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Dave:
Hello, everyone. Welcome to On The Market. I’m your host Dave Meyer, and I’m doing this one solo. I’m all by myself here, but we’re going to have an awesome show. We’re going to talk about and sort of summarize some of the major predictions for the 2023 housing market.
Now if you follow the show and hopefully you listen to lots of episodes, you’ve probably heard a recent episode where we had the full panel and everyone came on and talked about their expectations for 2023, which was a really fun show. But we’ve also want to know what other experts in the industry, perhaps people who maintain or build their own financial models or forecast models think are going to happen next year.
And one of my favorite sources for data in the entire real estate industry is Redfin. If you listen to this show or follow me on social media, you probably hear me quote it a lot. They actually have a ton of free data too. So if you want to download data or use their, if you want to just understand data about your local market, highly recommend you check out the Redfin data center.
This is not some paid sponsorship, I just use that website all the time, so you should check that out. But they also put out some reports and predictions based on all of their research. And today, I’m going to go through some of the predictions that they are making for 2023. I’m going to explain mostly why they think these things are going to happen.
I’ll provide my own opinion on these predictions, provide some color, and I think it will give you a really good sense in a holistic manner of what is going to happen or what is sort of the most probable thing to happen in 2023. Of course, no one knows what’s going to happen, there’s just so much and unending uncertainty with the economy.
Just in the last couple of weeks we’ve seen inflation numbers that were very encouraging, but then a few days later, the Fed raised the interest rates anyway, very uncertain if there’s going to be a recession next year. So we don’t know what’s going to happen, but we always, as investors should be developing our own investment thesis.
Right? We should keep in our minds what we expect or at least think is the most likely scenario in the coming months so that we can make decisions. Because if you just have no opinion or just say, “There’s, I have no idea what’s going to happen,” it’s really hard to make decisions.
Whether even if your decision is to hold off on investing, that’s okay, but that should be based on some thesis or belief about what’s going to happen in the housing market and what’s the best way to use your money in the coming months. So hopefully, this show’s going to be super helpful to you. I think there’s some really fun and interesting facts in here. We’re going to take a quick break and after that we’ll come back with these predictions.
Redfin’s first prediction for 2023 is that home sales will fall to their lowest level since 2011 with a slow recovery in the second half of the year. So I actually strongly agree with this. If you’ve been following data over the last couple of months, you’ve seen that the volume of home sales, and I just want to make sure that you know that this prediction is not about home prices.
This is about home sales, the number of homes that transact every single year. That is what Redfin is predicting is going to fall to the lowest level since 2011. And I actually agree with this. I don’t know necessarily know if we’ll fall to 2011 or something similar to that, but I do think we’re going to see a very big decline in home sales volume.
And this is really important. I think most people who are casually looking at the housing market sort of pay attention to housing prices first and foremost. But housing volume drives the entire industry. It has a huge impact on prices first of all, because if volume goes down, that usually signals that there’s less demand in the market and that can soften prices.
But it also has huge implications for all of the different services, for example, being a real estate agent or loan officers or all the different things that tangentially touch the real estate investing world. And so what Redfin is saying here is that they think that there’s going to be a huge decline in 2023.
And I agree, but let me just caveat saying why I agree with this. It’s because I think the first half of the year is going to see big declines in a year over year sense. And when we compare things in a calendar year, that’s how everyone wants to talk about things.
But when we look at 2022 and what’s happened over this last year, you see two very different markets. In the first half of 2021, things were booming, prices were going up like crazy, homes were transacting really quickly. Second half of 2022, we’ve seen a change to that.
So when we look at 2023 and we compare the first half of 2023 to 2022, it’s going to look like a huge decline, right? Because last year the first half was crazy and we all know the market is cooled and it’s not going to go crazy again in the first half of next year in my opinion.
And so we’re going to see a really dramatic change in year over year numbers for the next couple of months, but that to me doesn’t really necessarily signal that things are necessarily getting worse from where they are right now because we’ve already seen home sales volume tank. Right? Since June, they’ve been going down. We’re now, I’m recording this in the middle of December and we’re see already seeing that home sales volume is down.
And so this is why I think Redfin is saying that they’ll see a slow recovery in the second half of next year because again, first half of the next year we’ll be comparing to a crazy 2022. Second half of next year, we’ll be comparing to a slow half of 2022. And so we might see a recovery in home sales on a year over year basis towards the second half of next year.
So why is this happening? Why are we seeing this decline? Well, it’s pretty obvious, right? It’s because we have low affordability, right? Buyers just don’t want to buy right now. Sellers don’t want to sell right now. That is a perfect situation for lot, very few homes to start transacting. I’ve called it a stalemate, we’ve called it a standoff, a tug of war, whatever you want to call it.
Basically, sellers have anchored in their mind the prices from June of 2022. Whether that’s right or wrong, I think it’s a little bit crazy, but basically they’re like, “If I had sold in June, I would’ve made 20% more.” And now they’re going to hold out for that number for better or worse. That’s what they want and they don’t want to sell. Buyers on the other hand, just can’t afford prices the way they are right now.
Prices went up and they were affordable when interest rates were two and a half or three percent, but now that they’re six and a half percent, or I think they’re actually lower than that as of this recording, but they’re averaging around six and a half percent right now. Six and a half percent, it’s just not affordable so they don’t want to buy. And until one of those things change, I don’t think we’re going to see home sales volume increase. And to me, the thing that has to change is mortgage rates.
And we’ll talk about that with the second prediction. Prediction number two from Redfin is that mortgage rates will decline ending the year below 6%. To me, this is the single most important variable in 2023. And all of the other predictions that Redfin is making, all the other things that I am saying here are really predicated on what happens with mortgage rates. I just said this, right?
What is going on in the housing market is affordability is too low and that is preventing people from buying, it’s pushing down prices, so people don’t want to sell. The main thing, affordability has three components. Right? It’s home prices, debt, mortgage rates, and wages. And wages are still going up a little bit, but that happens pretty slowly. Home prices are coming down, but probably not enough to offset the increase in mortgage rates so far.
So what has to happen to restore some energy to the housing market is mortgage rates have to go down. And so this prediction, mortgage rates will decline ending the year below 6% would I think restore some energy to the housing market. But I don’t think we’re going to see this. Again, I think 2023 is going to be just like 2022 in the sense that it’s going to be a tale of two halves, right?
2022, you can’t describe the housing market in 2022 because the first half and the second half were totally different. I think we’re going to see something similar in 2023 where the first half of 2023, we’re going to still see a lot of uncertainty in the economy.
Mortgage rates are probably going to hang out where they are right now. And the mid-sixes might go up near seven, again, might hover near six, but let’s say between six and seven is probably going to be the average in my opinion for the next couple of months. But then in the second half of next year, a lot of things could play out, right?
Inflation, there is a case that inflation goes down, there’s a case that there’s a huge recession and mortgage rates go down because of that. There’s a case that the Feds cut interest rates. I think there are a lot of different scenarios where mortgage rates actually go down. And I know that is confusing to people because just two days ago the Fed raised interest rates again and actually mortgage rates went down right after that.
So let me just take a second and explain some of the different scenarios as why Redfin believes mortgage rates will go down in 2023. And I tend to agree with this. So the first is the more obvious scenario, which is that slowing, inflation slows and the Fed stops raising their Federal funds rate. Now the report that came out in mid-December reflects November numbers and shows that inflation on top level came down from 7.7% to 7.1%.
Don’t get me wrong, 7.1% inflation is unacceptably high. It is crazy. It’s still one of the highest numbers we’ve seen in decades. But that is the fifth month in a row that the CPI has fallen. And I think the most important thing to take away from the CPI report from the other day is that prices only went up 0.1% in March. That is one of the slowest monthly increases that we’ve seen.
And when we talk about the core CPI, which takes out the volatile food and energy sectors, that only went up 0.2%, which is the slowest monthly increase since August of 2021. So we are really seeing the pace of inflation start to come down. Now I know most Americans are not happy with inflation. It’s still way too high. I totally agree. But this is the beginning of potentially a trend.
And if this trend continues, for example, if we see 0.1%, month over month inflation rates will be below the Fed’s target by June. So this could signal that inflation is starting to get under control. And if that happens, the Fed could start stop raising their Federal Fund rate, which would stop putting upward pressure on bond yields and could make mortgage rates settle down. We could also see the spread between bond yields and mortgages start to come down.
So that is one scenario that is looking more and more likely right now because we’ve seen good inflation prints the last couple of months. And in my opinion, there are some things that point to the inflation coming down even more. Mostly shelter costs. So this is kind of wonky, but the way that the, this last month, the main thing that was keeping inflation high was shelter, which is basically rent and something that they call owner’s equivalent rent.
Basically, what a homeowner would buy, would pay in rent if they were renting their house instead of owning it. And the way that is collected in the CPI just kind of sucks. It’s really lag, it lags a lot. And so it’s still showing in the CPI that rents are going up really rapidly. But if you look at more current private sector data, there’s tons of it out there, RealPage is a really good one if you want to check it out.
You can see that rents are flat or falling in most markets. And so that reality has been happening since July or August, but it’s not reflected in the inflation report yet. And that is the main thing showing inflation going up in CPI. So when the real data starts to flow through the CPI in the first quarter of 2023, I think we’re going to see inflation come down even more.
So I think this is one likely scenario. The second likely scenario that could push down mortgage rates, and I’ve talked about this before, is basically a recession. And I know that is confusing, but basically what happens if the Fed over corrects, if they raise interest rates too much, which is another likely scenario right now, right?
Inflation is going down, but they’re still raising interest rates. So another likely scenario is that there they over-correct and that there is a global recession. What happens in a global recession is that investors tend to look for safe investments. And one of the safest investments in the world is US treasuries like the 10-year bond.
And when people want that bond, that increases demand and that pushes down to yields. Again, I’ve said this many times on the show, but bond yields dictate mortgage rates. And so when that pushes down yields, that could push down mortgage rates. So that is another very likely scenario. Right? We could have a big recession, bond yields could go down and mortgage rates could come down with it.
At the same time, if there’s a big recession, the Fed might realize that they over-corrected and cut interest rates. Another thing that can help bring down mortgage rates. So those two scenarios I think are probably the more likely and why I agree that mortgage rates will probably come down in 2023. There is one scenario where mortgage rates rise though, there’s probably few, but the most likely that I see is where the Fed raises rates like they are right now, but we don’t go into a recession.
They call this kind of a soft landing. But maybe they keep raising interest rates, which will put upward pressure on bond yields and mortgage rates. But if we’re not in a recession, then we won’t see this huge demand for bonds that pushes down yield. So that is another scenario that could happen.
I don’t know which of the three is most likely, but to me, two of the most likely scenarios push mortgage rates down and only one of the three likely scenarios pushes rates up. And so to me, I think the more probable outcome, and again, we don’t know what’s going to happen and you should be thinking in probabilities, that’s the best way to think as an investor, in my opinion. I think the most probable scenario is that mortgage rates go down in the second half of 2023.
I don’t think this is going to happen right away. So that’s my reaction to prediction number two, that mortgage rates will decline. I don’t know if they’re going to be below 6% too. That’s a specific forecast that I don’t know, but I think they’ll be somewhere between, let’s say five and a half and six and a half.
Right? So they will come down from their recent average, and I think that will probably reinvigorate the housing market a little bit. The third prediction, home prices will post their first year over year decline in the decade, but the US will avoid a wave of foreclosures. Strongly agree on both of these. So number one, Redfin is predicting a 4% year over year drop. I’ve made my predictions on YouTube, you can check those out.
But my estimate, and I don’t maintain financial models, I basically, I’m a data analyst. Right? I don’t have all these economic models, but I can look at historical data and trends. And my opinion is that we’ll probably see a national level decline in housing prices somewhere between three and eight percent next year. And remember that this is on a national basis.
Every market is going to behave differently and you have to really understand each of your markets. So I’m just talking about on a national basis. And I think the really interesting thing here about Redfin’s prediction is that they’re basically admitting, if you look at the details, that they don’t really know. That this is a really hard one to predict.
So in each of their predictions, they provide what they call a base case, which is what they think is going to be the most likely. They provide upside, so this is what happens if everything goes well. Or downside. Basically, if everything goes poorly, what’s the worst case scenario. In data analytics or data science, you often see something called a confidence interval. Right? Or you see basically a band of likely outcomes.
And again, this is sort of, maybe this is becoming a theme for this episode, but you want to think in probabilities. Right? People are making these predictions like, “It will be 4%.” But really when they do their analysis, it shows that it’s the most likely is 4%, but they are really confident that it’s going to be between 3% and negative 11%. Right? That’s really what the math comes out to be, and that’s actually what they say on their website.
So this is the headline that they decline 4%, but when you look at the details, what they’re saying is that they see a scenario, it’s not their most probable scenario, but they see a scenario where home prices actually go up 3% next year. That’s probably if mortgage rates drop considerably. They are base case what they think the most likely scenario is negative 4%.
And they also think the downside is negative 11%. So they also see a scenario, again, not the most probable scenario, but they see a scenario where national housing prices could go down 11%. So I think that this is a good analysis honestly. I do think that the most likely scenario is mid-single digit declines. Again, I’m saying negative three to negative eight percent is my belief. But there is downside risk.
There is a chance that things go way worse. If there’s huge job losses or foreclosures or mortgage rates go to 10%, yes, that can happen. I don’t think that’s the most likely scenario, but that can happen. There’s also a case that mortgage rates fall and home prices go up next year. I don’t think that’s the most likely scenario, but that can happen.
So I think this is a pretty good sober analysis of what’s happening in the housing market. And I am personally anticipating a, like I said, a single digit decline in national housing prices next year. Now there was a second part of this prediction, which was that the US will avoid a wave of foreclosures, and I definitely agree with that.
In the next couple weeks, we’re going to have Rick Sharga from ATTOM Data on. He is an expert in foreclosures. We already did the interview. We’re banking a couple shows before the holidays. So I already spoke to Rick yesterday and he was talking about foreclosures. And although there is going to be a tick up, we’re still far below normal levels and there’s very low risk of foreclosures.
People, very few people are underwater on their mortgages right now. Even, Redfin came out and said this, that even if their base case of negative 4% growth next year, if home prices go down 4%, only 3% of people who bought during the pandemic would be underwater. So that’s very few people would be underwater.
Being underwater doesn’t mean you’re going to go under into foreclosure as long as you keep making your payments. So that means very few people are at risk of foreclosure. And this is why Redfin, and I totally agree, I strongly agree with this, that there won’t be a wave of foreclosures. If you want to learn more about that, check out the interview with Rick Sharga.
It’s coming out in a week I think. Really fascinating conversation with Jemele, Rick and I, so check that one out. All right. So that’s what everyone wants to know, right? That’s the big headline. Right? I think housing prices are going to go down on a national level in the single digits. So does Redfin. Prediction number four, the Midwest and Northeast will hold up best as overall markets cool. I tend to agree with this one as well.
I do think that most markets are going to be impacted and go flat or even slightly negative, but when we look comparatively, it’s kind of obvious. Right? The cities that grew the most during the pandemic are at the biggest risk. You see these cities like Reno and Boise and LA and Seattle and Phoenix and Austin that grew 20, 30, 40 percent. It’s not sustainable.
The houses are not affordable in those markets. And so they have the largest likelihood of coming down, and most of them are already coming down. A lot of them have come down on a month over month from their peak. But what we really care about, again, don’t believe everything you see on the internet when people say things are crashing, look year over year.
That’s what you should care about when you look at a regional housing market. Year over year, they are starting to come down and that’s to be expected. So I do think that this is a good analysis. If you look at some of the lead indicators for markets in the Northeast and the Midwest. And lead indicators are just data points that basically help predict future data points.
I think I like to look at inventory days on market, new listings. If you look at those things in cities like Boston or Philadelphia or some areas of Connecticut, Chicago, Madison, some of these cities in the Midwest and the Northeast, they look more stable. They don’t look like they’re reverting back to pre-pandemic trends in the same way as some of these West coast cities.
Look at Denver, look at Austin, look at California. You see inventory is spiking, days on market is spiking, and that puts downward pressure on prices. So I agree with this. I do also think that there are some areas in the Southeast that are overheated, and but there are some areas that are going to do well. So think about a city like Tampa in Florida.
Florida in general probably has some markets that are going to see some declines, like the villages. I think, I don’t even know much about it, it’s a planned community. But it just went crazy. And there’s a lot of analysis out there that shows that the villages, for example, is going to take a hit, big hit. But I think areas Tampa, for example, seem to be doing really well.
So I think there are still subsections in the Southeast, in the West that are still going to hold up. Okay, but we’re just talking generally speaking. If you want to talk on a regional basis, then yes, I agree, Midwest, Northeast are probably going to do best as a whole. But there are still markets in North Carolina that are going to hold up great and in the Southeast.
In Texas, there are markets that are probably still going to do well. Even in California, even in the West, there are some markets that’ll do well, but on overall I agree with this. Brings us to prediction number five. Rents will fall and many Gen-Zers and young millennials will continue renting indefinitely.
All right, I have a lot of opinions about this. I’m going to just say I don’t necessarily agree with this. Rents will fall. Yes, I think rents are falling in some cities. We’re seeing household formations slow down. But I think the rent is going to be very, very regional. Right? Some markets are definitely going to see rents continue to go up, right?
Areas with large population growth, wage growth are probably still going to see rents go up. And I do think some markets will see rents go down, probably in areas where there’s a lot of large multi-family complexes coming online. If you look at some of the data coming out, there are areas where there’s just so many multi-family units coming on, specifically in the second quarter of 2023.
Those areas could see rents come down. I mean, it’s areas like, honestly, Arizona is one of the most guilty areas, Texas and Florida. So you might see rents come down, but generally speaking, rent is very sticky and I don’t think it will fall that much. You might see 1%, 2%, 3% drops. On a national basis, I would be surprised if we see rent go down more than one or 2%.
So that could change. It could be wrong, but rent is generally really sticky. Just for context, back in 2008, the peak to trough home prices fell over 20%. Rent fell six to eight percent depending on who you believe. So it’s a fraction, it’s a third roughly of what home prices fell. And I think that’s probably going to be true. Rent is just stickier than home prices generally.
Now I take exception to the second part of this prediction where they say that Gen-Z and young millennials will rent indefinitely. Now I don’t know what that means. Does that mean they’re going to rent for the next two years? Yeah, sure, probably. But I feel like for the last 15 years people have been saying, “Millennials don’t want to buy houses, they’re renters forever. We’re becoming a renter nation.” And it’s just not true.
I don’t know how to say it in more ways, but the data just does not support this. First of all, the home ownership rate in the United States is relatively stable for the last 60 years. It goes between 63% and 69%. Right now we’re at 66%. So we’re right in the average over the last 60 years. So saying that we’re a renter nation, not true currently. Of course things can change in the future, but right now that is not true.
And at least as of the last census reading, it was trending upward. So I don’t know if that’s going to continue, but the idea that we’re all of a sudden all renters is just not accurate. The second thing is that people, since the Great Recession have been saying millennials don’t buy homes. They don’t want to buy homes. It’s not that they don’t want to buy homes, it’s that they couldn’t afford homes.
If you look at all the data, it shows that they couldn’t. They weren’t earning enough money. This was the aftermath of the great recession. Wages were really suppressed and they couldn’t afford homes. Now when interest rates dropped and there was an infusion of cash into the market during the pandemic, millennials bought a ton of homes. It wasn’t that they didn’t want to buy homes, it’s that they couldn’t afford homes.
And as soon as macroeconomic conditions allowed them to buy homes, we saw this massive increase in demand for homes from millennials. And that is one of the major drivers that pushed up home prices over the last couple of years. So this idea, I don’t know if Redfin is saying this, I don’t know if they’re saying that they’ll never buy homes, but this idea that millennials or Gen-Z or any generation for that idea doesn’t want to own their own home, I think is really overstated.
And it’s just a matter of affordability. When people can afford homes, they tend to want to buy homes. And I think that is not going to change. So again, I do agree that given the low affordability in the entire housing market right now, young people are going to be hit the hardest by that. Right? They have the least time to save, they’ve tend to have the lowest income.
And so it’s likely that Gen-Z and young millennials will not be jumping into the housing market right now. But as soon as they’re able to, I think they will jump in. All right, last prediction. They did make 12 predictions, but I sort of picked my favorite so not to keep you forever here. But the last prediction that they’ve made here is builders will focus on multi-family rentals.
And this is another one I’m a little bit conflicted about. So if we’re talking relatively, are builder’s going to build more multi-family than single family homes in 2023? Sure. Yeah. I believe that because there is a national housing shortage and it is more efficient to build multi-family than it is single family. But I just generally think construction is going to be down in 2023.
We are seeing, I just said sort of in the last when we were talking about rents, that there is a lot of supply coming online in multi-family rents in the next year. Not so much that it’s going to make up all of the housing shortage over the last couple of years, but it’s a lot. And so I do think if I were a builder, I would sort of want to see how things play out over the next couple months with rents, with cap rates, with interest rates.
And I wouldn’t be building a lot. That’s just me. I’ve never built a house, so take that with a grain of salt. But I know I talk to a lot of syndicators, people who build, and I think that’s the general sentiment is, yes, maybe if you are building, you’re going to build multifamily instead of single families.
But generally think speaking, I think we’re just going to see lower construction, which might help stabilize the market a little bit and not see a glut of supply. But overall, the US just needs more housing. And so I hope that I’m wrong about that and I hope that we see more construction. Because generally speaking, to get the market to a place of more affordability where investors and homeowners can buy and the market becomes less volatile, right?
It’s just so volatile right now. And that’s not good for everyone. And I know people think that’s odd coming from a real estate investor like, “You don’t want to see the market go up like crazy? No, I don’t. I want it to be predictable. And that is we, for that to happen, we need a better balance of supply and demand. And that is not where we’re at. We need more supply.
And so I hope I’m wrong about this, but I do think we’re going to see construction come down quite a bit in 2023. All right. That is it for my predictions for, or I guess they’re not my predictions, my reactions to Redfin’s predictions for 2023. Thank you so much for listening. If you liked this episode, please make sure to give us a review.
We really, really appreciate it on either Apple or Spotify or subscribe to our YouTube channel. It really helps us and supports us in making the show. If you have any thoughts or questions about my reactions or thoughts of your own hot takes on the 2023 housing market, feel free to go on the BiggerPockets forums, we have an On The Market forum there. Or you can hit me up on Instagram where I’m at the Data Deli.
Thanks again for listening. We’ll see you next time for On The Market. On The Market is created by me, Dave Meyer and Kaylin Bennett. Produced by Kaylin Bennett. Editing by Joel Esparza and OnyxMedia. Research 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.

This article is presented by Kay Properties & Investments. Read our editorial guidelines for more information.

It doesn’t seem that long ago when the winds surrounding the commercial real estate industry were rustling with whispers of the Biden Administation’s plans of repealing the current 1031 exchange laws and quashing alternative like-kind exchange vehicles such as Delaware Statutory Trusts. However, when Congress passed the Inflation Reduction Act with no proposed changes to section 1031 of the Internal Revenue Code, three powerful forces amplified the reality that the 1031 exchange and Delaware Statutory Trusts will likely be here to stay. 

What is a Delaware Statutory Trust and How Does It Connect to 1031 Exchanges?

A Delaware Statutory Trust (DST) is a real estate ownership structure for 1031 exchanges that allows multiple investors to each hold an undivided beneficial interest in the trust. The term “beneficial interest” means that investors hold a percentage of the ownership, and no single owner can claim exclusive ownership over any specific aspect of the real estate. 

The laws of DSTs allow the trust to hold title to one or more investment properties that can include commercial, multifamily, net lease, retail, office, industrial, self-storage, etc. Investors are keenly interested in DSTs because the IRS blessed them to qualify as “like-kind” investment property for the purposes of a 1031 exchange. 

Currently, the appeal for 1031 exchange strategies such as DSTs has never been stronger. According to the Mid-Year 2022 Market Update Report from the real estate research firm Mountain Dell—in 2021, securitized 1031 exchange programs, which includes DSTs, raised a record $7.4 billion—doubling the previous record of $3.7 billion set in 2006. According to the same report, the DST marketplace is poised to continue to grow. 

What’s driving the popularity of 1031 Exchanges and like-kind investment strategies as DSTs? We believe there are three major forces that are driving the popularity of DSTs for 1031 Exchanges now and into the near future and that these same forces will hopefully make it unlikely that Congress will pull the rug out from under the current exchange laws.

Force One: Demographics

One of the most fundamental forces helping protect the 1031 Exchange market is demographics. According to the U.S. Census Bureau, baby boomers hold more real-estate wealth than any other generation in history. Born between the years 1946 and 1964, the influence of baby boomers on all things real estate cannot be overstated. 

For example, Americans over the age of 55 own 53.8% of all the real estate in the United States, including trillions of dollars of highly appreciated real estate investments. Now, many of these aging baby boomers (the oldest of whom will be turning 76 this year) are rapidly relinquishing their investment properties via 1031 exchanges. In addition, they are looking for alternative real estate investment options that offer both tax deferral and other life-enhancing benefits. More and more, this group of aging baby boomers is employing Delaware Statutory Trusts for their 1031 exchanges in order to defer their capital gains taxes and enter a passive investment structure. 

Force Two: The Pandemic

Another powerful force that helped ignite the popularity of the 1031 exchange laws was Covid-19 and its impact on rental property owners. Because our firm actively works with thousands of commercial property owners across the country, we heard firsthand some of the challenges and pressures property owners faced during the pandemic (and continue to face). These include mandated eviction moratoriums, strict rent-control laws, and other regulations that directly impact the financial health of real estate investments. 

Now, many of these same investors are stepping away from the financial burdens brought about by Covid and the headaches associated with “tenants, toilets, and trash”. Investors by the thousands are relinquishing their rental real estate and reinvesting the proceeds into other real estate opportunities like 1031 exchanges and Delaware Statutory Trusts. 

Without the ability to defer capital gains and other taxes through the 1031 exchange rules, many of these “mom and pop” independent investors would be subject to tax bills that could amount to 40% of the gains these investors realized after decades of working hard to build a modest real estate portfolio. 

William Brown, past president of the National Association of Realtors summed it up nicely in a New York Times article when he said, “Getting rid of the 1031 exchange would hamper the opportunity of investors because most investors cannot afford to sell a property and then buy something else after paying taxes.”

Force Three: Economics

Finally, there is something inherently virtuous in the Internal Revenue Code 1031. That is, like-kind exchanges help propel commerce through a number of other industries like banking, construction, landscaping, and insurance. 

A well-known study written by Professors David C. Ling of the University of Florida and Milena Petrova of Syracuse University analyzed how 1031 exchanges encourage useful economic activity and growth that also support local commercial real estate markets and local tax bases. According to the study, DST 1031 exchange also achieves the following three major economic benefits: 

1. Like-kind exchanges are associated with increased capital investment and reduced loan-to-value ratios (in other words, reduced debt) on replacement properties. 
2. Tax-deferred exchanges improve the marketability of highly illiquid commercial real estate. This increased liquidity is especially important to the many non-institutional investors in relatively inexpensive properties that comprise the majority of the market for real estate-like-kind exchanges. 
3. 1031 exchanges increase the ability of investors to redeploy capital to other uses and/or geographic areas, upgrading and expanding the productivity of buildings and facilities that, in turn, generates income and job-creating spending. 

Conclusion

By repurposing capital and real estate in a compressed time frame, 1031 exchanges and Delaware Statutory Trusts help the economic growth of cities and states across the country, making the like-kind law a relevant and important ingredient to the preservation of wealth and the continued strengthening of the United States economy.

This article is presented by Kay Properties & Investments

Kay Properties & Investments is a national Delaware Statutory Trust (DST) investment firm. The www.kpi1031.com platform provides access to the marketplace of DSTs from over 25 different sponsor companies, custom DSTs only available to Kay clients, independent advice on DST sponsor companies, full due diligence and vetting on each DST (typically 20-40 DSTs) and a DST secondary market. Kay Properties team members collectively have nearly 400 years of real estate experience, licensed in all 50 states, and have participated in more than $30 Billion of DST 1031 investments.

There are material risks associated with investing in real estate, Delaware Statutory Trust (DST) properties and real estate securities including illiquidity, tenant vacancies, general market conditions and competition, lack of operating history, interest rate risks, the risk of new supply coming to market and softening rental rates, general risks of owning/operating commercial and multifamily properties, short term leases associated with multifamily properties, financing risks, potential adverse tax consequences, general economic risks, development risks and long hold periods. All offerings discussed are Regulation D, Rule 506c offerings. There is a risk of loss of the entire investment principal. Past performance is not a guarantee of future results. Potential distributions, potential returns and potential appreciation are not guaranteed. For an investor to qualify for any type of investment, there are both financial requirements and suitability requirements that must match specific objectives, goals, and risk tolerances. Securities offered through FNEX Capital, member FINRA, SIPC.

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

David:
This is the BiggerPockets Podcast Show 704.

Paul:
Every day I wake up and we’re building this thing that, in my opinion, is providing so much value in this real estate space and we’re providing a real service on the front end and the back end. We’re helping fulfill people’s dreams on the back end of owning their dream property. Maybe they don’t own a home, but it’s pretty easy for them to go and put their credit card in and pay $200 a month. And in 5 to 10 years, they’re going to own this thing that they can pass down to their children. That’s a story that we hear all the time.

David:
What’s going on everyone? This is David Greene, your host of the BiggerPockets Podcast, here today with a fantastic show for you where I interview Paul Hersko and Willie Goldberg, two fantastic gentlemen that formed a partnership and put together a business model you’ve probably never heard of regarding real estate. These two have figured out a way to buy raw land, package it on a website and sell it to people on terms where they can put usually a couple of hundred dollars a month of a monthly payment to buy land in a contract, like a rent-to-own, and it’s been fantastic for them.
They currently own over 700 lots that they’re selling to other people and counting. They’ve got 15 salespeople alone as well as an entire backend operation. And a fascinating business model that if you’re having a hard time finding ways to make money in real estate and you’re open to something new, you might really enjoy this.
Before we bring in Paul and Willie, where we go back and forth digging deep into their business and a lot of the specifics of what they look for in a property, mistakes that they’ve made, ways that they’ve lost money, how they figure out where they should be buying, and how they’re structured, I’m going to give you a quick tip that I hope you never forget. During the show when we’re diving deep to try to figure out why is their business working so well, it comes to the surface that they focus on solving problems and making the experience better for the consumer. And they actually refer to Amazon as a company that focuses on the consumer experience instead of the owner experience.
And it has me thinking, so much of life and success in life comes down to how much value do you try to bring others versus how much value do you try to take from others. It’s very easy to look for something in life or someone in life that will give you what you want. It is much more difficult in life to look for what other people need or want and try to provide that to them. But when you think about the people that you want to do business with or you want to give the best version of yourself to, they’re always the people that put your needs first.
Here’s my challenge to you, think about how you can meet others’ needs without worrying about your own and wait and see if the quality of your life doesn’t improve. Living this life of faith will often help you in business, in life, in relationships, and many other areas. And as you listen to today’s show, you will see this theme pop up over and over and over. All right, hope that helps. Let’s get to Paul and Willie’s story.
Paul Hersko and Willie Goldberg, welcome to the BiggerPockets Podcast. How are you two?

Paul:
Doing great. Thanks for having me.

Willie:
Yeah, I’m doing super well. Glad to be here and excited to be on BiggerPockets. I used to listen to this podcast religiously when I was getting started and it really meant everything to me, so super excited to be on the other side, actually being interviewed.

David:
It’s going to be really weird when you guys hear your voice on here for the first time. I remember when that happened to me, so just brace yourselves right out. It’s a surreal feeling, but we’ll make sure that we get a good show. We actually just learned that you guys live in an area where I’ve been buying rental properties and visiting quite a bit in South Florida. That was pretty cool.

Willie:
Yeah. I’m out in Pompano Beach. You said you got a rental nearby.

David:
Yep.

Willie:
If you ever need anyone to go check it out, I’m your eyes and ears on the ground, so happy to help with whatever I can.

David:
And Paul, you mentioned you’re in Boca Raton?

Paul:
Yep. I’m up here in Boca Raton.

David:
Yeah, it looks like Florida looking in the background.

Paul:
Yeah, people ask me if it’s a real or fake background because this is where I take all my Zoom calls. I’m like, “Nope, it’s Florida.”

David:
If we’re lucky, we’ll see an iguana come running right across the road. They’re very funny when they run. I don’t know how to describe an iguana’s run. Its feet go out. They don’t just go straightforward. They go out and come in. It’s hilarious to me every single time I watch them. Have you guys grown up in that area or did you move out that way?

Paul:
No, so we actually both grew up in Chicago. We moved about two years ago and we actually didn’t know each other growing up. And maybe we’ll get into it later, maybe we won’t. But we actually grew up one town over from each other in Chicago, but never knew each other until we really started this business. It all crossed paths, but yeah, we’re from Chicago.

David:
All right. Now, I understand you two met and you’ve built a real estate empire after meeting, so tell me what’s the origin story of your relationship. We’ll start with you, Willie. Where were you in life when you met Paul and what happened when you guys met?

Willie:
Yeah, we were still both living in Chicago at that time. We both lived down there. Actually, first office was out there. I was running basically the same version of the business that discount lots, so we rebranded when we eventually partnered. But I met Paul at a party. I had a trolley. Trolleys are super popular in Chicago. One of my buddies was leaving town and one of my good buddies from growing up, he married Paul’s sister.
And so just happened to be that he brought him to the party and we met on the trolley and headed off right then and there. And not soon after that did we form our partnership. But at that time, I was basically running the land business on my own. Paul had a very different experience and skillset than me and we recognized that when we first met. And that’s how it all started.

David:
All right, Paul, what was going on in your life at that time that you met Willie?

Paul:
Yeah, so I had Amazon eCommerce business. At that time, it was super hot when I started. Basically 2015, I was thinking about starting a business. I was like, “I’m either going to go into real estate,” because I was listening to BiggerPockets at that time or I’m going to go into Amazon. That was when Amazon was super easy, 2015, 2016 era where you could just put a product up and it would sell super well.
And I was like, “You know what? I’m going to start with Amazon,” because the barrier entry is lower than real estate. And so, I went down that path and I guess Willie went down the other path. I had an Amazon business with one employee and I was feeling pretty unfulfilled at the time. I wasn’t really enjoying what I was doing, I just felt like I was taking things, putting on the internet, making a profit and just not really providing value. That’s where I was. I was seeking at that time something new and it just happened that we crossed paths.

David:
Was it working out? Was the Ecommerce business profitable?

Paul:
Yeah, definitely. I think at that time, we were probably doing maybe $2 million in revenue a year and taking home a couple of hundred grand. It was nothing crazy, but it paid the bills and let me travel the world and do whatever I wanted, but it wasn’t like I’m rich or anything.

David:
Was the problem that you wanted to make more money or was there something else about real estate that was appealing to you when you came across it?

Paul:
Yeah, so it’s more so that it was about the fulfillment. It wasn’t really about the money. It was about providing value in the world. And I grew up around real estate. My dad growing up, he had all kinds of Section 8 housing in Chicago. That was his niche that he was doing my entire life. That wasn’t his main thing, it was his side thing. As a kid, he used to take me to all these Section 8 buildings and I would help him.
Actually, I would go with my grandpa, too and collect rent and that was my earliest memories of real estate. And then my dad sold his first business and he was flipping houses when I was in second grade for a year or two while he was in between his next thing. So, I’ve really grown up around real estate, but I never really did anything with it until 2019. But I’ve been around it my whole life.

David:
I had a similar experience where I had a mentor, Tim Rhode, when I was 18, 19 years old. We’ve had him on the show before. He was an agent that bought houses and flipped them and I worked with him for a little bit, but I didn’t stick with it. I went off and I got into law enforcement and I just bought a handful of rentals and I never really took real estate investing seriously. I think there was something about that seed being planted though, that when I did come across an opportunity to get deeper into real estate investing, it was just pouring water on a sea that was there versus a lot of people that haven’t ever had that seed planted. They first get exposed to it and it takes a while to germinate.
Willie, was it a similar experience for you? Did you already have real estate on the brain or was it when you met Paul that you first got introduced to this?

Willie:
No, so my story, I come from a financial background. I got out of school and got out of college and started my career in investment banking. So, I had the financial investment banking, like analytical experience and background and skillset. That was my background. And for me, it was I was just looking to find something. I didn’t originally know what I wanted to get into.
For me, it was BiggerPockets is what piqued my interest. Just Googling around listening to different podcasts, found BiggerPockets. And basically, what interested me about it was I was looking for a way to get out of the profession, investment banking, finance. The culture is super tough and hard to sustain over a long period. I was pretty sick of it and just trying to find something I could do that I could make a good amount of money comparable to my salary. I wanted to obviously exceed where I was.
And for me, I saw the people that were really doing well in scaling and crushing it in real estate were the ones who were thinking about it at a high level. Thinking about it differently, thinking about it from an analytical and intelligent perspective and building systems and scaling. That’s what really interested me about it was the numbers aspect to it. And I thought my experience from finance was super relevant. Not quite from looking at a deal standpoint, but from a analytical and system standpoint.

David:
That’s really good. Now, when you two met, I’ll start with you Paul, how did you meet? What was the relationship like when you guys first crossed paths?

Paul:
This is a good story actually. Met Willie at the party. We’re drinking on this party bus. And my brother-in-law is like, “Hey, come meet my friend, Willie.” Because at that time, I didn’t have hundreds of entrepreneur friends that lived in Chicago. He was like, “Meet my friend, Willie. He’s another entrepreneur. You might like him.” So, we started talking or whatever. And I think, we exchanged phone numbers, become friendly.
And then the second time we hung out, I was actually going skydiving with one of my friends. I like to do high-risk things. I have a lot of fun with it. And I texted Willie. The first time we hung out outside of this party, I was like, “Do you want to go skydiving?” And so, we went skydiving the second time we hung out. It was me, him, and another friend, so that was the first time we hung out outside of this party. I thought we just started this thing with a bang.

David:
Did you guys each have another dude strapped under your back or were you experienced skydivers to where you could do it on your own?

Paul:
We had grown men strapped to the back of us. It was hot.

David:
Yeah, that will actually create a bond between two people. I’m sure that just massive crazy dopamine rush of jumping out of a plane is going to shake you out of your comfort zone a little bit. And then you look over at that person and they just went through the same thing. And you lock eyes, and you’re like, “This is the beginning of a bro-mance.”
Now, how did you realize that your skillsets were going to be complimentary? Willie, from your perspective, it sounds like you’re very comfortable with numbers, models, even a degree of risk. I’m sure if you’re working in the financial industry that you weren’t like a typical W2 worker who says like, “Ah, you mean I don’t get a paycheck guaranteed,” and they just can’t get out of that? You are probably used to dealing with mitigating and analyzing risk as part of an overall model. So, you’re almost bred to be ready to be good at that form of real estate investing. What was it like when you met Paul? What was appealing about him as a partner?

Willie:
Yeah, so I obviously have a very different background than Paul, so financial modeling systems, analytical. Paul comes from a sales, eCommerce, marketing background, so he’s super strong from this. What I found is when I started the business is like I got started in land investing and then listing property on a website, so that’s the origin of where it started. I tried to sell a lot of properties cash. And then realized that once I created a website and offered owner financing, that’s really when things started cooking and doing really well for us or well for me. And then the eCommerce aspect is super unique to our niche and what we built. I don’t know if there’s any other real estate niches eCommerce and marketing heavy as what we’ve built.
So, just seeing it from that aspect and just meeting Paul at that party and him just talking about marketing sales ideas that he had. I mean that’s really what interested me in working with Paul because he had that experience and that skillset of optimizing listings, marketing, paid ads, that background in Amazon. It wouldn’t have worked if he had come from a finance background because that’s where I come from and that he wouldn’t have been able to provide any value from there. But the fact that he used to do door-to-door sales, he used to go door-to-door, I think it was B2B pharmaceutical sales. And coming from the eCommerce Amazon background, that’s just high-level entrepreneur doing big things from a very different perspective, that’s really what made it work. So, the complimentary skill sets is the only thing that really made our partnership thrive.

David:
Now, how did you two decide on raw land? Was that one of your proposals or did you both come into that decision together?

Paul:
No, so the story is that Willie was doing this, he had I think one or two VAs at that time. He was doing this for two or three years before we crossed paths. And then he was telling me about what he was doing and as soon as he told me, I was like, “This is the coolest thing I’ve ever seen or ever heard of.” And then I started looking into it and I was like, “Wow. There’s so many opportunities for me to take my knowledge and skills, combine it with what he’s doing and really build a true brand.”
And really take this thing to levels that we today can’t even fathom that we’re at already. But it was just seeing this opportunity because he’s doing the same thing in the space for many years and I never even heard of this thing. And then I look at it, outsider looking in, I’m like, “Whoa, there’s a lot of things we can do here.” And that’s how I got started. So, he had a lot of experiences before I jumped in the mix.

David:
So, Willie, what was it about raw land that caught your attention to the first place?

Willie:
I was originally working in Boston and I was listening to all these podcasts with house wholesalers and flippers. And so, that was the original angle that I wanted to go down because it just seemed like the natural path. The only way at that time of what I thought to make active income in real estate rather than buying a property, sitting on it, earning some residual income. So, I started looking down the wholesaling flipping path. But for me, I was in Boston at that time working and I knew that that’s not the market that I wanted to be in. And I was also listening to a lot of people struggle with the marketing side of it.
I continued to listen to podcasts and find different avenues in real estate that could potentially work. And so, I stumbled upon land and what attracted me towards land compared to houses is the fact that it can all be done virtually. You can analyze a property all behind the computer screen looking at Google Earth. I could buy a property in California, Florida, Texas, wherever, all from Boston. That was the original thing that attracted me. I didn’t have to go onsite to a home, inspect a home, make offers in living rooms with sellers.
And the second thing that attracted me towards land was the margins of what people were able to buy it and sell it for. So, I heard of people selling lots or buying lots at $0.10, $0.15, $0.20 on the dollar and flipping it for 100 cents on the dollar and $0.90 to 100 cents on the dollar. And I just from my background return on investment from, even though the numbers were maybe a little bit smaller than houses, it’s just the total return and the low barriers of entry. You could buy a lot for five grand, sell it for $25,000 for example. So, lower barriers of entry, lower capital commitments, all done remotely and the ability to scale it as well because again, it’s all behind the computer screen. It seemed a lot easier to scale than maybe some other niches because of the virtual aspect to it.

David:
What is it about land’s margins that are so favorable?

Willie:
Yeah, so I can get into why our business model exists because it leads into the margins. But basically, we’re able to acquire lots from sellers, like I just alluded to $0.10, $0.15, $0.20 in the dollar. And so, the reason we’re able to do it is, and we play in a price point that’s typically less than 50,000 bucks, so where we’ll sell a property. We play in generally on the lower end of the land market. For one, it’s a lot harder to get deals in metro areas, but two, the margins are way better at the lower price points.
Sub-50,000 bucks, a buyer will not be able to get a loan from a traditional bank. Banks are unwilling to land on vacant land. They don’t like the collateral. Administratively, it’s very difficult. If there’s a default, they don’t know how to resell it.

David:
Let me interrupt you quickly. Yeah, I need you guys to come up with the name for the moment when the newbie investor first realizes they can’t use a 30-year fixed rate Fannie Mae loan to buy raw land. There’s always this moment like, “Wait. What?” The assumptions, I mean, “Oh, I could buy it for 15 grand and put it on a 30-year note.” And then when they realize it doesn’t work like that, it’s always heart crushing. Do you come across that very often in your experience?

Willie:
Yeah. When I first got starting real estate, I thought banks would just give you money. You show up with a pen and your driver’s license, that was my impression of banks when I first got started. Turns out, it’s just not the case.

David:
Not the case, right? That’s exactly right. Okay, go ahead with where you were. I know there’s someone listening to this like, “Oh, man. I could buy a land for a 30-year and they’re doing the math in their head, their mortgage.

Willie:
“$100 a month, 30 years?”

David:
There you go.

Willie:
But yeah, banks are unwilling to lend in the space. And at the price point that we operate in, title companies charge significant costs and realtors also charge significant costs as a function of the purchase price because realtors have minimum.

David:
Yeah, they’re not going to work for 3% on a $15,000 lot.

Willie:
Right, so realtors are forced to charge a higher price as a proportion of the sale price and then, also, title companies do the same. And also, just to add onto that, realtors are not incentivized to market and sell property at the price point as well. One, it could be far for them to drive out to compared to a house that’s in town that’s closer to where they live. And then just also, they’re not incentivized to do so because the commission is so much lower.
The market from all sides is just fairly broken. Sellers are willing to part ways for a property at a fraction of what it’s worth. We deal with a lot of people who inherited properties, don’t know what to do with it as well and motivated sellers. But in addition to that, the industry being fairly broken from a financial standpoint, from a incentive standpoint, from realtors, sellers and title companies allows us to hop in there and purchase property at major discounts.

David:
Walk me through briefly and I’ll have you answer this, Willie, then I’ll get to you Paul. What is the process like at a 30,000-foot view of how you go from buying land to how you’re going to go to sell it? I’m sure there’s some developing that’s taking place in the middle, right?

Willie:
Yeah, so the process is we buy property from traditional marketing that you’ll see in most other real estate niches, so we’ll do cold calling, We’ve got a team that does cold calling. We send out a lot of direct mail as well to get offers in front of people. We actually send out, offer prices on the purchase agreements that we send out in the mail. And so, we’ve got a sales team, the acquisitions team that closes the deals, negotiates deals, get good prices. And then we’ve got a due diligence and closing team that closes the transaction or works with title companies to close the transaction.
Once we own the property, we list it on our website, discountlots.com. And from there, we basically run paid ads. We do a lot of marketing. A lot of paid marketing, organic marketing to drive traffic to the website. And then, we’ve got a sales team of about 15 people that basically just, they’re calling the leads, working the leads and closing the sale. From there, they generally enter into a contract to buy the property.
Again, the problem that we solved is that there’s no financing available for lots at the price point that we operate, so we actually offer the financing. We unlock this unlimited demand of buyer base of people who want to own property, but haven’t been able to afford it and pay cash. We offer it on low down payments, low monthly payments over a period of seven to eight years on average. And yeah, we’ve got a customer service team that handles the customer after the point of sale.

David:
Okay, so once you close on the property though, what are you doing before you’re going to sell it?

Willie:
That’s the beauty of our business is the value that we’re adding is the financing piece, so we’re not a finance company. We sell on installment contracts, 0% interest. But the value that we’re providing is we’re fixing up the property. Not that we’re adding a fence or cleaning up or paving in roads. We’re not doing any of that. The value that we’re providing is from the installment sale contract.

Paul:
Yeah, let me simplify it. In the simplest form, I guess for the audience and for what we do, is basically we buy properties off market from landowners at major discounts because of these market inefficiencies. Grandma died. Left you a piece of property in Joshua Tree, California. You’re paying taxes. You don’t want anything to do with that. You live in Chicago. You’re paying a couple of hundred bucks in taxes. You don’t want 40 acres in the middle of the desert, but there’s a lot of people that do.
So, we’ll buy it from them. Make it really easy for them to sell their property to us. We’ll buy it from them for cash. And then we have our website, which we consider almost a platform of traffic and people come to the website. They find a property they like, so that 40-acre property. Come to our website. It’s as easy as putting their credit card into our website. They can check out a full eCommerce experience. Work with a salesperson, not work with a salesperson. They check out and as soon as they check out we’ll start billing their credit card on a monthly payment and they can use the property while they’re making the monthly payments.
It’s almost I think like rent-to-own, so they’re making monthly payments and then our average note, so we’re holding all the notes. That’s what our big value add is. We have a huge portfolio of people making these monthly payments and we’re charging their cards on this monthly payment. Then, it’s almost like a rental portfolio, but the rental portfolio ends. There’s an expiration date on that unless they stop paying and we sell it again. But we’re basically collecting. We’re collecting passive income on vacant land. And then once they make that final payment, then they have full ownership of that property. Does that make a little more sense?

David:
Let me see if I understand. I think I do. You guys go find properties and buy them below market value, so that you can own them free and clear from your perspective. Maybe you raise money to do that but your company owns this lot, right? That you bought with OPM of some type. Then you sell it to somebody, marked up from what you paid for it, but still probably less than they would have to pay if they went to go try to find it on the open market.
And it’s easy for them because they go right to your website. They don’t have to go to whatever realtor in town happens to sell land and try to figure it out and go through that process. Then you make it even better for them because they can pay buy it on terms, in a sense. Is there a down payment they’re going to pay or is it just?

Willie:
Yeah, it’s really easy. Basically, it’s a low down payment like the lower priced stuff. It’s $1 down, $300 document fee, so 300 bucks to get started. In our average contract, price is around like 250 bucks. I think our lowest is 180, so we’ll just charge their card 250 bucks for average eight years. Some of the terms are 10 years and it’s just on a recurring payment. And then they can go and use the property.

David:
Now, they can use the property or are they buying the property and they’re taking title to it?

Willie:
They don’t get title. It’s a land contract, installment contract, so they can use the property while they’re making the payments. If they wanted, for example, go and build a house on it today, those buyers are going to come to us and they’ll probably get a traditional construction loan and then take it out from us. Because it doesn’t make sense for them to start building if they don’t have ownership of it, because from the buyer’s perspective, it doesn’t make any sense.
We’ll get people that want to go dirt biking or shoot guns or want to just put their airstream out there, camping, you name it. Our plethora of stuff people do with the lots will bend your imagination. People want to have horses and they want to have a stable for their horses, all kinds of stuff. And it’s as easy as just charging the credit card.

David:
That was my next question is, I assume this was for real estate development, but if a lot of them are not actually developed real estate?

Willie:
It’s the opposite, opposite.

David:
This is some land that you could be hunted on that you guys buy and somebody wants to, whatever we’re going to call this, buy it, for lack of a better term, lease it from you, and then they get the right to use it for hunting or for whatever they’re going out there to do. Camping, putting their RV on, and maybe they can run a business that way. They make it into like they put several RVs there and then they turn them into glamp sites or something. Is that the idea?

Willie:
Yeah, more or less, exactly.

David:
Awesome. So, first off, I’ve never heard of anyone else doing this. You guys might be the only people in the world that thought of this, so kudos to you. Because Brandon Turner and I used to say it a lot when the market got hot and hard, you don’t find great deals, you make great deals. Now, it’s very hard to make great deals. Now, you got to design great deals. You have to be creative in the market we’re in now because resources are so scarce and interest rates are so high. You have to find a creative way to help people make money rather than just like, it used to be super simple. Go buy a house, make a cosmetic rehab, sell it for more.
And then it became buy a house, make a cosmetic rehab and a deeper rehab and add units and then rent it out. And just as this has become more and more competitive, it’s becoming more and more difficult to figure out ways to make profits. So, you guys are doing something that’s awesome here. Once you figured out this is what we want to do, what were the first steps you took in scaling what the system would look like? I’ll start with you, Paul.

Paul:
What we were talking about before, we’re not the first people to do this by any means. I just think that we do it better. We’ve created better systems and we’ve scaled it much larger than anyone else just because we’ve built this really strong infrastructure and we treat our business like a brand. And so, that’s a little bit, you know. I don’t want to take credit like that, we invented this business model. It exists. I think we’ve just fine tuned it to a really high level.

Willie:
How did we think about scaling? Started the business first couple years. Did basically 150 something deals before, 150 deals a year before Paul and I started. And then when Paul and I started, it was just myself. I had basically one full VA and a few part-time VAs who were helping with the administrative side of it. Once Paul and I started working together, we really thought about scaling from a people standpoint and a system standpoint and taking the business super seriously. So, I think we, at that point, like 150 deals to at this point we’ll try to finish this year around 1500 deals, so basically, 10X the business in the past three years.
The way we did it is largely by plugging in a lot of people into a system that works. I think one thing that we did that really changed the game for us is building out a sales team. Before, it was mostly myself handling a lot of the sales calls and then we built out this team. We started running a lot of paid marketing, getting a lot more leads in the door, driving a lot more traffic to the website. And we basically made a big mess and so we needed to start thinking through how to scale smartly, intelligently. We’ve hired a few business coaches at this point and we’ve implemented EOS.
We manage our business with a lot of KPIs and we manage over 250 KPIs that we track on a weekly basis to make sure that each person in each department is hitting the numbers that they need and so that we can oversee and understand reporting at a high level. At this point, we have over 60 employees that run all sides of the business. And so, it’s really the people in the processes that allowed us to scale from where we were at when we first started, 150 deals a year to around 1500 deals a year. I think that that’s primarily what happened.

David:
What’s some of the risk involved here? If you buy a stinker and just nothing happens with it, what are the stuff you got to look out for? What’s some of the risks that someone might not think is associated with buying this land?

Paul:
Man, before Willie and I started, he had a lot of good war stories. We don’t really miss very often anymore just because we’ve gotten so many reps in. When you buy 1500 properties a year and you sell 1500, so call it 3000 deals on the front and the back a year, it’s like rinse and repeat at this point, but there’s a lot of stuff you got to look out for. I got to see Willie smiling over there. Maybe you want to share some of those good war stories…

Willie:
Yeah.

Paul:
… before I was around.

Willie:
Paul had it easy because I basically figured out all the mistakes and things not to do before he came on. I had bought property all over the country, I can’t even tell you how many different counties and just learned that some property just doesn’t sell. Some property just sits and sits and sits and you really need to go to where there’s actually deals happening. The biggest mistake that I first made when I started was buying a ton of property in New Mexico, so I don’t touch that. We don’t really touch that state anymore, but we really got to go to where there already exists demand.
That was probably the biggest mistake that I’ve made. But from a due diligence standpoint, this niche is super forgiving because we buy these properties so cheap. If you buy a property you didn’t realize there’s a flood zone, you buy a property that doesn’t have an easement, that doesn’t have any road access, you’re still going to be okay because you bought the property so darn cheap. And since we’re able to solve a problem by offering owner financing and there’s not a lot of offers in town, the product market fit is just so strong that you’re going to be able to find a buyer for almost any property. There’s only, I could probably count the number of properties on one hand, maybe two hands that I’ve lost money on.

Paul:
I think we lost $3,000 or $4,000. It was the first time that we’ve, together, in three years lost money. I think it’s $3000 or $4000. We had this agent working for us, sorry, acquisitions guy that worked for us. This was his only deal. He didn’t make it at the company very long, but this is the one deal and we were working with a real estate agent actually to help us comp it out. It was a higher dollar property. Not one of these cheap ones. I think it was a $87,000 purchase price.
And we all misread, like in Florida, certain parts of Florida, they have this thing called a DEP study, which is a Department of Environmental Protection and these studies will tell you how wet or not wet the property is. And this agent who we had done a good amount of deals with told us, “Oh, this is a great property, super dry.” And looks at the study and she’s like, “Yeah, this is a winner. You’re going to sell this thing for 150 grand.” And we’re like, “Awesome. This kid working for us is doing great.”
Well, after we close on it, a couple of weeks later, she goes, “Oh, my God, guys. I’m so sorry I misread the study and it’s actually 87 or 85% wet. This is going to be a problem.” And I’m like, “We trusted you. Now, we don’t.” I think we had to take a couple thousand dollar haircut. It took a really long time to sell it, but we sold it. We closed on it. That was really in recent history where we took a little bit of a haircut. But Willie has got a lot of great war stories from back in the day.

David:
Willie, what are some of the big mistakes that were made that you just learned a painful lesson?

Willie:
Yeah, so one property, I remember when I was first getting started was the property, I was looking at it from an aerial view and you can’t see the back of the property but it just dips, like dips. It’s like a ditch. I bought a property. It only had the front 20% of the property usable. You can’t build on it.

David:
The rest was just-

Willie:
The rest is just, it goes down.

David:
That’s such a good point because when you look at surveys or you look at the titled company or a GPS satellite image, you’re like, “Oh, look it’s a really big trapezoid. This is a really big property.” And you can’t tell the actual, I don’t know what the fancy word is for speech here.

Willie:
Elevation.

David:
Yeah, the elevation of the property. And I did the same thing buying cabins in the mountains where I’m like, “This lot is huge.” And I’m all excited to go see and then I go and it’s like, “Oh, I have 12 feet of driveway and then a house and there’s nothing but complete drop off underneath it. It’s completely unusable land.” So, I can see how that’d be very easy to do when you’re buying out of state.

Willie:
Yeah, so that happens. And it actually happened a few times before I learned my lesson that Google Earth Pro actually has topography. You could actually look into it. Bought some lots that were in flood zones that you couldn’t build, too wet. I bought a number of properties without road access. Those actually can be okay from time to time if you buy them right. But those are the primary issues that I’ve had.
Usually, land is super simple. The inspection is nothing crazy. Unless you’re buying lots for few hundred grand that you need to make sure you don’t have any setbacks beyond X point.

Paul:
Septic issues. We learned a lot of lessons in Virginia and North Carolina. Those are states where… for example, you go to Texas or California and Florida. Florida, you got to look out for wetness. But perking and all this stuff, it’s not that relevant to the properties. It’s not really an issue. We’ve tried to do deals in, I remember, Richmond, Virginia and Raleigh, North Carolina, for example, and we got our butts handed to us in terms of buying dogs. We still, at least broke even or made a little money.
But we buy it and then the real estate agent is like, “This thing doesn’t perk.” I’m like, “How did you know that?” He’s like, “Well, if you go to this page on this website at the county level, they have all the perking information. And this is makes it a not buildable lot.” And we’re like, “How the heck were we supposed to know this?” As we’re built this thing, you just get those scars and you learn. It’s similar probably with houses and all that, but we learn it just, so now we’re like, “Do we really want to put a lot of effort into these areas where the barrier to entry is so high?” Not always, because there’s a lot of things that you could miss.

Willie:
Yeah, there’s one more thing that is common to miss that we’ve missed is properties can be in HOAs, Homeowners Associations and there’s big fees and back liens on the properties. Taxes are easy to check, back taxes. Liens are a little bit harder because you’re not always certain a property is in an HOA unless you investigate the area a little bit closer. I’ve had some properties that I’ve just had to let go to basically, go let properties go to tax auction because there have been big back liens on them.

David:
What I like about the story so far is you guys have freely accepted, “We’re going to make mistakes. We’re not going to bat a thousand.” You don’t know what you don’t know. Part of running a successful business is getting your teeth kicked in, especially in the beginning, but it never stops. There’s always a new thing that pops up or an employee that made a decision where they hadn’t seen that before. They made a mistake. There’s so many mistakes that happen in any good enterprise and a lot of investors have this, I don’t know what it is that makes us think investing in real estate or running a business in a real estate environment will be different than everything else in the world.
Where like, “Ah, mistakes shouldn’t happen here and you should just buy a property and you should go really smooth. And someone else should have been there to tell me every single thing that I would’ve needed to know. And if one thing goes wrong, they think I shouldn’t get into this.” Where you guys are like, “Oh, no, no. We could write a book about all the things that we had to learn the hard way.” But what I love is you figured out a way to mitigate that risk. You’re like, “Well, we make sure we buy at a certain price or we make sure that we have enough of these really solid ones in our portfolio to make up for some of the dogs.”
So, what are some of the things that you’ve implemented into this EOS system that you know are KPIs in your business? You’ve got to get this thing right and if you do, the rest of it will probably be okay?

Paul:
I wanted to add one thing you were going to say and then I’ll let Willie go into KPIs. We got business coaches. I think he’s out of his mind for the amount of things that Willie tracks. We have a high level executive coach and he was like, “What the heck are you guys doing?” And Willie is like, “We’re going to keep tracking these.” He’s very numbers driven.
But what I wanted to add to what you were saying is about failing and taking risks. One of the things, the way that I’ve run my life and the way that I do things and Willie is the same, is I’d rather learn by doing and trying versus reading about a theoretical thing. And we’ve implemented that culture into our business. So, now that me and Willie are not necessarily in the weeds on any of these deals, we give our employees a lot of freedom in terms of like, “I’d rather have someone go out and try some stuff and mess up,” versus having to have everything perfectly aligned and have every question answered. I’d rather let them make a mistake, learn from it.
We give our team members a lot of freedom to do stuff, so that they can try things instead of this rigid system. And I think that’s been a little bit of our secret sauce is, you know. And we also seek to hire people that are of that same mindset, not super rigid and more, they think entrepreneurial. Maybe they think like a business owner. That’s actually one of our company principles is thinking like a business owner and taking some risk. Not crazy risk, but having that company culture. And that goes hand in hand with not having this like, “Oh, my God, it has to be perfect.” And that’s when people get scared and they don’t act.
And for the people listening, it’s like some people don’t want to act or don’t want to get started because the stars have to align. When the reality is you could just jump in there. And if you take a calculated risk, okay, maybe you’re okay with losing $500 or $1000. It’s probably better to lose that $500, get that education, and learn and pick up and go again versus, “Okay, this has to work and da, da, da, da, da.” That’s the piece that I wanted to add there. And I think it’s really important that’s just how we think and I think the results are there to prove that it works.

David:
Yeah, I don’t think that it could be denied at this point that the “learn by doing” model is overall, you’re going to learn more and you’re going to learn faster than when you want to analyze something for six years before you take a step because you don’t want to make a mistake.

Paul:
It’s like people trying to time the market. You can’t time the market or stocks.

David:
Exactly.

Paul:
When’s the bottom? When’s the bottom? Well, if you would’ve just jumped in there and you average it out, you would have won anyways.

David:
That is a great point. Willie, what are some of the KPIs that you focus on from your end?

Willie:
Yeah, so basically, the way we break it down is we have 60-something processes in our business. And each process, like I think of a process like lead comes in, how does it work through the system? Or we buy property, what are the steps needed to close through a title company? What are the steps needed to close a property without a title company? Those are just some examples. We have 62 processes and each process has multiple steps. And at each decision point, and now, I’m getting a little technical and I’ll talk high level in a second. But each process has a decision point that may or may not be a KPI.
So, lead comes in, did we call them? Did we call that lead? What are the number of called leads versus uncalled leads? How many of those leads converted to an opportunity? And this is just from the acquisition side or sales side. How many of those opportunities converted to an appointment and how many leads converted to appointment to a sale? Just from that, we had X amount of leads come in, we had X amount of opportunities created, we had X number of appointments set and attended, X amount of deals closed. That’s just an example. Each side of our business has a process until we manage a lot of those KPIs.
For me, I review the KPIs once a week. Again, we have over 250 KPIs and most of them are not important. So, I think a lot of your listeners should realize that there’s only a handful that can do most of the work. For us, you can’t oversee an entire 60-plus person company by listening. You can’t listen to all the calls from sales, acquisitions, customer service, transactions, finance, et cetera. In order to just oversee and make sure that everyone is being held accountable, I just like to look, to see, “Oh, there’s been three delayed closings this week that its closing date has been pushed.” That’s one of the KPI examples.
So, just managing a business from a high level, looking at all the numbers from all the processes is for me, it gives me a little peace of mind being able to manage the business and understand what people are doing. And what numbers, where the numbers are trending to make sure that we’re going in the right direction. For me, it’s the only way to manage a company at scale and be able to understand and hold people accountable and responsible for what they’re supposed to do.

David:
If you had to sum up, “If we get this part of it right, we can make mistakes and the other parts will be okay?” What are the most important parts of the business?

Paul:
I think and this is applies to anyone that’s in real estate, and it’s a cliché saying, but if you buy the property, you can’t lose. If you buy it at the right price and you buy it at the right location or whatever it is, it’s in my opinion, if you do the work upfront, you’re going to probably be safe. It’s doing it right in the beginning versus trying to fix it on the back end or you’re going to sell it because you got better marketing. No, you bought it at such a low price and your basis is so low that it’s hard to lose.

David:
That’s a great point. Just buying it right. If you buy it in the right area where there’s demand, every other mistake can be figured out and your business is going to be okay, right?

Paul:
I guess. Everything will be okay.

Willie:
Yeah. The key to our whole business is that we’re buying land at discounted prices. The product is good. We’re buying good land at good prices. And so, a lot of our mistakes are going to be forgiven because we did the only thing that mattered.

David:
It’s a mistake that not just forgiven, but it doesn’t collapse the entire business if you make that mistake. Whereas if you pay too much for the land and you can’t sell it that would collapse the whole business. The whole thing would freeze. I’ve just noticed there’s certain mistakes that you’re going to make. And a lot of people put their attention on that part. They just focus on the wrong thing. They try to get operations perfect or they try to make the experience as smooth as it could be and they don’t actually buy the properties right or they don’t buy the right areas.
And so, that’s why I’m asking that question because every business has a thing, you get a better return on for doing well. And many people focus on the wrong part of that thing or even worse, they end up just following someone else’s blueprint that is completely unrelated to their own skillset and their own strengths and then it doesn’t work for them. So, with you two, what would you say each of you has to do well for the business to thrive? Paul, I’ll start with you.

Paul:
I think for me on my end, it’s changed over time as we built a team. When we first started, it was doing the marketing, doing the sales, and making sure that all that’s running smoothly. And now, that we have a sales manager and we have a whole team for marketing, it’s shifted. So now, it’s more like being the visionary. I’m more of the visionary. Willie is the integrator. So, where’s the company going? So, we decide, it’s going this way. Willie is the one that’s going to make sure as the operations, that the operations are going there.
My primary role is visionary and figuring out where do we need to march towards as well as, “Okay, we want to march towards this.” What relationships do I need to create outside of our organization that will help us get there? And who do we need to be networking with? Where do we need to be going? Who do I need to be reaching out to help us get to that destination? That’s what my primary focus is.

David:
And Willie, when you get to that destination, what are you doing?

Willie:
When we get there? Doing a little dance. No. What do you mean when we get to where? Like hit our goals or how do we get to our goals?

David:
The story that I heard Paul saying is basically you have this army and he’s going to go like survey, “Where should we move the troops? Where’s the opportunity? How am I going to speak with the locals when I get there? What alliances do I need to make?” It’s like, “This is where the biggest opportunity is.” And then it’s identified and he’s going to figure out, “How do I get us from where we are to there?”
And then when you get there, Willie, you jump in and you’re like, “All right, I’m going to make sure that when we’re here, we’re doing things the right way. We’re buying the right properties. We are getting enough stuff in the pipeline. We’re selling them at the right margins and we’re tracking what’s going on.” Do I have that wrong?

Willie:
Yeah, well, I guess the getting there is a journey in itself, so I think making sure that we have the right data systems. I also handle finance. Making sure that everything is we’re well-capitalized, our reporting is good. Just making sure that our CRM is what we needed to do. Right now, a lot of my time is spent dealing with, we’ve got three to five developers working on our CRM at one point. So, making sure that we’re building it, making sure that we’re hitting our KPIs, making sure that nothing gets lost. There’s a ton to do and a ton of organization that’s needed for us in order to just keep building and keep chugging and keep growing to hit the goals that we want to hit.

David:
All right. We’re going to move on to the next segment of our show. It is the Deal Deep Dive. In this section of the show, we’re going to dive deep into a deal that you guys have done and learn the specifics of it. So, question number one, what property is this?

Paul:
Sure. I just pulled up a random property that I think we sold right before this show. One second. This is a property in Southern California and this is Los Angeles County. I’m just pulling it up on my scree, so I can look at it. I have the numbers in front of me though. This is a property in California that we purchased for $6,300 and we purchased it with cash. It is located in a… let me see, I’m just pulling it up. It’s on a paved road in California. It is two and a half acres.

David:
And how did you find this particular property?

Paul:
This property, for example, is in one of our areas that we just have been doing deals in for probably five years. It’s just an area we know super well in basically, outside of Los Angeles, California. The way that we run our business is we have different areas. We treat our business, properties like inventory, like as of a store was stocking it. California is our main markets in certain areas, and so, this is an area that we “restock.” We look at each property as like a stock. This is just an area that we do business in regularly.

David:
Okay. And then you mentioned you paid $6,500 for it?

Paul:
$6,400. That’s great.

David:
Okay. And then is there a story how you negotiated or did someone on your team do that?

Paul:
Yeah. This property, I think we probably sent out a mailer and then our mailers go to either a live acquisitions member or it will go to our answering service. And then from there, we basically have a system to review the deals and if we like the deal, someone will go and call them and negotiate. And so, it’s probably negotiated by someone from the team.

David:
And then you’ve already mentioned you funded it by being cash. So, what did you do with it? How did you exit this property? How did you sell it?

Paul:
Sure. We sold this property for owner financing terms, so like we talked about before. We posted it on our website and maybe it was featured. Maybe it was a featured property of the week, I’m not really sure, but property was posted. Someone, a sales agent, helped the buyer find this property and they went to the website, put their credit card in and started making monthly payments on it. So, we sold it on owner-finance terms.

David:
Okay. Awesome. Now, I see the outcome there. Was there any lessons that you learned from this deal?

Paul:
This particular deal, no. This is just a cookie cutter deal for us. This is a little bit higher of a purchase price than our average. So, just I’m sure you want to go over the economics of it.

David:
You mentioned that okay, you bought it for $6400.

Paul:
I only told you what I bought.

David:
That’s true. What did you sell it for?

Paul:
Sure. This property, the person checked out and the terms were, had it in front of me, I think it was 269 x 120. Sorry, $269 for 120 months, which is $32,000.

David:
They bought on a 10-year note, basically?

Paul:
Exactly. They’ll make the monthly payments.

David:
And that’s 0% interest you said you guys are doing?

Paul:
Yeah.

David:
That’s pretty cool. So, we’re done with the deal deep dive, but I want to ask you, how big of a concern do you guys have with inflation when you’re selling most of what you’re selling on terms?

Paul:
Inflation, in what aspects?

David:
Like if you’re selling it for $32,000 but they’re paying it over 10 years, the money you’re collecting 6, 7, 8 years from now could be significantly less than what it’s worth today if inflation continues to get bad. Is that something you guys are taking into consideration when you’re doing these deals or are you just, “No, we’re going to make our money back in the first two years, so anything on top of that is just icing on the cake?”

Paul:
Yeah. That’s actually great. We talked to investors and all these people, no one has actually ever asked us that question before. It’s a great question, so maybe Willie has a different answer because we’ve never been asked it. But my response to that is that we look at it like, “Okay, we’re going to make our money back in one and a half to two years on average, and then every payment after that is profit.” I wouldn’t say it concerns me very much and I’d love to hear what you have to say about it, Willie.

Willie:
Yeah, so I think mean there’s two sides of it. We carry the note, yes, the value of the note decreases with inflation, so that is a consideration. But one, like you said, we do get our cost back super quick. On average on our whole portfolio, we’ll get our cost basis back in about 16 to 18 months, so we’re de-risked from that standpoint. Margin is super good. Everything after that is profit.
And the second thing is, the other side of it is that, and we can get into how we’re financed, but we carry a lot of debt. So, you can think of us, our model is that of a finance company. We raise debt and then we issue basically credit. It’s an installment contract, but we’re holding notes in a portfolio, so the value of our debt also goes down with inflation. It’s two sides of it. And the one thing that always goes up is the value of our inventory, the land that we own. Right now, we’ve got 700 lots that we own that as inflation happens, the value of those properties are only increasing.

David:
Which decreases your risk in the case of someone stops paying and you have to go, “Take it back.”

Willie:
Right, so from that standpoint, I could also talk about that and touch upon it. But we don’t take on really much credit risk at all because we own the property while customers are making payments. We keep the title. Like we said, it’s a rent-to-own type contract, so in the event of a default, we already own the title. There’s no foreclosure costs, there’s no legal fees. Maybe some operational costs, but nothing substantial. We retain the payments and a lot of times the property has appreciated in the timeframe, the buyer has been making payments.

David:
What you’re basically describing is you don’t have to go to court and go through a foreclosure proceeding to take title away from the person who owns it because they stop making the payments. What is the process like if you actually have to? Do you just file paperwork and you immediately take it back if you can show that they violated their contract by stopping their payments?

Willie:
Right, so I just want to be clear, by all means, we want people to continue making payments. It’s better for us, it’s better for them. We want everyone to start to finish the contract. But for us, operationally, we send out a certified letter in the mail once they’ve missed a payment or they’ve entered into a event of default and then they have a cure period. After that cure period, we can remarket and sell the property if they haven’t finished making their payment.

David:
Yep, but the point is it’s super easy to do, so I like what you’re saying. It’s, “Yeah, inflation might hurt us on the upside, but it protects us on the downside because the money that we’re borrowing from other people we’re paying back with cheaper dollars than what we borrowed.” And in a sense, you’ve tied the risk, like every smart personal finance manager does. No shock, Willie, that that’s what you did. You’ve tied the upside and the downside to the same place. As one goes up, the other does and as one goes down, so you keep your risk low and that’s very nice.
Plus you’re doing so much volume. I don’t think it matters as much as you guys thinking, “How much can we scale? How many of these properties can we buy and how many can we sell?” As when you’re only getting six or seven properties, how much inflation hurts you is very significant. But when you’ve got 700 lots in counting the impact of that on your actual personal financial situation is not nearly as prevalent. So, it’s very, very smart. I’m impressed with what you guys are doing and I’m also impressed with the creativeness of it.
Part of me is feeling like some of the secret sauce might be the website you’ve created where it’s actually incredibly easy for someone to just go in there and buy land with a credit card. I didn’t ask you about that, but do you guys feel that’s part of your advantage?

Paul:
I think there’s not one single point of advantage. I think it’s just probably just the reps that we’ve put in and the stuff that we’ve tried. And the finance piece of it, the platform piece of it of how we treat this a brand and this robust website with a full eCommerce team. And I really don’t think it’s one single thing. It’s all of these things combined together and our drive to improve it every single day and have the best possible experience and people ask us about it.
And coming from the Amazon background, Amazon, when they started Amazon, their most important thing was the customer. For us, we’re always thinking about the customer. How can we make this easier? How can we make it better? How can we provide better properties that people really want? And so, it’s like if you look at it from there and then walk back versus “How can I make the most amount of money?” Then you’re going to make bad decisions that aren’t good for the customer versus doing what the right thing is. And then if you do the right thing for the customer, it’s going to make you infinitely more money than only worrying about driving profits.

David:
That’s how life works. It’s just what questions are you asking. Are you asking, “How do I make this easier for me?” or are you asking, “How do I make this easier for the customer?” And that applies to every business or vocation anyone can be in. If you’re the title officer or the real estate agent or whoever who’s like, “Oh, this guy is always asking for something else. How do I make it easier for me?” No one wants to work with you. When you’re the one that’s always trying to figure out, “How do I make this easier for someone else?” All the business comes to you and you can actually scale it like you guys have. So, I wanted to highlight that because I wish more people would hear it.
I really think that’s the number one cause of most people that are frustrating economically is they’re taking the wrong approach to how to make money. They’re looking for a solution that does not require them to serve other people or so.

Paul:
And that goes back to my origin story of not being fulfilled or providing value. Every day, I wake up and we’re building this thing that in my opinion is providing so much value in this real estate space. And we’re providing a real service on the front end and the back end. And we’re helping people that want to that maybe they have land and they just don’t know what to do with it, or they’re having a hard time getting rid of it.
So, we’re helping people there and we’re helping fulfill people’s dreams on the back end of owning their dream property. Maybe they don’t own a home, but it’s pretty easy for them to go and put their credit card in and pay $200 a month and in 5 to 10 years they’re going to own this thing that they can pass down to their children. That’s the story that we hear all the time. And we’re making those dreams a reality all the time. And we have awesome reviews. People leave us awesome reviews just about fulfilling their dreams.
And for us, I think that’s super powerful. It’s not about the real estate. It’s not about making the money. It’s like we’re literally helping to change people’s lives through real estate. And as corny as it sounds, it’s really true. And we’re providing a product that is super easy to have an impact on someone’s life. Maybe they’ve been a renter their whole life. Well, now, they have an opportunity to own something. And maybe, they don’t have the financial acumen to buy a house, but they could buy this property. And now, they have something that they’re proud of. They’re fulfilling their version of the American dream.

David:
All right, we’re going to move on to the last segment of the show. This is the Famous Four. In this segment of the show, I’m going to ask each of you the same four questions we ask every guest. Question number one, we’ll start with you, Willie, what is your favorite real estate book?

Willie:
Favorite real estate book I would say is, Am I Being Too Subtle? by Sam Zell. He’s someone I’ve looked up to for a long time. Great investor, maybe the best real estate investor of all time. I thought that book was super valuable, super inspiring story.

David:
All right. How about you, Paul?

Paul:
I don’t know if this is weird, but I’ve never actually read a real estate book. Is that that okay?

David:
Yeah. Of the people you network with, what’s their favorite book?

Paul:
I don’t know. I know what podcast people like. I know what YouTube channel is. I know all that stuff. You want to talk business books, I’ve read a lot of them, but I’ve actually never read a real estate book.

David:
Not a problem at all. You guys are writing your own book right now, so that’s fine. The second question, you’re going to like this, so Paul, what’s your favorite business book?

Paul:
I like the business book, The Hard Thing About Hard Things by Ben Horowitz, who’s from Andreessen Horowitz. Because there’s a lot of books that I’ve read that are maybe business, but they’re like how to change your life. This is a hardcore business book of what’s it like running a multi-thousand person company. And you’re going public and then your stock prices tank and how do you manage that outcome? So, that’s my favorite business book.

David:
All right. Willie, same question. What’s your favorite business book?

Paul:
I was thinking about that one, too. That was definitely a good book. I like that a lot. I’ll go with Made in America by Sam Walton, the story of Walmart. I guess I like these stories of super inspiring people doing cool things. It was very well-written and another inspiring business book.

David:
All right. Paul, what about your hobbies?

Paul:
Hobbies? I am an avid tennis player, so that’s one of my hobbies. My other hobbies is doing any water sports. I do a lot of wake surfing and jet skiing and stuff like that. That’s one of the reasons why I moved down to Florida, so I could do more of that.

David:
All right. How about you, Willie?

Willie:
I have a few. I like playing chess a lot. I probably played chess every day after the Queen’s Gambit. My uncle started playing, my dad started playing and they got me hooked, so I’ve been playing a lot of chess.

David:
Do you have a score? Was it the Elo score?

Willie:
Elo?

David:
Yeah.

Willie:
I don’t know what Elo is, but my chess.com score is just above 1500. So, good enough.

David:
I’m going to smile and nod like I know 1500 is good or not. I have no idea. I’m assuming it’s pretty good because you seem like a smart dude.

Willie:
It’s good, it’s good. Yeah, so I like playing poker as well. I like playing tennis, being active, going to the beach.

David:
Do you guys play double’s tennis like you play double’s business?

Willie:
I’ve actually only played tennis with Paul once, surprisingly.

David:
What would the strategy be if you two were playing tennis together? How would you be attacking the other team?

Willie:
I would just be demolishing Paul. Trying to shove the ball on his side of the court.

David:
No, no, no. You’re on the same team in this.

Willie:
Oh, we’re on the same team?

David:
Yes.

Paul:
I don’t know. I feel like Paul has got a good serve.

David:
I think Paul would probably be distracting the opponents, talking to them, finding out what their goals are in life, what they’re interested in. And you would be a cold calculated, anticipating the trajectory of the perfect shot and putting spin on the ball and finding their weakness and exploiting it, while Paul gathered the intel that you needed to do. That’s how I see this relationship working.

Willie:
You’re not wrong.

David:
All right. In your opinion, Paul, what sets apart successful investors from those who give up, fail, or never get started?

Paul:
Yeah, that’s an awesome question. The big difference between that is just I think what we talked about earlier is the willingness to try things. The willingness to be okay with failure. And I won’t go into super cliché like a thousand, every shot you miss is a shot in whatever that quote is. But the biggest difference is like I said, is like you can go out there and you’re willing to lose money or okay with the outcome of failing. But just taking every single opportunity that’s put in front of you and treating it as a learning experience, whether it’s a win or a loss. It’s at the end of the day, it’s something that’s going to get you closer to your goal in the future. So, that’s what I would say sets people up differently. It’s just mindset.

David:
All right. Willie, same question to you.

Willie:
Yeah, I mean, I think it’s pretty similar. Just when you have an idea or opportunity to take something on, just if you’re educated enough and think it might work, just take the action, do the thing, and then learn later. I think one of the best things that Paul and I do is we have an idea and then, or how do we do the idea? And then we don’t put too much thought into it. I think just execution without too much thinking. Don’t overthink things. Being persistent.
Having courage. I think making good decisions while things are hard, while you’re in the trenches and things might not be working right now and you still have to turn the corner to figure things out requires a lot of courage. So, I think having courage. Knowing that things are going to go wrong and embracing it. And just having the mindset and the opportunity to overcome it, I think that’s how you get through things.

David:
All right. Paul, where can people find out more about you?

Paul:
I made a little website, paulhersko.com, and it’s one of those link tree things. And there’s a link to our fund if you want to do investing or there’s a link to my Calendly if you want to chat and my LinkedIn. And I’ve made it simple. Just go to that and you can contact me. All my info is there, paulhersko.com.

David:
All right. Willie, same question.

Willie:
Yeah. Same answer. You can go to williegoldberg.com, W-I-L-L-I-E-G-O-L-D-B-E-R-G, williegoldberg.com. We do have an investment fund if you’re interested in investing in discount lots. We have Sunny Capital Group. If you’re a credit investor, schedule a call with me. Go there. You could also shoot me an email. My email should be on there as well, just click the link. And look forward to connecting.

Paul:
I’m curious if I’m going to get more link clicks or will Willie get more link clicks?

David:
You’ve got a competition. I can tell you guys might be lightweight competitive based on the tennis. All right, so if you would like to ask a question about raw land, now that we’re going to be having Willie and Paul on scene Greene, go to biggerpockets.com/david and ask your question about raw land. We will pick the best one and we will bring back Willie and Paul to answer it and then we will see who won the Click Wars.
All right, guys, thanks a lot for being here. I’m going to let you get out of here. This is David Greene for BiggerPockets, signing off.

Jay Farner, CEO of Rocket Companies, joins ‘The Exchange’ to discuss the process of mortgage buydowns, diversifying mortgages investment portfolios with technology and housing inventory struggles.

Ashley:
This is Real Estate Rookie Episode 245.

Tony Clark:
Got into real estate after I got engaged. I think, a lot of the listeners and a lot of us kind of we go through our high school college years and then realize we have to be financially responsible and figure out how to build a life. And for me, just wanted to get into real estate or look for financial independence, but didn’t know where to start. But got into real estate a couple of years ago and moved across the country. I’ve bought a sprinter van, I’ve lived in a trailer, done a few just like out there things.

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

Tony Robinson:
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 today, I want to shout out Becky Sue, Elder Becky left us a five-star review on Apple Podcast and Becky said, “I love the dynamics between Ashley and Tony. They keep it fun and always interesting. I learned so much from this show and it’s given me the education and confidence to invest in real estate. Keep it up. I appreciate you both.” No, Becky, Ash and I appreciate you. And if you guys are listening and haven’t yet left us a five-star review on Apple Podcast, please do. The more views we get, the more folks we can reach. The more folks we can reach, the more folks we can help. And that’s always our goal here at The Real Estate Rookie podcast. Ashley Kehr.

Ashley:
I am so happy you’re finally saying leave us a five-star review instead of leaving us an honest rating and review. You slipped up that time.

Tony Robinson:
I’m looking through and we have not gotten a five-star review in quite some time. Actually here’s one, we got a four-star back in November, everything else was a five-star. So even when I say honest, most people are honestly leaving us five, so it’s not a bad deal.

Ashley:
Yeah, thank you guys so much, we really do appreciate it, it makes our day. We pour a lot of our heart and soul into the podcast, so we hope that you guys really are finding value from, and our producers do a great job of finding our guests to bring them onto the show too.

Tony Robinson:
Yeah. It’s been so cool. I mean, we’re at Episode 245 and my first episode was, what, 37 or something like that, so we’ve done literally over 200 episodes together and it’s just so crazy. It’s so crazy like the number of stories we’ve heard, the messages that we get, the impact that the show has had. People all the time, they thank you and I as the host for everything that we do. And so often, we have to remind them that, hey, we’re just the people asking the questions, it’s really our guests who bring the stories and bring the experience and bring the value, and we’re just lucky enough to be able to ask all the questions to people.

Ashley:
And they take the time out of their day to sit down with us with all of our tech issues we have and patiently wait for the podcast to get going. So yeah, we appreciate every single one of our guests so much. If you guys do leave us a rating and review, please let us know what guest had such an impact on you, what was your favorite episodes because I think it’s about time, we’ve hit over 200 episodes, maybe have some follow-up episodes and really see where everyone has been the last two years that they’re doing.

Tony Robinson:
Well, speaking of guests, we got our great one for you today. He goes by the name of Tony also, not Tony J. Robinson, but Tony Clark. So Tony Clark is our guest today. And funny enough, Tony applied to be on the podcast and then in between his application and today he actually ended up getting hired by BiggerPockets. So he’s now part of the BiggerPockets family. He’s on the agent sales team, so he is doing some cool stuff on the agent side. But Tony has got such a crazy story and we’re going to get into it, but he talks about how immediately after getting engaged even, he convinced his wife to move out of their home into a trailer and across the country. But how that decision really set him up for the success, it brought him to the podcast today.

Ashley:
Yeah. And the part that I really liked is him talking about how they chose their market and then how they built out their criteria too, and once they chose their market too.

Tony Robinson:
And near the end, he also plugs a really cool piece of advice on how he got some lending, even though he was essentially unemployed, and his wife was almost employed, but he was still able to find a bank to lend money on that first deal there. So really interesting story all the way around.

Ashley:
Tony, welcome to the show.

Tony Clark:
Thank you. Just say, which Tony? I know we got two of us today.

Ashley:
Well, as I mentioned earlier before we started recording, I don’t acknowledge the other Tony on the show, so it shouldn’t be a problem at all.

Tony Robinson:
It’s actually true. We don’t talk to each other a lot during the podcast, most of it is like us talking to the guests.

Ashley:
Yeah. Every once in a while we’ll throw a question to each other like, Tony, what do you think about that? But very rare I’d say.

Tony Clark:
Oh, nice. Well, hey, thanks for having me. I’m excited to be here and excited to talk with you guys.

Ashley:
Yeah, so let’s get a little bit into your background.

Tony Clark:
Yeah. So basically, I grew up not knowing anything about real estate. I grew up out in Colorado, so a lot of skiing, a lot of snow, a lot of just hanging out. My dad was a small business owner, my mom is a teacher and just really, for me, got into real estate after I got engaged. I think, a lot of the listeners and a lot of us kind of we go through our high school college years and then realize we have to be financially responsible and figure out how to build a life. And for me, just wanted to get into real estate or look for financial independence, but didn’t know where to start.
I know we’ll get into a little bit of my journey and how it happened, but got into real estate a couple of years ago and moved across the country. I’ve bought a sprinter van, I’ve lived in a trailer, done a few just like out there things. My wife spent along for the ride the whole way, but it’s been a lot of fun. And now I’m out here in California where she grew up and where I went to college.

Ashley:
Well, we’re going to have to talk more about that sprinter van because other Tony knows that it is my dream to capture him and Sarah into a camper van, and the three of us do a rookie road trip across the country doing live podcast with a vinyl wrapped camper van with the rookie podcast all over it, and Tony’s face across the path.

Tony Clark:
That’s a dream right there.

Tony Robinson:
She’s been pressing hard to make this happen. So we’ll see if one day.

Tony Clark:
2023, and I could see it, the whole tour.

Ashley:
Okay. So Tony, before we get into too much, what does your overall portfolio look like today?

Tony Clark:
Yeah. So right now, we’ve got three units where we’ve got a duplex out in Nashville, Tennessee. We actually just sold a rental that we had out there. And then I’ve got a house in California that we’re currently living in and might be splitting into a house hack.

Ashley:
Awesome. Congratulations on those.

Tony Clark:
Oh, thanks.

Ashley:
So before we get into your story, everything like that, tell me about what sucked about your life before real estate? What made you decide, I need to change something, I’m going to become a real estate investor?

Tony Clark:
For me, I realized how expensive life really is once you get into things. And I straight out of college, I was working at a church, I was making about $50,000 a year in Los Angeles, which, Tony, you know well is like making $30,000 somewhere else in the country. And then I met my now wife and we started dating and things started to get serious and I was like, “Wow, how can one provide for future family someday, but also how can I not have to work at a job where I’m working a lot of nights, a lot of weekends, long hours for the next 30 to 40 years?” And it was really then that I just realized that I had to do something different or I had to figure out a way to escape that grind.
I had one mentor growing up, or not even mentor, he was one of my dad’s friends who was a real estate guy. And I just remember being able to go golfing with him on a Thursday afternoon and he had the time freedom, he was someone that I really looked up to, and I was like, “Wow, maybe there’s something to it. So I should look into real estate and see if there’s something there.”

Tony Robinson:
Tony, you said your dad was a small business owner, what kind of business was he in?

Tony Clark:
Yeah. So he runs a moving company out in Colorado, just a local moving and storage business.

Tony Robinson:
And why not follow in your dad’s footsteps versus going down this other entrepreneurial route of becoming a real estate investor?

Tony Clark:
My dad always told me growing up, when I turned 13, he was going to throw me on the trucks to show me exactly what I didn’t want to do for the rest of my life. That’s been his thing. He loves what he does, he’s been very successful at it, but he just kind of said, “Hey, it’s tough work, it’s backbreaking work. It’s not going to be the path for you unless you really, really want to.” And I learned very early on that I didn’t want to lift furniture and drive moving trucks full-time.

Ashley:
My one business partner, Joe, his dad has owned a landscaping company and was kind of the same thing. He’s worked for the landscaping company for a really long time, since he was young, probably the same age as you at 13. And his dad is also a very successful real estate investor, he’s invested into stocks and everything like that, but he wanted to show his kids too as to like, “Okay, you can work hard, you can use your body to do physical labor and you can make a lot of money how they were doing that, but is it really sustainable?” And now we laugh because his dad, who still owns the landscaping company, he has these young kids working for him and he’ll be like, “Oh, you know what? It’s raining today. I’m going to head out to the lake, pop a movie in and I’ll be back in a couple days.”
And it’s like he has shown them that you build this other kind of income streams that are more passive that you could still have your business that you started out or whatever. But I think that concept of, do you want to be successful but you have to show up every day, you have a job. And it’s like the Robert Kiyosaki thing where you can own your business, but do you really just own the job and always think of a chiropractor. The chiropractor most likely isn’t getting paid unless they’re their cracking backs. And I’m assuming for a while was probably like that for your dad and maybe he’s built it out now where he doesn’t have to actually be the one that’s doing the physical labor and things like that. But not everyone can always get to that point, and starting out. With Joe, the strain on his body, I mean, he complains every single day about the backbreaking work, but this is the money that he is using now to fund all of his real estate deals and his investments so that he doesn’t have to break his back every day going forward.

Tony Robinson:
Tony, I want to talk a little bit because you started the story off with this super crazy camper van journey that you went on. So how do we go from living in Southern California making $50,000 a year, working for this church, getting engaged to being in a camper van somewhere else on the other side of the country? What happened in between in those steps?

Tony Clark:
Yeah. So really when my wife and I got engaged, it was fall of 2019 and so we were just getting ready to head into basically COVID and the world shutting down and everything that came along with that. And I’d started to think about, what can I do to make extra money on the side? I don’t have more time that I can spend. And so, what’s something basically I read Rich Dad, Poor Dad and said, how can I own an asset that somebody wants, and I can’t afford a house right now, so let’s just find something. And so, I bought a Ford Transit van. So when you think of the sprinter camper vans, you think of the really cool big ones that people drive around in and you size that down to the food delivery truck van size, that’s what I could afford. And so, I bought one of those and then just built it out, put a bed in it and put some flooring in it and turned it into a camper van and then rented it out on Turo. It was essentially Turo just for camper vans and…

Tony Robinson:
What’s the name of that site?

Tony Clark:
Outdoorsy.

Tony Robinson:
Outdoorsy.

Tony Clark:
Yeah. And so, rented it out on Outdoorsy and then basically wound up selling my car and just driving that when it wasn’t being rented. And so, that for me was really a way to just kind of say, well, I can make some money, I can own an asset that now people are paying for my car and paying for my gas money and that can at least help me start to pay off part of the ring that I just gave to my fiancé or try to start bringing in some passive income.

Tony Robinson:
So, Tony, how do you go from, okay, you have this transit van on Outdoorsy to eventually getting into your actual real estate investment?

Tony Clark:
So basically the camper van was the first step and then the next in between step is somehow my wife looked at the camper van and said, “Wow, that’s super cute. We can live in a trailer in Southern California because it’s cheaper than renting.” And so actually when we got married, we moved into this trailer that her parents had bought some property and they were getting ready to build a house.

Tony Robinson:
That’s so interesting. So it was your wife’s idea to move into the trailer?

Tony Clark:
It was either her idea or she just went along with it from the beginning. I think I brought it up offhand one day and I was like, “Oh, this would be kind of fun.” She’s like, “Yeah, let’s do it.” And I found a good one, that’s all I could say.

Tony Robinson:
But, Tony, were you the one that was driving the initial interest in real estate or was she also going on this journey with you?

Tony Clark:
Yeah. So I was initially interested in it. I’ve always been a numbers nerd, I was the kid that was selling baseball cards to his friends on the playground at recess and that translated into then real estate. I was really interested in real estate and I brought up house hacking to her first and just said, “Hey, we could buy a duplex and rent out half and it’ll cover our whole mortgage, or even in California cover most of it.” And it took a little bit of time to get started, but really the big thing that I brought up when I was talking to her about real estate is I said, “Hey, I want you to be able to be a stay-at-home mom with our kids.” That’s always been her dream is to not have to work and not be away from the family.
And so, I was just kind of like, “Hey, babe. Here’s something that I think, I’ve read some books on it but I don’t really know what I’m doing, but if this works, this might be a way for you to be able to stay home with our kids in whatever five, 10 years and I’ll be able to be there too and not have to be working all the time and we’ll really get to have some family time.” Because that’s something that’s really important to us. And I think that was the light bulb moment that went off for her where she said, “Okay, I see the vision, not just you want to go buy some houses and make money doing it. It’s no, this is actually chasing freedom for us instead of just another kind of passion project or something you’re working on.”

Ashley:
I think that’s something that a lot of people struggle with is when they’re approached with an idea is seeing the actual vision. And a lot of times that can be a spouse or a significant other, especially if you’ve started a lot at different side hustles or a lot of different hobbies, things like that. I mean, even myself, when my son was first born, my oldest, I had a little sweat shop in my basement where I was sewing baby clothes and selling them online and that was my side hustle. And then it got to the point like, “Oh my god, my fingers hurt and I couldn’t stand out there already or couldn’t be on my sewing machine anymore.” I’m like, “This is not sustainable.” So it’s finding people who are like, okay, you need to understand like, yeah, maybe I’ve tried these 30 different other things, but here’s why real estate will work. So were you that type of person at all where you had started lots of other businesses and you had that entrepreneurial spirit within yourself, but you just hadn’t found the right thing yet?

Tony Clark:
Yeah, totally. I always had some side hustle or something I was doing where I think… My wife’s a champ for going along with all of it, but it was even in high school, I remember I started a lacrosse equipment company. I played lacrosse and learned how to sewing baby clothes, I learned how to string lacrosse sticks and so I’d hand out brochures to my friends and then I was like, “Oh, this is great. I can actually email people in China and they won’t know that I’m 14 years old and I’ll say, Hey, can you send me X amount of this kind of lacrosse stick and then I’ll go sell them.” And probably if I did that now it would not end well and I’d go, it’s probably all sorts of fraud or something I don’t know.

Ashley:
But also how old were you when you did this that you actually found somebody to actually email in China? Even now, I wouldn’t even know where to start with kind of producing a product.

Tony Clark:
I don’t know. It was one of those things, but I’ve somehow found it and I was like, “Okay, here’s a factory that I can get in touch with.” But I think what I really learned from it and what I’m still learning is that entrepreneurial mindset can take you pretty far, but it can also hold you back from a lot of things if you’re always jumping from one thing to another, to another. And that’s where that whole lacrosse equipment company in high school, when I went to college, it started to die off because my time was taken up by something else and then I jumped to the next shiny object and the next, and the next.
I think it was until I found real estate where it was a vehicle where instead of saying, oh, I’m going to go create a product, sell it this week and make a bunch of money and then have to go find something else to do, it’s saying, well, here’s something that’s actually a long-term investment or a vehicle that I can use that is stable and that is simple and easy to understand and I don’t have to go reinvent the wheel because that’s what gets you in trouble as opposed to just doing the same things over and over.

Tony Robinson:
Yeah. Tony, you mentioned a couple of really insightful things that I want to circle back on. So first, in terms of your wife and how you got her on board, I get that question all the time because my wife is my business partner, we are side by side in a real estate business in so many ways and people always ask me, they’re like, “Tony, how did you get your wife on board? How did you get her to be okay with you investing?” And I think the approach that you took, and this is what Ashley said earlier, of really selling that vision about, hey, here’s what our life is going to look like once we can make this happen, that’s the way that you get your spouse on board is that you appeal to something that’s not just like, this is what Tony wants to do, but hey, this is what’s best for our family and to allow us to reach our goals.
But in order for that to happen, I think there has to be a certain baseline of trust, I think, between you and your spouse to where they have to believe that if you say that, hey, I’m going to commit to doing this thing, that they actually believe you when you say that. And I think in this conversation to my second point about the whole shiny object syndrome, I know I struggled with the same thing a lot my early 20s as well, where it’s like every couple of months I was jumping to a different business idea and if you log into my Blue Host account from 2009 to, I don’t know, a few years afterwards, there were so many different URLs in there because I was just trying all these different things over and over and over again. And it wasn’t until I got later in my 20s and I’d said, “Okay, part of the reason that I haven’t found success is because I haven’t really focused in on one thing yet. And once I really committed myself to this one thing, that’s when the success started to show.”
So wrapping up my point here, if you are someone who is in Tony’s seat and you want to get your spouse on board, first, I think pitching them on the vision of how it positively impacts the entire family and not just you is the first step. But secondarily, you have to prove to your spouse, you have to give them a reason to trust you when you say, hey, this is the thing that I want to do. And that trust comes by showing them that you’re actually committed to this. So that’s reading a bunch of books, going to the local meetups, going to conferences, talking to your spouse about what you’re going like. When they see that you’re invested, when they see that you’re taking this seriously, that’s how you build that trust that they believe you and when you finally do push that vision to them.

Ashley:
So to move on to the next thing based off of that, now that you’ve gotten your wife on board, you’re ready to jump in, how did you build out your criteria? What kind of things do you look to invest in? What are you setting your strategy up?

Tony Clark:
So really when we started to set our criteria, we kind of said, “Well, what are the limiting factors that we can’t do anything about?” First is, “Okay, we don’t have 20% down, we don’t even have 3% down in California, so let’s go ahead and take California off the board, either we need to go invest out of state and buy a rental property and keep living here, or we need to go move somewhere where we can go invest.” And so, that was the first thing that we wound up saying is, “Okay, well, we’re limited by how much money we have. We’ve been able to save up some, but where could we go, where we would enjoy living, where we could start to build up a portfolio and where the numbers make sense for real estate where once we move out of a house hack, we’re not in a negative cash flow situation?”
So we settled on a few different cities. We looked at Charlotte or Austin at the time, wasn’t as expensive it is as it is now and Nashville, and wound up settling on Nashville. And then once we got there, really started narrowing our criteria down to even from there, okay, what neighborhoods would we like to live in where there’s house hacks available, where we knew that we didn’t want to live in some of the parts of town that either we thought were unsafe or boring or a million different reasons, but it’s just like, okay, let’s figure out where we would want to live where the numbers also make sense. And then from there, really just kind of said, okay, let’s set up a search for properties in this area and then once something comes up, we’ve just got to be smart about putting in a good offer.
I was working in real estate at the time, I had just gotten my license and so I was like, well, we might have a leg up in getting the property as opposed to other people and just went from there taking what we were given and finding a property based off that criteria.

Ashley:
Tony, I think that is such a valuable piece of information you said that you looked at where you were limited first and started your criteria off of that instead of just looking like, okay, this is my minimum cash on cash return, I want a single family, things like that. You started with what your limitations were, and honestly I don’t know if we’ve ever talked about that on the podcast really when building out your criteria is a way to do that. I think that is an amazing way to get started as to building out your buy box, your criteria as to what you’re going to be focusing on. So when you did decide on Nashville, did you build a team out there?

Tony Clark:
We did. So first, we’d moved out there for a few months and spent that time really trying to build a team where we knew I had shifted jobs, I’d taken a job with a private equity fund that was doing residential real estate so that I could learn the business, so that I could run numbers on lots of deals and come in as basically the realtor on our team. So we didn’t need to find a realtor, but we did need to go find experts in different areas for property management, eventually contractors, other investors. And really what that just came down to was those first few months in Nashville, I would just go to every single meetup I could or ask anybody I knew in real estate if they had friends who I could talk to or just basically pulling the, “I’m new in town card, who should I meet?”
And it was really surprising in the best way of how generous people were with their time and willing to meet with me. And that was really how we built out our team. It was just, hey, I’m going to get there. I’m going to take time to meet people and get out of my comfort zone, and people were willing to jump on board and help us.

Ashley:
Did you think having your real estate license was a huge advantage in getting started?

Tony Clark:
So having my real estate license has helped us on one of the five properties that we have bought now, I’ve only taken a commission once. So it has helped, but what we normally wind up doing, and if you’re debating getting your real estate license and trying to figure out if it’s worth it or not, you can get your license and it does help. I think it’s beneficial to be able to run numbers and to MLS access and different things. But you don’t necessarily need it because what we wound up doing is I would call the listing agent and say, “Hey, I’m willing to waive my commission if you’ll accept our offer on this property.” Or in the case of our first property, because our down payment was a limiting factor for us, I said, “Hey, I’ll waive my commission if you can just give us this money in closing cost credits, so you’ll pay for part of our loan fees and make some upgrades to the house for us.” And that helped us more than just getting a commission.
So I think it’s 50/50 if you want to be entrenched in real estate or you think that you’re going to be buying a lot of properties. It doesn’t hurt, it could cost $600 a year, $1,000 a year to maintain your license, but you don’t have to have it to get started or to build a massive real estate portfolio. It’s really a personal preference thing.

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

Tony Robinson:
Yeah. I just want to go back before we keep rolling, Tony. Also, Ashley called it out already about how you started with your limiting factor. There’s a book called Good to Great by an author named Jim Collins and one of my favorite business books, I’ve read it a couple times and one of the concepts in that book… Sorry, let me take a step back. The whole premise behind Get to Great was that… We got Ashley’s kids who just got home from school maybe in the camera and all dressed up. The purpose of the book Good to Great was they did a study on all these companies that had made the leap from doing average or well in their market to doing exceptional and they had maintained that level of exceptionalism for some predetermined period of time. Anyway, one of the common things they saw amongst all these property or all these companies that took the leap from Goods to Great was that they all did what’s called confronting the brutal facts.
And what they did was they were super honest about where they were today, about what their limitations were, about what their constraints were, and having that brutal honesty about where they were, allowed them to create plans that were best suited for their unique situations. Where a lot of new investors get into trouble is when they start making these plans without really realizing the limited resources they have available to themselves. But when you can compare both this extreme optimism around what you’re capable of with this extreme honesty about where you’re currently at, combining those two things allows you to really tap into your potential. And it seems, Tony, that’s exactly what you and your wife did.

Tony Clark:
That’s such a great point. That’s one of my favorite business books too. And I love the confronting the brutal facts because there’s two ways to look at it and I hear a lot of people that are on the extreme ends of both sides where the one way is, I’m going to make this happen and not confront the facts that I don’t have any money in any experience and I just want to make it happen. It’s like, well, okay, let’s bring you back in a little bit from there. But on the other side, I think there’s a lot of people who get stuck in the, oh, well, here are all of the limiting beliefs or the limiting factors that I don’t have money, I don’t have experience, I don’t have this, I don’t have that.
But if you never move past that and say, well, this is what I don’t have, but what do I have or how can I get started, then you can get stuck in that analysis paralysis for years. And I think it was in Rich Dad, Poor Dad, where Robert Kiyosaki says, “Don’t ask can I do it, ask how can I do it.” Or something along those lines where it’s just saying, okay, here’s what I do have, here’s what I don’t have, how can I make what I want for my next step? How can I make that possible?

Tony Robinson:
Yeah. So, Tony, I just want to go back to the story here. So you and your wife get engaged, you convince her to move into the trailer or she convinces somehow you guys agree to do that. How long were you guys actually staying in that trailer before you make the move across country? And how much were you able to save by doing that? I think is a bigger question.

Tony Clark:
So the numbers behind the trailer and why we wound up doing it is we walked onto the trailer lot and we said, “Okay, we don’t know what we want to buy, show us some trailers.” And so they showed us some and they said, “Well, we’ll give you a 10-year loan on this trailer. Whatever you want to buy, you’ve got good credit, whatever.” And it was like, okay, cool. That sounds good. I was thinking on the real estate investment side where I don’t know why somebody would give you a loan to just go buy a trailer for 10 years that you’re paying off, but for us, it worked out where we wound up paying about $250 a month on that trailer and we had to put maybe $2,000 down or something like that. And so, to park it on her parents’ lot, we had a generator for power and had to get pour gas in the generator. And all in it was probably $400 or $500 a month that we were paying to live in this trailer.
I say it was a trailer, it was a nice fifth wheel kind of bougie trailer thing. And so, it wasn’t like we were roughing it in this something you’d see at Coachella. So that was helpful. But we were in it for eight months. So basically we bought it the day that lockdown started, so March 9th, I think, 2020 through Thanksgiving, we were there and then we packed up right after Thanksgiving and moved to Nashville.

Ashley:
So after that has happened, you’ve moved to Nashville, you’ve figured out your criteria, everything like that. Are all of your investments in Nashville besides your house hack at home in California?

Tony Clark:
Yeah. Yeah.

Ashley:
Okay. So once you’ve built out this team and you’ve got your first property down, what did you think about growing and scaling? Is this something where you want to be small and mighty, you want a thousand units and a huge team? What do you kind of see for the future? And actually what something we didn’t ask, are you still self-managing or did you ever hire a property management company?

Tony Clark:
So we started off self-managing and what we wound up doing, because I was a real estate agent out there and working primarily with investors is I wound up starting management company. And so, I took on a few clients in Nashville, so I was managing for them and managing for myself and I started to build a team. I brought on a virtual assistant and a couple of agents on my real estate team who could help with operations there, so we just wrapped our rentals into that management company. So it’s kind of a both, and we’re self-managing because I’m involved, but I would never want to self-manage if it was just us trying to manage everything that can go on with a rental property. I think there’s a lot of value in having a management company.

Ashley:
Well, that’s awesome. Congratulations with the startup of that. That’s very cool. What software are you guys using and what kind of systems do you guys have that you’ve implemented into that management company that might be beneficial to someone else?

Tony Clark:
So when we were just self-managing our properties, I was using RentRedi, which I think is probably the best software out there for any landlords who are self-managing. We now use Hemlane because it allows you to split up rent really well being a manager and has some cool systems there where it allows us to scale. Those two systems, and then really we post on Zillow and I post an MLS link anytime there’s a property for rent and then use a showing service called Showami or Showami, I don’t know how to pronounce it, but it’s basically Uber for real estate agents where you say, “Hey, I have showing at this property at this time, who wants it?” And other agents can say, “Yeah, I’ll take it.” And you pay them whatever you set a price and they accept it.

Ashley:
That is so cool. I’ve never heard of that before. I’ve heard of the companies where you give the person that wants to look at it, the key code and then it takes their ID and sets the key code for only that window of time, but to actually have a real estate agent come in and meet them, and I think you described it perfectly, the Uber hub showing units, I think that tells exactly what it is. So that’s a really cool. And then Hemlane was the property management software, I haven’t heard of that one either.

Tony Clark:
Yeah. It was when we looked at AppFolio, and AppFolio looked like it would work once we hit about 50 to 100 units, but we’re still small enough that we just said, “Hey, we need an option to split rent up.” We don’t like taking rent in and then paying the owners like a lot of management companies will, and Hemlane allows us to say, okay, rent comes in from the tenant and 8% comes to us for management and 92% goes to the owner so that we never have to have an account that’s rotating thousands of dollars on it. And then it really allows us to customize it. It works well for a small business like we are.

Ashley:
Yeah, awesome. It’s always nice to hear of new property management software. There, I feel like in just even in the last maybe five to 10 years, it has tripled, maybe even quadrupled in the options that are out there for especially small real estate investors. And of course, we love RentRedi because if you are a BiggerPockets pro-member, you get RentRedi for free to be able to manage your property. So if you haven’t taken advantage of that opportunity yet, make sure you go to biggerpockets.com and get that free membership if you’re a pro-member to RentRedi. Okay. So then let’s go to the first part of my question that we put on the back burner there is, what is your goal for your portfolio, small and mighty, you want to grow and scale?

Tony Clark:
So our goal with our portfolio is to have a few properties that have really high quality tenants who we don’t have to worry about and don’t have to have a lot of headaches while we’re trying to manage them. We wound up not opting to buy properties, try to get $10,000, $40,000 properties to start off and then sell those off and go buy a multi-family property or try to stack that way. We just kind of said, “Hey, we want a duplex in a nice area of town where we’ll house hack and then we’ll go try to pick up another one and maybe another one.” I think for us, it’ll just kind of be, let’s keep collecting properties where we’re at or we’ll buy properties in Nashville. We’re going to keep doing that. I love the market there.
I’m in real estate for the long term, and really we’re going to keep buying there because I’ve seen even in the last couple of years, the appreciation on those properties is so much bigger than some of the houses that I was looking at in that $40,000 to $50,000 range a couple years ago where, with our first duplex that we bought in Nashville, we were able to pull a HELOC out for all of our down payment plus some after we renovated it and do a burr that way, which is ridiculous. Even with the COVID spike in house prices, it was like, “Wow, this makes a lot of sense because we’re in a good area of a growing city.” And so I think I just want to keep collecting more of those properties and even if we scale a little bit slower, it’s less headaches along the way, it’s going to give us more freedom because we don’t have to manage managers or deal with a lot of evictions or stuff like that. And at the end of the day, we get to own properties and places that we enjoy visiting.

Ashley:
Well, that’s awesome. Thank you for sharing that with us. Do you want to go over one of your deals that you have and we can go through how you bought it, what happened with it, and the numbers on it?

Tony Clark:
Sure, yeah. I’ll run through the duplex that we have in Nashville right now. So we wound up buying this deal. We found it was a for sale by owner, so it had been put up on Zillow. We went to the for sale by owner tab and my wife found this one and she was like, “Hey, we should go look at this.” And there were no pictures. There was the Google Street View, was from about five years ago, and so looked like this really kind of rundown area of Nashville and we were like, “Well, we like the park that it’s near and so let’s go check it out.” And we went and looked at it. There was a brand-new development that had gone up right around the corner. It was this really cool little pocket of town. So we called the owner and said, “Hey, can we meet you? Can we talk about what’s going on with this property?”
And so we went out and we met the owner and I think that was ultimately what wound up getting us the deal because it was a duplex that was a three bed, two bath on each side. It was built in the ’90s. He built it himself. He built five or six rental houses around Nashville and that was his retirement. And so, he’s like, “Yeah, I’m starting to sell them off and I’m going to go move to Destin, and this is one of the last ones.” And he said, “I’ve got two or three builders who are looking at it to buy a lot and you can tear it down and build two homes.” And so he is like, “If you can beat the builder offers, it’s yours.” And we’re like, “Okay, sure. Let’s talk about it and we’ll get back to you.” And wound up submitting an offer.
We went in and there were a couple of things wrong with it, so we got our offer accepted. So we put in an offer at $460,000. It was listed at $425,000 and we knew that that was a steal. If we could get it at $425,000, it shouldn’t have been priced there. So then it wound up getting bid up to $460,000 but when we ran our numbers, we realized that still made sense, where we looked at what else was around, it was still a good deal, so we put in the offer at $460,000, it was accepted and then closed on the property. We started renovating one side. There were tenants in one side of the property, the market rent for that side was about $3,000 a month, and they had been there for 10 years. They were paying $900 a month and had 11 months left on their lease.
So we just picked the side that we were living in, we fixed it up while we were living there, let their lease expire, and then wound up renovating that side once we had fixed up our side and we basically house hacked, put up with the $900 a month for that amount of time, then we could renovate the other side. And now we’ve got one side rented at $3,000 a month, and the other side is going to be rented at about $2,500 a month. Here, we’ve got some showings this week.

Tony Robinson:
So, Tony, I want to make sure I’m understanding this. So you said originally that unit was renting for $900 per month and now it’s renting for $3,000 per month?

Tony Clark:
Yeah. It was 10 years in Nashville. I think one of the properties down the street, it was very similar duplex sold at like $120,000 in 2013 and is now worth $500,000 and the rents have doubled or tripled in most areas of town, it’s wild.

Tony Robinson:
That’s amazing. So one follow-up question for me. So I guess the question is, how did you fund the purchase of this property? I know you had saved up some money when you guys were staying at the trailer and when you guys got to Nashville, how much funds did you guys have saved up? Was it easy to get the loan? What was that process like?

Tony Clark:
Yeah. So this deal was actually the second one that we did. So the first house hack that we bought, we had saved up about $40,000. And that was the combination of, I wound up taking on a second job in California, we had our savings from living in the trailer, just a bunch of different things, and then I sold off my car. And so it was like, “Hey, we’ve got about $40,000 that we can put down on a property.” And I was starting a new career. And so our kind of limiting factors there was we had $40,000 saved up. I had just switched from a W2 job to a 1099 job where I was a real estate agent and my wife was just starting as a nurse. She’d finished nursing school, she had just gotten an offer letter and was getting ready to start.
And so, when we went through the financing process, banks didn’t like us very much for our first deal. They were like, “You want to do what? You want to put 3% down and you don’t really have a job. You’re a realtor and your wife almost has a job. She’s getting ready to start.” And we said, “Well, yeah, but look, we’re going to house hack and there’s going to be rent coming in. We’re basically going to pay zero for housing, it’s going to be great.” And we gave that pitch to, it was 10, 12 different banks that I was like, “Hey, how can we make this work? How can we figure out a way to do this” and they just said, “Nope, nope, nope, it’s not going to happen.”
And eventually we found a small local bank where we got to talk to the VP of lending there and I said, “Hey, here’s what we’re wanting to do. Here are the numbers of this specific property that we’re looking at. Is there anything that you can do or can you write a loan for us?” And she said, “Well, okay, let me see what I can do and how I can make this happen.” And she wound up saying, “Okay, if you can put 10% down, I can basically run everything off of your wife’s income and the income from half of the property and we can make it work as long as you feel comfortable with it.” And it was not the best loan terms. We were getting a rate in the fours when everybody else was high twos, low threes, but it was like, “Hey, here’s what we need to do to make it happen.” And thankfully we were able to talk to that local bank and they said, “Yeah, we’ve got some flexibility so we can do it.”

Tony Robinson:
All right. I’ve got a few follow-up questions here, Tony. First one, how did you find that bank, the one that finally said yes?

Tony Clark:
Honestly, I think I just Googled local banks in Nashville. It was because of the BiggerPockets podcast. There was a guest who had come on and they said, “Hey, I fund all of my deals through local credit unions and banks.” And I said, “Okay, well, that sounds good. Let me go start making some phone calls.” And it was really just Googling local banks and local credit unions in Nashville.

Tony Robinson:
So when you found this bank, did you say, hey, can I speak to the VP of lending, or how did you get to that person at the bank?

Tony Clark:
So I called the bank and just said, “Hey, I have a really unique situation. Do you have somebody who handles essentially non-qualified mortgage products or mortgages for self-employed people?” Just kind of strange situations, and that’s who they directed me to.

Tony Robinson:
So a couple illustrative points here for our rookie listeners. First, and Ash and I have said this time and time and time again that the smaller local credit unions and banks are some of the best places to go to get your financing because they tend to have more flexibility. Second, explain to them your situation and what it is you’re trying to do and not necessarily the type of loan product that you want because you wouldn’t even have thought to ask like, hey, can we just use my wife’s income, and can we pay 10%? Do you guys have a loan that can do that? But when you explained the situation, they were able to give you the loan product that match your unique situation and your goals. So two really important things for our rookie sender, and I just wanted to make sure we didn’t close over that.

Ashley:
Well, Tony, thank you so much for sharing the numbers with us and for sharing just everything in general. Your story is very inspirational for everyone, and I think there was a lot of value from that. But I want to take us to our rookie request line where you can answer a question and continue to add value for our listeners. So anyone can leave us a message at any time at 18885 rookie. And Tony and I actually get the voicemail sent to us directly and we may choose your voicemail to be played on the show.

Alex:
Hi. My name is Alex. I’m from the San Francisco Bay Area. I have money for a down payment for a property that I want to house hack. I don’t know what strategy I should go with. Should I go with a small multi-family, duplex, triplex or a single family and try to make it work and wall up walls and put some fixtures in that way? Thanks.

Tony Clark:
Yeah. It sounds like you’re thinking exactly the right way where you’re looking at your options and trying to figure out what works best for you. My first question would be, where do you stand on the comfort versus cash flow spectrum? It sounds like you’ve got a lot of options ranging from multi-family to single-family and walling off bedrooms or putting up curtains or whatever you got to do. What is your goal in buying this house hack? Are you wanting to live for free? Because if so, in San Francisco, a lot where I am in LA, that might mean a single family house or a duplex where you’re renting out everything possible and maybe sharing a bedroom with somebody, but then you’ll live for free. And if that’s your goal, absolutely do it.
I think there’s a lot of value in that. Or if you say, “Well, I’m okay with paying a little bit of money per month on this property, but I want to have my own space, or I want to have at least my own room.” Or whatever that looks like, I think that’s a very valid point and that’s something that you can navigate with saying, “This is what I want,” versus having to share a bedroom.
So I’d say that would be your first thing, just figuring out what your goals are outside of the finance side and then figure out, and maybe I would say your next step would be talking to a bank and seeing what kind of financing they’ll give you. Because the down payment is one thing, banks will probably look at multi-family properties more favorably than single family where if you go to the bank and say, “I want to rent out bedrooms in a single family house,” they’re more likely to say, “Well, we can’t use that rental income to help you qualify for the loan.” Whereas if you go and say, “I’m buying a four unit property and I’m going to rent out three of the units,” they’re more likely to say, “Okay, we can use that rental income or part of the rental income to help you qualify for the loan,” and that will help you buy a more expensive property if you want to.

Tony Robinson:
Love that answer, Tony.

Ashley:
Yeah. And the only thing I would add onto there is just if you’re going to put up some walls, just make sure you know if you need to get any kind of permits to add bedrooms or what you’re doing there, whatever town you’re doing this in. But I have seen it a lot, like when I was in college where dining rooms were turned into bedrooms so that they would easily turn a three bedroom into a four bedroom and be able to rent out those four rooms, and then all you had left was the kitchen and a living room. So that’s definitely something you could easily do is turn a dining room into a bedroom or even if there’s an office somewhere, any kind of extra space beyond living room or kitchen. And I’m sure there’s probably people out there that house hack that there’s not even a living room provided that you have your bedroom, and then there’s the common area kitchen, because, I mean, it really don’t need a living room, you can hang out in your own bedroom, I guess.

Tony Robinson:
All right. So I want to take us now to our rookie exam. So Tony, Mr. Clark, these are the three most important questions you will ever be asked while sitting in front of a microphone. Are you ready for the exam?

Tony Clark:
I’m ready.

Tony Robinson:
All right. So question number one, what’s one actionable thing rookie should do after listening to your episode?

Tony Clark:
I think the number one thing that you can do after listening to this is figure out what your next best step is, where you don’t need to become an expert investor overnight, you don’t need to know everything. There is to know about real estate investing to get started, but you do need to figure out, okay, what is my next step? Whether that’s saying, “I’m going to start driving a couple times a week for DoorDash to make extra money,” or that’s, “I’ve been putting off writing offers on properties because I’m scared.” Figure out what that next thing is that you can do to get you one step closer to your goal.

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

Tony Clark:
I’d say the most important app that I use is actually Zillow. And this is something that anybody can use, is just setting up keyword searches in Zillow and not saving properties, but saving searches in Zillow where if you go in and you search certain keywords like separate entrance or mother-in-law suite, or if you’re looking for a house hack, kitchenette is a good one. Setting up keywords that are in line with what you’re looking for, I think that’s huge. And then you can really do everything you need to on Zillow, this is a little secret from a real estate agent. Anytime a real estate agent tells you they have coming soon listings that aren’t on the MLS yet, those are the ones that have the big coming soon banner on Zillow, those don’t exist unless they’re not even listed anywhere yet, and then maybe there’s a little lead time. But all you need is to have a login on Zillow and then you can do 95% of the stuff you need to to get started.

Tony Robinson:
All right. Last question for you, Tony. Where do you plan on being in five years?

Tony Clark:
In five years, my goal is to be able to work three to four hours a day doing something I really enjoy. Right now I work for BiggerPockets as a part of their featured agent sales team, and that’s been a lot of fun. I get to work remotely, I get to help a lot of people, and then I do some consulting on the side for real estate systems, CRM stuff, all the that boring stuff that I enjoy. I’d love to be able to just spend three to four hours a day working and then spend a lot of time with my family, and then get to invest in real estate deals that are interesting to me. If somebody brings a deal and they say, “Hey, there’s a 50 unit tiny home community that we’re looking for partners on.” I’d be like, “Great, let’s go check it out,” or whatever that looks like. Just be able to do things because I want to, not because I have to. I think that’s the goal.

Tony Robinson:
That is an amazing goal. Yeah. We would love to get to the point where I’m more than working four hours a week too, man. We’re not quite there yet, but hopefully. All right, so before we wrap things up, I want to give a shout-out to this week’s rookie rockstar.
So today’s rockstar is Alfred Chung and Alfred Chung posted this in the Facebook group. He said, “How I went from an underpaid employee with zero net worth to owning $1.8 million in real estate.” So number one, he says, “I analyzed hundreds of real estate deals and also developed a system to quickly identify the best markets and the best deals. Number two, “I increased my active income by almost 2X by working smarter and providing more value to my employer. And number three, I invested every dollar I could into cash flowing real estate that appreciates over time. I’m not a real estate mogul by any means, but using the strategy has completely changed my life and my family’s future. I now have peace of mind knowing that my kids will be taken care of long after I’m gone because of the single decision I made for years ago.”
Alfred, congratulations. What an amazing journey, and we are so excited to be a small part of that success, man, and just wishing even more success as we get into 2023.

Ashley:
And Tony, thank you so much for joining us today. We really enjoyed having you here on the podcast and welcome to the BiggerPockets team. It’s been, what, three weeks since you’ve been working with BiggerPockets.

Tony Clark:
Three weeks, still brand new.

Ashley:
Yeah. It’s awesome. So thank you so much for taking the time to come on here and share your journey and any advice that you’ve given us has been great. So where can people reach out to you and find out some more information about you?

Tony Clark:
I’m pretty active on BiggerPockets, so Tony Clark on BiggerPockets, Instagram, Facebook, TikTok, Tony Clark on all of those. Just reach out to me, shoot me a DM, I’ll send you my number and we can hop on a call or happy to help in any way I can.

Ashley:
I’m Ashley at Wealth Firm Rentals and I was joined by Tony Clark and Tony Robins at Tony J. Robinson on Instagram. Thank you guys and we will see you on Saturday for Rookie Reply.

Last week, the Fed raised its benchmark interest rate by half a percentage point, a slowdown from previous sprints. Still, the federal funds rate is at its highest since 2007. While traders are betting the Fed will begin reducing the federal funds rate in the second half of 2023, historical trends suggest a different timeline. And while economists from major firms are split on where and when rates will peak, Fed policymakers have signaled that rates will likely remain elevated until 2024. 

Why the varying estimates? No one is certain how long it will take for high-interest rates to impact the job market or whether we will enter a recession. Inflation has been stubborn (albeit declining) largely due to low unemployment and supply chain issues, experts say.  

When Has the Fed Cut Interest Rates Historically?

Interest rates have peaked for an average of 11 months over the last five cycles. In past rate hike cycles, however, the Fed acted earlier to tame inflation and gradually raised rates.

Since high inflation in 2022 was initially thought to be a temporary, “transitory” result of the global pandemic, inflation was allowed to exceed target for 12 months before the Fed took action. This led to the fastest rate hike cycle, a rise of more than two percentage points in only six months. With inflation stickier than in the past, a longer-than-average holding period may also be required. 

Fed policymakers forecast additional increases in 2023 to a range of 5%-5.25%. Rate cuts are not expected to happen before 2024. But that’s not set in stone. The Fed’s own forecast clashes with trader expectations, while history seems to support the Fed’s timeline. Still, a sooner decrease is possible if a deep recession takes hold, analysts say. 

What Are Economists Expecting This Time Around?

Financial firm Morningstar expects inflation to turn around faster than the Fed currently forecasts, predicting rate cuts in the second half of 2023 that continue into 2024. The firm contends that the Fed is attempting to “talk” the market in the direction of maintaining tight financial conditions while dropping bond yields over the last two months and slowing economic growth, suggesting the fight to control inflation will end in 2023. 

Barclays initially expected rates to come down in the third quarter of 2023 as well but has pushed back the forecast to November of 2023 due to the resilience of inflation. But the firm’s estimates remain ahead of the Fed’s schedule due to a high likelihood of an upcoming recession. And Morgan Stanley continues to predict the first cut happening in December of 2023. Researchers at JPMorgan Chase say the Fed could cut rates next year as well—but only if factors like increasing unemployment, lower inflation, and weakening economic activity converge in time. 

Meanwhile, most of the investors the bank surveyed don’t expect rates to fall until 2024. Economists at Goldman Sachs agree. Chief Economist Jan Hatzius says inflation has been more persistent than expected and doesn’t expect rate cuts until 2024. 

Still, Bloomberg Economics is nearly certain a recession will take hold within a year, and most economists agree. Some say if unemployment rises enough, the Fed may rest its attempts to hit the target inflation rate of 2% since there are signs the inflation rate will remain above that target for the foreseeable future. In any case, future rate increases into 2023 are probable, which will impact mortgage rates as well. Even in a best-case scenario, most experts don’t expect mortgage rates to come down until the end of 2023, and they could stay elevated into 2024 if a resilient economy requires the Fed to be more aggressive. 

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

Dave:
Hey everyone. Welcome to On the Market. I’m your host, Dave Meyer. Joined today by the full panel. We have Kathy Fettke, James Dainard, Henry Washington and Jamil Damji joining us. And all four of you just got back from what looked like a very fun party that I’m very sad to miss to celebrate Jamil. Jamil, congratulations. Can you tell everyone what you were celebrating?

Jamil:
Absolutely. Thank you for the shout-out. We had the premiere of season two of Triple Digit Flip and my brothers and sisters were all in attendance. Other than you, Dave, we missed you. But we had you there in spirit. It was a phenomenal premiere, super fun show and the network executives came out.
We had The Outlaws from Tupac and The Outlaws performance, like are childhood heroes of mine and just got to live up a night that I’ll never forget. It was super fun.

Dave:
That’s awesome, man. Well, congratulations. It’s a great show and you definitely deserve to celebrate all of your success there.

Jamil:
Thank you, bro.

Dave:
Henry, what was the most compromising thing you saw or learned about Jamil during the party?

Jamil:
Great question.

Henry:
Well, it’s funny is when I showed up, he made me sign an NDA. So I can’t really disclose what I did or didn’t see. All I can say is that it was a night definitely to remember.
In all seriousness, what I love about hanging out with Jamil is that his warm, inviting and comforting nature is reflected in everybody that’s around him. We’re in a room full of hundreds of people and everybody is just having a good time, sharing information with each other, loving on each other, and to be able to create a community like that is not only a testament to his success but a testament to him as a person.
Thank you for letting me be there.

Jamil:
Thank you, man.

Dave:
Wow, awesome. Kathy, why, do you have something mean to say?

Kathy:
I was going to say no, no. I agree so much. Jamil and Pace are changing so many lives that the room was just full of hope and happiness and optimism of people who were learning how to invest and how to change their lives and their future that way. And it was just so much love in the room. And I got to see Jamil do some attempt at break dancing maybe.

Jamil:
You mean break necking?

Kathy:
Break necking.

Henry:
That was a really cool full circle moment for me. I had posted a video about it I think yesterday, but a guy came up to me who recognized me and said that he saw one of my videos about a challenge I was having a long time ago, and when I just started investing and me talking about that challenging experience changed his life, his perspective and he knew at that point he was going to be successful.
He then ended up connecting with Pace’s group. And while his mom was battling stage four cancer, he was able to go from where he was to make $90,000 in a year. And it was just cool to know that something that I said sparked this guy to get started.
He then works with Pace. I didn’t know Pace at the time. He probably started to connect with me. And then now we’re all in the same room together at the same time seeing his success. That’s the impact that sharing this information about real estate can have on people. And the world is smaller than we think it is.

Jamil:
Man.

Dave:
That’s awesome. That’s awesome. Wow, that’s super cool. And congrats on the community that you’ve created there, Jamil.

Jamil:
Thank you, man. It’s been a phenomenal experience and it’s just getting started. I see this as our life pursuit and I’m excited to do this until they tell me to stop.

Henry:
Amen.

James:
I hope you do. The parties are fun.

Dave:
James is like yeah, community. Whatever. I don’t know. Let’s have more parties.

Jamil:
James had one of the best outfits on ever. It was like we did a ’90s hip hop theme because it was so good.

James:
I will say the community is awesome. I lost my credit card in the bathroom somehow and someone had tracked me down somehow and handed me the card. I literally had just canceled it. He’s like, “James. I’ve got your credit card.” And I was like, “Oh, wow!” It was-

Jamil:
Wow.

James:
Talk about a good community.

Dave:
I just bought a boat on it.

James:
Yeah, I know. I need it for the boat repairs.

Jamil:
That’s so cool.

Dave:
All right, well I’m glad you guys had such a good time. Hopefully I could be there for next year. Let’s get into today’s show. We’re going to be doing one of our, I guess, repeat formats now, which is a correspondence show where we can… Each one of our panelists will bring a story that they are finding interesting that they think are important for our listeners to pay attention to.
We’ll get to that in just a minute. But first, we’re going to take a quick break. All right, Jamil. You’re the man of the hour. So let’s start with you. What story did you bring for us today?

Jamil:
Well, I wanted to look at this from a slightly different angle and perspective because as we have seen the real estate market shift and as investors, we all have a specific point of view and our point of views differ for sure. But we’re really looking at it from the bottom line of our perspective. Are we going to be paying more money for our houses? Are we going to be able to cash flow? Is the BRRRR still working so many different things? Is real estate going to correct? Overcorrect? There’s just a lot of tension and things that we as investors care about and think about and talk about.
Yesterday, however, I’m doing a popup meetup at my office and a lady who follows me on YouTube comes in and gives me a big hug and says, “I just want you to know that I’ve been watching you on YouTube and I was able to do my first deal. It was a small deal. I made $2,000 and it allowed me to sustain life for a little while longer and living in my car.” And I was like, “Hold on a second. What? You came to a meetup and you’ve done your first deal, you made 2,000 bucks, but you live in your car?”
And she said, “Yeah, I live in my car. Housing is just way too expensive and I can’t figure it out. I can’t figure this out.” Right there, I just had this moment where I thought, this perspective is so important to understand and at least talk about. And so lo and behold, I’m looking at articles and I see an article by AZ Big Media and it’s titled Why Experts in Arizona Say The Growing Housing Crisis is a Growing Cancer.
And I needed to understand what this is talking about. And so again, we’re looking at this from the different angle, a different perspective. Homelessness here in Phoenix, Arizona has become a massive, massive problem. We’ve got tent cities popping up all over the spots. In every neighborhood you go, there’s homelessness. It’s just regular people. It’s not just people with mental illness or addictions that you’re seeing where you’re like, “I understand there’s a lot of greater social problem or a greater mental or health problem here that’s causing some of this difficulty.” But this is like moms, dads just families and just regular folks having hardship, not being able to pay rent.
And as I see this and I think okay, we’re walking into or we’re in the middle of a correction and housing pricing, is there any way that this gets better for the little guy? As I read the article, I see it’s not getting any better for the little guy because what happens is right now, especially as we see rates increasing and demand slowing, days on market in Arizona or Phoenix especially, is still 33 days.
33 days on market, which means that there’s still demand. There’s still demand. People are still buying. Yes, prices are depressing. We’re already at over 10% correction and price, but that has not stopped trading. That has not stopped investors from buying, buy and hold investors from buying, large hedge funds and private equity groups from buying. That has not stopped, Ma and Pa Landlords from buying. We’re just getting everything cheaper right now. That’s it.
Because we’re getting everything cheaper, when you have people looking at opportunities now, because now you’ve got the little guy who can come in and actually purchase a home, albeit they can purchase a lot less home than they could have purchased say six months ago. But now they’re at the table and they’re trying. Their offer, even though it’s probably significantly higher than my offer, my offer’s cash, my offer is safe, my offer closes and it’s guaranteed and I’m still winning.
I’m still winning at the negotiation table even though I’m coming in significantly lower. That is creating more of a situation. It’s creating more of a homeless situation. It’s still sucking inventory away and rents are not following the housing situation. Pricing right now is correcting 10% or greater in Phoenix, Arizona. Rents have not changed. They’re still going up. It’s that whole… Is there a trickle down here? Is there a reprieve for the little guy? I need to take the perspective because again, we all, as a community of people, investors, we are all in this together. And there is a greater conversation that we need to have because what they’re proposing in this article is legislation.
They’re proposing that there is no fair market situation here. The market is not going to correct itself. The market is not going to allow opportunity for smaller people or the retail buyer to come in and participate. It won’t because we don’t play by the same rules because what that buyer has to qualify for, show for income, show for credit, I never have to do that.
I don’t have to play by those rules because I come in with cash and I’m going to best them every single time. They’re proposing legislation. They’re proposing legislation on rent control, they’re proposing on legislation on how many houses a specific LLC or a corporation can buy. They’re really wanting to create, in my opinion, some regulations that are going to take the fair market or the natural capitalistic market conditions that we all or many people believe need to be there off the table.
When you see Arizona has flipped from a red state to a blue state. We’ve all seen it happen. I believe that legislation like this is going to become the conversation. I want to talk about it. I want to hear perspectives. I want to understand, well, what do we think as investors about this? What about the perspective of the lady who came to my meetup who is living in her car right now, who is participating in real estate and doing deals and is a part of maybe the problem. That’s the article. That’s the thought.

Kathy:
I would love to comment on that, Jamil, I remember in the ’70s, I know many of you were not born, but I was young, very young. And we were sitting at the dinner table, and it was in 1971 when Nixon took us off the gold standard. And my father said, “This is going to be really bad. This is going to create separation between the haves and the have-nots because this will allow more creation of money without anything to tie it to.” Which at the time had been gold.
We know that politicians like to spend money. So inflation and the printing of money is a silent tax. It’s a tax that people don’t understand and don’t know about. And that tax is most felt by those who have less money because they have a finite budget. When things cost more, there’s no room for that.
Printing money and inflation hurts the lower class and creates more of a lower income class because more money is going to pay for goods because more money is being printed instead of taxing people. It always falls, the culprit always falls on the investor or often on the investor. In my opinion, what needs to be regulated, which may never be regulated, is the Federal Reserve that creates that money and politicians who want that money to stay in office because they keep offering things.
I have a very strong opinion on this. It always falls on the landlords. But if you look at it this way, if you’re throwing trillions of dollars out of a helicopter, let’s say, and the people who pick up those dollars because they’re fast at getting them or they’re doing something with them, those are the ones that get blamed when what they’ve really done is just picked up the dollars that were thrown out.
The regulation is going to come and that’s what my story is about. And we’ll talk about that when we get there. But I do hope that people really look at the systemic issues versus the bad naughty investors. Because at the end of the day, rentals are very important too. If we look back to the ’70s, again when we’re talking about this, home ownership rate was much lower. It was 63%. In the ’60s, it was 66% home ownership in the ’70s. Today it’s higher. It’s about 65%.

Dave:
Right there, 66%. Yeah, it’s gone up the last two quarters. Just for everyone says that it’s returning to a renter nation.

Kathy:
Yeah. More people are owning homes. It’s not that different. It’s better than the ’70s, ’80s and ’90s. And of course when regulation came in to stimulate housing and get more people buying, that’s when things went crazy with more regulation because of course we know that that’s when loans got too easy and it became too easy to buy a home. Home ownership for everybody. But people, all people do need a home unless they like to live in their car, which some people do.
I’ve got nephews who love living in their vans. That’s their choice. But otherwise, if you want a home, you’re either going to rent it or you’re going to own it. There has been typically 30-40% of people who choose to rent for whatever reason or who are renting. So again, I know that regulation is coming, but I do hope that we’re able to get the message out there of what the real problem is.

Jamil:
You’re talking about treating the disease instead of blaming the symptoms?

Kathy:
The disease is money printing and where does that money go? And when people really dive in and look where that money goes, I think they will probably be more upset than with a bunch of institutional investors providing rental homes.

James:
To piggyback on Kathy, I’m in the Seattle market where there is a lot of regulation that has been passed over the last three to four years. One thing about the news articles is I will say they start hyping up the regulation a little bit more than what it actually is. But the issue is if it becomes this fight, investors versus politicians and it doesn’t need to be a fight, it should be a common solution. There’s so many different things that could happen that could make homes more affordable.
You could subsidize the builders, the investors on their construction costs. You could get them their permits quicker. If the city came to me and said, “Hey look, we want you to cap on rent, but we’re going to forgive you all, maybe some tax relief, some utility relief and we’re going to give you your permits in two weeks.”
That would be a negotiation that’s a fair trade at that point. But the issues there is a lot of times is the cities, they kind of put up roadblocks all the way through with these investors. The permitting, the construction costs, the fees. We got a new tax that was put on us two years ago. We call it the developer tax in Seattle, where they charge us roughly to $2-3 per square foot on any permit that we’re pulling for new construction. Then that’s supposed to be going back into the community to help out. The problem is it never makes it to that community.
And then all that did wasn’t affect us as developers. That just meant we have to pay less now. It just affected this seller that’s trying to sell their property and then move into another… Whether it’s on their next phase of their life. And so I wish there was more community and brainstorming because there’s so many different solutions out there that could keep actually homes more affordable. We saw a construction cost went up by 20-35% over the last 24 months. The replacement costs are really high. If you can get those costs down, you can charge less for rent. Hopefully, at some point in the future, people will come up with solutions that help everybody because that’s how you fix the issue. You don’t overcorrect here and overcorrect here.

Henry:
Yeah, I want to piggyback on that because James is making a phenomenal point. I think we’ve gotten too comfortable in this country of playing this us versus them mentality. There’s the right and the left, the Democrats, the Republicans, the conservatives, the liberals, the landlords and the investors versus the regular guy. James is 100% right. Us versus them doesn’t solve the problems. I think when you look at this legislation, you have to understand what is the motive behind it.
Not what they’re saying the motive is because they’re saying the motive is let’s help the little guy. But that’s not the motive. The motive is I want to do the things that my party thinks is good so that I get more votes reelected, can continue to live the life and do the things that I want to do. If the true reason is to solve the problem, then it has to be together.
Nothing gets solved with us versus them. Things truly get fixed. The wound truly starts to heal when we work together. I had the exact same conversation that James is talking about. I spoke at an event about affordable housing and they invited me because I’m the dirty landlord and they wanted to talk about affordable housing. That’s exactly what I said to them is, “I do have property that I can and will take less rent on, but I still have to pay for that.”
And so if we can work with the city and come up with a way for the city to say, “Hey, if you can charge less rent for these types of properties, we can do this for you.” If we can go and then we work with the builders and do the same thing and say, “Hey, if you will build this type of property in this neighborhoods, we can give you these types of breaks or credits or…”
So that everybody is doing something that helps each other out. And then we heal the wound. That way, we’re not just treating the symptoms just like it. And it’s got to be that way with everything that we’re facing as a country right now, we’ve got to stop fighting each other. We’ve got to stop talking about, “Well, this person or this group of people is bad and my group of people is right.”
It’s not about that. We’re all on this planet together sharing these resources that we have and we all want to live the best lives that we possibly can. And so the only way that happens is if we start to have some empathy to other situations. That’s why I love that Jamil brought this story up. He brought the story up. He’s on the opposite side, he’s on the investor side, but he has empathy and understanding for what the regular person is going through and he’s able to listen to what their struggles are.
And so now maybe on a small scale, you and [inaudible 00:20:39] come to some sort of way to improve each other’s lives. But without each of you being willing to understand where the other person is coming from, what the other person has to deal with and then being able to talk about that in a way that it’s constructive and not combative, you get to real solutions. We’ve got to understand that for any of this to change landlords, cities and municipalities and local governments and national governments all need to sit down and try to figure out what can we all do collectively to fix the problem. Not what can I do on my side that my people like.

Kathy:
Amen.

Henry:
Yeah man.

Dave:
Well said. Well all of you, very good points. Jamil, I agree. Thank you for bringing up this important topic. It’s a really pressing issue right now. It sounds like we all agree that this is a problem. Affordability, I think in terms of housing is at a 40-year low hardest.
It’s the hardest time since the ’80s for people to buy a home. Even though as Kathy said, home ownership is up and is going up, that is sort of under threat if we remain at these levels of affordability. Rent is going up. This is just both a moral and societal economic imperative to fix, in my opinion, at least.
Jamil, to your point, something is wrong if people are hustling and working hard and they’re living out of their car. That’s a problem. But to your point, we also need to consider what solutions actually work. I actually just listened to a really good podcast on Freakonomics. I don’t know if you guys listened to this.

Jamil:
Yeah, great. I love that podcast.

Dave:
It’s great. Yeah, about rent control. I really recommend anyone listen to it. It’s a really good, well-balanced, unbiased perspective on what happens with rent control. And a lot of the times it doesn’t work. It actually leads to higher rent. And I won’t get into the details with that there, but I think it’s really important in solving this issue to not just be reactionary and look into say like okay, let’s cap rent. It makes sense on a logical level, but evidence-based, evidence-wise, it doesn’t actually do what anyone really wants it to.
I’m curious, Kathy, you mentioned that your story was about some regulation that is potentially coming, I don’t know if it’s on a national level in California, but can you tell us a little bit more about what some of the proposed regulations are to try to address this issue?

Kathy:
Yeah, it’s three Democrats from California who just came out with a new house bill in October. It’s called Stop Wall Street Landlords Act. This is an article from Vox, it is called, if you want to look it up, Democrats Eye New Legislation to Reign in Wall Street Landlords. I remember in 2012 right before Warren Buffet said, “Oh, if I could buy a few hundred thousand homes, I would.” That’s when Wall Street did jump in because they listened to what he says and they did find a way to manage the properties and jump in.
It was right around that time that of course prices were so low and interest rates were pretty low. I told all of my friends, you have got to buy something right now. Anybody in California who didn’t own real estate at that time, I was like, “Do it now because this is going to be your chance.”
Well, they tried and because they had FHA loans and any kind of loans that they were bid out, it changed like this. It was in a matter of weeks. Warren Buffett said his thing, funds jumped in and it was crazy. My friends and family who were making offers with loans were losing out every time because what seller is going to want to sell to a first time buyer with an FHA loan that may or may not close when they could get a cash offer from a Wall Street firm for much more.
There’s always two sides or three sides or four sides to any story when you talk about regulation. Personally back then, I would’ve loved to see some regulation back then because it was an incredible time for homeowners to be able to lock in low home prices, but they couldn’t compete.
That would’ve been a great time to maybe do something where you get 30 days to see for a first time buyer to see if your loan closes for what the institutional investor would pay. So the seller is still going to get the deal. The investor can be on the sidelines if the first time home buyer doesn’t close, then the investor can come in. I mean, some kind of regulation I really think would’ve been nice because I now see my friends 10 years later who never were able to get into the market and they can barely survive.
And some of them are in their 60s and they’re still renting and are getting priced out. So it is a very serious issue, has been for a long time. Regulation has not come in. Probably, it’s kind of late basically. We’ve got to remember that the Fed was subsidizing housing until this year, until March.
Keeping interest rates low, which drove prices up. This article is again, it’s basically saying we’ve got to stop Wall Street landlords, even though they only represented 3% of home sales and that would be funds that own a hundred homes or more. Between 2021 and 2022, it was only 3%. They’re not as bad as people think. They own about a little over 1% of rental properties that are out there. But in certain markets they’re really active and it’s in those markets and I’ll mention some of them, Atlanta, Jacksonville, Charlotte, Phoenix, Miami, and those markets, they have made it really hard for homeowners to get in.
With this act, I kind of like… I like the proposal in the sense that they’re basically saying maybe we don’t give the investors the same tax deductions that a home-owner would get. Maybe there’s a transfer tax or there’s a different kind of tax if you’re an institutional investor, they also recognize that really the real issue is supply and that maybe the better regulation or incentive would be tax credits.
This to me is super obvious, of course. Tax credits to people who will bring in affordable housing. Because anytime you give any kind of tax incentive, that’s where the money goes. So I do think it’s a somewhat balanced proposal. I didn’t read the whole thing and the article just talks about it or may not or may not go through. But I do know that other countries charge more to an investor than a homeowner in taxes. The property taxes going to be higher, there’s going to be potentially a transfer tax. So this isn’t something new or unusual and I don’t see that as a bad thing at all to… I’m a fund manager. This would not be good for me.
We have a fund. We’re buying aggressively. I just got back from Dallas and we just tied up homes for about 120,000 that don’t need… Well, they probably need 20 to 30,000 in rehab and the ARV is going to be about 220 for our fund at Grow Developments.
I can tell you from a fund manager perspective, a first time buyer wouldn’t want that home. You guys know that. We fix homes. To put a first time home buyer who’s barely able to afford the home to begin with maybe doing a 3% down FHA loan, now they got a house that it is barely livable? Investors are needed. I think that voice has to be out there too, that investors like me come in, take these old houses up and pick them up. We have the capital because we’re raising that capital to buy it, fix it and make it a really nice clean, safe place for a rental. There are people who need that rental.

Jamil:
And you need to be incentivized.

Kathy:
You need to be incentivized. So if we were taxed too much and if there were too high a transfer taxes, we probably wouldn’t do it because quite honestly, a single family rental fund, there’s not a huge spread there anyway. It’s not 20, 30, 40% returns that you’re seeing. I don’t know if you’re seeing that anywhere, but flippers are going to make more money.
The buy and hold investor funds, the margins are pretty thin. If you want companies like mine, mine’s definitely smaller than these big ones. There does have to be incentive to be able to create this clean, safe housing. Housing gets old. Somebody was saying the earth likes to eat housing. If you leave a house for very long, it will fall into the ground and Mother Nature will eat it. It will. After 20, 30, 40 years, those homes don’t do so well. They need constant investment.

Dave:
27.5, right?

Kathy:
Yeah. Appreciation. It’s an interesting article. I would definitely read it and check it out. One other thing I do agree with is that you shouldn’t be subsidizing the investor if it’s not needed. Like I said okay, subsidize the investor for trying to bring on affordable housing. I think I told you guys in our Park City project, we had to bring in 30% affordable and we’re super happy to do it.
But when costs went up and it costs twice the price to build that house, they’re not letting us sell it for more because it has to stay in the affordable. We’re losing about $400,000 per property of what it’s costing us to build this affordable housing. Why should I have to do that? That seems like it should be a… They’re a government incentive for that because it’s hurting our investors too. If prices go up, we have to eat that.

Dave:
I think that’s a really good point and agree with a lot of what you’re saying. But just to extrapolate that and how this has an impact on, in the long term, if the requirement that developers have affordable housing makes sense to a lot of people, myself included at the surface level.
But then you have to think about you’re in this conundrum now and unfortunately you’re losing money, your investors are going to be hurt by this. It means that you are probably less likely to do something like this in the future. And so it has this way of, even though the government is trying to create more affordable housing, if it’s not done in a tactful way where there’s some flexibility and into James’s point where you’re actually working together as partners to make something actually work long term, it could actually have some of the adverse effects and sort of the opposite of what is intended.

Kathy:
I could not agree more. We will never do this again because who could have predicted, who could have… The government’s telling us we can’t send our workers to work yet we’re still paying the overhead and then costs go up double and we go to the county and say, “You told us we could only sell these homes for $350,000. They’re costing us 800,000 to build. Is there any flexibility?” And the answer is no. They won’t do it.

James:
The only answer is don’t build it.

Dave:
Yeah.

James:
It’s just like, all right. This turns into a parking lot at this point.

Kathy:
And that’s not going to help the firefighters and teachers that need that.

Henry:
And then we’re charging rent for parking.

James:
One thing I want to mention is when I read these articles I hear this, how about these hedge funds that have bought a lot of homes and I’ve sold a lot of hedge funds’ properties and hedge funds did not take inventory from the first time home buyer. They did not take inventory from any home buyer and especially with a low down home buyer because they needed so much work.
They’re creating inventory. They’re carcasses. They’re homes that are not livable. They require capital to fix them. And no homeowner is going to go… The government needs to, if that’s what they want to do, then they need to come in with some construction teams and some zero down programs and some construction financing and then you government fix the properties.
Because it’s not inventory. The inventory’s not leaving because it was never inventory.

Jamil:
Good point.

James:
It’s being created by these investment companies and everyone’s complaining about them eating up all of the product right now or over the last two years. We needed those buyers in 2008, ’09, ’10, ’11. The inventory was massive and it was unconsumable at the time. And the only reason it got consumed up is because these big funds came into the markets and they bought the dirtiest of the dirt and they restored these properties.
We don’t know what would’ve happened to that market and how long we would’ve been bottomed out if it wasn’t for these companies. There’s always give and takes at both times, but I think it’s shortsighted because they’re creating inventory and housing. It’s a matter of how do we control the cost and that’s just policy at that point.

Kathy:
Yeah. I’m curious what you guys think because one of the comments made in this article was at a minimum, investors shouldn’t be subsidized for rental housing. What I mean by that is a lot of these big funds got Fanny and Freddy backed low interest rate loans.
These are government loans. Fanny and Freddy were created to help people, individuals, low income individuals buy homes. That’s why we have government backed loans. Why were these hedge funds getting those? So I can agree. Again, I love what Henry said, let’s work together towards a common goal. I think nobody wants families living in their cars unless… Again, unless they want to. Like I said, my nephews make good money and they love living in their van. Again, unless they want to.

Dave:
All right. Well this is a great conversation everyone. Thank you. It’s an important topic and probably one that’s going to come up more in the near future. I’ll definitely be reading up more on this. Thank you Jamil and Kathy for sharing these stories with us. All right, let’s move on to a different conversation about the housing market. Henry, it sounds like you brought a different type of story for us. What have you got?

Henry:
Yeah, I like this article because the article itself kind of mirrors what’s happening in real life. So the headline is, economists say a US housing recession has already arrived, it’s already here. And what they’re saying is that the housing market index is basically telling us that it’s declined to 33 and anything under 50 spells trouble because it’s on a hundred point scale. And so what they’re saying is based on this housing market index, that the housing market is already in recession. It’s been in a recession since mid-summer.
But this and the index has declined for 11 straight months. So the article itself is a scary headline, but at the end of the day, this index was based on what home builders are saying. And the market for a home builder has been different than the market for a traditional investor or the market for a first time home buyer, somebody who’s not looking to buy to invest but to buy to live.
It then goes on to talk about, well the interest rates are high and the same home now is going to cost you a $1,000 more a month than it was three months ago, which is very true. But then it also goes to say, well interest rates pass 7%, but they’ve come back down a little bit to around 6.3% this month. And so this article in itself feels like a rollercoaster ride. When I read the article, I’m not quite sure how to feel, I just feel like I’m going up and down. So this is good and this is bad and this is good and this is bad. It’s such a reflection of what the first time investor, the new investor, the first time home buyer is all feeling right now. Because they’re like, “Do I get in?” “No, I don’t get in.”
This is high. What I want people to understand is that we can really only make decisions right now based on what we currently know. But what I know as an investor is that the real estate market is a cycle. There’s going to be a time to get in when prices are really low like right now. You’re able to negotiate a lower price. That goes for the first time home buyer and the investor because there are less buyers than there were a few months ago. That gives you an opportunity to buy at a lower cost, but there’s also going to be a time in the market where the prices are high, but maybe the cost to borrow the money is lower, meaning A, that you can afford more and B… So it’s easier for you to get in there and to buy something and be able to afford a home maybe at a higher price.
What’s important is understanding what the market is giving you right now, I think I’ve used this analogy before, but in sports they say you take what the defense gives you. There’s always going to be an opportunity no matter what type of market cycle that we are in. If you look at what’s currently happening right now, I want people to be able to focus on okay, what is this market giving me as an opportunity?
Is that opportunity something that fits my financial goals? If your financial goal is to buy property and hold it for the long term so that you’re creating cash flow and building wealth through equity, it’s a phenomenal time to buy a property at a discount. Yes, the money costs more, but you’re getting a deeper discount. So it somewhat offsets itself depending on the discount. If that’s your strategy, it’s great.
If your strategy is to trade, to buy a property, fix it up and then sell it in a short period of time, the market isn’t really giving you that if you’re inexperienced. If you’re experienced and you have processes and systems in place to help you find those discounted properties, to help you get them renovated very quickly and back on the market and sold very quickly, then you can probably do that strategy.
But if you’re just the normal investor doing this first, second, third, fourth, fifth deal, trading isn’t as easy right now. It’s better for a more experienced investor. So you just have to understand what is the market telling me right now that is an opportunity and does that opportunity fit my financial goals?

Kathy:
I could not agree more, Henry. That was such good points. As you know, I just got back from Phoenix and there was the IMN single family rental conference. It’s their 10th year and you had all kinds of buy and hold investors there. In the opening session, they gave these really good stats from John Burns that I just want to share that supports what you said. They said that right now, there’s a 57% decline in iBuyers. So if iBuyers were bugging you, there’s 57% less.
That’s huge in itself. There’s a 27% decline in purchases from the funds that are the big ones, a hundred homes or more. And what was super interesting and they said they didn’t really know why, but they think they know why. But in the kind of 9-100 units that they have not declined, they’re buying and then the newbies, there’s a 22% decline because maybe they don’t have the experience like you said and aren’t sure how to get the deals.
The interpretation was these big funds, these big investors, they’re kind of struggling right now because a lot of them pivoted into building new home build to rent. Huge developments of new homes and the terms have changed. Their construction costs have gone up as I know and as you guys know. Their cost to borrow has gone up and then the end financing has gone up. So their plans are not working out as expected. So there’s expected to be quite a bit of fallout in that regard. And then those who would buy scattered lots like we’re doing or scattered homes, just buying homes and basically a BRRR fund model, buying, fixing, getting our money back and doing it again in the fund, you have to be nimble. You have to really know your market. You have to be a really expert investor.
You can’t be a white-gloved Wall Street investor and do that. This is the time. I can’t emphasize enough what Henry just said, that this is the time for us, for the people that can be nimble and can go in there and buy what nobody else wants and fix it up and still keep it affordable for somebody and provide safe, affordable housing. This is our turn, it’s our game. The big players are out because they don’t know how to manage a game like that.

James:
The big guys have… They can’t adjust and that’s…

Jamil:
They move too slow.

James:
They move too slow, their staff is too heavy. Even us, and we’re not big by any means compared to funds, but as you grow your businesses out, as the market has transitioned, we’ve had to shrink this back and get nimble. We can’t have… The more bodies you have and the more people you have doesn’t mean it’s more efficient. It just means it kind of gets more process orientated. But that doesn’t mean that your processes are, like you said, nimble, where you’ve got to cut cost.
Flipping homes is not an easy thing. It is not something… You can build a home a lot easier than you can flip a house. With building a home, you get plans, you’re working with professional subcontractors, they bid the plans and then you can schedule it accordingly. These old homes you rip, rip into and all of a sudden you got rotted walls, things fall, you got dead bodies in the… Who knows what happens inside these walls. And you have to be able to pivot.

Henry:
Dead bodies everywhere.

Jamil:
Only in the Pacific Northwest by the way, guys.

James:
Things happen and that’s what happens is they can’t adjust. And then that’s where I do think we might see a graveyard of investment property coming up. I keep coming back to that because if you can’t adjust and you can’t control your cost, if you’re 10% off on your construction, your values and your whole times, that turns into a big number if it’s a large property. And you have to be able to adjust and adapt. I know I’ve switched all my businesses to where we are way more nimble, way smaller, way more ninja get in, get out. On whatever business it is, we’re getting in and out. You have to do that by being nimble.

Jamil:
What’s interesting is from my company, Keyglee, we’re a national wholesaler, so I get to see what this looks like from the investor standpoint and what the volume of trades are happening and how much demand is there. Now, what’s funny is that a lot of my competitors, when the big funds were buying a lot of homes, the iBuyers, the institutions that have a hundred or more homes were buying most of my competition focused right on them.
They said, “Oh, these little mom-and-pop investors that are buying hold guys fixing flippers, they’re not paying us enough. They’re not closing fast enough, they’re not overpaying. So let’s just focus on these institutions.” And they failed to create relationships or maintain relationships with the small ma-and-pa guy. Our business model never shifted.
We stayed with the small ma-and-pa guy all the way through right now, when you look at our volume of trading, I’m looking at wholesalers and there’s a graveyard of wholesalers out there because they all screwed up shifting their business to the funds where we stayed with the man-and-pa guy and our volume, although we did take a dip, we had a couple of months where things were a little bit… We had to pivot and understand. But again, being nimble and being able to adjust, our volumes have picked right up and we’re crushing it.
You can see that this demand that you know guys are talking about when Kathy says it’s our time, it is our time and the people who are in the know who understand it, they’re getting in and they’re making it happen.

Dave:
All right. Well great conversation. This has been really fascinating. Thank you for bringing that Henry. James, what did you bring for us?

James:
I pulled an article because I think it’s important to kind of look at these types of click baby articles, but it says from Fortune, 20% price decline, seven forecast models are leaning towards crash. Here’s what the other 13 models, the 2023 market are going. The reason I do like the article is it gives you a good perspective from all different kind of sectors. It’s talking about Wells Fargo, J.P. Morgan, they’re giving their predictions. There’s Moody Analytics in there with John Burns.
They have their predictions and then you have the Zillows and the Redfins are all in there too. And in this article you can click through each one and read their perspective on how they came up with the analytics. The one thing I don’t like about it is this click bait, right? People are trying to get people to download stuff, 20% drop. That’s fear. If you really read through the whole article, there’s only two people that even referenced that number. Most of them are substantially lower in the 5-10% range on the decline.

Dave:
Can I guess who the 20% are?

James:
Yeah. Who do you think?

Dave:
Ivy Zelman?

James:
No, that wasn’t one of them.

Dave:
Ivy Zelman and Moody Analytics

James:
Actually no, no. Moody was not. John Burns was the most negative. 22% actually.

Dave:
Yeah, they’re pretty bearish.

James:
Yes. Moody was around 10%.

Dave:
John Burns is a smart guy.

Kathy:
And he’s usually right.

James:
I know.

Dave:
You might want to take that one seriously.

James:
And I might agree with him because there’s this one stat that just… Sometimes I’ve got to remember common sense. There’s all this data out there, there’s all these opinions, like Henry was saying too, this roller coaster of a ride, but sometimes just comes down the straight common sense. It says 20% peak through drop.
Home prices will be back to October 21 levels with a 10% drop. They’ll be at a 20% drop will still be at 2021 levels in the late February. It’s all about that massive run. And so it’s like most of the gains were done in 2021 are a big chunk of them. And so what the article’s really referencing is we’re not going into 2008 because they don’t think that there’s going to be this mortgage crisis and all these things going on with the economy. They just think everything’s deflating backwards.
Right now, I firmly believe that. I don’t think we’re going into a tailspin of 2008. 2008 was the lights went out and we were all sitting in the dark for a year going, how do we get this back on? This is just going to be deflating things down and it is going to hurt a little bit on the way on the door from stuff that you bought in 2021 or in ’22. But it will get better and you just have to kind of adjust.
The reason I like digging into all these stats and all these predictions is we’re building this into our underwriting. We can still buy very safely if we’re not… There’s nothing wrong with predicting the market might go down a little bit, but you have to do it in an intelligent way because I’m an active investor, I can’t get spooked. That’s unrealistic.
A lot of the 20% drop, I think a bit, we’ve already seen a lot of that drop and I think that we’re probably another 5% skid from where we are because we’ve already seen this 10. I know in Seattle I’ve seen 20% and that’s just what it’s been. But it allows me to continue to purchase. I can build that into my analytics as I’m underwriting, I’m looking at things. I’m going, “Okay, if I think the market’s still a little bit risky, I’m just not pushing the values.” There’s nothing wrong with that. And you can still get those buys and close the deals.
I think it’s really important that investors establish what they think personally. What I think is going to be different than Henry, Kathy and Jamil, we’re going to buy differently. We’re going to do our businesses differently but we are doing the right research off all our experience and we’re building that into what we’re doing in our specific market.
Because Jamil’s in Phoenix, I’m in Seattle, these are different markets. We’re also doing different things. And so you have to really narrow down to what do you want to do in this transitionary market? Then research that information and you can protect yourself. There’s a lot of really good buys right now. I don’t really mind these articles because it does spook people. We are buying a lot of… We’ve bought more property and it’s been way different type of property, but we bought more volume of property in the last 90 days than we did in the first six months of the year.
It’s completely different product. But the opportunities are out there just really you have to, as an investor, listen to everyone but then, and you got to kind of interpret it and really figure out what you want to go with. One of them is Redfin was, or I think it was Zillow, was predicting a 0.1 drop. And so based on what I know about the iBuyers, I go the opposite direction or whatever they’re recommending. If they’re saying 1%, I’m thinking it’s five to 6%. But I think it’s really important that people kind of interpret this information and then build it into your own day-to-day practice into your market. Cause every market’s different thing you’re doing is changing. And so just because housing could drop 20%, that might not be affect you at all. So just really pay attention to these news headlines and dig in. Don’t just pay attention to the scary click

Dave:
Bait. Yeah, I mean when it comes down to forecasting, I feel like there’s basically two things you should be considering when you read this stuff. First is what’s the business model of the people forecasting? Are you Zillow or Redfin or the Mortgage Bankers Association? Because you probably have a vested interest in predicting things one way. But I think there’s a lot of really good reputable forecasts out there. To me, it all just hinges on mortgage rates. If you think mortgage rates are going to stay above 7%, prices could fall 20%. I don’t personally believe mortgage rates are going to stay that high.
I think it, there’s a different group of people who are saying mortgage rates are going to be in the high fives, low sixes next year, and then you’re probably seeing single digit declines. I’m personally in that camp, we’ve all probably talked about this at length, but I think that’s a lot of why you see these differentiating things.
Because if mortgage rates stay high or go like seven to 8%, there is going to be a crash, in my opinion, like 20%. But we’ve already seen mortgage rates come down to 6.3%. Bond yields continue to fall. If they stay where they are right now, mortgage rates will be in the fives next year. So I think those are just things that you should keep an eye on. If you want to understand who’s correct here, just look at mortgage rates and the higher they go, the higher chance of a crash. Any last thoughts? Jamil, Henry, Kathy?

Kathy:
Just last thoughts from IMN were that renting is 30% more affordable in most places than owning the same home. So the fundamentals are really strong for being a landlord right now.

Dave:
Yep. Awesome. I like that tidbit. Put that on Instagram. All right. Well, thank you all so much for being here. We appreciate it. I had a lot of fun. And we’ll see you guys next time.
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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 Bigger Pockets team. Well, content on the show on the market are opinions only. All listeners should independently verify data points, opinions and investment strategies.