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David:
This is the BiggerPockets podcast show 657. This is why we rarely see a ton of appreciation in areas like Indiana or Kansas. There is so much land they can build so many houses that supply continues to grow along with demand, that keep prices from going up. It’s when supply is constrained and demand continues to grow that you see a rise in prices. I don’t know where you’re living, but I would definitely look for the best school districts. The areas that the city limits are pretty much all built out, the can’t buy more homes, go find the best neighborhood, go find the ugliest house or the biggest house that you can, and then slowly add value to that property by fixing it up over time. Over a 10 year period, that will be the fastest way to grow appreciation, and it’s super simple.
What’s going on everyone. Welcome to the best dang real estate podcast in the entire world. If you don’t know what BiggerPockets is, you are in for a treat. BiggerPockets is a company where we teach you how to build wealth through real estate. It’s pretty much entirely for free, and it’s some of the most talented people and best information you can possibly get. On today’s episode of our podcast, it is a Seeing Greene edition, meaning you get me David Greene, answering questions specifically from our fan base who are stumped in a position they don’t know how to solve or have come across some really good opportunity, you’re trying to figure out how to make the most of it. I answer all those questions and more on today’s show.
In today’s show we get into several pretty amazing questions. One of them is from someone who feels that they’re pretty good at real estate investing and wants to start coaching. And he asks me what advice I have for starting a coaching business, how he can incorporate this into other businesses, how he could basically change his life through real estate. I give a pretty detailed answer on a path for that person to take. I also get into one of my favorite things to talk about today, which is portfolio architecture. Not sure what portfolio architecture is, well make sure you listen to the show and you will find out about it and hopefully come to love it just as much as me.
And then finally we have several people on today’s show who have done very well based on appreciation they’ve gotten over the last couple years. One of them is a 20 year old, the other person I think is 25. They’ve got over six figures in properties and they’re trying to figure out, should I keep this house or should I sell it and reinvest that money? I give detailed and specific plans of action to both people that should definitely increase both their equity and their cash flow by increasing the efficiency of how hard their money works. And you will learn how to do the same by listening. This is my first quick tip, there’s going to be another one. Today’s quick tip. Think about how hard your money’s working. So many of us are letting our money be lazy. We work really hard, but then we take all the capital that we’ve saved and we don’t hold it to the same standard we hold ourselves to.
Stop doing that. Your money should be working just as hard or harder than you are. And for the second quick tip, we’re about a month away from BPCON. You’re here because you want to learn, right? So why not come to BPCON and learn from 2000 other people that are taking the same journey as you. I’m just saying that you should be there. It’ll be in San Diego in the early fall. Who doesn’t want to go to San Diego? And I will be there. So will a lot of other BiggerPockets personalities, and we’re all there for one reason, to help you on your journey towards financial independence through real estate. If you haven’t already go grab a ticket. All right, let’s bring in our first question.

Ben:
Hi David. This is Ben from Denver, Colorado. Thank you so much for taking my question. Love the Seeing Greene episode podcast. Very useful information. So thank you for that. Here’s my question. I own currently four properties, my primary residence, and then I have three rentals. One of my rentals is not performing too well, so I’m going to sell it via a 1031 exchange. My question is, it’s a two part question. First part, do I need to utilize all the proceeds towards one property or can I split the proceeds in 1031 into two single family homes? And the second part of the question is, in the long term, let’s say 10 years from now, which assets will have retained the most value and prone to appreciating, a small multifamily or single family homes? Thank you so much for taking my question. Looking forward to your answer.

David:
First off, Ben, this is a great question. I just want to commend you for asking a very good question. Also I know our audience is loving how concise and direct your question was. If you’re considering submitting your own video question, go to biggerpockets.com/david and do exactly what Ben did, because that was perfect. All right, Ben, I like that you’re asking about a 1031. I’m in the middle of one myself right now. And this might come as a surprise to some of you, but this is the first 1031 I’ve ever done in my entire career. Mostly because I rarely ever sell properties. Now I won’t get into the reasons why I had to sell. There were some complicated issues that were going on. It wasn’t anything to do with the portfolio itself. It was more business stuff that I had, but I was sort of forced to sell a lot of properties in Florida and reinvest that capital.
Now the road that I took was I wanted to high appreciating markets, just like what you’re saying, that your goal is. And I took on more debt than what I had before and I went for bigger, nicer stuff. It was really an upgrade all across the board. I did learn several things during a 1031. If anyone here has questions, I would highly encourage you to submit them at biggerpockets.com/david, especially if they’re about at 1031, I’d like to talk about this more. A few things that I need to say. First off, I’m not a legal expert. I am happy to connect you with the 1031 company that I use. Not a problem at all. Just send me an email or a message about that. But I am not a lawyer, so I could be giving advice based on my understanding that isn’t exactly accurate.
And especially with these situations there’s often nuance that goes into them where you want a qualified intermediary giving this advice. However, I feel comfortable answering this at a general level. My understanding is, yes, you can change one house for several properties. It does not have to be one for one. That’s not one of the rules. If you sell a property for a million dollars and you owed $500,000 on that house, you can go buy two new houses and put $250,000 down on each one. In my case I think I’m actually buying less properties than the amount of them that I sold. It usually would go the opposite. I just had quite a bit of equity and I’m buying more expensive properties than the ones that I sold. That’s why it worked out that way.
Something you do need to be aware of though, Ben, you have to have at least as much or more debt on the new properties than the ones you sold. When that hypothetical example, if you had $5,000 of debt on the properties you sold, when you buy the new property or properties, you have to have $500,000 or more of debts. You can’t actually access your equity through the 1031. There’s several other rules that I don’t want to take up the entire show talking about, but this is some really cool stuff. If you guys would like to know more about 1031s, please let me know. The second half of your question. What do I do with the money? How do I invest it? Is it going to work out better in a small multifamily or is it going to work out better in a single family residential home? Love this question.
First off, we have to make this apples to apples, because a small multifamily in Malibu, California is going to appreciate a lot more than a single family home in Tupelo, Mississippi, right? So just consider this as we’re getting into it. But let’s say you’re investing in the same market, in general single family homes will appreciate faster than multifamily homes, but in general multifamily homes will cash flow more than single family homes. This is not an across the board rule. So please don’t go comment on YouTube and give me the exception that you know about to this rule. It’s a general understanding. My advice if you’re looking for the most appreciation, the most money you can make over 10 years, is buy in a terrific neighborhood, buy the ugliest or biggest or both house in that neighborhood at the best price that you can get it at, and then fix it up over time.
If you’re choosing an area because you’re looking for appreciation, you want to see a place where demand is going to grow while supply will not keep up. This is why we rarely see a ton of appreciation in areas like Indiana or Kansas. There is so much land that can build so many houses that supply continues to grow along with demand, that keeps prices from going up. It’s when supply is constrained and demand continues to grow that you see a rise in prices. Look for areas that are either built out or have a political environment that limits how many permits are given or the home prices themselves stop home builders from moving in there to build. Sometimes if the prices are really high, it’s hard for builders to build a ton of homes and they tend to just be spec houses that are built in those areas.
I don’t know where you’re living, but I would definitely look for the best school districts. The areas that the city limits are pretty much all built out, they can’t buy more homes, go find the best neighborhood, go find the ugliest house or the biggest house that you can in that neighborhood, particularly if it’s both, and then slowly add value to that property by fixing it up over time. Over a 10 year period that will be the fastest way to grow appreciation, and it’s super simple. All right, our next question comes from Travis in Newberry, South Carolina. Travis has seven long term rentals within one hour driving. I absolutely love real estate investing and managing properties. He has a W2 job, but he dreams about the day of leaving that to do real estate full time.
He’s considering becoming an investing coach. The goal isn’t just to make money, but basically to do what you guys do every day, help others get started in real estate, but do it at a local level. The question is, what’s the best way to go about this? I’m thinking of charging a flat fee of $1,000 to get people into their first investment property and basically walk with them step by step the entire way. Maybe a percentage of monthly rent to manage their property on top of that. I know technically I’m not allowed to manage the property for them without a property manager license, but I still could do this under the title of lease up specialist. I’m in the process of getting seven LLCs for each property and a holding company for the whole lot. Should I operate this coaching under the holding company?
I imagine that becoming a real estate agent who helps them find suitable investment properties would be a natural next step. I’m considering this as well. What recommendations would you have for me? Okay. Thank you very much for this Travis. First thing I can’t give you legal advice on if you should do the coaching company underneath the entity that the homes are. I don’t see off the top of my head why that would benefit you. If one of your clients sues you and you’re having that business run out of the same LLC as the properties, I’m not a lawyer, so I might not be getting this perfectly right, but it seems like they’d have access to equity in your houses and that doesn’t benefit you. If you’re going to start a coaching business, I would start a separate legal entity that’s not connected to the homes.
Another thing to consider is that if you’re charging someone a thousand bucks to get them into their first house and you’re working with people that don’t take action, you’re never going to get paid, because they’re not going to actually get into the property. Another thing to consider is that this is a very difficult business to get into. You end up feeling pressured to make claims that you can’t really support, or you have people that are taking up all your time and blaming you for why it doesn’t go. I don’t know anyone who’s running coaching businesses the way that you’re describing. And because we here at BiggerPockets we give away information for free, you’re going to be competing with people like me that are giving out the information.
I definitely like the idea of you getting your real estate license instead. Let me tell you why. If you get your real estate license and you help get people into their first property or their second property or their third property, you’re going to be getting a lot more in commission than $1,000. You’re not getting into this guru territory where you’re now trying to charge people for something that they could get for free somewhere else. And this is part of the job of a real estate agent, at least a good one, and we could use more good agents in our field. I think that rather than people being coaches that teach people how to invest in real estate, it would be better if they became real estate agents that help their clients invest in real estate. This is what real estate agents are supposed to be, and they’re not very good.
So rather than having agents and coaches, I wish coaches and agents were the same thing. I would love you to consider tweaking your business model to go that direction. And then if somebody wants your advice but they don’t want to use you as an agent, just say, hey, I’d love to help you, unfortunately I can only help my own client. You’re going to have to ditch the realtor that isn’t doing their job, which is why you’re talking to me and use me. As far as collecting a percentage of monthly rent to manage a property, not every state has that rule that you have to be a licensed agent or have a specific property manager license. In California you don’t have to be a real estate agent to manage property.
So verify the rules in the state that you live in to make sure that you do have to have a property manager license, but if you’re going to be getting a real estate license, you might as well get a property manager license. It’s probably going to be a very similar testing process. And then you can legally be compensated for both, and you don’t have to worry about coaching. Okay? Even if somehow you do take the coaching road, you’d be better off to have coaching, which is the front of a funnel, and then you could take your clients and you could serve them as a property manager or a real estate agent, which is another way to create revenue, but it’s still bringing value. And then your clients that are the best at this are going to buy more properties. You’re going to have more properties to manage.
You could literally build a real estate agent business and a property management business off of the work you did. So giving coaching, and you might not even have to charge for that coaching. It could be something that you do for free and you still get compensated by helping represent clients. I think we need more people in the real estate agent space and the loan officer space and the construction business and the property management side and the CPA side and the bookkeeping side, all of it that are actually real estate investors themselves. I hope that I see you in my world doing just that.

Dave:
Hey everyone, this is Dave Meyer, host of the, On The Market podcast. Tom, I have a question for you from Matt Wilson. Matt wrote us and wrote, I just got under contract on a flip I completed in Wilmington, North Carolina. The house has an inground pool, so the liability of that combined with the very hot market swayed me to sell instead of hold on as a BRRRR. I funded the purchase and rehab with a line of credit on my stock portfolio, which is great funding option because of the super low rate, low fees, and even the option to make no payments until you pay it off. I have a few long term rentals in town already and my goal is to continue buying short single family homes and small multis and eventually 1031 into something big and completely passive like an Amazon warehouse.
My question is, how best to use the profits from the flip to buy more real estate? After fees and taxes I should keep about 150,000. The type of rental homes I like to buy are about 300K. So the 150 profit could cover 20% down in the closing costs on two more homes. Should I go this route or would it make more sense to put the profit in the stock portfolio to increase my credit line, so I can go after more and bigger BRRRR projects?

Tom:
Well, Dave, let me address the tax side of that, because that’s my expertise as a tax professional. From a tax standpoint, clearly better, you don’t get tax benefits putting money into the stock market, period. Except for 401(k), IRA, you don’t get tax benefits. The big tax benefits are going to be bonus depreciation from a cost segregation. You might be able to get 25 to 30% of the purchase price of that new project. The reality is, is that your flip is going to cause you to have ordinary income that’s tax at the highest rates. There are some things you want to do to reduce that tax liability, and one of the big things is to reinvest the money into long term real estate, as opposed to just building flips, because you’re just going to pay a lot of tax when you’re doing flips.

David:
Man, Matt, I love these kind of questions. When you’re starting off investing in real estate it’s all about the individual house. I remember those days where you would just analyze every single angle of this entire house. You knew every floorboard in it. And then once you’ve invested in real estate for long enough, you start to recognize patterns in investing and you start to see that the details don’t ever actually make you money. It’s much more of the big picture stuff. And then your priorities start to switch. And instead of analyzing a specific deal to death, you start just understanding the parts of the deal that are going to make you money and trying to capitalize on as many of those. So for instance, when I’m looking at real estate now, I’m looking much more at how can I add value to it? How is it going to cost?
Where am I going to find the contractor to do that? If it’s a short term rental, what can I do to increase revenue? And then what can I do to decrease the amount of time I’m working on this house? Which areas are likely to grow the most? What kind of backup options do I have? I’m typically looking at angles like that rather than just analyzing 100 deals a day. So questions like this that involve several different asset classes, I’ve got stocks, I’ve got homes, I’ve got options. I love it. Please send me as many of these questions as you guys can. I love talking about what I call portfolio architecture. How do I structure a portfolio for maximum efficiencies? We’re kind of getting into that with your question here.
First off, I like the way you’re thinking. You’ve got 150,000, is it better to buy one property or a down payment on two properties or put the money into stocks? I think Tom did a great job of explaining the tax benefits of investing in real estate. I’m going to take the next step and say that you’re also getting leverage. If you put the money in stocks, you’re not going to be borrowing more money to buy more stocks. You’re just going to be dumping 150 grand into those stocks. I’m also going to add that that’s going to be a little bit riskier. Now you did make a great point that putting the money into your stocks will increase your line of credit. I wouldn’t mind if you wouldn’t submit another video and just tell us how that works. I think our listeners would get a kick out of hearing how they can take a line against their stock, especially if it’s a low rate.
I personally haven’t ever done that myself, so I wouldn’t mind hearing more about it as well. However, here’s what I’d like to see. Let’s stretch that 150,000 into even more than two new properties. What if you put a very low down payment, say 5% on a house hack that could become a rental property when you move into it and it’s not going to take very much. If you can get a $300,000 house hack and you put down 5%, that’s 15 grand, you get your closing cost paid by the seller. You’re keeping almost all of that 150,000. So now you’ve got a house right off the bat that will become a rental property when you move out. Then you take your remaining 135,000, you have down payments for two new properties at 300,000. That’s 120. You’ve got $15,000 left over and you don’t even need that for closing costs because in today’s market you can make the seller pay for those closing costs.
You take that 15,000, you either put it in reserves or maybe put that into your stocks. Then take the cash flow that you’re making from these three houses that you bought, not two, you’ve increased your portfolio size by 33%, and you’ve increased how much money that you’ve borrowed and how much leverage you’ve taken as well, which your tenants are going to be paying off for you, which goes right to your net worth over time. Take the cash flow and put that into the stocks. Okay? You’re not going to put this really big, huge lump sum in there like you’re talking about where it’s stocks or real estate, you’re going to get both. You’re going to get real estate. Plus three of them, not two. You’re going to take that profit. You’re going to put that into stocks and you’re going to let it grow that way.
I like the idea of increasing your stock holdings, especially if you’re good at doing that. And if you can take a line of credit. I don’t like the idea of putting all your eggs in that basket, especially because like Tom said, you’re not going to get as many tax advantages from it. And this is why I love talking about portfolio architecture. I don’t know if I coined that phrase. Maybe I did. If anyone else has heard somebody else saying it, let me know. Otherwise I’m probably going to start taking credit for it. But it’s fun. I like getting into this kind of stuff. I hope that advice helped. I love to see you exponentially grow your wealth in many ways. Thank you for your question. And please let us know more about this line of credit you’ve got on your stock holding.
All right. Thank you, Tom, for joining me and giving some backup on this, Seeing Greene edition. Thank you everyone else for submitting questions. At this step in the show, I like to read comments that we have on YouTube from previous episodes. And at this point I want to encourage you, if you’re listening to this on YouTube, on your phone, on your computer, as long as you’re not driving, go and write a comment. Tell me what you think about my question. What questions that you may have, what you liked about the show. Do you like Seeing Greene? Do you like different stuff? Do you want to see more coaching calls? Tell me what you want and we will make content the way that you like it.
All right. Our first comment comes from DJ Parton. Here’s a show format idea. An episode entirely consisting of deal, deep dives. It could include deal deep dives into all kinds of deals from wholesaling to single family rentals to commercial. It could also include deals that went well and deals that bombed. It is a hard market to get started in right now, so hearing the specifics of deals real people are doing on a daily basis in this market could be very helpful to folks like me. Thanks for all the content y’all put out. DJ, fantastic idea. I love that. And Seeing Greene is a perfect place to do this. How about this? If any of you like this, go to the YouTube comments and say, yes, I’d like to see a deal deep dive episode.
We will either find a guest to bring in or several guests to do that. Or I could do my own deals that I’m buying and I could do deep dives on some that went well, some that did not go well, and I could break down for you all of that. Maybe I do three, four, five of my own deal, deep dives right here on a Seeing Greene episode. And you guys can see what I did. I could even bring in a partner. My lending partner, Christian is intimately familiar with all my deals because he’s financing them. And he also helps sort of, we tag team this when I want him to go smooth something out with someone that maybe my realtor ruffled feathers, I use Christian like a ninja often.
We could maybe bring him in and we could tag team these together. Let us know if that’s something that you’d like and I will have our awesome producer, Eric, put that together. Next comment comes from Cynthia Ibarra. Hi David. I loved your show. Loved, you don’t love it anymore? Just kidding. You guys are the best. I would like to see more about second home mortgages. Thank you. All right, Cynthia, I will keep that in mind. We will keep an eye out for questions. If you’ve got a question about a second home mortgage, please go to biggerpockets.com/david and submit it there. And our last comment comes from King Elaine C1. Recently found this channel and it is growing on me. I’ve only been investing for seven years and I learn something new with each episode.
Well, that’s pretty cool. Glad to hear that we have you in our world now and I hope you stay here. All right. We love it and I appreciate the engagement. Please continue to submit your questions or your comments on YouTube as well as video submissions or you could even submit a question written out at biggerpockets.com/david. Also don’t forget to like, comment and subscribe on our YouTube channel and share this with anyone else you know who’s interested in real estate. Oftentimes you can create friends for yourself by sharing content like this, that they end up liking to. All right, question number four comes from Wade Kelessa.

Wade:
Hey David, Wade Kelessa here, coming at you from Sioux falls, South Dakota, currently sitting in our second duplex that my wife and I own, doing a full rehab on this one, which is exciting. But my question is actually in regards to my parents who are both nearing retirement age, neither have a lot saved for retirement and do not have a lot of disposable income, but she reached out to me and was curious what she could do with a small amount of money, maybe around $5,000. If there was a way that they could jump in and get their feet wet in the real estate game. Any thoughts you have would be appreciative and I appreciate all you do. Thanks.

David:
Thank you for this, Wade. All right. How do you get started in real estate with $5,000? Well, there’s a couple options that they have that don’t involve actually buying property. I can’t think of any situations where $5,000 would be enough to get you started in real estate. One would be, they could give it to you. You could combine it with some of the money you have and they could invest in a property as a partial owner. Let’s say you find something that you can get into for $25,000 down. If you borrow $5,000 from them, you could give them 20% of the equity. I believe that that’s around, my math might be wrong, but you could give them a portion of what that would be, and they could get paid that way, especially if the property grows in equity. And that would make sense if you could use some extra cash for the next deal you’re in.
Another one, check out our episode with Matt from the Motley Fool, episode 639. Matt gives some ways that people can invest in real estate passively without having to qualify for a mortgage. In that episode, we talk a lot about real estate investment trust. Also known as REITs. REITs are very similar to investing in stock that’s based in real estate. You’re basically buying a portion of a portfolio that professional real estate investors and managers have handpicked and are managing. And as that portfolio grows in value, so does your investment. Matt talked about a couple REITs that he’s into as well as how to research REITs. I would definitely steer them towards that.
If they’re looking to buy specific property, they’re going to have to partner with someone else or they’re going to need some more money. Can they pull some money out of their 401(k) and use that to invest into real estate? That could work. However, they’re probably not going to be good at it. If they only have $5,000. I don’t know that investing in real estate is the best move for them right now. I would definitely turn them onto the podcast. If you guys are listening to this episode, hi, welcome. That’s officially from BiggerPockets. We’re really glad to have you here. And start focusing on education, right? Get exposed to this. The last piece of advice that I’ll give you is house hacking. If they can buy a new primary residence and get a little bit more than the 5,000, they can start to live in a property and rent out part of it. And then after a year they could always move back into the house that they had before.
Maybe the house they’re in could become a rental property if they live somewhere else. Overall I would need to know what their goals are. If they’re just looking to make a little bit of extra cash investing it in a REIT could be a good idea. If they’re actually trying to become a full-fledged real estate investor, they’d be better off to put their time into learning about real estate than trying to get in with $5,000. All right. Question number five comes from Paul Williams in Florida. Hey there, David, I have a two, two unit that I house sack in downtown Sarasota. It has two separate entrances. I live in the front and I Airbnb the back. In this hot market of Florida that we’re about a mile from the beach. I have a super good location. I have never had any issues renting this out as a short term rental.
I recently started travel nursing and raised quite a bit of capital to do something with. Travel nurses get paid really well. I just found this out not too long ago, like 15, 20, $25,000 a month, depending on where they’re going and to work into certain locations. If you’re a nurse maybe consider travel nursing, and if you’re trying to figure out what job you might want, I don’t know what the demand is right now, but travel nursing does seem pretty lucrative. Okay. Back to our regularly scheduled verbal question. I also saw that a similar house up the street for me sold for 500,000. My original plan was to drop 30K to fix the house up and make it a premium vacation rental. But my question is, what’s the better play?
If my goal is to buy my second investment property at the end of the year, should I put the 30K in and get it to a premium level rental that basically runs itself? It looks like after all said and done, I’d make between 10 to 12K a year after expenses renting it as a vacation rental. Or should I put a bit less in and list it and if I get an offer for four 50 K or more, take that and use it to buy other rental properties? My thinking is that would give me about 225K in cash in the bank, as I owe about 190K on it. I’m wondering is the passive income over a long term is better or since I’m new and trying to expand my portfolio as a chunk of cash as a potential jumpstart, a better play. Thanks. And I love listening to y’all.
Well, this is a great question and I get to talk a little bit about portfolio architecture again. I am a happy camper. The question isn’t should I keep cash flow or should I get a chunk of money? It just starts there. The question is, should I keep this property to cash flow or can I get more cash flow somewhere else? That’s what we’re really getting down to, because that chunk of money is going to be converted into that cash flow anyways. Right? The question is, is the property that I’m in the most efficient way to use my equity? This comes down to the return on investment versus return on equity, calculus that I’ve used before, where we look at how much equity are you making on your property. In fact, we might be able to do that because you gave me quite a bit of detail in your question. Let’s dive into that.
You said that you’re going to make 10 to $12,000 a year. Let’s assume that you are on the higher end and you’re doing 12,000 a year. That’s nice because that’s a thousand bucks a month. And you think that if you sold it after all your expenses, you would walk away with $225,000 plus. Let’s say that you’ve got 12,000 a year coming in and you divide that by 225,000 in equity. That is a 5.3% return on your equity. Not super amazing, especially for a short term rental. I think you can do better. I don’t think it’s uncommon for you to find a 15% return on your money, especially the area I’m familiar with in South Florida, where you are owning Sarasota. You could take that 225,000 and you could get a 15% return on it, which would triple the money you’re making from 12,000 a year into 36,000 a year or $1,000 a month into $3,000 a month.
You could also add to the amount of money that you’re borrowing. You sound like a younger fellow. I’m going to assume that you’re in a financially strong position because you said you’re a traveling nurse, which means that you are prioritizing building your wealth and making money, you’re not someone on a fixed income who I would give different advice to. Which means if you sell this place, not only can you increase the amount of money you owe from 190,000 into more, but what that turns into is buying additional properties. You could probably sell this house and buy a legit three more. And if you look to house hack another one, you might even get four more houses. That’s quite a bit of capital.
My advice would be this, sell this place, buy a new one that you can house hack, just like this, because you’re going to need a house to stay in, but try to find one that has three units, instead of two, you can get more cashflow that way. Take the rest of the money and buy more short-term rentals. Now we’re also assuming that you believe the fundamentals are strong, in Florida they are very strong, so I don’t have any qualms giving you that advice right now. Increase the amount of money that you’re making on the equity that you have and you could find that this could almost replace your full-time job with as much money as you make if you do another round of this three, four, five years later. You’re in a fantastic position, Paul, you are doing everything right. Keep your nose to the grindstone, stay focused, keep on your hustle.
Look to maximize that equity as much as you can. Buy in the best areas, manage your properties very, very solidly and continue to save money just in case something happens, and you’ll do great. Question number six, from Colby Fasilla in Des Moines, Iowa. Hi David. My name is Colby. I’m 20 years old and I’ve house hacked my first investment, a duplex at 19. Since then I’ve also flipped a single family home. I purchased a duplex for 170,000 last year. And today I’ve subdivided the duplex into buy attached units and both units are under contract for a total of 330, with a profit of around 150, along with the profit for my last flip, I have about 200 grand in cash. That is a good number for me to know. Thank you.
I’m planning a building in a high appreciation neighborhood with the builder I currently work for, but I’m wondering what I should do with the rest of the money, which is about a hundred grand. I’m currently renting with my wife until that build is finished, and then I will be there for two years. My goal is to be a millionaire by 25. Love your opinions and advice on BiggerPockets. Your show introduced me to house hacking in real estate and now I’m never looking back. Well, first off, I’m really glad to hear that our show helped to make you $200,000 of tax free money. That’s more like $280,000 of money if it’s being taxed. That’s probably more than most people would make in years of their life, and definitely more than most people would save. And you did it while still working a job. So you are off to a great start.
Let’s talk about what to do with that $100,000. Well, if you’re building a home, you’re probably going to be somewhat busy managing that. So there is the option where you could let somebody else borrow that money and pay you interest for a year or two or three while you’re working out some of the other stuff you have going on. Let’s say that you’re not too busy, well, you’re doing this build because I’m assuming that you want to live there. You didn’t mention if you’re going to be doing a build because you want to rent it out. So this $100,000 could be used for something else. I’m not sure why you’re putting a hundred grand into the new build if it’s a primary residence, you could probably put less than that unless you’re buying like a million dollar property. And doesn’t really sound like that’s something that you’d be doing.
So how can you invest this $100,000? Is there short term rentals around there that you can get into? Can you get into a two, three or four unit small multifamily property and put your money there? You work with a builder, which means you probably have access to people that do construction and you have a competitive advantage. Can you find yourself a fixer upper or an ugly home and do a side, maybe not a live in flip because it sounds like you’re going to be living in new construction, but can you work on a side project? You buy a house, you rent it out, maybe you leave one of the units vacant and you fix that one up with some of the connections you have in the construction business. Then rent that one out for more rent and fix up the next one when there’s a vacancy.
I would definitely look for a value add with a construction component with that $100,000. Once the house is fixed up, you either keep it and refinance it or you sell it. You turn that a hundred into another a hundred or maybe another 200 more. Now you’ve got 200 to 300 that you can snowball into the next deal. Continue to make base hits. Continue to find properties that you can add value to. Continue to buy in areas where there is growing demand, like where you are right now and continue to buy the worst property in the best neighborhood. You do this over the next five, 10 years, you will become a millionaire. All right, we have time for one more question. This one comes from Christin McKinney.

Christin:
I’m 42 and my husband is quite a bit older than me, 59. We own three small single family homes, a commercial building where he currently runs his business out of. Our primary home which is a pretty modest home, a duplex, which I tried to do a BRRRR on, but it didn’t appraise for what I thought unfortunately, and a house/cottage in Florida that we rent out as two short term rentals. Now to buy the last two properties, I now owe over $88,000 on the HELOC and $30,000 on the 401(k) loan. But we have another exciting potential opportunity as well from a guy that we know that wants to sell his 13 unit apartment building, but he is a little bit back and forth, wants to wait a couple years. He is in his 70s, it’s paid off, the rents are low, so it seems like it could be a really good opportunity for us.
Our goal would be to sell two of our single family homes to put down on the apartment building and then use the HELOC once I pay that off, as a backup for repairs. Now I also feel more pressure since my husband’s quite a bit older than me and I want to be able to retire at the same time as him basically retiring from my W2 job early. We don’t have any kids, so we do have a lot of flexibility there. I’m just wondering a couple things. I have a really good job, should I continue paying the HELOC and the 401(k) off and save up like I’ve been doing for the past few months, even though I feel like I’m really missing out on an opportunity for cash flow in the meantime?
I’m just not really sure if the smart thing is to pay off debt or to try to invest more with the risk of over leveraging ourselves. I’m also not sure if I should put all my eggs in one basket in regards to this apartment. I appreciate you listening to my story and providing any advice you have on what you would do if you were us. Thanks.

David:
All right, Christin, thank you for that. You did give me some pretty good context about what your goals are and that helps me to give you the best advice I can. The question of, should we continue paying off our debt or should we go invest in real estate? Now, if you had said I have 25 years before I retire, I would’ve said, well, then continue paying off your debt. But because you’re in somewhat of a rush and you’re trying to catch up with your husband so you guys can retire at the same time, that does change what you have to do. You’re not going to get where you want to get at the current trajectory that you’re on, which means that there is going to be some increased risk if you’re trying to shorten the timeline of when you can retire.
This 13 unit department complex, I don’t know the details. I don’t know the area. I don’t know the condition, so keep that in mind. But just assuming everything is good, this looks like a really good opportunity. I’m also assuming that the two properties that you would sell to buy it would be cash flowing a lot less than this 13 needed apartment complex. I don’t really see a reason why you would not do that. If you could sell those two properties and buy his apartment complex, that would increase your cash flow, would put you much closer to being able to retire. But you said he’s 70 years old. He may not need you to actually get a traditional loan and pay him off. You should ask if he’s interested in seller financing. You might be able to buy his apartment complex that’s paid off without selling your properties at all.
You could keep them, you could just take out a note, give him whatever down payment he’s looking for, which could be from the rest of your HELOC line, I just thought about that, and you could get these properties without having to sell the ones you have. If you do have to sell the ones you have to buy his property, it doesn’t mean you lost two properties. It means you traded less cash flow for more cash flow, less equity for more equity. And that you can take the cash flow from this apartment, start saving that money and then go buy two new duplexes to replace the ones that you had to sell. Okay? This is something I see people get into pretty frequently. They look at it like if I do this, then I don’t get that.
And at the beginning stages, that is true. But if you structure it the right way, there’s almost always a way that you can have this and that. It just means how much time can you take to get there. It sounds like you guys are making a lot of moves the right way. Do you have equity in the commercial building that you own? Could you tap into that through a cash out refinance or a HELOC and use some of that money to buy the apartment complex? There’s probably ways that you could get into it that don’t involve you having to sell two assets that you like. But if you do have to sell the assets that you like, just come up with a plan to save more money to buy two new assets to replace them and decide how close that’s going to get you to the money that you would need to be comfortable retiring.
I am rooting for you. I hope you guys are able to retire at the right time. I think it’s awesome that you’re doing this with your husband. Please tell him that we said hi. And then remember when you retire, you’re probably not going to stop doing real estate. You might actually make more money when you retire from the equity and the cash flow that you build in your portfolio than you are making at your W2 job. I see that all the time. And you guys already have a good enough of a head start that you’re going to be making some serious traction when you do start making moves. So don’t look at retirement like it’s just a scary thing and you’re going to lose money, it may actually make you more money when you get there.
All right, that was our show for today. Thank you very much for joining me. I really appreciate that. I hope that you like these types of episodes, because we put a pretty decent effort into getting them set up for you because we are told you guys really like this. If you do like the Seeing Greene episodes, please let me know that in the comments below. If you’re listening to this on YouTube and if you are listening to this as a podcast on an app, whether that’s the Apple Podcast app, Spotify, Stitcher, or what’s the other one? SoundCloud that people use, leave us a review on there. More people will get to hear about this if you would do so, and we really appreciate it.
If you would like to follow me or learn more about me, my name is David Greene. You could follow me on social media at davidgreene24 or on YouTube at youtube.com/davidgreene real estate. And BiggerPockets has an entire website for you to explore. It is more than just this podcast and YouTube channel. Please go to biggerpockets.com and check out everything. You can start at biggerpockets.com/podcast, and you can see a whole suite of podcasts we have. We have a rookie show. We have a money and financial independence show. We have a show geared specifically for women. We have a show geared specifically for people that want to invest in real estate. We have shows that are all about what’s happening on the market right now.
Tons of content for you to peruse through, grow your knowledge and help build your wealth through real estate because we are passionate about helping you do that. Thank you again for being here, we will continue to support you. Please do the same and I will see you in the next video.

Andy Walden, vp of enterprise research at Black Knight, joins ‘The Exchange’ to discuss housing affordability, why interest rates are pushing consumers to rent, and how return to office policies are contributing to housing market dynamics.

Dave:
Hey, everyone. Welcome to On the Market. I am joined here with Jamil Damji, coming to me from Phoenix, LA? Where are you?

Jamil:
I’m in Phoenix today, enjoying life, enjoying all of the fun-ness that comes-

Dave:
What’s the fun-ness? What do you-

Jamil:
What’s the fun-ness? Well, we actually got some offers on some of our flips. That’s been really relieving to me. Beyond that, I’m almost done filming season two of our television show. So, I’m about to become a free man.

Dave:
Dude, you’ve literally been saying that since I met you which was at least six months ago. It’s so hard. I hope you’re right this time.

Jamil:
Me too, me too. But I’m super… This guest was amazing.

Dave:
Oh yeah. John is great, and honestly, a lot of people have been messaging me and asking me and saying… A lot of the people come on the show share a similar opinion. If you’re looking for a contrarian opinion, that’s not that wild, I don’t think it’s crazy, but a very informed opinion about what you think is going to happen the next couple years, listen to this interview because John has access to data none of us do. He has his own consultancy firm, and he just provides so much good context and things that I’m good to go sit in a dark room and think about for the next like three hours.

Jamil:
Really though, I think one of the most enlightening conversations I’ve had all year. So, you guys are in for it.

Dave:
With that, we’re going to bring in John Burns who’s the founder of John Burns Real Estate Consulting. But first, we’re going to take a quick break. John Burns, welcome to On the Market. Thank you so much for being here today.

John:
Oh, I’m looking forward to this. You guys are great.

Dave:
Thank you. Well, I’ve been following you and your company for quite a while and I’m a big fan of your work, but for those of our audience who aren’t familiar with you and your company, can you just give us a brief background?

John:
Sure. I started it 21 years ago to figure out what was going on the housing market for investors, mostly big companies, and there’s 115 of us now that are trying to figure that out. We have a research subscription for big companies, it’s pretty expensive, and then we also do about 900 consulting studies a year. That’s very skewed to new home development.

Dave:
Wow. So, safe to say you’ve figured out the housing market, right? You know everything that’s going to happen over the next couple of months?

John:
No, I mean, our purpose statement is to solve today to help navigate tomorrow. So, I think we’re pretty good at solving today. What’s going to happen tomorrow, your guess is as good as mine.

Dave:
Well, I was hoping, that’s why we brought you on, John. You’re going to tell everyone exactly what was going to happen. So, we’ll just end the interview here.

John:
I do have a guess. So, I can tell you our… I mean, I have to decide how aggressively we’re going to grow our business. So, this is near and dear to me, believe me.

Dave:
Well, I’m just kidding. Obviously, we would love to learn as much as we can from you. So, just tell me a little bit. Over the last 21 years, what are the key variables, what’s the data, the economic indicators that you’re looking at to help understand what’s happening in the housing market?

John:
So, when I started the business 21 years ago, it was hard to find data. So, we were getting out and finding data, and now there’s just too much data. I feel like we’re become a data filter, and we’re still looking for more data. At the end of the day, the local market from a macro standpoint is all about job growth, and that’s free data. It’s available from the Bureau of Labor Statistics, always compare July to last July because it’s seasonal. We do that for our clients. That’ll tell you whether your local economy’s growing or not. There’s two surveys. The right answer’s usually right in between both surveys. So, I advise everybody to do that.
And then on the supply side, I know you’re monitoring listings and things, and we can get into the new home market versus the resale market because I think they’re going to behave massively differently this cycle, but just monitoring listings and days On the Market, everybody can do that, but that’s a very short-term indicator that can tell you what’s going to happen. The job growth will tell you whether or not your market is adding more people who can afford to rent your house or not.

Jamil:
I love that. It’s so simple.

John:
How did I build a business just on that, I don’t know.

Jamil:
I think that’s the key though, right? The more simple that you can make what you do so that people can digest the information, the better, right? From the perspective of your average investor in real estate, for the most of us that are involved in, I guess, the information that you’re disseminating, we’re looking at it from a resale perspective, right, and there’s not a lot of people that I know that are huge new home builders. For the most part, what we do is we buy distress property, fix, and flip them. So, if you don’t mind, Dave, I just want to come out the gate swinging here. I want to understand because you said something that is all the light bulbs in my head right now are firing off. How different is the new home market and the resale market going to look coming around the corner here?

John:
Well, we’re recording this at the end of August, and the typical home builder in America has already dropped price 5%. I don’t think the resale market has done that. So, the home builders are leading indicators, and there’s actually 23 of them that are publicly traded so you can listen to their calls for free and they’ll tell you what’s going on right up to the minute. There are businesses that are going to end up with empty homes that need to be sold, and actually, they’re going to convert, they are converting quite a few of them to rentals. They hadn’t thought of that 20 years ago. So, that’s going to be an interesting play here, but that’s what you might call a desperate seller. Even though their balance sheets are really strong, I wouldn’t say they’re desperate, but they’re businesses.
The resale market, as long as the economy is growing and people are not moving or not losing their job, they’re not desperate to sell their house. In fact, if they bought their home more than a year ago, they’re sitting on a ton of equity. They can just stay put. And the mortgages this cycle, as you know, have been pristine, so I’m wondering where the supply is going to come from in the resale market, and I don’t think there’s going to be a ton of supply. I think we figured out it needed to increase 800% just to get back to normal. I mean, that’s how ridiculously low it was.

Dave:
That’s from its low point though, right, not from right now.

John:
Yeah, yeah, maybe not quite that much. Maybe that was actually, that was a new homestead, but it needed to increase significantly just to get back to a normal level, and I don’t know where that increase is going to come from unless Jay Powell is successful in engineering a really bad recession. It seems weird to say successful about a recession, but in my view, that’s the only thing he can control to get inflation down, and he’s got a long way to go because the economy’s still super strong. Unemployment’s still super low. Maybe he’ll get lucky. Something will happen and inflation will tame down, or we just end up with inflation for a very long time which will be high borrowing rates which people don’t like.

Jamil:
John, would you mind clarifying that to me because we’re obviously seeing something a little different right now in the short term, right, with respect to listings and how things have sort of shifted since we’ve seen the interest rate spikes and all the people that were thinking of selling have rushing into the market and putting their listings On the Market which has obviously swelled inventory in many markets. One of the markets that I’m in… I’m in 132 different markets just to give you backstory on me. I run a wholesale franchise operation and we’re all over the country. Primarily though, the majority of our volume is sitting in Phoenix, Arizona, and we are fixing and flipping robustly out here, and throughout the year, we started the year off with… We would finish a house, we’d put it On the Market, and it would sell immediately over list, all kinds of crazy scenarios there.
And now, since the market has started turning the corner, we’ve seen that our flips are sitting longer. We’re taking price reductions. We’re getting lowball offers, something that we hadn’t seen in quite some time. Do you think this is temporary? Because from what you just said, the resale market is not going to have enough inventory to meet demand. Is this all a temporary blip where we saw this huge rush of listings and then maybe coming around the corner that might disappear.

John:
All right. Well, you’re not going to like my answer be because you’re like a home builder. I mean, if you’ve got a house that needs to get sold and it’s empty, you’ve got to sell and you’ve got to find the market. So, that’s exactly what’s going on. The difference is hopefully for you, you’re trying to find the market where there’s not a lot of other homes for sale, and so, yeah, maybe you have to price it back where things were in January or maybe even last spring or something when you got into the deal, and nobody likes that. But if you’re out in a new home area, they tend to be 10 builders across the street from each other, and there’s a hundred empty homes for sale. That’s a much more distressful situation.
The only advice I would say is you got to find the market. You made that investment when interest rates were three and your consumer was going to be able to buy the home, or maybe somebody would buy it from you and rent it out and borrow at three. Now, they got to borrow at five. They just have to pay less, and that’s happened.

Dave:
John, you said, and I tend to agree that the new home market and the existing home market are sort of going to behave differently in this cycle. Do you have any context how big the new home market is compared to the existing home market, and is it possible that trouble with builders and new construction could start bleeding into the existing home market?

John:
Yeah, the new home market is about 11% of all the sales in the country or something like that, and historically, it’s usually around 15. So, the lack of construction everybody’s been talking about is part of the reason why it’s less. Existing home sales are coming down so quickly, maybe they’ll be at 15 pretty darn quickly, but that’s a national number. I mean if you’re in Denver, it’s out by the airport where there’s a lot of new homes and it’s not near Stapleton where there used to be a lot of new homes. It’s a very different sub-market and behavior.

Dave:
I’m impressed by your knowledge of Denver. Do you live in Denver?

John:
No, but we do 70 pages on a hundred Metro areas and I’ve traveled enough to have gone to all home games at all 30 major league baseball teams. So, I travel a fair amount.

Dave:
Wow. That’s a very cool bucket list claim to fame.

John:
Yeah, I know, I know. They keep building new stadiums, so I got to get going again.

Dave:
So, what we’re talking about so far, I presume, is mostly with single family homes. Is that right?

John:
Yeah. I mean, town homes are similar to me. Apartments are different.

Dave:
So, can you tell us a little bit about how apartment conditions are a little bit different than town homes and single families?

John:
Well, right now, it’s a completely different story. When you jack mortgage rates, you tell renters who want to be homeowners, “You got to stay renting.” So, the demand is gotten even stronger which is really the challenge for the Fed. I think the CPI measure, I think 30% of that is rent. So, when mortgage rates go up, they’re actually pushing inflation up, not down because rent’s such a big component of it. Their favorite metric is something called PC. I think it’s about 17%, but they’re doing that really in my view to kill the economy because that’s what they need to have happen so demand slows, so inflation calms back down because history has shown that sustained inflation can actually be long-term worse for the economy than just ripping off the bandaid and having a short recession, like what happened twice in the early ’80s. I hope we don’t have to go there again, but it’s starting to smell like that to me.

Dave:
We sort of talked about the long-term and short-term prospects. Given what’s happening in the new construction market and home builders are having a hard time selling, do you think we’re going to start to see, and we’ve already seen construction start to slow down, but do you think there is a risk similar to the last recession where we just saw home building fall off a cliff and it took years, almost a decade for it to come back to that level? Is there a risk that we’re going to enter another period where we already have a housing supply issue in the US and it’s maybe going to get worse?

John:
Yeah, well, it’s going down. I mean, 23 public builders have told you they’re going to start less homes next year for the most part, so I’m not forecasting other than telling you what the guys who are going to build it are saying is going to happen. So many things are different this time, and I hate that phrase, but I mean, we are building less. We’re not building 2 million homes. We’re building 1,700,00, so still pretty high. There is a big pig in the python of all these unsold homes that are under construction that are going to get finished over the next 12 months. So, I do think that’s what’s going to drive prices down.
But what is different is the builder balance sheets, public and private home builders, have never been stronger, never. In fact, we just polled them on our client webinar last week. So, sales are down dramatically. Housing market should be the poster child for the industry that’s getting destroyed. We polled 400 clients and said, “Do you have more employees than you did at the beginning of the year?” and only, I think it was 20% of them had fewer and only 30% said they were going to have fewer 12 months from now which is very consistent with what they’ve been telling me is like, “John, we made so much money and we borrowed very conservatively, and if we have a recession, I don’t like it. So be it, but I’m not letting go of my good people, and I’m not dropping land, and I won’t grow as much.”
So, that’s a different story than the last cycle where people were borrowing money like crazy, and the consumer was levered up to their eyeballs with subprime debt, but most consumers can afford the payment. They’re fixed rate payments with their current jobs and they’re getting better raises than they were anticipating due to inflation. So, I don’t think we see anything like last time, unless the Fed induces some massive recession or something I don’t see coming.

Jamil:
John, how prevalent or important do you think the institutional investor has been in leading up into our current situation and possibly leading out of it? Because it’s interesting, I read a report that one of the major institutional buyers has just raised a tremendous, I mean, a sickening amount of money to purchase new homes and resale homes in the downturn that they’re currently describing. So, almost as if they have purposely pulled back, knowing that while the rates were spiking, they pulled back purchasing and everybody in the business of buying and selling, like myself, felt that, we all felt the institutions leave momentarily so that they could create a drop in demand, and then that will automatically create a drop in pricing, but they’re positioning themselves to come in and take a massive position. How impactful do you see that being in what we’re going to experience five years from now?

John:
So, we have done so much research on this.

Dave:
Finally. Someone.

John:
We’ve gone down to mapping each house that the publicly traded institutions have done and matching it to what they’re disclosing publicly. So, we’ve got it down to the house, and the headlines are complete BS. I won’t say the whole word, but they’re complete lies. So, I’ll give you some clarity on that. So, the iBuyers are 2% of the market nationally, two. Companies that own a hundred or more homes are three. Companies that own 10 to 99, which you’re in one of those camps, is three. And then those that own less than 10 are 19. Now, that 19 does include second homes, and the way we get the data is we say, “If the property tax bill is being sent somewhere else, this is not an owner occupant.” So, that’s how we… Maybe it’s not perfect, but The New York Times hates any PE firm that starts with Black. Congress gets reelected when they’re bashing Wall Street. So, all the headlines are on that, and I’m sure, and I’ll clarify it some more.
We actually summarized it by zip codes. There are some zip codes where the percentages of buying by institutions are like five times what I just told you. So, they all have this thing they call a buy box that you’re probably familiar with the term.

Jamil:
Yes, sir.

John:
So, the buy box is not in every zip code everywhere in the country. It’s in fast-growing metro areas, right around the median home price, right around a nice rent. That’s where the competition is super severe, and I totally get it, but I’m willing to bet that people listening to BiggerPockets is far bigger than anybody coming out of New York when you add it all up.

Jamil:
That is incredible to me. I want to reiterate this because I just had my mind blown because you just described what I… Leading up into this, John, I’ve been characterizing the private equity or the institutional buyer as the 800-pound gorilla, and you just told me that it’s actually, it’s an 80-pound chimpanzee.

Dave:
That’s really interesting. But maybe, Jamil, maybe you’re noticing it because they’re really active in Phoenix.

John:
It’s super active in Phoenix.

Dave:
Yes.

John:
Yeah, the percentages are bigger in… And you would really know. Are you in Charlotte?

Jamil:
We’re in Charlotte, yes.

John:
They’re crazy active in Charlotte.

Jamil:
Yes, sir.

John:
And actually, Dave, in Denver, it’s one of the least markets where they do the least. So, Denver and Austin.

Dave:
Really? Because it maybe’s just too unaffordable at that point?

John:
Well, for Austin, it’s all mom and pop. It’s all BRRRRs.

Dave:
Huh.

John:
The buy box is not working for the big institutions. Even with one of the biggest institutions in the country being headquartered in Austin, I think those hundred-plus are only buying 1% of the homes in Austin.

Jamil:
So, to just recap that, you said the iBuyer is 2% of the sales, of the purchases. The small institutional buyer is 3%.

John:
Well, yeah. Well, if they own a hundred or more nationally, they’re three.

Jamil:
Okay. So, that’s the large institution. That’s the big private equity firm.

John:
Yeah. Is that you too?

Jamil:
No sir. No, sir. That’s not us.

Dave:
Yeah, he’s just trading them.

Jamil:
I’m trading. Yeah. So, I sell to these large institutions.

John:
Yeah. So, flippers, flippers we think are about 8% of the market, but they’re coming in and out of that number, right? So, it’s hard. Some are in each of the buckets.

Jamil:
This is data that I don’t think anyone has put out there. You’ve got different data than I have seen. So, how did you track this? If you don’t mind, I know that’s proprietary probably, but how did you get so granular with it that you got it down to the house?

John:
We bought every transaction in the country. It was very expensive and we cheated a little bit. We did buy zip code because that was easier. So, if the proper tax bill’s going to a different zip code, that’s an investor. And then I just have a bunch of great people with databases that know how to run the math, and then we geo coded it too and did a lot of back checking. This took more than a year. I mean, this was not an easy assignment, but I knew it was critical to understanding the market.

Jamil:
The risk of a massive dump in inventory by a huge private equity firm isn’t as great of a risk as wall as the headlines or the media outlets are trying to make it.

John:
Well, I’ll even make you more comfortable with that statement. So, if you’re a REIT, which the bigger ones are, you pay a tax penalty as a REIT for selling houses.

Jamil:
What?

John:
Yeah.

Jamil:
I did not know that.

John:
Well, you get structured as a REIT, your income is tax free as a company and you pass it on to your shareholder. So, that’s the REIT benefit, and the flip side of that is they penalize you for becoming like a regular company where you’re selling homes, you have to pay regular taxes that way. And also, even further, they’ve borrowed money, putting all those homes up as security and a cash flow income stream, their debt covenants don’t allow them to sell a lot of homes.
The bigger risk is the guy who owns 10 homes and five homes and 20 homes times the many thousands of people that there are like that. That’s the person I think who dumps their home, and we’ve been talking to them. There’s a couple brokerage services now like Rootstock and SFRhub and others that specialize in that person. So, they’re clients of ours, and we’re asking them, “When you see a surge in selling, you be sure to let me know,” and they’ve seen a little bit of a surge, but what they’ve learned is that those sellers need to provide great information, like how have the financials been the last year and other things to sell these homes, and they don’t have it.

Jamil:
Because they’re not a sophisticated owner. They’re small ma and pa property management companies.

John:
So, they’re going to have to wait for the lease to expire and then kick somebody out and sell the house to somebody else. So, it’s not going to happen overnight. It would happen over time, if people are playing that game.

Jamil:
Wow. And primarily they’ve been purchasing with some tremendously low debt, right? And so, leading up into this, they’ve been holding a lot of inventory with some very favorable terms, and so, maybe that’s the vacuum we’re feeling right now is them leaving the space because the BRRRR’s not working as well as it was seven months ago.

John:
So, we have this fix and flip survey which by the way, if any of your BRRRR clients want to participate in that, just send it to me at [email protected], and I’ll get you in on the survey because we’re trying to stay on top of what people are doing. People are exiting and then not reinvesting the proceeds yet. I know that there’s 1031s and other things associated with that, but they’re not finding deals that are as underwriteable right now. In fact, I don’t have the exact stats. I’ve got it in the survey, but the percentage of ARV that they’re willing to pay now versus three months ago has gone down dramatically.

Jamil:
Do you have an average of what that has gone down?

John:
We have it by distribution, but it’s gone down maybe 10%.

Jamil:
Yeah.

John:
So, maybe if I was going to do a 75, I’d do a 65 something, but that means I’m going to pay less for your house or I’m going to borrow less money.

Dave:
Can you tell us a little bit more about that survey, John?

John:
Yeah. So, it’s just, it’s a survey. We partnered with a couple companies, Flatiron and Sundae and some others that are involved in this business. We’ve got a couple clients that fund fix and flip, and yeah, it’s just about 10 questions, but there’s a lot of participants, and you’re asking me these questions I don’t know the answer to, but if I ask a thousand people and poll them, we’re hoping to get those answers and find these things out. I want to ask, are you going to sell?

Dave:
Oh cool.

John:
Or are you going to reinvest?

Dave:
So, our listeners, if they want to participate and contribute data to this survey, they can, that’s what you were saying, email you or go to your website.

John:
Yeah. We’ll get you in. We do it once a quarter. We’ll get you on the next survey and then you’ll get all the results in return. That’s our give back.

Dave:
Cool. That’s awesome. I mean, if you’re a flipper, that’s a no-brainer. Go fill out 10 questions in exchange for a lot of information about your market. So, we’ve talked a little bit about what’s going on and what’s happening here, and I do want to get your opinion, I know that’s not data supported always and no one can predict the future, but what do you see happening over the next couple of months, and how do you feel about the long term prospect of housing valuations in the US?

John:
I mean, we think they’re coming down. I’m not going to quote the percentage, but it’s substantial, but I’ll say it another way. So, we just went through say two to three years of really substantial price appreciation. What if you had to give a year of that back? Would that sound unreasonable? No. Do the math on that percentage in your market. It’s a lot.

Dave:
Yeah, it is. And do you think that’s going to happen universally across markets?

John:
No. Every market is completely different.

Dave:
And so, you’re saying on a national level sort of-

John:
Yeah, right. And then those stats I quoted you, they’re so different in Charlotte than they are in Phoenix than they are in Denver, though that was all national. This is very local, and even I remember I have the Charlotte map kind of memorized in my head. It’s like all the east and west side of Charlotte where all this activity’s going on and nothing in the north and the south. So, it’s very zip code specific.

Jamil:
John, you’re saying that you’re seeing that housing values are going to come down based off of the research that you’ve done and some markets more than others, and I’m not quoting you, but possibly erasing an entire year’s worth of appreciation from our balance sheets. What’s the timeframe?

John:
I think it’s quicker where there’s a lot of desperate sellers like home builders, and it’s really slow on the resale side where people are not desperate.

Jamil:
So, emotions again, just like how we saw the massive appreciation happen based off of emotions because there’s a term that I love using, I call it emotional equity. That’s where we had people coming in and overpaying by 100,000, $200,000 more than a property was listed, and this isn’t lender-backed value. This is stuff, they were waving appraisal contingencies and just coming in and slapping down cold, hard cash to close this deal, and so, that equity, that appreciation that happened will disappear, and you’re saying it’s going to disappear as fast as it came here because it’s an emotional-based situation.

John:
Yeah. So, actually, a guy named Robert Shiller who won the Nobel Prize not that long ago for economics primarily won it for what you just said was his analysis on psychology and it feeding on itself. When things go up, it forces things to go up even more, and I think we’re going through a psychology shift the other way where if now’s not a good time to buy, I should wait three months or I should wait three… And I think that’s the most likely scenario until some new information comes along and changes everything I just said. But the other part of this question that I do find flippers don’t talk enough about is the mortgage rate and the borrowing rate. When you see 40% home price appreciation and rates go from 3% to 5.5%, who thinks that doesn’t matter? I mean, but that’s what you’re saying. If you don’t think prices are going to fall, you’re basically saying that doesn’t matter.

Jamil:
It has to matter.

Dave:
Of course, yeah.

Jamil:
It has to matter.

Dave:
Yeah, I mean, affordability is I think I saw some stat recently that said is near a 40-year low in terms of what people can afford, and of course that matters because it dries up demand and just less people are willing to get into the market. Do you think, John, this bodes… So, that’s sort of your short-term view. What do you think about sort of the long-term prospects of the housing market? Because we’ve done some analysis at BiggerPockets just about previous recessions, previous housing cycles, and to us it looks like the outlier is 2008 in terms of how deep housing price declines were and how long it took to come back to pre-crash levels. Do you see something like that as feasible? I know you can’t assign a probability or anything like that, but is it even feasible?

John:
So, that is the data and that’s exactly what it says when you chart it nationally. If you chart it locally, you’ll see that there are other precedents where things have taken just as long. So, like the S&L crisis happened in the mid-eighties in Houston, it fell for four or five years and took another nine years to come back.

Dave:
Wow.

John:
It happened in California in 1990. I mean, my wife and I bought our first home in ’91 20% off the initial asking price and sold it five years later for a loss.

Dave:
Whoa.

John:
And then seven, eight years later, it came back. Yeah, so this has happened. Yeah, look at the construction starts in the local markets. Now, I’m not saying that’s going to happen again. Those were all financial crisis. You know what happened last time before than that, it was the collapse of the S&L industry. There’s certainly no financial crisis that I’m aware of happening in real estate. If they were lending on Bitcoin or lending against hedge fund portfolios or something, then there could be one, but I don’t think it should play out like that, and we are undersupplied, our view is by about 1,700,000 houses right now. That’s a lot of undersupply. As we mentioned earlier, the apartment market is completely full. Until we finish all those apartments under construction, that’s going to stay the case. Yeah, it shouldn’t be something like you just outlined.

Jamil:
So, do you think the… Because we were sort of playing with this number of 10%, right, a 10% reduction in value, and do you think the 1.7 million houses that we’re short, do you think that’s what backstops that from a crash?

John:
Well, a simple demand supply chart, I think demands and rents have already corrected for that supply. So, probably priced out of those 1,700,000 people. So, as you drop rents or as you drop home prices, you allow those 1,700,000 to split up with their roommate or whatever they’re going to do and get their own place. So, I do think there’s an affordability component to that, but yes, the fact that we’re entering this undersupplied rather than oversupplied, which is the case in 2006 is a far better situation to be in.

Dave:
So, I’ll ask you the question probably on the mind of all of our audiences. Are better buying opportunities sometime in the near future rather than today because in your mind prices, values are going to fall?

John:
Well, the flippers have told us that. So, your listeners have already said, “My borrowing costs are up. I’m not going to take a bet on home price appreciation like I used to so I’m going to buy at a lower percentage of ARV,” and this woman, Kyla Scanlon has coined this term calling it a vibecession. We’re not in a recession, but it feels like it, the vibe is like we’re in a recession.

Jamil:
I like that.

John:
It’s exactly what you were just talking about. People are hitting pause, and when people hit pause, demand slows. What’s different this time is I don’t think supply is really going to skyrocket. So, that’s good, and people aren’t going to have to go through foreclosure and things like that in a big way. That actually argues for it taking longer to get back to where prices and rents need to be.

Dave:
That’s really interesting. Yeah, I love that, the vibecession. That’s a good point. We did a whole show on this, but basically we’re not technically in a recession, but who really cares because all of the underlying economics have been… The trends are what they are and people are feeling like it’s a recession which is pretty much what matters.

John:
Exactly.

Jamil:
Yeah, I mean, a hangover is a headache, but you can call them both the same thing, right? Either way, it doesn’t feel good.

Dave:
Yeah, exactly, yeah.

John:
Yeah. At least you know that’ll go away.

Jamil:
So, is there a way for a fix and flipper to bake in their forecasting? Because the bottom line is is that when we do this full-time for a business, right, it’s very difficult to just pause and wait and say, “Okay, look, I’m not going to purchase right now. I’m not going to…” Because you’ve got crews that you need to be responsible for. You have wages to pay. There’s things that need to keep the machine moving because if you don’t keep the ball moving, the entire thing falls apart, and then reassembling that later on is next to impossible, or it looks really different from what it looked like right now.
And so, I’ve seen a lot of rehabbers that I work with at least, they’re saying, “Look, Jamil, we can’t pause. It’s impossible for us to pause. We’ve got way too many people that we’re responsible for. We have a lot of inventory that we’re holding. We’re going to continue pressing forward, but we’re going to bake in some understanding. We’re going to bake in value, or we’re going to bake in a deceleration in pricing,” whatever you want to call it. What would you say to a fix and flipper that is trying to orchestrate a business plan for the next 12 months? How would you advise them?

John:
So, I mean, this has been really interesting for me because everything you just said, you sounded exactly like a home builder. Exactly. “I’ve got all these homes, I’ve got all these people.” What you didn’t say, but is underlying in all this is, “I’ve got a lot of debt that needs to get repaid,” and that is the answer to your question. So, if your debt is low or you’re able to restructure your debt and you can be patient, you’re going to be patient. If you have no choice, you got to go as fast as you can to make sure you pay back your debt, and Dave asked about the builders in the last cycle going under, they had a lot of debt. This cycle, they’ve been able to borrow like 4% fixed rate and it doesn’t mature for six years. So, they’re like, “I can be patient.” Their borrowing literally is like 30% against the asset value or less. If you’re at 70, 80% leverage, you’re in trouble.

Jamil:
You just described how rich they all are right now because they made so much money leading into this. So, when you’ve insulated yourself with all of this, all these years of really, really great returns, you position well to be able to come out of this at least intact.

John:
So, if your listeners have sold some house and stuck some cash in the bank and paid down their debt, they’re fine, but if everybody rolled it back to just keep buying more homes, which I know there’s a tax incentive to do that, you’re taking a lot of risk in a cyclical industry, and everybody knows housing is cyclical.

Jamil:
So, the depreciation buyer might not appreciate what you just said.

John:
Well, but they can hold on and enjoy the depreciation for a very long time. I mean, if you’re in a shape where you can just rent this out and refinance with some long-term debt, you’re fine. I know people that did that in the last cycle too. Some builders actually did that. There’s a famous one in Houston, did that with 4,000 homes that were intended to be for sale and they ended up renting them all out. It was awesome. It’s a different lender on a perm financing on something like that so you can get a fixed-rate debt too. I mean, maybe not from everybody, but that’s how you get through. You rent it out.

Dave:
John, this has been super helpful. I’m curious if you have any other things you think our audience of aspiring and active real estate investors should know about this about the housing market or where you think things are going.

John:
I’ll end on a positive because I felt like a little bit of a Debbie Downer today. I think this is not discussed enough. The housing boom of the early 2000s was 18 to 20 years ago and homes need a remodel on average, we’ve got the census data, 20 to 25 years after they’re built. So, the number of old, tired homes that need a refresh is massive. We have a lot of clients who are building products, clients who sell to the remodelers. We’re very bullish on remodeling and the need for rehabbing homes, purely due to the number of homes that was built 20 years ago.

Dave:
Oh, that’s fascinating. I didn’t ever think about that.

Jamil:
To my taste, Dave, I can’t live in a house that hasn’t been remodeled five years ago.

Dave:
Oh, I know, I know you buy a new house every year, Jamil. But do you think it’s possible, John, just curious if builders have all these people they’re trying to employ and they don’t want to build, would they reallocate resources towards remodeling? Is that possible?

John:
To some extent, but they’re also entering this with a labor shortage. So, it’s not like they have too many people they’re trying to… And actually, home builders are different because their trades are on somebody else’s payroll, but there’s been such a trade shortage here, I think some of those trades will flip to remodeling. In fact, I’m sure of that.

Dave:
Yeah, that’ll be interesting to see. John, I have one last question and it’s entirely selfish. I feel like the housing market is very confusing and so is the economy right now. In your 21-year history of looking at housing market data, how does this stack up in terms of complexity and normality, I guess?

John:
This is about as complicated as I can remember, but I think I would’ve answered that question the same over the last 20 years. It just seems to get more complicated.

Dave:
Yeah.

John:
There’s more things going on, and as I mentioned, there’s more data to analyze, like, “Oh my god, I hadn’t thought of that.” This flipper stuff, iBuyers, who was talking about iBuyers before? Yeah, it’s super complicated which actually is kind of good for our business.

Dave:
Yeah, it’s good for our podcast. That’s why we created it. But yeah. I mean, I think it’s reassuring to know for people who are new to this industry that this is complicated, that if you’re listening and feel a little bit confused about the economy, you’re not the only one.

John:
I think the guys in charge of the economy are confused about the economy.

Dave:
That is a painful truth.

Jamil:
Oh boy.

John:
When the Fed chair is apologizing for getting it wrong, don’t feel bad that you got it wrong.

Dave:
All right, John. Well, we’re very grateful. As investors and just people interested in the economy, we’re very grateful to have some time with someone like you with such great experience and access to so much unique information. So, thank you so much, and for anyone listening, if you want to connect with John, it sounds like the best place to do that is on your website or is there anywhere else they should do that, John?

John:
There’s a form on our website that would be awesome. Just fill out the form and say, “I want to be in the fix and flip survey,” or you can email it, [email protected] Someone will get back to you.

Dave:
All right. Great. John, thanks so much for joining us.

John:
All right. Take care.

Dave:
Dude, I feel like we need Kathy here to calm me down. We need to call her so we could have her soothsay to us for a while and make me feel better.

Jamil:
Right? That was sobering and depressing, but at the same time really interesting, right? I mean, I would have never guessed that 19% of the properties owned are just mom and pop investors. My eyes have been on these institutional investors in Wall Street, and it’s like one of those moments where you realize that you’ve been diverted, your attention’s been diverted to the wrong thing, and meanwhile, the actual situation is happening behind the scenes, and it was incredible to hear John describe that.

Dave:
Totally. Yeah, I think it’s one of these things that you look at data, read about data where it’s like is institutional investors going up, probably, but just with inventory and other stuff in the housing market right now. Is it going up from 1% to 1.5%? Will that impact a market? Sure. Is it going to impact the national housing market? Nah, probably not that much. So, it’s really important to get those sobering facts from someone like John who obviously knows. I guess, what I feel like if the housing market goes down, that obviously is bad for homeowners, for a lot of investors. That sucks. I think what’s making me just feel sad right now is just the lack of consensus. It’s like every person you talk to, it’s completely different, and the only truth is that no one knows right now, and it’s honestly great. It’s so good to have an alternative perspective. It’s so, so important because we’ve had other really prestigious analysts like Logan Mohtashami and Rick Sharga on the show, super experienced, saying something pretty different from that.

Jamil:
Totally different.

Dave:
I think the theme though that we’ve seen through the last couple shows is every market is going to be really different from here on out, and you really just got to understand your niche.

Jamil:
I think that’s really important, Dave, and I think that a reason why the BiggerPockets audience really needs to pay attention to this is because no one is going to give you the silver lining or that one-stop-shop answer. You’ve got to get into your local RIAs. You’ve got to get into your local marketplace. You’ve got to talk to the buyers out there. You’ve got to talk to the rehabbers out there. You’ve got to talk to the lenders out there, the hard money lenders. You’ve got to really do research for yourself to understand am I in a market right now that has the fundamentals that are going to remain strong so that I can make a decision. I mean, guys, he did not say that it was bad everywhere. In fact, there was a lot of positivity in those markets where that had strong job growth, right? If you’ve got strong job growth in your market, you really do have some insulation. So, paying attention to these key market indicators are super important in making a decision on how you’re going to progress your real estate investing business.

Dave:
Honestly, something about this makes me a little bit excited and feel like I have a bit of an advantage because the last two years it’s like you just throw a dart at a dartboard and you’re going to make some money. Now, it’s kind of like a researcher’s market. If you’re someone who likes to understand what’s really going on in your market, you’re going to have a huge advantage, and listen, there’s flip sides to both of these things. I feel like people I talk to, half the people are like, “Oh no, I’m so fearful of housing markets going down,” and the other half are like, “Can’t wait, can’t wait till the housing market goes down.”
And just the truth is that every market, like he said, even in Charlotte, new construction is different from existing homes. The north side is different from the east and west side. Single family assets are different from multi-family assets. There are going to be opportunities, but you’re going to have to try harder, and honestly, that’s a good thing. When it was easy the last few years, look how much competition you were facing. Everyone was out there trying to buy stuff because it was so easy. When it gets harder, the people who are committed to it and the people who really understand it have an advantage. And so, not wishing for anyone to lose money, but I’m just saying it means there will be opportunity, if John’s right. Who knows?

Jamil:
Yeah. Well, I think that’s great. You are right, and the good news, guys, is that you’re tuning into a podcast that’s going to keep you abreast of all of the information that we can find out there, right? We’re going to hear from all of the point of views, whether it be from somebody with a really optimistic, robust point of view of where things are going to somebody who’s looking at it from a different perspective. Always know that if you’re making decisions based on data that you’re doing a much better job than people that are just throwing darts at a dartboard.

Dave:
Totally dude. I mean, I think the thing I love about this show and everyone who’s on this show, I’m going to toot our own horn a little bit, is everyone just seems so willing to learn. We’re just taking information and changing your opinion, and I think that’s so important. So many people you see have said, “The market’s going to crash,” and they’ve been saying it for seven years. They won’t admit that they were wrong seven years ago, and we don’t know what’s going to happen. I don’t know if John’s right or if Logan’s right or whoever, but what we can commit to you is that we’re going to keep just bringing on people who are smart and who understand the industry and give you as much information possible, and hopefully, you can make good investing decisions with that. All right, man. Well, it was great having you on, really appreciate it, and hopefully we’ll have you again soon.

Jamil:
Always good to see you, brother.

Dave:
Well, thank you everyone for listening. We will see you all again next week. On the Market is created by me, Dave Meyer, and Kaylin Bennett, produced by Kaylin Bennett, editing by Joel Ascarza and Onyx Media, copywriting by Nate Weintraub, and a very special thanks to the entire BiggerPockets team. The content on the show, On the Market are opinions only. All listeners should independently verify data points, opinions, and investment strategies.