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One of the nation’s most powerful single-family landlords is getting into the home building business. CNBC’s Diana Olick joins ‘Squawk Box’ to report on the growing trend among public landlords and builders.

Scott:
All right. And before we bring in today’s guest, I wanted to issue a quick apology and say a quick, thank you to one of our Facebook group members, Carly Rechart. Carly called Mindy and me out, rightly so first spreading misinformation on last week’s episode of the Bigger Pockets Money Show podcast. We stated that Gaines in a 529 Plan would be forfeited if they’re not used for educational purposes. And that’s simply not true. The gains in a 529 Plan are simply subject to tax and, or a 10% penalty when they’re withdrawn and used for things outside of educational expenses or qualified educational expenses. So, they can be a powerful and flexible way to build wealth, save for college, pass money on to future generations and be used for other educational purposes. And there’s lots of other interesting tidbits about 529 Plans. They’re a useful tool in the tax advantaged investment stack for some people.

Carl:
Personally, I don’t use them. I may use them in the future, but I wanted to correct the misinformation that we stated last week. Certainly the gains are not forfeited. They’re just subject to tax and or penalty if, and only if they’re used for non-qualified expenses. So, thank you, Carly, and thank you to the many members of our Facebook group for calling us out. I apologize. We apologize for the misinformation. We have a responsibility to share truth and the correct information on this show. And we appreciate when we do get that feedback, so please keep it coming. And we will link to some resources on 529 Plans in the show notes here at biggerpockets.com/moneyshow308. Thank you so much.

Mindy:
Welcome to the Bigger Pockets Money podcast, show number 308, finance Friday edition, where Carl and I sit down to talk about lifestyle creep, being financially conscious, the shockingly low percentage of camp mustache attendees who use a budget and why tracking our spending in real time is the best choice for us.

Carl:
The tracking is where the real value comes in for us having to enter that and review it every once in a while to see where it goes. And I don’t know.

Mindy:
Well, here’s where I’m going to argue with you because having it set up the way that it is Mr. Waffles on Wednesday set that tracking spender up for me in the Excel sheet. So, that as soon as we go over whatever dollar figure we deemed was that category, the category turns red. And that is very helpful for me to see that in real time. Hello. Hello. Hello. My name is Mindy Jensen and joining me today is my husband, Carl, to talk about what a disaster, our May finances were.

Carl:
Wait, why were they a disaster?

Mindy:
Because we got lazy. We stopped tracking our spending in real time, we just stacked up receipts and then said we were going to do it later. And then we never did it later. And then we had to scramble to do it at the end of the month. And that didn’t work for us.

Carl:
Yeah. I don’t like that because when you’re forced to be accountable to the app on your phone and manually enter it, you really think more about all of your purchases like, ah, do I really need this box of [inaudible 00:03:15] from the grocery store?

Mindy:
No.

Carl:
I guess they don’t make those anymore.

Mindy:
You don’t need them.

Carl:
But yeah, I don’t need them.

Mindy:
They’re an unhealthy choice.

Carl:
Even if they did have them, they’re an unhealthy choice. But yeah. Having to pull off the phone and enter every purchase changes things. And some stuff you can’t help. Like gas is gas. You have to buy that. But I’m trying to think of a good example besides my poor example before. What’s an example of something that you would have to put in that you might reconsider because of the spending app?

Mindy:
Just frivolous things, like food is not something that I reconsider. Gas is not something that I even consider. I need gas. So, I buy it. But frivolous things like clothes and shoes. And like I have shoes, so I don’t need another pair of shoes. I want another pair of shoes. It’s needs versus wants that make me think about it before I put it into the spending tracker. This is our real life story. Yeah. So, we didn’t track our spending. I think on what May 2nd we’re like, oh, I’ll do it later. And then later turned into June 1st, which was … Look, we make a lot of purchases during the month and it can be a little bit tedious to grab your phone and open up the app and enter your spending into the tracker. But it’s so much more tedious to sit there at the end of the month and go through the credit card bills and be like, did I put that in?

Mindy:
No. Okay. Now I have to add it. And if you add it through the app, it’s way easier than if you add it through the computer or it tracks it in a different way. I don’t know. Ray told me to do it that way. But it’s just, it was a disaster. And you can tell if you look at our restaurant spending, it was way up because I didn’t even go into our spending tracker this month. I didn’t even look at how much we were spending because I knew I wasn’t tracking it. So, there was nothing to compare to as opposed to past months, I have it up on my computer all the time and I can just pop in there. Ooh, we’re getting close to our grocery spend this month. I’m going to try and really go through the pantry and shop at home instead of going to the grocery store to try and make it under.

Mindy:
But I have no idea how much I spent this month. So, I’ll just go to the grocery store because it’s easier. It’s not easier. I have to get in my car and go to the grocery store. But the grocery store has all the things and my pantry doesn’t.

Carl:
Yeah. I’m thinking about all this and I think the … So, you called one thing out and that was the restaurant spending. What do you think caused that? I have my own idea. I’m curious to know what your thought is. If it’s the same as mine.

Mindy:
Pure and simple laziness.

Carl:
Well, it’s laziness, but we’ve been working on the house as we have always been doing. And we were trying to wrap up a whole bunch of projects before the girls got out of school. And yeah, sometimes you’re going crazy for the whole day and you’re really trying to knock the stuff off. We try not to work on it when the girls are at home, we try to confine our two while they’re in class. So, yeah, we just got super busy and that’s an easy pressure release valve, I think. But it’s also kind of stupid and contradictory too, because we’re doing all this work on our house to save money. And then if we go out to eat that kind of mixes some of our savings. So, yeah, I put this on myself. I overdo it. Mindy’s [inaudible 00:06:39].

Mindy:
I put it on you too.

Carl:
Yeah. Okay. So, it’s my fault. I’ll take the hit.

Mindy:
I’ll blame you for everything, how about that?

Carl:
But you also mentioned frivolous clothes spending. I don’t know if anyone can see my shorts here. They’re pretty-

Mindy:
Stand up and show everybody your beautiful shorts.

Carl:
Yeah. They’re they’re in rough shape. So, I’m pining the clothes spending on you because clearly I don’t spend money on-

Mindy:
Well and that’s not even where we spent the money this month.

Carl:
Yeah. True.

Mindy:
We spent it on restaurants. We spent it on groceries that we didn’t think about. And going out to eat is not a time save. You have to get in the car and drive to the restaurant. You have to wait for your table. You have to wait for your food. You could make all of your stuff at home. You could have some sort of meal plan in place, which takes time to do, but you plan your meals out and then you’ve got food or all of the ingredients available. So, you can quickly make meals.

Mindy:
You can prep ahead of time so you’ve got freezer meals where you just pull it out of the freezer in the morning and let it thaw all day and pop it into the oven at night and have a delicious home cooked meal. But all of these things take planning ahead of time. And we have lived a very reactionary life instead of a proactive life where for the past several years where we are just reacting to what’s going on instead of trying to plan ahead and that’s not in every circumstance of our life, but in a lot of them and I would that to change.

Carl:
Yeah, you are correct. We took on this huge house project, which I think is bigger than we ever thought it would be. When we purchased it I know our scope expanded. We did things that we didn’t initially planned for. The way I think about it is, it’s very good for the finances, not so good for the life. I had a clever saying around that, but now I forgot what it is. Like money rich, life poor. I think that might have been it. But you have to have a, there has to be a trade off there. You can’t just be hell bent on trying to earn the next dollar. We have to live life in a, you said it perfect, a less reactionary manner. But we’re getting there.

Mindy:
Yeah. We have wrapped up our home projects on this house and for the summer we are taking the summer off. We’re not doing any house projects.

Carl:
Yeah. And we’re almost done with the house too. We have a master bath to do, and that’s pretty much it. One big major project left, the girls’ bath, but that’s pretty simple.

Mindy:
Oh, getting that stupid foil wallpaper off is going to be a nightmare. I’m considering just re drywalling the bathroom.

Carl:
It might peel right off. Who knows? We’ll see.

Mindy:
I know. It won’t. That’s not how foil wallpaper works.

Carl:
So, if we live here long enough, it’ll come back in style. So, I vote maybe we just leave it and then five years that bathroom’s going to look super nice and it’ll be in all those magazines and stuff. So, yeah.

Mindy:
Yeah. That’s not going to happen.

Carl:
We’ll just leave it.

Mindy:
Okay. So, let’s talk about our challenges this month. We didn’t track our spending. That was a big challenge. Our restaurant spending was a big challenge. Our household spending was ridiculous. You can see all of the spending that we did do at biggerpockets.com/mindy’sbudget. And you can see that our household spending went crazy. We went to Ikea and Target a bunch of times.

Mindy:
When your kids say, mom, let’s go to Target. Say no. That’s what you should do. And instead I said yes. And we went to Target a lot. We went to Ikea and bought big things. Those are one time purchases. We redid our older daughter’s bedroom. She has a bed. We bought her a bed. We bought her bookshelves. We painted. So, that was kind of a big undertaking. And that’s a one time expense. But household expenses’ kind of went nuts.

Carl:
It’s interesting, one thought about the Ikea thing is you can always find that stuff on Craigslist or Facebook Marketplace, if you look long enough. And sometimes it’s a little bit beat up or the people smoked or something like that. And I thought about that when she’s like, I want this specific item. I’m like, well, we could wait, but then we’re going to be on Facebook Marketplace every day. When it does come up, we got to go borrow our friends pickup truck. It might not be close when we get there. It might not be what we thought it was. So, in that case, I just decided to bite the bullet and go for it. We could ask her to be a little bit more flexible, but I don’t know. How do you feel about that?

Mindy:
It’s a one time purchase and I didn’t feel bad about making it.

Carl:
Yeah, it was a bookshelf and our other purchase was a solar pool cover. We have a pool in the backyard, which we did not want, but we got a great price on the house. Because people in Colorado do not want a house with a pool. And we actually the pool. It’s not that bad. It doesn’t take a part-time. But if we don’t have the pool cover, it stays very, very cool. So, unless you’re-

Mindy:
Freezing cold.

Carl:
Unless you’re like Wim Hof or you’re a polar bear and like swimming in very cold water, you have to buy this pool cover. And that thing was almost $300. So, that was a one time expense that we did not previously think about when we planned our spending.

Mindy:
That’s an interesting point. We didn’t think about it when we were planning our spending. And this goes back to the reactionary. We don’t really do a lot of forward planning, but we also don’t have the historical spending data to go off of because we haven’t been tracking our spending. So, I think if we had been tracking our spending and knew that the previous pool cover would only last two years, we could have predicted this. And some of this is going to be really, really granular. Like how much time do we want to spend thinking about how much money we’re spending versus just, oh, okay, well now we need a pool cover. So, we’re going to do it. The pool cover is $300 and we get one every two years. So, $150 a year for a pool cover. We can just budget for that in the future.

Carl:
Yeah. And actually I have two thoughts. Theoretically, this could have gone into the slush fund because that’s how I see that category as stuff this that we forgot about, but that we still have to buy on a routine basis. It’s an error in our thinking. But the other thing with this pool of cover, you mentioned every two years, the previous one only did last two years, but I got a cheaper one. Like a lower quality one. But it was still almost 200 bucks. This one was almost 300. But this one has an eight year warranty. And you could tell, you could tell this one is much better.

Mindy:
Oh yeah, it is. It is much thicker. Okay. Eight years, 300 divided by eight is much less than 300 divided by two.

Carl:
What is 300 divided by eight?

Mindy:
Shut up. I don’t know.

Carl:
It’s a little bit less than 48 times 40 is 320. I don’t know. 30. High 30s.

Mindy:
Okay. So, $30 a year is way better than $150 a year.

Carl:
Yeah. It’s going to be worth it. Our friends have a pool and they have a natural gas pool heater. It takes a lot of natural gas to heat up 10,000 gallons. And they’re like, why is our natural gas bill like 300 bucks in May more than it used to be. I’m like, well it’s in your backyard. There’s the answer. So, yeah, this is a better solution.

Mindy:
Okay. So, I just mentioned the B word, the budget word. And in my introduction I said the shockingly low number of people who attended camp mustache who use a budget. We just got back from camp mustache last weekend. And we were talking about budgeting because that’s what to do with these camps. And it’s a lot of fun. And we just, show of hands who uses a budget and two people raise their hand out of what, 40 attendees. And I thought that was very interesting that only two people out of all 40 people sit down and write out, I guess three, I didn’t count myself. So, three. Okay. Well that just went up, but sit down and write out every month how much they are going to spend in each category. And then we were talking about how many people, I think didn’t they ask afterwards how many people reconcile their spending afterwards or track it after the fact. And a lot more people, almost everybody raise their hand there.

Mindy:
So, I think that there’s a high percentage of people in the personal finance space who are conscious of their spending, but few people are sitting down and making the actual budget. And I thought that was very interesting because this exercise has showed me that when I am actively tracking my spending, I am actively spending less. I’m thinking about how much I’m spending, I’m looking at what I have spent, what I’ve entered into this spending tracker already for that month. And it’s not an obsessive amount. I have several tabs open on my computer and I just go to this tab and peek at it. Oh, grocery spending is, we’re really doing great on grocery spending this month there. Ooh, we’re not. Because we have basically five categories that we mess up every month. Household, which is ridiculous. Groceries, restaurant, gas. I think we may have figured out gasoline lately. But yeah, I need to track my spending in order to be conscious of where my money’s going.

Carl:
But I think the tracking is different from the budget. Like after this year, our budget, I don’t really think we budget. I think I would call it a loose estimate, loose [inaudible 00:16:42] it hasn’t been super accurate. But I think the track-

Mindy:
A guess.

Carl:
Yeah. The tracking is where the real value comes in for us having to enter that and review it every once in a while to see where it goes. And I don’t know.

Mindy:
Well, here’s where I’m going to argue with you because having it set up the way that it is Mr. Waffles on Wednesday set that tracking spender up for me in the Excel sheet. So, that as soon as we go over whatever dollar figure we deemed was that category, the category turns red. And that is very helpful for me to see that in real time. So, having the budget in there, I don’t want to spend $2,000 a month on groceries. I’m trying really hard to keep it under 750. I’m just not really doing a good job of that. I could try harder. I guess, I’m not really trying really hard. I’m thinking about it sometimes, but I feel bad when I go over.

Carl:
Yeah. We have an excessive amount of food waste in our household, which-

Mindy:
We do. Natalie Kolody said, “Take all of your produce. And instead of putting it in those drawers, put it front and center in the top of your refrigerator so you see it all the time, and then you will eat it all the time.” And in our refrigerator we have a bunch of sauces and things up at the top.

Carl:
Yeah.

Mindy:
We should rearrange the refrigerator.

Carl:
Yeah.

Mindy:
We need to be better at our food waste. That is true.

Carl:
When I was a single male, I would make one big thing and eat it for the next seven days. So, I would have four things in the entire refrigerator and I would … I don’t know. I’m not sure what the root cause of this is, but I wasted kind of zero amount of food. [inaudible 00:18:34] .

Mindy:
Wow. Wow. That sounds you’re blaming me.

Carl:
Well, I guess we have a little bit of a difference of opinion in that the rest of the members of my household do not enjoy leftovers. And if it was up to me, I would eat, I would cook once and then I’d eat leftovers. So, 99% of my meals would be leftovers. I think it’s a little bit more efficient and you get less waste that way, but no judgment. Well, I guess a little bit.

Mindy:
That sounds a whole lot of judgment.

Carl:
Yeah. Well you could judge me for wanting to eat leftovers every day. That’s that’s not really great either.

Mindy:
Yeah. You were eating pasta.

Carl:
I know.

Mindy:
You would make a giant vat of pasta and then just eat pasta the whole time.

Carl:
It was cheap. I had no money. In college you could eat for 10 bucks a week. It was amazing. Or not for your body. Okay. There is a happy medium there that we will search for.

Mindy:
There is. And we need to be more conscious about that. I think consciousness is the whole theme of this episode. Be money conscious, be conscious of what you’re wasting, be conscious of where your money’s going and we’re spending.

Carl:
Yeah, good.

Mindy:
Okay, well let’s talk about our wins.

Carl:
Yeah. We have a huge win, which is pretty cool.

Mindy:
Huge win. So, we have not had Umbrella insurance in the past and I was talking to my friend, Anna, and she said that she was getting an Umbrella Insurance policy. And at the same time I was thinking we really need one. So, I called up her insurance agent and I said, can you just give me a quote on this.

Carl:
Hold on, back up one second. What is an Umbrella Insurance policy? Is that something that ensures the umbrellas in your house? Like those rain protection devices?

Mindy:
An umbrella insurance policy is not for ensuring your umbrellas, you big weirdo.

Carl:
Well, they break all the time though. We really should have that.

Mindy:
We never even use umbrellas.

Carl:
Because they break. The wind comes and that’s the end of that.

Mindy:
We live in Colorado. It’s a desert.

Carl:
Yeah. Yeah. We don’t need them either. Okay. I hijacked the conversation.

Mindy:
You sure did. So, an umbrella insurance policy is like, it covers you, your household, your assets, when you are … It’s over and above your auto policy, your homeowner’s policy. Let’s say you get in a car accident and with me, I am at fault and you Google Mindy Jensen. You’re like, oh, Mindy Jensen is a personality. She’s known in the personal finance space. So, I’m not going to settle for her auto insurance policy. I’m going to go after her. And I now have an Umbrella Insurance policy that covers me in addition to my auto insurance policy or my homeowner’s insurance policy. Should my pit bull bite you, I don’t have a pit bull, so they’re not going to bite you. It’s just extra level of insurance.

Carl:
With that said again, please don’t sue us.

Mindy:
Yes, don’t sue me. But I have an insurance policy. So, they will take care of me now. But anyway. I called it the insurance agent and she said, well, let’s look at your auto policy. And we had the bare bones auto policy because we are very safe drivers. And auto insurance covers you when you are at fault. We had a homeowner’s insurance policy and she looked at both of them and said, “Oh, okay. So, our company can increase your coverage on your car insurance policy, because you really don’t have enough coverage.” And she explained several things to me and I said, “Okay, fine. What you’re saying makes sense.” The homeowner’s insurance policy was for when we bought this house a couple of years ago. And despite having an episode with Steve Longnecker about homeowner’s insurance policies and making sure you have enough coverage, I did not have enough coverage.

Mindy:
We increased our coverage almost twofold on the home and got an Umbrella Insurance policy. And we are paying less for all three policies with more coverage than we were paying for just the auto and the homeowner’s insurance. So, that is a huge win. I now have far more coverage than I used to and it’s costing me less. So, I like that more. If you have not re-quoted your car insurance, your homeowner’s insurance, or if you don’t have an Umbrella policy, you need to reach out to several insurance companies, get quotes and see how much money you can save. Because you probably can. Unfortunately, insurance companies do not have any loyalty to you and they will increase your rates every year. So, you don’t need to feel any sort of loyalty to them by staying with them if they’re not going to give you the same respect.

Carl:
Yeah. There’s a saying around that, insurance is the only business where loyalty is punished.

Mindy:
Oh, that’s a really good saying.

Carl:
Yeah, but I want to emphasize. We did increase our insurance, but we still don’t have our, like cars, we have old ancient cars, they have 200,000 miles on them, both of them. And we don’t have the, I don’t even know the terms. We don’t have the insurance that covers our cars. So, we elevated the insurance that covers other people should we cause an accident. But if we get into an accident with our cars, they’re worth nothing. They’re probably worth a negative amount. We’d have to pay someone to take our cars. [inaudible 00:24:12]. If you have kids, kids are little savages. Oh yeah. Don’t allow food in your cars if you’re-

Mindy:
Or crayons.

Carl:
Yeah. Oh, crayons. They melt. Window stickers. Our cars are rolling biological experiments. We probably have, we’ll either die younger or will live infinitely because a genetic mutation is caused by what’s going on in our cars. So, I still like to have the minimal insurance because what’s the whole point of insurance just to cover something you can’t afford to replace on your own. If one of our cars was lost, well, number one, we wouldn’t have to replace it. Because we have two, we barely need one. But if we did need to buy a car, we could do that. So, I prefer keeping the smallest amount of insurance we need.

Mindy:
Yes. But we increased the amount of medical coverage.

Carl:
Yeah. And that was very, I agree with you there. Because if you get into an accident and we injure someone else, it was small and yeah, that did need to be increased.

Mindy:
And the Umbrella Insurance policy has minimums on your other policies. So, you can’t have the bare minimum on your auto policy and have an Umbrella policy. So, we had to increase the auto policy and the homeowner’s policy a little bit just to be able to get the Umbrella policy. But again, we’re still paying less for now three insurance policies than we were paying for two insurance policies with less coverage.

Carl:
Yeah. I think all of this is under $2,000 a year.

Mindy:
Yeah.

Carl:
Homeowners insurance for a nice house, two cars and the Umbrella policy. So, that’s great. A lot of people-

Mindy:
It was 1,100 for homeowners and 560 for, yeah, it was like 1,500 or 1,600.

Carl:
Yeah. And that’s annual. I know people will pay over 2,000 just for insurance on one car. And that’s why we have not nice cars.

Mindy:
Beaters. Okay. Hey, did we make any big purchases that aren’t on our spending tracker this month?

Carl:
We did make a big purchase.

Mindy:
Oh, oh we didn’t do it in May though. We did it in June.

Carl:
Yeah. That could be a cliff hanger where we announced the big purchase.

Mindy:
We bought a house, another house. Yay. And it’s a dump, because that’s so on brand for us. We live in a neighborhood that is … How would you describe our neighborhood?

Carl:
It’s pretty nice. It’s an old school neighborhood. It was built 40 years ago. So, we’ve got big trees. It’s kind of, it’s built on a golf course, which I never really wanted to saying we live in a golf course neighborhood seems kind of offbrand and not in line with our values, but we’ve got a lot of good friends here who share the same values. So, we’ve got a really good community here, which is the whole reason we moved here. Yeah. But it happens to be on a golf course too, which is strange. We’re not golfers. We don’t even play tennis. What are another fancy sport? Polo. You did that for a while, right?

Mindy:
Oh, shut up.

Carl:
What was your horse’s name? Yeah, no horses.

Mindy:
So, we had an opportunity to buy a house, another house in this same neighborhood. And it is outdated, it needs some work. But it doesn’t need a ton of work. What we about that house is it has no stairs. Well it’s got a basement, but you don’t need to ever go down to the basement. So, it’s a ranch house and we could potentially retire in that house. The house that we’re in currently is a split level and has stairs everywhere. So, as we get into our 90s and 100s, stairs may become a little bit more difficult to navigate. And this house will be a really great home to retire in. And until we move in there, it’s not a great home to move into right now because our children are still at home. They are 15 and 12 and there’s not all that much space. So, it’s a smaller house than this one.

Mindy:
And this house that we’re in currently really fits our needs. So, we are going to, we closed on June 2nd. We are getting ready to do some rehab to it, starting in September, which will be documented on Bigger Pockets. So, you can see what a real rehab looks like. Not these frivolous rehabs, where everything is neatly wrapped up in 30 minutes. I anticipate some problems just because that’s how it goes with every other rehab. This one’s not going to be smooth as silk either. So, we need to redo the kitchen because their kitchen is this big, it’s the dumbest kitchen ever. And the doors to all of the bedrooms are currently sliding glass doors instead of actual solid doors. What are other, some of quirks on this house?

Carl:
Quirks. It as floors that need to be refinished, that’s not really a quirk. It’s got skylights that have issues.

Mindy:
Leaks.

Carl:
Yeah. They did a weird skylight design, which you’ll see when we do the video series. But yeah, it’s a quirky house. The layout is also a bit strange, but we knew this house has upside too. And we have multiple exit strategies. We might move in there. In the meantime, we might do a furnished rental. And if something changes in the fall, I think we could turn around and sell it and probably make a pretty good profit with probably a month of intense work. A month of 48 hour work weeks with you and I, and maybe another person. Aric with an A might help us, a friend. And you view audience members are local to Longmont and have some skills. We might hire a couple other people, because we’ve lived in [inaudible 00:30:09] our current house.

Mindy:
Oh, oh, oh, oh, oh, I’m sorry. We will hire other people. Not might.

Carl:
Yeah. We want to get through this one fast, current house that we’re sitting in right now is, what are we two and a half years into this and we’re still not done. It is monopolized much of my life. And I do not want that. So, this one is going to be a targeted strike. We’re going to go in there, tear everything out. We’re going to have everything ready to go and we’ll get this one flipped around fast. So, yeah. If anyone wants to help send us an email, do they know how to get ahold of you or me?

Mindy:
[email protected]

Carl:
Yeah. If you don’t have any skills, you can do demolition. There’s a need for everyone. We want, what’s the uncle Sam thing? We want you.

Mindy:
Yeah. I want you to come work on my house.

Carl:
Yeah. Fun.

Mindy:
Yeah. It’ll be super awesome fun. It’s the best thing ever. You could learn how to say bad words.

Carl:
Yeah. I think we’ll have more to say on that. Maybe we should do an … Well, I guess that’s what the video series for that’s for.

Mindy:
That’s what the video series is for. But I think that it’s disingenuous to buy a house and then not mention it. We are taking the summer off. That is still true. It is June, what’s today, June 5th, that we are recording this episode. And we are getting ready to go to Germany in two days, we’re going to Munich and Berlin for 10 days and this episode will air while we are out. Thank you for listening. We’re having a great time in Berlin, probably.

Carl:
Ooh. Maybe we should look at some German design aesthetics to inform us for how we should do this house. We could be all pretentious and have a minimalist thing with stainless steel and white everywhere. The house well one color in the whole thing.

Mindy:
No.

Carl:
Or even less than that.

Mindy:
It still has that stupid fireplace.

Carl:
I am going to get, I really want a cuckoo clock. I’m not a souvenir person, but I don’t know. There’s a special place in my heart for cuckoo clocks.

Mindy:
Is there a special place in the spending tracker for a cuckoo clock?

Carl:
Yeah, maybe the travel, slush fund.

Mindy:
Slush fund. If you look at our June projected spending, it is the highest of any month we have had so far. And that is, a lot of it is the travel. Most of it’s the travel. But that is again, something that’s easily cut out should the stock market tank like it has been for the last month. Which is, again, why we’re tracking our spending in such a granular way, because when there are things that we need to cut, it’s easy to look at where the money’s going and say, oh, well, we don’t have to do this going forward. We don’t have to do that going forward. We can cut out restaurants completely. We can cut out going to tap rooms with our friends and we can cut out parties and we can cut out all these different things.

Mindy:
So, the categories that we put in our spending tracker may not make a lot of sense to you as you look at them, but that’s okay. They don’t have to make sense to you. That’s the beauty of the Waffles on Wednesday Spending Tracker, which we will link to in today’s show notes, which are found at biggerpockets.com/blog/money-308. We have a new way of doing our show notes. But the Waffles on Wednesday spending tracker is a customizable spending tracker. So, you can do all of your spending in the ways that are important to you. So, you can see what categories are easy to cut back on or cut out entirely when you start tracking your spending.

Carl:
Cool. I have nothing to add.

Mindy:
Wow.

Carl:
That’s channeling Charlie Munger. You’re a Warren Buffet. That’s a compliment.

Mindy:
Oh yeah. Wow.

Carl:
I have nothing further to add. If you know who Charlie Munger is.

Mindy:
I have no comment. Is that what he says? I have nothing to add.

Carl:
I think so. Yeah.

Mindy:
It’s been a couple of years since we’ve been to that. We just missed it. Did you even know?

Carl:
Yeah, I knew. I read the letter. We’re talking about the Berkshire Hathaway Conference, Omaha [inaudible 00:34:14].

Mindy:
The Berkshire Hathaway annual meeting. Annual shareholders meeting.

Carl:
Yeah, the Woodstock of Capitalism. It’s pretty cool. You don’t look Warren Buffet though, which is good.

Mindy:
Well, thank you. What a amazing compliment that is. I really appreciate your kind words.

Carl:
I look more Charlie Munger than you look Warren Buffet. This has gone off the rails.

Mindy:
Boy it has. Okay. Well that’s a good place to end. All right. Well we appreciate you listening. We would love to hear comments from you, email me [email protected] Email Carl at, what’s your good email address?

Carl:
What is a good email address, mr1500, the numbers MR 1500, @1500days.com. 1500days.com, which is also the name of the blog. But yeah, seriously, if you’ve got construction skills, hit me up.

Mindy:
Okay. So, I didn’t even say that you are the comedic genius behind the dinosaurs and fart jokes at 1500days.com and the comedic genius behind the dinosaurs and fart jokes at milehighfivepodcast. Sorry, I should’ve said that in the beginning of the show.

Carl:
It’s all right.

Mindy:
And he’s my husband. And he does a lot of the work on this house that you can’t really see, because we’re just aimed in here, but-

Carl:
Put the shelf up.

Mindy:
You’ll see … Yeah, he put this shelf up. You will see him doing work on the new house, the strange house. I’m super excited to do this house.

Carl:
Yeah.

Mindy:
I get to help on this house too.

Carl:
We should put a link to it. We have our Instagram post where we did the little movie. Can we put a link to that in here?

Mindy:
Yes. We will put a link to that in the show notes. Again, show 308, biggerpockets.com/blog/money-308. So, you can see this quirky new house.

Carl:
Yeah. Cool.

Mindy:
Okay. So, thank you for listening from episode 308 of the Bigger Pockets Money podcast. He is Carl Jensen. I am Mindy Jensen saying, auf wiedersehen.

Carl:
How do you say goodbye in German? Was that it?

Mindy:
That was it.

Carl:
Oh, I thought it was Danke. Oh, is that thank you?

Mindy:
That’s thank you.

Carl:
I’m going to suck in Germany.

Mindy:
You really are.

Carl:
It’s going to be an international incident. I’m going to say the wrong thing and …

Mindy:
Okay. Bye.

Carl:
Bye. Danke.

Ashley:
This is Real Estate Rookie, episode 190. My name is Ashley Kehr, and I’m here with my co-host Tony Robinson.

Tony:
Welcome to the Real Estate Rookie podcast, where every week, twice a week, we give you the inspiration, information and amazing stories you need to hear to kickstart your real estate investing journey. My co-host, Ashley Kehr, what’s going on? What’s new in western New York these days?

Ashley:
Well, it’s per usual. My flight gets delayed and/or canceled, and so coming back from the Rookie Weekend in Denver, flight got delayed in our layover in Detroit, and I didn’t get home till about 2:00 a.m., and so, running on fumes today. The kids already missed three days of school to come to the event with me, so they had to get up at 6:30 this morning and get ready for school, and I’m sure they’ll crash tonight. But it was really nice getting to be able to have them come with me. But, yeah, we’re all pretty tired today.

Tony:
Yeah. But what’s unique about this delay, actually, is that it wasn’t weather. It wasn’t the bad weather in Michigan. It wasn’t the bad weather in New York. It was because they didn’t have a pilot.

Ashley:
Yeah.

Tony:
How do you book a whole airplane filled with people, but forget that you need a pilot?

Ashley:
Yeah. I don’t know if maybe the pilot canceled or what. I don’t even know the person that stands at the gate, the gate attendant, maybe, is called. I don’t know. But they kept making announcements updating us saying, “We’re just looking for a pilot. We’re very short staffed.” Then they were like, “We found a pilot who’s supposed to be having time off, but he is going to come, and he is about 10 minutes out.” And then he came, and everybody clapped.

Tony:
You just need to pack up and move to California with me. I never get my flights delayed. I’m never snowed in. My internet connection is pretty strong. It’s just like all signs points to Ashley coming to California.

Ashley:
Yeah. Well, we were trying to-

Tony:
And there’s dairy farms here.

Ashley:
Yeah. Well, we were talking about how many times we’ve been delayed, and Daryl was saying, my business partner, was saying how it’s always these two airports. I’m like, “Well, yeah, because there’s no other direct flights. There’s literally two or three airports you can fly direct to out of Buffalo.” So, yes, our layovers are always the same airport.

Tony:
Always here.

Ashley:
But, yeah. So, what’s new with you?

Tony:
What’s new? We’re still busy working on the resort out in Big Bear. As of right now, we’re supposed to be closing in about seven weeks.

Ashley:
Oh.

Tony:
We’re up against the gun. Things are moving fast. But fingers crossed that we kind of get everything done we need to. But I’m super, super excited for this project, and I still think there’s a lot of upside there, so me and the Alpha Geek Capital team are just hard at work trying to put that together.

Ashley:
Is your due diligence period over with?

Tony:
We have, I think, 10 days left in our due diligence. But we’ve gotten pretty much all of our inspections done. We did our phase one. We did the property inspection. We did the appraisal, termite inspection. So pretty much all the due diligence we wanted to do, we’ve we’ve pretty much completed. Luckily, no major red flags have come back yet.

Ashley:
Yeah. That’s what I wanted to kind of talk about on this Rookie Reply episode is due diligence in properties. Because you’re doing due diligence on your property in New York, too. Do you want to explain that one a little?

Tony:
Yeah. We actually pulled out of it because of our due diligence.

Ashley:
Oh, you did?

Tony:
I can share kind of what we-

Ashley:
Oh, I didn’t know that.

Tony:
Yeah.

Ashley:
Yeah.

Tony:
Yeah, we actually pulled out of it. We had a property under contract in western New York. Is that western New York or is that upstate New York, where we [inaudible 00:03:50] that property is at? What would you call that?

Ashley:
It depends where you live, because if you live in New York City, the whole state is called upstate New York. But I would say that was more central New York. Central New York is what I would say.

Tony:
Okay. All right. There you go. We had this beautiful property in central New York. It was a bed and breakfast, and it was built in 1922, so a very historic property in that town. We had it under contract. Our plan was to go in there, buy it, renovate it, turn it into an Airbnb. But, during our due diligence process, we flew out to New York, and we saw the property in person, talked to a lot of local people. We decided to pull out of it, and I’ll kind of explain why.
First was that we realized that we were already buying kind of at the max ARV, and our original goal was to purchase that property with either private money or hard money, do our renovations to kind of bring it up to 2022 standards, because it was very dated inside, and we just felt like it wouldn’t work super well as an Airbnb. Our goal was to buy it and renovate it and then refinance into some kind of long-term debt, but BRRRRs only work if you have enough spread between your purchase price and the after-repair value.
But this property was so unique, because it was a seven bedroom, eight bath property, and there just weren’t very many comps surrounding that property in that area. There were some that were kind of further away, but when we met with the realtors in person, they told us like, “Hey, honestly, where you’re at is probably the highest you’re going to be able to go.” So that was the first strike, was that we didn’t have any room to really push the ARV up.
The second thing we were saying, “Okay, even if we leave some money in the deal, it might still make sense.” But the other issue was finding good labor. Everywhere, everywhere, everywhere, right now, it’s really hard to find people to kind of take these projects on. We got a couple of recommendations. They all said, “Hey, come back to us in 12 to 24 months when all of our other projects have kind of cleared up.” And then they were saying like, “If you do find anybody that’s available right now, you should run away, because all the good contracting crews are pretty busy.”
So it was those two things, and then we found some other stuff in the inspection report. We tried to negotiate with the seller, and she wasn’t willing to negotiate. So there was just kind of all these things that got stacked on top of each other that we were kind of finding out during that due diligence process that made us realize that, “Okay, we like this area. We definitely want to move into that area with the property, but that specific house, we think it makes sense to pass on.”

Ashley:
Are you going to do any kind of direct mail or anything in that area to look for it, or just look at stuff that’s listed on the market, on MLS?

Tony:
We just started a direct mail campaign for here in California, where our Joshua Tree properties are, so we’re testing out there first. I think if we can really nail it in this local market, then we’re going to start using that same process to some outside markets, as well.
I was going to say, Ryan Dossey, who’s been on the podcast, right? I think he did a couple episodes before I came on. He’s got a company called Ballpoint Marketing, and he’s not paying me to say this, but it’s really, really a great product, because most postcards you send out, they’re typed, or you can tell that it came from a computer, but Ballpoint Marketing, he’s got some kind of robot that hand writes everything, so it looks like a handwritten letter. And our response rate on the first few postcards we sent out has been much higher than what we were doing with our other direct mail, so it’s worked out well for so far.

Ashley:
That’s what I use, too, and I was just thinking we should do an episode, maybe get him on again and walk through that process again. Yeah, we did ours right before Christmas. We did it for a lake house around two lakes that we want to get a short-term rental at for a lake house, and, of course, personal use. But we did it two days before Christmas, I think, and we were getting calls the day before Christmas Eve, when it hit everybody’s mailboxes.

Tony:
Crazy, right?

Ashley:
We were overwhelmed by it. But, yeah, it worked great. We ended up, actually, right now we’re negotiating on two properties from that campaign that was back in December of just us following up. And then that same round we did a round to campgrounds in the area, too. And that one we’re negotiating on a campground right now that came from that mail campaign. So yeah, we should definitely do a Rookie Reply or a full episode on direct mail.

Tony:
Direct mail works.

Ashley:
Yeah.

Tony:
Totally.

Ashley:
But, yeah, let’s do due diligence today, because I have a property, too, that also fell out of contract because it did not pass inspections, and we got out of the contract before our due diligence period was up.

Tony:
You have to tell us about it.

Ashley:
The property for me was 700 acres, two beautiful ponds, two lodges for wedding venues, a Barton restaurant, 80 RV hookups, 18 cabins. I mean, just amazing, one-of-a-kind property.

Tony:
So it was a really small property.

Ashley:
Yeah. We ended up getting it under contract for $3 million. With that under contract, it was basically “as is”. They weren’t going to make any repairs, but we still put in a due diligence period. I had used a broker on this deal. They had brought me the deal. But I have to say that-

Tony:
Ashley, can I stop you really quick?

Ashley:
Yeah.

Tony:
Because I want to highlight something, right? When you say “as is”, let’s break down what that means for the listeners. So when you agree to “as is”, what does that mean? What are the limitations you have as the buyer?

Ashley:
Basically, if I find anything in the inspection, they’re not going to fix it. I ran into this with the campground, right now, I’m trying to negotiate. When he countered me for a higher offer, I accepted that counteroffer, but I put that I now want a longer due diligence period.
He was like, “Well, this property is ‘as is’. If an outlet’s not working, I’m not going to fix it.” Blah, blah, blah. I had to explain, “I completely understand, but I can’t go into this property blind, and then all of a sudden I get a bill for $100,000 of repairs that needed to be done. I just need to make sure that there aren’t a ton of issues that aren’t coming up.” And I said, “At the lower price, I was willing to take that risk.” Because then I had a lot more capital to play with and could add in a large capital improvement in there.
So, yeah, just remember that if someone says “as is”, that doesn’t mean you have to buy it “as is”. You can go and do your due diligence on it and see what kind of costs are going to be associated with purchasing that property.

Tony:
Honestly, even “as is”, even though they won’t repair it, you can still ask for a credit. Because, I’ve had it done both ways, right? Some people they say, “‘As is’. I’m not going to fix anything. Don’t ask me for any more money.” But I’ve had other offers where even though it’s “as is”, I’ve still been able to negotiate credits to say, “Hey, this is a much bigger expense than what we were anticipating, so we need some kind of reduction in the purchase price. I don’t need you to fix it, but I just need a little bit of break there.” I just wanted to pause on that, because I know that term gets thrown around a lot, so we could break it down for the rookies.

Ashley:
Yeah, it definitely doesn’t hurt to ask to get that negotiated, even if they are saying “as is”, I would still … maybe they’re not even aware of the issue, and if you pull out of that contract and they go to another buyer, another buyer is probably going to find the same issue, and then it’s just going to happen again. That’s great advice to definitely try and ask for them to give you a discount on the price.
Okay, so this property, some of the things that we found out first going into it, first, it was a foreclosure property and there was back taxes owed on it. The county ended up taking possession of the property first, before the bank foreclosed on it, and it went up for tax auction. So the county sold it at tax auction, and the bank was the one that ended up buying the property. Because what someone else was bidding at, it wouldn’t even cover their whole loan that was owed to them, plus the back taxes, so the bank ended up buying the property.
Now they’re selling it through a broker, and they don’t know anything about the property. There’s no financials on the property, so already stepping into this, this was a very, very blind deal to go into. There was really no guidance. We actually hired a consultant who actually helped us build the financial pitch deck and the proforma for the property based off comps in the area as to what we could do with it, because there was no really financial history. So that was kind of a big red flag for us.
So, with that, kind of ties in the financing piece. When you purchase a property and there is no financial history or background on the property, it’s going to be very hard to have a bank finance it for you. A bank is going to want to see that this property has been generating revenue. Well, this property hadn’t been generating revenue for two years. It sat vacant. So, no bank wanted to touch it. We were going to have a private money lender and then raise the rest of the capital needed.
The second issue that came up was that we could not get title insurance on the property. This was something that our attorney found out for us during the due diligence period, that because it went up for auction and there was no title insurance purchased at that point in time, there was a three-year redemption period. We ended up having to go to a title attorney, an attorney who specializes in title issues, and he was the one that kind of discovered that for us, that it wouldn’t be until three years after the auction date that you could actually get title insurance on it. That means there’s still two more years before a bank would finance the property if we wanted to go and refinance.
But also, looking at it, what investor wants to invest in a property as the private lender or as a limited partner in a syndication deal where there’s no title insurance on the property? Especially when it was a very messy of a deal where the county took it over, the bank then bought it, and the bank was in the process of foreclosing. So, those were kind of the big issues.

Tony:
Yeah. Just to break down, the risk of that property not being able to get title insurance means that, say that someone else was on title or has some kind of stake in that property, after you purchase it, they could go back and say, “Hey, I actually owned 50% of this, and I need my money, or I need ownership, or X, Y, Z.” Now it becomes a very dicey situation. But if you have title insurance and someone says, “Hey, I was actually on title,” it’ll be the title, insurance policy that would pay that person out, as opposed to you, as the new owner.

Ashley:
Yeah. Yeah. Thank you for explaining that.

Tony:
Yeah, so a lot of risk if you don’t-

Ashley:
You’re doing a way better job of breaking things down for me.

Tony:
Well, I’m just saying, it’s a lot of risk there, right, if you were to buy that and you didn’t have that in place?

Ashley:
Yeah. That was kind of like the first thing for us. The second thing came up during the due diligence period. I want to highlight first is, when you’re doing the due diligence period, make sure that you’re looking at your financing options. What will work for the property and can you get financing on them? And not even for how you’re going to acquire the deal, how you’re going to purchase it, but if you plan on refinancing down the road, make sure that you can refinance. Go and start talking to banks and say, “What will you need from me to put a mortgage on this property in two years or so?” They may say, “Two years of tax returns on the property.” That means, actually, it’ll be over two years that you could actually go and refinance by the time your tax returns are done. So, go and ask all those questions. Also, what’s the loan to value? Different things like that. Just kind of get an idea of what it would be like to finance, so you can kind of work that into your deal.
The second thing besides the financing is talking to people that issue the permits that regulate the property, especially commercial property. You want to talk to the code enforcement officer. With this property, it had its own sewer treatment facility on it, and that was regulated by the DEC, the Department of Environmental Conservation, and they’re the ones that oversaw that.
Before we even contacted the code enforcement officer, he actually called my attorney and said, “I’ve heard a rumor this was selling, and I tracked it down. If it’s okay, I would like to have the purchaser call me.” He said, “I’m just curious what you’re doing with this property.” I said, “I’m going to turn it back into a campground and operate it.” He said, “Okay, well, I need to tell you some things about it.” I think this was very nice that he took the initiative before we even reached out to him.
But he just said that 50 of the RV sites that have full water, sewer hook-up to them, and electric, were never permitted. That means for the town, the county, to come back and issue me a building permit, if something doesn’t look right, they have to dig up all that infrastructure. There’s no site plans, no engineering plans were even handed in to the town or the county to put in all of this new infrastructure for these new RV site hookups. So that right there, I’m like, at 50 RV sites that are not permitted out of 80, that would be a huge expense for us if we did have to go back and redo it if there was something wrong and it wasn’t along with code or something like that. So, that was kind of like our second flag.
When you are talking with the DEC or with a code enforcement officer or whatever permit issuing agency is, we found out that in New York State, you can actually request a foil, F-O-I-L. And what it is, is you can get all of their information, all of their records on that property. I mean, this one for this campground site was, I mean, this huge thick folder. He actually said, “Why don’t you come into my office, because that would actually be faster than me just scanning all this in and emailing it, or copying every page and mailing it to you.” So check out what kind of options you have and what kind of information you can get, too, from the government agencies that have regulated and permitted these properties.

Tony:
Yeah, Ashley, I think going into the local town hall or wherever and get information on the property is super critical. We did that for our Big Bear property. We were just up there last week, and part of our stop was going into city hall and just saying, “Hey, we’re looking at buying this property. What can you tell us about it?”
When we were in New York, same thing. We went into the town hall there and said, “Hey, we’re looking at buying this property. Tell us what we need to do, what the steps are, et cetera.”
You get to go straight to the source and understand kind of what the potential risks are, what you need to do as a new buyer to make sure that you’re operating in a legal way, et cetera, et cetera. Yeah, there’s so much value that comes from just in person, talking to people, and getting information straight from the source.

Ashley:
Yeah. I think the only other thing that I would add to that is just talking to an attorney, too, about the property, especially if it is a commercial property, and seeing, what deals have you done like this? That was when I picked my attorney for this deal was an attorney I’d used before, but before I decided I was going with him on this deal, I said, “What’s your experience with properties like these?” He was able to tell me similar deals he had done, and able to guide me and help me in the due diligence period as the things I should look for, and things he had noticed with other properties that came up that he had helped close on, too, which was very helpful. And then, just kind of like Tony said, he had contractors come out, inspectors, and I think lining those all up and really knowing what you’re getting into and putting a dollar amount to it is very important.
And check the utilities. If you have well, you have septic, is it public utilities? One property I just purchased has propane tanks. Actually, there’s two buildings on it. One building has a propane tank and the other one doesn’t. It’s all wired, all hooked up, it has all the plumbing and everything for the gas, but there’s not actually a propane tank in the ground. Which isn’t a big deal for us. That’s something we easily can take care of. But imagine if you went into there not knowing that, and you’re like, “Oh, here we go. This is almost ready. I just have to finish this little cabin off a little bit, but oh, there’s no propane. I need a propane tank.” So, checking your utilities and making sure they’re all operational, or what you have to do to fix them.

Tony:
And just asking, “Hey, is this on septic or is it on city sewer? Is it on city water, or is it on well?” My mind is still blown by the well water concept, like the property in New York. They were like, “Yeah, there’s a well under here.” I was like, “So there’s just water underground, and that’s just coming into the property?” And he was like, “Yeah.” I was like, “So is it ever going to run out?” He was like, “Probably not.” Just knowing those things, I think, are super important, as well.

Ashley:
I can’t wait for you to come visit me sometime and have your first taste of well water at my house.

Tony:
Well water. Blow my mind.

Ashley:
Okay. Well, anything else you wanted to add to that?

Tony:
I think those are all the big things, Ash. I think that’s everything. I guess the last thing is just understand that the purpose of due diligence is to uncover as much about the property as you potentially can, so that way you can make an informed decision. You’re going to have to get up in the seller’s business sometimes. Right? You might need to ask for information that they’re not super keen on sharing. But at the end of the day, you have an obligation to yourself and to your business to turn over as many stones as you possibly can. And if you need to walk away, be prepared to walk away. Because the last thing you want to do is discover something during your due diligence that is a major red flag, but you’ve become so emotionally involved in the deal that you make the bad decision of moving forward anyway. Work with your data, work with the hard facts, and not so much your emotions, and that’s how you get the most out of your due diligence.

Ashley:
Tony, that hits home to me so much. The screen saver on my phone was the view from this property. My passcode on my phone, I should probably change it now, after this episode airs, was the address, the house number to this property. And that was just, I wanted this property so bad.
But, you know what? The opportunity cost of all that time wasted, even money wasted, I still have to pay my attorney. I still have to pay for, I had a drone footage done of it. I paid the maintenance guy to come. Just a lot of time and money wasted, but it’s an opportunity cost, because, or else I could have ended up with … we had already, I think had $300,000 of cap ex that needed to go into this property, and it could have been up to half a million as we started to find out more things. So, think of that as an opportunity cost instead of money wasted, but that emotional detachment is very important on a property, too.

Tony:
Cool. Well, glad you had the courage to walk away from it, Ash. Yeah.

Ashley:
You know what? The silver lining to it is this other property, this other campground we’re going after now, honestly, seems so easy after going through the due diligence of this other property. Just taking it over. It’s already operational. So I think it was a very good just-

Tony:
A stepping stone?

Ashley:
… learning curve for us, too. Yeah. And stepping stone. It’s making us take over this other campground, hopefully, if we can get a signed contract this week, a lot easier. But, okay.
Well, thank you guys so much for joining us. We will be back on Wednesday with a guest, and if you guys are loving the show and you have taken value, please leave us a review on your favorite podcast platform, and let us know how this podcast has impacted your life. I’m Ashley, @WealthFromRentals. He’s Tony, @TonyJRobinson. We’ll see you guys next time.

My friend, Ron, is a single-family developer on the East Coast. Ron has spent decades successfully developing subdivisions. He told me this shocking story the other day. 

He was planning to build 2,200 square foot homes on about 40 lots that he had developed, hoping to sell these homes in the range of $350,000. They were nothing special but near a beach, so that helped.

He saw a new house on the market in a subdivision across the street. It was only 1,500 square feet and sold for over $400,000 last spring, so he was very encouraged. He was surprised when it hit the market a few months later for $625,000. And it sold!

He was even more surprised when it hit the market again for $820,000 last month. It went pending quickly, and he told me the other day it actually sold for $20k over the asking price at $840,000. 

Remember, this is for a 1,500-square-foot house that isn’t beachfront. 

When it’s this easy, something might be wrong. 

Another friend of mine is an outstanding multifamily syndicator. He told me about a multifamily property that is particularly challenging for his team. 

Before I go on, I want to say he is one of the best multifamily syndicators I know. He’s got an excellent property management team, great marketing, great systems, and he usually doesn’t make mistakes with acquisitions. Well, this was one mistake. 

He told me his net operating income was barely covering his debt service. His debt service coverage ratio was dangerously low. Because he uses floating rate debt, his interest rate was in the 2% range. 

His property management team had done all they could but could not get the rent bumps they projected and the needed increases in net operating income. 

This was not a great investment. Then it became one. 

My friend got an offer 50% higher than he paid for this asset. The new buyer, probably a less experienced syndicator, has a floating interest rate at approximately more than double my friend’s, at roughly 5%. 

Think about this—how in the world is this going to work? How is it going to end for the investors? 

I don’t understand how the math works or how they got a loan, but that happens in times like this. In times that precede a market top (a bubble bursting), debt flows freely, and syndicators gobble up every bit they can.  

The only way this could even work, in my mind, is if the buyer got extremely low LTV debt and is hoping, praying, and counting on inflation to rescue him and his investors. 

But that’s not the point of this post. The point is that my friend got out of a terrible investment with a very nice profit. 

Once again, when it’s this easy, something might be wrong.

Charlie Munger, the legendary curmudgeon investing partner of Warren Buffett and Vice-Chairman of Berkshire Hathaway, said, “It’s not supposed to be easy. Anyone who finds it easy is stupid.” 

If Warren and Charlie invested in real estate, I think they would be selling right now. That is unless they could locate assets with significant intrinsic value that could be harvested. I’ve written on this, and my firm has staked our future on it: “There Are Still Deals Out There (for Now)—Here’s Where to Find Them.”

This is not limited to just these two examples. I hear examples like this all the time. I mean all the time. 

And it is not limited to a few asset classes. I’m hearing stories like this in multifamily, single-family, self-storage, mobile home parks, and more. 

This type of behavior almost always precedes the top of the market and a bubble that eventually bursts. 

I will admit it’s possible that massive inflation could save many of these speculators. But do you really want to count on that? I mean, do you really want to be in a position and put your investors in a position where things outside of your control have to go your way to make things work? 

If you are collecting fees and will get paid regardless, you may be tempted to charge forward. But I am pleading with you to reconsider that for the sake of your future, your reputation, and especially on behalf of all the people who are counting on you. 

This is not the time to play double or nothing. When the market is at unprecedented levels, then the margin of safety is the smallest (and, in this case, perhaps negative). 

This is the time to avoid risk and wait for blood to run in the streets (from others’ mistakes). If you keep playing double or nothing, you will eventually land on nothing. Then what will you have left to double? 

Speculators sometimes end up driving a Maserati and living in a mansion. But some of them wind up delivering pizzas. There is nothing wrong with delivering pizzas, but I am guessing you are involved in the BiggerPockets community because you want more. 

We all know that low risk leads to low returns. Correspondingly, we assume that high risk leads to high returns. But that’s not true. High risk leads to the potential for higher returns. And also the potential for low returns or total loss. 

Don’t gamble with your wealth. And certainly, don’t gamble with others’ wealth. They deserve better than that. So do you and your family. 

I was talking with another investor recently and used a term I assumed he would be familiar with. He wasn’t, which led me to realize that a simple but very effective tool for decision-making was likely to be overlooked by many others as well.

The tool/concept is called expected value (EV), and I’m most familiar with this concept because I spent my youth playing way too much high-stakes poker. 

In poker, EV is one of the most common tools used to determine an optimal decision (fold, call, raise, etc.) in the middle of a hand, especially in big situations where all the chips are on the line.

But, EV can be applied to a wide range of decisions, including decisions related to our investments. 

How Does Expected Value Work?

Let’s look at how EV works, using a straightforward example from the poker world.

We’re sitting in a poker game. It’s the end of the hand, and there’s $400 in the pot, and the other player in the hand bets $100, making the pot $500, requiring you to put in $100 to see a show-down.

You have a decision to make: Do you call the $100 bet or not?

While I could give you all the details of the hand—what cards you have, how the betting played out, whether the other player looks nervous. The only piece of information you need to make an optimal decision about whether to call is what you estimate the likelihood of you having the best hand (and therefore winning the pot).

To determine the expected value for a decision, you multiply the probability of each possible outcome by the value of that outcome and then add up the results.

In this case, there are three possible outcomes:

1. You have the best hand and win
2. You have the worst hand and lose
3. You have the same hand (we’ll ignore this)

Let’s say that you believe there’s a 25% chance that you have the best hand and a 75% chance of having the worst hand. In other words, you will most likely lose, regardless of what you do. 

But what about the expected value?

There’s a 25% chance of the first scenario above happening (you having the best hand and win), and if it does, you’ll win $500 (the amount in the pot). There’s a 75% chance of the second scenario happening (you have the worst hand and lose), and if it does, you’ll lose $100 (the amount you need to spend to call the bet).

To determine the EV, we multiply the probability by the outcome for each scenario and add them up:

EV = (25% * $500) + (75% * -$100)

EV = ($125) + (-$75)

EV = $50

The Expected Value is $50. What does this mean?

It means that, while we have no idea if we’ll win $500 or lose $100 this hand, if we were to play out this exact situation a million times, we should expect to win, on average, $50 per situation.

A good poker player knows that while there is a 75% chance of losing this hand and going broke. Over the long term, taking that risk every time it comes up will ultimately make money. 

In fact, if a poker player finds themselves in this exact situation 100 times, they should expect to earn 100 * $50 = $5,000 across all these situations.

A positive expected value investment/decision is one that you should always consider making. A negative EV investment/decision is one that you should always consider passing on. 

Had the expected value for the poker situation above been negative, a fold would have been the right move.

How Expected Value Applies to Other Investment Decisions

We can apply the same logic to other types of decisions and different types of investments.

For example, it’s typical for house flippers who do a high volume of deals to consider “self-insuring” their properties. This means they don’t get insurance for the flips and assume the risk/cost themselves.

But is it smart to self-insure your flips? Let’s make some assumptions and run an EV equation.

Let’s assume:

• A typical insurance policy for a house flip will cost $1,000
• 1 in 50 flips (2%) will have a small ($10,000) claim
• 1 in 200 flips (.5%) will have a big ($100,000) claim
• The rest of the flips (97.5%) will have no insurance claim

Should we pay the $1,000 in insurance for each of our flips? Or self-insure?

Let’s take a look at the EV for self-insuring. We’ll start with the possible outcomes and the value of each:

• 97.5% of the time, there would be no claim. Therefore, no out-of-pocket cost.
• 2% of the time, there would be a small claim of $10,000 that we’d have to pay out-of-pocket.
• .5% of the time, there would be a large claim of $100,000 that we’d have to pay out-of-pocket.

EV = (97.5% * $0) + (2% * $10,000) + (.5% * $100,000)

EV = $0 + $200 + $500 

EV = $700

The EV on self-insuring is $700. That means, on average, we’d spend $700 per project paying for things that would have otherwise been covered by insurance.

In other words, if we were to do 100 flips, we could expect that we’d save about $300 per flip by self-insuring. Or $30,000 across all 100 flips! 

Final Thoughts

While this is highly simplified, and you’ll have to use the numbers that make sense for your flips (both insurance costs and likely claims), you can see why many house flippers who are doing large volumes of flips choose to self-insure.

There are thousands of scenarios you’ll run into, both with your investments and daily life, where expected value calculations allow you to make much better decisions than just “going with your gut”.

Disclaimers about expected value

• Yes, there was another option in the poker example (raising). We’re ignoring that one.
• Yes, this discussion ignores variance. Sometimes, lower variance is more important than higher EV.
• Yes, you need to consider other things besides EV, especially when it comes to catastrophic risk (risk of losing everything).
• Yes, this requires that you are good at estimating the probability of each outcome and the value for each outcome, which can be difficult.

Prepare for a market shift

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Ryan Schneider, Anywhere Real Estate CEO, joins ‘Squawk on the Street’ to discuss why the company decided to rebrand, how the business is changing and if the rising rate environment is affecting all income brackets when buying a home.

Mark Zandi, Moody’s Analytics chief economist, joins ‘Power Lunch’ to discuss his take on the housing market after Wednesday’s mortgage demand data, his predictions for different housing market stability metrics and more.

If you haven’t noticed, real estate is the most expensive it’s ever been. For newcomers and experienced investors, it’s been a lot harder to find good deals at affordable prices.

Luckily, real estate investing provides enough strategies that you can get around the barrier of entry by executing a tactic known as “house hacking”. Let’s talk about what that means.

What is House Hacking?

House hacking is where you leverage the home you live in by renting out some portion of the property to generate income and offset your monthly mortgage payment. 

For most people, a monthly mortgage or rent payment is their biggest expense. If you could reduce or eliminate your monthly housing payment, you would inevitably have more financial independence, extra passive income for the lifestyle you want, and more cash to set aside for your next real estate investment. 

In reality, house hacking is an actual life hack that forces your largest expense to work for you. It’s also one of the easiest ways to become a landlord.

Why Now is the Best Time To Start House Hacking

Just think of the headlines in real estate over the past two years: “historically low-interest rates”, “unprecedented appreciation”, “historic low inventory”, and “record inflation”. The list goes on. 

We face surging inflation as we enter the aftermath of these unprecedented and historic runs. To combat it, the Fed has raised interest rates, and in conjunction, the 30-year fixed mortgage rate has already jumped from an average of mid-3% to over 5% in a few months.

Here’s how that affects people’s wallets:

Let’s use a $500,000 home as an example.

Based on the 2% rise in interest, the monthly payment has increased by over $500! $500 extra each month can make a real impact on your budget. Based on the Fed’s indications, rates could continue to increase. People have also lost significant purchasing power because of the increased rates. 

As the market fights against first-time home buyers and eager investors trying to get in, house hacking is an advantageous weapon in your arsenal.

Who is House Hacking For?

Technically, anyone can take advantage of the benefits of house hacking, but it isn’t for the faint of heart. It can be uncomfortable. You may have to share parts of your house that you previously enjoyed to yourself, or it may take a significant up-front financial investment. 

While anybody can house hack, here are some categories of people who stand to gain the most by putting it into practice.

Those looking to save and earn more from their homes

Studies show that up to 64% of Americans live paycheck to paycheck. It’s even higher depending on the income bracket. 

Amongst these groups, a large portion of their paycheck goes towards housing costs. If the average American can lower or eliminate that housing cost, it can change their entire financial picture. Utilizing a house hacking strategy is a life-changing opportunity that affords the ability to save and have increased disposable income for individuals and families.

Those searching for financial independence

There is a large group of people that make decent money and have a comfortable life, but that comes at the expense of their time. Most of our lifestyles, homes, cars, and healthcare costs are all predicated on doing what someone else wants us to do and being where they require us to be for 40+ hours a week. Many of us work the job we do because we have to, not because we want to.

For example, I knew personally that to earn some degree of financial independence, house hacking was the right move. My wife and I downsized by renting out our comfortable four-bedroom home, invested our savings into another house, and flipped half of it into an Airbnb to eliminate the housing costs and get us one step closer to financial freedom. 

It’s not stress-free, but there’s a substantial economic impact that will pay dividends for years to come. House hacking is an accelerant for those searching for financial independence.

The young and hungry

Hands down, the person who stands to gain the most from house hacking is a younger person looking to acquire more real estate sooner. 

Generally, someone starting out in the workforce isn’t making a ton of money and may already have some significant debt with student loans. 

It’s hard to save with lower wages, debt payments, and rent payments. If someone in this situation can get into home ownership and utilize house hacking to have lower costs than what they would pay in rent, they win! 

They begin to leverage an asset, and real estate does its magic. Equity grows, cash-flow increases, the home appreciates, and they can save more to buy the next property sooner.

Ways to House Hack

1. Rent to roommates

This is the simplest and easiest way to house hack. Purchase a home and rent out some of the rooms to friends or even people you don’t know. Why pay a landlord when you can be the landlord? 

I have a buyer in Denver who is a recent college grad trying to achieve this exact scenario. Rather than rent a room himself for $800-$1,000/month, or rent an apartment for $1,500-$2,000/month, he’s decided to buy real estate early and offset his costs through house hacking. 

We are currently looking at 3-4 bedroom houses where he can rent out other rooms. Only $1000/month will come out of his pocket to own an appreciating, updated 3-4 bedroom home in Denver when he’s all done.

2. Start a short-term rental 

Another lucrative way to house hack is by setting up a short-term rental (STR) through popular platforms like Airbnb and VRBO.

In my case, this is the strategy I use for house hacking. We purchased our second home in Denver with the goal of completely mitigating our mortgage. Our separate-entry guest suite with one bedroom, one bathroom, and living space consistently pays us more than our mortgage payment. 

3. Buy a multifamily home

Many refer to this model as the “OG” of house hacking. Buy a duplex, triplex, or quadplex, live in one of the units and rent out the others. This allows an investor to get into multifamily investing for the least amount of money. 

Generally, a multifamily investment takes a 25% down payment. You can get in for as low as 15% down if it is a primary residence. 

In one move, you can purchase multiple units that can bring enough income to eliminate your out-of-pocket mortgage payment.

4. Build a “hackable” space

Many homeowners really love their homes, dislike the idea of moving, and don’t want to give up any space they already use. Those same people who have enjoyed living in their homes for a while have probably experienced unprecedented and historic appreciation over the past few years, giving them a ton of equity at their disposal.

I have friends who are in this exact dilemma. They want to get ahead by investing in real estate and find the extra income and financial independence that comes with house hacking, but they love their home and don’t want to move or give up any of their amenities. 

What’s their solution? 

Leveraging their equity with a home equity line of credit (HELOC) to build an addition to their house to create a short-term rental space. 

We ran the numbers, and the income they stand to make from their Airbnb will pay for their mortgage payment plus the HELOC payment.

Final Thoughts

There are various house hackable spaces and ideas at hand for homeowners. Finishing out a basement, building an ADU, or even putting up an airstream in the backyard could make extra cash. 

All of these ideas are subject to your city’s zoning and regulations, but the concept remains the same, there are ways to win by house hacking your home.

You’ll hear a lot of investors talk about house hacking time and time again because it works. It’s not the most flashy of investments. It can be uncomfortable and possibly invade your privacy. But house hacking has the power to radically reorganize your financial situation and reorient your mindset to making real estate work for your behalf.

That alone makes it worth it.

Let’s face it, being a real estate or rental property owner is like trying to navigate a minefield. At every point, you must double-check federal and state laws to ensure you don’t cross boundaries on your own property. The various housing laws that exist always protect the interest of the tenants over that of the landlords.

So, it may seem that landlords have few, if any, rights. However, specific landlord-tenant laws protect a landlord’s rights. This article discusses some of these rights and how they protect your interests as a property rental owner. 

First, there is one important question to discuss: How did landlord-tenant laws shift in favor of tenants, rather than the landlord, who invested a lot of money in a house or apartment?

Reasons for Revising Housing Laws 

Changes to housing law legislation resulted from a growing awareness of the welfare of tenants. Unfortunately, this was primarily due to the unfair treatment of tenants in the past. The term slumlord came to mean a landlord who tried to maximize profit but failed to upkeep the property. As a result, the government set out to protect tenant interests by enacting rent control laws to defend them from oppressive landlords.

Also, in modern times, tenants are mobile, often moving from city to city, region to region, to suit their needs. As a result, past tenancy agreement laws might not be relevant or practical nowadays. For example, tenants used to repair and upgrade rented apartments. This was usually because they stayed in those locations longer than they do now.

The implied warranty clause means that rental units must be “fit for purpose.” This means that the property is up to standard and fit for human habitation. Landlords must ensure heating, hot water, waste disposal, and plumbing work. Of course, once the tenant moves in, they are responsible for caring for the place. However, the landlords still have responsibilities to ensure essential maintenance and repairs are carried out.

So, any damage caused by the tenant is their responsibility. Either the tenant repairs the damage, it gets taken from their security deposit, or it becomes a lease violation.

What Are My Rights as a Landlord? 

Landlords have rights, even though they sometimes seem like the bare minimum. Let’s briefly discuss some of those rights.

1. The right to tell a tenant how clean to keep the house

A landlord has the right to ensure a certain level of cleanliness in the rental unit. It’s within a landlord’s right to require that tenants remove garbage regularly, clean pet mess, and prevent unhygienic conditions from attracting pests and vermin. This is why it’s a good idea to have a cleanliness clause in the rental agreement. 

Of course, it’s not within a landlord’s jurisdiction to say how often to vacuum the carpets or clean the bathtub. However, you have a right to tell a tenant to keep the house clean. 

2. Landlord rights when a tenant destroys property

As a landlord, you have the right to inspect the property if you suspect a tenant is trashing the place. Of course, you must give proper notice in line with state laws. During a thorough inspection, you can document the evidence and take pictures. You can then decide on the best action to take. 

Destroying property is a lease agreement violation. Therefore you have the right to start an eviction action. This involves serving the delinquent tenant with a “cure or quit” notice in writing. If the tenant hasn’t repaired the damage after a reasonable amount of time, you can file for eviction. After the tenant vacates the property, you have the right to withhold part of all of the security deposit to pay for repairs. 

3. The right to screen tenants

The landlord reserves the right to screen potential tenants before signing lease agreements with them. While screening, the landlord confirms the character of the prospective tenant. Then, they decide whether they will sign the rental agreement. 

However, it is not permissible to base a decision on any discriminatory criteria. So, it is vital to check what the Fair Housing Act says about discriminating against any tenant seeking accommodation.

A landlord has the right to assess potential tenants based on the following criteria:

• A physical interview or meeting to assess the prospective tenant’s suitability.
• Check their identity.
• Check their credit score and history.
• Get references from previous landlords and employers.
• Verify whether they have a criminal record. However, state laws may prohibit this check. 

4. Right to collect rent and security deposits.

The landlord has the right to set the rental price and security deposits. However, state laws may limit the amount of security deposit you can charge. 

The tenant must pay the security deposit and a month’s rent in advance upon signing the rental agreement. The rent, in this case, refers to all the fees stated in the lease agreement. These fees include utility bills (if stated), taxes on the property, and fees for keeping a pet.

Landlords have the right to request a security deposit in line with state laws. This money is a kind of insurance against damage or unpaid rent. The landlord can use the security deposit to pay for costs to repair damage caused by a tenant. 

However, at the end of the lease agreement, a landlord generally must return the security deposit to the tenant. 

5. Right to evict tenants for lease violations

Tenants have obligations to the landlord while using their property. They include:

• Obligation to pay rent: In this context, rent refers to all forms of payment stipulated in the lease agreement. Therefore, the tenant must pay these fees as they are required. Non-payment of rent is a lease violation. 
• Not altering the property’s structure: The tenant can only modify the property if the lease agreement allows for this. For instance, they might repaint walls and install shelves only if the lease allows it. However, it is not acceptable to increase a room’s size by removing walls or making structural alterations. Also, a tenant must not cause damage to the property.
• Illegal activities: A tenant must not use the property for unlawful activity.

Violation of any of these rules or failure to comply with them gives landlords the right to serve an eviction notice to “cure or quit.”

For example, suppose a tenant fails to pay rent. In that case, the landlord has the right to start an eviction process. This would involve proving to a judge that the tenant is in violation of the lease agreement. Then, if the tenant fails to make the rent payment in full in the specified time, they can be evicted. 

6. Right to access the property

Landlords can access their property even after renting it out. The main clause in this is that they must give prior notice to the tenants before coming. Most states in the U.S. demand a 24-hour notice, while some ask even higher. If the landlord violates this clause, the tenants can sue them for privacy invasion.

However, in emergency cases, the landlord can come in without a notice to secure his property from losses. 

7. Right to make a “moving-out” inspection

The landlords have the right to inspect the property whenever the tenant notifies them of their desire to leave the property. Once they receive the notice, they can inspect the property for any damage that is more than just regular “wear and tear.” 

Regular “wear and tear” is superficial damage to the property due to day-to-day living. However, it doesn’t include severe damage to the property, fixtures, or fittings. For example, there is a difference between surface scratches on a baseboard and a large hole in drywall. 

Conclusion

Landlord-tenant laws in the U.S. indeed tend to favor tenants. However, it’s vital to remember that landlords have specific rights to collect rent on time, make regular inspections, and evict a tenant for a lease violation.

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David:
This is the BiggerPockets Podcast, show 619.

Laurence:
I think we might, and this is another prediction and I’m not an economist, but this is just my own personal belief. I think there’s a decent chance we’d go through a period of stagflation. So normally you’d raise interest rates to stop inflation, but I think in this case inflation’s going to keep going up, which makes affordability and cost of living also go up, but it’s less affordable so we might hit a recession even though there’s tremendous growth in prices. And that could cause a period of stagflation. So you could see some spiraling out of control in this way.

David:
What’s going on, everyone? This is David Greene, your host of the BiggerPockets Real Estate Podcast, the best real estate investing podcast bar none. Today, my co-host Dave Meyer and I will be interviewing Laurence Jankelow, the co-founder of Avail and the VP of Rentals at Realtor.com. Laurence is passionate about helping landlords do their jobs better and make more money in real estate. And Dave and I have a fascinating interview with him where he shares how he uses technology to help do a better job with investing in real estate, which areas he invests in, which asset classes he likes. We get into some really good stuff. Dave, what were some of your favorite parts of today’s show?

Dave:
I think Laurence provides some really practical, tactical advice on how to be a better property manager, particularly in an uncertain economy, which we’re seeing right now. But a lot of people talk about property management, whether you should sell [inaudible 00:01:30], or if you should hire a professional property management company. But don’t talk about the actual logistics, nuts and bolts of what you should be doing, particularly as a new property manager. I know I had a lot of very embarrassing and painful lessons when I was first self-managing and I think he gave some great advice on how to avoid some of those common pitfalls.

David:
Yeah, that’s a very good point. We got pretty deep into what to look for in a tenant, what to avoid, how important choosing the right tenant actually is. And it’s not talked about enough in real estate. Today’s quick tip – go to check out biggerpockets.com/podcasts. At BiggerPockets, we have now put together a landing page where you can see all of the podcasts that we offer on specific topics, as well as learn a little bit more about the host and what you can expect from every show. So head over to biggerpockets.com/podcast, click on The Real Estate Show to learn about me, click on the On the Market icon to learn more about Dave and see what BiggerPockets has to offer you that you might not be aware of.
Dave, my friend, so I got to admit, I have had my head completely zoomed in and focused on running the David Greene team, running The One Brokerage and in the middle of a 1031, trying to find replacement properties. And I’ve been so focused on the individual details of making this happen that I haven’t been able to pay as much attention to the market in general as I would like. But sometimes knowing what’s happening in the market in general is actually more helpful than paying attention to a specific property because the market tends to move as a whole. So would you be so kind as to kind of filling me in on what you’ve been seeing, what you’ve been noticing? What’s the talk in the real estate world today?

Dave:
Yeah, absolutely. I would love to. I think there are two topics that are really top of mind for me. And the first is inventory and just general inventory dynamic. I’m sure you’re saying this in all of your businesses, but to me it seems like the housing market is starting to have this sort of epic tug of war. And on one side we have demand and it’s just how many people want to buy homes. And that with rising interest rate is showing signs of softening. It’s definitely not tanking. But I follow things like the Mortgage Bankers Association survey and they track how many mortgage applications people are putting in every month. And those are down about 10% year over year. But so far there hasn’t been a decline in housing prices and housing prices are still going up double digits year over year because of the other side of this tug of war, which is inventory.
So even if demand starts to slip as it has been, if inventory remains as low as it has been for so long, housing prices really can’t go anywhere. You have to see inventory increase before the market can moderate. And so far, we just haven’t seen that yet. In fact, if you look at new listings on a seasonally adjusted basis, which is the way you have to look at these things, you can’t just say like, “Oh, listings went up from March to April.” Of course it does. That happens every single year. But if you look at this on a year over year basis, new listings are actually going down right now.
We just saw some new data came out that said construction permits were down 3%. Foreclosures, which a lot of people have been thinking are going to lead to a glut of inventory, they’re at record lows. They’ve been going down for seven consecutive quarters. So right now in the tug of war, I’m seeing demand, even though it’s down, is still far surpassing inventory. And that’s just how I’m reading it right now. That of course could change. And I think it will start to moderate and change. But to me, that’s the thing that I’m really focusing on to try and see where this market’s going. What do you think about all that?

David:
I think you’re spot on. You’re looking at the right things. One thought that I had when it comes to the, because really in a market where demand is steady or rising, it’s supply that’s the variable that controls the price. And that supply side perspective of economics will really help someone understand what’s happening with real estate. And I was thinking about how housing was something that used to be tied to how many people needed a place to live. That was the only reason that real estate existed. So you either owned a house or you rented a house from somebody that owned it. It was pretty simple to figure out how much supply was needed in a given market. And people didn’t move around the country nearly as much as they do now because they were tied to a location because of work and family support systems.
And it’s really technology that has created the ability for people to have like you, you’re living in Amsterdam right now and still doing your same job and still living your life. It’s just become easier to be a human with technological advances. So all of the things we used to need, like you needed a family member that could watch your kid or could help bring the cup of sugar over if you ran out of money. Well, it’s easier to connect with people when you move into new places. And obviously the work environment changing has played a role in this too. So people can leave areas much more quickly and easily than they could before, which makes it harder to regulate supply. How many houses do we need in Fargo, North Dakota once people realize I don’t have to live in Fargo anymore. And the other piece is that now housing is not just a place where people need to live. It has now become a business.
So with people traveling through short term rentals, one house, you could have a house that you don’t need as far as just how many people need a place to live in this city, but it makes a ton of money from people traveling to visit that city. And then you can start to get a hundred houses more than what you need that still make economic sense because people are traveling to use them. So now that the short term rental concept of vacationing and staying in someone’s home instead of a hotel, combined with how much more frequently people can move around easily has made it a lot trickier to figure out how much supply is actually needed. And I think that causes builders to be nervous about building homes because they don’t want to build and then there’s no one to buy.
It’s harder to tell. It makes it more difficult for the government to figure out what incentives to offer to get people to build homes. It makes it more nerve wracking for someone who isn’t familiar with real estate to go buy a house in the first place. And it gives an advantage to the big, the investor who has experience or institutional capital that’s playing the long game to sort of weather the storm of some of those risks that a normal person wouldn’t. And so it’s much more complicated to solve these problems than the last 200 years that we experienced.

Dave:
That’s a really good point. I think that the migration that’s going on over the last two years, and it’s slowing down a little bit, but not that much, still up well above pre pandemic levels, is creating this like reshuffling of supply and demand. And no one exactly knows what’s going to happen. And if I can plug on the market, actually I think given when this recording comes out, the next one that will be coming out is going to be a conversation with an economist from Redfin who actually modeled out all of the migration from the coast to the Sunbelt and how that’s changing the dynamics of the housing market. If anyone here is interested in those migration patterns and how they might be impacting your market, you should definitely check that out.
The second thing that I’m looking at right now is a recession. I think you we’re hearing it across every media outlet right now that we’re heading towards a recession and the signals of recessions are sort of confusing right now. If you’ve heard of the yield curve, which is a really reliable predictor of recessions, that inverted slightly, which isn’t exactly a recession trigger, but it’s starting to point that way.
There’s something called the lead economic indicators, which tends to predict recessions six to eight months ahead of time and it’s basically been flat, but it’s starting to decline. And so there are some concerning signs, particularly with the Fed continuing to raise interest rates that we could be heading for a recession. I just want to say that recession, technically all that means is GDP contracting for two consecutive quarters. That doesn’t necessarily mean that there’s going to be crashes in the housing market or the stock market. Those are independent things. But just, I think it’s worth noting that there are a lot of red flags coming up for a recession right now and I’m curious to hear your thoughts on this.

David:
All right. So this is me having to get out a crystal ball, which I always want to give a disclaimer, don’t make your decisions just based on my crystal ball, which looks a lot like my head. But I will share what I’m thinking-

Dave:
Very shiny.

David:
Yes, exactly. I think, and I mentioned this before, that we are going to have a economy where at the upper end of wealthy people, they’re doing very well. Those that are owning assets, those assets are going to continue to increase in value because inflation’s going to push their value higher. Those at the lower end of the spectrum are actually going to lose wealth. They’re going to be squeezed. I don’t think it’s like a tide where everyone rises and everyone falls. You’re going to see a division where the people that are in a position of advantage, where they own assets are going to do very well. The people who don’t are going to get squeezed. And this is not uncommon to many things in the world. If you’re a basketball player right now in the NBA and you’re this really slow, seven foot tall kind of useless guy that used to be really valuable in the NBA when shot blocking and everyone is trying to get close to the rim and you could be strong and tough and get rebounds.
Those were the people everyone wanted. Well now it’s the little guys with high levels of skill that with the current rule set where you can’t touch people, you can’t knock them around. They’re doing better. This is just how life goes. There’s shifts in who is in a position of advantage and who’s not. I think we are likely going to see the people at the lower end of the scale, unfortunately, be squeezed very hard as food prices are going to continue to increase, as gas prices are going to continue to increase depending on what happens in the Eastern part of the world, where supply chains could be further disrupted, now we’d have to start making things in America, which makes them way more expensive than what we think is normal. So paying $14 for a t-shirt is something we got used to. If you’re making that in America, it’s going to be much more than $14.
That’s unfortunately going to affect the people that make the least amount of money. I would expect to see in some case, depending on, I don’t know when it’s going to happen, but I do think there will be a recession in that sense, but I don’t think it’s going to necessarily crush assets. I don’t think you’re going to see a ton of wealthy people being super affected by this. They’ll probably end up making more money, which is usually what happens with wealthy people when we head into recessions.
Now, the other thing I’ll say is I think that we have printed so much money that there’s actually a bunch of it sitting on the sidelines waiting to jump in. So cryptocurrencies are down, the stock market is down. There’s a lot of traditional measures of value that we look at and it’s like, “Oh, we’re going bad, Bitcoin dropped whatever.” That could change in a day. I think there’s so much money sitting on the sidelines that if it rushes in, all of a sudden it was down to Bitcoin has record highs, it’s so easy to see and many different kinds of crypto. So it’s not enough just to look at what’s happening right now, you have to understand how much money is playing in the market and how much is sitting on the sidelines to wait and see what’s going to happen.
And with talks of recession, wealthy people tend to withdraw their money out of the market, hold it in cash and wait to see where the opportunity is before they rush back in. I think that raising rates is a smart move if we’re trying to stop inflation. I think it’s too little too late. I think this is like a semi truck going down a hill and the brakes are out and it’s barreling down. That’s why we’re seeing asset prices continue to rise so quickly. I think that rising rates is like just stepping on the brake pedal and you’re barely making an impact.
It’s going to affect people, unfortunately that are least likely to be able to handle it. That’s the best description I can give is to don’t look at it like the entire economy is going to move up or down as a whole. There are segments of the economy that are going to behave differently, much like this type of player in this NBA is going to do better than a different type.

Dave:
That’s a very interesting take. And I think, unfortunately, you’re right that this is going to disproportionately impact those on the lower end of the socioeconomic spectrum. It just seems that we’re going to see layoffs. That’s basically usually happens with a recession, and you also see inflation causing a situation where money is stretched further and further, even if people do retain their jobs. I do just also want to stress that although there is a lot of fear, rightfully so around a recession, recessions are a normal part of the economic cycle. And as an investor or as someone who’s just trying to manage their personal finances, there are things that you can do to prepare yourself for a recession. Just as an example, if you’re an investor, keep a bigger cushion. There might be an increased chance that you lose your job. Hopefully you don’t.
But if you’re going to make an investment, maybe you keep 12 months of reserves where you used to keep six. Examples like that. And recently just actually I was talking to, you know Jay Scott, right? We just had him on, On the Market. He wrote the book on recession proof real estate investing, which is a great book. It’s filled with tons of practical tips for how to prepare for this type of thing. And you can also check out my conversation with him On the Market. It just came out yesterday about that. But I just think that it doesn’t necessarily, like you said, have to be all or nothing, but there are things to keep in mind and you want to operate a little bit differently with the increased market risk that we’re seeing right now. And it could be year away, could be two years away. No one really knows, but I think it’s prudent to at least inform yourself on what you can do as an investor to do as well as you can in a potential recession.

David:
Yeah. And that’s one of the reasons that I’ve been giving advice that this doesn’t apply to everyone, but when everything was going great, the whole dream of quit your job, just live off of your real estate income, it made more sense to a larger degree of people. With this much uncertainty with not knowing what’s going to happen, we have ample time to prepare. It doesn’t mean that nobody should be quitting their job and going full time in real estate, but less of the people that have that opportunity should be doing so. I think that if you’re worried about a layoff, which you should be if there’s a recession coming, because like you said, that typically happens, now is it time to be improving your skillset. Can you learn how to be good at different things? Now is when you should double down on the value that you bring as far as your work ethic to your employer, what you’re capable of doing.
Not what a lot of gurus have been telling people is, “Hey, take my course, learn how to do real estate and then you don’t need to worry about a skill set in life. Your real estate is going to take care of everything for you.” In essence, now is not the time to become less valuable or weaker. Now is the time to start preparing to become more valuable and stronger so that when that does come, you’re not knocked over. I look at it like there’s a huge wave that’s coming, I want to brace myself and be ready for it. I don’t want to be looking the other direction, thinking everything is fine.

Dave:
Yeah, I completely, completely agree. And I actually think if you look, the economy right now is a little confusing because there are these red flags, but there are opportunities right now. And I think the biggest opportunity is if you want to change industries and find a job that’s more personally fulfilling to you or has more income, this is one of the best times, at least in my lifetime and I think in American history to try and find a new job. Workers have a lot of leverage right now. And as David was saying, that can really set you up for the long term. You can improve your debt to income ratio. You can have more money with which to invest in a couple of months. And that could really set you up. Of course, it’s not the dream of financial freedom, but given where the market is right now, I do agree that can make a lot more sense.

David:
Well, on the topic of a recession coming and cutting expenses and pinching pennies a little bit, there are many investors that will find themselves managing their own properties to try to keep their profit margins higher because property management is going to become tougher to afford quite frankly, when asset prices continue to increase.
So today we are going to be interviewing expert on this topic, Laurence Jankelow who is passionate about using technology to help make real estate investors lives easier.

Dave:
Okay, let’s bring in Laurence.

David:
Lawrence Jankelow, welcome to the BiggerPockets Podcast.

Laurence:
Thanks David. It’s a pleasure being here.

David:
Yeah, so can you tell us a little bit about your resume, what your company Avail does and then how you got started in real estate?

Laurence:
Yeah, totally. Well, I’ll start with how I got started in real estate I think first. I’m a do it yourself landlord, got started in 2010, purchased a three unit residential brownstone walk up here in Chicago from a friend I used to work with at Goldman thinking, “Hey, passive income, who wouldn’t want it?” Took the dive. I think you quickly realize once you have one passive income’s not really all that passive. And so that was my entrance into real estate, but at that time trying to manage an investment banking job and this passive income proved to be a little too hard. And so decided along with a buddy, “Hey, this isn’t how it should be for landlords and armchair investors.”
So left Goldman to build a startup that really aimed at helping landlords manage their rental properties called Avail. And essentially it takes a lot of the operational pieces of running your business as a landlord and makes it all mostly automated. So finding and screening tenants, collecting rent online, submitting and collecting maintenance tickets online, all of those things, it just does it for you.

David:
So you basically solved your own problems and then said, “Hey, I fixed this, now I’m going to offer this to other people.”

Laurence:
Yeah. In some ways you have to. No one was catering to small landlords in 2010, 2012. 2012 is when we started the business. But I struggled for two years managing the rental property myself. And you’ll find that there’s really no software back then and still even today outside of a handful that is geared towards such a small landlord, mostly because the economics aren’t there, like it’s too risky of a business. It’s really hard to find us. We’re super fragmented. And so the only way to come about it is to solve your own problem and go from there.

David:
And then how did you get started investing in real estate yourself? What was it that pulled you in? Did you have a friend that told you about it? Did you just read an article and get interested?

Laurence:
Yeah. Maybe it’s embarrassing or cliche, but read Rich Dad, Poor Dad in college and always had aspired and you realizing, “Hey, you got to have a little bit of money.” So after about six years of working in the real world had enough to buy that first business. And that’s I think how most people kind of enter it is you have this dream of what it’s supposed to be and then you buy it and you start getting a little bit of income coming in, you’re like, “Wow, this is great.” And then you want to expand it. So today I’ve got just over 20 units that started with just the humble three units in a single building. And I wouldn’t change it for anything other than maybe trying to get it earlier.

Dave:
Laurence, you mentioned that one of the reasons for starting Avail is that you were struggling with your own rental property management. I think most of us have also been there, but I’m curious, what specific issues were you encountering that felt insurmountable or necessitated you to start your own business to solve?

Laurence:
Yeah, for me, it started with just posting the listing on Craigslist, which people still do today crazy enough. And the way Craigslist operated then is you’d post a listing and it would be at the top for about eight seconds and then it would drop to the bottom. And then the next day, 24 hours and one second later you could go and post the next one. And it didn’t make sense. And then you’d get these leads and you can’t tell if they’re quality or not, which, spoiler alert, on Craigslist they’re not. And then you try to figure out, “Well, how do I know if these are good or not?” And there’s no access for some person who only has one or two or three units to actually get a credit score, background check, there’s no capabilities for those things. So I find that access to information and data that a professional would have was impossible.
Those were really the two starting points for me that we said, “Hey, we’re going to go build this.” And that’s how we started. And in Chicago, it’s really tough finding VCs that want to invest in you, particularly in 2012. And it’s really tough finding engineering talent. So my co-founder actually rolled up our sleeves and taught ourselves to code. I wrote the first 600,000 plus lines of code. And when you’re doing that yourself, you really make it what it should be and what it should be for landlords like me. So that was the first two problems we solved was listing syndication and tenant screening.

Dave:
How have you seen, starting and managing properties in 2010, I imagine was pretty different than how it is now. So what are some of the big changes that you’ve seen in the property management industry over the last 12 years?

Laurence:
Yeah, well, certainly the pandemic changed a lot. In 2010, if I’m remembering correctly, it just felt a little more even keeled between landlords and renters. I remember doing showings and it was a lot more of a barter and a trade, trying to make sure you landed those renters and, “Hey, here’s all these features and I’ll give you $200 towards moving” or whatever it is, you have to make some concessions a little bit then. And now it’s completely gone the other way around.
I get 20 or 30 visitors to a property and I can only take one. And so it’s completely changed and that’s forcing rents to go up. It’s forcing people to compete with each other. People are not getting places. It’s a lot more favorite towards the landlord now than it used to be. That’s maybe the biggest change, and the technology’s come about quite a bit. So back then it was common to find renters on Craigslist. It was common to receive a check in the mail and now it’s not that common to not have some technology behind you.

David:
So Laurence, obviously we are in very complicated market right now. There is a shortage of inventory, prices continue to go up, demand seems very strong, but now rates are going up at the same time that inflation is occurring. What I kind of see happening is that price of the assets is rising with inflation, but the ability for a tenant to pay the higher rents that are going up may not be in certain markets because their food, their gas, all the things they have to pay for are going up just proportionately to what they are able to make at work. We kind of have this stretch where I feel like the top of the market is getting hotter, but the downside is also growing in risk also because your tenant’s having a harder time paying their rent.
From your perspective on all of this, what do you think is the biggest challenge that real estate investors are facing with this very unique market we’re in right now?

Laurence:
The data’s going to show that renters pay their rent for the most part. I don’t know that getting your rent is going to be the biggest issue, but maybe it’s going to start coming in a little later than you normally would’ve as they try to make ends meet. I think the bigger issue is for those who are trying to grow their portfolio, they’re going to find it extremely difficult to find deals that they wanted because prices are going up still, even though inflation is going… It’s in line with inflation so it makes sense that it’s going up, but interest rates should have brought prices down and they’re not. It’s going to be hard to find those deals. And of course your cost now of ownership is tougher. And then you’ll find that if you want to liquidate or get out of your portfolio counter to everything, also prices because they’re up, you’re going to find it harder to liquidate and get out of what you want if you needed to.
We’ll find that I think transaction volume will come down a lot and that hasn’t happened yet. That’s more of a prediction. We’ll see if that comes out. At the same time for renters, I think we might, and this is another prediction and I’m not an economist but this is just my own personal belief. I think there’s a decent chance we’d go through a period of stagflation. So normally you’d raise interest rates to stop inflation, but I think in this case, inflation’s going to keep going up, which makes affordability and cost of living also go up, but it’s less affordable. So we might hit a recession, even though there is tremendous growth in prices and that could cause a period of stagflation. You could see some spiraling out of control in this way.

David:
I think that’s a really solid point to highlight because there’s errors that are made in real estate I think where people just make assumptions that they shouldn’t. I notice this happened with the phrase HELOC for a long time was just synonymous with bad business decision because HELOCs led to a lot of foreclosures. I’ll hear the phrase appreciation tied to speculation, which they’re not the same thing, but people will do that. There’s another concept that every recession will lead to a crash in home prices, that the two are tied together. And I don’t believe that’s the case. In fact, I think in three out of the last four recessions home prices continue to rise. Dave, you’re shaking your head. Am I wrong here?

Dave:
No, no, you’re exactly right. That’s exactly right. The last recession is obviously freshest on people’s mind and that was a dramatic decline in home prices, but there are plenty of examples over the last several decades where home prices did increase during recessions.

David:
And that’s because the last recession was caused by the market crashing. You almost can’t even tie them together because you’re you think recession leads to home prices. Well, the last time it was home prices crashing led to a recession. Those that are sitting there saying, “Hey, home prices are going to drop because we’re raising rates, that’s going to lead to a recession.” It doesn’t make logical sense if you understand the way that the economy works, because most people that own real estate already had a lot of money. They’re the ones that weather recessions. They’re in a position to do better.
Do you mind just sharing your opinion on that idea and what you are thinking when it comes to if we do head into recession, how you’re going to handle your finances?

Laurence:
Yeah. And I’ll admit it’s been a while since I’ve dusted off an economics textbook here, but in the most basic sense, it’s all driven by supply and demand. So I agree with both of you, it’s not necessarily a given that during a recession that housing prices come down. Historically there has been a correlation because when there’s a recession, people have less money than that makes demand come down.
I think what’s happening now is exactly what Dave said. People have a lot of money built up and it’s just sitting there. They have money that they want to do something with. And a lot of that’s just been accumulation over the pandemic because they haven’t gone on vacation or whatnot. And at the same time, supply is still at a low. And so when supply is low and demand is the same or even growing, you would expect that prices for housing is still going to increase and therefore not come down. And I think that’s what we’re seeing despite interest rates going up.

Dave:
Laurence, what are you seeing in the data about rent growth? Over the last year, it’s preceded at basically a breakneck unprecedented rate. Recently I’ve seen rates over 30% in certain markets, rent growing. It feels to me to be unsustainable, but I’m curious what you’re seeing with rent growth and if you think this could continue or perhaps even slide backwards on the other end of the spectrum.

Laurence:
Yeah. Nationwide we’re seeing rents are up 17% year over year, which is an astronomical number and over the last two years even higher. Most landlords, I think, Avails showing from our surveys that 75% of landlords are planning on raising the rent, tenants are telling us that on average their rent’s gone up $200 or more over the last year. Rents are going up. We’re seeing that. And I that’s going to cause, it could go one of two paths. It could cause renters to have turnover and start to look to move, look for cheaper alternatives; could be leaving some of those more expensive cities. We’re seeing a lot of folks move to more of the Sunbelt area, just because those are generally less expensive than some of the larger metros on the coasts. Or the alternative is you might find that renters don’t move.
Now I know these are complete opposites and it’s tough to move when you know your rent that the next place for an equivalent size unit is going to go up dramatically. What happens especially for DIY landlords or the smaller landlords is they don’t really raise rent on tenants who are renewing or they don’t raise it as much as they would for new renters. So you might see this bifurcation of renters who really stay to avoid those things. And then you’ll see the other side where they’re really trying to find a cheaper alternative and don’t know which way is going to push higher. But we’ll see over the next coming months. This summer will be a big telling point.

Dave:
It’s interesting what you said about smaller landlords not raising rent on existing tenants. I know that’s something I’ve always believed in is if you have a good relationship with a good tenant, why would you stretch that? Is that something that’s backed up with data that you’ve seen at Avail? Or is that just an observation of yours?

Laurence:
Yeah, both. Although I don’t have the data in front of me, so I can’t quite quote it, but we are seeing that change this year from the historical patterns too. Real estate taxes have been going up. I think everywhere in the United States costs of ownership for landlords are going up. So I think this year, and we’ll see it come out over the summer, might be maybe one of the first years where you see even DIY landlords or the smaller landlords skew towards raising rents on renewing tenants at a higher rate than we’ve seen in the past.

David:
Yeah, so that was part of my question is I’m wondering, do you see a future where it’s difficult to raise rents on tenants even though the asset price is going up because their ability to repay is being decreased by the money that they have left over at the end of the month because of inflation on your average daily things you have to pay for?

Laurence:
Yeah, it’s always… Frankly as a human being trying to work my own tenants and telling them, “Hey, I’m going to have to raise rents.” And then if you’re doing it in person, you can kind of see the looks on their faces of shock and it’s a scary proposition for them. So it makes it difficult on an emotional level to raise rent. It’s not like I want to. If I could keep making the same return I was before, then I wouldn’t raise rents. And I think a lot of folks, especially for the smaller landlords, they don’t realize how little landlords actually make. I think they all think we’re these super rich money makers who can just absorb it, but we actually don’t. I think on the average landlord might make a hundred bucks on a rental property a month.
It’s really not a lot. And any change in cost, now all of a sudden you’re losing money. So we have to stay in line and it’s difficult for renters, it’s difficult for us. Inflation causes problems for everybody. And those problems are felt in the shorter term more so than the longer term. Over periods of time, things kind of reach an equilibrium. You can adjust your own vendors that you’re using to find cheaper alternatives. But in the short term, you really don’t have a lot of options other than to raise rent.

David:
Do you see do it yourself landlording as far as managing your own properties and fixing some of the stuff yourself as sort of a path that many people are going to have to take to make the numbers work as they continue to get tighter and tighter?

Laurence:
Yeah, that’s an interesting, I don’t know if that’s a prediction on your end or not, or if you’re looking for me to make that prediction, but yeah, I could see that. We historically advocated for being a do it yourself landlord for our own audience. One, because you learn the business better. But two, because if you don’t, you’re paying those fees, you just don’t make money. For most landlords paying a property manager to find a tenant for you and collect rent for you puts you in the red and then it didn’t make sense to buy their rental property in the beginning. You should just get out of that business. I think you could see a change here where more and more landlords have to manage it themselves than previously.

David:
Yeah, I can see. I was just looking at short term rental property in Scottsdale this weekend. And even with the properties at best case scenario crushing it as far as revenue. Putting almost a million dollars down on some of these things, the numbers were barely breaking even. And part of that was because management fees at like 20%, they could be like $80,000 a year. And I was thinking the only way this works is if I don’t pay a manager 20%. That started my mind down to, “Well, what would this take?” And I quickly was like, “Oh, I don’t want anything to do with that. That’s that seems so much work to get this thing going, especially with a short term rental.”
But I’m sure if I thought that other people have got to be thinking the same thing. The margins are getting tighter. Where can I cut costs? There’s going to be people that are thinking property management is the place to cut. So what advice do you have if somebody is going down that road for how they can prepare themselves for how to do this well, what they’re really getting into some tools they could use, kind of speak to that person.

Laurence:
Yeah. If you’re going down this path and you’re, hey, all of these expenses are growing on you, you want to start paying attention to that. Most people in real estate will appeal their property taxes every chance they get, try to keep them lower. So if your audience is listening and haven’t done that, they should 100% do that. Sometimes whatever assessor’s office is looking at these things doesn’t really know the value, they just know it’s gone up and sometimes they just do it more than it should. And so you can appeal those. I would look if you have a property manager at renegotiating with that manager to reduce the fee or remove the manager. I think that’s a good avenue to go. If you just aren’t in state or you just can’t find a time to be on site, then maybe you have less option there.
So I would call and ask to go, if you’re paying 10% of rents, push it down to 5% or find a manager who’s willing to do that. I think not that managers are commodity, but in some ways you just don’t have a choice. I would also be thinking about how you’re buying all of the supplies you’re using for your rental. If you have just one unit, you can’t really get any kind of economies of scale, but if you’ve got a whole bunch of others, then try to keep it to be the same paint so that you can use the same paint in one place versus another, try to think about all of the tools that can just be shared across all of your properties and whatnot. Those things can help. And like I said, most landlords only make a couple hundred bucks so that can go a long way in getting you where you need to go.

Dave:
So Laurence, given this confusing environment we’re in, are you seeing a shift in the types of properties that people are renting or where rent is growing the fastest or just any of those dynamics?

Laurence:
Yeah. Two I think trends that are noticeable. One is folks are looking for slightly larger places, even though affordability has gotten tougher. So we’re seeing an increase proportionally for folks looking for two bedrooms over one bedrooms and three bedrooms over two bedrooms is increasing a little bit. Mostly driven by the pandemic and the idea of, hey, people are working from home a lot more, afraid of maybe another lockdown and you need the space and whatnot. So that’s one trend.
The other trend we’re seeing is a lot of folks moving towards the Sunbelt, a little more and away from the coasts, potentially away from some of the areas that might have some natural disasters or are super expensive. So we’re seeing those kinds of trends.

Dave:
That’s really interesting. I’m curious if the rental market is also mimicking the housing market in a shift towards the suburbs. Because after 2008, the suburbs got absolutely hammered in terms of housing prices, disproportionately to more urban areas. And then since the pandemic, suburb housing prices have been leading the way. Is the same thing happening with rents?

Laurence:
Yeah, you’re seeing that a little bit in condos and in more congested places. The prices on those are coming down or at least not going up as much as you would see on a single family home in the suburbs. People are looking for a little more breathing room and so that’s happening at the same time. And then those condo buildings are still aging, so the assessments are still going up, they become less affordable for folks. So both in terms of wanting more space to live in and from an affordability perspective, we’re seeing single family homes just do better than condos.

Dave:
Yeah, I think that makes sense given all the other dynamics and shifts in buyer preferences right now and renter preferences.

David:
When it comes to what type of buyer you think is best to be getting into condos and who should be sticking to single families, what’s your avatar of where you think that the individual investors should, or what does that investor look like that should be getting into condos versus single family homes?

Laurence:
Oh, I don’t know. Maybe I have a very narrow mindset on investing. I’m the kind of investor that likes to see cash flow. I generally advocate for folks looking for deals that are going to make them cash, whether their metric is a cash on cash number or they’re looking at some sort of net operating income. I think you’re going to find it easier when you’re dealing with some sort of individual property, so a non condo, for instance, a three flat, a four flat, even a single family home.
I think you can make those numbers work better than you can in a condo and have a little more control. And then a lot of condos have bylaws and association rules that can prevent renters or the type of renting or how often they can come in and out. So there is a risk to your business in that way. So not that you shouldn’t ever be an investor in a condo, but if you’re looking for cash flow, that’s probably not the best investment. There is potentially always the case for appreciation on those, but with where we’re seeing trends and even with what Dave said around how folks are moving to the suburbs, maybe condos might not be the best investment right now.

David:
Well, I’ll also say if someone doesn’t have experience with condos, how do I want to put this? When you’re buying a single family home in general, in a specific market, you’re looking at mostly the same things for every house. What does the inspection look like? The rents are not too hard to find. There’s not as many variables when you’re looking at single family homes.
The second you get into condos, it becomes remarkably complicated. Those bylaws are different for every single one of them. Sometimes the property itself has a lot of deferred maintenance and you’re going to get hit with assessments. They do have restrictions on how many people can be renting out units in there. It becomes exponentially more likely that you are going to have something that you did not see coming up when you’re buying into a condo, which is mostly the people that invest in those are really, really good at investing. They know what to look for.
If you’re not a big fan of jumping asset classes, what do you look for in a specific market that you think is attractive when it comes to where investors can be putting their attention?

Laurence:
Yeah, well, no, I love having multiple asset classes, so between real estate and non-real estate. But again, I tend to focus on things that produce cash. There are certainly parts of the United States where investing in real estate’s going to get you more cash and is less about appreciation. I take Chicago for instance, I just know the most about Chicago. That’s where I live. You can invest in an area of Chicago, maybe for instance Andersonville, which is maybe less well known as like a neighborhood like Lincoln Park. And therefore you’re going to get a better cash on cash or a better cash flow, but maybe not a better long term appreciation of the asset class itself or asset value. Whereas Lincoln Park would be the exact opposites. It’s already very built out, your cap rate or cash on cash is going to be a lot lower, but because it’s such a sought after area, you might find that appreciation is higher.
If you’re the kind of investor who’s looking to build net worth over the long periods of time and don’t care about the cash coming in today, then maybe that kind of area is better for you as your wealth might grow faster. You just won’t see the cash from it as quickly. You could take that approach into any city and choose neighborhoods in that way, or you could take it more holistically based on cities themselves. You could say Chicago is kind of already that built up city and you might want to move to a less built up, move your money to a less built out city. But for most investors, especially if they’re getting started, the easiest path is to do it where they live, where they can see it, get a feel for it, be there in case they need to, and they can find parts of their neighborhood where it makes sense.

Dave:
I was going to say, Laurence, you seem to be suggesting a very simple and practical approach to getting started, which I always like which is investing close to where you live, managing the property yourself. That’s how I got started, I think how most people get started. If someone is able to do that successfully and find a small multi or single family, what are some of the common pitfalls you see with DIY landlords when they’re first getting started? And do you have any tips for trying to avoid those pitfalls?

Laurence:
Sure. This definitely goes into the realm of opinion for what it’s worth. There’s a couple, there’s this idea of, “Hey, am I going to be strict with how I have my budget? Am I not going to be strict? How strict should I be?” And I think some landlords will misinterpret that. I think you want to have a budget and you want to be strict with it. But a lot of landlords will take that as an excuse to be cheap or have deferred maintenance. And in the end, that’s going to hurt you in a big way. So yes to budget, but don’t interpret that budget means don’t pay for things when they need repair. Your best bet is normally going to be preventive maintenance. That’s going to be less costly. Even some of the simple things like changing air filters is preventive maintenance, but some landlords don’t want to spend the 20 bucks to replace an air filter.
They think it’s only breathing quality, which is so important. But it extends the lifetime of the HVAC system by years. You can’t be cheap, but you do have to be wise with where you’re spending money. I think that’s a big pitfall. I’d say another pitfall is not thinking of your tenants as customers. They are customers. They’re not just people that… Sometimes you get the sense of you feel like you’re better than them or not better than them because they’re renting from you. And that’s the worst possible approach to come in. They’re your customers. You have to be doing things that make them want to live there and make them treat the property well. For all my tenants, I’ll usually use some sort of welcome basket on the kitchen counter for them when they move in. It’s usually nothing more than toilet paper and maybe some cleaning supplies, stuff that they forget to have, but that sets us both off on that right path and how we work together.
And then they’ll take better care of the property because of that. And that translates over time. And so there’s those things there. I don’t know if there’s a question in there around how do you go from one, your first purchase to multiple because there’s a lot of pitfalls in there thinking around, “Hey, the second property is identical to the first and I’ll do all of the same things.” That can sometimes backfire. You do have to kind of make sure you’re really looking at your investments as two separate businesses in a way, and you have to individualize them in that way.

Dave:
That’s great advice. I think that is probably the most common one is learning that you really get what you pay for. And if you go with cheap contractors, you’re going to hire two contractors and you’ll just hire the expensive one second after you already hired the first one. And I love what you said about treating your tenants as customers. That’s exactly right. The property that you’re offering is a product and this is a business and it’s your job to make your customer happy. And I think a lot of people don’t view it that way. I definitely respect that opinion. Before we get out of here, I also wanted to ask since you have so much knowledge about this, do you have any best practices or pitfalls with tenant screening that you can share with our listeners?

Laurence:
Yeah. When we started, we had seen, started Avail, we had seen an article, I think it was in USA Today that said, “Hey, 60% of landlords don’t screen their tenants.” That’s the number one pitfall, I would say. You should screen your tenants in some manner or the other. I think what happens is a lot of landlords get scared that they won’t fill a vacancy and they’ll just take the first renter that they see or they won’t dig in a little deeper thinking that, “Hey, the renter’s going to bounce and go to another place.” But I think in the end, you’d rather have a vacancy than a bad tenant because a bad tenant is going to have all of the negatives of the vacancy. You’re not going to be making your money or you’re collecting your rent, but they’re also going to just trash the place or have the potential to trash the place.
And although a bad renter can sometimes be seeded because you’re a bad landlord and you don’t know how to build a relationship with them. Oftentimes there are things that you would find in doing whatever screening reports. So checking with prior landlords, did they pay their rent on time? How did they treat the place? Looking at their credit score. How they treat other creditors is likely how they might treat you, just even looking to see how much debt they have. Can they afford the rental? Sometimes landlords will look at income to rent, but they won’t look at how much debt that income is taking up to. And so you might miss that and you might think, “Hey, they have three times the income to rent,” but when you factor in debt, they don’t. And so that’s something to look at. Depending on where you live and what laws there are in your state, I would suggest also criminal and eviction checks.
I think eviction being the most serious. Once someone’s been evicted a couple times, it’s probably a trend that’s going to continue to happen. And then of course you want to make sure you feel comfortable approaching the renter should something happen. I tend to try to avoid super violent criminal history and be flexible with things that aren’t. I’m not going to balk at someone having a speeding ticket necessarily. It’s got nothing to do with them and their capability of paying their rent. There’s lots of things in that realm where you first screen them and then just be flexible in your approach and thinking.

David:
I think choosing tenants is an extremely underrated element of successful real estate investing. If you think about the advice that you’re often given, invest in a good area, what you’re really saying is put yourself in a position where you’re likely to find a better tenant. It’s not the area, it’s the person who’s going to be renting from you. You could rent in any neighborhood anywhere. If you have a good tenant, it’s going to work out for you.
In fact, that’s often how people start or why they start looking into markets with lower price points because the price to rent ratio is higher. It just becomes more difficult to find the tenant that’s going to pay consistently and not ruin your house. If you’re going to be self-managing, the ability, the skill to choose the right tenant will absolutely have a huge impact on the success that you have with real estate investing. When it comes to technology within real estate, can you just share your opinion on where you think that’s going, what different technological advances will have an impact on the way that we manage rental property?

Laurence:
Yeah. Not to plug Avail, which is my company, but some sort of landlord platform is pretty critical in running your business. And there are others out there other than Avail, but you need to have something. That’s the one I recommend. And I think we’re going down the path where everybody will have one of those. Right now, it’s pretty uncommon for a landlord to use technology. So there’s this wide gap to bridge because the folks who don’t use technology aren’t going to do as well and they’re going to start doing worse than the folks who do use technology. If you’re one of those listening and you’re not using some sort of landlord platform, just go out and Google landlord tools or landlord software or Avail and start using something. I think there’s also technology around making showings a lot easier, better.
Those are still typically done in person, even if you’re using something like Avail. And with the pandemic, there’s been a lot of new technology that’s come around for virtual showings, for 3D tours, for floor plans. Some of those things the price has been outside of the realm for someone who’s got three units or something like that. But there are a bunch of providers who are bringing very affordable tools that allow you to do a 3D tour or something like that virtually that are coming about. And I think that’s a trend that we’ll continue to see.
I think we’re also starting to see software tools that are also geared towards helping renters more than they have in the past. So whether it’s helping renters report their on time rent payments, or helping renters better manage how they save for a down payment or how they become first time home buyers, all of those things are coming out. And I know at both Avail and Realtor, we’re focused on trying to figure out, “Hey, how do we bridge that gap between renters becoming first time home buyers? How do we help them communicate better with their landlords?” All of those things. And so I think that’s going to be a huge change in how real estate’s going to be done.

Dave:
Laurence, one last question, particularly on the technology side before we go, I’m assuming you’re familiar with the idea of Web3 and hearing about a lot of the direction that real estate is going with NFTs and crypto. Do you have any thoughts on where that side of things is heading right now?

Laurence:
Yeah, to be Frank, I don’t have as much of a background on some of those areas as I should. But the advice I would give for most landlords is what we talked about earlier, which is try to keep it simple for now. I think if you’re wanting to participate in some of those NFTs or think about blockchain or those things, it may still be too early for most people to consider. And I would follow the path of what’s going to get me the metrics I need to be successful and focus on finding good deals, finding good renters and being a responsible landlord. And then as you get experience, if you start to say, “Hey, I need this deeper technology to make my process better, or out eke this little last bit of return somehow” then maybe incorporate that into how you’re doing things. But for most folks, I think it’s probably a little still premature.

Dave:
I’m with you for the record. I think there is some really interesting things going on there, but is it actually at a point where it helps your business? I haven’t seen any examples of how it’s truly adding value to a small landlord’s ability to generate a solid return and to provide a good product.

Laurence:
Yeah, I have one renter who pays in Bitcoin every month, which is fine. It’s more of a nuisance than anything else for me as a landlord. I acquiesce because it makes it easier for them. It’s a pretty expensive rental. It’s nearly $5,000 a month, which is… In the scheme of it, it’s pretty pricey rental. And so I kind of allow it, but for me, it means I get it into Coinbase, I’ve got to immediately convert it to US dollars and I don’t want to take the risk. I don’t want to conflate my investment in real estate and the cash flow it generates with the speculative investment of Bitcoin or digital currency valuations. And so I always have to separate those two and treat them as two separate investments. It’s more of a pain for me than an opportunity.

Dave:
Just logistically, is the price fixed? Is there a floating exchange rate between USDs and Bitcoin and he adjusts the amount of Bitcoin based on the dollar price or the other way around?

Laurence:
Yeah, I’m not sure what it looks like when you go into Coinbase to schedule your payments or whatnot, whether you’re scheduling it in dollars and it converts in real time to Bitcoin, or if he’s doing the conversion on his own. But when it comes to me, it’s Bitcoin and then I have it automatically converted to US dollars right away. I think it’s important for landlords to do that, or for any investor to do that. I’m not suggesting people don’t invest and I’ll use air quotes on invest in crypto. It’s just, you should separate the two investments. They have two separate thesises. They have two separate metrics and how you want to analyze them. I don’t think we should conflate the investment of rentals with the investment of cryptocurrencies. I would take the cash in dollars and then if I find, “Hey, I think crypto’s a good investment,” I would then do a separate transaction for those things.

David:
There’s something I find very interesting about every single investment asset class opportunity that I don’t hear people talking about, just sort of the BiggerPockets audience. I’m going to let you guys in on a concept to think about, and then Laurence, I want to get your opinion on it. When we talk about Bitcoin, cryptocurrency, real estate, art, NFTs, stocks, everything, the value of it is expressed in terms of the dollar. So when something goes up or down, we have to take its value, convert it into a dollar and express how well it did in relation to a dollar. So it’s all tied to this central currency.
You can’t say this house is worth this many Bitcoin or this many shares of Apple stock or whatever. We have to have a baseline that we compare it to. But as we printed so much money, the value of the dollar has gone down. And now it’s very difficult to know how much value, and I’m using the word value as opposed to worth or money because I’m trying to separate it from the dollar because we typically express value in terms of dollars. What’s your thoughts on how confusing this is to leading people to believe they’re actually building wealth when they may not be, or some asset classes appearing like they’re doing better than they really are?

Laurence:
There’s almost a like a history lesson of going off like the gold standard but I’ll spare us. I tend to think of investments as something different than speculation. I don’t believe an investment is gambling and some people will. They’ll say, “Hey, investing in the stock market is gambling or buying a rental property is gambling.” But I don’t believe that to be the case.
I think investing is something about taking earnings or cash flow, figuring out what that cash over a period of time is worth to you today. And you can’t do that with something like cryptocurrency because there is no cash flow that’s occurring. There’s no inputs and outputs happening there. So for that reason alone, you can’t necessarily consider it an investment. I would consider it to be speculation and that’s fine.
Maybe in a good allocation strategy, maybe you leave 5% of your portfolio for some crazy thing like that. I think of art as the same way, as speculation because it doesn’t produce income, I can’t really discount that cash flow to what it’s worth today. But stocks and income properties are investments. And I think even though the dollar can fluctuate in value, relative to those investments, you have a sense of, are you making money? Is it appreciating or not? The value of your rental is nothing more than some multiple on the rents. And depending on what area you’re in, the multiple is a little different, but you can broadly think about it as like a 12 times multiple on rent is how much the property’s worth 12 times annual rent.
And you can look at that and say, “Hey, my investments improving over time or not improving over time.” And it all comes down to you increasing rents over time. And the same thing is true of stocks. You hope that the earnings increase each year so that the multiple on earnings has an impact and now what your investment was, which goes up. And that all of that should be irrelevant to what happens with the dollar because those earnings change in lockstep with the dollar as it changes.

David:
All right. Well, thank you, Laurence. This has been a fascinating interview where we’ve gotten actually some really good nuanced detail about many different types of real estate investing. I want to thank you for taking some time to do this with us. Before we get out of here, David, do you have any last words or any last questions that you’d like to address?

Dave:
No. Thank you, Laurence. This has been really enlightening. I appreciate your deep knowledge and data driven approach to providing answers to our listeners here.

Laurence:
Well, David, Dave, thank you so much for having me. Don’t fact check me too hard. If you find anything inaccurate in there, we’ll talk about in a separate time. Appreciate being on this show.

David:
All right, Laurence, last question for you, where can people find out more about you?

Laurence:
I love interacting with people on a one-on-one basis so they can certainly learn more about Avail or Realtor.com on our website. So Avail.co or Realtor.com. But if people want to talk with me, I love receiving emails. I respond to them. They can reach me at [email protected] Would love to engage with folks.

David:
Awesome. Dave Meyer, where can people find out more about you?

Dave:
You can find me on Instagram where I am @thedatadeli.

David:
Yeah, and if you have not been following Dave, please go do so. His page is blowing up. On YouTube your videos are crushing it. I don’t know if it’s your handsome face, if it’s your well articulated delivery, but you’re like that sandwich that someone put together and everyone is addicted to it and you’re selling like hot cakes.

Dave:
Comparing me to a sandwich is the best compliment I’ve ever gotten, David. You’re going to make me blush.

David:
In fact, we might even have to stop calling it hot cakes. We’re going to have to say you’re selling like Dave cakes, because that’s how fast you’re actually selling.

Dave:
Well, thank you. I appreciate that. And hopefully people do come check out the new YouTube channel because I am on the main BiggerPockets channel, but also I’m going to be transitioning more to the, On the Market YouTube channel where we’re going to be doing a lot more data news, current event type shows. We have all sorts of great content coming out there. So make sure to check that out.

David:
There you go. And Laurence, thank you for fighting the good fight of trying to make landlord’s jobs easier and make it more successful to invest in this awesome asset class. We are sort of under fire from hedge funds and institutional capital and municipalities that don’t like real estate investors and politicians that don’t like real estate investors. There’s a lot of different people that are making it more difficult to do what we love doing. So anytime we get somebody on our side helping to push the ball forward, I really appreciate that.

Laurence:
Well, thanks again for having me.

David:
All right, I’ll get us out of here. This is David Greene for Dave “Dave Cakes” Meyer, signing off.