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Ashley:
This is Real Estate rookie episode 380. Are you wondering where to start as a rookie investor? Should you pay for a course or should you self-educate? We’re going to talk about that and so much more today. My name is Ashley Care and I am here with my co-host, Tony Jay Robinson,

Tony:
And welcome to the Real Estate Rookie Podcast where every week, three times a week, we bring you the inspiration, motivation, and stories you need to hear to kickstart your investing journey. And today we’re going to be discussing a few topics, one of which being how do you structure a partnership split based on the amount of capital and sweat equity that someone’s bringing? When should you walk away from a deal versus doubling down? And we’ll also be joined live with rookie guest Nicole Rutherford, who you might remember from episode 3 73 to hear what questions to ask if you want to manage someone else’s Airbnb as a co-host. And just general tips for getting into a new short-term rental market and more. But our first question up is about where to even start as a real estate rookie.

Ashley:
Okay, so our first question today is from Spain. mk, super rookie question, highly interested in real estate investing. Where do I even want to start to learn? The last two years I’ve immersed myself in the BiggerPockets of Money podcast plus others to get my money mindset straight. And this worked. First of all, congratulations. That’s awesome. And if you haven’t checked out the Money podcast yet, you can check that out on your favorite podcast platform. It’s under a BiggerPockets umbrella. Okay, so to continue with our question, we have improved our family’s net worth significantly. We started investing in index funds, that’s pretty cool. That’s also what I invest in outside of real estate. Now we are ready to take it up a notch and real estate investing makes sense to us primarily to buy and hold and take advantage of appreciation and tax benefits. However, where do I begin?

Ashley:
I’m a methodical person who wishes that I could just take a class. However, I know a lot of people are self-taught. Is paying for a course worth it? If it is, which course would you recommend? I need to learn terms, how to know I’m getting a good property, where to get capital apart from saving a down payment, et cetera. Shell, I just start listening to all BP real estate podcasts. Would that be enough? Thanks so much. So what a great rookie question, and I think there’s probably a lot of other people wondering the same exact thing as to how do I get started and is paying for education the right way to go. Tony, what are your thoughts on that? The first thing that comes to mind for me is that you can find everything free online. It’s just the organization of it and kind of piecing it together that is the benefit of a paid course.

Tony:
Yeah, I think like you said, Spain, there’s so many different ways to go about this. You definitely can trudge through it yourself and learn from your own mistakes, and there’s a lot of people who started off that way. When I bought my first long-term rental, when I bought my first short-term rental, I didn’t go through any courses or anything. I just learned the ropes and did it that way. But like Ashley said, there’s a benefit to having that kind of community behind you as well, because you can usually move a little bit faster, right? You’re not wasting as much time searching for the information because the information is there in front of you and you’re able to spend a little bit more time executing and then B, hopefully you’re following a proven roadmap of what already works. So there’s pluses and minuses to both approaches there. But I think the biggest thing Spain is because the bigger question here is where do I even start to learn? You’ve already started that journey, right? You’ve already started the learning process. I think what’s most important now is deciding on the actual path you want to take because I think that, and actually ary thoughts on this, but I feel like that’s where a lot of rookies get caught up is that they just never decide what exactly is that they want to do. So then they’re just spinning their wheels forever.

Ashley:
So I’ve done a couple masterminds, I’ve done a bunch of courses, I’ve done a wholesaling course, I’ve done all these different things that some of the things I’ve never actually implemented, but the course was a reason for me to realize this actually isn’t for me. So I think that’s also a big benefit of taking a course is to understand if that specific niche is for you. So figure out, like Tony said, figure out what exactly you want to do and if you have time to do all the research, you can 100% figure it out yourself. So time is another variable. If you don’t have a lot of time to listen to podcasts, to read books, to scroll Zillow and look at what prices are and what houses are going for and tracking all of that and doing your own research, then maybe that’s where you do pay for a course to kind of fast track all of that.

Ashley:
So one thing to look at is the cost comparison. If the cost is instead of going out that month for dinner a couple times or not door dashing for a month, then yes, that’s probably worth it. But if this is your maxing out your credit card to pay for this course, I’m going to say no, it’s not worth it. Figure it out on your own and join some of the free Facebook groups because another great benefit of doing a course is the community, but you can get free community on BiggerPockets. You can get free community on Instagram, just follow other investor accounts, especially new people who are just starting out. Search the hashtag real estate rookie and connect with them, send them a dm. The first ever mastermind I was in was created off of Instagram and it was one girl messaged 10 of us and said, Hey, I’d like to start a mastermind. It’s just free. It’s just to get together. And we got together I think once every six weeks or something on a Zoom call and there up maybe being eight of the 10 people that did it. But putting yourself out there, building that community, that accountability, that’s a huge benefit when people pay for those courses is meeting the like-minded people. But you can do that other ways too without paying for a course.

Tony:
Yeah, I think a lot of golden legacy, you definitely want to make sure you’re coming from a place of financial stability before you take that plunge into maybe committing more to education. Quick side story from my own personal journey. The first mastermind I ever joined, it was a $20,000 apartment syndication mastermind and asked me how many apartments I’ve syndicated since then. The answer is zero, but I still do think I learned a lot from that because like you said, Ashley, when you kind of make that financial commitment, it does, I think take it depends on the person, but I think when you make that financial commitment, it does make it a little bit more real for you. Like, hey, this is something I’m committed to, and you kind of put your money where your mouth is. So I think there is an element of that, but Spain said that you do just want to go about this without investing into an actual course.

Tony:
Like Ashley said, there’s a lot of different ways to get active and get involved. I personally think you can get a PhD of real estate investing just by going through the forums on BiggerPockets. I first found BP by doing a search on Google, which led me to the forums, and I was blown away by the amount of information that’s in there because there are timeless truths of real estate investing. So even if you find a post from 10 years ago, there’s probably still a lot of truth in that post that still resonates today. So I’d say take the time, really drill down where you want to go, but I think what’s most important in Spain is choosing the strategy, choosing your niche, and then really getting focused on just consuming content around that strategy. Because when you first start, it’s all about awareness and you just want to learn as much as you can about so many different things.

Tony:
But when it comes time to take action, you want to narrow your focus. And I heard this phrase, it was on a marketing podcast a long time ago, but it was called just in time learning. Just in time learning. And it comes from the production world of just in time production. But anyway, it’s about only consuming content that’s needed for your next action. So if you decide span that you want to become a house flipper, then your very next step, the only content you should be consuming is about how do I find deals as a flipper? And then once you find the deals, okay, how do I create my scope of work and estimate my rehab costs? Okay, how do I fund it now that I’ve figured out what the rehab costs and each piece of content should help you take that next step? So that’s my advice.

Ashley:
Yeah, the last thing I would add is how do you learn? How do you educate yourself? What’s the best learning environment for you? So if you need to look back to high school to college, did you hate sitting in class watching videos? So maybe a lot of courses won’t even be for you because you won’t actually sit and watch the videos. I’ve started the real estate exam probably four times and it’s been like five years since I actually started it, but I just can’t stand sitting and watching videos of someone instructing me. So I would just start it. I would never finish. And now I realize I don’t even need my license or want it, but I know that about myself is that if I’m paying for a course, it needs to be more interactive than just watching videos where someone else, they may prefer a more self-paced where at any time they can choose which videos they want to watch.

Ashley:
So also look at what kind of course you’re signing up for and how you’re going to learn from it. What is the learning environment? Is it live or is it even in-person events? Not even on Zoom. Are they doing in-person events? Which that is actually the most beneficial to me and hands-on. Is it hands-on where it’s workshops? That’s even more beneficial to me. So also think about what your style of learning is and how you will learn the best, but I also learn really well from just Google searching and like Tony said, going on the BiggerPockets forums and I know exactly what I need to know to get to the next step and going and doing that research. But if you don’t even know what those steps are, that’s where shameless plug here, you can join the Real Estate Rookie Bootcamp and you can learn what those steps are to get your first deal and then from there you can go on to find your niche and take different courses like that. But I’m going to recommend a course. It’s going to be checking out the BiggerPockets bootcamps. You can go to biggerpockets.com/bootcamps. There’s a whole bunch of different ones that you can actually choose from

Tony:
Guys. The bootcamps really can be life-changing. Ash and I have both had the pleasure of hosting these and we were together a couple of weeks ago in Denver Ash, we had this big meetup and someone came up to me and he said, 10, I just want to thank you because I took your short-term rental bootcamp and a few months after that I closed on my first Airbnb and I’m under contract on my second right now. And guys, when I hear those stories, it just goes to show the, and it’s not because of me, right? I did my best to provide the value, but it’s because that person came in and they executed on what they learned. They made the most of that opportunity. So just to put a bow on this, it doesn’t matter what course you pay for, it doesn’t matter what coaching program you sign up for. It doesn’t matter what books you read if you never take action, there are people out there who are just course junkies who just jump from course to course event to event, but never take action. Don’t be that person, be the person who takes action and who implements, and that’s how we get the highest chances of success. Fan

Ashley:
Tony dropping bombs. And with that explosion, we’re going to go to our short break, but when we come back, we have a video submitted by Baker in North Carolina who is asking about investor payout strategies. So make sure you stick around. Okay, we are back from our break and we have a video question today from Baker McGinness and Charlotte, North Carolina. If you want to submit a question on the show, be sure to do it at biggerpockets.com/reply. Now let’s hear what Baker has to say.

Baker:
Hey, Ashley and Tony. My name is Baker McGinnis. I’m in Charlotte, North Carolina and me and two very close long-term friends. We plan on investing in a short-term rental property in Boone, North Carolina, so that’s the mountains of North Carolina. So I’ll be providing sweat equity in a small down payment around $8,000, and I was curious as to what a ideal payout would be, whether that’s a percentage of what we charge for rent or just wondering what you guys would recommend. Also, I want to thank you guys so much for all your fantastic information you provide on the podcast. Have an awesome day, guys.

Tony:
So Baker first, kudos you man on leveraging partnerships, and obviously this is my time to plug our real estate partnerships book. So if you head over to biggerpockets.com/partnerships, you guys can pick that up. We’ve had a lot of questions since that book released about how to structure partnerships, right? Ash, and I think you and I always say the same thing. There is no right or wrong way to do this. Bigger really comes down to what you and your potential partners feel is fair for that partnership. Now, the common mistake I think that we see from Ricky Investors is that they devalue. They undervalue the person who’s putting in the sweat equity and they overvalue the person that’s bringing the capital. Yes, the capital is necessary, yes, getting the mortgages is necessary. However, that is a one-time event, right? You’re going to sign those loan docs one time.

Tony:
You’re going to wire in the money for down payment and closing costs one time. And it sounds like Bick, you’re also going to be contributing at least something towards that down payment and closing costs as well. So you’re putting financial resources into this deal, but you’re also going to be putting your time resources into the deal, and that’s what equity, that’s something that’s going to be going on day after day, week after week, month, month after month. So I think my recommendation is always to start with just a 50 50 and see how your partner responds to that because I do think it’s fair, right? If someone’s going to be doing all of the work and the other person’s just going to be cashing a check, you got to balance that out over the life of that deal. So for me, 50 50 seems pretty fair. What do you think, Ash?

Ashley:
Yeah, I agree with checking into what is each person responsible for, what are the roles and responsibilities and putting some weight to it? And one other thing they can do is actually pay yourself for those job responsibilities that you’re doing and then go ahead and do your equity percentage. There’s a lot of different ways you can do it, but think about what is your goal, your outcome first, what do you want out of this deal? Is it cashflow? Is it equity so that you can cash out down the road? Is it you want to make more money now? So maybe you want to get paid directly for your sweat and your labor on the property. Then you can tailor it through the negotiation and figure out what your partner wants. What is the reason that they’re investing capital of those same things that I listed?

Ashley:
What is important to them? Then you can kind of structure it to make sure that it’s a good deal for both of you, because really you could say we’re going to be just 50 50 partners on it, but that may not be enough cashflow for you for the actual work that you’re going to be doing on the property. So I think defining roles and responsibilities is the first step, setting your goals, what you guys each want out of the property, and then from there negotiating how much equity is given up, and then if you’re going to be paid separate for any kind of task, and you can be paid as the property manager overseeing it, but also the other partner could be paid a percentage every month of the capital they put into the deal too. So that’s what I did with my first partner was he was given equity, but also he was paid back a percentage. Maybe he gets less equity but gets percentage back, a guaranteed percentage back on his money now too, almost as if he was part private money lenders too.

Tony:
Yeah, it’s a really good point. Ash should say, define those roles and responsibilities upfront. One of the very first partnerships that I ever did, it was a similar situation where I brought 25% of the capital needed for to acquire the property, right down payment, closing costs, furniture set up, et cetera. The partner brought together 75%. So because I contributed 25, the partner contributed 75, I kept 25% equity in that property, and the partner kept 75%, right? So our equity stakes matched our capital contributions. However, since I was going to be the person managing the property every day, I also got a 15% management fee for doing that work, which was slightly lower than market rates at the time. If we would’ve hired someone else, it would’ve been 20, 25, maybe 30, 40%. So I gave a break on the management fee, but I was renting the property myself. So you’re absolutely right, Ashley, in saying that, maybe separate that a little bit, your equity from the work you’re doing daily inside the property,

Ashley:
And really to take it even further, really notate and document what is the role of the property manager too. So if you guys need to go and refinance, does that mean you as the property manager are in charge of talking to the loan officer, quoting rates, filling out all the documents because you actually hired a property management company? They most likely would not do that for you. They’ll send you your profit and loss statement and your rent roll and things you need, but they’re not going to do that for you. Who’s going to get the taxes ready to collect all your W nine or not your W nines, but yeah, even your W nines and your 10 90 nines get your 10 90 nines. So all of those things, who’s going to do all this stuff at tax time? Even if you’re having somebody do it for you, somebody still has to hire a person to do it, gather all the information to give to them to take care of it.

Ashley:
So really define as deep as you can, how many roles and responsibilities that property manager is actually going to have too. Okay, if you guys are enjoying this episode, if you’re watching on YouTube, we’d love for you to give it a thumbs up or if you’re watching on your favorite podcast platform, make sure to leave us an honest reading and review. So we actually have Tony asking some co-hosting questions coming up, but before we get into that, we have one more question about walking away. So this question is from Chantel. When do you walk away super excited about first property under contract set to close in a week? Tentatively inspection showed end of life for roof insurance is having hard time getting an underwriter due to roof of age. My issue number one, my agent asked if I wanted to keep tenants month to month. I said yes, get response that, oops, they went to a 12 month lease that’s under market. My issue number two, I will not cashflow, I’ll need to put in about $300 per month to pay off my home equity line of credit payment each month, stay the course or say I’m out.

Tony:
There’s a lot to unpack here,

Ashley:
Right? We’ve been in situations like this before.

Tony:
Yeah, lots to unpack here. I think maybe let’s take a, okay, first, I think the first thing that we need to clarify Ash is like Chantal, what are your motivations when it comes to investing in real estate? Again, you’ve got cashflow, you’ve got appreciation, you’ve got the tax benefits, and if you’re doing short-term, you’ve got the vacation rental piece, right? When you’re buy and hold real estate. So I think Chantal, the first question for you is what are your motivations? Is it maybe you’re trying to get rep status, like real estate professional status and you want to be able to write off this cost segregation and apply that towards your W2 income or whatever it may be? Or do you want appreciation, right? Is this an appreciating market where maybe you’re not super concerned about the cash flow and it’s going to appreciate 5% a year for the next decade or whatever it is, but if it’s just cashflow, then I think that kind of changes things. So I think that’s the first piece, Ash, but maybe if we take it step by step and just kind of break down each issue, so what do you think about the roof issue? Would the roof by itself make you walk away from the property?

Ashley:
Well, that was my number one question as to what do the numbers show? So she had issue number two of I will not cashflow. Is that with her paying for the roof expense or does that not even include the cost of adding a new roof on and now you have to come up with another $12,000 or whatever it may be to pay for the new roof? So first question is do you have money to cover the roof cost? Is that going to cut into your negative cashflow even more because maybe you have to take more money off your HELOC to cover that, and now you’re paying $400 per month out of pocket for the heloc. So that is my first understanding is how does the cost of that roof factor into the numbers on the property? And the next thing would be can you still negotiate? Are you still in that due diligence period where the inspection showed end of life for roof, where you can actually negotiate a decrease in price to help cover the cost of the roof or ask the sellers to replace the roof before you close on the property and then you’re not coming out of pocket for any money at all?

Tony:
Yeah, I’d agree with you on that piece. I think my first objective would be like, Hey, let’s have the sellers fix the roof before I even take possession of this thing. That way I can make sure it’s done correctly, even if you have to push out closing a little bit. The motel that we just closed on, we had to push out closing because they had to fumigate the motel because we found some issues like, Hey, you guys need to take care of this and show us that it’s done before we’re willing to close on it. So you’ve got a little bit of leverage there, Chantal, I think, to hopefully get that roof completed or that roof issue completed by the owners. So moving on to the next issue here. We’ve got this Oopsie 12 month lease that’s below market rents. What are you doing in that situation? Ash? You’re the long-term rental queen here. What would you do in that situation?

Ashley:
Well, that was part of the negative 300. Is that negative 300 cashflow only because they’re in below market rents and after 12 months are you able to increase the rents and you’re actually cash flowing on the property? Because at that time, I may consider it as to yes, I can afford that $300 per month payment. So think about that first. Can you actually afford to make that $300 per month payment and still have your reserves in place for 12 months and after that 12 months will you be able to cashflow on the property? So making sure it’s not a financial burden on you and also what happens in 12 months, what can you increase it to and what does your cashflow actually become after their leases are up? Also, I would want to kind of look more into who the actual tenants are since you are inheriting them for a month, asking the seller for just to show that they have actually paid for the last year that they’ve been living in the property, that they’re good tenants and you’re not going to be stuck in a 12 month lease with a tenant that hasn’t actually paid in the last three months anyways, and a seller can tell you they’re up to date on the rent rider part of the sales contract, but sometimes it’s necessary to ask for proof, and that’s okay to do is literally ask for the bank deposit showing that that person paid each month, or if they’re using some kind of property management software or property management company, you can easily print off that report to send to you as the buyer that this person has consistently paid on too for the last 12 months.

Tony:
Yeah, I think you bring up a good point, Ash. It’s how under market rents, are they right? If you brought it to market rent, are you going to be breaking even at that point, right? Or if you got to market rents, does it become a juicy deal, right? Our market rents at 2,500 and they’re paying a thousand. Okay, cool. Then there’s a lot of room there, but our market rents 1750 and they’re paying 1550. Then it sounds like you might still have a bad deal in your hands either way. I think based on what I’ve seen, Ash, I’m curious what your take is. I think based on what I’m seeing here, assuming that long-term cashflow is somewhat important to you, Chantal, I’m probably going to be walking away from this deal.

Ashley:
My first thing to do, and I think you would agree, Tony, is to try to negotiate first. I mean, now that they have the 12 month leases, if they put this property back on the market, they’re going to have a really hard time selling it. Nobody’s going to want to be locked into a 12 month lease that’s below market rent. They’re going to completely eliminate anybody that wants to house hack because nobody can move into it to house hack. So their buyer pool has just diminished, and I think there’s a lot of room for negotiation on this to decrease the purchase price with the roof and it being locked into 12 month lease agreements that are under market too. So I’m going to say negotiate until the numbers work. If not, then I’m out. Maybe we should make that into a new show segment where people bring us their deals and we say whether we’re out or we’re in,

Tony:
We’re in bringing the capital. It’s like Shark Tank, huh? Yeah, I’m with that. I’m out.

Tony:
Alright guys, so coming up after this outbreak, we’re going to be joined by Nicole Rutherford. You guys might remember from episode 3 73, but her and I are going to talk a little bit of insider tips for creating a co-hosting business. So Nicole, welcome back. Super excited to be chatting with you again. You and I were on episode 373 together where we talked about transitioning from Airbnb arbitrage to building out this co-hosting business and the producers, and I thought it’d be cool to bring you back to ask a few more questions about Airbnb co-hosting. So welcome back to the Real Estate Rookie podcast.

Nicole:
Thank you so much, Tony. Pleasure to be here again with you.

Tony:
Alright, Nicole, so first question I want to ask you is, if I’m looking to hire a co-host, right? Say I own a property that I’m thinking of renting out as a vacation rental as an Airbnb, or maybe I already have one and I’m not happy with my current property manager, what should I be asking this new potential co-host?

Nicole:
The first thing would be just checking the rates that they’re going to be charging. There are co-hosts that will charge a flat management fee or there’s going to be host that will do a percentage. We opt to do a percentage for our business. You’ll see most co-hosts charging from 15 to anywhere up to 30% of the gross nightly rates is typically what you’ll see most people charging and knowing their communication, what they’re going to be abled to do if overnight emergencies happen, seeing if they have a team or if it’s just them. Are they going to be available 24 7 to communicate with guests and making sure that everything is very transparent of who’s going to be responsible for ordering supplies, who’s going to be responsible for leaving guest reviews, making every single detail announced and known to both parties, who’s responsible for what aspects of running the business and making sure that as a co-host that your property is something that they’re comfortable doing. We have turned down properties of, we’re not familiar with condos and not working with the HOA regulations, so making sure that your co-host is comfortable with doing that. If you have extra amenities at your property, such as pools, hot tubs, grills, who’s going to be changing out the propane in between guest stay or when a propane tank runs low in the middle of a guest stay. All those little details asking who’s going to be responsible for what aspect of running the business?

Tony:
Love that, Nicole. And I guess the inverse of that question is what questions should a potential co-host be asking a new client

Nicole:
For us? We have a whole list written out when we are potentially going to be bringing on a new client onto our, we always say team, and we have it listed out at first. We need to know the property address if there are short-term rental regulations in that area because most people aren’t familiar with those if they’re brand new to real estate investing and going from there of seeing what the bedroom count is, what the bathroom count is, and we take a look before we even say yes or no to this client, we take a look and see if that property is something that fits our portfolio. We tend to work with larger homes, not that we’re not able to work with smaller homes, but just for ourselves and the time that we dedicate to each property, we’ve set it out to match what our profit goals are and we make that clear to owners of after we do an analysis on our end of what we think their property can bring in, we let them know, honestly, if we think that it might do better as a long-term rental than a short-term rental because some owners don’t have the budget to really furnish their home as it might need to be in their particular market area.

Nicole:
And so talking to them and being very transparent at all times of how much do you have to put into furnishings? Are you willing to add these amenities to your home? If it doesn’t have these amenities, we’re not sure if it’s going to be able to meet your overall profit goals and seeing what owners are willing to do for their properties if it needs a hot tub to be able to pull in any sort of profit from doing your own market research, making sure that it fits your portfolio of what you want to be adding into it.

Tony:
Alright, next question I have for you, Nicole, is what are your need to knows when helping a new co-host move into a new market?

Nicole:
The first one is going to be really analyzing that particular property that they’re looking for. So looking at the market analysis and seeing if they have amenities at the property, what their monthly payments of including insurance and taxes and their estimated monthly utilities to make sure it makes sense. As a short-term rental. Most people aren’t doing co-hosting for long-term rentals. And when you are taking that percentage, we like to make sure that the owners are at least going to be breaking even or profiting on their rent. And from there, knowing exactly what the owners are willing to put into their property for furnishings, if it’s not currently a functioning short-term rental. And then you can start building out your team if it does seem like it’s something that’s going to be mutually beneficial for yourself and for the owner. From there, you start the ball rolling with finding your cleaners, your handyman, your full team, and everyone else that you need to be running a successful short-term rental

Tony:
And qua. I love that process, and I guess what’s the timeframe I should be expecting to be able to complete something like that?

Nicole:
A lot of people do take a month to get their properties ready, but the longest it’s ever taken us is two weeks time. So from day one of talking to the owners, and that’s been even with a renovation going on, our last property we just set up, we were able to design the property in usually less than a week. We take a few days to really get the design knocked down and have everything ordered and ready in our cart and take one week from start to finish of when we go into the property and to when it’s ready for its first guest, which is usually eight to 12 hour days of being at the property. We set up all the furniture ourselves, install closet racks if needed, hang up the TVs. We’re extremely hands-on, and we will, during that same week, we are meeting cleaners and interviewing cleaners because a lot of these markets we go into, we’ve maybe visited before the area, but we don’t have connections in a lot of these areas.

Nicole:
So we’ll at least interview three cleaners to come by the house for them to see the property. Same thing with handyman and pool teams if needed, having long guys come by and provide quotes for the owners. So it is a very hectic week usually that we’re getting properties set up, but a lot of people, the owners will connect with us and say, what is it going to take about a month time to get ready? Which for people working full-time jobs, understandably, it will take a lot more time to get it set up, but with the proper team in place, we’ve been able to get things usually set up in a week time at most two

Tony:
Weeks. That is incredible. I’m super impressed by that. For us, usually when we’re launching a new property, if it’s starting from zero, somewhere in that four-ish week range is good for us, but two weeks you guys are crushing it. So Nicole, appreciate you coming back on to the Ricky Podcast to answer these questions. For our audience here and for everyone that’s listening, if you want to get in touch with Nicole, check the, if you’re on YouTube, check the description of the video here. If you’re listening on your favorite podcast app, check the show notes down below the player and you can find all of Nicole’s contact information there.

Ashley:
Thank you everyone for joining us for this week’s rookie reply and we will see you next time.

In late 2022 and early 2023, private equity real estate investors sharply pulled back on funding. They caught on—in some cases, too late—that rising interest rates were going to annihilate deals funded by floating interest debt and drive cap rates higher (pushing prices lower). 

In our own passive real estate investing club at SparkRental, our members (myself included) have become more cautious. When we first started going in on group real estate investments together, we focused on potential returns. Today, when we meet to vet deals together, we focus far more on risk. 

Anecdotally, I’ve also heard a lot of active real estate investors pull back over the last 18 months, and I hear a lot of hemming and hawing and hand-wringing about interest rates. When will the Federal Reserve start cutting rates? How quickly will they fall? How will they impact cap rates?

You’re asking the wrong questions. 

Why Everyone in Real Estate Frets Over Interest Rates

At the risk of stating the obvious, higher interest rates make properties more expensive to buy and own since most buyers (residential and commercial) finance them with debt. 

That puts negative pressure on prices, especially in commercial real estate. Cap rates typically rise in tandem with interest rates, meaning that buyers pay less for the same net operating income (NOI). 

In residential real estate, the sudden leap in interest rates has caused many would-be sellers to sit tight. No one wants to give up their fixed 2.5% interest 30-year mortgage to buy a new home with a 7% rate. So, housing inventory has been extremely tight.

Residential investors want to know when financing will become affordable again, at least compared to the low rates we’ve all grown accustomed to. Commercial investors holding properties want to see lower rates drive cap rates back down so they can sell at a profit, or refinance properties currently losing money to high variable interest loans.

So yes, I get it: Interest rates matter in real estate. 

Why You Should Stop Fixating on Rates

First and foremost, you and I don’t have any control over when and if the Fed cuts interest rates. 

I don’t believe in timing the market. Every time I’ve tried, I’ve lost. The best-informed economists and professional investors get this wrong all the time, so it’s sheer hubris to think you can do it when they can’t. 

Instead, I invest in new real estate projects every single month as a form of dollar-cost averaging. Our Co-Investing Club meets twice a month to discuss passive group investments, and members who want to invest small amounts can do so. 

Is it a harder market to make money in today than it was five years ago? Probably. But two years ago, everyone was euphoric about real estate investments because they performed so well for the previous decade. Every syndicator rushed to show off their sparkling track record. So, investors flooded their money into real estate projects without properly accounting for risk. 

In retrospect, the real estate projects from two years ago are the ones most in trouble today. Superstar investor Warren Buffett’s quote comes to mind: “Be fearful when others are greedy, and be greedy only when others are fearful.” 

Over the last year, investors have felt far more fear. And from the dozens of passive real estate deals I’ve looked at over the last two years, I can tell you firsthand that syndicators are underwriting much more conservatively today than they were two years ago. 

What Investors Should Focus On Right Now

Investors should focus first on risk mitigation in today’s market. 

I don’t know when interest rates will drop again. It could take years. I also don’t know where inflation will go or the economy at large. 

In late 2022, many economists forecast a 100% chance of recession in 2023. That didn’t happen, and now investors seem to assume a 100% chance of a soft landing with no recession. That seems equally presumptuous. 

The good news is that I don’t need to foresee the future. I just need to identify the largest risks facing real estate investments right now—and invest to mitigate them. 

Mitigating interest rate risk

After all that talk about interest rates, how do you invest in real estate to avoid rate-related risks?

First, beware of variable interest debt. Although, to be frank, it’s a lot safer now than it was two years ago. 

Second, beware of bridge loans and other shorter-term debts of two or three years. Don’t assume that interest rates will be lower in three years from now than they are today.

Instead, look for deals with longer-term financing. That could mean deals that come with assumable older debt. 

For example, I invested in a deal a few months ago with a 5.1% fixed interest rate with nine years remaining on the loan. I don’t know if there will be a good time to sell within the next three years, but I’m pretty sure there will be a good time to sell within the next nine. 

Longer-term financing could also mean fixed-interest agency debt. Sure, these often come with prepayment penalties, but I’d rather have the flexibility to hold properties longer, unable to sell without a fee, than be forced to sell or refinance within the next three years. 

Mitigating insurance cost risk

Over the last two years, insurance premiums have skyrocketed, in some cases doubling or even tripling. That’s pinched cash flow and set up some investments that previously generated income to start losing money. 

“Between 2023 and 2024, my insurance premiums climbed more than 30%, which has been a huge strain on my portfolio,” laments Andrew Helling of HellingHomes.com. Higher insurance and labor costs have wreaked such havoc on his rental portfolio that he may pause acquisitions entirely. “I’m considering exclusively wholesaling my leads until we get some clarity on what the Fed will do with interest rates later this year.” 

This brings us back to square one: giving the Fed too much power over your portfolio. 

But suspending all acquisitions is far from your only option. Another way to protect against unpredictable insurance costs is to buy properties that don’t need much insurance. For example, I interviewed Shannon Robnett a few weeks ago about his industrial real estate strategy, and while he does insure the bones of his buildings, his tenants insure their own units. 

Likewise, our Co-Investing Club has invested in mobile home parks. The park does need to maintain a basic insurance policy for any shared infrastructure, but each mobile homeowner insures their own home. The same logic applies to retail and some other types of commercial real estate. 

Residential real estate, including everything from single-family homes to 200-unit apartment complexes, need to carry expensive insurance policies. But that doesn’t mean every type of real estate does. 

Mitigating rising labor cost risk

In many markets, labor costs have risen faster than rents over the past two years. Again, that pinches cash flow and can drive some properties to lose money each year rather than generating it.

“Labor expenses and average rents aren’t rising uniformly across markets, and in some, labor costs have risen faster than rents over the past two years,” observes Soren Godbersen of EquityMultiple. “Both factors contribute to which markets we are targeting in 2024.”

That’s one solution: Analyze the local market rent and labor trajectories before investing. But how else can you mitigate the risk of labor costs outpacing revenue growth?

Invest in properties with little labor required. In particular, look for properties that don’t require much maintenance or management. Examples include self-storage, mobile home parks, and some types of industrial properties. 

For instance, many self-storage facilities can be nearly 100% automated, eliminating management costs. The buildings are simple, with little or no plumbing or HVAC and only the most basic electrical wiring. They need almost no maintenance beyond a new roof every few decades. 

Alternatively, you could come at this problem from the other side: revenue. Our Co-Investing Club recently vetted a deal with a syndicator in a specific niche: buying Low Income Housing Tax Credit (LIHTC) apartment complexes and refilling them with Section 8 tenants. 

The short version: The loophole is that LIHTC restricts how much the tenant can pay in rent but not the total amount of the rent collected by the owner. By renting to Section 8 residents—in which the tenant pays only a portion of the rent—the syndicator can, in this case, double the rents they’re collecting over the next few years. This means they don’t have to worry about expense growth exceeding rent growth. 

My Outlook on 2024 and Beyond

I appreciated Scott Trench’s cautious, even gloomy analysis of real estate’s trajectory in 2024 and J Scott’s upbeat rebuttal.

Scott Trench isn’t wrong about the headwinds and risk factors, some of which we just covered. And J Scott isn’t wrong that plenty of tailwinds could cause real estate to perform well this year. 

My view on all this: You should invest consistently and conservatively. You can’t time the market, but you can analyze the greatest risks in any given market—and protect against them. 

I don’t need a crystal ball. By passively investing a few thousand dollars every month as a member of an investment club, I know the law of averages will protect me in the long run. 

I remember the mood in 2010-2012 in the real estate industry: bleak. No one had glowing things to say about real estate investing. Don’t you wish you could go back and invest in real estate, then? 

Stop assuming you know what will happen. You don’t. Stop worrying about what the Fed will do because you can’t control it. Invest instead to mitigate risk, and you’ll make money in both stormy and sunny markets. 

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The National Association of Realtors (NAR) announced Friday that it finally reached a settlement with homeowner groups that had been embroiled in lawsuits with the association since 2019. The $418 million settlement effectively ends the current NAR broker commission model, which the homeowners’ claimants alleged forced them to pay excessive commission fees. 

If a federal court approves the landmark case’s outcome, as expected, it could give the housing market its biggest shake-up yet. The commission rule changes the NAR has agreed to could restructure the entire process of buying and selling real estate and could also deliver potential home price declines across the country. 

Here are the changes at a glance and what they could mean for investors and agents alike.

The End of the 6% Commission-Sharing Structure

The most sweeping change introduced by the settlement is the elimination of the current NAR commission-sharing structure. 

Here’s how it’s always worked: Real estate agents who are Realtors are required to offer a share of commission with the buyer’s agent in a transaction, if present. Given the NAR’s dominance on agent designations throughout the United States, this effectively created an industry-standard commission, thus violating antitrust laws, as the plaintiffs alleged. 

NAR guidelines clearly state that the commission rate is negotiable and that “commission rates are set by the market.” But in practice, commission rates are always set by listing agents and almost always at a rate of 5% to 6%. For homes selling for $400,000, this can amount to a commission payout of $24,000.

Because the sellers pay the commissions, the key argument is that it inflates the prices of homes to make up for it. Seemingly, now that the settlement has gone through, we could very well see a reduction in home prices.

Ultimately, listing agents will no longer be required to offer commission to buyer agents, which will bring more competition amongst agents as sellers search for the lowest commission offerings.

It’s anyone’s guess how much commission real estate agents will now charge, but some economists think that we will see a reduction of up to 30%.

The End of the MLS Subscription Requirement 

This brings us to the second sweeping change introduced by the ruling: Real estate agents will no longer be required to sign up for their regional Multiple Listing Service (MLS). The MLS itself will no longer include any information about the commission offered on a sale. This change would end the practice of “steering,” where buyer agents select properties that are more expensive and pay a higher commission. In addition, the new rules abolish the requirement that Realtors subscribe to an MLS in order to perform their services.

This doesn’t mean that real estate investors will no longer need to have relationships with local agents. Agents will compile their own databases of homes for sale—which still will be an important resource for investors, and which agents will likely still charge for. But with the element of open competition thrown into the process, it’s also likely that agents will work harder to scout out properties they know buyers and investors will want to buy.  

One question that remains unanswered is how all these new broker-buyer relationships will be regulated, if at all. The NAR settlement will require any MLS-subscribing broker to enter into a written agreement with a buyer so that they “understand exactly what services and value will be provided, and for how much.” We can only speculate whether buyer-broker agreements will become the norm where there is no MLS access involved.

Kevin Sears, NAR president, said in a statement: “NAR exists to serve our members and American consumers, and while the settlement comes at a significant cost, we believe the benefits it will provide to our industry are worth that cost.” 

These changes, if approved by the federal court, will come into effect in July 2024.

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There are many reasons property values have ballooned over the last decade: favorable demographics, monetary policy (low interest rates), stimulus, and migration patterns, just to name a few.

But one of the most powerful and enduring variables that has pushed up pricing over the last decade is a shortage of housing units. Estimates vary on the size of this shortage, but they generally vary from about 1.5 million to 7 million units. And according to Realtor.com, the shortage is actually getting worse. 

A Look Back

To truly understand the housing shortage, we need to look back to the lead-up to the great financial crisis and its ensuing fallout. 

As seen in the graph, housing starts (new construction projects begun) accelerated in the housing bubble era of 2000-2007, then promptly fell off a cliff. Housing construction did bottom in 2009, but it took until 2020 for construction levels to return to where they were in the “normal” 1990s. 

There are several reasons why this recovery was so slow, but the primary reason is that many construction companies closed up shop when housing prices crashed—and it takes a while for an industry to recover from such an event. 

Of course, construction continued during this recovery, and according to Realtor.com, an estimated 13.4 million units were built from 2012 to 2023. Of those, 9.5 million were single-family homes, and 3.9 million were multifamily units. Although this may sound like a lot of units, this number needs to be considered in the context of rising demand. 

In the housing market, the best way to measure macro-level demand is through a metric called household formation. A household in this context is any independent person or group of people who live on their own. 

So a family living together is a household. A group of unrelated roommates living together is a household. An individual living alone, also a household. Thus, to understand how demand for housing is changing, we need to see how many new households are formed (or dissolved). 

From 2012 to 2023, 17.2 million households were formed. This means that even though 13.4 million housing units were constructed, there was a deficit of nearly 3.8 million units, according to Realtor.com’s research.

If we zoom in to just the last year, we can see that this problem is not improving. In 2023, 1.5 million units were completed, but 1.7 million households formed, growing the deficit by 200,000 units.

Implications of the Trend 

This has big implications for investors and the broader housing market: A housing shortage will provide sustained upward pressure on housing prices. To me, this seems clear, but I want to offer two caveats.  

First, as mentioned, there are many variables that impact the housing market, and the supply of homes is only one of them. I believe supply-side forces will help support housing prices for years (decades?) to come—but that doesn’t mean housing prices cannot fall, nor does it mean they will grow rapidly. There are other forces in the housing market, like affordability or the labor market, that could provide downward pressure and counteract the impact of low supply. 

Secondly, as with all real estate, the impact of this trend will be regional. Some markets will have sufficient supply or even an excess, but most will not. According to Realtor, 73 of the top 100 markets face a deficit, with some high-growth markets in Texas and Florida facing the largest shortage.

So just remember that this trend won’t be felt equally everywhere. For investors, I recommend that you research the relationship between housing construction and household formation in any market that you’re investing in. Understanding supply dynamics is super important.

Once you’ve done that analysis, let me know what you find in the comments below.

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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.

There’s no denying that big data and data analytics tools are transforming the real estate landscape. But just how is this happening? What is behind the power of analytics in real estate investing—beyond simply saving you time trawling through sales records? 

Let’s dive deeper into how real estate data analytics tools source, process, and use data to help investors make better decisions. 

Traditional Data Sources for Investors: The Local County and the MLS

First: Where does reliable property data come from? The first port of call for any real estate investor is publicly available property data contained in county records.

The key information held in these records includes the deed details and information on any liens against the property, as well as mortgage details and plat maps (e.g., details about land boundaries). 

These records are invaluable for a real estate investor because they help identify potential investment opportunities. A homeowner whose property has a lien against it (say, a tax claim) or that has an underwater mortgage or is in pre-foreclosure is likely to be motivated to sell to a cash buyer. 

Typically, obtaining these records means going to a local county tax assessor’s office, though some states have the public property data available online. That is, unless you are in a nondisclosure state, in which case you’d only be able to access the data through the multiple listing service (MLS). The MLS is available to licensed real estate professionals, so you’d need to earn a license or work with an agent to get the data.

If you do choose to work with an agent, they’ll typically send you a sheet full of sales figures, rental history data, and so on. It’s then up to you to make sense of it, which is time-consuming and, frankly, can be confusing.

Regardless of whether you’re able to access property data online, at a local tax assessor’s office, or through the MLS, you’ll likely end up going through the data house by house. 

Big Data in Action: Tools and Techniques for Investors

This is where real estate data analytics software can be useful. From the simple perspective of saving valuable time and identifying potential investment properties more efficiently, real estate data analytics tools will trawl through public records and MLS sales records for you, identifying potentially suitable homes. Analytics platforms like CoreLogic and Zilculator search through billions of records: CoreLogic boasts having access to records covering 99% of the U.S. population, or over 5 billion housing records. 

These platforms aggregate and then analyze the data, presenting the potential investor with potential leads. Some platforms are more detailed than others in what they include in the data analysis, but Zilculator, for example, calculates projected ROI, cash flow, and even profits after tax on properties it identifies as suitable during the search. 

Having said all this, property data-crunching will only get you so far. Ultimately, real estate decisions should always take into account local demographics and migration patterns. You won’t know what renters are looking for in a particular area or whether a local market is hot or not just by looking at property sales details. 

Real estate data analytics tools use geographical, demographic, and user behavior data to help you really get a feel of a local market. They do this similarly to Google Analytics, but in a much more targeted way because the data are real estate-specific. For example, you can get insights into prospective buyers’ or renters’ ages or what types of properties people are looking at the most on property websites and property-related ads.

Applying Data Analytics to Identify Market Trends

Let’s imagine you’re about to invest in a specific neighborhood of a popular metro area. How do you perform market trend analysis? How do you know whether people are likely to move into or leave the area within the next five years, whether home and rental prices here will continue growing steadily, or whether they are vulnerable to decline?

Traditionally, you would have to gain access to demographics reports and home price data and try to make sense of what was going on manually. That, of course, is how mistakes are made: To make statistically significant conclusions, you would have had to analyze data sets far larger than any investor can over a short period of time before making a home purchase. 

The benefit of data analysis tools is that they process vast quantities of data from multiple sources, including reports from ATTOM, Quantarium, and Terradatum. But these tools also use what we call unconventional or nontraditional data sources to identify market trends more accurately. These data sources range from local Yelp reviews of neighborhoods and restaurants to mobile phone signal patterns. In other words, they’re attempting to track how people feel about specific neighborhoods—and whether they’ll want to stay there. 

Predictive Analytics for Property Valuation

Nontraditional or nonlinear data sources also power predictive analytics tools that help investors in appraising property values. Again, there’s a combination of sheer volume and an acknowledgment that analyzing human behavior goes a long way toward predicting real estate investment performance. 

Traditionally, if you want to do a property valuation, you would perform a comparative market analysis by looking at how other properties in the area have appreciated over time. You would consider factors like local schools and amenities. 

Again, there’s ample room for mistakes here if you’re only comparing the property you’re about to buy with only five or even 20 others. A real estate analytics tool will give you a more accurate valuation based on thousands of other similar properties nearby.  

But again, that is only half of the equation. The other half takes into account nonlinear relationships between people’s preferences and home values. Remember when Zillow discovered that Seattle apartments appreciated more over time if they were in proximity to Whole Foods? That’s an important nonlinear relationship right there: an alchemic reaction between an urban population that valued access to high-quality, organic food.

Data analytics tools factor this type of highly localized data into their appraisals. Traditional appraisal methods easily miss such valuable insights.  

Case Studies: Success Stories of Data-Driven Real Estate Investments

Big data is already making big changes for real estate investors. One recent example is Dallas-based real estate investment firm Metro Realty Group. Metro Realty’s pain points were accurately measuring real estate performance and identifying lucrative new investment opportunities. 

The firm then partnered with Power App, developed by TechSolutions. The result was an 18% increase in profitability and a 30% rise in investment accuracy. Because the firm now had real-time data, it could make better decisions about which properties to invest in. 

Another issue real estate investors often face is an inability to connect with the right client base, whether that’s renters or buyers. San Francisco-based real estate agency RE/MAX was struggling to attract buyers. Using real estate data analytics tools, however, it was able to recraft its marketing campaigns and target the right audience by tracking demographics, online behavior, and interests. The result? A 20% increase in leads. 

And on the BiggerPockets blog, Eric Fernwood has shared how he uses real estate data analytics to fine-tune his investment decisions based on a very specific category of tenant he’s trying to attract.

Final Thoughts

Big data in real estate is all about using vast quantities of information to gauge precise, granular results relevant to your local market and specific goals as an investor. And to seamlessly integrate these insights into actionable strategies, consider leveraging DealMachine. It’s your gateway to maximizing the potential of big data in real estate, enabling you to find, analyze, and secure the best deals with precision and efficiency.

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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.