Blog

Ashley:
This is Real Estate Rookie, episode 274. You can always ask or maybe offer something too, so you could go to the tenant if you really want to increase the rent, but also maybe you’re going to rehab their whole kitchen and remodel it for them, is go to them and if they agree to the increased price to get their kitchen remodeled, then you can go ahead and have them sign that you both are breaking that lease agreement and you both are signing a new lease agreement with that increased rent. My name is Ashley Kehr and I’m here with my co-host, Tony Robinson.

Tony:
And welcome to the Real Estate Rookie Podcast where every week, twice a week, we give you the inspiration, motivation, and stories you need to hear to kickstart your investing journey. And I want to start today’s episode by shouting out someone by the username of NaftaliB and Naftali said, “Great show. Thank you, Ashley and Tony. I really enjoy listening to the Rookie Podcast. You guys provide so many great tips and insights and provide a true path for rookies to start investing in real estate. Keep those episodes coming.” For those of you that are listening that are part of the Rookie audience, if you haven’t yet left us an honest rating and review, it would mean the world to us if you took a few moments to do that. The more reviews we get, more folks we can help and helping folks is what we love doing here. Isn’t that right, Ashley?

Ashley:
Yes. Yes. Today we have a great rookie reply episode. Don’t forget, you can leave us a question in the Real Estate Rookie Facebook group and we may answer it on the show for you today. We talk about an estoppel agreement, which is … And also about lease agreements as to when you inherit tenants, when can you actually raise the rent? We go into getting a pre-approved for a loan, when is a good time to get a pre-approved when before you’re thinking of buying? Then also, another very common question that we get, LLC or putting a property in your personal name, which we break it all down for you.

Tony:
All right, so the first question today comes from Simon Woznika and Simon’s question is, “Hi all. I’m going to rent out my first rental property soon and I was wondering if I should go with property management or do I just rent it out to someone myself? What would you recommend? How much of the income would such a company usually take? What would they do that I couldn’t do myself?” Simon, this is a fantastic question and I think that a lot of new investors probably go back and forth on this same idea, the same kind of challenge as well. When it comes down to property management, there’s really three things that I consider. It’s time, it’s desire, and it’s ability. Okay? First you got to ask yourself, do you have the time to manage a property on your own? If you have a super busy W2 job and maybe a bunch of family commitments or community commitments and you just can’t fathom trying to eek out another however much time you need to manage your property, then maybe hiring a property manager makes sense.
Second is ability. Do you have the skills to manage? Essentially it’s like an ongoing project that you’re managing, right? Like taking in maintenance requests from your tenants and making sure those get completed in a timely fashion. If there’s payment issues, that you’re managing that, that you’re staying on top of the leases, and there’s a lot that goes into being an effective property manager and you have to ask yourself, do your abilities line up with what it would take to be a successful property manager? Then the last piece is desire. Do you actually want to do all of those things? Or even if you have the time, even if you have the ability, do you actually have the desire to do those things on a daily basis? Because if you don’t, it can really take the fun out of being a real estate investor if you’re forcing yourself into this box of activities that you don’t thoroughly enjoy. The first thing I will look at, Simon, is time, ability, and then desire. Ashley, I know you’ve got a lot of thoughts on long-term property rental management. What do you have for Simon?

Ashley:
I think the biggest thing is make sure that you can what the fair housing laws are, the rules and regulations, the laws in your area, in your market, because that’s where you can get into the most trouble. First of all, do you want to pay for the convenience of having somebody take over your whole property? The thing to remember though is even if you hire a property management company, that does not mean you are automatically a passive investor. You’ll have to do some asset management too, such as going through your owner’s reports every month and seeing what you’ve been charged for, what’s going on with your property, if tenants aren’t paying or late fees being collected, things like that, and just overseeing your property management company. Take that into consideration if you’re looking to be completely passive or just you might as well do the work yourselves. Think about that too.
I recommend exactly what Tony said, think about how much time you have that you can actually put into it. I did start out self-managing and it worked great until I got overwhelmed and I just didn’t want to do it anymore. I think look into if you can build out the systems and processes that can help you move it slowly and definitely focus on those in the beginning. For that first property, document everything, make every checklist you can. As you keep adding properties, it’s just a smooth process and doesn’t cause any more headaches or any kind of bottlenecks to your property management company that you’re using for yourself for self-managing. The income that a property management company usually takes, if you have a big portfolio, you can usually get a discount on that, but for somebody that only has one or two, the most common I am seeing right now is around 10%.
Then there are always additional fees. Ask what those fees are upfront and make sure that you’re adding those fees in so it’s not just 10% is what they’re taking out every month. You can look and see if they require you to do a yearly inspection where they charge you maybe $150 to go through the unit and just being proactive about it, but it’s maybe a requirement that they have that you do this inspection on your properties, things like that. Look into any other type of fee that they may have and then run your numbers based off of that. Even if you decide that you are going to self-manage right now, when you are running your numbers, when you are analyzing a deal, put in the property management numbers, put those in so that if any time you decide that you no longer want to self-manage, you can make sure that the deal still makes sense to you.

Tony:
Ashley, so a couple things you mentioned like learning laws, I think that’s a super important thing, especially for newer investors because, and even more so if you’re investing not in your own backyard. If you’re going out of state, you definitely want to make sure you have a good understanding of that. Talking with either other local property management companies or real estate attorneys and that specific market who can tell you, “Hey, what are the things I need to do as a landlord to be compliant in the city?” There is I think another benefit to potentially hiring, Simon, a property management company for your first property, even if you don’t plan to use them long term. What you do is if you hire them, you now have an inside look at how a professional would manage those properties and say you use them for six months to a year, whatever it is, during that time period, your goal isn’t just to pay them so that you’re hands off, your goal is to understand what their systems and processes are so you can essentially copy and paste those into your own business once you get things up and running yourself.
How do they handle rent collection? What do they do if there’s a lease violation? How do they handle late payments? What if there’s disputes between people who are … If you have a multi-family, between the person in unit A and the person in unit B, how do they handle renewing the leases? There’s so many nuances that go into managing and property and if you can see how a professional handles those things, when you go off to get that second property. Now maybe instead of hiring that property manager, you can take all the system and processes you learn from that first property and apply them to the second one. I do think, Simon, that for a new investor sometimes there is value in paying that 10% or whatever it is so that you can get indoctrinated into the right way to manage a property.

Ashley:
Then kind of the last question, what would they do that I couldn’t do myself? For that question I think really the resources that they have available that you may not, and just the convenience. Do you want to receive phone calls or messages or do you want to have to call a vendor or find a vendor? Do you have a list of resources that you can go to if their toilet is plugged? Do you have a plumber that you can call that would get there in a timely manner? Things like that. That can be a huge resource and convenience that they can offer, than you can. Also the fact that they have the systeming tools built in place to list your property for rent on a ton of different websites and maybe just not Facebook Marketplace, like you would be able to do.
Software in place to make it easy for your tenants. I 100% definitely think that you can get the software in place and set up all these things a property management company has. And it’s more, I think the real resource and benefit property management company is the convenience and just hopefully less headaches by having them deal with it and just that they’re professional and they know how to handle certain situations, and then just the resources and the people they have in their network to help you with your property to perform even better.

Tony:
But I think, and you touched on this a little bit already, Ashley, but just because you are hiring that property manager doesn’t mean you become completely hands off and there still is a level of involvement you need to have. I think the only true time that you can be a passive, passive investor is if you are either a private money lender for someone else’s rehab or project or if you’re passively investing into a syndication. Those are the two times where literally all you’re doing is putting up your money and then a few months or maybe a few years, if it’s a syndication, you get all your money back with a nice big fat return. But every other form of real estate investing, whether it’s long term, short term, whatever else it is, you need to have some level of active involvement to make sure that that property is profitable.
All right, so question number two comes from Joaquin Hara and Joaquin’s question is, “When you purchase a property with a tenant already in the middle of their lease, can you increase their rent or do you have to wait until their lease is up?” Ashley, you love to talk about the estoppel agreement and how that impacts landlords who are buying properties that already have tenants in place. Just for those of you that were confused like me, if you want to know how to spell that, it’s E-S-T-O-P-P-L. Look up the word estoppel. Ash, you want to break down kind of what that is and as a landlord, how you have to kind of abide by the leases that are already in place?

Ashley:
Yeah, so an estoppel agreement is given to a tenant. Usually I prefer to give it before the tenant or before you purchase the property, so before you close on it, but you can give it to the tenant after you close on the property too, if the previous owner doesn’t want to, they don’t want anybody to know they’re selling or something like that. But really it’s to verify everything in their lease agreement. You definitely want to do this before you close when there are no leases in place and it’s just the owner telling you, “Oh, they pay me $400 a month in cash” or, “They don’t have a lease agreement month to month.” You want to make sure the tenant is on the same page of that verbal agreement and the tenant isn’t all of a sudden going to come out with a lease agreement saying, “No, I actually only paid $300 per month. I don’t know why he told you 400. Here’s the signed copy of the lease agreement that he gave me.”
That’s definitely one way to protect yourself is having them fill out, you get all their contact information. It’s really just to verify that everything in the lease agreement is the same, that the owner and the tenant is saying. You can ask who owns the appliances, who’s paying the utilities? Because even though there’s something in a lease agreement, it doesn’t always mean that both parties are agreeing to the lease agreement. Maybe it says in a lease agreement no pets, but the tenant has a dog in there and the owner just doesn’t know or anything like that. It’s just a way to find out some information that’s about what’s going on in the actual unit and about your tenant and really helps you run your numbers too, because I also always ask, “Are there any repairs that are needed inside of your unit?”

Tony:
Yeah, but I think we can probably say this is a blanket statement. Obviously Ash, I haven’t invested in every state in the United States, but I want to say most states probably have some type of protection that says if you purchase a property where there’s already a lease in place, you cannot just tell that tenant, “Hey, because I’m the new owner, your rent is going up by $500 per month.” There are usually some sort of protections in place for tenants to say if there’s a legally binding document that’s already in place as the new owner, you have to honor that existing agreement and can’t just jack up the prices on the tenants that are already there.

Ashley:
Yeah, and so make sure you’re finding out when that lease agreement is up before you close on the property so that you know how long you’re stuck into the lease agreement of them paying that maybe below market rent, but make sure you know, too, your local laws as to how much notice you have to give them before their lease is up to actually increase the rent. In New York State, it’s kind of like a step up period. If they’ve lived there for less than a year, then it’s 30 days notice. If they’ve lived there for more than a year up to I think two years maybe or something like that, it’s 60 days and then over two years it’s 90 days. Make sure you know how much notice, because you also don’t want it to get into the situation where you don’t give them enough notice and now you’re having to wait even longer after the lease term is up.
I think one more thing to notice too is that you can always ask or maybe offer something too, so you could go to the tenant if you really want to increase the rent, but also maybe you’re going to rehab their whole kitchen and remodel it for them, is go to them and if they agree to the increased price to get their kitchen remodeled, then you can go ahead and have them sign that you both are breaking that lease agreement and you both are signing a new lease agreement with that increased rent. Just don’t think that there’s no negotiation that you can, if you both mutually agree to break the terms of the contract, then go ahead and you can go ahead and do that. It’s not like you have to stay into that lease agreement if you both want to mutually get out of that lease agreement too, or to change the rent.

Tony:
Cool. Well, let’s hop to our next question. This one comes from Sarah Lima and Sarah’s question is, “Do you use a realtor when you buy an investment home or is there any instance where you don’t? I’m new, no realtor type education and I’m looking at buying from a wholesaler but not sure how to do this. Do I contact a realtor and then all three of us work together?” Sarah, yeah, I think Ashley and I both have purchased real estate investments where there are no realtors involved, and you definitely don’t have to use a realtor to execute a real estate transaction. If you’re looking at buying from a wholesaler, oftentimes they don’t have realtors involved. I can tell you how I’ve done it in my home state of California and Ash can kind of give her insights on the New York side. There’s some similarities but some differences.
If you are working with the wholesaler, and this is how we do it in California, typically we use escrow and title as the intermediaries to facilitate that transaction. If the wholesaler is telling you to wire funds directly to them, I would 1000% not do that. You want to make sure that all of the money that you are sending in for this deal is handled by some sort of third party. Again, typically for us in California, that’s title and escrow that we work with to coordinate that. The way that our transactions usually work is if I’m buying from a wholesaler, we execute our own purchase agreement. Either the wholesaler has one or our escrow company can provide one for us. And that just like you would if you were buying with a realtor, constitutes or I guess outlines all of the fee details of that transaction.
The earnest money deposit, your due diligence period, when you guys plan to close, and any other agreements or provisions that you and that wholesaler have agreed on as part of that real estate purchase agreement. You sign those documents and then when you need to submit your earnest money deposit, you’re not sending that to the whole seller, you’re sending that into title and escrow and they hold those funds during the escrow period. When you’re actually closing the property, if you’re paying with cash or maybe you have a hard money lender, those funds again get wired into escrow and then title goes through and make sure that the title’s clean, that there is no encumbrances or any kind of issues with the title of the property.
And as long as the property turns out clean, escrow and title then release the funds to the wholesaler. They get paid out and then you now get your proof that it says, “Hey, I actually own this property. All of the paperwork is filed with the county” and it’s a true legal transaction. That’s how we do things in California. We oftentimes purchase properties with no realtors involved. What does it look like on your end, Ashley?

Ashley:
Yeah, so in New York you have to use an attorney to close a real estate transaction. I just hire an attorney like you would even if you are going through a real estate agent. The attorney, most likely if you’re using an attorney that’s knowledgeable in real estate closings, which you should, they will be able to guide you, walk you through the whole process. It’s fairly easy. They’ll drop the contract for you and then you can send it to the seller. Once it’s signed, you send it back to your attorney and then they pretty much handle the closing from there, they’ll work with the seller’s attorney to facilitate the whole closing. They work directly with the title company. I’ve never had to speak or talk to a title company before, which maybe it slows down the process, maybe it speeds up the process. I don’t know.
But I do know closings take a lot longer in New York than they do in other parts of the country. Yeah, I recommend hiring an attorney. Even if your state doesn’t require one, you can hire someone from the title company or an attorney, but somebody to help you facilitate. But you can also hire a real estate agent and just say, “Hey, can you just help me? I’ve already got my offer accepted. I need a contract drew up. Can I pay you a flat fee to just draw up this contract for me?” That’s one option that you could do, too.

Tony:
Awesome. Let’s jump down to the next question here. This one comes from Carl Anthony and Carl’s question is, “How do you decide what hard money lender to use? Is there some kind of ‘Yelp’ or review system somewhere?” Carl, I am so glad you asked. If you go to the Bigger Pockets website and Under Network, one of the drop-downs is Hard Money lenders and there’s a collection of featured hard money lenders. You can also search for a hard money lender by state, and if you click on one of those hard money lender’s profiles, you can see public reviews that were left for that hard money lender. Then you can also just search for that hard money lender’s name inside of the Bigger Pockets forums. And oftentimes there’s different posts that people have talked about where you can hear other people’s experiences with hard money lenders.
Going to the Bigger Pockets website, again, under Network, look for Hard Money Lenders. I don’t even know, there’s a massive database of hard money lenders there. Another great way to find hard money lenders is to ask other investors in your local market, so Carl, I’m not sure what city you’re in, but if there’s a local meetup or there’s a local Facebook group or just any kind of place where investors congregate, I would go there and just ask like, “Hey, are there any hard money lenders or can you guys recommend any hard money lenders?” I feel like at almost every meetup I’ve been to at least one hard money lender at that event because they’re also looking for new clients and new ways to get their deals funded. They’re always out there networking and meeting folks as well. BiggerPockets.com is a great first place to go.
Then I would say going to somewhere like an in-person meetup is a great second step, but once you find these companies, some of the things you want to look for because not all private or not all hard money lenders are created equally, you want to ask questions about, “Hey, what are your rates look like? What does the interest rate you’re looking to pay?” What kind of points are they going to charge you, right? That’s where hard money lenders typically make a lot of their revenue is by charging points up front. Even if one hard money lender maybe has a lower interest rate, if their points are exceptionally high, the overall cost of the debt could be more. You want to make sure that you’re evaluating the total cost of the money and not just looking at one metric by itself.
Other things to look for are what kind of LTV are they going to provide? Some hard money lenders, if you’re a first time rehabber or a first time flipper, they might only go up to like 60% LTV, whereas others might go up to 75 or 80% LTV depending on your experience. You want to ask as many questions as you can about their loan product and what the total cost of that money is, and then use that to start comparing one hard money lender to the next.

Ashley:
Also, the thing I would recommend asking about too is their customer service. Are you going to be assigned a loan officer? The hard money I did the past year, it was like 20 different people involved for each question. There was somebody else that had the answer, and it was just an awful experience for me. I recommend if you can work with a company that has, and I think Lodha Capital was a sponsor at the Bigger Pockets conference this past year, but I ended up working with them on a loan and we lost the deal, but they were amazing. I had one loan specialist I was working with where another company, it was just every day was somebody else emailing me. And even my attorney was like, “I don’t even know who to contact anymore at this point. It keeps changing.” Then after the loan was closed, they hire a third party service to actually service the loan.
They’re the ones who would send my statements and then collect my payment. When I talked to the person that was servicing the loan, from the specialist there that was assigned to my loan product, stated that there was no online access, that this hard money lender did not provide for that. Anytime I wanted to look at what my loan balance was, I would have to wait for my statement or I’d have to email. And I just feel like that is something that is so outdated that you can’t log into some kind of online system, see what your balance is, check your payments, things like that, check the due date of your loan, things like that.
That was another thing that I really would’ve liked incorporated into the loan product. Then the last thing was too, with they’re always having tons of people, different contacts that were going on, somehow my insurance policy was sent to them multiple times, and I ended up getting twice notices in the mail that I did not have insurance on the properties that they were lending on and that they were going to put their own insurance in place where they had already been sent twice already.
It just was very unorganized and a very poor system. I think besides what you’re paying, I think I would’ve paid more to go with somebody where I didn’t have these constant headaches of trying to get in contact with someone or trying to figure out these things or them to mess things up. When we closed on one of the properties, it was a Friday, we sat at the closing table for three hours because the young 22 year old kid that they assigned to work on my thing did not know anything about title work. And we actually had a title attorney come to my closing because my attorney had predicted this was going to be an issue, and it was three hours and we ended up not closing until the following Monday when we finally proved that we were correct and they were wrong.
That whole weekend, we had contractors lined up, we had ready to move on our properties, and we had to wait until the following Monday. I think not only just what you’re paying for the hard money, but talking to other investors that have used them as to how much of a hassle is this actual company and is it worth my time? Because I would’ve rather paid extra for somebody better.

Tony:
I think it’s also interesting, Ash, that you said that that hard money lender didn’t actually service the loan long term. I feel like usually the hard money companies that I see, they’ll kind of keep that on the books because it is such a short period of time. That is interesting.

Ashley:
Yeah, as far as the servicing of the loan as to they kept the loan on the books, it was just the payment was collected. It was almost like just a third party company verifying I had the insurance in place, that I was making the payments, but the loan was still on their books. They just actually didn’t deal with the collecting of payments and just the backend stuff of it, like the admin stuff, I guess.

Tony:
Got it. They were like a payment collector for that hard money lender?

Ashley:
Almost like a property management company, I would say.

Tony:
All right, well, let’s jump into our next question here. This one comes from Caleb Murber and Caleb’s question is, “When is the best time to get approved? I’m thinking that I’ll be trying to purchase and house hack a duplex in April or around that time. I’m wondering when the right time would be to get pre-approved. Should I wait until I have my down payment? Should I not wait at all? Should my credit be above a certain score? Yeah, what should I do?” Caleb, I think that the pre-approval is something that you should probably do sooner rather than later. And here’s the reason why I say that. I think an important part of being able to shop for the right properties and identify the right markets is understanding what your purchasing power is. And when I talk about purchasing power, there’s kind of two pieces to that.
There’s the capital that you have access to or that you have available. How much money can you put towards down payments or and rehab and startup costs and all those other things? But the other piece of your purchasing power is what amount of loan can you actually get approved for? And if this is your first time ever buying a property, you may not have a good sense of what loan amount you can actually get qualified for. Let’s say for example that you’re super excited, you choose your market, you start analyzing deals, and maybe the average price for the properties that you’ve been looking at is $400,000.
But say you go to get pre-approved once you finally get this property under contract and then you realize you can only get approved for $200,000, now you’ve wasted all this time and energy identifying this market and analyzing these deals at a price point that you can’t actually afford. I think that getting that pre-approval earlier in the process will help you narrow down and focus on the properties you can actually afford purchasing. That would be my advice, Caleb, is have that conversation sooner rather than later. What are your thoughts, Ashley?

Ashley:
Yeah, and I think the best, and they’ll be able to guide you as to how much you would need to actually close on the property, like what would be your down payment amount? If you don’t have that yet, just be open and honest. “How much do I need to save? This is the type of house I want to purchase” or, “This is how much I’m thinking of spending” too. They can let you know because you can estimate what the closing costs will be. Or you can think like, “Okay, I want to buy $160,000 house. My down payment is going to be three and a half percent. I know my mortgage amount is going to be this, amortized over 30 years. This is what my monthly payment is. Yes, I can afford that.” But when you’re closing on the property, you’re going to have to show reserves, you’re going to have to show what your closing costs are. You’ll have to pay those closing costs up front.
I think just sitting down with the lender and knowing what those things are can be a huge advantage ahead of time instead of waiting until you find the perfect property and you put an offer in and then find out that you can’t even get a loan for it because you don’t have the amount of money that you actually needed, even though you could afford the monthly payment.

Tony:
All right. Let’s move on to our last question here. This one comes from Elsie Talwar, and sorry, Elsie, I hope I got your name correct there. But this question is, “LLC versus high limit liability plus umbrella insurance. This would be my first rental property. Which one of these makes the most sense?” We’ve kind of chatted about this in the past before about the differences between going with an LLC versus maybe keeping some of the stuff in your personal name and what the kind of liability protections are. When you talk about putting a property into your personal name versus an LLC, from a tax perspective, it doesn’t really matter. If you have a property in your personal name, you can still recognize the income and expenses that are tied to that property as income for your LLC, right? The deed and the mortgage have no impact on your ability to recognize that as business income.
There are no major tax benefits of doing one versus the other. Where you really get the benefits is from a liability perspective. From an LLC, if you have the property deed to an LLC, if something happens, there’s some kind of claim against that property, instead of someone being able to come after you personally and saying, “Hey, I’m going to take Tony and Ashley’s assets,” if you set things up correctly, they can really only go after the assets the that the LLC owns. Now, if you for whatever reason decide to get the debt in your personal name or the property in your personal name, either because the type of debt that you got or whatever the reason was, there are still options to protect yourself from a liability perspective. And that’s what we did in our business because a lot of our debt is in our personal names or in our partner’s personal names.
And what we did was we got an umbrella policy, and I want to say that umbrella policy has up to $2 million of liability protection in addition to what our homeowner’s insurance covers as well. For us, we have a few layers of protection. We have the homeowner’s insurance as layer number one, and then we have the umbrella policy as layer number two above the homeowner’s insurance. And for us, that kind of gives us the peace of mind that $2 million should cover the vast majority of liability issues you would see on a property, and that helps us sleep better at night.
There are costs associated with setting these LLCs too, LLCs, too. You have your LLC creation costs. You have to maintain those every year. In California, I think it’s like 800 bucks, you have to file a tax return. There’s QuickBook files, there’s more things you have to do as you create more LLCs. I think you have to weigh the cost versus benefit of how much risk am I exposing myself to and what is the potential reward of having that LLC? That’s how we set it up, Ash. I don’t know what you guys doing in your business.

Ashley:
Yeah, so the first thing you should just look at is if you were sued, what would people be able to take from you? What is your net worth? If you had to liquidate everything to pay this lawsuit, how much would there be? If you rent an apartment, you don’t even own your own house right now, you don’t have a car or you have a car, but it has very little equity in it, and you just bought a brand new car and if you sold it, you’d probably make less than what you actually owe on it. Look at what your assets actually are, because if you are sued and there’s nothing to take, or maybe you have $20,000 in net worth or something like that, and most of the time an attorney is not going to waste their time going after and suing you because there’s very little that somebody could actually take from you in a lawsuit.
Think about that because one of the biggest reasons for getting an LLC is for that liability protection from your personal assets or from other assets that are in other LLCs. I have a business, the liquor store. The liquor store is in a different entity than the building the liquor store is, and I learned this from another investor who any business he has is in its own LLC. Then any building that it’s in is in its own LLC, and that just gives you that liability protection separate from each other. When you’re putting properties into an LLC, if you all of a sudden have a million dollars in equity, it may be time to start opening another LLC and building properties into that LLC, so you’re spreading out the net worth.
If that one LLC is sued, you’re not getting the $5 million is up for grabs from somebody that that you have in equity, instead maybe spreading it out so there’s a million in each of those LLCs, so they’re only going to be able to come after that million, and you still have your other four million in equity for the LLCs. But just starting out, think about what your personal assets are and how much is actually available for someone to sue you for? The next biggest thing to look at is how do you want to finance this deal? The 30 year fixed rate, low interest rate, lowest interest rate you can get today, but doing that, then get the umbrella insurance policy on if you put into your personal name. You can always go and refinance it later on and put it in a commercial mortgage where you’re deeding it into an LLC.
There are several investors, including myself, who have bought a property in our personal name, got that personal mortgage, and then deeded it later on into an LLC. And since I have remained 100% owner of the property, my personal name, and also 100% owner of the LLC, my due on sale clause has not been called, I’m still making payments on the property. Banks are not in the business of foreclosing on homes. The property is still being paid, tends to not be an issue, but look through your mortgage contract and see if you are, what the due on sale clause actually entails. But I’ve seen a lot of mortgages changing the language where if you remain 100% owner that they will not call the due on sale clause.

Tony:
Yeah. Elsie, just hopefully that gives you some insight. There are a lot of factors to consider there, but luckily even if you decide not to go with the LLC, there are still ways to protect yourself as the owner of that property. Yeah, I hope that was helpful.

Ashley:
If you guys would like to ask us a question, you can leave us a voicemail at 1-888-5-ROOKIE, and we may play it on a Saturday Rookie Reply or on Wednesday as a voicemail recording for our guests to answer. Thank you guys so much for listening, and don’t forget to join the Real Estate Rookie Facebook group where you can also leave us a message onto there, but I can almost guarantee that before we air the podcast episode, you are going to have a ton of answers and responses to your question within the Real Estate Rookie Facebook group.
It’s just great to have like-minded individuals to kind of consult with and interact with. We have rookie investors who just learned about real estate investing from a friend or from YouTube or whoever that are joining. Then we also have experienced investors right in the Facebook group too. Make sure you join. I’m Ashley, @WealthFromRentals, and he’s Tony, @TonyJRobinson, and we’ll be back on Wednesday with a guest.

Most entrepreneurs have a hard time getting loans from banks. It’s a big problem for all founders, but especially those from marginalized communities.

That’s why, several years ago, the Ewing Marion Kauffman Foundation formed its Direct Capitalization Loan Fund, which aims to expand the loan pools available to small businesses in Kansas City, Kauffman’s hometown, as well as nationally, and boost access to capital in disinvested communities.

The fund just announced its third award—a $5.3 million grant to DreamSpring, an Albuquerque-based Community Development Financial Institution (CDFI). DreamSpring also received $300,000 in funding to help it deploy the funds in Kansas City. “This partnership is aimed at helping to bridge funding gaps and nurture an environment where small businesses, particularly those owned by people from historically underserved populations, can grow their businesses and flourish,” says Anne Haines, president and CEO of DreamSpring.

Kauffman is focusing on CDFIs in large part because of their track record funding enterprises that can’t find bank funding. “They have alternative ways to assess the trustworthiness of a business,” says Shakia Webb, program manager, entrepreneurship. For example, CDFIs might review an entrepreneur’s track record of paying a variety of bills in a timely fashion that banks won’t include in their underwriting.

DreamSpring’s average loan size is $13,500, with a focus on BIPOC, women, startup, and low-to-moderate income small business owners. But it makes loans as low as $200 on up to about $2 million. Smaller loans might require repayment in a few months, while bigger ones have three to five year repayment terms.

According to Haines, over the next five years, the initial capital from Kauffman will be continuously recycled as loans to other small businesses. Ultimately, that will result in DreamSpring deploying about $140 million in capital.

With the additional $300,000 in funding, DreamSpring has hired its first loan officer in Kansas City. It’s also building out other capabilities to provide on-the-ground service and support in the area.

Akil Cooper, who heads a one-year-old signage and printing company in the Kansas City region just received $7,500 in funding that he’s using to buy a CNC milling machine, target bigger customers and expand his business. Eventually, he wants to purchase more industrial-size equipment.

Kauffman has already made previous funding awards to two CDFIs—$5.3 million to AltCap in December 2021 and $3.3 million to Holy Rosary Credit Union in June 2022. For now, according to Webb, Kauffman is pausing on making any more awards. “We want to observe the performance of the three CDFIs we’ve funded, so as we move forward, we have some historic numbers to go on,” she says.

President Biden’s proposed Budget for the Fiscal Year 2024 seeks to promote expanded access and improved affordability in healthcare and education while cutting taxes for low-income families and shrinking the deficit, but the proposed funding comes from increasing taxes on the wealthy and eliminating an important tax break for real estate investors, which will likely be rejected outright by many in Congress. 

Depending on your politics, you might have different solutions to taxes. Many might suggest that changing the tax code to be less advantageous for the wealthy is more complicated than you might think. In this case, Biden’s proposal may unintentionally harm middle-class families in the process, research suggests.

This article takes a look at how this proposal to the tax code could affect real estate investors, in particular.

Raising Taxes for the Wealthy

The proposed budget would increase taxes on wealthy Americans in several ways. For example, it would:

• Increase the capital gains tax rate from 20% to 39.6% for people earning at least $1 million in any year
• Increase the Obamacare tax rate from 3.8% to 5% for people with incomes of at least $400,000
• Levy a minimum 25% tax rate for the wealthiest 0.01%, or households worth $100 million or more
• Increase the tax rate on personal income from 37% to 39.6% for people who earn at least $400,000, reversing a previous tax cut 
• Place restrictions on the maximum contribution to Roth IRA accounts for people who earn at least $400,000
• Removes the step-up in basis for inheritances at death, affecting unrealized capital gains greater than $5 million ($10 million for joint filers) 

It’s important to note that while the effective tax rate for the top 1% has decreased since the 1970s, it’s still more than eight times higher than the average effective tax rate for the bottom half of earners, according to the Tax Foundation. But since the federal government spent $1.38 trillion more than it collected in revenue in 2022, it’s not surprising that policymakers are considering increasing tax rates for the wealthy, especially since wealth disparities were narrower in the years when high-earners paid more. Research belies the claim that cutting taxes improves the economy, and the government collects less revenue when tax rates are lower, so raising rates for at least some taxpayers may be essential.

There are, however, some unintended consequences of raising capital gains taxes above the threshold. For example, homeowners who earn far less than $1 million or even $400,000 annually may get stuck with a tax bill for selling a home in a hot market, where a $1 million home isn’t a mansion — it’s a median-priced single-family home. For example, the median home price in San Francisco sits at about $1.3 million, even after declining this past year. Even with the capital gains exclusion for primary residences, a homeowner who bought a property 20 years ago in what has become a hot market could potentially get dinged at the higher rate in the year they sell. That could make affording a similar home at today’s high mortgage rates difficult to achieve for movers. 

It’s unclear how many people will fall into this category. But it’s worth questioning whether certain exceptions may be necessary and whether the capital gains tax increase is the best way to accomplish the federal government’s goals. For example, critics say an increase in the capital gains tax rate discourages saving. The Congressional Budget Office estimates that a tax on consumption, which would encourage saving over spending, would have the greatest impact on shrinking the deficit—but this would also disproportionately impact low-income earners. There’s no easy solution. 

Eliminating 1031 Exchanges

Another aspect of the proposed budget is the elimination of 1031 “like-kind” exchanges for real estate investors, which have been around since 1921. Section 1031 of the tax code allows individuals to defer paying capital gains tax on an investment property by using the proceeds from the sale to purchase a similar property of equal or greater value. A fact sheet from the White House compares the tax benefit to an “indefinite interest-free loan from the government” and categorizes it as “wasteful spending on special interests.” 

There seems to be a misconception that real estate investors are already wealthy and insatiably greedy, and that they avoid paying a fair tax rate while exploiting their tenants for more income. Perhaps the framing of policy initiatives perpetuates the stereotype, but in the vast majority of cases, that’s patently false. The 1031 “loophole” doesn’t exclusively benefit the wealthy—it benefits real estate investors from all walks of life. 

Mom-and-pop landlords own 41% of all rental properties and nearly 73% of all two to four-unit buildings. These are not people earning $1 million annually—the estimated average annual income for landlords is $97,000. While real estate is often touted as the preferred investment vehicle for the ultra-wealthy, it’s also a tool for everyday people to boost their retirement savings and save enough to send their kids to college. Small deals for inexpensive properties make up the majority of like-kind exchanges. 

Furthermore, research shows there’s nothing wasteful about the like-kind exchange tax break—it plays an important role in encouraging economic activity and revitalizing communities and added $97.4 billion in value to the U.S. GDP in 2021. Like-kind exchanges make investment more efficient, creating hundreds of thousands of new jobs. They also make it viable for investors to convert vacant commercial spaces into apartment buildings, something that’s important to encourage during today’s housing shortage. The National Association of Realtors offers a few anecdotal examples of how 1031 exchanges have enabled investors to rejuvenate communities. 

Critics say the removal of 1031 exchanges would reduce federal revenue, exacerbate housing shortages, and lead to a decline in housing quality for tenants since property owners would have less incentive to upgrade their units with new kitchens and bathrooms. Companies may also be discouraged from relocating to buildings that better meet the needs of the business and employees. While it’s possible there could be a benefit to placing limitations on 1031 exchanges, eliminating them entirely would likely have adverse negative effects on the economy, research suggests. 

The Bottom Line

There’s a strong argument for increasing taxes on the wealthy to fund social programs. It may not be the only way to improve economic mobility, pull people out of poverty, and shrink the wealth gap, but it’s a potential solution—even some notable billionaires have come out in support of the idea.

But in the process of reforming the tax system, policymakers need to be careful that proposed solutions do not unintentionally harm low-income and middle-class families and communities or real estate investors who contribute to the economy in a positive way.

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

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

Have you heard about planned obsolescence? It’s an industry practice of designing products with limited lifespans (thus driving sales). It explains why electronics are now the fastest growing source of waste in the world, with big impacts on our planet. Social entrepreneur Laetitia Vasseur founded STOP Planned Obsolescence to reverse this trend (Halte à l’Obsolescence Programmée — HOP, in French). Ashoka’s Hanae Baruchel caught up with her to learn more about her movement’s activation of 70,000 consumers and 30 companies across France driving better policies and practices to build tech that lasts.

Hanae Baruchel: Laetitia — let’s start with the basics. What is planned obsolescence?

Laetitia Vasseur: At HOP, we talk about three types of “premature” obsolescence because in France, planned obsolescence is a crime with a very specific legal definition. The first type is technical obsolescence. That’s when a spare part is designed to break easily or when a chip is inserted in a product to make it stop working after a specific amount of time. Software obsolescence is the second type. The hardware might still work perfectly, but the software makes it obsolete, for example when you update an operating system that breaks or slows down your device. And the third type is cultural or psychological obsolescence. That’s a marketing strategy to make people think they should change their devices even though they still work properly.

Baruchel: This phenomenon dates back at least to the 1920s when the light bulb industry agreed to deliberately limit the lifespan of all lightbulbs to 1000 hours. You saw a documentary about it that ends with a call to action to end planned obsolescence – and you took it quite literally. Why?

Vasseur: It made me very angry both from ecological and consumer protection perspectives. Eighty percent of the environmental footprint of a product comes from manufacturing. And electronics are the fastest growing source of waste in the world. That’s why it’s essential to extend the lifespan of our devices, and give them second and third lives. Recycling alone isn’t the answer because not everything can be recycled and it is very energy intensive.

So I started to look for ways to contribute. At the time, I was working in the French Senate as a Parliamentary Assistant to a Green Party MP. I convinced him to let me work on this problem, which led us to introduce a law against planned obsolescence. It slowly made its way through the legislature and in 2015, France became the first country in the world to recognize planned obsolescence as a crime.

Baruchel: You eventually decided to leave the Senate to focus on this issue fully.

Vasseur: Yes. I knew that intentional planned obsolescence would be hard to prove legally, but that without putting the law to use it would have no teeth. So, I created an association to collect cases of planned obsolescence reported on by consumers. I knew we could make our case only if we grouped our complaints. In 2017, a U.S. study came out revealing a lot of complaints about iPhones that stopped working properly. The culprit was an iOS update, released right before a new iPhone hit the market. For us this was a clear cut case of planned obsolescence to drive new sales. We took Apple to court in France and won. They were fined €25 million and had to disclose their wrongdoing on their website. Making it public was really important for us because brands care about their image. This was a reputational blow for Apple.

Baruchel: So, by now the rules of the games had started to change. Planned obsolescence was a crime, and companies started to see there were consequences when they broke the law. But you didn’t stop there?

Vasseur: As much as this was a victory, I also knew that there wouldn’t be a lot of clear cut cases like this one. We needed to create an incentive for companies to extend the lifespan of their products. So we developed the French Reparability Index. The index scores devices like computers, smartphones, washing machines, and other household items on five criteria – like how easily it can be disassembled or reassembled, whether spare parts are available and affordable, etc. It helps to orient consumers, and it also makes companies compete for a higher reparability score. Disclosing a products’ reparability score is now mandatory throughout France – much like nutrition labels on processed foods.

Baruchel: As you point out, even if something can be repaired, it’s often so expensive that people don’t bother.

Vasseur: Yes. 70 percent of people don’t repair their devices because of the costs associated. So we created an innovative way to finance repairs by levying a mini-tax on corporations to finance France’s Repair Fund, launched nationally in December 2022. It’s really easy for consumers. All they have to do is go to a licensed QualiRépar repair shop to access repairs at a cheaper price. For example, people will get a €25 discount on smartphone repairs, or €45 off when it comes to laptops. The repair shops are themselves paid partially through this fund.

Baruchel: Are these measures being adopted elsewhere in Europe?

Vasseur: It’s underway. The European Union plans to make a reparability index mandatory across the Zone, which is great news. The only big downside is that their index won’t take the price of spare parts into account. From our standpoint if something is too expensive to repair, it’s not really reparable.

We’ve had another major victory in France which take things one step further. In 2024, all products covered under French Reparability policies will also need to be scored on their “durability”. This new mandatory index will incorporate criteria on reparability but also trustworthiness, robustness and upgradeability. We plan to export the Durability Index to the rest of Europe, and internationally.

Baruchel: You now have a coalition of 70,000 French consumers who are invested in this cause as well as an association of 30 or so companies in France who want to lead their industries and make products that last. What’s next for these groups?

Vasseur: We try to federate as much as possible – there really is strength in numbers. With our consumer coalition, we always want to protect and advocate for them, but we also want to build new consumer mindsets and a culture of durability. That’s why we created a website called Durable Products that provides people with advice and reparability resources near them. Similarly with companies: it’s important for us to show that building the circular economy and fighting planned obsolescence is not just for “angry citizens” or “activists”. Companies have a crucial role to play in building the alternatives and our corporate Durability Club demonstrates that some companies are ready for this shift and leading the way. We help them get there.

This conversation was edited for length and clarity.

David:
This is the BiggerPockets Podcast Show.

Rob:
746. Oh man, that felt good.

Jake:
I can’t believe three years ago I was buying my first property and today I’m collecting over $200,000 in rent.

David:
So, welcome to the show, everybody. That was Rob’s attempt to try to sync with me on an introduction. As you can see, there’s a reason that I usually do it alone. But, Rob, thank you for trying. Today’s episode-

Rob:
My fusion brother.

David:
Yes, that’s right. Let’s do that again. Put your hands up.

Rob:
You have to watch this on YouTube to see the magic happen.

David:
Today’s episode is going to make you laugh, make you cry, make you want to go run through a brick wall, and make you want to go hug your kids and pet a puppy. It is fantastic. Rob and I interviewed Jake Radawick, who is a 27-year-old who has 28 rental doors, over $200,000 in income, and he’s done this all in just three years. Getting a humble start as a valet, parking cars, moving into live-in flips, using the BRRRR strategy, putting low money down on properties, and then scaling into a different market and buying a 20-unit apartment complex. That and more in today’s show. I could talk about this forever, Rob. What were some of your favorite parts of the show?

Rob:
I think it’s a really great story. If you start out with the trust fund and you have a ton of money to get started in real estate, this is how you scale. No, obviously that’s not what this is. This is actually a very, a perfectly, I don’t want to say normal because it’s like it’s very abnormal how quickly he was able to do this. But I love his story that he wanted to save up 9,000 bucks and he did that. I mean, there’s a lot more to this we’ll get into in the episode, and then he got into this property and then he scaled again by putting another 3.5% down and he scaled again and again and again. It’s this snowball that I think anybody listening at home today can achieve, and he made that very obvious because it was all mindset for him.

David:
That is such a great point. It was how he built the momentum of a snowball that got bigger and bigger and bigger, and now that snowball’s taking out the obstacles for him. He’s not having to do all that work. If you are a new listener, you’re going to love how he got his first deal with less than $10,000 and he gives specifics on exactly what he did to save that $10,000. If you’re an experienced investor, you are going to love how he approached going to banks to get a loan when they kept telling him no. He eventually figured out a way to get them to say yes. When you listened to this, guys and gals, I promise you you’re going to think, “Is it really that simple? Does that actually work?” The answer is yes. He did the right moves. He took the right steps. He went to the right people, and he just kept doing it until he got what he needed. It is not that complicated.
This is an awesome story. You’re also going to love that Jake shares his why. It has to do with his family, what he saw his parents going through and his older brother. This one is one for the record books. You’re going to want to share this with other people.

Rob:
It was moving. It’s a moving story, and I think a lot of people today will take action, and I’m excited. I’m excited for everybody to listen to this one.

David:
Yeah, and you want to watch all the way to the end because you’ll get to see Rob cry, and who doesn’t want to want to see that?

Rob:
Just a little. So, someone was cutting onions over here.

David:
That’s right. Before we get into today’s show, today’s quick tip is-

Rob:
Surround yourself around people who are smarter and more successful than you. That’s something that Jake talked about a lot and how he was able to level up and scale his entire portfolio.

David:
Yeah, his idea to buy that apartment complex literally came from a meetup that he went to when he just asked honest questions, “Guys, where should I be investing?” He didn’t have to pay for a super expensive course. He didn’t have to overthink it. It was literally just talking to other investors. So, get out there, share your love of real estate, find other people that love it, and make some progress yourself.

Rob:
And get on the BP forums. Ask there. I mean, there’s hundreds of thousands of people there that will answer your question.

David:
Yeah, now more than ever, this is important because it’s hard to find anywhere that works for real estate. So, if you haven’t been talking to people, now’s the time to do it. All right, let’s bring in Jake. Jake Radawick, welcome to the BiggerPockets Podcast. How are you today, my friend?

Jake:
I’m doing good. Super excited to be here.

David:
Well, I’m glad to hear that. Before we get into your story, I’ll want to hear, where do you live and where are you investing?

Jake:
That’s a great question. So, I live in Spokane, Washington. It’s roughly 15 miles west of the Idaho state border. I’m investing locally using owner-occupied loans here, and then I’m also investing in Memphis, Tennessee as well.

David:
And I hear you take advantage of those beautiful outdoors in Spokane. What outdoor sports are you into?

Jake:
I have a great girlfriend. She’s super active and she loves CrossFit, so anything I can do to keep up with her. I love to mountain bike, love to snowmobile, to ski, snowboard. The cool thing about the Inland Northwest is we have tons of lakes and tons of mountains. So, whether it’s a ski resort or just hanging out in Lake Coeur d’Alene, just tons of opportunities to enjoy summer and winter.

David:
That’s cool, and it’s important to like where you live. Rob and I were having a conversation about why is there people that still live in certain areas. I don’t want to say any names because we probably have listeners there, but you’re like, “It’s freezing cold, it’s so boring. You know can leave, right? You don’t have to stay there.” I was wondering if there’s a form of Stockholm syndrome that some of these geographic regions have a hold on the people that live there because it is important. You have to enjoy where you’re at, otherwise what’s the point of doing all this. Now, I know you started investing only three years ago. You made a remarkable amount of progress in that time. What was going on in your life three years ago that made you decide to get into real estate?

Jake:
It’s a great question. So, it was March of 2020 and I was working as a project engineer for a construction company in Seattle, Washington. So, I would do that during the day, and on the side I was working as a valet at night and on the weekends at a higher end restaurant in Everett, Washington. I was grinding. I was working during the day and then taking as many shifts as I could at night. I was talking to the owner of the restaurant and she was talking to me and I was like, “I need something more. I’m looking for something more.” And she’s like, “Jake, you’re super driven. You got to get in real estate.” And I was like, “I hadn’t even thought about it.” And so, that kind of pushed me in towards real estate and buying my first property over near Seattle, Washington.

David:
That’s funny because I also got my start in restaurants.

Jake:
Yeah.

Rob:
So, Jake, you were looking for more. What was the reason for that? Was it because you just wanted more money? Were you not liking the paycheck that was coming out of being valet, or just general, the idea of wanting to progress in your career?

Jake:
Yeah, Rob, great question. So, I just, I feel like all my life I’ve tried to take as little as I can from my parents. My parents have always taught me to work hard, but my brother lives with them and my brother’s super important to me. And so, they spent a lot of time taking care of him and enjoying life, and so I try to be as self-sufficient as possible. And so, I got into real estate because the idea of passive income, I was working as many hours as I possibly could in a week, and I just needed a way to make more without working any more hours, which wasn’t possible.

David:
What would you say was driving you to need to make more money?

Jake:
Well, I have this dream, and call it farfetched, but I really want to have a life where my wife doesn’t have to work. And then I have a brother that’s autistic and he’s 35, and I want to be able to take care of him and not have that impact my future family as well as the life that he deserves as well. So, I really wanted to, I felt like it’s my responsibility to ensure that I can be there for my future family as well as the family I have currently.

David:
Okay. That’s some pretty heavy pressure that you’re feeling with, and you were 24 at the time-

Jake:
Yeah.

David:
… that you have these thoughts. So, you’re looking at this realizing, “I don’t want my spouse to have to work when I get married, and my parents are stressed out from having to care for my 35-year-old,” I guess at the time he would’ve been 33-year-old brother that you said was autistic.

Jake:
Yeah.

David:
And you also recognize that someone’s going to have to take care of him. So, you feel all that pressure on your shoulders. What was your plan originally, just work a lot of shifts at restaurants, or were you going to try to get into higher end restaurants? What was going on in your heart that facilitated this conversation? Because the manager of your restaurant didn’t see this going on and just go initiate a conversation. I’m sure you were reaching out trying to put together the pieces of this puzzle.

Jake:
I don’t know. I really liked the idea of being self-sufficient. My parents always taught me to work hard, and they were really good at working a lot of overtime, they were really good at working hard as an employee, and I really wanted to break out of that cycle and identify a way that I could start being an investor. As soon as I rented out my first townhouse and I had my first taste of passive income, I was like, “Wow, this is remarkable. I could do my day job and invest in real estate and the passive income from there can support my brother while my active income can support my family.”

David:
Yeah, I mean, that’s exactly how real estate works. I’m just curious why you think you really chose to take on the responsibility of caring for your brother as opposed to saying, “I’ll just let somebody else do it, and I’m just going to stay in my lane and do my thing.” What is it about you? Maybe up to that point in your life values that someone had put in you. Where do you think that came from that you ran towards responsibility and answered that call, as opposed to what most people do, which is just, well, that’s my brother’s issue and my parents’ issue?

Jake:
I think it was just me growing up and watching my dad. He did a lot for us, and to include, he worked as a contractor in Afghanistan where he worked out of country for all but 29 days out of the year for four years straight, and he did that so we could have the great life we did, but he sacrificed being present in our lives through my whole high school career. And so, growing up, I noticed that and I took note of what he sacrificed for us to give us a good life. My goal was I wanted to give that same life to my future family, but I want the opportunity to be present because that’s so important.
He used to call up his buddies that he… So, to give background, he was 20 years military and then 10 years he was a police officer before he became a contractor for a private company in Afghanistan. While he was a police officer, just like you, David, he was taking on every overtime shift he could. I was growing up and I saw this. I saw that Dad was always gone, and I didn’t want that for my kids. And so, I wanted to figure out a way to break the cycle. I saw and I was like, “If he’s giving all this time now, I’m going to give all this time before I have kids so that I can be present in those moments.”

David:
That’s some powerful stuff. Your dad really set the example of work ethic. So, you understood, I want to work really hard, I want to continue the legacy and continue the momentum that my father built. But you also saw the downside of the way he took to working hard. You didn’t get to see your dad as often. He didn’t get to see his family. I know what that life is like. You’re tired all the time. You’re sleeping at weird hours in the day. You’re always grumpy. You just have this sick, nauseous feeling that you carry around all the time for being sleep-deprived and exhausted. You never really feel healthy. You never have a lot of energy. So, you realize I don’t want to go that way, but I’m not going to rebel completely against hard work and say, “I don’t want to be like my dad.” You actually found this perfect medium.

Jake:
Yeah. Yeah, nobody in my family before me has ever owned more than one piece of real estate. I was kind of seen as the crazy person when I got into it, but I appreciate them supporting me all the way through, and it’s done me pretty good so far.

David:
Okay. So, what was the conversation like with your restaurant manager? How did they bring real estate into the conversation? Did they paint a path for you?

Jake:
Well, so I was currently managing her whole team of valet drivers, and I was just talking to her. Her name’s Jen. I was like, “Jen, you’re doing so great. I mean, what’s the next step here?” And she’s like, “Jake, you’re an awesome employee, but you got to be more than an employee. You got to be an investor.” She just said, she’s like, “You got to buy a piece of real estate.” The real estate market, it’s probably 2019 at this time. She’s like, “You got to buy a piece of real estate. The real estate market in Seattle, Washington is booming, and I’m making so much equity. That equity’s going to be so much more than you could ever make. You could work as many hours as you want here, but it’s never going to be as much as you can gain just by owning a piece of real estate.”
And so, that’s what I did. I didn’t have a plan. I didn’t know what I was doing. I didn’t even know what an inspection or an appraisal was when I put my first offer in. I just took it step by step. I said, “What do I need to do?” I need to contact a real estate agent. I did that. They directed me to a mortgage lender and then I went there, and I just took it one action step at a time, and it kind of fell in my lap.

David:
I think that’s a good point to hit because even though it sounds simple, there’s a lot of people don’t take action at all till they know all 27 steps, or however many it’s going to be, and they get to 26 and they’re not going to start till they know that 27, whereas the way it typically works out is you take the first step and that is what opens the door to the second step. And then you ask the loan officer, “Well, what do I have to do next?” “Well, you’re going to find an agent.” “Do you know one?” “Yeah, I know three. Here you go.” You talk to them, you talk to other people. Now, that agent’s, you don’t want them to say that, you want them to say this. Each of those steps opens doors to the next step.
It’s kind of like walking through the fog, or Brandon Turner used to have the analogy of driving through the fog is you can’t see what’s a hundred feet in front of you until you get closer to it. I mean, I love that you just said, “Okay, I’ll just keep taking it one step at a time.” What did that first deal look like? What caught your eye? What advice were you given? What made you say, ‘That’s the one’?

Jake:
David, I would love to say I was a genius here, but I wasn’t. I had $15,000. Actually not even that, I had $13,000, and I just had to find something that I could afford and fix up. And so, we found something in Lake Stevens, Washington, and I was able to buy this townhouse. Didn’t have a plan, just knew that I was going to buy it and then move into it. Ironically, this is right when COVID was hitting. So, I bought it, and then I lived in it temporarily, fixed up, add some more LVP flooring.
Now, at that time I read the book by Brandon Turner, How to Buy Real Estate with Low Money Down, and I’m like, “Oh my gosh, there’s actually a strategy to this.” And then I read your book, BRRRR. From there, it was like a rocket ship taking off. I immediately realized Seattle was great for appreciation, but I could move six hours away and invest in Spokane, where I was able to get a triplex for with an FHA loan for 3.5% down. I left my job, found a new job just to travel over here to invest in real estate, and that’s where my journey took me. So, after that deal, it kind of opened the door to what real estate could offer, and then from there I read a few books, and it was off to the races.

David:
So, that’s actually the secret to success for everyone listening. Read Brandon’s book, read my book, and you’ll be on a rocket ship to millions, really.

Rob:
And read your upcoming book, Scale, right? That’s coming out pretty soon.

David:
Oh, I love how this is becoming a running thing here. If you ever listen to the really old episodes of the BiggerPockets Podcast, Brandon and Josh would have these frequent callback jokes like Brandon couldn’t pronounce the word rural, Josh did not like the city of Detroit, Josh would repeatedly make fun of Brandon because everything, really, he was very good at doing that. But there would always be these callback jokes, and my book, Scale, is being one of the only books that Rob has ever read, other than his Japanese comic books. This is coming up all the time, Jake. So, if you’re curious why he’s doing that, it’s because Rob has developed a sense of humor. It’s like he’s going through adolescence right in front of our eyes. We’ve got a child actor.

Rob:
Well, you know, every new book that’s coming out, we’re coming out with so many great books to help people like Jake out in their journey. So, it’s promotion month for you, David Greene.

Jake:
I can’t say that word either. So, I’m just like Brandon, I can’t say that word.

David:
Well, because you’re investing in a rural area. Yes, that’s it, Spokane. Okay, here’s what I like so far. You did not overcomplicate things. You just said, “I’m buying small multi-family. I’m using an FHA loan. I’m going to buy in a area where I believe I can get tenants, and then I will see where it goes.” There’s really limited downside to that. Really, the only way you mess this strategy up is you buy in an area where nobody wants to rent or there’s high crime or there’s other undesirable attributes or the property doesn’t cash flow. So, if you know how to do basic analysis on a deal, you don’t need that much money to get started. How much did you end up putting down on this property?

Jake:
I ended up putting down I think 9,900 or it was 3%. There’s program through Freddie Mac, I believe it is, or Fannie Mae, the first time home buyers program, and you can put down 3%. And so, I put down 3% on something that was $320,000.

David:
It’s amazing. Right?

Rob:
That’s amazing, yeah.

Jake:
First deal was 3% down, second deal was 3.5% down. And so, within 12 months, I had two properties, three tenants, and I only put, I mean less than $20,000 into deals.

Rob:
So, Jake, tell me a little bit about how much were you making as a valet, if you don’t mind talking about this, because it probably took you a while to get there. I think this $10,000 number, you were at 9,000, but did it take you a long time to get to that $9,000 or is this something that, were you hoarding your whole life?

Jake:
It did not take me a long time once I decided I was going to do it. I made the mistake, of course, a lot of young guys will do this, when you get out of college, the first thing you want is a new truck. So, I bought a new truck and that put me behind.

David:
Wait, real quick, how much did you put into that truck? How much did you spend on it or how much did you put down?

Jake:
I put the same amount as I put on my first house.

David:
That’s what I was wondering.

Rob:
Nice. Well, I love though that you said, the most important thing you’re going to say this interview is it didn’t take long as soon as I decided I wanted to do it. Right? So, you put down $9,000 on a truck and then you’re like, “I want to buy a house.” And then you saved up the cash?

Jake:
Yep, I saved up. You guys did a podcast about side hustle. Side hustles are so important. In college, I worked two jobs. Out of college. I got a job. Everyone that gets a full-time salary job usually just does that salary job. Well, I did my salary job and then went and worked at a restaurant where my coworkers were coming for happy hour. I would leave early, set up the valet team, then valet my coworkers cars, and then stay there till 9:30, 10 at night, work there, and then see them at work again at 6:30 in the morning.
Then I moved to Spokane, I obviously don’t have that valet job anymore, and I’m like, “Okay, what am I going to do now?” Still managing my house in Seattle, moved to Spokane, have my triplex, and I hear this new app called Turo. And so, I’m like, “Okay, I got this new truck and this hefty payment because I’m a dummy.” I was like, “How am I going to offset this? I’m going to turn this liability into an asset.” And so, I just start Turo-ing it as much as possible. I buy a little dual sport motorcycle. So, I would put the motorcycle in the back, drive the truck to the airport, drop it off, take the motorcycle out, ride that for however long it was rented, and then when it was time to pick it up, I would just come ride this little dinky motorcycle back, put it in the back, and then just get my truck back.

Rob:
So, were you actually making money on Turo? I used to do that back in the day, and I just did it so that I could break even on my car payment. But you were actually turning a profit doing this?

Jake:
It was until it got saturated. In 2020, it was pretty good, ’21 was not as good, and then ’22 was pretty slow. But yeah, with COVID, a lot of the rental car companies sold off a lot of their fleet to increase their revenue, and so that meant they had less cars which meant Turo was prime for that period.

Rob:
Nice. Okay. And so, it was basically through valeting and side hustles and Turo that you were able to get up to your first $9,000 or so?

Jake:
Yes. Yep.

Rob:
Cool. And so, if you don’t mind me asking, were you making any cash flow on these first couple of properties?

Jake:
Yeah, so in that townhouse, I was making a hundred dollars in cash flow. So, I really had no cash flow. But I only had it, I closed in March and I accepted a new job in December over in Spokane. So, I knew I was moving over 250 miles away, and so I immediately rented it out, and then I moved and then I used my FHA loan to buy the triplex. I knew it was a good idea. Looking back, I didn’t know how to run my numbers exactly the way I should have, but it worked out really well. I bought something that was under-rented, increased the rents on them, was there onsite. I manage that until today and I got some great property management experience and was able to go from there to buying a few more.

David:
We’re going to get more into your story and we’re going to learn about how you scaled your portfolio, but I want to take a quick second and dive into what you’re doing is what we call the snowball method or building momentum. Most people understand this from the perspective of I have three houses, I pulled out the equity, I reinvested it, I got to nine. They see the snowball once it’s already pretty big. What I love about this is you’re explaining what you did to push the very first pebble down the hill and all the ways that that built momentum.
So, you start off as a valet. You’re doing a good job in the position you have in life so that they promoted you to be over the other valets. They don’t do that to the bad employees. They do that to the good ones. Your boss likes you which meant you are sacrificing, you have a servant’s heart, you’re bringing skill, you’re bringing value into the marketplace where you are. You’re not waiting until you get a better lot in life before you bring value. Right? Those values that your father gave you and your mother translated into the success in the workplace. That led to advice that you need to buy real estate. So, now you get a side hustle and you come up with this Turo idea where you were able to take a bad decision, which was buying a truck, and turn it in to mitigate the loss. Right?
You’re building momentum. You come up with this clever idea to put your motorcycle in the back of the truck so that you have a way of getting around, while you’re getting your truck payment paid for doing this Turo method. That led to you buying the first house, which you did from the money that you saved, doing something anyone can do. There’s nothing different about your story that any other American couldn’t do if they wanted to go get a second job, rent out their stuff on Turo, work, like you said, you would work at the valet place and you got a second job to make more money and you would then serve the people that were your employees basically. The people that worked for you, you’re now taking their keys and parking their car. Okay? That’s incredible that you had that level of humility because you were that driven.
This is the work it takes to build up your down payment to get the snowball moving in real estate. Okay? And yes, you did use a low money down strategy, but you still needed some kind of money. I love the approach you took wasn’t I don’t have $9,000, I guess I can’t invest in real estate. It was what would it take to make $9,000?

Jake:
You’re correct, Dave. Yeah,

David:
Rob, what are you thinking here? Because you also did the Turo thing, you did the house hack thing, you guys both have great hair. There’s a lot you got in common with Jake here.

Rob:
Yeah, I love it, man. I think a lot of people say that they want to make more money or they want to get into real estate, but the actions that they take to do that never really lead up to fulfilling that desire. Right? And so, you said that you wanted to do this, but I think the thing for you that I’m seeing in your story is that you needed to do this. Right? You needed to succeed in real estate because you had your why, your family, your brother. You talked about that. With that fire burning under you, you’re like, “I need to figure out how to make 9,000 bucks to get into real estate.”
I think that’s a very easy mindset change that a lot of people can just think about. Right? Like, “I need to do this.” If you need to do it, then you’ll go out and make it happen, because a lot of people, like I said, they want to do this stuff, but they don’t actually take the action because a lot of us work nine-to-five jobs and you’re really tired afterwards and no one wants to actually work after their nine-to-five job because they feel like they’ve worked enough for the day. You know what I mean?

Jake:
Yeah. So, I want to add on that. Not only did I have my why, but my why is my brother and he’s not… I choose my words carefully here. He’s my biggest inspiration. So, this is actually him right behind me right there. Growing up, I remember he was always told, “There’s no way with your disabilities you’ll ever be able to get a driver’s license.” And yeah, it took him a few times, and yeah, he didn’t get it till he was about 19 years old, but he eventually got it. There’s so many people when you have a disability that try to tell you what you can and cannot accomplish, and he never listened. He never listened to anything they said.
He really wanted to go to WSU and get his zoology degree, and yeah, it took him seven to eight years, but he did it. He sat in tutoring for six hours a day. He can’t type. So, he had a tutor type for him. I mean, those two things right there that he did showed me that if you don’t listen to what people say, if you don’t let other people tell you what you can accomplish, you can do so much more. He was my biggest why and my biggest inspiration.

Rob:
That’s amazing, man.

David:
The thing that stands out to me is where others might say, “That’s a lot of work. You’re working two jobs, you’re driving to the airport, you’re dropping it off, you got to get the motorcycle out of the truck. That’s just too much work. Real estate’s supposed to be passive income.” You’re comparing yourself to your brother and saying, “I got it easy compared to what he’s got to do.” It really does change the way you approach these things when you look at this and say, “Well, whatever I have to do now is much easier than what my brother’s having to struggle with. This is easy work compared to him,” and which I think probably had a role in why you took such a vigorous approach to building up this momentum in your snowball.

Jake:
Yeah.

Rob:
Well, that’s awesome, man. So, you get into these two deals, you said that you’re making some cash flow, you’re starting to kind of figure things out. Now I think we get to the point where it’s how do you actually scale from this point. Right? Because we know that you’ve got the tenacity, the grit to make this happen. What came next for you to sort of figure out how to expand your portfolio?

Jake:
One thing at a time. One thing at a time. So, living in the triplex and we get this opportunity. I could not have accomplished what I have accomplished without great agents. I had an agent, my girlfriend and I had an agent that brought us a deal and they said, “Hey, this is a great flip.” And we’re like, “All right, let’s go for it.” We didn’t know what we’re doing. I had never flipped a house before. I’d thrown in some LVP, but I’ve never done a full flip. That was the biggest learning experience ever, not only for my relationship, but for learning how to flip a house and what to sub out and what not to sub out. I mean, and I flipped this house with my girlfriend. We lived in the house. We had no way to cook our food besides an air fryer and a toaster. We had lawn furniture set up in the middle of the house for a summer.

David:
How much were you spending on haircare products during this time when money was tight?

Jake:
You know what’s so funny? I’m such a frugal guy, and my girlfriend and my friends make fun of me for it. I just go to Great Clips and I tell them, “Hey, just cut the sides off. Keep it finger-light on top. Make it easy.”

David:
So, this is a humble-brag. You’re like, “It just looks this good on its own [inaudible 00:27:56].”

Jake:
This looks this good all the time. I appreciate the compliment.

David:
Can you define what LVP for us is?

Jake:
Yeah, luxury vinyl plank flooring. If you’re going to do any sort of rentals, I definitely recommend it. You can get at Lowe’s Home Depot and it looks really nice and it’s renterproof.

David:
Yeah, you could beat the crud out of it.

Rob:
So, you mentioned you moved, you were working a new job at this point. Right? What was that job?

Jake:
Yeah, so I moved over, I was a project engineer in construction which basically is an assistant project manager. Moved over, took a job as a project manager for a company over in Spokane, Washington. So, now I am managing up to 15 to 16 commercial construction jobs at one time. So, I’m managing the HVAC and plumbing specifically, but I’m managing 15 budgets, 15 construction crews, and I’m staying in communication with 15 clients/customers for my main job. And so, I just took what I’d been doing commercially for my W2 and I said, “Well, if I can manage a budget and a schedule for a full-time job, I’m pretty sure I can do it for this residential house.”
But the funny thing is, guys, everyone thinks if you work in the trades means you know how to do the trade. I managed the budget, I used a keyboard, and I tried to do my own plumbing in my flip. My poor girlfriend, I actually ripped a pipe in half with a wrench on a Friday night and we flooded the basement, used all the towels, I used all the towels to mop up the basement. Then I told her that she had to shower at the gym. We had to go to the gym to take showers for the weekend because I wasn’t going to pay a plumber overtime to come on the weekend. She’s like, “Okay, can I have a towel?” And I was like, “Well, all the towels are actually in the basement soaking up the water in the basement.” So, we had to go buy new towels and shower at the gym.

Rob:
Oh man. Nothing solidifies a relationship like living in a remodel. Okay, so this is really great, and this actually goes back to what we were saying earlier where people work their nine-to-five job and they get home and they don’t want to work more. Right? You were not only working a nine-to-five job, you were working in construction and I’m sure the last thing you wanted to do was come home and actually continue doing more construction and remodeling. But you mentioned you were living in this property at this point. Was there ever a moment that you were like, “Yeah, you know what? Maybe we’re just going to go rent or go buy another place and not live in the same house”?

Jake:
Yeah, yeah, I promised my better half I would not have her live in an unfinished house again, if we did another flip that we wouldn’t live in it at the same time because I think it’s fair that she deserves a working shower and a way to cook food. But you’re young and you live, you learn. I grew so much through the experience. I had no idea what I was doing going into it. I subbed out some stuff that I probably could’ve done myself and I tried to do some stuff myself that I probably should have subbed out. I mean, I definitely don’t recommend trying to replace a dryer outlet by yourself. I learned that the hard way. So, I think, yeah, there’s stuff that I learned that it definitely helped propel me forward. I think if you just go in and you’re just willing to figure it out, you can accomplish it.

Rob:
I think I’m mostly agree with all that. David, what do you think? Because for me, when I was building my tiny house, I ran out of money and I kicked the crew out and I had to finish the last 40, 30, 40%. And so, I actually did all the final electrical. I had several outlets blow up in my face and then I broke several pipes doing it. I’m really glad that I did it though. But Dave, did you ever find yourself in the middle of your own remodels just doing tasks that had to get done for the sake of budget, or were you always pretty good at delegating that stuff?

David:
Bro, I can’t even call it a remodel. I tried to do some stuff myself. There’s two crazy stories, one was trying to take a bush out of a backyard that ended up in an entire day, thousands of dollars spent. I ended up hacking into the pipe that the pool would use to filter the water and flooding the entire thing because I don’t want to spend 150 bucks to have some professionals pull this bush out. I could take up the whole podcast telling that story. The other one was changing the door locks after a tenant left, which was like five trips to Home Depot to buy different tools. It was so bad that I realized I could have literally just gone to work, made overtime, and it would’ve been 10 times more money than what I had saved by hiring somebody.
So, I’ve never even attempted to do a remodel. I’ve always just focused on the numbers and then kind of staying in my lane. I have respect for you guys that do this. Brandon Turner has tons of stories of carrying toilets out of houses that were literally filled with feces and crawling through basements at 6’5 trying to fix things. I think he likes doing that stuff. Maybe each of you guys have a little part of you that’s like, “I like taking on the challenge.” It feels like going out into the woods and coming back with a deer draped over your shoulders.

Rob:
I did before I went full-time into it. Back when I was first getting started, real estate was a hobby, and so when it’s a hobby, you kind of enjoy learning and everything. Now, of course, it makes sense from a scale standpoint. It seems like that’s something that you were starting to figure out as you were going, Jake. So, were there any systems or habits or anything that you were working on that helped you determine your scale strategy?

Jake:
There wasn’t necessarily systems. So, after the triplex, we flipped the house, and then we moved into another duplex that I put 15% down on. After that I knew I had to… I knew Spokane was a great appreciation market, but I wanted to invest in a cash flow market to diversify my portfolio. So, I actually, I talked to some friends and there was a meetup. So, you guys on BiggerPockets have the local meetups listed on your website, and there’s this local meetup in Mastermind that meets in Bothell, Washington, it’s called Addicted to ROI. I connected with this Mastermind. I’d strongly advise, I don’t care what Mastermind you join, just join a Mastermind, surround yourself with people that are doing more than you, and you’ll be surprised at how far you can go.
And so, at that time, I realized the price of equity in my Seattle townhouse had gone up so much that I could sell it and make over 10 times what I put into it. So, I determined I’m going to sell it, and then from there I’m like, “All right, I need to figure out where I’m going to plant this new capital through a 1031 exchange. And so, I used this Mastermind group to start picking others’ brains that like, “Hey, where you investing? Where you investing?” I got a ton of different results. I surveyed those markets, and I found out where I could collectively establish a good team, and that was Memphis, Tennessee. I like that it’s a cash flow market. It’s a little riskier than Spokane. So, it’s adding some risk to my portfolio, but higher cash flow.
And so, I’m said, “All right, I’m going to go to this market.” No experience investing out of state. I take the money from my flip that I just talked about, and I buy two duplexes in Memphis. So, this is my first experience investing out of state. I mean, I had my rockstar realtor, she went to my inspection, she helped me out finding a local lender. That’s how I kind of projected to out-of-state investing. It was through joining a Mastermind and then just surrounding myself with people that are doing more and people that are investing out of state. I started to realize, “Well, maybe my market isn’t the most bang for my buck. Maybe I can go further and do better by doing what’s uncomfortable.” The whole process of what I’ve done has been super uncomfortable because I didn’t know what I was doing until I did it.

Rob:
That’s how it goes, man. So, look, just so that I understand the timeline a little bit, you buy these first two properties, you put down six and a half percent.

Jake:
Yep.

Rob:
Then you do a live-in BRRRR.

Jake:
Yep.

Rob:
And then you do another live-in BRRRR, and then you said you bought two more duplexes.

Jake:
So, I took the money from the flip, bought the duplexes in Memphis, and then I buy this property with 15% down, this duplex, and then I remodel it. The one half, I remodel it completely. So, I’m totally invested in this duplex $57,000, and I’m like, “Oh my gosh, I’m broke. What do I do now? What do I do now?” I’ve heard about this thing called a HELOC. So I started talking to people on Mastermind. I’m like, “How can I get this money back?” Someone’s like, “Oh, you should open a HELOC. It’s a great opportunity. You get 90% loan to value if you live in it.” And so, I opened this HELOC and I get 50 grand. So, now I’m only really seven grand into this property. Well, I have access to 50 grand again. And so, at this time I closed on… I’m still in the process of selling this townhouse in Seattle. I’m opening a HELOC in my primary, my duplex that I’ve lived in for six months, and then I’m buying these properties in Memphis.

David:
So, it sounds like you’re starting to pick up some momentum as far as analyzing deals, finding opportunities. You’re buying these properties in Memphis, but you can only make so much money work in a W2 job, especially as a young guy to be able to buy them. Right? So, you’ve kind of run into the problem of I have more opportunity than I have capital to get into it and I can’t really save my way. That worked to get your first $9,000, your next 12 or $13,000. Now that you’re buying these 20-unit properties, you can’t park enough cars to get enough money to do that.

Jake:
You’re so right.

David:
So, you’ve learned one of the secrets of real estate is when you buy it right and you add value to it, there is value that you could pull out of it through these equity loans and credit. Was that really the bridge that you needed to get from the way you had got started into scaling up into these 20-unit properties?

Jake:
Yeah. So, this is last year around July. I had closed, so I’m living in a duplex, I still have my triplex. I have this 1031 that got me a six-figure return, and then I was like, “Okay.” I find this 19 unit, I actually put an offer back in February of 2022, and then he denies it. And so, I’m just like, you know that 45-day window, you’re searching for deals. Out of the blue, he calls up my agent and says, “Hey, I’m ready to sell.” Well, times have changed. Interest rates are different, and so we were able to talk him down and we get under contract on this 19-unit property. I was able to buy this property, so I was going to throw my 1031 at it, and I knew I needed about $80,000 more. Right? So, I opened a HELOC for 50,000 on my primary and I determined that I’m going to save $30,000. There’s nothing I’m going to do to make this deal not happen.
Now, me telling myself that was huge, guys, because I went to three different banks, I went to two hard moneylenders, and all of them told me this wasn’t going to happen. “Jake, there’s no way to get a loan over your net worth. Jake, you only have small multi-families. There’s no way to buy a 20-unit property. Jake, the market’s changing.” I was like, “Okay, thank you for your time. I really appreciate it.” Next call. Eventually, I started talking to this bank, specific bank and this business relationship manager back in February about these duplexes, and that didn’t work out, but what I did was I called him once a month and just checked in. And then this 19 unit came up and he’s like, “Oh, let’s make it happen.”
All right, and then so we went into underwriting and I got denied. Right? Not enough reserves. Okay, let’s bring on a co-signer. Denied again, need more experience. Okay, let’s bring on a different co-signer with more experience. Denied again. And so, I’m talking to my agent, I’m like, “Are they just denying me just to deny me?” So, I had to figure out what to do, and so I just called up this banker, his name’s Dan. I said, “Dan, Dan, you’re the man. Tell me what we need to do to get this closed because I’m not going away.” And then he said, he’s like, “Well, let’s get…” They could see, because I had money in the bank, how much money I had in the bank, and they’re like, “Well, if you could throw another 7% at it and then get a cosigner, we can make it work.” I said, “All right, done.”

Rob:
You already had the co-signer at this point, right, didn’t you have?

Jake:
No, you don’t have to try to make it make sense. It didn’t make sense to me either.

Rob:
Okay, that is how underwriting, they ask you for things you’ve already given them, but it’s just slightly different.

Jake:
Yeah. Remember the first time they said I needed more reserves? Well, they just stripped me of all those reserves and they said I need to throw it into the deal. And so, I put 27.5% down on this deal, and then now we’re in the process right now. So, this was back in October, I closed. Right? The reason was the rents were so low, they’re only generating $6,000, but now I have it making $11,300.

Rob:
Wow. So, you almost doubled it.

Jake:
Yeah, and that’s why, it’s a beautiful property, and I want to give credit, my agent’s a rockstar down there. Without her, I would… When you’re investing out of state, having agents that are investor-savvy is so critical and she was able to fund this deal and she was able to make it work. Yeah, we ended up closing and now I’m at, I just had employment today and we’re opening up a second to get my money back down to 20%. So, I had to get really creative with the financing, and on top of that I was able to utilize the market swing. I always look at the rent ledgers. I’ve done a lot of things wrong before. One of the things I did right was I looked at the rent ledgers and I found that right before closing three people had moved out. So, I ended up getting 50,000 back at closing.

David:
Wow.

Rob:
That’s cool.

David:
Can you define what a rent ledger is for us?

Jake:
Yes. So important. So, a lot of sellers will give you something called a rent roll. A rent roll is a list of all the leases and how much the rent is for each unit of a property, where a rent ledger actually shows you what they’re paying. So, the difference between a rent roll, which you’ll get a lot of times, shows you what they’re supposed to pay, a rent ledger shows you if the tenants are up to date, if they’re behind, what they’re actually paying, their profit. It’s basically a profit and loss statement, and it’s really important to get these from the seller because a lot of times they’ll try to bluff you with a rent roll and you’ll figure out some people have a rent that amount to much, but they’re not actually paying. So, the truth always comes out with the rent ledger.

David:
So, the rent roll is what it could be. That’s potential. A rent ledger is what it is.

Jake:
Yeah.

David:
And you recognized, hey, these three units either aren’t paying, aren’t occupied, there’s no money coming in, so you owe me this much money at closing because we’d agreed upon numbers that were based on the rent roll. Is that accurate?

Jake:
That is accurate.

David:
Let’s hear, I mean, this is a pretty cool story, man. Tell us what your portfolio looks like today. How many units are you currently owning?

Jake:
So, at current, 28 units. If you include my girlfriend’s duplex we live in, that’s 30 units.

Rob:
And what’s the annual gross rental income on both, on all, I guess, 30 units?

Jake:
Well, not including her two doors, it’s $235,000.

David:
Okay. That’s pretty freaking cool. And then how much of that is profit? What’s your cash flow on that?

Jake:
My net is $75,000 a year.

David:
Is that more or less than you were making when you were parking cars?

Jake:
David, that is a great question. I am making more in passive income than I was my first salaried position out of college.

David:
Which is awesome.

Rob:
That’s amazing. And how old are you, man, just for everyone’s edification?

Jake:
I’m 27 years old.

Rob:
So, you’re making $75,000 passively as a 27-year-old.

Jake:
That is correct.

Rob:
And you’re done? That’s it?

Jake:
Absolutely not. I wouldn’t be doing my brother very much justice if I did that, would I? I got to keep going. My goal is I want to retire my family.

Rob:
It’s amazing, man. Have you talked to your brother about this? What does he think about all this?

Jake:
You guys are going to get to my heart here. He always calls me and he says, and he is like, “Jake, I just wish I could do as much as you do.” And the truth is, I wouldn’t have done anything if it wasn’t for him. So, he’s successful through me, and I would not be where I am without him.

Rob:
It’s amazing, dude. I think what’s really cool about this is real estate is a really tough journey sometimes, but I think when you have a purpose like that, you’re going to love this game. You’re going to love so much about what comes next because it’s true, man. You’re 27, you’re making $75,000, you’re doing this for your family, but you are just at the beginning. You got so much to go.

Jake:
I know. I really just want to thank all the people that took me under their wing. I just went. I didn’t know what I was doing. I just took action, and I asked questions to people that were more intelligent and further along than me, which I was able to find through a Mastermind group. I even, I remember I had to go to my Mastermind group and I had scheduled a one-on-one call with this woman named Jennifer, and I said, “Jennifer, everybody at my work is telling me that what I’m doing is crazy and I’m overleveraged.” And then she’s just like, “Jake, don’t listen to anybody. Don’t listen to anybody. Remember your why. Just don’t stop trying, and it’ll work out.” So, you don’t have to figure it all out today. You just got to take one action and just be willing to fail. I’ve failed, but just take one step at a time and before you know it, it’s insane. Especially with Masterminds today, with BiggerPockets Podcasts, the younger generation has so much opportunity to excel in real estate with the education that’s available to them.

David:
That’s awesome. If people want to learn more about you, they want to connect with you after the show, which I’m sure many of them will, where can they find out more about you?

Jake:
I’m just a normal guy. I got a Facebook and Instagram. My name’s Jake Radawick, and if you want to connect, if you’re interested in investing in Memphis or Tennessee, Memphis, Tennessee or Spokane, Washington, let me know.

Rob:
What’s your Instagram handle?

Jake:
It’s just Jake Radawick.

Rob:
Nice. Okay, R-A-D-A-W-I-C-K, right?

Jake:
You got it.

Rob:
Awesome man. What about you, David? What can people learn more about you?

David:
They can find me at davidgreene24 everywhere. That’s YouTube now. You can go to youtube.com/DavidGreene24. It’s kind of cool, YouTube made handles. They can find me on Instagram or social media there, and then they can check out davidgreene24.com. Don’t ask me why the 24. It’s not a cool story, but it is what I’m stuck with now. I’m married to that handle. How about you, Rob?

Rob:
You can find me over at robuilt on YouTube or on Instagram. But what I would really love if this episode inspired you in some way, because I know it inspired me, please consider leaving us a five-star review on Apple Podcast with something that you learned today or wherever else you download your podcast. It really does help us. It helps move us up the charts, get served to new audiences so that we can reach other people that are looking to get started in the world of real estate.

David:
Yes, thank you. And if anyone here would like to send Jake or Rob free haircare products because they still have hair, please consider DMing them to get the correct mailing address. Jake, thank you so much for being here today, man, and thank you for sharing your story. Everybody likes to come on these podcasts and they like to brag about how many units they have or how well they did. You gave us an authentic, transparent, vulnerable look into how you did this, what mistakes were made, what went well, how tenacious you were, and most importantly, the why. I’m going to give you the last word. Is there anything you want to leave people with regarding having a why and how important that is in building a portfolio?

Jake:
I just think it’s important to have a why that’s not only yourself, but whether it be your son, your daughter, your brother, your sister, your parents, having that why and then using that as a motivation just to keep going. There’s going to be mistakes. Just keep going and just learn through actions. Just take it one step at a time. Buy that first multi-family property, buy the second one, and before you know it, you don’t know where you could end up. You could be so far. Looking back, it’s only been three years, which is crazy, but I mean, you blink and you’re there.

David:
Awesome, man. Rob, anything else you want to say?

Rob:
Oh, not after that. That was amazing. Yeah, thanks, Jake. We really appreciate your story, man.

Jake:
Appreciate you guys having me on.

David:
Thank you, Jake. And if you like this show, if this is your first time listening, if you’re getting back into this because you’ve been away for a while, welcome back. Go to YouTube and leave us a comment, tell us what you thought about the show, something you want Jake to hear or know, what you’d like us to get into. We read these comments, we love to hear what you guys think, so go there and let us know. I’m going to let you guys get out of here. This is David Greene for Rob, my personal promo code, Abasolo, signing off.

Mechanics is the branch of physics that deals with the behavior of physical bodies under the influence of forces and motion. While the principles and concepts of mechanics aren’t directly applicable to startups, they can be used metaphorically as mental models which help you think more precisely about the business world.

In this article, we will discuss three key concepts from mechanics that are useful as mental models for tech startup founders.

1. Inertia

“Every body continues in its state of rest or of uniform motion in a straight line, unless it is compelled to change that state by forces impressed upon it.” – first law of mechanics, Principia, Isaac Newton

Inertia is the tendency of an object to resist a change in its state of rest or motion. This concept is crucial for startup founders because it can help them understand why it’s difficult to change the direction of a business once it’s set in motion.

An object that is moving in a particular direction will continue to do so unless there is a significant force to change its course. The more massive the object, the greater the force needed to change its course (or speed of movement).

The same applies to businesses. The bigger the business – the more money, interests, stakeholders, habits, and intertwined structures and procedures there are in the business, the harder it is to make any changes in general. That’s why big businesses tend to be extremely inflexible.

That’s not necessarily bad especially in good times, while the business is generating value. It’s hard for a single person to mess them up. At the same time, this is deadly in volatile environments where flexibility and adaptability are crucial. In tech, especially on the cutting edge of new technologies, flexibility is crucial.

That’s why small startups have a considerable advantage when it comes to innovation. They have much less inertia, which allows them to iterate and pivot much faster and much cheaper.

2. Friction

Friction is a force that resists motion between two surfaces in contact. In mechanical systems, friction can cause wear and tear, reduce efficiency, and even cause failure. That’s why mechanical systems often have methods to reduce friction – e.g. oiling the gears.

In the startup world, friction can take many forms, including market competition, regulatory hurdles, and technical difficulties.

Understanding the sources of friction in your startup can help you find an effective lubricant. For example, if you’re facing a lot of competition in your market, you might need to focus on developing a unique value proposition or finding a niche market. If you’re struggling with regulatory compliance, you might need to invest in legal expertise or explore alternative business models, etc.

3. Resonance

Resonance is a physical concept that describes the tendency of a system to oscillate at a certain frequency when stimulated by an external force. It is a property that can be found in many different physical systems, from mechanical systems like bridges or musical instruments to electrical and electronic circuits.

The concept of resonance has been used metaphorically to describe the behavior of social systems and networks, where it refers to the phenomenon of ideas or behaviors spreading rapidly through a group of people.

For example, resonance can be useful for startup founders in the development of marketing and branding strategies. Just as a musical instrument can be designed to resonate at a certain frequency, a brand can be designed to resonate with a certain audience. By carefully crafting a brand message that speaks to the values and aspirations of their target market, founders can create a sense of resonance and connection that is critical for building a loyal customer base. This might involve developing a distinctive brand identity, crafting compelling marketing messages, or leveraging social media to create a sense of community and engagement around the brand.

Commercial real estate is facing stress from several directions. The primary stress is rising interest rates, which are putting upward pressure on cap rates (which pushes down asset values), making refinancing costs increasingly difficult and expensive to come by. But there is another risk arising, specifically to the multifamily niche of commercial real estate: oversupply. Recent data suggests that there may be a short-term glut of multifamily units hitting the market at an inopportune time. 

To fully explain this issue, let’s take a look back at construction trends for multifamily properties (defined as properties with five or more units) over the last several decades. As you can see in the graph below, after severe declines in the number of multifamily units from 2008-2014, multifamily construction and the total number of multifamily units have picked up considerably. 

Since the beginning of the pandemic, the upward trend of increased multifamily building exploded even further, and as of Q4 2022, surpassed one million units under construction for the first time (at least according to CoStar’s data).

Of course, it takes several months, if not years, to build multifamily units, even in good times. But recent years have not been easy on builders—at least in terms of delivery schedules. With supply chain issues and labor constraints, construction has taken longer. This trend is resulting in a huge glut of inventory that has yet to hit the market. Looking at the chart below, you can see CoStar’s forecast for delivered units shows 2023 being the highest on records, with 2024 coming down a bit but still high. Yes, forecasting is difficult, but forecasting construction deliveries is a bit easier than other datasets. Due to the fact that builders and developers need to get permits for construction, there is solid data about projects that are planned and in the pipeline. Personally, I take this forecast a bit more seriously than I do other forecasts. 

An increase in supply is not a problem if there is proportionate demand to “absorb” the new units—but there isn’t. Demand is falling off. 

The chart below tells a very compelling story. First, look at the blue bars. That is the same as what we looked at above—high unit deliveries over the next two years. But then look at the orange bars that show “Absorption” (a commercial real estate metric that measures demand). It’s not keeping up. 

After a banner year for demand in 2021, “net absorption” (absorption – demand) turned negative, meaning more supply is coming onto the market than there is demand. That was in 2022! In 2023, even more units are expected to come online, and as this graph shows, demand is not expected to keep pace. Of course, some builders could cancel or pause their projects, but it is an expensive proposition that builders tend to avoid if at all possible. 

What happens when supply outpaces demand? Vacancy increases, as you can see forecasted in this CoStar projection. This should be a concern to anyone in the multifamily space and to any real estate investor. An increase in supply and a commensurate increase in vacancy can decrease income and push down rental rates. The data I’m showing, and my analysis, is regarding commercial properties, but downward pressure on rents and rising vacancy in multifamily has the potential to spill into the residential market in certain areas. 

Of course, this national-level data doesn’t tell the whole story. I took a look at several individual markets to see how this is playing out on a regional level. What I found is that certain markets are at significant risk of overbuilding. I picked a sampling of five markets that I think are at high risk of rising vacancy and rent declines for multifamily: Santa Fe, New Mexico; Punta Gorda, Florida; Myrtle Beach, South Carolina; Colorado Springs, Colorado; and Austin, Texas.

These markets all have significant construction pipelines, with a high number of units scheduled to hit the market relative to current supply and relative to expected demand. 

On the other hand, many cities, which I found to be smaller cities, are still doing relatively well. 

Missoula, Montana; Athens, Georgia; Midland, Texas; Provo, Utah; and Topeka, Kansas, all have solid net absorption, and their construction pipelines are very reasonable relative to current inventory levels. To me, these cities have a much smaller risk of vacancy and rent declines. 

Every market is unique, and I am just showing a few examples of markets at risk and not at risk. But I encourage you to do some research yourself and identify how your market is doing in terms of construction. You can find lots of good data for free on the St. Louis Federal Reserve website or just by googling absorption data for your local area. 

Conclusion

Multifamily properties are seeing a supply glut hit the market at an inopportune time, where rising interest rates are already putting downward pressure on prices and cash flow pressure on operators. As such, 2023 and 2024 could shape up to be difficult years in the multifamily space for current operators. 

The important thing to note here is that the supply glut and demand shortage will likely be short-term. Long-term building and demographic trends support strong demand for multifamily rental units well into the future, which bodes well for investors. For example, a recent study shows that the U.S. needs 4.3 million more multifamily units in the coming 12 years to meet demand. Household formation is likely down right now due to short-term economic conditions. Inflation is negatively impacting renters’ spending power, and economic uncertainty is stopping young Americans from forming their own households. It’s unclear when this economic difficulty will end, but when it does, demand will likely pick back up. 

Given this, investors could have good buying opportunities in the coming months and years. With cap rates likely to rise, prices for multifamily should go down. If NOI also drops due to oversupply issues, that will push prices down even further. This could allow inventors with some dry power to get into multifamily at attractive prices, but remember—this is a risky time. Be careful not to buy just anything and to understand the market dynamics in your local area in detail.

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

PR, aka hype, is important to VC investments in order to enhance the value of the venture and to create a market for later rounds of capital, after which investment banks want to take the company public, or strategic acquirers want to buy the venture before it takes off. The hype of huge valuations at each round is duly reported in the business press to make the venture into a “unicorn” (please note that any venture can become a VC-unicorn and I have written on Forbes about the method to do it.

So, what’s wrong with this hype? It has a long tail that often has unintended consequences.

The Price Destruction in the Stock Market

Ventures that come to market with a lot of hype from the VCs, investment banks or business press often end up with high prices for the stock – prices not supported by fundamentals. This hype may be partially responsible for destroying wealth in the stock market (prices as of 11/14/22):

· Carvana has fallen from about $360 to about $8.

· Affirm has fallen from $164 to about $10.

· Redfin has fallen from $96 to about $8. And now a financial analyst tells us that the company’s model is “flawed.” If so, should a professional financial analyst have disclosed it before it fell? Or before it reached a market cap of $10 billion? Did the hype affect judgment?

The Price Destruction in the Crypto Market

Sam Bankman-Fried was funded by VCs and promoted by the press – until his Icarus-like fall from grace caused a lot of pain among many investors who were left holding the bag. But the hype was on full blast. Now gurus like Elon Musk tell us that they could see through the hype. Why didn’t they say anything earlier?

The Value Destruction in Corporate Mergers & Acquisitions

The percent of corporate acquisitions that fail is supposed to range from 70 percent – 90 percent. Some of these are likely to be corporate acquisitions of the hot ventures funded by VCs and heavily touted by the business press so that the VCs can exit at an attractive valuation. And perhaps destroy corporate value. Caveat emptor?

The Dilution and Brainwashing of Entrepreneurs Seeking Early VC

VCs earn their high returns by seeking a significant share of the ventures they finance, and then hoping for a few successes and homeruns. Given the risk they are taking, and the few potential unicorns, the dilution seems justified. But when the business press endlessly hypes the unicorns that received VC, they are playing into the hands of the VCs. The reality is that 94% of unicorn-entrepreneurs took off without VC, and 76% never got it. So early VC and the capital-intensive angel capital-venture capital model rarely succeeds. Is the constant hype from the business press influencing business schools and incubators to focus on the VC Model, that helps about 20/ 100,000 ventures after Aha, instead of focusing on the Skills-Model that can help every entrepreneur?

The Credibility Destruction in the Business Press

Many in the business press like to parrot the VC community. Here is the most egregious example, and a mea culpa, by a Fortune magazine writer about the alleged con pulled by Sam Bankman-Fried. Should Fortune magazine know better than to repeat “facts” that are handed to them and assume that a venture has high credibility because a “reputable” VC financed it? Would Elizabeth Holmes (Theranos) have gained such prominence without having to prove her technology, and with no academic credentials if it weren’t the complicity of the business press who accepted her word and the “credibility” of her investors as gospel?

MY TAKE: The fact that VCs have their own interests should come as no surprise to the business press. There are good reasons for VCs to push the hype button. VC funds have a limited life (usually 10 years), and they have to get a high annual return (usually 20%+) to compensate investors for the high risk. So, VCs need inflated exits, and they need it fast, especially to compensate for the 80% of failures in their portfolio. Hype helps.

But why does the press have to destroy its credibility to benefit the VC industry? And why do academics ape the VC model?

Fortune CryptoHow everyone fell for SBF-including me

Yahoo NewsElon Musk and Mark Cuban are letting loose on FTX’s Sam Bankman-Fried: ‘Bulls**t meter was redlining’

MORE FROM FORBESHow You Too Can Create A Billion-Dollar UnicornBy Dileep Rao
Fortune CryptoHow everyone fell for SBF-including me

Yahoo NewsElon Musk and Mark Cuban are letting loose on FTX’s Sam Bankman-Fried: ‘Bulls**t meter was redlining’

MORE FROM FORBESHow You Too Can Create A Billion-Dollar UnicornBy Dileep Rao