talked about what you said about the fair housing and all this stuff, and they said that there were actually people out there. I don’t know if these people were attorneys or just professional tenants. But they would basically look for these big apartment complexes that were violating some of these Fair Housing Laws.
And literally just trying to apply, not even with the goal of getting the apartment, but just to try and catch some of these bigger apartment complexes and companies like red-handed. So, as the leasing agent, we had no discretion over approvals. We would literally just take all the information the person put into their application, key it into the whatever software that we were using, and it would spit out either a yes or a no. And once it happened, we had no control over trying to fluff the numbers or change this or make it easier. It was all automated with no human interaction outside of us just keying in the information.

Ashley:
Okay. Mantas has a question about an LLC. “Can you hire a real estate attorney in order to place your properties under an already established LLC? Does the attorney need to be located in the same state as the property? For example, if my property is in Oregon, does my real estate attorney have to be in Oregon even though I currently live in Maryland or could I do it with a Maryland real estate attorney? Much appreciated.”
So, what this question first, let’s address what it means to actually place properties under an already established LLC. So, you’ve already created your LLC, you’ve filed the documents for it and it’s an operating company and you want to put your properties in this LLC so that they are no longer owned by you personally and they’re now owned by the LLC that entity. So, in order to do that, you have to change the title, you have to change the deed of the property to state that the owner is the LLC and now they are under the LLC. So, in order to do that, usually you’d hire an attorney to go ahead and do a quick claim deed is what I’ve done and deed it from your name to your LLC. And there’s no title work or anything done because you were the previous owner and now it’s going into an LLC that you own too.
And you already had title work done when you purchased the property. And if you as the owner didn’t change anything, then there’s no reason to go ahead and do a new survey and to do the title work again. So, it’s just called a quick claim deed. As far as having that attorney do it in the state that the properties are in or the state that you live in. Another question I would ask is what state is the LLC in?
So, is the LLC the same as your properties or is the LLC the same as where you live too? So, Tony, I honestly don’t know the answer to this question as to where the attorney has to be from.

Tony:
I think the answer is that it doesn’t even necessarily have to be an attorney. Right? I’ve filed some of these changes myself just because you can just walk into the county and say, “Hey, I need to update the deed for my property. What paperwork do I need?” And I know here in California, or at least in the county that I live in, I need what’s called a PCOR form, which is like primary change of ownership form. And then, I also need to update the grant deed.
And as long as I fill out those two pieces of paperwork and I get them notarized, I can myself turn those pieces of paperwork in. I’ve had my attorney do it for me here in California. I just had my escrow company do it for me here in California. So, I’ve had three different types of folks manage that process for me and only one of them was an actual attorney. So, I think the question is does it even have to be an attorney?
Could you just go to the county yourself and fill that paperwork out? But I would think as long as the attorney is at least versed in what the correct paper trail is for your state, for your county, for your city, it doesn’t really matter where they’re at or where they’re located.

Ashley:
Yeah. And I think that right there is the key point is to maybe that the only reason you want an attorney that’s in the state where the properties are is because the actual work to put them into the LLC is to do the deed process do that little bit of title transfer. And so, just having an attorney that already knows how to do it and that state actually might be way cheaper too than hiring an attorney where you live and them just figuring out that process, maybe just an extra step that they’ll bill you for that.

Tony:
But actually, let me ask you because everything has to be done through attorneys in New York. So, do you have to hire an attorney to fill out like a change of ownership paperwork or could anyone do it?

Ashley:
I honestly don’t know because I’ve just always had my attorney do it, but there’s nothing on the paperwork that says my attorney information on it. It’s the seller’s name, the owner’s name, the property information, the description. So, if you already have the existing deed, I think you can probably just go right down to the county clerk office and file yourself to change the title.

Tony:
Yeah.

Ashley:
Last question we have here is from Carrie Molina. “I just purchased a multifamily home and one of the units is going to be available this month. How do you balance upgrading with just renting it out quickly? Should you do your upgrading in the beginning or try to recoup some of your down payment first? Trying to see if I should upgrade this kitchen and bathroom and then raise the rent or just rent it out right away to get some reserves.
If I renovate any recommendations for that ugly bathroom grout, I might be able to raise rent only $75 to a $100 after renovations. Thanks in advance.” So, I’ll tell you a little funny story about that ugly grout. I actually-

Tony:
Bathroom grout.

Ashley:
Yeah. I did a property over COVID with my son. He was I think six at the time. And so, we, me and him rehabbed the whole property and one thing that was not in the budget was in the kitchen, the backsplash to redo it. The tile was in great shape, but it just had these gross yellowish grout lines throughout the tile in the back splash. I actually ordered I’m pretty sure it was on Amazon, like a grout pen, and it was almost like a white mark.

Tony:
Like a Tide pen or something? Oh, yeah.

Ashley:
Yeah. Yeah. It was like a Tide pen, but it was white-out and we just went along and we did that along all of the tile lines to make them white. And it actually turned out so beautiful and it was way more cost-effective than actually going in and ripping out all the tile and putting it back in. But that actually worked really well.
So, it depends, I guess as to how extensive maybe it is and how you want to do where this was not an area where we were doing really nice upgrades in the property because we just couldn’t get that much rent for it. So, there was a little DIY hacks that we did in the property to still make it look really nice, but not going over budget where we couldn’t recoup what we could get in rent for it. With this one, let’s see. Should you do the upgrading first or rent it out first? Tony, what do you think? What would your answer be?

Tony:
I mean, I always want to try and get the rents, right, especially if the unit is vacant. In my mind it makes sense to go ahead and do those upgrades now. Still to Ashley’s point, you don’t want to over upgrade and invest more money into the property, then you’ll be able to get out as rent.
But if the property is vacant, use that as an opportunity to increase those rents, even if it’s only a hundred bucks, if you’re able to start doing that across, we don’t know how many units it is, but say you’ve got a small multifamily with four units, four times 100, it’s an extra 400 bucks per month, you’d be able to pull in by doing those as each unit turns. So, assuming you have the capital, I would prefer to do it now as opposed to waiting. But what’s your approach, Ash?

Ashley:
I would just say run the numbers and look at almost what your cash on cash return is based off getting $75 to a $100 more. So, if you’re going to be dumping $30,000 into renovating the, what was it, the kitchen and the bathroom, then only getting $75 to a $100 more might not be worth it for you. But if it’s only going to cost you a couple $1,000 to do these simple things that will add that a $100 value and rent, then yes, go ahead. So, I think take a look at the numbers and if they make sense or if you’re actually getting better value of keeping it at what it is now and not even doing the renovations. Okay.
Well, thank you guys so much for joining us for this week’s Rookie Reply. If you have a question that you would like answered, you can go to biggerpockets.com/reply and put your question in there. You’re always welcome to leave your questions in the Real Estate Rookie Facebook group, or you can send us a DM on Instagram at Wealth from Rentals or at Tony J. Robinson. Thank you guys so much for listening, and we will be back on Wednesday with a guest.

Most parents hope their children enter adulthood with the grit, confidence, and perseverance to become successful and happy. While it seems that certain people are born with an entrepreneurial spark, environment and guidance play huge roles as well. Recently, I’ve struggled with how to create a framework for my children to be more entrepreneurial. Not that they have to be entrepreneurs, but I at least want them to understand the value that entrepreneurial thinking can create to set them up for success in life.

Fortunately, one of the companies I’m invested with was working with a company called GravyStack. I was guided to this Lifestyle Investor podcast, which featured GravyStack founder Scott Donald. I immediately was drawn to the messaging that you have to focus on helping kids understand value and how that ties into entrepreneurial thinking.

After listening, I went to the resources from the podcast on the GravyStack site. There I found some of the framework that I was looking to create for my own kids. Here are some of the key points and takeaways I learned in regards to setting kids up for success.

Provide Money Making Opportunities

When should your child get money? What seems like a simple question can be surprisingly complex. In my household, I’ve had to consider decisions I make regarding things like allowance and how it impacts a person’s relationship with money.

Aside from the occasional birthday or Christmas present, children should generally receive money when they can contribute or be rewarded for their efforts. When children feel entitled to money just for existing, ambition can take a hit. If they get enough money to cover their wants without doing work, why would they be motivated to look for additional opportunities? If your children want money to buy things, create avenues for them to earn it.

When I downloaded the kid-focused financial literacy app from their site, I noticed an interesting feature. Through the app, kids have the option to work “gigs” to earn and save real money. The free resources can give you a ton of ideas to get started. Using that as a starting point, my wife and I sat down and built out a bigger list of possible chores.

Get 12 inches of snow in one day? Your neighbors can book your tween to shovel their driveways and transfer funds upon completion. However, it’s also about your kids understanding the value of doing it and not just you setting everything up for them. It’s more of a “teach someone how to fish rather than fishing for them” concept.

Your child probably has chores around the house that are expected to be done regularly. This can be considered your child’s contribution to the household. In Donald’s book, he describes this as an expectation. In my case, it’s whatever is expected of my kids for being a “Hall.” But if there are extra chores that your kid understands can add value then you can offer them at a set price. You could create a standing offer to pay $5 for weeding the flower bed. Alternatively, you could pay $1 per load of laundry the child washes and folds.

Whatever financial apps you introduce to your children, make sure they’re safe and interactive. Also, it’s a bonus when children can quickly view the results of their effort. After all, watching real money grow is far more motivating than being told about a number in an invisible savings account.

Teach As You Go

There are quite a few financial processes that people likely won’t need to experience in their childhood. Honestly, how many ten year olds need to take out a car loan? But if you’re taking out a car loan, you can still introduce your child to the process in real time. That way, when the time comes for them to go through it themselves, it might not be as daunting. It works the same way for starting and running a business.

If you’re an entrepreneur yourself, you can discuss some operational aspects of your business as they arise. Your child might find it unbearably tedious, but they’re likely to still absorb information. Just getting that familiarity with the business world and how basic concepts work can give them the boost they need in the future.

The above is more for older kids. You can have them follow you and show them things, and they’ll learn a thing or two. But for younger kids—like mine who are 4, 7, and 10—it’s a bit harder. You’ll want to more actively explain why you make certain decisions.

For example, in GravyStack’s downloaded material, it gives a list of skills that younger children can be taught or you can demonstrate for them. I never really thought my actions of daily affirmations, goal setting, or reflections could make sense to young kids, but why not? These are basic skills of problem solving and survival that are necessary for a child to understand.

Many who want to start a business but don’t cite inexperience or a fear of failure as a reason for hesitating. If your children never watch someone face challenges and address areas to improve, it won’t set them up for success. Getting your children comfortable with adding value for others and demonstrating a unique range of skills may empower them to take the plunge in adulthood.

Don’t Push, But Give Them The Option

If your child has no interest in going into business for themselves in adulthood, that’s not a bad thing. People can be perfectly successful and professionally fulfilled as employees. My oldest has already said that she clearly does not want to be an entrepreneur, which is fine. I just want her to live a fulfilling life. Donald’s method with GravyStack attracted me because it wasn’t just about creating future entrepreneurs. It was more about creating financially competent children.

The gamification aspect of the app takes away the burden of trying to get creative. This is especially helpful for me because sometimes I struggle with being too serious when teaching kids lessons.

Whether it be this resource or another, I strongly encourage other parents to find ways to set the next generation up for success. We live in an ever-changing world with AI and constant innovation that will make it very hard for unprepared children to adapt. However, if you can show them the importance of continually learning, taking initiative, and creating value for others, they will have a foundation that can guide them throughout life.

Dave:
Hello, everyone, and welcome to On The Market. I’m Dave Meyer. Joined today by Henry Washington. Henry, I heard a rumor about you today.

Henry:
Uh-oh. This can’t be good. Or maybe it is. I don’t know. Go for it.

Dave:
It’s good. I heard you finished your book.

Henry:
I finished the first half of my book. I’m still working on it.

Dave:
Okay.

Henry:
Still working on it.

Dave:
Show us how much attention I was paying in that meeting.

Henry:
We finished the first half of the book. We’re working on the second half of the book. We’ve got it all transcripted out, but we’ve got some more details to put in there.

Dave:
Well, the team at BiggerPockets Publishing seemed very pleased about your book and that things were coming in on time. It sounds like a great book. What’s it about?

Henry:
It is about finding and funding your real estate deals. Great book for beginners to learn how to get out there and start finding these deals. Man, with this economy, it’s crazy. You got to get good at finding deals.

Dave:
Heck. I don’t know if I’m a beginner, but I will definitely read a book if it helps me find better deals right now. I would love to know that. When’s it coming out, by the way?

Henry:
I think it’s March.

Dave:
Okay, nice. Nice. All right. Well, we’re both having Q1 books coming out.

Henry:
You have a book every Q.

Dave:
I have one book out. This is going to be the second one. I’ve just been writing this one for three years. I won’t shut up about it.
All right. Well, we have a great episode today. I think they call this one a… This is like a Dave Meyer special episode. We’re going to be getting a little bit nerdy today. We have a lot of great shows where we talk about tactical decisions in the economy/things that are going on with your business. But today, we’re going to go behind the scenes in one of the more detailed/technical economic things that does impact your business every single day. That is mortgage rates. But specifically, we’re going to talk about how mortgage rates come to be. You might know this from listening to this show a little bit, but the Fed does not set mortgage rates. It is instead set by a complex set of variables. We’re going to dive into those today with Chen Xiao from Redfin. She’s an economist. She studies just this: how mortgage rates come to be. I am so excited, if you can’t tell, to have her on the show to dive into this topic that, I think, everyone is particularly curious about.

Henry:
Yeah. I agree. I am excited as well. But not for the same nerdy reasons that you are excited. But I’m excited because everybody that you talk to has some opinion based on almost nothing about what they think interest rates are going to do. People are making decisions about their investing. They’re buying properties. They’re not buying properties based on these rando factors that they think are going to play into this. Actually, hearing from someone who is looking at this information every day and can make common sense of it for us is going to be super helpful if you are trying to figure out should you be buying property right now or should you be waiting, or how long do you think rates are going to stay where they are or go up or go down because these things are impacting the amount of money that investors are making.

Dave:
I think the thing I am so excited about this for is that we can all make projections, like you’re saying. But in this episode, we’re going to be helping everyone understand how this is actually going to play out one way or another. We don’t know which direction it’s going to go. But we can understand the ingredients that are going in. You can form your own informed opinion here and use that to make wise investing decisions.

Henry:
Dave?

Dave:
Yes.

Henry:
I’m going to have to ask you to do something. Are you going to be able to hold yourself back and not dive all the way into the deepest weeds possible? Because this is pretty much your baby here. This is what you love.

Dave:
This is my dream. I mean, three years ago/four years ago, I didn’t even know really what bonds were. Now, I spend all day talking about bonds. God! What has become of me? I will do my best to hold back and keep this at a level that is appropriate for real estate investors and not people who just like talking about financial instruments for the sake of [inaudible 00:04:24].

Henry:
We appreciate you.

Dave:
All right. Well, we’re going to take a quick break, and then we’ll be back with the show.
Chen Xiao, welcome to On the Market. Thank you so much for joining us today.

Chen:
Thanks so much for having me. I’m really happy to be here.

Dave:
Well, we’ve been very fortunate to have a bunch of different of your colleagues from Redfin joining us. You guys do such great economic research. What, in particular, are you focused on tracking and researching in your job at Redfin?

Chen:
Absolutely. Thanks for having so many of us from Redfin on. We’re all big fans of the show. In my role at Redfin, my job is to basically lead the economics team to think about how our team can help consumers and impact the housing community externally and also guide Redfin internally with our views on the housing market and economy. I’m very much involved with thought leadership on where are the topics that we should really be paying attention to and where should our research be headed towards.

Dave:
Great. Today, we’re going to dive into a little bit of a nerdy, more technical topic. We’re going to put you on the hook here. We’d like to talk about mortgage rates. This is not a very hot take. But clearly, given where things are in the market, mortgage rates and their direction are going to play a big role in the direction of the housing market next year. We’d like to unpack part of how mortgage rates are set. We all know the feds have been raising rates. But they don’t control mortgage rates. Can you tell us just a little bit more about what economic indicators are correlated to mortgage rates?

Chen:
Sure. I’m going to answer your question a little indirectly. But I promise I’ll get to what you’re asking. I think it’s helpful to take a step back and think about a framework for mortgage rates. Actually, think about a framework for interest rates more broadly because, oftentimes, we say “interest rates” in the economy, and there are various interest rates. At a very basic level, an interest rate is a price for borrowing money. It’s determined by two things: credit risk and duration risk. How risky is the person or the entity I’m lending to, and how long am I lending them this money for?
Critical to this discussion is thinking about the bond market. Bonds are just a way of lending out money to various entities for varying lengths of time. When we think about the bond market, we’re thinking about two metrics. We’re thinking about the price and the yield, which are inversely related. When there’s more demand, prices go up and then yields go down and vice versa.
Really importantly… When I’m thinking about mortgage rates, there’s two other rates that I need to be thinking about. The first is the federal funds rate. That is the rate that the Fed controls. Then, there’s the 10-year treasury rate, which I think we’ll probably spend a lot of time talking about today. Mortgage rates actually build on top of both the federal funds rate and the 10-year treasury. In that framework that I was talking about, for the federal funds rate, there is no credit risk at all. This is an overnight lending rate between banks. There’s also no duration risk.
If I’m thinking about treasuries now, the treasury market, treasuries come in a wide variety of forms. Anything from a one-month treasury bill up to a 30-year treasury bond. But the one that’s most important to mortgage rates is the 10-year treasury note. This is a reference rate in the economy. This is the most correlated on a day-to-day basis with mortgage rates.
When I’m thinking about the 10-year treasury, economists like to think about this as being decomposed into three components. The first is the real rate. That is the part that is most related to what the Fed is doing. How restrictive is the Fed trying to be with the economy, or how accommodative is the Fed trying to be? The second part is inflation expectations. This has to do with duration risk. This means if I’m thinking 10 years out, “What is inflation going to be?” Because whatever yield I am getting on the 10-year treasury inflation is going to eat into that as an investor.
Then the third is the term premium. The term premium is the squishiest. Term premium is how much excess return I’m demanding for holding this for 10 years versus a shorter duration. You asked what are the economic indicators that are most correlated with mortgage rates. Well, it’s all of these things that are going to affect the 10-year treasury note. Inflation obviously is important when we’re thinking also about economic growth. We’re looking at GDP. We’re looking at labor market conditions. All of the major economic components are going to be feeding into what the 10-year treasury yield is. Then, mortgage rates build on top of that.
I said the two are very much correlated. What that means is that mortgage rates are usually trading at a spread relative to the 10-year treasury. That spread, most of the time, is remaining pretty consistent. But one of the main stories of the past year is that that mortgage/that spread has really ballooned. We can talk about why that is and what the outlook is for that as well.

Henry:
Yeah. It’s like you know exactly what we’re going to ask ’cause I think that’s exactly where we wanted to go is to try to understand… Well, first, let me go back and say I think that was the best explanation of interest rates and how they work that we’ve ever had on the show. That was fantastic. Thank you for breaking that down. But secondly, yeah, I think we want to understand… so the 10 treasury rate yield, where it’s currently at, versus where it’s historically been, and how that’s impacting the market.

Chen:
Absolutely. Today, right now, I think the 10-year treasury is sitting just above four or five. That’s where it was yesterday at close. I think it’s actually climbing a little bit today. This is a historic high, I think, perhaps since 2007 if I have my data correct. It’s been climbing a lot. In May of this year, it was about 100 basis points lower.
The real story for mortgage markets in the past few months has really been… Why has the 10-year treasury yield gone up so much? Importantly, it’s confusing because inflation has actually fallen these last few months. I think for a lot of people who are listening to this are probably thinking, “I’ve been reading in the press, and the economists have been telling me that if inflation falls, mortgage rates won’t fall. Why hasn’t that happened?” It really has to do with this framework that I was talking about.
Like I said, since the whole debt ceiling debacle was resolved, the 10-year treasury has gone up about 100 basis points. Let’s think about why that is. About half of that is what I would call the term premium. What this is related to is mostly concerns about long-term debt for the US government and treasury issuance. As we know, the country is borrowing more and more. There’s more and more supply of treasury debt. At the same time, demand for that treasury debt has not kept up. That is causing that term premium to increase.
The other main story is the increase in real rates. This is the idea that the Fed is increasingly telling us that they are going to hold higher for longer, not necessarily they’re going higher than where they are right now, but that they’re going to hold at this high restrictive level for a longer amount of time, meaning that they’re projecting they will start cutting next year in the back half of 2024. But when they start cutting, it’s later than previously we thought, and that it’s fewer cuts. It’s slower than we thought. Oftentimes, people are debating: is the Fed going to hike again? Actually, another 25 basis points doesn’t matter so much. The real story now is how long are we going to stay in this restrictive territory.
Then, the other component of the 10-year yield that I’ve talked about before, inflation expectations, that actually hasn’t really changed very much. That’s not really playing a big story here. But if you are someone who’s following financial news, you have probably heard a lot of talk about this idea that the neutral rate has increased. That’s, I think, really important to touch on right now. It’s related to what I was talking about in terms of demand for treasury debt and this idea that we’re having higher interest rates for longer.
The neutral rate is something in the economy that is unobserved. We cannot measure it. My favorite way to think about it is that’s your metabolism. When you’re a teenager, you can eat a lot. You’re probably not going to gain weight. You have a high metabolism. Later on in life, your metabolism shifts. You can’t really measure. The doctor can’t tell you what it is. But you find that you can’t really eat the same things and maintain the same weight anymore.
The same thing happens in the economy, where, after the financial prices, it seemed like the neutral rate really fell. That’s why the Fed was holding rates really low. We could not really even get inflation above 2%. But then, something happened after the pandemic, where, all of a sudden, it felt like we had a lot more inflation. The rates had to be higher. What investors and increasing the Fed… Jerome Powell acknowledged this in the last press conference, is coming around to is this idea that the neutral rate has shifted up. That means that we basically just have to have higher rates for a longer amount of time. That view is also what is pushing the 10-year rate up. That’s pushing mortgage rates up.

Dave:
As you said, Chen, we’ve seen this steady rise in mortgage rates over the summer. It seems to have accelerated since this most recent press conference. It seems that what you just talked about is really what’s going on here is that we saw a few things. One, the summary of economic projections, which the Fed puts out with some of their meetings, shows that they still think that we’re going to have higher rates at the end of 2024. That’s a full year from now. But when you talk about the neutral rate, which I thought that was a great explanation of… Is that the indefinite balance/the ideal theoretical balance that the Fed wants to get to? Even after 2024, basically as far out as they are projecting, they think that the best rate that they can do is somewhere around 3% for the federal funds. Is that right?

Chen:
Yes, exactly. That is exactly what the neutral rate is. It is the rate that the Fed would hold the fed funds rate at. That would hold inflation and the unemployment rate in check. The Fed has this dual mandate, which is that we want low inflation and low unemployment rate. The neutral rate is basically a rate at which we are neither stimulating the economy nor are we trying to actively contract the economy.
When the Fed puts out its projection, it says, “Okay, for the long term,” basically past two or three years, “where do we project that neutral rate to be?” In their latest summary of economic projections, they actually kept that neutral rate at 2.5%, which was actually confusing for folks because if you looked at what their projection was for 2025/2026, it was showing a higher rate. But it was also showing the economy essentially in balance.
There was this discrepancy between… Well, what you’re saying for the long-term versus what you’re saying for the next two to three years. Reporters pointed this out. What Powell pointed to was this idea that, well, the neutral rate changes. There’s also this idea of a short-term neutral rate versus a long-term neutral rate. I think this is starting to get a little too deep into the rabbit hole. But what’s I think important as a takeaway from this whole discussion is that the Fed is telling us that they’re coming around to this idea that this neutral rate has increased. It could still change in the future. But if we’re thinking about a 10-year treasury rate or talking about a 30-year fixed mortgage rate, this is going to play a big role in setting a baseline expectation for what those rates should be.

Henry:
This information is extremely helpful to investors. I don’t want investors to hear how deep we’re getting and not think about, “What does this mean to you as you are buying property or as you are considering buying property?” What I think I’m hearing… I think one of the most important things I heard you say was that this could be a signal or that the Fed is signaling that the interest rates are going to stay in this realm of what we consider to be high for a longer period of time than what most originally anticipated.
For me, as an investor, as the investing landscape has changed over the past year due to these rates rising, a lot of strategies has changed. It’s hard to buy properties that cash flow because of the cost of money. That cost of money/that interest rate is eating into the money that I can make by renting out the property.
If you’re a long-term investor and you’re looking to buy properties at cashflow, what’s happening is people are jumping in right now and they’re willing to buy properties sometimes that break even or even lose a little bit of money every month because people have been betting on saying, “If I can buy these properties and hold them for the next six to 12 months, well, then boom. If rates come down, that means that I can refinance, and then my cash flow will absolutely be there. Then, I can go ahead and sell off some of these properties if I want to because when rates come down, people get off the sidelines. They go start buying again. There’s still an inventory issue. Now, prices start to go up.” It seems like a good bet right now to buy.
But as an investor, what I’m hearing is you really have to be careful about doing that. You have to have the reserves to be able to hold onto these properties longer ’cause we really don’t have a definite answer on when and if those rates are going to come down or how much they’re going to come down.

Chen:
Yes. I agree with what you’re saying. I think that it is definitely the case that as inflation got out of control and then the Fed started its hiking cycle last spring, that there was this rock-solid belief among many people that this was an aberration and not a paradigm shift. All we have to do is hold on and wait for this to pass, and then we’ll be back to normal, that what we were experiencing before was normal.
I think what people are increasingly thinking now is that… “Well, if you take a longer-term view of interest rates and you look back at whether it’s the 10-year treasury or you’re looking at mortgage rates, over the last few decades, it’s a story of rates just coming down. Post-financial crisis rates were very low. Like I was saying, with my metabolism analogy, that could have been the aberration. We might actually be looking at a return to maybe a more historical norm. That could definitely be the case.
Now, with that being said, the other thing I would caution is that there is a huge amount of uncertainty regarding the economy right now. If you had had me on last year, what I would’ve told you was there’s a lot of uncertainty about the economy right now. But I will say that this year, there is even more uncertainty. The reason is because, last year, we knew what the basic story was. We knew inflation was out of control. The Fed had this fight on its hands. It was going to hike interest rates really, really fast. We were going to watch that play out in 2023. That is what we watched play out in 2023.
Now, the Fed has done this. We’re in this position where they hiked more quickly than they have ever done so in history. We’re sitting here, and the question is, well, what happens now? There is still recession risk that’s significant. I think a lot of people have adopted this view that we got the soft landing. Recession risk is over. The economy is so resilient. I think that we still can’t forget that recession risk.
Then, on the other hand, inflation could still get out of control. Rates could still go higher. There’s actually risk on both sides. When I used to go skiing, there was this trail where you would ski. There was a cliff on both sides. This is how I think about this, in some sense, where there’s this risk on both sides. That creates a huge amount of uncertainty.
If you look at futures markets right now for what the futures markets are predicting about the 10-year treasury one year from today, they’re basically predicting that yields will be the same as they are today. That’s this idea that interest rates are basically going to stay here. That is assuming, for mortgage rates, that mortgage spreads also stay pretty consistent to where they are right now, which is not necessarily going to be the case.

Dave:
Let’s dig into spreads there because we talk about that a bit on this show. Just as a reminder to everyone, there is a historic correlation between 10-year treasuries and mortgage rates. I think it’s like 170/190 basis points, something like that. Now, it’s what? 300 basis points. Significantly higher than it used to be. You talked about the spread. Maybe we should just jump back a little bit. Can you explain why the spread is usually so consistent/how it has changed over the course of the last few years?

Chen:
Sure. Absolutely. Like I was saying, mortgage rates are, on a day-to-day basis, very much tightly correlated with 10-year treasuries. If the 10-year treasury is going up today, mortgage rates are probably going to go up today. Over a longer period of time, that relationship is less certain. Like you said, historically, just depending on how you measure… It’s about 170-ish basis points.
But, conceptually, why would that spread change? I think there’s two important things to think about. One is rate volatility and expected prepayment risk. The thing that really differentiates mortgage bonds or government bonds like treasuries is that mortgage bonds have this built-in prepayment risk, so someone who has a 30-year fixed mortgage and refinance or pay off their mortgage with no cost at any point. Investors can have their income stream cut off at any point. They have to think about that when they’re investing in the security.
When interest rates are very volatile or when interest rates are really high, and investors expect that that is an aberration and then interest rates will come down in the future, all this talk of, “Oh, buy now, refinance later,” then they’re going to demand a much higher premium for buying mortgage bonds. That is a big part of the story about why mortgage spreads have ballooned over this past year.
The other part of the story is just simply demand for MBS. There’s two parts of this. One is the Fed. The Fed owns about 25% of outstanding MBS. During the pandemic, they bought something like $3 trillion of MBS. Because in order to stimulate the economy during that very deep recession, the Fed brought out the QE playbook again and said, “We will commit to buying an unlimited amount of MBS in order to hold this ship together.” They kept buying, even when it seemed like actually the housing market was doing fine. But then they stopped. When they stopped, that was a big buyer, all of a sudden, just exited that market.
Then, the second part of the demand story is banks. Banks have a lot of MBS already on their balance sheet. Because of what’s going on with interest rates, there’s a lot of unrealized losses because of that. They can mark that as something that’s to be held to maturity. Therefore, they don’t have to mark to market the losses on that. But that also means that they have less appetite to buy more MBS now.
Ever since SVB happened in March, I think the view on deposits for banks has changed. That means that if banks feel like deposits are less sticky, meaning that there’s a greater chance that deposits could leave, they have less demand for long-duration assets like MBS. That will also lead to less demand for banks for MBS. If you want to talk about, “Well, what does that mean in a forward-looking way? Is this a new normal for spreads now, or could they come back down?” I think that just depends on a few things.
Going back to the two main reasons why they have gotten bigger to begin with, if great volatility comes down and prepayment risk is coming down, then, yes, you could see that spread come down. That higher for longer idea, that rates are going to be higher for longer, does mean that I think prepayment risk does come down a little bit. Therefore, there is a little room for spreads to come down.
Then, if you think about demand for MBS… The Fed is out. Banks are out. But there’s still money managers. There’s hedge funds. At some point, there’s a ceiling on how big these spreads can get because some investors will start to say, “Well, actually, if I can get this huge payoff for investing in MBS, I should do that relative to other fixed-income securities.” There’s a ceiling to how big the spreads can get as well.

Dave:
Just to clarify for everyone listening, MBS is mortgage-backed securities. It’s basically when investors or banks or originators basically pool together mortgages and sell them as securities on the market, too. All of the different parties that Chen just listed… For a while now, the Fed has been buying them. Normally, it’s banks or pension funds or different people who can basically invest in them.
Chen, this demand side of MBS thing is something that I’ve been trying to learn a little bit more about. The other thing that I was curious about… And this is going to be maybe a little too nerdy, so we shouldn’t go too deep into it. But how do bond rates and yields across the world in other countries impact demand? Because I’ve seen that investors are maybe fleeing to… or at least hedging their bats and putting their money in either securities or stock markets in other countries. That is also impacting the 10-year yield. Is that right?

Chen:
Oh, yes. Absolutely. I think the way an economist would think about this is just the opportunity cost of your money. If you are an investor, you can invest in stocks. You can invest in fixed-income securities. You can invest in foreign exchange currencies. There’s all these different vehicles that you can put your money in. If you’re thinking about fixed-income securities. You can invest in these asset-backed securities like MBS, or you can invest in government bonds. If you’re thinking about government bonds, you can think about US government bonds versus government bonds for other countries as well as all these other things that I’m not talking about.
Yes, as the rate of return on these other assets are changing, that is also going to influence the demand for both US government bonds and also MBS. That, in turn, is going to influence the price and, therefore, the interest rates that are associated with these bonds.

Henry:
I want to shift a little bit and get some… There’ll be some speculation and opinion here. But there’s one factor that we haven’t hit on yet that could have an impact or that some people feel may have an impact on mortgage rates in the future. That’s the next presidential election. Can you talk to us a little bit about how a political change in power might positively or negatively affect mortgage rates? Or has that happened historically, so speaking, specifically, if the Republican Party wins the election, then we have a shift from a Democratic Party to a Republican, and how that might impact rates?

Chen:
Absolutely. I think the most direct path that economists would think about when they’re thinking about something like an election is similar to other geopolitical events, which is thinking about it through the lens of what is the threat to economic growth. What does this mean for the strength of the economy? That would be similar to how we would think about all the ongoing strikes that are happening, the resumption of student loans, the government shutdown that seems like it’s looming. All of these things are… We can use a similar framework.
Historically, if you think about, well, are the Democrats going to be in power, or will it be the Republicans? There’s this perception that Republicans are more friendly to economic growth and maybe to the business community. Maybe that would be good. On the other hand, it depends on specific candidates. Is there just tail risk associated with any specific candidates who might be in power? I think people would take that into consideration in thinking about, “Is that more likely to lead to a recession?”
Then, you might also think about having these candidates in power mean for who is nominated to lead the Fed, for example, and what policies their administration is going to pursue. All of these things will come into play, which all goes to say that I don’t think there’s a really simple cut and dry, “If this person comes into power, that means stock markets and bond markets will do this and vice versa.” But that’s the framework that I would use.

Dave:
I don’t want to put you in the hot seat and ask you what rates will be next year. But if you had to pick two or three indicators to watch going into next year to get a sense of where mortgage rates start to go, what would you recommend people look at?

Chen:
Absolutely. I’m glad you’re not asking me to make a forecast because-

Dave:
That’s coming later. Don’t worry.

Chen:
I think a lot of economists are feeling like maybe we need to change the batteries on our crystal ball or something. But I think if you are trying to think in a forward way about where the economy is headed/where rates are headed, looking at a consensus expectation is going to be your best bet. That’s what the futures markets and that thing imply. That’s what really that is.
That being said, we are living at a time of, I think, unprecedented uncertainty. We have to really take that with a grain of salt. What are we looking at when we’re trying to take a forward-looking view? I think it’s all the standard stuff that we have been looking at, which is really just the main economic data releases. Even though I said, “Inflation’s gone down,” why did rates go up? Well, inflation is still an important part of the story. If inflation goes back up again… Right now, just in this past month or two, oil prices have shot back up again. That could have really profound implications for interest rates again. Continuing to keep an eye on inflation is very, very important.
Then, the most important economic indicator for the economy in general is not actually GDP. It’s actually the labor market. It is the jobs report. It’s thinking about the unemployment rate/looking at how many jobs are being added every month to the economy. Then, there’s also associated labor market reports such as JOLTS. The Job Openings and Labor Turnover Survey has been getting a lot of attention this past year. Then, also the private sector numbers like ADP and all of that. It’s really all of the same standard economic data.
What’s really different about economics today versus when I started my career is that there is so much more private sector data now. On the housing side, obviously, Redfin, we provide a lot of private sector data about the housing market that we think is more forward-looking than what you get from public data sources.
Similarly, I think it’s important to pay attention to data, for example, that the JP Morgan Chase Institute and the Bank of America Institute puts out about the state of the US consumer in terms of how much more savings is there left. We know that there was a ton of savings. People had a lot of excess savings after the pandemic. Has that really dried up? If it has dried up, for whom? Who still has savings? That’s important for when we’re thinking about issues. People are going to start paying student loans again in just a few days. Who is on the hook to make those student loan payments? Who has the money to make those payments? What will it imply for their spending going forward? There’s a lot of private sector data sources that I think are also really important to pay attention to.

Dave:
Great. Thank you so much, Jen. This has been incredibly helpful. Obviously, people can find you at Redfin. Is there anywhere in particular that you put out your work or where people should follow you?

Chen:
Yeah. The Redfin news site is where we publish all of our reports. We also just recently added from our economist corner of that to that website where you can see quick takes about events that happen or economic developments. That’s a really great place to find all of our thoughts.

Dave:
All right. Great. Well, thank you so much, Chen. We appreciate you joining us.

Chen:
Thanks so much for having me.

Dave:
What did you think?

Henry:
Well, first and foremost, that was an incredible job at taking a super complex topic and making it understandable even for people who don’t have an economics background or understand how all of these factors play into each other because I don’t. I was able to follow that better than any other economic conversation that we’ve had. I think that’s hugely valuable to our audience. There’s just a ton of speculation out there. Everybody’s like a street economist. They’re all like, “Yeah, interest rates will come down in six months. Then, it’ll be crazy out there.” No one really knows. It’s good to hear somebody that is actively looking at these numbers consistently and looking at these indicators consistently say that… “Well, my crystal ball still needs some battery.” Just a good word of caution that you got to be careful with your strategy out there.

Dave:
Totally. The more I learn about economics, the less, I think, I try to make predictions, and the more I just try to understand the variables and the things that go into what’s going to happen. No one knows what’s going to happen with mortgage rates. But if I can understand how the spread works, if I can understand why tenure treasuries move in the way that they do, then you’ll at least be able to monitor things in real-time and make an informed guess instead of just making these reactions based on fear, which is what I think all these armchair economists are doing.

Henry:
Give me a scale of one to 10. How hard was it for you not to just completely nerd out and go all the way into the weeds on everything she was talking about?

Dave:
I wanted to ask about how the Bank of Japan’s recent decision… This is not a joke. I literally was like, “Should I ask about Bank of Japan policy and what they’re doing with their buying yields?” I just knew no one would give a (beep) about what I was talking about. But I wanted to ask.

Henry:
I could see it on your face that you were just wanting to. You were like, “This is my people.”

Dave:
I know. I was like, “I need to keep Chen around after, so we could just have a side conversation about just totally in the weeds nonsense.” But hopefully, Henry was here to keep us in the realm of what normal investors and normal people want to talk about.
But all in all, I thought it was great. It was plenty wonky for me. There was tons of good information. Again, she made it super digestible. Hopefully, everyone walks away knowing a little bit more about why things go the way they do. I think, honestly, the most surprised people are is when you explain to them that mortgage rates aren’t dictated by the Fed. We talk about that all the time. I feel like people who listen to the show have gotten to that. But I didn’t know that five or six years ago. I didn’t really understand it. I think the more you can understand how these abstract things influence your business… Literally, your everyday existence are influenced by tenure treasuries. Who knew? I think it’s just very interesting and super important to pay attention to.

Henry:
How she explained it in a framework made it so much easier to understand. I just kept envisioning her. I’m like, “Man, I wish we had her in front of a whiteboard writing all this out.”

Dave:
That would be cool. Don’t give me ideas. We’re going to have a Mad Money, Jim Cramer joke, where we’re running around slapping buttons and throwing things around. Caleb will kill us. All right. Well, thanks, man. This was a lot of fun. Hope you also learned a lot. Let’s just do a social check-in for you. If people want to follow Henry, where should they do that?

Henry:
Instagram’s the best place. I’m @thehenrywashington on Instagram. Or you can check me out at my website at seeyouattheclosingtable.com.

Dave:
All right. I am @thedatadeli on Instagram. You can find me there as well. Thank you all so much for listening. We will see you next time for On The Market. On The Market was created by me, Dave Meyer, and Kaylin Bennett. The show is produced by Kaylin Bennett, with editing by Exodus Media. Copywriting is by Calico Content. We want to extend a big thank you to everyone at BiggerPockets for making this show possible.