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Startups borrowed so they didn’t have to give up equity. After the collapse of market leader SVB, they should expect higher rates and fewer deals in the near future.

David:
This is the BiggerPockets Podcast show 741.
The reason you’re feeling bad is might be ego. You’re looking at other investors that are making money. You’re looking at your balance sheet every month and you’re saying, “Well, I’m losing money. I’m doing it wrong.” Maybe not. Maybe this is how real estate has always worked over time. It was the people willing to lose the short term to make money in the long term that worked. Now, I hope it doesn’t stay that way, but I am preparing for a reality where the golden age where you’re just bobbing for apples, you just put your mouth in there and you came out and you hope your apple’s bigger than the other apples, but you always got an apple, that could be over.
What’s going on everyone? This is David Greene here today with a Seeing Greene episode if you didn’t notice it in the title. If you haven’t heard one of these before, you’re in for a treat. On these shows, we take questions directly from our audience base. That’s right, you. I deal with the struggles you got going on, questions you have about real estate, clarity that you might need. Or when you have several options, which one would be the best? I love doing these shows and I love you guys even more for making it possible because you ask great questions, which lead to great shows.
Today’s show is fantastic. We get into what the person might be doing wrong if their property is not cash flowing right now. This is a great topic that we get into about ways that you can approach real estate investing as well as a small tweak that would make that property cash flow and how they can execute it. Should I take on an out-of-state rehab on my first deal? Things to be aware of if you’re going to invest out of state. I do a lot of that myself as well as renovation stuff, which I also do a lot of. And what you do when you can’t find cash flow in your market. Is it too late to invest in real estate? Should we stop listening to BiggerPockets and instead start buying NFTs again, cryptos, investing in tulips, buying Beanie Babies, maybe Pogs, if you guys remember that. Is that the future? Should we buy a bunch of that and wait to see if it comes back or is real estate still a good option? All that and more in today’s Seeing Greene.
Also, I just want to remind you guys, I forgot to turn the light on again. I’m really good at doing that, so as soon as this little segment ends, you’re going to see the light turn blue. Don’t get confused. It’s still Seeing Greene. It’s just going to be greenish blue. What are the colors when you mix green and blue? Is that like turquoise maybe? Seeing turquoise for the first 15 minutes and then it goes back to being green. This is just me being forgetful, guys. It ain’t easy being Greene.
All right, today’s Quick Dip brought to you by Batman is, we have a new show coming on the BiggerPockets YouTube channel where I’m going to be a frequent contributor. I’m going to be showing people how to make more money in their current job. This is something that I’m passionate about, I’m very, very into. Don’t quit something that you’re not good at and just try to find a new thing that you think you’re going to be better at without putting effort into the first thing. You got to pursue excellence in whatever you do. So if you want to be featured on that show or this one, go to biggerpockets.com/david. Write out your question and check the jobs box if you’d like to be on the YouTube channel. All right guys, that’s enough of me. Let’s get into our first question.

Nick:
Hey, David. My name is Nick Gutzman. I’m 19 years old and a sophomore at Colorado Mesa University in Grand Junction. I’m looking to purchase a single family property near my school to ideally lease the students. I’ve been consistent using Zillow and BP’s tools, but I can’t seem to find a deal with what current rates as well as supplies in my town. I’m struggling to take the next actionable step. My primary question is what are some tools or strategies you could recommend for finding a deal and what are some creative ways I could finance a deal? The lender I would likely go through told me I could expect a 7.5% rate from him. With that number, I’m struggling to find anything that pencils out and works for my situation. Thank you so much for all you and BP does. Have a great day.

David:
All right, Nick, thank you very much for the video. This is a common problem a lot of people are having, so don’t be discouraged. This is just the state of the market that we’re in right now.
Now the good news is the reason it’s so hard to find deals is because real estate is still competitive and valuable and people want to own these assets. Couple things that we can get into, 7.5% is probably a… That’s a standard rate, it’s where most people are. If you’re working with the lender and that’s what he’s telling, it’s probably what you’re going to get. If you’re trying to find a creative way to finance your deal, that just means you have to find the money from somewhere else.
There’s not a lot of people that have hundreds of thousands of dollars laying around that are going to be comfortable lending it to you for less than 7.5%, which means you’re probably only going to get that from the owner, which means you probably need some kind of owner financing, which means you’re either going to have to overpay for the property to make it worth it for them to give you the better rate you want, or you’re going to have to find a distressed motivated seller, which is going to be a lot of work, and frankly, going to be very difficult for you to do while you’re going to school. None of those sound super appealing for the situation that you’re in.
The advice I’m going to give you is that instead of looking to find a deal, I want you to look to make a deal. If you’re having a hard time getting the numbers to work on a property that you’re going to rent the rooms out to other students, you might be analyzing the wrong deal. So here’s what I’d like you to do. We’re going to work backwards from this. Let’s say that at the interest rate you’re being given at the price range you’re looking at, let’s say that you’re coming up with a $4,000 a month mortgage, which means you need to make more than $4,000 a month from the rentals. If you can get say $800 a room and you can get a five bedroom house, that now becomes $4,500. That could be enough to be more than the $4,000 mortgage. We’re assuming taxes and insurance are included in that $4,000 number. Which means your goal is to find a property that has five or more rooms.
Can you find a property that has five bedrooms but has a living room and a family room and you can convert the living room into two more rooms? Can you find a property that has four bathrooms and that has enough square footage that you can add stuff to? I’d set my search parameters to only show me stuff that has high square footage. In addition to that, I’d be looking at properties that have more square footage than is being advertised. So one of the things I do when I’m looking at houses is instead of clicking on the arrow to the right and looking at all the pictures that the agent has uploaded, I go backwards. I click the arrow to the left and I look at the back of the house first.
Now, the reason I do that is if there’s unpermitted square footage that’s ugly that the realtor doesn’t want to show in pictures, I want to see that. I want to see framing in the basement. I want to see the partially finished ADU. I want to see the extra garage on the property that has electrical and plumbing in it. A lot of people put bathrooms into their garages because when they’re out there working on their car, working on their projects, they want to be able to stop and go to the bathroom without walking in the main house. Well, once it has plumbing like that, you can finish out that bathroom and make it nicer and add a kitchenette into those properties for much less money than when you have to run plumbing and drainage all the way into that asset. So you need to look for properties like this that other people are missing.
Now, all of that being said, that might not still be enough because it looks like you’re looking in a town that doesn’t have a lot of inventory. That’s a problem. If you’re in a college town and there isn’t a lot of listings that are hitting the market right now, this is going to be tough. Part of that is because sellers are not putting their homes on the market because they’re waiting for prices to come back up. Sellers have seen, “Well, prices are down, people were selling for more before. I don’t want to sell my house for less money.” It takes a long time before they get to the point where they just willingly accept this is what a property is worth, and that frustrates buyers. So you could look in a different town and look to accomplish the same thing. Different college town that has more inventory, that’s one method you could take. Or you could use some of the creative methods like driving for dollars, skip tracing. You could look at neighborhoods and find the properties that are listed as more square footage. A lot of that’s public data.
So if you could figure out a system of finding the houses that are at least 3,000 square feet, you know they’re likely to have more bedrooms and bathrooms, you could go knock on their doors, you could call those people, you could send them letters. You could try to find an owner that is willing to sell, but again, this is not a great return on your time. The odds of finding the house that you want and then they also have a seller that’s willing to sell and they’re also going to do it at the price you want is very difficult. I know a lot of people pay money to take those courses, and this is very popular right now because deals are hard to find, so we’re out there trying to use creative methods.
What no one tells you is it’s basically like working a full-time job. Oftentimes after all the time you got to put in to make this happen, you’d have made more money if you’d just got a job and worked. So it’s not always the best method. What I do want to say is don’t be discouraged. You’re trying to do this at a very difficult time in the market. We are in a stalemate. Sellers don’t want to drop their prices because they’re not desperate yet. Buyers don’t want to or cannot pay the higher prices that sellers want, and there is not enough inventory to balance this out, so just stay in the fight. You never know when the next listing’s going to pop up.
What you want to make sure is that you see it first. So set your filter to show you only houses with at least 2,500, ideally 3,000 square feet, have more bathrooms, and then look at all the houses that come out and see if there’s more square footage in that house than what the listing actually says or that can be converted so that you can make maybe a five bedroom house into six bedrooms, plus it has a garage that can be converted into two to three bedrooms with a kitchenette and a bathroom. If you could do something like that, you can find a way to make the property work for what you’re looking to do.
All right. Our next question comes from Josh Lewis in San Diego. Josh says, “I love all your contributions to bp. You are a solid stalwart for the mission.” Well, thank you for that, Josh. “Some context, I own a property in San Diego. I have access to a large chunk of equity, approximately 350,000 to 450,000 depending on the appraisal, and I want to utilize a HELOC in conjunction with the BRRRR method to acquire my first rental property and kickstart my journey. Question, looking back on your career, if you were given the same circumstance, would you find it more advantageous to go after one larger expensive property like a $300,000 fixer upper to BRRRR in the lucrative California market? Or would you go after multiple properties, say, in the SEC football market, like $250,000 properties? For my circumstance, I’m giving more value to cash flow, but I do understand there are more factors at play here with potential long distance management, which I’ve already purchased both your BRRRR book and your Long-Distance Real Estate Investing. Thank you for your time and your propensity to educate.”
Well, Josh, thank you for your mastery of the English language. You said both propensity and stalwart as well as circumstance all in your questions here. Very impressive, my friend. All right, let’s get back to the first thing you said. Looking back in your career, “If you were given the same circumstance, would you find it more advantageous,” another big word, “to go after one larger expensive property or several smaller properties?” I don’t look at the number of properties as the way to approach this question. Now, I will say in general, less is better, because the more properties you have, the harder it’s to manage them. The more expensive they become and the more things you miss.
So I am in general inclined to buy a million dollar property over two $500,000 properties, but it’s not always that simple. I would more look at the total amount of capital that I’ve deployed, okay? So if I’m going to buy a million dollars worth of real estate, whether it’s over two $500,000 houses or $1 million house or three $300,000 houses, the number of houses isn’t where I start. What I would look at is the value of the properties I’m buying. What is the game plan here? What’s the play? I think people do better over the long term, investing in areas that both appreciate in price and cash flow, okay? It’s often framed like cash flow or appreciation, and it is isn’t true. When you’ve done this for as long as I have, you start to recognize patterns. And what you see is the areas that appreciate and value also appreciate in rents. The two almost always go hand in hand. And so cash flow grows over time just like the value of the asset grows over time.
When you buy in these cheaper markets, the $150,000 houses, it’s not that they don’t appreciate, it’s that the rent also doesn’t go up. And everybody here who bought into turnkey properties owns in the Midwest, I’m getting a hallelujah amen out of them, and they’re all saying now, “Wish somebody would’ve told me this,” because the assumption with real estate is that rents are going to go up every year, but your mortgage is going to stay the same. That’s what makes buy and hold so powerful.
But that doesn’t happen in every market. Some of the areas like Detroit, Indiana, the Midwest in general, the rents may go up, but it’s very small. It could be like 10, 15, 20 bucks a year sometimes. This is the issue that I have with my cheaper properties. Versus the stuff I bought in higher growing areas that was more expensive, you get big rent jumps sometimes. My California properties were jumping $200, $300 a year in rent. So it could go from 1,500 to 1,800 to 2,100 to 2,500 over a four-year period. And when you bought it and it made sense when you first got it at 1,500, it’s really nice at 2,500. That’s the strategy that I want to take.
Now, this doesn’t work if you have to go into it and you need the cash flow right away, which is why I tell people all the time, real estate is a bad thing to invest in if you need money now. This is a thing where you’re constantly delaying gratification. This is putting 20 bucks in the pocket of your coat and then finding it later like, “Oh, cool, I forgot that I put this in here.” It’s like a supercharged saving account that’s going to grow over time. Real estate works much better when you give it a longer timeline to grow, like planting a tree. You can’t expect fruit the first year you planted the tree. If that’s the situation that you’re in, you need to do something else. You need to plant a bush or you need to grow a garden of flowers that can be harvested and sold and it’s going to be more work. It’s not like planting a tree that just puts off passive income all the time. Passive income takes time to develop.
So the first thing I would tell you when you’re looking at what you should do here is invest in an area that is likely to grow, okay? When I talk about ways to make money in real estate, there’s basically 10 ways to make money in real estate that I’ve concluded and five of them have to do with equity, okay? The first one that I just described is what I call market appreciation equity. This is choosing a market that is more likely to appreciate than other markets. It is not speculation, it is not guessing. It’s using education and facts to make an educated decision.
The next is what I call natural equity. This is just inflation combined with paying down your loan. That’s going to happen no matter what it is you buy, but timing the market can help. When you buy into markets where you’re more likely to see inflationary pressures, you’re more likely to make money in real estate. So when I see inflation ramping up, I put more time and more money into real estate versus my businesses. If I see inflation slowing down, I’d be less inclined to go crazy buying real estate and I’d be more inclined to put money into businesses or other endeavors. When I say put money, I mean put time and energy into them.
Another way that you can build equity in real estate is buy what I call buying equity, and this is just getting a good deal. This is buying less than market value. So if you’re going after a million dollar asset and you can get it for $825,000, you just bought $175,000 worth of equity. So the actual deal itself plays a role in this. And then the fourth way that I talk about creating equity is forcing equity. This would be something like a value add. You’re going in there and you’re going to cosmetically improve it or you’re going to add square footage to it. You’re going to do something to make the property worth more.
Now, I don’t look for deals that have one of these elements, although I may buy a deal that has one of these elements if it’s got a lot of it, if I can add a ton of value, if it’s a super hot market. Maybe I buy into a really hot market, I buy a turnkey property because I believe that the market appreciation equity is going to make up for the lack of value add because there’s nothing to add, right? Or maybe opposite. I’ll go into a market that I don’t think is going to grow very much and I don’t even get a great deal on it, but I see there’s so much value I can add to the property that makes worth it. But in general, I look for a little bit of all four. I can’t remember what the fifth one is off the top of my head. I might have to think about that.
But that’s how I want you to be thinking. “How can I add value to these properties that’s going to build me equity if I don’t need the cash flow right away?” Now, this is not saying cash flow doesn’t matter. What this is saying is focus on your equity and then convert that into cash flow. Much easier to build half a million dollars of equity and then go invest that for cash flow than it is to try to save $500,000 and invest that for cash flow. That might take you 40 years to save $500,000. That’s a lot of money. You can build that over three to five years if you’re using the methods that I just described when it comes to creating equity and then improving that equity yourself. So the first thing I would do is I would’ve gone into the markets like California. And I bought it at a great time. That was just dumb luck. I got a lot of natural equity because I started buying in 2009 through 2013, and then we made quantitative easing, and boom, the market shot off.
And then I bought it in a great market. California went up more than other markets. I also bought well. I bought them under market value, and so I came in with some equity. What I didn’t do in California was I didn’t force equity. I didn’t buy properties and then fix them up because I didn’t understand real estate that well. I didn’t understand construction, I didn’t know how to look at a property and see a vision for it like what I can do right now. So that’s one thing I would change, is if I was going into it where you are with my eyes now, I’d be looking at those four things and seeing how do each four of these apply. This is what we call the Greene goggles. When you’re looking at real estate from my eyes, you’re looking for those four things.
I don’t like the multiple houses in one market because it gives an illusion of safety, like, “Well, I’ve spread it out over three houses.” It’s just oftentimes you’re buying three problems instead of one good deal, right? You don’t hear about any investors, at least in my whole career, that made a lot of money buying cheap real estate and getting a lot of it. It doesn’t work. It’s like going to the flea market, yeah, you can buy a lot of the, not Nike, but Bike. You can buy a lot of Bikey shoes because they’re cheap, but they fall apart really quick and they give you blisters and you wish you never bought them and then you never want to wear them and then you’re trying to get rid of them as soon as you can and the next sucker comes in and they buy these.
What you hear about when it comes to buying real estate are the three rules, is location, location, location. There’s a reason that all the salty whiteheads are all saying the same thing. They bought the right location. You see Warren Buffet give the same advice when it comes to stocks. He’s not looking to get the deal of the century. He’s looking to buy the best companies, which would be the equivalent of location in real estate, and he’s looking to buy more when the market is down, which would be the equivalent of natural appreciation or inflation and loan pay down in our world. He’s using the same principles I’m talking about now, but he’s applying it in the stock market.
Well, in the real estate market, this is how that works. You’re talking about cash flow, of course you want it, of course you should want it. We all should want that. What I want to advise you is that you don’t need it until retirement. You don’t need cash flow until you just cannot work anymore or you don’t want to work anymore. So if you can delay that, if you can let the property build equity for you, and let’s say you buy a million dollar property for 825,000, it goes up to 1.2 or maybe two properties that’s worth a million that you pay a total of 825,000 and they go up to 1.2 and then the market kind of stalls and you sell those in 1031 into a new fixer upper project, you go by $2 million worth of property and get them both for 1.67 and then they go up to 2.4, you’re actually creating equity at every single rotation of this snowball that’s going down a hill.
And then when you’ve got that equity, then go invest it into the cash flow and then reive your scenario and decide, “Do I want to keep investing? Do I want to chill? Do I want to quit my job? What’s my next step?” We got a lot more options if you take the road that I’m giving you now, which most people don’t see. I look at it a little bit differently, which is why you guys are here for Seeing Greene episode.
And I just reminded myself that I’m doing a Seeing Greene episode, so now the light is green behind me. I swear people like me do the dumbest things over the dumbest things, like I can give a brilliant response to some question and people are like, “Mind blown,” but I can’t remember to turn my light green before I record. This is very common for me. I have to put my keys and my wallet in my phone in the same place because if I don’t, I’ll leave the house without one of them. I’m terrible for that. So if you ever make mistakes, if you ever do absent-minded things, if you ever beat yourself up for doing something that you think you shouldn’t, leave me a comment. Tell me what are the things that you do that no one knows or make you feel so dumb that you can share with the rest of us? And let’s see if other people make the same mistakes.
I know that I will get a comment from someone that says, “How am I supposed to know this is a Seeing Greene episode if the light is blue behind David’s head?” We get those every so often when I forget to do this, even though the title will say Seeing Greene, and I’ll start the show-off by saying it Seeing Greene. There’s always someone who’s like, “I’m confused. Is it Seeing Greene or Seeing Blue?” What I do about this light?
All right, our next question is a video from Justin Pack in New York.

Justin:
Hey David, thanks so much for making this podcast. Really enjoy the fact that you all take the time out to answer our questions and help out us newbies. So you all always talk about how house hacking is a great strategy to get started. Well, I’ve achieved step one and got a house hack. I was able to live very cheaply, renting my house out by the rooms. It’s a single family in Dallas that I bought in 2019. I’ve now rented out all the rooms and moved out of the house. The problem is the property’s not profitable, losing just over $200 a month in expenses after everything’s accounted for, but I have still haven’t transitioned into not paying for utilities, internet and those other things there. So I now have almost $100,000 in equity in the property after the pandemic popped, and I’m looking to figure out ways to either make the property more profitable or figure out if I should sell it. Let me know your thoughts. Thank you.

David:
Justin. Good stuff, man. This is a great question and you’re giving me a platform to just rant about real estate in a way that I rarely get to. So I appreciate you thanking me for making the show, but I want to thank you and every other listener we have for asking great questions because we wouldn’t have this show without it. And trust me, lots of people are in your same position and are struggling with your same situation, so they’re going to love hearing this.
All right, let’s break this down a little bit. When I first started investing, I had this thought. It was like 2007 and I was trying to figure out what could I buy, and I was talking to agents and I was like, “Yeah, I want a property that’s going to make more money than it cost to own it.” And they were laughing at me like, “Real estate doesn’t work that way. You don’t buy a property that makes more money every month than what it costs, at least not when you first buy it.” This was in the height of the market exploding, and so of course nothing was going to cash flow at that time. And I didn’t pull the trigger. I’m glad, because waiting, I got a better opportunity.
But I did realize something in that moment. In a sense, they were right. Real estate only cash flows if you get an incredible deal or you buy in at an incredible time or there’s not enough competition for the assets that you have an incredible opportunity, or you wait. Okay? Now I know this is going to sound like blaspheming real estate for the cash flow investors out there, so just hear me out. When you look at other countries, Australia, Europe, South America, their real estate does not cash flow when you buy it.
This is crazy. This is kind of an American phenomena. Nobody buying in Toronto is getting cash flow. Very few people that are investing in most Canadian areas are getting cash flow. In fact, the only areas that typically do cash flow historically at all times are the areas where management is a burden. You actually have to make it like a job to manage the property and manage the tenants. It is not passive income. We’ve become accustomed to this because we came out of such a huge crash in our economy and real estate that no one wanted to own these assets and no one wanted to buy. So we ended up with way more tenants. And then we also paired that with an economic boom after the crash where everyone is making more money, wages were going up. The value of these assets was going up. Inflation ran rampant. We had this perfect mix of you could buy real estate at incredibly low prices and then the economy soared after that. You got the best of both worlds. The result was cashflow became the norm.
And so as investors, we would just peruse through Zillow looking at every house and saying, “What has the best cash flow?” And it was awesome. I jumped in with both feet, right? I was working a hundred hours a week as a cop, saving as much money as I could because I felt like Super Mario when he touches the flower and he’s invincible and everything that I touched dies, that’s what I was doing. I’m like, “Dude, I’m going at a dead sprint and I’m buying as much of this real estate as I can.” Rates were low, property values were low, everything cash flowed. I could buy in the best markets and I could cash flow, and I was getting appreciation. I was like, “Everything was great,” and it all came to a screeching halt once we started to raise rates, and now we’re all frustrated. “I can’t make it cash flow. I’m doing something wrong. I’m messing up. I’m bad at this. Maybe I should go do something else.” No, this is actually normal.
Nothing in Australia’s going to cash flow. Nothing in Canada’s going to cash flow. Nothing in Europe cash flows. In fact, if you go to other parts of the world, you don’t get FHA loans. You don’t put 3.5% down on an asset. In fact, nobody gives loans for 30 years at a fixed rate of 3% or 4%. No one gives loans at a 30-year fixed rate anywhere. You wouldn’t do that. You wouldn’t lend your own money for 4% for 30 years fixed. That only happens because our government sponsors these loans. We’ve got a whole system created to keep interest rates low, and I won’t go into that right now, but this is why I started The One Brokerage is because I was fascinated with how lending worked, and I wanted to learn more about it and be able to help people buy real estate from lenders that they could trust. But I realized, “Oh my God, this is crazy.”
If you go to Egypt, they’re going to ask you to put 50% down and there’s going to be a balloon payment in two to three years, okay? It’s almost like a construction loan. A lot of people in other countries are paying cash for their houses, which is why houses are passed down from generation to generation. You can’t buy it. Okay? So it’s a little bit of a background in how hard real estate investing is in other places.
Here’s what I learned in 2007. Even if I paid ridiculously high prices for that real estate and I lost money every month, when you look at rent going up over time, your mortgage staying the same over time, the principle being paid down on the debt over time, I put it into a graph basically and I saw there was a break even point at about seven years in where I would lose money every year and at seven years years in I would start to make money. And then I said, “Okay, well, how much money will I have lost over seven years? And now that I’m making money, how long will I have to wait before I get paid back for the money I lost?” And at about nine years, I noticed like, “Okay, I’ve now broken even from cash flow.” This is before you get the loan paid down. This is before you get any kind of appreciation. This is just purely from rents going up.
And I realized, “Well, if I’m going to own this asset for 30 years, 40 years, 50 years, and I just got to wait nine years before I break even, that’s not the end of the world, especially if the tenant’s paying the mortgage off for me. So when I looked at it at a 30-year perspective and I ran the numbers, I saw, “There’s nothing that comes even close to this. I just got to be able to make it nine years of losing money, and then I’m golden.” Now, please stop screaming. Don’t yell at your phone. Don’t yell at your computer. I know what you’re thinking, like, “Don’t ever do that.” I’m not telling you guys to go do it. I’m saying it makes sense to do that if you take a long-term approach. When we take a short-term approach, when we say, “I want to quit my job right now, I need to find a duplex so that I can do it. I need money right now. I want to buy a Tesla right now. I need immediate gratification,” real estate becomes very frustrating.
I don’t have hardly any deals that made me a ton of money right out the gate, but I have zero deals that don’t make me money after I’ve owned them for a while. And I learned that delayed gratification is really the secret to wealth building as well as real estate investing. The deals that I bought, I have one in the top of my head right now, okay? It’s this 8,000 square foot cabin that I bought in the Smokey Mountains. It was owned by an executive at either Coca-Cola or Pepsi, I get them mixed up, but he was responsible for developing the extra value meal at fast food restaurants. So he got them to sell more sodas because a soda came with every single meal when they did the extra value meals.
He built this amazingly huge awesome place, okay? I bought it and it is making me money. It’s doing well because it can sleep like 30 to 40 people. It’s very unique. I tend to buy real estate that doesn’t just fall into a cookie cutter pattern, and this is why. But when you look at how much I can charge per night on that property, some of my other cabins maybe go for 200, $300 a night. That’s like the cheap stuff, okay? So if I get a 10% increase on that in a year, which would be really good, I go up 20 to 30 bucks a night. But on these expensive places that maybe I can charge 1,500 a night, a 10% increase is $150 a night.
Now multiply $20 a night times however many, 200 days in a year, or 150 times 200 days in a year, and the next year I’m getting a 10% increase hypothetically on the 1,500, that now became at 150 to that, so I’m getting a 10% increase on the 1,650. Okay, now my rents are going up $165 a night. It exponentially starts to increase because I bought more expensive real estate in markets that didn’t immediately take… It didn’t make me a ton of cash flow right off the bat, but it will grow to make much more cash flow.
This principle is what I wanted to highlight. Now, I want to bring this back to your specific scenario, my man. You are losing money right now, but you’ve gained a hundred thousand dollars of equity so you haven’t lost money, okay? You got to go through a lot of months of losing $200 a month before you actually break even at the $100,000 of equity that you have. So the question isn’t, “Do I need to sell this thing immediately and not lose the 200 a month?” unless your finances are in a position that you can’t take that blow. If you live paycheck to paycheck, $200 a month is devastating.
If you can’t find a one day of overtime or a side job… I mean, I know waiters that make 200 bucks a night work in a shift at a restaurant, okay? And if you said to me, “David, you got to work once a week.” No, once a month at a restaurant in order to not lose money on this real estate deal. You’re going to lose 200 bucks a month on the deal, but you’re going to make 200 bucks a month at the restaurant. Would you be willing to work once a month for the next 30 years to have a property completely paid off and appreciated? In fact, it wouldn’t even have to be for 30 years because at some point the rents are going to catch up. That is a no-brainer yes, do that. Okay?
The reason you’re feeling bad is might be ego. You’re looking at other investors that are making money. You’re looking at your balance sheet every month and you’re saying, “Well, I’m losing money. I’m doing it wrong.” Maybe not. Maybe this is how real estate has always worked over time. It was the people willing to lose in the short term to make money in the long term that worked.
Now, I hope it doesn’t stay that way, but I am preparing for a reality where the golden age where you’re just bobbing for apples, you just put your mouth in there and you came out and you hope your apple’s bigger than the other apples, but you always got an apple, that could be over. I don’t know. I don’t know, but I know that we kept interest rates really low for a really long time. And if you wanted a house at all, you had to overpay. You couldn’t get inspections. You got in a bidding war, you were very uncomfortable, you didn’t know what you were going to end up with, and it was risky. And I know that wasn’t healthy either even if you got cashflow right off the bat.
Now that we’re letting interest rates come up to kind of more traditionally normal levels, we’re all freaking out saying, “This isn’t how real estate works.” It might be that we have to accept that this is the new normal. And location, location, location is becoming important. Why? Because that’s where the rents go up. When you buy in the best location or you buy the best property, the rents go up everywhere and you get out of that hole faster. You get out of the hole of losing money faster.
Now, I’m not telling anyone here, go buy properties that lose money, okay? If you could avoid it, avoid it. I am saying, Justin, that you might not be in the worst situation ever. It might be your ego or you’re comparing yourself to other people’s deals that’s making you feel bad about this. Okay? This is Dallas, Texas. This is one of the hottest markets in the country. If I had to pick a market to put my money in over the next 15, 20 years, Dallas, Texas would be in my top three. That is a awesome market. You are going to continue to crush it in both rent growth and equity growth buying in Dallas. That’s a great place to park your money. It’s going to grow faster than if you found a place that cash flowed positively 200 bucks, but just was stagnant from that point forward. I don’t think this is a bad investment.
Now, it is a three bed, three and a half bath, okay? What if you just had a five bed, three and a half bath? Could you sell this property, move that money to another property in Dallas, Texas that was five bedrooms? That might solve your cash flow problem right away and you’re going to get more appreciation, okay? You did everything right. You just bought a house a little bit too small. If you just had two more bedrooms, maybe even one more bedroom, you wouldn’t have the negative cash flow. So this is an easy problem for you to solve. Sell it, move your equity into another deal that has more bedrooms. Boom, your cash flow positive. Keep it in that market for the long term, right? You want to plant a tree in Dallas, just uproot it, plant another tree also in Dallas.
But even if you can’t, for some reason if you don’t, it doesn’t mean you made a bad deal. You’re going to make a lot of money on this deal. Drop the expectation that real estate is supposed to be the magic pill that solves all of your problems in day one. You’re doing great, man. And you learned a lot from the deal, okay? You should be doubling down on real estate investing. You’re the person that should be investing more, buying more properties, doing better on everyone. Just make the small adjustment. When you’re running by the room, you need more rooms. It’s that simple, right? If you’re to sell cars, sell more expensive cars.
Sometimes there’s a tiny little thing that we can tweak that makes a huge difference in the returns that we get. For you, the minute that I see you bought a three bedroom, three and a half bathroom, I just think I wish the David Greene team had represented him because we wouldn’t have let you buy a three bedroom house. We would’ve looked for a five bedroom house that also had the ability to frame another bedroom out of a den and make it six bedrooms, and then you’d be making a bunch of money.
But I will tell you, the cashflow on this property will pale in comparison to the money that you make paying off your loan and letting the value increase over time. Thank you very much for your question. This was really, really good. Hang in there Dallas. Rents are going to continue going up while the rest of the countries don’t keep pace because that’s a great place to invest where a lot of people are moving to. Send me another question if you want to get deeper into what you could do to sell that property, what you need to talk to the agent about, where you should list it and where you could put the money into a new property.
All right, everybody, thank you for submitting these questions. I love it. In fact, I’ve talked a lot longer than I normally do on some of these because I’m so fired up about these questions. And I know so many of you love real estate just like I do, and you’re freaking frustrated. It’s very hard to find a place to put your money for a long time. You succeeded just by getting over the fear of investing and we were like, “Just do it. Just do it. Just do it,” and everybody did good. It’s not so much just getting over the fear. Now you got to get over the fear and you got to be willing to take a couple lumps and you got to look for a deal very hard. This is a harder time to invest than any that I’ve seen. At the same time, the potential’s probably bigger than it’s ever been. Okay?
I bought a lot of real estate recently, and I know that when rates do come back down, these deals that were like meh, are going to immediately look amazing. And over time with inflation, I want a portfolio worth $50 million going up as opposed to a portfolio worth $15 million increasing with time. All right. At this segment of the show, we are going to share some of the comments on YouTube, and I want to share your comments. So if you’d be so kind, go to the comments section on the BiggerPockets YouTube page and tell me what you think about the show. Is it funny? Do you like it? Are you annoyed that I keep forgetting to turn the light green, or is the humor actually breaking up the show? Let me know.
Our first comment comes from Susan Owen. “David Greene, thank you for this episode is my favorite in two years of listening.” This comes from episode 723 that we did. “I really appreciate the advice you gave the veteran in this episode.” Well, thank you Susan and thank you to all the veterans who served our country and served your fellow Americans with what you did. Respect to you.
Next comes from Lexi York. “I love how real he keeps it!” With an exclamation point. That’s pretty real. “Too many social media influencers out there preaching fake news and misleading people.” Thank you, Lexi. That’s not something that you’re ever going to get from me. When the market was exploding and inflation was taken off, I was telling people, “You got to buy. You got to put your money somewhere.” And now that it’s slowed down, I’m telling people, “Take your time and pick a deal, but wait. Give yourself a long runway of this real estate you’re buying. Don’t expect it to perform immediately right away.” Hey, if we could take nine months to grow a baby in a womb and we can wait that long for the joy of having a kid, you could wait a couple years before your properties are going to be cash flowing really high.
All right. And from OmarKansas1, “Yes! So glad you listened to Nate Bargatze’s podcast. I liked you before, but you just jumped up lots of levels in my book, seeing him in Vegas on Saturday.” Thank you for that, OmarKansas. I love Nate Bargatze. He’s a hilarious comedian. Check out his Netflix shows. This is where we got the idea to read comments because I would listen to his podcast and listeners would say the funniest stuff and he would try to read it on the show. It was very funny. That’s why we do this here. So thanks for that.
Also, if you see Nate at the show, tell him to come on ours. We want to get Nate on the BiggerPockets podcast and learn about his story. If he invests in real estate, what he invests in, or if he just makes jokes for a living and has no idea to do what to do with money, go tell him about BiggerPockets and see if he would come on our show. We’d love to have him.
All right, if you didn’t know before we move on, there is a new YouTube show that I’ll be a part of, okay? This is on the BiggerPockets YouTube channel. We are going to be talking about people that want to make a career in real estate as opposed to just become a full-time investor. Do you have a question about how to grow in your current job? You want to work in real estate or you want to maximize your earnings? We’re creating a brand new YouTube show all about using your W2 to start investing and grow your wealth. Use biggerpockets.com/david and choose the job question on the form, okay? So if you want to be on this show, you go to biggerpockets.com/david. You submit your question, we try to get you on. If you want to go on that show, you go to the same place, biggerpockets.com/david and just click the box that says Job Question, and we can have your question answered on the other podcast.
So this is for people that love real estate, but they’re not ready to just jump in with both feet, quit their job and try to make it as a wholesaler. Okay? Sometimes making more money at your W2 is a good thing. Sometimes starting a business is a good thing. And I suppose if you think about it, becoming a wholesaler is the form of starting a business. It’s not a form of just becoming a full-time real estate investor and living off the rental income. It’s what I did. So if you love real estate and you love working and you love making money and you love excellence, go to BiggerPockets.com/david and leave me a question there.
All right. Our next video clip comes from Brian Lucy in Colorado.

Brian:
My question is, I have a couple deals that are on our contract right now, and I would like funding for one of them specifically, but I have been trying to find private lenders that I can use that will fund the property. I’m trying to find out how I would go about vetting people that I find on Facebook. I’m a part of quite a few groups on Facebook and I want to make sure that these people are legit and won’t scam me out of my money because I’ve already had that situation happen once and it was a lot of money. So I’m wondering how do you go about vetting private lenders in order to find out if they are legitimate lenders. I’ve had one guy that told me to send him money prior to closing in order to do some administrative thing. I appreciate any help that you could help me out with this. Thank you so much, David. Love the show. Thank you.

David:
All right, Brian, thank you for that question. First off, very sorry to hear you got scanned by somebody. There’s a lot of scamming going on. There’s people with fake Instagram accounts that are saying that they’re me that are not. I’m actually nervous about this because I think people will be sending links that look like they’re coming from me to get people to sign up for stuff that I’m doing and it’s not going to be me. So you got to be super, super careful about vetting places before you send money.
One way that I’ve recommended that people look out for that is to ask for a voice memo from me if you think it’s me that’s asking you for something, like, “Hey, can you send me a video? Can you send me a voice memo?” You know what my voice sounds like, that’d be harder to replicate. Now, as far as how this happened with a private lender, it should be done through a title company. Okay, the money should be going to the title company and they shouldn’t be releasing any of it until it’s an escrow. That’s the way that I would avoid this, is if you’re just sending money back and forth between people you don’t know, there’s no immune system there. There’s no protection for you. So I try to avoid that.
But frankly, I’ve never had a problem of having someone rip me off off because I’ve only borrowed money from people that either I knew or that knew me. I don’t ask them for anything. There’s no, “Send me this money for an administration fee before I give you a bunch of my money.” That just shouldn’t be happening, okay? If there is going to be closing costs from this private lender, they should be done through a title company and they should fund their portion of money that they’re lending you into the escrow account, and then you can fund your administration fee or whatever they’re charging you into that escrow account, and the title company can release your funds to them only after they have their funds for you.
You want to have a neutral third party that’s going to protect you if you don’t know the person. Very sorry that happened, but thank you for sharing that with our audience so that more people don’t get ripped off because I can see in the future, it’s so easy to make social media profiles. It’s so easy to pretend to be someone else. That wire fraud is going to become more and more prevalent.
All right. Our last question comes from Heather Cha in the Bay Area. Heather says, “I’m finally at a stage where I’m committed to investing but have to look out of state. I’m currently looking at Dallas, Indianapolis, Atlanta, and Jacksonville. I’m specifically looking for long-term rentals and I have close to 800 credit score with money saved up and no debt. As a first time amateur real estate investor, do you recommend finding something that doesn’t need renovation? I have rented my whole life, so I really have no experience working with contractors since I’m really looking for somewhere out of state. I have the added layer of stress of not being close to the market I’m looking in. Thank you for your time.”
All right, well, first off, Heather, if you’re in the Bay Area, reach out to me. You never know when you need real estate help in California, and I got you when that comes. But if it comes to long distance investing, check out the book that I wrote about that topic. And yes, quite frankly, if you don’t have experience investing in real estate or knowing construction or working with contractors, don’t take on an out-of-state project. This is one of the fastest ways that people can make big mistakes and lose big money. In fact, the people who do out-of-state deals that have renovations on their first time, if they don’t lose money, they just got lucky. This happens all the time. All right?
So I don’t want you to buy a project that needs renovation other than small things that a handyman can handle, and your agent has referrals and they can oversee the project for you if you’re not there. Instead, I would be focusing on trying to buy a vacation rental and have it managed by a company that actually has experience doing that. I can put you in touch with a property management company I use if you’re in the Jacksonville area. They do some short-term rentals. I’m trying to remember the name of the city where a lot of people are doing really well. It’s not coming to mind right now, but if you reach out to me, especially with you being a Bay Area native, I will do my best to connect you with people. I’ll be happy to support you and look for ways you can support me.
All right, everybody. That is our show. I want to know in the comments, did I talk to long? Do you like it when I talk longer? Are you okay with shows that go a little bit longer? Do you want to keep these super, super tight because you’re on a schedule? Let me know when the timeline, if you would like longer shows or shorter shows, as well as what you think about some of the rants that I went on. Did that benefit you? Did you learn about the principles of real estate? Or do you just want to get to the nitty gritty? We read these comments and we adjust our approach based off of what you’re saying. Thank you again for your time listening. I know attention is expensive and you guys could be learning from anyone, so I really appreciate that you’re here learning from me and us at BiggerPockets.
If you want to follow me and learn more about what I’m doing, you can go to davidgreene24.com, or you could follow me on social media @DavidGreene24 on Twitter, Instagram, YouTube, whatever it is that’s you fancy, you can find me everywhere. I’m going to be putting a retreat together in Scottsdale at the property that Rob and I bought. So if you’re into goal setting, check that out at davidgreene24.com/retreats. And also, guys, if you skip through the BiggerPockets ads, stop doing that. Listen to them because I run ads on the BiggerPockets Podcast, and I want you to hear about some of the products that you can get from me where I can help you. So if you’re like me and sometimes you skip through ads, don’t, because there’s Easter eggs in there. You might hear my sultry deep base filled, smooth voice telling you about some of the things that I have going on, how we can meet in person, and how I can help you with your goals. Thanks again. If you have a minute, listen to another BiggerPockets video. And if you don’t, I’ll see you on the next one.

When founders scrambled to make payroll after the closure of SVB, some VC firms promised to help—but only a few actually wired money.

Last Friday afternoon, OpenAI CEO Sam Altman issued a challenge to Silicon Valley’s venture capitalists: Put your money where your mouth is. “Investors who ask ‘how can I be helpful’: today is a good day to offer emergency cash to your startups that need it for payroll or whatever,” Altman tweeted. “No docs, no terms, just send money.”

In the wake of Silicon Valley Bank’s abrupt closure that morning, Altman’s message struck at the big question for tech entrepreneurs and investors alike: With deposits at SVB frozen, how would they pay employees the following week?

Over that frantic weekend, venture capital firms scrambled to respond to the crisis. Some found creative ways to ensure their founders would have access to cash on Monday, at times offering up their partners’ personal funds. More set up contingencies to make loans if necessary, then hoped it would never come to that. Still others chose not to make such an offer, or failed to reach a consensus at all.

The moment mostly passed quickly; the FDIC announced it would protect all SVB deposits by Sunday night, meaning that by Monday morning, much of the situation’s urgency—and need for VC firms to back up their promises—had passed. But a few still did wire funds. The founders involved in the crisis won’t forget who stepped up, and who floundered at a crucial moment.

Conversations with about 20 investors and founders suggested that non-traditional investors like Altman, or smaller, individual-driven firms like Jason Lemkin’s SaaStr Fund, appeared to move the fastest, alongside several bigger firms that got creative in their problem-solving, including First Round and Redpoint. Most established firms, however, didn’t impress.

“Sadly getting requests from companies we have very minor positions in who aren’t getting help from their major investors,” billionaire investor Vinod Khosla said on Twitter. “Other investors being predatory. Not a time to make money.”

Loans, Equity And Wires In The SVB Aftermath

When Alex Lorestani, CEO of startup Geltor, which provides vegan proteins for beauty-product makers, started receiving emails from his investors last Thursday, most of them were one-liners. “They just asked, ‘Hey, are you exposed?’”

Geltor isn’t small—it raised $91 million in 2020—but it was exposed, its payroll funds tied up at SVB, with a transfer attempt to Mercury still pending. When Lorestani informed employees, then his 100-plus investors, however, help came from unexpected places: a fellow founder with some cash to spare, and newer firm Fifty Years, smaller than many with a $90 million fund. Both set up wired loans to transmit on Monday. Then those got blocked as potential fraud. At that point, Fifty Years founding partner Ela Madej connected her own personal bank account to Geltor’s payroll system and paid out the company’s employees herself.

“That was nuts,” Lorestani told Forbes. “It set a new standard.”

Over the weekend, meanwhile, Madej’s partner Seth Bannon tweeted to call out other VC firms that said they weren’t allowed to offer loans due to their limited partner agreements. “Yes you can. Just don’t use LP money,” Bannon wrote. His tweet drew an approving one from Khosla, who wrote that his firm, Khosla Ventures, was also working to use partners’ own money to help.

Khosla Ventures didn’t need to send out any loans in the end, partner Samir Kaul told Forbes, but was disturbed by the response of other established firms. “This wasn’t a time to point fingers; it was a time to get our founders to the other side to fight on,” he said. “When times are tough, we stick with our companies.”

Another bigger firm highlighted by its peers was Redpoint, where partner Alex Bard and others texted founders before the weekend to tell them they’d find a solution, then set up a separate entity and wired partners’ money into it to be redirected as needed. That promise moved another founder, Sahil Mansuri of salesperson-focused site Bravado, to share the messages in his own tweet thread. “It was an extraordinary measure of compassion and supporting entrepreneurs during a terrible moment,” Mansuri told Forbes. He ended up not taking any money, nor did any Redpoint founders, a source with knowledge added. (Greylock set up a similar fund that wasn’t accessed, according to one of its founders.)

As founders attempted to navigate the SVB website on Monday with mixed results, a few large firms surveyed by Forbes said they did send out a small amount of checks. Kleiner Perkins made one loan that was repaid within 24 hours; Menlo Ventures also wired one, without a time line for its return, according to partner Matt Murphy.

Perhaps the most active firm was First Round, two sources said. Of the early-stage firm’s 200-plus investments, 80 had money at SVB, one told Forbes, and 40 faced payroll concerns. With their LPs’ permission, First Round partners made a low-interest loan back to the firm—which had its own cash tied up at SVB—and made a handful of wires on Friday, then more than an additional dozen on Monday. (A source close to the firm said that such efforts paled in comparison to what some of the firm’s founders did, such as flying to California to be first in line to withdraw money on Monday.)

Most others that investors and founders disclosed to Forbes, or that responded to its requests for comment, said they’d prepared to wire loans in some capacity but had not needed to, a group including Accel, Benchmark and Index Ventures. Others were still evaluating options when the FDIC announced its decision, including Lux Capital and Sequoia, sources added.

Among firms linked with Thursday’s bank run on SVB because they reportedly warned founders to withdraw their funds, Coatue prepared to offer loans but didn’t, a source said; Union Square Ventures, meanwhile, circulated a loan offer document reviewed by Forbes that offered an interest rate of 4.5%, what the firm said was the minimum legal applicable rate for a short-term loan. The loan could also convert into preferred stock from the company’s most recent past funding round, or roll into its next equity financing of $2 million or more at 80% its price, per the document.

USV’s offer, too, went unused in the end by founders, partner Rebecca Kaden told Forbes by email. “We kept in close touch with our companies through Monday morning as the pipes started working again to make sure they all met payroll from their own accounts, which they did,” she wrote.

“From talking to other founders, I don’t think many VCs were able to do anything that helpful this weekend.”

Founders Fund, meanwhile, drew heightened scrutiny in part for its ties to Thiel, a public-opinion lightning rod. Blamed by some for helping to fuel the bank run (in reality, other firms warned their founders about SVB long before), Thiel eventually told the FT that he deliberately left $50 million in personal funds at SVB over the weekend, confident in the bank’s long-term survival. His firm, meanwhile, was mentioned by multiple peers as one that disappointed in its weekend response.

“They were saying, ‘We are not in the business of making loans—that’s not our problem. But we will buy more equity,’” said a partner at a firm that shares portfolio companies with Founders Fund. Firm spokesperson Erin Gleason said Founders Fund did not offer any equity-based convertible notes, known as SAFEs, to companies impacted by SVB.

“Corporate treasury management is ultimately the responsibility of the founders/CEO,” Delian Asparouhov, cofounder of space manufacturing startup Varda and a Founders Fund investor, tweeted on Saturday. “Never forget that.”

Some founders did tack on more funding to their last funding rounds generally, several investors said, with one telling Forbes that given 2023 equity pricing, such a move could have easily been more generous. Such notes would be more familiar to VC firms’ usual operations compared to loans, said Sandeep Dahiya, a professor of entrepreneurship at Georgetown University. “The whole idea of a venture fund isn’t to be lending to assets without collateral.”

A Longer Crisis Averted—And Uncalled Bluffs

If the FDIC hadn’t guaranteed deposits on Sunday and bank runs had extended to other startup banking partners, VC firms would have faced a crucible moment. Instead, it’s impossible to know how they would’ve truly responded when facing dozens, or hundreds, of companies facing business interruptions, with founders and board directors personally liable for employee pay. “I don’t think it was just virtue signaling,” said finance professor Michael Goldstein of Babson College. “Within the confines of the law, you’d be limiting the damage on a temporary basis and moving on.”

Several founders who spoke to Forbes wondered whether firms exaggerated their willingness to help because they anticipated the government making such efforts moot. “From talking to other founders, I don’t think many VCs were able to do anything that helpful this weekend,” said one tech CEO, who asked to remain anonymous so they could avoid giving “untrue fluffy bullshit.” “Even the best-hearted ones were spread thin over just how many companies were affected. So it was really left to founders to rally their resources and pull support from wherever they could.”

Some investors, especially fund managers without the personal means or large enough funds to provide financial assistance themselves, focused instead on providing the most up-to-date information on the state of the government’s response and alternative loan sources like Brex’s weekend emergency fund.

“It was all happening so fast that talking to founders and VCs were your only option,” said founder Jordana Stein, CEO of executive peer-learning startup Enrich, who turned to VC firm Bloomberg Beta’s founder Slack channel after she couldn’t get into a popular founder WhatsApp group that quickly reached the app’s 1,024-member limit. Others turned to Signal and WhatsApp groups, or email groups like A16Z’s CEO distribution list. (The firm declined to comment on whether it offered its founders loans.)

But the investors who actually walked the walk by wiring money, mostly from smaller partnerships or nontraditional funds, told Forbes doing so wasn’t nearly as hard as some big firms let on. Altman lined up a number of wires despite being just several days from OpenAI’s big GPT-4 launch. Others that Forbes learned sent a number of wires included Conviction founder Sarah Guo, solo capitalist Lachy Groom and former GitHub CEO Nat Friedman. (An honorable mention from several founders went to John Curtius, who reached out to startups he’d backed at Tiger Global to help, despite leaving last year to start Cedar Investment Management. But Curtius’ money wasn’t ultimately needed, they said.)

“I did it in 60 seconds. It was easy, and honestly, in a sense, fun, because it’s a time when you want to add value,” said Lemkin at SaaStr Fund. His fund’s money was also at SVB, but he was able to wire founders cash from his personal Wells Fargo account. “I offered immediately and wired without a thought, just told my LPs. But if you are a junior partner at a big fund, I suspect it would be very hard unless the ‘Big Bosses’ put it together.”

Ashley:
This is Real Estate Rookie episode 270.

Tony:
So, there definitely are I think a lot of positives and the disadvantages. I would oppose that question to the person that’s doing the arbitrage or asking to do the arbitrage and see what their responses are. Right, if you bring up the concerns about maintenance and repairs and they’re just kind of like stumbling, they don’t have a good response for you, then don’t work with them. If you bring your concerns around liability and what they’re doing to minimize that or mitigate that risk, then don’t work with them. So pose your questions to that person, see what their responses are, and if you feel confident with what they’re saying, I think it’s a win-win for both of you guys.

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

Tony:
And welcome to the Real Estate Rookie Podcast where every week, twice a week, we bring you the inspiration, motivation, and stories you need to hear to kickstart your investing journey. Today, I want to shout out someone by the username of Lukester8891. Lukester left to say five star review on Apple Podcast that says, it’s an encouraging podcast. “Tony and Ashley’s podcast is extremely informative and encouraging. Thank you for creating a space to give people like me the knowledge and extra nudge to feel confident about investing in real estate.” Luke, we appreciate you and for all of our Rookies that are listening, if you have not yet taken the two minutes and 27 seconds it takes to log into Apple Podcast and leave us a five star review, please do us a huge favor and do that.
The more reviews we get, more folks we can reach, more folks we can help, which is what we love doing here at the Real Estate Rookie. And if you’re not yet following me and Ashley on Instagram, do yourself a favor and do that also. I’m at @tonyjrobinson, she’s @wealthfromrentals, we’re always posting pretty much nonstop about all things real estate investing. And you could see some fun stuff from my wife, you get to see some fun stuff from Ashley and her kids. And you get to get a glimpse into the world of your two favorite podcast hosts.

Ashley:
Yeah, I actually had someone comment on one of my Instagram Reels today, and I just had this duplex that was trash. The upstairs and downstairs people were evicted two weeks apart and so, the whole property needed to be redone and I have these great contractors, they redid it and three weeks for me, turned the whole place around. It’s beautiful. So I’ve been using a lot of content from it and the two contractors that did it, I’ll text them and be like, “Okay, who wants to give you the most money? I’ll add you as a collaborator on this” or whatever. And it’s turned into a joke because they’ve been trying to grow their Instagram with showcasing what they do at properties and everything and it’s been great. So I did I think three Reels just off this one property so far in the last week maybe.
And I had someone comment and say, “I follow a lot of investors and it seems like you have a lot of units that are trashed and destroyed by people who are evicted. I’m just really curious, do you highlight that or do you just not screw good or what?” And I really went back through my Instagram and I looked, and there’s two properties, so three units that were trashed and had to be completely redone within this past year. And one was another investor that I do asset management for and not mine. And then there’s the rehab projects I do. We bought a hoarder house this year and we did a bunch of Reels on that, but it was just like all my Reels are just the bad stuff.

Tony:
Just beat up.

Ashley:
There’s no Reels of, this is how nice this tenant left this apartment and the next day it’s rented to someone else. And so, it really made me think of, man, maybe I should just show some of the good, not just all the bad. But I honestly responded, I’m like, “This is what people are entertained by.” So I think I am just posting the bad because here I am crying, but at least people are being entertained because I have to spend $20,000 on a rehab. Might as well make a $100 off of views on a Reel to pay for the rehab.

Tony:
For whatever reason, I think people just naturally gravitate towards the bad stories also. Like me and Rob, so the co-host for the Real Estate Podcast, we were chatting about YouTube stuff and we were saying the videos that tend to do the best are the ones that have flames in the thumbnails. It’s like if it’s my face and there’s flames around me or Rob’s face and there’s flames around him, those are the videos that people want to watch the most because they just think something bad is going to happen. But if I talk about a video where it’s like, “Hey, here’s a really effective strategy to be a great host on Airbnb,” and I’m smiling, no one watches. It’s the weirdest thing. So I don’t know, it is what it is. Well, we had a few good questions lined up for today. We talk a little bit about Airbnb arbitrage at the end.
So if you’re not familiar with that strategy, we break down what that is and how it’s beneficial for both the owner, the landlord, and the person doing the arbitrage, as well as some disadvantages you might want to look out for. We spend a little bit of time talking about HELOCs and when it is a good idea to use a HELOC for investment purposes and when it isn’t. And some of the things you should look out for when you’re pulling one of those lines of credit. We talk about turnkey properties and if in today’s climate, does this still make sense to use turnkey services? And if you do, what are the reasons it does make sense? We also talk a little bit about protecting yourself from liability. So we talk about umbrella policies and insurance, and then we also talk about CPAs and tax strategy. So if you want to save money on your real estate investments, make sure you listen all the way through because we’ve got some good topics coming your way.
All right guys, so let’s jump into the first question here. This one comes from William Craft and he posted this in the Real Estate Rookie Facebook Group. And Williams question is, “I have just one rental property that is in my name and the rental agreement as also in my name. Do I need to hire a CPA or can I file normally? Thanks.” I just want to start by sharing one of the biggest mistakes that I made in my real estate business and that was waiting too long to hire a CPA. William, if your goal is to continue to build your portfolio and hopefully at one day have a sizable number of properties, I think the earlier you can invest into good tax strategy help, the better you will be.
Because a big part of real estate investing is not just the cashflow that you produce, but it’s all of the tax benefits that come along with being a real estate investor. And so, often if you don’t have the right advice from a CPA, sometimes you make decisions that can hurt your ability to maximize your tax deduction. So even if you have one property, honestly, even if you have zero properties and you’re just thinking about buying your first property, I would probably engage with some sort of CPA so that you can start building the right roadmap for yourself to help minimize your taxable income.

Ashley:
And I think a big thing to point out is that you’re not just hiring a CPA, you’re hiring a CPA that’s knowledgeable in real estate investing, but also is going to give you tax planning. And that’s kind of like the crucial key there as to you can find a CPA who knows how to file a tax return for real estate, for your rental properties, knows how to take your bookkeeping or maybe even do your bookkeeping for you and then put it onto a tax return. The crucial key is finding one that is actually going to map out or plan out and help you strategize as to these are the moves you should or shouldn’t be making before you actually make them or before the tax year ends.
So a lot of times when you have a CPA, okay, it’s January right now, about a time this airs is probably February, maybe even March, but you’re getting your tax stuff together, you’re getting your 1099s in the mail, maybe you’re getting your W-2, you’re collecting your reports, then you’re sending it off to your CPA, your accountant. When they receive it, if there is something that they notice that you’re going to be paying this amount in taxes, there’s nothing that can be done. The tax year for that tax return has ended. I remember this one year, we got a tax bill, it was like the day before taxes were due, I think it was. And we just always send in our stuff to our accountant. She would let us know a couple of days before as to what our tax was due and if we could just stop in and sign. It was the day before the payment was due and our tax return was due.
And I just emailed her and was like, “Hey,” she emailed me right back and she was like, “Oh, you guys owe like $2,000” or something. I was like, “Oh my God.” I was kind of worried this year about what our taxes would be and stuff. And then I was like, “Wow, this is great.” I called my mom, I’m like, “Oh, can you believe it? I’m so excited.” A minute later I get another email, “Oh my gosh, I’m so sorry. That was for somebody else, you owe $30,000.” I immediately burst into tears, I’m like, “No. Oh my god, this can’t be happening.” And so, I called David, I was like, “This is how [inaudible 00:09:02].” He’s like, “It’s okay, we’ll like figure it out” and stuff like that. And that was where it hit us like, “Okay, we need to do some tax planning.” That was ridiculous. So going forward, that is something like the sooner you can implement that actual tax planning piece from a CPA is going to be so crucial instead of just hiring a CPA to file your tax returns.

Tony:
So much good advice there, Ashley, about just the idea of actually planning for your taxes and not letting your taxes take you by surprise. And that’s really something we’re trying to focus on this year as well, is more regular communication with our tax strategists around, “Hey, what does a P&L and the business look like so far year to date?” And if we think we’re going to have a lot of taxable income, what should we be doing to offset that? And we did some cost segregations at the end of last year to try and help reduce our taxable income and we’ve got some more properties that we’re looking at purchasing to help reduce some of that taxable income as well. I guess, one question for you, Ashley, do you do quarterly tax payments, like your estimate payments or do you just do one payment at the end of the year?

Ashley:
I don’t have to because I have farm income and farmers are not required to make estimated tax payments.

Tony:
Awesome. I mean, it is nicer if you can wait till the end of the year. That way you can keep all that money throughout the year and just make one big payment at the end.

Ashley:
Right. Because you’re giving the government interest free money.

Tony:
Interest free money.

Ashley:
They’re getting the loan from you. It’s not due until April 15th, but you’re loaning it to them for free early interest free. So I always have this debate with some of my friends as to if you’re a W-2 employee, you have contributions, they have money withdrawn from your paycheck to pay towards your taxes throughout the year. So I always think it’s best to zero that out. You hear people talking about, “Oh, I got a $5,000 tax to refund this year, super happy.” That’s like, no, you paid the government $5,000 extra and gave them-

Tony:
Too much.

Ashley:
… that money ahead of time. So I think that’s a huge misconception is that, you’re overpaying your taxes and you’re getting that money back and then might be great to get that lump sum. But think about if you had that money throughout the year and you could invest it a little bit or things like that. I bet you could see a bigger return on your money than giving it to the government interest free.

Tony:
Yeah, I always played with my deductions on my whatever. What was that for? You had to fill out as a W-2 employee or W-9?

Ashley:
No, W-9 is to show your social security number. I think it’s W… No, W-3 is what the…

Tony:
W-4.

Ashley:
Yeah, W-3 is what the employer has and they issued W-2.

Tony:
Yeah, so the W-4, you put your deductions and stuff. I was like always bumping mine up and down trying to figure out what that sweet spot was. Because same, I didn’t really want to get a return. I just wanted all that money throughout the year. So anyway, William, hopefully that helps you. If we didn’t say it loudly and clearly enough, hire the CPA, like Ashley said, specifically someone that has I think experience working with real estate investors and if you want a better kind of breakdown on what you should be looking for, go back to episode 255. We just interviewed Amanda Han, and she does a wonderful job kind of breaking down what you should be looking for in both a tax preparer and your tax strategist.

Ashley:
And the cost is not that big of a difference. So William, I don’t know if you’re just filing your tax return yourself using Turbo Tax or something like that. Once you start adding onto investment properties, usually there is an additional fee they charge because now you’re filing this form and stuff like that. So just the time you’re saving by having a CPA do it, I think is just super beneficial and it’s going to probably cost about the same. So for me to have an LLC tax return done, I believe this past year, it was 300. The years before that had been 250, I think. And then my personal return, I don’t remember how much that was, but a couple of $100 to do.
But it’s the tax planning portion that can be more expensive. But you can still do your own tax return if you want, if you feel like you’re very confident in that, knowledgeable enough to actually do your tax return and then just pay a CPA for that tax planning piece and that portion. Also, you want to find one that’s going to work with your attorney too, because that is going to kind of compliment each other if you are going to start setting up LLCs as to what that structure is going to look like.

Tony:
So should we move to question two?

Ashley:
Yeah.

Tony:
All right. So this next question comes from Chris Lat and Chris has a question about Airbnb arbitrage. So he says, “Airbnb arbitrage from a landlord’s perspective, what are the major disadvantages of this strategy? I just listed my primary residence for rent and I’ve already gotten inquiries about potential tenants that want to rent the property out as an STR for when they’re not using it themselves or they want to rent a portion of the house as an STR.” So I think the first thing that we should do is just define what Airbnb arbitrage is because not everyone is even aware of that term. So Airbnb arbitrage or rental arbitrage means that instead of taking a property that I own and listing that on Airbnb, I go out and I rent someone else’s property and say I rent it for a thousand bucks a month, then I turn around and take that listing and put it on Airbnb and then I get to keep all of the income above the 1000 bucks that I’m paying to that landlord.
As the person renting the unit and subleasing it on Airbnb, the benefit is that it’s significantly less cash to rent someone’s house than it is to go out and buy your own house. So you need less capital to get started with this, but there are some disadvantages while on the person who’s doing the arbitrage. But from a landlord’s perspective, are there some major disadvantages? So I mean, Ashley, you’re doing an arbitrage unit already. Maybe if you can speak to why the landlord that you’re working with outside of him being someone that you know, why was he open to that arrangement knowing that if he just put it on Airbnb himself, he probably would’ve made more money?

Ashley:
Because he didn’t want to deal with operating a short-term rental or have any clue how to even list a property onto Airbnb. So one reasoning is that he just had no idea how to do that or no desire to do that, his game was long-term rentals. And I think the biggest thing is vetting the person who you’re renting to that’s actually going to operate the short-term rentals. So he knew that I would be paying rent, that he’s not just somebody that he’s renting too, that he’s taking kind of a gamble with as to not knowing anything really about this person except for what their credit and background check shows. He knows where I live, knows where to find me if I didn’t pay rent. So basically having guaranteed rent in that unit was a big selling factor.
So I think if you are going to find somebody who’s doing this, who’s going to operate a short-term rental and you’re going to do a long-term lease to them is really take the time to vet them, see if they have any other short-term rentals, any other arbitrages they’re doing, talk to those landlords, what’s their track record? One benefit is that you’re going to get the house cleaned pretty frequently than if you had just a long-term rental in there. You’re going to most likely have it professionally cleaned every time there is a turnover. So I have two arbitrages right now and the first one I’ve had since maybe August 2018 I think actually. And that unit has just stayed in pristine condition and I see a lot of the turnovers that happen in the same apartment complex, it’s a 40 unit apartment complex.
Our unit is nicer than people who have only lived there two years and they have marks on the walls, things like that. Just wear and tear on the properties where since ours get cleaned so often that it has stayed in such a nice condition since 2018. Basically, we haven’t done any remodel since that 2018 or had to make any kind of significant repairs. And if for some reason, a tenant did damage the unit a guest for the Airbnb, that would be us taking care of that. So that’s another thing I kind of make clear when you’re making this arrangement as to what kind of maintenance and repairs, who going to be responsible for what? So if there is a lockout, okay, if you’re renting to a long-term rental and our lease is like a $25 fee for a lockout whatever. But if it’s a Airbnb gust, are they contacting you as the arbitrage operator or are they contacting the landlord because they can’t figure out how to get into the lockbox?
Things like that you need to figure out as to what constitutes wear and tear that the maintenance company is going to take care of or whatever. I will give you guys one example of something that happened recently where it was kind of like a conflict with the arbitrage where I can see as the landlord that this would be a negative towards doing arbitrage. So in this apartment or complex, there’s a property management company in place and so, it’s not actually the owner dealing with it. But either way, the property managed company or the owner, they work for the owner. So the guest that was staying in the short term rental had a dog barking and they could not figure out how to get ahold of the guest because they did not have the guest contact information. They only had my information as the Airbnb host.
So they contact me, I call, leave a message for the guest, no answer. The property management company goes ahead and it was either them or the other people in the building, somebody calls the police. The police somehow find out who she is, whatever, call her, and it turns into this big huge thing. So that was one disconnect I can see is if there’s something going on in the unit or something happening that the landlord doesn’t have a way to actually contact the guest that’s staying into the property. So maybe that’s something you can clarify ahead of time as to contact per information must be provided for somebody that’s actually staying into the house or something like that, just as the owner being able to correspond or can coordinate with that person. So, one downside that I’ve encountered.

Tony:
And I love that story, Ashley and this is me kind of putting my short-term rental hat on as a landlord and as the person operating the arbitrage unit. One thing that would be helpful, do you guys have noise monitors in that unit?

Ashley:
No, I’ve never even heard of that.

Tony:
Yeah, so there are devices that we’ve installed in our short-term rentals that essentially monitor the decibel levels inside of the property and if it goes above a certain level for a sustained period of time, it automatically sends a message to the guests asking them to keep the noise level down. And there’s even a setting, I’m pretty sure where you can have an alarm go off to really kind of rattle them. And if you can show to Airbnb like, “Hey, this person has violated my house rules because they’ve been excessively noisy,” now you can cancel their reservation and escort them off the premises without Airbnb being too upset with you. So there are some things you can do even as a landlord to say, “Hey, if you are doing arbitrage on my unit, I want to make sure that you have these noise monitors installed and that I’m also notified whenever there’s a noise issue.”
So that’s one thing, but I love that story because isn’t definitely something that I think landlords might be concerned about. But if you’re the person that’s renting the unit, you also have an incentive to make sure that your neighbor or that your guests aren’t everybody off because now you know that you’re going to have a harder time trying to renew that lease when it does come due. So I think there’s incentive on both sides to make sure the guests are always behaving well. I think the other thing that a landlord might expose himself to is maybe a little bit of additional liability. Airbnb does have what they call host protection, which is called AirCover. So if there’s an issue at the property, Airbnb has up to $1 million in liability protection, but it’s definitely not an insurance policy.
And there I’ve seen a lot of instances where things have happened and Airbnb feels it doesn’t fall under their AirCover protection. So I would probably try and make sure that your person doing the arbitrage has some sort of additional liability protection to make sure that if one of the 12 different people or parties that are coming through that house on a monthly basis, if something goes wrong, there’s a multiple layers of protection between you and that guest as well.

Ashley:
Yeah, that’s all great advice, Tony. That noise level thing, I’d never even heard of that. I almost want to borrow one from you and put it in my house and play with my kids somehow to trick that.

Tony:
It actually might work pretty well for kids at home too. Like “Hey, if you guys go…” But no, I think that’s the main thing. Honestly, Chris, for you is the landlord. If you don’t have the time, desire, or ability to put it on Airbnb yourself, you get the benefit of, as Ashley said, the property’s going to be cleaned professionally every two to three days. You’re going to have maintenance and repairs, most of the lower level items being repaired by the person doing the arbitrage, not by you. You’re going to be able to hopefully charge maybe even a little bit more for your rent, right? Because you understand that they’re running a business out of your unit. So you can say, “Hey, if market rent is a thousand, I’m going to charge you 1,300” and you can even get a little bit of a bump there and they’re going to be happy with that because they’re going to make two x or three x that on the arbitrage side.
So there definitely are I think a lot of positives and the disadvantages, I would oppose that question to the person that’s doing the arbitrage or asking to do the arbitrage and see what their responses are. If you bring up the concerns about maintenance and repairs and they’re just kind of like stumbling, they don’t have a good response for you, then don’t work with them. If you bring your concerns around liability and what they’re doing to minimize that or mitigate that risk, then don’t work with them. So pose your questions to that person, see what their responses are and if you feel confident with what they’re saying it, I think it’s a win-win for both of you guys.
All right, so let’s go on to question number three here. It comes from Mike Woodruff and Mike’s question is, “Recommendations on how to best protect myself as an investor. I’m purchasing a rental and trying to figure out what is the best type of insurance or ways to protect me personally. I know an LLC would probably be best but have heard mixed answers if I would be able to transfer it after closing if there’s a loan on it. Another option I have heard is just to get an umbrella policy. Also, are there any specific disclosures or terms you make your renters agree to?” So there’s a couple of questions in here, Ash. I think maybe we should kind of break them down in each of their own pieces. So the first is maybe we should even take a step back from a liability protection standpoint, there are two options. You have an LLC and you have an umbrella policy, I can say what we do in our business. Then Ash, I’m curious how you do it in yours.
For most of our properties, we have the actual title is in the name of our personal names and most of the debt is in our personal names as well. We still recognize all that revenue and the expenses and the profits as business income. So from a tax perspective, it’s part of our LLC, but from a legal perspective, it’s owned by me personally or my partner personally. So what we did in our business was we got additional insurance. So we have home insurance and we also got an umbrella policy for all of those properties as well. And it’s like several million dollars of liability protection that comes along with those umbrella policies. So if something were to happen at one of our properties, even though it’s our personal name that’s on title and on the debt, we still have this extra layer of protection. So the liability would have to be in excess of 2 million before it starts to affect us personally. So that’s what we’ve done in our business to try and mitigate some of that risk. How are you doing it in your business, Ashley?

Ashley:
Yeah, so anytime I take on a partner, I definitely open an LLC. And then at the first partnership I did, I was just super afraid of being sued. So I even had an umbrella policy over that LLC way more than you actually need to have. And especially at the time we had one, two, then three properties in it with not a ton of equity in it. So if we were sued, there’s not really anything anyone could really take from us being new investors. But now, I don’t have the umbrella policies over any of the LLCs. Personally, I do have umbrella policy over my primary residence. I still have one rental property in my personal name cover some of my businesses and then I still have the properties that were in my personal name. I had an umbrella policy over them too, but then I’ve recently deeded them into an LLC and I no longer have that umbrella policy over those.
One thing I recommend having is your tenants getting renter’s insurance, having them have carry their own insurance I think is a huge plus. But I think doing an LLC is a great way to protect yourself. Only thing to watch out for is if you do want that nice 30 year fixed low interest rate mortgage that you most likely have to put into your personal name and that’s when you should go ahead and get that umbrella insurance. So you can get that good mortgage rate. Not as good of a mortgage rate now as it was a couple of years ago, but still better than commercial. I just did a commercial loan and I think I got 7.4% was the interest rate on it. Have you done any recently, Tony, on residential or commercial?

Tony:
Yes. We closed on a deal recently on the residential side. I want to say we were right around 6% on that deal, so about a point lower than what you’re saying. And honestly, that’s a big reason why so much of our debt is in our personal name because we were able to get such favorable terms. Like I said, our best interest rate on one of our short-term rentals right now is 2.6% on a 30-year fixed. And it’s like that is just free money, especially in comparison to where rates are today. So there is some things to think through. We did do an episode now, I was trying to look at the episode number but I couldn’t find it so maybe we can put in the show notes.
But we interviewed a guy, Ashley and his whole business was about helping real estate investors from a liability perspective and how do you structure your business in different ways to reduce your liability. And obviously, his process was for folks that maybe had a little bit more equity and net worth and were more concerned. But he had a very solid framework that he had built out to say, “Hey, you need this kind of entity holding this, you need this entity holding this and you should own these kinds of properties with this thing.” So if we can find that episode out.

Ashley:
Yeah, it was Brian Bradley.

Tony:
There you go.

Ashley:
I know because I use it, I recommend it all the time. And it was episode 105 and then it was either 104 or 106 because we did back to back episodes with him. But that was a phenomenal episode. He also has a newsletter too that you can sign up for and he’ll email you, I don’t know what the frequency is. But I get them and I’ll glance through him every time, which is great recommendations on that liability piece as to how to protect yourself.

Tony:
That’s one of the episodes that’ll scare you almost away from being a real estate investor when you hear all the things that could go wrong. But I think he definitely did a great job of breaking down how you can set it up to protect yourself from some of the things that come along with being an owner.

Ashley:
And one question we always see too is should I open an LLC in the state that I live in or the state that I’m investing in? Or should I open one in Delaware or Wyoming and that he goes all into that too, because it depends on what your situation is. So, definitely two great episodes to listen to and if you do remember those episodes, great, time to go back and refresh those episodes too.

Tony:
All right, so let’s jump into the next question here. This one comes from Chase Fayver, and Chase’s question is, “What are the main downsides of turnkey properties? I’ve seen 6% interest on a 30-year loan advertised, which I’m not sure most people could get right now with an 8% management fee. Other than that, they seem like a pretty good option, especially if you could buy a new build with a cash flow from year one. So what are your thoughts?” I think in general, Ash, and I’ve never purchased a turnkey property, I don’t think you have either. But I think in general, you are always going to get a better return assuming that you buy right. You are always going to get a better return if you do the work yourself of finding a distressed property, rehabbing it, and then refinancing it yourself. The benefits of a turnkey property is that the hard work of finding the off market deal and managing the rehab and getting it stabilized, it’s all done for you.
So if you don’t have the time, desire, or ability to do all the hard work of doing that process, then I do think that there is a place where turnkey properties make sense, especially if you have maybe a consistent source of capital so that maybe every six months to a year, you’re able to buy another property without really worrying about, you run enough capital yourself. But if you want to be able to recycle your capital, buying is obviously a better approach. So I think Chase, it depends on your unique situation and what your goals are.

Ashley:
On Real Estate Rookie episode 29, so one of the original episodes we had Whitney Hutten and Lance Robinson, where they go into depth about their turnkey investing experience and they both were able to build their wealth based on doing turnkey rentals. That’s how they started out, and they built these great portfolios and built their wealth from that. Since then, I know Whitney has gone on and done other things, but that’s what got her started. So they kind of go into what are some of the things you should look for and like pros and cons of doing turnkey rentals. But they’re definitely two success stories that came out of doing turnkey rentals. But the thing here on this question is I’ve seen 6% interest on a 30-year loan advertised, which I’m not sure most people could get right now with an 8% management fee.

Tony:
I’m assuming Chase meant that it won’t cash flow as well. The returns won’t be as good with interest rates being high and accounting for the management fee. That’s my assumption. So Chase, if we’re off base, let us know. But that’s what I’m thinking he’s getting at.

Ashley:
Okay, so if that’s the case, then that would be a great question to ask the turnkey company provider. Say, “I’m looking at this, I don’t see how the numbers are penciling out” and see how they respond to that as to what they are kind of giving you feedback. If you’re not using an actual turnkey company and you’re just looking for a property that’s already redone, you’re buying it off the MLS. There’s not like a property manager in place or anything like that. It’s just somebody selling in just doesn’t need any rehab. Just throw out those low ball offers, try that. I mean, we are doing the men 90-day mentees here and we had Brandon on who’s from day one we’re just like, “Well, how many offers are you making?” He’s like, “Well, I haven’t made any.” The next time we talked to him, he made an offer. Offer accepted and he threw out what would work instead of just waiting for the purchase price to match what he wanted put out in low ball offers. So that would be my advice there is go ahead and make that happen.
Also, I’ve heard investors that say that one strategy they do is they don’t even buy for cash flow. They’re just looking to break even because they know there’s so much appreciation in the area and they’re investing for appreciation. So maybe that could be a way to kind of pivot what your strategy is. If for sure you want to go for cash flow because you want to quit your job next year and you need that income coming in, then maybe this isn’t for you. But if you’re just trying to build wealth, maybe build up some retirement and you’re not looking to really cash in on anything right now, you know, want to work your W-2 for a couple more years, things like that, then maybe breaking even isn’t that bad of a thing if you’re going to be building appreciation in this property just because it’s such a growing hot market too. So make sure you’re looking at all the different ways to actually build wealth off of a property and not just the cash flow and see if maybe one of those other ways will kind of suit your needs.

Tony:
Yeah, Ash, I’m so glad you brought up that last topic about appreciation because there are other things outside of just cash flow that we should consider when we’re looking at deals. Cash flow is just one piece, but you have appreciation of the property, you have debt pay down and you have the tax benefits. And if you are a W-2 income earner and you’re looking for an opportunity, there’s some things you have to do to be able to check those boxes. But if you’re looking for some waste, maybe offset some of that W-2 income, buying something that it already is set up and running might be an easier way to go.
It’s easier to do it in the short-term rental space. Significantly harder to do it in the long-term rental space, but if you can jump through those hoops you can. But we had J Scott and Dave Meyer back on episode 224 and they talked about the four ways that real estate generates profits. So if you want a refresher on things outside of cashflow, you should be looking at when you’re analyzing a deal. Go back to episode 224 with J Scott and Dave Meyer. Two of the smartest people that I know in real estate.

Ashley:
I agree with that for sure.

Tony:
All right, so this next question comes from Denise Bedinger and Denise’s question is, “Is an interest only HELOC a good tool to use equity as a down payment for a buy and hold property? Or would the financial method work best for a fixed and flip where you can force equity and refi or sell? So Ash, what are your thoughts on using a HELOC for a long-term buy and hold?

Ashley:
So for me, I’ve done this, but with I’m going to rehab the property, build that appreciation, I’m going to refinance and be able to pay off my line of credit. Felipe Mejia, who used to be a co-host on this podcast, he used to use his HELOCs to purchase a property and he would just take all of his cash flow and rapidly pay down the HELOC. He never went and refinance. He would use it as the down payment in this situation. So he did it that way and it seemed to have worked well for him, just like he wasn’t until that HELOC was paid off, he wasn’t keeping any of the cash flow for himself. And then any other properties was, so say he had two or three other properties that he had already paid off the down payment, he was taking that cash flow too to pay off the down payment for that fourth property. And would just go hard at paying down that line of credit until that was paid off and then go and start looking for the next house. Use that line of credit again as the down payment.
So definitely can work like that. So if you’re able to put some equity into it as to rehab it, maybe you’re even able to raise the rents going and refinancing. The downside is you’re paying closing costs twice. So when you purchase the property, you get the mortgage, you’re paying the closing costs and you go and refinance to pay off that line of credit and the first original loan, you’re going to pay closing costs again. But if you work that into your numbers, so when you’re using the BiggerPockets calculator reports, there is a section to say closing costs. So when you do the burst strategy, you can account for that. So you can still see what your cash on cash return is as to how much money you’re putting into the deal. So make sure you’re accounting for those things too when you’re doing the cash-out refi as to after you’ve already done an initial loan on the property.

Tony:
Yeah, I think my idea has always been anytime you have short term debt like HELOC, private capital, hard money, I typically am of the opinion that you should only do that for a short-term project. So I like the idea of doing it for a flip. I like the idea of using it for a BRRRR, but I just feel like I want to be able to sleep at night. And the idea of having this debt that’s really made for short-term purposes tied up in a long-term property, it might get you into sticky situation. But if the amount of money you’re using was relatively small, maybe this deal’s going to put off a bunch of cash flow. Maybe it does make sense, but I definitely think it is a risk that you want to weigh before you jump into it, Denise. So hopefully that helps.

Ashley:
Well, Tony, another great episode of Rookie Reply. Thank you guys so much for joining us. I’m Ashley @wealthfromrentals and he’s Tony @tonyjrobinson on Instagram, and we will be back on Wednesday with a guest. I’ll see you guys next time.

Content marketing seems simple, right? Publish some engaging blog posts, upload a couple of captivating videos and maybe throw in a few infographics for good measure. But if it were really this easy, every marketing leader charged with developing online content would see the ROI they dream of. Unfortunately, the reality is much more sobering.

Putting your content ideas out there for audiences to see doesn’t mean they will. Even if they do, the pieces your team works so hard to create must be relevant and timely to work. Complicating matters is the fact that what resonates today won’t necessarily do so tomorrow. As a result, most marketers need to shake up their strategies once in a while. If you want to breathe new life into your approach, here are four tips to try.

1. Match SEO to Audience Interests

Your content strategy isn’t complete without using search engine optimization. But a common mistake is to direct your focus toward company-centric SEO tactics. What does this mean, exactly? Well, it usually looks like keyword research that only includes a list of high-ranking phrases.

While you don’t want to aim too low, there’s more to developing successful content than ranking for keywords at the top of a list. Who’s to say those phrases match your audience’s search intent? Perhaps the words don’t even align with your business goals and areas of expertise.

Content and SEO may be interdependent, but it’s more important to consider the big picture. You’re more likely to discover a winning formula when you match selected keywords with the information your audience craves. To do this, begin with defining who your audience is and what topics they’re searching for.

2. Expand Partnerships

Over 75% of brands dedicate budgets to influencer marketing. Yet not all partnerships have positive effects on ROI. Influencer posts announcing new products reduce ROI by 30.5%, while originality boosts it by 15.5%. Other factors, such as follower count and posts with brand links, also increase ROI.

Surprisingly, you won’t get the best results from an influencer who seems to fit your brand like a glove. Rather, optimal follower-brand fit is governed by what researchers call a “Goldilocks effect”—not too little and not too much. If an influencer’s followers are too aligned with your brand, they may already be inundated with content similar to yours. If there’s too little alignment, your content won’t matter to them.

Expanding your partnerships with “just right” influencers can expose your brand to new leads with a balanced interest in your offerings. Say your company markets financial services, including retirement accounts. Instead of limiting partnerships to thought leaders in the same space, try branching out to those with audiences interested in passive income. That way, you won’t compete in the same space and overload consumers with repetitive content.

3. Experiment With New Platforms

You can create intriguing content all day long. But it won’t do its job if it’s not in the right places at the right time. In the digital marketing world, publishing your pieces on the correct platforms is key. It’s like choosing the radio stations your target market listens to.

Putting content on social platforms and channels where your audience members don’t hang out means you’re not giving posts a fair chance. Content about your new energy drink will likely gain more traction on TikTok than on Facebook. The reverse is true if you’re marketing retirement timeshares.

If your posts aren’t getting the response you anticipated, you might need to mix up your distribution strategy. Assess where your markets are and meet them there. Also, pay attention to shifts in audience preferences, platforms that up-and-coming markets gravitate toward and new channels with impact.

4. Refine the Message

Content marketing might be a cost-effective way to increase revenue, but it’s also highly competitive. There is lots of fascinating stuff in the digital jungle for people to find. However, they won’t think all of it is worth their time.

Another reason content performs poorly is that it doesn’t add value. The consumers marketers compete for are smart but have short attention spans. They’ll be turned off by content that seems disconnected from a brand’s purpose. People also don’t want to engage with the same information they’ve seen before.

While expanding your content calendar might seem like a good idea, make sure those slots emphasize quality over quantity. Publishing more pieces usually isn’t the solution to lackluster performance. More than likely, your content isn’t adding to the conversation in a convincing, helpful way. Go back to the drawing board to find places where your market’s interests and your brand’s purpose intersect.

Don’t Give Up

Creating high-performing content isn’t as straightforward as it looks. Developing effective strategies is a science and an art. You can’t overlook the basics, but you must also be willing to interpret what your audience’s behaviors say. When you do, your content will get a new lease on life.

Dave:
Hey, everyone. It’s Dave. Welcome to On the Market. Today we have a special episode for you. We actually had a different show entirely scheduled, but as you probably know, there has been a lot of crisis and activity in the finance and banking world, and we wanted to provide some context as information to all of you as soon as possible.
So that is what we’re going to do today. I’m going to discuss what has happened in the banking system over the last couple of weeks. We’re going to go into how and why this happened. I’m going to discuss some policy changes the government has implemented to address the issue. And, of course, I’ll give some thoughts on what this might all mean for the real estate investing world. So that’s what we’re going to do.
But just remember, I am recording this a few days prior to you listening to it. I’m recording it on Tuesday, March 14th, with the information I have right now at the time, but this story is, of course, still developing. That’s it.
The context and background will remain true going forward, and that’s what we’re going to focus on mostly today, but remember that, given that this story is evolving and will likely keep unfolding for at least the next couple of weeks, probably more, you should be keeping an eye out for updates, which we will be providing to you on the BiggerPockets blog, our YouTube channels, podcasts.
And if you want realtime updates, you can follow me on Instagram, where I’m @thedatadeli, and I put out information about this stuff all the time. So we’re going to get into this whole situation in just a minute, but first, we’re going to take a quick break.
Let’s first start with just going over what has actually happened and how this whole financial banking crisis, bank collapse started just a couple of days ago. So basically, the first signs that most of the public at least got that something was wrong was back on March 8th when the country’s 16th largest bank, Silicon Valley Bank, everyone knows this name now, showed some concerning signs.
And just in three days, from March 8th to March 10th, those quick three days, the bank had been taken over by federal regulators for insolvency fears. And this was really startling both to the size of the bank that collapsed and the speed of the collapse. Three days is quick for any institution to go down, but it’s kind of even crazier for a bank that had over $200 billion in assets. And also, this constitutes the second-biggest collapse of a bank in US history and by far the biggest bank collapse since Washington Mutual folded back in 2008.
So this collapse of Silicon Valley Bank, everyone has heard of it now, but it is not the only thing that has happened over the last couple of weeks. Since last Friday, March 10th, federal regulators have stepped in and took over another bank, Signature Bank, due to similar concerns about insolvency. And Signature Bank is smaller, but it’s still pretty big. It has over a hundred billion dollars in assets. So still a pretty significant situation.
And I should just say, right at the top here, big failures are not a normal occurrence. These are really significant events. So the fact that two of them have happened in just a couple of days is really remarkable and why we’re talking about this today.
So we saw that over the last weekend, and then, on Sunday, we also saw some other interventions from the government that were intended to stabilize the situation, which, at least for the time of this recording, have calmed fears at least for the very minute. But still, financial stocks are getting hammered, and there is just a lot of rightful fear about the banking system and financial system that is persisting right now.
So that is just sort of a high-level overview of what has happened so far and what we know. Silicon Valley Bank collapsed. Signature Bank collapsed. We’ve seen the government step in. So that’s at the highest level if you didn’t already know that what has happened.
But to really understand this issue and to understand what might happen, we need to get to the root causes and explain some of the background information. So in order to do that, I’m going to talk about some of the details, about what has happened, how the government is responding, and that will help us all get… By the end of this podcast, help us understand what this might mean for the economy and the housing market in general.
The first thing we need to do to fully understand the situation is to just take a step back and talk for a second about the business model of banks and how banks work. And if you’re familiar with the financial system, this may seem obvious to you, but it is worth reviewing, I think, because the details here matter.
You probably know this, but at the most basic sense, banks take in deposits from people like you and me or businesses. This is normally… If you go to your local branch, you can just go, take your money, and deposit it in a bank, and they will keep it safe for you. They will probably pay you some interest for keeping it at the bank, and then banks go and lend out that money for a profit.
So when you go and put your hundred dollars in the bank, it’s not like the bank is just keeping that hundred dollars in a vault somewhere. They’re going out and taking your money and lending it out to someone else. And they can do this in a lot of different ways. They can lend it out as a mortgage. That’s very common. Probably, investors here are familiar with that. You can lend it out as a HELOC, a small business loan.
And as relevant to this story, you could also lend it to the government in the form of government bonds. Buying a Treasury bill, buying a government bond is essentially just loaning the US government money for some exchange of interest. So that is basically how banks work.
But in order to ensure that banks don’t get too aggressive or start lending out money too recklessly, federal regulators require that banks keep a certain amount of deposits in the bank as, quote, unquote “reserves.” Basically, they can’t lend out every single dollar they take in as a deposit. Usually, they’re required to keep about 10% of all the deposits that they have in reserves.
So most of the time, this works. People don’t just normally, in normal times, all run to the bank at the same time, and they’re like, “We want our money right now.” So this 10% reserve system, the vast majority of the time, works.
So if the banks are only required to keep 10% of their deposits on hand, but then, say, 20% or 30% or 40% of people come, and they say, “We want to take all of our deposits out,” the bank won’t have enough money for everyone who wants to make those withdrawals, and the bank can fail.
And this underscores something that is just sort of an unfortunate reality about the banking system in the US and really in most of the world is that the banking is sort of this confidence game. It works because people believe in it, and they believe that when they go to the bank, and they want to take out the money that they are saving there, that it is going to be there.
But if people lose confidence in the banking system, it can be a very serious, dangerous situation. That’s sort of where we find ourselves right now. And normally, the feds, federal regulators understand that this is a dangerous situation. They don’t want… They are well aware that bank runs are really bad, and as we’re going to talk about, they can spread a lot.
And so, federal banking regulators do have protections. They have authority in the US to prevent bank runs and to stabilize the financial system in times of crisis or panic. And so that is sort of the context you need to understand what has happened to SVB, Silicon Valley Bank called SVB.
So now that we understand this sort of context and sort of what’s going on and how banks can fail, let’s just dive into what actually happened with Silicon Valley Bank.
So Silicon Valley Bank is very concentrated in the tech sectors. It’s not really a bank that works with normal customers. Not a lot of people just have their normal savings and deposits accounts there. It is highly concentrated with companies, so that is important to know.
But it’s also highly concentrated with a certain type of companies, tech companies, and even within tech companies, it’s a lot of startups, early-stage companies, and the investors who fund those startups, which are typically venture capital firms. If you’re not familiar with tech, venture capital is a type of investment that really focuses on high-growth companies, high-potential growth companies like tech startups.
And this is important because, during the pandemic, these types of companies, the specific types of firms that Silicon Valley Bank… Sort of their niche. They absolutely boomed, and deposits at Silicon Valley Bank grew like crazy because of this.
In 2021, the total deposits at SVB grew 86%. That is startling, and I think we all probably know why this happened, right? There was a lot of money flying around in 2020, 2022, 2021, all of them, and a lot of them… Venture capital firms were raising a lot of money from their investors, and tech companies were raising huge amounts of money.
So if you’re a tech company, a high-growth tech company, for example, and let’s just say you raise 10 million to start growing your company, you obviously don’t need all $10 million of that all at once. And so you put a lot of it, let’s say $9.5 million, in the bank. And a lot of these tech companies chose to do that at Silicon Valley Bank. And that is why deposits at Silicon Valley Bank grew so much, 86% in just 2021. So the bank exploded during these years.
Now, the bank, SVB, had a lot of deposits, and they want to earn money on it. That is, as we discussed, the banks’ business model. They take their deposits they rent, and they lend it out to other people for a profit. And so the bank wanted to earn a return on these deposits.
And the way they did it with a lot of these deposits, it’s they put money into US Treasurys. This is a government bond, basically. It’s as vanilla of an investment as you can make. And bonds, generally speaking, are very safe investments because the US government to date has never defaulted on a bond payment. If you buy a bond from the US government, and they say that they’re going to pay you 2% per year on your money, they so far in history have always done that. And so, when SVB bought these bonds, they were thinking, “Okay, that is probably a pretty safe bet.”
And this was all well and good until the Fed started raising interest rates, as we all know, about a year ago. And the rising interest rates impact this story in a couple of different ways.
The first way is that the tech sector has been absolutely hammered. If you own any stocks, if you invest in the stock market at all, you are probably very familiar with the fact that tech stocks, even the biggest ones, even the most reputable ones, have been getting crushed over the last couple of years more than really any other part of the stock market, generally speaking.
The other thing is that funding for startups has dried up. Those venture capital companies that invest in startups, they’re still making some investments but not as willy-nilly. The capital is not free-flowing to startups in the way that it was over the last couple of years. They’re tightening their belts a little bit because credit is getting harder to find, and so there’s less money flown to startups, which means that SVB is getting fewer and fewer deposits.
The other thing that impacts this is that because these startups were getting less money, and their stocks are getting hammered, and all these things, it means that these startups were burning through their cash faster than expected.
So remember that example I used when I said a tech company was keeping $9.5 million in the bank? Well, normally, they do that, but because of these adverse conditions that exist for a lot of these tech companies, they need the money. They’re using the money. They’re actually going out and spending the money that they raised from investors just to maintain their normal operations. They need to make payroll. They need to buy products, whatever it is. They are just using the money as they normally would.
But that has, obviously, an impact on Silicon Valley Bank. And the impact is that all these withdrawals meant that they had less deposits. They saw this huge spike in deposits during the pandemic. And since interest rates have been going up, their deposits have gone down.
And you can see this in some of their reporting. They’re a publicly traded company, so you can see a lot of their financial documents. And you can see that towards the end of 2022, SVB went from net inflows, meaning they were getting more deposits than they were lending out, to net outflows. Then this started at the end of 2022.
So that is the first way that rising interest rates affected SVB. They were just getting less deposits. People were using the money they deposited there. They had less money.
The second thing is that the value of those bonds that we talked about… Remember, we said they used a lot of that money that they had from deposits to go out and buy US government bonds. But rising interest rate has an impact on the value of those bonds.
So when you go and buy a bond, let’s say it’s a hundred dollars, you buy a bond for a hundred bucks, there is something called a yield, and that is the interest rate that you earn on that money. So during the pandemic years, if you went and bought, say, a 10-year dated US Treasury bond… It means if you hold the bond for 10 years, they’re going to pay you, let’s say, 2% per year. Yields were between 1% and 2% for most of the pandemic years, which is really, really low, and that is really important.
So that was fine. They went out and did this, and they were saying, “Okay, great. We’re going to get these really safe 1% to 2% returns from the government,” but they made a decision that is going to come back and haunt them in the story. It’s that they bought long-dated bonds, so they bought these bonds that don’t mature for 10 years, let’s say.
And so they are stuck with these bonds that have yields of 1% to 2%. And if interest rates remain low and bond yields stay the same, that can be fine. But when interest rates rise, it decreases the value of those lower-yield bonds. So since interest rates have gone up, bond yields… They were 1% to 2% during the pandemic. They are now, as of this recording, somewhere between 3% or 4%.
And so, if you’re Silicon Valley Bank, and you need to raise money because you have less deposits, and you’re thinking, “I’m going to go out and sell my bonds to make sure that I have enough reserves to cover the declining deposits that we have. I’m going to go sell my bonds.” Not many people want to buy those 1% to 2% yield bonds, right?
Because if I’m a bond investor, and I can buy Silicon Valley Bank’s bonds that yield 1% to 2%, or I can go and just participate in a Treasury auction, or I can go out on the market right now and buy a bond that yields 3% to 4%, I’m going to do that, right? I’m going to go out and buy the bond that has a better yield because it gives me better returns. It’s not really rocket science.
So the only way that Silicon Valley Bank can sell their bonds that are worth 1% to 2% is by discounting them. So again, let’s just use the example. If they bought, let’s say, a hundred dollars worth of bonds at 1% to 2% yields, the only way they can sell them on the secondary market is by heavily discounting them. And they might only make $70 to $80, let’s say, on that hundred dollars. So they’re taking a pretty big loss on all of those bonds, and that is obviously not good for the bank.
I just want to be clear that the bonds that they bought were still safe assets. Again, the US government has not, to date, defaulted on a bond. This selling, changing values of bonds is very common. Bonds are bought and sold all the time.
The issue was not that Silicon Valley Bank was not getting paid on their bonds. They were getting paid on their bonds. The issue is that their declining deposits mean they had to raise cash in order to cover their reserves. And when they went to raise cash by selling bonds, they were taking a loss, and so they weren’t able to raise sufficient cash in order to cover their reserves.
So because of these two things, the lower bond values and the fast withdrawals, SVB needed outside capital. They didn’t have enough inside. And so they went to Goldman Sachs last week to raise more money. The idea was, “We’re going to sell some extra stock, probably to some private equity investors, and that’s going to get us the reserves that we need. We’re going to have some money to maintain operations, and everything’s going to be great.”
Unfortunately for them, that didn’t happen quick enough. Moody’s Analytics, which is a credit rating agency… We’ve had guests from their show… Of their firm on On the Market several times. Different parts of the business. We’ve had people from Moody’s commercial real estate. The credit-rated agency is very different.
But Moody’s Analytics credit rating informed Silicon Valley Bank that they were going to downgrade the bank’s credit rating. They couldn’t pull off the private equity thing fast enough. That really is when all of the chaos started.
Basically, Silicon Valley Bank was worried that the downgrading in their credit would spook investors even more than the private stock sale. So they wound up announcing the planned sale, but Moody’s downgraded them anyway, and that’s when things really just started to get bad.
The following day, basically, investors were seeing this, and they were very worried. They weren’t able to raise the money in time from outside investors. They were getting downgraded by Moody’s. And the stock just absolutely tanked. The CEO, of course, came on to try and reassure people, but it just absolutely did not work.
So that’s when people really started to panic, and venture capital firms and startups alike started to pull their money out of the bank. And this happened really quickly, and I think it’s due to sort of the nature of startups and venture capital. But basically, a huge amount of their customers rushed to withdraw their money because they were worried that if there was a bank run, that SVB wouldn’t have enough money for everyone to go around. And so they wanted to be the first people to go take their money out while SVB still had some liquidity.
And that’s how a bank run starts. Basically, everyone’s like, “Oh shoot, I need to be the first one there.” And so everyone rushes to pull their money out. And as you know, most banks don’t have enough money on hand to handle those situations.
And I think that the particular details about Silicon Valley Bank… And this is important for understanding if and when… If this is going to spread to other banks. There are some specifics about Silicon Valley Bank that made this situation unique.
And to explain this, I need to just remind everyone that when you put your money in the banks, it is not guaranteed. It is guaranteed to a point, up to $250,000, but that is it. So when you go and deposit your money in the bank, the Federal Deposit Insurance Corporation, the FDIC, which is a federal regulator, guarantees your money. It provides insurance for you, basically, up to $250,000.
And that’s great because for most people, most normal people… You know, you don’t have a bank account with more than $250,000 in cash just lying around. But as we talked about, at Silicon Valley Bank, most of their customers are businesses. And so, businesses do have bank accounts where there is a lot more than $250,000 in the bank. And that means Silicon Valley Bank had a very unique situation where a huge, huge proportion of their money was uninsured. And so that makes people extra panicked.
Just for some reference point, the average bank, the average bank has about 50% of their deposits are insured by the FDIC. So that makes those people feel pretty good. Silicon Valley Bank, on the other hand, 86% of their deposits were uninsured. And so you can see from this situation how panic might have ensued really, really quickly, right?
Because all of these startups and venture capital firms are saying, “Oh my god, Silicon Valley Bank is not doing well, and 86% of our deposits are not insured. So if we don’t get our money out, there is a good chance that we won’t ever see that money again.” And that is why people started rushing to pull their money out of the bank.
And on Thursday, March 9th alone, customers tried to withdraw $42 billion from Silicon Valley Bank, which is about a quarter of the bank’s deposit. And that was just in a single day.
I think the other thing that is really notable about the particulars of Silicon Valley Bank is the relationship between startups and venture capital firms. So if you’re unfamiliar with this part of the economy, startups raise money from venture capital firms. Investing in startups is a relatively risky thing to do. And venture capital firms, generally speaking, remain pretty closely involved in at least the big decisions that go on at the startups that they invest in.
And what we saw on Wednesday and Thursday of last week is that venture capital firms saw what was going on with Silicon Valley Bank, and they sent out emails to the executives at all of these startups saying, “Pull your money out now.” I’ve actually seen some of these emails, and it’s pretty dramatic. These investors are saying like, “Wow, all of these deposits, 86% of these deposits are uninsured, and these are companies that we’ve funded, and they’re at risk of losing a lot, a lot of their money, so we have to warn them.”
And so venture capital firms all over the country sent out emails to their executives being like, “Take out your money as quickly as you can.” And so that obviously also contributed to why the bank run at SVB was so dramatic.
Again, those two reasons are one, because a high proportion of the deposits at SVB were uninsured. The second is because if a couple dozen of venture capital firms send out a few emails, the potential for billions and billions of dollars to try to be withdrawn is real. And obviously, we know that that’s what happened.
So that’s what happened on Thursday. And then, on Friday, because this huge bank run happened, we saw that the FDIC, which is again a regulatory agency, stepped in to take over the bank. And they did this because, as we talked about sort of at the beginning, bank runs are basically a cycle.
Banks are somewhat of a confidence gain. They work when people believe in them. But if the entire US country said, “Oh my god, Silicon Valley Bank just collapsed. What, is my bank going to collapse? Or is my local bank not doing well?” Because if people across the country start to fear that, they might take their money out of their local bank, causing another bank to collapse.
And so the government stepped in to basically say, “We’re taking control of this situation. We want to prevent any fear. We want to prevent any more banks from failing.” So that’s where we’re at as of March 9th.
And over the weekend, people really didn’t know what was going to happen. We didn’t really know if the $150 billion of uninsured deposits were going to be recovered. I have some friends who work in this industry, and they were really, really worried about whether they were going to be able to operate over the next couple of weeks.
But the government basically stepped in on Sunday the 12th to reassure markets, to reassure investors, to reassure just Americans about the state of the banking system. And they did three things.
The first thing they did was the FDIC took over a second bank, which we talked about at the top, Signature Bank. It has a lot of ties to the crypto industry. It’s about half as big as SVB, with a hundred billion dollars in assets. But again, anytime a bank fails is a very significant thing. So the fact that it’s smaller than SVB, sure, it is notable, but the fact that a second bank failed is super, super important.
The second thing is that the FDIC said that it would guarantee all deposits from both Signature and SVB. And this is really notable because, like I said, normally, a lot, the majority of the deposits in these two banks were uninsured. But the FDIC basically came in, and they said, “You know what? Everyone should get their money out. We are going to make everyone whole.”
And obviously, the idea here is to help people not worry. All these startups that were worried about making payroll, now they don’t have to worry about it as much. All these people who were banking at other small banks and worried about their uninsured deposits, now they can go and see that the feds sort of have this situation, they have it in mind, and they’re making people whole.
And although this smells a lot like a bank bailout, the Fed at least is saying that it’s not because it’s not protecting the bond holders or stockholders in Silicon Valley Bank or Signature Bank. The people who own stock in those companies or bonds from those companies are probably going to get wiped out. What they are doing is helping out the customers of Silicon Valley Bank. Again, it’s the depositors who are getting their money out and ensuring that they get all of their money back.
And it might not be called a bailout. They are saying it’s not a bailout, but it’s definitely bailout-esque. And so, obviously, the government is changing policy a little bit. This used to be that these deposits were uninsured, and now they are ensuring them. And we’ll talk about this in just a minute, but I want to get to the third thing that the government did.
The third thing the Fed did was loosen the rules around accessing reserves so other banks won’t face the same issues that SVB did. So if another bank needs money for reserves or a lot of people request withdrawals, the Fed is basically like, “We’ll lend you the money just so that there’s no liquidity crisis, there’s no insolvency, that you can maintain your reserves, all of those things.” So that is basically what happened on Sunday.
And these actions taken together were meant to calm investors and the general public alike because, as I’ve said a few times now, if people are afraid that smaller banks will fail, it could be this sort of self-fulfilling prophecy. People are afraid of a bank becoming insolvent, they move all their money to a bigger bank, and thus, they make the first bank insolvent. So there was risk that happened.
And as of Tuesday, when I’m recording this, that hasn’t happened. So hopefully, this government action will have stopped this crisis, but frankly, it’s probably going to keep playing out over the next couple of weeks. But so far, that is what we know.
That brings us to the last question. What happens from here? And, of course, this is a developing story. Something is probably going to change from when I am recording this on Tuesday from when we are releasing this, but let me just share a few thoughts with you about what is going on.
The first thing is that the banking system, you probably know this, is very complex and interconnected. Right now, the problems do seem to be isolated to smaller banks, mostly working with businesses, like SVB and Signature. These banks were hit particularly hard by rising interest rates.
And from what I can see at least, the big banks like Chase and Bank of America, and Wells Fargo, they don’t appear to share a lot of the same risks as these other banks do right now. So that is good because if those mega banks start to see problems, then we’re all in a lot of trouble. But right now, as of this recording, it doesn’t look like those huge banks are in trouble.
But there is, of course, still risk, and I’ve said this a few times, but I just want to reiterate this. A lot of the risk comes from people and fear, not from the banks’ balance sheets or anything at all, right? These situations are really hard to predict because bank runs are more about depositor psychology and what people do when in times of fear and panic, not necessarily about the balance sheets of banks.
I just want to remind everyone that when SVB started to go downhill, they were meeting all the federal regulations. So it really was all these people’s reaction to what was going on at the bank that caused the bank run and failure. It wasn’t necessarily… I mean, don’t get me wrong, Silicon Valley Bank made a lot of mistakes, but the thing that was the catalyst for them failing was not the mistakes that they made a few months or years ago. It was the reaction of the depositors about learning of these things.
So that’s why it’s super hard to predict because we could look at the balance sheet of all these banks and be like, “Okay, they’re in pretty good shape,” but if people panic and something crazy happens, then it’s really hard to say what will happen. So I think that is something to just keep an eye on and think about as this is going on.
And this idea behind psychology and people really needing to maintain confidence in the banking system is why the government intervention existed in the first place, right? I’m not an expert in the banking system to know if these specific actions, the three things I just said… They seem reasonable to me, but I’m not an expert. I don’t know if their actions are going to be the right thing to do. But I think it was important that they do something to ensure that the bank run did not spread. That would be disastrous. If there was this cascading effect of banks failing, that would be horrible for the entire country.
So again, I just don’t know if these are the right things to do. Obviously, I’m not a huge fan of bailouts, but I do think it was important that the government do something to stop spreading the fear because, to me, the worst possible outcome, again, is if people across the US start to panic. That starts a bigger bank run, causing a domino effect where tons of small banks fail, credit dries up, the economy is deeply and severely impacted. And to me, that needs to be avoided. And again, I really don’t know if the specific interventions the government used are the best choice, but I’m glad that they seem to have stabilized things, at least for now.
Third thing is, as this relates to real estate, I think it’s really too… A little bit too early to tell. The failures so far are localized in tech and crypto in many ways. These banks aren’t really real estate lenders. Silicon Valley basically had no exposure to real estate. Signature Bank, from what I understand, did have some exposure to real estate lending, but the problems so far are not really in the specific area of lending in real estate.
I just want to reiterate that the problems that have arisen of far aren’t due to bad loans. They are for sure due to bad business decisions, but not because the people that SVB or Signature were lending to were defaulting on their loans. That is not what is happening, and therefore, it is a key difference from what happened in 2008.
And I know these bank failures, financial crisis brings up a lot of issues with 2008, and there is good reason to be afraid about a broader financial collapse, but this is a key difference between now and 2008, at least so far, that it’s not because borrowers are defaulting. It’s because of business decisions that these banks made.
That said, I do think a few things could happen we should at least talk about in terms of the real estate space. The first thing is that credit could tighten. With banks on edge, they could look to reduce their overall risk and tighten lending.
This would probably put some downward pressure on real estate, especially, I think, in commercial lending, where credit would likely tighten more than in residential. Because in residential, as you probably know, there are big government-backed entities like Fannie and Freddie, and those things exist basically to keep the credit flowing. So if credit does tighten, I think it will disproportionately impact commercial more than residential.
Now, if there are more bank failures or there’s any sort of bank run in other industries, credit will probably tighten more across the board. But if we’re lucky, and the big dominoes have fallen already, then credit and real estate shouldn’t be too heavily impacted. At least, that’s my thinking right now.
The third thing here is that we also have to think about the future of banking regulations that might stem from this, and there might be tighter credit just generally in the future. Because the crazy thing about all of this is that SVB, again, was meeting regulations just a couple of weeks ago, and then, three days later, it was insolvent.
So clearly, there are a lot of regulations around banks, but none of them prevented this. So it will be interesting to see what, if any, policies change and if credit standards have to change at banks after this. So that’s sort of what I’m thinking about credit.
The second thing here is Fed policy, and I think this is one that’s going to be really fascinating. We’ve been saying for a while on this show that the Fed is going to raise interest rates until something breaks.
A lot of people, including me, I admit it, have been assuming the thing that would break first is the labor market, and we see mass… An increase in layoffs. But we have found something that broke, and that is the banking system.
So it’s going to be really interesting to see if the Fed looks at this situation and says, “Man, we didn’t directly cause the situation, but these banking crises are indirectly caused by our interest rate hikes.” And maybe that will give them reason to pause. I mean, the Fed has to be super concerned about a financial crisis right now, and that could cause them to pump the brakes.
The other thing is that today, on the 14th of March, the CPI dropped again down from 6.4% year-over-year to 6% year-over-year. Core CPI also dropped just a tiny amount, from 5.5% to 5.4%. So it’s not some amazing inflation print, but the slow and steady retreat of inflation has continued, and maybe that is another reason that the Fed might reconsider their super aggressive stance on raising interest rates too high.
Obviously, I mean, inflation is still too high for the Fed or anyone’s liking, but now they have more things to think about than just unemployment and inflation. They have the stability of the financial system to consider as well. And so it’s going to be really interesting to watch Fed policy over the next couple of weeks. I think most of us who watch this kind of stuff have been thinking, “Yeah, for sure, they’re going to raise rates in March and maybe through a couple more months of this year.” Now I’m not as sure, and we’re going to have to keep and hear what they have to say.
The other thing, the third thing, other than credit and Fed policy, I think is important to look at here is mortgage rates. As the financial system faces fear, bonds are seeing an absolutely huge rally right now. Bond yields were going up to about 4% before all this SVB stuff happened. Now they’re down to about 3.5%. And this happens because investors are basically taking their money out of maybe financial stocks or even out of the banks and putting them into Treasurys because bonds are safer.
And again, yes, Silicon Valley Bank did take some losses because they bought some bad bonds, but it wasn’t because the bonds weren’t paying off. The bonds, if you buy them, are still a really good bet that they are going to be paid off. And so people, investors around the world, seeing all this uncertainty, are pouring money into bonds because they see it as a really safe investment during this time of uncertainty.
When demand for bonds go up, yields fall. And that’s what we’ve seen. We’ve seen sort of this historic rally in bonds where yields have come down half a percentage in just a couple of days. And when bond yields fall, like the yield on a 10-year Treasury falls like it has, so do mortgage rates.
And so, on Monday the 14th, we saw bond yields move down sharply, and you should probably expect mortgage rates to come down a bit accordingly. And especially with the inflation print that wasn’t great, but it wasn’t terrible at the same time, mortgage rates are probably going to come down in the next week or two from where they had been in the beginning of March.
The last thing, and I really don’t have any evidence of this, is just the last thing to think about here is, will this whole situation increase demand for hard assets? So people are keeping their money in banks. Banks are looking a little wobbly right now. And so curious if people are going to take their money from banks, maybe if they have uninsured deposits and instead of keeping them in the bank, put them into things like Bitcoin and gold.
Just over the last couple of days, we have seen the price of Bitcoin and gold surge because it seems like people are doing exactly this. They’re taking maybe uninsured deposits or money that they would normally have in financial stocks and put them into some of these hard assets.
And another one of those hard assets is real estate. And real estate doesn’t work as quickly, so we can’t see if demand for real estate has gone up in the way that Bitcoin and gold have as quickly as we can see in those markets. But it’s something I just think is going to be interesting to keep an eye on over the next couple of weeks is, will all this uncertainty in the financial system lead people to want to put more of their money and their assets into real estate, which would obviously increase demand and put some upward pressure on the market?
So hopefully, this has all been helpful to you. I really wanted to help everyone sort of understand what has happened, why, and provide some preliminary thoughts on how this could all play out. Of course, it is really early. So what I’m saying here are just some musings. I’m just sort of like, “Here’s what I’m thinking about, given what I know about this situation right now.”
But obviously, we’re going to have to keep an eye on this, and we will make sure to give you updates on this podcast, across the BiggerPockets network. So make sure to subscribe to BiggerPockets, both our podcast or YouTube channel. Check out the blog and turn on notifications to make sure that you are updated anytime we are putting out information.
If you have any questions about this or thoughts about what is going on with the financial system, you can find me on BiggerPockets. There’s a lot of really good, robust conversation about this going on in the BiggerPockets forums that you can participate in, or you can always find me on Instagram, where I’m @thedatadeli. Thanks again so much for listening. We’ll see you next On The Market.
On The Market is created by me, Dave Meyer, and Kailyn Bennett, produced by Kailyn Bennett, editing by Joel Esparza and Onyx Media, research by Pooja Jindal, and a big thanks to the entire BiggerPockets team. The content on the show On the Market are opinions only. All listeners should independently verify data points, opinions, and investment strategies.

Erin Sykes, chief economist with Nest Seekers International, joins ‘The Exchange’ to discuss volatility bringing down mortgage rates, demand for single-family homes and the lack of housing affordability.

The last 96 hours have been one of the most manic and momentous in my last decade in venture capital. Silicon Valley Bank, once a stalwart of its namesake Silicon Valley was put into receivership by the Federal Government Insurance Corporation.

What does this mean for its customers? Its investors? The bank? The story continues to unfold.

But one thing is for certain: These failures will change the startup landscape and founder behavior in meaningful ways.

Here are five predictions.

Risk Management Comes To The Forefront

For many startups, it was completely rational, and justifiable to store deposits safely with Silicon Valley Bank. Afterall, they were a top 20 US bank and a cornerstone of the innovation economy.

No longer.

Startups will start to adopt strategies many of the largest players already employ: diversification and risk management in their treasury management function.

What does that mean? While the level of risk management will depend on stage (it is unreasonable to expect a two-person startup to have a sophisticated internal risk management function) and amount of capital raised (which drives the level of exposure) it will be part of the new mindset. Every startup can use multiple banks. Deposits, if on the bank’s balance sheet, should be diversified across multiple providers. Off-balance sheet solutions can be used if bank balances are too large. For example, one product, sweep accounts (which systematically spread capital across multiple banks) and money market funds can take capital off-balance sheet, and allow deposits to be bankruptcy remote.

Risk management will expand beyond just bank partners and become a key component for broader startup infrastructure.

Fintech startups that offer risk management will increasingly offer services for this category.

Counter-Party Risk Will Be Examined

For essential functions (banks, but also far beyond), counter-party risk will become a more important decision criteria.

If you’re an InsureTech with insurance partners, you live and die by your insurance partners. How much capacity do they have? What is their track record of consistency in good and bad times? How long have the individual sponsors worked at the bank? How committed are they to the strategy long-term?

If you’re a sales business, you may live and die by your CRM. How long have they been around? Are they profitable?

When a service provider is existential – as in if they stopped existing what would happen – counter-party risk should and will be more carefully examined.

For companies considering partnering with fintech startups: who is backing them? Are they profitable? Who are their partners? This will be a whole new area of resistances startups will need to overcome.

Diversification Where Possible And Practical

For certain providers, sole-sourcing is the only practical option (you would not have two CRMs or two payroll providers). But for many services particularly in the financial stack, redundancy is possible.

In these instances, startups should consider diversification.

As we have seen, banking partners, for the purposes of storing capital, can be easily made redundant with a few partners.

If you’re raising venture capital (of which I am one provider), don’t depend on only one firm. A single venture capital partner may happen to be out of capital the moment you need an emergency round. Having a few players around the table can be great (not just in good times to have multiple folks to support) but also when times are tough. And because staff at venture capital firms can also move around, make sure you meet a few of the partners in any one firm. I expect to see a rise in co-led rounds as a result.

Lastly, diversify your financial stack and capital options beyond equity. Venture debt historically was a key option. But since SVBVB
was one of the primary venture debt providers, going forward availability from them is no longer a given. New alternative capital solutions, for example, revenue-based financing, have started coming to the forefront for startups. We will see greater exploration of new capital types.

The Trust Barrier To Adoption Has Been Lowered

One of the reasons to go to Silicon Valley Bank was that it was Silicon Valley Bank. They were the incumbents in the land of innovation.

That made them the default option for so many products: banking, venture debt, etc. The same is true for many providers in different industries.

But as VCs, portfolio companies and many executives have scrambled for options, they’ve been open to try new ones as well.

This may be a unique opportunity for nimble players, both startups as well as incumbents, looking to serve startups in a tough time.

But even more broadly, SVB has shown that even the safest players are not immune from risk. Already nearly 90% of US consumers have used fintechs. But adoption was slower among corporates.

Subject to overcoming the counter-party risks and diversification needs above, I expect B2B fintech adoption to continue to increase. More people will be willing to experiment with emerging players.

Fintech Payers Coalesce Around One Of Two Stable Points

Where do things end up?

I predict two stable points for the world of banking.

On the one hand, players can be nimble rapid adaptable companies. That’s where fintech’s shine. Already, a number have reacted fast to the unfolding SVB collapse, doing everything from rapid enrolment to creating credit lifelines.

On the other hand, boring, timeless stability will be a feature, not a bug.

Incumbents that thrive will stay true to traditional risk management may see lower short term growth, but enduring long-term survival.

The Silicon Valley Bank story continues to evolve live. But one thing is for certain, the world of fintech and venture will never be the same again.