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Skylar Olsen, Zillow chief economist, joins ‘Money Movers’ to discuss her outlook for housing in 2024 and more.

Knowing what to look for when buying a rental property will save you time and money while reducing stress. In this article, we outline seven considerations that you can’t afford to overlook.

Consideration 1: Location

Location, location, location is consideration No. 1 when buying a rental property. 

Is the property close to amenities such as shopping? How about public transportation? What about local schools? Is the area safe? Is it family-friendly? 

Know which location(s) meet your requirements, and only consider properties within those areas. 

Consideration 2: Property Condition

Assess the property’s age and current condition to estimate ongoing maintenance needs and potential renovation costs. 

You must factor in the cost of upgrades or repairs to meet market expectations and enhance rental appeal. Should you require assistance, consult with a contractor and/or home inspector for professional guidance. 

This careful evaluation helps you forecast long-term profitability and maintain a competitive edge in the local rental market.

Consideration 3: Market Rent Rates

Investigate local rent rates to gauge the property’s earning potential. From there, compare these rates with similar properties in the area to calculate competitive pricing. 

Understanding market trends ensures your rent aligns with tenant expectations while maximizing your income. Regularly monitoring these rates helps adapt to market changes and sustain profitability over the long term.

Tip: Our rental property calculator comes in handy here.

Consideration 4: Legal and Zoning Regulations

Don’t assume that you know the legal and zoning regulations in the area you’re buying. Instead, you must do two things:

• Verify that the property complies with local zoning laws.
• Understand landlord-tenant laws, including any rent control measures. 

Compliance with all regulations is crucial to avoid legal complications and ensure smooth operation of your rental property.

Consideration 5: Tenant Demand

Without research into tenant demand, you may believe that you’ve found the perfect rental property. However, additional research is always needed to ensure that tenant demand is there (and is likely to remain).

High-demand areas often yield better rental rates and lower vacancy periods, contributing to a more stable rental income. Conversely, low-demand areas are hypercompetitive and have high vacancy rates. 

Consideration 6: Financing and Expenses

Examine financing options and calculate total expenses, including your mortgage, taxes, insurance, and maintenance costs. While you may not have exact numbers, depending on where you are in the buying process, accurate estimates are a must. With these numbers in hand, you can better choose a financing plan that aligns with your investment goals and cash flow requirements. 

During ownership of the property, regular financial reviews help you effectively manage costs and maximize return on investment. For example, you may find that refinancing your property allows you to save money on interest. Or perhaps a home equity loan positions you to purchase another property. 

Consideration 7: Future Value 

One of the primary benefits of real estate investing is the potential for appreciation. While there’s no guarantee of this, history shows that there’s a good chance your property will gain value over the years. 

When buying, consider the property’s potential for appreciation based on past market performance. Do the following:

• Analyze market trends and future development plans in the area that could enhance property value.
• Evaluate economic stability to determine the growth prospects of the region.
• Monitor housing market indicators such as supply and demand and foreclosure rates.

Your goal is to generate a positive return on investment (ROI) month after month as a landlord, while also owning a property that appreciates. This will make your investment well worth the money. 

Final Thoughts

These are seven of the most important considerations when buying a rental property. While other details will come to light along the way, an early focus on these will point you in the right direction.

Are you ready to take the next step? Before beginning your search for the perfect property, read our eight-step guide. It provides even more information on how to make an informed, confident investment. 

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Nick Bailey, Re/Max CEO, joins ‘Closing Bell Overtime’ to talk housing prices, the state of the real estate market, what’s ahead for 2024 and more.

David Greene:
This is the BiggerPockets Podcast. What’s going on everyone? It’s David Greene, your host of the BiggerPockets Real Estate podcast, coming to you from Kauai, and that’s one of the things I love about real estate is I get to bring you guys questions from our listener base from everywhere in the world. My hope is that more of you can get to the same position and we’re going to share some advice today that will help you do just that. Today’s Seeing Greene episode has a lot of good stuff, including what a home equity agreement is and if one should be used. The best ways to reinvest the cashflow that you’re making from your current portfolio today and how you should be thinking about it and a live call with one of our listeners where we go back and forth.
Helping them determine if they should take the money they’ve made in real estate and improve the properties they have or if they should buy new properties and if so, what to be thinking about when going back and forth with that decision. A lot of people in today’s market have equity and they’re trying to figure out how they should use it, and sometimes that means buying more real estate, but sometimes that means improving the real estate they have. I especially like this topic because a lot of people have equity and they’re tapping into it with HELOCs, but they’re not sure if they should use that HELOC money to scale into a bigger portfolio or improve what they’ve got. So we tackle that and more on today’s episode of Seeing Greene.
We’re going to bring in our first guest in a second, but before we do a quick tip for you all. You’re going to hear more about it in the next question, but I am a firm believer, especially if you’ve got a short-term rental that tapping into your equity and using that money to improve the property, improve the decor, add amenities to it, make it look nicer, get better pictures taken, is a quick way to get a return on your capital that can then be used to pay the equity line of credit back down. I don’t love in today’s market taking $200,000 out of a house at a pretty high interest rate and using that for the down payment on a property that you then have to get another loan for the other 80% and stacking up debt when rates are higher.
I’m a much bigger fan of a get in and get out strategy, kind of like using a jet ski instead of a battleship. Take out some equity, fix up your house, improve the revenue, and then pay the equity loan off with that revenue and then, ask yourself how you can do it again. How can you recycle that same 20 or $30,000 to improve the properties you’ve got and win in the short-term rental wars? All right, let’s get to our first guest today. Let’s welcome Stacie to the studio. Stacie, welcome to Seeing Greene. A little bit of background about you. You’ve got a single family property, a duplex, and a piece of property in the Austin area, in New Braunfels, Texas. So funny story here, I almost invested in New Braunfels myself about five years ago and wish I would have, because I would have done very well.
I fell prey to that same problem of, well, when I first heard about it was this much and now it’s $50,000 more. I don’t want to get in too late and made the same mistake that I tell everybody else not to make because I learned it in that example. So congratulations on doing the right do and having a New Braunfels property. So, tell us what’s on your mind today.

Stacie:
Thank you. Yes, so considering those properties we have and our long-term strategy of buy and hold, which we’re a 100% in on, so we have this property in New Braunfels. We actually bought it site unseen and it was a very good purchase for us. It’s zoned multifamily. It’s one block from the Guadalupe River, so it has a single family home on there where we have a long-term renter, but we have the opportunity to develop it because it’s already zoned for multifamily. It’s half an acre lot. Then, we have this plot, this quarter acre plot in Lago Vista near Lake Travis that was given to us from family that also has development opportunity.
So we have these two properties that we own, that have development opportunities, but also, we’re tempted to buy our next investment property. So we’re at the point of trying to decide do we stay the course, leave those properties as is because we have a long-term renter in New Braunfels, we’re cash flowing about $600 a month there, so it’s well paying for itself and then some. Then, we have this lot that’s just sitting there vacant that we’re trying to figure out what to do with. Our duplex in South Austin is cash flowing about $2,100 a month. So we have two long-term rentals there. We’re not looking to develop or do anything with that right now. So we’re at that kind of inflection point.
Do we buy our next investment property or is now the time that we actually do some forced equity and develop the New Braunfels property or build something in Lago Vista?

David Greene:
Alrighty.

Rob:
My first question here is what is the reason that you want to get into the next property? Is the reason you want to get into the next property simply for the sake of growth and you’re like, “Hey, I just want to add to the portfolio. I don’t really need the cash flow,” or do you want to get into another property because you want more cash flow because you need an extra couple of hundred bucks every month?

Stacie:
We don’t need the extra cash every month. We want to grow the portfolio and we also want to invest sort of, I know it’s not about timing the markets, time in market, but it still feels like now is a good time before everyone is back in the market, should rates come down. So we’re kind of feeling that, wanting to get the next property because we do want to grow the portfolio, but also, when is it time to actually develop these properties that we’re sitting on too? So we’re kind of don’t know which way to go necessarily.

Rob:
I think if you’re not pressed for the cash flow and you’ve got a lot and you’ve got a property that is zoned for more property, I’m a big fan of making as many streams of income off of one property as possible. So, if you have the steam and if you have sort of the dedication and I guess the open mind to just go through a new construction, then I think you should do it. A big fan, I actually think that new construction is just the best way to combat a lot of things that are happening right now because yes, you will be getting something at a higher interest if you buy a property. So for me, I’m like, I think if you can go and build something at your cost without the markup of someone … if you go and buy a new construction off of Redfin, you’re paying their cost and you’re paying a premium for it, right?
So if you can go and build something at your cost, it’s not really that same markup as getting it off the MLS and when you refi out and get your money out, you’ll have a higher interest rate on that of course, but it won’t hurt quite as bad as having gone and purchased a property straight off the MLS, if that makes sense. So if you have the ability to wait it out for let’s say 12 to 18 months, then I definitely think building from the ground up is a really smart thing to do right now.

David Greene:
All right. I will weigh in on this too. I love the question. It comes up a lot where I live in the Bay Area, you typically see this in more expensive areas, where the question is do I build an ADU or do I buy a new house? And the tricky thing is you can’t finance the build. If you could finance the build, it would almost always be an easy, “Yeah, just improve the property you’ve got.” The problem is you got to put a lot of capital down to do it. So I like to try to simplify this turning into apples to apples as much as I can. And I asked the question of, for the capital I’m going to put into this thing, how much cash flow am I going to receive?
What’s the ROI on that and how much equity am I going to build? What’s the return on investment on that? So if you were to add to the property that you already have, how much money would you have to put down to do this and do you think it would increase the equity

Stacie:
For the New Braunfels property, we probably would have to put down about 200,000 in capital to build an ADU, at least an ADU, right? A prefab ADU would probably be about 200,000, all in. For the Lago Vista property, we’re looking at probably 250 upwards to half a million of capital to put in to develop that property, because it is raw land, it’s going to require a lot more clearance and work to get that property ready for building. So I don’t think we would do both at the same time. I think we’re kind of anxious to really look at … I think the New Braunfels property has the most potential because it is such a growing area and the location of it is prime, being a block from the Guadalupe River. So I think there’s a lot of upside to developing New Braunfels from all that I can tell.

David Greene:
So if you put the $200,000 into New Braunfels, would you add equity to the property?

Stacie:
Yes, I believe we would add equity to the property.

David Greene:
How much do you think you’d be adding?

Stacie:
I think we probably would be adding … we bought it two years ago. We have probably about … I’m going to say about 40,000 in equity in just the past two years in the property. So if we add an ADU, we’d also have to configure the front house a bit too to put the ADU in. I don’t know, but I’m going to guess that we would probably add about … immediately about a hundred, 150,000 in equity in that property. Does that sound about right, the numbers I’ve shared?

David Greene:
I don’t know the area. Yeah, it could. It could work. What about the cash flow? If you build an ADU for $200,000, what will it rent for?

Stacie:
Yeah, because right now, we’re renting, all in P and I is like 1800. 18, 1900 we’re renting for 25 on the single family home, so we’ve got nice cash flow there. We can build up to 1,000 square foot ADU without it being considered a second principal structure on the property. So 1,000 square foot, we could probably rent that, I’m going to say around 18, 1900 in today’s market for 1,000 square feet.

David Greene:
Okay. Would this increase the property taxes on the property if you add to this work, make it worth more?

Stacie:
Most likely.

David Greene:
And then where are they at New Braunfels like two and a half percent or so?

Stacie:
No, it’s right around 2%. It’s like 1.97, something like that. Yeah.

David Greene:
So that is a pretty healthy return. I mean, you’re having additional property taxes and there’s going to be more insurance, but still, I believe you said it was 1800, you think that you’d rent it for?

Stacie:
Yes.

David Greene:
So let’s say you keep say, 1400 of that to invest 200,000. That’s not a bad deal there. You’re not too far off from the 1% rule. The downside would be you’re spending $200,000 to add $100,000 of equity, so you’re actually losing equity in a sense because you’re transferring that money from your bank account into the property. You’re going to lose $100,000 of value there, but you’re going to gain the extra cash flow of say, $1,400 a month or $1,300 a month. Now, here’s why I framed it that way. I think your job here, Stacie, is to ask yourself with this $200,000, if I put it into a different investment vehicle, could I get better than say 13 or $1,400 a month and avoid losing a $100,000 of equity? Could you put $200,000 into building a new home construction that you might gain $100,000 of equity at the end instead of losing it?
That’s a $200,000 swing, or maybe you get better cash flow, maybe the cash flow is not as good, but you don’t lose as much equity. Have you looked into opportunities like that?

Stacie:
I haven’t, no.

David Greene:
Okay. That’s how my mind goes to it. What if you paid cash for something that was $200,000, maybe a fixer upper, you fixed it up and then, you refinanced out of it, you could do it again, or you could buy a million dollar property, put $200,000 down, so you’ve got those. In my mind, you’ve got the three options. You put it as a down payment on something, you pay cash for something or you put it into the property you have. Rob, what are you thinking?

Rob:
Yeah, I guess I’d really want to … and we’re not going to be able to solve for this on this episode unfortunately, but I’d want to know what kind of equity we’d be adding because I think it’s, I’m not going to say rare, but I feel like if you’re building something on your property such as an ADU or a secondary unit, I feel like the equity that you’re building should be pretty commensurate with the amount of money that you’re investing, right? So it’s like I think if you were going to spend 200 but you’re only getting a $100,000 in equity, then yeah, I would agree with David. I probably wouldn’t do that.
I’d go find somewhere where I’d get the one for one ratio on that, but I do wonder if you would get that full equity out of adding an addition to the property. If the answer is yes, I would go that route and then build it and then, do a cash-out refi and try to get as much of that money back, because if you do that and you get a pretty significant portion of your money back, then your ROI skyrockets in that point. I’m a big fan of this strategy solely because you get to stack income streams on one property and it really makes a huge difference. I had a property in LA. When I bought it, it was $400 mortgage. I’ve since refinanced, it’s like 4,200 now, but I now rent out the main home, which goes for … anywhere from 3,500 to $5,000 a month.
I’ve got an ADU in the backyard that goes for anywhere from 2300 to $3,000 a month, and I even have a third unit that I don’t rent out, but I used to, and that was another $2,000 for that unit. So when you added it all up, it was like $8,000 on one property and your profit margins on that are just so healthy. Your landscaping bills are all consolidated to that one property. All of your bills are just consolidated into this one business, and that’s why I’m a big fan of building up basically as many income streams on one property as possible, assuming that your equity that you put in is one for one on the investment that you put in.

David Greene:
That’s the key there, Stacie. I don’t love the deal if you’re putting in more money than you’re gaining in equity. Hearing that, what’s going through your mind.

Stacie:
Yeah. No, that makes a ton of sense. I’m not 100% on all the numbers. This is as far as I’ve been able to get, but I will dig deeper in terms of the actual equity we’d be able to get out of that property. Yeah, and just to throw a curveball here, right? Our house in Los Angeles, we’re in the San Fernando Valley, we’re in Encino up in the hills. That’s why my internet is a little spotty. I mean, we were originally going to keep this house and sell it or not sell it, but use that as sort of our investment property here, rent it out. Our latest thinking was to sell this house to buy more properties in Texas.
So we’re trying to treat all of our homes as sort of part of the portfolio and how do we leverage them to the maximum, and I know David, you’re up in Northern California, but I don’t know, we were sort of starting to think that we just wanted to get out of California.

David Greene:
Shocking. I’ve never heard anybody say this.

Stacie:
Yeah, never, right?

David Greene:
Yeah. It’s something to think about because you probably have a lot of equity there. I don’t think it would benefit you to sell it and put the money into Texas, unless you know where you’re going to put the money, and it sounds like you got to figure that problem out first. Where are we going to deploy our capital and how are we going to deploy it? I don’t think it’s going to be as simple as let’s just build onto what we already have. There may be something where I would want to take some of that cash and look for a way to buy something that was maybe distressed that I could fix up and add value to it, although it’s not bad building an ADU in that area where you know you’re going to have tenants, you know the values are going to be going up.
It’s not going to hurt you. I just hate those high Texas property taxes, right? If the property value does go up, those taxes hurt out of the cash flow you’d be getting.

Stacie:
They do, and insurance is going up too, so that’s every year, steadily insurance is going up.

David Greene:
That’s right. Well, thank you Stacie. This was a good question. I think more and more people are asking this question because rates are high, so it’s not an automatic, yes, I should go buy another property. Now, the rates are getting really high. It’s hard to make them cash flow. So we’re starting to ask questions like this, so thank you for bringing this up.

Stacie:
Thank you guys.

David Greene:
Thank you, Stacie.

Rob:
Thank you.

David Greene:
All right, thank you Stacie for joining us today. I just dropped Rob off at a Chipotle, so I’ll be flying solo for the rest of today’s episode, but big thank you to Rob for joining. I was so appreciative that I actually left him with a dollar so he could get some extra guac on that burrito that he loves so much. His tip for getting the most out of one property is a great takeaway and I appreciate him sharing that. If you would like to have Rob and I, or me or anyone else in the BP universe answer your specific questions, head over to biggerpockets.com/david where you can submit them and that will make me like you. If you’ve submitted a question to Seeing Greene, you can consider yourself my friend, and when we see each other at BP Con, I will take a picture with you, hug you and say something nice.
I hope you’re getting some value out of today’s conversation and our listener questions so far, but we’ve got more coming up after this section. I like to take a minute in the middle of our shows to share comments that you all have left on YouTube or when you review the podcast. Our first review comes from 1981 South Bay. “Love the Seeing Greene episodes. I love these episodes and it’s a great addition to have Rob on the series. My wife and I have been listening to Bigger Pockets for two years. We finally just bought our first two duplexes and are planning to acquire more properties. We could not have done it without this podcast and the community. Thank you, David, Rob, and the entire BP community.”
Well, thank you South Bay for a five-star review. That’s freaking awesome. I hope some of our listeners go and follow your lead and also, if you’re in the South Bay of the Northern California Bay Area, we’re basically neighbors. I live about an hour away from you, so make sure that you reach out on Instagram. Let me know you are the one who left that comment and let’s see, if we can get you coming up to some of the meetups that I do in Northern California. We’ve got some comments here from the Seeing Greene episode 840 that came directly off of the YouTube channel. The first one comes from Dan Cohan. “Thanks for sharing this awesome video. I really relate to the struggles of estimating renovation costs, especially when you’re investing in real estate from far away.” And then Laura Peffer added, “Yes, please do an entire show on To Cash Flow or Not to Cash flow.”
Well, you’ve spoken and we’ve listened. We actually did record a show on when it’s okay or maybe not okay to buy non-cash flowing properties and I will talk to our production staff about putting a show together that says, is cash flow the only reason to invest in real estate or is it okay to not invest in it? Maybe we’ll have a back and forth where we have the cash flow defenders and the appreciation avengers or however we’re going to call that. In case you missed it, go back and listen to episode 853, which was released on December 6th where we break down three negative cashflow deals. All right, let’s get into the next question. All right, our next question comes from Roy Gottsteiner. He is a foreign national living abroad, so he’s having a difficult time getting financing.
He can only get 60 to 65% loan to value ratios and no access to products like FHA or HELOC. Roy started four years ago investing in North Carolina and Ohio and currently has a portfolio of 10 single-family housing rentals. He does mainly BRRR and long-term traditional rentals and recently started doing some medium terms. Roy says, “Hi David. These episodes are extremely helpful and are helping me to constantly adjust my thinking based on the current market dynamics as well as my own position in the investing journey, so thanks for everything. I built a portfolio of 10 units, which cashflow two to $3,000 a month. I’m 35 and I have a great job, so I don’t need this income and intend to reinvest all of it.”
“I’m trying to think of the best way to use that money to further enhance my progress towards financial independence. Here’s some options I had in mind, but happy to hear your thoughts. If there’s anything else I need to be thinking of. Investing it regularly into a stock index and dollar cost averaging for a long-term hold. Dollar cost averaging basically means you just keep buying stock even if the price is dropping. It’s funny that we came up with this phrase, dollar cost averaging to say, well just keep buying even if the price is going lower because eventually it’s going to go up and you will have bought it at a lower average than the prices when they were high. Number two, paying off mortgages on my investment properties to reduce leverage and increase cashflow.”
“Number three, save the money and try finding a creative finance deal with a 30,000 dollar entry each year. My last purchase was a sub two with a 42,000 dollar entry, and it was a great one. Looking forward to your sage advice.” All right, thank you for that question. I appreciate that. I can answer this one pretty quick. I don’t love the idea of paying off your mortgages, especially because if you bought them and you have 10 of them, they probably have pretty low rates right now, so you’re not saving a ton of money doing that. You also have to pay a ton of mortgage off before you actually don’t have to make the payment when it’s owned free and clear, so you don’t really see the return on that money for years.
It might be 10, 15, 20 years of trying to pay these things off before you actually get rid of that interest on your mortgage. So what will happen is you’ll build the equity in it faster, but you won’t put money in your bank faster. So I don’t love that idea and I don’t love investing into the stock index, because I don’t want to give advice about something that I don’t really understand and I don’t know that there’s any solid advice I can give anybody when it comes to investing in stocks. I also just think you’ll do better with real estate long term. So your third option, saving the money and trying to find a creative finance deal like the one you did last time is pretty good.
And here’s why I like that. If you don’t find the creative finance deal, you just have more reserves and you’re never going to find me upset about someone who has a lot of reserves, especially considering the economy that we are going into. In the past, success was all about scaling and acquiring. How many doors can you get? That was the cocktail party brag, I have this many doors. In the future, I believe, it’s going to be, what can you keep? How can you hold on to the real estate you’ve already bought? And reserves can be a huge factor in saving you there. All right, moving into our next question. This comes from Chris Lloyd in Hampton Roads, Virginia.

Chris Lloyd:
Hey David. My name is Chris Lloyd from Newport News, Virginia. And here’s my question. I currently have a property I was looking to renovate and I plan to fund this renovation using a HELOC. I’ve got two properties with some good equity in it and I found out recently that I can’t qualify for a HELOC because I’ve been self-employed for less than two years. Took my business full-time a little over a year ago. So I’ve been looking in other ways to finance this project and came across home equity agreements. This isn’t something I’ve really heard talked about on the podcast and I was wondering if there was a reason why. If this is a newer product, if it’s just getting traction or if this product is absolute junk, I don’t know. So I’m asking what instances would this make sense for someone to use and when and would it not make sense?

David Greene:
All right, Chris, thank you for that question. Appreciate it. My advice would be, no, I don’t think you should take on a home equity agreement unless you’re in dire financial straits. And even if you are, I’d probably prefer that you sold the house, took your equity and moved on to something else. All right, our last question is going to come from Nick Lynch and it’s a video question.

Nick Lynch:
Hey David, this is Nick Lynch from Sacramento, California. Thank you for everything that you and BiggerPockets do. I love you guy’s content. I’m hoping to buy my first home in the greater Sacramento area of California when my current lease ends April 30th of 2024. My question for you is what would be the best method to get in to my first home and into investing at the same time, given how high the prices are in California. I’m considering house hacking, house hopping, or simply buying a primary residence I’m comfortable living in long-term and using the remainder of the fund that would have after a down payment to maybe invest in out-of-state property that could capital more easily.
My biggest concern with house hacking or house hopping in California, that the property is so expensive, it would take a very large down payment to get those properties to cash flow even after living in them for a couple of years. Thanks, David. Appreciate the help.

David Greene:
All right, Nick, glad you reached out. We actually do a lot of business in the David Greene team in the Sacramento area, and we help people with stuff like this all the time. The key to house hacking is not about paying the mortgage down or buying a cheap home. The key to house hacking successfully, and by that I mean moving out of it and having it cash for later. What I often call the sneaky rental tactic because you can get a rental property for 5% down or three point a half percent down instead of 20% down if you live in it first, is finding an actual property with a floor plan that would work. We’ve helped clients do this by buying properties with a high bedroom and bathroom count because that’s more units that they can create to generate revenue.
We’ve also had people that we’ve helped doing this when they rent out part of the home as a short-term rental or a floor plan that can be moved around where walls are added to create more than one unit in the property itself. The key is not to focus on the expenses and keeping them low, but to focus on the income and getting it high. So when you’re looking for the property, what you really want to do is look for a floor plan that either has a lot of bedrooms and bathrooms and has sufficient parking and is also in an area that people want to rent from, or you want to look for a floor plan where the basement that you could live in and you rent out maybe two units above or two units above and it has an ADU.
Something where you can get much more revenue coming in on the property which you have more control over. I call that forced cashflow than a property that you just bought at a lower price because that’s not realistic. If you’re trying to buy in a high appreciation market like Northern California where wages are high and the market is strong, you are less likely to find a cheap house. Reach out to me directly and I’ll see if we can help you with that and start looking at properties with the most square footage and then, asking yourself, how could I manipulate and maneuver the square footage to where this would be a good house hack. Great question though, and I wish you the best in your endeavors.
All right, everyone that is Seeing Greene for today, I so appreciate you being here with me and giving me your attention and allowing me to help educate you on real estate investing and growing wealth through real estate because I’m passionate about it and I love you guys. I really hope I was able to help some of you brave souls who took the action and ask me the questions that I was able to answer for everyone else. And I look forward to answering more of your questions. Go to biggerpockets.com/david and submit your question to be on Seeing Greene. Hope you guys enjoyed today’s show and I will see you on the next episode of Seeing Greene.

Every real estate investor wants to know if there’ll be a housing market downturn in 2024. But perhaps a better question to ask, now and always, is: “Which local markets are most at risk of a downturn?” 

Regional variations consistently play a part in any housing market analysis or forecast. And now we have the most up-to-date Special Housing Risk Report from real estate data provider ATTOM. 

ATTOM’s data set is valuable to anyone wanting to zoom in on the prospects of investing in a specific area. The data is organized by county, which allows for precise localized predictions about housing market health going into the new year. 

ATTOM uses four main parameters for gauging the risks of a housing market downturn in each area. Here’s a look at each. 

1. Home Affordability

This factor is assessed by looking at how much homeowners spend on housing costs, including their mortgage, home insurance, and property taxes. In order to count as affordable, a home should cost its owner no more than one-third of their salary. On its own, however, this measurement does not indicate whether an area is at risk or not. 

Speaking to BiggerPockets via email, ATTOM CEO Rob Barber explained that affordability remains an ‘‘area of similarity’’ between most and least at-risk housing markets: ‘‘In 37 of the 50 most-exposed and 36 of the 50 least-exposed markets, major homeownership expenses required a larger portion of average local wages than the national level.’’ 

Affordability is at low levels nationwide, with the average percentage of local wages required to cover housing expenses now standing at 34.6%, according to Barber. 

2. Percentage of Underwater Mortgages

An underwater mortgage is a mortgage loan that is more than the current market value of the home. A high percentage of homes that currently are worth less than the remaining mortgages on them is a sign that trouble may be afoot. 

Barber told us that ‘‘among the top 50 markets most at risk, 28 had larger portions of residential mortgages that were underwater than the national figure of 5.3%. Just two of the 50 least at-risk markets faced that situation.’’  

3. Number of Homes Facing Possible Foreclosure

ATTOM accessed its own foreclosure reports in order to analyze the vulnerability to foreclosure activity in each county. Foreclosures happen everywhere, but there is a national benchmark for a level that is alarming and could indicate that an area is headed for major housing trouble. 

Of course, everyone remembers the mass foreclosure disaster that hit the housing market back in 2008, when large numbers of American homeowners found themselves unable to pay for their homes almost overnight. While this situation is extremely unlikely to ever be repeated thanks to tighter affordability checks for mortgage applicants, some local markets are still at risk of higher-than-average foreclosure numbers because they do not have adequate foreclosure prevention measures in place, and have large numbers of people on low wages or at risk of unemployment. 

The difference between the most and the least at-risk areas is pretty stark. As Barber points out: ‘‘All but one of the top 50 counties had higher portions of homeowners facing possible foreclosure than the national rate of one in every 1,389 residential properties. None of the counties in the list of those least at-risk surpassed the nationwide benchmark.’’

4. Unemployment Levels

The relationship between this factor and the previous one is very clear: The higher the local unemployment level, the higher the chance of an eventual housing market downturn through a wave of foreclosures and subsequent lowering of home values. 

While it can seem like a housing market is still thriving—i.e., home prices are high—steadily growing unemployment is bad news in the longer term. ‘‘Unemployment rates in November of last year were higher than the 3.9% nationwide figure in 49 of the most at-risk markets, but in none of the least exposed,’’ says Barber.  

How much of a risk of a housing market downturn does the most exposed area face? According to Barber, the figure is anywhere between two to six times the risk of the least exposed areas. 

With these figures in mind, here are the most—and least—vulnerable housing markets in the U.S. right now. 

The Most At-Risk Markets

According to ATTOM, the areas with the highest risk of housing market downturns are clustered disproportionately in Chicago, New York City, and in California. These three regional markets took a whopping 21 of the 50 at-risk locations in the ATTOM report. 

New York fared especially poorly, with both central areas like Brooklyn and the Bronx and suburban areas encompassing New Jersey showing signs of potential trouble. In California, several areas around Fresno showed similar downward trends. In Chicago, seven areas were identified as being at a high risk of a housing market downturn. 

However, New Jersey is the one to watch for a possible wave of foreclosures in the near future. ATTOM’s data shows that several New Jersey counties had the highest foreclosure rates in the country. They are:

• Cumberland County (Vineland), New Jersey (one in 359 residential properties facing possible foreclosure)
• Warren County, New Jersey (outside Allentown, Pennsylvania) (one in 459)
• Sussex County, New Jersey (outside New York City) (one in 461)
• Gloucester County, New Jersey (outside Philadelphia) (one in 470)
• Camden County, New Jersey (one in 509)

Unemployment figures are currently the most alarming in two Californian countries: Merced County (outside Fresno), which has a very high unemployment level of 8.9%, and Kern County (Bakersfield), where unemployment is at 8%. New Jersey’s Cumberland County also has a high unemployment level of 7.3%, and New York City’s Bronx County is not far behind at 7.2%.  

As the data suggests, underwater mortgages on their own are not the strongest indicator of a possible housing market downturn, as only 28 of the 50 most at-risk counties have that problem. However, a high percentage of underwater mortgages does signal that something isn’t right in the area and is something any potential investor should investigate. 

Take Webb County, Laredo, Texas, the U.S. area with the worst underwater mortgage rate of 56.6%. Earlier this year, Laredo dropped out of the list of top 10 safest U.S. cities, according to WalletHub. Its home and community safety rankings are going down, as is the financial well-being of its residents. It really isn’t surprising that so many people there are now finding that they own homes that are worth less than their mortgages.   

The Least At-Risk Markets

In contrast to these high-risk markets, many areas in the U.S. are enjoying low foreclosure and unemployment levels, as well as low rates of underwater mortgages, with most homeowners enjoying high levels of equity in their homes.  

The South, Midwest, and New England fared especially well in the third quarter of 2023. This won’t surprise savvy real estate investors who already know that these areas of the country have buoyant housing markets boosted by healthy local job markets and/or reasonable living costs. 

Take Nashville, Tennessee. Three Nashville metropolitan areas (Davidson, Rutherford, and Williamson) feature on the least at-risk ATTOM list. This is despite the fact that Nashville is not known for affordable housing, with the average home price in the city now approaching $600,000. 

So how can Nashville have such a stable housing market? The answer is simple: a low unemployment rate (2.9%) and a cost of living that is 2% lower than the national average. At the same time, the average salary in Nashville is $66,962, which is higher than the national average of $59,428. This is why there is very little chance of a housing market downturn here: People will continue buying expensive properties in Nashville because they can get good jobs and their other expenses won’t be as high as in, say, New York City. 

Other cities with similarly upbeat housing market trajectories include: 

• Knoxville, Tennessee
• Washington, D.C.
• Boston
• Hennepin County, Minneapolis
• Salt Lake City
• Wake County, Raleigh, North Carolina   

A special mention should go to Burlington. This Vermont city is prosperous in every way imaginable. According to the report, it has the lowest foreclosure rates in the country (1 in 72,326), the lowest underwater mortgage rate of just 1%, and a very low unemployment rate of 1.8%. All this reflects almost no chance of housing market trouble here. 

Those interested in the Midwest should look into Wisconsin. Several counties in the state have similar economic conditions to New England, especially Dane County (Madison) and Eau Claire County.

The Bottom Line

There is a very valuable decision-making blueprint for investors in the ATTOM report. It pays to do thorough research into multiple economic parameters in any particular area. 

Ask the right questions, such as: Are most people here in secure, well-paying employment? Do they have healthy levels of equity in their homes? And can they afford to live here, apart from the housing costs? 

When these conditions are met, an area will likely enjoy housing market stability for the foreseeable future. 

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Marcos Chan, head of research at CBRE Hong Kong, says demand for residential property will nevertheless pick up, and a “couple of percentage points up” in prices is possible.

Are you considering listing your property on Airbnb? Understanding how much an Airbnb host can make before listing your property as a short-term rental (STR) is crucial. Factors affecting profitability include Airbnb fees, property maintenance, occupancy rates, and location. With fierce competition in the Airbnb rental market, understanding these factors is crucial for increasing your rental income potential. 

Getting started as an Airbnb host can be a great way to earn passive income. While some hosts make substantial profits, regular rental income is not guaranteed.

What can you do to run a successful vacation rental business on Airbnb? Here are nine key factors that can impact your income potential. 

Understanding Airbnb Hosting

An Airbnb host is someone who rents space in their property to guests. The rental space can be a spare bedroom, part of their house, a boat, or an entire property. Earning extra income is the primary appeal of becoming an Airbnb host. Also, vacation rental owners enjoy various tax benefits, flexibility, and meeting new people. 

According to Airbnb, the average host makes around $1,150 per month. However, earnings from vacation rental properties depend on several factors. For example, dynamic pricing strategies can significantly increase income on holiday weekends. Also, Airbnb properties in popular travel destinations or near convention centers can make more money due to higher occupancy rates.

Nine Factors That Influence Airbnb Earnings

Earning passive income from vacation rental properties depends on several factors. Of course, daily rates, cleaning expenses, Airbnb fees, and seasonality impact your bottom line. However, location, pricing strategy, and user experience are other factors impacting your Airbnb profit. 

Let’s look in detail at nine Airbnb factors influencing your STR income. 

1. Pricing strategy

The daily rate you charge guests is one of the most crucial factors impacting your earnings. Charge too much, and you will scare off potential guests. However, if you charge too little, you won’t make enough as a vacation rental host to cover your expenses.

Rather than charging a flat rate, a dynamic pricing strategy can boost your profit potential. A pricing strategy should consider market fluctuations, competition, season, and local events. It’s also vital that the standard of accommodation and nightly rate meet guests’ expectations. 

2. Recurring expenses

Monthly expenses significantly impact Airbnb earnings. Operating expenses for a successful vacation rental include utilities, cleaning services, and maintenance. Therefore, knowing how your outgoing expenses will impact your profit potential is vital when setting a budget. 

Here is a list of the typical fixed and variable expenses you can expect as an Airbnb host:

• Housekeeping: Includes services like cleaning, laundry, toilet paper, toiletries, and supplies.
• Insurance: Monthly vacation rental insurance is a necessary expense for Airbnb hosts. Airbnb offers free comprehensive protection included in the booking fees. However, having additional insurance coverage for floods or other natural disasters is still a good idea.
• Maintenance: Regular repairs and preventative maintenance help keep your Airbnb property in good order. Depending on your vacation rental business model, you could hire a property management company or local professionals, or do repairs yourself. 
• Utilities: These are some of the highest variable expenses when operating an Airbnb. Utilities include gas, electricity, water, internet, heating, and lawn care. 

The good news is that many expenses associated with Airbnb rental accommodations are tax-deductible. 

3. Location

Choosing a suitable location for buying an Airbnb rental is vitally important. Location is a significant factor that impacts your earnings. Ideally, you want to purchase an investment property in a desirable, low-crime neighborhood. Remember, Airbnb guests will also leave reviews about how safe they felt. 

Researching the location is also vital to ensure Airbnb rentals are permitted. For example, San Francisco limits the number of properties a host can list. But in Dallas, short-term rentals are not allowed in certain neighborhoods. In many other cities, permits are necessary for STRs.

4. Seasonality

Seasonal demand greatly impacts Airbnb earnings. Peak seasons attract more guests, meaning you can charge premium rates. However, demand is lower in off-peak seasons, and it may be necessary to adjust nightly rates to attract more guests. However, seasonal demand gives you time to conduct necessary repairs and maintenance in the rental property. 

Fluctuating demand during the week also affects earnings. For example, it’s common for businesspeople to travel on Tuesdays and Wednesdays. Therefore, some Airbnb hosts increase nightly rates during these days and also on the weekends. 

5. Airbnb host fees

Airbnb fees also impact earnings. Most hosts pay a flat rate of 3% per booking. For example, say you charge $100 per night for a three-night stay, plus $50 for a cleaning fee. In that case, you would earn $339.50.

To keep your prices competitive and maximize earnings, it’s also possible to charge fees for extra guests and pets. These fees must be entirely transparent when guests book accommodations.

6. Occupancy rate

Occupancy rates directly impact the success of vacation rental businesses. More bookings mean increased revenue and a better return on investment. However, it’s vital to maintain competitive pricing to ensure you generate a healthy profit while offering an excellent experience. 

Here are two reasons why high occupancy rates are crucial: 

1. Airbnb guests tend to choose listings with higher occupancy rates when booking.

2. Airbnb’s search algorithm considers various factors, including the occupancy rate, in search listing results.

7. Reviews

Reviews indirectly impact earnings from rental properties. Reviews on Airbnb are important for both hosts and guests. They help to establish trust, improve reputation, and increase revenue through word of mouth. Some studies suggest that reviews and ratings impact listing prices.

For example, travelers typically use Airbnb reviews and ratings to find value-for-money accommodation. The higher the daily rate, the higher the rating guests expect. However, if the standard of accommodation doesn’t reflect reviews, guests will be inclined to leave poorer reviews.

8. User experience

Ensuring guests enjoy the experience of living in your vacation rental can significantly boost potential earnings.

Positive guest experiences result in favorable reviews and repeat bookings, boosting income. Conversely, a poor user experience can lead to negative reviews, decreased demand, and lower earnings. You can often enjoy higher occupancy rates and increased profitability by prioritizing guest satisfaction.

One study found that guests often blame themselves if the vacation rental doesn’t meet expectations. These feelings of regret and dissatisfaction often result in overly negative reviews due to their bad experience. The result is fewer subsequent bookings due to poor ratings. 

9. Amenities

Amenities play a pivotal role in vacation rental earnings. Of course, location, daily rates, and marketing are vital factors affecting Airbnb earnings. However, superfast Wi-Fi, fully equipped kitchens, comfortable lounge areas, and a barbecue can make listings stand out and let you command higher prices.

By investing in amenities, you enhance the overall guest experience. This factor also indirectly improves financial returns for hosts. You increase the chances of more satisfied customers, better reviews, and top-star ratings. 

Example Earnings (Annual)

The best way to learn how much you could make as an Airbnb host is to compare similar properties in the area. Work out the average daily rate and multiply it by the occupancy rate. This will give you an estimate of what average hosts make in your neighborhood. 

Of course, running a successful Airbnb business differs from traditional renting. Some recurring expenses are variable, while others are fixed. Also, occupancy rates and location can greatly impact your earnings. 

Here is a sample calculation of annual earnings based on per-stay expense assumptions: 

• Daily rate: $100
• Cleaning fee (if applicable): $20
• Host fees: $3.60 (3%)
• Utilities: $30 (calculate an average daily rate)

Adding the daily rate and cleaning fee minus the host fees and utilities means earning $106.40 per stay. 

To calculate annual earnings, multiply the per-stay figure by the target occupancy rate. A good Airbnb occupancy rate of 65% and above is ideal, although some cities have higher rates. That means you expect bookings for at least 237 days in the year. 

Therefore, your annual Airbnb earnings, for the example property, would be $25,216.80. However, you should also deduct income taxes and annual property maintenance. 

How much could you earn in your area as an Airbnb host? Why not check out the BiggerPockets Airbnb calculator to find out?

Tips on Maximizing Your Airbnb Earnings as a Host

Whether you’re a first-time Airbnb host or an experienced pro, a few key things can help to maximize your earnings. Here are tips on how to increase potential revenue: 

• Increase occupancy: You could offer additional sleeping space to increase earnings. For example, a sleeper sofa could accommodate two more people. You could also consider making your place kid- and pet-friendly and accessible for people with disabilities. 
• Use a dynamic pricing strategy: Track availability trends, competitor prices, seasonal demand, and special events. You can charge more during high-demand times, school vacations, and holiday seasons. An effective pricing strategy can help boost occupancy rates and earnings. 
• Optimize your listing: Make sure your listing stands out from competitors. Hire a professional photographer to showcase the best features of your property and the surrounding area. 
• Offer a super guest experience: Don’t be satisfied with offering basic amenities, like Wi-Fi, kitchen condiments, and a washer/dryer. Consider using small, thoughtful touches to impress your guests. A few ideas include a complimentary welcome basket, high-quality linens and towels, fancy soaps, board games, game consoles, and chargers. 
• Keep the place clean: Ensure the living space is always immaculately clean and welcoming. Guests typically pay a cleaning fee and don’t want to feel shortchanged. It’s also a good idea to reset kitchen cupboards and drawers after each guest. 
• Become an Airbnb Superhost: Do you want to attract more guests and boost earnings? If so, becoming a Superhost ensures your property stands out among the competition. To become and remain an Airbnb Superhost, you must maintain a 4.8-star rating.
• Embrace social media marketing: Use social media platforms like Instagram, Facebook, and X (formerly Twitter) to expand your reach and increase bookings. For example, create a social media account for your Airbnb. You could post high-quality photos, videos, and updates. Additionally, guests could share their experiences of their stay. 
• Partner with local businesses: You could collaborate with local businesses like restaurants, spas, and tour operators to offer deals and discounts. They also may be willing to cross-promote your services. 
• Offer add-on services: If you live near your vacation rental, consider offering add-on services. These can include airport transfers, home-cooked meals, tours, and bicycle rentals.
• Use local, organic, or sustainable products: You can increase the Airbnb experience by offering eco-friendly products. For example, are there local producers selling products like soaps or shampoos? You could use these toiletries in bathrooms and offer larger quantities for guests to buy. Or you could use natural cleaning products and install energy-efficient appliances. 

Final Thoughts

Becoming an Airbnb host can be a great way to earn passive income. You can boost occupancy rates and earnings by having a pricing strategy, keeping the property well maintained, and focusing on customer experience. At the same time, keeping an eye on expenses is crucial to ensure you enjoy healthy returns on your short-term rental investment.

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David:
This is the BiggerPockets podcast. What’s going on, everyone? This is David Greene, your host of the BiggerPockets Real Estate podcast, here as always with my co-host and good friend, Rob Abasolo. Rob, how are you doing today?

Rob:
Very good, my friend. Very good. My wife gets back from Paris today. I’ve been single daddying it up, watching both of my kids for the last five days, so I am excited to sleep again. Very excited.

David:
I can imagine. And thank you for joining me on today’s show with no sleep but tons of information and a good time.

Rob:
That’s right, yeah. We have a great show planned for everyone here today. We’re going to be talking to Kim Hopkins, who is a commercial real estate investor, cue the scary music, who is making deals work today in this market, yes, that’s right, in 2023. Today we’re going to be hearing about a deal that Kim is working on, what types of commercial real estate deals pencil today, the risks associated with this strategy and how not to get yourself into thy pickle.

David:
All that and more. This is a killer show. Let’s get to Kim.

Rob:
Kim, welcome to the show.

Kim:
Hey, Rob. Hey, David. Thanks for having me.

Rob:
Yeah, glad to have you. So if I understand it correctly, you’ve been investing in real estate for 10 years now and you own 15 properties through the real estate business you and your husband run together. A few quick questions to get our listeners a sense of who you are as an investor. First one here, how many markets are you in?

Kim:
Let’s see here. We have Oregon, Washington, Utah, Texas, Arizona, California and Florida, so seven.

Rob:
Okay, so just a few here.

Kim:
Some of those are short-term rentals that we abandoned as we moved from state to state.

David:
Now you’re investing in small commercial properties like mom and pop type situations. What is it about that that drew you into it?

Kim:
Really it was a process of elimination. So we didn’t want to be fixing toilets and having tenants that were individuals so we didn’t want multifamily. We didn’t want single tenant properties because that increases your risk. If a tenant goes out on a single tenant property, that’s it. No income. We didn’t want the tenant improvement, TI, expense that’s often associated with office. And so that left us with multi-tenant and from there, we chose multi-tenant industrial and small neighborhood retail.

Rob:
So what kind of commercial real estate deals do you think are actually working today for you? You mentioned at the beginning of this that there are no bad markets, there are just bad deals. So give us a little bit of what you look for in a property, what makes a good investment, all that good stuff.

Kim:
Yes. Our buy box is single story, of course, multi-tenant. We want the tenants to be on the smaller side, about 2,000 square feet for each tenant is our goal. No tenant occupies more than 30% of the space. We look for properties that don’t have too much auto because they’re dirty. We look for properties without too much restaurants because they’re dirty. And so that’s what we’re targeting right now. And then we are looking for about a 7% cap rate, although that really has to go up at this point because of where we are with interest rates. That really is closely tied to your terms of your loan at this point.

Rob:
Can I ask you a quick clarifying question? When you said that auto places and restaurants are dirty, do you mean they’re physically dirty and thus the wear and tear is just way worse on these types of spaces?

Kim:
Yes, that’s exactly what I mean. So auto tenants seem to come with a lot of environmental issues. They also tend to park a lot of non-functioning cars on the property. And then the restaurants, we can get into this later, it’s very relevant to the current deal we’re looking at, but same thing. The restaurants, especially if they’re frying food and things like that, can really mess up your property.

David:
I would also imagine that restaurants and auto repair shops would probably require more tenant improvements. They’re going to want you to bring in some money so they can put in a big car jack or move the floor plan around. Have you found that to be the case? Because you mentioned earlier you’re trying to avoid that by avoiding office.

Kim:
Yes, that’s exactly correct. That’s why I would definitely rank the multi-tenant industrial above the multi-tenant retail. They’re going to have more TI requests. With the multi-tenant industrial, we don’t even have to paint the thing. It’s like it’s already a low maintenance space, and then the tenants are also very low maintenance. They would never call you if their toilet isn’t working. They will just fix it.

Rob:
Which is why CrossFits never have an AC in them, even when it’s like a hundred degrees outside. It’s like, do you want me to just fry up in here? Is that the idea?

Kim:
That’s why they make the Big Ass Fan. Have you heard of that company?

David:
The only frying that will be done is going to be at a CrossFit when you’re hot, not at a restaurant because Kim does not allow frying in any of her units.

Rob:
No frying allowed.

David:
You do bring up a good point though, because investors will often just get greedy for the highest ROI they can get or in this space, they’ll be looking for the biggest cap rate that they can get. And when you’re only looking at those numbers, you don’t think about the fact that in order to get that higher cap rate, maybe you got to spend $200,000 to outfit this unit so that your new tenant could come in and then when their business fails after three years or they decide that they don’t want to lease the place from you anymore, they leave and now you have to spend money to get rid of the $200,000 you spent and spend more money to fix it up for the next tenant. And so that higher cap rate is being offered in order to entice somebody into where they’re actually going to make less money.
There’s a lot of things in real estate that will take your money. It’s more than just the mortgage, the taxes and the insurance. I like that you’re pointing that out. You’re actually looking in a sense how to run a lean business here as opposed to just being greedy and going for the biggest cap rate that you can get.
What are you looking at today when you’re trying to evaluate these deals? You’ve mentioned that you don’t want to get into office space, but is there a cap rate that you’re specifically targeting? Is there a unit size you’re looking for? What does your buy box look like?

Kim:
We’re really leading with the numbers. So you could have an advertised cap rate of 7.5%, but when you get into it, it doesn’t pencil. They’re using pro forma numbers. They don’t have a big enough vacancy. So we’re really leading with the numbers right now. We targeted multiple markets this last round. We didn’t pick a particular market. We’re looking for deals that pencil with the numbers. There is no speculation. We’re not looking for a deal that only makes sense with this value add. It only makes sense if you get to these market rents. It only makes sense if you can sell at this cap rate. None of that. We’ve seen a lot of where that’s getting people right now that did have that value add speculation. And so we’re looking for deals that pencil right now, cash on cash return of hopefully 7%.
But another comment I want to make is that we are also considering taxes. And I know that a lot of people say, “Oh, don’t do a deal for taxes.” And I agree. Never do a bad deal for taxes, but that is something that you can consider. So for example, if you’re going to be on the hook for several hundred thousand dollars of taxes and you have a deal this year in your hand that is only a 6% cash on cash return and you think, “Okay, maybe next year, I’ll find a deal with a 7% cash on cash return,” you need to take into account that you’ll have … Let’s say you had $300,000 tax bill. You’ll have $300,000 less to invest next year on that deal if you had to pay the taxes. Do you see what I’m saying? So the return next year has to be much higher in order to make sense. So we do take taxes into account too. So right now, we’re a little more lenient on a cash on cash return number than we might be next year because we have these taxes to consider.

Rob:
Well, that’s one thing that I always tell people because it does seem like in general … This is something that David has taught me over the past couple of years that cash on cash return is really just like one of those metrics. It’s one of the four big metrics when considering a real estate investment. You got your tax benefits. You got your debt pay down, your appreciation and cash on cash return. And so on the surface, a 7% cash on cash return might feel small to a lot of investors, but when you consider the actual tax benefits of cost segregation, bonus depreciation, accelerated depreciation, all that good stuff, it could really transform the return profile of any given investment.

Kim:
Yes. And also, I’ll just point out, to add to that, that our 7% cash on cash is that un-sexy no value add speculation number. That doesn’t mean that that’s where we hope to be in four years or three years or anything like that, but that’s how the deal makes sense now.

David:
That’s a great point. A lot of people make that mistake too. They just evaluate a deal in year one and they don’t look at, well, what is this going to look like in year five? You could buy something with a value add component or with lease bumps of five or 6% or something every single year and that measly 6% cash on cash return is now a 17% cash on cash return. And oftentimes when people say, “Well, how do you get these big returns,” the answer is well, buy it five years ago. And conversely, don’t buy properties that aren’t going to be improving over time because you got sucked into, oh, it’s an eight instead of a 6% return. That’s the best one and it stays an 8% return for the next 30 years.

Rob:
As we get into this a little bit, tell us a little bit about the biggest risks for commercial real estate and real estate at large that you’re seeing today because this is one that seems to be shifting quite a bit.

Kim:
Yeah. I think the risk right now is no one knows what the future is going to hold. And so we don’t know where the interest rates are going. If they go down, hopefully you can get a loan that has no prepayment penalty and refinance, but how do you know when to hit that button? And if they go up and you’ve gotten a short-term loan because you have a high interest rate, now you’re in trouble. So there’s a lot of risk around where we’re headed and how these tenants are going to do.
Our industrial properties did really well during COVID. They did well during recessions, that kind of thing. But multi-tenant retail, I’m not sure how well they will do. It really depends on the market you’re in and the nature of the business. If you have a Pilates studio as one of your tenants, do people need Pilates if time gets tough? I don’t know. It depends on the people. It depends on …

Rob:
What is the story on the industrial side? Because you said that was a little bit more, I guess, protected during the pandemic. Why is that? Is it because those services are just always needed? Is it just the types of businesses?

Kim:
Yeah. Actually, so the industrial and the neighborhood retail bolstered really well during the pandemic. So for industrial, yeah, we went through all our 130 business tenants and we marked which ones were essential. Do you remember that conversation about essential businesses, especially in Oregon and California?

David:
Oh, yes.

Rob:
Yeah.

Kim:
And they were all essential so they all kept operating. In fact, I think the only one that had trouble was our CrossFit, but they were covered too because typical CrossFit goer, pandemic doesn’t really bother us that much. So yeah, those tenants did really well during COVID. If they had problems, if they said they were going to have a hard time paying rent, we would just send them the paperwork for the PPP government stimulus fund application and tell them, “Fill this out and let us know once you filled this out.” And most of the time, they would never respond and just start paying rent again.
Now, neighborhood retail actually also did surprisingly well during the pandemic. If you look at reports on retail, you’ll see otherwise, but that’s because they group the small neighborhood retail in with the larger retail tenants and those are totally different product types. So your liquor store, your CPA, your insurance company, these guys all have to stay in business, and so they did well during the pandemic as well.

Rob:
So you mentioned that the industrial side of things maybe are a little bit more padded or I guess more solid businesses to endure tough times, but then you also mentioned on the retail space that maybe a Pilates studio wouldn’t be quite as insulated. Is there a type of tenant profile or a type of tenant that you like to take on in those spaces that make you feel a little bit safer about making sure that your place is always leased out?

Kim:
The type of tenant is going to be your hyper-local tenant, so you want someone that people are driving less than a mile to. I’m okay with nail salons because they’re hyper-local. So that’s the first thing, is the type of tenant is going to be a hyper-local tenant that’s not something that is one of a kind that people have to drive a long distance to.
And then the market in that case does matter. So if I have a Pilates studio that’s in a tertiary market, even if I have an industrial property in a tertiary market, that’s going to pose a lot of risk right now. You want something that’s infill, which means that it’s not out in the sticks. And if you have a Pilates studio, the property we’re looking at right now, the Pilates studio customers are driving nicer cars than I drive. Of course, there’s a real estate joke that we all drive used Toyotas, but still, they’re all driving nicer cars than I drive, so I feel more confident that during a recession, they’re going to be okay.

Rob:
Makes sense, makes sense. And is there any other things that you do to mitigate risk in terms of stabilization of your portfolio or going into a new deal?

Kim:
Yeah. So in terms of our existing portfolio, when we refi, we do not pull out all the equity. So we’re not brewing these suckers. We leave a lot of equity in the deal because on one hand, if you pull out all the equity, that’s fantastic, you can go reinvest that so I totally see that point of view. But on the other hand, now you have this high appraised price of your property and if the market dips, now you might have trouble because your debt payment has gone up if you pull out all your equity. And so we’ve refi’ed several of the properties, refinanced several of the properties in our portfolio a year or two ago when rates were great and we left a bunch in the deal. So our LTV across our portfolio is pretty low. It’s like 50, 60% our loan to value.
And then same thing with the deals we’re doing now. I wouldn’t say that this is totally our choice, but the loan to value, we’re using pretty low leverage right now, much lower than ever before, I think. We have 60% loan to value on this last property. And then of course, if you don’t want to do a low leverage, your other option is to try to go for seller financing. So that’s a really good option as well.

David:
Yeah. There is a method to the madness of actually taking on less debt with commercial property and it has to do with the financing architecture. So with residential property, you typically get a fixed rate loan for the life of the loan, usually 30 years. You don’t have to worry about having to refinance. You get to refinance if rates happen to drop to where it makes sense. But with commercial loans, they’re on balloon payment schedules and so you’re going to have to refinance it.
So if you have a high loan balance and you got a rate of 3%, that might make sense for you, but what happens if rates jump to 6% or 7% and you’re stuck at 80% loan of value? That could be catastrophic. So keeping a lower loan balance on commercial real estate, even when rates are low, is still a smart move and a defensive maneuver because you don’t know where rates are going to go. And if they go too high and you have a high loan balance, you can get stuck there.
I think a lot of people hear this with commercial property and they go, that’s stupid. Why would you ever do that? Why wouldn’t you want to maximize how much money you take out of the deal and buy the next one? It’s because the rates aren’t fixed.

Rob:
Yeah. You always hear them say, “It’s tax free. It’s tax-free debt.” And it’s like you want to keep some of your equity in there. That way, if you ever sold your property, you actually walk away with a paycheck, that’s how I always think about it. But now that we have an understanding of what Kim is seeing in the commercial real estate markets, we’re going to dive into a deal that she just completed. But before that, we’re going to take a quick break.

David:
Hello and welcome back to the BiggerPockets Real Estate podcast. We’re sitting with a boots on the ground investor, Kim Hopkins, and talking about all things commercial real estate. We’re about to jump into a deal that she’s doing right now. So let’s take a peek behind the curtain. Kim, where is this deal located?

Kim:
This deal is located in my current hometown of Phoenix, Arizona.

Rob:
And why did you choose this market?

Kim:
We chose this market because we found a deal, Rob.

Rob:
Nice. I love it.

Kim:
We looked in probably about 10 different markets every deal we could find, and this is where we found one.

Rob:
Good enough for me. What type of commercial real estate is this?

Kim:
This is a neighborhood retail center.

David:
And what was the purchase price on the property?

Kim:
The in contract purchase price is 5.4 million.

Rob:
How many tenants are in this property currently and are there any vacancies?

Kim:
So that’s a great question. It’s about 20 tenants in the property, and I would say that we were paying turnkey prices for this property. It was advertised to us as a hundred percent occupied with tenants at market rent. But as it happens, just as soon as we got into contract, we found out that two tenants were delinquent and one unit was vacant.

David:
It seems like they’re putting filters on everything these days, even the way that deals are being advertised. Would you say that this was a highly filtered pro forma that you were looking at? Yes.

Kim:
This pro forma was very Instagrammable until you got into the details.

Rob:
Okay. So I want to go back a little bit because we asked you why you found this deal. You said it’s because that’s where you found the deal, but why did you choose this deal specifically? What was it about it that attracted you to it?

Kim:
So first of all, it’s in a fantastic location. So it is infill, which means it’s not out in the sticks. It is in a very well-to-do, even better than well-to-do, an about to be extremely affluential area of phoenix, which is exactly what you want. You see the houses being flipped around it that are those big houses on the small lot that are white and black, the trend right now. So tons of houses being flipped around it. It’s next to a Dutch Bros, who I feel like is better at picking real estate than we are. And so it’s a great location. That was number one.
Number two is that it penciled. Always, always, always lead with the numbers. And so the cap rate was reasonable. The pro forma actually was pretty fair based on what we knew at the time, and so it had a solid return. So I would say those were the two main reasons.

David:
I love that we’re still seeing penciled. How long do you think we can get away with that before the next generation wonders, why do we keep saying that things pencil?

Rob:
For as long as we’re using pencils, I guess.

Kim:
Because Google sheeted sounds weird.

David:
Are they still using them though?

Rob:
AI’ed out.

Kim:
It spreadsheeted, that could come out wrong.

David:
All right. Now on this deal, Kim, did you stick to your buy box or was there any creative maneuvering that had to happen?

Kim:
Slightly painful at the moment. I think I said it at the beginning, but our buy box includes built on or after 1980. I might have forgotten that. But one of our buy box criteria is built on or after 1980. We made an exception. We made an exception. This building was built in the late 1970s, but the current owner bought it and added a ton of value. They did a ton of rehab. They redid the roof. They redid all the storefronts. They redid the parking lots. Anyone want to guess what I might be missing in those renovations?

Rob:
Oh, the toilet, the sewage, the pipes.

Kim:
Wow. You have not seen the things I’ve seen. Those sewer scope videos look like the worst colonoscopy you’ve ever seen.

David:
You do make a great point, Kim, because a lot of investors just don’t think about the fact that after something goes into the toilet, it has to go somewhere and there’s a way that it gets from your property into usually the city’s lines, and you’re supposed to put a camera through that and see what they look like. So I’ve seen tree roots growing into the actual pipes and creating clogs in there, and then some kid flushes a stuffed animal down the toilet and it gets stuck in there and it creates this blockade that can be incredibly expensive to fix, especially if you have to drill into the concrete or the asphalt of the parking lot, then you have to find what part of the pipe that it was at. Was this a problem with this specific deal for you?

Kim:
Yeah. So we went against one of our deal criteria. And the pipes are old. They have a finite life. They’re cast iron and they’re at the end of their life. So that is definitely a problem for us.

Rob:
Okay. I have lots of questions about this, but it’s okay. We can talk offline about the sewer on this.

Kim:
Oh, go for it. I would love to talk about this deal. I’m hoping this is secretly a private coaching call because I got questions on whether or not we should move forward.

Rob:
So when this happens, is it one of those things where you have to kick every … because usually, let’s say in an Airbnb or in a long-term rental if the water turns off, you got to put them up in a hotel or you got to figure it out. But this seems like a pretty massive underground renovation across the entire property. So do you have to shut down businesses while you make these repairs?

Kim:
Yes. I learned a ton about sewers that I didn’t really want to know and still don’t, but basically the pipes are doing what’s called channeling, which is where the bottom of it basically erodes. And so the bottom is the earth. And if you catch it soon enough, you can do what’s called pipelining where you blow epoxy through the pipes and you line it and you basically create PVC pipes inside the old cast iron pipes. And this is fantastic because you can do this in theory without disturbing any of the tenants. On the other hand, it’s for this property, like a hundred thousand dollar expense, so you really want to know that it needs to be done.
And I think you can guess. If you have someone who’s a pipe liner come out to scope your pipes, it’s just like having a roof inspector who does roofs, what do you think they’re going to say? Right. It needs to have been done yesterday. And so it’s a hard decision of whether or not to wait because if you wait too long, the pipes can collapse and then you do, like you said, have to dig through the ground, disturb tenants. It’s a big problem.

Rob:
Wow. So please tell me, were you able to negotiate any concession, the purchase price credits, anything with the seller?

Kim:
Yeah. So the two issues, just to recap, are these pipes, and then the other issue is these delinquent tenants. And usually, that’s not a big deal. I actually can’t remember the last property I bought where there weren’t a few delinquent tenants that just magically showed up as soon as we got into contract. The issue here is really we’re paying a turnkey price for this property. This does not have the same returns as the property we bought last year. We were told that it was in perfect shape and it was a hundred percent occupied and all the tenants are paying market rent. And so that lost income in year one, that’s not something that we should have to eat. This was advertised to us as turnkey, not value add.

David:
So once you uncovered the backed up colon of the property, how did you use that information to go back to the seller and try to negotiate a better position for yourself?

Kim:
Yeah. So we asked the seller for a phone call. I would be lying to you if I wasn’t scared, but all my friends who are like Cutco salesmen were like, “You got to ask for a phone call. You can’t do this email garbage. You got to ask for a phone call.” So I literally reread, never split the difference, and I asked him for a phone call and he said no.

Rob:
He knows that he has to make concessions. He’s probably scared to negotiate because he’s the one with no power.

Kim:
He did not want to talk with me. And so what we typically do, I don’t know if this is what you guys do on your end as well, but what we typically do is send a long email with lots of numbers that explains why we think we deserve this credit. And I just felt that wouldn’t hit home enough here. It wouldn’t be enough of an impact. So I did something new. I did a presentation, like a Google sheet presentation, and then I did a Loom video, walking through the presentation. And so I sent him a link to the Loom video, not even the presentation, so he had to listen to my voice, and I walked through showing exactly what these delinquencies would do to the income for us in the first year. And then I also walked through the cost of the sewer and showed him all the models, showed him the videos that we took of the sewer scope and asked for my credit request.

Rob:
I think that phone call solved like 90% of the problems in real estate, to be honest. I was actually thinking about this last night. Everyone is so dang scared to pick up the phone and actually negotiate like we used to back in the day, back in my day, and I had a situation where I was negotiating back and forth with the realtor who happened to be the wife of the seller. I presented a couple of options and then finally he just called me, he’s like, “All right. What are you trying to do?” And I was like, “Well, in your offer, it doesn’t actually cash flow, and I’m trying to put together a deal that actually cash flows for me.” And we actually struck a deal. So very good on you because I know it’s very nerve-racking to probably talk to a seller. It’s always a nerve-racking experience to break the realtor barrier, but I think it’s so important.

Kim:
Yeah. Well, I tried. I ended up sending the Loom video instead, but I tried for a phone call and I think the Loom video was second best.

Rob:
And so what happened? Did he say yes? Did he give you the money back?

Kim:
So he sat on it for a week and a half, and we finally followed up with him while we were on vacation and he said no. He said that he thought that he could fix the delinquencies himself. He didn’t think that the sewer was a big issue. And so he said he wouldn’t offer us any credit, so we ended up pulling out of the deal.

Rob:
Were you close to saying, “Let’s just do it anyways,” or were you resolute on it from the get-go?

Kim:
Well, it’s not exactly where the story ends. So we pulled out of the deal. We got back our earnest money. We told the lender all the things, completely done, off to moving the elf around the house and Christmas shopping, the important things this time of year. We pulled out of the deal. And then two days ago actually, the broker called us, the seller’s broker, and he said that he was willing to offer a hundred thousand dollar credit. I didn’t say initially, but we asked for $350,000 off.

Rob:
$350,000 off or $350,000 credit?

Kim:
$350,000 off the purchase price is what we asked for.

Rob:
So fast-forward to today, you get a phone call from the broker and they say, “Hey, the seller wants back in. He’s going to give you a hundred thousand dollars off the purchase price.” Great, okay. And then?

Kim:
So we said, “Thank you very much, but call us back if it’s 200.”

Rob:
And has he called you back? Has he called you back?

Kim:
So called an hour ago and it’s up to 130.

Rob:
Okay. Hey, that’s progress. Is this the final number? It keeps changing.

Kim:
Well, we could call him on speaker right now but …

Rob:
That would be a first in BiggerPockets’ history. I would love that actually, but okay. Okay, so 130. So where are you at? What do you want for this?

Kim:
I’m on the fence, to be honest with you.

David:
Even though we’re interviewing you, can we talk you through this?

Kim:
Yes, I would love that. Send me the bill later.

David:
Because I feel like we’re in the middle of the negotiation. We’re not hearing about a deal that was done for five years ago. Here’s what my thoughts are. If rates drop or stay lower, the seller is going to feel like I don’t have to give her money. I’m going to get another buyer. But if you see another rate bump, what someone is going to be willing to pay for that property is going to change because now all the numbers that you put into the Excel sheet change, and that means that he’s going to be more likely to come back and say, “Okay, you can have your 200,000,” but at that point, you don’t have the rate that you wanted so it’s probably going to be even more. Has that been communicated through the brokers like, “Hey, let the guy know that we’ll buy it for a $200,000 discount at this rate, but if rates go up, he’s either going to have to pay for me to get a lower rate or it’s going to be a bigger discount later.”

Kim:
Yeah. So our rate is locked, and one of our contingencies is that we close before the end of the year because we want to take advantage of the tax write-off that I was talking about earlier. But we have made the point to him-

Rob:
80%?

Kim:
Yeah. We have made the point to him that if rates go up, he’s going to have a hard time finding another buyer.

Rob:
I think he’s having a hard time finding the buyer now. He called you, right? If he called you and he is trying to strike this up again, you’re probably it.

Kim:
Yeah. I think the issue here I’ve realized is we are looking at two different properties. So the seller is looking at a property that he bought at a great price. This property was in bad shape. It was seriously in need of love. The property was practically vacant, it was dilapidated, all those things. And so he’s looking at this property that he bought at a great price. He also owns it in cash, so a lot less risk there. And so his point of view is what’s your problem? There’s a couple of vacancies. It’s part of doing business. You just fill it. Who cares if it’s $20,000 in TI to rehab this unit? Big deal. Because he’s sitting on a gravy train.
But us, we’re looking at this property where we paid a premium price. The returns weren’t great to begin with, but we were okay with it because it did meet the basic fundamentals. It wasn’t great returns, but basic fundamentals, fixes our tax problem, and we were thinking we were being handed something that was very low maintenance. Now we’re sitting somewhere where we’re going to rush to close on this deal before the end of the year. And honestly, that’s a big factor for us. We are interested in our quality of life. We’re about what’s your hourly rate? Not how much do you make per year? It’s a lot of work right now. So we’re going to close in the middle of the holidays on this property and then we’re going to inherit all these problems.

Rob:
Here’s my thought, and David, you can tell me if you disagree. I think he’s going to go up a little bit more than that 130 just based on where you’re at and the fact that they called you. But I don’t think you should take that hundred and let’s say 50 if that’s where you end up and subtract it off the purchase price because I don’t think that’s going to be significant in your overall monthly mortgage. I think what will be significant for you out the gate is getting $150,000 credit so long as that works out with the banking. There’s a limit to your credits. And David, you can chime in on this, but I would take that as a credit so that you can save that money in your down payment and use that to pay for that giant expense. And then at that point, you’re now looking at the deal that you were analyzing initially. That’s how I’d approach it. What do you think, David?

David:
Commercial financing may not allow that to happen, the same with residential financing, because you’re dealing with conforming loans. The rules are pretty clear of how much a seller can contribute to a buyer’s closing cost. It might not work the same in the commercial space. When they take it off the purchase price, it doesn’t really affect a whole lot. You just borrow a little bit less money.

Kim:
Well, we’re keeping our loan amount the same, so we would be saving that money as cash in the bank. We would be putting … If he gives us a $200,000 credit or off the purchase price, we’re going to be paying $200,000 less.

David:
Yeah. So it would be the same in your position. What if he goes in and makes the changes for you?

Kim:
I’d be very interested in that if he wants to deal with the sewer. The question is can he do that post-close? Do we trust him?

Rob:
It gets a little dicey because there are the sellers who won’t take that risk because the deal could always fall through. Case in point, this deal already fell through for that reason. And then you could always have some contract that makes him do it afterwards. But that always is a risk in and of itself. So it’s a hard one either way.

Kim:
Yeah. And I feel like I want to make sure I actually listen to the principles we talked about earlier in the show. I want to make sure I’m not speculating on getting tenants to market rent. And another issue is that we actually were planning to self-manage this property since it’s in our hometown. And do we want that headache? Do we want to take that on? We’re going to do the leasing as well. And just uncertainty with where the market is headed. Are we worried about the Pilates tenant? Are we worried about these tenants that are delinquent? Will we be able to re-let the space? So I’m getting cold feet.

David:
I don’t know that you’re wrong. I think in this position with the way the market is headed, it is more likely that things are going to soften in the commercial space then get tight. So you’ve got that on your side. And maybe Phoenix has been isolated from this a little bit and so the seller doesn’t realize that there’s going to be a lot of commercial properties that are going to start hitting the market with much more competitive prices than what we have seen because rates are so high. And as these balloon payments start coming due, refinancing will not be an option, and a lot of these properties were something that people put money in together to buy, so they have to sell it to pay back their investors.
I think we’re going to see more inventory hitting the market now than what we have before. And so time is on your side to find the deal. Time is not on your side for the tax part. So that’s really what you have to weigh. Is it worth taking the hit on taxes to buy the better deal or not? But I really appreciate you sharing the details of this story because this is real life real estate. This is exactly what happens. I was told this and then it turned out to be that, and then I said this and then they said that, and the story is always changing.

Rob:
Here’s what I would say. I think I would move forward, so long as I could get assurances that the owner was going to fix it beforehand or immediately after closing.

Kim:
Interesting. I like that idea.

Rob:
Because to me, it’s the same deal. If he’s going to pay for it through this concession, through this credit, however you want to slice it up, then it’s effectively the same deal. You just have to make sure that the repair gets made.

Kim:
Interesting. Yeah. And usually, we look for … What we say, we usually look for problems that go away with the seller. So give me an income statement that’s written on a napkin all day long. I have no problems that go away with the seller, but these are all problems that don’t go away with the seller. They stick with us as soon as we close. So that’s our hesitation.

David:
Well, I think you’re doing the right thing. Stick to your guns. If you have to take the hit on your taxes, and that makes more sense than buying the property, do it. But I’d also look at, if I was in your position, if I have to pay 70 grand more than what I wanted, would the tax benefit overall make up for that 70 grand? So even though the deal might not be what you wanted, big picture, this does make more sense. And if that’s the case, then you just ask yourself, let’s say your tax benefit was 40 grand but you’re going to have your 70 grand apart from where you want to be so you feel like you’re 30 grand in the whole, is this property in such a great location and such a great asset that that 30 grand is worth it? Or with your experience and your knowledge and what you do, Kim, could you just go find a better deal that you could make that money back somewhere else?

Rob:
All right, everyone. If you want to hear an update on this story and follow along in the process, be sure to follow Kim on all of her social medias. Kim, where can people find you and get the juicy update and conclusion to the saga?

Kim:
Yeah. So to learn more about what we do and get on our list for updates and opportunities, they can go to our website, which is ironpeakproperties.com. Follow me on LinkedIn under Kim Hopkins. And then lastly on Instagram as MoneyPlusHappy. And hey, maybe we should put this to a vote. If you guys hear this, go ahead and weigh in on what you think we should do with this deal.

Rob:
All right. Comment in the YouTube comments if you’re watching this on YouTube. Let us know what you think.

David:
All right, Kim, it’s been great having you here. Thanks so much for sharing your story with us. I’m sitting on pins and needles myself, waiting to hear how this story plays out, so I’ll be curious to hear myself. But we’ll let you get out of here for today. Thanks so much for being on the show.

Kim:
Thanks so much for having me guys.

David:
This is David Greene for Rob, shipped his pants from Kohl’s, Abasolo, signing out.