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Jack Schrupp started a whole foods-based protein powder company from his kitchen, somewhat by accident. Last year, he had over $2 million in sales.

A teacher, with an affinity for athletics, particularly skiing, Schrupp had always been interested in his diet and health. Yet when he started reading the ingredient lists on protein powders, he was disappointed to see that they were made with preservatives, stabilizers, and inexpensive ingredients that were not healthy for this gut.

“I don’t have any chronic gut issues, but when I would have a protein shake, I just didn’t feel good afterwards. I tried both vegan and non-vegan options…and still got stomach aches or felt really bloated,” he says from his New England home. So he started making his own experimental batches in his kitchen.

“I’ll admit, they didn’t taste the best at first, but they worked, and it was a few simple ingredients that I had literally ground up myself.”

In 2020, Schrupp began Drink Wholesome, selling his protein powder mixes online, while still working a full-time job as a teacher at a boarding school. Yet the pandemic changed things for him; he could no longer do the in-person tastings he was planning on to get the word out about the company. “I thought I’d go to sporting events, races and give out samples. But that wasn’t happening anytime soon.”

So he focused on digital, primarily his website. While sales were slow at first, within a few months, the wholesome ingredients caught the eye of customers looking for gut-friendly options that were easier to digest. As word started to spread that his concoctions were lighter on the system, and thus, a better option for those battling conditions which limited their food options, he saw an uptick in sales. “At that point, I was just selling to family and friends and then I started getting orders from strangers and it sounds weird, but that was the best thing, people who didn’t know me were buying it.”

Schrupp started to ramp up his inventory, using the cash flow from sales to buy more ingredients, expand his manufacturing, and eventually introduce new products — meal replacement drinks, in addition to protein powders, which helped a similar set of consumers looking to supplement their diet with an easy-to-digest formula.

With a focus on clean, straightforward ingredients, Schrupp sources many of the essentials from American suppliers and growers: oats, almonds, eggs, peanuts, and chickpeas. And he’s opted for actual foods, not natural flavorings. So there’s real vanilla beans in his mixes. “It’s crazy expensive, but you can’t match that flavor,” he says.

All of the ingredients, which rarely exceed 5, are listed on the front of the bag in big bold letters. It’s a clear deviation from the typical ingredient list hidden on the back. When asked why other brands haven’t taken this approach, Schrupp says, “It’s expensive. Mine is definitely a more premium product.”

Using less expensive fillers and core ingredients, such as pea protein or whey, he says can help bring down costs. But those can often be the very reason why some people cannot stomach protein shakes.

“Let’s be real. You should be getting most of your nutrients from real food, not supplements. But if you need more protein in your diet, or a convenient way of getting it, that’s when you should be using a protein powder mix. Not the other way around,” he notes.

Schrupp’s growth has come with the usual challenges: with egg prices skyrocketing this year, he saw his costs triple overnight. Or when shipping costs were sky-high during the pandemic, he had to be a bit more prudent about where he looked to source international ingredients from. But he’s been able to weather the storm. In fact, he had just over $20,000 in sales in 2020 when he launched; but in 2022, it’s now over $2 million.

It’s reached that point when Schrupp will have to give up his day job this year, and focus solely on the business. “I’ll be the first full-time employee on the books,” he says, laughing. So far, he’s built the company by using a variety of contractors. His products are packaged by a facility that works with a New England-based granola company as well. He hires individuals for specific tasks. It’s an old-fashioned approach to building the business from the ground up, and based on sales, rather than flooding it with investment.

Beyond just selling protein powder mixes, he’s opening up the dialogue on nutrition—even amongst the athletic circles he works and plays in. “Many athletes know that protein is good for you, but they’re not thinking about the source of that protein. In today’s world of highly processed food, it’s not just about getting in good fats and proteins, it’s about which ones you’re turning to daily. Think about it, if you’re having that supplement or protein shake everyday, you’re putting in more and more of those preservatives in your gut. That’s not good over a long period of time,” he explains.

“Keep it real, foods.” he says empathetically.

Ashley:
This is Real Estate Rookie Episode 255.

Amanda:
So there is a point where we are looking at, am I doing house hacking, am I doing short-term, or long-term, or a mobile home park? Those different investments have different tax consequences, and therefore different tax strategies. So before meeting with your tax person for the first time, you do want to have a fairly decent idea of what it is you want to do? What is my investment goals, how many rentals, what states do I want to be investing in? Because those kind of things play a very important factor for the starting point of what your plan is going to be on how to save on taxes.

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

Tony:
And welcome to the Real Estate Rookie Podcast, where every week, twice a week we bring you the inspiration, motivation and stories you need to hear to kickstart your investing journey. And I want to start today’s episode by shouting out someone by the username of Relatos, and this person left us a five-star review on Apple Podcasts with the title of, “Best Boring Banter Ever!” With an exclamation mark. This person says, “I love listening to you guys, you definitely cater to the rookie investor, making it easy to digest what you teach, asking your guests great questions for both the novice and the pro. Keep up the boring banter and Ashley’s laugh.” So Ashley, you’re getting some love from the Rookie audience about that wonderful laugh of yours. How’s that make you feel?

Ashley:
I feel like somebody I knew wrote that, because they’re so used to crying from all the hurtful comments.

Tony:
People love it, people love it, there you go. And the boring banter.

Ashley:
Well, thank you so much. We appreciate that you guys, so much.

Tony:
And if you guys haven’t yet, please do leave us an honest written review on Apple Podcasts. We’ve gotten so many coming in over the last couple of weeks here, it’s been fantastic. But the more reviews we get, the more folks we can help, and helping folks is always the goal of the Real Estate Rookie Podcast. I know this episode comes out at the end of January, but this is actually the first episode that we’ve recorded of 2023. So, 2022 is officially in the rear view, we’re now in 2023. And I’m excited for this year, I’m excited for some changes in our business and how things are going to grow. What about you? How are you feeling for 2023?

Ashley:
Good, excited. I mean, it’s definitely going to be different than the last two years, just with the market changing, interest rates going up. Everybody’s pivoting, changing their strategy. So there’s some that are super-excited about what’s going to be coming this year, and then I feel like there’s others that are sweating bullets and actually really nervous what’s going to be happening this year. So I think a lot of people are taking advantage of how to change, adjust and pivot their investing strategy right now to kind of take advantage of the situation and not be somebody that’s going to be struggling during the next year with however the market goes.

Tony:
You know what might be a cool show, Ash? And for our producers that are listening, is if we got, me and you, Dave Myer, and maybe like a panel of people who specialize in different asset classes. So maybe we’ll bring on like A. J. Osborne to talk about stuff, to talk about self-storage, James Ander to talk about flipping, obviously I can talk about like short-term rentals, and even the long-term rental side. And maybe we just kind of, from the data that Dave’s got like, “Which one of these asset classes is going to do worse or better as we go through this X market cycle?” That could be a cool show to talk about.

Ashley:
Yeah, yeah, that would be really cool. Almost kind of like a debate, where we’re each advocating for how our strategy can work. But not even just at a debate, but showing how we’re pivoting our current strategies to adjust to the market. So if somebody wants to change to pivot to that strategy, or stay focused on that, some of the things that we’re each doing based on that asset class. Yeah, that would be really cool. And I’m pretty sure our producers don’t listen to the show, so we’ll have to tell them after. So, how was your New Year’s, Tony? I saw that you were in New York City. We’ve got to do a little boring banter.

Tony:
Yeah, yeah, no. New Year’s was cool, yeah. We spent New Year’s Eve and New Year’s Day in New York City. Sarah and I went back in 2012, and we did the whole Time Square thing where we camped out all day, waiting for her to see the ball drop. Didn’t want to do that this time around, plus we had our son with us, so we were just like at a cool little arcade in Time Square for New Year’s Eve. So it was cool, super-busy, but still I love New York City. But I think three days there is probably the most that I can handle, just with all the people, and the noise, and the honking, and the sirens, and all the other stuff. But, it was good. We saw all the big sites, Central Park, we did the 9/11 Memorial…
The Memorial Museum for 9/11 is probably one of the coolest things I’ve been to, and I’ve been to it twice now. And I was in, I don’t know, junior high, elementary school when 9/11 happened, so I didn’t really understand the weight of that whole experience. But going to that museum, and hearing the stories, and seeing the… They have voicemails that people were recording when they were on the plane about to crash, and just everything in that museum was super-touching, and I was glad my son got to see it as well to kind of understand the impact of that moment. So, lots of great things in New York City.

Ashley:
Yeah, I’ve only been to the Monument, I’ve never been to the actual museum. But yeah, I’ll have to definitely check it out.

Tony:
Yeah, I highly recommend it, yeah.

Ashley:
Yeah. I did the New Year’s Eve thing when I was in college, and the same thing. You were packed, and you were cattle, and these-

Tony:
This little block, yeah.

Ashley:
… crowds were sectioned off. You can buy a $50 pizza, you can’t go to the bathroom. And then as soon as the ball drops everybody just runs, and it’s just garbage everywhere. And I just remember we were like, “There’s an Applebee’s. Okay everybody, we’re going to book it there. We’ll meet you there,” and everybody just took off and ran just to eat something. But yeah, for me it’s like one of those things, like you do it once and never do it again, yeah.

Tony:
Everyone, yeah.

Ashley:
Yeah. So this year we took the kids and we went to a ski resort, and so we did… That they had the fireworks, we went snowboarding, they do like a torch parade with the skiers down the hill before midnight. They had like a family party where they had a DJ and they had a dance contest, so we were so proud of the kids because they each did the dance contest, and they were telling us how nervous they were and everything, going up to do it. And they were well-deserved to be nervous, because there was like six and seven-year-old girls doing back flips and all these things. And we were like, “Our boys are still going to go out there and do a dance?” And there’s these girls doing acrobats out there. But we were just so proud of them for getting over those nerves, and going in there, and trying it out. But yeah, it was a lot of fun.

Tony:
Where was that at, where’d you guys go? Was it in New York?

Ashley:
Yeah, yeah, it’s Holiday Valley, so it’s the second-closest ski resort to us, yeah.

Tony:
Oh, cool.

Ashley:
It’s in a really nice town, [inaudible 00:06:48], which has a actually really nice short-term rental market, they actually-

Tony:
I remember you talking about that place.

Ashley:
Yeah, they stopped doing short-term rentals directly in the village of it now, just because there was so many that the actual occupancy of people who lived there full-time was so low, so they actually stopped doing short-term rentals right in the village. So it’s only in the town that you can actually have them, and so it’s definitely been like a changing market there for short-term rentals.

Tony:
Yeah, and we’re seeing that all across the board in a lot of different cities as well, where regulations are starting to tighten up a little bit. Which isn’t a bad thing, but part of the process.

Ashley:
Yeah. One of the projects I’m working on this year is a property I bought that’s about 10 minutes outside of this town, [inaudible 00:07:33]. And when they stopped doing the short-term rentals in the village it just added to our property value because we can still do it where we are, and we’re on the outskirts enough but still so close. We actually had somebody that stayed in one of my other short-term rentals, and this one’s 20 minutes away from this town, and they were staying just to go skiing at this resort, so…

Tony:
Well, we’ve got a good episode for you today right? We have the world-famous, none other than Amanda Han. If you guys don’t know Amanda Han, she is like the Obi-Wan Kenobi, or I don’t know, who else is like… She’s like the, I don’t know, who’s someone that’s like super knowledgeable? I don’t know, I’m struggling with my metaphors.

Ashley:
First of all, she is the nicest and most friendliest person you will ever meet. You are just like automatically attracted to her just because she’s so nice, and bubbly, and yeah. So that’s like the first thing, like-

Tony:
But she’s like, wicked smart.

Ashley:
Yes, full of knowledge.

Tony:
Yeah, she’s like a savant when it comes to everything related to tax strategy. So she’s written not one, but two books for Bigger Pockets on tax strategy, the first one is Tax Strategies for the Savvy Real Estate Investor, and the second one is The Advanced Tax Strategies for Real Estate Investors. And both of those books are really good kind of foundational building blocks if you want to learn about ways that real estate can help you from a tax perspective. But we brought Amanda on today to talk about a whole slew of topics, ranging from when should you start looking for a tax planner, tax strategist for your business, the difference between someone doing tax prep and tax strategy, and so many other things. I don’t know, what was your favorite part of the conversation Ash?

Ashley:
Well first of all, those books that you mentioned, highly recommend. I have them both, I’ve read them both, I give them out to a ton of people. But we do actually give a discount code out, so if you guys are interested make sure you listen to the episode for that discount code too. I think my favorite thing was talking about actually setting up your LLCs too, because you may not think that would be something you’d talk to your CPA about. Maybe that’s something more you talk to an attorney about. But she’ll go through reasons why you should consult your CPA, and I think there’s a joint offer there between an attorney and a CPA as to how you should set up that legal structure for your entity. So, that was kind of my favorite part of the episode.

Tony:
Yeah, I enjoyed that. I think my favorite part was when she ranked the different investment strategies from like best tax treatment, versus worst tax treatment. So if you’re on the fence about which way you want to go, listen to that part of the episode, it might help you decide the strategy that’s right for you.

Ashley:
Amanda, thank you so much for joining us, and welcome back to the show. We always love having you on. Can you start off with telling us a little bit about yourself and why you’re on the show today?

Amanda:
Yeah, yeah, I’m so excited to be here, to be back on the Rookie Podcast. So my name’s Amanda Han, I am a CPA and real estate investor myself. So not unlike a lot of the Rookie investors I still have a daytime job, my daytime job happens to be working at my firm, Keystone CPA, where we help investors nationwide on how to use tax planning to save on taxes. And by night I’m a real estate investor, again. I like a lot of you guys, wait until the kids fall asleep so I can sneak in some time to work on my real estate stuff.

Ashley:
Amanda, before we even get into the CPA part, and your daytime job, and all of the tax benefits of real estate investing, can you tell us just a little bit about your own real estate investing journey and maybe some of the strategies you have used?

Amanda:
Yeah, yeah. Well, I started investing in real estate in kind of like my mid-20s, and not unlike a lot of people my impetus to doing it was I read Robert Kiyosaki’s Rich Dad book. And at the time what was interesting was I was actually a CPA working with investors, but I just never thought I could do it. It was almost just like something that other people did, people who had a lot of money and experience and all that. But really seeing the tax benefits of what a lot of my clients that were making a ton of money, but not paying a lot in taxes was when my husband Matt and I decided we were going to get into real estate investing. And I just remember it was very horrific for me to sign the paperwork to buy my first rental property, again, which was this thing of like, why would I be able to do it?
Is it something that I can’t do? But I think for me that was like the hardest investment. Thereafter, every investment thereafter that has been just easier and easier, so never looked back.

Ashley:
So it seems that you definitely have some experience as an investor. What is your take on how beneficial that can be when you are looking for a CPA?

Amanda:
Gosh, well I think it’s very important when you’re working with not just a CPA, any kind of advisor right? So CPA is your attorney, your real estate agent, right? So your team, you just want them to invest personally in real estate. Because as real estate investors, we have kind of a different lingo that we use when we talk about stuff. Especially for bigger pockets people, the Burr strategy, or subject twos. And you just don’t want to be the person to be teaching your tax advisor what is going on in the real estate, you want them to understand the transactions in real estate because that’s the baseline for them being able to know what you’re doing, and then be able to help you with the planning and the strategy surrounding those transactions. So yeah, I think it’s very important.

Tony:
And Amanda, I don’t know if you know this, but you’re actually the reason, or at least a big part of the reason why I invest in short-term rentals. So our mutual friend Alex Savio was a client of yours, and you encouraged him for some of the tax benefit to come along with short-term rentals, to look at that asset class. He took your advice, bought a cabin in the Smoky Mountains. And then after he got his contract under a cabin he came to me and said, “Tony, you should buy a short-term rental.” And I said, “All right, cool. If you’re doing it, I guess I’m going to do it too.” So had it not been for your advice, I would have no short-term rentals at this point. I don’t know if I’ve ever shared that with you before.

Amanda:
Yeah, you know, it’s funny, but no, I didn’t know that. Until recently, when I was at your short-term rental summit, and I think everybody was there together, I heard that story. And I love it, it’s such an amazing story, to know that I was a tiny bit in kind of helping to help you guys build your portfolio. And that’s why I really love being on like podcasts like this, just, you never know who’s listening, and you never know who’s going to take action and implement like that tiny, tiny little golden nugget, and then grow their wealth and grow their friends’ wealth.

Ashley:
Amanda, before we get too far into the show, I want to make sure that we’re capturing our full audience. So this is the Rookie show, and maybe people are listening that don’t have a deal yet. And I don’t want them to tune out. What are some of the reasons they should listen to this episode? How important is it for you to know about these things, this tax strategy before you even start investing, or as you’re starting out, even if you have one, two, three properties?

Amanda:
You know, actually I think when it comes to tax planning, the best time to do planning is actually before you buy rental properties, or before you buy a lot of rental properties. And I’m sure we’ll talk a little bit about legal entity in a minute later today, but… And the reason for that is, as with anything, when you’re putting together the plan for a rookie investor, what am I going to be doing? Is it short-term rentals, is it long-term, is it house hacking? The different types of investments have different strategies. And so as soon as you know, “What’s my plan? What am I going to invest in, how many properties this year, or next year?” Then that’s a good time to educate yourself in terms of, “What are the possible ways I can use my investments to save on taxes?”
If you start planning too late, let’s say after I have five, six, seven rental properties, unfortunately I see this way too often, where people end up in the wrong entity structure, or just the wrong way to do things. And sometimes if you make a mistake earlier on, it could be very costly and sometimes even impossible to fix some of those issues. So yeah, the earlier you understand some of these benefits, the better it is.

Tony:
Yeah, and I can speak from firsthand experience the challenges that come along with waiting too long to get some of that professional help. So Amanda, one thing I want to circle back to because you mentioned this, is that you focus on tax strategy and tax planning. Can you just define for us the difference? What is the difference between what you do as someone who focuses on tax strategy, versus tax preparation, and how do those two different kind of people play into when folks start looking at those different aspects of tax?

Amanda:
Yeah. Well, I think one of the most common mistakes that investors make, and that’s not just rookies, that’s even very experienced people, is not understanding that there’s even a difference between tax planning and tax return filing. So tax return filing, I think that’s what a lot of people are thinking right now when they’re listening to our podcast. So tax return filing is when you’re taking your paperwork, a recap of what already happened last year, and you’re having a tax person put the right numbers on the right forms. That’s really it, they’re reporting what did or didn’t happen, and they’re going to tell you how much you owe in taxes, that’s really it. But tax planning is when you’re doing the right things throughout the year, so that by next April you can pay the least amount of tax, or get the biggest refund.
And so again, even though a lot of people right now are thinking, “Oh, I’m going to get my tax return file from last year,” what you’re doing is really just reporting what happened last year. But really what you should be doing is taking a look ahead at this upcoming year and saying, “Okay, what are some of the things I should be doing so that I can not just make more money, but save more money?” You know, or save more of the money that I just made. So I think that’s a huge difference in the two.

Ashley:
Well, let’s get into it. How are some of the ways a rookie investor can save money by purchasing their first investment property? And I’m not sure the best way that you want to kind of go through this, but do we want to go… You know, some of the top reasons for each strategy, or just things overall in general? But just, let’s start there as to, how can investing in real estate kind of benefit anybody? What are some of those tax strategies?

Amanda:
Yeah, it’s a really good question, because I think… I mean, we all know like wealthy individuals make a ton of money and don’t pay a lot in taxes. And so you read about those people, Elon Musk, Donald Trump. But I think for a lot of investors, especially for rookie investors starting out, it’s kind of like, “Wow, that’s great for them. But how does that relate to me?” And what I love about real estate is that that’s an asset class that encompasses a lot of the strategies that these super-wealthy people use. So if we go over some examples, so how do wealthy people make a lot of money but pay no taxes? Because they build businesses, or they buy things that go up in value, but they don’t have to pay taxes on that.
So that’s the same thing for real estate, if you buy a property for $100,000 and a couple years from now it’s worth $150,000, we’re not paying taxes on that appreciation. Versus comparing that to like a W2 income, if you make $50,000 of income [inaudible 00:19:03] you’re paying a good amount of taxes on that. And so that’s one of the reasons that real estate is really beneficial, because it allows you to grow your wealth without having to pay a ton in taxes.

Tony:
So yeah, there’s obviously a ton of benefits that come along with investing in real estate. But every strategy kind of has its own I guess ability to help you reduce your taxable income, like some strategies are better for taxes, others are not so great. So if you think about like the big buckets of investing in real estate, you have long-term rentals, short-term rentals, flipping, wholesaling, maybe at a higher level like commercial real estate in terms of syndications and stuff like that. If you had to kind of rank from maybe least tax preference to like highest tax preference, how would those strategies stack up?

Amanda:
Well I mean, I think the preference will differ from investor to investor, because every person has a different profile. Someone might be still working full-time, someone else might already be doing real estate full-time. But we’ll just take a kind of… The scenario of someone who is still working full-time at a job, because a rookie investor just starting out in real estate may be one property this year. From that perspective I would say for me personally, I heavily lean towards short-term rentals. A little bit about what you brought up earlier Tony. And the reason for that is for short-term rental properties, if you create a tax loss, and tax loss meaning that we’re maximizing write-offs or doing clever things with depreciation, not actually losing money.
So we strategically create losses, it’s a lot easier for us to use that, not just offset income from the rental property itself, but also offsetting income from our W2 job as well. And so the short-term rental, out of all the different ones that you named, that’s kind of the lowest-hanging fruit where it’s very possible for people to have a high W2 job but still be able to utilize a lot of those tax benefits by doing real estate on the side. For long-term rentals I think that’s probably next, and by long-term rentals we also combine single family, multi-family, commercial property, those are all typically long-term rental properties. That’s generally the second bucket, because we can still use all those depreciation and expensing and all that to offset the income.
But if you’re someone with higher income you just might not be able to use it to offset W2 taxes. I mean, it’s obviously possible to do with planning, but again, not as easy as the short-term. And then the third bucket is kind of what you mentioned, more the active real estate, so flipping, wholesaling, maybe getting real estate commissions. That’s kind of the third, or least preferred bucket, because when you’re doing those kind of transactions typically you pay higher taxes on that earned income. And especially for flippers and wholesalers, we don’t really get the benefit of rental real estate in terms of depreciation. Because after we’re done with the rehab, we’re just selling it immediately, so we’re not really getting depreciation like we would with rental real estate.

Ashley:
And Amanda, let’s talk about how this is all legal, these tax benefits. You hear sometimes in the news about, “Oh, this person or this corporation, they didn’t pay any taxes, they did this awful thing by cheating on their taxes somehow.” But these are all legal tax benefits, and if somebody else is taking advantage of them why aren’t you guys? Go ahead, this is at your disposal, this is for anybody to take advantage of these tax benefits to reduce your taxable income.

Amanda:
Yeah, and I think not only is it legal, it’s actually encouraged. And the reason the government gives us a lot of these benefits is because they want to encourage certain actions. So they want for investors specifically, they want us to be providing housing, because the government doesn’t want to do all their… They don’t have time to do all that, so that’s why they give us the incentives. Right now with, write off some depreciation, we’re getting bonus depreciation. And again, that’s another one of those that came out when they were trying to stimulate the economy, they’re trying to stimulate investors and business owners to spend money, make improvements on properties, and in exchange for incentivizing you to do those things is why the government gives us these different tax breaks. So yeah, definitely all our legal strategies, we don’t want to head towards the illegal side of things right? That’s not what we’re here to do.

Tony:
So Amanda, I think there’s this balance that especially new investors have to strike between showing the… Because you talked about the benefits of showing paper losses, and how it could allow you to pay zero to little taxes. But the flip side of that is that if you’re showing all these paper losses, it also makes you less bankable when you’re trying to go out and get that next loan. So as a new investor, how do you kind of balance trying to reduce your taxable income while still showing enough to help you get approved for that next mortgage?

Amanda:
Yeah, that’s a great question. And that’s one we hear a lot from investor clients that we work with. So I think there’s two main things, one is that if you’re doing things correctly there is a way to achieve both. Meaning you’re writing off, or you’re maximizing your write-offs so that you can get the tax savings, but at the same time it’s not eliminating your ability to borrow and use leverage to grow your real estate. So one of the major benefits of being a real estate investor is we get to write off depreciation, and that’s just a paper loss… We take the building of the property, we write it off over time. If you’re working with a good mortgage broker or a lender, they’re going to be able to explain that to their underwriters.
And so that’s a perfect example of something that’s tax-deductible for you to help reduce taxes, but is not hurting you when it comes to looking at your debt-to-income ratio. A couple other things on a similar note would be like, we always encourage investor clients, if you’re using your car for your real estate or if you have a home office, to make sure you’re claiming those. Because these are personal expenses that we all have already, but we’re just shifting it into a tax-deductible bucket when we’re a real estate investor. And those are two other things that, the lender’s already factoring in your rent or your mortgage payment. And so the fact that you are now deducting it as a rental expense, they shouldn’t be double-counting that against your income.
So there’s always little, different things like that where it helps to benefit you from a tax perspective, but doesn’t hurt you. But I will have to say, I mean we work… I think the vast majority of our clients are real estate investors, and I rarely come across someone who said, “You know Amanda, I really can no longer grow my portfolio because of loan issues.” I think I definitely see it more where if you have the right deals, you can find the money right? It doesn’t have to be bank financing, lots of other ways to achieve that goal of using leverage.

Tony:
So Amanda, we talked a little bit about deductions and reducing your taxable income. So just, if we can… Two questions here, first if we can just break it down, like the basic definition, what is a tax deduction? Is it just free money that the government is giving us, or what exactly is a deduction? And then if you can, what are some of the common deductions that a new real estate investor should be looking to take as they build their portfolio?

Ashley:
Yeah, so there is like this misconception that when you write something off you don’t pay for it, that the government pays for it. But yeah, so Amanda, if you can go in and kind of talk about what a deduction is, what a write off is, and what it means, and how it actually works.

Amanda:
Yeah, yeah, I love that. And so yeah, so a deduction or a write-off is the same thing for tax purposes. It’s a business expense that you’re using to offset the income that’s generated from that specific business. So we’ll use rental properties as an example, I made $100 of rental income, but I had $20 worth of expenses, right? And so $20 is my write-off, so instead of paying taxes on $100 of rental income I get to subtract 20, so now I’m only paying taxes on $80 of rental income. But you’re right Ashley, I think people are kind of confused sometimes and say, “Okay, well if I write off $20 that means I didn’t actually use my $20 to pay for the item.” But no, you still did, you still use it to pay.
The true cash from the tax saving is going to depend on what your tax rate is going to be. So let’s say you’re an investor and you spend $100 on Bigger Pockets membership for example, and your tax rate is 50%. So you write off $100, but then you apply your tax rate of 50% against this so you’ve saved $50 in cash. So that’s the way it works in terms of tax write-offs. Now there’s also tax credits, like if you are putting in solar for your car, or certain… Solar for your investment properties, or if you’re buying a new car and there’s electric vehicle credit, tax credits are actually dollar for dollar. So if someone says, “If you buy this car, you get $7,500 in credit,” that is actually $7,500 of cash in terms of like a refund or reducing your taxes. So, there is a difference between write-offs versus credits.

Tony:
But then Amanda, there are some things, like you talked about depreciation, that are paper losses, but not necessarily money you actually have to spend. Can you elaborate on those a little bit as well?

Amanda:
Yeah, for sure. So depreciation basically is what the… The government allows us to take a write-off over time for the purchase price of our building. So for example if I bought a building for $100,000, normally I can write it off over 27 and a half years. And there’s things that could be done where we can accelerate it, where we’re writing off much faster than waiting the entire 27 and a half years. But what a lot of people kind of get confused on is, what is the starting point for my write-off? So in my example I said we bought a building for $100, now regardless of whether you bought that building all cash, or if you did 20% downpayment, or if you did a subject two deal where you put like no money down, your depreciation is going to be exactly the same in all scenarios. We’re still looking at the purchase price.
So in other words, especially for new investors, I guess all investors, the more leverage that you’re comfortable to use in investing in real estate, the higher the potential tax benefit. Because our depreciation’s always based on purchase price, irrespective of how much downpayment you’ve put on a property.

Tony:
So Amanda, just to clarify, we have like two different types of… I guess really three different types of like tax benefits here. There’s the deduction you get for spending money, but you don’t get that full value dollar realized when you’re doing your taxes. You have tax credits, which is a dollar for dollar match, but you’re still spending that money. And you have this other bucket of things like depreciation, where you’re not actually spending that money but you’re still getting a tax benefit from doing it. So those are kind of the three big buckets, if I’m understanding that correctly.

Amanda:
Yeah. I mean, so depreciation just means that, you know, you don’t have to spend the cash today, right? You’re using leverage. I think we can also think about it in terms of deductions in general. So let’s say for example that I wanted to buy Ashley’s new book that just came out, but I don’t have money, I don’t have cash to buy it. And so what I did is I’m going to buy the book, but I’m going to charge it on my credit card. I could still take a deduction for it, just, even though I didn’t pay cash for it I can still write it off, because I charged it on my card, it’s an expense that I’m committed to… At some point I’m going to pay off the credit card. So yeah, when it comes to taxes it doesn’t always have to equate to cash spent. It’s more of, once I’ve incurred this expense. So that could be charging it on a credit card.

Ashley:
Amanda, besides buying Bigger Pockets books to educate yourself, what are some common tax deductions for rookie investors? Besides the property utilities insurance, should they be tracking their mileage when they drive to the properties? Things like that.

Amanda:
Yeah. I mean, I think for investors, all people but especially rookie, this is an area that where we see the biggest missed opportunity, where people are always looking at just the property stuff. Like you said, interest, and insurance, and things like that. But really there’s all kinds of things that could be tax-deductible. I think the best practice I always tell people is that when you’re about to spend money on something that’s somewhat significant, always ask yourself, “Is this something that’s going to help me improve my real estate portfolio or my wealth building? Is this something that’s ordinary and necessary for me as a real estate investor?” So yeah, it’s more than just the books or things like that, or definitely your mileage, your home office if you’re traveling to go to conferences.
It’s the flight, it’s the hotel, it’s the dinner and the drinks when you are networking with other investors. So really, just making it a habit. I know not everyone is like me and always thinking about taxes, but just make it a good habit. When you’re spending money, just kind of ask yourself a little bit, “Is this something that potentially could be a deduction?” Because here’s why it’s important, if you don’t track those expenses when you’re not asking yourself that question, then your tax person doesn’t even know you spend it. Unlikely they know, unless if they went to the conference with you. But you’re kind of that first line of defense to be tracking those expenses, and what’s the worst that could happen?
When it’s tax time your tax person might say, “Oh, actually no, that massage that Ashley had by herself was not a tax deduction.” But that’s fine, at least you’ve tracked it, it could have been.

Ashley:
So I have to get a couple’s massage with Tony in order for it to be a tax deduction and we’ll discuss business.

Tony:
Yeah, we’ll talk business.

Amanda:
Yeah, you can do some podcasts from there. I know it was Brandon Turner always talks about how he gets his inspirations when he’s getting massages. So yeah, that could work.

Ashley:
Okay producers, I know you’re listening. The next time me and Tony are in-person we’re going to do a couple’s massage while we record. Amanda, one thing I wanted to ask you about is the home office deduction. How does that work? Like, how do you actually deduct a home office?

Amanda:
Yeah. So a home office, basically it’s the IRS allowing you to take the business use part of your home as a deduction. So normally when we have our home, if you’re renting a house, or you purchase your primary home, we can only deduct mortgage interest and property taxes. Everything else, like internet, utilities, house cleaning, securities, those are personal expenses, we don’t really get a benefit for it. But as a real estate investor, if you have a room or a part of your home where you’re using for your real estate, that could potentially be a legitimate home office. And when you have a home office, well what happened is when it’s time to do your tax returns your tax preparer will help you determine a business percentage of the home that’s tax deductible.
So if I spent $1,000 on my utilities or internet for the year, but my home, 10% of it is my business office, then you might get like $100 of tax deduction on your utilities or internet use. And so again, it’s a low-hanging fruit because we all have home expenses. So if you can set your home up where you have a legitimate office, then you could be shifting some of these personal expenses into business deductions. A misconception that people think home office is only for people who own their home, but it actually works really great for renters too. So if you’re a newbie investor, you don’t own your home yet, you’re just renting, you can deduct part of your rent expense as your home office too.

Tony:
Amanda, now, one question from me, obviously there’s so many… Actually let me ask you, maybe you know the answer to this question. The IRS tax code, do you know how many pages, ballpark, it is?

Amanda:
I don’t, I know it’s like thousands of pages. And that’s just the code, right? And then there’s the regulations and all that that explains the tax code.

Tony:
So there’s so many different pieces to getting your tax strategy right, and I think as a new investor it can feel almost overwhelming when you start thinking about like, “Oh my God, am I doing this, am I doing this, am I doing that, am I doing that?” So if I’m a rookie investor and I’m having that first conversation with my tax strategist, what kind of information should I have ready for that person so that they can educate me on the deductions that are right for my unique situation?

Amanda:
Yeah, I think this is such a great question, because the goal, or my goal is never for an investor to become a CPA, right? We can get into the nitty gritty of depreciation, and the calculating the home office and all that. But really that’s not the intent, the intent for an investor is just to really understand, what are some of the things I need to do during the year, what are the systems I put in place? What expenses should I be tracking, how should I be tracking them? And that’s pretty much it, if you know what you should be doing and then you have the right tax advisors, they’ll be able to take the data, or the information you have, and then helping you to create the ideal outcome of your tax returns.
So for newer investors, I think it’s just understanding the basics of what I need. For very rookie investors, I think one of the issues that I see as an advisor, sometimes people will come to us and say, “Oh, I’m ready to do planning,” you want to know what is your investment strategy first. So there is a point where if you’re looking at, “Am I doing house hacking, am I doing short-term, or long-term, or a mobile home park,” those different investments have different tax consequences, and therefore different tax strategy. So before meeting with your tax person for the first time, you do want to have a fairly decent idea of what it is you want to do, what is my investment goal, how many rentals, what states do I want to be investing in? Because those kind of things play a very important factor for the starting point of what your plan is going to be on how to save on taxes.

Ashley:
So Amanda, we talked about different ways to track your expenses, and you may be able to save the receipts from your Lowes purchase of the new hardware you got for the cabinets, or you’re saving the copy of your insurance policy, showing the premium. But what’s the best way to track all of these expenses? And then even the expenses where you’re not getting really receipts from like your mileage, or even if you’re taking the home deduction, is there a good way to kind of keep track of how much you’re using your home office and what percentage of your utilities, things like that. Is there any great software that you recommend for a rookie investor?

Amanda:
Yeah, I think in terms of the how to track it, the system, I’m a huge systems person. I know everyone’s really busy, and so creating a system on tracking those expenses is really key. Because if you have the right system it’s something that you’ll be using throughout the year, right? I mean for me as a tax advisor, I don’t have a preference in terms of what an investor should be using. I think it’s going to be very specific to the investor themselves, so a lot of people like to use apps to track their stuff. You know, QuickBooks has apps, Stessa is another good one. So those different software and apps are really great, they can be geared towards real estate investors where a lot of these could be automated, you don’t have to do a lot of data entry.
But we also have investors who just don’t really like technology, they don’t really want to learn how to use yet another software, memorize another login. And so for people like that, especially for rookie investors, Excel or Google Sheets, something like that is also really sufficient too, as long as it’s something that you’re comfortable with and you’re using consistently throughout the year. For car expenses I really like MileIQ, it’s one that I use, it’s pretty user-friendly. But yeah, there’s different apps out there that you can utilize. For anyone who’s tracking like the real estate hours, if they’re trying to qualify for a real estate professional, or they’re using like short-term rental loopholes, a really great app is called REPS Tracker, R-E-P-S Tracker.
It was actually created by a client of mine who was a physician, and because I was tracking that in Excel. And she told me, “You know Amanda, Excel’s not good enough. Someone needs to create an app for it.”

Tony:
Amanda, can we just really quickly, because we’ve talked about this phrase a little bit. But can you define REPS? Like, what is REPS, and how can a rookie investor utilize that strategy in their investment business?

Amanda:
Yeah. So REPS stands for real estate professional status, and it is… Real estate professional is important for people who make over $150,000 a year, and are investing in long-term rental properties. Reason being that if you’re of higher income, and you invest in long-term rentals, even if you’re able to strategically create tax losses through write-offs and depreciation, things like that, your losses can only offset taxes from other passive income. So other rental properties, or anything else that’s passive to you. In other words, it’s not being used right now to offset taxes from your W2 income. So this is the limitation that… Kind of a current limitation that investors are concerned with.
So to be a real estate professional means that you or your spouse is spending at least 750 hours in real estate, and that you spend more time in real estate than your jobs. So if you’re working full-time at 2,000 hours a year, you can’t really be a real estate professional unless you spend more than 2,000 hours a year in your real estate. So, that’s why it’s important to track hours. And you know, and this kind of goes back earlier Tony, when you were asking what is the different buckets, what’s the order of preference, and that’s when I said short-term rental is the preferred bucket. Because for short-term rental properties, we don’t have to be a real estate professional to use the losses. In other words, we don’t care how many hours you’re spending at your job, we don’t have to have 2,000 hours.
You just have to have some material participation hours for your short-term rentals. So yeah, we can talk for eight hours on the whole real estate professional stuff, but that’s kind of the gist of it. And again, why it’s important, if you’re trying to go with one of these loopholes or strategies, that you’re not just tracking expenses but you’re also tracking your hours as well.

Ashley:
So, would this work for a married couple filing jointly if maybe the wife has a high-income W2, and then the husband is the stay-at-home dad, is it beneficial for him to actually take on the workload of their real estate business? And then with them filing jointly they’ll get that tax benefit of her high income along with the real estate professional status of his?

Amanda:
Yeah, yeah, exactly. That’s exactly the profile that would make sense, you’ve got one high-income person, you’ve got someone else who’s not working full-time, and having that second person be the main person in charge of your real estate activities and your investments and things like that. So this is where when you hear stories about, “Oh, I made $500,000 last year and I paid no tax,” odds are they’re talking about some kind of profile like this. And not just the same person making 500,000 and doing real estate full-time, right.

Tony:
So Amanda, with all of this information out there, and it’s mind-boggling to me how many different things you have to keep track of as a CPA. So I have the upmost respect for you and your ability to kind of keep tabs on all that. But if I’m a new investor, what steps can I take to I guess protect myself from getting the wrong information.

Amanda:
Gosh. You know, it’s interesting, especially with social media now right? There’s so much information and content out there, and I put out content myself too on social media. But I always try to tell people like, “Hey, content is content, but you want to make sure you’re talking to your own tax advisor to see if this strategy or this idea actually applies to your specific scenario.” So a strategy that works for Tony may or may not work for Ashley, right? And so it’s just making sure that you are speaking with someone who knows about you and what you have going on. So then the next question is, how do I find that person who is well-versed in real estate, or can help me in real estate? And I think nine times out of 10 when investors are interviewing tax preparers or CPAs, the question they ask is, “Do you work with real estate investors,” right?
That’s a easy question to ask. And probably 10 out of 10 times the answer’s going to be, “Yes, I work with real estate investors,” because everybody has at least one real estate investor client. So it’s not really a powerful question, I think a more powerful question is to kind of have them talk about real estate. Earlier we talked about the real estate lingo, so you can ask them. For example, “What do you think about subject two deals? How do you treat those for tax purposes?” And let them talk. I mean, maybe you don’t really know if they have the right answer or not, but at least you know whether they even understand what is a subject two deal. Or you can ask, “What are your other rookie investor clients doing, where are they investing, what are you seeing is successful with your other investor clients?”
And just really let them talk, and I think you’ll quickly be able to see how in-depth of a real estate conversation they can get into to see if they actually are someone who works with a lot of investors.

Ashley:
So Amanda, we talked a lot about different tax strategies, things like that. And in the beginning you had mentioned putting together the actual structure of the entities. So, could you maybe talk a little bit more in-depth about that, and as rookie investors what’s the best way to start? We hear all the time, “Put it into your personal name so you get that long, 30-year, fixed low interest rate,” or, “Put it in an LLC.” Should you do a corporation, do you have a holding company? There’s all these different ways. Do you put it into a trust? All these things. So what would be your recommendation for just somebody starting out, or does it really depend on what they have going on outside of just buying their first property?

Amanda:
Yeah. I mean, I have to go with the unpopular answer of it depends, because it really does. And I think that if you’re ever talking to someone and they say… Like if you go to like a conference and someone is saying, “Everybody needs to have a Wyoming LLC with a corporation,” definitely stay away from that, because there’s never a one-size-fits-all strategy, especially when it comes to legal entities. But kind of a couple high-level points, if you’re talking about rental real estate it’s going to be in your personal name or in an LLC, okay? It’s not going to be in any kind of corporation, and the reason is because there’s a lot of downsides to owning rentals in a corporation. On the other hand, if you’re someone who’s an active investor, meaning like flipping, wholesaling, real estate commissions, property management, then those are times where it could make sense and you could save taxes by being in a corporation.
But the vast majority of rental investors, and especially rookie investors, the LCC’s going to be the way to go because you can likely maximize all of the various write-offs we talked about today, regardless of whether you own the property in your personal name or inside of an LLC, okay? So the LLC is really just there for asset protection purposes, not for tax reasons. And a lot of newbie investors come to me and say, “Oh my gosh, I heard you on the podcast talking about writing off books, and this and that, but I don’t have an entity yet.” So it’s really important to understand, you don’t have to have a legal entity to be writing off these expenses, you just have to be in the business of investing in real estate.
And that could simply mean owning a rental property in your personal name, starting out just with the simplest, buy a property in my name, renting it out. Or even like house hacking, that you are in the business of real estate. So, don’t necessarily need to have an entity.

Tony:
So Amanda, I just want to recap what you just said, because I want to make sure it doesn’t go over the heads of our listeners. But what you’re saying is, you do not need an entity, an LLC, an S-corp, any of that to take advantage of the tax benefits that come along with investing in real estate? So the property could be in Tony’s name, the mortgage could be in Tony’s name, all of the expenses could flow through an account that’s in Tony’s name, and I could still have the tax benefits that come along with investing in real estate?

Amanda:
Yeah, exactly, exactly. And I think one thing especially for rookie investors is, even if you decided to have an LLC for your first one, or two, or three rental properties, the caution is don’t go overboard with legal entities. I unfortunately meet investors who spend 10 to $30,000 in legal fees forming all these very complicated, extravagant entities. A lot of times it’s not needed, especially if you’re just starting out. And it could get very costly in terms of the annual fees, different bank accounts and bookkeeping, and tax returns. So, be careful of getting too complicated too quickly.

Tony:
Amanda, just one followup question on that. What could be the reason that an investor would need more than one entity? Like, in what scenario does it actually make sense for them to do that?

Amanda:
So if we’re talking about rental real estate specifically, it would be from an asset protection perspective. So it could be a case where your attorneys says, “Okay, well you have two rental properties. One you have a lot of equity, the other one you have very little equity but high risk.” You know, there’s a pool, there’s stairs, your tenants have babies. So, maybe you want to have them in two different entities so that you’re bifurcating kind of the different risks associated with it. But you know, the reason you’d have multiple would be because your attorney feels like you need that level of asset protection, and not just because Robert Kiyosaki has these crazy structures, and therefore I must have that to be successful.

Tony:
So from a tax benefit, or from a tax perspective, there typically isn’t a whole lot of reasons you should have multiple different LLCs?

Amanda:
Yeah, yeah. I mean, we do want to separate out our investments from our active income, so again, if you’re someone who’s flipping and wholesaling you have an entity for that, then you have rental real estate, you have a different set of entities just to keep them separated. But yeah, tax-wise, specifically looking at taxes there’s not a reason to have a bunch of entities holding a bunch of different properties. For me, I think with anything else in real estate or business in general, I always take a look at it from the cost/benefit perspective. What is it going to cost me to have X number of entities, and what is the benefit that I’m getting from it? Whether it’s saving on taxes, or being able to sleep at night a little bit better, to then decide how many entities do I really want to not just form, but maintain, right? People love forming entities and picking out cool names, but you have to maintain those entities and bank accounts, and it’s just a lot of stuff.

Ashley:
I think one thing too, just to add to that, it’s not really for a tax reason. But also if you have different partners, you’re going to have different LLCs too, you’re going to… That would be a major reason to open up different LLCs, is if you’re taking on different partners. Because it would be almost impossible to have one LLC, but have a property me and Tony own 50-50, and then me and Darryl own 50-50, another property within the same LLC. So that would be just another obvious reason to have a separate LLC too, outside of the liability and the tax implications too.

Amanda:
Yeah, definitely. And we do see that sometimes with rookie investors who are scaling quickly, where they’ll have different deals with different partners. And that’s also a good sign that you should be working with a tax advisor too on, are there better ways to simplify the structures, or are there better ways to scale without having like six different partners and six different entities with just six properties too? But yeah, that’s a great point.

Tony:
Cool, all right Amanda. Well Ash, should we head into our questions? Is there anything else you want to hear from Amanda first?

Ashley:
No, I think we should definitely go into… We have a Facebook question today, instead of a Rookie voicemail. So Amanda, today’s question comes from the Real Estate Rookie Facebook group. This question is, “My husband and I are new investors, but I come from a family with a past in real estate investing. My grandfather, now deceased, had many rentals and eventually set up trust funds for several apartment complexes and storage unit sites with my uncle as the trustees, and my siblings and I as the beneficiaries. None of us have really taken the dive into all of this to see how to maximize the portfolio, we’ve just been enjoying passive income for years. My question is, once a property no longer has the tax depreciation, what options do you have to continue getting the maximum tax benefits of real estate investing?
“Sell the property, use equity to invest in something with a higher price tag? I am very curious as to how we can leverage equity to purchase more deals, especially since the 27 years of tax depreciation is up. One apartment building he bought over 40 years ago.”

Amanda:
Well, first off what a lucky person to inherit such a wonderful asset. And I think for all of us as investors, that’s where we hope to be, to leave our legacy to kids and grandkids in that manner. But yeah, that’s one of the best ways… And we talked earlier about the super-wealthy people, how they get the tax benefits, and we can do the same as real estate investors. So this is a really great example, right? This property has a good amount of equity. Now you could probably sell the property, and depending on how it’s structured, how it’s in the trust, or coming out of the trust, potential ways to do a 1031 exchange to defer the taxes on the gain, and then also reinvest that money into bigger and better properties, and create new depreciation, new write-offs, which sounds like it’s their goal.
But if you didn’t want to do that, tapping into equity is one of my favorite strategies. So if there was a million dollar, or $2 million of equity in this property, you can get financing to tap into that equity. The money you take out, you don’t have to pay taxes on it. So if you took out 600,000 or $800,000, you’re not paying taxes on that currently. So you take the $600,000 as a downpayment, and then you can buy another, a million, 2 million, 3 million dollars’ worth of real estate. That’s a huge amount of new depreciation and write-off that you get, and you still continue to hold onto the original property, right? Still appreciating, and maybe a little bit less cash flow because now we have debt.
But it’s still going to be appreciating too, so I love the possibility of being able to tap into that equity tax-free, and then using the new money to grow and build your portfolio even fasteR.

Ashley:
Amanda, let me ask you, how does it work then as to who actually gets the loan on this? So the trust would actually get the loan on the property, but then would the beneficiaries, or would it be the trustee? Who would actually sign as a personal guarantor, or would they have to go and get a mortgage where they’re not personally guaranteeing anything?

Amanda:
There’s various different ways to do it. I imagine probably… It’s going to be dependent on how the structure’s set up, and also whether they want to continue holding the properties in the trust. Or at some point, maybe they want to distribute the assets out of the trust so that the beneficiaries are just owning it individually or collectively in some sort of other entity too. But yeah, in terms of who’s going to sign, who’s going to be guarantors on it, I mean, I imagine it could be everybody, but I think that’s a better question maybe for like a lender to address.

Ashley:
Yeah, I was just curious of that. I don’t have a trust or anything, but I’ve worked with another investor who does, and it’s actually become like more of a headache for him than actually beneficial, I feel like. So that was just a question I had.

Amanda:
Yeah, and we do see that a lot too. That’s why I was saying sometimes the best option is to unwind the trust, just to take it out of the trust, because there are limitations. And the word trust is very generic, we don’t really know what kind of trust. There’s so many different types of trust that exist out there, some are easier to unwind and others not as easy to do.

Ashley:
Okay, well thank you so much for answering that question.

Tony:
Yeah, that was a great response. And I feel like we could keep this conversation going forever, like there’s so many things in the world of tax prep and strategy that… Yeah, there’s so many things, but you provided so much value, Amanda. So I want to finish things out by going into our rookie exam, these are the three most important questions you will ever be asked in your life, Amanda. So are you ready for the real estate rookie exam?

Amanda:
Yes, scared but ready.

Tony:
Question number one, what’s one actionable thing rookies should do after listening to this episode?

Amanda:
One actionable thing that they should do is follow me on social media, Amanda Han CPA. I try to put out good content every day, and so yeah, I think that little snippets of information, so that it’s not too overwhelming.

Tony:
And Amanda, you’ve been blowing up on Instagram, so kudos to you. I think you were at like what, 1,000 followers a few months ago. Now you’re at like, what, 10, 11,000, somewhere around there? So you’ve been doing a great job on social. Guys, make sure you do give her a follow.

Amanda:
Oh, thank you, yeah. It’s been fun, it’s been fun to share little tidbits and tips here and there.

Ashley:
Amanda, what is one tool, software, app or system in your business that you use today?

Amanda:
I use a ton, I use a ton for taxes and things like that. But I started using Zapier, I don’t know if you spell… I don’t even know if you pronounce it Zapier or Zapier, if you guys know, but it’s an automation tool that automates like a lot of stuff in our firm. From marketing, to administrative, I don’t really use it for real estate specifically right now, but I do use it for marketing and I really like that.

Tony:
Yeah, Zapier is great, and it has so many connections to so many different things. I even want to say that it has like some kind of accounting stuff built into it as well, but don’t quote me on that. But yeah, Zapier’s a great tool. All right, last question Amanda. Where do you plan on being in five years?

Amanda:
In five years, gosh. It’s interesting, because I really love what I do, my role, our firm, Keystone CPA. It sounds so strange to say, but I hope I’m doing the same thing that I’m doing now five years from now. Investing-wise, I think I want to be more passive. I mean, I’m somewhat passive now, I have a portfolio. My husband and I, we have a portfolio of properties that we somewhat self-manage. But we are trying to grow more into the… Put more of our money in the passive side of things. I’m a huge believer in leverage, in real estate we talk about leveraging when it comes to debt, good debt. But my new thing now is leveraging the expertise of other people, so other investors who are bigger, better, smarter than me, and just having them help me grow my portfolio.

Ashley:
Amanda, thank you so much for coming onto the show with us. Besides your Instagram account, where else can people reach out to you and find out some more information about you?

Amanda:
Yeah, I think Keystone CPA is our firm name, so keystonecpa.com is our website. I think that’s the best place to find me. We have a lot of great, free downloadable resources. So we talked a little bit today about real estate professional, and the short-term rental loophole, and legal entities. So if you’re a rookie investor and some of these kind of was the first time you’re hearing about it, definitely check out our website and download our free tax savings toolkit to get more information on that.

Tony:
Amanda, you also have two amazing books under the Bigger Pockets umbrella. Would you mind dropping those for us as well?

Amanda:
Oh yes, here it is behind me. So, Tax Strategies for the Savvy Real Estate Investor, and then our second book is the book on advanced tax strategies. And so for any of you who haven’t read it, I promise you it’s not what you think when you hear about a tax savings book. It is filled with stories, success stories and also kind of nightmare stories about what happens when you do tax planning correctly, versus when you do it incorrectly. So yeah, definitely check it out.

Tony:
Yeah, and it’s a great foundational book. Like if you were intrigued by some of these strategies that we talked about on the podcast today, but you also feel kind of overwhelmed by the idea that there’s so much more for you to learn, those two books are a great first place for you guys to get started. Before we close things out, I just wanted to give a quick shout out to this week’s rookie rock star. This week’s rock star is Raleigh Anthony Salazar, and Raleigh says, “It’s done, I bought my first true rental property, and I did it out of state. Back in July I cashed out and refinanced my live-in [inaudible 01:01:48], that is currently my primary residence for now. I put about 90K into my pocket, so I started looking for opportunities to invest.
“Living in the Pacific Northwest, I wanted to find better options so I looked into the Midwest.” And Raleigh says, “It would be possible without connections I made in the Real Estate Rookie Facebook Group,” so just another plug, if you guys have not yet joined the Real Estate Rookie Facebook Group make sure you do. But to wrap it up really quickly, Raleigh said, “Bought this property for $100,000 at 25% down, three bed, one and a half bath,” and is now looking to put in a lease for about $1,100 per month. And there’ll be cash flow in just over 100 bucks every single month, so Raleigh, congrats to you for getting that first deal done, and we’re super excited to see where it goes.

Ashley:
Amanda, thank you so much for joining us onto the show, we really appreciated having you. And if anybody would like to purchase the book on tax strategies for the savvy real estate investor, you can go to the Bigger Pockets bookstore and you can use code ASHLEY or code TONY to get 10% off. So Amanda, thank you very much. I’m [email protected], and he’s [email protected], and we will be back on Saturday with a Rookie reply.

Speaker 4:
(singing)

Howard Lutnick, CEO and chairman of Cantor Fitzgerald, joins ‘Closing Bell’ to discuss money moving towards commercial real estate, the projected path for rate hikes, and how to invest in public sector REITS.

By John Rampton, founder of Palo Alto, California-based Calendar, a company helping your calendar be much more productive.

The working world’s obsession with hustle culture may finally be ending. This shift in career aspirations means that there’s an opportunity—no, a necessity—to cultivate happy, healthy and thriving workplaces in 2023.

For business leaders, this perspective shift offers an opportunity to leverage best management practices alongside your company’s purpose. In the new year, consider these happiness-inducing leadership strategies to help change the way your organization feels about work.

1. Bring Your ‘Why’ To The Forefront

As a company, your “why” is at the very core of what you do. But even among the most committed professionals, the drumbeat of daily tasks can distract from your overall purpose. Combat the draining effect of day-to-day minutiae by integrating the why of what you do into every facet of your work.

Take a cue from tech firms like Amazon and place an empty chair in your meeting rooms to signify your customer or client. This silent reminder of who you’re doing what you do for can lead to more thoughtful conversations and decisions.

Use personas to think through your clients’ journeys, assigning real or stock imagery to depict them and their needs. This visual aid can help your employees better connect with their impact, even if they aren’t client-facing. When your employees better understand how their work makes a difference, they experience greater satisfaction and tend to be happier and more productive at work.

2. Invest In Your Employees’ Growth And Development—No Strings Attached

Traditionally, employers have provided a standard package of benefits to their employees. The usual health insurance and paid time off might be complemented by education reimbursements. Although free education is a generous offer, the strings attached could make this sweetheart deal turn sour.

To boost employee happiness, avoid presenting education benefits as a quid pro quo scenario. Instead of dictating plans of instruction, modify your education reimbursement program to provide a set annual amount for learning and development. Free up your employees’ options, allowing them to choose what to study versus requiring courses to be narrowly role-focused. Who knows? Enabling your marketing manager to take an art history class might prove even more valuable than an SEO certification course would have.

Collaborate with your management team to determine how your education benefits can boost employee engagement and retention. Review recent engagement surveys to identify concerns that your management team can strive to resolve. One such issue might be the time required outside of work to complete course requirements. If your workload demands can support it, update your policies to allow employees to learn during work hours. Providing support in both funding and time can improve course completion rates, boost employee satisfaction and enhance on-the-job results.

3. Develop Clear Career Trajectories And Organizational Goals

If there’s one happiness killer at work, it’s lack of clarity. When project plans, individual goals and decision-making criteria are unclear, it can put your employees on the fast lane to dissatisfaction. Be honest with yourself as you assess how your organization performs in these areas. If your assessment yields anything less than happiness-inducing transparency, a change may be in order.

First, review your employees’ career progression plans, and if you don’t have them, create a framework now. Each role on your org chart should have a growth plan that helps employees move forward. This can include skills mastery, goal achievement or next steps on the career ladder. Each employee should know what success looks like and how to earn a promotion, should they want to.

The same principle applies to setting goals, which can often vary across departments. Implement a S.M.A.R.T. goal system, in which goals are specific, measurable, attainable, relevant and timely. The combination of specificity, time-boundedness and measurability creates greater accountability for leaders and employees, establishing a playbook for success. Together, these improvements can boost employee happiness, especially regarding individual growth and team achievement.

Transparency And Collaboration

One trait of stale and out-of-touch leadership teams is a disconnect between seniority levels. Even if a CEO has risen through the ranks, it’s easy to forget the concerns of frontline workers. Counteract this possibility by building opportunities for feedback and collaboration between all levels of management.

Whether your chosen method is companywide surveys, manager-employee one-on-ones or some other tactic, establish channels for equitable input. By doing so, you’ll earn greater buy-in and build trust. Together, your organization can identify what success looks like, how to implement changes and how to create the happy, healthy workplace you’ve dreamed of.

David:
This is the BiggerPockets podcast show 718.

Dave:
If you’re in a market where wages are not going up, there is just a psychological limit to what people are going to pay for rent. It can only be X percentage. Usually, it’s 30% of their income can go for rent, and so I totally agree that in a hybrid or an appreciating city, rent growth will go up. I don’t know if that necessarily means they’ll ever reach the cash flow that these cash flowing cities tend to support, but personally, I think that that’s the better bet because you’re not betting on just cash flow or just appreciation or just rent growth.
You’re getting a little bit of everything. You don’t know which of the three might perform the best, but whatever happens, you benefit.

David:
What’s going on, everyone? This is David Greene, your host of the BiggerPockets Real Estate podcast here today with one of my favorite co-hosts, none other than Biggerpockets’ own VP of analytics, Dave Meyer with a fantastic show for you. First off, Dave, how are you today?

Dave:
I’m doing great. I had a real fun time recording this episode. I think people have a lot to look forward to.

David:
You are doing great, because if you guys listen all the way to the end of the show, you’re going to see exactly why this was a fantastic show about a very difficult topic that all of our competition is avoiding, because they don’t want to talk about what’s going to happen in 2023 other than screaming. The sky is falling, or pretend like nothing’s happening, and just give me your money so I can teach you how to invest in real estate. Here, we’re not about that life.

Dave:
Absolutely not, and maybe we should have talked about this at the show, but I think people are avoiding the concept of risk. They see there is risk in the market, and that’s true. I believe there is risk in the market, but risk is the counterbalance to reward. So, you have to understand risks so that you can reap the reward and opportunities that are out there. I think at the show, we really talked about that. We talked very specifically about what the risks are and some of the ways that you can mitigate risks and take advantage of opportunities that might present themselves over the coming year.

David:
That’s exactly right. So if you’ve been curious, if you’ve been frustrated, if you’ve been just wanting to understand what the heck is going on in the housing market right now, this is a show that will bring a ton of clarity to you. If you listen all the way to the end, we’re actually going to get into three strategies that we both believe will work regardless of what the market does in these uncertain times in 2023. Before we get into today’s show, I have a quick tip for you. Go to biggerpockets.com/report, and download the report Dave ROE.
A lot of the information from today’s show was coming out of that, and you can get it for free if you’re a BiggerPockets member. Dave, anything you want to say before we jump in?

Dave:
No, go check out the report. I spent a lot of time on it.

David:
Go support Dave, and leave us a comment in the YouTube video telling us what you thought of this report. Show him some love. If you like this show, please leave us a five-star review wherever you’re listening to podcasts. Guys, honestly, this is very, very important. We are currently the top real estate show in the entire world. We want to stay that way, but we cannot do it without your help. So whether it’s Apple Podcast, Spotify, Stitcher, wherever you listen to podcast, please take a quick second, and let the world know how much you like this podcast so we can stay number one. All right, let’s get into the interview.
Dave, you wrote a report about the real estate market. Tell us a little bit about that.

Dave:
I did. It’s a full comprehensive state of real estate investing for 2023. I wrote it because there’s just so much going on right now. We’re not and haven’t been in a normal housing market for the last several years. I start the report by going through all the different factors and variables that are going to impact the housing market right now, and then talk about some of the best strategies that you can use in 2023 to take advantage of what I personally think are going to be opportunities in the coming year, and just pose some questions about the 2023 market because we all obviously like to make forecasts, and guess what’s going to happen, but there are some just unanswered questions that I think are going to be the X factor for the 2023 housing market that we just don’t really know how it’s going to play out just yet.

David:
I’d say in my short career investing in real estate… Well, I say short. Compared to some people, it’s long, but I’m not an old man yet. This is the most complicated market I would say that I’ve ever seen. It’s got a lot more competing factors that influence what we’re seeing. Is that similar to what you’ve noticed, and is some of that covered in the report?

Dave:
Absolutely. When you look at the housing market back in time for the last 80 years or wherever we have pretty good reliable data for, the housing market is usually fairly predictable. It moves in cycles, but for, let’s say, seven or eight out of every 10 years, it goes up 2% to 4%, somewhat just above the pace of inflation. It’s pretty steady state and not that exciting. For the last 15 years or so, things have gotten a little more interesting, and it’s been a little bit more boomer bust over the last couple of years.
For the last three years in particular, as everyone listening to this probably knows, it’s become insane. It doesn’t mean that people are necessarily acting irrationally, or that we’re totally unhinged from fundamentals. In my mind, what’s happened over the last couple years is the variables and the factors that always impact the housing market have all aligned in this perfect storm to push housing prices up. Now, we’re sort of starting to see that unwind and go back to a more balanced and honestly more normal housing market.

David:
That seems crazy. It seems really negative. We’re having this overcorrection, but I think when you consider the insanity we had over the last eight years in how hot the market was, and you put it within context of that, I don’t think this is as big of an overcorrection as people are saying, but it certainly feels like it when you compare it to 20% increases in price being the norm in certain cities. Now, you mentioned that there are some levers of the housing market that affect the way that it performs. Can you tell me what you mean by that?

Dave:
Sure. I think generally, there are different variables, and these are mostly macroeconomic indicators that impact housing prices more than others. There’s thousands of things, and every individual housing market does perform differently. But when you talk about the national level housing market, it really all comes down to a few things. People often want to honestly even oversimplify it, and say, “Mortgage rates are going up, so prices go down.” Fortunately, it’s not that simple. There are more indicators. There are more things that really matter, and it shouldn’t be surprising.
These levers are things like supply and demand. Obviously, pricing always in an economic sense come down to supply and demand, but if you extrapolate that out a little bit more, we need to really look at things like affordability, inventory, the housing shortage in the United States, inflation of course, and things like mortgage rates. Those to me were the major things that were impacting the market in ’22, and will continue to impact in ’23, but just in a slightly different way because the way these variables are interacting with each other has changed.

David:
Now, we came out of one of the biggest recessions in our country’s history right before we had this explosion. So from your take, what impact did that great recession play in the home builder space over the last 10 years?

Dave:
I mean, from pretty much everyone’s estimation, the U.S. has a huge shortage in housing units. The predictions vary significantly somewhere between three and a half and seven million housing units. When you talk about economics, this just means a shortage of supply, right? There isn’t enough housing units in the United States for people, and this is largely attributed to what happened during and in the aftermath of the great financial recession. Basically, tons of builders just went out of business in 2008. It was rough out there, and people were looking for jobs. Businesses closed.
People who worked in construction wound up going into other industries, and so we see, if you look at the graph, and I put this in the report, it’s pretty startling the graph. You could just see that construction just fell off a cliff from 2008 to 2010. We’ve slowly been building our way back up, and it’s now at a pretty good level. But that eight years, or, like you said, from 2010 to 2018, we were well below the building rates that we should be at. So, that created these conditions where there weren’t enough homes.
That coincided with the time starting around 2020 when millennials, which are now the biggest demographic group in the entire United States, hit their peak home-buying age. We have these confluence of factors where there’s a ton of people who want homes, and millennials who are starting families, starting to have kids, and not enough homes. That is a perfect scenario for prices to go up. That’s just an example of how these different macroeconomic forces work together or did through the pandemic work together to push prices up.

David:
Now, if you want to hear more about the stuff Dave’s talking about, and the nitty gritty details that make this so exciting, you can download the report for free at biggerpockets.com/report, and see this data for yourself. Now, we’re going to continue talking about what’s in the report, but if you actually want to stop the podcast, and check this out or get it after the podcast is over, please head over to biggerpockets.com/report. Now, I think what you’re mentioning about supply and the issues in supply plays, in my opinion, maybe it’s the biggest lever in this whole drama of real estate prices and trying to understand them.
I was just talking about this yesterday when someone said like, “Well, David, if rates keep going up, do you see prices plummeting?” I said, “I don’t see them plummeting, because they’re such a constricted supply.” If you’re a homeowner and you’ve got a 3% interest rate, and you could sell your house and get a 7% interest rate, unless you have to move, you’re probably not going to do it, especially with your house being worth less now than what it was before. You’re going to wait. So because we’re not seeing a bunch of supply flood the market, we’re not seeing this crash in prices, and that’s what we saw during the last time we had a crash.
There was so much supply. There was way more properties than people could afford to buy or even wanted to buy, which is what led to the big decrease in prices. That’s, I think, what’s confusing to people that are like, “What? We’re going in a recession. Shouldn’t prices be dropping like they did last time?” What’s your take on comparing the environment we’re in now to the last time we saw real estate crashed?

Dave:
That’s a great point, and there’s a lot to that. I’ll just say about supply first that there are two good indicators of supply. One is this long-term indicator, and it’s what I mentioned before, that there just aren’t enough housing units in the U.S. To me, I am biased, because I’m a real estate investor. That’s the thing that points to long-term appreciation for real estate. Regardless of what happens in 2023 or 2024, because we don’t know what’s going to happen, to me, the fact that there are a lot of people who want houses, and there aren’t a lot of houses, that bodes well for real estate pricing over the next five to 10 years.
When you’re talking about what’s happening in the short term, I like to look at a metric called inventory, which is basically how many homes are on the market right now. To your point, it’s not exploding. It’s definitely up from where we were in 2020 and 2021, but not in the way where it’s signaling a crash. Just to explain this to everyone listening, inventory, I think, is one of if not the best indicator of the short-term performance of the housing market, because it measures supply and demand. It’s not just how many houses are put up for sale. That’s something known as new listings.
Inventory is a measure of how many homes are put up for sale, and how quickly they’re coming off the market. So when you see inventories start to spike, that signals a significant shift towards a buyer’s market, where prices are probably going to go down. We have seen that in the last six months that inventory is going up. But actually, David, I was just looking this week. I don’t know if you know this guy, Mike Simonson. He’s from Altos Research. He’s a big real estate guy. Inventory fell last week. It’s going down now, so it’s not like inventory is skyrocketing, and all of a sudden, we’re seeing things stay on market way longer than they were pre-pandemic.
They’re just going back to pre-pandemic levels. As of right now, things could change over the next six months. But as of right now, we’re recording this in January of 2023. Things are pretty stable in terms of inventory, and that is a big difference from what happened in 2008. I’ll also mention that the main biggest difference between now and 2008 is credit standards. This is not my area of expertise, but I read a lot about this. Basically, banks are not allowed to give out the crazy risky loans that they did back in 2008.
People are not defaulting right now. People are paying their mortgages on time, and that really puts a backstop in prices, because what really causes a market to just bottom out like crazy is forced selling. When people are forced to sell, because they cannot make their payments, that’s what sends the market into a tailspin. Right now, there is no sign that that is happening.

David:
That’s important to note. I was using the analogy yesterday when I was talking to my sales leaders that were asking the same questions. My take on it is we’re a semi-truck coming down a hill. Now, everyone knows you’re not supposed to just use your brakes when you’re driving down a hill, because your brake pads get worn out. You’re supposed to shift to a lower gear. But if this was a real recession, we wouldn’t be going downhill. We would be going flat. If the economy was struggling, people could not buy houses. They could not make their payments. They were suffering. With the job market, you’d see for selling.
We’re in a market where we are artificially slowing things down by raising rates. It’s like using your brakes when you’re going down this hill. If we take our foot off of that brake, you’d see home prices go up. You’d see transactions happening in greater numbers. You’d see days on market start to go back down. It is important to note this is not a recession based on fundamental problems in our economy right now, at least. Who knows if ChatGPT changes all that. We all lose our jobs, but I’ve said something crazy. This is absolutely something that the government has chosen to do for the sake of trying to slow down the inflation and rising home prices.
Now, that is something that real estate investors need to be aware of, the decision the Fed makes, the decision the government makes. These macroeconomic factors play a huge role in what your investment is worth or what the cash flow numbers are going to look like when you buy it. Tell me a little bit about what types of markets are created as a result of the swings of low or high inventory that you mentioned.

Dave:
Basically, inventory, I think, is really good to look at in your local market, because it’s behaving really different in different markets. Often and in the report, I use different examples, but I think generally speaking, places in the Midwest and in the Northeast are doing relatively “well.” Everyone has a definition of well. Some people want to see the housing market crash. I’ll just say that prices are stable in the Chicago, Philadelphia, Boston, Indianapolis. If you look at them, and you want to understand what’s happening in your market, if inventory is staying flat and is still below pre-pandemic levels, you could probably expect that the housing market in that area is going to either be relatively flat or maybe modestly even grow over the next year.
When you start to see inventory levels spike above pre-pandemic levels, that, to me, is a signal that prices are probably going to go down in that market. You see this frankly in a lot of the boom towns from the pandemic like Boise, Reno, Austin, Denver, where I invest. These markets are seeing more of a correction, because they just went up too high. They’ve just reached a level, and this is another important indicator of affordability that is just not sustainable, people who their salaries, their wages cannot sustain the prices that we’ve seen in some of these boom towns.
I really recommend if people want to look at their individual markets, and figure out what’s happening, looking at inventory and days on market are two really easy ways that you can start to understand like, “Are you in a seller’s market? Are you in a buyer’s market?” Just for clarity, because I think people actually confuse this a lot, buyer’s market means often that it’s a good time to buy. I know that’s confusing because people see prices going down, but that means you have more leverage traditionally. Buyers’ market means buyers have the power. Seller’s market means sellers have the power.
So, we are leaving a time on a national scale where sellers had all the power, right?we sell this every… I mean, you’d probably deal with this every day, David. Sellers could basically be like, “I want everything, no concessions, your firstborn child. Give me your car and your wedding ring,” and people were doing it. Now, it’s a different scenario where buyers can be a little bit more selective and negotiate. Again, days on market inventory, good ways to tell where if your market’s in a balanced market, a seller’s market or a buyer’s market.

David:
That is a great point. I think something that sets our podcasts apart from other ones is we don’t just rely on the fear factor to get clicks. Now, it’s easy to tell people, “During a seller’s market, you shouldn’t buy because the seller has all the power. Just don’t buy.” But the reason it’s a seller’s market is usually because prices are increasing so fast, or rents are increasing so fast, or your alternative options to real estate are so bleak that this is clearly the best option. So, more of your competition floods there. That creates the seller’s market.
Then conversely, it’s easy to jump in and say, “Well, it’s a buyer’s market, or sorry, prices are dropping, so you shouldn’t be buying. You should wait for the bottom, even though it’s a buyer’s market. This could be a better time to buy, and so you have to be aware of both markets. There’s a strategy that works in either one, and there’s pros and cons. Buying in a seller’s market is very difficult. You’re going to give up a lot of things that you nor… Sometimes an inspection you have to give up. However, you’re getting the upside of the asset exploding in price.
In a buyer’s market, you may be buying into a time where prices could go lower. Theoretically, we never know where the bottom is, but you’re gaining due diligence periods, sellers paying a lot of closing costs, getting cream of the crop inventory that you couldn’t even get your hands on before unless you had 1.2 million in cash to go compete. There are pluses and minuses to both, and we really are trying to bring the full picture here rather than just making some title that says, “Buy now or wait. The crash of the century is coming.” Then we’ve seen that stuff for eight years. It never came.

Dave:
They’ll be right one day if they keep saying it. They’ll be right one day.

David:
That’s a good point. A broken clock is right twice a day. Isn’t that how it goes?

Dave:
Exactly.

David:
Your take on this is what I think people should be looking at as opposed to just, “Tell me what to do. Is this buy, or is this sell?” It’s understand the factors that are influencing price, and then the right decision will usually make itself known. We’ve covered the supply side talking about inventory, monitoring inventory, understanding this is why prices aren’t plummeting right now is there isn’t a lot of supply, but the demand side’s important too. Real estate is interesting, because the demand is a little more complicated than it would be in something else like maybe Pokemon cards.
Can you tell me a little bit about demand and how that works within real estate specifically?

Dave:
Demand in real estate is composed of two things. I think people often think demand is just how many people want to buy a home. It’s not. It’s how many people want to buy a home, and how many people can afford to buy a home. Those are two… They both influence demand, but they behave in different ways. I think the biggest example, David, we are both millennials. I think for years, you see these pundits on TV being like, “Millennials don’t want to buy homes. They’re not buying homes.” It’s like their data doesn’t show that. It shows that they couldn’t afford to buy homes, and then the second they could afford to buy homes brought on by low interest rates in the pandemic, they jumped into the housing market like crazy.
So, demand is not as simple as people don’t want to buy homes. I think that the major things that are driving demand and will, I said it already, is that millennials are reaching peak family formation years. This is a strong thing. People really underestimate, I think, the impact of demographics, but it’s super, super important. We’re seeing the largest generation in the country enter their peak home-buying age, so that is going to increase demand. Like I just said, with low interest rates from 2020 to mid 2022, people are going crazy into this market.
Now, that demographic demand will probably last another three to five years if you just look at the demographics of the U.S., but what has changed and the biggest factor that has changed from mid 2022 until now is that affordability factor. The second half of demand is how many people can afford to buy a home. With mortgage rates going up as quickly as they have, that is just completely eroded affordability. We have seen basically the housing market react to this single factor more than anything else, because if people can’t afford to buy a home, that pulls all the demand out of the market, and that really tempers prices, or can even send prices going down backwards.
That’s really what’s happened with demand. Frankly, maybe I’m getting ahead here, my opinion about what’s going to happen in the housing market over the next year, two years, three years, is all about affordability and if it recovers. It really comes down to, in my opinion, will affordability improve? That’s when the housing market will bottom and start to grow again.

David:
This is such a powerful nuance point that you’re making. Demand has two heads when it comes to real estate. You got to be willing, and you have to be able. Conventionally, able has been the problem. Even if you wanted to buy a house, you just couldn’t because the prices were going up faster than you could keep up, or you didn’t want to be competing with 11 other offers, or waving your contingencies, so you just said, “Hey, I’m out. I’m not going to do this.” When you’re in a really, really bad market is when the willing side is gone.
People don’t want to buy a house. That was what we saw in 2010. A lot of people were unable to buy a house, but many of them could. They just didn’t want to. I remember in 2010, no one actually looked at real estate like buying an asset. This is hard if someone wasn’t around back then. They looked at it like tying themselves to a 30-year anchor called a mortgage. If you said, “I bought a house,” I’d be like, “Oh my God, you have to make that payment for the next 30 years. Why would you do that?” This is funny, Dave, because my first house, my mortgage was $900. That was still considered a death sentence. Why would you ever want to just tie yourself to $900?
Nobody was willing to buy homes, and there was so much supply that caused that plummet in prices. This is what we’re monitoring when we’re looking at what’s the market doing is how much supply is out there, which we’ve covered, and then how much demand is out there. There’s two components to it. It’s you got to be willing to buy a house, and you got to be able to buy a house as opposed to many other things that don’t involve financing, like the Pokemon card example I gave. It’s just, “Are you willing to buy it, right?” Most people can afford to pay $30.
I don’t really know much about Pokémon cards. Then I bought my nephew some for Christmas, and he was super excited about it. It’s not a thing where you have to be able to buy them with real estate.

Dave:
So much of being able to buy real estate is out of our control, because most people use leverage, use debt to finance real estate. So, the rate on a mortgage really impacts what you can afford, and that was positively impacting people during the pandemic, because people could all of a sudden afford way more. Now that we’re back to… Actually, it’s high compared to where we were, but we’re right about the historical average of mortgage rates. Now that we’re back to a more normal mortgage rate in historical terms, that’s negatively impacted affordability.
When you talk about buying a Pokémon card or fine wine or whatever else, you’re just using equity. You’re not usually leveraging those purchases, so it’s really up to you like, “Do you have that money in your bank account? Then you can go buy it.” There are other examples of leveraged assets, but real estate is probably the biggest example of a leveraged asset, and it really is. That’s why real estate is really sensitive to interest rates is because it really, really impacts how able you are to buy investment properties or primary residents.

David:
Now, when it comes to rates and the Fed, can you tell us a little bit about how these decisions are made, and then how that ultimately ends up affecting affordability?

Dave:
Oh boy, my favorite topic. Basically, as we all know, inflation is really high. That is a huge problem for the economy. It erodes our spending power. Everyone hates it. Real estate investors hate it a little bit less, because real estate is a fantastic hedge against inflation, but it still sucks for everyone. The Fed is basically making decisions to try and combat inflation. They do that by increasing the federal funds rate. That’s the only thing that they can control. It’s wonky, but it’s basically the rate at which banks lend to each other.
The idea behind raising the federal funds rate is that if it becomes more expensive to borrow money, less people do it. When there’s less people borrowing money, less money is circulating around the economy. That’s also known as the monetary supply, and so they’re trying to reduce the monetary supply because we’ve seen it go crazy. Over the last couple years, there’s a measure of monetary supply called the M2. Basically, we’ve seen that explode, and that happened for a few reasons. One was because of low interest rates, but the other was because of money printing. We have introduced a lot of new money into the system, and so they’re not able to pull that money out of the system.
What they can do is raise interest rates, and try and get it from circulating around the economy less. If less people are borrowing money, the money stays in the bank, or it stays in your savings account, or you do less with it. That helps cool down inflation at least in traditional terms. That’s what the Fed is trying to do. Obviously, as of early January 2023, inflation is still super high, but the trend looks like it’s starting to come down. Now, the federal funds rate does not directly control mortgage rates, but it does influence mortgage rates. So, we’ve seen mortgage rates go from…
The beginning of 2022, they’re, I think, below or right around 3%. Now as of this recording, they’re at about 6.2%, so they’ve more than doubled. That significantly increases the amount of… That significantly decreases affordability, I should say. We’ve seen a time when at the beginning of the pandemic, affordability was at almost record highs. People could afford anything to a point where now, affordability is at a 40-year low. This is the least affordable real estate has been since the 1980s, and the implications of that are obvious. If you can’t afford it, you’re not going to buy it, so there’s less demand in the market.

David:
That is really, really good. Now, to recap here, so far, we have covered the housing market levers, what makes prices go up or down, supply and inventory and how you can be tracking those, demand and ability, the nuance of what affects demand as well as mortgage rates and inflation, which are all ingredients in the cake of the real estate market, I should say, that you monitor. You add more flour. You add more eggs. You add more sugar. You’re going to get a different tasting cake. This is what we’re all trying to understand when we’re trying to predict how things are going.
Now, before we move on to what works in an uncertain market like this one, my last question for you is that what needs to happen for affordability to become rebalanced again to where investing in real estate is something that people can be excited about and actually possible?

Dave:
First of all, I still think real estate investing is possible and excited. You have to be a little creative, which we’ll talk about in just a second. I think what’s happened is basically for two years, every single variable, all the levers that we’ve talked about were just pointing in one direction for prices, and that was up. Now, we’re at a point where we’ve need to rebalance, and things have changed. Affordability has declined to the point where prices are likely, in my opinion, going to go down a little bit in 2023. What needs to change for affordability is one of three things.
Affordability is a factor of three different things. One is housing prices of course, and so if prices go down, that improves affordability. The second thing is wage growth. If people make more money, things start to become more affordable. We’re already seeing wage growth start to decline, and I don’t think that’s going to be a major factor in the housing market. The third is mortgage rates, rights? If mortgage rates go down, affordability will go back up. Those are the major factors at least I’m going to be looking at for the next couple of months.
Mortgage rates already come down off their peak. They could go back up again, but back in October, November, they’re in the low sevens. Now they’re in the low sixes. Affordability is already starting to improve a little bit. That’s probably the thing. If you’re going to look at one thing to understand the housing market in 2023, affordability is the thing I would recommend.

David:
affordability is, as you mentioned, a combination of the price versus the mortgage payment. It’s not as simple as just one or the other.

Dave:
Exactly.

David:
Just funny because when rates were going down, everyone was complaining about how homes were unaffordable, because people could afford to pay more for them, so prices kept going. Then when prices finally came down, people complained that interest rates are too high, but they’re both two sides of the same coin. You can’t usually have one without the other, just like supply and demand. All right, let’s move on to three things that work in an uncertain market like this one. What’s your first piece of advice for strategies that people can take advantage, or where they can make money even when we’re not sure what’s going to happen with the market?

Dave:
Well, one of the things I’m most excited about, and I’m actually looking to make an investment in the next couple weeks here on, is private lending. When you’re in a high-interest rate environment, that’s the bank who is charging those high interest rates. So, if you can become the bank, that is a pretty exciting proposition. There are probably a lot of flippers out there who want money. There’s probably syndicators who need bridge loans. There’s people who need mortgages, and so there are opportunities to be a private lender. I am not an expert in this. David, I don’t know if Dave Van Horn, the third Dave. Maybe we should have him on one time.

David:
Three D.

Dave:
He’s a real expert in this. I forget what his book’s called, Note Investing. BiggerPockets has a book. Check that out. I think private lending is a really interesting option right now, because if debt is expensive, that’s bad for the borrower, but it’s sometimes good for the lender. That’s something I’m at least looking into at 2023. Have you ever done private lending?

David:
I have a couple notes through Dave’s company actually, the PPR Note Company I believe it’s called. It’s a similar concept like what you’re saying. That principle applies for private lending, but it also goes into just saving. You got punished for saving the last eight years or so. Inflation was way higher than what you could get on your money in the bank. That helps fuel the rise in asset prices because you’re like, “Well, I got $100,000 sitting in the bank, earning me half a percent while inflation’s at God knows what it is, probably realistically 20% to 30% if you look at food prices and gas and real estate and stuff like that.”
I got to put it somewhere. Where am I going to put it? Well, I’m probably going to put it into real estate, because that’s what’s going up the most, right? But when we see rates go higher, even though it does slow down, the asset prices going up. Man, there was a time, I remember, when I was working in restaurants where I was making 6.5% of my money that I would put in the bank, and that wasn’t even in a CD. So, strategies like private lending, just saving your money at a certain point become possible when we finally get rates up to healthier levels.

Dave:
I actually just wrote a blog about this in BiggerPockets that I think we’re reaching a point where savings rates are attractive again. In my high-yield savings account, I can get almost 4% right now. I know inflation, it comes out tomorrow, but as of last month, I think it was at 7.1%, right? People are like, “The 7.1% is higher than 4%.” Yes, that’s true, but 7.1% is backward looking. That’s what happened last year. If you look at the monthly rate, it’s averaging about 0.2% over the last five months. So, if you extrapolate that out, and no one knows what’s going to happen, but if you just extrapolate that out, you can imagine inflation a year from now might be somewhere between 2% and 3%.
So if you’re earning 4% on your money for the first time in years, your savings rate can actually earn you not a great return, but at least more money than inflation is eating away. Personally, at least I’m putting the money… I’m looking for opportunities in real estate, but I’m taking the money I have, putting them in either a money market or a high-yield savings account, because at least you can earn 1% to 2% real returns on your money as opposed to the last few years where if you put your money in a savings account, you were losing 6% or 7% at the minimum.

David:
You didn’t even have this as an option when rates were super low, and it was fueling this big run that we had. Now, with no investing specifically, you do make a profit on the interest that comes in from the note, but it’s negligible compared to how much money you make when the note pays off early. Typically, what you’re doing is you’re buying a discounted note in these cases. I bought a note. Let’s say maybe I paid $50,000, and the note balance was $75,000 or $80,000, and I get my $300, $400 a month coming in from that note, so there’s a return on the money that I paid.
It’s amortized, so you’re going to get more than what you put out, but you really win when that person sells or refinances their property, and you get paid back the $80,000 when you only had spent a smaller percentage for the note. The hard part is unlike real estate, you don’t have control. It’s not like an asset. I can go in there, and I can buy, and I can fix it up to make it worth more. I choose at what point in the market I’m going to sell it. You’re at the mercy of the other person, so the strategy is just to have all of these little notes that are out there. Unlike a jack in the box, you don’t know when it’s going to pop, but at a certain point, it’s going to.
Then boom, you have a note pop off. You make a profit. You either go buy a bigger note that gets more cash flow, or you go invest into something different, which is something that I had planned on doing a lot more of when I bought it. Then we saw what happened with the housing market. It was like, “Oh no, all steam ahead, get me irons in the fire as I can as this market is increasing.” I think that’s great advice, different strategies surrounding real estate, but not necessarily just owning it. The second thing I see that you mentioned are hybrid cities. Let’s start with what do you mean by hybrid?

Dave:
If you look back historically, different housing markets perform really differently. Traditionally, pre-pandemic, what you saw is that certain markets were great for cash flow, but they didn’t really appreciate much. Other markets were great for appreciation, but they didn’t cash flow that much. Those are the two ends of the spectrum, but there are some that get modest appreciation and modest cash flow, which personally I am really just interested. I think that’s the best conser… It’s conservative in a way that you have good cash flow, solid cash flow, not amazing cash flow, but solid cash flow so that you can always pay your mortgage.
There’s no risk of default. You can hold on. There’s nothing. No risk there. But at the same time, it’s appreciation, so you still get some of the upside opportunity that you get in markets like California or Seattle. It’s not quite that much, but you get a little bit of each. I think those markets are going to do particularly well, because a lot of these hybrid markets tend to be more affordable cities. My theme in a lot of what I’m talking about today is affordability is dominating the housing market. I think, markets that are more affordable are going to perform well relative to other markets over the next couple of years.
I think some of these hybrid cities are really interesting. I just want to caution people who have gotten into real estate in the last few years that what we’ve seen over the last few years is so atypical in so many ways, but what I’m talking about right now is appreciation. We’ve seen every market appreciation, big markets, small markets, rural markets, urban markets, suburban markets, everything. Why not? That is not normal. Normally, some markets go up. Other markets stay flat. Some markets go down.
I personally believe we’re going to return to that dynamic over the long run. I don’t know if it’s going to be this month or next year, but I think that is normal for the housing market. I think we’re going to get back to that. So, I would look at markets that we’re seeing some cash show and some appreciation pre pandemic. These are tertiary cities like Birmingham, Alabama or Madison, Wisconsin or places like this that have strong demand population growth, but still offer cash flow. I think they’re going to outperform other markets for the next couple years. That’s just my opinion, but that’s what I’m looking at.

David:
If somebody wants to identify cities like this, what data should they be looking for?

Dave:
I think the number one thing is if you want to look at cash flow, you can look at a metric called the rent to price ratio. You just divide monthly rent by the purchase price. If it’s anywhere near 1%, you’re doing really well. You’ve probably heard of the 1% rule. I think it’s a little outdated personally, and that expecting a deal that meets the 1% rule is probably going to cause you more harm than good, because you’re going to wait around forever looking for a mythical unicorn. Not that it can’t exist, but like I was just talking about, those 1% deals often occur in markets that don’t appreciate. I think to me, that’s not worth it.
I would rather see something that’s a rent to price ratio of 0.7 or 0.8, but is an appreciating market. That’s what I mean by a hybrid city. Rent to price ratio is good. Then for appreciation, it’s difficult to predict, but the most important things are very simple, population growth. Is there going to be demand, or more people moving there than leaving? Two, economic growth, you can look at this in terms of wage growth or job growth, but if people are moving there, and they’re getting paid more and more, asset prices are going to go up.

David:
We often talk about appreciation and cash flow as if they’re opposing forces like Yin and Yang. Are you a appreciation investor, or are you a cash flow investor? But in practical terms, for those of us that own real estate, we realize that they’re not actually mutually exclusive, that many times, you see cash flow appreciates as rents go up. What are your thoughts on the idea that certain markets will have rent increases, just like the value of the asset will increase?

Dave:
I personally… I agree. There are great markets that have 1% cash flow. I wouldn’t invest in them, because personally, I work full-time. I’m not reliant on my cash flow for my lifestyle entirely. But also, it’s just too risky to me, because those markets tend to have declining populations or not great economic growth. That’s, to me, risky. I know people say cash flow is a good hedge against risk, but I think some… But if your vast value is going down, then I don’t think cash flow is going to make up for that. I think that’s super important.
I personally would caution people against assuming rents are going to go up at least this year or the next year. I just think that we had what they call in finance or economics a bit of a pull forward, where it’s like rent prices usually go up a couple percentage points a year. They went crazy the last few years, and that might have just taken all the rent growth for the next two or three years, and just pulled it forward into 2021 or 2022, for example.

David:
Very possible.

Dave:
My recommendation is to underwrite a deal assuming that cash flow is not going to go up for the next year or two. If it happens, which it might, that’s just gravy on top, but I think the conservative thing to do is to presume that cash flow is probably going to be pretty mellow… I mean, rent growth, excuse me, is probably going to be pretty mellow for the next couple of years. But if you’re holding onto it for five years, seven years, then I would probably forecast some rent growth for sure.

David:
Well, when you’re making a decision on where to buy, do you think it’s reasonable to expect a hybrid city’s rents to increase more than a cash flow market, Midwest non-appreciating market?

Dave:
Oh yeah, 100%. I mean, if you’re seeing a city that has economic growth, I mean just look at wage growth. If wages are going up, if good jobs are coming to that city, those are some of the best indicators.

David:
People are able to pay more because there’s demand within the rental market, just like there is within the home ownership market. Same idea.

Dave:
Exactly. If you’re in a market where wages are not going up, there’s no legal limit, but there is just a psychological limit to what people are going to pay for rent. It can only be X percentage. Usually, it’s 30% of their income can go for rent. If you’re way above that, and if wages aren’t growing, then it doesn’t support rent growth. So, I totally agree that in a hybrid or an appreciating city, rent growth will go up. I don’t know if that necessarily means you’ll ever reach the cash flow that these cash flowing cities tend to support.
But personally, I think that that’s the better bet because you’re not betting on just cash flow or just appreciation or just rent growth. You’re getting a little bit of everything, and you don’t know which of the three might perform the best. But whatever happens, you benefit from it.

David:
Well, that’s what I wanted to highlight for the people who are maybe newer investors, that are inexperienced in some of these cash flow markets where turnkey companies tend to operate, and the gurus that are selling you a course, they’re usually, “Cash flow, quit your job. Get a girlfriend. Don’t be a loser. You need cash flow, and they’ll fix all your problems.” Then they push you into some of those markets that rents hardly ever go up. For the last 10 years, they’ve been the same. Versus if you had invested in maybe Denver 10 years ago, it might have been modest cash flow when you bought it, but 10 years of rent growth, and it’s doing really, really well.
We don’t want to say assume it’s going to go up, but you can absolutely put yourself in a position where it is more likely to go up by going into one of these markets that is having wage growth, companies moving in, population growth without completely betting the whole farm on investing in some wild appreciating market that you’re bleeding money. There is a responsible way to do it. I think that’s a really good sound advice that you’re giving here.

Dave:
I mean, this is probably a whole other show, but God, man, you know how many rentals it takes to become financially free? I know a lot of real estate investors are like, “Oh yeah, just quit your job. Buy three rentals, and be financially free.” It’s just absolute nonsense. The way to think about it is the way you earn money and cash flow in investing is you need X dollars invested at Y rate of return to equal Z cash flow.

David:
Just like we look at every other financial investment vehicle when we’re like, “How much do you need in your 401k at what return to retire?”

Dave:
Exactly, and so you can choose to be a cash flow investor and say, “I’m going to have $100,000 invested at 11% cash on cash return.” Great, that’s making you $11,000 a year. I can’t live on that. If you want to build for the long term, and you say, “I’m going to make a 6% cash on cash return, but through appreciation and working at a good job, I’m going to have $2 million invested at a 6% cash on cash return,” then you’re making $120,000 a year. I think people just get obsessed with this cash on cash return idea without thinking about the amount of principal you put into your investments is equally if not more important than the cash on cash return. That’s just my rant.

David:
We won’t go too far down that road, but I will tease people, which is this little idea. This is one of the reasons that I encourage people into things like the BRRRR method or buying and appreciating markets, because your property can create capital for you much like you earned at your job that you were working. You can have two sources of capital being created. We just call it equity when it’s within a property. We call it capital when it’s in our bank account, but it’s the same energy. You start your career off using methods like that, and then later in your career, you transition into higher cash flowing markets that are a little bit more stable, and then you do exactly what you just described.
This is some pretty deep cool stuff that we’re getting into when we just plan on talking about the market.

Dave:
I like this conversation. This is fun.

David:
All right, last topic I want to ask you about is buying deep. What do you mean by buying deep?

Dave:
I mean, buying deep just means buying below market value. I don’t know about you, David, but for the first eight years of my real estate investing career, I never even offered at the asking price. I would always offer less than the asking price. Only in recent years did it become normal for you to offer above asking price, and still pray.

David:
So true. You hear agents say things like they paid full ask, and I laugh like, “That’s a deal out here.” Full ask doesn’t mean anything, but they’re operating from the old paradigm where nobody pay the asking price.

Dave:
Totally. In the beginning, you would always try and nickel and dime the seller a little bit, see whatever you can get. I think we’re back to an environment where that’s possible. Not in every market, not every asset class, but we are in a market where you can buy below asking. I think it’s just a good way to hedge. If you think your market might go down 5%, try and find a property that’s 5% below. I invest in Denver, and it’s already gone down almost 10% in Denver. It’s one of those leaders of the market in terms of price declines.
I think it might go down another 5%. So when I make an offer right now, I’m going to offer 5% below asking. That way if it goes down, I’m okay. It gives me a little bit of cushion. That’s what I mean by buying deep. It’s just going below asking price to give yourself a little bit of cushion. I’ll also say I really think timing the market is hard, and if it’s between 1% and 2%, don’t worry about it too much. I bought my first property in 2010. The housing market bottomed in 2011, 18 months after I bought or something like that.
Do you think I’ve ever once thought about that, that my property went down 1% before it started to come back up? Not once. People tell me how jealous they are that I bought in 2010. What they don’t see is that my property value actually went down 1% or 2% before it started growing like it did over the last couple months. I think buying deep is really important, but I wouldn’t obsess about trying to get it exactly to the bottom of the market. It’s literally impossible to do. But if you think the market’s going to go down 5% or 10%, try and get some concessions out of the seller to make yourself more comfortable.

David:
That is incredibly sound advice. When I bought my first property, it was the end of 2009, so I wasn’t even at 2010. Then it went down more. I was like, “I’m so dumb. I should have waited.” Everyone was like, “Why’d you buy real estate?” In my head, I pictured it going all the way down to zero. Then a year later, it started going up, and then it exploded. It’s funny. I paid 195 for that house that probably dropped to 185, and I was kicking myself. Now, it’s worth 525 or so. It just doesn’t matter.

Dave:
Exactly.

David:
This doesn’t matter, right? It’s your ego trying to be smarter than you are, and you’re making it. That was a property that I was under contract at 215, and I went in there to get some seller concessions, and got it at 195. That is exactly what people should be doing in this buyer’s market. If the house has been on the market three days, it’s getting tons of interest. Maybe you don’t get to use the strategy, but I look for houses with high days on market, poor listing photos. I literally teach people how to target stuff in the MLS that’s been passed up by other people, write very aggressive offers, and then gauge based on the counter offer how serious that seller is and how we can put a deal together.
In the 1031 exchange that I wrapped up a couple months ago, I think I bought 17 or 18 properties, but only 12 or 13 of them were through the exchange. From those 12 or 13, I made over a million dollars in equity based on the appraise price versus what I paid. It was just this strategy of, “I’m on the MLS. I’m not doing anything crazy,” but I’m not going after the house with the beautiful listing photos professionally taken by a really good realtor. I’m looking for the people that paid a 1% commission to their realtor. They took some pictures with their iPhone seven.
It looks terrible. It’s been sitting there for a long time. I mean, literally, Dave, some of them had upside down uploads. The bathroom pictures were uploaded upside down that you can tell Zillow’s, “Four people have looked at this, and no one has saved it.”

Dave:
Those are the ones you want.

David:
That’s exactly right. So buying deep, I refer to as buying equity. Same idea. Don’t just think you have to pay asking price like you used to. Explore. Write a really low offer, and wait and see. I tell people, “An offer should be like a jab. If they accept your first offer in this market, you probably wrote too high.” You shouldn’t be knocking people out with an offer. It’s a jab, and you wait and see how did you defend? Are you weak? I won’t go too deep into it, but one of the deals in particular was listed for 1.6 million, had dropped its price all the way down to 1.2 million.
I went in and wrote an offer at $1 million 50 with about $50,000 in closing costs. It was about 1 million even. He countered me accepting my deal, but just he didn’t agree to the $50,000 closing cost difference. I knew if he countered me that hard, he wants to sell this house. I’ve got all the leverage here. I’m going to get this deal. I ended up holding out, and he still came back and said, “Fine, I’ll give you the closing cost too.” Now, if he had countered me at maybe $10,000 off of his 1.2, I would just let it go. That’s not a motivated buyer.
You could never use strategies like this the last eight years. They just did not exist. That’s a great point. If you’re worried the market’s going to keep dropping, just go in there and write a more aggressive offer than you normally would have, and cover yourself that way.

Dave:
You got nothing to lose. I think people are like, “Oh my God, they’re going to reject it.” It’s like, “So what?” Obviously, you don’t want to just be doing stuff that makes no sense, but if you think your offer is fair and reasonable, might as well try. See if they agree.

David:
Then the other thing, the piece of advice I’ll give people is don’t assume that one punch is going to knock someone out. Many of these properties we’re talking about, I wrote an offer. They said no. I had my realtor go back a week or two later, and it was maybe. A week or two later after that, it was like, “Let’s play ball.” Then that started the actual negotiation. Sellers are freaking out just like buyers are freaking out. Everybody’s freaking out in this market, and you just want to find the right kind of freak to match up with your interests.
Dave, I’m going to lead us to wrapping this thing up by asking you for the one thing that we’re always hesitant to do, but everybody wants to know, what are your predictions for 2023?

Dave:
It’s really hard, but the thing I feel confident about is that we’re probably going to see a continuation of the current market conditions through at least the first half of 2023. I just think right now, there’s just still so much uncertainty. Are we going to see a recession? How bad is it going to get? Is unemployment going to go up? What’s the Fed going to do? There’s just too many questions right now, and until there’s some confidence about those big economic questions, I think we’re going to see, like you said, people freaking out a little bit and not really having stability enough for the market to find its footing.
The second half of the year, I think, is really the X factor. I think there are different scenarios that can play out. I’ll give you three different scenarios. The first is if there’s a global recession, which most economists believe there will be people… I won’t get into the details of this, but if there’s a global recession that tends to put downward pressure on mortgage rates, people flock to U.S. government bonds that pushes down yields, mortgage rates track yields, and so you see a scenario where mortgage rates could go down more than they are now. If mortgage rates go down even more than they are now, I personally believe the housing market is probably going to bottom a year from now, the end of 2023, beginning of 2024, and start to grow again.
The other scenario is the Fed miraculously achieves a soft landing, and mortgage rates could go down. That’s another scenario where I see the market bottoming towards the end of 2023, early ’24, or inflation keeps going up, unemployment goes crazy, but the mortgage rates for some reason don’t go down. Then in that scenario, if mortgage rates stay above 6.5%, above 7% for a long time, I think we’re probably in for a two-year correction. All of ’23 and ’24 will be like this. In that case, we might see double digit declines in the national housing market, but it’s still hard to say.
I think, two of the three scenarios in my mind point to a one-year correction where we’re going to see single digit price declines. I’ve said I think it’s going to be somewhere between 3% and 8% negative on a national level if mortgage rates stay high. I’ve said this. It’s all about affordability. So if affordability doesn’t improve, the mortgage rates stay high. Through the second half of this year, that’s when I think we’ll see 10%, 15% national declines, and not bottoming to the end of ’24, maybe even early ’25.

David:
That is a remarkably well thought-out and articulated answer for someone who did not want to give a prediction, so thank you. Thank you for that. I like how you’re providing the information you’re basing it off of rather than just throwing something out there. Because as the information changes, so will the prediction. Something people have to remember, these things are not set in stone.

Dave:
Totally. People are like, “You said this, and you didn’t factor in this.” It’s like, “I’m not a fortune teller.” I’m just like, “I’m looking at this information. Here’s how I’m interpreting it.” I don’t know what’s going to happen, but I think those three scenarios, I don’t know the probability of each of them, but I think that it really will come down to mortgage rates and affordability, and when we see it bottom. I will just say… Can I just say one more thing about it is that traditionally in recessions, they say that housing is the first in and the first out, where because mortgage rates go up, and real estate is a leveraged asset, prices tend to decline first. That’s what creates the recession.
We’re seeing that right now, right? Rates went up. Housing is in a recession, and so we’re starting to see that start to ripple throughout the rest of the economy. But like I said, when mortgage… When we enter official recession or whatever, mortgage rates tend to come down. That gets people to jump back into the housing market. That creates a huge amount of economic activity, and it pulls us out of a recession. It’s just interesting to see that recession’s not good for anyone. I’m not rooting for that, but if you see it, it often is the first step, and the housing markets start to recover. So, it’s another thing to just look that.

David:
It’s why you can’t time the bottom, because you don’t know when that’s going to happen. By the time you see that show up in the data, it’s already started, and the bottom’s already on the way up.

Dave:
It’s already happened.

David:
Great point. All right, so we’ve got a pretty good market prediction for 2023. We have a very solid understanding of the things that affect real estate prices. That would be the levers that people pull on to make prices go up and down, supply, and you can measure that by inventory, and then demand, which is a double-headed monster of both being willing to buy a property and able to buy a property. We’ve talked about mortgage rates and inflation and all of the complexity that that’s created in this insane but beautiful market that we like to invest in. We’ve also talked about ways that you can make money in 2023 regardless of what the market does.
Private lending and buying notes is one way that people can expect to make money in real estate. Looking for these hybrid cities where you’re not… You don’t have asymmetric risk in either direction of a cash flowing property that never increases in rent or in value, as well as a speculative market that you’re just hoping goes up and lose control over, and buying deep, understanding that this is a buyer’s market, and that means you have the control. So, you’re a fool if you don’t use it. Use the control to try to go out there, and get the very best deal that you can rather than just worrying about things you cannot control like when the market is going to bottom out.
Dave, thank you very much for joining me. I love it when you come for these things, and we can help make some sense out of the emotional insanity that we typically feel when people don’t know what to expect. Is there any last words you’d like to leave our listeners with before I let you get out of here?

Dave:
No, this has been a lot of fun. But if you want other recommendations about how to make money in 2023, or to understand this in full detail, I encourage everyone to download the report I wrote. It’s free. You could just do that at biggerpockets.com/report.

David:
All right, biggerpockets.com/report. Check it out. If you thought Dave sounded smart, wait till you read them. He looks even smarter when you’re reading there. Then you wrote a book with J Scott on a similar topic to this. Can you plug that real quick before we go?

Dave:
Sure. J and I, if you don’t know, J is a prolific excellent investor. He and I wrote a book called Real Estate by the Numbers. It is all about the math and numbers and formulas that you need to become an excellent real estate investor. I know if people think that sounds intimidating, it’s not. The math behind real estate investing is not super hard. You just need to understand some simple frameworks, and that’s what we outlined it. The whole point of it is to help you analyze deals like an expert. So, if you want to be able to analyze deals conservatively, especially in 2023, and understand what assumptions to make, that stuff, you should check it out.

David:
Yes, go check that out as well. If you’re a nerd, or you want to be as smart as a nerd without being a nerd, this is the book for you. All right, Dave, thank you very much for joining me today. I’m going to let you get out of here, and get about doing some more research to help the BiggerPockets community understanding what’s going on in the market. This is David Greene for Dave, the gentleman’s renegade, Meyer signing off.
I’m a professional. Just watch. Watch how good I am at saying things.

Dave:
He’s Ron Burgundy. He’ll read anything you put on the teleprompter.

Learning some basic accounting principles will not only help startup founders to manage their projects effectively but also make informed decisions that will benefit the company’s growth and success in the long run.

While finance and accounting can seem daunting for those without a financial background, you don’t need to dive too deep into finance as an early-stage startup founder. Initially, your project would be relatively simple, which means you’ll be able to make informed financial decisions and communicate effectively just by knowing certain fundamental accounting concepts and by consulting experts on the topics you need help with.

Later on, as your company grows and the level of financial complexity grows with it, you should be able to hire a specialist (a CFO) to take care of that part of your business.

Until you reach this stage, here are three crucial accounting concepts to make you more confident when you spend time in front of the spreadsheet in which you organize the finances of your project.

1. Accrual Accounting

Accrual accounting is the method of recognizing revenue and expenses when they are earned or incurred, rather than when cash is received or paid.

For example, if you deliver a service to a customer in January but you get paid two months later in March and you need to cover the expenses related to the service in April, under the accrual accounting method you’d put down all the revenues and expenses in January when the actual value was generated.

This is important because the payment date can distort the picture you see of your company’s financial health and performance. Continuing with the example from above, if you account for all transactions in the months they happened then it would seem as if in March you generated a higher revenue, while in April – higher costs. When your business has multiple projects, this could add up to a lot of confusion and the finances of your business could seem more volatile than they are in reality.

Accrual accounting helps you distinguish when and with what activities you were able to generate the most value for your company without letting payment dates distort your understanding of the financial health of your business.

2. Cash Flow

Cash flow is simply said the opposite concept. It is the movement of cash in and out of the company, and it can be positive or negative. Consequently, it cares about transaction dates, rather than the period when a service was provided.

Positive cash flow means that the company has more cash coming in than going out, while negative cash flow means the opposite. Knowing the cash flow status of the company is crucial because it determines the company’s ability to meet its financial obligations.

In other words, while accruals accounting makes sure you understand if your company is profitable and how it generates value, cash flow accounting helps you plan successfully to have enough cash to cover your expenses. It lets you see in advance if you would need financing (from banks or investors) in order to cover periods of negative cash flow and let your business run without hiccups or strained relationships with partners and suppliers.

3. Financial Statements

The three commonly used financial statements include the balance sheet, income statement, and cash flow statement, and provide a snapshot of the company’s financial health at a specific point in time. Depending on where your business is registered, your company would be required by law to produce these statements. Generally speaking, this would be done by professional tax accountants.

It’s important to keep in mind that the main concern of your tax accountants would be to make your business compliant with tax laws and regulations and to minimize the company’s tax liability – in other words to optimize things so that you owe as little taxes as possible.

Because of this, it is fairly likely that the professionally created financial statements would look a bit differently than the documents you use to manage the finances of your business – this shouldn’t worry you, as the two types of documents serve two different purposes.

Dave:
What’s up everyone? This is Dave Meyer, your host for On the Market and today we have a super cool show for you. We are bringing on three different super experienced lenders to help us all understand the state of the borrowing and lending market for 2023. As we all know, we’ve talked about ad nauseam for the last year or whatever, interest rates have been going up and that has really shifted the types of loans that are available, the way that mortgage companies are working. And as an investor, it’s really helpful to understand the intricacies of the mortgage industry because it helps you get better loans and just become a better borrower, find better products that are more aligned with your real estate investing strategy. So it’s a super cool episode. We have a great lineup of people who are on. And just as a recommendation, if you are looking for a lender or want to understand more, check out biggerpockets.com/loans.
It’s completely free. There’s great places where you can connect with lenders who are specifically working and geared towards investors. So it’s not just conventional loans where you can find things like a debt service coverage ratio loan or different bridge financing options. So definitely check that out because you’re going to hear about some of these different loan products that are available for investors that aren’t really meant for conventional home buyers. And if you hear something on this episode that you’re really interested in and want to learn more about, biggerpockets.com/loans is a great way to do that. So with that, I’m going to take a quick break and then we’ll be back with our lender panel.
Let’s all welcome in our lending panel today, I’d love you all to just go and explain a little bit about your specialty and who you are and Christian Bachelder, could you please, let’s start with you.

Christian:
Yeah, absolutely. First foremost, appreciate you inviting me here, and happy to take part in it. I’m Christian, I am David Green’s business partner, co-owner and founder and managing broker of The One Brokerage, which it’s been mentioned a number of times, but I think I’m the only broker here, so kind of cool we’re getting a kind of varying stance on the market, so excited to take part in it.

Dave:
Awesome, great. And in that role, do you mostly focus on residential real estate or lending, or do you have any particular niche?

Christian:
Yeah, we’re definitely a little bit of… We got a lot of tree branches kind of branching off from the main one. If I had to say what our trunk was, so to speak though, absolutely one-to-four residential is the majority of our business. While we do have commercial programs and kind of a wide variety of kind of niches that we can branch off into, one-to-four, anywhere from conventional through DSCR and kind of more creative loan products when someone doesn’t qualify conventionally, is definitely your brand and butter.

Dave:
All right, awesome. Matt Neisser, how about you?

Matt:
Yeah, thanks for having us. Appreciate it Dave. Thank you. Matt Neisser, I’m CEO and co-founder of Lending One. We’re a national lender for investors around the country, so 40 some states. We specialize both in it’s all one-to-four family, largely a little bit of multi-family, but let’s assume all one-to-four and a lot of long-term rentals. So we specialize in lending to landlords and also a little bit of fix and flip and short-term type lending programs. I think where we probably excel is the long-term lending 30-year fixed rate loans, comparable to a little bit different than a conventional lender, a little bit easier to get qualified. And then we have a larger program for large investors, non-recourse, large portfolios of properties up to say $50 million.

Dave:
Awesome. Great. And then for our final guest today we have Bill Tessar.

Bill:
Thank you, Dave. Bill Tessar, President and CEO of Civic Financial. Similar to Matt’s company, we’re a national lender, specialized really in a handful of products, your DSCR products, which is really 5, 7 and 10/1 I/Os, your bridge and fix and flip and multifamily as well. Balance is probably 45% bridge, 45% rental and about 10% multifamily. And I think it’s just under 40 states.

Dave:
Wow, that’s awesome. Well, it sounds like we have a great wealth of experience here for lending and this is something we’ve really wanted to dive into on the show. As investors, we deal with lenders and work with lenders all the time, but hearing from you, we’d love to know your insights into the industry and sort of what we can expect over the coming year or so. So Bill, let’s start with you. How would you say the rising interest rate environment over the last nine months has impacted your business?

Bill:
I think the first thing I’d say is it had a huge impact on our industry. So not just, when I say industry, I mean the whole lending industry. So if you think about it, from a conventional side, and I spent the first 30 years of my career on the conventional side and developed a lot of long-term relationships there, and it literally gutted that industry, probably second only to the financial crisis. And in many of these instances they had volume levels down 80 to 90 percent. They couldn’t cut their way out of those problems. I think that continues. As it relates to our space, I think Matt would agree that a lot of the smaller folks, medium-sized folks, really took it on the chin. They had a whole bunch of loans sitting on their warehouse lines that got re-traded by their capital partners and so they go into those trades above par and they come out significantly under.
So some of those trades are still taking place right now as Wall Street picks through those portfolios. So I think it really screwed up the capital markets on the BPL side and forced the companies that are still around really to reset and find a pricing level that could at least be at par. So they were originating for origination fees and junk fees and I think the level is there now. I think you’re starting to see, it’s the beginning of the year, more of those Wall Street guys coming back into the market and I think it’s actually pretty darn good for some of the folks that are still around. But yeah, I mean, big shake up, Dave. And probably still a little more to come on some of those peripheral lenders that hanging on by a thread.

Dave:
Matt, are you seeing something similar?

Matt:
Yeah, I mean, I largely agree with Bill. I think the fortunate part for probably both of us is there’s been a sort of demise line of large lenders and smaller lenders and the in between, probably… If you were small or large, you’re probably okay. If you were in between, those are probably much more challenging for those folks. But as it relates to borrowers, I think it’s a big reset on the way that you look to underwrite a deal. And probably for the audience here, if I rewind 12 months ago, maybe started in January of last year, and we had rates in the fours basically, 30-year fixed, which I guess when I started the business I thought would’ve been crazy. And then that ended up happening, and people were excited and people were buying stuff and could afford to probably pay the premiums that were out there to buy properties.
And I think the big shift that’s happened is now that rates not just ours, it’s really across the whole mortgage industry as we… A conventional rate tipping to 7% last year is a huge shakeup both for us as lenders and investors as a whole as to, how do we navigate? And I think that’s really what a lot of investors were struggling with of what do I do with my strategy? Does it have to shift? How do I navigate rates going from four and a half to seven? And that happening very quickly. I think probably the quickest that’s ever happened in history. So that’s what I think really this uncertainty is what created so much uncertainty for borrowers and investors understanding what am I going to do into 2022. We do feel like most people have now sort of come to the realization this is a new normal at this point and are adjusting their strategy. And we’ve started seeing that last quarter, I think Q2, Q3 people were just confused and didn’t know what to do really, frankly. So that’s what we’re seeing.

Bill:
You think about what Matt says, so I think the stats are… A typical investor going into the rate increase was making about 67,000 a transaction, in-and-out all-in return on their investments. So if you think about rates going up, let’s just say 200 basis points, and in some cases more, but at 200 basis points on a half a million bucks, it’s $10,000 of carry for the year. And so now they’re making 57,000 and at least what our experience has been is that the investors are still in there, they got people on their payrolls, the bigger firm, the bigger groups, and so they’re still going in and making trades. They’re negotiating better deals on the buy side. Yeah, their cost of capital’s cheaper, but now contractors are coming back into the space and supply chains are a little bit better. So they pick up on some areas, lose on cost of capital, and 57 isn’t a bad number if that’s the average return on your investment or transaction.
And so we haven’t really seen a lot of our investors, Matt, I don’t know about you or Christian, if you guys have seen a lot of your investors completely get out. I think they’ve just reset expectations, as you mentioned earlier. And from a volume perspective now you have these new rate levels. We really haven’t seen a dip off, which is, that’s probably the biggest surprise for me. At least mentally, I was rethinking the way 23 would look like from a volume perspective, but I actually think it’s still going to be good. And I think just everyone’s reset expectations and living with the new norm.

Christian:
Yeah, I was thinking as you were talking, and I think there’s a added layer to it, too, that especially us three, I know we’re all very investor focused. With BiggerPockets, we’re like trying to be in this realm and I think that there’s been a concentration of buyers into the people who are knowledgeable and not everybody’s able to just, oh, I have $10,000 increased carrying cost. Not everybody’s capable of adjusting their plans to accomplish still success in that realm. And that’s why I think when we’re talking about the large and the small lenders, typically, it’s all the people who just did the in between loans as well, not just the volume wise, but it’s the in between loans of maybe the intermediate experience, maybe the non-experience, but really fine-tuning systems like you said, they may be making extra premium on, maybe they’re saving on contractors, maybe they’re saving on the supply chain’s cheaper, the cost of wood is cheap or whatever it is.
And experienced investors and people who have been through the trials and tribulations of what… I know you guys do a lot of fixing and flips. With me, it’s running accurate numbers on rentals, running accurate numbers on maybe short-term rentals, being able to educate yourself on, man, is this market compacted or is there something unique that can be taken advantage of here with the right staging? I think I haven’t seen a pullback, but I’ve definitely seen a concentration into a fewer number of hands, which I think is a really interesting market trend.

Dave:
So Christian, you’re saying that total volume is remaining at a pretty steady state, but it’s just fewer people taking on higher volume per person, per investor?

Christian:
I don’t want to misconvey. Volume just on a grand total is down, but volume per investor if that’s a metric that I could use, is definitely-

Dave:
It is now.

Christian:
Yeah, so I just think there’s a larger amount happening per person that we work with, which is kind of interesting when you think of total volume being down, but volume per person… I can’t think of a whole lot of people that we’re doing our very first loan for. So many of our clients are repeat, so many of our clients are experienced, they know what they’re doing, they’ve run their numbers and just like Bill shared, that extra $10,000 holding cost if they’re making 57 versus 67, a lot of investors still take that, right? And they just pivot their numbers a little bit and they find a way to make it work. So that’s an interesting trend that I’ve seen kind of take place and our firm kind of encapsulated there.

Dave:
One thing I’m curious about, given what you’re saying about investor activity, all three of you, is are the types of loans and loan products that investors are interested in changing at all? Matt, let’s start with you.

Matt:
Yeah, I think a little bit is the answer. And it depends… Again, depending on their strategy coming into the year last year and what… If they were building a rental portfolio and relying on what a lot of clients and I see on BiggerPockets quite a bit is sort of like the BRRRR strategy coming in, buying, renovating, hopefully refinancing and then pulling equity out. I think the biggest shift I’ve seen is the challenge of them actually getting equity out, at this point, to keep that velocity going that they had before or got a little bit accustomed to. Whereas I think three or four years ago, I don’t think the perception was that every deal I did I’d pull out all my equity. I think it was every deal at least I kept some equity in the deal. And I think that mentality changed a little bit, particularly with COVID, when prices were appreciating so rapidly that people got accustomed, for 2022, it’s basically I got to pull out equity on every single deal and just keep on going.
Now that isn’t a true, true product shift, but I’ve seen that shift of on the backend, refinance then trying to evaluate, okay, can I keep this same deal level up on the buy side that I kept up a year or two years ago effectively? So that’s the one thing I am noticing a little bit. And honestly, values are down in some markets five or ten percent already. I don’t think it’s on all markets, clearly, but you’re seeing both values in a little bit or at least more conservative values from appraisers. And then you have this LTVs and they’re… They might have to bring a little bit of money to close and that’s a strange concept for a lot of people that have been doing transactions the last few years. Although-

Dave:
Imagine that.

Matt:
You go back five years ago that was like, you expected it.

Christian:
Yeah, I can piggyback on that for sure. I can’t tell you how many times we’ve had the conversation of is a BRRRR a fail if I don’t a hundred percent cash out the funds I invested. It’s like, no man, you’re getting 60% of it back, make that keep rolling. It doesn’t make the strategy completely null and void. It’s just, it’s a pivot, right?

Bill:
Yeah, I think, Dave, what we’ve seen is if I do a 24-month look back, we were heavy bridge and fix and flip and then really became super heavy on the rental. I think part of the success, and Matt you probably saw this too, but we inherited a bunch of loans and customers where lenders just couldn’t deliver at the closing table. And so, was that really organic growth or did we have staying power right place, right time, probably the latter, right? And so we saw a big swing in the rental units, not volume, units through 2022, almost to like 65%. So I think we closed just about three billion last year and 65% of that was rental. The last quarter, and going into this quarter, looking at the pipeline, what we’re seeing our investors do right now is they’re just paying the higher WAC on the bridge because they don’t want to get locked into a prepay in these high coupon rental loans, believing that rates are going to come down in the very near future.
And whether that’s true or not, I mean I do get it. Matt, I don’t know if you or Christian heard the last conference. I was at the IMN conference, and they were talking about new products. And one of the products that’s been floated around there is kind of a hybrid between the rental with the prepay and the bridge. So a little bit lower WAC than bridge, a little higher than rental, no prepaid component. So people could kind of go into nomad land for a little bit and decide whether rates are going up or down. Probably going down long-term, but this quarter, little rocky. But yeah, so right now we’re 50/50 on bridge to rental. We’ve seen a big swing recently.

Dave:
And WAC just for listeners is weighted average cost of capital, right?

Bill:
Yeah, weighted average coupon. Sorry. Yeah.

Dave:
Oh, coupon. Yeah. Okay.

Bill:
My wife always, as I’m talking to my boys that are in this… We’re talking at the table and she goes, “You guys sound like you’re foreigners.”

Dave:
No, I just want to make sure I’m tracking. And then with… Christian, I’m especially curious in the residential space, I hear a lot about sellers buying down rates for people. Are you seeing that pretty frequently?

Christian:
Oh yeah. I think, last month, we did a little internal audit. I think we got… On our purchases, I think we got seller credits on 90% of them.

Dave:
Oh wow.

Christian:
I mean it was that level where… And I mean granted that’s like the realtors that we work with, we help coach them too. Hey, we have a 2/1 buydown program, like go negotiate seller credit. The sellers, the house has been on the market for 90 days. It kind of becomes the obvious trend once a couple realtors pick up on it. But especially if… Our borrowers are also coached, so they’re advising the realtor, “Hey, I want to get the interest rate from eight months ago, 12 months ago,” whatever it is. And even though the 2/1 buydown program is a temporary buydown, right? So that’s a really big product right now in the conventional space, where the first year you’re 2% lower, the second year you’re 1% lower. And there’s even a 3/2/1 buydown that gets a little expensive at that point.
But they’re really cool products and we’re utilizing it a lot. And I know, I think even you guys, Bill, I don’t know if Civic’s got a buydown. So everybody understands, I’m a broker. I actually work with both Civic and Lending One, so we’re on their wholesale space, so I’m somewhat familiar with their products, but I don’t know if you guys are seeing more of those. I don’t know if you guys are implementing buydown programs, but that’s my experience.

Bill:
The loans are expensive on the BPL side anyways. On the conventional side, if you start with a little bit of rebate, then you get the par, then you buy into through points. It’s a little different than maybe what Matt or I get to see, because people are paying quite a bit of points if they’re going to buy that rate down. Loan still has to have value somewhere. So yeah, I don’t see a lot of it. I do believe that on your side, Christian, just having links to some of the biggest firms in the nation, they have to come out with new products and they have to come out with new products like right now, or you’ll see big companies, publicly traded companies fall.

Christian:
A hundred percent.

Bill:
They have to come… The 3/2/1 buydown graduated payment mortgages, qualifying at the start rate I/Os. If real estate values weren’t so uncertain right now, in some areas you’d see NegAm loans work their way back in for the market, like back in the ’06, ’08 time. So I think they have… The only thing conventional space can do to save the majority of the conventional spaces is come out with products that are exciting for the marketplace to get back in there and buy. And you’re doing it right now, Christian, with what you mentioned. More is coming, and way to lead the group, but more’s coming,

Christian:
I want to make sure I point that out for any borrowers. That’s probably the best said that I’ve heard it is that these programs aren’t… A lot of people have told us the programs are to save the housing market, have these temporary rate buydowns so people can still pay exorbitant prices. That’s not the goal. It’s exactly what Bill said. This is what has to happen. There has to be a loan-

Dave:
To save the lenders. That’s what you’re saying. Not to save… Yeah.

Christian:
In some capacity. Yeah. And granted, I mean, these guys are in different spaces and then in non-QM and bridge and fix and flip. But the big… I mean, I don’t know if you guys heard LoanDepot Wholesale went under, right? I mean, they don’t work with brokers anymore. I mean, there’s these very, very large lenders, we were talking about large and small kind of state. There are some big lenders they got out of the space too, the AmeriSaves and LoanDepot Wholesales. So there’s a little bit to that, Dave. They got to come up with these programs to save face at some point when they go in the right direction.

Dave:
So it sounds like, just to make sure everyone’s tracking this, there are programs right now, like a 2/1, where basically you can buy down your interest rate. Christian gave an example where you can buy down your rate by 2% for a year and then 1%. And the trend that, as a listener or as a borrower you can consider, is that costs money. You have to buy points to get those reduced interest rates. But the trend is that you have this seller who’s usually a motivated seller in this type of market, buy down those points for you, so you’re able to get your purchase and get a lower interest rate on the seller’s dime. But it sounds like what Bill and Christian are saying is that this is just the beginning, potentially, and there might be other borrower attractive loan products that come out for borrowers in the next couple of months. So I’m curious if any of you have recommendations for where listeners can stay on top of this information. What type of incentives and what type of new products are coming out that might be useful to investors?

Bill:
I think Christian’s doing a pretty good job with his company, but the fact is you won’t have to look very far. They’ll find you.

Christian:
That’s exactly what I was going to say. I mean, all of us are on BiggerPockets. If you’re just in a network or an environment, I mean, the information’s going to find you if you’re even relatively searching for it. So get with a broker, get with a loan officer for one of these guys from one with my company. It’s really something where if you want to stay on… I mean, Dave and I had an episode on our series that we were doing where a new program came out when he was in escrow. That was for the deal.
Dave, I don’t know, I think you were in the background that episode after I think they brought you in. But literally as he was in escrow, a program came out and I was like, this is a perfect match for you. And we pivoted, we completely canceled the loan, opened up a new one on an entirely separate product, and we only knew that because he was so fine-tuned into what I had to offer and obviously we’re business partners, but I knew what he was looking for. So communication is key with your loan officers

Bill:
And I don’t actually think it’s just lenders trying to solve this. This is being solved at Wall Street. You got a lot of bond traders that don’t know what the hell to do with their time. Just think about the green backwards. Matt and I were talking about golf earlier, but think about the green backwards. This stuff is being solved in Wall Street right now because there’s just no trades on the conventional side. There’s no trades. It is tumbleweeds, the way you would think about an old Western.
And so yeah, I do think they will come out with products. I’m actually quite blown away that the fourth quarter didn’t show that, but I think there was so much trauma and some of that trauma’s leaked… It kind of leaked into the first quarter that if I’m a gambling man, I would say you’re going to see stuff this quarter that is going to be good for the market. And Dave, when I think about 3/2/1 buydowns or 2/1 buydowns, I’m thinking about that as a product. Then you could employ Christian’s strategy and you could buy that start rate down, but the product is a 3/2/1 then Am for the rest of the 27 years. But you could buy that loan down and now you’re talking about a rate that people can get their arms around and live with, right?

Dave:
Yeah, absolutely. Two things about that. First, I think this conversation just underscores the idea that you shouldn’t assume, just because you’ve seen a headline, what interest rates are right now that that’s what you would be paying, and you should actually go out and talk to a broker and see what you can actually get and learn about some of these new products. Let me ask you this, Matt, and I guess all of you, is there an interest rate that you’re seeing through some of these new products where people are comfortable? Because it seems like just looking at the market, once it hits 7%, things were going crazy. I mean, things really just halted. Is there… Do you have a sense of what the sweet spot is where buyers and borrowers are feeling like that’s a tolerable rate?

Matt:
I think it also, like I was indicating before, is that if you pencil your deal to start… If I’m underwriting a deal, and I’m talking on an investor side, then we’ll talk about conventional sort of like I’m a home purchaser looking for my house. If I’m an investor and I underwrite from day one and say the rate’s going to be 7% and I’m able to get 10% off on that deal now that I was overpaying by 5% nine months ago or six months ago, it’s tolerable, it’s just more of a mental thing of getting comfortable actually doing that. Now three or four months ago, I would say that if the rate was in the sixes when it got into sevens, people started to get jumpy because they were used to paying four and five. And then it jumped to seven or eight, and then when that came back underneath seven, that was a mental trigger, as you’re talking about to say, okay, I’m interested again.
But practically, my personal view is if someone’s underwriting day one, they can get comfortable with any rate, as long as it values that they can apply the deal right. And that was the sellers hadn’t adjusted yet. I think you’re starting to see sellers adjust now. And then on the conventional side, I mean you’re starting to see it. It’s like there’s not much inventory at all, but you’re seeing all the things that were… You are, at least in my markets that I follow, seeing price reductions on the listing side. I don’t think there’s any screaming deals yet, but at least you’re directionally going the right way.
So I think some of it is just a mental breaking point with people and saying, okay, I get it now. I know rates aren’t going to all of a sudden going to be 5% again. It was six months ago, I really… Half of our borrowers believed, as Bill was sort of indicating, when things were in sevens or greater, they were still in their minds thinking things would be high fives again somehow in three months, until the Fed sort of laid out what’s happening. And then I think people started, okay, this is not going to randomly go back down 200 basis points in three months. So that’s what I’m seeing.

Bill:
I think, Matt, I think that’s a bullseye. Think about stock market, think about interest rates, think about real estate values. When things are moving around a lot, I always think the smart money just takes a step back and tries to figure out is this going to continue rattling back and forth or one way or the other, or has it just settled down and they have a new norm? And I think that’s right, Matt. Interest rate wise, it’s perspective. If you look the last 12 months, interest rates suck. If you look at the last five years, interest rates are good. If you look at the last 25 years, interest rates could arguably be great. But we lived for three years in the most incredible low interest rate market where all of us got to get fat and happy about the originations. And on the conventional side, they were rewriting customers five to seven times over 36 months.
Like, hey Bill, it’s Matt, just want to let you know I’m going to drop you from three and a quarter, 2.75, no point no fee, sending the documents, sign them. And you get a half a point rate reduction. And they would literally stairstep those borrowers down. Those borrowers, for the most part, most of them are never touching those loans unless there’s a death, a divorce or some move up or move down. I actually think you’ll see seconds kind of expanding, because no one wants to touch the two or the threes. So there’ll both be… There’s seven or eight percent on a second, and then five years from now they’ll do the cash-out refi at the four and a half. So I think you’re spot on, Matt. We’re seeing… The Fed’s probably close to being done. This next time, whatever they’re going to do quarter and a half, it’s probably, probably it.
They just need to say that. Once they say it, then I think you’ll see some smart money come back. I mean, the 10-year is better right now, just thinking about it from perspective of overnight lending rate. We’re owned by a publicly traded bank. They’re overnight cost of funds have gone up significantly, but the 10-year, because I’m a mortgage guy, but it’s so much lower than it was three rate hikes ago. So it’s interesting that way, but I think it tells me that rates are going to come down. If you had a magic wand telling you, end of the year, you’re going to see lower rates than we have today, both BPL and the conventional space.

Dave:
That’s a good segue. And just to sort of clarify what Bill’s saying here too is that we’ve discussed this on the show many times, but what the Federal Reserve controls is the federal funds rate that is not controlled mortgage rates, and the much more highly correlated indicator for mortgage rates is the yield on the 10-year treasury. And as Bill was just saying, despite the Fed raising the federal funds rate, the 10-year is back below 4%. I don’t know where it’s today. I think it was at 3.7 yesterday or something like that. And so there are indications that loan rates are at least slowing down and could start coming down towards the end of 2023. That’s just sort of my take. And Bill, you just gave yours. Christian, where do you see rates heading over the course of 2023?

Christian:
Yeah, I’m in agreement with everybody. I think they’re a lot more on the capital market side, so I know you guys have a very intricate understanding, right? Me on the broker side, I’m much more client-facing. I obviously keep up with what’s going on. What I would say is I think… I want to draw it especially to demand and what’s really driving clients. I don’t think it’s an interest rate that everybody’s looking for. I think it’s just some amount of stability. We’ve been through this 12-month period where it’s like I get pre-approved and you guys know how long it takes to buy a house. A few days to get pre-approved, your credit’s only good for 60 days, you got to go find a realtor, you got to go tour 10 houses, you got to find one you like, you make an offer, right? There’s a process to it. And a lot of times it’s 60, 90, 120 days before you have a house.
Well, when rates are changing by a point and a half in that time period over a 12-month period, it’s like nobody wants to buy because they’re like, I go get in love with getting a loan, and by the time I actually get one, we’re talking about a one and a half, two percent difference in my rate. So I don’t think it’s a rate everybody’s looking for specifically. I don’t think it’s just a magic… If rates are back in the fives, we’re ready to go. I think it’s just like can I just have some confidence in what my rate will be at this point? I don’t want it changing this drastic amount in the time it goes and takes me to find a house.
And I do kind of double down on what everybody’s saying. I think obviously the Fed can’t do it forever. I do think they’re trying to build in wiggle room because I mean we got down to 0%, right, during COVID. I mean, historically, they’ve been able to use dropping interest rates to stimulate the economy and you can’t drop them unless there’s some margin to drop them by it, right? That’s where I’m thinking is that they’re building it up to a point where they have enough leverage maybe in the future to potentially stimulate again and we play this rollercoaster on and on and on, right?

Dave:
Absolutely. Yeah. So Matt, one of the other things about rates I’m curious if you have any insight on, is despite the Fed raising rates, they’re doing their thing, the spread between the federal funds rate and at least conventional mortgages, I’m less familiar with the commercial side, is abnormally high right now? Typically, it’s like 170, 190 basis points. I think it’s well above 200 still. Can you tell me, with you and Bill, your knowledge of the capital markets, can you tell me why it’s so much higher and if you think it’s going to change in the coming year?

Matt:
Yeah, there’s a number of things going on. As Bill indicated, generally bond investors and broadly Wall Street right now in the last Q3, Q4, if it’s a mortgage, there’s a little bit of uncertainty and that means buyer liquidity has drained out. Two, you have a historically large and probably unprecedented balance sheet of mortgages held by the government, which never has happened before in terms of the size and scale. So they own, I forget if it’s two or three trillion, whatever it is, Bill, maybe somewhere in that handle, I think, of mortgages. And of which at some point they’re going to need to sell down or let it wind off. People are unsure what that’s going to be. So you have this huge net seller of unprecedented size that has never existed before, sitting on this inventory that maybe they could sell at some point. That creates a lot of uncertainty. And then three, you have really high rates, which means that when rates are very high, people need to assume that that loan will prepay at some point and that creates this inverse.

Dave:
Wow.

Christian:
That’s the tricky part. Yes.

Bill:
That’s the bullseye right there.

Christian:
Yep. Couldn’t agree more.

Bill:
He’s right. That’s it. Matt, that’s bullseye. There’s just… Think about it, rates at 7%. Who believes that’s going to be on the books for 30 years? Who believes that’s going to be booked… I think you have to have a loan on the books for somewhere between 36 and 40 months to break even if you’re a purchaser of conventional loans. I think that’s the number-ish. Think about that. Who believes a 30-year six and three quarters or seven is going to be on the books? Those suckers are going to get a call from Christian the second rate’s got-

Christian:
The three and a half all got eaten up when rates went to 2.99. I couldn’t agree with that more.

Bill:
That’s right, though, Matt. It’s, man, it’s those… And here’s kind of the scary thing that Matt mentioned earlier. You think about the government, if they didn’t have that many loans at that low of interest rates, it goes back to what we were commenting on earlier, death, divorce, some life-changing event before those people are going to get out of those mortgages. They can’t afford a home equal to that. Most people can’t, when you go up to today’s interest rates. And so they just sit, which puts some pressure on real estate inventory and probably helps us with valuations with all the other crap going on it. It’s an interesting study, but I think the government’s going to have to take it on the chin if they try to start offing some of those mortgages.

Dave:
That’s fascinating what you said, 36 to 40 months to break even on a loan. And with almost everyone predicting that rates will go down, maybe not in ’23, but probably in ’24 at least, or even ’25. That’s why the lenders are baking in this extra spread to, I guess, accelerate that break-even point.

Matt:
And to clarify, just so you know, and everyone understands. The lenders themselves, this is not more profitable for them. Put us aside for a second, our little… We’re a sliver of the mortgage market. We all pump our chest and think we’re big, but we’re like a gnat on this whole mortgage market. So if you met the whole mortgage market, those folks are not more profitable right now, even with those spreads the way they are, they are the least profitable they’ve been in a long time, because they’re not the ones taking that margin, just a risk premium built into the market. And they’re selling their loans immediately and their margins are the worst they’ve ever been. So it’s a weird dynamic right now.

Bill:
It went from being the greatest business to be in if you were the LoanDepot Wholesale or the FOA biggies that were printing profits quarterly, printing hundreds of millions of dollars, they couldn’t cut quick enough. Yeah, the bigger ones are really suffering.

Christian:
Yeah. I mean, I can’t think of… There’s like three lenders that we partner with where we have the same account executive as 12 months ago. There’s not very many. Account executives are, I mean, we have over 150 lender partnerships.

Dave:
Wow.

Christian:
So I mean, it’s like account executives have gotten axed across the board. And it’s funny, both of these guys actually have the same person. But it’s just wild to me that, I mean, exactly like Bill said, there is just that… They cut, they just cut, cut, cut, the moment it turned. That’s definitely felt.

Bill:
Well, Matt’s right, if you take the biggest three lenders in our space, those lenders do as much in a year as some of these guys were doing in a week to two weeks. It’s just not apples and turnips.

Dave:
Yeah. Well, this has been fascinating and I’ve learned quite a lot, but unfortunately we do have to get out of here. But would love to hear just from each of you, advice you have for borrowers and investors heading into this year and how to navigate the rapidly changing debt markets here. So Christian, let’s start with you. Do you have any words of wisdom?

Christian:
Yeah, I think pretty much every time I’ve been asked, I’ve always answered the same way. While you hear less people are maybe successful in real estate, less people, crypto, stock market, whatever it is, if you are surrounding yourself with knowledge and people who are well-versed in the space, you’re going to have the right guidance to be in that top 10, 20% of producers. And those are the people who make money in the hard times. I mean, there’s still people having success on the stock market right now. It’s probably the better people, the people who are more knowledgeable, the people who are more informed, the people who have more access.
Whereas, I mean, there’s people still succeeding in short-term rentals, even though a lot of markets are impacted and a lot of markets are shutting them down. The people who are well-educated and well-versed on how to run them successfully thrive throughout those times. So surround yourself with it. Listen to stuff like this, get with me, get with Bill, get with Matt. I mean, get with people who are industry professionals in the space and they know what they’re doing and that’s all you can really do is put yourself in the best position to win. And if you win, then it’s not a surprise, right?

Dave:
Awesome. Great. What about you, bill?

Bill:
Yeah, so look, I’ve sat on so many of these panels throughout the year and at the last six months, I kind of felt like I was an individual on an island by myself. I’ve heard all the doom and gloom, heard the inflation, heard the recession, heard real estate values pulled back. I’ve heard all of that stuff. But we’re close to six million homes underwater in terms of supply and demand. And if you believe any of this stuff I said earlier about low interest rates and those people not refinancing or selling out of those transactions, I think it’ll exasperate the problem.
So I am really bullish on real estate, short and long-term. I think you can get a better deal today than you could six months. You can negotiate a little bit, you could demand a little bit more. You’re not paying over list price, you’re getting contingencies on your deals, you’re getting seller concessions on points, you’re getting all that stuff. That’s great. So I’m bullish on real estate, and if I was to give a recommendation, I think you got to get your partnerships in line. So you hook up with a company like Matt’s or ours on the BPL side, you hook up with a company like Christians on the conventional. You get a kick ass realtor, you get some kick contractors, you get some good vendor relationships. And I think partnerships today will make a big difference as we go through ’23 and ’24 in terms of what investors believe is successful or not.

Dave:
Awesome. Great. Well, Matt, take us out. What’s your advice for any borrowers this coming year?

Matt:
The one thing I’d say to borrowers I say to myself is I try not to bet on interest rates. Okay. Because it’s one of the craziest things in the world of to bet on. So it’s not an all or nothing decision you’re making. If you’re out there buying 10 properties over the next two years, or multiply that by however big you are, you can spread that decision over 10 or 20 decisions over the next two years. So you don’t have to… You’re not making one big bet. Okay. This month, I don’t know, maybe my rate’s a little bit higher than it should have been, but maybe next month or three months from now, it’s a little bit lower than it was. And you’re really just like, if you’ve heard the concept of dollar cost averaging in stock market, I don’t look at it that dissimilarly to borrowing is that you just need to look at it over a couple year period and say, all right, I won some, I lost some. What’s my average over that timeframe, am I comfortable in the deals, still pencil. That’s the way I look at it.

Dave:
That’s great advice. I like that a lot. All right. Well, thank you all. Matt, where can people connect with you if they want to learn more?

Matt:
Sure, lendingone.com. We’ll take care of you. Just call in. You can call in. You’ll get someone live. We’re staffed all the time, so it’s probably the easiest.

Dave:
All right, great. What about you, Bill?

Bill:
civicfs.com.

Dave:
All right. And Christian?

Christian:
Same thing, the1brokerage.com. All of us are just company name.com. Yeah, all of us are pretty easy find. We’re all on BiggerPockets too.

Dave:
Making it easy.

Christian:
Yeah, we’re all on BiggerPockets. If you go to the find-a-lender tool as well on BiggerPockets, an awesome resource to get to find someone.

Dave:
All right, thank you. Well, appreciate you all being here and sharing your insight and experience, and hopefully we’ll have you on again sometime soon.

Bill:
Good stuff, guys. Thank you.

Matt:
Awesome. Thanks guys. Appreciate it.

Christian:
Appreciate you guys.

Dave:
All right, thanks to Christian, Bill and Matt for sharing their insight and knowledge with us. That was super interesting. I learned a lot. And I think the main thing I want to reiterate, and this is something people ask me all the time, they’re like, what interest rates should I be looking for, or I don’t think I qualify for this kind of loan or this kind of loan? And they ask me and I have no idea. So I really think that, in this type of environment, it’s super important to just connect with a lender. Even if you don’t do a deal, just go call two or three of them. As we just learned on this show, people are getting interest rates in the 5% using seller buydowns and buying points. And there’s all these different products that lenders are coming up with to incentivize people to buy right now and to borrow right now.
And so don’t just assume because you see some headline either in the media or in the newspaper or whatever that says that interest rates are at 7%. There are different products available, especially for investors, than just those top-line things. So that was my number one takeaway from this, is just talk to someone and see if your assumptions are right or learn more about some creative ways to potentially borrow on any of the deals that you’re looking to do over the coming year. So that’s it for us today. I hope you found this episode helpful. If you did, we really appreciate a five-star review on either Apple or Spotify. If you have any questions about this episode, you can find me on either BiggerPockets or on Instagram where I’m @thedatadeli. Thank you all so much for listening. We’ll see you next time for On The Market.
On The Market is created by me, Dave Meyer, and Kailyn Bennett, produced by Kailyn Bennett, editing by Joel Esparza and Onyx Media, researched by Pooja Jindal, and a big thanks to the entire BiggerPockets team.
The content on the show On The Market are opinions only. All listeners should independently verify data points, opinions, and investment strategies.

Every business is built on its human resources. Those humans have experienced unprecedented change since 2020 and, with them, the companies they work for.

Many employers are paying more, increasing benefits and adding flexibility to once-rigid scheduling to attract and retain the best talent. Meanwhile, economic uncertainties are causing other companies to rein in costs until they can ride it out. In this tug-of-war, it’s tough to anticipate which approaches can help a business move ahead of its competitors.

It’s not sound strategy to achieve growth by grinding employees down to a nub. Instead, companies should focus on building their employees themselves so they, in turn, can grow the business. Adult learning may be the perfect way to achieve this.

The shift toward helping employees bloom where they are planted is once again changing business as usual. And companies that make that shift accordingly will benefit. Here are a few reasons why you don’t want to miss out.

Adult Learning Lifts Everyone

You have probably heard the Doctor Seuss passage: “The more you read, the more things you shall know. The more that you learn, the more places you shall go.” The value of lifelong learning is virtually indisputable. But it’s no longer just about learning more on the job or reading or traveling more. It’s about adult education.

The “adult” adjective is significant here, and not just because those learning are over the age of majority. It’s used because working adults face a lot more barriers during the learning process. There is the transition back to education, the cost of it, the time needed to devote to it, and all the normal distractions of full-time jobs, kids and—maybe—a social life.

Employers have the perfect opportunity to remove some of those barriers for employees who want to further their education. If employers take advantage of it, they can grow their own talent to right-fit changing needs within their companies.

The vast majority of employees agree that access to professional development opportunities is vital. If granted access, they’re also more likely to continue working for the employer that invested in them.

Retention, engagement, job satisfaction and productivity all rise when employers actively encourage adult education. In that scenario, everyone gets to go places.

Adult Learning Is a Piece of the HR Strategy Puzzle

Automation spurred by the development of artificial intelligence and machine learning is also changing the face of business. Long-term HR strategies must consider the impact it will have on a company’s workforce. The pegs and the holes are morphing simultaneously.

It’s an almost overwhelming proposition for HR managers. They’re looking at the employee roster and seeing how many people may be made redundant by technology. At the same time, they’re looking at novel positions being created by that technology and wondering where they’ll find the talent to fill them. Adult education should be a piece of this puzzle.

Automation potential in emerging technology will change everything from sales and marketing to customer service and fulfillment. In fact, it’s already altering roles and accelerating the changes daily. Company leadership needs to peer down the road and plan accordingly.

Consider those employees whose roles will be replaced by automation. Provide the educational opportunities they need to move into newly created roles or to handle future roles the latest technological advances will demand. A savvy reskilling strategy is a great way to retain a company’s best and brightest.

Taking the long view will also transform other HR functions, such as creating job postings, recruiting, hiring and onboarding. Of course, technology has challenged the status quo since the invention of the wheel. Adult education will help companies meet the challenges today’s tech developments pose.

Adult Learning Promotes Diversity

The pandemic, social unrest and sharp political divides have prompted companies to confront their diversity demons. Diversity, equity and inclusion have reshaped everything from board and C-suite agendas to the exit interview. No one said altering hundreds of years of collective corporate histories would be easy.

Most companies continue to struggle with reaching the DE&I goals they have set. In fact, many have made little headway at all. And if they manage to get diversity right, they can’t seem to follow through with the equity and inclusion bits.

Creating a diverse workforce requires a sea change in multiple business practices, from the writing of job descriptions to eliminating recruiter bias. Adult learning shouldn’t be overlooked as a potential path to achieving even the most ambitious diversity goals. And it can do so on two key fronts.

First, adult education on diversity issues for leadership and HR can alter entrenched perspectives from the top down. Second, companies can offer educational opportunities to current team members. Employees of certain races, social backgrounds, genders and sexual orientations may have lacked some of the educational opportunities of their white, male, cisgendered colleagues. Adult learning can narrow that gap. And once these diverse employees are on the job, continuing education can keep more of them advancing within the company.

Using adult education as a tool for creating a truly diverse, equitable and inclusive workforce is shrewd. It makes companies less reliant on market forces and more self-reliant. They’re creating their own success from within, rather than paying lip service to DE&I goals.

Making the Shift

Education can be the key to success in business. Employees know that, and they’re often enthusiastic about furthering theirs to advance their careers. Companies need to embrace and support those employees.

So many forces are changing how business is done these days. Adult learning is an easy and profitable one that will take employees and employers to the head of the class.