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

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

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

David Greene:
Alrighty.

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

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

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

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

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

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

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

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

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

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

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

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

Stacie:
Most likely.

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

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

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

Stacie:
Yes.

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

Stacie:
I haven’t, no.

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

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

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

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

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

Stacie:
Yeah, never, right?

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

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

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

Stacie:
Thank you guys.

David Greene:
Thank you, Stacie.

Rob:
Thank you.

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

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

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

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

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

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

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

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

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

1. Home Affordability

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

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

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

2. Percentage of Underwater Mortgages

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

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

3. Number of Homes Facing Possible Foreclosure

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

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

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

4. Unemployment Levels

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

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

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

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

The Most At-Risk Markets

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

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

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

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

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

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

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

The Least At-Risk Markets

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

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

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

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

Other cities with similarly upbeat housing market trajectories include: 

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

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

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

The Bottom Line

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

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

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

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

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

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

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

Understanding Airbnb Hosting

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

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

Nine Factors That Influence Airbnb Earnings

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

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

1. Pricing strategy

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

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

2. Recurring expenses

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

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

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

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

3. Location

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

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

4. Seasonality

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

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

5. Airbnb host fees

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

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

6. Occupancy rate

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

Here are two reasons why high occupancy rates are crucial: 

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

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

7. Reviews

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

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

8. User experience

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

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

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

9. Amenities

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

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

Example Earnings (Annual)

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

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

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

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

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

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

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

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

Tips on Maximizing Your Airbnb Earnings as a Host

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

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

Final Thoughts

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

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

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

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

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

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

Rob:
Kim, welcome to the show.

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

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

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

Rob:
Okay, so just a few here.

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

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

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

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

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

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

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

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

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

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

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

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

Rob:
No frying allowed.

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

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

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

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

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

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

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

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

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

David:
Oh, yes.

Rob:
Yeah.

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

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

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

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

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

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

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

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

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

Rob:
And why did you choose this market?

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

Rob:
Nice. I love it.

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

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

Kim:
This is a neighborhood retail center.

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

Kim:
The in contract purchase price is 5.4 million.

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

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

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

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

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

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

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

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

Kim:
Because Google sheeted sounds weird.

David:
Are they still using them though?

Rob:
AI’ed out.

Kim:
It spreadsheeted, that could come out wrong.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Rob:
80%?

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

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

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

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

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

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

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

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

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

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

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

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

Kim:
Interesting. I like that idea.

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

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

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

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

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

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

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

Kim:
Thanks so much for having me guys.

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

Bill Cobb, Frontdoor CEO, joins ‘Closing Bell Overtime’ to talk the housing sector and how it fits into the picture.

Ashley:
This is Real Estate Rookie, episode 351. My name is Ashley Kehr and I’m here with my co-host, Tony J. Robinson.

Tony:
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, Ash and I want to take a little trip down memory lane and give you some of the top moments from the Real Estate Rookie Podcast for this year.

Ashley:
If you want to listen to any of today’s full episodes that we recapped, you can go to our Real Estate Rookie YouTube. You can find a link to that in the show description, and we have a playlist for you for each episode that was covered today. Going into the new year can be hard to keep yourself motivated so we’re going to start off by sharing some stories to keep you motivated going into the new year and starting the year off fresh and ready to get your next deal. And hopefully this is something that you can find relatable as to why you want to start your journey too.

Tony:
Dani, what about for you? I mean, was your why aligned? Was it more so Brandon that kind of initially planted the seed? How did you get integrated into the business?

Speaker 3:
So my why was not aligned at all. We can’t even sugarcoat that. I was completely dead against it for a very long time. He had probably been talking to me for maybe a year, maybe a little longer about his desire to do real estate and I was like, “Nope, nope, nope.” And to me it was having to change the mindset of having money in your bank account versus investing. All I could see was the bank account going down and I couldn’t wrap my head around how this was going to make us successful. How is this going to give us financial freedom if we don’t have money in the bank account? It took a lot of long nighttime conversations and him also sharing the education with me.
I had to get into learning about it, running the numbers and diving in with him to understand what we were doing and why this was going to be beneficial before I really agreed to it. Our first property, I was still very much on the fence. I was supportive, but very much on the fence about what we were doing and why, and I just kept telling myself that I’ve trusted him all along. I just got to keep trusting him. And to this day, he’ll present a deal and I’m like [inaudible 00:02:29] I’m like, “But I trust you, so if you feel it’s a good deal, then we will roll with it.” And that’s just how it works for us.

Tony:
Dani, I appreciate the transparency there because I know one of the biggest questions that we get on this podcast is how do I get my spouse on board? How do I get my spouse to go on this journey with me? You said one word that I think is so critically important. You said, “I trust him and I’ve always trusted him.” I think that’s the baseline for getting your spouse on board is that the trust between you and your spouse has to be there. And if you don’t have that baseline of trust, then there’s nothing that Ashley and I can say on a podcast that’s going to create that trust. It has to start deeper within the relationship. But obviously Brandon has done something throughout your time together for you to say, okay, when Brandon puts his mind to something, it’s not a brash decision. It’s not him being irrational, it’s because he’s thought about it and it’s because he thinks it’s what’s best for our family.
So I just love hearing that from you because I think a lot of people overlook how important trust is. But something else you mentioned though was the sharing the education. So just from a real standpoint, were you guys just listening to podcasts together? Did Brandon just hand you a book and say, “Go read this?” What did your educational path look

Speaker 3:
So he started it. He would start talking to me about it, and I’m like, I’m clueless. I have no idea what you’re talking about. And so it took me downloading the BiggerPockets app and he had me join some Facebook groups, and then I kind of just started reading and things that caught my eye or my attention. And then the conversations kind of started from there. “Did you see that they posted this or did you see this?” And then that would kind of start those conversations.
I’ll never forget the day he taught me how to run numbers. We were driving and he’s like, “Get your phone out, I’m going to teach you how to do this.” And I’m like, “No, I’m not going to be able to do it.” He’s like, “Get your phone on. I’m going to teach you how to do this.” When we did, and I don’t remember where we were driving to, but he did. By the end of it, I was running numbers for him. I always say it’s like our little marriage hobby. We don’t have a lot that we do together because we both work so much, but this has allowed us to find something in common that we enjoy doing and has brought us closer that way. So it’s been kind of cool.

Ashley:
What is your why for all of this? Why are you grinding and hustling to become a real estate investor? What’s the purpose behind it?

Speaker 4:
Yeah. So my why is to break generational poverty in my family. So I was born in the housing projects of New Orleans. The Calliope Projects is probably one of the worst housing projects probably in America. And I was raised by a single mother who was not lazy. She worked about three jobs, but just with a barely high school education, maybe up to ninth grade. She had to become a janitor in hospitals. So what she did was, as a single mother, she tried to help me and my sisters. I’m one of seven, I have six sisters.
She didn’t have a financial literacy background. My work ethic comes from her, but she didn’t know you can’t just get wealthy from working. And my why is to break that curse because I’m the only one that’s mainly in my family who understands financial literacy and practice it. So it would be a full circle moment to be able to leave a legacy that’s beyond me. So my future nieces and nephews and great nieces and nephews and possible children wouldn’t have to be born into poverty. So that’s my why.

Ashley:
Lawrence, I’m so proud of you. Just stating that you’ve taken the initiative to educate yourself, and that’s very hard to change how you’ve kind of known everything for your whole life to change and to want to take action onto something else. I think that is a great why, and it seems like it’s definitely motivation enough for you to keep going and to really create that generational wealth.

Tony:
Lawrence, I love hearing the story and I think it’s proof that where you start obviously has a big impact on how far you can go, but it definitely doesn’t cap what you’re capable of.
Lyrva Sanchez is a registered nurse, single mother of two boys living in Southern California, actually not too far from where I live in SoCal. And after her separation, she spent two years chasing down the shiny object syndrome of wholesaling and a little bit of out-of-state investing. But then she doubled down on a real estate strategy that really worked for her kids and learned that one property could really change her life. What would you say drove you into the world of real estate investing?

Speaker 5:
So as you mentioned, I was newly separated. We have two young boys, and that was a really difficult time. Actually, there were a lot of good things going on and not so great things going on. I had just paid off all of my debt. I had school debt, I had car loan, just paid off everything.

Ashley:
That is amazing. Congratulations on that. That’s not typically an easy thing to do.

Speaker 5:
Thank you. Thank you. So I was on a Dave Ramsey trip and it was just full on saving and saving and putting everything towards the debt. So when we made this choice, this decision to separate, it was a really, really obviously difficult and challenging time in my life and it just made me shift towards working on myself. So I dove into personal development, self-help books, all of that. But part of that process, I also came across real estate investing, building wealth, how do I still carry on with my dreams and the life that I want for my kids now that I’ve pretty much lost my income, half of my income overnight basically.
So that’s how it just came to be. It was part of that whole process of going inward and just trying to do better, be better and have the same or better life for my kids regardless of my status.

Tony:
Just one other question. What would your advice be to someone that is maybe in a similar situation where they’re going through this big life change? A separation divorce is something that’s unfortunately common today, and there are a lot of folks that have these aspirations of becoming a real estate investor, but they might use this life event of a separation or divorce as an excuse as to why they can’t invest in real estate. So just what is your advice to someone who’s in a similar situation that’s looking to get started?

Speaker 5:
I think my advice is to keep hope. Somehow you can figure out a way. It’s not that you can’t, it’s just that you haven’t figured out how yet and finding a way to make it work for you and your lifestyle. I would say going through the motions, it took me a long time not giving up, trying to find information, reading things. You’ll come across random articles, things that help you. That’s how I found it play out for me. I was really tight on cash to purchase a property. Not for my expenses. These little clues would come up or opportunities.
There was an opportunity at work for me to get a promotion and I took it because I was thinking in the back of my head, “Real estate that’ll help me.” So just try to stay motivated and don’t lose sight. The shiny object syndrome is a really big thing and it really did impact me for a good two years.

Tony:
So you guys just heard some ways that some of our top rookie guests found their whys behind their real estate investing business, but obviously a lot of you guys have a goal of maybe doing this whole real estate thing full time, but in order to do that, you’ve got to be really solid on the fundamentals. So what you’re going to hear next is the foundation that some of our real estate rookie guests built that allowed them to take that step into doing this full time.

Speaker 6:
And I got started in my investing journey in 2020.

Tony:
It’s a great time to start.

Ashley:
Yeah. What made you start then? What was that kind of moment that happened for you?

Speaker 6:
I’m not sure if it was an epiphany or a come to Jesus talk with myself, but I hit that crossroad where I was like, “Okay, I can keep going down this path that I’ve been on and I’m going to get the same results.” Or I can change the game up and see if I can better my life. I was not somebody who was big into finances. I honestly was a day by day type of guy like paycheck to paycheck. I’ll figure it out eventually. And then 2020 happened. I think I can accredit a lot of it to a good buddy of mine, Caleb Kennedy. He was the first person that I ever had a finance talk with and he made being frugal look cool.
Instead of going out and on the weekends and stuff, he’s like, “Mike, nah.” He showed me, I believe it was his Robinhood account and it had a very significant amount of money in there. I knew at the time we made about the exact same money at year and my account didn’t look anything like his. So I was like, “Man, how did you do that?” He’s like, “I’m cheap. I don’t spend money.”

Tony:
Yeah. Mike, I love that story because you said he made being frugal look cool. And that is such an antithesis to what society promotes. Me and a friend were talking the other day and it’s like there’s so many people on social media who have these big followings and a big part of the reason that their followings are so big is because they’re posting wads of cash and I got this and I got that. And that’s just not my personality. I’m not a flashy person like that. But that’s what a lot of people are drawn to for whatever reason.
But I think if we can all do a better job of normalizing frugality and making that the cool thing, and exactly what you said where it wasn’t necessarily the car that he was driving. It wasn’t necessarily him going out on the weekends doing all these crazy things, what really impressed you the most about him was his Robinhood account.

Speaker 6:
100%. I mean, it was a game changer for me because I was one of those people. I drove a BMW and it was literally paycheck to paycheck. I never thought about my retirement. I never thought about, “Hey, if I have kids, it’s going to cost two, three, $4,000 a month. I’m not saving two, three, $4,000 a month, so what am I going to do?” And so that was in February of 2020. I was like, “Well, I’m going to be cheap.” I eliminated as many bills as possible. I started tracking every single penny that I spent.

Ashley:
How were you tracking that, Mike? Were you using Excel, an app or something like that?

Speaker 6:
The good old-fashioned way, pen and paper.

Ashley:
Yeah?

Tony:
No way.

Speaker 6:
Yes, sir. I have books now. So I literally just started writing down everything that I spent and each month I would try and improve it. I spent this much on gas, I spent this much on food. Let’s see if I can knock a little bit of this off. And at the time I was still bodybuilding, so my food was very basic. So I’d go and try and find the cheapest chicken, I’d try and find the cheapest rice. I’d buy it in bulk, 20, 40 pound bags of rice. I cut vegetables out. I was like, “Man, I just need protein and carbs and fats.” So sorry the greens ain’t working no more.
And just made it as cheap as possible when I started paying off debt, because I did have some credit card debt, had that car, which I ended up selling, getting rid of when the economy went crazy and used car values went up, I didn’t have to pay anything to get out of it because at the time, I think I owed 26, $27,000 on a car, which was, now I look back, I’m like, “Jesus, Mike, if you just had the money you spent back then, you’d never have to work a day in your life.”
So that was that February. I’d never even thought about buying a house. As bad as this seems, I didn’t think I’d ever be able to because I didn’t keep up with my credit. I used to be ashamed of all this, but now I look back and I’m proud of it because it led me to where I am today.

Tony:
And Mike, just really quick, I don’t think you should ever be ashamed of that, right? It’s like every person has a backstory and none of us would be who we are today without that backstory. So there is a high possibility that you wouldn’t be on this podcast with us right now having this conversation if it wasn’t for those decisions that you made and what you feel were mistakes if those mistakes didn’t happen. So I think there’s always a lesson to be learned.
But just one thing I just want to ask before we keep moving. So you went on this journey to radically reduce your monthly spend. You don’t have to tell us the exact numbers, but just were you able to cut it in half? Was it like a 25% decrease? How much were you able to bring down your expenses over that timeframe?

Speaker 6:
Probably a little over probably $2,500 a month.

Tony:
Wow.

Speaker 6:
Yeah, that’s what I was able to save per month after. So I reduced it by $2,500 a month.

Tony:
How did you make the transition from saving everything to now pouring that into building your income?

Speaker 6:
Well, I knew real estate was the way out. It was about that time in 2012… Actually, it hadn’t gotten until the end of the year because I set a goal that February, I said, “By the end of this year, I’m going to buy a house.” So I was eliminating debt, improving my credit score, saving money. I paid off all those credit cards, paid off a ton of debt. December 30th of 2020 is when I closed on my first ever house.

Ashley:
My cousin, she just got engaged yesterday actually. And when she started dating her boyfriend, he owned a duplex. And after a year dating, she moved in with him and she was just complaining, “We need a bigger place. I don’t have a closet, all this stuff.” And I said, “What are your plans this weekend?” And she named two places they were going on to dinner. They were going to, I don’t know, a concert something. I was like, “What trips do you have planned?” She’s planning all these trips and I was like, “Do you enjoy that? Do you love all that?” And she’s like, “Yeah, I do.”
I said, “Do you know why you can do that?” And she’s like, “Well, my boyfriend pays for me.” I said, “Yeah, do you think he could pay for that if he has this huge house mortgage now?” She was like, “Oh, yeah.” It clicked with her and now she just got engaged in Scotland and they just bought this beautiful huge house and everything. It was that delayed gratification that she had to suffer and live in a small little apartment and have a tenant downstairs for a couple years. But it is remarkable what can actually happen.
It may not seem like that much, but it actually can add up to a lot down the road. It’s almost like you think of compound interest. It’s all these compounding effects of house hacking and be able to cut those living expenses out can really add up in the long run to save for that big beautiful diamond ring she got.

Tony:
When I met you, you were still working your day job as an engineer. And for so many people in the country, you had already achieved a piece of the American dream. You went to college, got a technical degree. You had a very healthy salary. You had this position that probably you would’ve been employed for the rest of your life and you would’ve been able to retire and do all things the right way. So what was the impetus for you or the motivation for you to leave this very comfortable lifestyle you had built for yourself?

Speaker 7:
Basically when we started the return to office, my soul just died. I had basically spent the last two years during COVID being able to work from home. I got my real estate license as well. So I was already selling real estate on the side and my life just felt like enjoyable and I had more control over my time in my life. So the second we started going back into the office, I was commuting an hour each way to work, which was not fun. I just started getting so angry and frustrated. And if you know me, I’m not a very angry person. Having that taste of freedom really just kind of skyrocketed it for me. And that’s when all the gears started changing. And then I actually won tickets to Tony’s conference and went to the conference and came out, and put in my two weeks notice.

Ashley:
Oh my gosh. Wow. That’s incredible. Okay. So let’s start right there. So at the conference you decide you’re putting in your two weeks notice, what were the safety nets you had that you could go ahead and make that decision?

Speaker 7:
So buying my duplex was honestly step number one. I didn’t realize how much of a safety net it really was because especially… And I still don’t really take any money from it, but I was just building up this little nest egg. But the cool thing about my duplex is it covered all of my living expenses, so I knew that even if push came to shove, it’s literally me and my dog. That is my family right now and the only people I have to take care of. So I knew that if push came to shove, I would be able to survive off of ramen for the next few months and still be totally okay.
So that was the first step. And my duplex also cash flows too, so I have extra money coming in from that. But then I also have lots of other side gigs like my social media stuff. I knew I was going to be okay, I just needed the push. And then that’s also when I started our short-term rental business too. And I say are because literally after that conference I was on the flight home and I texted my best friend who we just literally talk every day, do everything together.
She’s heard me talk about real estate for years, and I’m like, “So I think I’m going to start this business. Do you want to join me?” That’s how everything just little started.

Tony:
So, Olivia, if we can, I just want to drill down a little bit on this a bit more. So at that moment you said that you were angry, you were upset about the idea of going back into the office, but I mean it has to be a really strong emotional reaction to say, “This is a big enough of an issue for me to want to leave my job.” So I guess just walk us through just not only the logical side of I want to leave, but just mentally, emotionally, what was going on for you to say, “This is enough. I’m going to leave because of this.”

Speaker 7:
So I really went through this emotional and mental breakthrough. It was like an identity change because for the last 10 years I’ve been an engineer and I’ve been advocating for women in engineering, Black people in engineering and all of that stuff. And suddenly I was just kind of letting it go. So that was really hard just personally to work through because it felt like I was letting a part of my identity go. But then I just saw how much upside there was to it.
I was so much happier when I got to do real estate things and when I was setting up properties and when I was doing all this stuff. So that kind of just pushed me over the edge. But also the way I won tickets to Tony’s conference is I don’t even actually remember signing up for this giveaway because tony was doing a social media giveaway and I was depressed basically on the couch and a little bit inebriated, but I don’t remember actually signing up. But I was in such a bad mental space. And then three days later I get this notification on Instagram from Tony being like, “Congratulations, Olivia, you have won tickets.” And I’m like, “Wait, what?”
I remember I was supposed to go offshore during the conference in the middle of the Gulf of Mexico, and I was like, “Nope, I am putting in vacation days. I’m going to this conference. This is a sign.” And so that kind of just spearheaded everything. And then I went offshore the next day when I got back.

Tony:
Ashley, I just want to point out, me, you and Olivia all have that same identity crisis type thing after college. I initially went to school to be an engineer. I was actually working at Chevron. Isn’t that where you work too, Olivia, at Chevron?

Speaker 7:
Yep.

Tony:
Yeah. So I was also working at Chevron as an engineer. Ashley, I know you went the accounting route. And it’s like it is difficult because you go to school for all these years and you pour into this identity of who you are. And to come to this realization that it’s not who you want to be anymore. It is a difficult pill for a lot of people to swallow, but I think we should all give ourselves some… I don’t know. We should be proud of ourselves for, A, being so young and making that decision. But second, just having the courage to do that because there are people who feel that feeling inside of them for years, decades for their entire life sometimes, but they’re never able to really pull that trigger and make that change happen.
One of the things that I always thought and fall back on is if I make this decision and say things don’t work out, I always know I can go back out and get another job.

Ashley:
That was great motivation. I loved hearing from Lawrence’s why, Mike’s money mindset, and how Olivia was able to quit her six-figure job. We always learn a lot from our rookie guests and I want to continue with hearing some great tips that rookies have shared with us throughout the year. Did you think having your real estate license was a huge advantage in getting started?

Speaker 8:
So having my real estate license has helped us on one of the five properties that we have bought now. I’ve only taken a commission once, so it has helped, but what we normally wind up doing, and if you’re debating getting your real estate license and trying to figure out if it’s worth it or not, you can get your license and it does help. I think it’s beneficial to be able to run numbers and to MLS access and different things, but you don’t necessarily need it because what we wound up doing is I would call the listing agent and say, “Hey, I’m willing to waive my commission if you’ll accept our offer on this property.”
Or in the case of our first property because our down payment was a limiting factor for us. I said, “Hey, I’ll waive my commission if you can just give us this money in closing cost credits. So you’ll pay for part of our loan fees and make some upgrades to the house for us.” And that helped us more than just getting a commission. So I think it’s 50-50 if you want to be entrenched in real estate or you think that you’re going to be buying a lot of properties. It doesn’t hurt. It could cost 600 bucks a year, a thousand bucks a year to maintain your license, but you don’t have to have it to get started or to build a massive real estate portfolio. It’s really a personal preference thing.

Ashley:
I love that answer though, just getting your perspective on it and your opinion because we get that question so often.

Speaker 9:
Yeah. So I mean I was newer to real estate, but what I did is I started with finding the deal. So I found the deal, I ran the numbers, I learned how to comp properties so I knew what this property would be worth after the repair. I knew what it would take to go into it just with my background in general contracting, had some people look into it. So I started with finding the deal and then we go, “Okay, how are we going to fund this? Who’s going to buy this?”
And even though I didn’t really have real estate experience at the time, I had life experience. And so back from my home in Southern California, my husband and I were very involved in multiple circles. We were coaches in different aspects and sports and things like that. So this connection was someone who we had worked with for years. They had trusted us with their kids.
So I was like, “Well, if they trust us with their kids, they’re going to trust us with their money.” And so we just called him and we said, “Hey, Bob, I know this is crazy, but this is the deal. This is what it’s looking at. Here’s the numbers. I’ll show you. I’ll send you the comps. Here’s what I think it can do.” And because they had that trust aspect I think already with us, they trusted us in the opportunity. So because we had already built that relationship with them, they felt comfortable to take that leap into partnering with us. And so since then, they actually are one of our main partners. They partner with us on a lot of deals now and we’re very grateful for them.

Tony:
McKenzie, you just did a phenomenal breakdown of a lot of what Ash and I talk about when it comes to finding partnerships. So I’m just going to break down what you said here for a second. So bear with me. So first you identified what your unique skillset was, and that was finding the deal. You leveraged your strengths, you leveraged your skills to find a really good deal. Then you said, “Okay, if I’m looking at the puzzle pieces of making this transaction happen, I’ve got the deal finding, I’ve got even the property or the project management side, but I’m missing the capital side. So okay, let me go out and find a partner to fill that void.”
So you go out there and you find someone that has those resources that you’re lacking. Now, this person had never really done real estate before, but you said the reason that they were willing to work with you is because there was that level of trust there. One of the things that Ash and I say in the book is that when you’re looking for a partner, people typically partner with people that they know, like, and trust. So you need all three of those. So even though this person had never invested in real estate before because you had that foundation of know, like, and trust, when you presented them with an opportunity, they were willing to jump at it because you guys had built that foundation.
Ash talks a lot about her first partnership where that partner invested his life savings into a deal and it’s because him and Ashley had that know, like, and trust. So I just love that story because you really exemplify all of the critical elements of putting a partnership together.

Speaker 9:
I think a lot of people think, “Oh, I can’t get started until I have all this real estate experience.” Well, you’re never going to get started if… Because it takes deals and capital and things to get that experience. So I completely agree, and I think if people open their eyes to, “Oh, maybe this person,” I hear that all the time, “I don’t know anyone with money.” I actually really doubt that’s true. So really look and it never hurts to ask, and I always say, “If you find a deal, I feel like the money and the capital will follow.” You just got to start with the deal. So yeah, I agree.

Ashley:
Where are you getting this data from that you’re pulling to use for your numbers, for your expenses so that you know it’s the most accurate data that you can get?

Speaker 10:
Yeah. Okay. So as far as expenses are concerned, the upfront expense is going to be the down payment that we make. We usually make 25% down payment risk of it refinance. So that part is fixed, which is the upfront expense. Then after that expense is the interest, which is a mortgage payment. For that, I have close relationships with the lenders and I try to stay on top of the market so that I know, “Okay, what is the rate for a 30-year fixed mortgage? What is the rate for 7/1 ARM? What is the rate for 5/1 ARM?

Ashley:
Is that just you emailing them and asking them or are you going to a website to look for that? Where could somebody else find that information?

Speaker 10:
I actually call them up to get that information, yes. So I call them up and that’s how I get that information because every scenario is so different, and since I’m not looking at only a long-term rental, it could be even a midterm rental. I could buy a second home, use it as an investment property. I could buy a duplex or a triplex or a quadruplex. And financing does vary depending upon the type of the property. So that’s why it is so important not to just rely on one number from a website, but to actually share the detailed scenario and then get the rates so that information I’m getting from my lender and I’m not just calling up one lender, I’m calling up at least three so that I’m doing my shopping before I decide to go with one

Tony:
Puja, one follow-up question to that, I know a lot of rookies, they get nervous about either having their credit run a bunch of times or maybe building a bad rapport with the lender because they’re always telling them these deals, they never actually end up buying. What are your thoughts or how do you navigate that? Are they running your credit every single time or are they just giving you preliminary numbers? Do they know that these are properties you’re just looking at or are they expecting you to purchase all of these? How do you work that dynamic?

Speaker 10:
Yeah, so regarding being worried about what the lenders are going to think that, “Oh, you’re just asking them to give you the rates and just keep calling them up.” And you don’t know when you would be able to pull that deal off. It could take three months, four months. I’ve been calling up my lender for the last seven months, so it’s a long time. And then after that, as far as the credit check is concerned, no, they don’t run my credit check. I agree. I don’t want a hit on my credit every time I’m trying to shop, every time I’m trying to analyze a deal.
They don’t even run a soft check and it just varies. Let’s say if I’m working with the lender who I have already worked with in the past, they would ask me the questions, “Hey, has anything changed with respect to your situation in terms of the new debt that you have taken in terms of your income?” They would ask those questions on the basis of the information that they already have about me, they are able to run that scenario for me.
So no, the hard credit check is not a mandatory step. A good lender who wants your business, who knows what they’re doing should always be willing to give you that pricing.

Tony:
Puja, I want to follow up because one of the other things you mentioned that I thought was interesting, and you’ve led into it a little bit, is that in these four or five steps that you listed out here that you focus on the expenses first and you say, “Hey, I don’t want my expenses to exceed X dollars per month.” Can you walk me through why that’s one of your first steps? Because I think most people start on the other end where they say, “Hey, I want my cashflow to be X.” But you’re looking at it from the opposite side where you’re focusing on the expenses first. What do you feel has been the benefit of you flipping it around and going at the expenses versus the cashflow?

Speaker 10:
The reason I start with expenses is also to account for the unforeseen scenarios, to account for the vacancies. Let’s say the house is vacant for a month or two months. Let’s say the tenant is not able to pay their rent for a month or two months. You have to go through the eviction process so that monthly outflow will decide whether or not I would be able to pay that mortgage even if nobody’s paying that mortgage for me. So if it is $10,000 a month then I have to pay those $20,000 for two months. That’s a lot of money. I don’t want to take that risk.
So depending upon my own reserves, depending upon my own income, I decide that threshold. So that $5,000 is I’m okay. So one month I could pay $5,000 if there was a vacancy or somebody didn’t pay the rent on time. So that’s the reason I start with the expenses because… And this is my personal opinion. If I stay focused on generating a cashflow of let’s say $500 and I’m buying a property which is like 1.5 million and the monthly cost is like $8,000, and if I have to pay that $8,000 one time, $500 does not make sense. So that’s the reason I have this process where I actually look at the expenses first.

Ashley:
What made you start with flipping?

Speaker 11:
Because one thing I love about real estate, and once I got further into it, I realized how diverse there was. I was having a little analysis paralysis because it was like, “Do I want to find a storage unit? Do I want to flip a house? Do I want to do Airbnb and do more of the hospitality side? Do I want to do just buy and holds?” I really got more into flipping first just because a lot of the investors I was working with were doing flips, and so I really was able to learn a lot from that process. I would go walk the properties with them.
There would be investor list and wholesaler list that would send out, “Hey, we’re having an open house one to three this day, all you investors come to this house.” I would go to the house, really not the intent of purchasing it, but I would go to just walk the property, work on trying to get my rehab costs. I’d have my own little spreadsheet that I was working off of. Then maybe I got lucky a couple of times and I had a contractor actually walk some places with me that they would give me their idea of what it thought it would take.
I would just go to some of these open houses and just listen to what other people were saying too because a lot of these were some of the bigger investors in Houston and they would be walking around pointing out things. I would just listen and I would hear what they would say, “Oh, this is going to cost 1,500 to do this toilet thing or whatever like that.” And I was just mentally taking notes.
I went to 20, 30 of these in the first few months with no intention really of buying, didn’t have the financial means to buy anything, but I was just getting all this information to really learn rehab costs and what was really going to make me comfortable going to that next level of actually putting in an offer and putting up my hard-earned money that I’ve been working for so long that I was so nervous of deploying.
But once I actually started putting out offers, all that stress kind of went away because I saw the ability of what it would actually generate if something went through with a well deal and just trying things.

Tony:
Garrett, we’ve interviewed your episode 289, so we’ve had 288 conversations up until this point, and I don’t think a single person has ever said that they’ve gone to open houses just to hear what other potential investors are saying the house might need when it comes to rehab. Dude, what a simple yet super effective way to estimate your rehab costs because I feel like for a lot of new investors, that’s one of the things that really gets them stuck is that if you’ve never done this before, it’s hard for you to ballpark what amount of money you might spend to buy and renovate a home.
Obviously, once you’ve done it a few times, and if you’re buying with inside your buy box, you know exactly what it’s going to cost. Ash, I’m sure you know exactly what it costs to renovate a duplex in buffalo. I know exactly what it costs to renovate a three bed, two bath and Joshua tree, but if it’s your first time doing it, there’s a lot of question marks there. You also mentioned about getting the GC to walk with you, but one other follow-up question on this listening.
So I guess first, how long were you at these open houses? Were you just there the entire time and just letting people come through and then were you actually having conversations with the other investors or were you just kind of a fly on the wall and taking notes? Just walk us through the tactical side of how you actually got information out of that open house.

Speaker 11:
At first I was a little more nervous. I wasn’t trying to be obvious that I didn’t know what I was doing and things, even though looking back, that’s so naive to think that way. But I would go maybe 30 minutes, 45 minutes. I would just walk around and act like I knew what I was doing. I wouldn’t really talk to many people. Every once in a while I may kind of get into it, but a lot of these people were looking at whoever was in the house as their competition and things like that.
But it blew my mind. I noticed this from doing residential retail sales that people go into houses and they just talk out loud and they don’t realize that I may be listening or buyers are walking in saying all these things. And the opposite side is you got to be real careful. And I tell my buyers, when we walk into houses, you need to be real careful what you say out loud. It was similar on the investor side. People were just kind of like, they would be walking in a bathroom, they would look up and be like, “Oh man, you see that? Oh, there’s a leak right there. Oh, that’s going to be a good $5,000.”
I was just taking this all into account. And after I got a little more comfortable with different investors and the terminology and all my own research through BiggerPockets and just trying different spreadsheets people put online, there’s a ton online that… And especially in Texas, there’s different contractors or people that do rehabs that will put out a free spreadsheet of what they estimate this cost for a new window here.
There may not be the exact answer, but it gave me a good guideline to where I was going to go when I started walking properties on my own that I was actually considering buying. I would always add that extra cushion on top knowing that everything is always more. I saw this from helping investors that everything always goes more expensive than you. Very rarely does a flip or anything go under budget.

Tony:
No way.

Speaker 11:
Yeah. Once I realized that, I was like, “Oh, I probably need to add a 20% buffer on top of this too while I’m doing it.” So it was just really getting bits of information and I had analysis paralysis probably for the first year or two because I was just so nervous like, “Oh, these guys, they’ve been doing it. They got cash funds to do it. Even if they fail, they’ll be fine. And if I fail, my cash funds are gone.” But once I do it and I saw regular Joe’s and Jill’s doing whatever, doing the same things I wanted to do, I knew that there was a way I could make it happen, and I really just needed to put my feet in the fire and probably start making offers and have a few failed deals, which is what happened to kind of learn, “Okay, this isn’t going to work, but I learned a lot from it.”
Nothing like that is a failure. You can’t fail until you quit. You can only take these as lessons from all your losses or all your tribulations that the next one, eventually you’re not going to make that mistake again. When you start making consecutive mistakes, that’s when there’s an issue that needed to be corrected. If you make one mistake and you can nix that in the bud from the beginning, then that is how your journey should be going from what I’ve seen from the outside.

Tony:
One question I want to ask was because you’ve got these systems dialed in to really high level of detail, and I think one belief, maybe a limiting belief that a lot of people have when it comes to flipping homes is that you got to be there to walk the properties. You got to be there to shake the contractor’s hands and make sure that you’re checking on their work. Is that true or is it possible to do this remotely as well?

Speaker 12:
It’s totally possible to do it remotely as long as you have boots on the ground that are driving the properties at least once a week. So even if nothing changes in the rehab, say it’s sitting there, we’re waiting for permits to get processed, we will still drive it every week because you never know if squatters are going to show up, all of a sudden a pipe is going to burst, it’s going to, whatever, you want to make sure that you also have pictures if anything happens that you need to go to court for.
Not to scare you guys, but if someone breaks in and you need to file an insurance claim or something like that, you now have a record trail. And so the biggest blessing for being efficient in our business was the fact that both Tara and I lived over an hour away from all of the projects that we did. So there was no way we’re going to drive to maybe three hours in traffic to and from those projects every day or every other day.
So we created these systems to be able to manage them afar. We’ll go down once a week and we’ll take pictures once a week, and then we trained our contractors that if they had a question, they text us a few pictures, they send us a video or we FaceTime them and we’ll get them the information that they need.
And then we also made sure that we had boots on the ground in that area, networking, maybe newer investors that wanted to learn where if we really needed something, then they would help us out because we’re also contributing and helping them grow their business. The other thing is we’d also have a handyman on call where, say, a basement all of a sudden starts flooding and our contractor can’t get there that’s on the job, or it’s not part of a scope, we need it clean up something after hours and they’re just going to be too expensive to do it. They’ll go and put bags and [inaudible 00:43:31] it out or something like that.
So in the beginning when we didn’t have systems set up, I was working six and a half days a week. Long, long fricking days, but mainly on the computer. I’d only drive the properties once a week. And as you start setting up these systems, these templates and getting really good at the planning in the beginning to get the contractors all of the information that they need upfront, then you’re really just monitoring the construction as it goes along and problem solving little things that come up that were unforeseen in the beginning.
So within the last few years I’ve gone to South Africa for two months at a time while I have seven projects going on, for example, or I travel a ton at least once a month. And so-

Ashley:
You’re not even home right now as you’re doing this podcast.

Speaker 12:
I’m not home right now. Yeah, exactly. And so having that freedom, and honestly, that’s why we got into real estate. And so start today in building those systems, building those templates. Like I said, they’re not scary. Just start putting information down on paper and then figuring out how you want to organize that. And if you’re not the best at that, then hire a VA that is good at organization and then eventually lead up to hiring a team member that is.

Tony:
I guess first if you can define what midterm rental is because there might be some folks who aren’t familiar with that phrase. And then second, how are you sourcing people to put into your midterm rentals?

Speaker 13:
Absolutely, yeah. So medium term rental, at least in my definition is anything that’s a 30-day stay that’s furnished where you’re paying the utilities. And so it’s basically that you have an Airbnb that instead of renting it out for a weekend or three, four nights, whatever, you’re renting it out for at least 30 days plus. And the main reason for that was because Fort Wayne’s not a vacation market. People aren’t coming here for leisure. They’re coming here for work.
And me being in healthcare, whenever I went and I walked through the hospital once we were allowed to come back after, I think it was like six weeks, they had us, NP stay at home and try and do video visits. And then once I got back in the hospital, I didn’t recognize anybody in the hospital. I didn’t recognize any of the nurses. And I was like, “What is going on?” And so I started talking to people and everybody was a travel nurse. And I was like, “Where are you guys staying?” And they’re like, “Oh, I’m staying at the Super 8 down the way.”
I’m like, “How much are you paying for that?” “Oh, like 60 bucks a night.” I’m like, “Are you kidding me? That sounds horrible.” And so it got my wheels turning. I was like, “Surely there has to be a market for this.” And that’s how we got started. We started renting out the carriage house. So we furnished it. It’s 600 square feet. It’s a little brick. It looks kind of cool. My wife did a wonderful job of making sure that it looked really, really good.
And within the first 24 hours of us going live on Airbnb, we had a nine-month booking. And the nine-month booking was not even for a nurse, which is what I expected our bread and butter to be. It was somebody that was coming to town with his wife and he was a lineman like power lines. He was working on them for Indiana Michigan Power, the power company. And so not even somebody that was on my radar, they booked it for nine months. And so that just really opened my eyes that, “Hey, there’s a huge industry for this, not just travel nurses.”
And so then we expanded. We’ve got now our main house that was with the carriage house. We moved out of that, and that’s now a medium term rental. That’s a two bed, one bath. And then we have a town home that’s a three bed, two and a half bath. That’s a medium term. We did an arbitrage of a one bed, one bath that’s near the hospital that I worked at, that is a medium term. And then I’m co-hosting for a friend of mine that’s a medium term.

Ashley:
Can you explain what arbitrage is?

Speaker 13:
Absolutely. Yeah. So I just gave them a call. I was like, “Hey, my name is David. I do medium term rentals for travel nurses. I work at the hospital. There’s not enough housing. Would you guys be willing to do a corporate lease with me so that I can rent out to some travel nurses?” So basically you go in there, you sign a lease saying, I will pay X amount, which is whatever the market rent is. And then we furnish the building, put all the utilities in our name, and then we’re re-renting it to travel nurses, and then we make the spread.

Ashley:
Did they do a whole tenant screening on you, do the credit and background check on you-

Speaker 13:
No.

Ashley:
… as the renter? No?

Speaker 13:
They didn’t do anything.

Ashley:
Wow.

Speaker 13:
I made sure that I walked in with my scrubs on, with my badge on, so maybe that helps.

Ashley:
I liked how you used the word when you approach them, you want to do it as a corporate rental because that has been… That’s actually done for a really long time is corporate rentals where this medium term stay is new where more people may not know what it is. So I really like the way that you kind of worded that and pitched that and that’s really awesome.

Speaker 13:
I made sure that I never once mentioned the word Airbnb. I was like, “Then they’re going to freak out.” But it was, yeah, I think it was that I’m going to be having nurses that are coming into town that are working at the hospital. And so it’s pretty hard to try and turn somebody down with that whenever they’re coming to the community to help out with the sick people that we have.

Ashley:
I think one of the key points that you touched on there is the operations piece. And even if you are seeing yourself as an investor and you’re buying multifamily, single family or whatever asset you are buying into, there is some piece of asset management and that is part of the operations. I think that’s actually where a lot of money is left on the table too because everybody’s so focused on, “I need more, I need more. I need more units. That’s how I’m successful.” Instead of going back and looking at your properties and being, “How can I restabilize them? How can I cut my insurance costs by quoting my insurance? Doing all of these big picture items and then getting into the details of the actual property and then how you have your systems and process.
You go in and you’re like, “This is the operation method we have. This is the process we’re using.” And that is part of why you have been so successful, been able to keep a strong portfolio is because as you mentioned in the beginning, there was those three things. The quality, just answering the phone, even making sure people know you are there, that is a huge part of a lot of strategies. And Tony, even more for short-term rentals, like customer service is a huge thing. And having those operations put together. And if you can really take the time to put out those systems and processes that is going to bring you more money than just buying, buying, buying.

Speaker 14:
A hundred percent.

Ashley:
We had a guest recently on that did short-term rentals, and she said, “We’re not buying anymore right now. We’re going back to the current rentals we have. We’re adding a hot tub. We’re adding a sauna. We’re seeing how we can add value to the current properties we have already because we’re going to see a larger… We take 20 grand, we put it into our current property. We’re going to see a larger increase in revenue than if we went and bought a whole nother property where we have to set up another whole set of operations. We have more overhead now.
And I think that’s a big piece that’s forgotten. Everybody just talks about the acquisitions, acquiring and the operations is almost kind of set aside sometimes.

Speaker 14:
Well, and it did because the market was so good, nobody had to do it. And two, frankly, everybody got lucky. So everybody, all these capital allocators and everything, they were just like, “Oh my gosh, we’re just getting the benefit of this upside.” Nobody thought about actually running it. Why? Because you didn’t need to. Occupancies were so high. Rental rates were just going up regardless of what you did. And that’s great in the moment, but that’s never a long-term trend. That will always reset. Always.
The market will get rid of bad performers and owners, and bad assets. That’s an actual inefficiency in the market if it doesn’t do that. So when we look at it’s really important. I love what you said, Ashley, because the goal is not to have doors. The goal is to have money. And so I’m not trying to have the most doors, I’m trying to have the most money. And most people think that just because someone has a lot of doors that they actually own those things, which actually is most of the time completely not true.
I would rather buy something at 30 bucks a square foot and have it be worth in 10 years, 300 bucks a square foot, as opposed to just having that much more doors but not getting that lift. You’ll make more money.

Ashley:
That much more of a headache too.

Speaker 14:
That much more of a headache. And a not profitable one. Then you’re burn out, everybody. I talk about this a lot. Most people buy themselves a job. That’s what they do. They buy themselves a job. And two, it doesn’t actually create them financial freedom. That’s not how it works. Right? You can’t just buy something and it just works and it doesn’t have… You’ve got to build a structure on it. You have to build a business. Even if that’s one property, everyone, one property. And two, I’m not saying you build anything. You don’t have to property manage. You don’t have to do anything. You still have to build a business.
So I’m my property manager. I have my broker, I have my bank. I’ve got maybe even an asset manager, or maybe you’re the asset manager. I got my insurance guys, you’ve got your whole team. What are the processes? What are the reports asset or that property manager. I need to know what they’re doing and I need to know if they’re doing a bad job or a good job. So I need to learn how to operate a real estate asset. Not because I have to do it, but because I need to know the right questions to ask or I’m going to get reports and I’m not even going to know what they mean.
So you are running a business even with one property, and even if you’re doing zero of the work. It’s still a business and you’ve got to treat it like that. And then from there you can also figure out how to grow more because a lot of people aren’t going to like this guys, but one duplex isn’t going to make you financially free. It’s just not going to. Right? You’ve got to have more than one.

Ashley:
I mean, maybe if you want to live in your mom’s basement and she cooks all your meals.

Speaker 14:
I like ramen noodles, so I’m okay with that. But you need to buy more than one. So you need to figure out, understand what you’re doing, take your time. You don’t need to do the work, but then you need to figure out how to repeat that, right? It’s not about owning a thousand, right? It’s about owning enough to hit your goals and having a good way that you’re operating it and that those things are building wealth and income for you. That’s what it’s about. You need to do that good and right and take your time. So many people, you guys are just in a rush because so many people made so much money in the short term and now they think that they need to do it.
They saw all these guys that just went and raised a bunch of money and put it to work and now they’re saying that they own a thousand doors and they’re just like, “Wow, I suck at life because I’m not doing any of these things.” Meanwhile, they actually make more money at their W2 than that guy does with his thousand doors. That’s actually quite a comment. And so I think bring it down to earth. Don’t beat up on yourself. Focus on the long term and build correctly, even if you’re not doing it. Do it right.

Tony:
Something else you mentioned was using the 0% interest credit card to help fund some of the rehab. I just posted on my social a couple days ago that me and Sarah took this amazing, amazing, almost week long vacation in Mexico. I want to say the trip was probably worth about $12,000 once you add up our flights, the place that we stayed at, and we literally only spent $200 to go there because everything else was covered with our points.
It was like several hundred thousand points that we had. But we run a lot of our flips through our credit cards when we’re buying materials and stuff as well. We host our events in person. Pretty much all of our events are run through our credit cards. We run ads for our events, just like all the different things we have in our business we run through our credit card as much as we can. We get to take some pretty cool vacations a couple times a year.
So we spent five days in Playa del Carmen at the super, super luxurious resort right there on the beach front. We got private airport transfer and a Tesla that picked us up and dropped us back off. We got free access to all the parks. So anyway, it was a fantastic trip. So for all of the real estate investors that are out there, I think a common thing that people overlook is the ability to use credit card points to help fund your vacations. Sarah and I, most of the time when we travel now, we don’t pay for our vacations.

Ashley:
Honestly, not even if you’re a real estate investor because a lot of the credit cards have the signup bonuses and there are people out there that are amazing at doing this where they go and open new credit cards, close them out or whatever, and they’re just racking up all of these points because credit cards will have like, if you spend $5,000 within the first three months, then we’ll give you a hundred thousand points to use for travel or whatever. And so I actually have done this for probably four or five years now.
I started out with doing the signup bonuses and now with doing my rehabs and everything, it definitely helps accumulate the points. But if I fly Southwest for the last four years, I’ve been able to take somebody with me for free. I’ve had their companion pass. And so it’s like bittersweet because if I fly Delta, I have enough points that I’ve accumulated status there from the points from their credit card. And so it’s like I usually get upgraded to first class.
But if somebody comes with me, they fly for free on Southwest, which doesn’t have any upgrades. So it’s like hmm, [inaudible 00:56:56] I get to go… Yes, you get to come with me, this is great, but now we’re flying Southwest.

Tony:
Make them pay for themselves.

Ashley:
Sorry five-year-olds. You have to scrape up money for your ticket to come with me

Tony:
Wait. What’s been your favorite credit card? Which one do you like the most for the points?

Ashley:
I think the Chase Sapphire.

Tony:
Yeah, the same what I was going to say.

Ashley:
Especially if you’re first starting out, do that one because they have the five rule. It’s some five rule thing where you can only have… It’s five credit cards open by Chase over four years or something. It’s something like that or I don’t know, but they cap you out as to how many credit cards you collect for the points. And if you can open the cards in your personal name, if you have businesses, you can open them in your business names, but you can combine all those points for your personal Marriott rewards number or Delta or whatever that is.

Tony:
And not to go too far off the rails on this, but what I’ve realized because we have the Chase Sapphire too, and I have one in my name, Sarah has one in her name. And even though they’re personal cards, we only use them for business stuff as well. And then we have the Chase Business Inc card and you’re able to do all these cool things. But what I’ve noticed is that it’s actually the points at Chase are worth more than the miles that I get with United.
I could have a hundred thousand miles and I could have a hundred thousand points and the points with Chase go further than the miles do even if I’m booking on United. Anyway, point of this whole conversation is everyone listening, you should be leveraging debt the right way to help you fund the vacation of your dreams.

Ashley:
If you do have a history of maxing out credit cards, not accumulating debt on your credit cards and not paying them monthly, this may not be the strategy for you to try right now to travel hack. But if you have been very diligent and you pay your credit card off every single month, you’ve never accumulated a balance, then you might as well take advantage of these points. And the travel point guys is like thepointsguys.com I think it is, is a big website. There’s a whole bunch of people. I think it’s aunt.kara or Aunt Kara, something like that. She talks a lot about travel hacking, so lots of different places you can try to learn about it.

Tony:
I’m glad you mentioned that because I don’t want anyone to think that me and Ashley are just racking up six figures of credit card debt. My assistant goes in and probably pays on our credit card every other day. So we very rarely carry an actual balance on our credit cards as well. So you want to make sure you have the cash.

Ashley:
If I didn’t pay it off every week… Usually, it’s a week to every two weeks. First of all, I can’t stand having high balance, but it would probably… Daryl would be at Lowe’s. It would be like, “Sorry, it’s declined. You maxed out. The limit is at Lowe’s already these last two weeks.”

Tony:
Hey, so we hope you guys enjoyed listening to this best of show. We’ve obviously covered a lot of ground in 2023 and our hope is that you guys can take these stories, take these tips, take these little pieces of motivation and use them to kickstart your investing journey because that’s really what we’re all about here at the Rookie Podcast. So cheers to 2023 coming to a close. But here’s to 2024 being your year. Let 2024 be the year you get that first deal. And when you do, come back to us and let us know because we want to hear your story on the show next.

Ashley:
We would love to have you a part of the 2024 rookie episode crew. So you can go to biggerpockets.com/guest and apply to be a guest on the show. But before you go, if you want to listen to any of today’s full episodes that we recapped, you can go to our Real Estate Rookie YouTube. You can find a link to that in the show description and we have a playlist for you for each episode that was covered today. Thank you guys so much for being a part of our journey on the Real Estate Rookie Podcast and we have loved every minute of it. We’ll see you guys in 2024.

Speaker 16:
(singing)