Blog

David:
This is the BiggerPockets Podcast Show 702.
I’m not against using 40-year loans and I’m not against interest-only periods. There is a danger to 40-year loans, and the last time we saw them was 2005, ‘6 when the market was red hot.
The reason that they introduced 40-year loans into the market was because you couldn’t afford the house at the price the seller wanted on a 30-year loan, which meant you couldn’t afford the house. So by making it a 40-year loan, they could reduce your payments to the point that you could now get pre-approved. That is dangerous because it allows you to pay more for a house than you really should be paying.
What’s going on everyone? This is David Greene, your host of the BiggerPockets Real Estate podcast, here today with a special edition Seeing Greene episode. What makes it special you ask? Well, because it’s a Seeing Greene episode.
In these shows, if you haven’t listened to one before, we take questions from you, our audience, asking specific things about situations they’re in or general questions about the market and what’s going on. And I do my best to give them the most sound advice possible based off of my experience with the portfolio of properties that I own myself. These are some of our most popular episodes, so I really hope that you like this one.
You’ll notice that the light is green right now, letting you know it’s a Seeing Greene episode, but I forgot and it was blue when I was actually recording the content. So don’t be surprised if you’re watching this on YouTube when the light turns to green to blue. That’s just me making a mistake, but instead of doing the whole thing again, I left it in there so you could see that me just like you is not perfect and I make mistakes also.
Today’s episode is awesome and we get into some very cool stuff, including if somebody should buy a house when renting actually is cheaper in the short term. This was a really fun one that we got into. If a 30-year loan or a 40-year loan with 10 years of interest-only payments is the better option. And how to make a decision between focusing on relationships or real estate when you feel that you got to make a choice and make a decision there.
This was a fantastic episode with some of the best questions we’ve ever received. I want to thank you all, give you a big shout-out for asking great questions and continuing to support the show by asking them.
Before we get into the show today’s quick tip brought to you in the Batman voice is consider that investing in today’s market is different than investing in a market even as short as six months to a year ago. Things are changing very, very quickly and that’s why you need to be listening to podcasts to get new information.
My personal strategy, the way that I’ve adjusted is I’m focused more on building a financial fortress than I am on just expanding as quick as I can. When I’m making investing decisions, I’m thinking about defense and how I can protect my wealth, not just offense and how I can grow it.
Most wealth will grow on its own over time if you make wise decisions. So you don’t have to focus on that, but you do need to focus on protecting what you have, especially as things change. So always ask yourself the question, what will I do if things go poorly?
All right, I hope you enjoy today’s show. Let’s get to our first question.

Collin:
Hey David, hope all is well. I am reaching out with a question for you on the house hacking strategy. So I’m currently looking to relocate to Boston, which is a fairly expensive market, and as I’ve started to crunch the numbers on the properties that I’m looking at, which are mainly three units, I’ve found that in many cases my out-of-pocket cost on a monthly basis would be more than if I rented.
And so what I’m trying to figure out now is if it makes sense to pay a little bit more every month than what I would pay if I rented so that I can get into a property earlier and start building up equity, building up my wealth, which is my ultimate goal, or whether I should focus in the short term on renting, paying as little as I can every month, saving as much money as I can and then getting into properties down the road.
Would love to hear your thoughts on this. Thanks so much as always for your time.

David:
All right, Collin, thank you for that. This is a good question. What do we do when we can actually rent for less than what it costs to own?
Well, there’s a few factors that I think you should take into this decision. You kind of hit on it at the very end there, so I know you’re thinking the right way. You’re asking, should I be trying to build equity or should I not and try to save a little bit of money? Because when you own a home, you pay for more than just the mortgage, the tax, the insurance. There are capital expenditures, there is maintenance. There are other things that are going to go into owning a home.
So the question here is really what do you want your future to look like? 30 years down the road, 20 years down the road, 10 years down the road, what kind of a position do you want to be in? Because while rent may be cheaper right now, it tends to not stay that way. Rent tends to not go down or even stay the same, it tends to go up.
And when you have inflation, rent goes up quickly, especially when you have a shortage of housing, which we have in most cities. Not everywhere of course, there’s some places where more people are leaving than are moving in, but man, if you’re in one of those areas that people are moving to and you’re not having increasing supply, rents can get out of hand very, very quickly.
The other thing is you’re talking about Boston. That is a high appreciating market and appreciation doesn’t just affect the value of the property, it affects what the rents are as well. So if you were asking this question and you were somewhere where you’re talking about a $65,000 house and rents are $400 a month, I don’t think there’s as much at stake there. That would be okay to continue renting.
But for you talking about being in a major metro area where prices are going to be going up, especially when rates come back down, where rents are going to continue to increase as wages increase and inflation increases, it becomes exponentially more expensive to continue renting in a market like that long term.
So one of the mistakes I see people make is they look at the rent right now versus the cost of home ownership right now, and it’s almost always cheaper to rent. In fact, I bet if you went back and studied the housing market over the last 50 years at almost every single point in that 50 years at the time you bought the house, it would’ve been cheaper to rent than to own. But if you go back to any of those points 20 years ago, 30 years ago, 40 years ago, and you compare it to now, owning is much cheaper than renting.
So do your best to face your fears and get away from this idea of what’s cheaper right now and think about the future. 10 years of paying that place down, of rents going up, but your mortgage being locked in place, pretty significant.
And with house hacking, I say this all the time, it’s not just that you’re saving in the rent you would’ve been paying going up, you’re also charging more rent to the people that are renting from you. So it’s a double whammy, so to speak.
In that case, it sounds like it would be better for you to buy right now, even though it might be a little bit more expensive than renting and own a home instead of paying somebody else. In 10 years, you’re not going to regret it.
Now, if you can repeat this process with a new home every year for 10 years, you’re probably going to be a millionaire. And this question of, well, should I have saved money on rent instead of buying isn’t even going to be in your mind.
All right, our next question comes from Adam Quinonez in SoCal. Is doing a HELOC on my primary residence wise for my first investment deal? Also, if yes, would it be a better strategy to use the BRRRR method to recoup the initial cost? Thank you.
Well, Adam, I can’t say for sure if you should use a HELOC on your primary residence to buy your first investment property because I don’t know what your financial situation is like, but I know that if it’s a good deal that usually ends up working well. If it’s not a good deal though, it can hurt you twice because now you’re saddled with extra debt and you have a property where you’re losing money on. This is where I don’t have enough information about your specific situation to get into this and this is where having more specific information about your situation would allow me to give you better advice.
The concern here is that because you haven’t bought a property before, you’re probably not going to make a great decision on your very first home. So now you’re increasing your risk factors and you’re increasing the likelihood that the deal you buy goes bad. Throwing a HELOC on top of it, you actually needed to do extra good to be able to pay for the extra money that comes out of the HELOC. So in some cases this could work out, in other cases it might not.
I would say I would not recommend that you go forward with this strategy unless you have enough money and reserves and you make a decent enough income that if you do lose money on the investment property, it’s not going to bankrupt you. It’s okay, everybody, to lose some money the first year, the first two years of owning an investment property. It’s okay to lose money in real estate, believe it or not, in the short term. It’s not okay to lose money in the long term and it’s not okay to lose money if you cannot afford to lose money in real estate.
That’s a really key point I want to make. This is why I’m always saying to save reserves, to continue working, to increase your income everywhere you can, to be a great employee, to work hard to push yourself because you want more money coming in to cover up for the inevitable risk of investing in real estate. It’s like everything else. There’s going to be times where you lose money.
Now to the question of should I use the BRRRR method? Yeah, that’s ideal because you’re giving a loan to yourself with this HELOC. You’d like to be able to pay that back after you refinance, but you just can’t assume that every BRRRR’s going to recoup a hundred percent of the money. In fact, oftentimes they don’t recoup a hundred percent of the money. That’s actually rare when that does happen. So you don’t want to depend on that.
And an alternative to BRRRR is house hacking. Look, if you go invest money in a BRRRR and you pull out 90% of it, you only left 10% of the deal. That’s a win, that’s better than 20 or 25% if you bought it traditionally. But you can house hack and put 5% down or three and a half percent down and when you do that, you don’t even have to BRRRR.
If this is your first deal, I’d much rather see you take the HELOC on the property and buy another primary residence to move into to house hack and get your housing expenses lower. Take the place you have now and make that a rental. Then I would want to see you go try to take on a rehab project, something big like a BRRRR that could go bad, if you’re having to borrow money from your HELOC to pay for it.
Again, you know your financial situation much more than I do. I didn’t have a ton of information to go off of here. But in general, if this is your first investment property, I don’t love you having to use a HELOC unless you have a great deal.

Drew:
Hey, what’s up BiggerPockets? First of all, really want to thank Dave and Rob. They’ve been extremely impactful to me in my journey for financial freedom. Thank you guys so much.
A little bit about me, my fiancée and I did a live and flip three years ago that just recently netted us 130K. We put all of that into a house hack, a one bedroom STR house hack that’s going to cash flow us 4K this month and should average over 2K cash flow per month.
I also just recently started a co-hosting company that’s allowed me to develop a lot of the systems I need to scale my portfolio while also helping other hosts be able to grow their business and increase their revenue and essentially pay for myself while managing their business for them.
I consume most of the content out there on Airbnb optimization, arbitrage, acquisition, how to scale my Airbnb business. And right now I’ve opened some HELOCs one on my house and one on my mom’s house, which should give us access to about 250K in capital. My goal is to become financially free via cash flow and then start building wealth.
So most of my cash is being saved right now and I want to start leveraging some of this debt. So how do I spend it? Should I primarily focus on, one, networking, content, social media and marketing? This would grow my co-hosting business and my fundraising credibility, capability. Two, acquiring my next STRs via arbitrage or purchase through the HELOCs to grow my cash flow and add to my visible co-hosting portfolio. Or three, investments in high level education on sales or content creation, which I consider to be my weak points right now.
I’ll be doing all three, so I guess you could say I’m in a bit of analysis paralysis in terms of how to take the next big step. Thanks again so much. You guys have truly changed my life. I appreciate it.

David:
All right, thank you Drew, and thank you for the kind words. Excited to answer your question here, and thanks for asking it. If any of you would like to have your questions submitted here, just go to biggerpockets.com/david. You can submit a question just like Drew did.
All right, Drew, if I remember correctly, it sounds like you got three options that you can put this money into. You can either invest into the business that you created to try to get more clients coming in to earn more revenue. You could invest into more short-term rentals or you could invest into education to try to improve yourself.
I don’t know enough of the numbers for how your business is doing, how much time you want to put into this to be able to tell where the best ROI is going to be. But I do remember you saying that you recently started this business and you only own one short-term rental right now.
I don’t think it’s super wise to try to scale a huge business teaching other people how to run short-term rentals when you only have one. You can’t know some of the problems that are going to pop up when you only have one property. Sometimes you hit it lucky and you get an easier one and as you get more and more, stuff pops up that you wouldn’t have known could go wrong.
You’re basically not going to be an incredibly well-rounded educator until you get several properties and you see things going wrong that you couldn’t have anticipated and you adapt to that. That’s why people pay a coach. That’s why people listen to a podcast like this. It’s not all the stuff I can tell someone that can go well. It’s all of the anticipation I have for things that can go wrong and how I prepare them to get ahead of those problems before they happen.
You also mentioned that you’ve been building out some systems. I don’t think you want to be coaching and training other people until you have well established systems that, like I said, help prevent mistakes from going wrong.
So right off the bat, I think it’s cool that you’re doing some coaching and you’re helping some people, but I wouldn’t want to see you dump a ton of gasoline on that fire because it’s still so small. You just got a little bit of kindling, you’ve been rubbing the sticks together, you got a little bit of smoke coming out. You don’t want to dump gas onto a fire until it’s a big healthy raging bonfire. Once you’ve got the solid base of wood that’s in there and the flames are hot, then yeah, dump your gasoline on it.
But if you try to dump too much marketing money onto a business that’s new, has barely got started, you don’t have systems, you don’t have support, you don’t have employees, you don’t understand how to do it, sometimes rather than the gasoline making the fire go bigger, it actually snuffs it out and you lose what you even have right now.
Now that brings us to option number two, should you buy more short term rentals? I’m leaning towards this. If you’ve got the one and it’s going to average 2K a month, I would lean towards you should get another one, because you’re going to have increasing returns on your time.
You’re not going to have to build a new system from the ground up getting a new short term rental, especially if it’s in the same market as the one that you have right now. You’ll actually be able to benefit from economies of scale, buying a second property in the same area, using the same systems, using the same software, and using the same knowledge. You’ll make a lot less mistakes. This is very synergistically sound.
Your third option was to invest in training, which you say is a weakness of yours or more courses. That could be good, but I think if you’re already managing a rental, it’s probably not necessary. I’d rather see you get a couple of them and hit a ceiling.
Let’s say you get three or four short-term rentals and you’re like, “Man, I don’t know how to keep up with customer complaints. I don’t know how to keep up with managing the cleaners.” At that point, you see what your own limitations and your flaws are. That’s when I would invest the money into the coaching.
Right now they’re going to be teaching you a bunch of stuff that isn’t even a problem in your business because you’re only running one and some of that money could be wasted. You won’t get as much value out of it.
So on one hand you’ve got your marketing company, on the other hand you’ve got investing in yourself, and then the other you’ve got the actual real estate. I’d buy the real estate and once I had enough of the real estate, I would invest in the coaching. And once I had some of the knowledge from the coaching and the real estate portfolio to back it up, then I would dump money onto the business you’re trying to create to show other people how to do the same as you. And at that point you should have a well-oiled machine and be well on your way to doing great financially.
Thank you for asking this question, Drew. I like that I got to dissect that and give you some advice. And make sure you keep in touch with us and let us know how it’s going.
All right, at this part of the show I like to read comments that y’all have left on YouTube from previous shows. This is one of my favorite segments of the show because sometimes you guys say some funny or some insightful stuff and I get to share it with the rest of the audience.
Our first YouTube comment comes from episode 687 and it’s from Laila Atallah. I love you’re Seeing Greene episodes, David. This episode was jam-packed with gems and it was intriguing to hear a bit of what’s going on your computer screen all day as you manage your businesses.
Yes, please do a lot more episodes where you and other investors share all the details start to finish and the dollar amounts and other relevant metrics of the deal, rehab, ongoing management costs, big repairs, cash flow, cash on cash return, et cetera. Also, please share a bunch of stories of people’s different real estate failures with all of the numbers of what exactly went wrong and the lessons we all can learn.
Well, I can see that Laila is definitely a stickler for details and she wants all the details. So we will keep that in mind and we’ll look for more people to come in and share specific numbers in the future.
Our next comment comes from Lorena Zaragoza. OMG, David, when do you sleep? Side note here, are you supposed to say OMG or oh my God? I’ve always read it as OMG when somebody texts that. I don’t ever actually read out loud oh my God. Same for WTF, which is why I think it’s funny that people send that because how much time are you really spending? But I don’t know. Let me know in the comments. Are you supposed to pronounce this OMG or oh my gosh?
OMG David, when do you sleep? I’m going through a divorce and I’m getting myself positioned to not only survive but thrive going from two incomes to just mine. Sold the marital home and used part of my portion as down payment on my home. Reserved money to build a 700 square foot ADU, fully stocked and furnished to rent out. I’m renting my master on Furnish Finder and will also list my ADU on Furnish Finder once it’s built.
If all goes well, I will have replaced 75% of my ex-spouse’s take home in just over a year. Please have an episode for people going through a divorce. I’m 50 years old and using my energy and resources to launch forward into my real estate investing journey. Thank you.
Well, I’m sorry to hear about the divorce there Lorena, but I’m glad to know that you are taking that negative energy and turning it into something positive by investing into real estate. So thank you for your comment and all the detail there and I do wish you the best.
Our next comment comes from TJ. I always look forward to Seeing Greene episodes. I like the format of having different personalities answering questions. This is a great episode. I learned a lot. Thank you.
Well, thank you TJ. We appreciate you guys being here. And we can’t make these shows without you, so go to biggerpockets.com/david and submit me your trickiest, your craziest or your most practical question. I don’t care what it is, I just want to be able to help other people by getting it out there and letting them hear.
All right, if you guys don’t mind before moving on, please take a second to like, share and subscribe this and then leave your own comment on YouTube telling me what you think of this episode. Anything funny, entertaining, insightful, profound, whatever you can think of. I love it.
Our next video question comes from Colin Higgins in Titusville, Florida.

Colin:
Hi David, my name’s Colin Higgins and I’m a realtor here in Titusville, Florida. Right now I’m reading one of your books. I’m actually listening to the audio book which is Sold. And it’s filled with tons of great information, but I did have a question about some things that you mentioned in chapter four.
In chapter four, you’re talking about things that you can bring to the table that help close the deal both on the buyer’s behalf or the seller’s behalf, what have you. And one of the things mentioned, which is offering the sellers a free or reduced cost renter buyback agreement in circumstances where the buyers would have to break their lease in order to move into the new home.
Now this is interesting to me because when I’ve heard of rent buyback agreements, I’ve always heard of them pertaining towards the sellers, so the sellers can figure out where they’re going to move next and that buys them some time. I’ve never heard it pertain to the buyers and I’m just curious what this exactly means.
Is it that they’re getting their lease bought out so that they can move in? How does this pertain to the buyers, if you could clarify that. But anyways, thanks for taking my question. I’m a fan of the show. I know this will help myself, it’ll help my clients and it’ll help everyone else on BiggerPockets and YouTube.

David:
Thank you for that, Colin. I appreciate your question and it’s going to be cool to get to share with other people what goes on behind the curtains in the real estate world of negotiating deals. Here’s the gist of what we’re getting at here.
When negotiating, my mind always looks for a way that I can give something up to the other side, that my side doesn’t care about or value. You don’t want to give up the things that your side really, really cares about, like the price of the home. That matters a lot to the buyer. You don’t want to have to give up by paying more because that’s going to hurt your buyer.
But there may be a situation where the buyer says, “I’m in no rush to actually move into the house. If the seller accepts my offer, I’m happy to let them stay there and rent the house back from me.” Well, sometimes your client can’t do that. Sometimes they got to move in right away. And so offering the seller rent back hurts your clients, but other times your clients don’t care, and in other cases it actually benefits your client to do that.
So I would frequently have people come and say, “Hey David, we want to buy a house.” By the way, if you guys are in my area, if you’re in California and you want to buy a house, please reach out to me. I am never too busy to help you become a homeowner or sell your house. I would love it if you do that.
So this person comes and they say, “Hey David, I want to buy a house, but I’m stuck in my lease for another three months.” Everyone thinks in their mind because they’re in a lease, they just can’t get out of it. Now, when the market was hot, I had many of these clients go to their landlord and say, “Will you let me out of the lease?”
And the majority of the time the landlord said, “Yes, I can rent it for way more than you’re paying right now. Give me a month to advertise it. When I find a new tenant, you can move out and they’ll move in.” And boom, the lease issue isn’t an issue at all, just no one thought to ask.
Well, in other situations the landlord may have said no, or you could have a situation like right now where rents probably won’t be higher than what your client is paying. So landlords aren’t going to just want to let them out for free. There’s going to be a penalty that your client doesn’t want to pay.
So in those situations, this is especially crucial in January, February, March where spring is coming and they’re going to get out of their lease in May or June, and I’m trying to avoid my buyer having to go into the market when it’s the hottest and the hardest to get a house. Well, if it’s wintertime, they’re at an advantage as a buyer.
So instead of waiting until springtime when their lease is over, I would say, what if we look for a home and we write offers on homes, but we say that the seller can rent it back for three months. What you do is you write the offers saying the seller’s going to rent the house back for whatever period of time it is that they need, and their rent is going to be whatever your client’s principal interest tax and insurance is.
Okay, so basically your client is paying the mortgage, but they’re receiving the equivalent from the seller of whatever that mortgage is so they’re not actually losing money. And when this works out, well, you’re shopping for a house in February, you get it at a better deal than you would’ve got it at in the spring, but your client doesn’t have to move in right away.
The sellers keep that, they stay in the home even though the title transfers to the buyers. The sellers stay there, which gives them more time to find their next house, which made them more likely to accept your client’s offer, which meant you could write an offer that was better for the buyer than the seller because the seller’s getting that flexibility. This also benefits the buyer because they don’t have to move into the property right away and they don’t have to worry about the expense of breaking their lease.
These win-wins are what negotiation is all about. It’s not about dominating the other side, putting your boot on their neck and forcing them to bow because you have the power. That’s the wrong way to look at negotiating. It’s about the agent being clever and creative, and that’s why I gave an example in the book.
Agents don’t even ask these questions. They don’t even ask the question of, if a client says, “Well, I’m in a lease right now.” Okay, well come to me in three months when you’re ready. Houses are a lot more expensive in the springtime than they would be.
Or what if they just start looking now, and if you don’t find anything you like, we don’t write an offer, but if you do, we write an offer telling the seller they can rent it back and if the seller doesn’t need to rent it back, we just move on from that house, we don’t buy it. There’s lots of creative options and as the agent, I really believe they need to do a better job of looking for ways to structure deals that benefit the clients they’re representing.
So thank you for asking that question, Colin. I am very pleased to see that you’re reading this book, that you’re caring about being a better agent, that you’re trying to represent your clients a bit more. We need more people like you in the BiggerPockets community that are taking this approach and actually educating themselves on how to do a better job. Real estate is very difficult and having a good agent can make it much easier.
If any of you are real estate agents and you want to hear more tips like this, go check out my other books. You can go to biggerpockets.com/store and you’re going to look for Sold, Skill, or my next book Scale, which will be coming out, all written for real estate agents to help them be better at their jobs.
Our next question comes from Dennis Robinson in Orange County. On one of the duplexes that I own that’s valued at 900,000, I have a 40-year fixed rate mortgage. The first 10 years is interest only at three quarters of a percent higher than my other identical duplex, which has a traditional 30-year loan.
While I’m enjoying the extra $1,000 per month cash flow on the 40-year loan, but I’m concerned that I’ll regret this decision in 10 years if I want to refi and no principal has been paid down. I’m 41 years old, so I feel like I’m just getting started in my investing career and I’m equally concerned about my long-term outlook as well as having a little extra cash to enjoy life, especially while my kids are young. Which loan would you consider a better choice in my situation?
Great question here, Dennis. All right, before I answer it, I want to give a highlight here. I’m not against using 40-year loans and I’m not against interest-only periods. There is a danger to 40-year loans and the last time we saw them was 2005, ‘6 when the market was red hot.
The reason that they introduced 40-year loans into the market was because you couldn’t afford the house at the price the seller wanted on a 30-year loan, which meant you couldn’t afford the house. So by making it a 40-year loan, they could reduce your payments to the point that you could now get pre-approved. That is dangerous because it allows you to pay more for a house than you really should be paying.
Now, I’m not against the 40-year loan in a situation where you already own the house, but you’re refinancing it because you’re not paying more, you’re just getting a lower payment, stretching it out over 40 years. The same is true of interest-only payments. I’m a fan of interest-only payments, but not if the reason you’re doing it is you couldn’t afford the payment that also had principal.
All right, moving on to the next part of your question, should you go for the 30-year payment or the 40 year with 10 years interest only? It sounds like your concern here, my man, is that if you go with the 40-year interest only, you’re not going to pay your principal down enough over 10 years. Glad you asked that question because now we get to talk about amortization, which is a fancy word to describe the process of paying down a loan.
You said that the duplex is valued at 900,000. All right, now I’m sure that you don’t owe the full 900,000, but you didn’t mention how much you do owe. Let’s assume that you put 20% down just so I can do some math here. Okay, so it’s worth 900, you put 180 down, meaning that you owe $720,000.
Now assuming an interest rate of 7%, again, I don’t know exactly what your interest rate is, your principal and interest would be $4,790. But of that only $590 of that first payment would be going towards paying down the principal. So if we fast forward this 10 years, because you’re talking about a 10-year interest-only period, that’s 120 months. At that time, your loan balance would be $618,000 where you started off at 719,000. So it’s about a $100,000 is what you’d pay off over 10 years.
It’s not as much as you would think. And that’s because at the beginning of loans being paid off, a higher percentage goes to the interest than the principal. So you’re not paying off an even amount. A lot of people think like, oh, if I’m making a $4,000 a month payment, I’m paying $4,000 off of my balance. You’re not.
In this case, your payment was 4,790 and your first payment only paid off $590. And at the end of your first year, your 13th payment went up to 630, barely anything. It’s like a $30 difference in this case, $40 difference. So if you’re thinking that you’re paying massive amounts down on your mortgage because you’re making a $4,790 payment, you’re not paying off $4,800 a month, you’re paying off 5 or $600 a month and it slowly goes up.
Over 10 years, you’ve only paid off a 100 grand, but the payments you’ll have made over 10 years, let’s figure that out right now, if we take 4,790 times 12. So every year you’re paying 57,480 and then you multiply that times 10 years, you’ll have paid the bank $574,800 only to have paid off a 100 grand. You’re not paying off the full $574,800.
And that’s why interest-only loans are not as bad as what you might think. You’re not eliminating as much principal as people think, and over 10 years I imagine it’s going to be appreciating also probably more than a $100,000 that you didn’t pay off.
Okay, so for your specific situation, I think your 40-year loan with a 10 years interest only is a better financial choice for you. Take that $1,000 a month, save the majority of it just in case something terrible happens. Don’t just live off of that $1,000 a month. Maybe live off a couple hundred of it.
Put the other 7 or $800 off to the side, so if in 10 years when you got to refinance or whenever you got to refinance, if you haven’t paid off that principal, instead you’ve saved all that money that you could put towards the principal in a worst case scenario. I always plan for the worst case scenario.
Hope I didn’t confuse you too much with all this math talk and calculators here, but I appreciate you asking that question, Dennis, because our whole audience got to hear how not as much of a loan is being paid off as most people think.
All right, our next question comes from Lincoln in the Dallas, Texas area. I have cash savings of about $500,000. I bought my first single family house three months ago with $250,000 cash and now I’m waiting for the six months to get a loan and pull 200,000 of that out. A typical single family house in the area is 3 to 400,000.
Should I continue the practice of buying with cash to hopefully get a better deal? I’m assuming this is true, and then wait to refi and pull out the 80% or should I use the 500K as down payments on several properties all at once? Ooh, this is a good question here, Lincoln.
All right, first thing is there’s a fallacy that you’re getting a better deal when you pay cash. It’s not guaranteed. Sometimes it does help. I don’t think that’s wise. What I’d probably do is I’d write the offer with financing. Like let’s say that you want to buy a house that’s 400,000 and you write the offer for 350. Write it with financing, and if they say no, say fine, what if I give you all cash?
If they say yes to the cash when they said no to the financing, you did get a better deal and that’s going to work out good for you. But oftentimes they’ll say yes to the offer that you wrote of financing, so you didn’t actually get it at a better deal with cash.
Cash closes tend to be more advantageous when the seller is in distress and time is of the essence, when they’re headed to foreclosure, when they’ve got a notice of default, when they need a quick sale, yes, a cash purchase can help you because you don’t have to wait for the loan to fund.
But my mortgage company frequently funds loans in 14 days or 16 days, and most cash offers are like a two-week close. It’s the same freaking thing. So don’t get too caught up in thinking that cash is getting you a better deal.
Another thing to consider, what if rates are worse right now than they’re going to be in the future? If you think rates are going to get better, paying cash right now and then refinancing into a better rate in six months would help you. But what if it goes the other way? What if you could get a 7% interest rate today, but six-month rates are at 9%?
In that case, any benefit you thought you got from buying cash is erased because now you have a higher interest rate when you actually go in there to refi it. So you have to follow what’s going on with interest rates and how things are trending before you can make that decision.
There’s also the fact that home prices could continue going down, which I don’t know is guaranteed, but I think that it’s probably more likely that they’re going to stay the same or dip a little bit than it is that they’re going to go up. And I’m basing this off the fact that I don’t think that they’re going to go back up again until rates go down and we don’t have any reason to think that rates are going down in the next six months.
So I don’t think buying a whole bunch of properties right now is in your best interest because the market could be softening up in a lot of different places. What I would prefer to see is that you buy properties with financing right now and if the seller says no, try to get a better deal with your cash and then refinance.
Thank you for asking the question here, Lincoln. This was very well thought out and it gave me a chance to answer a pretty tricky dilemma that I think a lot of people are facing that have stacked up cash and waiting for an opportunity like this.
All right, we have time for one more question and this is going to be a video question that comes from Wyatt Johnson in Billings, Montana.

Wyatt:
David, what’s up? My name’s Wyatt Johnson. I’m an electrician up here in Billings, Montana. A little bit of background on me. I’m 25, got three properties, should be closing on the next one here in January. But I’ve noticed that I’ve always put my work life above my social life, especially relationships and it sucks because I feel like a loser when I’m not hanging out with women and working too much, but then I feel like a loser when I’m hanging out with women because I’m not working as much as I think I should be.
So I was wondering if you had any advice on how to avoid that mindset and also be more effective at juggling the two things. Really appreciate you taking my question. Appreciate everything you guys put out there. My life would look a lot different if I didn’t have you to listen to every week. Thanks.

David:
Wyatt, what an excellent question you’re asking here. This might be my favorite question someone’s asked at least off the top of my head in a very long time. I love that you asked it. And you’re summing something up that I think a lot of people go through, especially if you’re someone who values yourself based on how productive you are. There’s personality tests that people can take that will determine how much they value productivity. This is a great question to ask me because mine’s about as high as it could be. If I’m not being productive, I don’t feel good about myself.
Now productivity comes in many different ways. It doesn’t just mean making money because that’s always what the people who don’t value money jump in, there’s more to life than money. They can’t wait to come in and say that. I know, calm down.
You could be productive with health and fitness. Spending time at the gym is productive, if you’re working out really hard. You could be productive with meal prepping, right? If you’re at the grocery store shopping for good food and then you’re putting it into your fridge to eat healthy, that’s productive.
You could be productive in your relationship, right? I’ve never really been in a significant long-term relationship that was stable. So I can’t speak on this 100%, but I know the people that have, they always say it’s work, it’s work. Well, I think what they mean when they say it’s work is that it requires you to challenge your own natural self, like your personality tendencies that you need to hold with a loose hand.
And they’re also saying it’s an investment. You are constantly investing in your significant others’ wellbeing. You’re investing in the relationship showing that you value. You never get away from that. So there’s many ways to be productive is the first thing I’m getting at, but I love being productive.
If I’m having a conversation with a friend or in a relationship, I don’t want to talk about the weather and sports. I want to get into significant things that matter. To me that’s being productive.
Now you’re posing this question of when I’m working all the time, I feel like a loser because I’m not enjoying all the fruits of my labor. I could be out there talking to some fly mamacitas and having a good time and being respected for all the work that I did, feeling good about myself. But when I’m doing that, I feel like I’m leaving something on the table and I could be working.
All right, I’m going to ask you to reframe the way that you’re looking at the situation. Don’t look at spending time with women as generally speaking, being productive. It’s the relationship that matters. It’s the woman that matters. If you’ve got a woman that you love that you can see I could spend the rest of my time with her, or you’re not sure, but that’s a possibility, the time that you put into them is an investment, if it’s for the purpose of figuring out could I marry them, could I be with this person?
And then once you realize that it’s not the right person, you invested time in getting to the answer, you’ve got your win, get out, get back to work, get back to the goals that you have and wait for the next person to come along to invest in.
If you’ve done that and you’ve got to the point that you’re like, I think this is one that I could spend the rest of my life with, you’re not wasting time spending time with that person. You are investing into a future with that person that should be paying off dividends.
Now, if that person sees you the same way, they’re not going to resent you going to work. They’re not going to resent you making money. They’re not going to resent you practicing a craft because they’re going to benefit for the rest of their life by the work you’re doing, the financials that you’re building and the empire you’re creating as an electrician. They’re actually going to invest into you because they want you to do that.
So when you find somebody that’s resentful that you’re not spending all your time with them or they’re not the number one priority a hundred percent of the time, or you’re not giving them enough attention, that’s a sign this is the wrong person because they’re not seeing you as a future. If they saw you as a future, they’d be investing into where you’re going, which is your job and your real estate investing because that’s part of their life. They’re going to benefit from all that stuff too.
If they’re seeing you as someone who just wants all your attention, all the resources that you have, but they don’t want to help you build more of those resources, that is a sure sign that this person is using you. They’re looking for something that they can take from you, not necessarily something they could give.
And maybe this is a lesson for all of us to learn, when you find the person who sees you as a potential person they could have in their future, they invest in you because a future with somebody, a partnership like that is something you share together. So investing in the other person is investing in yourself.
So to sum all this up, if you’re with a girl that you really, really like, you’re not wasting time and not being productive, you’re investing in your future. If you’re with girls that you don’t really like and you don’t see going anywhere, you are wasting your time and you’re not investing in your future.
And when you’re trying to figure out if that’s the right girl for you, use the same metric based on them. Is she investing into your future? Is she building you up and supporting you and encouraging you to do more, even if it comes at the expense of her own immediate gratification, the attention that she’s looking to get from you?
Or is she just trying to get your money and your time and your attention and your resources and she doesn’t care about if they’re ever going to run out because when they do run out, she’s going to move on to the next person?
I think this is something we all could benefit from learning and focusing on and I want to commend you for having the guts to ask this question. I don’t know if it answered exactly what you’re going for, but if it didn’t, make sure you send us another question with a beautiful background like you have in this one so that I can answer it again.
All right, that was our show for today. I hope you guys enjoyed a Seeing Greene episode where I just remembered I forgot to turn the light green behind me and it’s been blue this whole time. So I’m sorry if that confused you. I do get complaints about this. How am I supposed to know it’s a Seeing Greene when the light is blue? I realize that. Hopefully the title, calling it a Seeing Greene, me introducing it as a Seeing Greene and me talking the entire time without a co-host was enough for you to realize that was the case. I’m going to record another one pretty soon here and I’m going to have to remember to turn that light green.
Thank you guys all for your attention, for following us here. If you want to learn more about me, you could follow me anywhere online, @davidgreene24, that’s my handle on all social media. You could also check out my website, davidgreene24.com, which is new, but is being remade right now. So let me know what you think of it. You find a lot about what I’m doing, where I’m going, what I’m reading, what I’m buying, more stuff about me there.
Last but not least, please go to wherever you listen to your podcast, Apple Podcasts, Spotify, whatever it is and leave us a five-star review. Those help us a ton and we want to stay the top real estate investing podcast in the world. All right, thanks, you guys. If you have time, watch another video and I will see you on the next one.

Mindy:
Welcome to the Bigger Pockets Money Podcast Finance Friday edition, where we interview Richard and talk about increasing income, the pros and cons of the public service student loan forgiveness plan, and investing from a position of strength.

Richard:
For me, it’s weighing out the nice, happy lifestyle that I have, working from home 100%, get a lot of time off, spend a lot of time with my wife and my pets. It’s very happy on this side, and I still have something, I still have a good, in my opinion, I can still save about 20% of my income as long as I’m not paying off the credit card. But you’re right, I do think about that often, leaving the government for the private sector.

Mindy:
Hello, hello, hello, my name is Mindy Jensen and with me as always is my big thinking co-host Scott Trench.

Scott:
Always another scalable opportunity to chat with you about money today, Mindy.

Mindy:
Scott and I are here to make financial independence less scary, less just for somebody else. To introduce you to every money story because we truly believe financial freedom is attainable for everyone, no matter when or where you’re starting.

Scott:
That’s right. Whether you want to retire early and travel the world, go on to make big time investments in NASAs like real estate. Start your own business, buy businesses, become president or live in a castle. We’ll help you reach your financial goals and get money out of the way so you can launch yourself towards your dreams.

Mindy:
Scott, I’m super excited to talk to Richard today because he has a lot of opportunity ahead of him. He’s also got some pretty big, let’s see, challenges ahead and some things to think about.

Scott:
Yeah, I think what’s awesome about the show today is Richard has some pretty clear dreams and some pretty clear goals in his life that he wants to achieve, and what he’s missing is a foundation that is suitable from which to pursue those goals in a way that is responsible and high probability, and that’s what he needs to pour over the next couple of years. And I hope that the advice we gave him is motivating in that yes, you should and can go after these dreams. You can’t go after them now responsibly in some ways, but within 1, 2, 3, 4 years, meaningful steps towards those dreams should be realistic and probable.

Mindy:
Absolutely. Before we bring in Richard, I need to tell you that the contents of this podcast are informational in nature and are not legal or tax advice, and neither Scott nor I nor Bigger Pockets is engaged in the provision of legal tax or any other advice. You should seek your own advice from professional advisors, including lawyers and accountants regarding the legal tax and financial implications of any financial decision you contemplate. Richard is newly married and his wife just started her job this week. They live in a high cost of living area and are looking for help with budgeting, saving and investing. Richard, welcome to the Bigger Pockets Money podcast. I’m super excited to talk to you today.

Richard:
Howdy? Very happy to be here.

Mindy:
Let’s jump into your numbers. I see income at 4479 hitting your bank account as your monthly net with an additional income of $240 from strength training class and $80 a month as personal training for a total of 4799. And as we just mentioned, that’ll be going up once your wife starts receiving a steady paycheck. I have monthly expenses, a total of $3,700 a month, which really isn’t so bad since you’re in such a high cost of living area. The only expense I want to call out is your rent of 2279. Again, that’s the high cost of living area. I don’t know what you could do to lower that, but that’s really the only expense I see that jumps out as like, wow, this is a lot. We have debts of student loans, $108,000 at interest rates between 3.4% and 7% currently in the Covid forbearance. So you’re paying $0 on those right now.

Richard:
Correct.

Mindy:
I see a car loan of $15,000 at 3.75%, and you had a terrible situation in the past with an old car. It died and you had to roll in $9,000 from that car loan into this one. So you’re essentially paying off two cars when you only have one. That stinks, but it is what it is. Credit card at zero, yay, you just paid that off. Congratulations. And a TSP loan of $1,100 and you’re paying off $200 biweekly. The original loan amount was 5,000, so you could pay off the credit card earlier. I think that makes sense because this has a much lower interest rate than those ridiculous credit card loans. Total debt is $125,000 with of course the bulk of that being the student loans, which will at some point come back do. So investments, I show approximately $22,000 in your TSP. So Richard, how could we help you today? Can you give us a brief overview of your money story and then talk about some of your pain points?

Richard:
I think my money story really starts right around the end of college. I was thinking about what I wanted to do. I was graduating with Business Management degree. And I thought about what I like to do and long story short, I was trying to find out what kind of leadership position I would want one day, and I think pretty lofty goals, and I know it sounds silly, but I thought maybe I want to be President of the United States. Let’s go with that. That one single thought five years ago led me to where I’m at now in Washington DC or at least the metro area. And it led me to search what presidents are like and then I found out most of them were millionaires and I found a lot of them became millionaires because of real estate. And that led into the great rabbit hole that I think we’re all familiar with of books, podcasts, YouTubers, and now we’re about five years down the line and I’ve read a lot, watched a lot, listened a lot.

Scott:
Awesome. And can you walk us through any of the money buildup? It sounds like the most of your position is these student loans and then there’s a little bit of money in the TSP.

Richard:
Correct.

Scott:
Any insight into your savings or investing approaches?

Richard:
Took me a little while to realize ETFs Index Funds were the way to go. Of course when Robert Hood came out, at first everyone was all about it. I was one of those guys, spent a little bit of time trading, but then quickly realized that just long-term investing was the right idea. But once I got my full-time job here in the Washington DC area, I just set my contribution to the Roth TSP and the match rate, which is at 5%, which isn’t great, isn’t bad, but I set it there and don’t touch it ever. Either than that TSP loan, which really helped me out, get rid of high interest credit card debt and put that into the TSP, which is a 1% interest and pays back to me anyways, not to a bank or anything. As Mindy mentioned earlier, my car, I had a truck back when I lived in Texas and it was a bad truck.
I do not buy Fords anymore, and it had about $9,000 on it and I had to wrap that up after it died into a loan for a Toyota Camry. So that makes up the rest or more debt. I think the student loans, that is troublesome, but it’s also one of the reasons why I got into the Federal Government, the public service, because we do have really great forgiveness on that after a certain amount of payments. And I actually looked out on how that forgiveness is going to work out for me, mainly because all these $0 payments still count towards my qualified payments. But that’s the story right now. I had a car loan, I got my student debt, I’ve got my full-time job working and so far I’ve just been putting towards my TSP Roth. That’s really the only investments that I’ve made.
And the main trouble, my main pain points is building up the savings and keeping it, I think I’m a pretty disciplined person, but for the past several years it’s been hard to keep that, hold onto it. Something usually happens, something big or something that seems big and it disappears, falls away, then I’m back to zero. You get a little bit of that shame that you feel like, man, I had all that money and I let it go. And then you get into some comfort spending and now you’re back in credit card debt and it’s a vicious cycle, but now I’m back to zero, so that’s why I wanted to talk to you all.

Scott:
Awesome. Well, Richard, what do you do for a living? What is your job?

Richard:
My official title is Operations Research Analyst. What I’m really doing is data science, lots of computer programming type stuff, Python, Sequel, data management, predictive analyses, things like that.

Scott:
Great. And you said you make $106,000 a year?

Richard:
Right, approximately.

Scott:
And what are you withholding from that paycheck? Do you max out your 401K or TSP?

Richard:
I don’t max out the TSP. So it is a TSP. I don’t max that out, I just contribute to the match. And one of my reasons for that was I wanted to try to save up an emergency fund before I started maxing that out. But that’s been one of the challenges is keeping that built up savings fund.

Scott:
Great. And you live in the city limits of DC?

Richard:
Not the DC proper, so sorry to any DC folks that live over there. I’m in Arlington, Virginia. I can see the monuments from my apartment, but I’m not technically in DC.

Mindy:
So taxation with representation?

Richard:
Yes, correct. Yes, I’m in Virginia.

Scott:
Awesome. I know the area, it’s very expensive. Very expensive to live there.

Mindy:
Yes. I have several questions. You talk about your savings and you save up and then something happens and you need to spend that. That sounds like an emergency fund to me. Do you have an emergency fund or is it just this savings account?

Richard:
So currently I don’t have an emergency fund. That was something that I put off until I paid all my credit card debt. I was going to ask you all about this back when I applied, but now that the credit card’s all paid off, it’s a little moot. But I wanted to put off saving anything until all of my credit card debt was gone. Just putting everything to that made me feel better as I watched it chunk away over the months. But then again, I don’t know how wise that decision was, but because now I’m zero credit card, but I also have zero savings. So that’s where I’m at with my savings right now.

Mindy:
And have you thought about changing jobs or have you explored the private sector job market? The government security is awesome, but they don’t pay that well, whereas data, what did, data…?

Richard:
Data Scientists.

Mindy:
Yeah, data scientists can make a lot of money. Data programming, you could make a lot more money in the private sector. You could even go out, do you have a security clearance?

Richard:
I have not the top secret, I am just the normal secret. So I do have a security clearance.

Mindy:
So that’s a perk. Those are expensive to get. And having one, how long does your security clearance last?

Richard:
That I’m not sure about.

Mindy:
Having that, it’s a lot easier to renew it than it is to just get it brand new and it’s a lot cheaper to renew as well. So having that and going out and looking in the job field in the private sector could get you contract jobs with the government and could get you a lot more money. So I would first encourage you to look within and see if there’s any opportunities internally, but if there aren’t, look at the private sector jobs and see what’s available. That doesn’t mean you have to switch, but if you’re making a 100 with the government and you look, you’re like, oh, data scientists make 250 in the private sector, that makes it a lot easier to switch jobs.
And the 5% match is super awesome, but if you’re getting $150,000 rates, and I’m just making that up, I don’t know what data scientists make, but I know they make a lot of money. So you could be, what is the phrase? Jumping over dollars to save pennies by staying for the match if that’s why you’re staying. There’s a lot of other perks for working for the government, but there’s a lot of perks for working for the private sector called dollars. So I would encourage you to look and just explore. That doesn’t mean you have to change, but just see what’s out there and see if it’s worth it.

Richard:
I do have a response to that. And that is one thing that I did think about for a long time, especially earlier this year. I, earlier this year, got a promotion to the 106. I was previously, first half of this year, making about 86. And I was looking at going to the private sector because I had just graduated another basically certificate program from Georgetown University for Data Science. And my professors there told me the same thing, you don’t have to stay with the government, you can go and find something that pays way more. Around that time though, that’s when the tech layoffs started and it was also really hard to find people that wanted to hire another data scientist.
So that’s when I did look internally and I said, if I can’t leave, let’s look internally. And I did find that promotion. So that’s been nice and I totally hear you. It’s something that I’ve thought about and for me, it’s weighing out the nice, happy lifestyle that I have working from home 100%, get a lot of time off, spend a lot of time with my wife and my pets. It’s very happy on this side and I still have something, I still have a good, in my opinion, I can still save about 20% of my income as long as I’m not paying off the credit card. But you’re right, I do think about that often leaving the government for the private sector.

Mindy:
Well, let’s go to the other elephant in your financial situation and that is the student loans currently in $0, you’re eligible for public service loan forgiveness?

Richard:
Yes.

Mindy:
How much longer do you have in your public service to get the loan forgiveness?

Richard:
I started in 2019. I believe I should have about six more years by the time I actually have to start paying actual dollars. So to explain that a little further, when I first got this job and certified my income for the public service loan forgiveness, they go off of your most recent tax return. It just so happened to be that the last tax return I got was under the income limit for me to make a payment. So they gave me a year of $0 payments that all count towards my forgiveness. Each one of those might be zero, but they still count towards the total 120.
That following year was 2020 and Covid hit, and then the forbearance started and they kept everything at $0. To make a complicated and long story short, I’ve had about three to four years of $0 payments that all count towards the total 120 versus the past four years of me actually having to pay something forward. So I do have about, by the time I have to start paying an actual payment next year, when I have to re-certify my income, I would already have four years done and I haven’t paid a cent. And then by the end of the six years they’ll forgive the rest.

Mindy:
They forgive the entire amount?

Richard:
Yeah, after 120 payments within the limits of the rules.

Mindy:
And so you have to stay working for the government in order to get this, is that correct?

Richard:
Correct. But they don’t have to be consecutive. I could leave and come back and continue those payments, but say if I go to the private sector and work there for a year, the payments that I would make there, even if they are under the income based payment plan, those won’t count because I’m not full-time for the government. You have to be full-time for a government organization or a nonprofit.

Scott:
What are the biggest pain points right now and things that we can help you with? Where do you want to be in three to five years? Where do you want to be at the end of this year? What can we help you with?

Richard:
So I think there’s two things that will help me in the short term and then will eventually build up and walk me into the long term. One is maybe something that Mindy has a lot of experience with, given that you’ve been tracking your budgeting a lot is maybe better ways to really effectively track my budget, even if it’s real time. Because what I have a problem with through the months is that I make a budget, I write everything down, I take the exact amounts, I allocate dollars to a specific group of type of spend. But it’s pretty hard sometimes to track that throughout the month in real time and it gets away from you sometimes. So do you have any tips on how to track that in real time or more effectively?

Mindy:
Yes, I do. You sound like the perfect candidate for a product called Qube, which is a digital cash envelope system. It’s QUBE. You put a certain amount of money into your bank account, it is a debit card attached to an app on your phone and in the app you allocate so much money for each category. Groceries are 300, car payment is 249, cell phone is 113. And then when you’re at the grocery store, there’s no money on your debit card. You have to take on the app from the grocery budget and put it onto the card. I’m about to spend this much money and if your grocery budget is 300, but you’re about to buy $400 worth of groceries, it won’t go through because there’s only 300 in there. So in real time you have to readjust your budget and take the money and put it from a different category into the groceries so you can buy the groceries.
Of course, you could cheat and swipe a credit card and be done with it, but that helps you track without tracking where your money’s going and being more conscious of it in real time. Because I love the waffles on Wednesday spending tracker, but I also had time for a while to track my expenses as I’m spending money. And then after a while it got to be daunting because it was a lot. And as you can tell, I’ve stopped tracking my spending in real time, but I’ve got other things going on right now. So that could be a great way to do it. You’ve got some like… Gasoline is a great way to, that’s another, animal supplies, home utilities, maybe, maybe not, but it’ll help you with everything that you’re swiping your debit card for and then you can see, oh wow, I’m really not spending only $55 in gas. It’s actually much more. Or I’ve got accounts that I don’t have allocated in my cash envelope system. I’m actually spending way more money than I thought I was.

Scott:
And I think in addition to the great points Mindy’s making about Qube, I will say this, I’m just doing some simple math here. We say rent’s 2279, groceries are $300, that’s preposterously low. Car payments 249, cell phones 115, Wi-Fi is 103, car insurance is a 100. Just the fixed items there is $2,800 a month. So that leaves you with $900 for groceries, all your fun, all the rest of life is $800 in Arlington, Virginia. No way, man. It’s just not reality. You’re going to hop on an airplane a handful of times a year, right? You have family that’s not near Arlington, I imagine? So those things are not accounted for in your budget. So I think you need to go back for 12 or 18 months and say, no, no, no, what’s actually happening in my budget on an overall basis?
And if you’re not setting aside money for those other categories, like again, airfare, these larger items that come up less frequently. And I would put in a $500 miscellaneous budget per month because life happens and you need to repair the car or whatever it is. And so you’re not planning for those expenses and that’s why your budget is evaporating on you on a regular basis is because that’s not mentally accounted for. In addition to the system that Mindy just outlined here, which will help you actually get a really firm grip on that and control those expenses.

Richard:
That helps.

Scott:
You’re going to be in a negative feedback loop here because of the way you’ve set up your budget. You’re going to say, oh, I should be living off of $800 a month aside from my fixed overhead here. You’re going to be absolutely miserable and you’re going to whiff every month on that budget, would be my guess.

Richard:
And I think that’s what sounds like is the problems because a lot of the times it is things that you just said, like the car thing or the dog gets sick and you got to go and it’s a $1,500 bill. So it is those kinds of things and I think that is going to seriously help me if I can go back and add those in to my plans. Would you say to I guess, small percentages of those things where I, kind of calculating cap X or something like that, but putting a certain amount aside, you see my budget there. So would you suggest, you said, 500 as a [inaudible 00:23:22]?

Scott:
There’s probably three approaches to this. One is do your very detailed thing, think of all the possible things and start allocating money in buckets for them. The car breaking down, the dog getting sick, whatever, trip home for Thanksgiving, whatever those things are and make sure you plan for them throughout the year. The other would be to, and I’m lazy, so I would just say probably personally, oh all right, I’m going to bucket 500 bucks a month for that stuff. That’s six grand a year. I have not on average experienced more than $6,000 in nasty surprises over the course of a year. So that’s going to work for me.

Richard:
That makes a lot of sense and that really helps me out. I think the next follow-up question, I know I’m starting off with super beginner things, but I am in that very first stage of my financial journey I would say. And I’m trying to get to that second step, but for me it’s keeping the savings held onto. I keep getting out of credit card debt and then having a great plan. The emergency savings starts building up and then something happens. Do you all have any strategies I could use to ensure I don’t spend those savings? Do you all have any fail safes or anything like that? Do you think that will help?

Scott:
So I think Mindy’s got some things, but I just want to echo this is directly related to the point we just discussed. You got to plan. You’re building an emergency reserve, you’re not really building an emergency reserve. You’re saving just enough to not fall behind. When these unexpected things come up, you’re not actually saving because you have to account for these things in your budget. So I think that they’re directly related. So once you’ve accounted for those, the money on top of that, the money you’re saving plus the $500 you’re setting aside for life is actually what would be going towards an emergency reserve that would be able to handle a true emergency. Something that’s not day-to-day or month-to-month expenses.

Mindy:
That was going to be my suggestion is create an emergency reserve account and a savings account and your emergency reserve account needs to be built up. And this is for emergencies, this is when your car breaks down or your furnace goes out or whatever while you’re renting. So it’s not for when your furnace goes out, but it’s for true emergencies. And then have a savings account. And your savings account is for savings and they are different accounts. At your financial position right now you need to have two different accounts. But again, going back to the income, I think your biggest lever is the private sector income and the PSLF, the private…

Richard:
The Public Service Loan Forgiveness, PSLF.

Mindy:
Public Service Loan Forgiveness. That’s what I wanted to talk about. You haven’t wasted that because you haven’t paid anything into it. That’s $0 that you have paid for four years. That still counts. But if you could take a job that doubled your income, you could live on your current income and throw every extra dollar at those student loans and be done in a year or two and then go on and do everything else that you’re doing. Have your emergency fund, have these student loans and when you’re paying them off, when the interest is still zero and zero is due, all of that money goes right to the principle.
If you love your job, that’s different, but if you could make so much more in the private sector, then maybe that’s the better option. Another thing you could do is look for private sector contracts that you could do in the off. You just got married. Do you have children?

Richard:
No.

Mindy:
So yes, you just got married and you want to spend time with your new wife, but you could do a short term contract, make a bunch of money, throw it at the student loan debt. While still working your government job and growing your student loan forgiveness or throw it into an investment account or throw it into your savings account, your emergency fund, and then check out where you are when you’ve saved up $108,000. And say, “Hmm, now I can pay this off, quit my job and move on.” Or now I’m almost there at, if you were nine years into a 10-year plan that’s different than four years into a 10-year plan making, I would say significantly less than what you could in the private sector.

Richard:
Definitely. And unfortunately I can’t do the contract work while I work for the government. There’s a pretty strict non-compete there that the government won’t let me do that same work. But I hear you in that the lever that I can pull is increasing my income and that’s something that I’ve thought about for a while.

Scott:
What does your wife do and what will she do and how much will that bring in?

Richard:
So she just got a job as a Biomedical Equipment Technician. So she’s a Biomedical Engineer. She fixes hospital machines and devices. So that is a very technical job as well and has the potential to rise a lot and looking forward to seeing her first paychecks as well because that’s going to seriously help me covering these bills because a lot of it is all me.

Scott:
Great. And how much will she bring in?

Richard:
So she’s going to bring in 52,000 a year and if you want to say gross a month, that might be 4,300 maybe after taxes. The taxes around here can go up and they can be high, but we’re expecting that she brings in around somewhere between 2000 to 3000 net a month.

Scott:
That is all going to be gravy if you are able to. So right now the picture that’s forming in my head of about your situation is you are treading water. You’re not getting ahead, but you’re also not really falling behind at this point in time. You don’t really have a lot of consumer debt. You have small amounts that you’re about to finish off here in the TSP loan and you have the car payment perfectly normal of 15 grand and then it’s the student loans. But you’re not getting ahead and you’re not accumulating more consumer debt.

Richard:
Exactly.

Scott:
So your wife’s job is going to put you in the black. 25, $30,000 a year, as long as nothing changes and you don’t start spending more, you don’t have more to spend. You’ve been treading water, presumably waiting for this opportunity for your wife to start earning income. Now do you guys plan to start a family in the next couple years?

Richard:
Nope.

Scott:
So this is going to continue on an ongoing basis. So what you should do now is you should go back and revise your budget and say it’s nice that you presented these numbers to us, but they’re not the reality of your spending. Your spending is probably about a thousand dollars a month higher than what you currently have, what you presented to us. You should reflect that in the reality and say, great, when your wife’s income comes in, you’re going to put two or $3,000 to that emergency reserve every month for the next six to 12 months. And you’re going to come out with a 15, 20, whatever you think is a comfortable amount, 15, 20,000 probably in that ballpark is going to be great. And you’re going to be really secure at that point because now you’re actually getting ahead compared to what you expected, because your numbers are realistic and you can actually meet them on a monthly basis and you’re going to actually have some cash in the bank.
After that, now we begin to think about investing and asset allocation. I think Mindy’s completely correct and there is a great thing to think about. Can I earn way more money as a data scientist in the private sector and pause this… Your situation makes me anxious to a certain degree around the student loans because you’ve got six more years left before you get forgiveness. That feels like a trap, a mental trap. I can see how that’s just, and if it was 20 years, I would say, okay, let’s just forget that even exists. That’s not even a part of this lifetime. Let’s go pay it off and crush the debt. If you said it was next year, I would say, okay, let’s push through the next year. Six years is long enough that you can completely change your trajectory and get close to a net worth of a million dollars in your situation. If you wanted to make a couple of reasonable bets that were significant like a house hack or something like that from a property perspective and make a couple of job changes and invest aggressively.
But it’s also close enough around the corner where, okay, 10% of that, if you believe me that you get to a million dollars or 20% if you only believe you can get to 500,000 in net worth over six years is going to be this student loan forgiveness component. And so sticking it out to get that could make sense. My lean is that if you’re willing to get aggressive and really lean into personal finance, you want to be a millionaire fairly quickly and be self-made. So that helps your aspirations for the US presidency in a few years, that I would start thinking about, I would just forget, okay, that’s nice that the student loan thing exists, but my potential is worth many multiples of that and that potential can be unlocked by aggressively pursuing other alternate opportunities with this. What’s your reaction to that assessment of the situation at high level?

Richard:
I do actually have a really great reaction to that because it’s something that I’ve thought about specifically on the aggressive investing side. I have a very aggressive want to not just be, okay millionaire, I want to really achieve a high net worth. That’s why I really want to go into business acquisition. I would love to own not just one, but multiple businesses. To me that’s extremely attractive. And I guess I could say my goal materialistically or just vision wise, I know this sounds silly, but I want to live in a castle. I grew up as the nerdy kid that loved Knights and Dragons and stuff.
So for my personal finance goal, I always told myself specifically was let’s go get a castle. And then I started looking at how much that was and I thought, well, I’m going to need a lot of money, so how do I make a lot of money? And now I’m here, like you said, I’m not really getting ahead and that’s what I’m trying to do. So I’m trying to find that path forward that’s aggressive, that’s realistic, but I need the change. I’m still here trying to make savings happen and I’m not making them happen. So for me, I’m all on board with going aggressively.

Scott:
Just to be clear, you have paid four years of dues towards the student loans and you have six more to go for a total of 10. Is that correct? To get to the forgiveness.

Richard:
To get to the forgiveness. Correct.

Scott:
Great. No, I think this is great. Look, that’s a big vision. I love it. Live in a castle. Let’s back into something that allows you more flexibility and let’s start with an obvious truth. You’re not going to live in a castle and be a millionaire a couple times over with several different private businesses working at a government job making $106,000 a year, spending the next six years of your prime potential. Letting the student loan forgiveness accrue slowly. That is a trap that you’re about to fall into relative to the vision that you have outlined. So you can’t do that if you want to get there in the next 10 or 15 or 20 years. You can’t just like wait six more years to delay that. You got to start taking some, and this is compounding, so you’re not going to get there overnight, but you got to make the first 10% of progress towards that vision in the next year or something like that. So that involves a large amount of self-education on how to run businesses. Do you know anything about running business?

Richard:
Surprisingly, I do. Before I worked in the government, I had small business experience. Of course, I have a degree, but honestly a degree’s not going to really put you in the position to run a team of people, be in charge of everything, both on HR, accounting and staffing, just everything that goes into running a business. But I do have some experience. So yeah, I do. And what you’re saying I 100% agree with, this is why I’m actively, and I guess the word is aggressively looking to acquire a business versus real estate. So that’s another thing that we could talk about. I’ve done quite a lot of research and reading and things like that on business acquisition as well. And I’ve started a pretty good network.

Scott:
What kind of business would you like to acquire?

Richard:
So there’s two kinds and they are very, very different from each other only because that’s where my networking has led me to. One, which is the most obvious would be tech or IT consulting. There’s a lot of those that are out there for sale, they’re much more expensive and you would need investors backing you. There’s things like search funds, angel investors, not really, but search funds are basically a group of investors that find an operator that has experience in that industry and they’ll back the acquisition and put you in with a small percentage of ownership. So that’s one avenue that I’ve considered and thought about and made some connections with given the IT route. There was another route though that when me and my wife were talking about it, it’s completely different, but it’s something I’ve always talked about in my spare time.
I’ve talked to her about one day owning a winery. It was just this one thing that I always said, I would love to own the land, grow the grapes, make the wine, of course, hire the right people. But I had said it all the time. So she said, why don’t you look for that instead of all this IT stuff? Because that’s what you seem more passionate about. So I did. I actually got in contact with a owner of a winery that was selling his winery. I couldn’t make a deal happen. But right now we’re actually looking at helping him expand into a remote tasting room. So there’s connections there and those are the two industries which are obviously completely different. But right now for me it was more of a let’s get out there and learn and talk to people and just see what’s possible.

Scott:
If I was starting over today, or let’s say that I get fired, I don’t want to get fired. I like my job. Please don’t fire me anybody if you’re listening to this. But what I would do is I would be looking in the small business space, I’d be looking at services based businesses. So these are janitorial businesses, carpet cleaning businesses, those types.

Richard:
Home remodeling. Landscaping.

Scott:
Home remodeling, landscaping. Exactly. These are businesses that in many cases have been run for 20, 30 years by the same individual. Don’t have a website, don’t have employee management protocols. Generate 300 to $500,000 a year in free cash flow. In many cases a good living but are not scaling, they’re not looking for other opportunities. These are businesses with no one to buy them. Lots of baby boom reserve retiring and there’s nobody lining up to buy these businesses. There’s more than just financial considerations for the seller. This is their life’s work. They know their employees. They don’t want to give up on the business and have their employees who they know, who are part of the family be let go or not have a place to work. They’re moving the owners from Denver to Florida. I know some folks that fit that profile, for example, great.
So you can buy these businesses for one and a half, two times cash flow. You aggregate them. If you buy three or four, for example, over a five-year period, each one expands operations a little bit. You’re looking at a three or to 5 million EBITDA or profitable business. That’s a business you can sell to, for example, private equity for three, four or five times cash flow. That’s really good arbitrage. That’s a really compelling investment thesis. I would want to hear that. It doesn’t have to be that thesis, but a thesis like that from you, if you’re going to seriously consider leaving a six figure career to go and pursue something like that and say, okay, that’s something that we can do there. I think that a search fund or looking for investors is great, but what’s way better is bringing 50 or a 100 or $150,000 to the table as part of that and saying, the last three years I have spent reading up on how to run businesses.
I have taken this internship or done this on the side in order to hone my skills. I also scrimped saved, hustled my way to saving $150,000 in cash. I’d like to buy your business. Here’s the partner, friend, family, whatever that’s going to go in with me and bring the other 300,000. I’d like you to carry a hundred or $200,000 in the note and I’m going to use a small business loan to finance the rest of it. Now we’ve got a really compelling case. I don’t know what you would’ve said to the winery salesperson, but you’re not a serious buyer in the current situation.
Because you can’t tell that story and then come to the table with $150,000 in cash or a 100 or some amount that says, I’m serious and this is a big percentage of my net worth and I’m going to go in with whoever is willing to take a shot on me as an investor, be that friend, family member or the person. So I think that’s a great path forward. I would love folks that are interested in going after something like that because I think it’s a phenomenal opportunity and it’s one of the best asset classes and opportunities that exist in America right now. But I think that that’s something that you need to consider getting in.

Richard:
Well, I totally agree with you. I had a similar thesis somewhat with the winery owner. I explained to him what my plan would be for growth in terms of acquiring other smaller wineries since his is a slightly larger. And that same thesis can be really applied to a lot of different kinds of businesses, is that you find that platform business, you grow through acquisition of other similar type businesses and then you can have an exit. So I explained that similar logic to him. Of course, I didn’t have any money to bring to him, but I did say, let me go find investors and see if we can make this happen. That just got me with a lot of SBA lenders, a lot of other kinds of folks. But either way, you’re totally right. That is the path and that is the kinds of thesis that I am trying to build, but it’s going to be way, way, way more powerful and I think, not easier, but…
It’s going to be better if I have that 150,000 or so capital on hand to actually invest into it. And that’s one of the main reasons why my pain point is getting an emergency savings, getting a savings and building it up and stop letting it disappeared because that is the goal that I have. Instead of getting a house hack or getting a rental, I want to get a business and I want to go into that and I read this book. I know we’re going to talk, have the favorite book, but The Buy Then Build. This happened in my little rabbit hole. This is by Walker Deeble that came somewhere after Richest Man in Babylon, Millionaire Next Door. That one popped up on the suggestions and I read, blew my mind. It totally opened me up to everything that you just talked about. And I realized that’s the path that I want to go on. But I need to take the first steps of how do I get to that point where I can make that kind of deal happen.

Scott:
Here’s the homework, if you will, that I would assign you right. First, we got a big set of visions here. You should write down on a piece of paper. The reality you want to see yourself in three years, five years, or seven years. I do not think a castle is likely in that three, five or even seven year vision at this point. It could be in your 20-year vision. I also do not think the US presidency, but I think it doesn’t sound like you’re aspiring to be president any longer at this point.

Richard:
Not too much. It was just a starting off point.

Scott:
Great. Well, I love it. I would put together a vision and put it on paper and look at it because you got some big ideas and you need something that you actually believe you can achieve in three years, let’s call it. And life can be pretty good in three years if you make some moves. Second, you got to make a move on the career front at some point. Your career is fine. There’s nothing wrong with it. It’s just not going to get you to the vision you just articulated. You’re going to be sitting back in five, 10 years saying for you that wasn’t good enough. It’s good enough for a lot of people, but that’s what I’m hearing you say. So you’re not going to be comfortable with yourself if you don’t take a shot. You’re also not in position to take a shot right now. You have no cash savings.

Richard:
Exactly.

Scott:
You are treading water from an expense standpoint. You need to make some changes here. One of those could be switching a job in the short run to increase the income. The other is simply building the emergency reserve, which should be very achievable for you guys now that your wife is working. And you can also consider some things on the expense front. Can you move farther away? For example, if you’re working mostly from home, I know there are cheaper areas in Maryland and Virginia where you could bring that rent down by a few hundred bucks a month pretty easily. So those would be some tactical things in the short run. Understand that those are building blocks to the first six, 12 months of emergency reserve, which in your situation, emergency reserve is probably better than a formal investing approach.
You plan to buy businesses, or at least that’s where you think you are right now. So why would you put the money in stocks if you think you’re going to earn a 30, 40% return on a business that you buy and learn over a period of time? And then last, you need a business thesis. And with that thesis, very few people are probably going to go in and invest with you on one of those businesses in the near term. So you need to say, how do I increase the power of the story that I want to tell to a potential investor or a seller of a business who I hope will sell or finance portions of that business over the next year or two. I’m going to read these 15 or 20 books on being a CEO. I’m going to have a written investment thesis that establishes that.
I’m going to bring together financial returns, social good, the wellbeing of the employees, the wellbeing of the seller, all those things into one pot. Make everybody money, make everybody happy in this and demonstrate that skillset. I’m going to bring in this coach or this mentor to help me with that. All right. Put together some sort of plan that makes that story believable so that a year from now you’re actually reasonably close. I could, if I wanted to bring $30,000 to a purchase, and I’ve got a bunch of books and I’ve got a network of these things. I’ve talked to business brokers in the area. I’ve actually analyzed a few businesses and deals with this. So those would be some of the things that I would provide as next steps here.
And a year from now, again, you could be sitting on $30,000 in cash and progress along the journey here so that you’re not coming onto a seller and saying something that sounds pie in the sky, but perhaps it’s [inaudible 00:48:32] to the winery seller. You’re coming in with something that sounds okay, maybe here. And then two years or three years, you’re a no-brainer. You’re going to win. You have a serious chance to win at a couple of these things. So that would be my advice to you in a nutshell, is make that story compelling. Have hard evidence in a year or two or three of slog behind that, that demonstrates your credentials that are beginning to compound behind you and make the story go from impossible to inevitable, which I think is a book title. Someone…

Richard:
Sounds like a good one. If it’s not written, get to it. Well, that sounds fantastic. And that’s the advice I was hoping to hear.

Scott:
Is your wife on board with all of this?

Richard:
Absolutely. That was one of the main points I think I looked for before I married her. I listened to you all’s money dates and also the prenup episode and all of those things. And we did not get a prenup, but we did listen to the episode. And then pretty much anything that we could find that was on marriage, finances, and really sat down and talked about how we want to do it. And she’s also very business minded too. She wants to have a business one day as well, but hers is in the medical equipment industry where she wants to invest in medical equipment and rent them out to hospitals. So we both have that same mindset and we’re both on the same page with what we want to do.

Scott:
Awesome. Well, I look forward to hearing what you do next from a story standpoint. And when you do move into that castle, please send us a picture because that’s awesome. I love that. I love a big vision like that.

Richard:
Thanks. Absolutely. We’ll do. Maybe you all can come by and check it out.

Scott:
For sure.

Richard:
Airbnb at a tower or something.

Scott:
That would be a fast way to get to your castle, right?

Richard:
Yeah.

Scott:
If you could find a way to, if it’s a great vacation rental.

Richard:
Exactly. That sounds like a really awesome, I would take that Airbnb or Vrbo.

Scott:
Well, awesome. Anything else we can help you with before we head out, Richard?

Richard:
No, I’ve got a lot of information and homework that I can do that I believe is going to help me. And I think it’s just fantastic that you all brought me on because I’m such a beginner. But I do think there’s just a lot of people out there in my circle at least, that listen to you all’s show, but they’re in the same place as I am. We’re okay, but we’re not getting ahead and we would like to get ahead and I really think this episode gave me those really small but important fundamentals that are going to get me moving forward and achieve those financial goals that I’ve set for myself.

Scott:
Well, I’ll leave you with one last one thing there then, which is if you want to set a big goal for this next year, because it’s going to be an incremental year. You got to save up the emergency fund and begin pouring a foundation to get there. Best way to do that. The big goal would be read 50 books, pull out a book a week, get a shelf in your house, and pile up 50 on it over the course of the year that are relevant to this. And you won’t be a beginner anymore from your frameworks, and you’ll figure out what you need to do.

Richard:
Well, I’m an active reader. I’ve probably read 50 books this year or more, but half of them fiction, but I think I hear you, 50 books within that same field of knowledge.

Scott:
50 books that move you towards your goal.

Richard:
Cool. It’s going to happen.

Scott:
Richard, great to meet you. Thanks so much for coming on the show.

Richard:
Thank you, Scott. Thank you, Mindy. I really appreciate it. Had a great time.

Mindy:
Thank you, Richard. We’ll talk to you soon.

Richard:
Bye-bye.

Mindy:
All right, Scott, that was Richard, and those were some pretty lofty goals. What did you call them? Well, that’s a big vision. That is a big vision, and I like that he is thinking long-term and thinking large, but I also think that we gave him some pretty good things to think about, including increasing his income and diving into that public service student loan forgiveness plan to make sure that that’s really truly the path that he wants to go on. I think that, I would look into that a lot further if I were in his position and really run the numbers and see does it make sense to forego the extra income to get that $100,000 wiped out? And honestly, I don’t think it is.

Scott:
I think that it is a big vision. I love it. I think that it’s great, and I know I’d love to see more people with huge visions like that. I want to live in a castle. That’s awesome. Let’s do it. And I want to own multiple, medium to large businesses. That’s what I heard. We want to do that. Let’s get started and understand that that’s not a 40 hour a week vision. That’s a 80 to a 100 hour a week vision. That’s a, I’m going to work all day. I’m going to spend very little, I’m going to read a book every single week for a year that’s directly relevant to those goals. I’m going to be going to bed, and dreaming about this vision at night. I’m going to save every dollar I can. Find every development opportunity I can. Take a significant risk from a reasonable position of strength at the earliest possible opportunity.
Be serious and go after it. Richard is not yet doing the things necessary to make that vision come to pass, and he’ll have to decide if he’s willing to do that. A lot of people are not willing to do that, and a lot of people can become financially independent and build a significant net worth within the next six years by sticking out a job that pays $106,000 a year with their spouse making 50 and saving up a good income, even in a higher cost of living area, like DC. He could become moderately wealthy and on a path to financial freedom if he wanted to do that, but if he wants to achieve that vision, serious, serious steps on multiple fronts need to be taken in multiple directions.

Mindy:
Absolutely agree, Scott. Should we get out of here?

Scott:
Let’s do it.

Mindy:
That wraps up this episode of the Bigger Pockets Money podcast. He is Scott Trench, and I am Mindy Jensen saying, let’s jam Sam.

Ashley:
This is Real Estate Rookie episode 244.

Tony:
If your partner is just bringing the capital, if all they’re doing is bringing the capital and you are doing literally everything else, you’re sourcing the deal, you’re managing the rehab, or doing the work yourself, managing the tenants long-term, finding those tenants, maybe you deserve more than 50%, but it’s all going to depend on how much work is moving into that deal.

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

Tony:
And welcome to the Real Estate Rookie Podcast where twice a week we bring you the inspiration, motivation, and stories you need to hear to kickstart your investing journey. And I want to start today’s episode by shouting out someone who’d love to see five star review on Apple Podcast. They go by the username Real-A States. So I like the name, but they say, “Thank you guys so much for the info and for the inspiration. This is definitely the best and most engaging/addictive podcast that has helped change my mindset and my path towards financial freedom.” We appreciate you username Real-A States, and if you haven’t yet left us an honest rating review on Apple Podcast or Spotify, please do. The more reviews we get, the more folks are able to help and helping people is our goal.
So Ashley Kehr, I got to start by saying a very happy belated birthday to you. You turned another year older and wiser this past week and I hope you enjoyed yourself. I know you were a little under the weather, but hopefully you still got to enjoy yourself a little bit.

Ashley:
Yeah, I was. So I didn’t really do much. So I stayed in my celebration for the weekend. We had a huge snowstorm hit Buffalo, where 10 minutes from me, they got 80 inches. We were lucky we didn’t get quite that much, but there was the Bills game this weekend, which was supposed to be a home game and it got pounded the snow and there’s just nowhere to put any of the snow to clear it out of the stadium or the parking lots for all the tailgaters. So I ended up packing up my Wagoneer with seven people and we drove out to Detroit Saturday, spent the night and then Sunday went to the Bills game in Detroit where it was moved and that was a lot of fun. The best part about it, I think is we got club seats for $30 each. When is that ever going to happen again?
So that was considered my birthday celebration I guess. So that was fun. Something spontaneous and if you guys follow me on Instagram and listen to the podcast for a while that my why is so that I can be spontaneous and I got to take my middle child to his first Bills game. So he loved it and it was just a great experience overall.

Tony:
That’s awesome. Well, I’m glad you enjoyed yourself and I’m glad you’re feeling better.

Ashley:
Thank you. And to Tony, happy anniversary, your wedding anniversary, it was yesterday.

Tony:
Thank you. Yeah, it’s been crazy. Sarah and I have been dating for 14 years. We’ve been married for two and it’s crazy to think now literally almost half of my life we’ve been together. So it’s been a great journey together. So we’re grateful and we’re excited for what’s coming next.

Ashley:
I saw on her Instagram story, so for those of you that don’t know that want to do some digging one night when you can’t sleep. Tony has a music video out on YouTube and so Sarah had told us before how she had gone and she would stand with Tony and pass out CDs. So this already shows you how much of a hustler Tony was, even at a young age when he was a teenager passing out his mixtapes. And Sarah would go with him and she showed a story and saying that all those years of passing out mixtapes paid off because she finally has a sugar daddy and showed the video of the store of Tony taking her out shopping. So I just thought that was so awesome and true.

Tony:
Yeah, she deserved every minute of it. Hang up with me on my crazy ideas.

Ashley:
Yeah. Well, today we are going to be going over four rookie reply questions. The first one is going to talk about your reserves and how you actually track your reserves. Should you just keep them in one bank account? Should you have separate bank accounts? The next question is about investing in a burr and estimating the rehab cost. So how, especially if you’re investing out of state, you can’t even be physically in the property. How are people figuring out how much a rehab will cost before they put in their offer? Our next question is talking about structuring a deal with partners. Tony and I always love the partnership questions, so we’ll go into what our thoughts are on partnership and putting 50% of the money from each partner into the deal.
And then lastly, it’s about that time everybody should be meeting with their CPAs to do their tax planning if you haven’t already, and how to screen a CPA. So we go through some tactics and questions that you can actually ask somebody when you’re trying to find a real estate specific tax advisor.
Okay. Tony, our first question today comes from Cameron Burnett in regards to organizing and separating finances from rental units i.e. vacancy expenses, capital X savings and the money received from rent. Do you guys recommend setting up a separate checking saving account for those things, or what is the best method you have found? Also in regards to repairs, do you use a separate credit card? Is that what you use for day-to-day? Thanks.
Okay, so the first thing I think of is it’s going to be on what is going to work best for you. And I put this in a personal finance perspective. If you have always been somebody that can easily save money, you’re not racking up credit cards, you could have a lot of money in your bank account and you are not just going and spending it because you have it, keep that money just in one checking account. There’s no need to actually separate it. But if you are someone that has money in account and you have a very hard time not spending that money or thinking it’s available and you need that out of sight, out of mind money, then go ahead and put that into a separate savings account.
I have seen where people even put it into a separate account for vacancy, a separate checking account for capital expenditures, maybe another one for repairs of maintenance, all these different savings account that they have. And you also see this very common in the personal finance community when people are budgeting where maybe they’ll have their Dave Ramsey envelopes where, okay, this month these are how much money I have to spend for each of these things. You could also do that for your properties if you think that will give you a better overall picture of what your finances look for the property and help you save and figure out what you can take as cash flow for yourself by separating those things out.
Or you can just simply create an Excel spreadsheet and say, “Okay. I have $5,000 in this bank account, 2000 of that is something I’m saving for capital expenditures. A thousand of that is, I’m saving in case there is a vacancy. And the rest of that maybe is cash flow or your three to six month savings for your mortgage in case it does become vacant.” So I think it really depends on what will help you the best and which will help you stay more diligent in not spending that money.

Tony:
Yeah. I think that last statement Ashley is perfect. It’s about what is the system that works best for you? And in my personal finance life, I don’t do this as much anymore. When I was working my W2 job, I had 24 separate checking accounts. So when I got paid, my direct deposit would get dispersed between all these different accounts. It was like my car payments, my mortgage, my insurance costs, my groceries, my clothing expense. I had a different checking account for every major spinning category. And for me that was an easy way for me to budget my money without having to put too much thought into it.
And even in our real estate business, we have not to that extent, but we have a separate account for taxes. Every property has its own reserves account. And then we use our operating expense accounts to cover things like vacancy and the short-term rental space need to repairs and maintenance. So I do like to separate it out just so that there is some not to touch that money. If you want to go buy a new bed frame or you want to buy a new appliance or whatever it is that you’re not dipping into the money that needs to be set aside for something else. So I do like the idea of separating those things out.

Ashley:
In regards to that, don’t be super strict on, “You know what? I need money to buy a new HVAC, but I don’t have enough in my capital expenditures account.” Sometimes you will have to take money that you’re saving for your rainy day fund or that you are saving for to cover vacancies, things like that, you will have to pull money. So if you do have the money all in one account might have to use a large chunk of that for one thing and then rebuild it with cashflow over the next couple months. So even if it is separated, there may become a time where you have an expense or you need to cover a mortgage payment where you’ll need to draw from several of those accounts.
So it’s not what each individual thing is you’re saving for. What matters is the amount or the total dollar amount that you have, saving that percentage that you’re saving for in. We like to recommend three to six months, definitely more towards the six month side, especially as you’re first getting started. And then as you’re building your portfolio, you can decrease that because you have built up this large chunk of money as your reserves that the chances of every single property needing a new roof most likely is not going to happen. So just think about that too when you’re making your decision. And also, who’s keeping track of all this, do you have time to actually track all these different individual accounts too?

Tony:
So the second part of that question is do you use a separate credit card for your day-to-day expenses? So we do have one general business credit card that we use for a lot of things, but then we use the property specific account to pay off that credit card. So I’ll usually go in a couple times a week and say, “Okay. I’ll order new charges we built against the credit card,” and then I’ll say, “Okay. For this property, this is for that property,” and then I’ll make a payment to the credit card from each property specific account. So that’s how we do it and honestly we don’t have to do it that way. I just like to get the points and we spend so much with our business that it will be crazy for us not to do that. But that’s what worked for us. What about you Ash?

Ashley:
Yeah, I think the biggest thing is if you have the properties in an LLC or not, you want to make sure that your credit card is in the LLC and that you’re making payments from the LLC account to pay off the credit card. But yeah, I agree with Tony with taking those points, those sign up bonuses have gotten me lots of vacations for sure. So anything and everything I can pay with a credit card, I do and I do keep it separate. And then I have it linked to my QuickBooks. So my QuickBooks is pulling information from… So right now I’m using Chase in Wells Fargo, it’s pulling the statements in the charges from those accounts directly. And then also I can use ScanSnap right in my QuickBooks app and I can take a picture of the receipt and we’ll link to that transaction. You can use this with Tessa too, that we always recommend.
So I think having that separate credit card is great just for bookkeeping purposes too. And then you’re not having to go through and actually like separate, okay, this was for a personal expense, this was for the business, this was for this property. And I also have different credit cards for different LLCs too, which make it easier so that this charge I know is for a property in this LLC.

Tony:
I love that last point. Literally, I was telling Sarah, my wife this the other day that we need to probably add a couple more credit cards because we have our flips, we have our short-term rentals, we have our events. There’s so many different things we’re spending on, it becomes a bit of a pain trying to pay everything off at the end of the month, which is why I usually go in there honestly, once is a week at least. But the idea of having a different credit card for different parts of your business makes a ton of sense too.

Ashley:
And there’s certain times where it comes up like, “I need to buy something at Lowe’s for three different properties that are in different LLCs.” So what we try to do then too is even just do check out three different times so it has those three different receipts instead of like, “We need to go through this receipt and break it down line-by-line.” So that has helped too. And the rare circumstances that happens. So Tony, with the business credit cards and the personal credit cards, there is a difference with them too. So when you get a personal credit card, it’s going to show up on your personal credit report.
So for example, I got a 0% interest credit card a couple years ago. Actually opened it in my husband’s name and my debt’s income because he had nothing on his credit at that time. So I did it in his name. So it ended up like we did 0% so that we could do our rehab and put our things on that. Well, it reported that balance to the credit reporting agency. So it showed on his credit report that he had this balance on a credit card, even though it was 0% interest, he still owes that money. So it shows up on that.
I think the minimum payment on that was $35. So it’s not really killing his debt of income because of that low monthly payment. But still that’s something to be very cautious of that if you are using a personal credit card, you’re not paying it off if you’re getting that 0% and hopefully if you have anything over a 0% credit card, you are paying it off every single month and so it’s not accruing and putting a balance on your debts income.
So there are credit card companies that have a limit, and this is why at the time I have been huge into travel hacking. So it’s called the Chase five where you can only open five Chase credit cards within 24 months, I think it is. So I had already reached that Max getting these signup bonuses to get us this great free vacation in Hawaii. So I opened the other one in his name. So be cautious of those things too, that doing in your personal name, there do become limits as to how many credit cards you can open into your name with certain companies.
If you go on the business side and opening your LLC… I have a lot of people ask, should I open a business credit card just to establish credit for my LLC? First of all, I’ve never had anyone ask what my credit is for my LLC. I’ve never run into a situation where that’s been an issue. So I don’t even know a circumstance where somebody would look up my LLC credit. I’ve been able to get a business credit card anytime I’ve opened a new LLC without even showing any income or anything yet. They’ll ask what the annual income is and I’ll put in projected based off of what the rent is coming in currently.
So with that, it usually does not report to your personal credit report. There is one company, I can’t think of it offhand if it’s Chase or Capital One, but one of them, if you have a business credit card, it will actually still report to your personal credit showing that you have those accounts too. So that’s just something to play the game with is if you want to go the business route or go the personal route.

Tony:
Yeah. We do have a business credit card actually through Capital One, but we very rarely use it just because the limit is so low and honestly the points aren’t as good. We have a Chase Sapphire reserve or preserve, one of the Chase Sapphire cards and I love that one and it’s a personal card, but we only use it for business expenses. So we still get the benefit of it being a business credit card even though it’s not. And then just like you said, Ashley, we pay it off. It never carries a balance from one month to the next. I’m literally going in once a week probably and paying the balance down to zero. So yeah. Anything else on that one?

Ashley:
No, I don’t think so. Let’s go on to our next question. So the next question is from John Mazzella. Hey everyone. I am planning on doing a bird from a distance. I’m going to use a realtor chart to find the property and provide the ARV with comps. Remember the ARV is the after repair value. My concern is how can I estimate rehab costs to know how much to offer on a house? I don’t think it makes sense to drag the contractor around with me all day while I look at properties I might not buy. I’m very comfortable running the numbers but missing the piece of estimating the rehabs. Any and all suggestions welcome. Thank you. So Tony, when you’re looking at flips, how are you estimating the rehab?

Tony:
Yeah. So John, I mean I can sympathize with your situation. So when I first started investing, I live in Southern California and I started investing in long-term rentals in Louisiana. And just like I was targeting properties that needed rehab and I was struggling with that same thing like, “Oh my God, how do I get to these rehab estimates without me being there? Without me knowing really what things cost?” So there was a few things that I did. Okay. First, I found properties that represented what I wanted that property to look like after the rehab. So I found my own comp. Say, “Hey, once this rehab is complete, here’s what I want it to look like.” And I found a few contractor contacts, mostly through my agent and through my bank. And I said, “Hey, I’m looking at purchasing this property, here are some photos of what I want it to look like post rehab, can you give me a ballpark of what this might cost?”
So that was one way of showing them, hey, here are the before photos, here are the after photos. I just need a ballpark on what that might cost me. The second thing I did was I asked them to give me… I said, “Hey, for properties that are similar to this, for projects you’ve recently completed, what was the cost per square foot on those rehabs?” So now I have a ballpark number for this property, but that cost per square foot. Now I have something that I can apply to future projects as well. So if I find another property and I know that it was whatever, how much per square foot, now I can go and apply that to this next property I’m looking at without needing to reach back out to that general contractor.
And the third thing I did was I offered to pay them. I said, “Hey, here’s one that I’m serious about. I’ll pay you for your time if you just go and walk this and give me a bid.” Now, honestly, I think I only ended up paying one of those contractors, but the majority of the properties I looked at, the contractor was willing to walk for free just because they wanted to work. They were willing to walk it just as part of their bidding process. So those are three steps that I took. So showing the photos of what I want the ARV to look like and ask them for a ballpark, asking them for price per square foot on their previous jobs that were similar to mine. And then the third was offering to pay them for their time to actually go out there and walk it for me. Give me a rehab estimate.

Ashley:
Yeah. I think seeing this is you haven’t even put in an offer yet. So when you put in your offer, even if you don’t have somebody come in and estimate the rehab for you yet and you are not sure, you can build in that inspection period, that due diligence period where you can go ahead and put it under contract and then you have the contractor walk through it. You can let them know, I have this property under contract, my intent is to purchase it and go through with it. I just wanted to know that it makes sense. And then if the numbers don’t make sense, you go back and renegotiate with the seller showing them that you had somebody bid out the property and Tony made a great point about paying somebody, offer them to pay them for their time to go and walk through the property.
And this also gives you more of a time period. The market is definitely shifting where the minute they become listed, you’re not having to make an offer. There more of a cushion period now so that you could have somebody walk through the property. But also if you build that in that inspection, that due diligence period into your contract, you’ll have more time to coordinate with the contractor to get them into the property. So you’re planning to in invest long distance, you’re not going to be at the property to really look at it. And I think finding somebody local to go through the property is going to even just be an advantage of itself to even if you’re having to pay them, just so that you get an idea yourself of what the property is looking like, instead of just relying on photos off of the MLS or maybe you even do have a great real estate agent who’s taking video for you, FaceTiming you through the property.
The last thing that I would do is, this will be time consuming but if you want to keep investing in this market, and if you want to get a safe and sound investment, you want to do your research and do your homework. So you can also reach out to contractors and ask them, “What do you charge to install a toilet? What is your price per square foot to paint a property? What is your price per square foot to install flooring?” And you can build yourself out a template. And this is what James Denyer does. He gets prices from his contractors and he uses his template to do his estimate. And then that’s how he creates his offer based on these estimates of what his contractors have been charging him.
And since this is your first property, or even if it’s only maybe your second or third property, you still may not have a great idea of what rehab cost, but you can go through and you can look up, go to lowes.com, homedepot.com, get an idea of, okay, this is the size of the kitchen, this is how much cabinets would cost for this. This is how much the price per square foot is for a decent luxury vinyl plank flooring. And then you can find out what it costs to install. I mean even Lowes and Home Depot, they do a ton of installation services where they’re actually contracting with a lot of the local vendors to do their installs for them.
So you can get an idea of how much that is just by going on their website or calling the pro service desk too at your local hardware store and asking them, “What is your current price right now to have carpet installed, have flooring installed, have cabinets installed, anything like that too? And you can get an idea. I mean, you can get real nitty gritty, watch a YouTube video of how to install a toilet and you can see, okay, you need a wax ring, you need the toilet, you need the hose, all these things that you need. And then you can say, “Okay. I’m going to go on Lowes and I’m going to link each of these items into an Excel spreadsheet and build out your material list.” Okay. You’re going to do tile, you need the tile, you need the grout, you need the mortar, you need the tile spacers, all these different things.
And then you have this going forward. So there’s multiple ways of estimating the rehab, but give yourself that buffer, so James Nana. Experienced flipper, I mean I’ve done over 500, maybe even be a thousand homes. He still adds in, I think it’s a 20% rehab buffer for his estimates, for things that maybe change orders, things that you couldn’t see until you ripped open the walls or for changing in material costs, things like that. So always add in that buffer, that percentage too.
Before we move on to the next question, Tony, I want to hit on when we head on Celine too, on episode 241, he talked about mistakes he made with contractors too, because it’s not only estimating the rehab, but you’re learning how to deal and manage contractors and sometimes the lowest price isn’t always the best price, or the best quality and the best thing for your…

Tony:
Best value.

Ashley:
Yeah, the best value. So if you go and listen to his episode, he’ll tell you about a couple mistakes he made and that was episode 241. Okay, our next question is from Jesse Uniraff, how does everyone go about structuring a deal with a partner? Do you both put 50% of the money in for the down payment, even when one is doing the bookwork, brought the deal, et cetera?

Tony:
It’s a loaded question. It’s something that I feel like comes up all the time. It’s a great question, Jesse, and I think Ash and I both are super passionate about partnerships because we both use them quite a bit and scaling our current portfolios. First, I’ll say is there’s two types of partnerships. You have debt partnerships, you have equity partnerships. A debt partnership would be more so like a private money lender type situation where that person isn’t retaining any equity in the deal, but they do have a guaranteed repayment of their money at some predetermined period of time. But I think what most people think about when they think about partnerships and probably what you’re leaning towards is an equity partnership, Jesse. And the first thing that we’ll say, and Ashley and I have said this a million times over, is that there is no right or wrong way to structure a partnership on the equity side.
Some things to consider though are who is doing the hard work, who’s bringing the labor? If you guys are buying a real estate deal, someone has to source the deals. Someone maybe has to set up transaction coordinating the closing process. Someone once you actually close probably needs to manage that property on a long term basis. Maybe if there’s a rehab, someone needs to manage a rehab or actually do the rehab work. Think about all the different things that need to be done to get this deal completed. And ask yourself, is one person doing this? Are you guys sharing those responsibilities equally? Or is one person doing 75%, the other person doing 25%? So I think the first thing to look at is the sweat equity component, the labor component.
And the second piece, and this is what I think most people think about is the capital side. Who’s bringing the money for the down payments and the closing costs? If there are any rehab costs, who’s covering the rehab? I will say that I think most people overvalue the capital, especially newer investors, they overvalue the capital, meaning that just because someone’s bringing the capital doesn’t mean that they deserve 80% of the deal or maybe even 50% depending on what that deal looks like.
So I think ultimately, Jesse, you and your partner have to sit down and think about what is the structure that you guys are most happy with? But what I can say is that if your partner is just bringing the capital, if all they’re doing is bringing the capital and you are doing literally everything else. You’re sourcing the deal, you’re managing the rehab, or doing the work yourself, managing the tenants long term, finding those tenants, maybe you deserve more than 50%. But it’s all going to depend on how much work is going into that deal.

Ashley:
And I think an important part too is if this is your first deal partnering together, make sure that you are not in a situation where it’s going to be every deal going forward. So date this person, first try out this deal, try out this deal structure. Just because you set in stone this one deal structure for this one property doesn’t mean going forward for the rest of your guys’s life, every deal you do together needs to be that same structure. So think about that too. I love putting a cost or a dollar amount per the activities or the job responsibilities that you’re doing for the business too.
So making out a list. You said one of them is going to be doing the bookwork. Okay, put a dollar amount to that and maybe they get paid $100 per month or $25 per month, whatever that is to do the bookwork so that when you do eventually decide, you know what, I don’t want to do the bookwork anymore, I want to outsource this. Well, that’s not fair because we’re both 50/50 owners and I’m still doing all the maintenance, but now you’re not doing the bookwork or the leasing and you’re still getting half the cash flow. So putting that dollar amount to the jobs and responsibilities and getting paid for those. So taking in owner’s off for those things that you’re doing, then splinting the cash flow after that.
So in your question, do you both put 50% of the money in for the down payment? That also will depend on how you are purchasing the deal. If you are doing it in your personal names or one personal name, or if you’re doing it with an LLC because if you’re putting it into your personal name, the bank is going to require you to show that you have brought all the funds yourself or they were gifted from a family member. So think about that too, is how were you actually purchasing the property too. And then if you’re doing it into an LLC, it’s a lot easier to gather money from wherever to put it into the actual property into the deal.

Tony:
And just the last thing I’ll say on that point too is even if one person brings all the capital, there are different ways to repay that person as well. You could set it up so that person maybe gets a certain percentage of the cash flow every month before you guys split it. Somebody’s like, “Hey, the first 10% of all the cash flow goes to partner A for bringing all the capital, then the remaining 90% we split down the middle.” Or it could be a fixed dollar amount every month to say, “Hey, partner A gets back $100 per month every single month until they’re repaid what they brought to the table, regardless of how much profit is generated.” Or maybe there’s no profit that gets paid out and it’s just when you guys sell the property. So that’s called a capital recapture.
So you say, “Hey, when you guys go to sell the property, you guys agree to split everything 50/50, but partner A gets paid back first.” So say you go to sell the house and there’s $100 in equity, but partner A put up $25,000 to purchase that property, that means partner A gets their 25K back first and then the remaining $75,000 could split 50/50 between the two of you guys. So there are different ways to even structure paying that capital partner back outside of just like, “Hey, you get all of the equity in this property.”

Ashley:
Okay. So our last question today is from Derek Moore. And remember you guys, if you want to ask question, you can leave a question in the Real Estate Rookie Facebook group and we may pull it to be played onto the show where we answer it for you. So make sure you are a member of the Real Estate Rookie Facebook group.
Okay. So Derek’s question is how do you all screen a CPA and determine whether or not they’re familiar with real estate investment taxes? Every CPA I’ve spoken with says, “Yes, I know tax strategies for real estate.” Any good screening questions, you all can recommend anything? I should be on the lookout as a red flag. Lastly, anyone in the Tampa, Florida area know of a good CPA? So love for you guys to, if you’re watching this on YouTube, to comment into the YouTube video in the comments below and let us know if you have a good recommendation of a CPA in Tampa. But I think what the cool thing is that it’s very easy to find a great CPA that can be virtual. They don’t have to be in your location. There’s really no need to have a CPA that is located in your market or near you. You just have to make sure they have that knowledge of your state tax prep. So that’s the only thing.
As far as screening a CPA, and actually I was on the Real Estate Ricky Bootcamp call last night and we were talking about this too with Tyler Madame. And our recommendation that we gave when you’re trying to find a good CPA is reading the two textbooks that BiggerPockets has by Amanda Han. So it’s Tax Strategies for the Savvy Real Estate Investor is one, and then the other one is more advanced strategies. Reading those books and taking some notes of those tax strategies. And then using your knowledge, your basic knowledge, no reason to go in depth to ask your CPA about those tax strategies.
So I think a very common one is obtaining real estate professional status, even if that’s something you don’t need or you don’t even want, asking if your CPA knows what that is. And you can even put in a question about it, given my situation, what would I have to do to be a real estate tax professional? Wait, is that right? Tax professional? Did I say it right?

Tony:
I think it’s just-

Ashley:
Yeah. It’s just professional as I said that, yeah. So a real estate to qualify as a real estate professional. And then there’s other things in there can ask them a question about 1031 exchange, things like that. So I think giving yourself basic knowledge by reading one of those books can give you enough to build a questionnaire and make sure the question is tailored. So it’s not a yes or no question. So here’s an example, and this is actually a question I feel like Tony and I have gotten a couple times recently is I own a property with another investor and we want to do a 1031 exchange. Can we keep the property in, or can I just buy the new property and my partner just cash out and not have to be a part of the 1031 exchange? So asking different questions like that and seeing how knowledgeable they actually are.

Tony:
Those are great qu questions to ask Ashley. I think the only other thing I would ask too is don’t just ask them like, “Hey, are you familiar with real estate investments, the tax strategy?? Say, “How many real estate investments do you own?” And if they’ve only got one or two, maybe not the best person, or maybe ask them how many of your current X number of clients, what percentage are full-time real estate investors? And if it’s a really low percentage, if maybe like 1%, the other 90% are doctors and lawyers and cops or whatever it is, then maybe that’s not the right person for you.
But I want to see from my tax strategists, from CPA as someone who has a heavy concentration in real estate investments. Either because they own a lot themselves or because the majority of their clients are real estate investors also. So I really do think that spending time and places like the BiggerPockets forums or the Real Estate Rookie Facebook group and asking for recommendations from other investors is probably, Derek your best bet of finding a good solid CPA that understands real estate investing and its tax implications.

Ashley:
Well you guys, thank you so much for joining us for this week’s Rookie Reply. Keep the awesome questions coming. You can leave your questions on the Real Estate Rookie YouTube channel. You can also leave them in the Real Estate Rookie Facebook group or send a DM to Tony or I, and we may choose them to be played onto the show. You can also always leave us a voicemail at 18885 Rookie. Thank you guys so much for joining us and we’ll be back on Wednesday with a guest.

Back in March and again in August, I noted that “We are undoubtedly reaching the limits of affordability for Americans,” which should “cool the real estate market” and likely “cause a correction” but without the unpleasantness of a crash. 

This, in my humble judgment, is still the case as the real estate market is—unlike in 2008—buoyed by much more qualified buyers with substantially more equity in their homes and long-term, low-interest, fixed debt versus the teaser rates of the early to mid-aughts. A chart of mortgage originations by credit score should drive that point home.

However, I was clearly wrong about one thing. I didn’t believe there was sufficient “political will” to really tackle inflation. That still may be true as the Fed could quickly abandon its current course. But given the litany of rate increases and the signals of more to come, it would appear that high-interest rates will be with us for quite some time. 

Indeed, the 3% mortgage I got on my personal residence last year would be more than twice that now. As Dave Meyer put it, the Fed has made it clear that they want a housing correction to take place to reduce inflation and address near-historic levels of unaffordability. 

So, where does that leave us now? 

A Housing Correction and the “Sellers Strike”

This is what the number of new listings looks like in the Kansas City Metro Area, where I live:

New listings in September 2022 were down almost 600 from 2021, a 12.9% decrease. They were down a full 15.5% from 2020. 

Thus, despite the rate increases, inventory only crept up from 1.5 to 1.7 months in September 2022. A balanced market is six months, so this is still considered a “seller’s market.” (Although I would argue with this, given how odd the current market is.)

It’s important to look at year-over-year (YoY) comparisons here as new listings follow a cyclical pattern and always fall off during the winter. For instance, the year-over-year trend for new listings nationally fell 23.6% YoY in October.

However, homes for sale are still up 5% from last October. This increase in inventory came in large part due to fewer sales and nearly 20% of buyers backing out of signed contracts. There are also some rather amusing headlines, such as “average sale-to-list-price ratio fell to 99% in September.” It had been a shade over 103%, which is, well, not exactly typical.

Overall, this is what Bill McBride calls “the sellers strike.” There simply aren’t very many good reasons for homeowners to try and sell their house right now. So, they don’t. Therefore, we should expect this trend to accelerate and be with us for quite some time. 

Americans Are Staying Put

Of late, Americans have been substantially less likely to move than they had in years past. As The Hill noted in 2021:

“New data from the U.S. Census Bureau shows just 8.4 percent of Americans live in a different house than they lived in a year ago. That is the lowest rate of movement that the bureau has recorded at any time since 1948.

“That share means that about 27.1 million people moved homes in the last year, also the lowest ever recorded.”

Even before the pandemic, record lows were being set. The reasons for this are many, including an aging population, fewer children, and, of course, housing being so expensive. 

In that same vein, the number of new home listings was also falling even before prices went through the roof and the recent interest rate hikes.

The average duration of homeownership went up to eight years, an increase of “about three years over the last decade,” according to The Zebra. The change in the median length of stay is even more dramatic. It has almost tripled from about five years in 1985 to 13.2 years in 2021.

If you think about it, it makes sense. Why move, particularly now?

Most homeowners (approximately 95%) have 30-year, fixed-rate mortgages. Anyone who took out a loan in the last five years has a rate below at least 4%. Why would you ever voluntarily pay off such a loan?

And as we have seen, fewer and fewer people are.

Interestingly enough, the same thing is happening in the rental market. 

Tenants are renewing their leases at a record level. In April of 2022, over 65% of tenants renewed their lease versus just over 56% in 2019, according to RealPage. 

This also makes sense if you understand that the giant rent increases you hear about are just for new listings. For example, back in April, when the year-over-year rent increase for new listings was 16.9%, NPR found that the average tenant was only paying 4.8% more than the year before. 

The reason is that very few landlords are willing to raise rent all the way to market on current tenants. Increasing the rent much more than 5% often inspires a tenant to leave just out of spite. So, if rent is (or at least was) going up 16.9% elsewhere but only 4.8% where you are, you’re likely to stay put.

So, is the United States—birthed in a fight against monarchy and entrenched aristocracy—regressing to a realm of feudal serfs bound to the land they currently inhabit?

Well, for the time being, sort of.

Opportunities In This Very Odd Market

The Homeowner That Rents

The “sellers strike” has and will continue to buoy the housing market as long as interest rates are high (at least by post-2008 crash standards). At the same time, it is likely cooling the rental market, and I suspect many homeowners who need to relocate are choosing to rent out their homes instead of selling them, and thus the volume of rentals is increasing.

Asking rents are starting to moderate. From a high year-over-year increase of 18% in April, they are now down to just 7.4% in November and only 1.2% higher than in October. 

Even still, rents are quite a bit higher than they were even a few years ago, so continuing to hold rentals as a landlord should do fine in the near term.

Furthermore, for any homeowner out there who needs to move for a job relocation or whatnot, the best play is likely to rent your current home and then find a rental where you are moving to. After all, the softening rental market will help you in finding a rental equally as much as it hurts you in renting out your current residence.

And again, why pay off your 2.65% loan on your current home to get a 6.95% loan on a new one? That is not a particularly lucrative form of arbitrage right there.

I suspect the “homeowner who rents” will become much more common in the next year or so. And while such ideas may come naturally to the readership of BiggerPockets, they likely won’t naturally occur to the “normal” homeowner despite it being in their best financial interest. So please make sure to enlighten others about their options in this high (by recent standards) interest rate environment.

Subject To

The next major opportunity is a bit more rife with uncertainty, and this is the infamous “subject to” strategy.  

“Subject to” just means that the purchase is “subject to the existing financing.” Effectively, the buyer assumes an unassumable loan. 

Or in other words, the buyer takes the deed to the property and makes the loan payments, but the loan stays in the seller’s name.

The advantages to the buyer, in this case, are obvious. If you can “assume” a loan at 2.85% on a property, how much does the purchase price even matter? 

There are several problems, though. First of all, you need to seriously build rapport with the seller in order for them to trust you to pay their mortgage on a house they no longer own. After all, if you don’t make the payments, it’s the seller’s credit that will take the hit.

Secondly, virtually every mortgage and deed of trust has a “due on sales” clause. This allows a bank to call the loan due the moment the property transfers ownership. In the past, banks have very rarely done so. It might be different this time around, though. Would a bank keep a 3% mortgage on its books when the going rate is over 6%? 

All we can really say is that we don’t know for sure. If you do employ this strategy, you should have a plan B to refinance or sell the property if the bank does elect to call the loan due.

Lastly, holding a mortgage without the corresponding property will seriously affect a seller’s debt-to-income ratio and make it very difficult to buy a new property. At the same time, as a subject to buyer, I would never want to pay off any mortgage made between 2018 and the middle of 2022. Thus, there could be a long-term conflict and even an ethical issue that wasn’t present so much when subject to’s first became popular in the early 2010s. 

Even though you may not have a fiduciary duty to the seller, you should be very clear about what the ramifications could be with the seller upfront. I would recommend even coming to an agreement or something to that effect about how long you will keep that mortgage in place before refinancing or selling.

Conclusion

As long as rates stay high, the “sellers strike” should continue. Expect very low rates of new listings for the foreseeable future. The real estate market will soften and decline a bit, but without a strong incentive to sell, the sellers strike, amongst other factors, should keep it afloat. 

Find an Agent in Minutes

Match with an investor-friendly real estate agent who can help you find, analyze, and close your next deal.

• Streamline your search.
• Tap into a trusted network.
• Leverage market and strategy expertise.

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 701.

Eric:
That one point right there makes the decision much easier. If I would’ve just realized the tax implications in year one, I would’ve probably started out with a BRRRR model versus a fix and flip model, because once you cut the profit in half for Uncle Sam, it starts to make the $400 a month. I mean, in four years you’ll make that money back.

David:
What’s going on everyone? This is David Greene, your host of the BiggerPockets Real Estate Podcast, the biggest, the best, the baddest real estate podcast in the world, here today with another fire episode with another flame co-host, Rob Abasolo. How are you today, Smokey?

Rob:
Hello. Hello. They call me the baddy of the real estate world. So that’s interesting that you say we’re the baddest show. It all makes sense.

David:
Yeah. In fact, I thought they called you Little Baddy, but maybe that’s just when you’re rowdy.

Rob:
That’s my stage name. Yeah, exactly.

David:
There you go. Today we have an amazing show for you with a person who runs a very successful real estate business. Eric Brewer shares tons of information, stuff that he learned from his career in the military and then his career selling cars, and now with this all inclusive business where he wholesales, he flips, he holds some rentals.
He basically spends over a million dollars a year to generate leads, works them through a funnel, and then figures out which ones will be kept and sold and dispo’d, all kinds of creative ways that you can make money in real estate. Rob, what were some of your favorite parts of today’s show?

Rob:
Man, so Eric is the master of the pivot, or as Ross Geller would say, the pivot!

David:
Pivot!

Rob:
Pivot! Dude, he’s pivoted. He walked us through his whole journey and every single time he sensed a change in the market or in the buyer sentiment, it seems like he was just super quick to get a read on it and pivot his business to still remain active and profitable and everything like that. So I think we could all take a page out of that book and understand how important it is to be able to be adaptable when the market is changing.

David:
Absolutely. That’s one of the themes of today’s show, not just what the market’s doing, but what you can do differently in this market that will work that did not work before. To me, when I listen to a podcast, that’s the number one thing I’m looking for, tell me what’s happening right now, tell me what I can do differently or better that will work right now so I can keep an edge on my competition, and today’s episode definitely delivers.
Before we bring in Eric, today’s quick tip is, remember that real estate is a relationship business and you need to be focused on the relationships, not just the deal. When we say something is transactional is where people put the value on the transaction, not the people in the transaction. Real estate does not work well, much like dating, when you treat somebody that way.
So in anything that’s relationship based, remember to focus on the person, their goals, treat them the way that you would want to be treated, and you’ll find the money comes your way versus just focusing on the deal and treating them like a means to an end. Eric gives some very good examples of that in today’s show. And without any further ado, let’s bring in Eric.
Eric Brewer, welcome to the BiggerPockets Podcast. How are you today?

Eric:
I’m doing well. How are you?

David:
I’m doing fantastic. Thank you for asking. So we’re excited to talk to you today. Before we get into it, can you give us a brief rundown of what your real estate business and your personal portfolio looks like?

Eric:
Yeah. I’ve been investing in real estate since 2006. Currently, we are operating in two core markets here in South Central Pennsylvania, and we also run a market in Ohio. We do a balance of wholesaling, fix and flip, and turnkey.

David:
Okay, so you got a lot of stuff going on.

Eric:
We got quite a bit, yeah. 30% or so of our business is wholesale, 30% turnkey, 30% fix and flip. Then we have a portfolio of about 70 to 75 rentals. It was closer to a 100, and then at COVID decided to sell off some stuff. Regretting a little bit of that now, but at the onset of COVID with the uncertainty that was going on at the time, we sold off a few rentals.

David:
Okay, and do you have business partners? Is that the we?

Eric:
No, I just include everybody that works with me.

David:
Oh, that’s interesting. We’re going to have to ask about how that’s structured. Before we get too deep into that though, tell me how did your journey into real estate look? What was going on in your life? What made you decide to get into real estate? It was clearly the best time in history. 2006 is notorious for being the best time to start a real estate investing career.

Eric:
Before getting into the real estate business, I had spent about eight years in the automotive business. And at the tail end of my career in auto sales had just reached a tipping point where the hours had got to me. I was moving in the direction of having my first child and just really knew that I couldn’t be a great dad and a great car manager and had to make a decision.
So obviously chose to hang up my car salesman shoes and took a few months off just doing some soul searching to figure out what my next move would be and made the selection it would be real estate and thought that it would be wise to start my journey in real estate on the finance side.
So I looked into mortgage businesses and did a couple interviews and ended up … My first job in real estate was basically cold calling for refis in 2006, and did actually really well with it. I was surprised at how easy it was in comparison to me grinding out two and a half hour appointments with car buyers to make 300 bucks on a new car. I was literally spending 45 minutes on the phone calling someone and making a couple thousand dollars on a refi.
And after doing that for, I don’t know, four months or so, my mentor from the car business reached out to me and said, “Hey, I’m thinking about getting into real estate, and I thought of you. Would you like to have lunch?” And we had lunch a couple days later and immediately following the lunch that we had, we made a decision to start flipping houses in February 2006.

Rob:
So you decide to leave behind a somewhat lucrative but tedious business in the car world. You get into real estate, you say, I want to flip my first house. What was that house actually like? Did you know anything going into it about ARVs or comps or budgeting? Walk us through that journey a bit.

Eric:
So the first house that we bought was a bank owned property. I walked the house. My partner had bought a couple rentals and had a real estate agent. And the real estate agent got us into the house, met me there, and we were talking about ARV. I don’t think we called it ARV. We said, what could it sell for after we fixed it up? I didn’t even know what ARV meant. And he gave me a number and we did the math.
And he was really, really well spoken in Spanish and we met a contractor there. The number that I got was $12,000. So I did my math based on $12,000. We ended up negotiating, buying a house from the bank. I met the contractor back there three, four weeks later to tighten up our rehab budget, brought up the number of 12,000 and he said, “Yeah, what about materials?” And I said, “Well damn, I thought that was in the 12.” And he goes, “No, it’s never in that. That was a labor number.”
So now I’m staring down the barrel of what I thought was a 12,000 rehab that’s more like 22. And we got the rehab done and ended up selling it and making a little bit of money, a little, maybe 3 or $4,000, and it was a good learning experience. I understood better on day two how to estimate a rental budget, but the first one I royally flubbed up.
But it was a $90,000 house, so luckily for me in South Central Pennsylvania, $90,000 was very inexpensive. There was more buyers for that stuff than there was homes to buy. So we ended up selling our way out of it.

Rob:
So you go into several flips after that. How long did it take before you started graduating to a little bit more expensive flips, or were you always in that $90,000 wheelhouse for a while?

Eric:
So most of the time in the very beginning we stayed at or around the, and this is crazy to think, 80 to $125,000 property. Now back in 2006, I don’t know what the median was, but it was probably close to that, which if you think about it, it’s a smart decision, but definitely, I wasn’t smart about it back then. It just so happened that that was the stuff you had the best chance to buy on the MLS.
There was less competition because in our area, that house was probably in the city where the taxes are higher, the schools maybe aren’t as nice as what someone might get in the suburbs, and some of the locations can be a little dicey. But for me, we would buy homes for 25, put 35 in them and sell them for 99. I mean, that’s the only place I can get inventory.
And back then, when we first started, I was buying 90% or more of my deals on the market, on the MLS, and that’s where the available inventory was. There was more competition on the higher priced suburbia stuff that didn’t need a full rehab. So we really started on the MLS and buying less expensive stuff.
And then coming from the car business background, I would say we actually sucked at buying homes. We sucked at renovating homes. What we were really good at is selling. So I didn’t sell much of my stuff on the MLS when we started. I would run, yes, I’m going to say newspaper. I was in the business when people still actually ran newspaper ads. We would take out a half page in the Sunday news with color ads and we advertised no money down, monthly payments, to generate a bunch of inquiries.
We’d get 30, 40 leads a week. We’d send them over to a lender, have them pull credit, get them pre-approved and if we got three or four qualified buyers a week out of those 30 applications, that was a good week and then we would sell. Not long after our first full year in business, we did 150 flips. Did 70 some our first full year. Second full year, we were north of a 100.
But we did a really good job of running ads. It’s the same thing I did in the car business. We’ll put a zero down payment on the windshield. People drive by and go, “Yeah, how do I get that Chevy Blazer down there for 299?” We literally took what worked in the car business and said, I think we should run these same type of ads for our house, and it worked.

Rob:
Wow. Okay. So if I hear you correctly, you started off with a flip. You didn’t really know too much. You underestimated the reno in your first one. 365 days after that, you had completed 150 flips. Is that right?

Eric:
It was the second full year.

Rob:
Oh, the second. Okay.

Eric:
So our first full year we did 70 couple, I don’t remember the exact number. It was north of 70. And then the second full year we were over a 100 plus. It was probably closer to 150. Then every year after that, we were right around 200. So by our third year we were doing 200 a year.

Rob:
I’m always just super interested in this part of the story, and I think a lot of people at home, because I think we understand the general concept of going and buying a house. You fix it up, you sell it, you make a profit, you take that profit and then you use it to buy your second house. And then hopefully on your second house you make a little bit more profit and then you take that money and then you go and you buy a third and maybe even get a fourth one concurrently.
But how does one actually get from, let’s say 3 to 5 to flip 50 because doesn’t that require some level of funds and funding and private lenders? That just seems impossible.

Eric:
So it would be under normal circumstances. I was very blessed that my partner was the owner of the car dealership that I worked at, and we didn’t deal with private lenders. I had one private lender as my business partner.

Rob:
Oh, I see. And so what was his role in all of this? Was he just like, hey-

Eric:
We worked side by side. In the beginning, we were driving out to bank owned properties, kicking in back doors, crawling in windows because someone lost the key in the lockbox and walking through properties with flashlights, trudging through wet basements. I mean we did all the crappy stuff that you had to do to buy a property and we did it together.
Literally for the first five years in business, I didn’t look at a budget, I didn’t look at cash flow, I didn’t look at any of that crap. I was blessed to have a partner that managed the backend business aspects, the finances, all of that stuff. All I had to do was go out and buy good deals, get them into construction, get them out of construction, and then work my face off to get them sold. So the hardest part about my job between 2006 and probably 2012 was I literally worked all the time.
The big difference between real estate and the car business, I had more control over when I worked. I could check out for two hours to go pick my son up from school, take him to basketball practice, pat him on the butt, tell him to have a great practice and then go to the parking lot and make 30 phone calls. Where in the car business, you literally have to stand at the car dealership and wait for some sucker to come in to buy a car. With real estate at least you can work sort of from anywhere.
Certain things, it was hard for me back then. I don’t know what the cell phone situation was in 2006. It certainly wasn’t like what we’re dealing with in … There was no Matterport. There was no FaceTime. I think the MLS capped you at six pictures. So you literally had to go to the house and look at it to make a decision about what you could pay.

Rob:
I think I want to say that 2006 was right around when the iPhone came out, the first one, the very first iPhone that’s ever existed.

Eric:
2006, I think I was straight up Nextel. Remember the little … the push to talk Nextels? So yeah, I mean my job, I didn’t worry about any of that stuff. I literally didn’t have to worry about it. And frankly, now I worry about that stuff every single day. We manage an inventory of, excluding rentals, at any given time we might have a pipeline of 45 to 60 properties. And cash flow is a really big influencing factor when we make a decision about will we wholesale something.
I don’t mean to jump ahead, but what we’re noticing right now is there’s a bigger gap. For the last two years, if I looked at what I could wholesale something for versus if I took it down, fixed it, flipped it, there was not much different. I was getting close to my projected income on a fix and flip and I was wholesaling the property.
So I’m like, you know what? I’m not going to go through the hassle of doing construction and funding this deal. I’ll wholesale it and make 25,000 bucks because if I fix and flip it, I stand to make 40. That to me is not … Normally, if it’s north than 50% of what I can make on a fix and flip, I’ll wholesale it.

David:
Now I know Eric, you’ve done several things in life it sounds like that have led you to this point. We briefly touched on selling cars and you did mention some of the things you didn’t like about it, but certainly there were things you learned doing there that set you up for success in this world, like what you just said, I would go in the parking lot and make 30 calls.
I’m a real estate agent, I own a mortgage company. I understand it is pulling teeth to get salespeople to contact possible clients for anything. It’s the hardest part of my job is someone comes to me and they say, “Hey, I want to be a real estate agent, David. Teach me everything.” And we say, “Okay, you’re only going to have to call five people a day.” And that’s like, you’ll maybe get five a month and then it’s like three of them is going to be their mom.
I don’t know what it is that creates such fear of calling people and talking to them, but you didn’t have that and I think it probably played a big role in putting you in the position where you can have this wholesale business and this flipping business and this deal volume that you’re doing that everybody hears and they go, I want to have Eric’s life, but they don’t want to make those 30 calls.

Eric:
Yeah, and there’s lot of other stuff that comes with it. I’ll give you a quick story about the car business. So the first two years I was there, I worked my way up through the service department. I started actually as a lot porter, which is a glorified term for park cars. And the whole reason I applied there is because it was a Mercedes and a Toyota new car franchise. I was like, I literally get paid to drive around Mercedes and brand new Toyotas all day, sign me up.
So I worked my way up through the service department and then that was my first glimpse into sales. I didn’t realize it at the time, but when you take your car and you drop it off with what’s called a service manager or a service advisor, it’s a sales job.
They’re going to compare your car in the mileage and the condition to what is the epitome of safe and then they’re going to make recommendations about, hey, you have 54,000 miles on your car, Dave. Have you considered getting a 60,000-mile service? This is what it includes. We could take care of it while you’re here. It would only cost an additional $448.
By the way, we noticed that your back brakes are getting a little bit low. You could let it ride for a little bit and they may start to squeal. And when you notice that, make sure you call me or we could go ahead and take care of it while you’re here today.
I’m sure that’s not how it sounded when I was doing it back in 1996, but I sold a lot of stuff and it’s only because the technician would come to me and go, “Hey man, these people ought to really get this stuff done.” I’d go, “Well, explain that to me. What is a timing belt?” And he’d tell me. I’d go, “Okay, I’m going to go call them.” And I would just call them and tell them that stuff and then say, “Do you want to get it done?” So I sold all this service and I got awards and stuff. I had no idea what I was doing. I was just following instructions.
And eventually I caught the attention of the sales manager who ended up being my business partner in real estate, and he’s like, “Man, customers really like you. We’ve had a couple people wander out to the sales floor and say, ‘Hey, you guys do such a good job in service. Eric’s working on my car.’ Next thing I know we’re selling them a brand-new vehicle. You ever think about getting into sales?” And I was like, “Sales? I’m not doing sales. You pressure people into doing stuff. I’m not cut out for that.”
So he kept working on me and June 17th, I don’t remember the year, was my first day in sales on the sales floor. So I transitioned from service to sales on June 17th. Typically, back then at this particular dealership, if you sold 20 cars in a given month, you would be salesman of the month or at least in competition.
So I start June 17th, I don’t know the difference between a spark plug and a muffler. I don’t know how to do a great walk around. I don’t know how to do a test drive. I’m like, I’m just going to go talk to everybody. I didn’t know what a buyer looked like. I didn’t know what negative equity looked like. I didn’t know what kind of shoes you should be wearing if you were a good credit customer. All these other salespeople did, they’d go, “That guy can’t buy. They’re probably buried in their trade. They’re upside …” I just went and talked to people.
I sold 21 cars between June 17th and June 30th and didn’t have a clue. So in my brain I went, all I did was talk to a bunch of people, I brought them inside, I got them excited about this Toyota Camry. And then I went and got a manager and said, “Hey, these people really like the car, can you close them?” And I was salesman of the month, sold 21 cars. And then every month after that, I never sold less than 20 cars. Most months I sold 30 cars and I was salesman of the month and made a crap ton of money at the age of 23.
And I think what happened to your point is most people hate car salesmen. So there’s nothing more uncomfortable than walking up to a stranger that you know hates your guts and can’t wait to lie to you and ask them can you help them, because they’re going to tell you no, I’m just looking, and you know they’re not just looking.
So you get this thick skin as a car salesman and when I showed up in real estate, making 30 calls to me was no big deal. So I think the car business, as a matter of fact, right now, it’s a big place we hire from.

David:
I can see why. It makes so much sense.

Eric:
It’s the resiliency that’s required to be in the car business. And frankly, other than the last two years, most car salesmen have to sell a crap ton of automobiles to make six figures.
When I made that decision, I remember saying out loud to my business partner who was my mentor at that time, “Dude, we just made $20,000 on this house. We make $300 a car.” We were just shocked. I remember saying this that I can’t believe we did that for so long. He was in the car business for 20 years by the time he made the transition.

David:
But there’s value that you got out of it that wasn’t just the money. So you learned about human psychology, you learned about working a system, you learned how to be different than other people. Every other salesman was pushy, you were not being pushy in a sense. You were probably listening much better. I can tell that’s something about you is that you listen to what other people are saying and then you have an intuitive nature to see what they really want and then you just offer it to them.
It was brilliant when you said, hey, this could happen with your car. These are common issues with timing belts. Do you want us just to take care of it now? Because if you don’t know about cars, which no one does and you hear that, what you think in your mind, you didn’t create pressure Eric, but the question created pressure because you’re thinking, well, if I say no, am I actually leading myself to having a huge problem later? I don’t know enough about cars to trust that I can say no. Yeah, just go ahead and take care of it. It’s only $1,500, right?

Eric:
Yeah.

David:
Whereas if you didn’t bring it up, the pressure’s never there because they don’t even know that it’s a potential issue. That is a much smarter way of going about it that doesn’t make you feel slimy. And that’s what I’m noticing about you, just talking to you now, I’m not shocked that you have a sales based business that is doing good volume and you like yourself. You’re not the slimy wholesaler that everyone’s worried about.
If we could take one more step back in your journey, I want to ask you about the army and what lessons you learned in the army that helped build the resiliency to be able to succeed in the car business that allowed you to have the fortitude to go succeed in real estate.

Eric:
So at the time, here’s what was going through my head in 1994 when I went to Fort Knox for bootcamp. And at four in the morning I had just got a buzz cut, I had hair back then. They shaved my head, made me drop off anything that resembled the outside world, jammed me into a school bus, took me out to this building in the middle of nowhere with 50 other men.
Just threw us in bunk beds, waited just long enough for everybody to fall asleep and then turned all the lights on and started screaming and yelling at us at five o’clock in the morning and dumped all of our beds, threw them out the window, made us go out in front of the building, stand in a formation when no one knew how to stand at a formation. And we did pushups until 75% of the people either quit or puked.
And at the time I was like, what in the hell am I doing here? Literally last night, my mom made me a freaking peanut butter and jelly sandwich with chocolate milk and celery with more peanut butter on it and now I got some grown man that kills people for a living screaming at me. Why am I here? This is horrible. And you just got through it.
And the next day it happened again. The third day it happened again. And really what they were doing now that I understand it, is they were tearing us down as individuals and everything that we did, we did together. We won together, we failed together, everything we did together.
So now looking back on it, I understand what they were doing is they were stripping us of our personal identity and they were making us a group. They were making us a team and everybody counted on each other and we won and lost as a group. But at the time I didn’t know it, I tried to figure out a way to not be the guy that got the other 59 guys in trouble.

David:
That’s exactly-

Eric:
And I did a pretty good job of that. I was like, I know what you guys are doing. I’m going to fold my socks because literally, you’d have to fold your 12 pair of socks and they would come through and they checked everybody. Take 59 guys, four pairs of socks, so they’re inspecting 240 pairs of socks.
And if one of those suckers wasn’t folded by the exact measurement, the whole 59 people were getting their socks dumped outside, January in Fort Knox, Kentucky, it’s flipping cold. And then you’d have to go outside and do pushups. And then they’d bring you back in, make you fold all your socks again and they’d inspect you again.
So at the time what it taught me was the value of process, the value of the predictable outcome. Everybody does things the exact same way. You don’t say apple when you’re trying to spell out a letter, you say alpha. You don’t say Billy, you say bravo. Everybody speaks the same language. So there’s very efficient communication and there’s very minimal miscommunication in the military because there’s an SOP and a process for everything.

David:
I can imagine your brain because what’s happening is, like you said, the way that you always approach life, your instincts, your habits, the literal neural pathways that tell you, oh this happened, you do this, most people are living without realizing it, a slave to habit in some form.
That all gets torn apart and you’re rebuilt in a way that would make you a more effective soldier or person to be a part of that unit. And I think a lot of today’s culture looks at that as a negative. We throw words on it like abusive and toxic and stuff like that, but in a sense that keeps you alive and it makes everything run much smoother.
And it actually sets you up for success in other team-oriented environments, which is where I’m going with this, because you’ve said many times today, we do this, we do that, even though you may be the leader or the brainchild or you may be playing a bigger role than some of the other people, maybe not, but my guess is whether you ever do or don’t, it’s always a we.
Real estate’s freaking hard, man. Those of us that are doing it know this is very difficult and you need people on your team to win. You’re now in this position that you’ve built a business that is team oriented. Was that happenstance or do you think that some of the background of what you got in the army led to you having a brain that was rewired to succeed as a team?

Eric:
It’s a really good question. And I would say that all of my life experiences have led me to the way that I behave now. So I had someone that was 24 years old, I was at a mastermind three months ago and he said, “All right, if you could go back to being 24 years old or 25 years old in real estate, what’s a piece of advice that you would give yourself?” And my knee-jerk reaction was none. And he said, “What do you mean none?” And I could almost hear what he was thinking. “You mean you haven’t learned anything from when you were 25 years old to now?”
And my response was, is that if I were to change, and here’s where I knew I was old and he was young, I said, “It’s kind of like the movie Back to the Future.” And he looked at me and went, “I don’t know what that is.” And you remember Back to the Future, if he went back into history and he interrupted that interaction between his mother and Biff, that his dad would’ve never saved his mother from Biff and then she wouldn’t have fell in love.
So I said, “Literally, I’d be concerned if I went back and gave myself a piece of advice about what to do at that particular age or when I was early in business, it would’ve changed my experience and my experience is what has led me to where I am today. So I wouldn’t change anything. I wouldn’t give myself any advice. I’d want me to go through …”
Real estate is hard and I’m glad you said that because I think too often people don’t talk about that. I actually don’t love real estate. What I’ve realized I love is I love building meaningful relationships and then nourishing those relationships to get the most out of myself and to give the most to that relationship in exchange.
It just so happens that if you do what I just said in real estate, you should have a pretty good experience. You should make pretty good money, you should be able to get people to come work for you, you should be able to get them to stay and work for you. And if you do it correctly, which I’m still working on, you should be able to create a lifestyle for yourself that requires far less work at some point than what you did in the beginning.
So I think there’s a lot to be said, that real estate’s hard. We don’t talk about it as often as we should. I wish I could go back and keep 40% of the 4,000 deals I’ve done since 2016, I’d be in a much different position. But it required a different level of discipline for those 16 years to not flip that house, keep it as a rental, make a little bit of money each month, not make the $25,000 rip that I made flipping it and say, hey, I’m going to live with getting all my cash out and I’m going to make $400 a month. If I had the stuff that I bought between 2008 and 2012 and I kept 25 to 40% of that inventory, I’d be at peace right now, I think.

David:
So this is such a good point, especially when we go back in time and hindsight’s 20-20. The problem is at the time you’re looking at it like, how do I want to describe … Real estate, it’s hard for us to imagine right now because it is such a competitive asset class, everyone wants it. We’re all fighting over houses. No one has a great deal. Even in a slow market like this where nobody takes it, we’re still scouring looking for the deal. They’re just harder to find because rates went up, so the cash flow has gone down.
But at the time you were doing this, nobody wanted real estate like that. I don’t know how to describe it. It was not super popular. It’s trying to imagine a band that everybody cares about right now that in 10 years no one will even remember. It’s kind of like that, but in reverse. There wasn’t a big appeal to keeping properties.
What you were doing was you were saying, okay, I could have 400 a month or I could have 25 right now. That sounds like a pretty simple decision to make. One of the things that I’ve done with myself, because we still have challenges like this where we don’t know what’s in the future and we don’t know what we should do is I’ve learned to look at money differently.
Instead of seeing, okay, I can have 25,000 cash in the bank or I can have $400 a month in the bank, I say I can have $25,000 in the bank or I can have $25,000 in the property. Instead of calling it cash, I call it energy. If the energy’s in my bank account, we call it cash or money, if it’s in the property, we call it equity, but it’s the same thing.
Now it works differently because when the market shifts, you lose equity in a property and when the market goes up you can gain equity in a property. So it’s more volatile in the property. In the bank, it’s more functional, you can use it for more things, but still it’s energy that behaves differently depending in the environment that you keep it in.
And I think learning to look at it like that has made the decisions easier because I didn’t feel like I was losing on the 25,000 cash. In fact, I would see now, all right, $25,000 rip that’s going to be taxed at 50% for capital gains over the short term. That’s actually 12,500. Then I have to figure out where I’m going to go invest it.

Eric:
That one point right there makes the decision much easier. If I would’ve just realized the tax implications in year one, I would’ve probably started out with a BRRRR model versus a fix and flip model, because once you cut the profit in half for Uncle Sam, it starts to make the $400 a month. I mean, in four years you’ll make that money back.

David:
Even if the property didn’t appreciate. That’s right.

Eric:
Correct. And then the equity only matters when you sell it. And if you’re not selling for 10 or 15 year cycles, you can time it much like a lot of people did. And I sold off a couple of my rentals just after COVID, because I looked at it and I was like, this is an abnormal set of circumstances. Property values are up 40% in one year. I’m cashing in.
And seven months ago, I regretted that decision. Right now I’m not so upset with it because we’re seeing some of that 40% be given back. It’s market specific, but I was looking at a heat map the other day from realtor.com and the amount of inventory in certain places across the country is alarming. In Arizona, it’s up 145%. In Pennsylvania where I am, it’s up 2%.

Rob:
Wow.

Eric:
Not much change in inventory here. So that’s one of the benefits of where I am. In 2006, people in Las Vegas, Phoenix, Arizona made a gazillion dollars. But then with the flip of a switch, anybody that had flips hanging out there were screwed. Literally the value changed.
I had 10 or 12 flips in the pipeline. I remember the day, it was eerie. And buyers’ agents and lenders were calling me like, “Hey man, our deal’s falling apart.” I was like, “What’s up? Something with the inspection, the appraisal?” Like, “No, the bank is out of business. They literally closed their doors at three o’clock today. There’s no deal.” And I was like, “What do you mean they just closed? You can’t just close. What do you mean they’re closed?” Like, “Yeah. Yeah, they’re done. They’re out of business. Everybody’s fired and they went home for the day forever.”
At some point we’ll probably talk about novations, but coming out of that in 2008, that’s how I discovered novations because prior to 2008, nobody was using FHA financing. It’s one of the things I’m seeing in the market right now. It’s funny knowing what I know now that every 10 or 15 to 20 years these cycles repeat themselves.
So if I knew that, I think to your point, back then, real estate was a really well kept secret. There was only this small little circle of people that knew about it. It’s probably because someone in their family grew up that way. They taught them how to do rentals, here’s this tax code that nobody talks about. We don’t want to bring a lot of attention to it because if we do that, they might change it.

David:
That is exactly right.

Eric:
Which we’re seeing now, right? Once everybody finds out about it, you go, oh they’re exploiting it, we’re going to get rid of that.

David:
Call it a loophole and call them a greedy and throw a millionaire on there and yep.

Eric:
Yeah, once too many people make enough money and they see it that, that needs to be corrected, they’re going to change it, which they’re probably going to change-

David:
Well, they’ve already changed bonus depreciation. That’s stepping down lots of things.

Eric:
Yeah, that’s a big impact. There’s a lot of people that would make a decision to buy a property, maybe pay a little bit more than they wanted to, but the bonus depreciation would say, you know what? I’m getting all these tax advantages. I’ll go ahead and pay what you’re asking for it.
I mean that’s the one thing, had I known that back then, I would’ve said it doesn’t matter what it’s worth in four years because I’m looking at a 20-year deal. What’s it worth in 20 years? And for the last 100 years, property values double every 20 years. So I know it’s going to be worth double. Whatever I pay now in 20 years it’s worth double.

Rob:
So Eric, I mean you talked about you sold some of your portfolio here during COVID, but you had one really big pivot in your career and that was in that 2008 era where you were crushing it on your home flips and then all of a sudden maybe you weren’t crushing it as much and you completely changed the direction of your real estate career. Can you tell us about that pivot and why it came to be?

Eric:
Yeah. So it’s happened a couple times. When we started, we were almost exclusively MLS. And then that, the tough part is in 2008, it got really hard to sell a house and predominantly because there was this flood of inventory coming, so there was a ton of competition. And the hardest thing to do in late 2008 was to get a stinking mortgage. There was this opposite reaction to the very forgiving, probably irresponsible lending that was happening for a couple years leading up to the recession that banks made a very corrective set of measures to get super tight. You had to have a 700 credit score and 15% down to get a mortgage unless you were using FHA in 2008.
In 2010, I started doing installment sales agreements. I had people that would come to me in 2009 with a 640 credit score and $15,000 down getting declined by lenders. They didn’t have enough, maybe they couldn’t prove their overtime or they hadn’t been on their new job for two years. It was really, really hard to get a mortgage.
So these people are coming to me, they got 15 grand down, they want to buy my house, they have the ability to pay, they have good income, we started doing installment sales agreements. I had over 140 installment sales agreements by the end of 2011.
And I was getting 15 to $20,000 down on $150,000 property. They were paying me 8 to 10% interest and I was borrowing it from the bank at 5 to 6%, because again, fortunately I had a business partner that was able to leverage his wealth and go to the bank and say, hey, we’re going to structure these deals at 80% of appraised value. We already have basically a highly qualified tenant. So we don’t have any maintenance, we don’t have any of that stuff. And our advance was lower than 80% because we had their down payment plus the equity we already had booked into the property.
So we did installment sales agreements. That was 30 to 40% of my sales for two years on the heels of the crash. In 2011 and ’12, there was more investor activity back in the market and I started to see it become more and more challenging to buy properties on the MLS. So I had to pivot to direct to seller between 2012 and 2015. Now my business is 90% direct to seller, virtually zero MLS activity.
In 2000, about four years ago, I pivoted into turnkey. Got away from retail fix and flip, pivoted into turnkey because rates were coming down and there was a lot of investor activity. I think the Wall Street Journal calls them laptop landlords, people that buy turnkey across the United States. They find qualified rehabbers, good property management companies and they buy turnkey real estate. They leverage it and they utilize the Fannie and Freddie product up to 10 loans in their own name.
And it’s the most desirable rental product you can get on the market. It’s 30 years. Typically, it’s at a discounted rate and you can get up to 10 properties in your own name. And now just in the last six months, that turnkey business has vaporized. So I’m back to pivoting again because the property that was cash flowing $300 a month for this out-of-state investor with the rates where they are, it’s negative cash flow. At an increased rent, the same price, the interest rate has had that big of an impact on cash flow and those buyers have stepped aside for now.
So I’m back to, full circle, selling my properties retail to probably FHA. That’s the thing I was saying, right now for flippers, if you’re not selling your properties to FHA, VA borrowers that need 3 to 6% sellers help and have minimal down payment, you’re missing the highest paying buyer in the marketplace right now.

Rob:
And why is that? Can you explain the math there a little bit, or why is that the uncovered niche?

Eric:
So we all know the market the last two years, right?

Rob:
Yeah.

Eric:
Ridiculous. Probably the most lucrative real estate market we’ll ever see, ever. And if you were an FHA borrower that needed 6% sellers help and had a $500 deposit, you couldn’t probably find a real estate agent that would take you out and show you homes. There’s no way you could buy a house. Anything that qualified for FHA financing, they were getting either cash offers or conventional no sellers help, appraisal waivers, no inspections. As an FHA borrower, you were at a significant disadvantage.
So those people now with rising interest rates, it’s created the opportunity for them to be able to buy a house. So they’re not comparing 7% to three and a half percent because they weren’t active at the three and a half percent rates. They were not an active buyer because the market would not allow them to purchase.

Rob:
So Eric, basically, if I’m hearing you correctly, there’s a very large group of people in the United States, people who are just married or are trying to move, they’ve had no shot at entering the market over the past two years and now they actually have a chance. Interest rates are a little bit higher. Maybe they’re going to be getting something in the sixes versus in the fours, but they still really want the house.
Whereas on the flip side of this, investors are paying 7 to 8%. The cashflow is a lot smaller now, they’re just not penciling out. So they’re not getting quite as competitive because they don’t know where this market’s going to go necessarily. Whereas maybe the homeowners are fine, they want to buy the house so they’re willing to take the risk a little bit more. Is that more or less what you’re describing?

Eric:
Yes. There’s a window because what do you think is going to happen to investor activity the instant rates drop down in the fives?

Rob:
Oh yeah, they’re going to be getting back at it.

Eric:
It’s going to go bananas again, right?

Rob:
I’m seeing a little bit of an opportunity here. It’s like I feel bad, all right. Maybe it’s like I shouldn’t feel bad, but the market has been so dang competitive. Sellers have been so very confident, so they’ve been raising those prices and now there’s terror lurking the streets. And I’m making some pretty aggressive offers like 3, 400K under asking. And I feel bad because I’m like, ugh, but it is genuinely the only way that these deals pencil out.
And I’m actually fine with it. Even on some of these deals where I was used to getting a 20 plus return cash on cash, some of these deals I’m getting a 10 to 15 and I’m like, well, I’m actually fine with it because I think in a year or two when rates go back down, I’ll refi and then it’s going to be the greatest deal ever.

Eric:
That was one of the pivotal moments for me as an investor is when I got less concerned about what I was paying in relation to asking price and what I was paying in relation to the value.

David:
So true.

Eric:
And it’s one of the things that gets in investors’ ways, I’m not paying over list. Well, who cares what list is, what’s the value of the property?

David:
Yes.

Eric:
And can I make money out of it? Is it a reasonable deal? Does the deal make sense? I mean, it took me years to get past that where someone would say I need highest and best and I’m like, screw you.

David:
You know what’s funny, Eric? That you’re saying it took years to get past that, but in the car world, nobody pays sticker price.

Eric:
Well, the last two years they have. They’ve been charging 25 grand over sticker. Back in the day, 2018, you had to sell a house.

David:
You had to work.

Eric:
In order to be a list agent and get multiple offers, you had to price it really well. So I actually would get annoyed when people would put up, I had 17 offers in two days. It’s like, dude, you didn’t do that. Tell me what you did to negotiate those seven offers and find the one that delivered the most value to the seller and how you got it to close on time. Don’t tell me about the offers because none of that credit really belongs with us.

David:
Or house sold in two days. That’s like yeah, it popped up on Zillow, everybody was looking for it. You didn’t do anything special.

Eric:
We didn’t have anything to do with that. If you literally were active in real estate the last two years, you could make money in spite of yourself. It was really hard to get a deal, it was super easy to sell it. We’ve seen 180 degrees now. It’s getting easier already today to get a deal. I know when I go to sellers’ houses, it used to be I’m getting five other offers a year ago, now it’s like, I hope you guys can help me.
But then once I get the deal, I got to work like a dog to go out and find somebody that’s crazy enough to buy it with interest rates at 7.5%, and it’s got to be a good deal. They’re going, you know what? If I brought it to Rob and I was like, Rob, you want to buy this? He’ll go, yeah, I’ll buy it. I don’t care what the rates are, but it better be a good deal.

Rob:
Yeah, a hundred percent. I mean, it has to work, right?

Eric:
Yeah.

Rob:
So Eric, tell me this because I know that you said that you’re selling directly to sellers. How are you actually marketing to get sellers, A, into your system, and what is your deal flow process even looking like at the moment because I know there’s a lot changing right now?

Eric:
Mail’s our number one. It’s the thing that we spend the most on. It generates the most leads. And my average profit per transaction is the highest off of television. Then direct mail, PPC. We stopped doing cold calling. I’ve been fighting that battle for three years. I just finally threw my hands up and said, no one likes to get a cold call, no one likes to do a cold call, we’re just going to stop it. But we have a fair amount of success with texting and we’ve been able to operate inside of compliance.
So that’s generally where we spend the majority of our marketing dollars and we generate about 320 to 350, what I call net leads a month. Inside of our funnel, we expect to make same day contact or live answer with those people around 90%. 65% of those people, we expect to get an appointment with. 90% of those appointments we expect to confirm and show the day of the appointment. And then we look to achieve minimum of 25% contract at appointment. We do all in-person appointments.
So that generally nets when you go through that funnel, would have net us, from net lead to contracts, about 10%. So our goal is to write about 40 contracts a month and I’ll close 32 to 35 of those. You’ll have some fallout, some title issues, seller change their mind, deals that don’t work for one reason or another and ends up getting released. So gross 40 contracts, close 32 to 35.

Rob:
All right. So let me ask you a couple questions here because I think a lot of people are going to have … The way you’ve described it makes perfect sense, funnel marketing 101, but when you say you’re getting a lead at that very top of the funnel, what is the ideal scenario that happens with that lead? You put, let’s say a TV commercial, you do all the process you just talked about. That lead, what are they doing? Are they getting to you to buy one of your homes that you already have listed and ready to rock? Are you wholesaling it to them? What’s the final product that they’re getting when they connect to your company?

Eric:
Sorry. Sellers or buyers?

Rob:
Well, I mean just in regards to your specific business, what is the final output of your funnel?

Eric:
Yeah, so now … And I learned this through some of the data aggregates that we work with. Shout out Audantic, they run a bunch of our data sets for us. You know who buys the most property as an investor in every market all across the country? What demographic of investor buys the most inventory? First time investor. It just so happens they pay the most.
So the largest volume of homes are sold to a first time investor in every market and they actually pay the highest percentage of “value,” however you calculate that. They pay the most money and they buy the most. But what does everybody teach you about wholesale when you’re going to go out and try and sell the property? Pull a buyer’s list. Where does your buyer’s list come from? Someone that’s already bought a property in that area, in that zip code or in that school district in the last 12 months. Well, the guy that’s buying their first investment property is not on a list anywhere.

David:
That’s true. You got to go find them.

Eric:
Right? So you got to look at, what we found is, it’s called a DINK. Dual income, no kids between a certain age that makes a certain amount of income is the most logical person to buy their first investment property. And then on the back half of it, there’s people that are more between my age, 45 to 60, that are at the tail end of their professional career, are looking at their 401k and going, that’s not going to cut it.
So now they’re looking to start to produce tax savings. They’re tired of paying Uncle Sam. So if they get a rental property and they depreciate it, it’s going to chip away at their tax bill. If they put enough of these properties at the age of 45 into a portfolio, 15 years from now they could have $2 million in equity that the tenant paid down for them.
So what you have to do is get a data set for predictive analytics for potential investors because they’re going to buy the property at a high enough price that you can get it under contract with the seller and still exit that property and make a reasonable profit.
The problem most people have is they’re locking up deals today at 2021 prices and buyers are paying 2023 prices or what they think they’re going to be. Sellers are still operating on the misconception that we’re still in a market that we were seven months ago, and buyers are forecasting how bad it can get six months down the road. So sellers still want a little bit too much, and buyers are willing to pay a little bit too little.

Rob:
Well, we’re always willing to pay a little too little.

David:
Well, that sums up the market in general, and it also has to do with understanding that in the business, you have to pivot. You cannot just copy a blueprint that you saw other people do and say it works when everything is going great. You learned this lesson when 2006 became 2008. You learned you had to pivot. Now what you’re describing are techniques that people have to use to pivot. It is easier to buy something than it was, it is harder to sell it the last, God, like eight years.
If you’re a real estate agent, getting a listing was incredibly difficult. Finding a buyer client was incredibly easy. And then getting that buyer into contract was hell and selling your listing was the best thing ever. It’s changed. Sometimes now we’re like yeah, give me some buyers that are willing to buy something. I don’t want another listing because like you said, sellers have the idea in their head that their house is worth what it was at the peak. And with rates doubling or more than doubling in some places, buyers are not going to pay that.
And there is a problem with communication between those two sides. And that’s how real estate works. And then we have this lag while sellers have to have their expectations adjusted and buyers aren’t going to budge. It gets to the point where the market will reset, we’ll have equilibrium and then boom, something will change, we’ll have another. This could go away very quickly, just rates drop. Imagine how fast all the stuff you’re talking about how, oh, I need five people on the dispo side.

Eric:
Five and a half percent solves all of that crap.

Rob:
Yeah. So Eric, tell us, because you’ve explained funnel marketing really great, I just wish we could do a whole episode on this. I’m very giddy about it because if people just understood the simple, I guess metaphor of hey, it’s a funnel, your customers go from top to bottom, the more you lead them to the bottom of the funnel, the more conversions you have on that final product. That could make so many millionaires out of the listeners if they can just master this.
So now that you’ve talked us through your funnel, obviously you’re getting a lot of leads, can you tell us a little bit about your qualified leads, the distressed ones versus not? And can you explain this seesaw concept that I know that you’ve mastered as well?

Eric:
Yeah. I hate the Q word, qualified. I think most people that do direct to seller have gotten so good at disqualifying sellers, they’re actually able to disqualify qualified sellers now. We’ve been so protective over what we think our version of motivation sounds like, that when a seller calls in, if they don’t say, I’ll take 60% of Zillow, I’m behind all my payments, the house is a wreck, I just want to be done with it in 30 … Literally, I talk to people and they’re like, “Yeah, if they’re not looking to sell in 60 days, we don’t even attend the appointment.”
You know one of the problems with that? When you ask someone, are you looking to sell in the next 60 days? I think a fair amount of those people are actually answering a different question. What they’re answering is, am I ready to move out of this house? And they might be ready to sell today, but they’re not ready to move. Or they don’t know that they can move because you haven’t come out to the house and made them a reasonable offer and help put those pieces to the puzzle together.
So too often we go through this. Here’s what someone has to qualify in order for us to go to an appointment. They’re a decision maker and they’re asking less than 200% of retail. So I could care less about what they ask for the property. I’m more interested in, are you a decision maker and are there any circumstances surrounding your situation that might contribute to you being willing to sell to someone like me at a price that might be a reasonable discount.
And then again, even with that being said, people are like, well, you’re closing percentage might suck. No, we’re historically, year over year, north of 25%. In a whole year, I can’t achieve 30%. But we literally attend any lead that has a pulse and make an offer. Have you ever bought a property, Rob, that you didn’t make an offer on?

Rob:
No.

Eric:
This goes back to the funnel, if you want to buy more homes, what should you do?

Rob:
Make lots of offers.

Eric:
So is turning a “unqualified seller” away contribute to us making more offers or take away from making more offers? It takes away.

Rob:
Yeah, it takes away.

Eric:
So every time you “disqualified” a seller … And I tell you, anybody that’s listening to this, go back and look at your pipeline from six months ago. Do a data scrub and look how many leads that you disqualified six months ago sold to someone at a price you would’ve gladly paid. I bet it’ll make your stomach turn upside down.
So we have this little box of what we believe “motivation” looks like. I would tell you, particularly in higher price point properties, we’re solving first world problems. And I’ll use this analogy. I’ve had a pretty successful business career. Real estate has provided me with some amazing opportunities in regards to income. I barely graduated high school, didn’t go to college. It’s amazing, right?
If I go to Chick-fil-A and I’m waiting in line for seven minutes, I’m in distress. If you came to the back of the line, you’re like, Eric, if you pay double, you can skip the seven-minute wait and we’ll get you your food right away, I’m paying double every time.
But when we have someone that calls in with a property to sell, we look for are they behind on payments? Is it vacant? Do they have issues? When they might have a set of first world problems that we’re not even aware of. Convenience becomes a source of distress for people that aren’t in financial crisis, but we don’t look for that stuff. We disqualify someone if they don’t have visible signs of these five or six points of motivation that we think would historically drive someone to sell us a property.
So to answer your question, the seller’s seesaw for me is, when you look at property conditions, so if on one side of the seesaw is condition and the other side’s motivation, as condition deteriorates, motivation and distress goes up.

Rob:
Nice. Okay, cool.

Eric:
The problem with qualified is we’re making a decision about qualified or unqualified normally after a five-minute phone call, and you’re asking a very high impact question, when do you want to move? What’s the least amount you would take? And we’ve had a very low impact relationship with the seller so far.
So it’d be like the equivalent of going out to a bar or a nightclub walking up to a young lady, buying them one drink and asking them if they want to get married for the rest of their life.

Rob:
It rarely happens.

Eric:
That approach might work for some people, but that’s what it’s like getting a seller on the phone and saying, are you looking to move in the next 30 to 90 days, and what’s the least amount that you would take? You can’t look for high impact transparency from people until you’ve had a high impact conversation with them. And that doesn’t happen in five minutes over the phone when they called you off a postcard. It’s just not. You’re a stranger, they’re not going to be open and honest with you at that point.

Rob:
Yeah, especially if you’re just calling them out of the blue or you’re texting them out of the blue. Why would they let down all their barriers and all their guards to someone that’s just trying to basically, in their mind, swindle them into selling their property. You got to build a little bit of trust.

Eric:
Yeah. So that’s how I look at qualified versus unqualified. It’s just a bad set of terminology in our book because too often we’re … So the other thing I realized is when I started in this business, I did acquisitions and at some point I was managing acquiring properties, managing renovations, selling them. I started to become more selective about the seller appointments I would attend.
So as the owner of the company, we start to become more and more selective about the seller appointments we’ll attend. And then once we hire people, we don’t go back and undo that process to say, hey, I got two acquisitions agents now, the best thing they can do every day is go to a seller’s house, make an offer, and ask them to make a decision.
So we have this buy box for what qualified is, and we’re very strict about what we’ll go to and make an offer and I mean, quite frankly, it costs us tons of opportunities each and every month because we’re over qualifying.

Rob:
So can I ask you this, where do novations fall into your seesaw strategy? Do you think you could just give us a brief explanation of what a novation is?

Eric:
Yeah. So the novation is a wholesale style transaction, but we’re exiting at retail price. So by wholesale, what I’m saying is, we don’t have to put our cash in it, we’re not rehabbing it, we’re not closing on it. So that’s what makes it wholesale style. But we’re able to pay a good bit more for the property because we’re selling to retail buyers.
So if you think about wholesale, I always say we’re looking for a needle in a haystack. It’s that 10% unbalanced seller seesaw. We’re looking for someone with high distress. That normally comes with a property that needs at least a little bit of work, and then once we buy it at a discount, we have to sell it to a cash buyer because an assignment’s not a financable transaction to a retail buyer. You can’t get an FHA loan on an assignment from a wholesaler. It won’t work. It’s not a financable, insurable transaction.
So we have to sell to an investor cash buyer. So we’re buying one needle in a haystack and then we’re going out and trying to sell that needle to another needle in a different haystack. That’s a cash buyer that’s willing to do a bunch of work to a house and then hope that they make a couple bucks versus novations allow you to, now I can actually make something out of the haystack.
How many people do you think call in an average funnel and they have a decent property that they would sell a little bit below retail? A lot.

Rob:
Yeah, I was going to say more than getting the people that are willing to sell for a lot less.

Eric:
And we turn those people away.

Rob:
Yeah.

Eric:
So basically novation means replacement. So general wholesale is I buy a property, I sign my interest in the property to a end user. Novation means replacement, so when we replace our agreement, we alleviate the seasoning, we alleviate the arms length transaction, and now it becomes a financable transaction to the end buyer because I’ve conditionally released my original A to B contract, which now makes it a financable transaction and I can sell it to an FHA, VA, Fannie Freddie borrower, and I can still make my spread in between.

Rob:
Is it a little bit more of a micro, I don’t know, wholesale transaction? Whereas if you’re a typical wholesaler, you’re going to go and find, let’s say something a 100K under, you’re going to sell it to a flipper. They’ll put 50K into it so that they can make a $50,000 profit. Whereas with the novation, it sounds like you’re finding someone, just a regular person, house maybe needs a little bit work. You get a much smaller fee to sell it to another basically buyer, like a normal buyer, not a flipper, and they make a smaller fee.

Eric:
So it’s actually, normally, the fees are more.

Rob:
Oh really?

Eric:
The average novations, we’ve taught it to … I think it’s just shy of 300 people that I’ve taught novations to, our average profit’s $26,000. If you look at normal wholesale profits across the country, most people are between 15 and 20K, because when you sell a property to an investor, they’re looking at how much is my rehab? How much can I sell it for? I got carrying cost. A retail buyer’s not looking at any of that. They’re going, can I afford it? Am I approved for it? How does it compare to the other two homes on the market? If you fit in that sweet spot, they’re going to buy your house.

Rob:
And they may be willing to do some of that work and rehab over time. They’re not super worried about-

Eric:
Yeah. So imagine this, and this is what really pumps up the numbers, is you can still get a deal at wholesale price. And if you understand novations and the contracts and the language and the scripting and the legality of it, you can buy it at wholesale price, get permission from the seller as long as you’ve disclosed your intentions and sell it retail without ever closing on it. You can’t do that in a standard assignment. You can only assign it to another cash buyer that’s going to pay their version of discounted price.
Versus you can get a property under contract at a wholesale price that is in a financable condition and take it to the open market or the MLS and sell to a retail buyer. So now you’re buying it wholesale and exiting it retail. Those spreads are huge.

Rob:
Yeah.

David:
Yep.

Eric:
Then the other. So there’s two opportunities, you can lock up the same deals that you’re buying now at wholesale price, but rather than being handcuffed to a cash investor buyer, once you understand novations, you can take them to the open market and sell it to a retail buyer.
The second way that you can positively impact your profit and your volume is the deals where the seller won’t take your MAO. But let’s imagine, on a house that’s worth 220, this is the value no one talks about in wholesaling. They talk about after repaired value, they talk about rehab, they talk about MAO. When do we ever say what’s it worth in its current condition to a retail buyer? Never, because as a wholesaler, we can’t get to that buyer unless I close on it. Now I need transactional funding. Now I got seasoning.
Some people do wholetail, but wholetail requires you to pay for the property. If you have a property that’s worth 229 in its current condition and the seller will take 200, are any of you locking up that deal currently? Probably not. Because by the time I close on it, I clean it out, I do all that stuff, my $20,000 or $30,000 spread’s now 8 grand and I’ve tied up 200 grand. I’m not doing that.
But with a novation, if it’s worth 230 in its current condition, you can lock it up with the seller for $200,000, which is well more than they’ve got offered by any other investor, take it to the MLS at 229, pay out 4 to 6% commission total, net 220, make a $20,000 profit and give the seller the 200 that they wanted when everybody else offered them probably 140 or 150.

Rob:
Okay. I don’t know, it’s very interesting, it seems like there’s probably a lot less tension in these kind of conversations, whereas maybe sellers are used to, like you said, getting super low balled and then they’re just like, ugh, I’m tired of these low balls. If you come in with a reasonable offer, then they’re like, well, that’s actually not bad, I’ll do it.

Eric:
Yeah, and it goes back to the balance, right? It’s like they’re kind of motivated, they’d prefer to sell this way or a little bit different than what they’re accustomed to with a real estate agent, but they’re going to say things like, Rob, this sounds good, but I’m not going to give it away. David, this sounds good, but I’m in no hurry. That should be a trigger for you to go, this sounds like a good novation opportunity for me.
And if the property’s in good enough condition that you could sell to a retail buyer without a laundry list of inspection repairs, either on an FHA, VA appraisal or a home inspection, that is an ideal novation opportunity. It’s a property that’s in good wholetail condition that you can’t buy at wholesale price and you don’t have to close on it, go through seasoning, funding, all that stuff. You can take it to the retail market, sell to a finance buyer and never have to close on the property.
I call it wholesale 2.0. This should be the new way of doing business. Again, we go out normal wholesale, you’re looking for a needle in a haystack and then you’re selling that needle to another needle in a different haystack. You got to find a super distressed seller that has a house that’s all messed up that’ll sell it to you for 50 cents on the dollar. Then you got to go out and find a cash buyer that’s willing to fix it up and make a couple hundred bucks a month cash flow or to make 25 grand flipping it.
Now you can shop and when you take your deals to the MLS, which is what I mean by the open market, it’s the best buyer’s list in the world. Remember I told you about, if you go back and look, new investors pay the most for real estate. Think about me, the first deal I bought, what did I tell you today? I screwed up. I paid too much because I didn’t understand that there was materials that I had to add into the rehab budget that I got from my contractor.
I was a first time investor. I paid too much because I wanted a deal so bad and I was trying to figure out a way to make it work, which is a bad situation to be in as a buyer, right? The best situation to be in is, it’s not for me. That’s when you get the best deal, when you’re okay saying no. So where do you think most first time real estate investors shop?

Rob:
MLS.

Eric:
MLS. It’s the best buyers list in the world. So this gives you the ability to take your deals to the MLS.

Rob:
I’m going to re-listen to this because there’s just so many nuggets throughout this episode from a masterclass on how to pivot when you’re detecting market changes to really just owning a new space like this or wholesale 2.0. I know the concept’s been around, but I like that you’re calling it 2.0, because with the market changing right now, it makes total sense that this could be a new path for people looking to get into the wholesaling business specifically, because if you’re trying to sell a property to a flipper right now, they’re probably being pretty cautious, is my guess. They’re probably not going to be taking the same deals they were three months ago, whereas going direct to seller, which is the greatest buying pool right now, it’s like yeah, it seems like a good opportunity.

David:
And the seller hasn’t really had that come-to-Jesus moment where they recognize, oh, my house isn’t worth it.

Eric:
I think it’s just now starting to sink in. We bought two homes this week in pre foreclosure. I haven’t bought another property in pre foreclosure in 18 months. They didn’t have to sell it to us. They could take it to the market, it would sell. They weren’t getting foreclosed on. You couldn’t even start foreclosures until, I don’t know, 6 or 12 months ago. You couldn’t even start the process because of COVID. Some of that’s catching up to people right now. The options have been reduced a little bit versus what they were six months ago. So we’re at the onset of sellers starting to come back to planet Earth.

David:
And as long as rates stay somewhat stable, we’ll find this equilibrium. The problem is they freaking tinker with it so much that every time you start to think the kid’s ready for bed, somebody gives them sugar and then they’re bouncing off the walls again.

Eric:
I think even if they just stop raising rates and everybody would just sink into the reality that 7% is a good number, you’d see buyer confidence go back up.

David:
Yeah, we need stability. People don’t like when they don’t know, is the car going to be worth 50 grand or 20 grand? Nobody wants to buy when they don’t know what’s happening. It’s a great point, Eric.
All right. Well, this has been a fantastic show. I’ve thoroughly enjoyed hearing your insights on what’s going on and more than just your insights, but practical applications of how to take this information about the changing market and apply it to the offers you’re writing, the way you’re having conversations with sellers, the people that you’re hiring, how you’re structuring your business, and how to pivot when these things hit.

Rob:
Eric, if people want to learn more about you and your business and what you have to offer and all that good stuff, where can people learn more about you?

Eric:
So the best place to find me, if you want to follow me on Instagram is Eric Brewer Invest on Instagram. If you want to learn more about novations, you can go to brewermethod.com.

Rob:
Awesome, man. Thanks.

Eric:
Thank you.

David:
We’re going to let you get out of here because we would talk to you all day long and we could probably turn this into two or three shows. I thought it was a fantastic time. But thank you very much for sharing what’s going on in your world and your business.

Eric:
I appreciate you having me.

David:
This is David Greene for Rob Pivot, Pivot-

Rob:
Pivot!

David:
… Pivot Abasolo signing off.