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Ashley Kehr:
This is Real Estate Rookie, Episode 171.

Dave Meyer:
To me, the best way to invest is real estate. But in general, because of the way the economic and financial world is right now, the only way to realistically build wealth is to actively invest your money.

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

Tony Robinson:
And welcome to the Real Estate Rookie podcast, where every week, twice a week, we bring you the inspiration, the information, the education you need as a new real estate investor to get started or keep going if you already started. So Ashley, what is going on in your neck of the woods today? What’s new?

Ashley Kehr:
Not much actually. I’m finally getting ready to have my surgery on my knee, which by the time this airs, I’ll already had it. But my injury happened in December and I’m finally just getting surgery now, so looking forward to getting the out over with and starting rehab all over again. Yeah. But I actually did have something super exciting that happened today. I had somebody call me saying they own a campground and that they would be interested in selling it to me.

Tony Robinson:
Whoa.

Ashley Kehr:
So that was super exciting. Yeah. A friend had actually told me about the campground and I sent them an email. And so I just heard back. They ended up calling me, like, “Yeah, we would definitely be interested.”

Tony Robinson:
That is awesome, Ashley. Where is it at? Is it in New York?

Ashley Kehr:
It’s in New York. Yeah.

Tony Robinson:
Okay. That’s awesome. What’s the term? Is it spot pads? Spots?

Ashley Kehr:
Yeah. So this is actually cabins. It’s 28.

Tony Robinson:
Oh, wow.

Ashley Kehr:
Yeah, 28 cabins and then there’s about 50 RV hookups.

Tony Robinson:
Wow, that’s awesome.

Ashley Kehr:
Yeah, so we’ll see.

Tony Robinson:
Okay. We’ll, fingers cross.

Ashley Kehr:
But it’s always exciting when a lead comes in and it’s off market too, so you’re not competing with a ton of people. So yeah. What about you, Tony? What do you have going on?

Tony Robinson:
So much. So much is going on right now. We actually just took one of our newest short-term into listings live this morning. So that’s exciting. We’ve got four more that we’re closing on next month. We’ve got another four rehabs we’re working on. So we’re just like all over the place right now.
But what’s most exciting is that I think we’re inching towards closing on our first resort. It’s a 24 cabin resort in a lake town here in SoCal. The buyers were initially asking for 10 million. Our first offer was like 5.5 million, so like way off. They didn’t even counter with that. But I think we’re going to end up closing somewhere around like 8 million or something like that. It’s crazy. Ashley, I can buy single family short-term rentals like all day at this point and not really lose any sleep over it, but we’re going to have to syndicate this property and I’ll have to raise money to make it happen. I don’t know. Just get the estate-

Ashley Kehr:
Just due diligence on a property of that size. Yeah.

Tony Robinson:
Totally. Totally, right? I’m excited if we get it, but I’m also really nervous, you know? It’s like, am I going to be able to really knock this out the park? So I don’t know. We’ll see. I’ll keep you guys posted as things go along.

Ashley Kehr:
I know how much you’ve wanted a resort area. Either a motel or something that you can do short-term rentals out of that’s just more than one unit. So this is awesome. I’m so excited for you.

Tony Robinson:
Yeah. Fingers crossed. We’ll see.

Ashley Kehr:
Well, if you need any help with the due diligence, my business partner Daryl that you know, he’s done it all on the campground we have under contracts.

Tony Robinson:
I’m fine. You guys are my first call.

Ashley Kehr:
Okay.

Tony Robinson:
Tell Daryl if he does that, I’ll forgive him for not saying goodbye to me when we saw him in Denver.

Ashley Kehr:
Yeah. He had extreme anxiety over not saying goodbye to you and Sarah and Seattle, yes.

Tony Robinson:
In Seattle. Yeah.
All right. We got a good episode today, Ash, right? Obviously this show is about like the rookie investor, but from time to time, we bring on experts. And I really love the expert episodes. Our most recent one was with James Dainard and he came on and gave like a masterclass in flipping. We’ve had other folks. And today, we’ve got Dave Meyers who is the… What’s his official title? The VP of data and analytics at BiggerPockets?

Ashley Kehr:
Data and analytics, yeah.

Tony Robinson:
Yeah. So Dave is like a wealth of knowledge when it comes to macroeconomics and using data to make good decisions as a real estate investor. And he gets into so many good juicy topics throughout this entire, entire, entire episode.

Ashley Kehr:
Listening to Dave talk about what’s going to happen, what he forecast will happen, but he gives you why he’s forecasting that or why he thinks that’s going to happen looking at historical trends and data. He also tells you where you can find that data yourself. So if you want to go and research your market specifically, this is the episode you guys have to listen to. Or if you are trying to decide what strategy you want to use going into 2022, what’s the best, he talks about that too. So I think if you are unsure if you should buy a property or not because of everything that’s going on in the world right now, our interest rate’s going to rise, things like that and the war in Ukraine, listen to this episode. And I think that it will give you a reason to overcome your fear or whatever hesitation you have as to why you haven’t taken action on buying your first or next property.

Tony Robinson:
The only thing I’d add to that is like Dave made a really interesting comment about how he thinks that there is possibly a price correction coming, but why he’s buying property still anyway. Just listen for that segment because I think that’s a really, really important point for a lot of our rookies to understand.

Ashley Kehr:
Dave, welcome to the show. We have had you on here before and it is always a pleasure. But why don’t we kick it off for our new listeners with you telling us a little bit about yourself and some background on you?

Dave Meyer:
Great. Well, thank you guys so much for having me back. I sometimes co-host the regular show, but actually I admit I listen to Real Estate Rookie a little bit more than the other show. I know I’m probably not supposed to say that, but I kind of consider myself a rookie still, and I love you guys so I’m really happy to be back here.
I am the vice president of data and analytics at BiggerPockets. I’ve worked here for about six years. And in that role, I have the responsibility of doing all sorts of internal stuff behind the scenes, which none of you, listeners, probably care about. But the fun stuff I get to do is look at the housing market and economics and interpret a lot of that data for BiggerPockets listeners and BiggerPockets users. And I have also been investing in real estate for about 12 years, mostly in Colorado. I’m primarily a buy and hold investor. I do have one measly short term rental, Tony. So nothing compared to you, but I’m pretty happy with it so far. But yeah, I’ve been investing for 12 years.
And about three years ago or two and a half years ago now, I moved out of the country. And so I’ve sort of been investing passively for the last couple of years, but I’m really eager to jump back into the active investing world. I’m leaving for the US to do a little bit of a trip to start scouting some new markets, which I’m really excited about. And that’s about where I’m at. But real estate is so much of my life whether through its investing or my full-time job at BiggerPockets, and I’m very happy to be here talking about it.

Ashley Kehr:
Dave, what made you get interested in real estate investing first of all? Was it because you started working at BiggerPockets or was it something before that?

Dave Meyer:
No. I guess I’ve always sort of been entrepreneurial when I was a kid starting at 12 or 13. I wanted to have some money and so I would walk dogs or shovel driveways. I did that through college, started some small businesses. I always was just kind of trying to find ways to bring in additional money on top of my full-time job.
I told this story on The Real Estate show a couple of years ago, but the way I got into real estate was really serendipitous. I was going skiing with a friend of mine who really did not have his stuff together very well. But he bought a rental with his girlfriend at the time and they were absolutely killing it. And I was like, “If this guy can do it, I can absolutely do it” and went to a couple of friends of mine who had more money than I was. I was waiting tables at the time and found a deal and convinced them to convince them to go in on this deal with me. I borrowed the money for my portion of the down payment as a secondary lien. And so I just hustled my way into it. For five or six years, I just did two deals.
And then in 2016, I had been working in tech for a while. I’ve always sort of been into data and analytics. And I was just like, I really like doing real estate and I really still like doing analytics and software. I just Googled real estate technology jobs. And I had never heard of BiggerPockets. I found BiggerPockets. It was like a mile from the house hack I was living in. I applied and got interviewed simultaneously by Josh Dorkin, Brandon Turner, and Scott Trench all sitting on a couch with me. And luckily, they gave me a job. And that was six years ago.

Tony Robinson:
Dave, what an interesting story you’ve got, man. I love how just like me, your journey with BiggerPockets started with a Google search, right? I feel like that’s how so many people kind of get connected with the brand, right? I think I was Googling how to become rich through real estate or some crazy thing. And I ended up on the forums.
So Dave, I just want to get some clarity for folks. You say that your title is VP of data and analytics, right? What the heck does that mean, right? What kind of data and analytics are you looking at? Give me some context of what that even means.

Dave Meyer:
Sure. So the behind the scenes stuff is me and my team look at all the information that’s coming in from BiggerPockets and help the other people in the organization make decisions. That’s really what analytics and business intelligence is all about. So we’ll take in data about what forum topics are most popular, what topics are people really interested and that will help the marketing team or the content team use that information to make decisions.
And in the second part of my job which is sort of the external facing role where I co-host or guest host the podcast or make YouTube videos, I try and do the same thing. I try and take data, this time externally, that’s coming from the housing market or from the federal government or wherever it’s coming from and help investors make decisions. That is what I’ve been focusing on more over the last couple months, because as you guys are probably aware, things are changing super rapidly right now. The housing market is a bit confusing especially for people like rookies who aren’t as familiar, who haven’t been through many market cycles. So BiggerPockets and myself have really been focused on helping real estate investors update their strategies and form their strategies based on this sort of unique market cycle that we’re in right now.

Ashley Kehr:
Dave, can you give maybe three different ways that rookie investors could use the BiggerPockets’ website to find this kind of information? What are the best resources available?

Dave Meyer:
Sure. I am always releasing content on the blog, so that’s one way to find it and you can just search my name or just go on there. There’s usually something out there. The second thing is not on the site, but on YouTube. Every Friday I do a YouTube video about the market or some trend that’s going on that real estate investors should be paying attention to. And the third, I guess, am I allowed to say this? We are releasing a new podcast and online presence for a new show that we’re creating called On The Market which is going to be all about this, helping real estate investors make decisions based on current trends, economics, news. And so that will be launching around the time this episode’s coming out. So that will definitely be something all the listeners should check out.

Ashley Kehr:
I am so excited for this podcast. As soon as I got one of it, I’m so excited. I listen to AJ Osborne forecast economics and talk about trends and stuff. It’s to relax me, listening to it. So I’m very excited to hear your guys’ podcast. So who is going to be on this podcast with you?

Dave Meyer:
Yeah. So it’s going to be really fun. We’re going to have myself, I’ll be the post moderator. And we’ll also have James Daniard, Henry Washington, Kathy Fettke, and Jamil Damji so it’s going to be a rotating group. So you’ll see two or three of them each week in addition to myself. We’re just going to be breaking down really important topics that you should be paying attention to, but we’re really trying to make it fun. We’re going to be playing games. It’s going to be light hearted and it’s not this super serious news show. I guess not everyone’s like you Ashley who relaxes to the sound of economic data so we’re going to try and make it really fun and engaging at the same time.

Tony Robinson:
Yeah. I think most people are probably not relaxed by heavy economic data. But what’s that short saying, Ashley, about the spreadsheets?

Ashley Kehr:
Yeah. A lady in the streets is about to freak in the spreadsheets.

Tony Robinson:
There you go. Yeah. Right.

Ashley Kehr:
I mean, I think four people sent me that t-shirt in the last two years.

Dave Meyer:
That’s so funny. But I do think it’s true. Even if economics or data isn’t your thing, there is comfort, at least to me, in knowing the numbers. Being able to analyze a deal or to formulate an investing hypothesis or thesis that you operate against is super comforting to me. So I feel the same way, Ashley. Hopefully, people who don’t, automatically or by default feel that way, will enjoy this show because that’s our goal, is to give you that confidence about investing and formulating your own plan, but making it fun and accessible at the same time.

Ashley Kehr:
Well, I think just the fact that you guys are taking all of the information and compiling it so it’s easy for real estate investors to understand. That’s the great part of it, is that you don’t have to go out and try and figure it out on your own. You guys are bringing it all, condensing it, “This is what you need to know as a real estate investor.” So I think that is the true value right there.

Tony Robinson:
I want to add one thing, Dave, because I’m so glad you brought up the data component. I feel like a lot of new investors, especially when they’re working on that very first deal, there’s a very big emotional factor that plays a role in that first deal for people, right? As an experienced investor, you can toss out numbers and put out offers all day. But for someone that’s new, there’s a very big emotional factor that plays a role in the decision making process. So for you, Dave, I’m curious, right? As someone who’s very deep into the data, very deep into the analytics, how do you weigh the difference between your heart strings, your heart, your emotions, and the data? Are you just stone cold that the numbers work and this is what we’re doing? How do you balance those two things?

Dave Meyer:
Honestly, even being a really data oriented person, I am not as stone cold data as you might expect, because I think I am relatively a conservative investor. I have a lot of financial anxiety and want to invest in a way that is appropriate for my own risk tolerance. And I think that’s one of the things I recommend to people.
And at the end of the day, yes, when a numbers work, I try to pull the trigger, but my own criteria, the criteria I make for myself are probably more conservative than some people. And I think that’s okay, especially if it’s your first deal. I don’t think you need to hit a home run in your first deal. I think getting that first deal is far more important. But if you are uncomfortable with what someone else tells you should beat your criteria, I think that’s okay. You shouldn’t be embarrassed by that or think there’s something wrong with that. You just need to set that criteria so that when you do see a deal that meets your criteria, then you can take the emotion out of it and you can operate against it. But in setting your strategy, you have to be honest about who you are and what you’re comfortable with.

Tony Robinson:
Dave, what a fantastic breakdown. I mean, I think how you described it is the exact same way that I’ve kind of approached investing as well, is that everyone’s going to have their own kind of investor personality or their risk profile as you said. I feel like I’m somewhat conservative, but I’m willing to take calculated risks, right? I know other people that aren’t willing to do that. I invest heavily in short-term rentals. I know some people that say you shouldn’t buy a short-term rental if it doesn’t work as a long-term rental. I don’t believe in that. Right? Almost none of my short-term rentals would make money as long-term rentals, but I’m okay with that risk, right? I’m okay with that risk.
So you’ve got to figure out what works for you. But the criteria piece, I think is super important as you kind of start to narrow in, “These are the kind of properties that I’m looking for. Here’s the kind of return that I want. Here’s the size that I want. Here’s the kind of neighborhood that I want” and as long as you’re able to check those boxes, it becomes a little bit easier to kind of move forward.
Awesome, Dave, man. So I really want to get into just kind of picking your brain because you’re just like a wealth of knowledge that we got to share with our rookie audience. So the first question I have for you, Dave, and this is one that we get all the time is, is 2022 the right time to buy? There’s so much going on. Should I wait for this impending crash? Do I wait to figure out what’s going on with Russia? Do I wait to figure out… Should I just buy crypto instead? Is 2022 a good time to buy real estate?

Dave Meyer:
This is a great question and I get it all the time and one I love talking about. I think that the best way to answer this is to start by looking in a historical context. Because if you look at any moment in time, like, “Is right now a great time to invest in real estate?”, that’s a complicated question to answer. There’s a ground war in Europe in 70 or 80 years. We’re seeing interest rates going up, inflations at 40-year highs. It’s complicated on a week-to-week basis to decide if that is a good time to invest in real estate.
However, if you look at historical trends, I think the answer is overwhelmingly yes, that investing in real estate or just investing in general is not just a good idea. It is necessary to build and preserve wealth. There’s all sorts of reasons for this. But I think if you just look over the last 15 years, and the trend goes back much longer than that, 40 or 50 years. With interest rates so low and even though they’re rising right now, they are still near historic lows and probably will remain that way even though the Fed is raising rates. And that just bolsters asset prices. I mean, I can get into the details of why, but you see when interest rates are low, you see the stock market go up, you see cryptocurrency go up and you go real estate to go up. And although rates are rising and there probably are going to be some fluctuations in pricing in all three of those markets over the next couple of years as rates start to go up, the government policy or the Fed’s policy over the last 15 years is not showing any signs of changing.
And that means we’re probably going to continue to have relatively low interest rates, which means there’s a lot of easy money. And for better or worse. I’m not making a judgment on this as the right policy or not, but it is the Fed’s policy over the last 15 years. And rates have been coming down since 1970. So you see this trend. And in data analytics, we say the trend is your friend, right? You look at these little things on a weekly basis and it gets all crazy and it sounds nuts, but you see this trend over 40, 50 years and I’ve seen nothing that suggests that’s going to change.
And so, as long as there’s sort of this easy money policy where interest rates are relatively low, it really, really incentivizes people to invest. And because rates are low, that means that there is no viable way to use a savings account to save for your retirement or to build wealth. And so your only option is investing, and we can get into this. But to me, the best way to invest is real estate. But in general, because of the way the economic and financial world is right now, the only way to realistically build wealth is to actively invest your money.

Ashley Kehr:
Dave, you talked about historical trends in there and you said that’s where you looked at historical trends. Can you kind of just describe for somebody what that entails looking at historical trends? What did you see in the past that is helping you kind of forecast what you expect for the future?

Dave Meyer:
Sure, absolutely. So the number one thing I think about when I just look at trends in real estate investing are, one, is interest rates because it sounds so boring but it makes such a big difference about the way the world works. It’s kind of crazy. And so interest rates back in the mid 1980s were up at 15 or 17%. And what that means in day to day reality is no one wants to buy real estate then, right? No one wants to pay 17% on a mortgage. No one wants to pay 15% on a mortgage. It makes people less inclined to invest. But when you could borrow money at 3 or 5% like you can now, then it incentivizes people to invest. And this trend has been going on. So more and more money has been moving to the investment world and that is increasing asset prices. So that is a trend that I think it’s starting to bounce back up but is likely not going to change dramatically. I don’t think we’re going to see 7 or 8% mortgage rates anytime soon.
The other thing which I haven’t touched on yet but I think the other historical trend that I think is super important in the context of real estate investing is just basic supply and demand. There is just not enough supply in the United States and there has been a… Most people believe, I should say that this is… We had a guest on The Real Estate show named Ivy Zelman who thinks differently out this and brought up some really good points. But I think most people believe that ever since the great recession, we’ve been underbuilding in the United States, which means there’s just not enough supply of houses. There’s just not enough places for people to live. And the basic rule of economics is, if demand remains stable, and demand is actually up right now and supply is down, prices are going to go up. And so that is why we’re seeing the price increases. We’re seeing right now is interest rates are super low. Demand is high and supply is low. It’s a perfect storm.
And although these trends might alter a little bit in the coming years, the long term trends still point to tail winds for the housing market. It’s still pointing to maybe things go up and down over the next year or two, but in 10 years, the housing market is going to be way higher than it is right now and that is almost certain.

Tony Robinson:
Dave, you’re dropping so much good stuff right now. My head’s [crosstalk 00:23:24] a little bit. I’m like scribbling feverishly over here to make sure I’ve got so many follow-ups where I don’t want to forget anything. But before I-

Ashley Kehr:
I feel really relaxed, Tony. Am I at the spa or something?

Dave Meyer:
This is like a day off for you, Ashley. Just hanging out.

Tony Robinson:
Sure. This looks like a Sunday brunch for Ashley.

Ashley Kehr:
Yes.

Tony Robinson:
So one thing I want to go back to that you mentioned Dave that I felt was really powerful and I want to make sure the guests picked up on that, you said not only is it a good idea, but it is necessary to invest your money if you want to build wealth. And I think that is so incredibly true. We’ve seen, right? Inflation is at record highs right now. Imagine all the people that just have their money sitting in a savings account. How much value did you lose over the last 18 to 24 months by letting that money sit there? Now, think about the people that invest that same capital into real estate. How much equity have you gained in that same time period? So many people are on the sidelines sitting, waiting for this big correction and they’re missing out on huge, huge opportunities.
So Dave, you talked a lot about interest rates so I want to dig in on that a little bit. I hear a lot of people, not necessarily other investors, but a lot of kind of common folk who are still kind of doing the W-2 thing and aren’t investing themselves talk about how “Oh, interest rates are going up so that means housing prices are going to come back down. So I’m waiting to buy because I want to see these prices come down.” Based on the data that you’ve seen, do you believe that there’s like a direct correlation between interest rates going up and housing prices coming down?

Dave Meyer:
Yeah. So there is a [inaudible 00:24:59] prevailing idea that interest rates and housing prices are perfectly correlated. And they are correlated. They definitely have a strong relationship. But a lot of what used to exist in the housing market has changed. And the way I like to think about this and the way I like to think about the housing market in general is that there are all of these competing forces. Some of them push prices up and some of them put push prices down. No one of these forces is going to be the be-all, catch-all, the one thing that dictates the housing market. That’s an overly simplistic way to look at it.
Right now I would say that rising rates always do put downward pressure on the housing market, so it just makes housing less affordable. And just to explain that to everyone, when interest rates go up, your mortgage rate get more expensive and so it is harder for you to afford the same purchase price because interest rates are more. It’s more monthly. Obviously the down payment is the same, but your monthly payment goes up. Typically, in more healthy housing markets I would say, that would cause demand to drop. And again, basic supply and demand. When demand drops, prices drop. But that’s not happening right now. And I think a lot of the old rules in the housing market have changed.
Just to be clear, I do think there is a point in the next two, three years we will probably see flat or even negative housing market growth or price appreciation, but I don’t think we’ll be that serious and I’m still investing anyway because of all the things I did say and I’m about to say. But I think realistically, the market works in cycles and you’re going to see it flatten out or decline a little bit at some point. That’s just reality.
So to get back to what I was saying, rising interest rates are going to put downward pressure on the housing market. At the same time, supply and demand are putting enormous upward pressure on the housing market. Two main things that we often talk about and I talk about in YouTube and, well, on this new show is that supply is extremely constrained. And you can see just this week, Redfin released something that inventory is at an all time record low. There are less houses on the market than any time since they have existed. So that’s at least 10 or 15 years, I think. And we all see this. I mean, I’m sure you guys see this in the market. There’s just nothing to buy.
But at the same time, demand is up. And there’s a lot of reasons for that. The primary one is just demographics. Millennials, they’re the largest generation now. And they’re reaching the peak family formation years, which means that all these people want home homes. They want to buy homes and they’re having children. And so that is a very strong motivating force that I think people really underestimate, is that people, when they have a kid, they want a home, they want to own a home. That is like the prototypical American dream.
So demand is up from that. Demand is up from investors. We’ve seen that the average share of investors in buying homes have gone up from 16 to 19%. It’s not driving the market, but that’s considerable. Second home demand is up. And so people still want to buy houses even though interest rates are going up. And like I said, supply is down. And so those forces are going to continue to put upward pressure on the housing market.
And so the way I think about is like you have supply and demand pushing up, you have interest rates pushing down. It’s going to settle somewhere in the middle. And I think that’s why no matter whether you think it’s going to go down in the next year or up, we’re going to see a moderation of appreciation a lot, because to date we have seen no downward pressure. Interest rates are the first introduction of downward pressure in two or three years and so we’ll definitely see appreciation slow down in my mind. But if and when it turns flat or negative, it’s really hard to time the market. And I think at the end of the day, if I could give anyone advice in this episode is, don’t try and time the market. 10 years from now, the housing market’s going to be up. That’s why I’m investing right now.
I think I explain this all not to help you try and time the market, but I explain it because I think it’s helpful for people to understand the forces that are at play here, because it helps you take this sort of longer term view than what’s happening right now, but you could see these long term supply demand and interest rate trends all favor long term growth for the housing market.

Tony Robinson:
Dave, one follow up here. You kind of touched on it a little bit already. But you said you do feel that there could be a correction in the next couple of years, right? Even if it’s a moderate one. First part of the question is, outside of interest rates, what other factors are you seeing that are applying some downward pressure on prices? And then second, why are you still investing even if you feel that there is that correction coming?

Dave Meyer:
Great question. I think this is tied with interest rates. And so your question was, what else might put downward pressure? And I think to me, the only other thing is affordability. Those things go hand in hand. Interest rates are a huge factor in home affordability. But if the housing rate… I think the risk is housing price is going up too much. I know a lot of people think that’s confusing for a real estate investor to say, but I don’t want the housing market to go up that much. I would much, much rather see 3 to 5% appreciation because that keeps pace with wage, growth in normal times, not always. And that’s what you want to see, because then normal people can afford homes. They can afford rent. And right now we’re at a pace that is unsustainable. So all the things I’m saying about the housing market going up is not like me rooting for that happening. That’s just what I think is going to happen. And so I do think if the housing market continues in this toward pace, that could be serious but I do think it’s probably going to slow down.
Second question was, why am I still investing? And there’s two reasons. One is, I was talking to Henry Washington the other day. We were talking about my Everything Else Sucks Theory of investing right now is that cash, like you said Tony, is losing 7% per year. The stock market is super volatile. Crypto is super volatile. Bonds are yielding 2% and that’s up, and that’s not even going to keep pace for inflation. And so if you want to preserve wealth, you have to look at what is out there. And real estate, in my mind, is by far in a way, the best option. It is no doubt in my mind that it’s the best option.
And yeah, I’m biased because I’m a real estate investor, but I consider myself an investor first. If there was something better to invest in than real estate, I would invest in that instead. But I’m a real estate investor because it’s the best investment. So I think that’s sort of what I was getting at the beginning of the show is that, it’s necessary to invest. Sitting on the sidelines right now, to me, is not worth it because people say, “Oh, it’s risky to invest in real estate,” but it’s risky to do nothing right now. In fact, it’s worse than a risk. It is a guarantee that you’re going to lose money doing nothing right right now. I mean, who wants to do that? So to me, it is worth losing the prospect of a temporary fluctuation in housing prices knowing that it’s going to go up over the long term and also knowing that it is impossible to time the market. The housing market might go up another 10% before it goes to down 5%, and buying right now still makes sense.
I know this is really emotional. It is for me too. I say this and I come in these shows and talk about it because it’s something I know a lot about, but when I do a deal, I still get a little nervous. I mean, I think everyone does. But the reality is, when you look at the long term trends, when you look at what’s happening in, really, the global economy, it makes so much sense to invest in real estate. The non-emotional decision in my opinion is to continue to follow your plan and to invest for the long term. And my long term investing plan is to try and acquire rental properties.

Ashley Kehr:
Dave, on that note of talking about like it’s risky not to invest right now, do you think a lot of people look back at 2008 and that’s like the fear that they have, is talking to other investors that they’re going to buy high now and then we’re going to go into a recession? What strategy would you recommend for people to kind of feel more secure and have less risk if they really think a recession is coming?

Dave Meyer:
That’s a great question, Ashley. I’ve been calling it housing market trauma recently in some of my content. It is a joke. It’s tongue and cheek, but I don’t want to belittle it because I’m a millennial. I graduated in 2009. That was the worst housing market… Or excuse me, it was the worst job market at that point since the depression. I think class of 2020 might have taken us over for worse job market since then unfortunately. But I think what happened then was much, much more significant of a housing market decline than we’ve ever seen in the United States. I think that’s really important to remember that business cycles where housing prices go flat or they even decline for a little bit for a year or two, that is normal. These are normal economic cycles.
What happened in 2007 to the housing market was the equivalent of the 1929 stock market crash. This was the big one. It was way bigger than anything that has happened. Although it’s certainly not impossible that it would happen again in the future, it is unlikely that the next time there is a contraction in housing market prices, that it is anywhere near the same.
I did an analysis a couple of weeks ago that showed that prior to the great recession, the longest it had ever taken to housing prices to recover in a downturn was about two years. And the peak of the decline was somewhere around 8%. Actually in that time, it went from 8% to down 4% in four months. So it really was only about 4% down. In the great recession, it dropped 20%. That’s a real crash to me. When I look at a 4% drop, that’s a normal market cycle in my mind. A 20% drop? That’s serious, especially when you’re leveraged. That’s a really challenging situation. That was also coupled with a huge, huge unemployment problem. And that’s what really caused the foreclosures and everything that followed after that.
I actually did a recent show, David Green, about this in foreclosures. I’m like, for foreclosures to happen, you need that perfect storm. Right now, if prices go down, and again they probably will sometime in the next few years go flat or negative and who knows when, it is unlikely that we’re going to see foreclosures because people have so much equity in their homes and it’s likely not going to be accompanied by a huge unemployment problem. So that probably didn’t actually answer your question, which is what people should do. But there’s some context for you.

Ashley Kehr:
Yeah.

Dave Meyer:
But what people should look at, in my mind is, if you are a conservative and you’re concerned, I would look at longer term strategies. So I think either buy and hold rentals, house hacking or short term rentals. Anything where you expect to own the house at least three to five years is probably a pretty good strategy. Because as I said, with the exception of the great session, usually if the housing market goes down, it pops right back up in about 18 months to 36 months. And so if you hold onto your property for that amount of time, you’re going to be building cash flow during that time, you’re going to be paying down your loans during that time, you’re going to be getting tax savings during that time. And you’re still going to be generating return. The loss that you’re seeing is a paper loss. It’s not real because you’re generating other returns, but if you want to sell it, you would take a loss. But you don’t have to sell it if you’re cash flowing.
So that’s my number one tip, is just look for longer term strategies. And obviously, don’t buy emotionally is just always another good tip.

Ashley Kehr:
Well, that was a lot of the people that got hurt in 2008 was because they were trying to sell whether it was a flip house or a new development, or even with the stock market going down that they were getting ready to retire and they had to pull out for retirements, or if they just pulled their money out of the stock market and didn’t let it sit in there and hold onto it and wait. Dave, what are some resources if people want to get over that fear of 2008 and understand it more? So I know there’s J Scott’s book, Recession Proof Real Estate Investing. Then there’s also a couple movies, which I don’t know how factual they are. But The Big Short, I mean that really helped me kind of wrap my brain around what happened, and then also the Margin Call. Do you have any other resources that aren’t 20 page boring economics document that people can look into?

Dave Meyer:
No, that’s a great question. I have put out a couple videos on YouTube. You can check it out. It’s called the Housing Market Trauma. So you can look at that. We dive into some of the data. But Ashley, if you want to just relax by looking at some data, Google the median home price in the United States over time. And there’s a website called FRED, it’s the Federal Reserve Bank of St. Louis. They have great data. Just Google FRED median home price in the US. And you’re just going to see a chart that goes up into the right for all of history. There’s a little bit of a blip in 2007. But if ever I’m sort of concerned about the housing market, I just look at that graph and it makes you realize that over time, housing prices just go up. And if you wait long enough and your patient, yeah, your investments are going to work out.

Tony Robinson:
Wow, Dave, as soon as you said that, I Google that chart. And yeah, it’s literally just like one very strong trajectory going up. That was crazy, man.

Dave Meyer:
Yeah. Yeah. It tells it all. In one of the videos I posted, I can’t remember what it was, I sort of juxtapose that to the stock market, which is, it looks like someone’s heartbeat. It’s like a EKG. It goes like up and down constantly. I mean, to be fair, the stock market definitely returns positive, generates positive returns over time, but there’s a lot more volatility and ups and downs. The housing market, at least historically, has not been nearly as volatile. It’s much more steady progress over long periods of time.

Tony Robinson:
And you get cash flow. Not only is it the appreciation, but you’re getting paid every single month for owning it, so yeah. I mean, obviously we’re biased here. This is a real estate podcast. So if we talk to our friends in some of the finance podcasts, they may have something else to say.
Dave, so many good points here. I want to try and start taking some of this high level thinking and apply it in a way that our rookies can use to really start making some decision. So there’s all these different factors that you’re looking at from like a macro economics kind of level. But what data points, if I’m a new investor, should I be looking at when I’m trying to maybe decide on what market to invest into or whether or not a certain property is a good property? Maybe let’s start with the market first. I know that’s a [inaudible 00:40:14] for folks. And then we can talk about the property stuff afterwards.

Dave Meyer:
Yeah. This is something I’ve really gotten into recently, because before I moved out of the country, I only invested in Colorado. And now, like I said, I’m trying to get back into the active investing game, like the whole country. I could just choose anywhere. I have no geographic bias. And so I’ve been really interested in this. I’ll say that the things that I really look at for looking for a market are pretty simple. You don’t need to overcomplicate this. But to me, I really look for strong population growth and strong economic growth. You can measure that in a couple of different ways, but if you really want to simplify it, where are people moving? And to get back to like the macro level, that’s, where is there going to be demand? If there’s more population growth, that’s going to be increased demand. In areas where there is a big and growing economic engine, you often see housing prices grow. As wages go up in those places, you’ll see rents be able to go up and property prices to go up more.
So those are the main things I look at. I also love to look at the diversity of employment to make sure it’s not super dependent on any one sector. But that’s for sort of long-term rentals. I think, Tony, you’re probably more qualified than I am to talk about short-term rentals, but I think it’s almost in the short term rentals, it might even be the opposite, like you’re really looking for vacation destination. So that advice is really about long-term rentals.

Tony Robinson:
So Dave, if I’m a new investor and I’m trying to kind of narrow down on the market, I know I want to look at the population, economic growth, where am I going to find that data? Am I just jumping on Wikipedia and looking at the Wikipedia pages for these cities? Where is the best easiest place to gather that data?

Dave Meyer:
Well, in a couple of weeks, it will be On The Market is the best place to look at this data.

Tony Robinson:
Yeah.

Dave Meyer:
I should say, after that shameless plug, that in addition to the podcast and YouTube channel, we are going to be putting interactive data up on the blog. So you can be able to go search Orlando and we’ll have rent-to-price ratios and all this data up there. But the other thing, if you’re like me and like digging into the data yourself, the website I mentioned earlier, FRED, it was what it’s called there, the Federal Reserve of St. Louis is an aggregator of government data. I think it’s extremely, extremely helpful. So you can get everything from construction permits, population growth, unemployment rates, all that in one place. So that’s where I usually send people. It’s pretty reliable and works really well and it’s completely free.

Tony Robinson:
Just one thing to add, Dave, I also want to plug BPInsights, right? Because I know that’s a tool that you’ve helped craft as well. We talked about it on the show before, but you can literally go into BPInsights, plug in a zip code or an address, and you’ll get a lot of pretty accurate data on what market rent are. So, Dave, I don’t think I’ve shared this with you before, but my first investment property, I did not use BPInsights to set the rents, but I ended up renting it out for, I think, $1,400 per month. And when I typed it into BPInsights, the market rent back out to me was $1,350.

Dave Meyer:
Yes.

Tony Robinson:
So it was like almost spot on what we were actually charging, right? So if you’re a new investor and you’re trying to get some more insights on, “Hey, what can I charge? What does the demand look like?” BPInsights is a great place to start as well.

Dave Meyer:
Well, thank you. I worked on that project for years and I didn’t mention it. So thank you, Tony. I appreciate you bringing that back up.

Ashley Kehr:
Dave, I actually have a memory to share too with BPInsights, it might have been when it was first released. I think it was spring of 2020 where all of the BiggerPockets pro members got this PDF file you had put together where it went through and analyzed, I think was it like 20 or 50 markets across the US? And it was like, “Here’s the top cash flowing markets. Here’s the top markets for appreciation.” And I still send that document to people because there was so much valuable information in there.

Dave Meyer:
Oh, well thank you. I guess I need to re-release that. So we are not the tool, but-

Ashley Kehr:
I know. We need an updated one.

Dave Meyer:
All right, we’ll do it. We’re sort of rebranding that part. The content part of it is going to be On The Market now. It’s going to be the new branding of that. So look for that. But the tool you’re talking about, Tony, we call it the rent estimator now, is still available to all pro members. Yeah. And it’s honestly I feel like, I’m not as involved in that anymore, has done a great job because it’s hard to keep up with if what’s going on with rents right now, but they’ve done an amazing job producing accurate estimates of rent. And it’s super helpful because I did say, and as talking about the FRED website, you get a ton of data there, they don’t have rent data and there’s really not good rent data out there. And I think the rent estimate we have on BiggerPockets is one of, if not the single best place, to try and figure out what you can rent a long-term rental for.

Tony Robinson:
Dave, so much good information you share with us brother. We got to have you back on I think on a more regular basis. There’s just too many good things to talk about. We could keep going on for hours. And Ashley’s so relaxed right now for those of you that are watching [crosstalk 00:45:27] for economic talk.

Ashley Kehr:
I’m ready for nap. But the good kind. I’m refreshed, relaxed, not because I’m bored.

Dave Meyer:
All right. I’ll record a data meditation for you, Ashley. If you ever can’t sleep or something, you could put it on in the background.

Tony Robinson:
What is it? Like the ASMR thing where they’re whispering into the mic, but you’ll just be whispering economics data to Ashley instead.

Dave Meyer:
I’ll have one download, but I’ll know it’s you, Ashley.

Ashley Kehr:
Actually, the time that I listen to podcasts the most is when I get my eyelash extensions done and you have to lay there for 45 minutes. And it’s torture for me to just lay there with your eyes closed so that’s when I listen to economic podcasts to relax during that time. So that would be perfect. That’d be very suiting.

Tony Robinson:
Well, Dave, you know you’ve got a very niche market for the new podcast, women getting their eyelash extensions done. It’s got to be a huge market, man.

Dave Meyer:
Yeah, we did all this market research and we thought that’s the market we’re going to go after.

Tony Robinson:
All right.

Dave Meyer:
There’s no competition at least, right? There’s absolutely no competition. So it’s wide open, the opportunity.

Ashley Kehr:
It can be called Lashes and Crashes.

Dave Meyer:
All right. Well, if On The Market is the success that we think it’s going to be, we’ll follow up with a spinoff of Lashes then Crashes.

Tony Robinson:
All right. So Dave, it’s been a great conversation, man. I want to finish up with our Rookie exam. Same questions we’ve been asking to every single guest for the past few episodes. So Dave, are you ready for the exam?

Dave Meyer:
It’s been a while since I took an exam, but hopefully.

Tony Robinson:
All right. Question number one, what is one actionable thing rookie should do after listening to this episode,

Dave Meyer:
Go look up the data in your market. I think like Ashley, you can get a lot of comfort in seeing long term trends. So Google some of the stuff that we talked about, whether it’s the median home price in the US or looking [inaudible 00:47:26] growth or economic growth in the areas that you are interested in. And as an analyst, I would advise you not to just look at what happened over the last month or last year. The trend is your friend. Look at long term trends and see what is going on in your individual market.

Ashley Kehr:
Dave, that kind of makes me think. If you are somebody that’s not going to invest in real estate because you think the housing market is going to drop or whatever that reason is, if that’s somebody listening right now, do what Dave said and go look at the data. Can you actually give me a reason that you’re not going to invest instead of just saying what you think is going to happen or what you’ve heard has happened? Do your own research and try and verify the data. Okay. Question number two. What is one tool, software, app, or system in your business that you can use?

Dave Meyer:
Well, I have to say that the new tool is listening to On The Market, and I know that’s a shameless plug. But I do really believe in this. We’ve been working on this for a year. And so I’m going to just take my opportunity to make the shameless plug because it’s going to be an awesome new show. I think it really is going to help people manage and navigate all the news that’s out there, all the information that’s out there and help you focus on the things that are important to real estate investors.

Tony Robinson:
Love that, Dave. All right. Question number three, where do you plan to be in five you years? Maybe still in Amsterdam. Who knows?

Dave Meyer:
Yeah, I don’t know. We’ll probably be back in the US by then. But where I’m going to be in five years is hopefully still in BiggerPockets. I love working at BiggerPockets. And I know I’m probably… The minority of listeners, I know a lot of people’s goal is to become a full-time real estate investor. And my goal is to do that at some point, but I’m having so much fun at BiggerPockets. I know you guys are a big part of the BP sphere now and I hope you would agree. It’s just a fun culture. It’s a fun thing to be a part of. And I hope to be doing what I’m doing right now. Hopefully with a bunch more units and some more passive income, but full time. I’m not trying to return right now. I’m really enjoying what I’m doing.

Tony Robinson:
Let’s talk a little bit more about the real estate piece, Dave. Do you have a portfolio size in mind or like a cashflow target? What are your plans for the real estate side?

Dave Meyer:
Yeah, I would really like to get to about $10,000 in post tax cashflow.

Tony Robinson:
Oh, I love the post tax piece.

Ashley Kehr:
I know.

Dave Meyer:
Yeah. Yeah.

Ashley Kehr:
You don’t hear people say that often. That’s a really good point. Yeah.

Dave Meyer:
Such an analyst nerdy thing to say.

Ashley Kehr:
Did you get freaky in your spreadsheets figuring that out?

Dave Meyer:
Yes, exactly. I don’t know. Tax policy always changes up and down and stuff, but at the end of the day, yeah, I could have said post tax inflation adjusted cash flow, which is probably what I really want, but I’ll spare you guys that. But yeah, I think that’s where I’d love to get to. I think that would make me feel really comfortable. I’m one of those people who’s always going to work. But that is like if I want to be relaxing, like Ashley getting her eyelash extensions, that number would make me feel super relaxed.

Ashley Kehr:
Do you know what that number is with inflation and taxes?

Dave Meyer:
There’s no way to know, but I would think it’s probably more like 20,000 because taxes is probably going to cut 35, 40%.

Ashley Kehr:
Yeah, [inaudible 00:50:46].

Dave Meyer:
And then inflation at 7% right now. I think inflation will start to go down in the next year, but who knows? That’s a real variable.

Tony Robinson:
Wait, Dave, sorry, really quick on the inflation piece. When you say inflation will start to go down, are you saying you think the rate of inflation will slow down? So we’ll still see a positive inflation? Or are you saying that we’ll see some sort of deflation happen in the near future?

Dave Meyer:
Very good question. I think the rate of inflation will go down. So we’ll start to see something more like 4 to 5% year over year inflation rather than 7 or 8%. I’m not an expert in inflation, but I read a lot about this. Most economists believe that the supply chain part of inflation is going to start getting worked out over the next year or so. So hopefully they’re right because no one wins with inflation. It’s terrible for everyone.

Tony Robinson:
But Dave isn’t like… I’m no economist by any stretch, but deflation is also very terrible for economies, right? You want a healthy rate of inflation, but if your currency starts to lose value, that has a lot horrific economic implications too, right?

Dave Meyer:
Absolutely. Yeah, that’s a great question. Something I get a lot is the fed sets a target of about 2% inflation for a year. And there’s a very good reason for that. If people feel that prices are going to go up, they spend their money and that stimulates the economy. If you think prices are going to go down, you’re just going to wait. It’s like always waiting for a sale. And so people don’t spend their money. And that has all sorts of negative implications, because I think it’s like 70% of the US economy is consumer spending. And so if people are thinking like, “Oh, I’m not going to buy a car because next year it’s going to be way cheaper,” that’s really bad for your economy. Honestly, so is inflation, both are bad. But 2 to 3% of inflation, that’s probably what you want to see. I don’t think we’re going to get there this year, but hopefully we’ll get a lot closer to that.

Ashley Kehr:
I’m going to take us to our Rookie Rockstar, and this is where we highlight an investor from either Facebook or Instagram. So this week’s Rookie Rockstar is Tyler [Kwan 00:52:50].
Tyler just closed on a renovated duplex for 330,000 and he has the intention of house hacking it. He was planning on using a VA loan, but ended up taking advantage of the really low rates and was able to secure a loan at 3% with a lender’s credit of 7,000, which was roughly what he needed for closing costs. Putting my overall upfront investment on the deal at about $300 out of pocket. That’s awesome, Tyler. So Tyler actually left some advice for something he learned and wanted to share it with rookies. “Real estate works. Although I didn’t knock it out of the ballpark with this deal, I will be able to live rent-free, build equity, enjoy appreciation of the property hopefully, and take advantage of the tax write-offs. It’s a win, win, win. No brainer.” Congratulations, Tyler. That’s awesome.
Well, Dave, thank you so much for joining us on the show again. We always love having you on and wish you the best of luck on your new podcast. And I can’t wait to listen while I get my eyelashes done.

Dave Meyer:
Thank you guys so much. This was a lot of fun. And anytime. I’m happy to join anytime you need some nerdery to relax you, Ashley.

Ashley Kehr:
Where can everyone find out some more information about out you and find the new podcast and all the other information you put out?

Dave Meyer:
Yeah. Great. So you can find me at On The Market, which is brought to you by Fundrise, I should mention that. So they’ve been an awesome launch partner with us. So you can find us at On The Market. You can also find me if you want to ask me any questions or follow up on Instagram is the best way to follow me and I am @thedatadeli.

Ashley Kehr:
Okay. Awesome. Well thank you so much, Dave. Everybody, I hope you enjoyed today’s podcast. If you loved it as much as we did, please leave us a 5-star review on either Spotify, Apple Podcast, wherever you listen. And make sure you check out the Real Estate Rookie YouTube channel. I’m Ashley @welcomerentals and he’s Tony @tonyjrobinson. And we will be back on Saturday with the Rookie Reply.

Technological advancements impact the way we exchange goods and services. eCommerce has consistently driven the need for mobile wallets while helping to reduce the need for paper checks or cash. 

Apps like Venmo and PayPal have upscaled the usability of mobile wallets by making peer-to-peer money transfers convenient and easy to use. As a result, they’re an excellent fit for paying money to family and friends or paying bills online.

But what about using Venmo or PayPal for collecting rent? Off face value, these digital wallets seem like a good idea because they get rid of rent checks and cash payments. After all, you want to collect your rent in full, on time, and without hassle. However, there are compelling reasons to avoid PayPal and Venmo to collect rent. 

Let’s go over why landlords should never use Venmo or PayPal to collect rent.

Using Venmo to collect rent

Venmo is a digital wallet for making instant transfers. With Venmo, all your tenant needs to do is transfer the rent payment to your account, and it arrives instantly. In addition, the app allows the tenant to use their debit card, credit card, or bank balance. 

Unfortunately, Venmo is not the best option for collecting rental payments. Not only is there no protection, but Venmo lacks essential features that many rent collection apps come with standard. 

Let’s look at the pros and cons of using Venmo for rent payments.  

The pros of using Venmo to collect rent

• Easy to use: Once you download the Venmo app, you can start sending and receiving payments. 
• The money transfer is free: A tenant can make transfers from their Venmo account to your account for free.
• Allows tenants to split rent: With Venmo, a tenant can split the rent between roommates. They can send an instant payment to the tenant responsible for paying the landlord. 
• Venmo offers credit and debit card payments: The app provides credit and debit cards without charging annual fees. However, it can add 3% to the tenant’s credit card rent payment. 
• Social media features: Venmo incorporates popular social media features like comments, likes, and messages on payments. This switches up the user experience, enhancing the experience and allowing parties to communicate. 

The cons of using Venmo to collect rent

• Charges fees for business transactions and “cash a check” features: Though person-to-person fees are free on Venmo, rent payments are categorized as a business transaction with a 1.9% processing fee plus $0.10. Also, if you use the “Cash a Check” feature to deposit a check directly to your Venmo account, you will be charged 1% and a minimum of $5.
• Charges fees for instant payments:  There is a 1.5% fee (with a minimum fee of $0.25 and a maximum fee of $15) for instant transfers on Venmo.
• No recurring payments option: Tenants can’t set up automatic rental payments. Therefore, late rent payments become more likely, causing disrupted cash flow. 
• Impossible to cancel a Venmo payment: Venmo’s policies do not allow a refund to the renter or transfer to the landlord if a tenant pays the wrong amount due to incorrect details. The “no cancellation policy” makes it impossible to cancel a Venmo payment.
• No automatic late fee calculations: Unlike rent payment apps, there is no way to charge late fees automatically. So, this means more paperwork and administration for you. 
• Venmo’s dispute policies: Generally, Venmo won’t get involved in payment disputes. However, if they do, the company will often favor the buyer (tenant) over the seller (landlord).
• Venmo can’t block a partial payment. You can’t decline or stop a rent payment made via Venmo. Nor can you block partial payments. The eviction process halts once the landlord accepts payment in some states, depending on the conditions of your situation. Therefore, you may find it difficult to evict a tenant. 
• No option for credit bureau reporting: With Venmo, you cannot report rent payments to credit bureaus, which affects the tenant’s credit score. When credit reporting is out of the picture, there would be no means of incentivizing or penalizing late rent payments.

It’s easy to see how these cons outweigh the pros. No doubt, Venmo works perfectly for sending money to family and friends. It could even be helpful to split the rent between roommates. However, it is a bad idea for landlords to use it for rent collection. It offers neither protection nor incentive to you as a landlord. 

That said, is PayPal a better alternative for rent payments? 

Using PayPal to collect rent

Like Venmo, PayPal is generally great for making instant transfers. But is it suitable for landlords?

The pros of using PayPal to collect rent

• User friendly: The app is easy to use and provides robust security that helps to prevent fraud. It keeps your bank and credit card info safe by encrypting them. 
• Offers multiple payment methods: Rent payments can be made with a debit card, a credit card, a bank account, or a PayPal balance.
• Business accounts: A PayPal business account helps you keep track of your invoices. It offers payment protection plans for accounting purposes. However, there is no protection for real estate transactions. 
• PayPal sending limits: With a verified PayPal account, there are only a few limits to how much you can send. PayPal sending limits offer an option of sending up to $60,000 in a single transaction. However, these can sometimes be limited to $10,000. Also, remember that rent payment goes to your PayPal account, not your bank. 

The cons of using PayPal to collect rent

• Limited features for landlords: You can’t apply and enforce late fees automatically; neither can you block payments. This makes it challenging to go through an eviction process successfully.
• PayPal charges for rent payments: Although friends and family transactions are free on PayPal, business fees range from 1.9% to 3.5%, including a fixed rate of up to $0.49 commission. PayPal classifies rent as “goods and services,” qualifying it as a commercial transaction. However, there is no payment protection for “real estate transactions.”
• Charges for instant transfers: PayPal charges 1% on instant access to your funds, while a free bank transfer will take a few days. 
• Insufficient protection for landlords: When payment disputes arise, PayPal often takes sides with the payer, in this case, the tenant. Just like Venmo, landlords are offered little to no protection.  
• Inability to report payments to credit bureau reporting: PayPal’s features do not include an option to report rent payments to credit bureaus. Late payments showing up on a credit report can motivate tenants to pay rent on time. With PayPal and Venmo, you miss out on this incentive.
• Rent reminders: PayPal doesn’t send rent reminders before the due date. It only does when invoices are overdue.

Overall, apps like PayPal and Venmo do nothing to serve your interests as a landlord. So, what should you do instead? 

Let’s talk about property management apps and why they’re a better alternative. 

Why use property management apps?

Property management apps offer the best options for rent collection. Here are some of the benefits of property management apps: 

• They’re designed for rental management: Property management apps help you charge and track security deposits, late rents or utility fees, prorate rent, and send automatic reminders to tenants. 
• Efficiency: Property management tools incorporate features such as leasing, applications, screening, and rent collection. In addition, some apps facilitate maintenance requests. 
• Recordkeeping: Property management apps keep track of rent payments, making them visible to landlords and tenants. Some apps connect with accounting software and allow landlords to enter their revenues and expenses.
• Flexible payments: With property management apps, you can decline or block payments, split rent payments among tenants, set up recurring payments, prorate rent fees, and enforce late rents. 
• Low charges for rent collection: Most property management apps don’t charge fees for rent collection. If they do, they’re a lot lower than Venmo or PayPal.
• Credit bureau reporting: Some property management apps allow you to report your collections to credit bureaus.

Closing thoughts

The benefits offered by property management apps make a strong argument against using Venmo or PayPal for rent payments. 

PayPal and Venmo are not designed to serve your interests as a landlord. Instead, stick with the software built for you.

Property management apps will facilitate instant, prompt, and adequately documented transactions.

What do you use to collect rent payments? Let us know in the comment section below!

If you haven’t noticed, there really hasn’t been a better time to sell a property.

The Case-Shiller Index rounds out to about 282 points as of late January, and median home prices rose 15.9% year-over-year in February.

Add in the fact that sellers are receiving multiple offers within a few days after listing and you have all the right ingredients to start a bidding war, increase the price of your property, and walk away with more than you could imagine.

But, there is an issue. Taxes.

It’s great seeing the price tag of your property increase, but that also means your tax bill will be significantly higher. If you want to take advantage of the appreciation your current investment has earned but don’t want to get hit with the corresponding tax bill; you might want to consider some of these 1031 exchange strategies the top investors are using to navigate the seller’s market.

Why use a 1031 exchange?

With a 1031 exchange, you can shelter your gains from being taxed by following up the sale with another real estate investment of equal or greater value. If you follow the rules set by the IRS, your real estate investments can grow tax-deferred. 

The challenge of using a 1031 exchange in a seller’s market

These days, the most challenging part of executing a 1031 exchange is finding the replacement property within 45 days of closing the sale on the former property. 

As we discussed earlier, sellers are enjoying the luxury of bidding wars and sky-high prices. Investing in today’s market is much more challenging. Deals are hard to find, and you can’t guarantee that the property you want will fall into your hands.

The good news is that once found and placed under contract, the IRS grants an additional 135 days to finalize the purchase before the 1031 exchange is no longer eligible.

1031 exchange strategies

The best way to execute these 1031 exchange strategies is to have a plan before the property you’re selling is placed under contract. It’s the time of closing that determines 1031 exchange eligibility, so you’ll need to know your available routes before this date.

You don’t need to have the ball rolling on a second property while your current is under contract. Not everyone is comfortable going after the replacement property before their original sale closes—even with contingencies. Make sure to determine your risk tolerance and only take action that lets you sleep at night.

The four 1031 exchange strategies we’re going to talk about are based on where you’re currently at in the sales timeline. Those are:

• If you haven’t listed your property yet
• If you’re already under contract
• If you’ve already closed
• Use a reverse exchange

Dreading tax season?

Not sure how to maximize deductions for your real estate business? In The Book on Tax Strategies for the Savvy Real Estate Investor, CPAs Amanda Han and Matthew MacFarland share the practical information you need to not only do your taxes this year—but to also prepare an ongoing strategy that will make your next tax season that much easier.

If you haven’t listed your property yet

The first strategy is to negotiate the closing of your sale in a way that keeps you in the driver’s seat. If you can find a friendly buyer, this is the simplest way to do a 1031 exchange.

A buyer willing to wait for you to conclude your property search is the best-case scenario, but if you can’t find someone willing to wait, you need to research a few things.

First, find data on your market and examine the average days on market (DOM). This number will let you know how long you have to find another property or even the leverage you have over selling your own.

You can source this data through Zillow, Redfin, or Realtor.com. Or, get in touch with a trusted local real estate agent in your area who can provide highly accurate data using the multiple listing service (MLS).

You could also ask other real estate investors what their past month has looked like in your area.

Based on what you find out, here are the following options you have:

• Delaying putting your property on the market until after you find a replacement.
• Negotiate an extended sale date with the option to accelerate.
• Add a contingency clause to the offer that makes the sale dependent on you finding a suitable replacement within a certain amount of time.
• Add the option to extend closing by 15-30 days or more.

If you’re already under contract

If you are already under contract to sell your property, you can still take action to meet your 45-day identification deadline.

The goal is to begin making offers as soon as possible. The difficulty in a seller’s market is that buyers have little to no leverage. If you can’t meet the seller’s terms, they can simply choose another offer. So you’ll have to be smart.

You have a few paths to take here:

• Consider making offers contingent on your sale (the odds of this working is extremely low in a seller’s market, but it’s worth trying on a couple of properties).
• Ask for an extended closing (I suggest two weeks after your sale is scheduled. Some of our investors are experiencing lender delays on their sales that disrupt tight closings).
• Try to get an inspection, due diligence, or financing clause that expires a week or two after your sale is scheduled to close.
• Consider a tiered earnest money offer to get one of the above strategies to work. Specifically, offer a solid earnest money deposit at signing with another larger earnest money deposit after your sale closes. Make these refundable or non-refundable depending on your risk tolerance and what the situation warrants.

If you’ve already closed the sale

This isn’t the best scenario to be in, but not all hope is lost. Remember, you still have 45 days post-closing to find a replacement property to execute a 1031 exchange.

But, you need to be fast and efficient in looking for new properties.

If you’ve exhausted your options and spoken to every connection you have who might know about a new deal coming to market, from the local agent to the plumber who always fixes the leaky faucets, you might want to consider expanding your range.

The first thing is to consider dipping into markets outside of your own. If you haven’t been already, you might also want to look at properties that you might not normally invest in.

For instance, if you’re a short-term rental investor but can’t snag a deal, perhaps you should dip into the multifamily market?

Finally, maybe it’s time to look into fractional property ownership structures like a Delaware Statutory Trust or a syndicated tenant in common project. When done right, these types of investments can prove to be lucrative and provide a 1031 exchange outlet.

Use a reverse exchange

If you have found the perfect replacement property but can’t get the sale of your original property lined up in advance, a “reverse” exchange may be a good fit. 

A reverse exchange is a more complex exchange structure with a longer lead time, special financing requirements, and a higher price tag. That being said, if you locate a great opportunity, the exchange will defer a significant amount of tax.

A reverse exchange makes sense in a seller’s market as hot as the one we’re in now if you can pull it off.

Closing thoughts

While certainly not the preferred option, it is important to emphasize that there is no penalty for starting a 1031 exchange and not completing it. 

If you cannot find a suitable replacement, it would be better to let your exchange die and pay the taxes rather than make a bad investment. In the long run, you’ll regret the bad investment more.

If you have any other 1031 exchange strategies, leave a comment below to share them with the BiggerPockets community!

Mindy:
Welcome to the BiggerPockets Money podcast show number 289, where we interview Hugh Carnahan and talk about real estate and making literally every bad money choice you could possibly think of.

Hugh:
I was like, “Oh, David Greene does that like almost every day.” Almost every podcast, he’s like, “Don’t buy stuff in a war zone.” Oh, and there’s a full chapter in BRRRR, which I listened to three times that I never heard once, don’t buy properties in a war zone. So my mind was definitely like, “Take action, take action. I want to be financially independent.”

Mindy:
Hello, hello, hello. My name is Mindy Jensen. And joining you today is David, hip hip, Pere, from The Military Millionaire group podcast network channel yada, yada. He just left active duty and is now in the Reserves, right? Are you in the Reserves?

David:
I am for at least a little lot longer.

Mindy:
In the Reserves and working as a real estate investor buying up literally every house you can find in his area, right?

David:
Trying. Yeah, we’ve done nine so far this March 7th.

Mindy:
Wow. He is on a tear and he is here with me to make financial independence less scary. Plus, just for somebody else to introduce you to every money story because we truly believe financial freedom is attainable for everyone, no matter when or where we’re starting.

David:
So whether you want to retire early and travel the world, go on to make big-time investments in assets like real estate or start your own business, we will help you reach your financial goals and get money out of the way. So you can launch yourself towards the life of your dreams.

Mindy:
Today’s episode runs a little bit long, but that’s because Hugh Carnahan has such a fascinating story. Don’t let the fact that he’s only, what is he, 33?

David:
Thirty-one.

Mindy:
Thirty-one. Don’t let the fact that he’s only 31 sway you from his fabulous story. He has still made a lifetime’s worth of mistakes. One, he’s made enough money mistakes for a hundred-year-olds. He started off making mistake after mistake after mistake, simply because he didn’t know what he was doing with his finances. He wasn’t taught finances in high school. He wasn’t taught finances in college. He luckily had an internship where he learned a little bit but not enough to really make a great difference.
And I think that a lot of people can identify with this story because I wasn’t taught anything in high school about money. David, what did you learn about money in high school?

David:
About the extent of my knowledge was that my mom had envelopes. And that was about the extent of my knowledge. And I even put this in writing, which I probably shouldn’t have done, but I probably still owe her money because I used to go and sneak out of her gas envelope and go buy, “Oh, it’s for gas.” I need gas when I was in high school. So not a whole lot of education, but I knew the envelope budgeting system. I didn’t know that’s what it was. But that was about the only info I got.

Mindy:
Yeah. I didn’t get anything in high school either except how to write a check, what you put in each section of a check. That’s not teaching you about finances. That’s just teaching you how to get into debt because how can I be overdrawn, I still have checks. Do you ever hear that phrase?

David:
Oh, yeah.

Mindy:
You ever do that phrase?

David:
You don’t want to know about my check balancing.

Mindy:
Yeah. So anyway, Hugh joined David and I in making some mistakes and then went on to make some even more mistakes, and he turned it all around. I shouldn’t give away everything, but he turned it all around through real estate investing. So this story that you’re about to hear has mistakes about money and real estate to the rescue.
Today’s guest is Hugh Carnahan, the first person to successfully buy his way onto the BiggerPockets Money podcast. What? Yep. Way back on Episode 245, where my co-host was Joe Saul-Sehy, Joe was casually mentioning how his uncle had told him, “Well, I don’t have any extra money to invest.” And I jumped in and said, “Wait a second. There’s no such thing as extra money.” If you have extra money, send it to me at 3344 Walnut Street in Denver, Colorado 80205.
And Hugh took it upon himself to send me not only this letter, which is written in crayon, which I love, but he also wrote me a lovely letter and included $7. So Hugh Carnahan, thank you for buying your way onto the show. You better be funny. Welcome to the BiggerPockets Money podcast.

Hugh:
Woo. Well, thanks, Mindy. Successfully bought my way on. That’s right.

Mindy:
Yes. And if you’re thinking about following in Hugh’s footsteps, that’s already been done. So if you have extra money, please send it to Mindy Jensen at 3344 Walnut Street in Denver, Colorado 80205, and keep it under $10,000 because I don’t want to report it to the IRS. However, you’re not going to get on the show because of it.

David:
I was going to say …

Mindy:
Hugh’s already done it. So find a new way.

David:
… $7 for 30,000 or 40,000 people listening to your story is probably like the greatest marketing ROI out there. So you don’t tell people that they can successfully do that. Otherwise you’re going to have a wall of people sending you seven bucks.

Hugh:
Well, I did say that I didn’t have extra money, but I was going to be investing the $7 in a beer from Mindy.

Mindy:
So Hugh, with that out of the way, I do feel obligated to let people know that you did buy your way on. But I want to know about your money story because you do actually have also an interesting money story. So tell me, where does your journey with money begin?

Hugh:
A long, long time ago.

Mindy:
Oh, we don’t have that much time.

Hugh:
My money story begins as a kid and I was growing up. My father was born in the Great Depression. He was born in 1929. So he grew up in a third-world country, the United States.

Mindy:
Wait, what? Hold on. How old are you?

Hugh:
I’m 31.

Mindy:
How old was your father when you were born?

Hugh:
Old enough.

Mindy:
Okay. Well …

Hugh:
No, he was 61. He was 61 when I was born.

Mindy:
Okay.

Hugh:
Well, it’s funny because most people who are in their 50s and 60s, they share the same parent age group as me. And so my values are more established, yeah, from a different timeframe.

David:
Hugh’s an old soul.

Hugh:
I’m an old soul.

Mindy:
Yeah. I was going to say, I’ve met you in real life and you don’t look like your dad was born in 1929.

Hugh:
So my father grew up in a third-world country in the rural Midwest in Missouri. And then my mother was born in Taiwan, which in the ’50s was also a third-world country. And so they had the very entrepreneurial, we’re going to work hard and through blood, sweat and tears, we’re going to make something of ourselves.
But when I came along, I was the last one of 12, I was the only one of kids from the two of them combined, and while growing up, basically, there was a fiasco, little thing happened in ’89 in Beijing. So it scared the crap out of all the Western countries, they left China. My dad being an opportunist growing up in the Great Depression said, “Let’s enter China.” And so they started a manufacturing business in the ’90s in China right when it opened up.
So when I was growing up, because I was born in 1990, I saw the drastic difference between wealth and poverty growing up because there were a lot of really poor people there. And there’s one instance, and I consider this the beginning of my money story, is that when I was a kid, I was probably five years old, I was old enough to remember things but not really old enough to understand things.
And so we went to some party, like a dinner, in a apartment in Shanghai. And coming out, there were beggars that were at the base of the place and there was a boy that was my age and he walked up and I felt so bad. And I had a coin that was given at the party. It was a fake gold coin, I didn’t know that, but I was like, “Oh, here’s this coin, maybe I can give this kid a coin.”
And my mom ended up buying them food and then we left and then later they said, “Hugh, the only difference between you and that beggar kid growing up is that you were born to us. You don’t deserve anything in this life. You’re just lucky. So you should appreciate it.” And that was one of the very first things that I ever remember, period. And it was around money and hard work, and that kind of a thing.

Mindy:
Your mom sounds …

Hugh:
Tiger mom?

Mindy:
… pretty much like a realist.

Hugh:
No. I mean, when everyone grows up poor, they were like, the only difference between you and them is you were born to us. So that could have been you, so appreciate everything and work hard in life.

Mindy:
Well, let’s fast forward to high school. It sounds like you grew up in China. How long did you live in China?

Hugh:
From age zero-ish to age 10, I traveled back and forth and didn’t really have a good education because I would be in a few months at this school in the US, a few months at a different school in China. And then at age 10, they were like, “Oh, this kid’s dumb. He’s not getting good learning.” So they put me in a boarding school and I was actually in the military school from age 10 until 18. And so that’s where I got my original background and discipline and that kind of stuff.

Mindy:
Okay. So what was your financial position coming out of boarding school? I’m assuming zero-ish?

Hugh:
So we didn’t have the opportunity to work jobs while in school. So I didn’t have the work hard to earn a car or any of that. We didn’t have … I think we had a $20 allowance a week or something that they give. But other than that, we’re not taught about money at all. So I really was completely unprepared.
So leaving high school, what I was able to do was I only applied to senior military colleges intending to pick up a military contract, but I wasn’t sure because I didn’t want the parents to have to pay for college. So I ended up going to Texas A&M and I joined the fight in Texas Aggie Corps of Cadets there because they give you in-state tuition was a very good part. And so I ended up going to college and so-

David:
That’s not why you went.

Hugh:
Huh? Oh, yeah-

David:
You can’t just not tell the truth on this show.

Hugh:
So there is something that happens. So it was an all-male military boarding school. And at one of the career fairs, Major Huffman was like, “Hey, come to Texas A&M, there’s 40,000 women here.” And I was like, “I’m scared of girls.” I should probably go to Texas A&M instead of West Point. And so that’s where I ended up going because that sounded way better. That was probably at least 30%, 50% of the reasoning is there’s just normal life there.

David:
I think that’s a logical reason.

Hugh:
So I had scholarships, I made good grades and I had some in-state tuition and then some basic assistance, but I was very, very fortunate my parents decided that they would pay for my college. So I ended up exiting college basically with debt free. And that was pretty much it. And also, I was in the corps cadets at Texas A&M so I did not have a ability to work during the time.

Mindy:
Okay. So were you in the military? What’s the corps cadets? I don’t know what that is.

Hugh:
The corps cadets is the ROTC program and it’s the feeder for the officer program into military. So in order to be an officer, generally, you go to college, attend an ROTC program, pick up a contract where the military pays for your college. And then as a debt to that, to pay that off, you then join and enter the service.
For me, another reason I chose to go to Texas A&M is because I wasn’t sure because at that time, I had been in a military school for eight years when I was 18. And I didn’t know if I wanted to actually go active duty. So I had two more years to decide by going to Texas A&M. So that was one of the other factors as well as opposed to had I picked up the West Point contract or something like that, that I would’ve absolutely had to go into the military. And I just decided that I want two more years to figure it out because I’m 18 and I don’t know what I’m doing.

David:
Hugh ultimately ended up marrying into the military for a little while. I frequently refer to him as my favorite dependent.

Hugh:
Yes. Yes. Yeah. After I graduated, I went to work for an oil company. So exiting the position in college, the last thing that I did was I was looking for credits and I volunteered for a financial advisor to run their computer systems because I was an IT background. And that’s what I studied in college was MIS.
And luckily, in exchange for doing the IT program, the financial advisor taught me about pay yourself first. And outside of that one instance when I was four or five years old and then growing up, my parents never really talked about money. And honestly, even though they were very successful, I don’t think they really knew how to use it as a tool. They just knew it roughly. And then it was that few months that I spent as an intern where the financial advisor was continuously teaching these courses and I would be there making sure the computers run correctly or whatever. I heard about pay yourself first.
And that was pretty much the only preparation I had for actual finances moving into being a young adult. Oh, in high school, I did get a D in accounting.

Mindy:
Oh.

Hugh:
But that’s D for diploma maybe.

Mindy:
Ds get degrees.

David:
Okay. So you graduated college and you go, you said, to work for an oil company. I don’t see that you’re like a chic with millions and millions and millions of dollars worth of oil at this point. So what’s the trajectory from there to Hugh nowadays, right? What changed?

Hugh:
So that’s … So I graduated college. I then move to Bartlesville, Oklahoma, very fancy town. You drive to Kansas to get beer because Oklahoma is just not good in general. I’m working for the oil company. I think I started at 75,000 a year, but it’s also in rural Midwest.
The engineers, they came in at 100,000, but there’s a problem with Bartlesville, Oklahoma. And it’s that it’s in Oklahoma and there are no available single females that are there. They’re either already married or there’s a lot of wealthy people, not wealthy people, people with very good-paying jobs, W2s, working for this one company that keeps the entire town afloat, and it was just not much to do.
And so I started reaching back out and I ended up meeting a friend I knew in college and we ended up flirting, chatting, end up getting married. So I quit my job and I had 12 grand saved up, which I thought was the most money I’d ever had like, “Oh, a 12 grand. This is going to be incredible. I’m going to move to San Diego because she’s being PCS to San Diego.” And so I arrived in San Diego with no plan, no job and then end up talking my way into another IT job. But that’s basically the transition now.

Mindy:
You were making $75,000 a year, living in a town where there was nothing to do, and you saved a whopping $12,000?

Hugh:
Yes.

Mindy:
I don’t like to shame people on this show financially for past misdeeds. I will make an exception here for you because you bought your way onto the show. But what were you doing with your money when there was nothing to do?

Hugh:
I think there was a lot of alcohol involved. I definitely started buying homebrew equipment and also like most young-

Mindy:
Oh, there’s a lot of money right there.

Hugh:
I think it was like $1,500 to get started for all the equipment that you needed at the beginning. But also it was like the first time ever I had had money and that I made the money myself. So it was your standard like, “Oh cool. I’m bringing this paycheck in every two weeks. Regardless of what happens, I’ll be fine.” And so I think it was video games and homebrew, and a lot of it was also going out to eat, “Oh, we’ll just go out to eat. Who cares?”
And also, because there wasn’t very much to do, there was a really tight friend group that we had and we’d also go and do, I don’t know, 22-year-old things, which is, go to house parties and eat outs.

Mindy:
I want to do a little bit of a self-promotion for my own little spending tracker experiment that is ongoing this whole year and say that I asked him point-blank, what did you do? You had nothing to do in this little town and you were making a lot of money. So where did your money go? And he’s like, “I don’t know. It just went wherever.” And looking into my crystal ball, I’m guessing that you weren’t tracking your spending in any way.

Hugh:
No, the only thing I was doing was I was … Because of pay yourself first, which I had to define in my brain as steal from myself before I could spend it and then blow it, right? They talk about pay yourself first quite a bit on the show. But basically, I would immediately get, I think it was like $500 a paycheck, and I had it go somewhere else first. And then what was left was … And then I paid the bills and then what was left, I would blow.
So I didn’t know anything about investing then and no idea. I think I maxed my 401(k) for the matching. I mean, that was about pretty much it.

Mindy:
Okay. So first of all, no, it’s not stealing from yourself. It is investing in your future. And second of all-

Hugh:
Oh, but that’s the way I justified it. I was like, “I have to hide it from me because I’m dangerous or else I will spend it. So I have to steal it first so I don’t think about it.”

Mindy:
It’s not stealing. Okay. But anyway, whatever you have to do to invest. But it’s not stealing, it is investing in your future. So what did you do with that $500?

Hugh:
So after $1,200 were saved up, I then got this fancy idea that I was going to move into California and, promptly, I spent all of it because California’s very expensive. So I thought I was like, “Oh, this is like a year runway for me. I’ll be fine.” It was like-

David:
I think what Mindy was asking, before we dig further into that part, is were you just putting the 500 in a savings account and letting it rot or you-

Hugh:
Yeah, I was just straight-up putting in the saving. It wasn’t even a high yield savings account. It was just a savings account. Actually, it might have been a checking account. I don’t have that bank anymore, but I just didn’t know what I was doing. So I was just saving … That was like your standard, “Oh, this is an emergency fund.” I really didn’t understand what investing was. I didn’t know anything about a simple path to wealth. Didn’t know anything about S&P 500 index funds. I knew nothing.

Mindy:
Okay. So that $500 that you would take from your paychecks was the 12,000 that you moved to … Oh, I thought you were investing it, like putting it in an after-tax brokerage account or something. Oh, okay.

Hugh:
I got a Missouri education [crosstalk 00:20:32].

David:
Hugh might not have actually gone into the military, but he did a lot of the same things we all do, which is alcohol, food, dates.

Hugh:
I might as well bought a brand new Corvette.

David:
Yeah.

Mindy:
Well, at least you’d have a hot car to drive then. I mean, no, you should not have purchased a brand new Corvette either. Okay. So back to plugging my thing because I never actually got around to plugging it, I am tracking my spending this whole year publicly. You could follow along at biggerpockets.com/mindysbudget. You can see that in January, I blew my budget. In February, I blew my budget.
We are recording this in the beginning of March, but I already know that I have blown my budget in March because three for three, because budgeting is hard and tracking your spending is something that you have to do all the time or it all goes out. It’s so easy to spend money. And it’s so easy to get to the end of the day and be like, “Well, I had $40 in my wallet and now I have three. I don’t remember where I spent any of that money. Oh, wait a second. I got a cup of coffee and that was like $3. Where did that other money go?”
And it’s so hard to try and remember just even in the course of the day where your money went, let alone what year are we talking about when you were in Bartlesville, Oklahoma, and just graduating from college?

Hugh:
That would’ve been 2013.

Mindy:
So this is nine years ago that you did all of this. I mean, I can’t even remember what I did nine hours ago. Well, I was asleep nine hours ago. But this is really hard. So that’s why I’m tracking my spending. My friend, JT, yes. JT, another shout on the show. JT is awesome. He sends me messages all the time and he’s like, “Why are you tracking your spending? What’s the point?”
The point is, I want to be conscious of where my money’s going. And the only way for me to be conscious of where my money is going is to track my spending. And this is just going to be a whole bunch of plugs right now. But waffles on Wednesday, wrote an article about how to create a mobile spending tracker. It came out, they published it right at the same time that I was talking to my husband and saying, “I wish there was a customizable mobile spending tracker that I could have on my phone so I could put my own little categories in.”
And then the next day, waffles on Wednesday, was listening to my conversation, I guess, because they came out with one and it’s based off of a Google Form that goes into a spreadsheet. So that’s what I have on my phone. And every time I spend money, I put it into the spreadsheet and you can follow along again, biggerpockets.com/mindysbudget. And you can see just how much I am screwing up my projections.
But the thing is in February, I blew my budget because my furnace broke. And my furnace would’ve broken if I had been consciously tracking my spending or not. So I would have spent even more money because it’s so easy to spend money if I wasn’t keeping track of it publicly. I feel even worse when I spend money than when I normally do. And people are listening and they’re saying, “Oh, you shouldn’t feel bad spending money. It’s yours to spend.” Well, I don’t feel bad spending money, but I feel like I need to have a reason to spend this money because I don’t need to just spend it willy-nilly.
First of all, I don’t need more garbage in my life and I need to be conscious of where it’s going so I can use it for things that really mean a lot to me. So clearly, alcohol really means a lot to Hugh. And then he moved to San Diego with his wife where we pick up his … Now were you married when you moved to San Diego?

Hugh:
I was not. I moved there and then we got married four months later.

Mindy:
Okay.

Hugh:
I think just total of 10 months. From the time we started dating until we got married was 10 months. So again, I’m tracking that whole military spending lifestyle almost to a T. So 10 months knew her. We knew each other from college. Got married and then, yeah, so that’s where we started. By that time, I was able to work for a tech company that had an office out there and I spent the last bit of the money that I had saved the month that I got the job. So I lucked out, but I ended up getting an entry-level position.
Now I think when I got hired, it was effectively $100,000 that I came in at, but it was 90,000 plus benefits when I … But that’s San Diego money, right? So coming from the Midwest at $75,000 with very little expenses, it was effectively taking a 20% pay decrease, mainly because expenses were so much higher there. I mean, it’s like a step-down, but I’m very lucky to have gone to that company because, one, it prevented me from being starving. But, two, I didn’t know it then, but it’s where I eventually got the seed money to start investing in real estate.
So there, still have pay yourself first. And what I was doing there was combined. I think my ex-wife for the time was making around a hundred. We were making around a hundred and we were able to save, I think, $1,200 a month in San Diego.

Mindy:
By making $200,000 a year …

Hugh:
Correct.

Mindy:
… you were able to save $1,200 a month.

Hugh:
Correct. Because remember, that time would’ve been 2014. And in 2014, I was a 24-year-old adult person. I’m going to use that with quotations. And then it was like, “Okay, cool. I’m going to do what young 20 somethings do.” And you’re going to go to the beach and you’re going to go to parties, you’re going to go eat out. It was just significantly more expensive there.
So the only thing keeping us afloat is still that college internship I took the last two months that I was there, which was like, “I think we should be saving something.” And yes, that also went just into a account, I’m pretty sure it was still just a checking account actually.

Mindy:
Okay. So you were just saving $1,200 a month. You weren’t investing $1,200 a month, but …

Hugh:
Correct.

Mindy:
… were you participating in a 401(k), was your wife participating in the TSP program?

Hugh:
So with that, I don’t think we … I mean, Dave hadn’t written his fancy article yet, so we don’t know about the TSP. So she wasn’t TSP. She was probably going to be in the G Fund. I don’t remember because it was just a long time ago and we weren’t paying attention to it. We didn’t know about money.
I came from a company that had a 401(k). When I got to the tech company, it didn’t have a 401(k), but they did have an ESPP program.

Mindy:
Oh.

Hugh:
And I was participating in that. And that is actually what saved me. So I had two things going on. One, as a part of my compensation package, I was given stocks the day that I started, but it would vest quarterly after a year. So many stocks would vest. And some of that we sold to pay for the wedding. And then there was the ESPP.

David:
Hugh did everything, right, Mindy. Everything, all the right moves.

Hugh:
I’m just doing the young 24. I’m basically a financial … There is a financial disaster to real estate master with Brandon Turner. And I feel like I’m on par.

David:
Well, I would just point out this, though, is at 24 years old, if we sit back right now, we look at you making $200,000 a year and you’re only saving $1,200 a month, that sounds terrible. But at 24 years old, I would wager that that is better than probably what 90% of people are doing. Most people aren’t even … I mean, when I was 24, I wasn’t putting money aside other than my little 5% to 10% TSP contribution, which I had no business in 2014 writing an article about that. So that’s why I didn’t know what I was doing. I left it in bonds. So it’s not great.

Mindy:
Oh, I forgot about that.

David:
It wasn’t until 2015 that I started learning about all this stuff. But I would just throw that out there that I wasn’t even saving $500 a month outside of the TSP at this point in my life. So it could be a lot worse.

Mindy:
Yeah. I’m sitting here judging you mostly because I know that you have since turned it around. I shouldn’t be so flippant about it because at age 24, I wasn’t even saving $1,200 in a checking account. I was saving $0 in no accounts at all. I believe I was a waitress and I was spending all of my money that I made because as a waitress, oh my goodness, that money is so easy to make, you just work one night and then, wow, you have $200 in your pocket. And it doesn’t matter if you go out and spend all of it because I can pick up a shift tomorrow and do the same thing again.
So if I need money, I can just work another shift. And it didn’t occur to me [crosstalk 00:29:19].

David:
Depositing the money is so much harder than just spending it when it’s cash.

Mindy:
Well, plus it’s like a stack of signals.

Hugh:
You have to withdraw the money anyways to spend it.

David:
What kind of restaurant was this?

Mindy:
I was a cocktail waitress.

David:
Just kidding.

Mindy:
Shut up.

David:
I just …

Mindy:
Back on track. So we’re in 2014, you’re saving $1,200 a month in a checking account. And you have stocks as part of your compensation. Is this a well-known company? Would we recognize the name of this company?

Hugh:
The ticker symbol is Now, N-O-W, it’s ServiceNow. It’s business to business. I think most people wouldn’t know it, but a lot of people in the industry would know it.

Mindy:
Okay. So do you still own this stock?

Hugh:
I don’t. I should have kept one share just for funsies, but I don’t own any of the stock. And long story short, wheels fell off the marriage. And in 2016, we basically separated. And when that happened, the divorce ate up funds from both sides. I think the only person that won from that was the lawyers. They got all the money. I think at the end, I paid 13 grand to her and it balanced everything out.
But because … Before I was married, which I got hired two weeks before I got married, was when my stocks were awarded to me for the vesting. After we basically sold the stocks to pay for the wedding, I pretended like I didn’t have any stocks. It wasn’t the cash that Mindy was handed waitressing. I never saw it. It was never in my account. I didn’t take it from my account to go buy it. It just plopped into the account. And so because of that, I treated it like it was not mine. I didn’t have it.
And then I moved back to Missouri and started working for a family company. And when I did that, I straight up forgot that I had the stocks. I knew they were there, but I didn’t check on them. I wasn’t actively contributing to anything. I just was like, “Oh, yeah, I also have stocks.” But I remember it was like $57,000 worth of stocks when I left California. That’s where it was. So that’s the last I remember checking on it. I didn’t even care.
But when I was leaving, there was another gentleman, his name’s Ken, and he was an ex-Green Beret. Super cool, crazy guy, lived up in Washington. And he was talking to me about commodities training and how it’s insane gambling and it’s awesome. So I was really intensively looking into options contracts for commodities.

Mindy:
Oh, good.

Hugh:
I didn’t do it, but I looked into it a lot. But he said something, which was effectively, they’re going to, they being ServiceNow, the company, the company is going to do a stock split or when it hits $300 a share, it’ll be a billion dollars or something. So I kept holding onto it, not spending it because I was waiting for the stock split because I was going to sell it after the run-up. So that’s basically what I just kept hanging on, kept hanging on, kept hanging on.
Flash forward to 2019, I get wind from my friends because they’re buying houses and stuff in San Diego. And so the stock price is doing well. So I check in on it and it’s worth almost $190,000 at the point. And so here I am, I’m working back in Missouri. My expenses are lower. I’m figuring things out and then I decided that I’m going to sell the stocks. And so I said, “I remember what that guy says.” He says, “It’s going to go to $300,000 or, sorry, $300 a share.” So I set it at $289 a share because everyone was talking about it. The hype’s going to go up. It’s going to go up. So it’s going to hit 300. So what I did was I decided that I was going to play it safe and, before it hit that, do that.
So I woke up one morning, I was in China at the time because I was flying back and forth, working for a manufacturing company at that point. And while I was in China, it sold and I then left $225,000 in the settlement fund for the next year, approximately, because I didn’t know any better.

Mindy:
Explain that. So you set a sale price.

Hugh:
I set a limit order.

Mindy:
At $289. So when the stock hits this, it will automatically sell.

Hugh:
And I sell all shares.

Mindy:
Okay.

Hugh:
And so I sold all shares and I got $220,000. And when that sells on the platform, it’ll go into just a settlement fund, which is a non-interest-bearing checking account for most people. But from that checking account, you can then buy stocks.
I didn’t know what I was doing. I was scared. I didn’t know anything about investing. I probably knew about S&P 500 index funds at the time. I still didn’t really know like I do now. So I just left it there.

Mindy:
Just sitting there doing nothing.

Hugh:
And it just sat.

Mindy:
Okay.

Hugh:
It just sat there and did nothing and got eaten alive by inflation for like a year.

Mindy:
Do you want me to tell you what Now is closing at right now?

David:
I just did the math.

Hugh:
Yeah, tell me.

Mindy:
Did you look it up?

David:
You would’ve $398,615-ish. It’s a 512.

Hugh:
Okay. I think I did the math once and it would be like $300,000 today. But now I’m retired, financially independent, and have, I think, about $200,000-ish in stocks as well, but then I have some real estate now.

Mindy:
No, this is a good point to make. You made a couple of financial missteps throughout your beginning journey. And then in 2019, you took the seed money of, what did you say it was, $225,000 is what you sold.

Hugh:
That I owed taxes on.

Mindy:
Oh, we didn’t even say the T word yet, that you owed taxes on.

Hugh:
Yeah. So I sold that, then I owed money on it because of the price difference. So I think I was, technically, should have only had liquid $183,000. However, I did have $225,000.

Mindy:
Did Uncle Sam come knocking on your door and say, “Hey, remember me?”

Hugh:
Well, they did. But I was like, “Ah, I have a few months to figure out how I’m going to pay that back if I need to use it.” But in the meantime, I’m just going to keep it in the settlement fund.

David:
Perfect. So while your money’s earning interest to the IRS, you’re not earning a return on it.

Hugh:
I’m not earning a return on it. And I sold it, I think it was March. I think it was March when I sold it. So it just sat there the rest of the year.

David:
Yeah.

Hugh:
And then it wasn’t until next year, next calendar year, that I was like, “Oh, yeah.” I still had the money. I didn’t do anything with it so I could have just paid that off. But instead I came up with a better idea. I was going to be financially independent.

Mindy:
Oh, great.

Hugh:
So here I am in Missouri and I’m like, “You know what, to live life, the secret to life, is to have low expenses.” What better way to lower your expenses than to go and buy solar panels, $180,000 worth of solar panels, to be precise.

Mindy:
I know a lot of better ways to lower your expenses than to buy $180,000 worth of solar panels.

Hugh:
Well, the government was going to give us money back. It was like 30% or something back then. So that was where I started down that path.

Mindy:
Wait a second. If somebody just gives you, here’s a really great idea and here are 10,000 really bad ideas, do you just look and see which of those 10,000 is the worst idea to pursue?

Hugh:
I don’t think it’d be worst idea. I think it was a bad idea, but it wasn’t the worst idea.

Mindy:
So what was your thinking behind the solar panels? Because I know that solar panels really do seem like they’re a great idea, but when you look into the money, they’re actually not, and it’s sad.

Hugh:
They’re okay. I think it was … I factored in, it’d be like 11-year payoff. And my thought was being an IT background and I went into manufacturing, I have a very engineering tinkering, analytical mindset. So I’ll probably be lumped into groups of people, maybe like Carl even, where I’m going to do stuff to see if I can do stuff less because I need to do that thing.
So my plan was get rid of gas, electrify everything in the house, put solar panels on, figure out batteries down the road. And that was my thoughts around all of it is, how can I offset that? Because the house I live in was built … Actually, you can see some of it here in the picture behind you in the mirror. That’s actually the bottom of an 1851 log cabin with no insulation.
So my house that I live in now was the one that my father built and, well, kept adding on to in the ’60s. And so it’s like a horribly energy inefficient house and it costs about $10,000 to $14,000 a year just to operate and maintain it. That’s just in utility costs.

Mindy:
Okay. I was going to ask you how much could your utilities be. Have you heard of insulation? Because I just reinsulated my house and it was significantly less than $180,000 in solar panels to do so. And I’m teasing you in a way that I hope comes across to people who are listening, who are like, “Wow, Mindy’s being really rude.” No, I’m just teasing you because I know that we’re up to 2020 and it still hasn’t gotten any better yet. And it has-

Hugh:
No solar panels, no insulation.

Mindy:
But if you have a house that is leaking air and it costs a lot of money to maintain the heat, step number one is close up all the air holes and then find ways to insulate this house so that it doesn’t cost so much to heat rather than put $180,000 worth of solar panels out in your backyard to generate more electricity, free electricity. It’s clean electricity, it is not free electricity.

David:
Not to say that that wouldn’t work, but I’m also going to throw out there that if you had seen Hugh’s house, you would understand that the idea of insulation is kind of a …

Hugh:
You can’t insulate the house.

David:
So Hugh’s house is like-

Mindy:
Buy a different house.

David:
It was built over like three or four generations. And it’s built in a horseshoe around this … Imagine a hotel-sized pool, hot tub, gazebo, encased in like a green room, that’s just solid glass. And so it’s an energy nightmare.

Hugh:
It’s horrible now.

David:
It’s a super cool house, but it is an efficiency nightmare for energy, I’m sure.

Hugh:
And before I had to pay for any of this, I didn’t like it. Yeah, I liked it when I was a kid. And then now it’s like, every roof is a different roof. Every building material is from a different era. And then were grandfathered into the codes from the initial building of the house, which was 1851.

David:
Oh, and by the way, that’s-

Hugh:
That was pre-Civil War.

David:
… $10,000 to $14,000 in the Missouri nine kilowatt hours, $9 a kilowatt hour.

Hugh:
Yes.

David:
So in San Diego, where energy is three or four times expensive, it’s a pretty expensive house, energy wise.

Hugh:
So for me, I was thinking, “I’m young. If I can offset this and the house doesn’t burn down while I’m alive, then after 11 years, it’ll be paid off and I’ll be making stuff.” I think that was the rough calculation was 11 years. And I also factored in oversizing my system. I didn’t know about … Electric cars weren’t really a thing back then. I have one now, but back then, it was like, “I’m going to oversize the system because I’ll have a family one day probably. And so I’ll just oversize it and then electrify everything in the house.” So that was my thinking behind it.

David:
But we didn’t do that, thankfully.

Hugh:
But we didn’t do that. And there’s a funny story about that, well, kind of funny. He’s a BiggerPockets member, though. So I’m going to pick on them just a little bit.
And so can’t insulate the house, can’t do any of that. Now one caveat before we go into the finance side, when I was in manufacturing, all I did all the time, I end up stumbling across something called lean manufacturing, which a lot of people recognize as Six Sigma. And there was a flavor of that I subscribe to, which is 2 Second Lean, which is a dumb down simpler version of lean that normal people like hicks from Missouri, like me, can understand.
So here we are. I now drank the Kool-Aid with that very, very big on efficiency and the fundamentals apply to everything. It doesn’t matter what you do. It’s like gravity. If I drop something, it’s probably going to fall. And if it doesn’t, then there’s something drastically wrong. So that was the way I thought. Not only that, for whatever reason, and it was probably my father instilled in me, general Midwest stuff, if you’re kind to other people, be kind to everybody, be polite to everybody and help everybody out.
So I had an abundance mindset. I now know it’s called an abundance mindset, but I was bidding four or five solar panel companies against each other. And every time they would come over, we’d spend hours. I’d ask all the questions, the technical specs, we want this inverter or an optimizer, all those things. And I did this for about six months because I was going to spend the money on the solar panels to go ahead and do that.
So what I ended up doing was every time someone came over, I was helping the solar panel people try to run their business better with lean manufacturing techniques. Because if they could set up a solar panel 10% faster, well, over the course of a month, then that’s one extra array that they got for free because the labor is fixed, they were going to pay that labor anyways.
So it wasn’t that so they were saving. It was that they could do more with less. And so every time they were there, I just kept giving them information and papering stuff out. So I finally got it down to two companies and the bid I was going to go for was 180 some odd thousand dollars. And the guy tries to do it. And the city basically denies it. They’re like, “Oh, sorry, you’re the very last node for the electric panel. And so we can’t put solar on because you’re back-feeding towards the rest of the town. So you can’t do that. And so we’ll only approve you up to something like a quarter of the size system.”
Well, at that point, we’re still talking. I’m like, “Okay, well, we can push for it again.” And the guy stops me and he says, “Listen, Hugh, you’ve been helping me out a lot with this lean stuff. Don’t buy solar panels.” This is the owner of the company. Don’t buy solar panels. So he’s turning down $180,000 job. He tells me, “Don’t buy solar panels. Go buy real estate and use the real estate money to pay for your electricity. It’s more economically efficient.”
And he turned down $180,000 job and he looked at me and he said, “Cool.” We had a beer, right, because that’d always get them talking over some homebrew. And we were sitting there talking and he’s like, “Yeah, it’s pretty cool. Go to this thing. It’s called BiggerPockets. Go to YouTube, type in BiggerPockets. The BRRR strategy. It’s B-R-R-R-R. Just Google that or just YouTube that.”
And so that’s where he left me. And then he left. And then six months later, he went out of business, which is an unintended side effect.

David:
Yeah. You could have kept him afloat.

Hugh:
That is how I got my start.

David:
You put him out of business by not giving him that solar.

Mindy:
Well, I hope he’s at the top of your Christmas card list every year. Did you … So I know that you started investing in real estate. What was your first property?

Hugh:
This solar panel interaction was like in August. And then September 19th, I start a LLC. And then from there, I just start binging BiggerPockets. So I started up episode one and I basically listened from episode one on 2x speed every night for three hours, 2x speed, I just watched every single podcast there was. And then on the weekends, I think I did six hours.
And so every night, I was crushing six episodes of BiggerPockets OG podcast. And then as I listened one month later, I think I was caught up to Episode 386 or whatever it was at that time. And I started making offers because Brandon Turner was like, “Hey, making a decision is more important than what decision you make. Hey, making decision is more important than what decision you make.” And so I started making offers.
And so I made an offer on a two one and that got turned down. I made an offer on a college rental equivalence that was kind of category into campus, that got turned down. And then I tripped over a piece of garbage cement in the street. And I look, and because I had been running deals and running the BiggerPockets calculator over and over and over for the last few months, right, so I have zero experience, don’t know anything, I noticed that there’s a for sale sign in the yard and that there was a piece of sighting that was falling off of it. And I was like, “Oh, I’ve seen this before.”
So then I had the realtor call and say, “Hey, ask about this house because it was just a little tinky two one.” And the guy was like, “Oh, it’s for sale,” but there’s another 26 houses attached to it for sale as well. And they’re all rundown. And so I have the BiggerPockets calculator over and over and over ran the analytics. And it said it was a 1.58% deal. Or it was 1.6 something. And the guy won a $1.15 million to buy everything. And so the cash flow was above that. I think it was $15,080 a month at that time. And it was for sale for $1 million.
So even though I had zero experience, I’d never bought a house before, never tried to buy a house before, Brandon Turner was all like, “Hey, you should take action, take action, take action.” And so I was like, “Well, I’m not so sure, I’m going to check.” So I’m going to email this guy, Dave Pere, some random guy, I don’t know who he is, he says he’s from the Springfield area. I’m in that area.
So I go and I reach out to him and he gives me a 15-minute time window at a coffee shop and I talk his ear off. And he is like, “I’m not going to give you any answers because I don’t want you to buy this thing and then blow up on you. But I think you’re saying you’re going to buy a bunch of crack houses and you have zero experience and you don’t have a contractor or a property manager. Oh, and again, you have zero experience.” And I was like, “Yeah, that sounds about right. But the math says that I should do this and I’ll figure it out.”

David:
Yeah. So if I can just set the stage here for like a minute because, Hugh, I don’t want people to think Hugh is as crazy as he is because he’s probably crazier than that. So Hugh reaches out to me and we’re talking back and forth. I’m going to dig a little bit. Hugh’s one of those guys who he’ll send a Facebook message and then have another thought, and send another one, another one.
And so we’re talking and I would send an answer. And instead of one paragraph, it would be like bing, bing, bing, bing. And so I was worried that if I was going to go to a coffee shop with Hugh to let him pick my brain, that if I didn’t set an end time, I was going to be at this coffee shop for the entire day.
And I was in town from Hawaii at the time. And I was only in town for like … I mean, I think I flew out the next day. And so I had a million things to do. And I was just like … So I was going to this coffee shop for three hours to work on my laptop. And I was like, “Okay, I’ve got 15 minutes or maybe 20. From here to here, if you can make that work, I’ll be here. If not, sorry, maybe next time I’m in town.”
So Hugh shows up and this was the first time we’ve ever interacted. And he’s basically like, “So I’m looking at 26 houses. I’ve never bought investment property before. I don’t have a contractor. Every property manager I’ve talked to has told me they don’t want to touch these. And what do you think?”
And I’m like … I mean, he’s right. The numbers work. But I don’t want to say go for it because this is a risk you need to be okay with because this is … So I point out the things that could go wrong because I just lost money on a flip probably six months prior to this. And I’m like, “Here’s an introduction to my property manager. I know she’ll take care of you. Here’s an introduction to … I think I might introduce you to my lender, but we don’t use that guy anymore.”
So I introduced him to a property manager and I’m like, “Call me if you need anything. I don’t have a contractor. Mine sucks. Please just make sure that you’re okay. Here’s everything that could go wrong, make sure you’re okay with that. And if you are, go for it because the numbers absolutely worked. But it’s just a big risk.” And so that was pretty much the whole conversation. And then we didn’t touch base again for … I mean, we talked every now and then. And six months later, he and I are buying deals together and doing whatever.

Mindy:
I’m going to jump in here because this is giving me a rash to listen to this guy who has no experience listen to Brandon Turner, preach about how you should just take action. So he’s going to jump in on a million-dollar deal for 26 crack houses in the middle of nowhere and he’s just going to do it. What do you think? The numbers work. But I can’t find anybody to work on these properties for me. This is absolutely the time that I would say, “No, don’t do this deal. What are you thinking?” What are you thinking?

Hugh:
Yeah, Dave.

David:
Yeah.

Mindy:
So, yes, David, thank you. That was so great.

David:
There’s a reason I didn’t say go for it, you’ve got this.

Hugh:
I was just sitting there. I have a little printout and had the graphs on it and there’s a picture and I was like, “Look at this, look at these numbers.”

Mindy:
That’s not all you need to make a successful real estate deal is a printout with graphs on it.

Hugh:
The banks certainly didn’t care.

Mindy:
Sorry if I blew out anybody’s eardrums when I screamed. I’ll mark that to-

David:
The numbers mathed, Mindy, the numbers mathed.

Mindy:
I don’t care if the numbers mathed.

Hugh:
By Episode 300 something, I started reading all the BiggerPockets books because they’re the same books they tell you for all the things all the time. And so I was sitting there … So I started buying the books, right? So I bought BRRRR. I bought Long-Distance Real Estate Investing, estimating rehab contracts, all that good stuff, which is now out of date. But never once in any of the podcasts or any of the book, BRRRR, did David Greene ever say, don’t buy something in a war zone.
And then after I bought the properties, which we’ll get into later, I was like, “Oh, David Greene does that like almost every day. Almost every podcast, he’s like, “Don’t buy stuff in a war zone.” Oh, and there’s a full chapter in BRRRR, which I listened to three times that I never heard once, don’t buy properties in a war zone.
So my mind was definitely like, “Take action, take action, I want to be financially independent.” And the why was, I woke up, I was 29 years old at the time. Am I 29? Yeah, I was 29 years old at the time. And I was working a W2 job like a normal person. And I was like, “I don’t want to do this forever.” And I see the managers that were there and they’re like, “Okay, well they own their house. They’re approaching their mid-60s, late 60s. They’re miserable. Their bodies have given up. They can’t go do the things that they want to do even if they can retire.” And also, I don’t think they can retire.
And so I just saw that and I was like, “I got to do something. I got to do something.” And after 386 episodes, it’s the same story over and over. And so that conviction was solidified to go buy a bunch of crack houses with zero experience.
So one thing that helped was in the BRRRR book and Long-Distance Real Estate Investing, David Greene talks about the Core Four. He said, “You don’t actually need experience. You just need to talk to these people who have experience and run them well. And here’s how you do it.” And my background was from operations in a manufacturing facility. So I already knew how to run teams and manage a company. So I said, “Oh, this is going to be weird. It’s like managing a company but just for me. They’re doing everything anyways. They have the experience running a company.”
I don’t know what’s going on in people’s departments. I know what should happen, but as sort of the day-to-day, I’m depending on the experience of all the operators, both the workers, the managers, the team leads. And I was already used to that. So I was very nervous but I was like, “Eh.” The math says buy it. It’s above the 1% rule, right? I know that’s what you guys don’t like to hear, but it says above the 1%, I was like, “This is the one point.”

Mindy:
Okay. So you weren’t inexperienced. You were inexperienced in real estate, but you had zero real estate experience that you had related life experience and related work experience that would translate into the real estate experience. So I want to highlight that because I can hear people listening to the show saying, “Oh, Hugh bought 26 houses not knowing anything. I’ll do that, too.” That’s not the lesson that we’re teaching here today.
The lesson we’re teaching here today is Hugh made it work because he had other experience that would allow him to bring in-

David:
And $225,000 sitting in an account. So there’s also that. While this is definitely a risk, there’s a significant chunk of cash sitting for use.

Mindy:
Yes. He didn’t try to do this with no money.

Hugh:
Right. I was just going to spend all of money that I … I never treated that money like it was mine anyways. I treated it like it was something I was taking care of like a dog or something that you [crosstalk 00:56:35].

David:
And refresh me, correct me if I’m wrong. Some of these were occupied, right? They weren’t all vacant.

Hugh:
Oh, right, right. So the reason why I said it was a 1.68% rule is there were five vacancies. It was still producing 1580 on paper. It was producing 1580. It allegedly produced 1580 when I bought them. And there were also 30% under market value, every single one of them. And so-

Mindy:
The properties or the rent?

Hugh:
The rents were under market value by 30%. And it was already at the 1.68% rule. That’s what it was. I said 58 but it’s 1.68% rule. And the houses should be like 85, 90 grand and they were all 20 grand or 26 to 35 grand. Depends on … Some of them were like triplex and three twos. But most of them were two ones. And they were all in what? The area here, locally, we have a area that’s like, “Ooh, it’s the bad part of town. Ooh.” And it’s like methy people walking around and you have burglaries. But it’s not like when I was in San Diego or somewhere else where it was like, “Oh, you might die today.” No, it was just rundown.

David:
Totally unrelated. But Hugh and I are neighbors with at least two of those properties that we know of, where we look across the street with each other. So these might be rough areas, but it’s not like you’re going to get shot if you go there at night type of rough. It’s like-

Hugh:
Midwesterners considered a rough area.

David:
Yeah. There’s no graffiti. People are probably just sitting in their house doing meth, but they’re not trashing the town.

Hugh:
Right. So we buy this place. I still owe taxes. Something happens. We’re going back and forth in negotiation. BP told me to never split the difference. And so I bought the thing for … And then we go to get it appraised and we finally talk them down. I talked them down to one, zero, one, seven, $766 and 11 cents. So I’ve set like a very specific number and this was three or four [crosstalk 00:58:40].

David:
People are driving right now trying to figure out where the comma goes in that, 1.01.

Hugh:
1.01 million, but I had very specific stuff. And we went back and forth with the whole numbers. And then we stuck to that. Then we just got everything under contract. I went to go buy it. The bank was like, “Cool, let’s get it appraised.” The appraisals were like, “This is not worth that much money. What are you, crazy?”
And so I was just like, “Oh, I guess the deal’s dead. All right. See you.” And then they were like, “Oh, well, we’ll come down on the price.” I accidentally negotiated them further down on the price. I didn’t know I was doing that. I was just like, “Yeah, the bank said it’s not worth that much.” And the realtor was like, “Oh, you should try to get them down some more. This is great.” And I was like, “Oh, it is? Oh, okay.” So they came down on the price and I think I ended up buying it for like 106 or whatever it was.
They lowered it even more slightly. And then I had to bring 20% to the table. I had $225,000 and I needed 251. So I go and I ask family for a loan. So I’m now … First off, I owe taxes. So technically, I have 183,000 or something to spend or 187,000 to spend. I knew that. And I used all of the 220,000 and borrowed another 25,000 from family to basically be like, “All right, the numbers work. I have a graph, there’s a piece of paper. See?”
So I found a bank that took a chance on me and it wasn’t very good terms. And they were like, “Ah, I don’t know about this guy, but we’ll loan you money.” So I ended up buying the 26 crack houses the last day of December of 2019. And immediately, they shut the … I had no experience, property manager, they were involved. They knew what was going on. I needed a commercial account for the triplex. A commercial account takes three business days to set up, which I learned, but the previous people had already cut power.
So the day off happens, they cut their power. It’s like 30 degrees out and there’s snow on the ground. And I was like, “Oh, great. This is what all the things look like.” So I just started everything off with a bang with your standard horror stories. And that was the very beginning of my … Technically, I was financially independent at that point because I cash load stuff.

Mindy:
Okay.

Hugh:
That was the very beginning.

Mindy:
We always say that numbers don’t lie, but numbers sometimes lie. You’re not financially independent when your property …

Hugh:
They were not in good … Mindy, when you were like, “Oh, I had a water heater go or my furnace went out for 800 bucks,” I was like, “Woo, that’s so cheap.” I know a lot now about … I had a very good education over the last-

Mindy:
It was just a fan that I fixed. We replaced the fan. We didn’t replace the whole thing.

Hugh:
Oh my gosh, a fan for 800 bucks.

Mindy:
Well …

David:
Probably a fan for 20 bucks and a labor for … Yeah.

Mindy:
It’s a fan for like 150 and labor for whatever. And my husband was leaving the next day and it was 13 degrees outside. And you do what you have to do when you don’t want your pipes to freeze or be frozen yourself.

Hugh:
Yeah.

Mindy:
Yeah.

David:
I’ve got one [crosstalk 01:02:06] right now.

Mindy:
Okay. So once you get all the power back onto all of your houses, how long does it take you … Oh, just one. Oh, okay.

Hugh:
It was just a triplex.

Mindy:
How long did it take you to get these up and running and performing? Are they all … Do you still own all of these houses now?

Hugh:
Actually, last week, I sold two of them to … I started a BP meetup because Brandon Turner was like, “There isn’t one start one.” And then I was like, “Oh, I recognize that Dave guy, he did that in Hawaii.” And then I was like, “Well, there’s no one here. So I’ll start one.” And so people started showing up.
So at the time, I sold it, which was last week, I don’t want to say I’m too lazy to deal with a small house, a small two one, but it’s just as much effort to do the little ones as it is to do an 18 unit apartment complex. So that’s what I’m doing now. So I ended up buying all the other ones. And it’s been great because I took myself from W2 to financial independence with the definition being that my expenses and my income can go sunset.
Then I scale the team very quickly that worked for me. And I’m about to make that retire the company, where the operations of the company indefinitely exist from the income generated from that. And I’m very close to that goal now. But most of that-

Mindy:
So you are financially-

Hugh:
I’m financially independent. And then I scale the team of four employees and then we’re going to make that financially independence indefinitely, in perpetuity, allegedly.

Mindy:
Just on these 26 properties or there are more properties?

Hugh:
No, that was just the beginning. And so what it-

Mindy:
You really took this to heart. Jump in. Do it.

David:
I will say they’ve all been just as crazy, but I don’t know that he owns anything normal.

Hugh:
The numbers tell you to do it so you do it because the numbers say, “You should do this.”

David:
We’ll get to this one, but I may or may not have a TikTok with 1.2 million views on one of Hugh’s properties right now. We’ll get to that one in a minute, though. It’s good.

Hugh:
So basically, I spend the … And I didn’t realize this, but I had prepped and prepared for BRRRR and I was like $225,000. Sorry, I was $183,000, $187,000, whatever it was. I can BRRRR with that in my area. That’d be fine. And then I effectively had no idea what I was doing because I did a traditional purchase. I took 20% down and I borrowed 80% from the bank. No different than anything else.
And so I had no idea what to do next. I was like, “Oh, I don’t have money for renovations. What do I do?” And so what I did was I cash flowed. I took the cash flow and my W2 earnings and, I don’t know, odds and ends stuff I was selling to then constantly pay for all of my properties. And so I would just do a renovation and then I’d go onto the next one, and a rehab, and gone to the next one. But I didn’t know how to BRRRR it back out.
So finally, I do this for a while. And 10 months later, I actually successfully pull a BRRRR off. I think I had done five properties at that point. So I BRRRRed all the money back out. I got, I think it was $297,000, out. I refinanced all the properties and then I created a loan out of no loan, just for negotiations, with different lenders in town because I shopped it back around because I wasn’t happy with the first lender. I told the lender to their face, I was like, “Hey, I’m not very happy with this, but thank you for giving me money. By the way, everyone else in the nation is doing this. Can you guys do something?” And they kept saying no. So I negotiated, found another lender and moved over.
Once I had that hundred something thousand dollars, it’s like 290, I then paid the family loan. I paid the family member back off. And then I think I bought a bunch of Tesla stock right before Battery Day. That was the thing. Yeah. So I put that money back into the stock market. By that time, when I got bored with the BP podcast, I listened to the BP money podcast. I also started episode one and I would just mix that in if I was just too burn out on real estate.
And so I put a bunch of the money into VTI [crosstalk 01:06:41]. Then I set up the auto draft. Oh, taxes.

Mindy:
He would be in jail [crosstalk 01:06:48].

David:
Hugh is actually a tax evasion specialist. That’s how we built this portfolio.

Hugh:
And then I paid my taxes and I think there was a penalty of some kind.

Mindy:
Oh, I bet there was.

David:
IRS normally charges, I think it’s 4% interest on anything outstanding.

Hugh:
It was late. And then there was something … I think I extended my taxes that year, the tax year.

Mindy:
Of course.

Hugh:
And then I ended up reporting it all and then I paid off my taxes. And so at the end of it, I think I was left with 100 grand that I could go do stuff with.

Mindy:
Now, wait, 100 grand after you had completely pulled all of the money that you had put into these houses out?

Hugh:
Correct.

Mindy:
Okay. So you own 26 houses that are generating enough income that you can live off of them.

Hugh:
I think at that point, I remodeled five of them and I upped rents. And then as I up rents, the value of the properties increased because I had also remodeled them. And then I basically did one big BRRRR. At the beginning, I did one big BRRRR, where I just moved from bank A to bank B. And when they got them all reappraised, the value was much higher because they weren’t … I mean, some of these wouldn’t have normally gotten traditional lending at all. And now they were in that $85,000 to $95,000 range for most of those.
So I was able to BRRRR out a significant amount, but it didn’t matter because the note was still well paid for by the actual loans or by the income from the properties.

Mindy:
I’m trying to wrap my mind around the financial position just on these 26 properties. So you purchased 26 houses with your $225,000, plus your 30-ish thousand from your family member for your loan. Then how long before you refinanced that?

Hugh:
It was 10 months.

Mindy:
Ten months later, you refinanced and pull all of the money back out so that you can pay off your $30,000 loan.

Hugh:
I think I pulled $279,000 or $276,000 out.

Mindy:
Okay. So you pay off your family member, you pay off your taxes. You still have $100,000 left.

Hugh:
Right. And then some of that, I used to then buy the Tesla stock.

Mindy:
Okay. So you now have free and clear, well, not free and clear, you own with no money into the properties, 26 houses. So you just have free 26 houses that generate enough income that you don’t have to have a job anymore.

Hugh:
Ever. So I think, technically, it was 10 months after I purchased and I did the first BRRRR. And by that time, I had only BRRRRed … I had only refinanced, I think, a quarter, 25% of the portfolio. And so even today, I think I still have five houses or so that aren’t turned yet.
We just got a refi back yesterday where I think I bought the house for 35,000, it appraised for 55,000 and then we renovated it. It just came back at 111,000, but that’s mainly due to their craziness. From the time I bought it, 2020 and COVID and all that stuff happened. So there was 25% market inflation or something. So I pretty much just rode that up along with the renovations, the force depreciation, but I pulled $102,000 out of that.

Mindy:
So how are you financing these because this sounds like a traditional loan, but you can’t have more than 10 properties or 10 loans in your own name, right?

Hugh:
That’s a great question. So I also, because I had zero experience, did not know about conventional loans versus commercial loans. And I blew right past conventional loan, shot myself in the foot forever being able to own anything with a conventional loan. And I just started it with a 25 year … Actually, that one was a 20 year, five-year balloon note. And it was commercial loan. That was the very first one that I [crosstalk 01:10:58].

Mindy:
So purchase all 26 and one loan.

Hugh:
To purchase them. When I refied out, I negotiated basically Rosie’s deal. I designed Rosie’s deal, which Brandon Turner [crosstalk 01:11:09] …

Mindy:
Oh, I’m like, Rosie’s deal. What is that?

Hugh:
Well, he said negotiate with your lenders.

Mindy:
Yes.

Hugh:
So I bid it back out in the market and then there was a local lender and I was able to end up getting it. Instead of 20 years, I was able to get it for 30 years, 85% loan to value. And that’s probably where I’m getting most of the money from, it’s 85%, the LTV. And I will never sign a balloon unless I have to.
And so I sign an arm, but the arm has a ceiling. So that’s where the Rosie’s deal thing came in was I was comfortable signing an arm. I knew about the Dave Ramseys and the people getting in trouble in ’08. So I didn’t want to overextend myself, but I wanted to borrow as much as I possibly could because I am informed optimist and I believe that inflation’s going to happen.
So I was trying to borrow as much as I can to get started out as early as I can and fix it for as long as I can. And so I didn’t want to pull a Dave Ramsey and sign 90-day balloons and then complain about it to the rest of the world for the rest of his life.

David:
And just to clarify for anyone listening, the lender that Hugh and I use, well, for one, he’s amazing but it’s a portfolio lender. So this is a bank that holds everything in house. And so they’re able to do things that most lenders aren’t willing to do. I mean, I’ve had an experience before where I bought a property and the board was like, “Ooh, we don’t like how that property looks. I don’t think we’re going to finance it.” And then he called me and I was like, “Well, I bought it for 90 and it brings in $2,000 a month.” And he was like, “Okay, you’re proofed.” So it’s that kind of a bank, but they also only lend in our part of the state. They won’t even touch other cities in the state.

Hugh:
I can’t remember … But a lot of the BP podcasts will tell you to go to your local lenders because they just beat out all the national guys. National guys are probably great for conventional loans. But commercial loans, some of these smaller towns, it comes back to a handshake and your word and you can get a lot of very good loans.
And by that time, I was a proven seasoned operator with my 10 months of experience. Remember, it’s the same amount of time that I was married for or that I dated, pardon me.

Mindy:
Oh my gosh.

David:
Oh my god.

Hugh:
But, yeah. So I was a seasoned operator and I say seasoned operator jokingly, but I had rehabbed five crack houses. So I had the crack house issues with the roof and all the plumbing needs to be fixed and all the terrible things. And, oh, the guy owned it from the ’70s and never updated anything once. And, oh, this has not been too wiring. And all of the thing.
I learned painfully how a house works, all of the … I basically built a house, I haven’t built it, but I was there making the decisions about what needs to be done to very old houses. And so by the end of the 10 months, I was really experienced in estimating rehab costs. Because if I got it wrong, then I have my paycheck and all of my cash flow and I was going to be selling more stuff. And so I got really seasoned with being able to do that. And that’s where my experience was at that point.

Mindy:
Hugh, this has been a super lot of fun hearing your story and hearing your real estate story. It’s also given me a lot of the heebie-jeebies because you’ve made it work and I’m so excited that you’ve made it work, but I could see these also going completely sideways. And I want anybody listening to understand that you have made calculated risks based on, first of all, being funded, just because you had to owe taxes on that money, which I would’ve paid off first and I would’ve made different decisions, but it isn’t my story. It’s your story.
You had money to buy. You weren’t borrowing all of the money from somebody else. So you started off with a good financial foundation and you had life experience and work experience that allowed you to not start from ground zero. You were doing things. You were taking your experiences and moving them forward. So it wasn’t like you were just figuring out as you were going, you had processes in place. And these are proven processes that work in business. They do translate very well to real estate.
So it sounds like you started from zero, but you didn’t start from ground zero. And I just want to reiterate that before somebody is like, “Hey, I heard Hugh just jumped in with both feet not knowing anything. So I’m going to do that, too. And why did his succeed?”

Hugh:
I’d recommend not doing what I did.

Mindy:
Don’t be like Hugh.

Hugh:
I would do it again, but now I have a lot more experience to know what not to do. But I’d say I definitely lucked. I was very, very lucky and fortunate.

Mindy:
Thank you for using the L word because, yes, you were very lucky.

Hugh:
I was very lucky. I mean, I had zero reserves. I borrowed an extra 50 and I owed a lot of money to the government and I took the risk anyways because I believed that the numbers and the fundamentals would’ve worked out. And the biggest thing I had was education, except for $12 books, $20 books from BiggerPockets. I think that was all of $200 into education and a lot of free content from online. And you guys really set the fundamentals.
And so it was a … Yeah, I mean, I was very, very fortunate and very lucky to be able to pull it off. But I also believe in the definition, the Seneca’s definition of luck, which is, luck is when preparation meets opportunity. And so I was lucky that it happened because I was prepared and I was fortunate that nothing incredibly terrible happened while owning them so far.

Mindy:
That’s a great way to phrase it. And it sounds like I’m dismissing you, but I’m not. We still have the famous four questions. Are you ready, Hugh?

Hugh:
Whoo. I am, famous four plus one, right?

Mindy:
Famous four plus one, famous four questions plus one demand. So the first question is, what is your favorite finance book?

Hugh:
My favorite finance book. It’s going to be tough. Personal finance or business finance?

Mindy:
One of each.

Hugh:
Okay. Personal finance is if I could go back in time and smack myself as an 18 year old, I’d force me to read Set for Life by Scott Trench. And for a business book, my favorite finance business book is Michalowicz. If you are a business owner or you’re entering into real estate or whatever, I don’t know, you sell wicker baskets, you should read Profit First if you’re going to step out into making your own money.
And earlier you do it, the better. But if you already are years deep into your company, read it anyways because you’ll end up getting something from it. It’s just a very practical, straightforward approach in running finances for your company that even me, a hick from the sticks from Missouri, can understand.

David:
I switched over to Profit First about three months ago after Hugh and I had a long conversation and some whiteboard math and I sleep a lot better now.

Hugh:
Having money set aside to pay your taxes, to Mindy’s point, I’m like, “Oh thank God. At least I can pay my taxes and my loans. Everything else might be okay or terrible, but I can pay my taxes and my loans,” because I’m scared of the IRS.

David:
And we just had a plumber snafu so we went 6,500 over budget on a reno. And having 10 grand in the tax account already for the year, it was easy to go, “Okay, cool. Now we’ll cover the reno and then we’ll put it back in on the refi,” which is a much better spot to be in than not having money sitting on standby in a tax account. So it’s a good safety net. What was your biggest money mistake, Hugh?

Hugh:
Ooh, my biggest money mistake.

Mindy:
There’s so many to choose from.

Hugh:
There’s so many.

Mindy:
The first 45 minutes of this show.

Hugh:
Yeah. I’d say the biggest money mistake I ever made was not learning sooner about where to put investments. If I could go back in time, I’d say I would’ve started investing when I was 18. But biggest money mistake is hiring employees, that’s very costly.

Mindy:
That is true.

Hugh:
That was a joke. No, employees are awesome if you have the right ones. Yeah. I didn’t know anything about investing. Several times, Mindy was like, “Oh, where’d you put the $500?” I’m like, “Yeah, I saved it.”

Mindy:
You literally put it in a checking account.

Hugh:
Oh, I think it was a checkings account. Yeah. I did not know what I was doing.

Mindy:
Okay. Let’s look at that for a second. You did not know what you were doing and yet here you are. It is still possible to figure out your finances and fix your mistakes even if you have literally made them all as Hugh has literally made every mistake financially. It is still possible to turn your finances around and set yourself on the right trajectory by jumping into real estate with both feet knowing nothing.

Hugh:
Yeah. I knew that it was going to be important to save, but I didn’t know what for. I just heard save. So I did. And one day, I found BiggerPockets and I was able to use it, which all of your listeners already know that. But it was that I saved. In the future, it was helpful.

Mindy:
What is your best piece of advice for people who are just starting out?

Hugh:
I’d say jump in with both … No, don’t do that. I’d say get educated. Learn, read, listen to podcasts, question everything, question this podcast, whatever you’re doing. Just because I did it or someone else did it, figure out why, what was the circumstance? Learn the fundamentals and run the numbers. Practicing makes you a lot more comfortable with things.
So whatever that is, if you are going to, I don’t know, be a gardener, start doing things with it and keep notes and practice and learn all the things that you want to do about whatever it is that you want to do. So get educated.

David:
What’s your favorite joke to tell at parties, Hugh?

Hugh:
Favorite joke to tell at parties. This is a … I have a good finance joke, but I generally don’t like to brag about my financial situation. But I have credit card companies that call me every day and they tell me that my balance is outstanding.

Mindy:
For more, really, really, really terrible jokes like these, Hugh shares them in our Facebook group, which you can find at facebook.com/groups/bpmoney. Okay. Hugh, for people who aren’t in our Facebook group and, really, if you’re not, you should join, where can people find out more about you?

Hugh:
I have a YouTube channel, it’s called the Hillbilly Millionaire. And I also have a website called hillbillymillionaire.com. Yep. That’s where you can find me.

Mindy:
Okay. And we will link to both of these in our show notes, which can be found biggerpockets.com/moneyshow289. Hugh, this was a lot of fun. Thank you so much for your time today. This was really great to get to know your real estate investments and, oh my God, those money mistakes have made me really, really, really sad. But I’m so glad you were able to turn it around because wow, wow, that was a lot of cringe in the beginning of this show.

Hugh:
Yes. And probably more to come.

Mindy:
No, no, you figured it out. No. No more money in a checking account.

David:
Thanks for joining us, brother.

Hugh:
Well, yeah, thanks for having me on. This has been a dream to come on BiggerPockets. And I think I have that idea that everybody has when they first do it and they said, “I’ll be on BiggerPockets one day.” And here I am.

Mindy:
Okay. Hugh, we’ll talk to you soon. Okay. David, that was Hugh Carnahan and his … You know what, he should be called Hugh Carnival because he has a crazy carnivalesque story and carnivalesque life. So we’re going to call him Hugh Carnival from now on. I mean, there’s only a few minutes left for the show.

David:
I always introduce Hugh as my eccentric millionaire friend and he never disappoints because he is … I mean, who goes and buys a missile silo, right? And that was-

Mindy:
Who goes and buys 26 houses?

David:
Well, that’s also … Yeah, yeah. So my first few interactions with Hugh, I thought he was a little off the hill. And then the more I’ve gotten to know him and the more I’ve gotten to partner with him on deals, the more I just realize that, yeah, he takes some risks but he’s a smart dude and he’s savvy. He’s good at building teams. He’s good at scaling. And it’s a lot of those things that come together and it’s helped him out. He’s doing well.

Mindy:
Well, and if you listen to him, he didn’t say, “I bought 26 houses because I knew I needed to start investing in real estate.” He said the numbers made sense. So he looked at it more than just, “Oh, that would be cool. Now I have 26 houses.” He still ran numbers. He still did the preliminary research that he was supposed to do. Maybe he could’ve done more. I can’t believe he did that. I would’ve said no at the coffee shop that you were sitting with him at. I would’ve been like, “Nope, not a chance, run far.”
I would run far from that and I’m more experienced, but I’m also a cautious investor and I don’t invest in that class of home. I don’t want 26 houses. I mean, even if I had one point whatever, he finally paid for that, I would not want 26 houses to manage. So that property wouldn’t appeal to me, that deal wouldn’t appeal to me at all. But for a first-time deal, I’m so glad he made it work because I could see a thousand different ways that it wouldn’t. So I’m really glad.
But the reason that it worked is because the numbers made sense. The fundamentals of that deal were in order before he even started and that’s really what’s so important. That, and what did he have? Like 368 episodes of the podcast that he had listened to, which is probably something like 500 hours of education.

David:
Yep.

Mindy:
And if you’re going to educate yourself, one episode isn’t going to be enough.

David:
No, definitely worth doing your homework.

Mindy:
Even though he listened to 30 days’ worth of podcasts or even though he listened to the podcast for 30 days, he listened to 500 hours and 30 days. Man, does he ever sleep? We didn’t ask him that.

David:
Well, he listens to everything at 2x as well.

Mindy:
That’s true.

David:
So actually, I think he’s at two and a half x now. So that condense but he dove all in.

Mindy:
Yeah. Really, if you’re going to be like this, you got to dive all in. Okay, David, should we get out of here?

David:
We should.

Mindy:
From Episode 289 of the BiggerPockets Money podcast, he is David, hep, hep, hooray, and I, Mindy Jensen, saying, let’s go silo.

Ruchir Sharma, Rockefeller International chairman, joins ‘Closing Bell’ to discuss the growth story for Chinese stocks.

David:
This is the BiggerPockets Podcast show 591. CEOs of tech companies don’t necessarily bet on a company, they bet on a market. What they were getting at is in the right market a lot of companies will do well and the actual company itself doesn’t have as much to do as the market that it’s coming up in. And real estate is like that too. When you have a really solid market like this, you can make a lot of mistakes and you can be okay. When you’re in a really tough market, you can do a lot of things right and you’re not going to be okay. And because I realized that I started paying a lot more attention to the bigger factors that affect how our individual properties perform.

David:
What’s going on everyone? It is David Greene, your host of the BiggerPockets real estate podcast here today with a special Seeing Greene episode. Look, if you’re trying to find financial freedom through real estate, if you want a better life, if you want to live life on your own terms, or if you know that you have potential that you are not reaching and you believe real estate is the vehicle that you are going to get to it, you are in the right place. BiggerPockets is a community of over 2 million members, all on the same journey as you and we at BiggerPockets are dedicated to helping you get there. We do this by providing an incredibly powerful forum on the website, BiggerPockets.com, where you can ask any question that comes up to real estate investing. As well as research question that other people have answered. We have a very, very strong list of blog articles where you can read articles other successful investors have written detailing how they did it.

David:
And we have the world’s best podcast where we bring on different guests to describe how they won at real estate, how they made mistakes at real estate or experts in the field such as tax strategy, lending, rehabs, analyzing deals, commercial, triple net, short term rentals, long term rentals, you name it, we got it. That come in and give you a play by play understanding of how they succeed at real estate and more importantly, how you can too. On today’s show we get into some really, really good questions. So what you’re in for now is if you go to BiggerPockets.com/David, you can leave a question and I will answer it right here for all of you to hear. We get into some strategy talk as well as some nitty gritty, some brass tacks, there’s a little bit of everything on this episode, but it’s a lot of fun.

David:
One of the issues that we got to was a really good question no one’s asked me about and the guest said, “Hey, I’ve got a bunch of money in the bank. I’m saving it to go do a BRRRR deal, what do I do with it in the meantime? Should I pay down my loan? Should I not pay down my loan? Should I pay down my loan, get a HELOC, what do you think is the best bet?” One of the people asking a question on our show said, “Hey, I want to get from residential into commercial. What should my criteria be?” We talked about, should you buy one property and pay it off and just live off the cash flow? Or should you buy several properties using a loan as well as how to get a loan when you leave your W2 job and more, we have some incredible questions today so make sure you listen to this entire episode.

David:
Before we get to it. I want hit you with today’s quick tip. Look, we are wrapping up the first quarter of 2022 already. Now, many of you made goals as we all did this together to start the year. Now’s the time to check in and see, where are you at with them? I encourage you to use BiggerPockets to help you achieve those goals. So if you have questions that you need help answering, check out the forums. If there’s a specific topic that you want more information in, go to BiggerPockets.com/store and see if have a book on that topic where we can help you. If you’re looking for a partner, consider going to a meetup and meet other people and find someone you think that you can trust to get into business with. BiggerPockets has so many different ways to help you with your goals.

David:
In one of the shows we interviewed Jonathan Greene, same last name as me who, said he actually time blocks time in his calendar to get on BiggerPockets and interact with the other members, just to bring value to them. Doing something like that can have an incredible impact on your business, so do it. Looking for an agent? Check out our agent finder. There’s all kinds of ways that we can help you and we want to do that. So see where you are with your goals. If you’re behind that’s okay, you got plenty of time to catch up. And if you’re on pace, see how BiggerPockets can help you get ahead. All right. I want to encourage you before we move on to listen to us on our YouTube channel, we take these same podcasts and we do put them on YouTube. When you’re listening on YouTube, you get to see some of the weird hand gestures that I make or funny faces that I make.

David:
But more importantly, you can leave us a comment. And that’s what I’m looking for. If you go to YouTube and leave a comment about what you liked, what you didn’t like, what you want more of, I will know how to answer these questions better. Please be sure to like, share, and subscribe what you see there. And if you’re listening on iTunes, Stitcher, or any of the places you get podcasts, leave us a review there too, they really, really help. We want to stay the number one real estate podcast in the world. All right, enough of that, let’s get to our first question.

Caleb:
Hey David, my name is Caleb. I’m a home builder and a realtor here in north central Texas in Fort worth specifically, I actually got 42 new sets of plans that I have to get started this week. So it’s going to be really busy, but my question is obviously pertaining to investing. So my wife and I, we have our primary residence and we also have an investment property that we just put under contract to sell. And when it’s all said and done, I’m going to walk away with about $80,000 investment for investment purposes. That’s not including our personal savings and all that other personal finance guru, recommendations. That’s strictly just money to use to invest. There’s two schools of thought here, and I’ve kind of been going back and forth between the two once this house closes. One option is to split that money into two 20% down payments on around $200,000 properties.

Caleb:
And so basically I’m doubling down. I’ll be turning that one rental property into two rental properties, just because the amount of equity that I was able to pull out of it by selling it, I didn’t want to refinance it because the rates and the price just wouldn’t have made sense for the amount that I could have pulled out without doing an appraisal. It was kind of a complicated situation.

Caleb:
Anyways, it was better for me to sell it. So option number one is to double down, buy two houses with that. Option number two is the BRRRR strategy to save up enough cash to where I can buy a house cash, remodel it myself, doing all the work and then refinance and just do the traditional BRRRR thing. I think that would take me another six months or so to save up the money that I would need in order to achieve that or find somebody to partner with. What are your thoughts on this scenario? What would be the best course of action in your mind and what are you betting on appreciation wise in 2022, that’s this year. All right, man, I really appreciate it. I love all of BiggerPocket’s content. You’re awesome, thanks.

David:
All righty. Well, thank you, Caleb. That was a very well thought out video with some really good questions in there. And I’m happy to tackle this for you. Now, let me start off by saying to you and to the audience, this is a subjective interpretation of what I think you should do, which is based on what I would do, but you’re in a different circumstance in life than me. So take that into consideration if you’re listening to my advice. Not everybody’s in the same situation and not everybody is seeing the cards being dealt the same way that I’m seeing them, but with you guys understanding that if I was in Caleb’s situation, here’s what I would do. I would go ahead and answer. First off the last question you asked is probably the best place for us to start. It’s what do I see happening in 2022?

David:
And that’s a great question to ask because my advice is going to be geared off what I see happening. The same advice doesn’t work in every single market. You really got to adjust your strategy to what’s being offered to you. So here’s what I see in 2022: more money being printed, money that has already been printed hitting the actual consumer experience. So you’re going to see gas prices go up more groceries go up more. The price of assets go up more. So this wave was started, this tsunami in the middle of the ocean of inflation. It’s now making its way to shore. So we’re going to see more of that. I think you’re going to see more people rushing into real estate because they are recognizing that is a great inflation hedge. We’re also not building enough of it. I think rates might go up a little, they might go down a little.

David:
They’re largely going to stay the same. So I don’t think the rate issue is going to play a very big role in real estate. But I do think that real estate is going to go up in value, both in rent and in how we value it as far as what it would sell for. So overall it’s going to be another really strong market, that’s what I think. And that’s why I’m going to give you the advice I’m giving. So option one was, should I take my $80,000, save up more and then use the BRRRR strategy. So theoretically, you’d get the majority of that 80,000 back to go buy the next house. Now that’s usually where I tell people that they should go. You can preserve more capital, you can scale faster, it forces you to get a better deal because you have to buy below market value.

David:
However, with the competition that we are seeing, my fear Caleb is that in the six months that you try to save that money, especially if something happens and it takes more than six months, prices are going to go up faster than you can keep up with them. So you may end up never getting the amount of money you need to buy a place cash because prices are going up faster than you could save money. Even if you do get to a point where you can pay cash for something and do the BRRRR deal, or you give up and you go the hard money way so you can buy something, how much will prices have gone up while you were waiting? Now maybe in the area that you’re in, I believe you said it was Fort Worth, maybe prices aren’t going up as fast. If you’re in the $200,000 price point, it’s probably not red hot.

David:
So if there’s a lot of fixed upper properties, if you really can do it in six months or even better, if you could find the money from somewhere else, borrow it from somewhere, get a small loan, something to get started sooner, I’d recommend that. If you can’t do that, which is probably going to be harder to do. I would say, take that money and spread it out over several different properties. Get as many of them as you can in the best locations possible. Now here’s my advice to you, I don’t want you to look at how many properties you own. That is a misleading number. It’s why people say I have X amount of units, X amount of doors. It just doesn’t matter. Look, you could have one property in a great area that makes a ton of money, or you could have another property in a terrible area with a ton of headaches, but 50 doors.

David:
Would you rather manage 50 headaches or one great property? It’s why you don’t want to look at how many properties or how many units you have. Instead, what you want to look at is how much cash flow do I have, how much equity do I have, and how much debt have I taken on? Now when interest rates are low and we expect inflation to continue, having debt is actually a good thing if it’s good debt, not consumer debt, we’re talking about real estate debt, debt that pays you because you bought it with an asset that brings in income. So what I would recommend you do is you take on as much debt as you can in the best areas that you can with the most cash flow that you can and the most equity that you can. Now, I realize that’s saying, go do everything. But what I’m saying is the way you use your money should be taken into consideration with that strategy.

David:
So if it was me and I had $80,000, if I could buy four properties and put 20% down, that’s what I would do, but I wouldn’t go and say, I’m going to put the whole 80 or whole 100 into one property, just pay cash for it or something like that. You’re better off in this environment to get more real estate, to take on more debt, because you’re going to be paying it back with cheaper dollars and to get more revenue coming in. Now don’t make the mistake of thinking that the cheaper houses are the better deals or the safer deals. It’s not true. Doesn’t matter the price of the home, it matters the location of the home and the quality of the tenant you’re going to get. Sometimes a more expensive home is much safer than a less expensive home, even though the price point is higher and it feels scarier.

David:
So I would be looking for areas you think you’re going to have more growth, just look at which parts of Texas are growing faster. You’re a home builder. So you obviously have a very good idea where homes are selling right now. I would invest in those areas putting as little money down as I had to to get the loan that I wanted to get and taking on as much healthy debt as possible to get the most expensive real estate in the best area. And then I would let inflation do its job as prices go up, as rents go up and eventually you’ll be able to refinance those properties that they’ve gone up in value, so you don’t have to do the BRRRR method and do it all within a six month period. You can sort of do it over several properties at a longer span of time. Thank you very much for that question.

David:
All right, question number two is from Micah S. in Oregon. “In your recent Q and A podcast, you mentioned placing notes against a commercial investment property versus syndicating. Wondering what terms you’re using on that money while you renovate or turn a property around. With that is there a dollar figure you go after? What’s the interest rate you’re offering the investor and over how long? Lastly, are you putting them on title at all for their peace of mind or strictly a personal note?” Okay there Micah, thank you for asking this. Here’s where I’m going to start. If you’re asking because you’re trying to do the same thing you probably don’t want to copy my model because we’re in a different position. I have a lot of experience investing in real estate. I’ve never lost money investing in real estate. I have a ton of money that I keep aside in reserves.

David:
I have very healthy income streams coming in from things that are both real estate and non real estate related. So someone lending money to me is different than them lending money to I’m presuming you. Now I don’t know you, maybe you’re a billionaire, but you’re probably not going to be submitting a question to BiggerPockets if that’s the case. So here’s what I’ll say. I’ll share with you my terms, I’ll share with you why I give them, I’ll share with you who the right person to invest with me is. And then I’ll give you some advice if you’re trying to do this for yourself. When I’m raising money, I’m not doing it in a syndication and here’s why: when you invest in a syndication, you are not investing in a person, you’re investing in a property. So you have to hope that property performs well and your return is tied to how well that thing goes.

David:
So I’ve invested in syndications before where no fault at all of the general partners, a hurricane hit and destroyed the property, which meant we all did not make money for several years because any money that property made went right back into fixing it up. So the returns were bad. And if you were depending on high returns in that syndication, you would be screwed and there’s nothing that you can do about it. It’s okay because syndications tend to give of a higher return, but that’s because they are associated with more risk. Now, the position that I’m in, I just couldn’t lose someone’s money. I can’t sleep at night. I wouldn’t feel right about everything. Anyone who gives me money when they’re lending to me is not lending in a property they’re lending to David. They are trusting David’s going to pay me back. Not that property’s going to pay me back.

David:
And it may sound like a subtle difference and somewhat nuanced, but it actually makes a difference. So if I start a syndication and I borrow money, I feel like I’m going to have to pay people back even if the property goes terrible. So what happens is I’m taking on extra risk to get the same return as I would get if I didn’t do that, it doesn’t really make sense. So instead, what I do is I guarantee the note personally, they get paid regardless of how the property performs. Now, another part of your question was, do you put a lien on the property to secure them? You said so they can have peace of mind, right? The answer is I do if I can. So I have several properties I’m raising money for right now. If one person comes to me and says, “Hey, I have $500,000 and I want to lend it to you.”

David:
That would be a note on that property in second position, easy enough. If I get 10 people with $50,000, then what would happen is I’d have a second, a third, a fourth, a fifth, or I would have to combine them all together. And now it becomes a syndication. You see what I’m saying? So it depends on the amount of money that someone lets me borrow. If I can put a note on or a lien on the property I should say to secure their financing. Now, most people that lend to me don’t need that because they trust me. They know I’m going to pay them back. They see my track record. They hear me on the podcast all the time or I have a personal relationship with them so that doesn’t become an issue, but I have no problem doing it and I’ve offered to do it without someone even asking in times where they have enough money, that can be tied to one property.

David:
But often it’s not like that. Sometimes I borrow money and I flip a couple different houses with it. Sometimes I borrow money and I put it in different deals. And then I BRRRR the money back out, I refinance it, I put it into the next one. So sometimes I can’t tie it to a property because it’s moving around amongst different things. But for the majority of people, if you’re considering letting someone borrow money that you don’t know is a really good investor or has a really good track record, or you don’t know personally, even if you know them personally, even in that case, you want your money to be secured against that property. You want some kind of lien in case that person can’t pay you back. Now, as far as the terms that I offer, they obviously differ depending on the amount of money that I’m being given and how long they want to let me borrow it for.

David:
Typically, I’m looking for a person that wants an alternative to a bank. I’m not looking for the real estate investor that wants to go out there and tear the world up and just set the earth on fire. That person doesn’t want to lend their money to me. They want to go learn how to invest themselves. I’m looking for the person that doesn’t want to learn how to invest, doesn’t have the time, doesn’t want to take on the risk, is already good at something else that they’re doing and they just want a return on their money without having to go put a lot of work into it. I’m not looking for the person that says, “Hey, I’ll let you borrow my money but tell me everything you’re doing in this deal.” That would just slow me down too much to even be able to use the money. So I’m looking for people that want an alternative to a bank. That’s why I pay 8% interest on the money that I borrow.

David:
And it can go up more depending on what’s going on in the economy or depending on how much they’re letting me borrow. If they let me borrow more, sometimes I offer a higher rate of return than that, but that’s the gist of it. I don’t think most people are going to be able to offer the same terms and rate that I do. That’s just the way it goes. So if you are looking at this Micah and you’re trying to figure out how you should do it, you’re probably going to have to tie their return to the equity in the deal. Unless you’ve got 100s and 100s of 1000s of dollars sitting in reserves where you can actually pay them what we say is debt.

David:
So I pay debt, they get their 8% and it doesn’t matter how the property does, every month they get a deposit just like if it was a bank. If you’re not experienced, if you don’t have as much money, you probably can’t guarantee it the same way that I can. You’re going to have to tie it to the equity in the property. They’re probably not going to get their interest until the very end when you pay them back, you’re going to have to structure it differently than I do. And if you want to invest with me or let me borrow money, stick around on to the end of the show and I’ll tell you where you can go to register to do just that.

Shane:
Hey David, I have a lending question for you. My name is Shane. I’m a college student. I have two properties at the moment, two single family houses and I’m looking to get my third. And my problem is I don’t make a lot of money on paper. I work in real estate sales, closed about two deals a month last year, it was my first year. I made nine bucks an hour as an EMT and obviously college student. So I’m looking to get out of the house I’m in now, which was supposed to be a flip. It’s way too big of a house for me to be living in. I’m going to turn this one into just a larger, higher end rental. But so I’m looking to put a seller finance offer out, get into that and then do a balloon payoff in I don’t know, about five years or less. So I need to qualify without a lot of income for a personal home, which will eventually be a rental, but I just need help refinancing after I get into it. Thank you.

David:
All right. Thank you for that, Shane. Luckily for you, this is not too difficult of a have a problem. So if I hear you correctly, what you’re telling me is that you want to refinance out of this loan that is seller financed with some private money and hard money into just a straight 30 year fixed rate mortgage, but you don’t make a lot of money so your DTI isn’t solid, you’re having a hard time with the refi. What you need to do is to find a broker like me and ask them if they have the debt service coverage ratio loans, or DSCR. Those are loans where the bank is going to take the income that the property itself would be making if you rented it out and use that to qualify you as opposed to money that you are making working nine dollars an hour as an EMT, I believe you said.

David:
So you can try banks, you can try credit unions. They’re probably not going to have products like that. You need to go to a broker like me who goes and finds different lenders and then we find the one that has the product that you need. And then we broker the deal for you. So luckily for you, it’s not too complicated or too hard. You just have to be asking the right people. You could call a hundred credit unions and probably none of them are going to have the product you need. So the right direction for you to go in is a mortgage broker. All right, in this section of the show, we are going to go through the comments that are dropped on YouTube. Now I love when you guys drop me comments on YouTube, because it gives me an idea what type of content you want to see, what type of questions we should be picking.

David:
It also lets other people see what you think of the podcast, what everybody kind of thinks of it. So this is one of my favorite segments where I get to go through and share some of the comments we had. The first one comes from Christa Seals, “#DavidGreeneforpresident.” That’s pretty cool. What do you call the emojis where the hands go up like this? Praise hand emojis, and then a smiley face. “Thanks for dropping all this knowledge. Economics definitely affect real estate so I appreciate you touching on those topics.” Well, thank you Miss Christa. I appreciate that. That is a thing that most real estate influencers or teachers, whatever you want to call us, want to shy away from. It is easier to tell you how to analyze a deal, it is to tell you how to pick a tenant, it’s easier to tell you how to rehab a house than it is to get into the huge, complicated macroeconomics of real estate.

David:
But I heard a very smart person tell me once that CEOs of tech companies don’t necessarily bet on a company, they bet on a market. What they were getting at is in the right market a lot of companies will do well and the actual company itself doesn’t have as much to do as the market that it is coming up in. And real estate is like that too. When you have a really solid market like this, you can make a lot of mistakes and you can be okay. When you’re in a really tough market, you can do a lot of things right and you’re not going to be okay. And because I realized that I started paying a lot more attention to the bigger factors that affect how our individual properties perform. So I appreciate that you noticed that.

David:
Comment number two, “These are my favorite. How can we know if it’s a Q and A episode, search coaching calls in the title?” Okay so [Aberance Art 00:21:58], this is a very good question. How do I know what type of episode I’m going to get, especially because you like this one. Well, one way is that the light behind me is green, you know it’s a Seeing Greene episode. But maybe you want to find out before you actually open and start watching it. So another way would be to look for the title artwork. So if you see just my face, it’s probably just me on a Seeing Greene. If you see me and Rob Abasolo or me and some other co-host, then odds are it’s an interview with someone or a deal deep dive or a topic deep dive into a specific strategy or something that we’re working on or deal we did maybe. But when it’s just me, it’s more likely to be a Seeing Greene episode. Another thing is that you can check out the show description.

David:
So if you check out the little arrow that points down and it drops down the whole show, you’ll see the topics that we talk about when there’s a lot of them with timestamps you’ll know, hey, that’s more likely to be one of these Q and A episodes. When it’s just a paragraph that describes the guest we’re having it’s probably not a Q and A episode. So thank you for asking that. That’s actually a very smart question. And the last one from [Talita N. Runalinho 00:22:57]. “Hi, David. At 54 minutes, you answer on return and equity and the advice you gave him. Can you make a more detailed video on your thought process around equity return doing a cash out verse selling and a 1031 into another, when to do either one. Thank you.” This was from episode 570.

David:
All right. So I can make more videos. If you guys check out my YouTube page, I do talk about this, but let me just take a second to give you the summary of it right now. Whenever I have a decision of, I have a lot of equity in a house, should I keep it or should I sell it, or should I refinance it, or should I sell it? You’re you’re trying to figure it out. I turned it into like this flow chart. So the first question is, do I have equity? If the answer is no stop right there. If the answer is yes, move along to do I want to sell, do I want to refinance? If I want to sell the first question I ask myself is, is this a property I want to keep? Now, there are a few metrics I look at when I’m deciding if I want to keep it, the first would be, is it causing me a headache?

David:
Maybe the location’s bad. I would want to sell that one. Maybe the property manager in that area just is terrible and for whatever reason, I can’t make that property work. That’s causing me a headache, I might want to sell it. I would ask myself, are the rents going up consistently? If they’re not going up consistently, I probably don’t want to hold it long term. I would ask myself, is the value likely to continue going? Will it continue to appreciate? If the answer is yes, I might want to keep it and that would lead to maybe I should do a cash out refinance. If the answer is nope, it’s not going up, I probably want to sell it. So those are the questions that I start to ask myself. What benefits would I have by keeping it? Is it going to appreciate? Is the cash flow going to go up? And is it causing me headaches?

David:
If the answer is these are all bad, that’s going to be a sell. If the answer is, these are all good. That becomes the cash out refinance. And then it becomes very simple. I’m going to cash out refi and I’m going to go buy more property. When I go buy the more property I ask myself those same three questions. Is it going to cause me a headache? Is it going to increase in cash flow and cash flow strongly? And is it going to appreciate, and if you just keep real estate that simple, you’ll find that you can scale pretty fast, pretty easily. All right, let’s take another video question.

Andrew Freed:
Hi David, Andrew Freed. Thank you for taking my question. I currently have eight units, one of which I’m house hacking and that kind of brings up my question. What low down payment loan product would you recommend for somebody wanting to house hack a three to four family this year, but has already used his FHA loan? Thank you, appreciate your help. Take care.

David:
Now Priscilla Rodriguez had a very similar question. They’re asking about low down payments and FHA loans. So I’m going to answer both of your questions here at the same time. All right, let’s look at your options here. You’re thinking the right way, you’re house hacking, you want to buy another three or for unit property so you can repeat the process, but you’re trying to put less money down and borrow more. In a high inflation environment that is usually a better strategy. The problem is if you’ve already used your FHA loan, you don’t have a ton of options. Now, when you’re buying a single family residential property with a conventional loan, you’ve got 3% options, 5% options. You’ve got different options depending on the price point of the home and the location of where it’s at. When you’re going after a multi-unit property, those go away. So with a duplex, you can get 15% down on a conventional loan in most areas.

David:
With a three or four unit property, you’re going to be looking at 20 to 25% down, depending on your circumstances. The FHA is the exception. So here’s what I would say. The property that has the FHA loan on it, if it has equity, refinance out of that into a conventional loan that frees up your FHA loan, which you should then use to buy the next property. Now FHA loans are great. 3.5% down is awesome. They also have a lot of flexibility on things like credit scores, but they’re not something you can just keep doing over and over and over again. You can only have one at a time. So what you want to do when you’re using that loan is you still want to look for a really good deal. You still want to get something in a high growing area or as below market value as you can so that you can refinance out of it faster, meaning you have the equity to get in at to 80% loan of value and then use it to buy the next property.

David:
All right, moving on to the next question. We have question five from Maxime. “Hey David, in episode 570, you had mentioned that good new deals are getting harder and harder to find as more investors are coming into the market. Given that technology has made investing easier…” Yes, I did say that. “Do you think that these two trends are indicators of home ownership levels decreasing as investors push up the real estate prices? If so, how hard do you think it will be to break into the market 10 to 15 years from now? I am 15 right now. So not investing just yet. Just interested in real estate and planning ahead. Thanks.” Well, first off Maxime, kudos to you for being 15 and listening to this podcast and thinking ahead, that’s way further than I was when I was 15. Also we just interviewed Dominique Gunderson who got her start at 17 years old.

David:
So you may not be as far behind as what you think. Now, let me clarify a few things. I don’t think it’s just investors that are making the market too hard for people to buy homes. I work in real estate and real estate sales, and I see that a small percentage of the people buying homes are investors. It’s still mostly people who just want a place to live and want to own not rent that are buying the majority of homes. I don’t think the problem we have is because there’s too many investors. I think that the problem we have is because there’s a lack of inventory. So if I was in new your situation, here’s what I would be thinking, monitor the amount of homes that are being built in the area where you want to buy. So it doesn’t matter if you live in Tucson, Arizona, and they’re building a lot of homes in New York.

David:
What you want to know is if you’re going to be buying in Tucson, how many are they building there? Pay attention to that. If they’re not building more homes, it’s going to be harder and harder and hard to get these homes when you become of buying age. If they are buying homes, then that means prices probably won’t be going up as fast in those areas as they are in others. Another thing to think about, and this is going to be hard to swallow, not just for you, but for everyone else. When we had a more consistent money supply, saving up money, made more sense. You knew if I can save up X amount of money, I can go buy a house. I remember a conversation I had with one of my aunts when I was your age, 15. And she said, “Shoot, I think if you go into a bank and you have $30,000 that you say you have as down payment, they’re going to give you a loan.”

David:
And at the time she was actually kind of right. It was very hard to save up money. And $30,000 was a lot more then than what it is now. The problem is if you’re saving up money, I don’t know what that money’s going to be worth when you go to actually buy something. So it might not be enough of a down payment, or it might be actually less than what you started with because the purchasing power has gone away.

David:
So I do want to encourage you to save your money. You shouldn’t be spending it on dumb things, especially if you want to be an investor, I just wouldn’t get completely wrapped up in, hey, I’m just going to save up money and buy a house. A really good strategy for someone at your age would be to find a wholesaler or a flipper or someone like Dominique, who we interviewed on the podcast, who has a business, where they find off market deals and learn how to find your own deals so that you’re not dependent on whatever prices are on the market when it comes time to buy a house, you’re also going to learn a ton about real estate and about life in a business like that. So I think if you could find a good one, that’s a great place to start.

David:
The next question comes from Michael N. in Denver, BP headquarters town. “I have a rental property, two bedroom, two bath with a garage and a town home in Arvada, Colorado.” If I’m saying that wrong and it’s Arvada, please forgive me, Coloradans. “I bought it for 200,000 five years ago. Currently looking to sell it for 350.” Well kudos to you, Michael. “I want to use about a $100,000 to invest in either Detroit, Pittsburgh or Kansas City. Is this a good idea? My question is, should I buy $100,000 of property cash and just cash flow forever? Or should I buy multiple properties in multiple cities and just put 20% down on each and on possibly five properties. Less risk with one property paid off, more risk with multiple properties. Which plan is better? I’m planning on owning long term either way. Thank you.”

David:
Okay, Michael, let’s break down your question. First off, good job buying the property. You’ve now got this $100,000, probably a little bit more to go invest. So the question is what’s the best way for you to invest it? Well, the first thing is I think you have to define your strategy and maybe think through if you want to BRRRR a property, how many properties you want to own over the long term. I don’t know how old you are. I’m assuming you’re on the younger side because you’re you have this rental property that you bought that was smaller. If you’re older, that’s typically when we play more defense. If you’re younger, we typically play more offense, but those strategies are not set in stone. It really depends on your financial situation.

David:
In general in the market we’re in right now, I think we’re going to see a run up in prices. We’ve continued to see a run up in prices. We’re continuing to see the dollar becoming worth less and less. So I would encourage you to buy more properties, putting less down. I wouldn’t go pay cash for something and as you said cash flow forever. I would be looking at how can I put as little money down on as many properties as I can in the best areas that I possibly could. That’s what my preferred strategy would be going forward. Now the second part of your question here has to do with where to invest, Detroit, Pittsburgh, or Kansas City and is this a good idea? Here’s what markets like that tend to have in common. They’re going to be lower price points, they’re going to appear to cash flow higher on paper because they’re all going to meet the 1% rule.

David:
And they’re going to be challenging markets to own in which you might not be thinking about. So the reason that those houses are cheaper is because there’s less demand for them. Why is there less demand for them? Because the tenant base isn’t as desirable, the industry’s not as desirable. There’s not as many companies with really good jobs that are moving into those areas where they’re attracting high talent, where you’re going to be able to increase the rent all the time. You might not see rent increases hardly at all. So there’s always this temptation, like when you watch the old movies and they’re in the middle of the desert and they see this mirage and it’s this beautiful oasis with all this water and they go running and they jump into it and they get a mouth full of sand thinking they’re drinking water. That’s kind of how I see a lot of these properties.

David:
There’s this spreadsheet magic that goes on where like, oh look how amazing that is. I’m going to get a 22% return and you go jump into it and you come out with a mouthful of stand. I’m not saying you cannot invest in these areas. There are people who do very well investing there. If you know the area, that’s a different thing. I’m saying don’t do it because it looks good on a spreadsheet. You’ve got to have some other reason that you like it. You’re getting deals way below market value, you’re in a better part of town than average. Something like that. My advice would be if you have this money and you want to go invest it, go invest it into a market that is going to see big growth. I like south Florida because a lot of New York is going there. I like Arizona, Nevada, Idaho, Colorado, because a lot of Californians are moving there.

David:
Look at where people in Seattle are living and say, where would they want to move to? Ask the agents who are selling houses there, where are the people moving that you have that are clients and go buy in those areas. That’s what I’m doing. And I think that’s a much better strategy than going into the cheapest market that you can find just because the housing prices are low. Now it may be a little more competitive. You may have to work a little bit harder, but in the long term, if you invest in an area that’s growing, you’re going to do much better than invest in that mirage looks really good from the start because you appear to get really good cashflow, but it never really works out like that.

Dylan Bard:
Hey David, my name’s Dylan Bard, I am a investor and realtor in Lincoln, Nebraska. First off, appreciate you answering this question and all the other questions it’s super helpful, but I’ll get right to it. So scenario is we have some money sitting in the bank account for a duplex BRRRR something like that, down payment and rehab in there. And of course we have a safety net that I don’t talk about because we never go below it. But my question is, do I take that money and do I throw it into one of our other rentals, which would allow us to have a higher cashflow and higher return on equity than having it sit in a bank account that’s getting like 0.1% interest or whatever it is. Is it better having the money sitting there and using HELOC and drawing out when we need to, fixing up, burn it and getting that money back into that. Just your thoughts on this. If you’ve ever came across… If you ever heard anyone use that rather than the money just sitting in their bank account doing nothing. So that’s my question. Appreciate it, thank you.

David:
All right. Thank you, Dylan. I think this is a great question and it’s not one I’ve been asked before. So I like these challenging ones. Let’s talk, if I understand your question correctly what you’re saying is I got all this money in the bank that’s earning me nothing. I don’t want to necessarily put it into property yet. I’m going to use it to BRRR, but I’d like to do something with it. Should I pay off a house or pay down principle on one of my existing rentals to save on the interest portion that I’m going to pay off. And then you’re saying, if I do that, I could get that capital back through a HELOC because I created more equity in that property. You are thinking along good lines. I like that you’re taking in that direction. Here’s a few things to think about. Your interest rate is probably very low.

David:
So putting that money and paying off this note is not going to save you as much as you think. You’re probably not even paying it all the way off. You’re just paying it down some. So the couple little bits of percent that you’re making are not really going to move the needle very much. The other thing is yes, you could pull it out of a HELOC because if you could take all of it out on a HELOC, essentially it doesn’t matter you’re not getting a good return. You’re getting better than nothing and you can still get access to the money. The problem is you’re probably going to lose 20 to 30% of it as in access to it because HELOCs don’t let you borrow a 100% of your equity, they only let you borrow usually between 20 and 30% somewhere in that range. So you’re going to lose some access to it.

David:
I’m not thrilled about paying down the mortgage with that money and then getting it out through a HELOC because then you’re also going to have to pay a higher rate on that HELOC, you’re probably going to be in the 6, 7, 8% range of depending on where you are if you want to take that money out of the HELOC. So now you’ve paid off interest of 3 to 4% to borrow it at 6 to 7%. So I don’t love that idea.

David:
I would prefer to see you lend that out to somebody in the private lending space that you would trust and get a higher return on it, to take half of it maybe and invest it into something else and then save up more money for the BRRRR. Or to take all of it, add a hard money loan or a private money loan from someone else to give you what you need to BRRRR that duplex or saving up to and just do that sooner rather than later. The reason I’m telling you that I would rather see you take action quicker is that that money you keep in the bank is losing purchasing power every day.

David:
That’s what’s hard. It really has just increased the sense of urgency that we have to operate in. And none of us like that, because you don’t usually make good decisions when you have to make them quickly. That’s often when people make bad decisions. So the rate at which real estate is increasing and the rate at which the money supply is losing purchasing power is making it harder to make good wise decisions. And I totally recognize that. It’s basically one of the reasons you have to kind of step up your game when it comes to your knowledge of real estate, your knowledge of local markets, your knowledge of how to operate an asset because the stakes are just getting higher. So I like what you’re thinking, trying to maximize that money. What you’re telling me in practical terms is not worth the risk or the loss of what you’re going to give up if you put that money into paying down your note.I’d rather see you keep it aside and get a higher return somewhere else or just wait before you do the BRRR.

David:
Okay, next question comes from John Gutterman in Indiana. “I currently have three single family investment properties I have bought over the last few months that are in the suburbs of Detroit. I’m a dentist and I’m about to leave a job at a corporate practice and go from being a W2 employee to a business owner. Getting financing on my properties has been extremely easy as a W2 employee, but I’m about to buy a private practice where I will make significantly more and become the business owner. As I understand it, it will be significantly more difficult to get financing as a new business owner showing two years of business income and whatnot. Is there anything I can do to make this transition smooth so that way I don’t have to put my investments on hold for the first one to two years of being a business owner?”

David:
All right. I like the question. This is a challenging one, John I’m going to do my best with it, but I do want to say that this is one that we would want to run through a CPA before we put it into play. Happy to introduce you to mine. If you want to send me a message, you or anybody else, I can make the introduction for you. But here’s what I would do if I was you. When you become a business owner, you’re not necessarily giving up W2 income. It depends how you structure that business. So I have corporations that I run my businesses through, but then that corporation can pay me as a person, a salary, a W2 to work in that corporation.

David:
So if you are going to buy a practice, but you’re still going to work in the practice, which it sounds like you are, one thing to run by your CPA would be if I pay myself a salary out of that business, can I do that? And if so, most lenders will let you use that income that you paid yourself as long as there was not a significant break from when you were practicing dentistry from someone else to yourself. So if you buy the business, jump from the person that you’re working for now to working for your own business, because remember that business is a different entity for tax purposes than you, and then pay yourself the income. They probably won’t see it as a break in employment and you can use whatever income you pay yourself out of that business to buy real estate. Now why a lot of people don’t do that is they don’t want to have to pay taxes when they pay themselves.

David:
And this has to do with the type of structure that you set up. If it’s a C-corp, you’re going to get a lower corporate tax rate on the money that the business makes, but then you’re going to get taxed again when you pay yourself out of it. If it’s an S-corp, the money’s going to flow from that corporation to you. Same as if it’s an LLC, you really have to run this through your CPA to find out how to do it because they’re going to be the one that are helping you with taxes. But there’s a lot of opportunity here. And a lot of different ways you can structure it to where you could show the lender I still make money as a dentist. It’s still coming in similar to the W2 and they will use that income to help you buy your next house.

David:
The other option, as I’ve said before, is a debt service loan. You want to find a broker that will set you up for a loan that uses is the income from the property you’re buying, not from you yourself. That’s something that we do a lot of on my team. And that’s what you want to be looking for is you want ask a lender? Do you have a loan that will use the income from the property not the income from me? You’ve got two really good options there. I hope you can keep buying.

Speaker 6:
Hey David, it’s about 5:20 AM right before I clock in to work. First and foremost, I want to thank you for even looking at this video and putting me on the podcast if that is the case. My name’s [Amecca 00:41:44], I’m from Austin, Texas, living in Lawrence, Kansas, investing in Kansas City area. I’ve done three single family deals and I’m shifting all my focus to apartment complexes. I think I got four to five partners who want to go in together and buy an apartment complex. And my question to you is how do I find that crystal clear criteria? Whenever I present this apartment complex, I’m going to make sure everything that I want is a win-win for everyone. And the only thing I know right now is I want to invest in a area that has a population growth. So I listened to episode 571 and that had some great insights and I definitely took notes and going to take that with me home. But what is the steps to finding my own crystal clear criteria that fits me? Thank you.

David:
Great question, Amecca. Let’s get into this thing. I’m guessing that the reason you want to get into apartments is because the single family homes did not work out as good as you thought. And that is often the case when you get into a easy… The market, I believe you said, Kansas City, easy to get in, hard to get out. We had a question earlier in the show where I talked about the mirage and I believe it was even Kansas City is one of the places they were looking at. When you invest in areas like that, the price point’s lower, you don’t need as much money to buy the property. The risk feels lower because you’re not putting as much money in the pot. The problem is the rents don’t go up, the values don’t go up. Stuff breaks when your tenants leave, it’s very hard, have very thin margins you’re trying to operate on to make it work.

David:
And many people that start in those markets get out. Why do they get out? Well, A, they already learned the fundamentals of running property. That’s the benefit of these. I call them markets like training wheels. You’re probably not going to lose everything. You’re not going to fall off the bike and crack your skull open, but you’re never going to go that fast. So it’s a great way to learn the fundamentals of real estate and then from there scale into where you are going to make more money, which it sounds like is what you’re doing here. So I commend you on that. I also commend you on bringing up the fact you need a crystal clear criteria. Here’s how I would go developing it. A lot of things that people don’t think about when they first get started is the financing component.

David:
So if you found a property, you analyzed it, you spent hours digging into this. You did a bunch of due diligence. You decided I want to buy it. You submitted your letter intent, you go through the process. You go to the bank and they go, “Whoa, whoa, whoa, whoa, whoa, what’s your net worth? Oh, you can’t buy a property like this. You need a person with more money backing you. What’s your experience with this? Oh, we can’t lend to you, you’ve never done it before.” And all that work was for nothing. So I would recommend that you start with the lender, find a person or a bank or an institution that will lend you the money for this. And say, if you were to look at this deal right here, what would you need from me? And they will give you a list of the criteria that you’re going to go through.

David:
It’s very different than residential properties. As I bought more and more commercial properties, I’ve seen in some ways it’s easier, but it’s very different. A lot of the times they’ll want a key sponsor. That’s a person who’s got a really big net worth that’s going to be on the hook, kind of like a co-signer and they’re going to want a chunk of the deal because they’re taking on the risk of, hey, if this thing goes bad, it’s my credit that’s on the line. Because the bank wants to know that if you manage this thing poorly, somebody else has a lot of money and they can come them and they can still make that payment. You might not have been thinking about that when you’re considering getting into this different asset class. The reason I like to start with the lender is that the lender’s actually a bigger investor in this deal than you.

David:
So let’s say they want you to put 20% down. In our mind we’re like, that’s way more than 5%. This is ridiculous, I got to put down 20%. In the bank’s mind they’re saying, I’m putting down 80%, 20 is nothing compared to 80. And so, because they’re the bigger investor in this deal, they’re going to have just as much due diligence in some ways, as you. They’re going to have systems in place to limit the chances that this thing could go wrong. So by learning how to meet their criteria, it forces you to analyze a deal from a different perspective and better. So that’s where I think you should start, start with the lender, find out what they need. Now, once they do, they’re going to tell you based on your net worth or the assets you have under control right now and your experience level, they’re probably going to give you a price range.

David:
Let’s say they say, okay, three to five million is what you’re going to be able to buy in. Well, that’s the first part of your crystal clear criteria. You know right off the bat, I’m looking in the three to five million price range or below. Once I had that, I would ask myself in the area that I want to invest, what’s the best location that I can be in the three to five million range? Now you’ve got the location down. So you’ve got the price. You’ve got the location. Once you’ve got that, I would say to myself from here, what are the assets that I will need that will support me? The team I’m going to need to build. You’re probably going to want a property manager. You’re probably going to want a handyman. You already know you’re going to need that lender. So start finding the pieces that are going to help you, that work in those areas.

David:
That’s the next thing that I would do. If you can’t find any, maybe that area is not going to work for you, but you are definitely going to need them. You mentioned demographics briefly. That’s the next thing to look at. What type of people are moving here? What type of people live here? What’s the job industry like? Why do people live here? Do they live here because they want to work? Do they live here because they really like the weather? Is it just, these are people that have lived here their whole lives and so they never get out of this city and they just keep continually living here forever. You want to know who is my tenant base because that’s the customer that you’re serving. That’s the person you’re trying to create an environment for, to live in. So you want to know who’s going to be there and are those the kind of people that you want as your customer base?

David:
The last piece is what broker are you going to use to help you find in the deal? Now you may just go on LoopNet or CoStar and look for it yourself and go with the listening broker. That’s what most people do. You may go to a broker and ask them to help represent you. But I think that’s a really good start for you when it comes to the crystal clear criteria that you want. Now there’s a very good chance that when you actually look into this, you realize I don’t like any of these properties or there’s nothing that I want in my price range. If that happens, find a different area or find a different person to partner with you on this deal that does have the experience. But once you’ve got those down, you’ll know very quickly, if this is a strategy that’s going to work in the area that you’re in, or if you’re going to have to look elsewhere.

David:
If you guys want to know more about finding your crystal clear criteria, check out episode 571 that I did with my good friend, Andrew Cushman, where we broke down our system for analyzing properties and screening them before we buy them. And if you want to go even deeper checkout episode 586, where we go through the second set of screening, we pretty much open up our whole playbook and show everybody, this is exactly how we screen for properties. So I think that will probably help you out Amecca, as you watch what we’ve got put in place and you get a little bit more education than you did on the first one. And if that’s not enough, I did another episode with a different partner of mine who’s also the co-host of the regular BiggerPockets podcast with me, Rob of Abasolo where we break down our 10 step system for how we meet regularly to analyze deals and make sure that we keep the ball rolling in our own journey.

David:
So I think you’ve got quite a bit there. If you just look backwards in the catalog of podcast episodes to get you a really good start. Thanks for your question. Really appreciate it and your energy, keep sending more. All right. That is going to wrap up our episode today. So what did you guys get? You got a fast-paced hard-hitting episode where you threw questions at me and I did my very best to break them down. Now, why do we put this on the airwaves for you guys to hear? Well, first off, I think it’s cool if you’re a fan of BiggerPockets, to be able to get featured on the podcast for a question, I would’ve got to kick out of that. So if are one of our guests, thank you very much for submitting your question, please go share this on your social media and let everybody else in your world know that you are awesome, because you are on the best real estate podcast in the world.

David:
But we also do it for the listeners. So many times people have questions that they’re embarrassed to ask or are stopping them from moving forward that really don’t need to. So even if the person on the show today didn’t ask the question that you were thinking, odds are, it was a question in the same vein as the one you were thinking and that hearing how simple the answers can be for some of these commonly encountered problems should give you confidence to get out there, take action, and start doing things. If you enjoyed the episode, please tell me in the comments below, but don’t just tell me you enjoyed it, tell me why you enjoyed it. Tell me what you like about this episode. In this episode, I read some of the previous comments and one person said that they like that I get into the greater economic stuff. That really helps, that lets me know this is what you guys want more of from me.

David:
So tell me what you liked and then say, hey David, I really wish you’d have dove deeper when you briefly touched on this topic, then I know on the next one, that that’s what you want to hear. This is a podcast, we are listening to you, we make it for you, we live to serve you our audience because we know just how much is at stake with helping you find financial freedom through real estate. And I love doing it. Now I mentioned earlier that if you wanted to invest in a deal with me, how you could do it, just go to invest with DavidGreene.com. It’s for credit investors only that’s an SEC regulation, not my rule, but if you register there, I will give you some information about deals that I have coming up and money that I am raising to buy them.

David:
If you wanted to talk to a mortgage broker, you’re also welcome to contact me there. Email me at [email protected] and we can put you in touch with the loan officer who can answer some of the questions that you guys had here. But don’t just do that, I want to hear from you go to BiggerPockets.com/David and ask your questions so that I can answer it on this podcast. Keep the questions coming. There are no dumb questions as you saw from today. It’s really cool when you get to put yourself out there and everyone in the BP community gets to hear it. I want to thank you guys very much for joining me and for giving me your time and attention. I know there are so many options out there and there’s so many things you could be listening to. And I deeply appreciate the fact that you are giving me that time and trusting us at BiggerPockets to help you on your real estate journey.

David:
Please check out the website, check out the forums, check out the blog articles, go to BiggerPockets.com/store and check out all the books that we’ve got there for you to check out, read, gain your knowledge. There is so much out there. I really want to see you improve your position in life. For everyone out there who knows that they were meant for greatness and believes real estate is a way to get there, I believe in you too. Don’t stop, keep learning and I will see you on the next one. Oh, and if you’ve got a second, check out one of our other podcast episodes, because there’s Greene gold everywhere.

“Anyone may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one’s taxes.” – Gregory v. Helvering, 69 F.2d 809, 810 (2d Cir. 1934)

I bet it is no surprise that your tax bill is one of the largest expenses you pay, often more significant than your housing and healthcare expenses. If you have spent any measured amount of time on BiggerPockets, you probably have a high-level understanding that investing in real estate could help you offset some of your tax burdens.

For example, depreciation could help you shelter passive income (and possibly your active income) from your rentals. Using a 1031 exchange when you sell a property could help you defer your depreciation recapture and tax on capital gains. You could remove equity from your rentals tax-free through a refinance and invest in more property.

However, most investors who enter the real estate arena know little about strategically reducing their tax bills. If you’re like me, we grew up being trained to pay taxes. Yes, trained.

Do you think I’m kidding?

I know for me, I was raised to go to school, get a great job, buy a house, get married, start a family, and contribute to my 401(k).

With this “plan”, the only chance of reducing my tax burden was to take a standard deduction, deduct my mortgage interest (if I could), get a tax credit for my kid, defer my income to retirement, and hope the tax rate would be low by the time my career came to a close and I had to pull from my retirement fund.

Somehow, with all of this, I still would wind up paying thousands of dollars in taxes.

It turns out that hope is not a strategy.

How the best in real estate approach taxes

I’m not a CPA, accountant, or tax guru. As with any advice, please consult a qualified tax strategist to understand how the information I’m about to share with you can apply to your unique situation.

What I’ve learned working with tax strategists and studying the wealthy is that there are better ways to approach reducing your tax bill. One of my favorite books on the subject is “Tax-Free Wealth“ by Tom Wheelright.

Overall, I have two critical takeaways from studying taxes.

First, there is a clear “order of operations” you must follow to maximize your tax savings. The traditional narrative I grew up with is not the correct strategy if you’re trying to reduce your tax bill significantly.

Second, the U.S. tax code is actually a treasure map that tells us where to invest our dollars. Real estate and business are two spaces where the IRS wants the private sector to solve problems. As a result, investors get the best tax breaks.

Wealthy individuals know how to combine a clear step-by-step strategy with the tax code’s “treasure map” to reduce their tax burden significantly. Why couldn’t you do the same?

Let’s talk about how you can.

Step 1: Take deductions (including depreciation)

Investing in a business (even if you have just one rental) allows you to take more deductions. Ordinary tax-deductible expenses include:

• Interest
• Depreciation
• Taxes
• Insurance
• Repairs and Maintenance
• Property Management Fees
• Utilities (Oil, Gas, Electric, Water, Phone, etc.)
• HOA Fees
• Professional Fees
• Snow Removal/Landscaping
• Travel Expenses
• Supplies
• Leasing Commissions
• Advertising/Marketing
• Business Mileage
• Education
• Bank Fees
• Employees & Independent Contractors
• Home Office Expenses
• Business Meals

The most significant deduction, which is borderline magical, is depreciation. The IRS understands that tangible assets (such as real estate) will break down over time. At some point, the carpet, cabinets, and HVAC will need to be replaced. In their eyes, it would be best if you, as an investor, keep the asset in good working order. Therefore, the gift of depreciation is awarded to help us offset costs and reinvest back into the property. You could also use passive depreciation to shelter passive income and keep it tax-free. 

Dreading tax season?

Not sure how to maximize deductions for your real estate business? In The Book on Tax Strategies for the Savvy Real Estate Investor, CPAs Amanda Han and Matthew MacFarland share the practical information you need to not only do your taxes this year—but to also prepare an ongoing strategy that will make your next tax season that much easier.

Step 2: Focus on building passive income

There are two types of income: active and passive. If you want to enjoy lower taxes (and financial freedom), then you should focus on building passive income.

The IRS classifies employees or self-employed persons as active income earners, which get taxed at a higher rate. Business and investment income, on the other hand, is generally considered passive income and is usually taxed at a lower rate. It’s important to note that the number of hours you spend on any given activity doesn’t factor into the equation. Instead, it’s purely based on what the IRS determines.

For example, I have real estate notes that I spend no time managing, but it’s considered active income and taxed at ordinary income rates. Yet, my rental properties and partnerships take more time to manage and earn a good share of income but still get taxed at a lower rate because of the way the IRS classifies the income.

The big idea is that those who earn income through their own business or earn from a company they invested in will pay the lowest taxes. For more information on this, I suggest reading “The Cashflow Quadrant“ by Robert Kiyosaki.

Step 3: Lower your tax bracket through creative employment

Now that you have steps one and two, it’s time to partner with your tax strategist to look for ways to shift your income to lower tax brackets. You can do this by employing your dependents if you have any. 

Yes, I really mean to hire your kids if you have extra work that they can cover for you. It’s legal.

If your child is under 18, they can work for you in your real estate business and earn up to their standard deduction (currently $12,950) before they have to pay taxes on income.

Just think, you could have your 16-year-old file paperwork, clean the office, keep the books, and maybe manage your social media. With what you pay them, they can use those funds for their expenses, save for college, start a Roth IRA, or invest alongside you.

The same strategy could apply to other dependents you support.

However, you have to be careful. The IRS is fully aware of this tax loophole and is purposely looking for anyone mischievously taking advantage of it. Ensure that whatever your dependent is hired for, they are actually doing their job. You can’t just place them on the payroll and not have them do anything. Otherwise, the IRS will call it out and disqualify the tax break.

Partner with your tax strategist to craft an accurate job description, pay scale, and maintain proper documentation before hiring any dependents.

Step 4: Reduce income through tax credits

There are a number of different tax credits you may qualify for. Speak with your tax strategist for a personalized look into your situation.

Credits are a dollar-for-dollar reduction of income. Some credits may apply to your personal tax situation, examples being the saver’s credit or child tax credits.

There are also credits that may apply to your business (energy credits, water credits, tax abatements, and more). Credits are another way the IRS incentivizes behavior, so be sure to know what you qualify for.

Step 5: Defer income to lower your tax bracket this year

If you still want to reduce your taxable income after moving through the first four steps, then you should consider deferring income. This means you can push aside part of your income to be reported towards next year’s taxes or later. This is helpful when you need to reduce your reported income just enough to be placed into a lower tax bracket.

It’s worthwhile to note that if you are still working a W-2 job, it may be beneficial for you to fund your retirement accounts to maximize employer matches and pensions.

If you choose to fund your retirement accounts, be sure to explore contributing to self-directed IRA accounts (SDIRAs) or other qualified retirement plans that are in your control. With these types of accounts, you have more options to invest in alternative assets like real estate while maximizing the tax code. For example, through an SDIRA, you can invest in:

• Real estate lending
• Fix and flips
• Buy and hold rentals
• Syndications and funds

Ask your tax strategist to create a model to see if funding these accounts will genuinely help your overall situation.

Closing thoughts

“In this world, nothing is certain but death and taxes.” – Benjamin Franklin

Taxes are among the most significant expenses eroding your wealth, along with investment fees and debt. Just imagine how much you could boost your investing journey by generating an additional $10,000, $20,000, or $50,000 in tax savings to reinvest.

Like most things in life, success leaves clues. Following the examples set by the brightest and most successful in our industry is a great way to achieve your own success. It’s in your best interest to sit down with a qualified tax strategist to see how you can implement the above strategies and start reaping the benefits.