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Dave Meyer:
This is the BiggerPockets podcast show 742. The Four Steps to Financial Freedom is about how you can still make positive, concrete, positive steps towards achieving pretty much any type of financial goal, even in today’s market conditions. The content covers really practical information like how to pick a market to invest in, what’s a good cash on cash return, what sort of ROI you should be looking for. We even go through individual metrics so that you can go and research specific markets yourself. We’re going to talk about how to find leads to build your deal pipeline. We’ll obviously get into property analysis, because that’s sort of my thing.
What’s going on everyone? This is Dave Meyer, your host for today’s special, different episode of the BiggerPockets Real Estate podcast. If you listened a couple weeks ago, we released a bonus episode where I went through a webinar I did recently about investing during a correction. And it was really popular. We got really good feedback about it, so thank you all for listening to it.
And we’re going to go through a webinar I put together just over the last couple days called Four Steps to Financial Freedom Through Real Estate. And what we’re trying to do with these types of episodes is give you more practical, step by step information about investing in current economic conditions. I think this is going to be really practical for you if you are interested in pursuing financial freedom, which I’m guessing you are, because you are listening to this podcast.
Today’s quick tip is, I guess it’s kind of a two-parter. The first one is if you’ve ever thought about becoming a BiggerPockets Pro and want to do it today, we have a 20% off discount code for you. Just use the code Analysis20. That makes a already great deal and even better deal for pro, and it really gives you basically all of the tools that you need to start scaling your real estate portfolio.
But we even have an extra bonus, which is the second quick tip. Which is that if you go Pro today using that code Analysis20, you get a free copy of the book I wrote with J Scott. It’s called Real Estate by the Numbers. And it’s designed to teach you how to analyze real estate deals like a pro. Normally that costs $46. But if you go and become a BiggerPockets Pro member today using the Code Analysis20, you’ll get that completely for free. If you have any questions or thoughts for me about this episode, make sure to hit me up on BiggerPockets.
Settle in and focus, because the topics, and tricks, and tactics that I’m going to be talking about today. They’re not hard, but they’re incredibly powerful tools to help you achieve whatever financial goals you might have in mind, and sort of the financial goals that got you to attend this webinar in the first place.
Before we jump into everything, I’ll just give you a quick high level overview of what we’re going to talk about today. At the end of this webinar, you can expect to have learned how to set your goals, how to find the right market to invest in, find the right deals within that market, and to analyze those deals to determine which ones are actually worth pursuing.
So as the topic and title of this webinar implicates, we’re talking about four steps to financial freedom. And we’re not going to make you wait for them. Those are the four steps. How to set your goals, pick the right market, find the right deals, and analyze those deals. And those four steps, I know it sounds really simple, but it is true. Those things can help you, and they are really the essential things to getting you to financial freedom.
And I’m actually just going to add a fifth thing, that yes, you can do this in today’s market. And I know we are in a weird housing market, a weird economic climate. But let me just tell you something. I have bought deals in the last couple of weeks. Every single experienced investor that I know is still buying deals right now, because they know how to adapt their strategy and to find the right deals in really any type of economic climate. The steps that I am going to walk you through today, these four things work in really any type of economic climate. And as we get through the webinar, I’m going to talk about some tactics or things that you can change in your shiftings, but particularly when you’re analyzing deals and finding deals, that can help you adjust and still make profitable, good long-term decisions about your finances, even during this type of economic climate that we’re in.
Let me just quickly introduce myself. If you don’t know me already, my name is Dave Meyer. I’m the Vice President of Data and Analytics at BiggerPockets. That means I get to work at BiggerPockets for full-time, which is amazing. I’ve also been investing in real estate for more than 12 years. Mostly in rental properties. I have one short-term rental. I live in Europe now in Amsterdam, and so I also do a lot of passive investing, in syndications and in lending funds.
I host the On The Market podcast, which if you like staying on top of the economy and housing market news, you should check that out. It comes out every Monday on Friday on neither Spotify or Apple.
I wrote a book with J. Scott called Real Estate by the Numbers, which teaches you how to analyze deals like a pro. But most of all, what I want you to know is that just like all of you, I’m guessing a lot of you are probably relatively new to real estate. Maybe some of your experience. But just like all of you, I was once new to real estate too. I really was unsure what I was doing for the first several years that I was investing in real estate.
But ultimately, I came up with some simple frameworks that I use to pursue my long-term goal of financial freedom. And that has helped me through ups and downs, through bear markets, through bull markets. All of that is really manageable once you know some of the tactics and simple strategies that real estate investors have been using really for decades.
None of this stuff is really revolutionary. It’s not new. It is proven. These are proven things that literally tens of thousands, hundreds of thousands of people have done before. You just need to do them for yourself, and that’s what we’re going to do.
If you do have any questions about this, you can always find me on BiggerPockets. After the webinar, you can hit me up on BiggerPockets or on Instagram where I am at @thedatadeli, I post all sorts of news, data, econ type stuff there. You should check it out.
Okay, so we talked about four steps to financial freedom. And we’re just going to jump right into this right now. No more waiting. Let’s get to the first step. The first step to financial freedom is knowing what you want. What does financial freedom mean to you? And I know when you think of this, sometimes people start thinking of financial freedom as being rich. Maybe you dream of buying a fancy car, or going shopping, or extravagant vacations.
But for most people, and at least for me, that is not what financial independence and financial freedom is about. And rather than finding these showy things, it’s much more about being able to do the things that you want, when you want, and with who you want. And for some people like me, love traveling. That is something that it really motivates me, and my own investing and pursuit of financial independence. For some people, that’s taking time with their family, or being able to start a family and not having to work all the time.
And ultimately, I think the most common theme that I see among people who want to pursue financial independence is what they’re really looking for is not money, but it’s actually time. They want to have more freedom in their day to do what they want. Some people like me still continue to work even once you’ve achieved financial freedom, but that’s because we like to, not because have to. I get to choose what I do with my time.
And I think that is the most important thing about financial freedom is that time, unlike money, is a finite resource. You can’t make more of it. And so that to me is the most precious thing you can have in this life. And so financial freedom, although it’s focused on money, what it’s really about is allowing you the time to do what you want.
So I think the first step for people, and I found this very, very helpful, and I see people all the time benefit from this. Figuring out what that number is. How much money do you actually need? Because so many people come up to me and they’re like, “Dave, should I flip houses? Should I buy a rental property? Should I do a syndication?” I’m like, “Well, what are you trying to get to?” And most people, they don’t actually know what they want, and that’s super hard. How can you enact a plan? How can you get somewhere if you don’t even know where you’re trying to go?
It’s like if you pulled over on the side of the road and you asked someone for directions and they’re like, “Yeah, I’d love to give you directions. Where do you want to go?” And you’re like, “Well, I don’t know.” How could that person possibly give you directions? You need to have in your mind where you want to be going. And for financial freedom, that is extremely important.
And so as you’re thinking about this, I recommend you make your goal, you make a financial freedom goal. And you want to make it smart. Maybe you’ve heard of this before, I don’t know. A lot of people use this. It’s very common in business, something called a SMART goal. And I find that making goals in this format helps you stick with them better than other types of goals.
And so when I say a SMART goal, what that means is that the goal is specific. So it has to be a very specific number. So you don’t want to just say, “I want to be financial free.” That’s not a SMART goal. To make it smart, you need to be specific.
So what is financial freedom to you? Maybe it’s that you want $7,000 per month in cash flow, in passive income. So that’s specific. It’s also measurable. Through accounting, you can figure out how much cash flow your portfolio is making you every month. So by saying, “I want $7,000 per month in cash flow,” it is both specific and measurable.
You also want to make it actionable, which you’re doing right now. You are making a goal that is actionable, because real estate is an actionable way to pursue financial freedom. Relevant. By most people’s metrics, cash flow is what you want if you’re pursuing financial freedom. And so as long as your goal is about cash flow, it’s probably relevant.
And then the last one, don’t forget about this, is time bound. So that means you have to put an end date to this goal. You can’t just say, “I want $7,000 per month in cash flow.” That’s pretty good goal. But if you say, “I want 7,000 per month in cash flow within five years,” now that is a powerful goal. It has started the clock in your head, which will start motivating you hopefully to start getting towards this goal.
So I really encourage you. You don’t have to do it right this second, but you probably have a number in your head. I’m guessing all of you’re sitting there, it’s like, “Mine’s 6,000. Mine’s 10,000.” I don’t know. But after this webinar, take some notes, write this down. If you don’t have something in your mind right now, write it down. After this webinar, go think about what it is that you want out of pursuing real estate. Because I promise you, getting a crystal clear idea of what actually matters to you is going to be motivating. It’s going to help you stay on pace, on track. It’s going to help you through the difficult times.
There are difficult times in real estate investing. It’s not hard, but there’s going to be challenges. And having that crystal clear goal is going to be really helpful to you.
So ask yourself, are you ready to achieve that goal? I mean, once you have written that down on paper, once you know in your mind what it’s going to be, are you actually ready to put in the time and the effort to do this? It’s not hard like I said. But it does take action. It does take you actually doing something.
Real estate they say is passive, and it is much more passive than a normal job. But it’s not like you can do nothing. You actually have to get up and take action to start pursuing that goal that you have. So let’s do that. That is the goal number one guys. Sorry, that is step number one is to set your goal and come up with that intention that you have that’s going to guide you through the rest of your real estate investing.
All right, step number two is picking the right market. Once you know what your goals are, you have to start backing into how you’re actually going to pursue that. And the number one thing I’d recommend you do next is picking the right market.
And when I say market, I’m talking about a location. So you could say California or you could say Los Angeles. Or maybe the specific neighborhood within your metro area that you want to invest in. But maybe you don’t know. So there are two key questions that I think you need to ask yourself when determining what kind of market you want to invest in.
So number one question: is your goal related to net worth or cash flow? So as I said, if you are pursuing financial freedom, most people want their goal to be about cash flow. Because cash flow, unlike building equity, which is the other way you earn a return as a real estate investor… Unlike building equity, cash flow can easily replace your nine to five income, or your W-2 income, or whatever your income is. So that is really important. So I’m going to assume most people are talking about cash flow here.
Personally sometimes, I look at both. Sometimes I invest for cash flow, sometimes I invest for net worth. That is really up to you. But I think the important thing here is that historically, there is a trade off in certain markets between cash flow and appreciation. So there are certain markets that just appreciate… And when I say appreciation, I just mean the value of the homes go up. So some markets appreciate far more than other ones.
So some that come to mind are San Francisco, or Seattle, or Boise over the last couple years. These cities have exploded in popularity, and property prices have followed soup. The thing is though, when properties appreciate like that, it makes cash flow harder to find, right? Because rent doesn’t usually grow as quickly as home prices. And so when home prices grow faster than rent, it makes cash flow hard to find. So that means that the cities that appreciate a lot are typically harder to find cash flow. It doesn’t mean it’s impossible, but it’s just harder.
The other thing that you should consider is that some markets are better for cash flow. So when you look at a city like Philadelphia, or Baltimore, or Birmingham, Alabama for example. These cities, the property prices are not as expensive, and so they actually cash flow better.
So on one end of the spectrum, you can look at a market that really cash flows well. On the other end of the spectrum, you might have one that really appreciates well. Or you could pick one that’s right in between. These are cities like Tampa Bay, or Tampa in Florida, or Atlanta, or Nashville. These are good hybrid markets, that you can consider.
The second question that you need to ask is, do you want to invest close by? So some people really just sleep better at night knowing that they can drive to their investments if they want to and they can go take care of problems their selves. Other people don’t really care, and are willing to invest wherever the best deals are.
So ask yourself that question. There’s really no right or wrong answer. But should know for yourself, are you the kind of person that wants to see your property physically on a regular basis? Then you should invest close by. And you should just find the best market, the best neighborhood within let’s say an hour or two hour drive of your primary residence.
If you are willing to invest long distance, which is what I do now that I live in Europe. I only invest long distance. It sort of opens up almost any market to you, and you can start to examine markets for different qualities, different characteristics.
For example, I like to look at a couple of different criteria for evaluating markets. This works for long-distance investing. So if you’re going to invest somewhere far away, these work. But also it also works even if you want to invest close by.
I used to invest in Denver primarily. I still own a bunch of property there. And even in Denver, certain areas had good cash flow. Even though Denver as a whole, not a great cash flow city, there were still zip codes, there were areas that had good cash flow. There were other ones that were just exploding in property price. So these metrics that I’m about to show you work well both for long-distance and local investing.
The first one I love is called the rent-to-income ratio. And this is super easy to calculate. All you have to do is take the annual rent for a given area. I publish spreadsheets on BiggerPockets that you can check out. It’s called the file place on biggerpockets.com. You can find these spreadsheets that I published there.
But you just take the annual rent. So take the monthly red multiplied by 12, that’s annual rent. And divided by the average household income for the area. You can find this by Googling it. So again, you do have to take some action on your own. So just go Google it, and figure this out for yourself.
Most finance experts, personal finance experts, budgeting people say that you don’t want to spend much more than 30% of your income on shelter. So when you evaluate rent-to-income ratio, if you see that the rent-to-income is about 30%, that’s pretty good. That means that the market is pretty well-balanced. If you see that it’s well above 30%, that to me is a little bit of a red flag because it means that that area is “rent burdened,” which means that people are probably stretched a little bit thin for rent as it is currently. And hopefully, that means tenants can still pay their rent, but it does increase the risk that they can’t if they’re paying a large share of their income for rent. That’s a little bit of a red flag. And, it also probably hampers future rent growth, because there’s just a limit to how much people can realistically pay for rent. And so if the rent-to-income ratio is really high, if it’s 33, 34%, it’s not a huge deal. But if it gets to 40%, that is a red flag for me.
On the other hand, if the rent-to-income ratio is well below 30%… Let’s say it’s 22%. That’s to me something that looks really good. Tenants are probably very easily able to pay as agreed on their leases, and it bodes well for future rent growth. So rent-to-income ratio, great way to evaluate markets.
The second one is called the rent-to-price ratio, and this one’s also super easy to calculate. All you got to do is divide the monthly rent by the average purchase price. Sorry, on this deck it says annual rent. But that was a mistake. My bad guys. It is monthly rent divided by the average purchase price, for the rent-to-price. And rent-to-price ratio is awesome because it’s a proxy for cash flow, right? So when you do this, you’re basically saying, how much income are you getting? That’s the monthly rent. And comparing it to your biggest expense, which is the purchase price. And that ratio helps you understand how much cash flow you’re likely to get in.
You’re probably going to get a number when you evaluate this, somewhere between 1% and 0.5%. And the higher the better. So the higher the number, if it’s around 1%, it’s probably going to be a market that has abundant deals with cash flow. If you get something below 0.5%, it’s probably a market that doesn’t have a lot of cash flowing deals.
Again, that doesn’t mean it doesn’t exist. It just means that it’s going to be harder to find them. Because generally speaking, on average, when the rent-to-price is below let’s say 0.6%, it is probably going to be tough to find those deals. But because we’re talking about averages, that means that even in a market with a rent-to-price of let’s say 0.7, it means there’s going to be deals better than that. Maybe 0.8, 0.9, even 1%. And there’s going to be deals worse than that. But as an investor, it’s your job to find the deals that are better than that average and pursue them, which we’re going to talk about in just a minute in steps three and four. So that’s the rent-to-price. Great proxy for cash flow.
When I’m looking at markets where I want to buy, it’s one of the first things I look at. Again, it’s kind of a crude metric. So you still want to evaluate deals and analyze each and every one of them, which we’ll talk about. But it is a good way to screen markets if you’re considering a bunch of different markets.
The third one is population growth. When it comes to rent and home appreciations, everything really, it comes down to supply and demand. The more demand there is, relative supply, the higher prices are going to go. And as investors, once you buy an asset, you want the price to go up and you want your rent to grow up. And population growth is one of the best predictors of future rent growth and property appreciation, because it just means there’s more demand. So check out population growth. There’s tons of free websites where you can find this. The FRED website, the Federal Reserve Bank of St. Louis, they offer a lot of data for free. You can go check that out there.
The last one is economic growth. Again FRED website is another good place to do that. But basically when you want to predict appreciation and rent growth, you need people who can pay the higher rates. The coal economy in the area, in the market need to get better. So tracking economic growth like job growth, the unemployment rate, and GDP, which stands for gross domestic product. It’s basically just like an aggregate number that measures all the economic output for a given area.
If you look at any of those things, you want to find markets that they’re going well, right? You want to see an area with good, high paying jobs. You want to see relatively low unemployment rates, and you want to see strong GDP growth. So when you’re looking for markets, these are my top four things that I recommend you look at. Again, it’s the rent-to-income ratio, the rent-to-price ratio, population growth, and economic growth. So check those things out.
So that’s step number two guys. So as you can see so far, these are not super hard things that we’re talking about. Talked about setting a goal. That’s just looking inward and deciding what you want, what you need to achieve financial freedom. Step number two is selecting your market and figuring out where you physically want to buy an asset. And the next step, step three… And again, we only have four steps, so we’re moving along here. Step three is finding a property.
This gets a little bit harder, but it’s not hard. This is really about developing a system where you can look at a lot of property. So the number one thing I want you to know about finding a property is that most of the properties, almost all of them are going to be bad. That’s okay, so don’t get discouraged. I talk to so many people who are like, “I’ve looked at five deals and none of them work.” It’s like yeah, exactly. If they were all super easy, people would all be going out and doing that.
99% of the properties, maybe 98% of the properties that you look at are not going to be right for your goals. Maybe they offer strong appreciation, but you’re looking for cash flow. Or maybe the seller is delusional and is trying to sell it for a price that is not reasonable in any universe. Or maybe it has a lot of deferred maintenance, and you don’t want to pay to fix up the property. There’s a million different properties out there. There’s actually 140 million different properties in the United States out there. All you need to do is find the right one for you, or at least the next one. If you’re just getting started, you need to find the first one. But you always need to find the next one that is good for you.
So the way that I recommend that you look for deals is by using a system at BiggerPockets we call the LAPS system L-A-P-S, LAPS system. And basically, the LAPS system is designed as a fund. If you’re into marketing or know anything about sales, this is similar. It’s all about a funnel. Where at the top of the funnel, you need as broad of an exposure as possible. And that in real estate investing is leads, right? You need as many leads as you can possibly get.
So let’s say we’re trying to buy just one deal. What you need to do is find a way to get 100 leads, right? 100 leads are going to help you get to that one deal. And a lead is basically just a property that you’re kind of interested in. You don’t have to run the numbers yet. It’s just something you see. You’re like, “That’s in the right market. It’s a duplex. I’m looking for a duplex. The price point is about what I’m looking for. So that would be a lead.” You don’t have to even see it yet. You just need to know that it has the right, basic ingredients for the kind of deal that you’re looking for.
Then step two of the funnel in the LAPS system is analysis. So once you’ve got 100 deals, it’s time to actually analyze those deals and see which ones make sense for you on paper. Which one offer the right cash on cash return, offer the right potential for appreciation, offer the right economics for you, for you to actually pursue that deal? And so you need to go out and analyze all those deals. Maybe not 100 of them. Maybe some of them, you look at them and you decide that, “You know what? Of these hundreds, I’m going to analyze 40 of them.” And if that sounds daunting, don’t worry. I’m going to show you how to analyze deals quickly in just a second, but just stick with me on the LAPS system right now. So you get 100 leads, then you need to analyze 40 of them, and then you need to start pursuing them.
So of those 40, maybe there’s 10 that are really, really good. So we’ve gone from 140 now to 10. And those 10, you actually go out and start making offers on them. And you know what? Some of the offers are going to get rejected. And again, that is okay because you just need that one.
And so this is the system. It’s about going and looking at tons of deals, and being okay with the fact that a lot of them are not going to work out for you. As long as you find that one that meets the criteria that you are are going to support your long-term financial freedom goals. So that’s the LAPS system. So let me just walk you through and help you a little bit with each of these things.
So again, LAPS systems is leads. Let’s say you need 100 for your first deal. Where can you find them? Well, number one is MLS and agents. So one of the great things about the economic climate we’re in right now… And there’s not too many great things. There’s a lot of confusing, frustrating things about it. But one good thing that’s happened to the housing market is that there are way more deals right now. This is because we’ve gone from a seller’s market to a buyer’s market, which means there’s much more inventory. And it means that sellers are much more likely to negotiate. I participated in a deal recently where we bought a multi-family unit for 30% lower than it was last summer. 30% lower. And that’s not what they listed it for. But after a lot of the negotiation, that’s what we were able to get it for. Because sellers know that housing prices are rocky right now, and they’re willing to accept deals under list price.
And so it used to be over the last couple of years during the pandemic, you really had to find off-market deals, or at least that was the most reliable way to find good deals was off market. That is not true anymore. You can now find very good deals on the MLS, on Zillow, whatever website you want to use. There are a lot of good deals. So that’s the number one way to do it. If you don’t have an agent, I’m sure an agent can help you find that. If you don’t have an agent, you should check out biggerpockets.com/agent. You can get matched with a investor-friendly agent for free there, so that’s a good way to do it.
Online, obviously you can do your own searching. Either on BiggerPockets. We have a listing platform where you can find some on and off-market deals. Or you can do off-market deals as well, which is sort of like private marketing. You’re looking to identify someone who would be willing to sell a property before they actually list it for sale.
You might have heard of the term driving for dollars. This is an off market strategy. You might have heard of yellow letters or mailing postcards. These are all similar strategies to get off-market deals. But basically what it is you go out and find a property that you want to buy, and you make an offer before they go and put it on Zillow, and there’s a lot of other people who have the opportunity to make bids on that property.
I’ve done this. Found an area where I want to buy and just called some sellers, negotiated with them, and I’ve been able to successfully do that. It does work and you can find great deals like that, but it does take a little bit more effort just so you know. You have to actually go out and make a lot of phone calls. You usually have to spend a little bit of money on marketing for off-market deals. But it does work.
But again, one of the benefits of the housing market that we’re in today is that you can find good deals on the MLS, on Zillow. And so that’s probably the easiest way to do it if you’re new to this.
The second thing of the LAPS system… So that’s how to get leads, right? The second thing is analysis. And let me just tell you the three things about analysis.
So analysis is a little bit more complicated. With leads, you can find an agent, go on Zillow. You can do that. But the deal analysis actually has three components to it. The first one is the crystal clear criteria. Again, this is sort of similar to our first step in the webinar today when we were talking about coming up with a goal. The same exact premise is true when you’re analyzing deals. You have to know what you’re looking for. If you start analyzing deals and you don’t know what a good cash on cash return is, or what a good ROI is, then you’re never going to be able to actually pull the trigger. You’re going to be stuck in analysis paralysis. You’re going to be like, “Is this a good deal? I have no idea.”
The trick is to set your criteria up before you start analyzing deals. If you already know, “Hey, if I find a deal with a 7% or an 8% cash on cash return, I’m pulling the trigger.” Then you are less likely to get stuck in that analysis paralysis loophole. Instead, you could start actually going out and buying deals instead.
So when it comes to crystal clear criteria, I think there are five things that you should really be thinking about. So think about this. After this webinar, you can start writing this stuff down. But basically, one is property type. Do you want to buy a duplex? Do you want to buy a single family? Do you not care? If you don’t care, that’s also okay. Just when you’re writing down your criteria, be like, “I’m open to anything under four units.” Personally, that’s me. I’ll buy a single family if it’s right, or a duplex, or a triplex. Some people if you’re house hacking, you might only want a duplex or a triplex. So write down the property type.
The second is location, which we’ve already talked about in finding your market. But the more specific you can get, the better. So maybe when you think about the market and go through the steps, look at those metrics that I told you about, you decide that you want to invest in Jacksonville, Florida. Once you Jacksonville, go one step further and find a great location that you’re super excited about. Talk to your real estate agent. Talk to other investors about where they want to buy, and then put that in your criteria. It doesn’t have to be one zip code. It could be like, “I want anywhere North Jacksonville, or anywhere west of the downtown area.” I’ve never been in Jacksonville. I don’t know anything about it.
So just write down some criteria that in your head, you’ll know if you find that property, you’re going to like it. Price range should be pretty obvious. But given how much money you have, once you talk to your lender and determine how much you can qualify for a loan, figure out what your price range is and write that down as well.
Condition is really important. I think this is one that people really miss. And that is, do you want something that is “turnkey” or “stabilized”? Which means it’s in really good shape, and renters are going to like it right off the bat. They’re going to want to move in, and it’s going to be super nice. That’s great. I mean everyone kind of wants that, but they’re more expensive, and they tend to offer lower cash on cash returns out of the box if they’re really in good shape already.
On the other hand, you can buy something that needs a little work. Those are usually cheaper, but you have to put money into it to rehabilitate it. But they tend to offer higher upside.
This is called value-add, right? If you buy something that needs some paint, and it needs a new kitchen, and it needs new carpet, and you’re willing to do that work, you can usually earn a better cash on cash return because of it. And so that’s something you should think about.
And then the last one is profitability, which I sort of alluded to a minute ago when I was saying, “I’ll know if I get a 7% cash on cash return. That’s when you should get this good deal.” And so profitability, let’s just talk about that for a second, because I think this is a common question here.
Ask yourself, what is a reasonable rate of return? We’re going to talk about the metrics in just a minute. In just a minute. But think to yourself, what do you want? Some people come out and say, “I want a 15% cash on cash return.” Okay, that is possible. But risk and return are sort of counterbalances to each other. So any deal that has an amazing reward, there’s going to be associated risk with it. That is just how investing works.
So for example, you can buy a US treasury bond. You get 3 or 4% right now. That’s super low risk, but a 3 to 4% return is not very good. If you want an 8% return, you can probably do something that’s still relatively low risk, but it’s not going to be no risk like a bond or a savings account.
And as you go up in the amount of return that you’re targeting, you have to understand that there’s more risk. So flipping, for example. You can earn a 30% ROI on a flip. But flipping houses is relatively risky in terms of the spectrum of real estate investing.
Buying a rental property, you can easily expect to get an 8, 10, 12, even a 15% total return on your property, with relatively low risk. So I think that is a great rate of return that you should target. Some of that could be cash flow. Some of that could be through amortization or appreciation. But that’s something for you to think about, what level of risk and return you’re comfortable with.
And then you need to think about, what’s a good deal in your area? You pick a market and find out what a good deal is. Are you looking at deals, and all of your friends who are investors or every deal that you look at is a 7% cash on cash return?
Then all of a sudden, you’re analyzing your 40 deals like we talked about, and you see one that’s a 9% cash on cash return. That’s when you know it’s time to pull the trigger. That’s you know what deal is the right one for you to pursue, is once you establish what’s a reasonable rate of return, and what’s a good deal in your area.
And if you’re saying, “I don’t know, I don’t have friends, I don’t know what a good deal in my area is.” We’ll get to that because that will come from analyzing a lot of deals. If you analyze 40 deals, you’ll know what the average cash on cash return is for their 40 deals, right? Because you’ve just done it. I’m going to show you how to do that in just a minute.
But that’s a great way to do it. It’s just analyze a lot of deals. You’ll understand what a reasonable rate of return is. And then you’ll be able to spot the ones that are even better than the average, and those are the ones you want to go after.
All right. So once you know, these criteria, what metrics should you be looking at? And I’ll show you how to calculate these in just a minute. But number one, as we talked about, financial freedom is cash flow, right? And you probably heard this term, I’d imagine. But if you don’t know what it actually means, basically cash flow is if you take all the income from a property… For a rental property, that’s rent. For a short-term rental, that’s also income coming from your guests. So you take your total income. And then you take all of your expenses. That’s your insurance, your mortgage. We’ll get into all this, but all of your expenses. You just subtract it. That’s your cash flow. Super easy. So we’re going to calculate that in just a minute, but that’s what cash flow means. I just want you to understand what it means. We’ll do the math in an easier way in a minute.
Second one is cash on cash return. And so we just talked about cash flow. But if I told you I earned $300 a month in cash flow and asked you if that was good, what would you say? Well, if I spent $10,000 to earn 300 bucks a month in cash flow, that would be great. That’d be fantastic. But what if I spent a million dollars on my investment in order to earn 300 bucks a month in cash flow? That’s not so good. So you need to measure the cash flow as a percentage of your total investment.
And so that’s what you. Cash on cash return, basically you take your annual cash flow, you divide it by the amount of money, your cash that you invest, and you get a percentage. So one of the most common questions is… I’m going to cheat. I don’t usually do this. I don’t usually tell people what a good cash on cash return is. But I’m going to give you some rules of thumb that I use for myself.
So I would say that a decent deal with a 5% cash on cash return. Now, I wouldn’t do a deal with a 5% cash on cash return unless there’s some upside as well. So maybe I’m doing a value-add. Maybe it’s in a really good location that’s likely to appreciate. Maybe I know something about the zoning where I’m going to be able to add another bedroom or an ADU in the future. That’s when I would consider a 5% cash on cash return.
If I’m just looking at a deal for pure cash flow, I usually look for something at least 7 or 8%. If you can hit 10%, I think that’s a fantastic cash on cash return. And if you can hit 15%, that is a grand slam. You’ve found a great deal. But like I said, make sure that you’re not taking on an excess amount of risk to get that cash on cash return. It might be in a bad neighborhood, it might be a property with structural problems, or something like that, in order to get that 15% cash on cash return.
So when you see a great deal that is way better than every other deal, you want to be interested and jump on it. But also, be a little skeptical. Make sure you say to yourself, “Is this real? Is it too good to be true?” Because again, risk and reward, there are counterbalances to each other. And where there’s one, there is usually the other. So that’s two metrics. We have cash flow and cash and cash return.
We also have equity. I talked about building your net worth earlier, and equity is the amount of money that you have sitting in your deal. So if you take the property value, which hopefully is going up over time. And then you subtract all of your liabilities, which is basically your mortgage. The amount of money that you owe the bank and any other debts that you have to pay off when you go to sell the property. That’s how you get equity. And that grows over time through different ways that I’ll show you. But basically, your property value going up, paying down your loan helps that. If you do any value-add and improve the property at all, you can build equity. And that’s another way in addition to cash flow that you earn a great return as a real estate investor.
The last one is total profit, which is basically combining the two things I just talked about, which is equity and cash flow. So if you add your equity and cash flow together, you get your total profit. Which is at the end of the day, the highest, most important number for a lot of investors is, “How much are you making on this deal total?”
All right, so enough talking. Let’s actually do this. We’re going to run the numbers together. That’s the third step. So now we know the criteria, we know what metrics we’re going to look at. And now let’s do it. We’re going to run the numbers. I’m going to show you how to do this. So we’re going to actually just do this together. We are going to analyze a real live real estate deal, and I’m going to show you how easy this is, right?
Remember I said during the LAPS system that you need to be able to look at a lot of deals, you need to analyze a lot of deals. I’m going to show you how to do it quickly using the BiggerPockets calculator. So I’m just going to jump over here and just show this to you.
So I’m just going to jump over here biggerpockets.com. You can find this if you go to the tools area, there’s all these calculators here. I just hit rental property. So I’m going to just hit view my reports, just to show you that I really do use these calculators all the time. I have a master’s degree in business analytics, and I still use these calculators all the time, because they allow me to run deals really quickly. Which as we’ve talked about, is sort of the essential component to the LAPS system. You need to look at those 100 leads. You need to analyze, let’s say 40 of them. And doing a spreadsheet for every one of those 40 is going to take a long time. So I use these calculators, so I’m going to just show you how to use this.
We just hit start a new report, and I’ll just show you that I found a property here on the BiggerPockets deal finder. So if you just go over here to tools and hit real estate listings, you can find deals.
I was talking to an agent in Tulsa the other day. So I wanted to look for properties in Tulsa, and I picked this one right here. It is an occupied duplex that’s selling for $165,000. Each side is two bed, one bath. And this again, is in Tulsa, Oklahoma.
So this is what we’re going to look, we’re going to analyze this deal. I have not analyzed this before. I did find the listing before, but I don’t know what’s going on. Dahlia is the agent I was talking to. She’s a great agent if you are looking to invest in Tulsa.
Okay, so let’s just go back to the property calculator. I’m just going to paste in the address here, and it should auto find that and fill that in for us, which is great. And I’m also going to add a photo. And you don’t have to do this. But because the LAPS system necessitates that you are looking at a lot of deals, you probably might forget the address. At least I do. I will never remember 1050 North Irvington Avenue, but I will remember this photo. I guess that’s just the way I remember stuff. So I add photos to it because I think it’s helpful. And then next, we’re moving on to purchase. So what was it for? It was going for 165.
So I’m just going to assume at the beginning… And we’ll talk about this, because I do want to talk about offering under list price, especially in this kind of environment, economic environment. But for now, I’m just going to put it in a list price and say that we’re going to buy this for $165,000. And closing costs are going to be around four grand.
And if you’re wondering how I know that number of four grand, well, I’ve been investing for a long time, so I have a pretty good idea. But if you don’t, you could just check out these help things over here. So just click on calculate closing costs. And you could see, for example, typical closing costs are around 1 to 2% of the purchase price of the property. But it can differ. I’m going to assume it’s actually above 2%, because for lower price properties, actually I think it’s above 2%. Check that out.
So I’m going to assume then we need to discuss, are we rehabbing the property? I don’t really know anything about this property, but let’s just assume that we’re going to put some money into it. That’s one of the best ways to make money as a real estate investor. And I’m making this up guys. I just want to show you how to use these calculators, how to run a lot of deals. I don’t know if these are accurate. When you’re running your own deals, you’re going to want to think through each of these pretty carefully. I run a lot of deals, so I could do these pretty quickly. But you’ll get there.
So after-repair value, let’s say we think we can make the value of this property 200 grand, by putting in let’s say $15,000. So now we know what a lot of our costs are, and we’re ready to move on.
There’s something here that you should look at, which is this property value growth here. So we at BiggerPockets when we built these calculators, put an assumption at 2% property value growth.
And as you probably know, over the last couple of years, property values were growing insane. Sometimes we saw 10% year over year growth, 20% year over year growth.
But the reality is that for most markets, properties appreciate about the pace of inflation. Which I know inflation’s really high right now, but normally, inflation averages about 2 to 3% a year.
So what I recommend for people right now is to estimate low on the property value growth to mitigate the risk of housing prices going down. We just saw so much price appreciation. I don’t think we’re going to see a lot of that in the next year or two. So I would say 2% is fine. Let’s just put 1% in there just to be super cautious.
All right, next. Loan details. Because I’m an investor, I have to put 25% down. But if you want a house hack or you’re going to owner occupy a property, you can usually put 20% down. And again, if you need help on any of these inputs into the calculator when you’re first getting started analyzing deals, just click on this stuff and we’ll help you fill this out.
Next, we’re going to do interest rate. They’re about 6.5%. I’m just going to put that in there. Points charged. Again, I don’t think I’m going to get charged points. But if you put less than 20% down on a house hack, sometimes you get charged a little bit of extra money. And then I’m going to do a 30-year fixed straight loan. I love a fixed straight loan. I’m going to do it for 30 years and hit next.
So as you can see over here, we’re already doing pretty well on this property. We’ve done property info, we’ve blown the purchase price. Now I’ve done loan details. Now it’s time for rent.
This is one of the questions I get the most is, “How do you figure out rent?” Whole thing about the BiggerPockets calculator is it’s already telling us that for each of these units, it’s $795 per month. But let me show you how BiggerPockets actually comes up with that.
We have this other tool called the Rent Estimator over here. It’s actually a tool I helped build, which I’m pretty proud of. So if you check this out, I could just type in… I’m just copying and pasting the address. I’m going to do this and hit search address.
So what this does is it pulls comps for rent near this property. So we can see that in this area, there are a bunch of different comps. This one’s a one bed, one bath for 650 nearby. But this is a two bed, one bath. And so it’s going to average. There’s an algorithm that’s going to look into it and tell us, “Here’s probably the best comp right here. Two bed, one bath, similar size for 800.”
So we can look at each individual thing, we can learn some stuff about the property, like that the property taxes or $2,000 a year. We can learn all this great stuff about it.
The cool thing about the calculator that I really like is that this says the confidence level, and it’s telling you that the confidence level is low. Which is not ideal. But as an investor, I appreciate the fact that this is saying, “We think it’s 295, but we’re not super sure.”
So the best way to use this tool in my opinion, is use it when you’re analyzing those 40 deals. This is genuinely what I use when I’m doing 40 deals. When I get to that pursue level of LAPS, right? Remember leads, analyze, pursue. When I’m making offers, I will do a much deeper dive into the rents to make sure that I’m accurate, because that’s a super important component of analysis. And the way I do that is, why not look at Zillow and see what other things are renting for? But I’ll also call property managers or other investors that I know in the area, and get their read on what it will rent for to make sure that I’m accurate. So the good thing about the calculator is it told us this. It’s 795. But the important thing is that this is a duplex, so that’s 795 per unit. So that would be 1590 total for gross income. So that’s what I’m going to put in there.
Again here, we’re going to put in income growth. Annual income growth. I actually think it’s going to be low the next year, so I’m going to say 1%. That is very conservative. Because when I buy a rental property, I plan to hold it for five to 10 years. And I do think that income will average more than 1% per year over five to 10 years. But like we’ve been talking about, I want to be conservative in this type of economic climate, and so I’m just going to put 1% annual growth just to be safe. Then going on to the last section.
As you can see, the calculator knows all this public information and knows what your property taxes are. I’m going to estimate insurance around 1200 bucks just to have a good sense for these kinds of things. But you could just Google this. So just Google, Tulsa, Oklahoma average insurance, and you’ll be able to find this. I’m going to put 1200 bucks a year for this. And then it’s time to do some of the variable expenses.
So right here, repairs and maintenance. I’m going to put, let’s say 5%. It depends on the property condition, but the reason I’m saying 5% is because I just said at the top of this calculator that I was going to put 15 grand into this property. That’s 10% on the property price. I’m going to put 15 grand into it to upgrade it. So I don’t think my repairs and maintenance are going to be as high as they might be had I not put that initial investment in it, right? Vacancy, I like to put 5%. And capital expenditures, I’ll also put 5%.
Capital expenditures are similar to repairs and maintenance, but they’re for the big stuff. So it’s for your roof, or the HVAC system, or the foundation, whatever. You want to make an improvement to the property, that’s a capital expenditure. But again, because I’m investing 10% of the purchase price back into this property, I think that the CapEx isn’t going to be low. I live in Europe, so I’m not self-managing this thing. So I’m going to say 8% as a management fees, and then that is it for me.
I personally like to let my tenants just pay utilities directly. If they have electricity, they should pay what they owe. I don’t need to get involved in that nonsense. So I put 0% here. If you get a duplex that’s not metered separately, again, I just recommend Googling it. Just Google median or average electricity cost for a two bedroom apartment. You’ll be able to find it. In your area. Specify the area. And you’ll be able to see that. Water and sewer is usually 10 bucks a month. Garbage, I usually pay this stuff, 10 bucks a month.
And that’s it guys. That is it. That is analyzing a property. I’ve been blabbering on here, and this took me five minutes. So if I wasn’t talking to you, I could probably do this in two or three minutes. And when you first get started, this is going to take you 10 or 15 minutes. But I promise you after you do three, five, 10 of these things, you’re going to be able to do them really quickly, and all you got to do is hit finish analysis here. So that’s it. Now we can see that was all it took, just that little effort. And now we can get all the numbers for analyzing a deal.
And remember what I said. 99% of properties you analyze are probably not going to be the right ones. Actually what I said was you’re going to want to pursue 10 properties. So let’s say 90%, you probably won’t want to go past the analysis stage. Let’s see if this is one that we think that we would pursue.
So at first glance, this is probably not up to the standard I personally would invest in. Because even though there’s $151 a month in cash flow, not bad. The cash on cash return is a little light. It’s at 3%, which is not great. But the annualized return, remember we talked about total profit? That’s at 11%, which is good. Just for reference, the average stock market is 8 or 9%. So even though this is below my standard, it’s still better than what most people get investing in index funds in the stock market.
So if you’re thinking, “That’s too bad, it’s not a great deal.” Don’t think that just yet. Because while a lot of people think you can just go out there and find deals, and sometimes you can, sometimes you need to make your deal.
And so when we were looking at this deal, I assumed at first that I would just pay full asking price. But I think the cool thing about the BiggerPockets calculator is I can actually say, “All right, 3% isn’t good enough for me. What happens if I offer 155 instead?” I can drag this here and now I can say, “All right, now it’s at a 4% cash on cash return.” That’s not bad. Let’s just say I can get it down to 152. What are we at here? All right, 4.5% cash on cash return. Probably still too low for me, but now we’re getting closer. So in my mind I’m thinking, “All right, maybe I can pursue this deal if I can get this seller to accept,” whatever I put in here. 151,700.
How about this? During today’s current market conditions, this is a trick for you all. Because we are in a buyer’s market, a lot of sellers are willing to buy down the interest rates of their buyers. That means they pay three grand or five grand so that the buyer gets a lower interest rate. It’s really cool. Ask your real estate agent about it. A lot of sellers are willing to do this right now.
So let’s say our seller will buy down our rate to 6%. All right, now we’re talking. Now we’re getting a 5.3% cash on cash return. Maybe they’ll do a two one buy down where I actually get my rate bought down by 2%. So let’s say it goes down to 4.6%.
Now these are temporary. You would only get that rate buy down for a couple of years, not permanently. But a lot of people think interest rates will go down in the next couple of years, and then you could refinance. So now, we’re looking at a deal that I would consider.
So these are big assumptions, but let’s just say I can get it for 150. And I could get that seller to do a two point buy down where I can get 4.5%. Now we’re talking about, first of all, an 18% annualized return. That’s almost double the stock market. A cash on cash return of over 7%, and you’re making $360 a month. That to me, is a deal that is very much worth pursuing. Will the seller accept this? I have no idea.
But this is what it’s about, that LAPS system. You need to analyze these deals so that you know what you’re willing to accept. This is all about that criteria. I knew, I said to you before that I would accept something around seven or 8% cash on cash return. And I’m going to stick to that and I’m going to go to the seller and then say, “I will offer you 151 and I need a two point pie down for the next two years.” If the seller says yes, great. But that might only happen one out of 10 times. Remember the LAPS system? You might have to pursue 10 deals before one seller accepts it. And if nine sellers reject it, that’s okay. Because you have your crystal clear criteria, and you need to stick to that. Absolutely need to stick to it. So that’s what you got here.
So that’s the power of these calculators. It’s super helpful. You can not just analyze deals quickly, but you can play with them to see what you should actually be offering sellers right now. If you scroll down, you can see some of those other metrics that I was talking about, like how much cashflow you’ll be earning per year. The profit if you sold.
So if you held this property for five years, you would earn $73,000, which is amazing because you’re not really investing that much into it. Remember, you’re putting 25% down on $150,000 property. So you’re probably putting 40, 50 grand into this. And you would more than double your money in five years, which is phenomenal. And you could see your analyzed return after five years is almost 18%, which is incredible.
I have one more thing to show you. So one other thing here is this share button. And this is super important when you’re going to negotiate with a seller, or you want to find private money to help you, or bringing your spouse on board. But if you hit enable share reporting and then to hit download pdf, if you click on that button, you get a super nice looking PDF that shows you all of the numbers.
And I think this is super important because when you go to a seller and you’re like, “This is what I can pay you,” they might take offense to that and say, “You’re just trying to work me over. You’re not willing to pay what it’s worth.” And you can show that, “Listen, I expect a 7% cash on cash return.” And these are the numbers that make it work. You can convince people. You can show them that you’re not just making this number up. You are actually putting together a thoughtful offer, and you are offering them what you think the value is worth.
And so I think that is super important. It’s just the last thing I wanted to show you here. Again, if you talking to a lender, you can bring these reports or anything like that. So that’s analyzing deals guys. This is the LAPS system. I’m going to get back to our PowerPoint here.
But as you can see, if you use the BiggerPockets calculator, it is not really that hard. You can do all the analysis that you need to do. So again, this is the last system, just as a summary. You got to get all those leads, analyze as many of them as makes sense to you, pursue the ones where you think there is a realistic path to a good deal for you. And then all you need is one. Every time you run the system, you just need one.
So now that we’ve talked about you, I just want to talk to you a little bit more about buying in this type of market, that it’s super hard to time the market. I spend my whole life basically analyzing the housing market, and I don’t try and do it because it’s super hard.
I will try and offer below asking right now. If I’m looking at a property that’s 200 grand, I’m not going to offer 200 grand right away. I’m going to offer below asking, to provide myself a little bit of a cushion. But what I know and other experts know is that timing the market is nearly impossible, but time in the market is what really matters.
So over time, if you get that amortization, that cash flow, that is what leads to financial freedom. Real estate is not a get rich quick scheme. It is about building property and portfolio over time.
And when I encounter people, and I guide people, and coach people on investing right now, a lot of people say, “What’s happening next year? What’s going to happen six months from now?” I don’t know. No one knows, but that is okay because real estate is a long-term game. It’s about where your property values and where your portfolio is going to be five years from now, seven years from now, 10 years from now, 20 years from now. So if you can find deals that you think are going to help you over that life period, that lifespan, that 10 years, then it’s not as important what happens next year.
Again, don’t go out and buy anything. If you think the property value’s going to go down 5%, offer 5% below asking. I’m not saying to just go spend willy-nilly, but I’m telling you to focus on the long term, because that’s what financial freedom is all about. You’re not going to get there in a year or two unless you have several million already. But if you concentrate on the systems that I’ve talked to you about today, you can get there in the next couple of years.
So let’s just quickly review. One, do you have a goal in mind? Do you have a crystal clear idea of what you want and why you’re pursuing financial freedom in the first place?
Number two, do you know some strategies for evaluating real estate markets? There are four metrics. Hopefully you wrote them down, but you can go check those out or you can watch this webinar again to get those again.
Do you know how to begin analyzing your next deal? Hopefully that demonstration I just did shows you that this is not hard, and you can do that. You can run dozens of deals in a single day if you just commit yourself to it.
Well, I hope all those things are true and that you know how to do those things. But unfortunately, knowing those three things, it’s just not enough. It’s super important, but you have one more thing you need to do.
Because if information was the answer, we would all be rich, right? We would all be billionaires with perfect abs as Derek Sivers says, but that’s not the reality. Instead, you actually have to start going out and doing stuff. Yes, it’s important to learn the four steps that I just gave you. But you actually have to start taking action.
So for some people, the right next step to start taking action is BiggerPockets Pro. BiggerPockets Pro is a set of tools and services that we have created, and it really provides you everything you need to succeed in real estate investing. We have tools, we have premium content, we have access to our community, and services. It is all part of BiggerPockets Pro. When we design these tools… And I’ve helped design these tools over the last seven years. What we focus on is creating a one-stop shop where you have basically everything you need to start, and scale, and manage your portfolio over the long term, up until that point you hit financial freedom and beyond. So if you were wondering how one subscription can really provide you with all the tools that you need for everything, let me just quickly explain some of the features and values that it has.
So the first thing is those calculators. You can go try them for free, and I recommend that you do that. But after you use them five times, you do need to pay for them. But as we talked about with the LAPS system, you need to analyze a lot of deals, and that’s what these calculators are built for. And so if you are interested in getting your first deal and you want to analyze a lot of deals, calculators are super helpful.
We also have the Rent Estimator tool, which I walked you through as well. That is hard information to find, but BiggerPockets makes it super easy.
We also have premium content. BiggerPockets puts out a lot of content. But for our Pro members, we have curated videos, we have courses. We have webinar replays that really help you get to that next step, get to your first deal, and build that financial freedom.
We also have a couple workshops that you can attend. So David Greene and Brandon Turner put together an Investing with Low or No Money Down workshop. It’s worth 200 bucks. But if you go pro, that’s completely free.
We also have a Finding Great Deals Masterclass. As we talked about in the LAPS system, finding deals, finding leads is super important. And we have a masterclass for you that has been sold in the past for $1,000, that is part of the Pro subscription. So you can check that out.
You also get to show the community you mean business with your Pro badge. And I think this is super important. Because personally, I get asked for investing advice all the time by people, and I never know if they’re really serious. Are they just tire kickers? Are they wantrepreneurs, or are they actually people who are going to take action and start investing in real estate?
And the print badge is one way. I know when I’m interacting with people on BiggerPockets, that they’re serious. That they are willing to put some skin in the game and start working on their financial freedom. So that’s I think a really overlooked value of the BiggerPockets Pro membership.
Next, we have lawyer approved lease documents. So if you need a lease, if you need a break lease form, a pet addendum, whatever it is. Every state in the country, we have up-to-date legal forms for anything you need as a landlord. So that’s super valuable.
We also have tools and services, which are incredible. This is new stuff. It’s so valuable. It’s kind of crazy that we include this in the Pro membership. But you get free property management software for Rent Ready, which is one of the most reputable, best property management softwares. You get that completely for free. You get discounts on AirDNA, which will help you if you want to be a short-term renter. You get discounts for CPA courses. And you even get access to Invelo, which is a tool for finding off-market deals, which is really incredible. All these things cost honestly hundreds of dollars, but you get them for free.
The last thing I’ll mention about our BiggerPockets Pro is boot camps. So you can learn from some of the most experienced investors in the world. These are only open to Pro members. But if you want to learn from Ashley Kehr, or Tyler Madden, or Avery Carl, or Craig Curelop, or Matt Faircloth, any of these experienced investors that you hear and see on the BiggerPockets platforms. They teach courses that are only available to pro, and you could do that if you join pro.
But all these features, all the things that I’m talking about, they’re great. But the number one reason to consider Pro after all this, the number one reason is just simply because it works.
Guys, I have worked at BiggerPockets for more than seven years now. And I genuinely mean that I have seen tens of thousands, probably 30, 40, 50,000 people pursue, and get close, and achieve financial freedom through BiggerPockets Pro, because it works.
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That’s it for me today, guys. Thank you so much for joining. I hope you learned a lot. If you have any questions for me, you can always find me on BiggerPockets or on Instagram where I’m at @thedatadeli. I appreciate you all, and I’ll see you again soon.
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Global warming has already caused irreversible damage to the earth’s ecosystems and communities, according to a critical report just issued from the United Nations Intergovernmental Panel on Climate Change.

The damage is extending to the U.S. housing market, which just saw unprecedented snow and flooding in California, as well as unusual winter tornados in the south. All that came after one of the worst hurricanes on record in Florida last year.

These changes have profound implications for the nation’s nearly $12 trillion mortgage market.

Hurricane winds are getting stronger, common storms are getting wetter, wildfires are spreading faster —and millions of U.S. homes sit in the path of all of it. But the housing market currently doesn’t price that climate risk into home values. U.S. homes exposed just to flood risk may now be overvalued by roughly $200 billion, according to research recently published in the journal Nature Climate Change.

Fannie Mae, which backs more than 40% of all residential mortgages, could face much of that risk. The mortgage giant’s chief climate officer, Tim Judge, says mortgage underwriting does not currently account for climate risk. So he is mounting a major effort — really a defense — to figure out the exact climate risk to Fannie Mae’s balance sheet, so that it can ultimately incorporate that risk into mortgage underwriting.

“I think there’s still more that we have to do, and I think we just don’t have the analytics yet to do it,” said Judge.

To help, Judge is hiring climate risk modeling firms, such as First Street Foundation and Jupiter Intelligence, as well as others, to figure out just how to factor climate risk into home values and mortgage underwriting.

First Street, for example, looks at climate risk from floods, fire and wind, and brings it down to an individual property level. Jupiter studies neighborhoods and communities.

But the work can’t come fast enough. New research from CoreLogic shows that on the current climate trajectory, the estimated number of U.S. homes significantly impacted by climate-related disasters will rise from less than a million in 2030 to over 62 million by 2050. In value, that’s losses of just under $200 million to close to $9 billion in any given year.

Consumers are largely unware of potential future costs from climate-related disasters. Mortgage lenders are also struggling to figure out the financials.

“It is a massive challenge for all of us to really think about,” said Kristy Fercho, head of mortgage lending at Wells Fargo.

She also says climate risk may need to be factored into mortgage underwriting.

“To date, it hasn’t. I think it’s something that we’re evaluating like the industry is,” Fercho added.

Fercho just finished a term as chair of the Mortgage Bankers Association, which issued a special report from its research institute in 2021 saying, “Climate change may increase mortgage default and prepayment risks, trigger adverse selection in the types of loans that are sold to the GSE’s [Fannie Mae and Freddie Mac], increase the volatility of house prices, and even produce significant climate migration.”

Fercho agreed, “It’s certainly impacting how we’re thinking about mortgages and what we need to do.”

The problem is the models from the different firms, as well as from government agencies like FEMA, all vary widely, and Judge says that has made the project harder than he expected.

So far, Judge says, Fannie Mae has learned that climate impact varies widely across the country but impacts vulnerable communities far more than affluent ones. It echoes the UN report, which found the impact of climate change is worst in the world’s poorest nations and islands, which are home to about 1 billion people but account for less than 1% of greenhouse gas emissions.

But Fannie Mae is not yet rejecting any mortgages based solely on climate risk.

“No, we’re not there yet,” he said. “The first step is understanding what the damage will be to each property. The second step is how is that going to change our behavior? And how is that going to change valuation of properties? That’s a lot of the work we have to do. Is it five years away? I’m not sure.”

I never thought I would be a part of the fastest bank run in history. On a late Thursday evening earlier this month, I received a text message saying that Silicon Valley Bank – our company’s bank – was on the brink of collapse. I read the message three times, letting it sink in, and then sent out a couple of messages of my own. It was immediately clear what we needed to do. Thanks to the bank’s online portal, we extracted all our deposits in a matter of hours.

As it turns out, I was not alone. I was part of a digital herd that received the data with unprecedented velocity and translated it into immediate real-world action at an extraordinary rate. Hundreds of executives learned the news about SVB’s precarious situation and collectively withdrew a staggering $42 billion in a single day. Compare that with the last major American bank run, when customers withdrew $16.7 billion over nine days.

The difference lies in the 15 years separating the runs, during which we witnessed the digital service revolution and social media takeover. The first expedited withdrawals, while the second drastically accelerated the spread of information. As House Financial Services Chair Patrick McHenry put it, this was the “the first Twitter-fueled bank run.” A few years ago, I needed an account manager to extract large sums from the bank. Today I simply clicked on the button of an app.

In other words, we have baked in our technology the conditions for creating digital herds. Up until now, their impact on the real world has been prosaic. This time, we witnessed that our institutions can spin into vertigo when the rapid spread of information meets a large group of people with access to a button that generates financial activity in the real world.

Shepherding anonymous online users towards an action is the essence of all digital businesses. The focus of innovation is on leveraging technology to compound efficiency and drive action while shortening analog pathways.

In my industry, digital healthcare, walking people through simple digital steps that overcome barriers in the physical world holds the promise of reducing healthcare inequities. For example, an app that compares prescription drugs to find the cheapest option available, can be very cost effective for low-income people. For 45% of Americans who do not have access to public transportation, or the 61 million living in rural areas, a digital health service that allows you, with a few simple clicks, to take a clinical-grade test at home instead of at the doctor’s office, can be life changing.

Guiding people digitally can hold many benefits to society, with one caveat: it can just as easily accelerate collective actions where immediate digital transactions may cause massive social disruption – with disastrous consequences.

We have seen this destructive impact in electoral disinformation campaigns that spread like wildfire in the 2016 and 2020, and then in the events that led to the January 6 riots. In 2021 we saw the force of the digital herd when a pack of young online investors feeding off social media and communicating via memes used the Robinhood app to balloon the stock price of the fading video game company GameStop stock by 400%. This led to the creation – and loss – of billions of dollars in just a few days. In 2022 we saw the rise and fall of crypto pyramid schemes fueled by social media-driven hype and frictionless withdrawal mechanisms.

The impact of the SVB bank run on our economy and the tech space is still unfolding. But with the benefit of hindsight and the humility of participants in the quickest bank run in history, tech entrepreneurs must recognize the responsibility that comes with our ever-growing digital power.

Technology today can help people actions’ travel across mountains and rivers without leaving their front door. But SVB’s collapse made clear that we must see ourselves and our products as responsible digital shepherds and — through a dialogue with the regulators — make sure we put in place the right pathways, and guardrails, to mitigate any possible destructive impact. Otherwise, the next time the herd runs wild the consequences might be even more harmful.

Dave:
Hey everyone. Welcome to On The Market. I’m your host, Dave Meyer. And today, I’m going to be joined by an incredible guest, Joe Brusuelas, who is the principal and chief economist for RSM US. And he is going to be talking about a topic that isn’t immediately obviously relevant to real estate investors, but it’s super important and that is the labor market.
And if you’ve been following the news, you’ve probably seen that despite tech layoffs that have really made a lot of splashy headlines in January, which is the last data we have for the job market, as of this recording, there was an unexpectedly large number of jobs added over 500,000. And this obviously impacts every one of us because we, most of us want jobs and have jobs and whether or not there are layoffs and how the economy is growing is super important.
But the labor market is also really fundamental to what the Federal Reserve is doing right now. And obviously as real estate investors, we care a lot about what is going on with the Fed and what they’re doing with interest rates.
And just before we have Joe on, I just want to re-explain something we’ve talked about a few times on the show, but I just want to make clear, is that in the Federal Reserve, their mandate from Congress is twofold. They have two jobs. The first on one hand is to, is they call it price stability, which is basically fight inflation, right? Don’t let inflation get out of control. You want stable prices. Their target right now is 2% growth per year. That’s what the Federal Reserve targets.
On the other hand, they also want to ensure maximum employment. They want as many people working as possible. And these are their two jobs, and sometimes they work really well together. For most since the Great Recession until the pandemic, they were doing really good. We had relatively low unemployment, we had low inflation. That was great for the Federal Reserve. It made their job relatively easy.
Now, over the last couple of years, it’s gotten a lot harder because we have two things going on. We have inflation going up so rapidly, that many economists, and we’ll hear Joe’s opinion about this in just a minute. Many economists feel that we need less employment to control inflation. And I’m not saying that’s what I want. I don’t want anyone to lose their job, but a lot of economists believe that the key to fighting inflation is to increase the unemployment rate.
The thought here is that, if you increase the unemployment rate, fewer people have less spending power, they spend less money. That puts less, that puts downward pressure on demand and prices basically. So a lot of people think that, and a lot of the Fed’s intention with raising interest rates is to create what they call, quote, unquote, they call it, they have this word for it like, “slack in the labor market” quote, unquote, basically means more people losing their jobs.
So the Fed is basically hoping, it’s not what they want, but they’re basically saying that they are so worried that about inflation being bad, that they’re willing to sacrifice their other mandate. They’re willing to increase unemployment in that effort.
The problem is that nearly a year after their first interest rate hike, it’s not working. The unemployment rate is extremely low. And frankly, I don’t fully understand why. Which is why we invited Joe onto the show.
Joe has been an economist for 20 years. He’s got a lot of really interesting opinions about what’s going on in the labor market, and obviously Joe doesn’t know for sure, but he’s an expert on this topic and studies it a lot. And what he talks about will have a really big implication on what happens with interest rates and the housing market, obviously follow those interest rates decisions.
So I found this super interesting and gave me a lot to think about. I hope you enjoy it. So we’re going to take a quick break, but then bring on Joe Brusuelas, the chief economist and principal for RSM US.
Joe Brusuelas, welcome to On The Market. Thanks for being here.

Joe:
No problem. Thanks for having me.

Dave:
So we’re excited to have you on because we can’t make sense of the labor market. So we’re hoping you can help us understand what is going on. So can you give us a high level summary of how you see the labor market right now?

Joe:
Sure. A couple of things. The first is between 1945 and 2015, the labor market grew about 1% per annum. Given the shocks we went through in the great financial crisis, all of the things that followed, plus the shocks in the pandemic, the labor force is now barely growing.
We’re talking one to two tenths of a percent per year. We’re simply not producing enough native born replacement workers. And so we’ve reached a situation where the labor market is going to remain historically tight for the foreseeable future. Let me put that in a context for you.
So we only need to produce about 65,000 new jobs a month to meet demand. That’s very, very low. Right now, I think even notwithstanding the, “517,000 jobs” quote, unquote, that were created in January, the underlying rate of job creation is about 200,000 a month. So we just really have a very tight labor market.
Now, for many of your listeners, they’re probably thinking, “What’s this guy talking about? All I read are how all these people are getting laid off. How intentions of hiring or slowing.” Well, when you take a look at the underlying condition of the labor market, the median duration of unemployment’s eight weeks.
So if I see 250,000 or so, people have been laid off in tech, why aren’t they showing up? Well, not only are we not producing enough people, the people we are producing don’t have the requisite skill sets that are necessary to meet where the demand is.
So those people who’ve lost their jobs in tech, they have two choices. They can trade down, take a little less money and stay in tech, or they can go work in the other portions of the real economy where those skillsets are incredibly in demand and they’re going to find very good employment at very good wages, triple to quadruple what the average American probably makes. So that’s how you sort of square the circle. That labor market is tight. It’s going to remain tight.
Here’s the important thing. Wages are not going to increase at one and a half to 2% per year. We grew accustomed to between 2000 and 2020, they’re probably going to be in that three to 4% range. And that’s good for workers, but that’ll be a challenge for businesses who are now adjusting to this historically tight labor market.

Dave:
And so it seems like this problem has become more acute recently, when if the source of the issues you say is sort of a lack of native born Americans. Why is it sort of all coming to a head right now?

Joe:
Well, in 2017, we really began to tighten immigration policy on top of the tightening that occurred really since 9/11. And so the typical solution in my lifetime, when labor’s gotten tight is we go ahead and we begin importing workers, through either the H-1B visa or we increase legal immigration, or we just basically de facto legalize the illegal workers.
So when you tighten up on all those things you get in the situation that we’re in. That’s why over the last several years, labor market has become somewhat tight.

Dave:
So when we look at the unemployment rate in the US, I often get a lot of questions about this. I’m hoping you can clear it up for us.
How is it calculated and does it factor for people leaving the labor market and people having two jobs or how, can you just explain to us how it works?

Joe:
So the monthly employment report is two separate surveys. The establishment and the household. The unemployment rate is derived from the household survey. It does account for people who exit the market, who exit the market permanently. And it attempts to see who is out of the market but looking for work. And then it does population adjust the number. So we get a pretty good sense of who’s working and who’s not. Now, is it perfect? It is not. But it’s the best we have for now.
I think the important thing to understand is as wages have increased over the past three years following the shocks of the pandemic, we’ve drawn people back in to the point where we’ve got more people working than we ever have just on a nominal basis, even if the employment population ratio remains basically 60%.
So we are at a situation where the people who are now coming back to the labor market, their skillsets of atrophy, their professional networks are almost nonexistent, and they often need vast and deep retraining to make sense. And so this is adding costs onto the firms who now are really having a difficult time finding qualified workers. You can find workers, but can you find qualified workers that you don’t have to train or retrain at an increased cost to your operation?

Dave:
Got it. Thank you. So most people assume, I’m one of these people, that as interest rates have risen, that we would see larger percentage of firms laying off workers and that we would start to see the unemployment rate tick up, but we’re seeing it move in the other direction. Can you help us make sense of that?

Joe:
Okay. Well, one is again, we just, it’s what I outlined earlier. The population or the increase in the population of the labor force just isn’t growing the way it did before, and that’s created an imbalance. Okay?
Second, economists like myself do a terrible job at explaining the long invariable lags on the real economy from interest rate hikes. Now, historically it would take one to two years. Now, it’s starting to show up in dribs and drabs, we can see it.

Dave:
And is that a year, sorry to cut you off, but is that a year to 24 months from the first hike? Because we’re not even at a year for the first hike.

Joe:
Yeah. From the first hike in each successive hikes.

Dave:
So this could be years in the future.

Joe:
Yeah. We had six supersize hikes in the middle of last year. They’re just barely beginning to show up. And second, we’ve had some labor hoarding, especially in tech and especially in real estate construction. And it makes sense in tech, it’s because we don’t have people with those scientific math and engineering skills, right?
In labor or in the construction industry, it’s because we cut off the immigration valve. So it’s very difficult to find anybody to work. I built a home in Austin, Texas last year, early over the past two years. It took a long time to do that-

Dave:
That must have been a challenge.

Joe:
It was very difficult to find people to do the work, much less the supply chain issues where I had to put all kinds of things that I wouldn’t normally put in the house because that’s what was available.
And that added a secondary layer of cost once things begun to get available, but those are first world problems. That’s not really something we got to concern ourselves with in the economy. So the combination of labor hoarding and immigration policy has created a situation of constraints in the overall economy.

Dave:
Could you just explain to everyone what labor hoarding means?

Joe:
Sure. What it means is that detect economy and the life sciences economy runs on a separate and distinct logic compared to the one that you live in. They are so flush with cash that when they find employees, they’d rather keep them in order to meet expectations, expected increases in demand, even if that means they don’t have enough to do with them.

Dave:
Wow.

Joe:
So that’s why in 2022, you saw tech in the really last six to eight months of the year, released some of their workers back into the workforce. It was about a quarter of a million, a little bit less, but those people aren’t showing up on the unemployment roles because hey, if you can hire them, you probably should because they can do some incredible things that your workforce probably can’t.

Dave:
That’s super interesting. So the cost of eventually replacing these people is higher than holding onto them through a recession.

Joe:
You just nailed it. The cost of letting them go is so expensive. You’re better off keeping them, and we’re beginning to hear that more and more inside the real economy, outside the supercharged areas of life sciences tech, obviously we see what’s going on in artificial intelligence. And so right now it’s very difficult to let somebody go. You don’t want to because it’s going to cost more to replace them.

Dave:
That’s fascinating. But it sort of makes sense given this sort of challenge that people have had hiring over the last few years. There’s definitely some, I’m sure, some reticence to let people go because they’ve seen just how difficult it can be to rehire.

Joe:
The last time we saw this was at the end of the 1990s during the dot-com era. I remember going to the grocery store and the unemployment rate was in the mid-threes, and it was difficult to hire people.
And I remember the person who back then who would’ve bagged your groceries, was basically been out of workforce for a good 10 to 15 years and looked at me like, “Am I supposed to be doing this?” And I’m like, “Well, yeah, this is I think what you’d be doing.” And they didn’t know how, right?
They were mixing up things, they were putting the eggs on top, that sort of thing. It’s been a long time since we’ve been in a situation where labor’s just this tight. And it’s natural that A, you’re asking these questions and B, the public is going a little bit restless because the explanations we’re providing don’t match up with their historical experience, and we just haven’t seen this in over a generation.

Dave:
So given that you’re saying there’s this lag of 12 to 24 months from each successive rate hike, do you expect unemployment to go up over the course of the year?

Joe:
Well, historically it was. I think it’s a bit sooner for these reasons. One is transparency out of the central bank. We know what they’re doing in almost real time. B, large scale asset purchases are what journalists call quantitative easing. The use of the balance sheet really impacts the real economy in very different ways because the Fed didn’t do that part of the great financial crisis.
And then three, the structural changes in the market, mean financial markets are much more important, vis-a-vis the banks. So we get a much shorter time span. So it is going to start to show up. Okay, where will it show up? Here we go. Here’s the thing you can take with you, Dave, and hang your hat on.
In the housing market, there are currently through the end of January, 1.7 million homes under construction, and that’s just about what we need to, because we got a big shortage in overall, the overall stock of housing. We need a lot more housing and we need it quickly.
But housing starts and housing permits, imply a run rate of 1.3 million at an average annualized base pace. So as those homes get completed and we decelerate down to that 1.3 million, you are going to see a lot of men, 25 to 54 discharged and looking for work in the open market that will make the unemployment rate go up.
Now, I want to say this, and this is really important. The economy will slow, but it’s not yet certain that we’re going to go into recession. If we do go into recession, it’s going to be modest and it will not have unemployment rates, that you would normally associate with the recession.
Now you’re a younger guy, Dave. You remember two recessions, the pandemic where it went to 14% and the great financial crisis where it went to 10%. We’re not going to get anywhere near that. We’re talking 5%, that would’ve been considered full employment 20 or 40 years ago.

Dave:
Interesting.

Joe:
So again, to circle back, those demographic changes I have now come home, it’s altering our own understanding of how the economy works and what constitutes full employment.
We have a 3.4% unemployment rate. My estimation of full employment is 4.4%. When I was in college, it would’ve been 6%. Indeed, times passed and things have changed and they require new policies.

Dave:
You hit on something, I want to get back to the labor market, but you hit on something about a recession and that it might be a mild one.
I think one of the common questions we have from our audience is how do you define a recession? Let’s ask an economist.

Joe:
Okay. I could tell you it’s easier to talk about what it’s not. It is not two consecutive quarters of negative growth. We define recession in the United States economy very differently. It’s a broad and synchronized decline across a number of discreet economic variables such as reemployment, retail sales, hotel, wholesale sales, industrial production. We could go into it deeper, but that essentially nails what a recession is.
And here’s what the difficulty is. If one were to look at, say, housing, I think it’s pretty honest. We’re in recession right now, even if the unemployment’s not there because residential investment declined by 26.7%, in the fourth quarter. Manufacturing is very close. It either is or soon will be. But you look at tech, you look at life sciences, you look at the broader service sector, not so much. Right?
I travel a lot as an economist, the best part of my job is I get to go around the North American and global economies. I’m not stuck in the glass skyscraper as I was for many decades. It’s made me a better person and a better economist. I get a good idea of what’s going on out there. Try going to an airport right now. Just try. It’s a difficult proposition. I mean, there’s no recession at the airport, right?

Dave:
No way.

Joe:
It’s happened.

Dave:
Oh my God. It’s crazy, yeah.

Joe:
So if we do have a recession, we’re going to have a non synchronized recession or what some might call, a rolling one.

Dave:
Okay, a rolling one. Because that makes me wonder what purpose or what use does the word or term definition of recession mean then, if it isn’t ubiquitous across the economy, should the average American really care if we’re in a, quote, unquote, “recession” or not? Or should we really just be thinking about the individual sectors of the economy that impact our individual lives?

Joe:
Okay. There’s two things here. There’s the public and then there’s investors. The public should care because we need to get that downturn, you will get an increase in unemployment and remember one person’s recession is another person’s depression. Right?
Now, if we’re talking about investors, that’s a different thing. We definitely need to be looking at the different ecosystems out there because they’re going to have different realities and the deeper you dive down to the zip code level, the different outcomes you’re going to have.
I live in Austin, Texas. My job is in New York, basically I’m all over the place. I live in the tech utopia, but this Austin’s the boom town. We don’t have enough people to fill the jobs. We don’t, I mean, the unemployment rates and the low twos, we don’t have enough homes to meet the needs of the people who live here. We don’t have enough people. So that’s going to be very different than Huntsville, Alabama.

Dave:
Right.

Joe:
Right? Or Kansas City, Missouri or Kansas City, Kansas for that matter. So it really does matter whether we’re in a recession or not. Now, before the time you and I inhabited this, the third stone from the sun, federal government said is the fiscal and monetary authorities did not respond the way they do now.
It was thought that, well, markets automatically clear, markets are perfect, and what the best thing we should do is nothing. Just let the market clear, liquidate stock, liquidate labor, liquidate everything, because that’ll get us back on the virtuous cycle.
Well, we had some problems along the way, and markets are not perfect. They don’t perfectly adjust. I know for some people those are fighting words, but that’s just the way that is these days.
And we need to be able to identify when the economy slowed down in order to use the balance sheet of both the fiscal authority and if necessary, not always the case, but if necessary, the monetary authority, the central bank, in order to stimulate the economy to get the animal spirits moving again and create the conditions for resumption and expansion of overall economic activity.

Dave:
That’s a great segue to my last question about monetary policy. Given what you said at the top of the show that a lot of this is demographic driven and that we have basically too many jobs right now for the working population.
How difficult is the Fed’s job going to be? They seem particularly concerned about wage growth, which you said would be three to 4%, and a lot of people are saying they need to, quote, unquote, “break” the labor market before they stop raising rates. So how do you see this all playing out?

Joe:
There’s a couple of things here, and this discussion works on our travels on a couple of different levels. The first thing is the Fed does need to generate additional labor slack in order to cool the economy. We were looking at the employment costs index through the end of the fourth quarter. It’s up 6.3% on a year ago basis, that’s clearly too strong, and that’s on the edge of wage-price spiral terrain. So policy needs to move in further into restrictive terrain.
That means the policy rate’s going to increase. We think three consecutive 25 basis point increases in March, in May, and in June. That’ll bring us to a potential peak of 5.5% with risk of moving higher. It’s going to depend on the evolution of the data.
Now, the problem here is that the inflation that we’re seeing is a bit different than that, which we’re going to see going forward. Most inflation we’ve seen has to do with the supply of shocks and unleashed by the pandemic, and then the policy response put in place to mitigate those shocks.
April 2020, unemployment rates at 14%. You know what these inflation problems are well worth an unemployment rate at three point a half percent as opposed to 14%. So I do the same thing over again essentially, perhaps with some small differences on the margin.
Now, as the goods inflation is turned to deflation, we’re now shifting to demand for services, hence why it’s a problem at the airport or at the mall or the grocery store, right? Because demand’s still strong. That’s where we have to deal with what’s going to be higher on employment through the middle. That’ll start in the middle of the year and increase probably through the end of next year.
Now, there are things going on with respect to the supply side of the economy that don’t have to do with monetary policy or fiscal policy that have to do with some of the broader economic and strategic tensions out there in the world. It’s very clear that at the very least we’re going to be engaging and selected to coupling from China. The G7 are clearly moving in that direction. That means, goods specifically higher priced, sophisticated goods are going to get that much more expensive and those are going to be passed along here in the United States.
That means that 2% inflation target is likely to give way to a three or perhaps three and a half or 4% inflation target, because we just don’t have enough people, and we’re engaging in this decoupling from hyper-globalization to a globalization that’s defined by regionalization. Well, that means rates are going to meet higher than what they’ve been for the past 20 years.
Most of your lifetime, what you know is inflation at around one to 1 and a half percent per year and very low interest rates that in real terms are negative. That’s not going to define the next 20 years for you. You’re going to be moving and living in a very different time, a very different era. Essentially the era of 1990 to 2020, the era of hyper-globalization has effectively come to an end.
We’re moving into a different era that requires different policies and quite frankly, different people with different analytical frameworks and economic models. So we’re going to have a pretty big turnover here, and that’s why your question about why the public should care? Is spot on. But the public is different from investors, and so the two right now are traveling on parallel lines.

Dave:
All right. Well, Joe, thank you so much for being here. We really appreciate you joining us. Hopefully we can have you back someday to expand on this topic a bit more.

Joe:
Sure. Thank you very much.

Dave:
All right. Big thanks to Joe for being here. Obviously, the labor market is not my area of expertise, but I’ve been trying to learn a bit more about it given its importance in what the Fed is doing in monetary policy in the US, and because that has huge impacts on the real estate market.
I really want to understand more, and I think the main takeaway for me is that the interest rate hikes that have been going on for nearly about a year right now are really just starting to be felt in terms of the labor market.
And although we’re seeing these sort of surges in jobs recently, it’s probably, according to Joe, Joe thinks that we’re going to start to see the unemployment rate tick up over the next couple of months, starting probably mid-year is what he said. And as a result, that should help inflation. That is Joe’s opinion, and I think that’s an interesting good take. We’re obviously don’t know what’s going to happen, but I think he’s very informed and offered some really interesting opinions there.
So thank you all. Hopefully you like this episode. If you have any questions about it, you can always hit me up on Instagram where I’m @thedatadeli. We appreciate you listening and we’ll see you next time for On The Market.
On The Market is created by me, Dave Meyer and Kailyn Bennett. Produced by Kailyn Bennett, editing by Joel Esparza and Onyx Media, researched by Pooja Jindal, and a big thanks to the entire BiggerPockets team.
The content on the show On The Market are opinions only. All listeners should independently verify data points, opinions, and investment strategies.

Startups borrowed so they didn’t have to give up equity. After the collapse of market leader SVB, they should expect higher rates and fewer deals in the near future.

David:
This is the BiggerPockets Podcast show 741.
The reason you’re feeling bad is might be ego. You’re looking at other investors that are making money. You’re looking at your balance sheet every month and you’re saying, “Well, I’m losing money. I’m doing it wrong.” Maybe not. Maybe this is how real estate has always worked over time. It was the people willing to lose the short term to make money in the long term that worked. Now, I hope it doesn’t stay that way, but I am preparing for a reality where the golden age where you’re just bobbing for apples, you just put your mouth in there and you came out and you hope your apple’s bigger than the other apples, but you always got an apple, that could be over.
What’s going on everyone? This is David Greene here today with a Seeing Greene episode if you didn’t notice it in the title. If you haven’t heard one of these before, you’re in for a treat. On these shows, we take questions directly from our audience base. That’s right, you. I deal with the struggles you got going on, questions you have about real estate, clarity that you might need. Or when you have several options, which one would be the best? I love doing these shows and I love you guys even more for making it possible because you ask great questions, which lead to great shows.
Today’s show is fantastic. We get into what the person might be doing wrong if their property is not cash flowing right now. This is a great topic that we get into about ways that you can approach real estate investing as well as a small tweak that would make that property cash flow and how they can execute it. Should I take on an out-of-state rehab on my first deal? Things to be aware of if you’re going to invest out of state. I do a lot of that myself as well as renovation stuff, which I also do a lot of. And what you do when you can’t find cash flow in your market. Is it too late to invest in real estate? Should we stop listening to BiggerPockets and instead start buying NFTs again, cryptos, investing in tulips, buying Beanie Babies, maybe Pogs, if you guys remember that. Is that the future? Should we buy a bunch of that and wait to see if it comes back or is real estate still a good option? All that and more in today’s Seeing Greene.
Also, I just want to remind you guys, I forgot to turn the light on again. I’m really good at doing that, so as soon as this little segment ends, you’re going to see the light turn blue. Don’t get confused. It’s still Seeing Greene. It’s just going to be greenish blue. What are the colors when you mix green and blue? Is that like turquoise maybe? Seeing turquoise for the first 15 minutes and then it goes back to being green. This is just me being forgetful, guys. It ain’t easy being Greene.
All right, today’s Quick Dip brought to you by Batman is, we have a new show coming on the BiggerPockets YouTube channel where I’m going to be a frequent contributor. I’m going to be showing people how to make more money in their current job. This is something that I’m passionate about, I’m very, very into. Don’t quit something that you’re not good at and just try to find a new thing that you think you’re going to be better at without putting effort into the first thing. You got to pursue excellence in whatever you do. So if you want to be featured on that show or this one, go to biggerpockets.com/david. Write out your question and check the jobs box if you’d like to be on the YouTube channel. All right guys, that’s enough of me. Let’s get into our first question.

Nick:
Hey, David. My name is Nick Gutzman. I’m 19 years old and a sophomore at Colorado Mesa University in Grand Junction. I’m looking to purchase a single family property near my school to ideally lease the students. I’ve been consistent using Zillow and BP’s tools, but I can’t seem to find a deal with what current rates as well as supplies in my town. I’m struggling to take the next actionable step. My primary question is what are some tools or strategies you could recommend for finding a deal and what are some creative ways I could finance a deal? The lender I would likely go through told me I could expect a 7.5% rate from him. With that number, I’m struggling to find anything that pencils out and works for my situation. Thank you so much for all you and BP does. Have a great day.

David:
All right, Nick, thank you very much for the video. This is a common problem a lot of people are having, so don’t be discouraged. This is just the state of the market that we’re in right now.
Now the good news is the reason it’s so hard to find deals is because real estate is still competitive and valuable and people want to own these assets. Couple things that we can get into, 7.5% is probably a… That’s a standard rate, it’s where most people are. If you’re working with the lender and that’s what he’s telling, it’s probably what you’re going to get. If you’re trying to find a creative way to finance your deal, that just means you have to find the money from somewhere else.
There’s not a lot of people that have hundreds of thousands of dollars laying around that are going to be comfortable lending it to you for less than 7.5%, which means you’re probably only going to get that from the owner, which means you probably need some kind of owner financing, which means you’re either going to have to overpay for the property to make it worth it for them to give you the better rate you want, or you’re going to have to find a distressed motivated seller, which is going to be a lot of work, and frankly, going to be very difficult for you to do while you’re going to school. None of those sound super appealing for the situation that you’re in.
The advice I’m going to give you is that instead of looking to find a deal, I want you to look to make a deal. If you’re having a hard time getting the numbers to work on a property that you’re going to rent the rooms out to other students, you might be analyzing the wrong deal. So here’s what I’d like you to do. We’re going to work backwards from this. Let’s say that at the interest rate you’re being given at the price range you’re looking at, let’s say that you’re coming up with a $4,000 a month mortgage, which means you need to make more than $4,000 a month from the rentals. If you can get say $800 a room and you can get a five bedroom house, that now becomes $4,500. That could be enough to be more than the $4,000 mortgage. We’re assuming taxes and insurance are included in that $4,000 number. Which means your goal is to find a property that has five or more rooms.
Can you find a property that has five bedrooms but has a living room and a family room and you can convert the living room into two more rooms? Can you find a property that has four bathrooms and that has enough square footage that you can add stuff to? I’d set my search parameters to only show me stuff that has high square footage. In addition to that, I’d be looking at properties that have more square footage than is being advertised. So one of the things I do when I’m looking at houses is instead of clicking on the arrow to the right and looking at all the pictures that the agent has uploaded, I go backwards. I click the arrow to the left and I look at the back of the house first.
Now, the reason I do that is if there’s unpermitted square footage that’s ugly that the realtor doesn’t want to show in pictures, I want to see that. I want to see framing in the basement. I want to see the partially finished ADU. I want to see the extra garage on the property that has electrical and plumbing in it. A lot of people put bathrooms into their garages because when they’re out there working on their car, working on their projects, they want to be able to stop and go to the bathroom without walking in the main house. Well, once it has plumbing like that, you can finish out that bathroom and make it nicer and add a kitchenette into those properties for much less money than when you have to run plumbing and drainage all the way into that asset. So you need to look for properties like this that other people are missing.
Now, all of that being said, that might not still be enough because it looks like you’re looking in a town that doesn’t have a lot of inventory. That’s a problem. If you’re in a college town and there isn’t a lot of listings that are hitting the market right now, this is going to be tough. Part of that is because sellers are not putting their homes on the market because they’re waiting for prices to come back up. Sellers have seen, “Well, prices are down, people were selling for more before. I don’t want to sell my house for less money.” It takes a long time before they get to the point where they just willingly accept this is what a property is worth, and that frustrates buyers. So you could look in a different town and look to accomplish the same thing. Different college town that has more inventory, that’s one method you could take. Or you could use some of the creative methods like driving for dollars, skip tracing. You could look at neighborhoods and find the properties that are listed as more square footage. A lot of that’s public data.
So if you could figure out a system of finding the houses that are at least 3,000 square feet, you know they’re likely to have more bedrooms and bathrooms, you could go knock on their doors, you could call those people, you could send them letters. You could try to find an owner that is willing to sell, but again, this is not a great return on your time. The odds of finding the house that you want and then they also have a seller that’s willing to sell and they’re also going to do it at the price you want is very difficult. I know a lot of people pay money to take those courses, and this is very popular right now because deals are hard to find, so we’re out there trying to use creative methods.
What no one tells you is it’s basically like working a full-time job. Oftentimes after all the time you got to put in to make this happen, you’d have made more money if you’d just got a job and worked. So it’s not always the best method. What I do want to say is don’t be discouraged. You’re trying to do this at a very difficult time in the market. We are in a stalemate. Sellers don’t want to drop their prices because they’re not desperate yet. Buyers don’t want to or cannot pay the higher prices that sellers want, and there is not enough inventory to balance this out, so just stay in the fight. You never know when the next listing’s going to pop up.
What you want to make sure is that you see it first. So set your filter to show you only houses with at least 2,500, ideally 3,000 square feet, have more bathrooms, and then look at all the houses that come out and see if there’s more square footage in that house than what the listing actually says or that can be converted so that you can make maybe a five bedroom house into six bedrooms, plus it has a garage that can be converted into two to three bedrooms with a kitchenette and a bathroom. If you could do something like that, you can find a way to make the property work for what you’re looking to do.
All right. Our next question comes from Josh Lewis in San Diego. Josh says, “I love all your contributions to bp. You are a solid stalwart for the mission.” Well, thank you for that, Josh. “Some context, I own a property in San Diego. I have access to a large chunk of equity, approximately 350,000 to 450,000 depending on the appraisal, and I want to utilize a HELOC in conjunction with the BRRRR method to acquire my first rental property and kickstart my journey. Question, looking back on your career, if you were given the same circumstance, would you find it more advantageous to go after one larger expensive property like a $300,000 fixer upper to BRRRR in the lucrative California market? Or would you go after multiple properties, say, in the SEC football market, like $250,000 properties? For my circumstance, I’m giving more value to cash flow, but I do understand there are more factors at play here with potential long distance management, which I’ve already purchased both your BRRRR book and your Long-Distance Real Estate Investing. Thank you for your time and your propensity to educate.”
Well, Josh, thank you for your mastery of the English language. You said both propensity and stalwart as well as circumstance all in your questions here. Very impressive, my friend. All right, let’s get back to the first thing you said. Looking back in your career, “If you were given the same circumstance, would you find it more advantageous,” another big word, “to go after one larger expensive property or several smaller properties?” I don’t look at the number of properties as the way to approach this question. Now, I will say in general, less is better, because the more properties you have, the harder it’s to manage them. The more expensive they become and the more things you miss.
So I am in general inclined to buy a million dollar property over two $500,000 properties, but it’s not always that simple. I would more look at the total amount of capital that I’ve deployed, okay? So if I’m going to buy a million dollars worth of real estate, whether it’s over two $500,000 houses or $1 million house or three $300,000 houses, the number of houses isn’t where I start. What I would look at is the value of the properties I’m buying. What is the game plan here? What’s the play? I think people do better over the long term, investing in areas that both appreciate in price and cash flow, okay? It’s often framed like cash flow or appreciation, and it is isn’t true. When you’ve done this for as long as I have, you start to recognize patterns. And what you see is the areas that appreciate and value also appreciate in rents. The two almost always go hand in hand. And so cash flow grows over time just like the value of the asset grows over time.
When you buy in these cheaper markets, the $150,000 houses, it’s not that they don’t appreciate, it’s that the rent also doesn’t go up. And everybody here who bought into turnkey properties owns in the Midwest, I’m getting a hallelujah amen out of them, and they’re all saying now, “Wish somebody would’ve told me this,” because the assumption with real estate is that rents are going to go up every year, but your mortgage is going to stay the same. That’s what makes buy and hold so powerful.
But that doesn’t happen in every market. Some of the areas like Detroit, Indiana, the Midwest in general, the rents may go up, but it’s very small. It could be like 10, 15, 20 bucks a year sometimes. This is the issue that I have with my cheaper properties. Versus the stuff I bought in higher growing areas that was more expensive, you get big rent jumps sometimes. My California properties were jumping $200, $300 a year in rent. So it could go from 1,500 to 1,800 to 2,100 to 2,500 over a four-year period. And when you bought it and it made sense when you first got it at 1,500, it’s really nice at 2,500. That’s the strategy that I want to take.
Now, this doesn’t work if you have to go into it and you need the cash flow right away, which is why I tell people all the time, real estate is a bad thing to invest in if you need money now. This is a thing where you’re constantly delaying gratification. This is putting 20 bucks in the pocket of your coat and then finding it later like, “Oh, cool, I forgot that I put this in here.” It’s like a supercharged saving account that’s going to grow over time. Real estate works much better when you give it a longer timeline to grow, like planting a tree. You can’t expect fruit the first year you planted the tree. If that’s the situation that you’re in, you need to do something else. You need to plant a bush or you need to grow a garden of flowers that can be harvested and sold and it’s going to be more work. It’s not like planting a tree that just puts off passive income all the time. Passive income takes time to develop.
So the first thing I would tell you when you’re looking at what you should do here is invest in an area that is likely to grow, okay? When I talk about ways to make money in real estate, there’s basically 10 ways to make money in real estate that I’ve concluded and five of them have to do with equity, okay? The first one that I just described is what I call market appreciation equity. This is choosing a market that is more likely to appreciate than other markets. It is not speculation, it is not guessing. It’s using education and facts to make an educated decision.
The next is what I call natural equity. This is just inflation combined with paying down your loan. That’s going to happen no matter what it is you buy, but timing the market can help. When you buy into markets where you’re more likely to see inflationary pressures, you’re more likely to make money in real estate. So when I see inflation ramping up, I put more time and more money into real estate versus my businesses. If I see inflation slowing down, I’d be less inclined to go crazy buying real estate and I’d be more inclined to put money into businesses or other endeavors. When I say put money, I mean put time and energy into them.
Another way that you can build equity in real estate is buy what I call buying equity, and this is just getting a good deal. This is buying less than market value. So if you’re going after a million dollar asset and you can get it for $825,000, you just bought $175,000 worth of equity. So the actual deal itself plays a role in this. And then the fourth way that I talk about creating equity is forcing equity. This would be something like a value add. You’re going in there and you’re going to cosmetically improve it or you’re going to add square footage to it. You’re going to do something to make the property worth more.
Now, I don’t look for deals that have one of these elements, although I may buy a deal that has one of these elements if it’s got a lot of it, if I can add a ton of value, if it’s a super hot market. Maybe I buy into a really hot market, I buy a turnkey property because I believe that the market appreciation equity is going to make up for the lack of value add because there’s nothing to add, right? Or maybe opposite. I’ll go into a market that I don’t think is going to grow very much and I don’t even get a great deal on it, but I see there’s so much value I can add to the property that makes worth it. But in general, I look for a little bit of all four. I can’t remember what the fifth one is off the top of my head. I might have to think about that.
But that’s how I want you to be thinking. “How can I add value to these properties that’s going to build me equity if I don’t need the cash flow right away?” Now, this is not saying cash flow doesn’t matter. What this is saying is focus on your equity and then convert that into cash flow. Much easier to build half a million dollars of equity and then go invest that for cash flow than it is to try to save $500,000 and invest that for cash flow. That might take you 40 years to save $500,000. That’s a lot of money. You can build that over three to five years if you’re using the methods that I just described when it comes to creating equity and then improving that equity yourself. So the first thing I would do is I would’ve gone into the markets like California. And I bought it at a great time. That was just dumb luck. I got a lot of natural equity because I started buying in 2009 through 2013, and then we made quantitative easing, and boom, the market shot off.
And then I bought it in a great market. California went up more than other markets. I also bought well. I bought them under market value, and so I came in with some equity. What I didn’t do in California was I didn’t force equity. I didn’t buy properties and then fix them up because I didn’t understand real estate that well. I didn’t understand construction, I didn’t know how to look at a property and see a vision for it like what I can do right now. So that’s one thing I would change, is if I was going into it where you are with my eyes now, I’d be looking at those four things and seeing how do each four of these apply. This is what we call the Greene goggles. When you’re looking at real estate from my eyes, you’re looking for those four things.
I don’t like the multiple houses in one market because it gives an illusion of safety, like, “Well, I’ve spread it out over three houses.” It’s just oftentimes you’re buying three problems instead of one good deal, right? You don’t hear about any investors, at least in my whole career, that made a lot of money buying cheap real estate and getting a lot of it. It doesn’t work. It’s like going to the flea market, yeah, you can buy a lot of the, not Nike, but Bike. You can buy a lot of Bikey shoes because they’re cheap, but they fall apart really quick and they give you blisters and you wish you never bought them and then you never want to wear them and then you’re trying to get rid of them as soon as you can and the next sucker comes in and they buy these.
What you hear about when it comes to buying real estate are the three rules, is location, location, location. There’s a reason that all the salty whiteheads are all saying the same thing. They bought the right location. You see Warren Buffet give the same advice when it comes to stocks. He’s not looking to get the deal of the century. He’s looking to buy the best companies, which would be the equivalent of location in real estate, and he’s looking to buy more when the market is down, which would be the equivalent of natural appreciation or inflation and loan pay down in our world. He’s using the same principles I’m talking about now, but he’s applying it in the stock market.
Well, in the real estate market, this is how that works. You’re talking about cash flow, of course you want it, of course you should want it. We all should want that. What I want to advise you is that you don’t need it until retirement. You don’t need cash flow until you just cannot work anymore or you don’t want to work anymore. So if you can delay that, if you can let the property build equity for you, and let’s say you buy a million dollar property for 825,000, it goes up to 1.2 or maybe two properties that’s worth a million that you pay a total of 825,000 and they go up to 1.2 and then the market kind of stalls and you sell those in 1031 into a new fixer upper project, you go by $2 million worth of property and get them both for 1.67 and then they go up to 2.4, you’re actually creating equity at every single rotation of this snowball that’s going down a hill.
And then when you’ve got that equity, then go invest it into the cash flow and then reive your scenario and decide, “Do I want to keep investing? Do I want to chill? Do I want to quit my job? What’s my next step?” We got a lot more options if you take the road that I’m giving you now, which most people don’t see. I look at it a little bit differently, which is why you guys are here for Seeing Greene episode.
And I just reminded myself that I’m doing a Seeing Greene episode, so now the light is green behind me. I swear people like me do the dumbest things over the dumbest things, like I can give a brilliant response to some question and people are like, “Mind blown,” but I can’t remember to turn my light green before I record. This is very common for me. I have to put my keys and my wallet in my phone in the same place because if I don’t, I’ll leave the house without one of them. I’m terrible for that. So if you ever make mistakes, if you ever do absent-minded things, if you ever beat yourself up for doing something that you think you shouldn’t, leave me a comment. Tell me what are the things that you do that no one knows or make you feel so dumb that you can share with the rest of us? And let’s see if other people make the same mistakes.
I know that I will get a comment from someone that says, “How am I supposed to know this is a Seeing Greene episode if the light is blue behind David’s head?” We get those every so often when I forget to do this, even though the title will say Seeing Greene, and I’ll start the show-off by saying it Seeing Greene. There’s always someone who’s like, “I’m confused. Is it Seeing Greene or Seeing Blue?” What I do about this light?
All right, our next question is a video from Justin Pack in New York.

Justin:
Hey David, thanks so much for making this podcast. Really enjoy the fact that you all take the time out to answer our questions and help out us newbies. So you all always talk about how house hacking is a great strategy to get started. Well, I’ve achieved step one and got a house hack. I was able to live very cheaply, renting my house out by the rooms. It’s a single family in Dallas that I bought in 2019. I’ve now rented out all the rooms and moved out of the house. The problem is the property’s not profitable, losing just over $200 a month in expenses after everything’s accounted for, but I have still haven’t transitioned into not paying for utilities, internet and those other things there. So I now have almost $100,000 in equity in the property after the pandemic popped, and I’m looking to figure out ways to either make the property more profitable or figure out if I should sell it. Let me know your thoughts. Thank you.

David:
Justin. Good stuff, man. This is a great question and you’re giving me a platform to just rant about real estate in a way that I rarely get to. So I appreciate you thanking me for making the show, but I want to thank you and every other listener we have for asking great questions because we wouldn’t have this show without it. And trust me, lots of people are in your same position and are struggling with your same situation, so they’re going to love hearing this.
All right, let’s break this down a little bit. When I first started investing, I had this thought. It was like 2007 and I was trying to figure out what could I buy, and I was talking to agents and I was like, “Yeah, I want a property that’s going to make more money than it cost to own it.” And they were laughing at me like, “Real estate doesn’t work that way. You don’t buy a property that makes more money every month than what it costs, at least not when you first buy it.” This was in the height of the market exploding, and so of course nothing was going to cash flow at that time. And I didn’t pull the trigger. I’m glad, because waiting, I got a better opportunity.
But I did realize something in that moment. In a sense, they were right. Real estate only cash flows if you get an incredible deal or you buy in at an incredible time or there’s not enough competition for the assets that you have an incredible opportunity, or you wait. Okay? Now I know this is going to sound like blaspheming real estate for the cash flow investors out there, so just hear me out. When you look at other countries, Australia, Europe, South America, their real estate does not cash flow when you buy it.
This is crazy. This is kind of an American phenomena. Nobody buying in Toronto is getting cash flow. Very few people that are investing in most Canadian areas are getting cash flow. In fact, the only areas that typically do cash flow historically at all times are the areas where management is a burden. You actually have to make it like a job to manage the property and manage the tenants. It is not passive income. We’ve become accustomed to this because we came out of such a huge crash in our economy and real estate that no one wanted to own these assets and no one wanted to buy. So we ended up with way more tenants. And then we also paired that with an economic boom after the crash where everyone is making more money, wages were going up. The value of these assets was going up. Inflation ran rampant. We had this perfect mix of you could buy real estate at incredibly low prices and then the economy soared after that. You got the best of both worlds. The result was cashflow became the norm.
And so as investors, we would just peruse through Zillow looking at every house and saying, “What has the best cash flow?” And it was awesome. I jumped in with both feet, right? I was working a hundred hours a week as a cop, saving as much money as I could because I felt like Super Mario when he touches the flower and he’s invincible and everything that I touched dies, that’s what I was doing. I’m like, “Dude, I’m going at a dead sprint and I’m buying as much of this real estate as I can.” Rates were low, property values were low, everything cash flowed. I could buy in the best markets and I could cash flow, and I was getting appreciation. I was like, “Everything was great,” and it all came to a screeching halt once we started to raise rates, and now we’re all frustrated. “I can’t make it cash flow. I’m doing something wrong. I’m messing up. I’m bad at this. Maybe I should go do something else.” No, this is actually normal.
Nothing in Australia’s going to cash flow. Nothing in Canada’s going to cash flow. Nothing in Europe cash flows. In fact, if you go to other parts of the world, you don’t get FHA loans. You don’t put 3.5% down on an asset. In fact, nobody gives loans for 30 years at a fixed rate of 3% or 4%. No one gives loans at a 30-year fixed rate anywhere. You wouldn’t do that. You wouldn’t lend your own money for 4% for 30 years fixed. That only happens because our government sponsors these loans. We’ve got a whole system created to keep interest rates low, and I won’t go into that right now, but this is why I started The One Brokerage is because I was fascinated with how lending worked, and I wanted to learn more about it and be able to help people buy real estate from lenders that they could trust. But I realized, “Oh my God, this is crazy.”
If you go to Egypt, they’re going to ask you to put 50% down and there’s going to be a balloon payment in two to three years, okay? It’s almost like a construction loan. A lot of people in other countries are paying cash for their houses, which is why houses are passed down from generation to generation. You can’t buy it. Okay? So it’s a little bit of a background in how hard real estate investing is in other places.
Here’s what I learned in 2007. Even if I paid ridiculously high prices for that real estate and I lost money every month, when you look at rent going up over time, your mortgage staying the same over time, the principle being paid down on the debt over time, I put it into a graph basically and I saw there was a break even point at about seven years in where I would lose money every year and at seven years years in I would start to make money. And then I said, “Okay, well, how much money will I have lost over seven years? And now that I’m making money, how long will I have to wait before I get paid back for the money I lost?” And at about nine years, I noticed like, “Okay, I’ve now broken even from cash flow.” This is before you get the loan paid down. This is before you get any kind of appreciation. This is just purely from rents going up.
And I realized, “Well, if I’m going to own this asset for 30 years, 40 years, 50 years, and I just got to wait nine years before I break even, that’s not the end of the world, especially if the tenant’s paying the mortgage off for me. So when I looked at it at a 30-year perspective and I ran the numbers, I saw, “There’s nothing that comes even close to this. I just got to be able to make it nine years of losing money, and then I’m golden.” Now, please stop screaming. Don’t yell at your phone. Don’t yell at your computer. I know what you’re thinking, like, “Don’t ever do that.” I’m not telling you guys to go do it. I’m saying it makes sense to do that if you take a long-term approach. When we take a short-term approach, when we say, “I want to quit my job right now, I need to find a duplex so that I can do it. I need money right now. I want to buy a Tesla right now. I need immediate gratification,” real estate becomes very frustrating.
I don’t have hardly any deals that made me a ton of money right out the gate, but I have zero deals that don’t make me money after I’ve owned them for a while. And I learned that delayed gratification is really the secret to wealth building as well as real estate investing. The deals that I bought, I have one in the top of my head right now, okay? It’s this 8,000 square foot cabin that I bought in the Smokey Mountains. It was owned by an executive at either Coca-Cola or Pepsi, I get them mixed up, but he was responsible for developing the extra value meal at fast food restaurants. So he got them to sell more sodas because a soda came with every single meal when they did the extra value meals.
He built this amazingly huge awesome place, okay? I bought it and it is making me money. It’s doing well because it can sleep like 30 to 40 people. It’s very unique. I tend to buy real estate that doesn’t just fall into a cookie cutter pattern, and this is why. But when you look at how much I can charge per night on that property, some of my other cabins maybe go for 200, $300 a night. That’s like the cheap stuff, okay? So if I get a 10% increase on that in a year, which would be really good, I go up 20 to 30 bucks a night. But on these expensive places that maybe I can charge 1,500 a night, a 10% increase is $150 a night.
Now multiply $20 a night times however many, 200 days in a year, or 150 times 200 days in a year, and the next year I’m getting a 10% increase hypothetically on the 1,500, that now became at 150 to that, so I’m getting a 10% increase on the 1,650. Okay, now my rents are going up $165 a night. It exponentially starts to increase because I bought more expensive real estate in markets that didn’t immediately take… It didn’t make me a ton of cash flow right off the bat, but it will grow to make much more cash flow.
This principle is what I wanted to highlight. Now, I want to bring this back to your specific scenario, my man. You are losing money right now, but you’ve gained a hundred thousand dollars of equity so you haven’t lost money, okay? You got to go through a lot of months of losing $200 a month before you actually break even at the $100,000 of equity that you have. So the question isn’t, “Do I need to sell this thing immediately and not lose the 200 a month?” unless your finances are in a position that you can’t take that blow. If you live paycheck to paycheck, $200 a month is devastating.
If you can’t find a one day of overtime or a side job… I mean, I know waiters that make 200 bucks a night work in a shift at a restaurant, okay? And if you said to me, “David, you got to work once a week.” No, once a month at a restaurant in order to not lose money on this real estate deal. You’re going to lose 200 bucks a month on the deal, but you’re going to make 200 bucks a month at the restaurant. Would you be willing to work once a month for the next 30 years to have a property completely paid off and appreciated? In fact, it wouldn’t even have to be for 30 years because at some point the rents are going to catch up. That is a no-brainer yes, do that. Okay?
The reason you’re feeling bad is might be ego. You’re looking at other investors that are making money. You’re looking at your balance sheet every month and you’re saying, “Well, I’m losing money. I’m doing it wrong.” Maybe not. Maybe this is how real estate has always worked over time. It was the people willing to lose in the short term to make money in the long term that worked.
Now, I hope it doesn’t stay that way, but I am preparing for a reality where the golden age where you’re just bobbing for apples, you just put your mouth in there and you came out and you hope your apple’s bigger than the other apples, but you always got an apple, that could be over. I don’t know. I don’t know, but I know that we kept interest rates really low for a really long time. And if you wanted a house at all, you had to overpay. You couldn’t get inspections. You got in a bidding war, you were very uncomfortable, you didn’t know what you were going to end up with, and it was risky. And I know that wasn’t healthy either even if you got cashflow right off the bat.
Now that we’re letting interest rates come up to kind of more traditionally normal levels, we’re all freaking out saying, “This isn’t how real estate works.” It might be that we have to accept that this is the new normal. And location, location, location is becoming important. Why? Because that’s where the rents go up. When you buy in the best location or you buy the best property, the rents go up everywhere and you get out of that hole faster. You get out of the hole of losing money faster.
Now, I’m not telling anyone here, go buy properties that lose money, okay? If you could avoid it, avoid it. I am saying, Justin, that you might not be in the worst situation ever. It might be your ego or you’re comparing yourself to other people’s deals that’s making you feel bad about this. Okay? This is Dallas, Texas. This is one of the hottest markets in the country. If I had to pick a market to put my money in over the next 15, 20 years, Dallas, Texas would be in my top three. That is a awesome market. You are going to continue to crush it in both rent growth and equity growth buying in Dallas. That’s a great place to park your money. It’s going to grow faster than if you found a place that cash flowed positively 200 bucks, but just was stagnant from that point forward. I don’t think this is a bad investment.
Now, it is a three bed, three and a half bath, okay? What if you just had a five bed, three and a half bath? Could you sell this property, move that money to another property in Dallas, Texas that was five bedrooms? That might solve your cash flow problem right away and you’re going to get more appreciation, okay? You did everything right. You just bought a house a little bit too small. If you just had two more bedrooms, maybe even one more bedroom, you wouldn’t have the negative cash flow. So this is an easy problem for you to solve. Sell it, move your equity into another deal that has more bedrooms. Boom, your cash flow positive. Keep it in that market for the long term, right? You want to plant a tree in Dallas, just uproot it, plant another tree also in Dallas.
But even if you can’t, for some reason if you don’t, it doesn’t mean you made a bad deal. You’re going to make a lot of money on this deal. Drop the expectation that real estate is supposed to be the magic pill that solves all of your problems in day one. You’re doing great, man. And you learned a lot from the deal, okay? You should be doubling down on real estate investing. You’re the person that should be investing more, buying more properties, doing better on everyone. Just make the small adjustment. When you’re running by the room, you need more rooms. It’s that simple, right? If you’re to sell cars, sell more expensive cars.
Sometimes there’s a tiny little thing that we can tweak that makes a huge difference in the returns that we get. For you, the minute that I see you bought a three bedroom, three and a half bathroom, I just think I wish the David Greene team had represented him because we wouldn’t have let you buy a three bedroom house. We would’ve looked for a five bedroom house that also had the ability to frame another bedroom out of a den and make it six bedrooms, and then you’d be making a bunch of money.
But I will tell you, the cashflow on this property will pale in comparison to the money that you make paying off your loan and letting the value increase over time. Thank you very much for your question. This was really, really good. Hang in there Dallas. Rents are going to continue going up while the rest of the countries don’t keep pace because that’s a great place to invest where a lot of people are moving to. Send me another question if you want to get deeper into what you could do to sell that property, what you need to talk to the agent about, where you should list it and where you could put the money into a new property.
All right, everybody, thank you for submitting these questions. I love it. In fact, I’ve talked a lot longer than I normally do on some of these because I’m so fired up about these questions. And I know so many of you love real estate just like I do, and you’re freaking frustrated. It’s very hard to find a place to put your money for a long time. You succeeded just by getting over the fear of investing and we were like, “Just do it. Just do it. Just do it,” and everybody did good. It’s not so much just getting over the fear. Now you got to get over the fear and you got to be willing to take a couple lumps and you got to look for a deal very hard. This is a harder time to invest than any that I’ve seen. At the same time, the potential’s probably bigger than it’s ever been. Okay?
I bought a lot of real estate recently, and I know that when rates do come back down, these deals that were like meh, are going to immediately look amazing. And over time with inflation, I want a portfolio worth $50 million going up as opposed to a portfolio worth $15 million increasing with time. All right. At this segment of the show, we are going to share some of the comments on YouTube, and I want to share your comments. So if you’d be so kind, go to the comments section on the BiggerPockets YouTube page and tell me what you think about the show. Is it funny? Do you like it? Are you annoyed that I keep forgetting to turn the light green, or is the humor actually breaking up the show? Let me know.
Our first comment comes from Susan Owen. “David Greene, thank you for this episode is my favorite in two years of listening.” This comes from episode 723 that we did. “I really appreciate the advice you gave the veteran in this episode.” Well, thank you Susan and thank you to all the veterans who served our country and served your fellow Americans with what you did. Respect to you.
Next comes from Lexi York. “I love how real he keeps it!” With an exclamation point. That’s pretty real. “Too many social media influencers out there preaching fake news and misleading people.” Thank you, Lexi. That’s not something that you’re ever going to get from me. When the market was exploding and inflation was taken off, I was telling people, “You got to buy. You got to put your money somewhere.” And now that it’s slowed down, I’m telling people, “Take your time and pick a deal, but wait. Give yourself a long runway of this real estate you’re buying. Don’t expect it to perform immediately right away.” Hey, if we could take nine months to grow a baby in a womb and we can wait that long for the joy of having a kid, you could wait a couple years before your properties are going to be cash flowing really high.
All right. And from OmarKansas1, “Yes! So glad you listened to Nate Bargatze’s podcast. I liked you before, but you just jumped up lots of levels in my book, seeing him in Vegas on Saturday.” Thank you for that, OmarKansas. I love Nate Bargatze. He’s a hilarious comedian. Check out his Netflix shows. This is where we got the idea to read comments because I would listen to his podcast and listeners would say the funniest stuff and he would try to read it on the show. It was very funny. That’s why we do this here. So thanks for that.
Also, if you see Nate at the show, tell him to come on ours. We want to get Nate on the BiggerPockets podcast and learn about his story. If he invests in real estate, what he invests in, or if he just makes jokes for a living and has no idea to do what to do with money, go tell him about BiggerPockets and see if he would come on our show. We’d love to have him.
All right, if you didn’t know before we move on, there is a new YouTube show that I’ll be a part of, okay? This is on the BiggerPockets YouTube channel. We are going to be talking about people that want to make a career in real estate as opposed to just become a full-time investor. Do you have a question about how to grow in your current job? You want to work in real estate or you want to maximize your earnings? We’re creating a brand new YouTube show all about using your W2 to start investing and grow your wealth. Use biggerpockets.com/david and choose the job question on the form, okay? So if you want to be on this show, you go to biggerpockets.com/david. You submit your question, we try to get you on. If you want to go on that show, you go to the same place, biggerpockets.com/david and just click the box that says Job Question, and we can have your question answered on the other podcast.
So this is for people that love real estate, but they’re not ready to just jump in with both feet, quit their job and try to make it as a wholesaler. Okay? Sometimes making more money at your W2 is a good thing. Sometimes starting a business is a good thing. And I suppose if you think about it, becoming a wholesaler is the form of starting a business. It’s not a form of just becoming a full-time real estate investor and living off the rental income. It’s what I did. So if you love real estate and you love working and you love making money and you love excellence, go to BiggerPockets.com/david and leave me a question there.
All right. Our next video clip comes from Brian Lucy in Colorado.

Brian:
My question is, I have a couple deals that are on our contract right now, and I would like funding for one of them specifically, but I have been trying to find private lenders that I can use that will fund the property. I’m trying to find out how I would go about vetting people that I find on Facebook. I’m a part of quite a few groups on Facebook and I want to make sure that these people are legit and won’t scam me out of my money because I’ve already had that situation happen once and it was a lot of money. So I’m wondering how do you go about vetting private lenders in order to find out if they are legitimate lenders. I’ve had one guy that told me to send him money prior to closing in order to do some administrative thing. I appreciate any help that you could help me out with this. Thank you so much, David. Love the show. Thank you.

David:
All right, Brian, thank you for that question. First off, very sorry to hear you got scanned by somebody. There’s a lot of scamming going on. There’s people with fake Instagram accounts that are saying that they’re me that are not. I’m actually nervous about this because I think people will be sending links that look like they’re coming from me to get people to sign up for stuff that I’m doing and it’s not going to be me. So you got to be super, super careful about vetting places before you send money.
One way that I’ve recommended that people look out for that is to ask for a voice memo from me if you think it’s me that’s asking you for something, like, “Hey, can you send me a video? Can you send me a voice memo?” You know what my voice sounds like, that’d be harder to replicate. Now, as far as how this happened with a private lender, it should be done through a title company. Okay, the money should be going to the title company and they shouldn’t be releasing any of it until it’s an escrow. That’s the way that I would avoid this, is if you’re just sending money back and forth between people you don’t know, there’s no immune system there. There’s no protection for you. So I try to avoid that.
But frankly, I’ve never had a problem of having someone rip me off off because I’ve only borrowed money from people that either I knew or that knew me. I don’t ask them for anything. There’s no, “Send me this money for an administration fee before I give you a bunch of my money.” That just shouldn’t be happening, okay? If there is going to be closing costs from this private lender, they should be done through a title company and they should fund their portion of money that they’re lending you into the escrow account, and then you can fund your administration fee or whatever they’re charging you into that escrow account, and the title company can release your funds to them only after they have their funds for you.
You want to have a neutral third party that’s going to protect you if you don’t know the person. Very sorry that happened, but thank you for sharing that with our audience so that more people don’t get ripped off because I can see in the future, it’s so easy to make social media profiles. It’s so easy to pretend to be someone else. That wire fraud is going to become more and more prevalent.
All right. Our last question comes from Heather Cha in the Bay Area. Heather says, “I’m finally at a stage where I’m committed to investing but have to look out of state. I’m currently looking at Dallas, Indianapolis, Atlanta, and Jacksonville. I’m specifically looking for long-term rentals and I have close to 800 credit score with money saved up and no debt. As a first time amateur real estate investor, do you recommend finding something that doesn’t need renovation? I have rented my whole life, so I really have no experience working with contractors since I’m really looking for somewhere out of state. I have the added layer of stress of not being close to the market I’m looking in. Thank you for your time.”
All right, well, first off, Heather, if you’re in the Bay Area, reach out to me. You never know when you need real estate help in California, and I got you when that comes. But if it comes to long distance investing, check out the book that I wrote about that topic. And yes, quite frankly, if you don’t have experience investing in real estate or knowing construction or working with contractors, don’t take on an out-of-state project. This is one of the fastest ways that people can make big mistakes and lose big money. In fact, the people who do out-of-state deals that have renovations on their first time, if they don’t lose money, they just got lucky. This happens all the time. All right?
So I don’t want you to buy a project that needs renovation other than small things that a handyman can handle, and your agent has referrals and they can oversee the project for you if you’re not there. Instead, I would be focusing on trying to buy a vacation rental and have it managed by a company that actually has experience doing that. I can put you in touch with a property management company I use if you’re in the Jacksonville area. They do some short-term rentals. I’m trying to remember the name of the city where a lot of people are doing really well. It’s not coming to mind right now, but if you reach out to me, especially with you being a Bay Area native, I will do my best to connect you with people. I’ll be happy to support you and look for ways you can support me.
All right, everybody. That is our show. I want to know in the comments, did I talk to long? Do you like it when I talk longer? Are you okay with shows that go a little bit longer? Do you want to keep these super, super tight because you’re on a schedule? Let me know when the timeline, if you would like longer shows or shorter shows, as well as what you think about some of the rants that I went on. Did that benefit you? Did you learn about the principles of real estate? Or do you just want to get to the nitty gritty? We read these comments and we adjust our approach based off of what you’re saying. Thank you again for your time listening. I know attention is expensive and you guys could be learning from anyone, so I really appreciate that you’re here learning from me and us at BiggerPockets.
If you want to follow me and learn more about what I’m doing, you can go to davidgreene24.com, or you could follow me on social media @DavidGreene24 on Twitter, Instagram, YouTube, whatever it is that’s you fancy, you can find me everywhere. I’m going to be putting a retreat together in Scottsdale at the property that Rob and I bought. So if you’re into goal setting, check that out at davidgreene24.com/retreats. And also, guys, if you skip through the BiggerPockets ads, stop doing that. Listen to them because I run ads on the BiggerPockets Podcast, and I want you to hear about some of the products that you can get from me where I can help you. So if you’re like me and sometimes you skip through ads, don’t, because there’s Easter eggs in there. You might hear my sultry deep base filled, smooth voice telling you about some of the things that I have going on, how we can meet in person, and how I can help you with your goals. Thanks again. If you have a minute, listen to another BiggerPockets video. And if you don’t, I’ll see you on the next one.

When founders scrambled to make payroll after the closure of SVB, some VC firms promised to help—but only a few actually wired money.

Last Friday afternoon, OpenAI CEO Sam Altman issued a challenge to Silicon Valley’s venture capitalists: Put your money where your mouth is. “Investors who ask ‘how can I be helpful’: today is a good day to offer emergency cash to your startups that need it for payroll or whatever,” Altman tweeted. “No docs, no terms, just send money.”

In the wake of Silicon Valley Bank’s abrupt closure that morning, Altman’s message struck at the big question for tech entrepreneurs and investors alike: With deposits at SVB frozen, how would they pay employees the following week?

Over that frantic weekend, venture capital firms scrambled to respond to the crisis. Some found creative ways to ensure their founders would have access to cash on Monday, at times offering up their partners’ personal funds. More set up contingencies to make loans if necessary, then hoped it would never come to that. Still others chose not to make such an offer, or failed to reach a consensus at all.

The moment mostly passed quickly; the FDIC announced it would protect all SVB deposits by Sunday night, meaning that by Monday morning, much of the situation’s urgency—and need for VC firms to back up their promises—had passed. But a few still did wire funds. The founders involved in the crisis won’t forget who stepped up, and who floundered at a crucial moment.

Conversations with about 20 investors and founders suggested that non-traditional investors like Altman, or smaller, individual-driven firms like Jason Lemkin’s SaaStr Fund, appeared to move the fastest, alongside several bigger firms that got creative in their problem-solving, including First Round and Redpoint. Most established firms, however, didn’t impress.

“Sadly getting requests from companies we have very minor positions in who aren’t getting help from their major investors,” billionaire investor Vinod Khosla said on Twitter. “Other investors being predatory. Not a time to make money.”

Loans, Equity And Wires In The SVB Aftermath

When Alex Lorestani, CEO of startup Geltor, which provides vegan proteins for beauty-product makers, started receiving emails from his investors last Thursday, most of them were one-liners. “They just asked, ‘Hey, are you exposed?’”

Geltor isn’t small—it raised $91 million in 2020—but it was exposed, its payroll funds tied up at SVB, with a transfer attempt to Mercury still pending. When Lorestani informed employees, then his 100-plus investors, however, help came from unexpected places: a fellow founder with some cash to spare, and newer firm Fifty Years, smaller than many with a $90 million fund. Both set up wired loans to transmit on Monday. Then those got blocked as potential fraud. At that point, Fifty Years founding partner Ela Madej connected her own personal bank account to Geltor’s payroll system and paid out the company’s employees herself.

“That was nuts,” Lorestani told Forbes. “It set a new standard.”

Over the weekend, meanwhile, Madej’s partner Seth Bannon tweeted to call out other VC firms that said they weren’t allowed to offer loans due to their limited partner agreements. “Yes you can. Just don’t use LP money,” Bannon wrote. His tweet drew an approving one from Khosla, who wrote that his firm, Khosla Ventures, was also working to use partners’ own money to help.

Khosla Ventures didn’t need to send out any loans in the end, partner Samir Kaul told Forbes, but was disturbed by the response of other established firms. “This wasn’t a time to point fingers; it was a time to get our founders to the other side to fight on,” he said. “When times are tough, we stick with our companies.”

Another bigger firm highlighted by its peers was Redpoint, where partner Alex Bard and others texted founders before the weekend to tell them they’d find a solution, then set up a separate entity and wired partners’ money into it to be redirected as needed. That promise moved another founder, Sahil Mansuri of salesperson-focused site Bravado, to share the messages in his own tweet thread. “It was an extraordinary measure of compassion and supporting entrepreneurs during a terrible moment,” Mansuri told Forbes. He ended up not taking any money, nor did any Redpoint founders, a source with knowledge added. (Greylock set up a similar fund that wasn’t accessed, according to one of its founders.)

As founders attempted to navigate the SVB website on Monday with mixed results, a few large firms surveyed by Forbes said they did send out a small amount of checks. Kleiner Perkins made one loan that was repaid within 24 hours; Menlo Ventures also wired one, without a time line for its return, according to partner Matt Murphy.

Perhaps the most active firm was First Round, two sources said. Of the early-stage firm’s 200-plus investments, 80 had money at SVB, one told Forbes, and 40 faced payroll concerns. With their LPs’ permission, First Round partners made a low-interest loan back to the firm—which had its own cash tied up at SVB—and made a handful of wires on Friday, then more than an additional dozen on Monday. (A source close to the firm said that such efforts paled in comparison to what some of the firm’s founders did, such as flying to California to be first in line to withdraw money on Monday.)

Most others that investors and founders disclosed to Forbes, or that responded to its requests for comment, said they’d prepared to wire loans in some capacity but had not needed to, a group including Accel, Benchmark and Index Ventures. Others were still evaluating options when the FDIC announced its decision, including Lux Capital and Sequoia, sources added.

Among firms linked with Thursday’s bank run on SVB because they reportedly warned founders to withdraw their funds, Coatue prepared to offer loans but didn’t, a source said; Union Square Ventures, meanwhile, circulated a loan offer document reviewed by Forbes that offered an interest rate of 4.5%, what the firm said was the minimum legal applicable rate for a short-term loan. The loan could also convert into preferred stock from the company’s most recent past funding round, or roll into its next equity financing of $2 million or more at 80% its price, per the document.

USV’s offer, too, went unused in the end by founders, partner Rebecca Kaden told Forbes by email. “We kept in close touch with our companies through Monday morning as the pipes started working again to make sure they all met payroll from their own accounts, which they did,” she wrote.

“From talking to other founders, I don’t think many VCs were able to do anything that helpful this weekend.”

Founders Fund, meanwhile, drew heightened scrutiny in part for its ties to Thiel, a public-opinion lightning rod. Blamed by some for helping to fuel the bank run (in reality, other firms warned their founders about SVB long before), Thiel eventually told the FT that he deliberately left $50 million in personal funds at SVB over the weekend, confident in the bank’s long-term survival. His firm, meanwhile, was mentioned by multiple peers as one that disappointed in its weekend response.

“They were saying, ‘We are not in the business of making loans—that’s not our problem. But we will buy more equity,’” said a partner at a firm that shares portfolio companies with Founders Fund. Firm spokesperson Erin Gleason said Founders Fund did not offer any equity-based convertible notes, known as SAFEs, to companies impacted by SVB.

“Corporate treasury management is ultimately the responsibility of the founders/CEO,” Delian Asparouhov, cofounder of space manufacturing startup Varda and a Founders Fund investor, tweeted on Saturday. “Never forget that.”

Some founders did tack on more funding to their last funding rounds generally, several investors said, with one telling Forbes that given 2023 equity pricing, such a move could have easily been more generous. Such notes would be more familiar to VC firms’ usual operations compared to loans, said Sandeep Dahiya, a professor of entrepreneurship at Georgetown University. “The whole idea of a venture fund isn’t to be lending to assets without collateral.”

A Longer Crisis Averted—And Uncalled Bluffs

If the FDIC hadn’t guaranteed deposits on Sunday and bank runs had extended to other startup banking partners, VC firms would have faced a crucible moment. Instead, it’s impossible to know how they would’ve truly responded when facing dozens, or hundreds, of companies facing business interruptions, with founders and board directors personally liable for employee pay. “I don’t think it was just virtue signaling,” said finance professor Michael Goldstein of Babson College. “Within the confines of the law, you’d be limiting the damage on a temporary basis and moving on.”

Several founders who spoke to Forbes wondered whether firms exaggerated their willingness to help because they anticipated the government making such efforts moot. “From talking to other founders, I don’t think many VCs were able to do anything that helpful this weekend,” said one tech CEO, who asked to remain anonymous so they could avoid giving “untrue fluffy bullshit.” “Even the best-hearted ones were spread thin over just how many companies were affected. So it was really left to founders to rally their resources and pull support from wherever they could.”

Some investors, especially fund managers without the personal means or large enough funds to provide financial assistance themselves, focused instead on providing the most up-to-date information on the state of the government’s response and alternative loan sources like Brex’s weekend emergency fund.

“It was all happening so fast that talking to founders and VCs were your only option,” said founder Jordana Stein, CEO of executive peer-learning startup Enrich, who turned to VC firm Bloomberg Beta’s founder Slack channel after she couldn’t get into a popular founder WhatsApp group that quickly reached the app’s 1,024-member limit. Others turned to Signal and WhatsApp groups, or email groups like A16Z’s CEO distribution list. (The firm declined to comment on whether it offered its founders loans.)

But the investors who actually walked the walk by wiring money, mostly from smaller partnerships or nontraditional funds, told Forbes doing so wasn’t nearly as hard as some big firms let on. Altman lined up a number of wires despite being just several days from OpenAI’s big GPT-4 launch. Others that Forbes learned sent a number of wires included Conviction founder Sarah Guo, solo capitalist Lachy Groom and former GitHub CEO Nat Friedman. (An honorable mention from several founders went to John Curtius, who reached out to startups he’d backed at Tiger Global to help, despite leaving last year to start Cedar Investment Management. But Curtius’ money wasn’t ultimately needed, they said.)

“I did it in 60 seconds. It was easy, and honestly, in a sense, fun, because it’s a time when you want to add value,” said Lemkin at SaaStr Fund. His fund’s money was also at SVB, but he was able to wire founders cash from his personal Wells Fargo account. “I offered immediately and wired without a thought, just told my LPs. But if you are a junior partner at a big fund, I suspect it would be very hard unless the ‘Big Bosses’ put it together.”

Ashley:
This is Real Estate Rookie episode 270.

Tony:
So, there definitely are I think a lot of positives and the disadvantages. I would oppose that question to the person that’s doing the arbitrage or asking to do the arbitrage and see what their responses are. Right, if you bring up the concerns about maintenance and repairs and they’re just kind of like stumbling, they don’t have a good response for you, then don’t work with them. If you bring your concerns around liability and what they’re doing to minimize that or mitigate that risk, then don’t work with them. So pose your questions to that person, see what their responses are, and if you feel confident with what they’re saying, I think it’s a win-win for both of you guys.

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

Tony:
And welcome to the Real Estate Rookie Podcast where every week, twice a week, we bring you the inspiration, motivation, and stories you need to hear to kickstart your investing journey. Today, I want to shout out someone by the username of Lukester8891. Lukester left to say five star review on Apple Podcast that says, it’s an encouraging podcast. “Tony and Ashley’s podcast is extremely informative and encouraging. Thank you for creating a space to give people like me the knowledge and extra nudge to feel confident about investing in real estate.” Luke, we appreciate you and for all of our Rookies that are listening, if you have not yet taken the two minutes and 27 seconds it takes to log into Apple Podcast and leave us a five star review, please do us a huge favor and do that.
The more reviews we get, more folks we can reach, more folks we can help, which is what we love doing here at the Real Estate Rookie. And if you’re not yet following me and Ashley on Instagram, do yourself a favor and do that also. I’m at @tonyjrobinson, she’s @wealthfromrentals, we’re always posting pretty much nonstop about all things real estate investing. And you could see some fun stuff from my wife, you get to see some fun stuff from Ashley and her kids. And you get to get a glimpse into the world of your two favorite podcast hosts.

Ashley:
Yeah, I actually had someone comment on one of my Instagram Reels today, and I just had this duplex that was trash. The upstairs and downstairs people were evicted two weeks apart and so, the whole property needed to be redone and I have these great contractors, they redid it and three weeks for me, turned the whole place around. It’s beautiful. So I’ve been using a lot of content from it and the two contractors that did it, I’ll text them and be like, “Okay, who wants to give you the most money? I’ll add you as a collaborator on this” or whatever. And it’s turned into a joke because they’ve been trying to grow their Instagram with showcasing what they do at properties and everything and it’s been great. So I did I think three Reels just off this one property so far in the last week maybe.
And I had someone comment and say, “I follow a lot of investors and it seems like you have a lot of units that are trashed and destroyed by people who are evicted. I’m just really curious, do you highlight that or do you just not screw good or what?” And I really went back through my Instagram and I looked, and there’s two properties, so three units that were trashed and had to be completely redone within this past year. And one was another investor that I do asset management for and not mine. And then there’s the rehab projects I do. We bought a hoarder house this year and we did a bunch of Reels on that, but it was just like all my Reels are just the bad stuff.

Tony:
Just beat up.

Ashley:
There’s no Reels of, this is how nice this tenant left this apartment and the next day it’s rented to someone else. And so, it really made me think of, man, maybe I should just show some of the good, not just all the bad. But I honestly responded, I’m like, “This is what people are entertained by.” So I think I am just posting the bad because here I am crying, but at least people are being entertained because I have to spend $20,000 on a rehab. Might as well make a $100 off of views on a Reel to pay for the rehab.

Tony:
For whatever reason, I think people just naturally gravitate towards the bad stories also. Like me and Rob, so the co-host for the Real Estate Podcast, we were chatting about YouTube stuff and we were saying the videos that tend to do the best are the ones that have flames in the thumbnails. It’s like if it’s my face and there’s flames around me or Rob’s face and there’s flames around him, those are the videos that people want to watch the most because they just think something bad is going to happen. But if I talk about a video where it’s like, “Hey, here’s a really effective strategy to be a great host on Airbnb,” and I’m smiling, no one watches. It’s the weirdest thing. So I don’t know, it is what it is. Well, we had a few good questions lined up for today. We talk a little bit about Airbnb arbitrage at the end.
So if you’re not familiar with that strategy, we break down what that is and how it’s beneficial for both the owner, the landlord, and the person doing the arbitrage, as well as some disadvantages you might want to look out for. We spend a little bit of time talking about HELOCs and when it is a good idea to use a HELOC for investment purposes and when it isn’t. And some of the things you should look out for when you’re pulling one of those lines of credit. We talk about turnkey properties and if in today’s climate, does this still make sense to use turnkey services? And if you do, what are the reasons it does make sense? We also talk a little bit about protecting yourself from liability. So we talk about umbrella policies and insurance, and then we also talk about CPAs and tax strategy. So if you want to save money on your real estate investments, make sure you listen all the way through because we’ve got some good topics coming your way.
All right guys, so let’s jump into the first question here. This one comes from William Craft and he posted this in the Real Estate Rookie Facebook Group. And Williams question is, “I have just one rental property that is in my name and the rental agreement as also in my name. Do I need to hire a CPA or can I file normally? Thanks.” I just want to start by sharing one of the biggest mistakes that I made in my real estate business and that was waiting too long to hire a CPA. William, if your goal is to continue to build your portfolio and hopefully at one day have a sizable number of properties, I think the earlier you can invest into good tax strategy help, the better you will be.
Because a big part of real estate investing is not just the cashflow that you produce, but it’s all of the tax benefits that come along with being a real estate investor. And so, often if you don’t have the right advice from a CPA, sometimes you make decisions that can hurt your ability to maximize your tax deduction. So even if you have one property, honestly, even if you have zero properties and you’re just thinking about buying your first property, I would probably engage with some sort of CPA so that you can start building the right roadmap for yourself to help minimize your taxable income.

Ashley:
And I think a big thing to point out is that you’re not just hiring a CPA, you’re hiring a CPA that’s knowledgeable in real estate investing, but also is going to give you tax planning. And that’s kind of like the crucial key there as to you can find a CPA who knows how to file a tax return for real estate, for your rental properties, knows how to take your bookkeeping or maybe even do your bookkeeping for you and then put it onto a tax return. The crucial key is finding one that is actually going to map out or plan out and help you strategize as to these are the moves you should or shouldn’t be making before you actually make them or before the tax year ends.
So a lot of times when you have a CPA, okay, it’s January right now, about a time this airs is probably February, maybe even March, but you’re getting your tax stuff together, you’re getting your 1099s in the mail, maybe you’re getting your W-2, you’re collecting your reports, then you’re sending it off to your CPA, your accountant. When they receive it, if there is something that they notice that you’re going to be paying this amount in taxes, there’s nothing that can be done. The tax year for that tax return has ended. I remember this one year, we got a tax bill, it was like the day before taxes were due, I think it was. And we just always send in our stuff to our accountant. She would let us know a couple of days before as to what our tax was due and if we could just stop in and sign. It was the day before the payment was due and our tax return was due.
And I just emailed her and was like, “Hey,” she emailed me right back and she was like, “Oh, you guys owe like $2,000” or something. I was like, “Oh my God.” I was kind of worried this year about what our taxes would be and stuff. And then I was like, “Wow, this is great.” I called my mom, I’m like, “Oh, can you believe it? I’m so excited.” A minute later I get another email, “Oh my gosh, I’m so sorry. That was for somebody else, you owe $30,000.” I immediately burst into tears, I’m like, “No. Oh my god, this can’t be happening.” And so, I called David, I was like, “This is how [inaudible 00:09:02].” He’s like, “It’s okay, we’ll like figure it out” and stuff like that. And that was where it hit us like, “Okay, we need to do some tax planning.” That was ridiculous. So going forward, that is something like the sooner you can implement that actual tax planning piece from a CPA is going to be so crucial instead of just hiring a CPA to file your tax returns.

Tony:
So much good advice there, Ashley, about just the idea of actually planning for your taxes and not letting your taxes take you by surprise. And that’s really something we’re trying to focus on this year as well, is more regular communication with our tax strategists around, “Hey, what does a P&L and the business look like so far year to date?” And if we think we’re going to have a lot of taxable income, what should we be doing to offset that? And we did some cost segregations at the end of last year to try and help reduce our taxable income and we’ve got some more properties that we’re looking at purchasing to help reduce some of that taxable income as well. I guess, one question for you, Ashley, do you do quarterly tax payments, like your estimate payments or do you just do one payment at the end of the year?

Ashley:
I don’t have to because I have farm income and farmers are not required to make estimated tax payments.

Tony:
Awesome. I mean, it is nicer if you can wait till the end of the year. That way you can keep all that money throughout the year and just make one big payment at the end.

Ashley:
Right. Because you’re giving the government interest free money.

Tony:
Interest free money.

Ashley:
They’re getting the loan from you. It’s not due until April 15th, but you’re loaning it to them for free early interest free. So I always have this debate with some of my friends as to if you’re a W-2 employee, you have contributions, they have money withdrawn from your paycheck to pay towards your taxes throughout the year. So I always think it’s best to zero that out. You hear people talking about, “Oh, I got a $5,000 tax to refund this year, super happy.” That’s like, no, you paid the government $5,000 extra and gave them-

Tony:
Too much.

Ashley:
… that money ahead of time. So I think that’s a huge misconception is that, you’re overpaying your taxes and you’re getting that money back and then might be great to get that lump sum. But think about if you had that money throughout the year and you could invest it a little bit or things like that. I bet you could see a bigger return on your money than giving it to the government interest free.

Tony:
Yeah, I always played with my deductions on my whatever. What was that for? You had to fill out as a W-2 employee or W-9?

Ashley:
No, W-9 is to show your social security number. I think it’s W… No, W-3 is what the…

Tony:
W-4.

Ashley:
Yeah, W-3 is what the employer has and they issued W-2.

Tony:
Yeah, so the W-4, you put your deductions and stuff. I was like always bumping mine up and down trying to figure out what that sweet spot was. Because same, I didn’t really want to get a return. I just wanted all that money throughout the year. So anyway, William, hopefully that helps you. If we didn’t say it loudly and clearly enough, hire the CPA, like Ashley said, specifically someone that has I think experience working with real estate investors and if you want a better kind of breakdown on what you should be looking for, go back to episode 255. We just interviewed Amanda Han, and she does a wonderful job kind of breaking down what you should be looking for in both a tax preparer and your tax strategist.

Ashley:
And the cost is not that big of a difference. So William, I don’t know if you’re just filing your tax return yourself using Turbo Tax or something like that. Once you start adding onto investment properties, usually there is an additional fee they charge because now you’re filing this form and stuff like that. So just the time you’re saving by having a CPA do it, I think is just super beneficial and it’s going to probably cost about the same. So for me to have an LLC tax return done, I believe this past year, it was 300. The years before that had been 250, I think. And then my personal return, I don’t remember how much that was, but a couple of $100 to do.
But it’s the tax planning portion that can be more expensive. But you can still do your own tax return if you want, if you feel like you’re very confident in that, knowledgeable enough to actually do your tax return and then just pay a CPA for that tax planning piece and that portion. Also, you want to find one that’s going to work with your attorney too, because that is going to kind of compliment each other if you are going to start setting up LLCs as to what that structure is going to look like.

Tony:
So should we move to question two?

Ashley:
Yeah.

Tony:
All right. So this next question comes from Chris Lat and Chris has a question about Airbnb arbitrage. So he says, “Airbnb arbitrage from a landlord’s perspective, what are the major disadvantages of this strategy? I just listed my primary residence for rent and I’ve already gotten inquiries about potential tenants that want to rent the property out as an STR for when they’re not using it themselves or they want to rent a portion of the house as an STR.” So I think the first thing that we should do is just define what Airbnb arbitrage is because not everyone is even aware of that term. So Airbnb arbitrage or rental arbitrage means that instead of taking a property that I own and listing that on Airbnb, I go out and I rent someone else’s property and say I rent it for a thousand bucks a month, then I turn around and take that listing and put it on Airbnb and then I get to keep all of the income above the 1000 bucks that I’m paying to that landlord.
As the person renting the unit and subleasing it on Airbnb, the benefit is that it’s significantly less cash to rent someone’s house than it is to go out and buy your own house. So you need less capital to get started with this, but there are some disadvantages while on the person who’s doing the arbitrage. But from a landlord’s perspective, are there some major disadvantages? So I mean, Ashley, you’re doing an arbitrage unit already. Maybe if you can speak to why the landlord that you’re working with outside of him being someone that you know, why was he open to that arrangement knowing that if he just put it on Airbnb himself, he probably would’ve made more money?

Ashley:
Because he didn’t want to deal with operating a short-term rental or have any clue how to even list a property onto Airbnb. So one reasoning is that he just had no idea how to do that or no desire to do that, his game was long-term rentals. And I think the biggest thing is vetting the person who you’re renting to that’s actually going to operate the short-term rentals. So he knew that I would be paying rent, that he’s not just somebody that he’s renting too, that he’s taking kind of a gamble with as to not knowing anything really about this person except for what their credit and background check shows. He knows where I live, knows where to find me if I didn’t pay rent. So basically having guaranteed rent in that unit was a big selling factor.
So I think if you are going to find somebody who’s doing this, who’s going to operate a short-term rental and you’re going to do a long-term lease to them is really take the time to vet them, see if they have any other short-term rentals, any other arbitrages they’re doing, talk to those landlords, what’s their track record? One benefit is that you’re going to get the house cleaned pretty frequently than if you had just a long-term rental in there. You’re going to most likely have it professionally cleaned every time there is a turnover. So I have two arbitrages right now and the first one I’ve had since maybe August 2018 I think actually. And that unit has just stayed in pristine condition and I see a lot of the turnovers that happen in the same apartment complex, it’s a 40 unit apartment complex.
Our unit is nicer than people who have only lived there two years and they have marks on the walls, things like that. Just wear and tear on the properties where since ours get cleaned so often that it has stayed in such a nice condition since 2018. Basically, we haven’t done any remodel since that 2018 or had to make any kind of significant repairs. And if for some reason, a tenant did damage the unit a guest for the Airbnb, that would be us taking care of that. So that’s another thing I kind of make clear when you’re making this arrangement as to what kind of maintenance and repairs, who going to be responsible for what? So if there is a lockout, okay, if you’re renting to a long-term rental and our lease is like a $25 fee for a lockout whatever. But if it’s a Airbnb gust, are they contacting you as the arbitrage operator or are they contacting the landlord because they can’t figure out how to get into the lockbox?
Things like that you need to figure out as to what constitutes wear and tear that the maintenance company is going to take care of or whatever. I will give you guys one example of something that happened recently where it was kind of like a conflict with the arbitrage where I can see as the landlord that this would be a negative towards doing arbitrage. So in this apartment or complex, there’s a property management company in place and so, it’s not actually the owner dealing with it. But either way, the property managed company or the owner, they work for the owner. So the guest that was staying in the short term rental had a dog barking and they could not figure out how to get ahold of the guest because they did not have the guest contact information. They only had my information as the Airbnb host.
So they contact me, I call, leave a message for the guest, no answer. The property management company goes ahead and it was either them or the other people in the building, somebody calls the police. The police somehow find out who she is, whatever, call her, and it turns into this big huge thing. So that was one disconnect I can see is if there’s something going on in the unit or something happening that the landlord doesn’t have a way to actually contact the guest that’s staying into the property. So maybe that’s something you can clarify ahead of time as to contact per information must be provided for somebody that’s actually staying into the house or something like that, just as the owner being able to correspond or can coordinate with that person. So, one downside that I’ve encountered.

Tony:
And I love that story, Ashley and this is me kind of putting my short-term rental hat on as a landlord and as the person operating the arbitrage unit. One thing that would be helpful, do you guys have noise monitors in that unit?

Ashley:
No, I’ve never even heard of that.

Tony:
Yeah, so there are devices that we’ve installed in our short-term rentals that essentially monitor the decibel levels inside of the property and if it goes above a certain level for a sustained period of time, it automatically sends a message to the guests asking them to keep the noise level down. And there’s even a setting, I’m pretty sure where you can have an alarm go off to really kind of rattle them. And if you can show to Airbnb like, “Hey, this person has violated my house rules because they’ve been excessively noisy,” now you can cancel their reservation and escort them off the premises without Airbnb being too upset with you. So there are some things you can do even as a landlord to say, “Hey, if you are doing arbitrage on my unit, I want to make sure that you have these noise monitors installed and that I’m also notified whenever there’s a noise issue.”
So that’s one thing, but I love that story because isn’t definitely something that I think landlords might be concerned about. But if you’re the person that’s renting the unit, you also have an incentive to make sure that your neighbor or that your guests aren’t everybody off because now you know that you’re going to have a harder time trying to renew that lease when it does come due. So I think there’s incentive on both sides to make sure the guests are always behaving well. I think the other thing that a landlord might expose himself to is maybe a little bit of additional liability. Airbnb does have what they call host protection, which is called AirCover. So if there’s an issue at the property, Airbnb has up to $1 million in liability protection, but it’s definitely not an insurance policy.
And there I’ve seen a lot of instances where things have happened and Airbnb feels it doesn’t fall under their AirCover protection. So I would probably try and make sure that your person doing the arbitrage has some sort of additional liability protection to make sure that if one of the 12 different people or parties that are coming through that house on a monthly basis, if something goes wrong, there’s a multiple layers of protection between you and that guest as well.

Ashley:
Yeah, that’s all great advice, Tony. That noise level thing, I’d never even heard of that. I almost want to borrow one from you and put it in my house and play with my kids somehow to trick that.

Tony:
It actually might work pretty well for kids at home too. Like “Hey, if you guys go…” But no, I think that’s the main thing. Honestly, Chris, for you is the landlord. If you don’t have the time, desire, or ability to put it on Airbnb yourself, you get the benefit of, as Ashley said, the property’s going to be cleaned professionally every two to three days. You’re going to have maintenance and repairs, most of the lower level items being repaired by the person doing the arbitrage, not by you. You’re going to be able to hopefully charge maybe even a little bit more for your rent, right? Because you understand that they’re running a business out of your unit. So you can say, “Hey, if market rent is a thousand, I’m going to charge you 1,300” and you can even get a little bit of a bump there and they’re going to be happy with that because they’re going to make two x or three x that on the arbitrage side.
So there definitely are I think a lot of positives and the disadvantages, I would oppose that question to the person that’s doing the arbitrage or asking to do the arbitrage and see what their responses are. If you bring up the concerns about maintenance and repairs and they’re just kind of like stumbling, they don’t have a good response for you, then don’t work with them. If you bring your concerns around liability and what they’re doing to minimize that or mitigate that risk, then don’t work with them. So pose your questions to that person, see what their responses are and if you feel confident with what they’re saying it, I think it’s a win-win for both of you guys.
All right, so let’s go on to question number three here. It comes from Mike Woodruff and Mike’s question is, “Recommendations on how to best protect myself as an investor. I’m purchasing a rental and trying to figure out what is the best type of insurance or ways to protect me personally. I know an LLC would probably be best but have heard mixed answers if I would be able to transfer it after closing if there’s a loan on it. Another option I have heard is just to get an umbrella policy. Also, are there any specific disclosures or terms you make your renters agree to?” So there’s a couple of questions in here, Ash. I think maybe we should kind of break them down in each of their own pieces. So the first is maybe we should even take a step back from a liability protection standpoint, there are two options. You have an LLC and you have an umbrella policy, I can say what we do in our business. Then Ash, I’m curious how you do it in yours.
For most of our properties, we have the actual title is in the name of our personal names and most of the debt is in our personal names as well. We still recognize all that revenue and the expenses and the profits as business income. So from a tax perspective, it’s part of our LLC, but from a legal perspective, it’s owned by me personally or my partner personally. So what we did in our business was we got additional insurance. So we have home insurance and we also got an umbrella policy for all of those properties as well. And it’s like several million dollars of liability protection that comes along with those umbrella policies. So if something were to happen at one of our properties, even though it’s our personal name that’s on title and on the debt, we still have this extra layer of protection. So the liability would have to be in excess of 2 million before it starts to affect us personally. So that’s what we’ve done in our business to try and mitigate some of that risk. How are you doing it in your business, Ashley?

Ashley:
Yeah, so anytime I take on a partner, I definitely open an LLC. And then at the first partnership I did, I was just super afraid of being sued. So I even had an umbrella policy over that LLC way more than you actually need to have. And especially at the time we had one, two, then three properties in it with not a ton of equity in it. So if we were sued, there’s not really anything anyone could really take from us being new investors. But now, I don’t have the umbrella policies over any of the LLCs. Personally, I do have umbrella policy over my primary residence. I still have one rental property in my personal name cover some of my businesses and then I still have the properties that were in my personal name. I had an umbrella policy over them too, but then I’ve recently deeded them into an LLC and I no longer have that umbrella policy over those.
One thing I recommend having is your tenants getting renter’s insurance, having them have carry their own insurance I think is a huge plus. But I think doing an LLC is a great way to protect yourself. Only thing to watch out for is if you do want that nice 30 year fixed low interest rate mortgage that you most likely have to put into your personal name and that’s when you should go ahead and get that umbrella insurance. So you can get that good mortgage rate. Not as good of a mortgage rate now as it was a couple of years ago, but still better than commercial. I just did a commercial loan and I think I got 7.4% was the interest rate on it. Have you done any recently, Tony, on residential or commercial?

Tony:
Yes. We closed on a deal recently on the residential side. I want to say we were right around 6% on that deal, so about a point lower than what you’re saying. And honestly, that’s a big reason why so much of our debt is in our personal name because we were able to get such favorable terms. Like I said, our best interest rate on one of our short-term rentals right now is 2.6% on a 30-year fixed. And it’s like that is just free money, especially in comparison to where rates are today. So there is some things to think through. We did do an episode now, I was trying to look at the episode number but I couldn’t find it so maybe we can put in the show notes.
But we interviewed a guy, Ashley and his whole business was about helping real estate investors from a liability perspective and how do you structure your business in different ways to reduce your liability. And obviously, his process was for folks that maybe had a little bit more equity and net worth and were more concerned. But he had a very solid framework that he had built out to say, “Hey, you need this kind of entity holding this, you need this entity holding this and you should own these kinds of properties with this thing.” So if we can find that episode out.

Ashley:
Yeah, it was Brian Bradley.

Tony:
There you go.

Ashley:
I know because I use it, I recommend it all the time. And it was episode 105 and then it was either 104 or 106 because we did back to back episodes with him. But that was a phenomenal episode. He also has a newsletter too that you can sign up for and he’ll email you, I don’t know what the frequency is. But I get them and I’ll glance through him every time, which is great recommendations on that liability piece as to how to protect yourself.

Tony:
That’s one of the episodes that’ll scare you almost away from being a real estate investor when you hear all the things that could go wrong. But I think he definitely did a great job of breaking down how you can set it up to protect yourself from some of the things that come along with being an owner.

Ashley:
And one question we always see too is should I open an LLC in the state that I live in or the state that I’m investing in? Or should I open one in Delaware or Wyoming and that he goes all into that too, because it depends on what your situation is. So, definitely two great episodes to listen to and if you do remember those episodes, great, time to go back and refresh those episodes too.

Tony:
All right, so let’s jump into the next question here. This one comes from Chase Fayver, and Chase’s question is, “What are the main downsides of turnkey properties? I’ve seen 6% interest on a 30-year loan advertised, which I’m not sure most people could get right now with an 8% management fee. Other than that, they seem like a pretty good option, especially if you could buy a new build with a cash flow from year one. So what are your thoughts?” I think in general, Ash, and I’ve never purchased a turnkey property, I don’t think you have either. But I think in general, you are always going to get a better return assuming that you buy right. You are always going to get a better return if you do the work yourself of finding a distressed property, rehabbing it, and then refinancing it yourself. The benefits of a turnkey property is that the hard work of finding the off market deal and managing the rehab and getting it stabilized, it’s all done for you.
So if you don’t have the time, desire, or ability to do all the hard work of doing that process, then I do think that there is a place where turnkey properties make sense, especially if you have maybe a consistent source of capital so that maybe every six months to a year, you’re able to buy another property without really worrying about, you run enough capital yourself. But if you want to be able to recycle your capital, buying is obviously a better approach. So I think Chase, it depends on your unique situation and what your goals are.

Ashley:
On Real Estate Rookie episode 29, so one of the original episodes we had Whitney Hutten and Lance Robinson, where they go into depth about their turnkey investing experience and they both were able to build their wealth based on doing turnkey rentals. That’s how they started out, and they built these great portfolios and built their wealth from that. Since then, I know Whitney has gone on and done other things, but that’s what got her started. So they kind of go into what are some of the things you should look for and like pros and cons of doing turnkey rentals. But they’re definitely two success stories that came out of doing turnkey rentals. But the thing here on this question is I’ve seen 6% interest on a 30-year loan advertised, which I’m not sure most people could get right now with an 8% management fee.

Tony:
I’m assuming Chase meant that it won’t cash flow as well. The returns won’t be as good with interest rates being high and accounting for the management fee. That’s my assumption. So Chase, if we’re off base, let us know. But that’s what I’m thinking he’s getting at.

Ashley:
Okay, so if that’s the case, then that would be a great question to ask the turnkey company provider. Say, “I’m looking at this, I don’t see how the numbers are penciling out” and see how they respond to that as to what they are kind of giving you feedback. If you’re not using an actual turnkey company and you’re just looking for a property that’s already redone, you’re buying it off the MLS. There’s not like a property manager in place or anything like that. It’s just somebody selling in just doesn’t need any rehab. Just throw out those low ball offers, try that. I mean, we are doing the men 90-day mentees here and we had Brandon on who’s from day one we’re just like, “Well, how many offers are you making?” He’s like, “Well, I haven’t made any.” The next time we talked to him, he made an offer. Offer accepted and he threw out what would work instead of just waiting for the purchase price to match what he wanted put out in low ball offers. So that would be my advice there is go ahead and make that happen.
Also, I’ve heard investors that say that one strategy they do is they don’t even buy for cash flow. They’re just looking to break even because they know there’s so much appreciation in the area and they’re investing for appreciation. So maybe that could be a way to kind of pivot what your strategy is. If for sure you want to go for cash flow because you want to quit your job next year and you need that income coming in, then maybe this isn’t for you. But if you’re just trying to build wealth, maybe build up some retirement and you’re not looking to really cash in on anything right now, you know, want to work your W-2 for a couple more years, things like that, then maybe breaking even isn’t that bad of a thing if you’re going to be building appreciation in this property just because it’s such a growing hot market too. So make sure you’re looking at all the different ways to actually build wealth off of a property and not just the cash flow and see if maybe one of those other ways will kind of suit your needs.

Tony:
Yeah, Ash, I’m so glad you brought up that last topic about appreciation because there are other things outside of just cash flow that we should consider when we’re looking at deals. Cash flow is just one piece, but you have appreciation of the property, you have debt pay down and you have the tax benefits. And if you are a W-2 income earner and you’re looking for an opportunity, there’s some things you have to do to be able to check those boxes. But if you’re looking for some waste, maybe offset some of that W-2 income, buying something that it already is set up and running might be an easier way to go.
It’s easier to do it in the short-term rental space. Significantly harder to do it in the long-term rental space, but if you can jump through those hoops you can. But we had J Scott and Dave Meyer back on episode 224 and they talked about the four ways that real estate generates profits. So if you want a refresher on things outside of cashflow, you should be looking at when you’re analyzing a deal. Go back to episode 224 with J Scott and Dave Meyer. Two of the smartest people that I know in real estate.

Ashley:
I agree with that for sure.

Tony:
All right, so this next question comes from Denise Bedinger and Denise’s question is, “Is an interest only HELOC a good tool to use equity as a down payment for a buy and hold property? Or would the financial method work best for a fixed and flip where you can force equity and refi or sell? So Ash, what are your thoughts on using a HELOC for a long-term buy and hold?

Ashley:
So for me, I’ve done this, but with I’m going to rehab the property, build that appreciation, I’m going to refinance and be able to pay off my line of credit. Felipe Mejia, who used to be a co-host on this podcast, he used to use his HELOCs to purchase a property and he would just take all of his cash flow and rapidly pay down the HELOC. He never went and refinance. He would use it as the down payment in this situation. So he did it that way and it seemed to have worked well for him, just like he wasn’t until that HELOC was paid off, he wasn’t keeping any of the cash flow for himself. And then any other properties was, so say he had two or three other properties that he had already paid off the down payment, he was taking that cash flow too to pay off the down payment for that fourth property. And would just go hard at paying down that line of credit until that was paid off and then go and start looking for the next house. Use that line of credit again as the down payment.
So definitely can work like that. So if you’re able to put some equity into it as to rehab it, maybe you’re even able to raise the rents going and refinancing. The downside is you’re paying closing costs twice. So when you purchase the property, you get the mortgage, you’re paying the closing costs and you go and refinance to pay off that line of credit and the first original loan, you’re going to pay closing costs again. But if you work that into your numbers, so when you’re using the BiggerPockets calculator reports, there is a section to say closing costs. So when you do the burst strategy, you can account for that. So you can still see what your cash on cash return is as to how much money you’re putting into the deal. So make sure you’re accounting for those things too when you’re doing the cash-out refi as to after you’ve already done an initial loan on the property.

Tony:
Yeah, I think my idea has always been anytime you have short term debt like HELOC, private capital, hard money, I typically am of the opinion that you should only do that for a short-term project. So I like the idea of doing it for a flip. I like the idea of using it for a BRRRR, but I just feel like I want to be able to sleep at night. And the idea of having this debt that’s really made for short-term purposes tied up in a long-term property, it might get you into sticky situation. But if the amount of money you’re using was relatively small, maybe this deal’s going to put off a bunch of cash flow. Maybe it does make sense, but I definitely think it is a risk that you want to weigh before you jump into it, Denise. So hopefully that helps.

Ashley:
Well, Tony, another great episode of Rookie Reply. Thank you guys so much for joining us. I’m Ashley @wealthfromrentals and he’s Tony @tonyjrobinson on Instagram, and we will be back on Wednesday with a guest. I’ll see you guys next time.