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Danielle Hale of Realtor.com joins a ‘CNBC Special: The Fed Decision’ to discuss what’s likely to happen in the housing and mortgage markets for the rest of the year. With CNBC’s Steve Liesman.

Mindy:
Welcome to the BiggerPockets Money Podcast Show Number 282, Finance Friday Edition, where we interview Nicole and talk about investing in real estate even if you’re getting started a little bit late.

Nicole:
That’s when I thought about that goal that was kind of for me to live comfortably and be able to take vacations and do whatever I want to do with my daughter. That 4,000 would be comfortable for me. Even though I’m living below that now, it’s for a reason, but I don’t want to continue to live that low.

Mindy:
Hello, hello, hello. My name is Mindy Jensen and with me as always is my solves the Wordle on his first try co-host, Scott Trench.

Scott:
I don’t know about that Mindy, but I did get … I’d only done one Wordle and the word was moist last week. So I know that’s favorite word of many listeners.

Mindy:
That’s such a gross word.

Scott:
Wasn’t that your first word that you guessed in Wordle each time?

Mindy:
That used to be my first start word, and then I stopped and then it was the word and I was very upset. So now I have to find a new first word and someday I will get it on the first try. But I don’t right now. Anyway, Scott and I are here to make financial independence less scary. Less 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 you’re starting.

Scott:
That’s right. Whether you want to retire early and travel the world, going to make big time investments in assets like real estate, start your own business or start over after a divorce with a fresh financial start, we’ll help you reach your financial goals and get money out of the way so you can launch yourself towards those dreams.

Mindy:
Scott, I love today’s guest because she is not financially perfect but she’s doing a lot of things right. So we give her several things to look at, very … There’s a couple of research opportunities in there as well. And I’m excited for her trajectory. I think she has a lot of potential.

Scott:
You say she’s not financially perfect, but she’s pretty close, in my opinion, relative to where her current financial position is. She’s got complete control over her budget. She ends up a little over a median income, I would say around a median income, and doesn’t have much in the way of assets. But I think is really setting a financial foundation for herself that’s likely to be really strong. I think it’s just a great perspective and someone to learn from. I think we’re going to be all admiring her progress within the next three to five years, based on the trajectory that she’s set up for herself, and we heard about today.

Mindy:
I agree. And when I said she’s not financially perfect, I meant there’s things that we can suggest and there’s room for her to explore. And we were able to give her research opportunities, which I love. Okay, before we bring in Nicole, I have to tell you that the contents of this podcast are informational in nature and are not legal or tax advice. And neither Scott, nor I, nor BiggerPockets are engaged in the provision of legal tax or any other advice. You should seek your own advice from professional advisors, including lawyers and accountants regarding the legal tax and financial implications of any financial decision you contemplate.
Nicole is a recently divorced single mom looking to get started investing in real estate. She feels like she’s getting a little bit later start in life. But at age 35, I think she’s doing really well. Her monthly spending is tight. Her debts are low and getting even lower. And she’s got a military pension and a VA loan to help her on her way. Nicole, welcome to the BiggerPockets Money Podcast.

Nicole:
Thank you for having me.

Scott:
Nicole, before we get into your numbers, could we hear a little bit about your backstory and what’s happened over the past 10, 15 years to set us up for this conversation we’re going to have today?

Nicole:
My money journey, growing up, we had very little but we made ends meet. But I wasn’t really educated on finances and saving for the future. So I really had a lack of knowledge with that. I joined the military at 17 years old. After I graduated high school, I joined the army reserves. I’ve been in for 18 years now. Went to college, did not incur any college debt. Worked two jobs to pay for everything, and came out of that degree with zero debt. I had a full-time job, started working, but wasn’t really saving. Didn’t have a good understanding of saving for the future. I could have started a lot earlier.
About seven years ago, eight years ago now, I started my current W2 job and started saving for my future with their 401(k) program. So I was saving 10% of my income with that 401(k). I’ve been divorced for about two years now. Through that divorce, I lost quite a bit of money, $30,000 out of my 401(k), $20,000 in marital debt that I did not know about that I had to pay off. So that set me back a little bit. But through that divorce, I’ve regained that financial freedom. We were living off of my income, family of four. So it was very strapping and wasn’t able to really save as much as I wanted to. I just got back on my feet, was able to buy a home. I still have a marital home that I’m trying to get rid of. But was able to buy a home for my daughter and I, and on my way to financial freedom, hopefully.

Scott:
Nicole, would it be fair to say that following the divorce here, that’s when your money story really begins or the next chapter begins?

Nicole:
Yes, definitely.

Scott:
What’s happened since then from a financial perspective? Have you started learning more? Have you been taking different actions or changing up how you invest or save? What’s been the trajectory, if any, has changed?

Nicole:
I ended up living with my mom for about a year to get back on my feet. I was able to save up enough money to buy a home for my daughter and myself, and saved up that money for closing. I had to pay a little more over the appraisal rate. I started just building up my emergency fund. And I started listening to BiggerPockets about eight months ago. And it has just opened up a whole new world for me. I had always had a budget and lived frugally. But now I read Scott’s book about two months ago and I’ve really started on that plan and process to move forward, save as much as I can, lower my spending, and on that right track.

Scott:
Awesome. So let’s go through your numbers now with that back … Thank you for sharing that backstory. And let’s start off with the income statement. How much are you bringing in and where are you spending it?

Nicole:
All right. It’s about 4,000 for my civilian job and then 500 a month for my army reserve position. My monthly expenses, my mortgage is 895. Electric/water, 200, 113 for cell phone, 500 estimated for groceries. Current car payment is 181, gas is 120 a month, auto insurance is 99, gym membership, 30, miscellaneous entertainment, 150, internet, 54. And then I do have allotted 275 for credit card payment. I have $3,300 at 0% interest so I’ll pay that off within the year. That is included in my monthly budget. I have about $1,900 left over after my monthly expenses.

Scott:
Awesome. That’s a really tight budget. So you’re doing a phenomenal job on that front, at least my opinion on that. Where’s the money going? What are your assets, liabilities, debts?

Nicole:
Currently, I have two mortgages. The mortgage I live in, the house I live in right now, I pay. My previous mortgage that is still under my VA loan. My ex-husband assumed the mortgage so it’s a wash not paying for that. That will be refinanced and out of my name, off my debt to income in the next 90 days. That’s 188,000. The home I currently live in is 155. I have 3,300 in credit card debt. So that is my liabilities right now, my debts.

Scott:
Great. Do you have any investments in cash savings?

Nicole:
I have 12,000 in cash and 80,000 in my 401(k).

Scott:
Great. Any other assets or things that we should be aware of?

Nicole:
The one thing, I do have my military pension. Like I said, I’ve done 18 years. At 20 years, I’ll get my 20-year letter and I will be guaranteed that military pension. So current value is 325,000. And then when I complete my 20 years, it’s estimated at 387,000 and that’s in current value.

Scott:
Great. And how long to the 20 years?

Nicole:
October of 2024.

Scott:
You’re two years away from realizing this $354,000 asset.

Nicole:
I cannot collect that until age 58.

Scott:
Okay, great. Well, awesome. What is the best way we can help you today based on what you’ve told us?

Nicole:
I’ve made some adjustments to how I am in investing, I guess, in saving. I have a couple questions with that. And then also I would like to really start investing in real estate. Do I use my VA loan? Do I go conventional? What is your recommendation? I can start with the how I’ve changed my investing a little bit.

Scott:
Well, let’s zoom out a little bit. What’s the goal?

Nicole:
Short term, one year, I want to save at least $20,000 for this year. Starting with your steps and $20,000 to $24,000. Three years, I would like to have $2,000 in passive income. And then in five years, I would like to have $4,000 in monthly passive income.

Scott:
That’s fantastic. Thank you for being so clear about what it is you’re looking for. I love it. I think that these goals make a lot of sense. They’re ambitious, but definitely achievable. This will be fun. So that sounds like the first question is to save 20K, which you already have 12,000. You’re not even including the 275 you’re paying towards credit card debt, which I count as savings towards that savings number. And you’re accumulating 1,900 a month in cash based on what you told us from the budget. So you should absolutely crush that goal over the next 12 months. That would be 22,800. In additional savings, in addition to paying off your credit card, in addition to the 12,000 in cash over the next 12 months. Is that right?

Nicole:
Yes.

Scott:
Awesome. I love that. It sounds like the next question really then is the real estate side of things. You’re talking about using a VA loan. My belief is that VA loan will require you to move into the property so that implies you thinking about house hacking. Is that right?

Nicole:
Yes. To reference your book, currently I have two VA loans, the mortgage I’m living in now and then my previous home, so it’s tied up my eligibility. Once that other home is refinanced out of my name, I will gain that eligibility and then the eligibility I have currently in this home. So my question is this home that I have now, if I were … I’ve lived it in a year and after a year, you’re able to … You can rent it out. So I would still have VA eligibility left to purchase something else if I wanted to within a certain number based on how much eligibility I have left. Or I can keep it or I can sell it and purchase possibly a duplex house to make additional passive income. Because this would only produce probably $200.

Scott:
Yes. Well, I think that’s the first really smart question is what do you do with the existing home? And you have to run the numbers and analyze. And I think you say, “If I was starting over, would I buy this place as a rental property today?” What’s the answer to that question in your mind?

Nicole:
I think I bought it for too high to get enough passive income out of it.

Scott:
How long have you lived in the property?

Nicole:
A year.

Scott:
How many months?

Nicole:
April, it’ll be a year. So it hasn’t been a year quite yet.

Scott:
Okay. I love the way we’re thinking about this. The reason I’m asking that is because if you live in a place for more than two years, you can sell it and you do not have to pay capital gains taxes up to a certain threshold on that. So that’d be April of 2023. That might be too long in your position relative to the … Well, how much do you think the gain would be? What’d you buy it for? And what would you be able to sell it for in April?

Nicole:
There’s probably only $15,000 worth of equity in it.

Scott:
Okay. So to me, that’s too small of an amount to necessarily disrupt your whole strategy in order to realize the $3,000, $4,000 in tax savings you might have from the sale of that home. I like the instinct to potentially sell the property, but let’s do a couple more questions on it before we do that. How much would it rent for from a short term perspective? Would it make a good short term rental?

Nicole:
The area, I really don’t see that it would be a good short term rental.

Mindy:
What about a medium term rental? Do you live near a hospital? Do you live near a large corporate facility where somebody would need to be staying longer term? Do you live near an oil refinery? Is it Louisiana that does the oil refinery stuff? He’s got a bunch of properties that he rents to the people that are working in the oil refineries because it … The contractor’s down there.

Nicole:
Unfortunately, I’m in a location that is there’s tons of rentals and there’s really not a market for that. I have explored those options and there’s really not a market. So I’m leaning towards possibly just need to get out of it.

Mindy:
Okay. You would be, if you live in there for more than a year, but less than two years, you’re looking at short term capital gains, and that is taxed at approximately 15% depending on your financial situation. I think based on your financial situation, it would be 15%. So it’s 15% of the gain, which is going to be $2,200. Not an amazing amount, not a horrible amount.

Nicole:
What if I rented it for a year and then sold …

Mindy:
Same thing.

Scott:
You got to live in it for two of the last five years.

Nicole:
Your primary residence.

Mindy:
Unless you wanted a house packet and get a roommate for a year, then it’s still your primary residence. That could be an option. I don’t know if you have enough bedrooms to do that. That could be an option while you’re looking for your next property. But like Scott said, the VA loan is an owner occupant loan. You must live in there for the first year. So you can use your VA loan up to four units. It doesn’t just have to be a duplex.

Nicole:
Four doors.

Scott:
Let’s go through absent the financing for a second. What would a good house hack or investment property look like in your area or the areas you’re considering moving to?

Nicole:
There’s not an abundance of duplexes, triplex, complex in Central Florida. So it would really be a find if I did come across one, but it probably … Price point, is that what asking or …

Scott:
What’s a good deal look like to you?

Nicole:
There’s not even that many for research-wise, but I would probably be looking at 250 for a duplex, at least, would be a decent deal.

Scott:
What are the numbers? It doesn’t have to be duplex, right? There could be a single family where you live in one part of the house and rent out the other part or whatever. This is going to be turned into the first homework assignment I would have for you is I think you need to get clear on what a good move looks like. So you have three to six months to really prep yourself for, “Okay. What am I looking for here?” And if you’re going to follow the stuff and set for life, and thank you for mentioning the book a few times here, then you’d want it to make sense as a rental after you moved out. What’s the place that would produce the most income while you live in there and then be a great long term rental for you as soon as you leave the property?

Nicole:
Definitely would have to be a duplex or a triplex. Would definitely have to be that. Something else I was considering all over the place and what to do is possibly partnering with somebody for finding a short term rental and continuing to live in my current home. Because the mortgage isn’t too high.

Scott:
Well, let’s think about the financing here next. Within a year, you’re going to accumulate a total of about $30,000 to $32,000 in cash. And you could use 5% of that, if you bought a $250,000 property, for example, like you just mentioned, 5% down would be $12,500. So you have $20,000 left over, which I think is a really solid position to be buying a property from. If you have good credit, you have $20,000 in cash left over, you’re buying a house hack, that’s a really strong position for that. And that allows you to keep your VA loan. Why that might be interesting for you is because $250,000 is probably well within your purchasing power with your current income and situation. And if you were to get a tenant to rent from you, for example, for a year for half the duplex, you’ll have that rental history on your tax return.
And when you go to buy the next property, you might find, “Hey, I’m going to buy this quadplex for $700,000,” making that up. Well now, because you’ve got the income from the rental and you got a history there. Not only will you get to add that to your income and your salary and your military income, you’ll also be able to add the rental income and the projected future income of the property that you’re considering buying. So your VA loan may balloon in purchasing power on the second purchase if you were able to, for example, swing it to put down the 5% using an alternative form of financing. I’ve heard of military folks, for example, putting down the 5% when they’re stationed in Florida and using the VA loan for the San Diego purchase, for example.

Nicole:
That definitely makes sense. I was questioning that. Do I use it or do I save it? I definitely think that’s great advice as far as possibly the first purchase, saving it, not using it, and using the money that I saved to put that 5% down.

Scott:
I think you can’t make the decision about the … I like the instinct to house hack. It’s a great starting point for someone in your situation making around a median income, starting with relatively few liquid assets and you don’t have hundreds of thousands dollars to … You’re doing great, but you don’t have hundreds of thousands dollars to invest. And that’s just a really powerful tool in the kit. It’s likely to be a big winner for you. Even if it doesn’t produce cash flow or let you live for free, it’ll likely substantially reduce your month to month living expenses. So I love that. What does the short term rental look like?

Nicole:
I was possibly thinking of something local, beach-wise, but possibly partnering with somebody. Because short term rentals here are not $250,000.

Scott:
What’s local?

Nicole:
Beaches, New Smyrna east coast or west coast on Central Florida. So either coast.

Scott:
How far are these from where you live and work?

Nicole:
New Smyrna Beach is 30 minutes. The other coast is about an hour-and-a-half.

Scott:
Would you consider living in one of those places? For example, is there a duplex or a condo with one of the doors that locks off the other unit or whatever with that for a year? Would that be an option available?

Nicole:
I was looking at one of the beaches that’s close or 30 minutes away. They do have more duplexes there, and possibly being able to use one half as a short term rental and then live in the other half. So it would be house hack times two with the short term rental.

Scott:
Would you be required to commute every day?

Nicole:
I work remote. The only limitation would be my daughter and her school zone, which I could still commute with that. It would just add extra transit time for myself. But it would definitely, profit-wise, would be worth it.

Mindy:
I’m looking on realtor.com at some of these New Smyrna Beach houses. I like the idea of a duplex on the beach where you’re living in one portion of it and renting out the other portion short term. You can do the turnover so you are not paying somebody to clean. That is the biggest pain point in short term rentals is finding somebody reliable to clean the property on your schedule. There’s ways to do this, especially when you’re doing it yourself, there’s ways to do this where you just literally bring everything back to your house and take brand new over there, have two sets of everything so that the turnover is a lot easier. Now the schooling for your daughter, is she in a special school or could she go to … Could she just transfer to the school in New Smyrna Beach? I mean, she’s pretty young. I’m assuming she’s only in the first couple of years of school.

Nicole:
She’s in kindergarten. It’s a little bit difficult. Her father lives in that school zone and that’s what we’re going off of right now. It is something that could possibly work moving her, but I would probably keep her in her current school. But the drive wouldn’t be out of the question.

Scott:
I think, if I’m looking at this now that we’re a couple minutes in the conversation, I think the biggest challenge for you is you’ve got a really strong financial base. You got really clear goals here. And real estate’s your tool that you’re likely going to use. Your market seems, from my seat, to be one that is affordable and within your reach to buy properties in, you’ve got the VA loan, all this kind of stuff. I think what I would advise you to do at the highest level is I think you need to pay what I call the entry price into real estate investing, which I think is in about 250 hours, maybe more, of just listening to podcasts, reading books, analyzing deals.
I think you’re still exploring some of these concepts at a high level. And I think you need to get clear on what good looks like and you’ve got at least 90 days before you’re really able to make the decision. Or if I were in your shoes, I’d feel comfortable buying property until that mortgage is off of my name. I think that would be a really good thing is I’m going to walk away from … Today’s February 8th when we’re recording this. I’m going to walk away from end of April and I’m going to be super confident. I know what a good deal looks like. I can articulate it in crystal clear detail about what I’m going to do.
One of several options or one particular strategy, here’s a duplex, it’s $200,000. It was built in 1950. It’s two bed, one bath on each side. Or three bed, two bath on each side. The square footage is this. It’s got a garage, it’s got a yard for the dog, whatever it is that you want to, that you’re looking for, cash flows like this. And here’s what’s going to do for me when I move in, here’s what’s going to do when I move out. There are five to 10 of them that have sold in the last 90 days or that I’ve watched sell over those last 90 days. So I know that they’re likely to come on the market.
And here are the Airbnbs in New Smyrna Beach. They’re within my price point from a VA loan because I’m qualified there. And here’s what they would produce from income. That I have to commute 180 days a year to the school zone for that or whatever it is. I think that’s what I would love for you to be able to articulate something to that effect very confidently by end of April. And I think that’s a very achievable goal over the next couple of months, in my opinion, for you.

Nicole:
Definitely. I’ve just struggled with that. And finding what I want and what looks good. So that definitely helps me. Thank you.

Scott:
Since we already plugged my book, maybe this will be the show of plugs here. Maybe we could send you your pick of 10 BiggerPockets books. Any ones that look interesting to you, we’ll send your way in your preferred format. And I think we will also give you a pro membership. so you can use the calculators to analyze as many deals as you’d like in there to help with that search. But I think it’s a self education slog to …

Nicole:
I’ve definitely tried to continuously listen and educate myself. Sometimes it can be overwhelming. Like Mindy was saying, your position is different than everybody else’s. And when you’re listening to someone that is younger and in a better position, it’s sometimes discouraging but I feel like I’m on the right track.

Mindy:
You have a great track. That is the part that I think we have … We don’t spend enough time on this show saying you’re doing great. You are 35 and you don’t have a net worth of $7 million, but you also don’t have a negative net worth. You don’t have $400,000 in student loan debt or $300,000 in credit card debt because you went nuts with the credit card every day for seven years. You’re doing really well. Your expenses are super tight. Could you cut things? Sure. Let’s put you on beans and rice every single day for the next month-and-a-half. Let’s take away your cell phone and take away entertainment and take away your gym membership. We can get your $2,600 spend down to $1,500. We can really tighten that belt and make your life totally miserable or we can continue on a path where you are having a good life and saving and you’re still doing really well. Does your budget feel tight?

Nicole:
No, I think it feels comfortable. Like you said, I could definitely tighten it up.

Mindy:
You could also definitely loosen it. You have $1,900 every month at the end. Go on a vacation every single week or buy a house once a year.

Nicole:
There you go.

Mindy:
I think that you should connect with a real estate agent. I’ve got a note here to reach out to you after we’re done recording to get a list of books and to connect you up with the pro membership. Thank you, Scott, CEO of BiggerPockets for offering that. That’s very generous of you.

Scott:
This is who they’re for, right, is you. You’re getting some information together. You’ve got a good idea of how things look, but you need to push through to that, “What does good look like so that I can actually feel confident to make that?” You need to do that over the next … You can’t take action for the next 90 days so that says time to study up. Probably, in addition to that analysis and that education, it’s probably a good time to meet a couple of lenders and agents as well and pick their brand, and local investors. If there’s a local investor meet up or anything like that, those would be really good things to start paying attention to and learning about in your area.
Take everything with a grain salt. See if you can pick out who you think knows what they’re talking about and who you think is maybe a little too aggressive or doesn’t really know what they’re doing. Once you get to that point where you feel like you actually can make that distinction, that’s when you know you’re ready from an investment perspective, to make that next purchase and make it really good decision.

Mindy:
I’m going to go one further and say, if you are a New Smyrna agent who has information about the area, please reach out to me, [email protected] and I will connect you with Nicole. I think Seth Jones is a mortgage … I know he’s a mortgage broker in Florida. I think he’s all of Florida. So I will introduce you to Seth after the show as well.

Scott:
And we have no financial affiliation with Seth Jones or any of these other folks, right?

Mindy:
Correct. No, we don’t have any financial … I’m just a matchmaker …

Scott:
Members of the community.

Mindy:
… to members of the community. I love to connect people. It doesn’t do me any good to just hold Seth Jones to myself. He’s the not going to write me a mortgage, because I don’t invest in Florida right now. But just talk to an agent and see what’s out there. There are zero quadplexes in all of New Smyrna Beach. Okay, that’s good to know. Or there are 17,000 or they’re building new ones. I don’t know anything about New Smyrna Beach. I don’t even know where it is on the map. I’m sorry. I don’t know what coast it’s on either.
But it doesn’t matter because I’m not the one that can help you with this. I can just connect you to somebody who can. So find what’s there. I mean, if you’re looking for a duplex and there’s only two in all of the city, that’s a really great indication that we need to change our focus. Could you find a really large house and turn it into a duplex? Is that something that would be easy to do? Or maybe there is a large house that’s already a duplex that isn’t official and you go through that channel?

Scott:
I don’t like the large rehab project for her at this point with that. I think that’s a big thing, like, “It’s great. You put in $30,000, $50,000 and turn it into a duplex.” Well, that’s just not reasonable relative to Nicole’s position because she doesn’t have all that cash. I like the single for the first play here. And then after two, three years, do some of the work yourself, get good with that and then take on the bigger projects incrementally with each of the next two or three projects.

Mindy:
I sometimes get ahead of myself. I’m like, “Just do it yourself.” Not everybody’s been doing it themselves for that.

Scott:
That was a big worry for me, I remember because I was like, “I have $12,000 and no skills.” I don’t want to do that on this particular project.

Nicole:
I do want to invest in real estate. I do know that. And it is a little discouraging knowing that I don’t have an overabundance of liquid cash. So it is discouraging at times, but it can be done and working towards that.

Scott:
But that’s where you can look for the work that would be reasonable for you to do yourself like kitchen … When I bought my first duplex in a very similar financial position to what you’ve got here, my evenings were spent staining the kitchen cabinets, which came unfinished. And painting and installing blinds and doing those types of things. There was a plumbing project that I did have to spend $8,000 on and that was it, and I knew that going in. That level of work might be very reasonable for you and might be able to get you a good deal.

Nicole:
I’m definitely not above doing any of that work and do have a little bit of background in that. My dad used to flip houses when I was younger. So free work, free labor.

Mindy:
Paint can transform a house for $35 a gallon. It is amazing what you can do with a gallon of white paint.

Scott:
I feel like your instincts are … I’m completely aligned with your instincts and it sounds like Mindy is as well here. House hacking is a great next option for you. Your foundation is perfectly set up for that. And real estate is you’re perfect fairway for someone who might benefit from real estate investing. You’re willing to do the work yourself. You’re willing to learn about it. You’ve got the financing options, you’ve got a good job with all this. You’ve got a high savings rate. You want the passive income in a reasonably fast period of time, so I love that. What else can we help you with today from a strategic ..

Nicole:
So recently, I cut my contributions to the [inaudible 00:36:46] which is 4% at my work so that I can save as much as possible. And I switched that over to a Roth rather than the 401(k). Does that feel like that was a good move? Should I continue with that?

Scott:
If the goal is $20,000 in income in a year and $2,000 in passive in three years and $4,000 in passive in five years, then absolutely, that’s a great move. That’ll be really hard to do inside of your 401(k) in my opinion. I like the move to the Roth. Take the free money, put it in the Roth and then put the rest towards the fund to go after the real estate investments. I think that makes sense to me.

Mindy:
I’m wondering what your W2 job is. And are there any opportunities for advancement within your company? Are there any opportunities for advancement by, advancement meaning an increase in salary, by finding a new job if you’ve been there for a while? And are there any opportunities for generating any additional income as a side project, either through your W2 or through … maybe your fluent in, I don’t know, Swahili and you want to give Swahili lessons and that’s something that is going to be a lucrative side hustle. I wouldn’t necessarily suggest doing something that’s pretty low value like DoorDash that doesn’t really pay a lot. That’s a lot of initial cash outlay in the form of wear and tear on your car and gas into your car, and then you’re not making a whole lot of money on that. Are there any side hustle opportunities for you?

Nicole:
Over the past two years, you know, since my divorce, I’ve really tried to focus on getting my life back together and focusing on my daughter. So currently, I don’t manage anyone. There are opportunities I could go back and manage people and certainly increase my salary. So that is something that I have been contemplating going back into to make additional money. Also, I have explored an additional job, maybe cleaning. I used to take real estate pictures for foreclosures. And when people left and it was disgusting, I would go and clean houses and do that. You could pick and choose what you wanted to do, which I need flexibility when it comes to having my daughter. I would clean houses for that, again, just to make that additional money.

Scott:
I love it. I think it’s not a lot of folks would, I think, do that in your situation. And the fact that you’re willing to do that, the fact that you’re saying, “I want to become financially independent. I want to build wealth. I’m willing to house hack. I’m willing to clean. I’m willing to take on these jobs or fix it up myself.” As a single mom here with that, I think, is super impressive and something that five years from now, when we have you back on the show and you’ve got your $4,000 to $10,000 in passive income from this, you’re going to be an inspiration and very proud of that dynamic. I think it’s awesome and I love that.

Nicole:
I definitely want to make sure that I instill that in my daughter and she sees that hard work, too.

Scott:
All the right things are going on in your financial position. You have been sitting on this particular trajectory for a long time. And I’ve mentioned that before on some of the system of our guests where you come in, you’re eight, 12 months into really absorbing perspective on finance and learning about what good looks like from a personal finance position. You’ve set that up. And you just haven’t been sitting on it for two, three years to stockpile, to see the results of that piling up from a cash position and then in investment form.
So that’s why you feel like you’re behind. But I guarantee you … I don’t guarantee you. I think there’s a high probability that over the next couple of years, you will see the compounding benefits of what you’re doing here if you continue to keep this trajectory going and slowly accelerate it month to month. I think it’s awesome. We answered your question about the 401(k). What other questions do you have?

Nicole:
I haven’t calculated my FI number. Is that something that you could assist me with? And the best way to factor in my military pension.

Scott:
I wouldn’t worry about your FI number right now, honestly. I would worry about it in two years or three years once you’ve got the first $2,000 in passive cash flow. You can absolutely calculate your FI. I’ll give you the technical answer. Right now, you spend $2,600 a month. Therefore, your FI number is somewhere between years three and five when you hit $2,000 to $4,000 in passive cash flow from your real estate investments or other investments. Another way to calculate the FI number is to take the total amount of your assets, like your equity in the real estate, plus your stock market investments and boil it down to the 4% rule.
So right now, you spend 2,600 a month, 2,600 times 12 is going to be 31,200. Therefore, you need about 25 times that amount in assets. That’ll be $780,000. But I believe that as you go down this journey and build up some of those assets and get more confident with your real estate investing career and keep this going, that that number will expand to some degree and be a little higher than the $31,000, $32,000 in annual that you’re spending today. I think that’s why I wouldn’t worry about your number quite yet. I just worry about keeping the trajectory going and building the asset base.

Mindy:
Okay. I’m going to give you a completely different answer because yes, Scott’s right but also Scott’s wrong. So you are spending approximately $32,000 a year. $31,200, let’s round up to $32,000 just to make it easy. That is $780,000 is your FI number. I need to get to this so that I can start withdrawing according to the 4% rule. However, you have a pension. Your pension is $12,000 a year, approximately. So now we’re down to a $480,000 nest egg for you to withdraw from the 4% rule because of your pension. We did a show back on Episode 259 with Grumpus Maximus where he talks about pensions. Should you cash it out? Should you take it as it comes to you? Since it’s a government pension, I would not cash it out. I believe that’s what Grumpus said as well.
The government’s not going to go out of business. If they do, you’ve got way bigger problems than just the fact that your pension’s gone. So I would keep it the way it is. I would also not really worry about it. I say this flippantly and I don’t mean to, but it’s $1,000 a month. That’s not going to be hugely helpful in your … By the time you’re 58, your spending is probably not going to be just this $2,600 that you’re at right now. Maybe your mortgage is paid off and maybe it is only $1,600. And now you’ve got $1,000 from your pension and you need to cover up the $600, or make up the $600 difference and then it would be really helpful. I would keep it in the back of my mind as, “Yes, I will get this someday. But because it isn’t such a large amount of money, I wouldn’t be concerned with it so much. I wouldn’t really factor it in. I would just continue to …”
I mean, if you have $2,000 in passive income in three years and you have $4,000 in passive income in five years, you’re kind of already generating all the income you need without doing anything. You don’t seem like the kind of person who’s just going to be like, “Well, now I’m going to the beach every single day. I don’t have to do a thing for the rest of my life. I’m just going to sit around and do nothing.” I think that understanding the numbers behind the 4% rule are good. But I also think that your $4,000 in passive income goal in five years is not only doable but also a really good FI number for you in general. That’s already more than what you need to live right now.

Nicole:
When I thought about that goal, that was, for me, to live comfortably and be able to take vacations and do whatever I want to do with my daughter, that $4,000 would be comfortable for me. Even though I’m living below that now, it’s for a reason. But I don’t want to continue to live that low. Thank you. That helps me a lot with understanding with that perspective.

Scott:
It’s this trajectory of, “Hey, I’m going to spend at this very low level for a period of time in order to stockpile the asset base. And then as my asset base begins growing and compounding, and that’s a greater and greater percentage of my wealth accumulation, it’s not just coming from the spread between my income and my savings.” You can begin easing off and letting the assets pay for incremental lifestyle expenses. And that’s what I found to be true for my personal life.
I would never have been able to articulate that when I first wrote the book with that but I can see that now. That’s how I would think about the FI journey is. Get the first couple thousand in passive cash flow and then take a look in three, four, five years from position of even greater financial strength and say, “Okay. What is the end game now? And how do I make sure that I’m never dependent on wage income on a go forward basis?” But also have that trajectory to get in the lifestyle I do want at the end state.

Nicole:
Yes.

Mindy:
Okay. Before we let you go, I have one more comment about the VA loan. The VA loan is a wonderful tool for our veterans. I think that it is fantastic. And I think that it also has a lot of stigma around it from real estate agents who don’t necessarily understand what it is and what it does. It is a benefit to you. There’s not really a lot of downside to the sellers. And having a lender who specializes in the VA loan is going to help get your VA loan offers accepted more so than a lender who’s like, “I’ve done them before.” They can take a really long time. They can take forever because there’s all these little steps that you have to do. But a good VA lender knows that you can start all those steps as soon as you go to contract.
I have a VA lender who’s done three VA loans for me, 21 day closes. And that is kind of unheard of in lending in general. But in the VA loan world, I’ve seen people write 45 day VA loan closes. And they’re like, “Well, I hope I don’t have to extend this.” In this market right now, it’s unfortunate, sellers don’t have to jump through hoops and “deal with the problems I’m doing” for those of you who aren’t watching me on video. They don’t have to deal with the problems of the VA loan. There aren’t problems with the VA loan. I have had more problems with FHA loans than I have ever had with a VA loan. They’ve always been smooth sailing. But because there are so many agents who don’t deal with these loans on a regular basis, they can see one and maybe they have two identical offers.
But one is a VA loan and one is a conventional or an FHA. They’ll be like, “I’ve heard VA loans are terrible so I’m just going to go with this one.” So when you go to use your VA loan, make sure you’re using a lender who does them all the time, who knows all the … I don’t want to say loopholes, because that makes it sound like they’re doing something wrong. They’re playing by the book. I mean, it’s a government program. There’s rules and you can either follow them or not get your loan approved. But they jump through all the hoops in such a fashion that it doesn’t take forever to get it closed. That’s my rant. The end.

Nicole:
I actually had a nightmare with purchasing the home that I live in now. The credit union that should deal with lots of VA loans and I literally had to do the work myself to get my certificate of eligibility. They got the wrong one. It was a nightmare. And if you could send me that lender, that would be great because I will not use the lender I used before because I almost lost the house because of how poor of the process it was. And it was a 45 days and they wanted to extend it. It was just a horrible experience. Luckily, everything worked out. But I do not recommend the lender I use. It was a bad process. Like you said, there is a stigma around VA loans, but there’s nothing wrong with them. And the lender makes all the difference.

Mindy:
It really does. I will send you that when we’re off the call.

Nicole:
Thank you.

Scott:
You had at least one more question. I’m cheating here, looking at the notes since you haven’t asked yet. But I think you were wondering about whether 2022 is a good time to do all this stuff. Is that right?

Nicole:
Yeah.

Scott:
I love talking about this one because it’s always on top of everyone’s mind. I bought my first property, a duplex for $240,000 in Denver, Colorado when I was making $50,000 a year and saved up my first 20,000 in 2014. And everyone was talking about how the market had been going up for five, six years in a row, it was absolutely crazy. And there’s no cash flow left in the market in Denver. It was the peak of the market and the bubble was about to burst. I bought the property in November. All of 2015, I was worried about the crash. 2016, second property. 2017, I think it was. The next one, 2018 was the next one. Another one last year. And the whole time, you’re worried about the market conditions. Nobody can predict the market reasonably well.
I will try to pick the market for you anyways in a few seconds here. But I think that it’s just very hard to do that. And it’s like, “I’m going to base my investing philosophy over a lifetime because I would like to be financially free for the entire rest of my life. Not just the next couple of years with this.” So I buy one property every year or two, and don’t worry about the market conditions. I’m just consistent. The strong financial foundations, spending less than you earn and buying and buying and buying and buying. Never to the point where that property can bankrupt you, but always with the idea that long term, that property will go up in value, rents are going to increase. I’m going to pay down the mortgage and it’s going to be a long term winner.
That philosophy I think, is a really powerful position to not worry about the market. Because if the market tanks next year, great. You are going to buy property number two next year and you’re able to get that one at a lower value with that. It’s the dollar cost averaging with real estate, you’d know that long term over a five, 10-year period, if you sustain it, absent apocalypse, which is going to affect everyone, you’re probably going to be in a pretty strong position even if you do have to go through a couple of years of downturn.
That’s the risk we’re going to take with real estate if you’re going to use leverage to buy an asset. But I think that you can feel comfortable over a long period of time that you’re playing the long term averages reasonably well, or at least I do, with that. That’s my answer about the market. And I think that it’s much more predicated on your personal position, which I think is nearing a position of a really strong position to get into real estate with a strong savings rate. Plenty of down payment and $15,000, $20,000, $30,000 left over in cash in emergency reserve.
Now, second part of that, what do I think’s going to happen in 2022? The big question mark this year is interest rates, right? So the Fed is signaled that they’re going to raise interest rates in March and people are pricing in, I’m hearing, up to five interest rate hikes over the course of this year. Long term, the factor, if you forget about those interest rates, you think prices are going to rise. If interest rates were to stay flat, prices should rise. Because millennials are buying homes. There’s a ton of demand. There’s not enough land, there’s enough … The supply and demand factors are really strong for this. I mean, I’m interchanging them. But lots of people want homes. There’s no supply of labor, there’s not a supply of land, there’s not a lot of water in parts of the country. It’s just hard to get these properties built.
And I think Dave Meyer estimates that there’s four million, our VP of data analytics here, estimates that there are four millions home short of meeting demand in the country currently. It’s going to take eight to 10 years at current build rates to really catch that up. But interest rates rise, that can have a big impact on things. And so my prediction for 2022 is that I think interest rates will rise. I’m not clear on how much that will affect pricing. It could be that prices come down, it could be that they don’t appreciate quite as much as they did last year. It could be that they appreciate a tremendous amount because the interest rates don’t rise enough to offset those factors.
What I think might happen this year is that rates will increase, prices may not appreciate as much and rents will rise very quickly relative to that because of inflation. Is that the worst thing in the world if you don’t get that much appreciation? Or even if your property loses some of its value, but rents increase over the next couple of years, if you believe that. I wouldn’t make an investment decision based on a market forecast because no one can predict the market. But I do have fun talking about that and at least thinking through that. That’s my bold hypothesis, is that rent growth will outpace property growth in 2022 for the first time in a while but we’ll see.

Nicole:
After talking to you guys, I’m not going to let any of that hold me back and I’m definitely going to make that next step. Do my research like you said, and make that next step.

Mindy:
In addition to everything that Scott said, I think we still have low inventory. I’ve got a really great graph that I will include in the show notes, which can be found at biggerpockets.com/moneyshow282. You can also find it at fred.stlouisfed.org/series/houst or just click on the link here. Scott, I shared it in the show notes that we have, and it is showing housing starts dropping from … What is this? 2006. They just went down almost to nothing all the way down to 2009 and they have not come back up to where we were in pre-2006 levels. So I think that there is an enormous shortage of houses to be purchased. So I think that yes, interest rates are going to go up. The Fed has said they’re going to do that. That might cap the skyrocketing prices a little bit but I don’t think that the market is going to just stop. Of course, past performance is not indicative of future gain. Your mileage may vary. Insert other clever comments here.

Scott:
There are no guarantees but I’m planning to buy again this year per my strategy that I outlined.

Mindy:
I’m keeping an eye on the market. When something nice pops up, I might snap it. And if nothing else, I’m helping people buy.

Scott:
Any other questions or things that we can help answer or discuss today?

Nicole:
No. I think you guys really covered it all and gave me a better understanding of what I need to do and just the research I need to make for making that first step into real estate investing. So thank you, I appreciate it.

Scott:
Well, thank you for sharing your story here and for the great discussion today. Thank you for plugging the book and letting us plug a bunch of bigger podcast stuff today. Hopefully, that’s helpful to you. Really look forward to seeing what you end up deciding and doing over the course of this year. I’m very optimistic about the next couple of years from a success standpoint for you.

Nicole:
Thank you. I will keep you guys posted.

Mindy:
Please do. We would love to check back in with you in a few months … Maybe in a year. Let’s see what’s going on in a year.

Nicole:
Let’s go with a year.

Mindy:
Okay, great. Well, we will talk to you soon. Thank you, Nicole. Okay. Scott, that was Nicole. That was a great episode. That was a lot of fun. I’m super excited for all of the options she has available. She’s doing really great. I think that we stink at being supportive and celebrating all the great things that she’s doing. Her budget, her spending is so good without feeling unnecessarily restrictive to her. She’s doing awesome. She’s saving money every month and she’s got clear cut goals. I love her story.

Scott:
What I think was really important that we heard today was Nicole is willing to do whatever it takes to move her financial position to the next level. She is considering moving into a house hacks. She’s willing to move into an Airbnb. She’s willing to clean up really what sounded like horrible messes from foreclosure properties and those types of things to get ahead. She’s not above doing that. And I think that’s what it takes to really get the start of this grind over with. To be willing to take on that house hacks project and to earn those extra bucks by putting in the extra hours and doing the work that you don’t want to do for a couple of years to get that financial foundation. Over the hump where it can begin to support you in the asset base, it gets large enough to start snowballing you.
That asset base outside of your retirement accounts, outside of pensions that only come into play when you turn 58. That asset base that you can actually spend in your early or middle aged adult life with that. I think she’s doing all the right things to set herself up for that. What’s so hard and frustrating for many listeners who are probably in her position is because she’s only been on this trajectory for a year or two, really, and building that financial position, she feels like she’s behind. So just give yourself another one, two, three years if you’re in a position like Nicole’s because you will see those results or you will have very good odds, at least, of seeing those results carry through if you’re willing to pull those big levers and grind it out for a couple years, the snowball will start rolling down the other side of the hill with it.

Mindy:
If you’re listening to the show, if you’re thinking about your finances, if you are tracking your net worth, tracking to your spending, if you are even being conscious of the fact that money comes in and money goes out, you are so far ahead of the average American who doesn’t do any of those things. And she’s got a positive net worth, she’s got a plan, she has well-defined goals. She would really have to try not to succeed. She would have to try to sabotage herself in order to not succeed, just because she’s so driven and she’s going to do the work.

Scott:
But another thing you just said there that’s such a great point, clearly defined goals. It’s so hard to put together a good financial plan and say, “What should I do with my 401(k) or my Roth?” Well, it depends on your goals. “My goal is to save up 20,000. My goal is to get $2,000 a month in passive cash flow within three years. My goal is to get $4,000 within five years.” Okay, great. Now we can work with that and back into that and say, “Well, is that realistic? Well, if you’re willing to clean foreclosures on the weekends and house hack, it’s realistic. If you’re not willing to do those things and want to live in a nice house that’s a big percentage of your income and have your car payment, maybe that’s not realistic for you.” We can give feedback about that.

Mindy:
She doesn’t have the goal of $10,000 in passive income by the end of the year. That’s not a realistic goal. Her goals are realistic, her goals are doable and she’s taking steps to do them. Like you said, she’s willing to do the work. She’s willing to do, what is that phrase? Be willing to live like nobody else now so you could live like nobody else later. She’s willing to go above and beyond, to go extra, to do more so that when she’s a little bit older, she doesn’t have to go above and beyond.
She doesn’t have to do extra. She doesn’t even have to do the bare minimum. It does it for her. It’s called passive income. But you have to do the work now. You can’t just sit around and go on vacations all the time and eat bonbons and go to the beach every weekend. And all of a sudden, life is great and throwing money at you. That’s not how it works. You got to do the work at some point. And she’s ready. She’s willing. She’s going to do it. And she is going to be successful.

Scott:
Love it.

Mindy:
And we’ll check in with her in about a year. I can’t wait to see all of the successes that she’s had in the next year.

Scott:
Absolutely.

Mindy:
Okay. Scott, this was a super fun episode. Are you ready to get out of here?

Scott:
Let’s do it.

Mindy:
From Episode 282 of the BiggerPockets Money Podcast, he is Scott Trench, and I am Mindy Jensen saying, in honor of Girl Scout Cookies season, peace out, Girl Scout.

David:
This is the BiggerPockets Podcast Show 581.

Derek:
You can sit there with the bat on your shoulder and watch all these houses come down the pipe. And when you see one that has ADU potential after you’ve done this a few times, it’s so obvious. It looks like a beach ball coming down, belt high, fast balling. That’s the best way I can describe it. Is you have this really easy criteria, and then you just sit there and wait for one to come along.

David:
What’s going on everyone, is David Green, your host of the BiggerPockets Podcast. The show where we teach you how to find financial freedom through real estate. We do that by bringing on different guests, as well as sharing information ourselves to sort of highlight for you what it looks like to find that financial freedom that you seek.

David:
Today’s guest is a specialist in accessory, dwelling units, or ADUs. If you’ve ever wondered, what is an ADU, why do people talk about them? Why are there so many acronyms in real estate that I don’t understand? Well you’re going to learn a lot about that today. This is a very, very, very relevant and important sort of like a hot topic that’s going around in the world of real estate. And we brought in an expert from Oregon who knows construction, who also knows ADUs, who does it himself, and then helps other people do it to share a lot of information with you. Henry, what were some of your favorite parts of the show we just did with Derek.

Henry:
Man, this is arguably one of my favorite episodes so far of the BP Podcast. And not just because I got to be here and co-host it, but the information that was provided was phenomenal. Because you’re right, it’s a topic a lot of people want to know about that not a lot of people are talking about. Some of the favorite parts of the show for me were him giving great tips and ideas of how to look at properties that you probably see every day.

Henry:
You may have walked five properties last week with your real estate agent. And maybe one of those would’ve been an excellent candidate for an ADU and you didn’t know that. He’s going to start to reveal to you what you should be looking for and I promise you, you’re going to have some aha moments about, oh, you know what, that house is a great one for this. Because I had two of those aha moments myself, just thinking through my market as he was talking.

David:
That’s how you know, it’s a great show, right? As you’re listening, when you’re like, ooh, ooh, I could go do this thing. That’s exactly what we’re looking for.

Henry:
Yeah. Just what I needed, another strategy to go look at for real estate. But yeah man, it’s phenomenal. He also gives a great, great tip for how to speak to people, especially when you’re going to do these ADUs, you have to talk to the city, city council members, planning commissions, right? He gives a great tip on how to approach them to not only get their expertise on your plans, but to essentially help them green light what you’re trying to do.

David:
Yeah. We cover that in the fire round. So make sure you listen all the way to the end where we get into the fire round, where Derek gives some really practical advice that’s sort of unheard of. We don’t hear many people that are actually helping you walk through the permitting process with the city.

David:
And then he gives a really good point about how, if you go the traditional method, you might have a 20 page report of code that you have to abide by. But if you go the ADU way, it might be actually 20% of that much, much smaller. So the ADUs provide a workaround for a lot of the common problems that investors face. So if you’re somebody who has often wanted to invest in a market that you feel is too expensive or wouldn’t cash flow, or you just don’t want to pay the mortgage to buy a house there, this is an episode for you.

David:
If you’re a creative person who says, “Hey, no, I’m willing to do some work to make this deal work. I want to make real estate work.” This is a deal for you. And if you’re somebody who’s just curious, like why does everyone talk about ADUs and what does that even mean? And you don’t want to feel like you’re left out of the next meetup or the next party you’re at, this is an episode for you.

David:
Today’s quick tip is brought to you by me, David Green. In today’s market, we mentioned in the show, you don’t find a great deal. You could find a great deal, but it’s probably going to be a great deal that just finds you. If you go looking for it, it’s very difficult to find, but you can make a great deal. So I want to highly encourage you to look at property from a creative perspective and ask yourself, how could I make this work?

David:
And if you do that for long enough, you’ll start to find patterns in properties and floor plans that you will recognize when you see them. Once that happens, you’re going to need a person who’s going to help you with writing an offer, doing some research. Don’t try to do it all yourself. BiggerPockets has an agent finder system that will connect you with a real estate agent that you can reach out to when you have questions, just like from today’s show.

David:
What I love about it is that your agent is probably listening to the same podcast that you are right now and they’re learning all the same things as you. So I like to try to keep it within the BiggerPockets community whenever I can. Henry, anything you want to say before we bring in Derek?

Henry:
Yeah, man. I just want to encourage people to listen with an open mind. I know for me, I’ve thought about ADUs, but the second you start digging through city codes and ordinances and having to call the city, it kind of gets overwhelming, especially if you’re a new investor, I’m a seasoned investor. But what our guest Derek kind of points out is that this is a whole lot easier than people think on the front side.

Henry:
And so listen with an open mind about this ADU strategy and it’s a pretty flexible strategy. You can have them attached, you can have them detached, some are cheaper to build, some of them more expensive to build. And it’s just, you can take something existing and convert it as it sits.

Henry:
There’s a ton of ways to take this ADU strategy and make it profitable. And I think you just have to have an open mind, take some notes and our guest is just, he’s just so kind and thoughtful and ready to help. So this episode comes with a teammate for you to reach out to and get help. I love of this episode.

David:
Great point my man. Appreciate you pointing that out. All right. Let’s bring in Derek. Derek Sherell, welcome to the BiggerPockets Podcast.

Derek:
Thank you David. Glad to be here. Thank you.

David:
How are you today?

Derek:
Better than I deserve.

David:
That’s a Dave Ramsey line, isn’t it?

Derek:
Hey thanks, you get bonus points for calling that out. Honestly, if I was any more excited to be on BiggerPockets today, sharing this ADU strategy with all the listeners, I’d probably fall out of my chair, and I’m not kidding.

David:
I’m really glad to hear that. I hope you don’t, but I understand. I believe you’re a firefighter, right?

Derek:
Yeah. I put my seatbelt on.

David:
Okay. So if you fall out of your chair, you’re the best person qualified to sort of get yourself back out of it. Again, we don’t have to worry about you being stuck-

Derek:
Copy that.

David:
… and not able to get up. So tell us, what does your business look like? What’s your portfolio look like and a little bit about yourself.

Derek:
Yeah, thanks. So my portfolio consists of six primary houses, 14 units total. And what I do is I’m a buy and hold, build and hold investor. And I’m looking for a property that I can either convert, attach, or build a detached accessory dwelling unit, turning a single family property into a small multifamily. And my goal is to create the best product on the market, a product that’s really high demand, low supply, and get the best tenant and place them in there and then teach the tenant how to do this process. And I also like to teach first time home buyers how to use this strategy to break the barrier of home ownership.

David:
So how did you first come across this idea of incorporating ABUs into existing properties?

Derek:
By complete chance, David. I started an apprenticeship in high school. So I got into this construction technology class when I was 16, and Oregon was on the cutting edge of accessory dwelling units in the country. And we had a two term class where we were building a guest house for one of our teachers. That’s where I saw the process. I later became a carpenter. I was a licensed finished carpenter for years and I was building accessory dwellings and guest houses in Southern Oregon, Ashland, Oregon. And this was a product that was right before my very eyes the whole time. It wasn’t until years later that I realized it was actually an investment vehicle that I could attain myself.

David:
Now you have a construction background, is that right?

Derek:
Yeah. I was a builder and like I said, I started apprenticeship in high school and right after high school, I got my contractor’s license and this is back in the run up of the great recession. So everybody was a builder. Everybody had a truck and a lumber rack. We were all making really good money, so we thought at the time. Everybody was buying boats and little did we know there was this huge crash that was coming a few years later. So that was kind of, I got started in the height and I got out as everything was falling, the whole Cardhouse just started collapsing.

David:
So it sounds like you sort of built your skillset when it was really popular to be in construction. It fell apart, you got in something more stable. So now you’re working as a firefighter, but you still have those skills. And now you’re seeing, “Hey, there’s a lot of demand for this stuff. People are looking to fix their houses up again, right?”

Derek:
Yeah, exactly. So as we know in healthy economic cycles, we have this kind of ebb and flow and this up and down. And where the idea really came to fruition for me was when I was looking to buy my second house. I bought a home and I got into real estate on accident. I bought a house in 2004 and I was that guy. I was the subprime poster boy.

Derek:
So I went in to get this loan. They said, “How much do you make?” And I said, well, I don’t really know. And they told me, this is what you’re making, we’re doing a stated income. And they said, these are your assets. I didn’t have those assets. And I was able to get this subprime mortgage on this house.

Derek:
So a long story short, when I moved into town to pursue a career in the fire service, I needed to find something a little bit closer to the municipality. And the only way I was going to be able to buy a house, we’re a high market. Our average value in our two towns, average sales price is from 400,000 to 700,000 in the two towns. So it’s a high barrier of entry. And the only way that was going to be achievable for an average guy like me, was to have income property attached to a single family residence that I could buy for 5%.

David:
So you sort of had to house [inaudible 00:09:56] in order to make it work with the job you wanted to have?

Derek:
Absolutely had to. And this was before house hack or it was curl locked or before bur this was just common sense. It was like, how do I do the math? So I can have a home. I grew up in apartments and my path to real estate was how do I have a roommate at my first place? And then the second place, how do I build an accessory dwelling unit? So I can start to be an adult and not have a roommate, but still have income coming in from that primary property.

David:
Well, they say necessity is the mother of invention. And I think in this case that worked out. Now, this first ADU, did you build it from the ground up? Did you buy something? Already had one? How’d you make that work?

Derek:
Yeah. Great question, David. And this is what I teach people for free. This is what I’m so enthusiastic about for first time buyers is, you have to look for a house that has potential to do a conversion. Some people call it carve out. So this first house, it had an attached space that at one point was a music studio. So it was completely finished, it had a bathroom in it, it was basically Turnkey ADU.

Derek:
And so the thing that I try to tell people is, go with what you have. If your price point is only going to allow you to do a conversion ADU, because that may cost 20, you want to stand alone, may cost 120, set your goals and go from there. But that project was an attached ADU that was already 90% done David.

Henry:
That’s super cool, man. This is an interesting strategy. It’s one that I’ve thought about several times. And it’s one that I think a lot of people, especially people in higher price markets such as yourself are looking into. So it’s great to talk to somebody who’s putting it into actual practice. So talk about kind of in a little more detail on your first deal. So did you go looking specifically for property that was set up for an ADU and how did you go about deciding what kind of an ADU and kind of what that process looked like on your first deal?

Derek:
Yeah. Wonderful Henry, thanks. This is not just my first deal. For our audience, these few criteria, this is for your next deal or your first deal, for what that’s worth. I look for the zoning code. So in order to deploy this strategy, you have to become an expert in ADU zoning. And it sounds really extravagant but it’s not. Most accessory dwelling unit codes are like five pages or less. So when I say you need to be an expert in ADU code, you need to spend about an hour reading something and digesting maybe a couple phone calls to ask some questions.

Derek:
But to circle back to the question, I had a crystal clear criteria, even before I knew what a crystal clear criteria was. I knew this is a town, an accessory dwelling unit attached interior or detached is an allowable use in that zone and I could meet the standards. So after that it was like, is this a place that I could live forever with my family? That’s kind of my meter. How’s the crime, how’s the transit, how’s the jobs, could I live here forever? And then can I fund it and make it work? So it’s that simple. Is it an allowable use? Would you want to live there forever? And can you pull it off? Does it make sense financially?

Henry:
So when you say, would you want to live there forever? Are you using that as just a criteria? As that’s just something Derek wants to own or is that a criteria because some of these uses require you to live there?

Derek:
Yes and yes. So my thought is I’m going to live there for the first year before I go do it again. And my second thought is my criteria, my needle and my stomach, could I live here forever if I have to? If there’s a downturn like there was an ’07 and all my friends lost their boats and their houses, would I feel comfortable moving up here into this place? Could I live here with my family?

Derek:
So that’s kind of my gauge of my criteria. And then the second piece of that is a great question. I’m glad you brought it up because part of becoming an expert in your ADU zoning is some areas do require a residency requirement in the primary or the accessory. So in other words, I was doing a little research recently in Arkansas, and there’s a small town where you can have two ADUs, one attached, one detached, there’s no limitations, there’s no residency requirement.

Derek:
And then there’s a town, just a couple, one county over and they allow one accessory dwelling unit and you cannot rent it unless it’s your primary residents. So if you’re an investor and you’re going to stack all these up, you may not be able to deploy this strategy. But what’s so powerful and what we know and what I know from almost 600 episodes is that it’s not the first deal that we go big on. It’s not the first deal that builds wealth. It’s the first deal that lights the fire in our belly and says, “I’m a normal a guy or girl, and I can do this.”

Derek:
So that’s really what I kind of coach people into the code and say, “Hey, if this is an area you’ve identified, can you build an ADU? Do you have to live in it if you do?” So that’s kind of a long winded answer Henry, but there’s just so much information. It’s hard to kind of keep those short and brief.

David:
So this next section, Derek, we’re going to sort of get into what challenges you faced, how you overcame those and like what you learned through the process of having to overcome some hurdles.

Derek:
One thing I’m really proud of and I don’t know it’s worth even mentioning, but the coaching I’m doing right now for all these homeowners, it’s not freely like getting no down payment, it’s free like I’m giving my time. BiggerPockets has given me the tools to go become wealthy and on a scale that I consider, and now I have the time to go give this away. So that kind of is the intro into the fire stuff, and my town did burn down. Can be hard to talk about at times, but that’s kind of the back wrap.

David:
Well, I think the ADU strategy is super popular right now, mostly because there’s a shortage in housing, people need places to live. Housing is expensive, so people are willing to get a smaller property to have less of a payment. And then if you’re the investor who wants to own the asset, you’re trying to figure out how do I make an expensive of asset cash flow? I need another unit that I can rent out, another source of revenue. So ADU is kind of work for almost every single perspective here in how to make real estate work when it’s hot.

David:
Now, I’m sure that could be a problem if there’s not a lot of people that need to rent in an area, if the population is shrinking, but right now that’s not our issue. So as you sort of said, hey, this is my niche, I’m going to continue to replicate it and keep moving. What are some of the challenges that you faced in doing something that not a lot of other people are doing?

Derek:
There’s a lot of challenges that come with kind of being first to market. Not that I’m the first person to build ADUs because I’m not. But a lot of people in the town that you’re in may not know that it’s an allowable use because single family zoning for years and years and years has kind of been the gold standard for planning in this country. And as we get more open to infill, especially in these appreciating markets where there’s a higher demand for housing than there is available units, some of the challenges are just literally educating the cities at times of their own code because city planners have so many things on their mind.

Derek:
They’re looking at flood Plains, long term master plans, housing needs analysis. They can’t dive in as detailed as we can. So one of the challenges is just kind of educating people that is allowable use, the neighbors.

Derek:
So if you’re doing infill build, a lot of people, they really value their privacy. And there’s an area in your backyard that they’ve looked over for years that they actually kind of feel like is their backyard because of their view. And all of a sudden you go out there with an excavator and you’re digging a 20 by 40 pad in the ground. People can kind of get their hackles up rightfully so.

Derek:
Another challenge that I’ve seen come up is costing. So people think because it’s small, it’s going to be really affordable. And it’s quite the opposite of that. When we’re building, we don’t really have an economy of scale on a small unit because we have all the infrastructure, all the system development fees, all the appliances, all the amenities of a large custom house, but we don’t have any volume to kind of cost average that in.

Derek:
So those are just a few of the challenges. Maybe one more I would add, and this one could be debated in its own show, but would be, what is the best way to finance them or why are they so hard to finance? And the reason for kind of all four of these challenges is just because they’re new. As a planning community, as a building community, as people in general, we’re really just slow to change, we’re archaic, we don’t like to move this big ship and do something new. There’s probably 100 benefits, but those are four challenges that I’ve brought up against doing exclusively accessory dwelling unit as a strategy.

David:
Yeah, that’s the same thing that I’ve found with our clients that want to do it. Here’s a common question that I’ll get. Hey, David, I want to buy this property or maybe they already own a property. They say, I want to build an ADU. And it’s going to cost $125,000 to build it, but it will then create this much cash flow. And so it’ll bump my ROI up to this point on my current house, or at least my cashflow.

David:
And I’ll look at that and I’ll say, “Well, here’s the issue, that isn’t going to add $125,000 of value to your home, guaranteed.” It might be more, it will likely be less because at this stage, their new appraisers are not at those in every circumstance like they’re as valuable as I think the market is saying that they are.

David:
So it’s going to be tough to get your money back if you do that. And because you can’t finance it, it’s the equivalent of $125,000 down payment that you could make on a complete different property. And then you’re getting to buy, a $500,000 house with this $125,000 down, instead of just adding $125,000 ADU to your property. What is your answer to the people who find themselves in that situation?

Derek:
The answer is kind of multifaceted, but I would… First I would say, it really depends on your goals, because if your goals are to scale, it’s not to put that 125 down, it’s to go by two properties with 25% down potentially. But I would say if you’re thinking of building an accessory dwelling unit and you own a home and you’re talking to David, you’re in an appreciation market and there’s a high likelihood that you have good equity in the house that you’re already using and maybe not all of it, maybe you don’t get the whole build cost.

Derek:
But what we’ll do is we’ll set up a financial stack where we’ll, we’re going to take funds from wherever we can, home equity being a good one. There’s another great product for somebody in this scenario for that question, David, that has a house.

Derek:
Maybe they refied, they were smart, they refied last year and they’re under 3%. So they don’t want to do a cash out refied because they don’t want to set that back up at 4% today. But maybe they’ll look at a second loan or maybe they’ll look at a potentially a custom construction loan or there’s a product called a HomeStyle Renovation loan, that’s a Fannie Mae product where you can get a loan depending on your loan ability, 75% to 95% of finished value.

Derek:
So in that case, your client comes to you and says, “David, I own this house in XYZ, California. And I want $125,000 ADU, but I don’t have any equity, but I am lendable, I have good credit.” I would say those are three really good options to look at. But it all depends on your goals.

David:
Yeah. That’s a great point. If your goal is build as big of a portfolio as you possibly can, as fast as you can, it might make more sense to take that same equity and use it to buy more property. Assuming you can. Some markets are so hot that you just can’t get a house at all.

Derek:
Totally. And the last thing I would add, and it’s very important and I don’t mean to interrupt, but it is kind of an issue, like how do I fund this? And what I do is it’s a mindset, do I think about it is this is going to be hard to fund or do I think about it as, oh my goodness, I live in one of the most highly appreciating areas in the country and I have a free lot, how do I build a small house on my free lot?

Derek:
And if we change our mindset and we look at it that way, it’s not a problem, it’s a solution. So again, it’s just about goals. So it’s not the greatest and best use in all areas. And some of these neighborhood protectors, which is the new term for NIMBY, because NIMBY is not really appropriate, but neighborhood protectors, they have good points and some of them, they don’t think it’s the greatest and best use in their neighborhood, and some of them are right. So that’s worth noting too. David, thanks.

David:
Well, one of the areas that I’ve found that does make it a no brainer, because I’m in this situation all the time where clients come to me and they say, “David, what do I do with my money? How do I get it the biggest point?” So I have to work through the same things that you are. If it’s building it from the ground up, it usually makes sense, if you love the house, you’re going to live in it. You want to place that you can include in that area and adding square footage to your property is going to make the value go up.

David:
So like in the bay area where I am, this makes a lot of sense. In many cases, this can make sense. It wouldn’t make sense in the example that we said where you’re just trying to get the most value that you possibly can out of the money.

David:
Another scenario where it is a no brainer is when there is an existing structure on the property that could be converted into an ADU without having to build it from the ground up. So do you mind sharing Derek a little bit about when you do that, what to look for? What are the things that you want to see in a structure that will reduce costs? Sometimes I’ll see a shed and my client will say, “Hey, can we convert that into an ADU?” You might as well, that’s going to be more expense because you have to get rid of the shed. So what are the things that they want to be looking for in the structure?

Derek:
Yeah. David, just so you know that’s all solid gold, that’s solid gold, that’s awesome. So what I tell people to look for in a structure is what’s easy? You’ve been talking for years, David, about house hacking and if you see something on the MLS, that’s a three, two and has 1800 square feet or 2100 square feet, you always know you’re getting another bedroom.

Derek:
It’s the same exact lens, you just shift it a little bit. And it’s like, “Okay, we have this big Gotti formal dining room and there’s already a bathroom over here. We have 400 square feet. It’s vaulted.” I mean, I’m talking about pulling the permits, paying system development fees and spending $500 to put up a firewall, two layers of 5/8 Type X to get life safety protection, carbon monoxide detector, and a smoke detector, and a kitchen.

Derek:
So there’s opportunities that are very, very easy and very, very affordable, like you said, an absolute, no brainer to convert them. And I’ll share a quick story with you. I get calls all day long about ADUs and I did a walkthrough with a lady in Ashland, Oregon yesterday, who’s a first time buyer.

Derek:
So I said, “Hey, I’ll come give you my two hour free consultation.” And this property she’s under contract with it, $565,000, it has an 11, which is a really weird number, an 11 by 26 detached permitted legal shop. So it has 100 amps of power, it’s finished, it’s got drywall it’s roof. I mean, it really just needs a bathroom and plumbing and she can turn this thing into an accessory dwelling unit. And I get it there and we do the figures and then we’re looking at SDCs, and we’re looking at kitchen, and we’re looking at a sewer tap.

Derek:
And I said… We were an hour into this, and I said, “Well, what are your goals?” And she said, “Well, I was just, I kind of wanted to just get a roommate, I’m only one person.” This is a house that’s almost 1900 square feet, it’s a huge cabin style, two, two. And I said, “Let’s go in the house.” And we walked in the mud room, which is now after I left is the kitchen.

Derek:
So we walked into the mud room and there’s this big dice area, there’s a big, beautiful bathroom and a huge bedroom, and there’s 136 inch transit walkthrough into the kitchen in the main house, in the other living quarters. And it was just like, bam, right there. I mean, we were looking at spending $50,000 for her to potentially convert this little tiny narrow structure that would not have really efficiently fit a bed and a bathroom.

Derek:
And we go inside and there’s another opportunity, that’s a couple $1000 that accomplishes the same thing because she wants to live alone, she was already going to have a roommate. And so it’s really about going into a property with the lens of how do I meet my goals?

Henry:
And that’s awesome. So what I hear you saying is really, as you’re looking at these properties, if you’re somebody that’s thinking about doing an ADU, it doesn’t always have to be an external ADU, and you can look at a property and what David preaches and kind of what you said is exactly right. If you look for these houses that are three twos with over 2000 square feet or two, twos with, 1500, 2000 square feet, there’s obviously extra space in that house.

Henry:
And so if I’m hearing you correctly, you just have to be kind of mind present or thoughtful of that space and try to envision, Hey, is there a bathroom close by this additional space? And is there a way we could put a wall up at a kitchen and then maybe some way for them to access that space? And then now you’ve taken something that was already under roof and made it to unit. Is that what I’m hearing?

Derek:
Oh, that’s right on the money Henry, all day long home run right there. And the thing about that too, is we have to plug this is you’re buying this single family turn duplex potentially for 5% down while you live in it for a year and then you go do it again. Unlike a lender, that’s going to say, Hey, if this is an investment loan, you have nine, maybe 10 before you get out of nonconforming loans. Owner occupied loans, you could do this 100 times, not that you would want to.

Derek:
But more to your point Henry, Warren Buffet talks about this book that Ted Williams wrote, The Science of Hitting. And Ted Williams took the strike zone and he cut it into 77 different cells, each the size of a baseball, and he realized what he would bat if a pitch was in his strike zone or out of his sweet spot.

Derek:
And this is the same thing with ADUs and MLS or off market single families that have ADU potential. I just, you can sit there with the bat on your shoulder and watch all these houses camo down the pipe, and when you see one that has ADU potential after you’ve done this a few times, it’s so obvious. It looks like a beach ball coming down, right belt high fastball.

Derek:
And sorry, I don’t have a better ju-jitsu analogy for David, but that’s the best way I can describe it. Because you have this really easy criteria and then you just sit there and wait for one to come along.

David:
Well, the reason I suck at ju-jitsu is I don’t have that perspective. I don’t know what I’m looking at when this person’s coming at me. It’s, I’m the newbie in this world and I’m like, “What do I do when this happens?” And you watch the people that are good and they don’t even think they’re just like, “Why would you leave your hand down right there?” They’ve jumped right through. So it is encouraging when you’re saying “Henry, did you have something you wanted to add?”

Henry:
Yeah, no, I was just going to say it’s like the red truck theory, right? Like once you know what you’re looking for, once you’ve seen it a couple of times now, everywhere you go, you can spot it pretty quickly.

Derek:
Definitely. Yeah. That’s awesome.

David:
The last thing I want to run by you, Derek is the expert here is one of the areas that we found a lot of success for our clients, because basically we’re like scavenger hunter in probably the hottest market in the country, the Bay Area right now, we have to try to find a way to get a person in there with outbreak in the bank.

David:
And so I’ve become incredibly creative at finding floor plans and opportunities like what you’re saying. Garage conversions have been really, really big. Can you share any insight that you have as to what to look for and how to execute a garage conversion?

Derek:
The number one thing and we’re not thinking about it, probably not even on our radar, is that, can we meet the parking standard in the outline zone if we turn our garage, our parking spaces that we use to meet the standard into living space? So that’s where it goes back to my step one of my crystal clear criteria, you have to become an ADU zoning expert.

Derek:
So the garage conversion is the most attainable, it’s the most affordable, but it’s also really hard if you have a parking standard. I can’t speak intelligently for California, but I know in Oregon, January 1st, 2018, we passed a house bill that required that all cities and municipalities in our state remove a parking requirement for the first accessory dwelling unit. But to further dig into your question is that the ADU conversion into a garage is amazing.

Derek:
And if you have clients in a really, really high price market, I’m sure you know this strategy, David you’re super sharp, you’re a lender. You have all the angles. But one to think about if you haven’t is, if you can bring a design to the closing table and you can bring a license contractor that meets the needs of the lender, you can bring that custom construction loan to the table with the primary loan and you wrap it all into one deal for 3% for a first time buyer.

Derek:
So if you have a property in your market, that’s a million dollars and they want to convert the garage for 100,000 and it will meet the siding and design standards in their zone because you’re now an ADU expert or you called me and I told you, and you can meet the parking, you can show up to the closing table with the finished value of that accessory dwelling unit built in to the price and finance 1.1 at 3%, that would be a strategy I would say to look into.

Derek:
I mean, we know that lenders are not created equal, you might have three people tell you no before one person tells you yes, but I can tell you this, accessory dwelling units, they’re not just a new fad, they’re here to stay, they’re sweeping across the country. And whoever comes up with a really, really good product to lend on these and to lend high loan to value on these, is going to be really rich. They’re not going to be working after they figure it out.

David:
Okay. Now Derek, let’s say I’m a home buyer, I’m an investor, I’m out with my agent, we’re walking a property. I love the location, I love the house, I want to buy it. It just feels like it’s going to be a little too high of a mortgage or it’s not going to cash flow. But I got a little capital that I can use to do a garage conversion.

David:
Tell me as I’m walking into that garage, what should I be looking for? Should it be attached to the home? Should it be detached plumbing, electrical? What are the things that I can see that lets me know, ooh, that’s the red truck that I’ve been looking for?

Derek:
Yeah, David. So the cheaper option is a lot of times the better option. So if it’s attached, it’s going to be more affordable, so we’ll start with an attached unit. If it’s attached, we’re looking for first and foremost, I’m looking for sewer.

Derek:
So we’ve been using gravity for a long time, thousands of years because it works. And if we have a property grade and the sewer line is on the other side of the house, it may be a tough lift. We can pump, we can pump sewer, but I’m looking for sewer first, the next thing that I’m looking for is if I-

David:
Well, hang on one second there, you’re looking for the sewer line to be on the same side of the house that the garage is on, that’s what you’re saying?

Derek:
Yeah, or a spot that I know it will fall to. And it’s really easy, you can pop your head in the crawl space and you can see the main and you can usually see which corner of the house it goes out. So that’s a quick way to identify that without an inspection or a scope.

Derek:
The next thing I’m looking for is the attached garage. Is it big enough to be a unit? Does it have seven foot ceilings or nine foot ceilings? What’s the shared wall? Is the shared wall that would be the bedroom of the ADU? Is that the master? Because we can soundproof that, and we can vibration proof that, but that’s not ideal. We’d rather have that be a kitchen wall.

Derek:
Couple other things is what is the natural light. If I’m going to do a conversion in your market, in a garage, it’s still going to cost me 50 grand and I want it to be marketable, again, if you go back to my criteria, it would be the same that you would want for your client. Is it the best ADU in your neighborhood?

Derek:
So those are a few things. Detached is way better. Ideally, you want a detached unit because A, the house has privacy, and B the tenant has privacy, and people will pay a premium for detached. So if you’re walking through a property with your client and has a detached garage or shop that’s, I usually say 400 square feets about the minimum, and there’s already water, sewer power out to it, that’s a no Rainer. That’s that beach ball coming right down the belt, high, fast ball.

Derek:
But I’m just looking for mostly where’s the sewer, and if I was a tenant and I was going to live in here, how does it feel? Is it a dark little, 300 square foot garage with seven foot ceilings that are trusses? Because if it is, I’m going to have to take the roof off. I’m going to have to go up. If the sewer lines on the other side of the property, it might not be worth the effort, I might be better off starting new.

Derek:
But to tie that all in together for the garage is will it work? When you walk in there you know, you don’t need to do very many of these and you walk in and you say, “Gosh, this just feels great.” One thing that I do always add on the garage conversion is when they do garage for uncondition space, they don’t put a vapor barrier under the slab on grade. And what you get is you get this effervescence and you get this moisture similar to a basement where they didn’t properly do a moisture barrier.

Derek:
So if I’m starting with a place that feels kind of dang, that’s just kind of a red flag. So it’s really like, how does it feel when you walk in? Can you get sewer fall and how much privacy is your tenant going to have? And are you going to be able to get? As Joe Asamoah calls it the creme de creme, like how do you get the best tenant? It’s by having the best product and giving the best customer service.

David:
Awesome. Henry, anything you want to add on that?

Henry:
So also what tends to be in place in some of these garages in my market specifically is the electrical panel for the entire house is a lot of the times found in the garage. And so when you see that, is that a big red flag? Or are you moving those with ease? Or how does that work?

Derek:
Yeah, what you do is you just flip them over. So they’re already on an exterior wall and all you have to do is pull the meter and you flip them over. So that’s not a major concern at all, that’s like something easy, if there’s everything else and there’s electrical panel in there, that’s butter. If you see a gas meter, that’s a lot different, those should be exterior.

Derek:
But a lot of times people build garages where their carport was, where their gas meter used to be, and those diaphragms off gas. So that’s a whole different thing. But David, just to jump back to your question, walking through with first time buyers, I would ask you to maybe at least give them the option of looking at a master conversion, because the garage is so much harder, if we’re looking at like, how do we get into our first house? And you’ve got clients that are right on the edge of getting qualified, the master is so much easier to convert, especially if it already has an exterior door.

Derek:
And everybody, they want their kitchen and they want their bedroom, those might be their goal. So it might be a hard sale to your clients, David, but just consider master bedrooms are always the easiest. Everybody thinks it’s the garage, it’s not the garage, especially if you can’t meet the parking standard.

David:
So if you see a master bedroom, that’s big, has its own bathroom, has its own entrance, you’re saying that can easily be converted into a studio, just throw a kitchenette in there in your…

Derek:
All day long for so, I mean, your ROI is so much better, and then a year later, you go by the one you want that has the master. And a lot of times, if it’s a three, two, there’s a Jack and Jill, or there’s a close bathroom, or if there’s not a close bathroom, there’s plumbing on the wall of one of the other bedrooms, and you can add one little bathroom in your master and turn your master into an apartment for pennies on the dollar compared to a standalone build.

Henry:
That’s a phenomenal piece of advice, because most floor plans now new floor plans are split floor plans. And so you’ve got your master on one side of the house, anyway, that’s a phenomenal piece of advice for people looking to do conversions.

David:
And this what we mean when we say in this market, you don’t really find great deals, you make great deals, because you’re turning that into something great. If when I go look at homes, I’d say 90% of what I’m doing is walk in this house and my mind is trying to figure out, could I do exactly what Derek’s describing? What areas would become their own units? Where is the plumbing running? Is there a bathroom right on the other side of this wall, that I could just take all the plumbing and push it over here? How would we run the electrical for the kitchen that has to go in there?

David:
I love what you’re saying, Derek and I think that it’s never been more necessary than now in a market that’s hot. The last piece that I’ll add, that I don’t know if we covered it in depth before we move on, is that in California and in many other markets that we actually passed legislation in California, that made it illegal for a city or municipality to say, “You cannot have an ADU.” I believe it was SB 9, do you see something similar happening in Oregon?

Derek:
Yeah. House built 2021 in Oregon, SB 9, SB 10 in California. It’s going to change the way housing is built and accepted. Very similar to when we had urban sprawl 50 years ago, and the first multifamily structures started being built in primarily single family zones. It’s the same wave, if we go back and we look at the history, if you’re not on board with an ADU strategy right now, you’re going to get left behind.

Derek:
And not only because you brought up California legislation, not only did the cities say, “Hey, all you planners at the state…” Told all these city planners, you’re not doing it right. All of our long term planning sucks. We have a housing crisis, we’re going to tie your hands and we’re going to set the rules.

Derek:
They also said, “You can split these off and sell them as fee simple loans.” So which is going to completely change the dynamic in California. You have what? The fifth largest market in the world, setting this new housing standard, it’s just going to sweep across the country. I mean, Florida’s already doing it, there’s stuff in Texas, Connecticut, New York.

Derek:
I put some stuff in the show notes where there’s AARP is setting a model code that a lot of cities and states are adopting. So if you’re looking at an area and you think ADUs are coming, I would read AARP’s model code, and that’s probably pretty close to what’s going to stick.

David:
Well, I’m glad we have you on. I imagine I’m not clairvoyant, but I would imagine your inbox is going to get pretty full after the episodes. [crosstalk 00:39:34]

Derek:
I don’t know. I just tell you what, all I want to do is help people and I want to make the promise that if you reach out to me, it may take me a year, if I get 1000 emails at an hour each, but I will get back to you. I want to help you create housing, I want to help you get off the hamster wheel enough.

David:
All right. Well, we can’t keep you all day, so we are going to move on to the next segment of our show, it’s The Deal Deep Dive. All right. On this segment of the show, we are going to dive deep into one specific deal that you’ve done, do you have one in mind? And are you ready to go?

Derek:
Sure. Shoot.

David:
Okay. We will alternate our questions and I will go first. Question one, what kind of property is it?

Derek:
Single family, turned multi-family with the ADU strategy.

Henry:
Awesome. How did you find that deal?

Derek:
MLS. I never get a good deal, I always pay market because I make the deal.

David:
Awesome. How much was this deal?

Derek:
316,000.

Henry:
And how did you negotiate it? If you did?

Derek:
That’s great one, it was on an online auction and I was bidding against a machine and I made a decision to spend 316, the deal closed, I got a call saying, “You didn’t get top bid, you can add five grand if you want. And I said, “No,” I stuck to my guns, which was stupid, I would’ve added another 100 grand if I know what I know now. And they called me back and said, “Actually, you got the deal.” So I was betting against the machine and just got lucky.

David:
That’s awesome. I love that you admit that. I’ve been there many times, I’ll give you a… This is not my deal, deep, dive, but I’ll just say, last summer I was looking in 2021 for a property for myself. This is the deal that got away. It’s like that one girlfriend you’re like, “What was I thinking?”

Derek:
Oh yeah.

David:
Except for me- [crosstalk 00:41:21]

Derek:
Heartbreaker.

David:
Yeah, they wanted 1.8, I offered 1.85, it sold for two million, I didn’t want to go that high. And now that property is probably like, it’s the best you could find in the 2.5 range over just like a seventh month period. I’m like, “Why didn’t I?” Yeah. So I feel you Derek. All right. I’m glad it worked out for you though because we have a deal deep dive to get into. Next question, how did you fund this deal?

Derek:
With owner finance? So 5% down, primary mortgage, secret weapon.

Henry:
That’s amazing. So what did you do with it?

Derek:
So this house is the textbook. It had a big, huge Gotti formal dining room with a kind of like second living room, and there was one wall, it was a shared wall with the kitchen and a shared wall with the staircase, and an entrance on each side, I literally pulled the permits, paid the SDCs, covered the two walls, soundproofed the entire shared wall, and punched a door out to a cute little patio, and I’ve got the happiest tenant you’ve ever seen in Oregon.

David:
Well, you sort of also described the outcome there. So we’ll skip to the last question. What lessons did you learn from the deal?

Derek:
I learned the lesson that this process is really simple, anybody could do it, and the deep dive here, David and I won’t take up too much of your time, but it was on a big enough lot that I was able to split the lot and do the exact same process behind it. Like when I thought it couldn’t get any better, it got better.

David:
Well, there you go, folks, that is exactly what it can look like when you use this same strategy. Simple doesn’t have to be the deal of the century, but it ends up looking like the deal of the century after you make it into that. So thank you Derek for sharing that, that’s a great example. We’re going to head over to the next segment of our show, which is The World Famous…

Automated:
It’s time for the fire round.

David:
We are going to ask you questions that come directly out of The BiggerPockets Forum, and fire them at you, and we will see what you can do with them. So if you’re listening to this and you like what you’re hearing, go check out The BiggerPockets Forum and see what else might be in there. Question number one, what are the pieces that I should be looking for in my city’s code for ADUs?

Derek:
You are looking specific for the ADU ordinance. Like I said, it’s usually five pages or less. Most cities use the same code management software and there’s an hour, there’s a search bar and you simply go up into the search bar, and type ADU and it’ll bring up every code, it’ll usually bring up the definition and then the specific piece of municipal code, read it.

Henry:
Awesome. Question number two, how much return will I see on an ADU? What are the risks to consider?

Derek:
So like anything, there’s risks in all investments. The return that I tell people to shoot for is 25% cash on cash return, unless you can use a little bit of leverage and then the return is infinite. But for the example that David used, I’ll just pull that one up.

Derek:
Somebody owns a property in Dubai, they have a $120,000 standalone bill and say they can rent that for 2,400 a month, they have a 20% cash on cash return right there. If they don’t bur out of it, if they don’t refi out of it, that’s kind of where I tell people. But if you buy a house with a really easy master conversion, it just goes up from there.

David:
Okay. Next question. Little different, but I’m curious if there is an answer to this. Are there any workarounds I can use that make ADU comply if they aren’t legal in my city?

Derek:
Great question. Yes. And that’s where you go back and you become code expert, and outside of municipalities, counties aren’t as friendly to accessory dwellings or there’s small towns that don’t want to compete with the city. And what we have is a piece of code called the detached living space.

Derek:
And the living space is kind of defined by the national standard of planning as not a dwelling because it doesn’t have more than three of the five dwelling statistics, which is eating, sleeping, living, cooking, and sanitation. So you build a detached living space at your municipalities max, a lot of them are 400, 600 or 800 square feet and you put in a bedroom and you put in a wet bar and you can’t have a stove.

Derek:
So what you do is you use legally, you get it permitted as a legal user in your zone. And then after the inspection’s done, people just use a plugin hot top appliance. And those are kind of called legacy accessory dwelling units, but that’s the legal workaround. So you meet the standard with the city and then you want to make sure you ensure it properly if it’s a living space. So those are the things that I would say are workarounds per se.

Henry:
Great. Question number five, who are the people I need to seek out to start an ADU build out? Just the GC, is there other people?

Derek:
I would start with doing the research yourself, in today’s climate, you can get a general contractor, but you’re going to probably end up managing the general contractor. So I tell people there’s two ways to build an ADU. There’s the easy way where you pay for everything, and then there’s the hard way where you kind of self-manage.

Derek:
So depending on your time, and your goals, and your skillset, I usually recommend people at least try to general the project. So you follow a couple steps, you have somebody like me help you and you are a construction manager. So that would be kind of the steps to go about building an accessory dwelling. The more formal way would be to get a set of plans, and then you shop the plans around, and you have a general contractor provide that product for you at said price.

Henry:
Awesome. So I’m going to sneak an extra question in here. So you talked a lot about speaking with city planners and people of that nature to do your research, but there’s oftentimes in art form when it comes to speaking to these planners and getting them to understand why you’re asking questions, what you’re trying to do, because they’re trying to protect their communities. So what tips can you give people when reaching out to the cities to talk about potentially adding ADUs or how to get that going?

Derek:
I usually just start by telling them exactly what I’m looking at and what I want to do. So there’s, you’re very direct. And I lead with, I have a little bit of planning knowledge, and I’m really good at research, but I’m just, I know just enough to be dangerous, could you tell me based on your professional opinion, what you would do with this property, if it was yours to get the greatest and best use?

Derek:
And what I’ve learned is that you, it’s not a manipulation tactic, you just, you empower them because they are the smartest person in the room. You empower them to tell you what you should do. And that’s been the best strategy that I’ve found is just treating people right, being direct and asking them what they would do. And what I found is most of the time people come in and they tell them what they’re going to do.

Derek:
But if you ask them what you can do and what they would do, you see this shift and they’re like, “Oh wow.” This person cares about my education, and my knowledge, and my experience.” And I kind of take that approach mixed with my imagination and my experience, and we can usually come up with a really good plan. So that was a great question, I’m so glad you added that Henry. I mean, that’s probably the relationships, and the talking, and the communication is probably the most important piece of this puzzle.

Henry:
That was a phenomenal answer. I hope you guys wrote that down. You’re right. It’s not a manipulation tactic, it’s just treating people right. But it feels like a Jedi mind trick at times, right? Because you’re getting people to talk, well, people love talking about themselves, and people want to feel like they’re respected and that their opinion is valued. And that really opens them up to being more helpful to you. I love that tip, great.

David:
And I will second what Henry just said there, as far as your answer, Derek. I still, at this stage of my career, asked that to every single person. I was just this weekend, looking at a house for myself in the East Bay Area, beautiful house, $2.5 million place, we’re going over, what we would do to do exactly what you’re saying with it.

David:
And I would say, “Hey, here’s what I’m thinking. What do you think about that? What would you do differently?” And oftentimes what you’ll see is hesitation in your contractor’s face as they’re listening to you, because they don’t want to say that’s dumb or it won’t work, or maybe they’re thinking through when I’m like, “Hey, here’s my idea.” And there’s like 19 steps they got to figure out.

David:
Which I found is very different than me, they’re like where would the air return come from? And where’s our drain going to be? And you realize, oh how would you do it? They say, “You could just put it over there,” and I’m like, “Yeah, but that doesn’t make sense,” why? Because you don’t have to do this, and this, and this, and, “Oh, all right.” So, and there is not a point your career, I think we should ever get to where not asking those questions, I really liked that you brought that up.

Derek:
Cool. Thanks David.

David:
Yeah, absolutely. Thank you for that great answer. Next segment of our show is going to be…

Speaker 8:
Famous for.

David:
This segment of the show we ask every guest on every episode, the same four questions. And we are going to ask you yourself at this time. Question number one, what is your favorite real estate book?

Derek:
My favorite real estate book, if you’re not already tracking, I’m obsessed with accessory dwelling units and this is the best piece of literature, this is the ADU Bible. My buddy Cole Peterson at a Portland, Oregon wrote that it’s Backdoor Revolution. If you are wanting to build an ADU yourself, if you’re a professional practitioner, or if you are a policymaker, you got to have the book.

Henry:
Awesome. What is your favorite business book?

Derek:
Business book? I thought long and hard about this one. I wanted so bad to say Set for Life by Scott Trench. I mean Scott and Mindy, if they ever listen to this, they’ve helped me tremendously. And I love Scott’s approach that’s simple, it’s based on a solid financial foundation, but it was slightly beat out by Jim Collins, The Simple Path to Wealth.

Derek:
And although it’s more of an investing book, it’s the same key principles. It’s all about simplicity, a simple average plan repeated over time and you have extraordinary results. And if that’s an index fund, so be it. If that’s an accessory dwelling unit or if it’s a self storage unit, the same rules apply.

Henry:
Fantastic. So what are your hobbies?

Derek:
My hobbies, right now are taking phone calls all day long for first time, home buyers for free and going and looking at almost every house that’s for sale in the neighboring markets to try to help people say, this is where you can do an attached or detached ADU. Is starting to bog me down, that’s the only reason I started this business is so I could like track the calls, and so I could kind of organize the workflow.

Derek:
But outside of that, I’ve got an amazing girlfriend, Bryce and my family we like to run around in the sun. I’m an avid trail runner, so I’m training for 100 miler this year. I run a 50 miler every year, trying to run about 60 miles a week. And if the snow’s good, you’ll find me probably calling in sick at work and skiing powder on Mount Ashland.

Derek:
So running, skiing, ADUs are incorporated into everything I do. You know, if I’m on a trail run, on the PCT I have the three spots I know I can stop and get cell phone reception to look at something real estate. And if you don’t believe me, both of you are welcome to call me and I’ll answer my phone and I’ll probably be on a chairlift or something. So try me.

David:
All right, next question. In your opinion, what sets apart successful investors from those who give up fail or never get started?

Derek:
Relationships all day long and not just this awesome relationship with my lender or the relationship with the subcontractors, but the relationship that I have with myself, believing in myself when it’s really, really hard or the relationship I have with my girlfriend when she basically props up the whole day, so I can work 16 hours and literally fall asleep on the hardwood floor in front of the wood stove at night.

Derek:
The relationships I have in my life are the only reason I’ve found a tiny bit of freedom, it’s no work of my own, it’s all the people around me. I didn’t even choose to surround myself with, they kind of found me. And to end with, anybody can have those relationships, I’m just an average person like you can do this.

Henry:
I love that, man. It kind of rings true to one of the things that I always say as people say, they’re these self-made millionaires and that’s normally not the case, man it’s, you’re a team made millionaire typically.

Derek:
Every time, every time. Oh, that’s beautiful.

David:
All right. Well, Derek, this has been an amazing interview on a topic that doesn’t get talked about enough, so I really appreciate that you did this. I think one thing that stood out to me was I’m most of the, and this includes me. Most people assume an ADU always means a standalone dwelling unit that is not attached to the home, but you gave a lot of examples of ways you can take square footage you already have, that doesn’t require a really big rehab budget or the $150,000 that I mentioned putting it down, and you can just take the property as it’s built. Any last words that you want to add on that subject?

Derek:
Yeah, just directly to that subject. I know that there’s a lot of places in the country that build with basements and we didn’t even get to talk about basement or attic conversions, but everybody’s looking for a garage conversion. I mean, is it built on a house? Do you have a daylight basement? Can you put an egress window in for a few $1000? And bam. The other cool thing about a basement conversion is all these municipalities have a high end cap on square footage, unless it’s a conversion of a part of the existing home.

Derek:
So if you have an 800 square foot ADU max in your area, but you have a 3000 square foot, two story house, you can convert not even the basement, the lower or upper floor. So I’m always thinking, shared wall duplex, over under duplex, cottage style duplex, but they’re all within the ADU strategy. And the most powerful piece of the ADU strategy is you’re getting multifamily results without the 200 page code that wants carbon gutters, street trees, fire sprinklers, all this list of bureaucratic processes that you can kind of go around with accessory dwellings. So I’m glad you brought that up, David, I wish I would’ve been able to share more about basement conversions.

Henry:
Awesome. So tell everybody where they can find out more about you.

Derek:
Yeah. Check out my website, at thataduguy.com, and then I also put a bunch of other competitor websites in the show notes. So there’s a bunch of other people that kind of do similar things in different regions, and it’s all about sharing, this is collaboration, not competition.

Derek:
So everything that I know ADU that I send people to, I put in the show notes, but thataduguy.com, send me an email, my phone number is on there. If you call it, I probably will answer. I just ask that if you call me, be ready to take actionable steps to change your life.

David:
Awesome. Well, thank you very much. I appreciate that. Everybody reach out to Derek. He wants to help and you probably need that help if you’re trying to do what he’s doing, which we do all the time, where I live. Henry, also great job today as always, really appreciate your support in this. I’m going to let you guys get out of here. This is David Green. For Henry, find that red truck Washington. Signing off.

Ashley:
This is Real Estate Rookie episode 163.

Andrew:
If you just made a little bit of progress every single day, you will get to your dreams. When there’s two years, five years, 10 years, it will be much quicker than you think. It’s a snowball, but if you don’t start it now, you’ll wake up at 50 building somebody else’s dream.

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

Tony:
And welcome to the Real Estate Rookie where every week, twice a week, we give you the inspiration, information, motivation that you need to get started as a real estate investor, or keep going if you are already started. So Ashley, what’s going on?

Ashley:
So as you can see, I am not in the closet, Tony’s not in his office and we have someone sitting in between us. So we are actually in Tennessee right now in one of Tony’s short term rentals. So Tony, do you want to just give like a little brief overview real quick of your cabin?

Tony:
Yeah, yeah, so we bought this cabin a couple months ago. But as part of the purchase of this contract or the purchase of this property, we had to honor a property management contract from the previous owner. So they had it under contract at the end of the year. So we took over control officially this week. So we figured let’s come out, let’s see what it’s like and decided to invite Ashley along and our awesome guest. So we’re all kind of here breaking in the cabin for the first time.

Ashley:
Yeah, so today we’re just going to meet doing a live podcast. We also have a meet up tonight that we’re doing. So hopefully if you guys listening in Tennessee, we actually met each other a couple months ago when this is recorded.

Tony:
So Ashley and I want to start doing this a little bit more often. We got our Rookie road trip. We’re just going to kind of pop around in different markets that we like, markets we’re investing in and set up shop, interview a guest on spot on location, and then hopefully have a meet up and meet some cool people.

Ashley:
Yeah. So we actually put out an Instagram post that we wanted to interview somebody in person. And the first person that reached out to us was Andrew.

Tony:
Sorry, not the first person, the best person that reached out to us was…

Andrew:
Thank you. Flattery will you everywhere with me so go ahead.

Ashley:
So Andrew, why don’t you go ahead and tell everyone a little bit about yourself?

Andrew:
So my name is Andrew, Andrew [inaudible 00:02:11]. That’s what my mother named me. Most people call me Breezy, but you guys can call me whichever you prefer. So I grew up in Chattanooga, Tennessee, about two and a half hours from here. And I’m really, really excited to get on here and tell my story. When I was a little kid, I think like most people I had dreams of what I was going to be, but I figured it out a little earlier than most. I’m sure you guys have never heard this story of a 15 year old reading, Rich Dad, Poor Dad, never been heard on this podcast before. But I read that and I got so obsessed with real estate, with financial freedom and I never thought about money in a traditional way. Again, I didn’t want to work for somebody else.

Tony:
You were poisoned from an early age.

Ashley:
How old are you now?

Andrew:
I’m 33.

Ashley:
Okay.

Andrew:
So I was 15 or 16, I don’t remember the exact time, but all the Ritalin in the world couldn’t get me to focus at school. And then I told my dad and I just wouldn’t stop talking about Rich Dad, Poor Dad and how excited I was. And so we went to Florida on vacation and he said, “I will buy you whatever book you want, however many books you want to read, just let me know what you want.” So I left the condo twice that entire week, I read like 2000 pages as a 16 year old. And I was hooked from then on. And I didn’t get started as a 16 year old, unfortunately, but I knew from then on, I wanted to be a real estate investor and I didn’t want to work for somebody else for the rest of my life.

Tony:
Just out of my own curiosity, what introduced you to the book? Did you just stumble upon it?

Andrew:
Somebody gave it to my dad, told him my dad was a pastor and my mom was a nurse growing up, and someone at church said, “Hey, you should read this book and you should give it to your kids.” And my dad respected that person enough to follow that, read it and then give it to me. And I don’t actually don’t know who that was, but it was pretty fortuitous for me.

Ashley:
Yeah, that’s awesome. So after that, you’ve read that information, then what happens when you graduate school? You go to college or you pick up a nine to five job that you didn’t want or what happens there?

Andrew:
So I went to a small private school that had really good study abroad options. So I went to Italy to study abroad, same tuition, all the classes transferred, great. I meet the girl of my dreams, my now wife, and I don’t come home for two years because I couldn’t leave. And what I learned during that experience, why I think that’s relevant to our conversation today is I learned that not taking no for an answer and being like, “How can I do this?” Because I went to the office of the school and I said, “I want to stay here and I want to work for you guys. I’ll clean dishes, I’ll clean floors, whatever it is,” and they laughed me out of the office.

Tony:
You stayed at the university?

Andrew:
I stayed at the school.

Tony:
I thought you were stuck in Italy. I thought that’s…

Andrew:
No, I voluntarily stayed at the school because I didn’t want to come home. I met the girl of my dreams and I was like, “I’ve messed up. I can’t go home now.” And so I got laughed out of that office. The school director said, “Hey, every year, you’re a nice kid, but every year kids want to stay. This is paradise for you. You’re here in downtown for Lawrence, Italy. You’re living the dream. This is not a place for you to stay.” And I said, “Okay.” And I knew how they worked, they worked on guys had to get their visas or girls had to get their visas coming in to work at that school. And I was told by several employees that oftentimes visas get denied and they have to pull kids out of the community to work there. And so the second I found out that visas had been denied, I was back in that office.
Still told me no. But a few weeks later, I just kept persistently going in there and telling, “Hey, I’m still available. I still want to stay. I only have a one way ticket. I’m not planning on going home.” They relented, they paid me [inaudible 00:05:13] a month. They gave me room and board. So I had cafeteria and I literally scrubbed floors and cut vegetables and did whatever was needed. I made beds, anything that was needed at the school for a whole nother 14 months before I went home. And then my wife and I got married and then I did not get a nine to five at first. I tried to figure out what I was doing in my life, dropped out of school, didn’t need a liberal arts degree to be a real estate investor, didn’t want a bunch of student debt. That led to me working some seasonal jobs, getting my CDL, getting a job, driving a truck, and doing what would kind of be a house hack at my parents’ house.
My parents were super generous with us, let us move into the basement, and we took six years off and on building a full apartment in the basement. So we put in every Sunday for eight hours and then whenever we could during the week we built a full bathroom, a full kitchen, put in a laundry room, put a bedroom, we put a window below grade. And we did everything. It flooded at one point because the water main broke and we repaired all of that. I put in a sub-panel. If the county’s listening, this was all permitted and good, but what I did learn is that I could do a lot of this with hustle and with work. And so when we did save up, when my wife got out of nursing school and I had progressed in my job into sales after driving a truck at the beer distributor, I was able to then buy a house hack and move out into my own with some skills and not just YouTube for the first time. I’d already done that for a little a while.

Tony:
I love stories of perseverance and just like rolling with the punches that life gives you and like you said, not taking no for an answer. There are a lot of skills that people, technical skills that I think people need to develop to become a good real estate investor. We talk about those a lot on the show, but there are also a lot of soft skills that people need to develop to be good real estate investors. And a big one is having the, I don’t know, the grit to be able to roll with the things that life throws at you, man. So I love the fact that you shared that story because I think it exemplifies that really well.

Andrew:
Yeah, the sticktoitiveness, I was not taking no for an answer.

Ashley:
Yeah. Well, while all this was happening, real estate was still at the back of your mind. And then when did it become time to actually take action on it?

Andrew:
So I started thinking about it a little bit and I found the perfect fourplex that will forever haunt me. We didn’t get it, spoiler alert, because at that time it was about $425,000. My wife had just started working or was just about to start working. I had maybe been working for few years making 40,000 or $38,000 a year. And we did not have our financial house in order. We weren’t bad, but we didn’t have a ton of credit. We weren’t ready. And so it comes on the market. I’m just starting to look around. I see it.
It is walking distance from all of my favorite bars, all of my favorite restaurants. It is right off the main drag. It sold for like $750,000 last year, just a few years later. So it would’ve been amazing, but I couldn’t afford it. But what that did is plant the seed that, okay, it’s time. We’re not that far away. So at that point we were DINKs, dual income, no kids. We saved about $40,000 over a couple years. And then in 2017, we started looking in earnest for a house to buy. We wanted the house hack and we were looking for duplexes specifically.

Ashley:
I think Tony wants you to go over the word DINKs again.

Tony:
I’ve never heard that phrase before. Dual income, no kids.
But it reminds me-

Ashley:
It’s like part of-

Tony:
Doug Funnie, right? Is that where it’s from? I don’t know.

Ashley:
It’s from like the personal finance community.

Tony:
Oh really?

Ashley:
Yeah.

Tony:
Boy, if you guys know Doug Funnie from the 90s Nickelodeon TV show, his neighbors, they were the DINKs.

Ashley:
Oh really?

Tony:
They were dual income, they had no kids.

Andrew:
No, I saw it on the internet one day. And then I was at a bar at some point and someone was like, “Oh yeah, we’re all DINKs.” And I’m like, “What?” And then once that got in my brain though, that became the greatest way to describe those of us who were in a different path. We were in our mid twenties, no kids, and dual income. So we’re able to save a significant amount of money compared to the average person. Kids were expensive and living at home with my parents just paying 350 or $400 a month of utilities, that’s all they let us pay, allowed us to really set a nice footing and I’ll be forever grateful for that.

Tony:
Yeah. Can we talk a little bit more about the work you were doing in the basement? Was there an agreement between you and your parents to say, “Hey, we’re going to do all this work and then we’re going to rent it out.” Or are you just doing the work so you had a nice place to live? What was the thought process behind that?

Andrew:
It was a little bit of both. I did tell my parents as a selling point, and I’m really lucky that my parents have trusted my judgment. My dad and I are kind of the same person so that’s helpful. We definitely think things alike in a lot of ways. So that’s helpful. But I told them initially, “Hey, we don’t know where we want to go. I don’t want to get a mortgage or rent because then I will be stuck in a job. I want to do real estate or me go back to school or something. But this is a bad decision, me just going out and getting job flipping burgers or whatever I can to just pay rent.” So they were like, “Cool. Move into the basement.” Well, my wife didn’t love that idea. But she trusted me as well. And once we moved in, my dad helped me put a wall in.
And then he was basically like, “Whatever you want to do down here, we’ll cover the money and the materials and whatever else. We don’t have the money to pay for somebody to come do the work, but we’ll put this on all credit cards, Lowe’s credit cards, you can just buy the materials and you can do the work, whatever you think we want to do once you move out, we’ll rent it.” And I was like, “Cool. That is exactly how I hoped this would work.” And that was how it worked. And now we’re actually in a partnership on something differently later on that we’ve can talk about that this laid the groundwork for and we were much more explicit about. But luckily alls well that ends well. Working with family can be very, very tough, but my parents are really nice and we got along and so it worked out.

Ashley:
With your family in that apartment in the basement. So they do have it rented out now?

Andrew:
Yes. So it became an immediately a rental as soon as we moved out. They had to learn how to be landlords. That was a little tough for them. And then they’ve actually moved out to take care of my grandparents now. And I manage both the upstairs and the downstairs of that property now..

Ashley:
Okay. So then let’s go back to you. So your first property then let’s go through that.

Andrew:
Sure. So we actually got a duplex off market and the way that happened was, this is my belief on her motivation, we ended up with a real estate agent, didn’t know what I didn’t know, so I went to a guy that was a mortgage broker and I was like, “Hey man, I know you, I trust you. I know you won’t screw me over on purpose. So let’s do a loan together. And I don’t have a real estate agent.” And if I had known about BiggerPockets at the time, really followed what was, I kind of knew it was there, but I wasn’t paying close enough attention. And so he gave me a real estate agent, I think brand new. But what she did have was like the ability, I guess, to follow what we wanted. So we had very clear what we wanted. We wanted at least two bedrooms on each side.
We wanted side by side, not up and down. And we wanted at least one and a half bathrooms. We had been in a one bed, one bath for six years. My wife had lived through a construction zone. So we wanted something that was at least almost livable, that didn’t really happen, but it was close, but really wanted two bathrooms. And so that was what we decided on. And we probably toured six or seven properties. There wasn’t a lot available. And then none of those made any sense. We wanted to be in what’s called Red Bank, which is a particularly hot part of the market now, was unbelievably hot at the time. And so after six or seven properties and we were very specific in what we wanted, our real estate agent said, “Hey, would you be interested in looking at two duplexes on the same lot that my sister owns in Brainard?” And both my wife and I were not really interested in being in Brainard, but there’s no reason not to look.
No reason not to check it out. So we go there, we tour them both. They’re on one lot, technically subdivided because they’re deep lots, but they’re right together. You would not want to own one and not the other. They share a driveway, they share a parking, they share mailboxes, they share steps up. I mean, it’s all together. And so eventually we decide, okay, this is actually a really good opportunity. One of these duplexes with two units is two beds, one half baths each, side by side, exactly what we wanted, just old and beat up, needed love. And the other set are one bedroom, one bath loft apartment. So it’s got an open loft, similar to what this has here with the [inaudible 00:13:17] room. And so we were like, “I don’t know about these one bedrooms, but two duplexes for the same price that we were looking at ballpark for these other duplexes in the areas we liked, okay, let’s take a shot.”
So we settle on $250,000 that overall purchase price report.

Tony:
So for all four units.

Andrew:
All four units. So that would be 130 and 120, I think that’s the breakdown, but it was definitely 250 total. I have a piece of advice [inaudible 00:13:43] how I do things after that. But we go through the first to buy one at a time, didn’t have any paperwork on the second ones. They could have sold the second one out right from under us, they didn’t, then listed on the MLS and she represented both sides of the transaction. So Cody got totally screwed because it’s her sister she was representing, but she was great. Everything went well up until it appraised. And the smaller duplex was supposed to be 120,000. It appraised for 98,000. The duplex is supposed to be 130, appraised for 118.
And I know now what happened. It said these duplexes sit on a ridge that divides downtown from the suburbs more or less. It’s a dividing line geographically. There’s not a lot of duplexes in that area. The comp stakeholder were from a roughly from just over the ridge that has [inaudible 00:14:30] flies a couple hundred yards, but isn’t wildly, you have to go several miles to get there. That would be like comparing the [inaudible 00:14:36] that sit right above us, which is a million dollar house, but it’s up the ridge at the very top overlooking the city, whereas we’re down towards the bottom of the ridge. So they got a really bad appraisal, but their calculus was, at least to my understanding, we paid cash for these. We put a little bit of work. We cash a lot a ton of money out of them and we subdivided them so we’re making our money back. They wanted to go for Christmas to Bali, which I think they did once like a month, which is good for them. And so they said, “Let’s just close at the lower price.” But the thing was-

Ashley:
So they took the appraisal price? Wow.

Tony:
Let’s pause on that for a second. Because I think that’s a really big, I don’t know, like lesson, clue, something for Rookie investors to understand is that every seller is motivated by something, but it’s not always money. It’s not always getting the biggest return that they can possibly get. Your sellers wanted to go to Bali.

Andrew:
If they put it on the market, it would’ve been sold in February or March maybe or something.

Tony:
They wanted to go to Bali for Christmas which was a very specific timeframe that they had to operate within. And as the buyer, your job to get the best deal possible is to solve the seller’s biggest problem.

Andrew:
Yes. And my wife and I only had about $40,000. And so they were actually already taking, we talked about the loans we use, whatever else, but they were already taking some of the closing costs. So we renegotiated a little bit, but we had no extra money or we do the deal so that we are roughly $40,000 out of pocket or we can’t do it. And so we are putting 3.5% down with an FHA loan on the owner occupied more expensive one. And then we put down 25% conventional on the second one.

Ashley:
And were these both through like a local bank?

Andrew:
No, these were through a mortgage broker who, great guy, but didn’t do a ton I don’t think of investment stuff. So not the guy who’s now, no ill will, but I think that the transaction was a little bit more difficult that way. But the good part was he was previously in-house loan guy at Keller Williams. So he knew, he’s the one who recommended her because he called them and said, “Hey, can I get a real estate agent for these guys?” So he has some good relationships there so he worked really seamlessly with us and her and really we worked it around. So we worked the closing costs out so we took slightly less of discount. After the whole transaction ended, we had about $2,000 in the bank and that’s as low as we could go. And then we went from no mortgage payments to two mortgage payments and we did not buy those simultaneously. We bought one month in October I think and the second we closed [inaudible 00:17:07]. So just back to back, we started the process literally the day it closed.

Ashley:
Were they rented out already in what was becoming a landlord like for the first time, especially going from zero to three units that you’re managing and a living in one of those units too along with your tenants?

Andrew:
It was fun. It was really fun. I was super, super excited. It was the winter time so my work was a little bit slower. And first thing we did was say, “Okay, which of these four units is in best shape that we can get on the market?” They were previously all four short term rentals. This was Airbnb at the beginning in Chattanooga. They didn’t do any sort of tax collection. There was no city ordinance. Now there are permits required. There are city ordinances. There’s a whole zone. That road, in fact, our side of the road is in the overlay that allows short term rentals. The other side of the road, 35 feet from the front door, is not. So that was pure luck. That happened later.

Tony:
Let me comment on that really quickly, because that’s something that I talk about a lot to. When we talk about choosing a market for short term rentals is that I’ve personally shied away from markets that haven’t established ordinances yet. Because like you said, you got lucky that you were 35 feet the right way. But had you gone 35 feet the other way, now you’re caught holding the bag for something that maybe doesn’t work as well. So just for the listeners, I think it’s important to kind of do that research. That’s the very first thing I do before I go into a market is understand what the policies are.

Andrew:
And we did not buy these to be short term rentals. I’ll explain the breakdown of the four units and what we did with each one. But we bought them as cash flowing rentals. We believed they would cash flow, but they were all short term rentals so we kind of saw how that was and thought, “Well, this would be interesting.” And then the two, one bedroom units, there’s three parking spaces between the two of them. Really though, there’s only one parking space each because the hill that the two, one bedrooms sit on, the shared driveway, can only fit four cars total and it’s a nightmare if you’ve got four cars parked there. So we let the tenants park two cars for the unit that’s next to us. I park one car on the hill so everyone can get in and out easier. And then my wife parks down below in one of the three parking spaces.
So that makes two parking spaces, even if there were three, it’s not as big a deal. But what matters is, if you were to rent that property out yearly, who’s going to stay in a rental, one bedroom, one bath, a nice affordable housing potentially, but who’s going to stay there when you literally cannot park more than one car, where there’s no street parking, it’s a busy road? You would stay there one year at the most and you’d be out of it. And so it wouldn’t be a good investment for us. So we believed, “Hey, let’s try this furnished rental thing.” So of the four units, the two outside units of each building, so the outside one bedroom unit was in pretty good shape. We furnished that in about a month. Got it on Airbnb. Maybe it was yeah, right about a month. Started our adventure there, blind leading the blind, didn’t know anybody who did anything, didn’t have any friends that were doing it, so definitely Googled.
But like right now there are tons of stuff all over YouTube you can watch. I watched one Tony of these videos where it would make me want to buy a [inaudible 00:20:08]. [crosstalk 00:20:08] all the way up here going “No Andrew, stick to what you’re supposed to do, no shiny object syndrome.” But we got that one up. We kind of figured out our way through that. We actually moved into the other one bedroom unit next to it because it was in decent shape but it needed a little bit of work. We got the first two bedroom unit as quickly as we could, we did a basic rehab, we painted the countertops. We put in a few new fixtures. Just the bare minimum. It needed love. The only thing we did was hire somebody to come in and remove the laundry room, which was just laundry hookups in the kitchen.
There’s a patio and there’s a room off each patio, it’s a storage room. We had them re-dry wall, and since the patio room and the kitchen line up together, they could pull plumbing and pull power easily through a wall and put a laundry room in there. So that’s the only money we paid someone else to do. And then we fixed that up, got that on the regular market, got that as a regular long term rental and then completely gutted the unit we were going to move into, which was the roughest unit of the four. Eventually moved into that one, then we redid the one bedroom unit we’ve been living in, got all four stabilized. That probably took six months or so.

Tony:
So over the course of six months, you and your wife were just kind of moving from unit to unit, shuffling the rehabs around, get through them all then and knock them out and getting them ready.

Andrew:
Yes. Nights, weekends, took every Saturday completely off. But other than that, it was just all hands on deck every moment we could possibly put in before work, after work, whatever we could do.

Tony:
So, sorry, just to clarify. So what was the final decision on which one were long term and which one were short term?

Andrew:
Okay. So then as we were figuring out what to do, we had the one bedroom that was already short term, and then we had the two bedroom, one and a half bath that was long term. We left that one as long term because we didn’t want to mess with the parking situation and it was next door to us so we wanted to live next door to either people we liked, which we ended renting to a lot of friends, which I think is something that’s fun to talk about. And we wanted to live next door to the same people and not have new people coming in. If somebody throws a party door to you, it’s kind of annoying. So didn’t want to have that. The other unit, and this is what has actually really changed our investing, the other one bedroom unit needed more work. And in order to qualify for permits, at first, it was a monetary decision, but monetary in the sense that needed more work.
So I didn’t want to put as much work into it. And I wanted some stability, so we’re like, “Oh, let’s try it furnished and see what we can do.” And then we couldn’t permit it. So I didn’t want to risk getting in trouble. And so we put it for monthly furnished rentals and we had thought and we had been told by actually our real estate agent that she was like, “Hey, if this was me, by the way, I would do these all like month long. This nightly rental is really hard.” That didn’t really set in for a few months because it was six months later or so that we actually got that one done and on the market, but we started that one, we got our first booking, I think three months. And that three months turning into six months.

Ashley:
Can you just explain what is a monthly booking and what are the type of people that come? Is it people that are working virtually and just want a [inaudible 00:23:07], but who is the person that books for a month?

Andrew:
Absolutely. So that’s actually changed a lot over the past couple years for us and our business. But at the beginning, exclusively traveling nurses and people on internship. And I learned a lot about how to market to those folks. But at the beginning we got a bunch of requests, I think because it was a one bedroom, one bath on the other side, it was pretty cheap. We didn’t have a lot of reviews. So we used a lower price, try to get good reviews, take care of people, et cetera, et cetera. We got a lot of messages saying, “Hey, would you be willing to rent this out for a longer period?” And so we would actually “This one no, but we have one next door that’s exactly the same layout, here’s the literally the booking link, check it out and see what you think.” So we started that one at a thousand dollars a month, actually $33 a day, or maybe the first month was $30 a day.
I don’t remember. But at 31 days, you have a drop off in Chattanooga taxes and fees, so it becomes more affordable to rent. So that’s the first thing. The other thing is, I don’t know if this is everywhere, but in Chattanooga, the ability to rent out a one bedroom, one bath with kitchen and laundry and the things you would want to live in, it’s hard. There’s very few of them. So we kept getting these inquiries.
“Can we rent out your place?” And again, it was almost always professional folks, either traveling nurses or people doing medical internships because the university’s just over the way. That has changed. And we have had now had some folks building a home that wanted to build a home is they need a place to work from home from. We’ve had several people rent it out for six or eight weeks at a time instead of two, three or four months. And they’re just traveling digital nomads. So I’ve got a little mix the two now, but it started out as just folks who needed usually almost exactly three months because a lot of those internships were summer internships for three months, or traveling nurses who had either a six week contract or a 12 week contract.

Ashley:
How are you finding them? Is that they’re coming to you from Airbnb or I’ve heard of the traveling nurses websites. Are there different places you’re looking for these people?

Andrew:
We have not had great luck with Furnished Finder, although I have a different listing on that, it has been almost exclusively in Airbnb. And actually in 2021, we really, really changed our amount of money we were getting for these units because, watched a bunch of YouTube videos, I had the time and I really sat down and tried to get a better pricing structure and realized I was underpriced. And this is the first half cool tip, if you want to rent for three months at a time, this is not my idea, I learned this from YouTube, put little dash or something on the end and put ideal for long stays or perfect for long stays. There’s a character limit there so you got to get creative, but make it clear in your booking that you are looking for long stays. I only accept 31 plus days. I’ll do 33 days if you want, but you got to have 31 at the beginning.
And I leave that in the first part of this. So when you’re looking at your Airbnb listing and someone’s pulling it up, the very first part of the description, right below it, I make sure before you got to click to more, I make sure there’s, we are only looking for bookings of at least 31 days at this time. But in the title it says ideal for long stays. And that has increased both of our listing views in the analytics on Airbnb and our bookings exponentially. And I think that is because we were initially getting these views from folks looking for a one bedroom that they could hit up to be like, “Hey, is there any chance you’d rent this out?” I don’t have Instant Book on, which is one of the things that gets you high in the SEO on this particular unit because it’s monthly so I want to be sure I know who I’m talking to and whatever else.
So getting that, putting ideal for long term stays made a lot more people click on it that were looking for that exact same thing. And from there, it’s a little bit of a negotiation. And what I like about those tenants is if you have the money to spend 1,200 plus fees, so 1,600, $1,700 a month, which what they’re paying now, probably got a pretty good financial backing. So there’s less chance of you not paying. Then additionally, you’re probably taking it more seriously than somebody looking to party for a weekend and booking your place.
So one of the downsides of short term rentals can be that someone could trash your place, they throw a big party. And if you’re booking the place for three months, and I tell you I live next door and there’s only one parking space and we loved it, but I tell you, I love the neighborhood, my wife and I love the neighbor. We live next door. We’ve never had any problems. I’m not telling you you’re not welcome there. I’m letting you know that if you party next door to your landlord, that’s not going to be fun. So they really, for my quality of life, I turn over the unit every two, three or four months and I still get almost as much as I would get as a short term rental.

Tony:
One question is out of curiosity because I know we have times where we have guests who check in and they just kind of drive us crazy with the amount of questions that they ask and information that we’ve already given them but they’re saying that they don’t have. When you’re are walking distance from your guests, when they can just kind of walk over and knock on the door, do you see that happening a lot? Or are they pretty chill for the most part? Just what’s your experience.

Ashley:
Are they not peeking in the window?

Andrew:
So these units sit so close together. My unit and this unit are the two inside units. There are not windows on my side of the house, but if there were, we could see into each other’s units, I have the fence that runs across and touches both houses. I took the whole yard from that house so my dogs have somewhere to go. So they have a patio. They have no side yard. So they’re very close. I also keep a bunch of tools, don’t come around me, and it’s like vacuum cleaners and random stuff in the back patio closet. I make all of that abundantly clear from the beginning. “Hey, you might see me coming to get the weed eater to weed eat the inside of my fence.” That’s the first thing. The second thing, and I don’t know how this is with you, but there’s a certain Spidey sense you get when somebody reaches out to you and how they communicate and how they talk to you about whether they’re going to be trouble.
I’ve had one tough tenant and he paid through the whole pandemic. And so even though I had about a $1,500 rehab after he left, because he smoked in the unit even though he said he didn’t and a few other things, that’s the worst experience I had. I’m picky. I’m not trying to be. I just try to lay everything out before. And if I’m really clear with folks, we live next door, it’s one parking space. And I tell people being honest about the good and the bad of the unit and that if you’re polite and communicating in a way that is normal, we’re good. If you’re like, if it’s one or two words like “How much?” Well the listing price is right there. Like, “Can I have pets?”

Ashley:
It just sounds like when you list the property on the Facebook marketplace,[inaudible 00:29:19]-

Tony:
What’s the price?

Andrew:
Same type of thing. So I’ve definitely shied away from some of those folks a little bit. But we been really lucky. And even in our short term, the one next door we’ve had in since 2017, late 2017, maybe four tough experiences. And even those were not that bad. And I think a lot of that is preparation. Some of that is luck. And some of that is a one bedroom apartment, doesn’t get a ton of party.

Tony:
So give us the timeframe Breezy, how long ago did you purchase that duplex and what’s kind of transpired since then?

Andrew:
So we purchased both of those in 2017, October, November, and the first year, I think when I did my math, I think we cleared about $750 total for the property on top of all expenses, not including setting aside anything for [inaudible 00:30:01], but including repairs that we spent. Last year, we were about $600 that went in 2019, we were about $600 a month. Similar for 2020. 2020 was tough because one of the units went empty for a whole month. And then we transitioned to how can we get somebody in this one bedroom, one bath that’s normally nightly for three months? So again, that was about 600 bucks a month total. So you’re thinking $300 a door. It’s not terrible. And it’s providing my internet since they were on one lot. My lawn mowing is all billed to that. My every expense that I can put, my pest control, everything’s billed to that address.
And they happen to serve my duplex next door too. So I’m getting some benefits there, but it was not as good as 2021. So I don’t have final 2021 numbers. I haven’t sat down and crunched November and December. But we’re on pace to make about $1,200 a month.

Tony:
That’s awesome.

Andrew:
So we’ve doubled our profit and we did an extensive rehab on the units. We put in all new siding, about $6,000 worth of siding repair, as well as several other couple thousand dollars here, a couple thousand dollars there. So I think close to 10,000 in repairs and we still cleared about $1,200 a month total between the two of them. And that’s after they paid for all of my personal internet because I share the internet. All of my personal lawn mowing, I share the lawn mowing. I paid for all of that, pest control. So it was a real home run in 2021. And a lot of that came from doing my homework and trying to make sure I ran a better business and changing my pricing too all by watching YouTube and trying to make sure I was doing a better job.

Tony:
It’s a really good house hack effectively. I love the idea of combining the short term stay with the medium stay with the long term stay. I don’t think I’ve met anyone that’s kind of played with all of those on one parcel before, but it seems to be working out really well for you.

Andrew:
So when the pandemic hit, the nightly one went completely empty. Everything canceled out and we were just done. And so it was a month of being like, “Well, what do we do?” And I’ve always bought this from the very beginning that if something terrible ever happens, it’s okay that I haven’t spent the money and fixed this other one up and gone nightly because at least that thousand dollars a month will cover the mortgage and most of the utilities. And that’s exactly what it did. Even though it was rough, at least like mentally, and we didn’t have the money coming in, we were maybe $500 in the hole with all those extra expenses, that including lawn mowing and the other things, instead of being, if both of them had gone into we’d have been $1,800 in the hole or whatever.

Ashley:
Andrew, before we move on to our segments, I just want to ask you for our mindset segment is if you could do anything different or just looking back, is there something that you thought about real estate that you realized wasn’t exactly true now?

Andrew:
I don’t know if mindset wise. I thought I could do more or better than others. So we bought another duplex and I ended up when I quit my job rehabbing that for an entire year. That was… Real estate’s really forgiving, especially in this market so it all worked out, but I wasted half of that year at least, and a ton of money and I’ve missed out on all sorts of opportunities because I was stuck in this like I need to protect my cash because it’s a pandemic and what happens if they go empty and what happens? And so I should have farmed things out sooner. I should have realized several months in instead of a year in that I need to pay others to do it. And yet from now on, I have put my tools literally in storage, I can get to them if I want to do a project at my own house. But I’ve put my tools in storage so it’s hard for me to get to them so that I have to call somebody.

Tony:
Can we talk about that just really quickly because I think that’s something that a lot of new investors, it’s kind of a trap that they get caught in where they think that they’re saving money by self-performing a lot of the work, but in the long run, it’s actually costing the money. Let’s give like a real life example or not a real life example, let’s give an example, I guess, is the word I’m looking for.
But as an example, let’s say that, I don’t know, hiring a general contractor, like a handyman to do the work would cost you $10,000, but they’d be done in two months or you could self-perform the work and it’ll cost you $3,000, but it’s going to take you eight months. And say that you could rent that property out once it’s done for $1,500 a month. If you do all that math, even though there’s a cash outlay out front, the time that you’re losing by not renting that property out is going to surpass the amount of money that you saved or that you think you saved by not hiring that general contractor.

Andrew:
I feel that in my soul.

Tony:
I don’t know if those numbers actually add up because I made that up as I was talking, but you guys get the gist of what I’m talking about.

Ashley:
And just physical labor on your body too.

Tony:
Yeah.

Andrew:
And I do think there’s something to hustling at the beginning. If you don’t have a good W2, if you don’t have a ton of extra money. We put in $40,000 into those four units together and six months and we worked our tails off, that was a good use of my time at the time because my ability to get another deal was contingent on me getting those units up and going, spending the least amount of money possible because I didn’t have any money left. But later on, it was the exact opposite. I was still in the frame of mind that I was going to do what I did before and I was not treating it like a business when it should have been.

Tony:
I’m so glad you said that because I think that’s a really important distinction to make, is that do what you’re able to do financially. I remember when I first started, when I first got interested in real estate, I was a broke college kid and I hear these big real estate investors talking about how they outsource this and I don’t do any task that’s under a thousand dollars an hour. And I’m trying to think like, “Okay, yeah, I should start outsourcing these things.” But I’m like “With what money? Who’s going to pay these people to do these things that I’m supposed to be doing?”

Andrew:
A lot of contractors, especially if they’re not big outfits don’t take credit cards. That’s been my experience at least. So now I do have some relationship with folks that could take credit cards so I could do some riskier things. I did a ton of that on two more rehabs, but I didn’t know at the time how to do that. So yeah, I was just pinching every penny. I could put the materials on a card, but the labor was all me.

Tony:
Right, right.

Ashley:
Yeah, what Andrew’s talking about right there’s actually a really great rehab tool is to buy the materials with a 0% interest credit card. That’s 0% for 12 months or 18 months. And then once you flip the property or refinance it, you go ahead and pay that credit card off before you actually pay interest on it. But yeah, if you can get a contractor, then you can cover all of your rehab costs.

Andrew:
And look, it’s a little risky. But if you’ve done a couple, if you know how to do it, it’s okay. And if you get a Lowe’s credit card, for example, Lowe’s has 5% off so you can get savings or six months or 12 months, depending on the purchase. So you can really play the game and finance your stuff on a credit card, like you’re saying, and just buy materials and pick your battles on how you want to take things. And then all you need is the cash to pay your contractor. Or if your contractor is willing, they’ll take a credit card and maybe charge you 3% or whatever else. And you can even do that with a 0% interest. You just got to be careful because you don’t want to overextend and then-

Ashley:
Right, you don’t want to over-leverage yourself. You don’t want to be stuck in credit card debt because once that 12 months in, the interest rate goes to what, 25, 30%.

Andrew:
And you pay all the accrued interest from all that.

Ashley:
Yeah.

Andrew:
But you can do it and it’s all about being creative and figuring out don’t bite off more than you can chew, but also don’t be stuck like I was in a mindset that held me back.

Ashley:
Let’s go on to our Rookie request line. So this is where you guys can call in at 1-888-5-Rookie and leave a voicemail with your question and we may play it on the show for our guest to answer. So today’s question…

Michael Perrera:
Hello, this is Michael Perrera from Clovis, California. My question was around, do you use an LLC or C Corp and S Corp when you’re starting a partnership with somebody? I heard you talk a lot about partnerships, but not necessarily how to legally frame them. Also, just for the shout outs of the Teslas, I bought a Tesla and I rent it out on Turo on every weekend and it pays for the bill for the Tesla. And it’s been two and a half years and I haven’t made a payment yet. So that’s for your partner that’s always saying they want a Tesla. So just a little tip there.

Andrew:
So in a partnership, I use an LLC. I’m not a tax attorney. Consult your lawyers. I don’t play one on a podcast. However, what I was told by my tax attorney was that if you have a multi-member LLC, different families, different people, it is good to have an LLC. It is important for asset protection and it is better for everybody. I do most of my business in a sole proprietorship because what I was told is it’s very easy to pierce that veil of a single member LLC. And then if it’s my wife and I in LLC, that a judge is going to look at that and say, “That’s yours. This is not a real business unless you follow everything to the T.” So that’s the advice that I took. I think you could do it either way, but I would recommend hitting up, and then the way I found a lawyer and I think this is a good way to do it, I got this from BiggerPockets, write a post for your Facebook, ask for recommendations for a lawyer that you’re looking for.
If you have a real estate group you’re a member of like the Rookie Real Estate group, post, see if anybody in your area has recommendations, make that same post on BiggerPockets. Come back the next day or two days later, put all those responses together, see if there’s multiple people and then interview three. You got to interview three. And the reason is not because the third one’s going to for sure be better than the first one. You will not know the questions you need to ask the first one until you’ve interviewed the first one and taken that 10 minutes. What should I do? How should I do it? Why should I hire you? And the second one, you’ll ask better questions. By the third one, you will know if the first one, second one, or third one is a better fit for you and you will know what you’re asking about and you can make an informed decision. Every time I have done that, I have had a better outcome than just randomly picking somebody.

Ashley:
That’s such great advice. And the point that you make about that when you ask the first one, you’re not going to know all the questions till you talk to all three, that’s really good advice.

Andrew:
I’m the kind of person that that feels really daunting. And so if you just sit down and make that list and call those three people, all right in a row if you can do it, it will pay off in the end. It will save you potentially thousands of dollars on contractor bids, you’re doing contractor bids, anything you’re doing. If you just bite the bullet and get three or five or however many you’re willing to get, you will save money and you will learn about that process so that you make an educated decision, not just get the easy one.

Ashley:
And a lot of attorneys do the free initial call too. That doesn’t even cost anything to initially talk with them.

Tony:
Yeah, just one last comment on that. I think a lot of new people have this misconception that you need to have an LLC to do a partnership, but that’s not really the case. Like you said, an LLC is more so for asset protection for liability purposes. If you just want to partner with someone, as long as you guys have the details of your partnership of your agreement outlined between each other, that’s all you really need. We have joint venture agreements that we use for all of our partnerships and we don’t necessarily create a new LLC every time that we create a new partnership with someone.

Ashley:
Yeah, see with me, I haven’t done, well, I’m doing my first joint venture now, but previously I’ve only done an LLC and I do an LLC with each partner. So the properties that I buy with partner A, they all go into that LLC. Partner B, our properties together all go into that other LLC.

Tony:
And I think that works because you guys are buying multiple properties together, but for us, we haves nine properties that we have partners with. So to have nine separate LLCs, that didn’t quite make a ton of sense for us.

Andrew:
And is that operating agreement, in my opinion, that’s the important part. Make sure you have all that stuff laid out. If expectations are off, partnerships are really tough. If expectations are clear, partnerships are not that hard, kind of awesome in my experience. But you got to have it all clear and you have to be willing to talk about things.

Tony:
Love that last point about being able to talk about things. Because even if you guys go on some partnership retreat where you spend an entire weekend trying to map out all the details of the partnership, things are going happen is you’re actually working together, you’re like, “Oh shoot, we didn’t think about that.” Or, “Oh shoot, we didn’t think about this.” And you have to be able to go back, have those difficult conversations to go back and update the agreements, the partnership documents, whatever it is to reflect whatever decisions you’ve made. So it should be this kind of evolving document as your partnership continues to mature.

Andrew:
And I have questions for you guys. Do you guys put out clauses in your joint venture agreements or your operating agreements?

Ashley:
So I do a buy sell agreement stating as to what’s going to happen as our different exit strategies. If someone wants out, what am I going to buy it for? And my attorney puts together an equation like this is how we will determine the value of your LLC and this is what you would pay at this point in time.

Tony:
I got to check my LLC operating agreement because I don’t think I have that in there. But what we’ve done on our joint venture agreements with our partners is, and this is a recent change that it auto the time duration is set to five years. So if after five years, the default, if nothing else happens, the default action is that we sell the property. The only way that we retain the properties if both parties agree to renew that partnership again for another 12 month period or whatever it is.

Ashley:
Could you buy the property though, like buy out the other owners? Like that would be a sale. So you could still be the buyer of the sale, yeah. Okay, cool. Tony, do you want to take us to the Rookie Review?

Tony:
Yes, let’s do that. To the Rookie Exam.

Ashley:
Oh, exam.

Tony:
To the Rookie Exam.

Andrew:
Should I be nervous?

Tony:
Yeah. So this is our newest segment of the show. We’re asking the same three questions to every Rookie that comes onto the podcast and the hope is that our listeners get good value from this, but are you ready for the exam, Breezy?

Andrew:
I’m ready. Let’s do it.

Tony:
This has a pass rate of zero. So everyone that’s taking this exam has failed. So I have very low hopes… No, I’m kidding.

Andrew:
Is it two correct to pass? Is it one correct? How many do I have to get?

Tony:
No, there’s no right or wrong answers to the Rookie Exam. We just want to get into the psyche here. So question number one, what is one actionable thing Rookies should do after listening to this episode?

Andrew:
Okay. So analysis paralysis paralyzes everyone, myself included. I would think you guys agree that there’s times you get into into it and you don’t figure it out. So this is my cure for that. Get up 30 minutes earlier than you would normally get up. The way I do it is I get up, go downstairs, drink glass of water, put the coffee on, shower, straight down get the coffee. My cell phone is still plugged in. I don’t get on my cell phone-

Ashley:
Not even looking at it yet.

Andrew:
Not even looking at it. I used to do it an hour early, 45 or an hour, but 30 minutes is the minimum in my opinion. Go to whatever task, whatever single five minute, 10 minute task towards your goals. I need to figure out who I’m going to call in that LLC question. Then you make that Facebook post. Do that, make that post, and then decide if you have a little time left, what am I going to do tomorrow? And if every day you just got up 30 minutes earlier and instead of giving your time to a boss, giving your time to something else and giving the best moments and brain power of your day, which mean you’re fresh. And when you get home, at least for me, I am zapped. And maybe I’ve had a bad day, maybe I’m whatever and I just want to sit down on the couch and veg out and watch Netflix.
Well, I can’t do that, or I’m going to ruin a certain goal of mine. But if I’m in the morning, if I’ve accomplished one thing, even just one little thing forward, it doesn’t matter what it is. Even if it was listening to this podcast and taking notes on something that you wanted to learn. Spend that time productively, read something, do something, do a task. And if you do that 3, 4, 5, 5, 6, 7 days a week, I got financial freedom in two and a half years and that was basically my whole entire eight hours on Sunday and an hour every morning that I could spare it. And I got financial freedom long before I thought I would. And I believe it’s that consistent daily action. 30 minutes is plenty to make tons of progress.

Ashley:
You know what? Congratulations on that.

Tony:
Took the words out of my mouth.

Ashley:
That’s really awesome. And you were willing to make that sacrifice. There’s so many people that will not give up those eight hours on a Sunday or that hour during the week. And what you said about getting up and doing that one thing every morning towards your goal, that reminded me of the book, Eat That Frog, where you’re getting rid of the hardest thing you have to do, or the thing you’re procrastinating or putting off, you just get that done first and get it out of the way and then you go on to the rest of your day.

Andrew:
If you’re scared or that task is too big, break it down smaller. What’s the [inaudible 00:46:01] the most important next step in the journal, like whatever it is, you can do a smaller task or a small, if it’s collecting phone numbers for who you’re going to call, then do that. Then schedule it for your lunchtime, you’re going to call, whatever it is. But if you just make action every day, even if you don’t spend your Sundays doing it. I know people have kids. They have much why’s than I do, I don’t have kids yet, but even if you can’t give up those extra hours, if you just made a little bit of progress every single day, you will get to your dreams. Whether it’s two years, five years, 10 years, it will be much quicker than you think. It’s a snowball, but if you don’t start it now, you’ll wake up at 50 building somebody else’s dream. You will have been paid to build someone else’s dream instead of building your own. That’s my why. I don’t want to build somebody else’s dream. I want to build mine.

Tony:
It reminds me of this meme, you guys may have seen it floating around the internet, but it’s like this employee walks up to his boss and his boss just bought like a new Ferrari or something. And the employee’s like, “Man, that’s a really nice car.” And the boss responds and says, “Well, you know what? If you work hard, you put in a lot of hours, you stay dedicated, you stay motivated, maybe I’ll be able to buy another one.”

Andrew:
Painful.

Tony:
Right? But so true. But so true. But so true.

Ashley:
Okay. So onto the next question. What is one tool, software, app, or system you use in your business today?

Andrew:
I try to keep everything on my phone that I possibly can. I picked up eight rental units in the last year to manage for other people. One of the things that keeps me from having to get W2 is having some more income and my grandparents were getting older, I took over theirs. So the first thing I did was, and actually got this from your podcast, I picked up a Google phone, a number that I never really used before. So I made an email address. If you don’t have an email address, a business email address, that’s the first thing you can do. You don’t need a complicated name. I could have done my initial AB Properties at gmail.com. It doesn’t matter what-

Ashley:
Yeah. And you don’t even have to buy a domain. You can just use a Gmail, a Yahoo.

Andrew:
And then you have a business account, it doesn’t matter, you can always whatever you want to do, but then create a Google voice and give that number out to tenants. And here’s why I’ve done that. Number one, I went to Brazil for two weeks in December. I went to Jamaica and New York for a week and a half in November. And I went on a 10 year wedding anniversary in October for 10 days to Mexico. That was all amazing and I was able to manage my properties from my phone because I didn’t have internet. I did have internet access, I did not have a cell phone reception. But all of that is WiFi based. Additionally, had I not wanted to manage my properties, I could have just forwarded that number to somebody else’s number or given another property manager or a friend in real estate that log in and they could have managed my properties from their couch.
And that would’ve all been done, and my tenants would’ve never known the difference. And there was never a risk that their call would go unanswered because they called my cell phone. Also, little tidbit. If you want to be a little bit more professional and you have a number that’s a Google voice number, you can put do not disturb hours. You can choose when your calls go to straight to voicemail, and you can put a business voicemail. So your tenants or your business associates are not getting, “Hey, this is Andrew. Leave a message.” They can get, “Hey, this is Andrew with X, Y, Z Properties.”

Ashley:
And you can link it to multiple phones. So my business partner and I, we use it when we send out mailers and it’s linked to both of our phones. So we’ll both get to tag both of our phones will ring, we’ll both get the voicemail too.

Andrew:
There’s many other things I use, but I think that’s the simplest. Anyone can integrate that and you can get on your desktop too. So say you want to make a call from your desktop, you want to type text from a desktop. You want to log in, whatever, all you need is WiFi, desktop, phone, whatever and you’re good to go. And that’s helped me manage and scale and also not pull my hair out.

Ashley:
My business partner too whenever he meets a girl, he gives out the Google voice number. So I get to see all the texts from the girls coming in. I’m just kidding, he’s standing right over there.

Andrew:
If you get a wedding crasher stage five cleaner, I mean, you got to protect yourself.

Tony:
I didn’t know about the do not disturb hours for Google voice. We use that for all of our short term rentals. So we’re on the west coast. We have a lot of east coast folks. So sometimes they’ll call us at like five o’clock in the morning. So it’s good to know the do not disturb.

Andrew:
So initially I had set that up and I had a beer sales rep. I didn’t want to give out my real number because I was worried an angry customer might call me on Saturday morning when the beer distributors closed. Well, I found out, and I assume this is still the case, you could put in all of your do not share hours. So that’s what I did initially. And then like when I set up my real estate number a few years go, that’s what I set up, my business hours, and you still see the notification on your phone.

Tony:
So it’s not too bad for them either. So last question, Breezy, and this is the most important, but where do you see yourself in five years?

Andrew:
That is something I have been struggling with a lot. I want to keep this as a lifestyle business. I was burned out to the max and I didn’t know it when I quit my job. I had a soul crushing job for seven years that got worse and worse and worse towards the end. It wasn’t so bad at the beginning. But real estate was kind of forced me to retire and I was happy that I retired. I’m self-employed, but I call it retired. It feels better that way. And so now I want to continue building it. I may transition out of some of my short term. We have two more properties that are medium term now. So we have four units total that are medium term. It’s still a lot of work. So I would like to transition into more regular rentals. I’d like to buy four properties this year, eight properties next year.
And then after that, I’ll have to reassess and I’d to buy some larger multi-families. I don’t know what that market’s going to look like. I don’t know if that will still be profitable. I don’t really know. But I would like to continue working 20 to 30 hours a week at the most on a regular basis, not including the big weeks and whatever else. And I’d also like to still spend my time doing what I love, because for seven years I didn’t get to travel and visit my in-laws in Italy. I still haven’t been back because of the pandemic.
I didn’t get to spend my weekends doing the things I liked to do depending on what it was. If it fell on a Monday and a holiday, we work all holidays, whatever, whatever. So I want to spend time doing what I want to do and I want my work now to revolve around my schedule rather than my life revolving around my work schedule. So my hope is in five years, I’ve continued to keep that balance and I continue to be able to do what I love, volunteer in charities, do all the things that make me happy and give me fulfillment because real estate’s great and I like it, but I don’t believe it will bring me lastly fulfillment on its own. So all the other things that I get to do because of real estate that bring me that lasting fulfillment.

Ashley:
Well, that’s awesome. And thank you for sharing that with us and I definitely think you’re going to get there. You reach financial freedom in two and a half years and you definitely have the drive, the vision and the work ethic. So, yeah.

Andrew:
Thank you.

Tony:
Awesome. Well, let’s take it to our Rookie rockstar. If you guys want to get featured on the Real Estate Rookie podcast, get active in the BiggerPockets forums, get active on the BiggerPockets Real Estate Rookie Facebook group, get active in Ashley’s DMs, all those are very acceptable places to get featured as a Rookie rock star. So today’s Rookie rockstar is Mattie B. And Mattie said, had my very first binder conversation with two inherited tenants. It worked flawlessly. So if you’re not familiar with the binder conversation, it came from episode 448 with Dion Mcneeley, the real estate show, but Matt says, or Mattie says that both tenants went up to $1,200 per month, one from $900 and the other from $850. And that added $650 per month in cash. So he said, give it a shot, cost me 70 bucks at Staples to make the binders and I practiced my pitch before I went over there. So Mattie, congratulations.

Ashley:
Yeah. That’s awesome.

Tony:
An extra $650 per month.

Ashley:
I love the binders, yeah.

Andrew:
That’s awesome.

Ashley:
Okay. Well Andrew, thank you so much for joining us. Can you tell everyone where they can find out some more information about you, where they can reach you and also about your podcast?

Andrew:
Oh sure. So I host a podcast, a soccer podcast. If you’re a big soccer fan and you love Chattanooga Football Club, that’s a very particular niche, you can check us out at The Section 109 podcast. And if you like listening to people talk way too much about that, that’s where you can find that. You can find me on Instagram. I consume more than I put out, but there’s stuff on there.
You can connect with me on the BiggerPockets forums, I’m pro member. I love BiggerPockets. Again, there I consume more than I put out. It’s an unbelievable resource. If you have a question, it’s been answered. And if you don’t have a pro membership, BiggerPockets is not paying me for this, but the calculators are worth 10 years of pro membership just for one year. The ability to have infinite use of those calculators is so… Plus, there’s landlord docs and all the other things. So get at me on the forums. You can hit me up on Instagram and yeah, if you want more tips, more actionable things, I would love to share what I know. So maybe I’ll write a blog post and put it in my bio on Instagram with just the small things that I think you can do, the granular stuff to not make some of the mistakes I did.

Ashley:
And anyone can apply to write blog posts too for BiggerPockets. So you should submit it through there. Yeah.

Andrew:
Okay. Maybe I’ll do one of those New Year’s lists where they have all the like hacks for a better life. Maybe I’ll do that. We’ll see.

Ashley:
Yeah, that’d be awesome.

Andrew:
You’ll know by the time this is released if I follow through.

Ashley:
Hold him all accountable. So everybody reach out to him on BiggerPockets and Instagram and make sure that he does have that blog post written. Well, thank you guys so much for joining us. I’m Ashley at Wealth From Rentals and he’s Tony at Tony J Robinson. And we will be back on Saturday with a Rookie reply.

We’re all aware that the COVID-19 pandemic has significantly impacted real estate investments—it’s a reality many of us face on a daily basis. As a result, many investors have been forced to change their real estate investing strategies to deal with the economic effects of the crisis. 

And, investors are also facing new challenges as the country emerges from lockdown restrictions. One of the biggest challenges right now is soaring inflation rates. According to Trading Economics, the inflation rate hit 7.5% in January 2022—the highest inflation rate in 40 years. Adding to the issue is the fact that energy costs are skyrocketing—and there is a widespread labor shortage to contend with as well. 

So how are these economic trends affecting real estate investing strategies? And after the country shakes off the shackles of COVID restrictions, what do these trends—and the subsequent strategy shakeups—mean for property investment, especially in the rental property market? Well, while it’s not entirely clear what will happen to the real estate market post-pandemic, the good news is that investing in real estate post-COVID will almost certainly be a good idea. Here’s why that is—and information on what types of real estate investments may be a good idea after the coronavirus pandemic is over.

The effects of COVID-19 on the rental property market

The pandemic brought many uncertainties with it—and not just for investors. With shelter-at-home orders in force throughout the country, many people were confined to their homes, unable to go to the office, visit friends or family, make a quick trip to the grocery store, or take their planned vacations.

And, many people lost their jobs or saw significant decreases in income, which meant that rent was tough to pay for many tenants. To help avoid another economic crisis, eviction control measures were introduced on the federal level. These measures were meant to help renters avoid being evicted from their rental units. 

In turn, open units were a scarcity. According to a 2021 report on the pandemic’s effect on the U.S. rental market, rental listings were 26% lower in the first half of 2020 than they were just one year prior. Home sales transactions in large metropolitan areas also fell by 50%—and average sale prices declined by 18%.

And, according to some analysts, there were certain real estate investment market sectors were hit harder than others. For example, investment in senior care facilities, hotels, and gas- and oil-related properties posed a greater risk to investors than residential properties, and the sales data is evidence of these issues. This was almost certainly due to the uncertainty plaguing certain industries, like travel, at the height of the pandemic, but it had a big impact on how investors chose properties.

Much of the pressure on these industries has decreased significantly in the time since, but questions remain as to what the real estate investment world will look like after the pandemic is over. It also begs the question of what the best types of real estate investments will be at that point. While it’s difficult to predict what exactly will happen, there are a few real estate trends that may be worth keeping an eye on in a post-pandemic world.

3 real estate investment trends to watch for after the pandemic

What types of real estate investments have the potential to excel in 2022? And what are the trends to look out for as the country recovers from the pandemic? Here’s what you should know.

1. Real estate investment in rental properties will likely remain strong.

Despite eviction moratoriums, multifamily properties performed relatively well during the pandemic. At the height of the pandemic, many tenants received rental aid assistance and direct aid to pay monthly rent—which kept these types of investments appealing to savvy investors—and rental units have remained in very high demand in the time since.

Also, many landlords worked out payment plans with tenants to ensure that they continued to receive rent, and this also kept the rental market tight with few evictions. Furthermore, the ban on evictions didn’t wipe the slate clean with rent debts, so landlords who did not receive rent during that time will still be able to collect the rent they are owed from tenants. 

This is a good sign of what’s to come for multifamily units, as these investments weathered the tough times and are now incredibly lucrative for the right investor. And, it’s likely that these types of real estate investments will remain strong post-pandemic, too.

2. Commercial real estate will continue to recover.

There were mixed fortunes for owners of office and retail properties during the pandemic. Many offices were deserted as people were forced to work from home. There was talk that investment in office space would never recover.

However, the complete shift to working from home never happened—and it appears unlikely that it will. As such, office and retail properties are likely to be a good investment in a post-pandemic world, as the demand will likely be higher than once expected.

Another good sign? Retail properties stabilized as stores were able to open and resume trading during the last quarter of 2021—and will likely continue that trend throughout 2022. 

Related: A beginner’s guide to investing in office buildings.

3. Industrial real estate investments will remain strong.

During the pandemic, some of the best real estate investments in the commercial real estate sector were those connected with logistics and shipping. One of the main reasons for this was that e-commerce businesses were doing more business than ever thanks to an uptick in online shopping, and, in turn, needed a lot more storage and shipping space.

Many analysts say that the demand will remain high for commercial properties thanks to continued growth in e-commerce—which had been occurring well before the pandemic. The lack of in-store shopping options simply added more fuel to an already burning fire.

Other notable real estate investment trends in 2022

While industry experts agree that the pandemic affected real estate investment strategies, real estate and property investment remain a target for many investors. We’re already seeing positive trends in the first few months of 2022, including:

A shift in investment strategies

Right now, many real estate assets require repurposing and redevelopment due to the changing landscape. This is requiring investors to have robust strategies that allow them to understand the core aspects of their investment targets. In most cases, this means they are gaining access to data-driven analysis and in-depth marketplace insights—which helps to heavily inform their strategies. 

For example, one thing that the pandemic made clear is that rental property owners need to make analyzing tenant risk profiles a top priority to avoid losses whenever possible. After all, there was a potential for a crisis in the rental market at the start of the pandemic—which could have caused huge problems for many investors.

However, a surprising number of renters kept on top of rent payments—likely due to landlords and investors doing their due diligence on potential tenants. Thorough screening remains one of the best ways to protect your investment assets—and given the uncertainty of the future, will likely remain a trend in real estate for some time.

Demand for flexible spaces

The demand for office space is increasing as workers return to the office. However, commercial tenants now want flexible workspaces because hybrid models have become the norm. This requires repurposing existing office space to make it more accessible for hybrid work, which requires room for collaboration and meeting spaces. It may also require commercial property owners to redevelop office space with flexibility in mind.

Environmental, social, and governance (ESG) is a top priority

Sustainability and ESG are becoming priorities when commercial tenants are looking for new space. In addition, corporate clients must provide their socially-conscious investors with guarantees about operating sustainable businesses, which means there’s even more demand for these types of spaces. And, with many cities having ambitious net-zero emission targets, the demand for energy efficiency, cool roofs, and reducing wastewater continues to increase as well. 

Technology informs the way buildings operate 

The COVID-19 pandemic forced many investors, property owners, and tenants to rethink how they use technology. For example, many residential landlords switched to online rent payment and collection methods. They arranged virtual tours for potential tenants and started using e-signatures on electronic documents. In turn, landlords found that these new technologies helped to streamline their rental businesses. 

Related: Ways technology is overhauling property management.

Technology will continue to be essential in meeting tenants’ demands for commercial properties. Take, for example, the fact that during the pandemic, it became evident that robust air-filtration systems were important to help prevent the spread of coronavirus. There is also increased demand for touchless technology in buildings—which includes everything from hand sanitizer dispensers to automatic lighting and motion sensors. 

This shift in technology could lead to more workers using apps on their smartphones to control various systems in the office, whether the elevator, heating, or lighting controls. As such, investors who invest in smart building technology and ESG principles can typically command a premium for rent. 

Final thoughts on real estate investing post-COVID

While there’s no question that the pandemic has had a major impact on real estate investing, many of the long-term effects it had on real estate investment strategies remains to be seen. Time will tell how the downtown office sector adjusts to a hybrid working model.

That said, there are already some prevailing trends to take note of. For example, residential landlords will continue to invest in new technologies to provide high-value tenants with a premium service—which may help to shape the way you invest, too. The trend of rising rental prices also means that landlords should recover losses incurred during the pandemic in time. 

And, it’s almost certain that investment in real estate will continue to remain attractive for many investors. That trend is not going anywhere in the near future—even if strategies shift over the long term.

David:
This is the BiggerPockets Podcast Show 580.

Daren:
Foreclosures are actually providing almost a refurbishing of housing inventory. And again, it’s a small piece it’s not going to solve the affordable housing issue that we have or the housing supply issues completely. But it’s one piece of the puzzle that is taking these properties and putting them back into the market.

David:
What’s going on everyone. It is David Greene, your host of the BiggerPockets Podcast here today with my amazing, awesome and fun co-host Dave Meyer. If you are here because you want to find financial freedom to real estate, you my friend are in the right place. BiggerPockets is a community of over two million members that are all on the same journey as you. They want to improve their lives, get back freedom to live life the way that they would like and build wealth through real estate. We help you by bringing on stories of other people that have done the same thing. People that are experts in the areas of real estate investing that would benefit you, people that made mistakes so that you can avoid them. And guests like today, where we have Daren Blomquist, a VP of marketing and economics for Auction.com, who is a foreclosure expert.
So Daren spends the majority of his day looking at data of how many foreclosures are hitting the market, and then trying to connect buyers of those foreclosures with the inventory that’s being released. So Dave and I get into some pretty deep information about how many properties are going to foreclosure, what happens once they get there? If you want to buy those, what you need to do as well as what we think is going to happen in the future. So this was a fascinating conversation. Make sure you stay all the way to the end because we give a take [inaudible 00:01:45] that you don’t hear very often that has to do with the psychology of human beings that are all sitting in the seats that we’re sitting in and how it tends to move back and forth very strongly, depending on what the masses are doing and how you can capitalize on that to build your wealth. Dave, so glad you’re here today. What were some of your favorite parts of today’s interview?

Dave:
Oh, thank you so much for being here. I’m glad to be back. And I think the favorite part was what you talked about. You just said, it’s so interesting because I’m person, I’m not an economist, but I do read a lot about economics and look at a lot of data. And while data is super helpful in decision making, there is this element of psychology that you really have to take into account and you have to factor in in doing your research, and you and Daren both talk about that really well at the end of the show. But I also just think this topic is something I’ve wanted to dive into for quite a while, because there is a lot of data about it. I’ve looked at it a lot myself and I wanted to get an expert’s opinion on whether foreclosures are going to cause either a crash or maybe they’re going to help the housing market because there’s going to be more inventory. And Daren was great and provides all that information. So everyone’s going to want to stick around for this.

David:
Great point.

Dave:
So the interview with Daren is great, but David, I also have a surprise segment for you coming up before that interview and it’s going to be really fun. We’re going to talk about some news, we’re going to talk about major headlines and I actually have a pretty big announcement so everyone’s going to want to pay attention to this first segment we’re about to do.

David:
All right. Today’s quick tip is follow us on YouTube at BiggerPockets. There’s a lot of content we’re making on YouTube that isn’t only being shown on the podcast. So Dave’s got a channel he puts a lot of information. I have a channel for BiggerPockets, I do more videos. There’s a lot of different people on there, so if you’re needing more real estate information and there isn’t a new podcast to listen to go check us out there. Here’s what’s even better, you can leave us a comment on YouTube and tell us what you think. So we’re doing shows like this today because we’ve committed to going deeper and giving more factual and specific information on literal topics in real estate.
So today would be the foreclosure game. We want to hear what you want to hear more from us about. So tell us what topics you’d like us to cover, we will put a show together for you, we love that. And then also don’t forget to leave us a comment on iTunes. We still check that, that still really matters as far as how popular the podcast becomes. And we want this information to get to as many people as possible. So please leave us a rating and review on iTunes, leave us comments on YouTube, tell us what you like to see more of and we will get to it. Dave, any last words before you hit me with these surprise questions that you’ve got?

Dave:
No, I’m excited to bring on my surprise segment. All right. So today, David, first of all, I love that you’re just letting me take over the show and have no idea what I’m about to propose to you. But what I’d like to start with is a new quiz game, I like to call it news or noise. And basically what I’m going to do is read some recent headlines from the world of real estate investing and get your opinion on whether this headline is in fact news or if it’s noise. And not that you’re not great on your own, but I’ve also brought in some extra firepower for this game. We have Mr. Henry Washington and Mr. Rob Abasolo joining us today. What’s up guys?

Rob:
How’s it going?

Henry:
What’s up buddy?

Dave:
Awesome. Thank you guys so much for joining us here. I feel like we’ve got the all star team and for our first headline Redfin released data this past week showing that a record 32.4% of their users looked to move to a different metro area in January. This is an all time high and represents a 25% increase in people who are looking to move over Q1 of 2020 right before the pandemic. So Henry let’s start with you, is this in fact news or is it noise?

Henry:
Oh man, this is news. The world is changing with the pandemic forcing the world to get comfortable with virtual working, with virtual learning. You don’t just have people with jobs that can relocate to areas that they maybe feel like are more affordable because the housing prices are increasing across the country. And so you’ve got people moving to areas where they feel like they can afford more because they know they can continue to work at their current job. You’ve also got students moving and I just think this freedom of where you work is going to continue. And I don’t see housing prices coming down anytime soon. So this is absolutely news, it’s going to continue to happen. It’s the new norm for right now.

Dave:
All right, David, I saw you nodding along there. What is your thoughts? Is this news or noise, and what are some of the implications of this?

David:
Well, this is absolutely news. It’s just not news to me because as a realtor, I’m watching this happen constantly. I would say that I think it’s probably overall healthy for our country to have a variation in what different states can offer. This is just my personal opinion, I don’t want to be speaking for anybody else, but there’s obviously going to be a difference of opinion in how things should be run politically. And when the federal government tries to make every state work the same, if they’re going against what the individual wants to see, they’re going to be very frustrated. If they become unpatriotic, then it becomes negative and bitter. But if you have a state that will have a set of rules or be governed politically according to what you like, and then other states that you don’t, you have freedom of choice.
You can go to the state that does things the way you like things to be done. Like Dave, you’re an Amsterdam. It’s notoriously known for not having laws when it comes to the entertainment industry, so to speak. So it draws people that are looking for that, and I’m not trying to imply that that’s why you’re there. It’s not a big rich party. I just think Amsterdam’s a really good example of that. If you’re super conservative, you don’t want to be around anything like that, you go to Singapore. If you’re looking for a little bit more of a party, you go to Amsterdam, it’s nice to have choices. So I think what we’re seeing is people are recognizing, like Henry said, I can move. I’m not tethered to my area because of my job.
Maybe my family could keep me tethered and as kids are moving out of the house and people are retiring, they’re saying, “Hey, I want to be in this type of political environment instead of that type, I want less sales taxes on me or state income taxes on me.” And other people are saying, “No, I like high state income taxes because they pay for programs that I like to support and that’s what I enjoy doing.” So I think what we’re seeing right now is this is how people would have been acting all along. But some of the restrictions that stopped it have been removed, like what Henry mentioned. And I think as an investor, it is so important to pay attention to what we’re talking about because I am specifically going to those areas as long distance investing that I believe more people or wealthier people are going to be moving to and I’m trying to buy properties in those areas before they get there.

Dave:
All right. We’ve got two for news. Rob, are you going to agree with everyone? And I’m curious as well, I’m going to throw an extra bonus question for you.

Rob:
Ooh. A curve ball.

Dave:
Yeah. I got to test you early. Is this going to be a long term trend or do you think this is just a blip after the pandemic?

Rob:
Okay. Let’s do this thing. News, it’s definitely news. Dave, I’ve moved three times in the last year. Literally-

Dave:
You’re contributing to half of this statistic, Rob.

Rob:
I am the statistic. I moved from Los Angeles to Tennessee to pursue building a tiny house village out there. I lived there for a year, then we decided, “Hey, we miss home. Let’s go back to LA.” We lived there for a month, and then we were like, “Hey, you know what? Let’s move to Texas.” And we’re currently in Texas at the moment. So I don’t know when we’re going to move again or if we’re going to move again. But to answer your question about if this is temporary or permanent, I think it’s permanent. I think it’s here to stay. You have to really consider the culture shift in the paradigm here. For a long time, all we knew was working in an office 9:00 to 5:00 and this is so common with so many different things out there. So let’s just take taxi cabs, for example.
Our whole life, we thought taxis were our only option and they were. And then Uber came around and people could then hire a taxi on demand, and now Uber is the new taxi. For a long time, we all thought long term rentals were the way to go. And then this whole thing called Airbnb came by and now that’s a whole new shift in the real estate market. But on top of that as a consumer, we thought hotels were our only option because for many, many years they were. Then Airbnb comes along and now people say, “I don’t want to stay in a little creaky, old nasty hotel. I want to go stay in a cool Airbnb where I can split really big house with my family for half the price.”
I think this is the exact same way with office and corporate culture where we thought we had to stay in the office 9:00 to 5:00 our whole life and be on the grind and work 40 years and then retire at 65. But I think what the pandemic has given light to is that things are important in a different way, we give importance to certain aspect to different things. So before money and security was something that we were all so married to, but I think the pandemic has helped a lot of people realize that, “Yeah, you know what? Maybe I don’t want to be working in the [inaudible 00:11:09]. Maybe I want to be closer to my family and if that means I make a little less, then hey, I’ll just move to a different city where I make a little less so I can be closer to that family.” So I think this is just the very beginning of a very huge culture shift in America. Thanks for coming to my Ted talk.

Dave:
I thought I was going to throw you off with that curve ball, but you nailed that one. So I’ll actually just come back to you with the second headline and we’ll do this one a little bit quicker, otherwise we’re going to get in trouble. But number two headline here is Zillow has emerged from its post iBuying shame, hiatus, whatever they call it, and is now claiming to be building a super app where home buyers can manage the entire home purchasing process in one place. Rob, is this news or noise?

Rob:
So can I get some clarification here. When you say noise, does this mean this is not truth you just made this headline up or?

Dave:
No, this isn’t two truths and a lie. No.

Rob:
Okay. Just making sure-

Dave:
Is this something that real estate investors should be paying attention to?

Rob:
Got it. I’m going to go noise on this. I think Zillow’s best interests and effective every capacity to try to come up with this really big thing that’s going to save them from this giant hole that they dug themselves into. Did they make an app? Maybe, but calling it the super app that’s going to help you do everything from start to finish, doesn’t necessarily mean it’s true or that it’s going to be really that super. So I’m going to go noise on this one.

Dave:
All right. David, what do you got?

David:
I think Rob nailed it. I think in general, every time somebody tries to convince you that things are easier than they are, they’re making money and you’re not. So this has been very common for a long time. Zillow will tell the people who are cruising on their website, “Hey, give us your information and we’ll get you in touch with an agent.” And then they go sell that information to five different agents and your phone blows up by these people that you never really wanted to talk to in the first place that paid money like $200 for that lead. And so they’re all going to just call you forever.
And I think Redfin had a model where they’re like, “Hey, we’ll credit you back to commission.” And what ends up happening is that agent basically makes no money and so their argument was well, every agent’s the same. So you might as well get your commission back and then you end up getting an agent that’s not as good or doesn’t understand your needs as much. And so it wasn’t true that all agents were the same. Side note, if you want to get a good agent, use BiggerPockets Agent Finder and find an agent that actually is on BiggerPockets and understands what we’re doing.
So this new idea that, hey, we can solve all the mystery and complexity of real estate investing with one app that you could just get in and get out and buy a house is just nonsense. It won’t work. Those of us that do invest in real estate know that it takes a massive commitment. That’s why we’re here on this podcast several times a week, putting out information because that’s how important it all is. So I would hope that it might be useful, it might be helpful in accomplishing some of the elements of a real estate transaction. I can’t say that it wouldn’t be, I haven’t seen the app yet. And so I would look at it from that perspective, but I wouldn’t assume that buying a house is ever going to be something that you just, it’s like buying groceries at the store. It’s never going to work that way.

Dave:
Yeah. All right. I’ll reserve my opinion, but Henry what’s yours?

Henry:
I wish I had some maracas or a tambourine, something to make lots of noise. This is total noise. You think about Zillow-

Rob:
Okay man, I’ll be your maraca.

Henry:
That was awesome. No that’s noise, man. Look, Zillow’s a publicly traded company and they’ve had a rough year. They’re down 66%, their stock price is down 66% over the last year. And so they’ve got to try to do something to get that stock price up. They are trying to stay face in the eyes of their shareholders I’m sure. Now are they great at what they do? Yeah, they’re a big real estate information, even some would say technology company. And so sure they have the power to do great things. Is this that? No. To me, the sounds like they’re trying to rally the people behind them, get that stock price up a little bit, get some more momentum. And so nah, noise to me.

Dave:
All right. No Zillow boosters in the group today.

David:
Dave, can you give us a quick take on if you think this is news or, you may have a contrarian opinion I’m concerned.

Dave:
No. I think it’s the same thing that Henry was saying. I think that it’s a publicity stunt. What does a super app even mean? Wouldn’t they already have been trying to do this for years? It doesn’t sound like they’re actually doing anything differently, they’re just rebranding their app.

David:
That’s a very good point.

Rob:
Is Zillow not the super app? It’s like they’re going to make a whole nother thing that’s different?

Dave:
Yeah. Well, we’ll see what happens.

David:
Maybe we should all do that. Can we rebrand ourselves? I’m going to now be Super Dave, Super Rob, Hammer and Henry

Rob:
Super Henry, Hammer and Henry.

Dave:
Hopefully you’ll get as much press as Zillow did for this.

David:
Yes.

Dave:
But for our last headline, I have a very special one and it reads, the BiggerPockets Real Estate Podcast is very excited to announce that Rob Abasolo will be appearing on the podcast weekly as the new regular co-host of the podcast alongside David Greene. And in further excellent news, Henry Washington will be continuing to be an important part of the show appearing regularly as a guest host alongside David and Rob. Rob I’ll just start with you, is this news or noise?

Rob:
This is news. Oh my goodness, I can’t believe that we’re here. It feels like just yesterday I was making my very first appearance as a guest on the BiggerPockets Podcast. And six months later here I am getting to share the mic with one of my real estate heroes here, David Greene, and Henry you’re one of my heroes too, man. So I’m honored to be here-

Henry:
[inaudible 00:17:01] Henry there I did.

Rob:
I’m doing my best here guys. And I’m going to do my best here to share all the knowledge that I have to the world and hopefully make real estate just a little bit more approachable for everyone looking to get started in this journey.

Dave:
Awesome. Henry, what are your thoughts?

Henry:
Hey man, this is absolutely news and I want to congratulate Rob. That’s super awesome, this is so much fun. And I just can’t appreciate you guys enough for even providing this opportunity for us. I have been this BiggerPockets follower for a long time. And so right when I started investing, I put on my vision board a picture of the old podcast tile that had David’s face and Josh’s face and Brandon’s face. And then the BiggerPockets logo, because I had a goal to try to become a guest on the show and they gave me that opportunity. My second year in real estate, I had done 30 deals and they were like, “Well, come on the show and share your story.” And I was just so taken aback by that because I didn’t think what I was doing was that special.
And they saw something in me that I didn’t even see at the time and provided me this opportunity to share on the platform that inspired me so much. And that was only my second podcast interview that I had ever done. And so them believing in me and giving me that opportunity. And what’s funny was I just never took that off of my vision board, it’s still there today. And then all of a sudden you look back a couple of years later and I’m getting this opportunity to become this reoccurring host and share my journey and my insights and knowledge and information with people and hopefully inspire even more people to get in this game of real estate and to have a heart for people as they do it. So I couldn’t be more thrilled. This is absolutely news to me, and thank you so much for the opportunity.

Rob:
Your sound bite was way cooler than mine. Did you rehearse that in front of a mirror, what the heck?

Dave:
Rob, I’d give you another crack at it, but I think they’re going to tell me that this is already going too long. But it’s big news, I think it’s worthwhile. This is really exciting guys and both extremely well deserved from you, but let’s hear from the big honcho, the big cheese. David, what’s your thoughts on this?

David:
I am very excited to be having some backup firepower here. In all seriousness, hosting a podcast like this comes with a lot of weight. There’s a lot of people that listen to us and make decisions based on the information and the guidance and the influence that we have. And so I feel very good that Henry and Rob are two people who will be throwing in their two cents, because I don’t believe that they’re going to lead people astray. I think that they both run sound businesses, they’re both men of integrity. That’s very, very important when you’re picking who we’re going to be putting up there as giving advice. So I was very worried about this decision because it could have an amazing consequence or it could have a terrible consequence. Either way, it’s going to be big. And I think we got the right people, so I’m very excited. Welcome to the family boys.

Dave:
Welcome, this is awesome.

Rob:
Happy to be here. Thanks.

Henry:
Thank you.

Dave:
And before we go, before we end this segment, I do have a couple other pieces of news that are very exciting as well. First and foremost, I will continue to join the show monthly to co-host the Bigger News Show, so of course I think that’s exciting. And if you like the Bigger News Show, which I hope you are, because you’re listening to it right now and you like this news or noise segment, we have a lot more of this coming in the near future. We’re actually developing an entirely new podcast designed to help you understand today’s changing market dynamics and help you make informed investing decisions on your journey to financial freedom.
I actually am going to be the host, Henry is going to be super involved and we have a bunch of other experts who are going to be joining that show as well. So make sure to stay tuned for more announcements as to when this is launching, it’s going to be a lot of fun. So that was a lot of announcements, but I’m done now. So Henry and Rob, unfortunately I have to kick you out, although this was a lot of fun. Super excited for you guys. You guys have done an incredible job and really deserve this. And with that, David, I think you and I are on to interview Daren.

David:
Yes. I can’t wait to be doing this show with you. This is one of my favorite projects that we’re doing, the Bigger News Show. And Dave, here’s what I’d like to say to you because I only got to talk to Henry and Rob, Brandon and I may have had history, but you and I have chemistry.

Dave:
Ooh, I’m going to blush. Can you guys see this right now? I know, I got little chills right there. That’s quite a compliment, but David, I do love hosting this show. I think it’s so much fun and we’re getting such a good reaction to this and I don’t know, hanging out with all you guys is something I look forward to every single month. So I’m glad that we’re all going to be doing it together.

David:
Me too. This is awesome. Guys, welcome and I will see you soon.

Dave:
All right. Well that was a lot of fun. I’m very honored that I got to make that very big announcement and excited for you, but we also have a great show today. In addition to this announcement, we now have a great guest who’s going to come on and talk all about the state of foreclosure. So if you’re like me and you’ve heard a lot of news out there about foreclosures and what’s coming down the pike, you’re going to want to stay tuned to this one, because Daren’s going to drop some really good information for us. With that, let’s welcome Daren Blomquist who is the vice president of market economics at Auction.com. All right, Daren, thank you so much for being here. Before we jump into the meat of all the data and information I know you have in store for us, can you just tell people really quickly what it is that you do, what do you spend your time looking into, the type of research you’re up to at Auction.com?

Daren:
Yeah, absolutely. I’m vice president of market economics here at Auction.com. So what I spend my time doing each day, I spend lot of time just in the data, in our own data. We have a rich data set of folks coming and bidding on properties on our platform. So as you can imagine, that’s a pretty rich data set almost real time. And then also just looking into a lot of other data that we’ll talk about today, I think, and trying to figure out what that means for Auction.com as well as for our sellers, which are the banks and the servicers and the lenders who are selling these properties as well as our buyers, those are probably more aligned with your audience, folks who are looking to buy these foreclosure properties. And so what’s coming down the pike for our company, for our buyers and sellers is a lot of what I spend my time doing and it’s really fun.

Dave:
Great. Well, thank you so much for being here. I’m sure our audience is going to be super interested in learning all the things that you have to share with us. One of the things that I’m really excited to talk to you about is just foreclosure volume. And there’s just been this narrative in the real estate media recently, or if you watch YouTube a lot about a foreclosure crash and people have all this fear because there has been a moratorium on foreclosures. And once that has been lifted, is that going to cause a huge ripple through the whole housing market? And I want to get into all of that first, but before we do, could you just share with everyone a little bit about the history of foreclosures. Probably over the last 20 years, what happened in the great recession and relatively where are we today compared to everything that happened back then?

Daren:
Yes, absolutely. Especially right now and during the pandemic, that’s a lot of what you talked about first there, which is, is there going to be this huge wave of foreclosures is a lot of what I am looking at and trying to answer for because that makes a big difference for Auction.com. But the historical perspective, the way that we look at it is what we call foreclosure BTA, which is foreclosures brought to auction. And I think most people would understand that as just properties that are foreclosed on, properties that complete the foreclosure process. And there’s one of two outcomes, which is at that auction there’s either the property is sold to a third party investor who’s buying the property or it goes back to the bank as an REO or real estate owned by the lender. So that foreclosure BTA number is what I’m going to hang my hat on for using this for the historical perspective.
And we could do it as percentages, but this is actually going to be raw numbers. So at the height of the last foreclosure crisis, it was 2010, we saw about a million foreclosure BTA, foreclosures brought auction, in 2010. And that was the peak of the last crisis. We saw about five years there where it was well over 500,000 half a million a year from 2008 through 2012, 2013. Those were the worst of the foreclosure crisis that I think is still pretty, even though it was a decade ago or more, is still pretty fresh in folks’ memories. And there’s a lot of concern or anticipation that this could happen. And so to put that in perspective, what we saw in 2019, the last year before the pandemic, which is a whole different animal was we saw about 215,000 foreclosures brought to auction in that year. And so we’re at less than a quarter of that peak year in 2010.

Dave:
What would you consider normal? So on one hand we add a million around 2010 and then right before the pandemic, you said about 215,000. Is that what you would normally expect to see in a year?

Daren:
Yeah. It’s a little tough, because of course the whole market is expanding as we go. But prior to the last crisis we were seeing about 200,000 a year in 2004, 2005, 200,000 to 250,000. So I think 2019 we were getting back to about normal. Now we could talk about, and maybe we’ll do it later or now, but there was still a fairly healthy percentage of these 2019 foreclosures that were still tied to the last crisis. And so there’s an argument there that it probably could have gone down a little bit more, I’m waffling obviously on this answer here, but I think normal is around that 200,000 level when we look back over the last two decades.

Dave:
Okay. So 200 about normal and then walk us through what has happened in the last couple of years. We all know the housing market has been nuts, but can you give us a little bit of context about what has been going on in the foreclosure market in the last two plus years?

Daren:
Yes. What we saw after the pandemic hit was there’s a pretty immediate response politically and policy wise to prevent another wave of foreclosures. And so there was a foreclosure moratorium that was put in place pretty much at the end of March through the Cares Act, that had a lot of other impacts on the economy and the housing market as well. But we saw one big one was the foreclosure moratorium and then also a nationwide forbearance program. So one thing on the moratorium, it wasn’t a true moratorium, but there was still some foreclosures happening, but basically it did stop most foreclosures. The big exemption was properties that were vacant or abandoned. And so we saw foreclosure activity really almost dropped to nothing for a couple of months. And then slowly has started to come back as banks got more confident that they knew that properties were vacant and they could foreclose on them.
And then of course in the last few months, we’ve actually seen the expiration of that foreclosure moratorium, which we can get into a little bit more, but also the forbearance program, which allowed people to basically… It was actually a financially savvy move to go into forbearance some could argue, because you could basically get up to 18 months without making your mortgage payment and really no penalty, and just start making your payments at the end of that. And then the unpaid balance is put into a non-interest bearing, basically loan that goes to the end of your mortgage. But anyway, the forbearance program also those 18 months are expiring for many people. And so the majority of people have exited forbearance and there’s another few hundred thousand that will be exiting over the next six months. As those protections expire, we are seeing the tide of foreclosures start to lift.

Dave:
That’s a great point. I just want to make clear for everyone who’s listening to this what the forbearance program was and what it exactly does, because you made a really good point there. Basically at the end of March in 2020, there is a program that allowed people to basically stop paying their mortgage. And this doesn’t mean that their debt was forgiven, it means that they basically put it on pause. And the payments that they skip for most parts, it’s not the same for everyone, for most parts, just get added to the end of their mortgage. You have a couple more months or years of payment, 18 probably.
And I think this is a really important point because we saw this huge amount of people going to forbearance. And I think that is a root cause of a lot of the fear that people have, that there is going to be a foreclosure crisis. But if I’m getting you right, Daren, it sounds like what you’re saying is some people were just opting to go into forbearance even if they weren’t in a poor or difficult financial situation, they were just doing it because they didn’t want to pay their mortgage. They said we’ll just stack some cash for 18 months. Is that right?

Daren:
Yeah, absolutely. I think you see that happening with the proactive and early on in the pandemic, people didn’t know it was going to happen. And so, hey, I take this payment off the table that I don’t have to make just in case something bad happens. But what we saw is that from the vast majority of those people, the worst case scenario did not happen. They didn’t lose their job or they got their job back fairly quickly. And so that resulted in the vast majority of those forbearance… According to Black Knight, 8.3 million homeowners entered forbearance over their entire life have entered forbearance of the program. And of that 8.3 million, we only have 578,000 that have exited forbearance and are not in any type of loss mitigation, which would also protect them from foreclosure. And so that 8.3 million, if that were to be the number that were to hit the market, that would be a lot scarier, but we’re talking more along the lines of less than a million folks who are still in what I would consider that high risk category, that 578,000.

Dave:
That’s great. And I want to jump into that number, but would love David, to hear what are your thoughts? Are you seeing any foreclosure activity in your market? Do you think the forbearance program largely was successful?

David:
I think it was successful from the sense that it was popular, people really liked it. It gave people the sense of, “Hey, you’re going to be okay.” It’s hard for me to comment on how useful or necessary it actually was, because I don’t know how many people did lose their jobs. I’m seeing zero foreclosure activity in the market that we’re working in. And frankly from my position, it’s very difficult to see how we could have foreclosures when asset prices have risen at the degree that they have. So in order to have a foreclosure, from my perspective, you need two things. You need the inability to pay your mortgage and the inability to sell your house.
And what we saw in the last crash was that was happening is people didn’t want to pay their mortgage or they couldn’t pay their mortgage and value of the assets was dropping. So they were stuck with it and they just let it go. But nobody would do that now, you would just make a bunch of money by selling the house, even if you just bought it a year previous. So I wanted to ask you, Daren, there is a huge contingent of people that are banging the drums saying there’s a wave of foreclosures coming, don’t buy real estate, don’t jump in early, the white walkers are approaching the wall and they’re all coming and we have to be ready. What are your thoughts on what you would need to see before you could put more credibility towards that position?

Daren:
To your point just a second ago, we’d have to see home price correction or crash. And that it’s a two-pronged thing, you’re always going to have foreclosures because you always have folks who get into a difficult life circumstance, but typically you have to have a double trigger to get folks to actually get to foreclosure. And so you have that life circumstance, but then you also have little or no equity in the home, as you mentioned. Now, I do want to jump into that because there’s actually some research out there that pushes back on that a little bit. It’s like equity is not the panacea for foreclosures, we actually see people going into foreclosure with equity.
And I think that maybe speaks to people, we all know humans are not completely rational beings, so they don’t always behave rationally despite economics suggesting that they should. But anyway, that may be a separate topic, but I think by and large, for most foreclosures, you do need that combination of unfortunate shock life event and then also lack of equity to see that wave. And it’s funny, I hear a lot about it but I’ve actually never encountered anybody that I can remember who’s arguing that we are going to see a wave anything along the lines of what we saw last time. And maybe I just need to get out more and talk to more people, but we’re definitely not seeing that in the data.
However, we’re also not seeing the zero foreclosures that you talked about in your market. We’re seeing right now in the fourth quarter, basically every quarter, every month, since the second quarter of 2020, where we saw our numbers drop dramatically, we’re seeing now record numbers of, I shouldn’t say record numbers, but pandemic highs in terms of foreclosure level. So in the fourth quarter of 2021, we saw foreclosures up 97% from a year ago from a very low number, but they’re still at 38% of what they were prior to the pandemic. So I just want to nuance that a little bit we’re not seeing the wave, but we’re not seeing nothing either.

David:
When I say we’re not seeing them, what I mean is they’re not making their way to the market where a person would see that house in the MLS as REO or a foreclosure. I’m sure people are going through foreclosure. It’s funny you said that because my very first venture in a real estate was working with my first mentor Tim Road. And we would find people that had been issued notice of defaults, and we would go try to buy their house from them before it foreclosed. And because they did have equity and they didn’t know what to do, they were just frozen or sometimes they didn’t have enough time to get it ready, put it on the MLS, get it a 30 day escrow to close. They would’ve lost the house before then because they waited too long. So we would target those people and buy their house so that their credit wouldn’t take a hit and we’d get a deal that way.
So I’m sure that it’s still happening, like you said, in cases. It has to happen at a large systemic level before actually that inventory makes its way to where the public, who just looking on Zillow or Realtor.com would see, “Hey look, there’s foreclosure right there.” The people that are very savvy that are in the game, that are maybe looking at Auction.com, that are going to the Courthouse Steps, they’re going to be the ones grabbing those type of deals. Side note, pick out BiggerPockets book, Bidding to Buy, if you want to get into the auction game. They wrote a book about that very topic. But I think Daren, what I would like to see or to know from you as someone who tracks this data all the time, at what point would you be concerned that there’s going to be for… What do you think historically would need to happen maybe in our overall economy before we would be getting into that danger zone where a wave of foreclosures is likely to be coming?

Daren:
Yeah. I think right now the biggest threat I see, the biggest risk I see is inflation, which I know gets a lot of press and a lot of talk time. But I do see that as a risk, even if we look back over the last decade, which has been a very long housing boom, the points of weakness in that housing boom were when we saw mortgage rates rise, it’s extremely mortgage rates sensitive housing market. And so to the extent that inflation would push up mortgage rates, which they already have, or at least the threat of the Fed raising their interest rates has done that. We would see weakness in home price appreciation. And we saw that there’s two examples of that if we look back at about 2013, 2014 mortgage rates went above 4% for an extended period of time, as well as 2018, 2019, we saw that same thing.
And actually I look at the public record data shows we actually had a very, very slight at least flattening and even 1% decrease in home prices at least nationwide in 2019 and the NAR numbers don’t show that. But that was another point where we saw an extended period in 2018 and 2019 where mortgage rates went above 4% and went above even 4.5%. And that did definitely cool demand and cooled home price appreciation, at least at the very least slowed it down. And so I see that as a big threat that not only would trigger that slowdown in home prices, but also psychological factors are very important. And then everybody thinking, oh, the market is slowing down. And that becoming almost a self-fulfilling prophecy as well is the biggest risk I see right now.

Dave:
So it sounds like, basically summarizing the first part of this conversation, we are seeing an uptick in foreclosures after the forbearance period ended, but you’re not seeing a lot that suggests we’re anywhere near 2007 levels. And frankly, as David pointed out, it’s not really hitting the market in any way where it’s really impacting inventory. We’re seeing inventory numbers in January and February right now that are near all time lows. So I think hopefully that addresses some fear that people or our listeners have about foreclosures, but there’s also this other part of foreclosures that are really relevant to real estate investors, and David hit on this, and that’s the role of investing in foreclosures. And Daren, I’d love to get your thoughts, but before you do David, I’m curious, can you just give everyone a little bit of a primer about how you invest in foreclosures, why people do it and what role it plays for real estate investors?

David:
Yeah. Well, basically the reason you want to be investing in a foreclosure is because you’re getting a distressed asset so you’re probably getting it at a better price. That’s a short answer. Most foreclosures are not in the best condition that they would ever be in because the person who’s losing them probably wasn’t taking care of them very well. And the person who’s selling it we should also probably define there’s the foreclosure process, which is the act of taking a property, the title back from the owner and giving it to the person who lent on it. And then there is a property that has been foreclosed, which is owned by the lender who gave the loan on it. We typically would call that REO or real estate owned, because most of the time the lender would be some kind of bank. So there was a time when a bank owns a lot of real estate and they’re not very good at owning it, they’re not property managers, they don’t know what to do with it.
They’re usually going to sell it at a discounted price because they want to get out from under that. They want to turn the REO on their books as an asset that the bank owns into money that they’ve received back, that they had lent out and put it on their books in that fashion. When there’s not a lot of them and there’s still a lot of demand for housing, a foreclosed property goes back to a bank, a bank hires a real estate agent like me, I go put it on the MLS and I sell it just like any other house. And so that is misleading when you think that foreclosure automatically means great deal, that’s not the case. It’s when it’s distressed asset that you’re more likely to get a great deal or the seller is in a time where they need to get rid of the house. So something in the foreclosure process, the owner still has title to the property, the bank has not taken it, that could mean distress.
There’s absolutely an opportunity there where they would let it go for less than it’s worth, because they’re going to lose it anyway. But once it goes back to, I’m saying bank because in most cases the bank is the lender on the property that will take the title, it only becomes a distressed asset if that bank wants to get rid of it very badly and is willing to let it go at a lower price. And that’s only going to happen when it’s sat on the market for longer than the average days on market. So in 2010, 2011, we were seeing houses would just sit there forever and they were owned by banks. So you were getting them at better prices than the regular seller, they were also in worse shape. But today man, it’s like pouring a glass of water on sand at the beach. That inventory just gets sucked up so quick that the fact that it’s REO or in the foreclosure process or a house that isn’t there, it’s all the same to the end buyer.

Dave:
Yeah. That’s a good point. And just to be clear, there are some challenges with foreclosures too. Usually it’s site unseen and you have to pay all cash, is that right?

Daren:
Yeah. I can jump in on that one and I think that’s a good distinction, a good overview by David about the difference between foreclosed versus in foreclosure. And those foreclosed properties that are on the MLS are going to be more like a typical sale. And those would be you wouldn’t have some of those challenges, but if you’re buying and you’re going to get that distress discount, there are some challenges that basically come along with that. And if you’re buying at the foreclosure auction, typically in most states, you have to pay on the spot cash so people are bringing cashiers checks to the auction. We do have a remote bid now on our app where you can actually put funds in an escrow account and pull out of that to pay at the auction in many counties, which we’re trying to bring foreclosure auctions into the 21st century a little bit.
That’s one challenge. And then related to that, the reason that you’re paying cash is because you’re buying these properties. The property is transferring from that distressed homeowner to you, and so up until the point of the auction, they own the property. It’s going to be very hard to go in and do an interior inspection of the property, get a full appraisal of the property that would even qualify it for financing. And even if you could, the condition of the property often is such that it’s not fanciable. And so that’s why we love our buyers is because they’re not just Joe or Sally buyer down the street, they’re the ones that are ready, willing, and able to take on these challenging properties and renovate them and return them back into the retail market six to 12 months later, a lot of times. So I would say it’s three pronged to the cash piece related to the financing piece, which is related to the condition of the property and the renovation required.

Dave:
Yeah, that makes sense. And I think as we talk about on the show all the time, if you’re going to look for a deal, you got to do a little bit of extra legwork. It’s pretty hard to just find an excellent deal. And so just like with driving for dollars or doing bar with a rehab, you’re going to have to do some work to find a deal. And this is just one example. Daren, I’m curious given everything that we’ve talked about, the condition of foreclosures today and the housing market and the state that it is, what do you see the role of the foreclosure market playing in the broader housing market, the broader housing picture in 2022?

Daren:
Yeah, I think it plays a role. It’s a small, it is a little bit like pouring water on the beach, but it is adding some inventory back into the market and it’s taking these properties that tend to be much older, when we look at the average age of these properties, in poor condition and the folks who are buying them on our site are then rehabbing those properties. And typically in most cases, not all the cases, sometimes they’re holding them as rentals, but what we found in the majority of cases, our buyers are actually selling them back to an owner occupant and these properties tend to be on the lower end of the market. And so in my view, this foreclosures are actually providing almost a refurbishing of housing inventory.
And again, it’s a small piece. It’s not going to solve the affordable housing issues that we have or the housing supply issues completely, but it’s one piece of the puzzle that is taking these properties and putting them back into the market. And so we see 71% of our buyers who then renovate and sell back to an owner occupant and even in low income since this tracks, it’s 68% sell to an owner occupant and in minority tracks, 70% sell to an owner occupant. So we see that as actually a good thing in the long term. Of course, it’s never great to talk about someone losing their home, but when you see what’s happening to those properties over six to 12 months.
And we would argue that our buyers do a lot better job than the banks. And one thing I wanted to mention to what David said earlier is one huge shift with the pandemic we saw is that at the foreclosure auction, I talked about there’s two things that can happen, it can go REO, or it can go to an investor. Prior to the pandemic, only about 40% of properties were selling to an investor at the foreclosure auction and the rest were going REO. It’s completely flipped during the pandemic, which is why you’re seeing that fewer of those REOs, what we call our sales rate is now 60 plus percent going to investors at the foreclosure auction and the remainder going REO.

David:
And that makes sense because there’s more demand for these properties.

Daren:
So there’s a lot of demand, yeah.

David:
That’s exactly right. People are going to want to buy them at the auction more, whereas before they probably only just took the cream of the cup and everything else went to REO.

Daren:
That’s right.

David:
So here’s a question for you, Daren, if somebody that’s listening here wants to get into the auction game, they want to buy these properties before the title transfers back to the lender, what are some things that they need to be aware of as they prepare for this so they’re walking in with their eyes wide open? Just as far as how they need to be prepared, how the process will differ from traditionally buying?

Daren:
I think the number thing is you do have to have some dry powder, some cash to go into this with. And so it’s not one of those things where you… Now that said, there’s some very low price properties and there’s new people getting into this. We have some great buyer stories you probably don’t have time to get into, but people I’ve talked to who have actually started doing this during the pandemic and had never been an investor before. So it’s possible, but you do have to have some foundation in terms of capital going in typically.
And you can sometimes work with hard money lenders or private lenders to help with that. So I would think that would be the number one thing. I would say, anybody who’s considering this, I would advise to go to a live. These foreclosure auctions are in-person events. Now we have the mobile app that allows you to participate remotely, which is really cool, but I would encourage someone going to just attend the in-person auction, usually at the Courthouse Steps. And just to go there observe a few times and see what other investors are doing, what other buyers are doing and get a feel for it before jumping in.

David:
Do you have any examples, Daren, of what a deal at Auction.com done right would look like?

Daren:
I pulled some data here just over the last few years of properties that have been purchased at foreclosure auction, which is where you do tend to get the better deal. Sorry just a quick side note, we do also the REO auctions where it’s almost immediately after the foreclosure auction if it doesn’t sell, then some of the banks and also HUD does this what’s called second chance auction. And so those are still good discounts because they’re not going back on the MLS, they’re REOs but they’re auctions almost immediately after the foreclosure auction. But when I looked at our data with the foreclosure auctions and I just did as a benchmark compare the properties’ sale price to the 2022 AVM automated valuation investor terms that would be the after repair value.
And what I’m showing is those properties were selling to our buyers at auction for about 54% of the 2022 after repair value. And this is over the last five years, and then they’re selling for 88% of the after repair value. And so to put it in dollar figures the average price is $136,000 purchase on our site. The average resale by the fix and flipper is about $224,000. And that’s over the last five years. So hopefully that helps. I can’t give a specific example, but we’re seeing basically in percentage points, the value gain go from 54% to 88%. And in terms of dollar figures going up by close to $100,000 between when they buy it on their site, renovate it and then resell it.

Dave:
But that’s great, Daren, thank you. I think that’s really excellent data and for everyone listening out there and you’re considering entering a foreclosure, this could be a really good option. Or if you’re just looking for deals right now, foreclosure could be a really good option because deals are not the easiest they have ever been to obtain right now. Daren, before we jump off, is there anything else you think we should know or our listeners should know about foreclosures, what’s happening in the market or the opportunity there before we let you go?

Daren:
To circle back to what we talked about early on is you are going to see some pretty big percentage increases and they might be in the headlines. And so at first blush that might look like confirmation that there’s this foreclosure wave coming. But for instance, I just looked at the Black Knight data and January there was a 700% increase in foreclosure starts. So when you look at that, you’re going to think, oh, maybe there’s another foreclosure wave and just be very cautious with that because we are seeing foreclosures come back, but they’re coming back from almost nothing. And so it does spell more opportunity, but at this point, at least we’re not seeing it be this overwhelming wave that’s going to pull down the rest of the market with it at all. It’s more of just finally there’s some of this inventory that’s becoming available that investors can access, but just be wary of those headlines coming out over the next few months and weeks.

Dave:
I was going to say, well, that’s a perfect tie in with our first segment where we were talking about news or noise and, Daren, just for reference, we were talking about whether certain real estate stories were important or not. So I think that was a great way to summarize this conversation that foreclosures are coming up. But if you hear that, keep in mind that this is a recovery from almost all time lows or basically artificially low. And that does not mean that there’s going to be a huge wave of foreclosure. And after everything we’ve learned today, keep in mind that there is a lot of stuff that would have to happen to see a big foreclosure crisis in the US, at least in the next six months to a year who knows what’s going to happen after that?

David:
Yeah. I think that’s a perfect precursor to the point that I was thinking of Dave. Daren, you said something incredibly insightful I don’t want to get passed up, you mentioned that it was something along the lines of the psychology of the buyer plays a very big role when you see a foreclosure crisis. So we had that in 2010 and this is something I just… Because I sell a lot of real estate, I own a lot of real estate, you realize how few human beings make decisions based off empirical data and how much emotions go into it. And one of the huge things that affects people is the herd mentality. When you don’t know really well what you’re doing, you just follow what everyone else does and it feels better. So we had a run up in prices from say 2000 to 2006 or so based off of really bad lending, everybody was buying houses. None of them had any idea what they were doing.
They did not know if a property would cash flow, they didn’t know how to manage a property. It was literally just buy it, wait and you could sell it later, because it’s going up. So that was herd mentality on the offensive side. And then a lot of those loans started to reset. And so people couldn’t make the payment anymore and they would sell the house if they could, but enough of them resell at the same time that too many houses hit the market for sale and people didn’t buy them right away. And then they started to foreclosed, which meant more inventory was hitting the market. And you saw this little shift just went right over the edge where it went from there’s not enough homes and everybody’s buying them to, I don’t want to buy a house what if the prices are going to keep going down?
And so what happened is it’s not like 10% of the market backed off and said, “Hey, I want to wait and see if prices stabilize.” It was 98% of the market backed off and said, “I’m not touching a house because I think prices are going to come down.” And then prices started coming down So even more people said, “I don’t want to buy a property prices are going down.” And then people that worked in those industries, the lending industry, the real estate industry or people that worked in luxury markets, they sell boats or they sell time shares or that type of thing. No one’s taking out money on their house to go buy that RV or that new car or that boat. So now they’re losing their jobs and now they’re starting to lose their houses to foreclosure. And it just went so fast as everybody did the same thing. They all said, we’re not going to buy and prices kept coming down and it never slowed down. They just plummeted because nobody wants to step in and catch the falling knife, so to speak.
And it wasn’t until it hit the bottom and investors basically changed it. They said, “I could buy that house and it could cash flow and it doesn’t matter if it keeps dropping in price, I don’t care. It’s going to cash flow, I’m going to buy it.” And then investors started to buy, houses started to come off the market a little bit and then the masses said, “Oh, it’s time to buy.” And everybody came in again and boom prices shot up just as fast as they had come down. So while we talk about the individual owning real estate and we want them to understand the skill of operating a property, the metrics involved in its value, how to make sure that you’re making money, individually those things matter. The way that property values go up or down is largely psychological. It’s what the masses are all looking at. And most of them are not listening to this podcast, unfortunately that’s the case they should be. And so they’re just following what the herd says.
And you made a great point. The foreclosures are coming, but they’re not going to overwhelm the market because the psychology of the buyer right now is there’s a lot of inflation, I want to invest in real estate, it’s a limited supply. I need to get it before there isn’t any of it. Our population continues to grow, so there’s still a big demand for housing and we’re not building enough of it. And so the things that make somebody think I want to buy real estate psychologically are still very, very strong. And on the other side, if that changes, it changes quickly. It’s not something that, oh, we’re starting to see a slow down in prices and they tick back down over a five year period. So people like you listening to podcasts like this is very important, because you want to be one of the first people to know if it looks like it’s starting to hit that tipping point going over the edge.

Daren:
Yeah, totally agree. Good stuff there. And we do have a scenario, our most likely scenario, our forecast is seeing over the next five years, about 200,000 to 250,000 foreclosures per year. But we do have a scenario if that psychology turns. If home prices drop, we see that falling knife scenario we are seeing in that model, the volume go up to over 400,000 foreclosures a year, which actually still is not the recession level or last recession level, but the path could vary, it’s certainly not set in stone. If we knew that for sure, we probably wouldn’t be talking about it here.

Dave:
All right. Great. Daren, thank you so much for joining us and sharing all this information with us. It’s super helpful for us and for our users. Really appreciate you being here.

Daren:
Thanks so much for having me. It was great.

Dave:
So Daren now, before we go, where can people connect with you or learn more about Auction.com if they’re interested?

Daren:
Yeah, absolutely. Auction.com, you can just go there and there’s no subscription fee or anything like that. Just to look at properties and to actually bid on properties. Of course, you have to have the cash to if you’re the winning bidder. So check it out Auction.com. And then a lot of the research I’m doing if you go to auction.com/inthenews, you’ll see that. We have heat maps about where we see foreclosures emerging and things like that, that could be very useful to the audience. As well as some great buyer stories of people who’ve been in the business for decades as well as people who’ve just gotten into investing over the last couple of years and are specifically buying at foreclosure auction or bank owned REO auction. And so I think those are some great resources, that’s auction.com/inthenews to see all of that.

Dave:
All right, good stuff. Thank you, Daren.

Daren:
Thank you.

Dave:
All right. David, well, there you have it. There dropped a lot of information. What are your thoughts on all this?

David:
It was a lot of data, which I think frankly we needed because there’s so much controversy about this issue. I think this was the perfect guest to give us some clarity on it. It sounds like though many of us that are investors are hoping for a wave of foreclosures. It’s not very likely to happen and that the market fundamentals for real estate still seems strong even as the price of it continues to rise.

Dave:
Yeah. I’m glad to see this and hear it from someone who’s as engrossed in this data as Daren is, because I put out a lot of YouTube videos and I’m on YouTube a decent amount. And you see these people who are screaming about a foreclosure crash and a forbearance crash and all this stuff. And frankly, I’ve always thought it was overblown and I’m glad to hear that that’s the case. Now there’re of course additional challenges to today’s housing market, but there is one last thing you have to worry about is a foreclosure crisis. So if we’re going to round this whole show out, I would say that thoughts of a foreclosure crisis is noise and not news.

David:
All right. Well, thank you very much audience for listening to us, and Dave, thank you for doing a stellar job with the interview that we just took down of Daren Blomquist. You are getting better and better at this the more you do it. Everybody, go check out Dave on YouTube, he’s got some really good stuff. You can also follow him online on social media at thedatadeli-

Dave:
Thedatadeli.

David:
There it is. You can follow me at DavidGreene24 on all social media. Dave’s name is way cooler than mine. [inaudible 01:00:19] the datadeli is awesome because Dave loves sandwiches. So thank you very much. This is going to be the end of our show. So go check out another BiggerPockets Podcast or follow us on YouTube and see what you think there. This is David Greene, for Dave, thedatadeli Meyer signing off.

David:
This is the BiggerPockets podcast show, 579.

Rob: Most of the properties that I’ve purchased have been sub $500,000. But now as my time has grown more rare, I suppose, I’m really not looking to acquire real estate that’s less than a million dollars in the short-term rental game. And then we start looking at the deal that you and me are looking at. That’s a $3.4 million luxury home.

What’s going on, everyone? It is David Greene, your host of the BiggerPockets Real Estate Podcast, the podcast where we teach you how to find financial freedom through real estate. So if you’re looking to have a better life, to have more freedom, to have more control, to build your own destiny instead of someone else’s, you my friend have found the right place to be.

David:
If you don’t know who we are, BiggerPockets is a company with over 2 million members whose sole purpose is to help you find financial freedom through real estate. We do that by bringing on experts, guests, people who have done this before to share what they did right, what they did wrong and how you can do it too, giving away the knowledge that used to cost a lot of money to get access to, and you can now get for free.

David:
In today’s episode, it is a Seeing Greene show, as you can see, there’s a green light behind me. This is where I will be going and taking all of your questions and answering them myself.

Rob:
We now interrupt this episode of Seeing Greene to show you how to make more green in the FTR industry. Hey, what’s up man? I’ve got some questions.

David:
Rob, I am such a narcissist. I totally didn’t even realize you were here.

Rob:
I was sitting here the whole time. That’s okay. Man, I have a question. I have a question for you. Can we continue the conversation on short-term rentals that we started on Thursday?

David:
I think it would only be right. We did promise everybody that we were going to continue that conversation and share the rest of the information today. I’m glad that you’ve been sitting here for three days straight, waiting for me to log back in and do this. What a trooper.

Rob:
I haven’t even used the restroom, man. Come on.

David:
Well, why don’t we take a quick break to let you use the restroom and we will be right back?

Rob:
This episode is brought to you by Nutri-Grain bars, the official bar of the BiggerPockets podcast.

David:
All right, on today’s show, Rob and I are going to finish up part two of what we started on the last episode. We are going to be talking about how to choose your property type if you want to buy a short-term rental. How to figure out the timeline that you want to achieve success by. Is this a long-term investment? Is it something more short term? How quickly do you need cashflow versus how much can you delay gratification to make more money later? And then what work is going to be involved in the beginning? And if you’re going to partner, how to divvy up that work.

David:
Now, Rob and I are actually doing this ourselves. We are buying properties together. This information that we’re giving you comes right out of the systems that we have created for how we stay on track ourselves. After this show, I want you to keep an eye out for a future show where we will talk about how to analyze and underwrite properties right up to the point where you’re going to make an offer. And then after that, we’re going to do a show where we explain how we manage these properties. This is a short-term rental masterclass, and you are being taught by a master classman with my co-host, Mr. Abasolo.

Rob:
Hi. Hi. Hi. Fellow master classman here. Man, I’m excited to dive into this. I think everyone knows I get all giddy whenever we start talking about Airbnbs and short-term rentals and for good reason. I think it’s a really great place for a lot of new investors to start. And today we’re going to be covering a lot of things.

Rob:
We’re going to be covering property types. Are we doing standard single families, multi-family, modified single family, luxury? The timelines associated with it. How do you want to divvy up work? Who are you going to empower? Are you working with a partner? Should you do some of the work? Should you make all your partner do the work? How do we avoid resentment in partnerships? So pretty stacked itinerary I’d say.

David:
Very nice. I imagine that you also might be a little extra giddy, because you went to the bathroom for the first time in three or four days now. So, well done.

Rob:
Well, yes, that’s… I thought we were going to edit this out, but yes, I did use the restroom and I’m back. I’m back, baby. I lost myself there for [crosstalk 00:03:38].

David:
Jedi-like bladder control, incredibly impressive. And that is how I know that I picked the right partner.

David:
Before we get into today’s show, let’s hear a quick word from today’s show sponsors. All right. Thanks to our show sponsors as always. Rob, anything you want to say before we get into it?

Rob:
There is nothing that I’d like to say other than I appreciate you, man. I don’t know if anyone tells you that enough, but today I’m letting know, my friend, I appreciate you.

David:
Thank you, Rob, that warmed my heart.

Rob:
You appreciate me?

David:
Not that I’m going to admit on a podcast for everybody to hear, but you could be worse.

Rob:
We’ll fix that in post.

David:
You’re really-

Rob:
I could be worse. I’ll take it.

David:
You’re very okay. I’ll give you that.

Rob:
Hey, that’s no way to speak to your future social media manager.

David:
That’s a very good point. Rob has done a lot to help me as far as with the camera quality and with social media in general. So if you’re following me on social media, it will look better soon. Thank you for your patience. It’s been under construction for five years, and we’re finally getting around to actually finishing the rehab on my Instagram. Very good point there. Thanks for pointing that out.

David:
Today’s quick tip, if you’re interested in what we’re talking about, if you want to dive even deeper into a specific asset class, BiggerPockets has resources for you. Check out biggerpockets.com/events, where you can find a host of different boot camps, one of which is hosted by Tony Robinson on this specific topic, short-term rentals. So if this has tickled your fancy, if it’s caught your interest, if you have itching ears, go to biggerpockets.com/events and sign up for the short-term rental bootcamp or a different bootcamp that might suit your needs.

Rob:
I’d like to add a bonus quick tip here. If you’re looking to get in shape, just follow Tony Robinson’s workout routine. He’s jacked.

David:
All right. Without any further ado, let’s get into today’s show. All right. Number four. The fourth step we talk about is the property type. You’ve got a couple different options. Why don’t you run through those?

Rob:
Option one here is going to be your standard single family residence. This is most of my bread and butter here. This is a house, basically, just a house that you can go out and buy on Redfin. This to me is perhaps my favorite to go into because you can buy a house, and I don’t typically buy a single family residence within a neighborhood where I have close neighbors. I’m not against it. I own probably one or two that are like that.

Rob:
But I’m usually trying to find something that’s on half an acre or on an acre, something that’s a little bit more secluded. You have that luxury a little bit more in those national park type of areas, because usually houses aren’t stacked next to each other, like in the Smoky Mountains, dor example.

Rob:
This to me is probably one of the less risky ones specifically because you don’t have neighbors that can call the cops on you or get mad at you. You don’t have really too many people that you can make angry. You don’t have next door neighbors in a condo, for example, that they can be loud.

David:
That’s just a huge, huge point. If you’re going to do a short-term rental and the neighbors are super close, you are asking for problems.

Rob:
Happy neighbors, happy life.

David:
Yes. When you and I are looking at properties one of the first things we’re looking at is how close are all the other houses to it? This one’s on five acres and there’s 10 acres on each side of it. There’s nobody else around, that becomes much more desirable than if it’s a track house and they’re all right next to each other.

Rob:
And so then we get into things like multi-families, which is a duplex. I’m okay with that. I actually love the duplex strategy quite a bit. I was buying a house in Destin that wasn’t technically a duplex, but it was a main single family residence home. Then there was a pool, and then there was a carriage house in the backyard.

Rob:
And it wasn’t that I wanted to rent it out to two separate parties. I actually wanted to rent it out to just one really big group of people, like two families, that will pay me a premium to have their own set of bathrooms, their own kitchens, their own spaces. Because if you’re traveling with other people’s kids, if your kids are like my kids, they’re probably ultra wild. I don’t want my kids to be in the same house as other kids at night, when everyone’s trying to go to sleep and we’re trying to cook for each other and it’s like a whole thing.

Rob:
I love the idea of a multi-family where are two separate kitchens and you can rent it out to two families at a much higher premium than if you were renting out two houses separately.

David:
And then next up is we have the modified single family. This is one of my favorite asset classes. What’s your thoughts on that?

Rob:
So this would be if you’re converting a space into any kind of bonus space or anything like that, right?

David:
Yes. Taking a house and basically modifying it by either adding an ADU, converting a garage, splitting it into two different components. It functions as a duplex or a triplex, even though it’s just one property.

Rob:
Oh yeah, man, this is what gave me my jumpstart. I really attribute the wealth that I have today and everything that I’ve been able to build up to my house hack. Like I said, I had this in Los Angeles, it had a 279 square foot studio under it. I rented that on Airbnb. That was making $2,000 to $3,000 a month. And then I built a tiny house in my backyard. I was also Airbnbing that too.

Rob:
And now I don’t live at that house anymore. So now I rent to three different tenants. I rent to the people in the studio. I rent my tiny house on Airbnb and now I rent my main house on Airbnb. And it’s all three different types of stays. It’s long-term stays, short-term stays and mid-term stays. And so I’ll have basically a triplex.

Rob:
And on that property, it’s a $4,000 mortgage. Total, I think it brings it anywhere from eight, on a high month, $9,000. The cashflow is quite a bit for me. And it’s because I’ve modified a lot about that property and converted it to the ultimate house hack/triplex-esque type of place.

David:
And that is what you got to do in today’s market. If you want to be in the best areas with the best properties, you can’t just take it right out of the box. I think that’s where a lot of the listeners that are frustrating saying, “I can’t find good deals.” They’re looking for something that’s already there. In their mind, analyzing it in the calculator, looking at the cash on cash return to writing an offer is the job of an investor. And when that doesn’t work, they say, “Well, real estate as it work.”

David:
But you and I are putting a much, much more creative and detailed look into every single property. We’re sitting here and we’re saying, “This is what it would look as is, this is what it could be.” We’re seeing the vision like a coach that’s drafting raw talent. What can we turn this property into? And then we’re saying, if it was there, how would it be performing? What could we expect out of this player if we got them at their maximum ability?

David:
And then the question is, well, is that worth the time and effort it would take to get it there? Or could we find something else for less time, less effort that would perform at the same point? Just like Brandon and I used to say, you don’t find deals right now. You make deals and you have to embrace that that is what we’re doing.

David:
Not only are we looking to make a deal, but we’re understanding we are competing against all the other people that are trying to do the same thing. It’s not set it and forget it real estate when you get into the short-term game, it’s high risk and high reward. So your unit, your property has to be better than the other options and that’s how you mitigate risks.

David:
So that’s part of why we want to do this show is I’m trying to get people to understand the level of detail that you and I put into what we’re looking to do. And it’s not just run it on a calculator and then move on.

Rob:
And getting into the risky stuff, like luxury, that’s where you and me are starting to transition to. And all previous to now, most of the properties that I’ve purchased have been sub $500,000. But now as my time has grown more rare, I suppose, I’m really not looking to acquire real estate that’s less than a million dollars in the short-term rental game. And then we start looking at the deal that you and me are looking at. That’s a $3.4 million luxury home.

David:
So that’s a great point, that brings us into the last asset class, at least how I see it, luxury real estate. So let’s define what that even means. Because it could mean different things to different people.

David:
In my mind, the way I look at real estate and as I’ve described it in the Sold series I’m writing for BiggerPockets, you’ve got three tiers. You’ve got starter homes, which is where a first-time home buyer, what they’re trying to get into. You’ve got step up homes, which are typically, I got a starter home, I sold it and I used the equity to buy this step up home. These are going to be your B, A class neighborhoods, better schools, bigger house, amenities like pools, a little bit bigger lot, better location.

David:
And then you’ve got luxury homes, and this is going to be, this is more than anyone needs in a house. This is what you do when you have enough money that you don’t have to worry about money basically.

Rob:
It’s a little extra.

David:
A lot extra. A little, that’s exactly right. Now, luxury is not dependent on price point. Because if you call it a million dollar listing, in where I live in the Bay Area, that is not that impressive. It is actually incredibly unimpressive in a lot of different areas.

David:
But if you do the same thing in Kansas, you might have a mansion. So you can’t define luxury by price. You define luxury by its price in comparison to the other homes in the market. I look at luxury like its own asset class, because the people who are going to be renting that property from us are not the same people that are just a traveling nurse who needs a place to lay their head.

David:
This is someone who wants an extravagant experience, who’s going to maybe have a lot of people go with them and they want to have an amazing memory that they’re going to be… It’s not practical is basically what we’re getting at here. That’s what luxury is.

David:
Now some people own luxury properties to live in, so they can have a non-practical experience themselves. Other people like us buy luxury properties to rent it out to luxury people who want to have a non-practical experience, but our purposes are so practical. We’re trying to make money with this thing.

David:
So as you’re looking at different property types, if you’re going to get into the luxury market, you have to understand what you’re looking for and the quality of service you have to provide. Frankly, you can’t run out of batteries in a luxury house. You have to have a property manager on standby that if something goes wrong, the heater in the pool is not working, a bug gets into the house, yes, that does happen. They will call if a big bug ends up in a property. There is someone that, boom, lickety-split is on that and they are taking care of it and that person knows that their experience will be good.

David:
You’re probably going to have to stock the fridge with Cokes and other things that people are going to want. Maybe have a chef go by and cook for those people. It’s a higher detailed experience, but that’s why you’re going to make more money.

David:
So when you’re trying to choose your property type, we have the standard single family. That’s probably the least amount of work. You’ve got the multifamily. That’s going to be a little bit more work, but probably a little bit more profit. Because like you said, Rob, you have extra income streams.

David:
You’ve got the modified single family, which is the way you combine steps one and two into a property that hopefully gets you the best of both worlds, but it will be the most work. Then you’ve got luxury, which is a completely different animal, high risk, high reward, high attention. Anything you want to add on those?

Rob:
No, just a little. I said no, but a little bit. On the luxury side of things, what I’m really excited about, and this has been something that we’ve talked about a lot, because in some senses, we are moving a little bit away from the cashflow side of things. Because one thing that we’re uncovering here is, the more you invest, funny enough in this market, the return is actually going down just a little bit more. But we’re okay with that because if we’re buying the $3.4 million house, while we’re not necessarily cashflowing as much as we want, over 30 years, when someone pays for this house, it’s going to be worth double, maybe triple.

David:
That’s a great point. Now let’s say real estate continues to climb like it’s been climbing. This is something else you and I talk about, we should share. 10% per year is a pretty big number. I wouldn’t assume it’s always going to be that case, but in most of the markets we’re looking in, that’s what we’ve been seeing, sometimes even more. I’m just going to use 10%, because it’s around number. I don’t have to get my calculator out to do the math of 7.2% of whatever it might actually be.

David:
Let’s say that you buy a house for $300,000 and it appreciates by 10%. You’re going to make $30,000, which is nothing to turn your nose at. But this 3.4 million house that goes up by $340,000, the work is going to be roughly the same. The investment on our half will be bigger, but proportionally it’s going to be the same.

David:
Even if the ROI is slightly smaller than that 300,000, so let’s say we can get a 14% return, that other one could get a 20% return. It’s dwarfed in comparison to the increase of 10%. And the increase of the 3.4 property is probably going to be higher than the $300,000 one, because there are less of the $3.4 million properties. There aren’t as many of them to compete with. Builders are not going to be building houses like that. They’re going to make more of the $300,000 home.

David:
And then you throw in how much of the principal is being paid down with every single payment. You look at the whole picture, that starts to be a much more clearly advantageous financial decision, versus the $300,000 one, which it’s still a good deal. I’m not saying people shouldn’t get into it, but that tends to be, the value of that is that you’re going to learn the fundamentals of real estate at a lower risk for yourself. It’s like learning to swim in the shallow end of the pool.

Rob:
And even just going back to what we talked about earlier, let’s just say worse comes to worse, we buy a $3.4 million house, and then we just break even for two years, but it went up $600,000. Well, let’s sell it and make half a million bucks after all of our fees are paid off. It’s not really that sad. It’s not that sad of a scenario to break even right there.

David:
That’s right. And then another thing we’ve talked about just as far as mitigating risk, because I know if I heard you say that my first thought would be, well, you’re assuming it’s going to go up. When they go down by 10%, you’re going to take an even bigger hit. When they go down by whatever, you don’t know you’re going to be able to sell. And that’s absolutely right.

David:
But here’s another reason that Rob and I are looking in the luxury market for ourselves. If we’re getting $2,000 a night for this thing and the market becomes less demanding and we can’t get $2,000, if we drop our price to $1,000 a month, we are a much better option than the other options people were looking at for 800 to $1,000.

David:
So if we’re talking about a 6,000 square foot amazing estate that has its own basketball court, its own pool, its own movie room, its own game room, it’s got a place you can ride dirt bikes, it’s incredible. And you could go pay $1,000 a month to just rent a nice big house that has nothing, you might say, you know what, for maybe 1,100, instead of 1,000, we get that. Let’s just get one extra person in our group and let’s go do it.

David:
So in a sense, our risk is actually less, because we can drop our price more, still hit our nut and be a better option than our competition that can’t do the same thing. So we have thought about both ends of this. The upside is higher and the downside is also better in this situation.

Rob:
There are a lot of reasons to do this and I would ultimately shy away from this for a new investor. I’ve been doing this four or five years. David’s got a lot of experience in real estate too. And it’s like we could do this. We’re built for this. We got the experience.

Rob:
If you’re starting out, I’m probably not going to recommend anyone buy a $3.4 million house starting out.

David:
Great point.

Rob:
But work your way up to it. Scale accordingly. The reason I’ve always hit home runs on all of my portfolio is because I just was really strategic and tactical. And so I really took it day by day and I didn’t scale up too quickly. And because of that, I now have all the reserves and the cash that I need to get into an investment like this and survive if there is a dip.

David:
And have a partner that can benefit you there too. So this is what I want to wrap this one up with, all the fears that someone has as they listen to this, the what ifs, but what if this, but what if that, those are all very good. Instead of letting those stop you from moving forward, get them out of your head and write them down on paper or on a Google document, put them down somewhere.

David:
Then with your partner or yourself or however you’re going to do it, systematically work through every single what if and say what the plan is, if that happens. So if somebody was to get on here and challenge Rob and I, and say, what are you going to do if this happens or what are you going to do if that happens, there is a contingency for every single one of those that we feel confident that we can handle.

David:
Now, even if we don’t make money, we’re not going to lose the property. We’re not going to go bankrupt. That’s what we’re getting at here. It’s okay every once in a while to take an L. You’re going to have that happen in real estate, even buying the $300,000 properties, you can take Ls.

David:
The important thing is that it doesn’t take you out of the game, just like a poker player. You can lose hands. You don’t want to lose your entire pot that you’ve got on your side.

Rob:
You don’t want to re-buy in.

David:
That’s exactly right. And that’s the problem is when people start playing reckless, like I’m going to go big on my first deal. If you don’t know how to ride that bike, you should not be taking off the training wheels. You definitely shouldn’t be getting on a motorcycle that’s 2000 CCs. That’s what we’re talking about here.

David:
But if you’ve been riding them for five years and you feel very comfortable and you know how to handle it, it’s not the same risk as someone who’s new. So thank you for pointing that out. That’s very responsible of you, Robert.

Rob:
Hey, that’s Rob to you, pal.

David:
You got it. Number five. Our fifth step is the timeline. So this is also important. Before you invest in short-term rentals, you need to be thinking about what is your specific timeline for the property, the partnership, everything else? Why don’t you start with what you think we went into, Rob, when we were deciding on our partnership?

Rob:
I think we wanted to start with just one and get it right. And it would be very easy for you and I to be like let’s go buy 15 of these things, because we can. But we’re really focused on setting and solidifying a strategy. We said, okay, let’s start with one. Let’s start with a $3.4 million property. We’re starting here in the big leagues obviously, but let’s start with one and let’s perfect the systems needed to run a luxury property that’s on five acres.

Rob:
Who do we have to hire? Do we have to hire several landscapers because it’s five acres? Do we have to hire a team of cleaners? I think that for us has been the really nice thing is that we’ve been taking it slow. I think once we perfect that one, then we can really assess how quickly we want to scale up.

Rob:
I don’t know. I would imagine my goal, I don’t know about yours, you can tell everyone here for the world to see, but I would like to be acquiring a luxury property every two months.

David:
I believe that that goal came from our conversation. So I subconsciously planted that into your mind. But, yes-

Rob:
You Inceptioned me. I hate when you do that.

David:
That’s exactly right. That’s a great movie. If anyone has not seen Inception, it’s the like Matrix, but less confusing. So I would highly recommend people check that out. So yes, that’s exactly right.

David:
Now, when it comes to our goals for the properties, one of the things that we talked about as far as our timeline was long-term wealth. You and I looked and said, all right, we could either get a whole bunch of cashflowing, high ROI properties like those cabins that we mentioned, that would become our full-time job if we scale this thing up. Or we could be a little bit more careful about what we buy, a little more focused to play the long-term game. They’re going to cashflow most likely a little bit less. We’re going to have to keep more in reserves, but over a significant period of time, they’re going to perform way better.

David:
So you and I chose a path that I would describe as long-term wealth. Other people who might not be in our position, they might not have the resources we do, the experience we do. They might still be working jobs, and not even have the time we do. They might need to go for short-term cashflow.

David:
So that’s an important thing that you’re deciding either with your partner or with yourself, which of these properties are you going to be pursuing? Because if you’re trying to get maximum cashflow and maximum long-term wealth out of one property, it’s probably not going to work.

Rob:
It doesn’t happen from one property. It happens from a very strategic journey over years. You build many, many properties. Ultimately, to me, I’m working towards having a solid portfolio. I have 14 now. I would to actually take on less, but take on more strategic. And in the next year, I’d like to be at 20. When I was on the BiggerPockets podcast six months ago, I wanted 40, but no, I’m trying to really diversify correctly.

Rob:
And the way I’m doing that is now I’m moving into luxury real estate. I just want to have a really well balanced portfolio to just cover me. I think diversification, for me, I finally have figured out. It’s not necessarily about chasing cash. It is sometimes about chasing stability and that’s me. I’m an adult now. I’ve figured it out. Thank you, David.

David:
I’m an adult now. That’s funny. I need a little stability in my life. I got rid of the pocket protector and the 401(k) and I need to replace it somehow. You made a really good point I want to highlight, that had to do with, you’re not going to find it all in one property. That’s exactly right.

David:
So the emotions that somebody has as they’re trying to figure out real estate investing, typically is I want appreciation and I want cashflow, I want freedom. I want my time back. I love real estate. They have all of these feelings that they are then trying to figure out, how do I express them? And the mistake comes when they try to express it through the same house.

David:
I don’t look at a house and say, “I need this to provide it for me.” Just like one relationship can’t provide everything you need in your life. You need a life full of different relationships that meet different needs.

David:
Your portfolio should be that way. Your portfolio should provide cashflow, not a house. Your portfolio should provide appreciate, not a house. And you take a lot of risk off of yourself when you understand, all right, I’ve built up to 10 to 15 of these type of properties that I use the BRRRR method to get, now cashflow. I have most of my capital back. With that, I’m going to buy five properties in markets that I think are going to appreciate very solidly with the capital that I pulled out of these deals.

David:
Once I’ve got those two things working really well, solid cashflow, and I’ve got quite a bit of equity, now I can buy one or two of these maybe luxury short-term rentals like David and Rob are talking about. And if they don’t go well, that’s okay, because the rest of my portfolio can support it. This is in that same video I talked about on YouTube. I call it pyramid theory.

David:
And so that will take a lot of pressure off of you. If you say, you know what, I really just need a buddy in my life. Well, that might not be your spouse’s job to be your buddy for everything. You need to go make some friends. And then if you got some friends and you’re like, man, I’m just feeling romantic right now. That’s probably not your friend’s job to meet that need either. Maybe you’re going to need a spouse in your life.

David:
And then you have different people that you work out with, people that I do jujitsu with, people that I talk business with, people that I talk spiritual things with. When you have a more balanced life, you don’t put pressure on any one thing.

David:
And for so many people listening, I really feel like what is holding them back from taking or making progress in real estate is they’re trying to find it all in one deal. And you and I after doing this for a couple years have realized it’s not healthy. It doesn’t work that way, but you can get it all out of one portfolio of deals.

Rob:
Everyone’s chasing the home run that they forget about the singles or the doubles. Get the bases loaded, then go for the home run, because then it’s a grand slam.

David:
And you know the other thing I learned, because I used to play baseball and I was not nearly as good as basketball, but in baseball, if I tried to hit the home run, I rarely ever did. Home runs came when the pitcher made a mistake. They just left the ball out there that they shouldn’t have. Basketball would be the same thing. If I tried to get a steal and I reached, I would either foul them or I’d be off balance and they’d go past me.

David:
If I waited for them to make a mistake with the ball, the steal would come to me. It was just like this thing I learned, steals happen for you. You don’t really make them very often. You can create pressure that’s more likely to have them make a mistake, but still it’s a mistake that allowed the steal.

David:
Good deals come like that. You create pressure by putting yourself in the right environment. You make the right relationships. You have the conversations. You can’t make that seller that’s not motivated, be motivated. You’ll just foul them and you’ll ruin the whole thing.

David:
But being in that position, you will come across the person who’s like, they made a mistake in life. They’re financially strapped. They don’t want the property. They didn’t take care of it. They need to get rid of it, and boom, that’s your home run or that’s your steal. That’s your win.

David:
And so just adjust your mindset when it comes to that. Home runs happen. You can’t really make a home run happen. You can’t make a pitcher throw a bad pitch. You just take advantage of it when it comes your way. But you should focus, like you said, Rob, on these singles, on these doubles, because if you hit a home run with no one on base, it’s still only worth one run. If you’ve got three people on base when that home run comes, because you have a portfolio of other properties, and then rates drop and you can refinance four properties and get better rates or pull your money out, that functions as a home run if that makes sense. Do you have anything you want to add on that?

Rob:
I think it’s a consistency game, man. That’s the greatest home run, that’s the only way that you can control home runs is just being consistent. I get a lot of people that are like, “Man, how do I go viral?” And I’m like, listen, I’m pretty good at YouTube. But the only way that I ever go viral is I post a video every single week. I’m on my game every single week. And that’s the only way that you can control anything is with consistency, I think.

David:
I love that. Now we’ve got a sixth step, a bonus step that we did not tell you about, but we love you.

Rob:
Bonus. Let’s do it.

David:
At BiggerPockets, we just want to overflow you with value and do everything we can to help you make some money. So here is the bonus step. In stage one of choosing your location, your market and your strategy, which we’ve actually taken that and split this up into two podcasts. So you’ll hear us talk about stage one as these three things, but it’s being split over two different shows.

David:
The other thing that we recommend you do is you decide how you will divvy up the work. That’s something that either you and your partner need to decide on, or you yourself need to decide, how are you going to handle these components? Rob, if you want, we could just alternate back and forth between the steps that we’ve come up with that needs to be divvied up when someone’s going to buy a short-term rental.

Rob:
Definitely. So if you’re going into a partnership here, this is really important, because property management is going to be something that’s going to come up. Someone needs to manage the property. Obviously, you can go-

David:
Can you give us some examples of what that means in practical terms?

Rob:
So if you’re managing an Airbnb, that would consist of things like messaging guests back and forth, scheduling any maintenance. If something is broken, you need to get it replaced. You need to communicate and schedule all of your cleanings. You need to make sure that your cleaners are communicating with you, that things are broken. And then they need to communicate with the maintenance person, contractors that need to come in and fix any big repairs.

Rob:
I had a roof leak one time. Maintenance person, finding them, I’m sorry, not maintenance, lawn maintenance, finding them, finding someone reliable that will come every single week. Last one, pool service, if you want that. Oh, pest control. So these are all moving parts that you have to figure that out. You have to coordinate with it.

Rob:
My pest control person still contacts me every two weeks. She calls me, “Hey, I’m going to come by on Monday. Is that okay?” And then I have to look at my schedule and say, “I’m booked that day. Come the next day.” So, that’s a lot of work and it’s also a little bit of work, once you actually get your systems down, your automation, but still, you still have to do it. Someone still has to figure out how to automate all of that. Someone has to do it.

Rob:
Now. I’m a big fan myself personally of self-managing. I teach people how to self-manage. That’s my jam. I prefer to self-manage, because I don’t think in the Airbnb space, it is… Again, this will get into time and value of time, but I don’t think it’s worth it to hire a property manager necessarily, because property managers in the short-term rental game can charge between 15% and 30% of your gross revenue. That’s a lot.

Rob:
What’s standard for long-term rentals, is it eight to 15?

David:
6% to 10%. So if it’s a higher, what I pay in California, because the rents are higher, I pay 6%. When I get in some of the cheaper markets, it’s more in the 8% to 10%.

Rob:
10 is what I’ve heard back and forth. So it could be up to three times more than a long-term rental property management company.

David:
Or five times more if you look at 6% to the 30%.

Rob:
That’s exactly right. So that’s a really big difference. I think especially if you’re entering a partnership, if there’s someone that’s willing to put in the work and do a little bit of the sweat equity side of things, that is going to make everybody a lot more money.

Rob:
Because I’ve gone into partnerships where, when I work with investors, for example, we will charge them anywhere from 7% to 10% to manage the property. That’s a really good deal because we’re like, “Hey, we’re still going to charge a little bit, because our time goes into this, but we’re saving you…”

David:
But it’s a third of what they would pay from someone else.

Rob:
That’s exactly right. So that’s the benefits of it.

David:
I would also add, in addition to it being cheaper, if you manage it yourself and if you do a good job, it’s also better. So the problem isn’t that proper managers want money, it’s that they might not be good at what they do because they don’t care. A lot of property managers are trying to do the minimum they can, especially if you negotiate a better rate for yourself. You’re just disincentivizing them to care.

David:
And with short-term rentals, the quality of management is exponentially more important than it is in a long-term rental. Your long-term tenant says, “Hey, the toilet handle is jingling. Can you get someone to fix it?” If it takes a couple weeks to get someone out, they’ll deal with it. That’s their house. That’s where they live.

David:
Your short-term rental, if they don’t have enough sheets in the house or if they smell because the cleaner didn’t do their job right or something, that’s a bad review on Airbnb that decreases future bookings for a very long period of time. It’s a huge, huge, huge deal. The quality of work for short-term rentals has to be significantly better than with long-term rentals. And if you’re doing it yourself, you have more control over how things go down.

David:
Now, Rob and I agreed that we would take a chunk of the revenue and pay it to him and his team, since they will be handling the management of the property. But even if you’re not doing a partner, you need to decide, am I doing this myself or am I going to hire somebody to do it?

Rob:
And again, there are pros to hiring someone to do it. I understand that. And as I grow and develop and all that kind of stuff, develop my philosophies, I think my brain is done developing now. But my philosophies, then I would say, I’m starting to now come around to the idea of it.

Rob:
But what I’ve done is, I have an assist that helps me across all of my businesses and property management is just one way that she helps me. I could still be involved with it, because I don’t ever want to feel like I’ve grown too big to just send a guest a message. I’m not in the weeds of my business, but I’m in there. I’m bird’s eye viewing it. I step in when I’m needed.

David:
Well, I’ll give everybody a little behind the scenes look. I’m actually looking at making a property management company that will manage short-term rentals. It won’t be full service, so it’ll be cheaper, but it’s a company that’s going to handle the bookings, the revenue, getting you going. And so they’ll be responsible for making sure that there’s people staying there. And then the person who owns it can be responsible for making sure that everything gets done.

David:
I see that there’s a really big need here. Rob doesn’t have time to manage them all. He’s incredible at the stuff he does, but for a lot of you listening, send me a message and I’ll get you connected if that’s something that you think you might want some help with.

David:
The next thing we have here is bookkeeping. So bookkeeping also becomes a little bit more detailed when it comes to a short-term rental because there’s just more income and expenses that are coming out. With my long-term rentals, I get a rent check every month. Sometimes it’s two, because they don’t pay the full amount right away. And then every once in a while, there might be an expense on there that’s not much. I get a statement from a property manager. My bookkeeper takes it, puts it into my information for taxes and that’s all there is to it.

David:
But with a short-term rental, I’ve got several different sources of income at different nightly rates for different periods of time. I’ve got several different types of income. I’ve got cleaning expenses. I’ve got registration expenses. I’ve got the actual booking of it.

David:
I’m sure Rob could probably come up with some more, and then sorry, that was [crosstalk 00:34:36].

Rob:
Batteries. Lots of batteries.

David:
That’s in the expenses side. And then on the expenses, I said expenses, I meant income. You’ve got all the materials that you’re getting, all of the products that you’re buying, all of the different people, the handymen, the cleaners, the things the cleaners had to buy, the things the guests needed that we had to go drop off last minute, the property management themselves. There’s a lot more expenses associated. So bookkeeping becomes a much bigger issue and you’re going to have to decide how that’s going to be addressed.

David:
Rob, what’s your preferred way of tackling that in your properties?

Rob:
I have a bookkeeper, and my bookkeeper basically creates a profile for every single one of my properties. I thought about doing it myself, but then it was one of those things that I had to really be honest with myself and say, am I going to be punctual about this? And the answer was no. So I hired a bookkeeper. They can be affordable. They can be expensive. It’s up to you.

Rob:
But for me, because of how fast my portfolio grew, I started getting very serious about tracking and everything like that. I sync up all my different bank accounts and all of my different credit card accounts and everything like that. Now I’m starting to have to really get into the nitty-gritty of getting a separate credit card for every single property, so that we can match it up to the different profiles.

Rob:
But luckily my bookkeeper is much smarter than me at the mathematical stuff. So far, it’s been the best decision I’ve ever made.

David:
I think you saying mathematical might have been the most funny part of this entire show.

Rob:
Mathematical.

David:
I haven’t heard that since third grade. Good job. All right. Why don’t you move us on to the third segment in the bonus step?

Rob:
This next one’s going to be setting up the furnishings, the decor, any kind of rehab work. If you’re going to partner up with somebody in this world, then you should really lay out responsibilities here, because a lot of people really underestimate the furnishing part of it. We’ll get into this in another episode. We got a whole episode where we’re going to actually dive deep into the nuts and bolts of analyzing and furnishing and everything like that.

Rob:
But what I do want to say about this is, a lot of people, they underestimate furnishing. They’re like, “Oh yeah, whatever, you’re going to move a couch? Well, how hard can that be?” And then you get there and you’re like, all right, we have three days. And then you’re late to the airport because someone was cutting up a box and you couldn’t find a place to dispose it. And oh man, I’m getting all the flashbacks and everything like that. I’ve had some crazy times.

Rob:
But most of my Airbnbs, I’ve actually set up with my partners. I think there’s a little bit of comradery there. So I would recommend that if you have a partner in the deal, even if one is like, “No, you can do it,” if y’all agree on that, I would definitely recommend just everybody. It’s a full effort. It’s not a one person job. Setting up an Airbnb can be a two, three, four, five person job.

Rob:
There are some diminishing returns there for sure. I’ve had eight people in my Airbnb before where it’s like, what are we doing? Everyone’s doing a little bit, but not a lot. And it ends up being worse than if there were just three people there.

Rob:
But same thing with rehabs. Some partners are very handy and they want to hop in there and they’ll say, “I’ll just paint the wall. It’s so much better than hiring a handyman for $1,000,” or whatever. So regardless of what that is, just make sure that there’s some level of compensation or some level of agreement for how everybody’s going to maintain the status quo.

Rob:
My partner just went out and completely set up a new unit for us in West Virginia. He was happy to do it. He has to do it out of the two of us, because of my schedule for this month. And I was like, “Well, let’s just pay you, man.” And we’re going to pay him $2,000, $3,000 to go and do that for a week. And he was like, “Dude, that’s awesome. Thank you.” And I was like, you deserve it, because without you, I couldn’t do this.

Rob:
I think throwing a bone to your partner in this category specifically will go a long way, because resentment can start as early as furnishing in Airbnb.

David:
I said on Facebook a while ago, I think I said bitterness, but it’s very similar to resentment is the lactic acid of relationships. When you’re working out, lactic acid builds and at the point it gets to be too much, at least this is my understanding. I know there’s fitness people that are about to DM me and say, “That was totally only 99% true. You missed this part.”

Rob:
The YouTube comments are going insane.

David:
Yes. There you go. The basic understanding is that lactic acid builds and then the muscle can’t perform. And then it has to be flushed out before it can perform again. And during that period of time, it regrows. But if you let bitterness and resentment leak into your relationships, the relationship stops performing. And here’s the thing is lactic acid doesn’t really do anything to actually help you perform better. It just slows you down. So resentment doesn’t have any positive impact on a relationship. It doesn’t protect you from anything. It’s totally bad. So you’re very wise to mention, you don’t want that to build.

David:
The part I want to highlight here is that this is not passive income. Short-term rentals are not passive income. They are high income. They are real estate investing, but real estate investing and passive income are not synonymous. There are ways of doing it that are passive. There are ways of doing it that are not passive and there’s a whole lot in between.

David:
So this setup portion is, what I tell people is imagine you just bought a business. You bought a Taco Bell or a 7-Eleven or some franchise. You have looked at it from the outside, but you don’t really know much about what you got. You’re going to have to show up and look at all your employees, who’s got a good attitude, who’s got a bad attitude, who needs to be fired, who needs to be promoted? What’s your inventory look like, how the book’s been kept. It’s a lot of work when you first buy it to try to get it running the way you want.

David:
That’s what you’re doing on these short-term rentals is you’re showing up and you’re trying to get the business set up the way you want it to be, the furniture, the decor, everything you want that’s different than what the previous owners had, and that’s work. So be prepared. That’s why we’re going over this in the bonus step. If you’re going to be doing that work, be prepared knowing you’re going to go into it and what is going to be done. And in a future episode, we’re going to dive deeper into all of the steps that are involved.

David:
All right. And that brings us to our last point, are you going to work with investors? Now, Rob and I are bringing this up because we are raising money to help buy these properties. Like you said, we’re going to buy one together, maybe a couple together. Then we’re going to start raising money from other people, so people can invest with us in these properties. They’ll be paid out, just like if it was money in the bank.

David:
Now, some people are going to just use their own capital and you can get that from refinancing houses, from putting HELOCs on existing properties. Typically, if you’re going to try an expensive Airbnb, you probably already have quite a bit of capital saved up. So odds are, you’ve done a little bit of real estate investing yourself if you’re jumping into that.

David:
But if you’re not and you’re looking to raise money, it’s very important that you understand that cashflow will cover the debt service of both the loan that you’re taking out and the investors that you’re going to be paying out. That’s one of the reasons that bookkeeping and analysis is very important, because you’re not just investing your own money. You actually have to take care of someone else’s money, even more importantly than if you did it yourself.

David:
So if you want to invest with Rob or I, please reach out to us. You can go to investwithdavidgreene.com and you can learn a little bit more about it. But if you’re also looking to do this yourself and you want to invest with other people, that’s one more reason why you better have a lot of money in reserves. I personally don’t like the model that says, “Hey, invest in real estate, you get some of the equity, but if it doesn’t work out, you invest it at your own risk.”

David:
Some people do that. In fact, a lot of people do that. The majority of people I think do it. I just don’t like it. I don’t like it because I can’t sleep at night. I don’t like it because so many people trust, “Hey, if I’m saying you should do this,” that that’s why they’re investing in the deal with me, and they’re not doing it because they’re looking at the deal. They’re doing it because they’re looking at David.

David:
When we first talked about this, Rob, I’m curious, did you have concerns, fears, were you excited? I don’t think we ever talked about what emotions you went through when we talked about doing this with investors.

Rob:
Wow, man, we’re going to air it for everyone to see here. No, no. I’m excited, man. I’ve worked with investors quite a bit. I work one-on-one with investors and I think what investors really appreciate when they work with me is that they see the pain. They see the future pain. They see, I really take an investor’s dollar very seriously. I always say in my mind, an investor’s dollar is worth four of my own. And so if I lose an investor’s dollar, which has never happened, but if I do, it hurts me like I lost four of my own. That’s how I really need to approach it.

Rob:
Because I always make it very clear how serious I am with all of my analysis. I shoot down stuff. I’ll have investors that pitch ideas to me that are just not good or they’re okay, and I’m like, “Listen, I understand why you think that, but let me be real with you.” I try to just be very real with investors of what has worked for me, what doesn’t. If there’s something that I haven’t really tried before and they’re pitching that to me, I’m like, “No, I’m sorry. It probably will work, but I’ve never done it.”

Rob:
I think a little bit of honesty with your investors and your commitment to making sure that their dollar goes a long way is super important. I think I’ve had a couple investors that have been not annoyed, but a little like, “Hey, I thought you were going to move faster on this.” And it’s like because I haven’t found you the deal yet, man. I found a bunch of deals that comped out here, but for it to be Rob stamped or whatever, it’s got to be here.

Rob:
It’s like a fault and a good thing that it’s like I’m over critical of every deal that I go into, something that you and me talk about quite a bit. And it’s like I’m happy… I used to be a lot more of a risky person. And now when other people’s money is on the line, I’ve actually become really conservative with how I approach deals.

David:
It’s the way you drive when you’re in the car yourself versus when your kids are in the back seat.

Rob:
Exactly. That’s so perfect. Yep.

David:
So one of the ways that we are structured, and I am saying this because I highly recommend anyone else who’s looking to raise investor money, please consider what I’m about to say. I am keeping enough money in reserves that even if some horrible thing happened, a tornado ripped the house off the ground, aliens abducted it, and they just sucked our property off of the Earth.

Rob:
Hate when that happens.

David:
Just in case, we have enough money set aside that investors will still be paid on the investment that they made. I just wouldn’t be able to move forward if that wasn’t the case. This is not one of those, “Hey, it’s on you if it works out or if it’s not.” And so if you’re investing with someone who’s never done it before, or they don’t have any money themselves, I would just be way more cautious. If they haven’t learned how to manage their own finances, I wouldn’t trust them with managing your finances, even if they’re very charismatic or hardworking or you’re impressed by their knowledge base. There’s a little more that goes into, there’s some discipline that goes to managing money, in addition to just the skill or the knowledge of investing in real estate.

Rob:
I think there’s always a little bit of due diligence that’s needed. I think it’s important to reveal that due diligence, so that they’re like, “Oh, okay, they’re pretty serious with my dollar.” I try to make that as clear as possible, as soon as possible.

David:
All right. Well, I hope you have all enjoyed the first and second part of our series for choosing your location, market and strategy when it comes to short-term rentals. Now there will be future episodes in this series that we will be diving into, so keep an eye out for those.

David:
Please leave some comments below and let us know both on the YouTube page and on biggerpodcasts.com/podcast what you think. Did you like the deep dive into a specific strategy? Would you like it if we would actually maybe analyze a deal live on the podcast for you to see how Rob and I break down both the pros and the cons of a property and weigh out if this would work?

David:
We actually have a matrix that we use that incorporates five different elements that we think are important in real estate investing. And when we’re looking at a deal, we evaluate it through that matrix. So we’ll go and say, “Well, how does it affect this one? How is it affected by this one? How does it weigh out?”

David:
I just want to know, what would you guys like to see more of and what did you like about this show? So please leave it in the comments. If these are popular, if you like having us go deep on one specific strategy like this, tell us. We will do everything that we can to do more. Anything you want to add, Rob?

Rob:
If anyone wants to hear it from you directly, if they want to just find you online for those short-term rental knowledge bombs, my friend, where can they find you?

David:
They can find me on all social media @DavidGreene24. And then I have a YouTube channel as well. But what I basically do is when we’re doing in the podcast, I’ll take a concept that I was like, that was really, really good, and I’ll dive deeper into a video on that. I was describing how you diversify risk in a portfolio. I’m going to make a video on that, cashflow versus appreciation, I’m going to make a video on that. So oftentimes what I hear people say is, “This was a great point. Can you talk about it more?” Well, I get buried in DMs. I can’t answer every single person individually. I try to make a video there.

David:
And I know you’re no slouch on YouTube yourself. Rob is a bit of my… I’m the Padawan learner and he’s the experienced Jedi when it comes to YouTube. He does a lot.

Rob:
We got to do a collab, man.

David:
Yes. that’s a good point. If you notice my camera, it looks like this because your camera looked… I’m not as handsome as you, I’m still working on that.

Rob:
I disagree.

David:
You’ve done a lot to help me in that area. So where can people find you if they want to learn more about what’s going on in the brilliant Jedi mind?

Rob:
Well, as always, you can find me on YouTube at Robuilt. A lot of people say Robuilt, that’s fine if you want to. But Robuilt, like Rob built it. R-O-B-U-I-L-T. You find me on the Gram as the young kids call it, @Robuilt as well. TikTok at Robuilto, because someone snagged that Robuilt from me.

David:
I love that you say that every time. I still think Robuilto is hilarious.

Rob:
It’s important because I think this is a sign that’s like, oh, okay, I’ve made it because I’ve got a lot of scammers that will make fake accounts of me. By the way, just anyone watching this right now, I will never ask you for crypto or Forex or any of that other stuff. I will never ask you to DM me on WhatsApp either. But I always have to clarify because there are a lot of Robuilts.

David:
That goes for both of us. I have a scammer, I get them all the time. It’s usually some derivative of DavidGreene24. So the current one is-

Rob:
It’s DavidGreene25.

David:
Yes. DavidGreene024, DavidGreene_24, David Green with no E at the end, 24.

Rob:
Or David dah, dah, dah, Greene 24.

David:
It’s always like that. So look very closely at the screen name. Scott Trench ha the same thing going on. There’s a Scott with three Ts. And so what happens is people will make these fake profiles. They’ll message you, because you trust us, then they will ask you for money or they’ll ask you to buy crypto with them, or invest in some course they have. They’re ripping you off. So there’s nothing we can really do about it. I would love it if I could get that check mark from Instagram finally, so you would know if it was me or if it was Rob, but that’s very difficult. Instagram is-

Rob:
2022, man, we’re going to get those blue check marks.

David:
It would save a lot of people money. But in the meantime, please pay attention to that. We don’t want you to get ripped off and then follow Robuilto. [foreign language 00:49:00].

Rob:
[foreign language 00:49:02].

David:
[foreign language 00:49:10]. I don’t know how to say I would appreciate it, but I would like that. [foreign language 00:49:24].

Rob:
[foreign language 00:49:24].

David:
[foreign language 00:49:24].

Rob:
Robuilto.

David:
Robuilto. On YouTube. All right. Enough of these shenanigans. Thank you everybody for your time. We really appreciate you listening. Let us know in the comments what you think, reach out to each of us and tell us what you would like more of. We will let you get out of here, but keep an eye out for future shows in this series of how to get your first short-term rental with Robert mathematic Abasolo. No. With Robert mathematical Abasolo. This is David Greene for BiggerPockets, signing off.