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Ashley:
This is Real Estate Rookie, episode 241.

Sahleem:
Our dreams were the confidence. We had dreams, we had dreams, we had no road blockages in front of us. Nothing could stop us from completing this property. There was something in our minds that say, “Hey, every obstacle that we faced, we’re going to jump over.” We did not care at all. And I believe that I still carry that to this day. I do carry that to this day actually. There’s nothing in my way that’s going to stop me from being myself.

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

Tony:
And welcome to the Real Estate Rookie Podcast, where every week, twice a week, we give you the inspiration, information, and stories you need to hear to kickstart your investing journey. We’re here for those people that are new or looking to get started and expand and scale. So, before we jump into today’s amazing episode, I want to give a quick shout out to a person in the Rookie audience that left us a review on Apple Podcast. Their username is just a collection of letters and numbers. I’m not going to try and pronounce what that is, but it says, “BiggerPockets is a great resource, definitely worth listening to. Every episode has solid content, tangible stories from real rookie investors.” So, if you haven’t yet, please leave us an honest rating and review on whatever podcast platform it is you’re listening to. The more views we get, the more folks we can reach, and our goal is to reach as many people as we can. So, Ashley, we got a pretty good episode lineup for our listeners today, right?

Ashley:
Yeah, I mean, we could have gone on and on. We have Sahleem on today who goes into almost a James Dayner type story for those of you that listened to On The Market. Sahleem started out working at Chipotle and turned into a wholesaler. So, he goes through his journey, and my favorite part about the episode was that he tried real estate and then actually took kind of a brief pause from it from three years because he got into such a bad deal, and I think it just goes to show that even if you’re scared right now to get started because you’re afraid of having a bad deal, I love having people on that have this bad deal to show you that life goes on. You can overcome it. There’s different exit strategies. There’s different ways to pivot your business strategy. And so, I think Sahleem is a great example of that. And just his motivation, he’s just so cheerful, and he makes me want to get pumped up and go do something more.

Tony:
I know. I love Sahleem’s energy, and yeah, just his whole demeanor and his vibe. But Sahleem also I think in this episode provided a great example of how you can find a mentor, and there’s this phrase that we threw around called mutual mentorship near the end of the episode. So, if you’re a newer investor and your goal is to find that mentor to help you add skills or learn new things in the world of real estate investing, Sahleem is a perfect example for you to follow and model.

Sahleem:
I did. Yeah, I was a line cook. First, I started off as a line cook, then I was a kitchen apprentice. That didn’t work out too well. So, when I started off as a line cook, I was there for about two years before I actually got into the kitchen. The biggest thing for me was moving up. I always wanted to move up in Chipotle because everybody wanted the general manager spot. If you cooked well enough and you can wash dishes well enough and you can run a store, then hey, you can get a hundred thousand job at Chipotle. Most people don’t know that, but you can.

Ashley:
So, basically you have to do all the jobs in Chipotle and then become the general manager. Yeah, yeah.

Sahleem:
Yeah.

Tony:
Really? So, the general managers at Chipotle makes six figures?

Sahleem:
Yes. Yes.

Tony:
Wild. It’s the same thing for In-N-Out. There’s no In-N-Out where… Do you know what In-N-Out is?

Sahleem:
Burgers, a burger spot, right?

Tony:
Right, yeah, yeah, but In-N-Out’s like this-

Sahleem:
Like McDonald’s? Yeah.

Tony:
No, nothing like McDonald’s.

Sahleem:
I’ve only gone one time because we don’t have them New York either.

Tony:
No disrespecting In-N-Out like that. No, but In-N-Out, it’s like the White Castle of the West Coast, right? It’s all super fresh. Nothing’s frozen. But same thing, I have friends that have worked at In-N-Out. Even if you come into the base bottom level, you’re making pretty good money. Yeah, if you’re a manager for a location, it’s a pretty healthy six-figure salary for doing that. So, I do know people that have made a career out of In-N-Out Burger. It’s crazy.

Ashley:
Yes. So, Sahleem, what happened with Chipotle, and how did you get into real estate then? Where was that transition from wanting to be one of the chefs in the kitchen to now you’re buying property?

Sahleem:
Okay. So, interesting enough, I always wanted to be better. I always wanted better for somehow. I didn’t know how to make money, but I always heard about people buying and selling cars, always heard about the car auctions down in Philadelphia, Pennsylvania where I’m from. I’ve heard people say, “Hey, I just bought this car for $2,000.” And I say, “Hey, well, I work overtime all the time. My checks are maybe $1,300.” At that time, I probably had two to $3,000 bills. So, I say, “Hey, you know what? Let me save up some money to go buy me a car so I can go to the auction and make my own money.” So, I believe my first car was a Buick Century or a Buick Park Ave or something like that.
I went to the car auction. I had like $2,300, and from there I actually bought the vehicle. I knew how to fix cars all the time because I used to watch all my friends fix cars. So, it kind of led me to go into flipping cars. So, I bought one car, bought the Buick, next thing I bought a Pontiac, next thing I bought a Hyundai, a Honda. It just kind of tripled.
So, from me buying all these vehicles, I had a guy at my job, he said, “Hey, I always see you coming to work with new cars all the time.” He’s like, “How are you doing this?” I said, “Hey, I’m just going to the auction. I drive the cars for two weeks just to make sure that they’re good and stable, and then I go and post the car on Craigslist or OfferUp,” and I would sell the car and I would make almost like a 500 to a $1,000 profit depending on the vehicle it was. So, from there he said to me, he say, “Hey, why don’t you jump into real estate? I’ve heard about this real estate game. I’m going to this event.” I did not make the event because of work. I had to go to work. So, he told me, “Hey, come to this event next time.” I still didn’t make that event. I just wasn’t taking him serious. So, once he was like, “Hey, I have this thing called wholesaling,” and he was trying to tell me about wholesaling and I just wasn’t interested. I wasn’t interested at all.

Ashley:
Why do you think the reason was that you weren’t interested? Why do you think that was?

Sahleem:
I just don’t, it was too much. He was telling me about contracts and you have to assign it over to… It was too technical for me. The only thing I knew was HDTV. The only thing I knew was people on YouTube. All I knew was people on Facebook flipping houses, and that was my inspiration. I said, “Hey, I want to flip houses. I don’t want to wholesale.” So, we kind of brought our money together. We had a LLC together. I totally forgot the name of it because that was back in like 2015 or 2016, not too sure. Oh, actually I got it. It was called Growing Homes LLC. So, it was Growing Homes LLC. We were 50/50 on the LLC. We went to the Philadelphia sheriff’s auction and we purchased a property, and we didn’t know what we were getting into.

Ashley:
Before we even get into the property of what happened, how did you decide to partner with this person and did you… Being your first deal, because I know even for myself putting together my first partnership, it was very loosey-goosey, but can you talk about that? Did you guys have an operating agreement? Did you have your roles and responsibilities? What went good? What went wrong?

Sahleem:
So, I believe I rushed into that deal. I didn’t know anything about paperwork. I didn’t know anything about operating agreements. All I knew was LLC. That’s all I knew was limited liability company.

Ashley:
Did you set it up yourself?

Sahleem:
We set up ourselves.

Tony:
Yeah. If I can ask just one clarifying question, Sahleem. So, I mean, this is the same partner that was trying to get you to come out to this event and was trying to pull you into the world of real estate investing. So, I mean, you were hesitant at first, and it seems like you went from zero to a hundred because you went from I don’t want to do this wholesale thing to, okay, let’s form this partnership. So, what was that turning point where you finally said, “Okay, I think we should try and pursue this together”?

Sahleem:
We had a three-hour talk. He called me one night. I remember exactly where I was at. I was standing on the corner for three hours. He called me, and I was standing in the corner for literally three hours pacing back and forth talking to this guy, and he was just telling me just the world of real estate and just how we can change our wealth and just our mindsets. He said, “Hey, you already have the mindset. You buy broken down cars, you fix them up and then you sell them.” He said, “Do you know how much money you can make?” And at this time, I’m maybe 20, 21 at this time, and he’s telling me these things, and I’m not grasping all this stuff until the second hour of the conversation. He’s just telling me, “Hey, your Chipotle checks won’t have anything on real estate at all.” He said, “You want freedom in your life.” He said, “I know you hate coming to work sometimes.” He said, “I see you, you come in here, you drag. I know you don’t want to come to work sometimes, but if you do this stuff right here, you can set yourself up for the rest of your life.”
And once he kind of put that bug in my head, I continuously just pictured myself living the life that I wanted to live, living the life of having freedom, and doing all the things that I ever wanted to do in my life. At that time, I’m 20, 21, I’m thinking about material things at that time. I’m comparing my life with material things. That’s just what it is. So, from there, I took that bug and I said, “Hey, you know what? Let’s take this money. Let’s put this money together, and let’s go and buy this property.”

Tony:
Man. So, he was able to convince you, it sounds like, by pointing out, A, the skills that you had in yourself that you weren’t even really recognizing. He’s like, “You’re already doing this, you already have the ability,” but it sounds like what really kind of puts you over the edge was that he painted the picture of what your life could be like, and I think that, that, Sahleem, is the part that’s really interesting to me because… And, Ashley, we get this question all the time, right, how do I get my spouse on board, right, or how do I get my partner to want to come along with what I want to do, and it’s like maybe if you get really, really good at painting the picture of what your life could be like once you get there, that might be the key to actually unlocking that partnership.

Sahleem:
Yeah. Yeah, and that’s exactly what happened for me. I believe that key has switched and it never turned off. It never turned off. Even when I enlisted in the United States military, that never turned off. That stayed with me the whole time I was there. I always knew I wanted to rank up when I was in military, and even with ranking up, I always wanted to go to every duty station and do real estate. That was my goal.

Ashley:
Sahleem, thank you very much for your service. And what is the kind of timeframe that you served in the military? Was this before Chipotle? Was this after?

Sahleem:
This was after Chipotle.

Ashley:
So, I mean, we’ve got a lot to talk about here. We’re going to need longer than 40 minutes here. So, you’re at Chipotle and then you go and do your first deal in 2016, and then it was after that that you went into the military?

Sahleem:
Yes.

Ashley:
Do you want to continue to go into that auction deal, and maybe break down how you even buy a piece of property at auction?

Sahleem:
So, at that time, and in the Philadelphia auction, they have a book. So, they put out like a book every month. The beginning of the month, they put out a book. So, you have to go and pick the book up or sometimes they even mail them out if you’re on a mailing list.

Tony:
Like a physical book, like printed papers? That’s crazy.

Sahleem:
Printed paper book, yes. So, this is at that time. Now times have changed now. Technology’s a little bit more advanced. So, we opened a book, we found a property, and I forgot the exact price that… There wasn’t a starting price on the property, I believe. I don’t believe there was a starting price. But we looked at the property. We used to drive up and down the street just looking at the property. We would drive up and down the street just looking at it, and then one day we got out and we kind of walked because it’s a row home. In Philadelphia we have a lot of row homes, and they’re like two story, three story. So, we walked down the street, up the street again, checked the neighborhood out, and said, “Hey, oh, it’s a good deal. Hey, we got the money, so let’s go. So, let’s wait until auction date and let’s go to the auction.”
We went to the auction, we bidded on a house, and we won the bid. You have to put down 10% of the purchase price of the house and you have the next 30 days to come and you have to cover the rest of the bill. So, that’s what we did. I believe we were in the property within a week after putting down the 10%. We were in the property at the week. The property, it was a vacant property. It was trashed. So, this is a two-story property. You walk inside the front door, the beams were hanging down, there was trash everywhere. It was busted. The house was disgusting, I’m sorry. This is one of the worst houses I have ever encountered in my life, and I’ve been in so many old houses. There were raccoons everywhere.

Tony:
Raccoons inside the house?

Sahleem:
Yes. Yes, raccoons living inside the property.

Tony:
Did you have to evict them?

Sahleem:
They evicted themselves. They actually evicted themselves once we went there and sprayed some repellent in there. So, they actually left the property after that.

Tony:
It sounds like, Sahleem, once you guys purchased this property, it was a much bigger job than you had anticipated because had you seen inside prior to actually closing on the property or was it was just the outside view?

Sahleem:
No. It was just the outside, literally.

Tony:
Let me ask a couple questions here, Sahleem. So, what made you guys confident that this was a good deal, given that you weren’t able to inspect the inside of the property before buying it?

Sahleem:
I believe our dreams were the confidence. We had dreams, we had dreams. We had no road blockages in front of us. Nothing could stop us from completing this property. There was something in our minds that say “Hey, every obstacle that we face, we’re going to jump over it.” We did not care at all. And I believe that I still carry that to this day. I do carry that to this day actually. There’s nothing in my way that’s going to stop me from being myself, from me jumping into these properties or me doing anything in life. Me and my girlfriend were skydiving like a week, two weeks ago. I was so scared. I wanted to tell her, “Hey, I don’t want to get on this plane. I want to stay on the ground and you can go up.” But a switch flipped and I got on the plane and that was it, and I jumped. That’s how I lived my life from day to day. So, during the time that I had that property, I had the same mindset that I have today.

Ashley:
Sahleem, not to make you feel bad, but just the last guest that we interviewed last week, he actually has over a thousand skydives.

Tony:
Yeah. He was a professional skydiver.

Ashley:
Yeah. So, to go from a professional to being terrified.

Sahleem:
Oh my god. Yeah. I mean, when I hit the door, it was the most terrifying experience I could have. I don’t know how to-

Ashley:
Okay, but then after you did it, after you did it, what was the moment?

Sahleem:
I still was scared.

Ashley:
So, there never was a moment where it was like, “Actually this is awesome”?

Sahleem:
When the parachute actually opened, that was it.

Ashley:
Well, yeah, that’s what I mean, that relief, and then from there it was enjoyable?

Sahleem:
Yes, it was very enjoyable, very.

Ashley:
Kind of, or until your feet hit the ground?

Sahleem:
My feet hit the ground. Everybody else was on the ground before me because I don’t know why, I guess I was so heavy. I don’t know what went on, but everybody else was on the ground before me, and I’m just like, “Hey, y’all all jumped out after me. How are y’all on the ground after I jumped out? It doesn’t make any sense.” So, just having that mindset literally kind of channeled me to be the person I am today.

Ashley:
So, how do you think that kind of translate into getting deals and doing business?

Sahleem:
So, I believe that the one thing that may translate is overanalyzing. We can sometimes overanalyze some things and we overanalyze out of fear. I believe sometimes when we overanalyze, that’s a road blockage for us because some of us overanalyze and we never jump. We never jump out that plane. We never buy our first property because we overanalyze. So, I believe that me not overanalyzing things and me just taking action once I learn these types of things have translated into real estate.

Tony:
Yeah, Sahleem, I love that mindset, and I do think that fear is something that holds a lot of people back, and I’ve heard a bunch of other successful people say this, I think Brandon Turner’s even said it before, but there’s two types of fear. There’s real fear which poses an actual threat and then there’s perceived fear, right, and that perceived fear usually comes from a lack of knowledge or a lack of understanding. As a new investor, you have to be able to decipher between those two types of fear, right? If I jump out of an airplane without a parachute, that’s dangerous, right? But if I jump out of an airplane with someone who’s trained and that has done this a thousand times and he has not one but two parachutes, the level of perceived risk starts to decrease. So, as investors that are new, I think we want to try and break down or differentiate between the two types of fears.
Sahleem, I want to tie this back though to that first property that you guys purchased because I feel like what you guys did, it almost is jumping out of an airplane without a parachute, right?

Sahleem:
We jumped.

Tony:
You guys couldn’t see the property. And this is your first deal, right? So, you had no experience rehabbing properties. You had no experience managing crews. You had no experience. So, I guess just kind of take us through, once you guys actually closed on that property, what was that journey like and was there ever a moment where you felt that parachute open?

Sahleem:
So, parachute opening, no. But, okay, so the first week of actually having that property, me and my partner, we actually started to clean out the property ourselves. We walk around the neighborhood. We seen bunch of dumpsters, and we seen people throwing out trash, throwing out all types of wood, chairs, all types of stuff from vacant properties. So, we did exactly what they were doing. We cleaned out the property ourselves. We literally got all specks of dirt off the floor. That’s how I feel. We were literally in there with Clorox, bleach, doing all types of stuff, cleaning a vacant property. The walls were disgusting, we cleaned the walls. We literally had this image in our head that if we cleaned this property, that we would be able to complete this property ourselves.
Leading from us cleaning out the property, we didn’t know. We kind of had a few contractors come to the property, and this is when I was working at Chipotle, of course. So, I would leave Chipotle, drive all the way to the property in the car that I got from the auction, and walked through the property with a contractor, and these contract would tell us, “Hey, this is going to cost you about 60,000 to fix up.” We say, “Oh no, it’s not.” Of course, we didn’t know. So, we hired, not hired, excuse me, I guess pre-hired, or we had some inspectors come through and they all told us 60, 70 to fix this property up.
So, it was like, “Okay. Hey, we need a loan. We need a loan. We need to get a loan from somebody,” because we didn’t have the money to fix the property up. So, we actually got a loan from somebody. It was like $5,000 or something like that, and we came up with the rest because we had a framer who came to the property and he framed the property up, but he was only going to charge us $5,000 to frame this property. We gave him $11,000 to frame the property and to do the drywall. He frames the property up-

Ashley:
You say to do it. So, did you give it to him before he did it?

Sahleem:
Yes. The worst mistake ever.

Tony:
Yeah.

Ashley:
I mean, that is so common we hear that. I’ve made tons of mistakes. Even just last year, I paid a contractor hourly. They just dragged that out, and I eventually had to fire them. We all make these mistakes because we feel like these people are so trustworthy, like, “Oh, this is awesome. We found a contractor. It’s a great price,” blah, blah blah, and we all just put these blinders up. We know the red flags, we know them, but we just don’t follow them.

Sahleem:
I didn’t have any type of blinder, any type of parachute, any type of help at all. We literally gave this man $11,000 in cash. We didn’t have a checkbook. We didn’t have a business bank account. We didn’t have anything. We literally gave this guy $11,000 in cash. He said, “Hey, I’m going to charge you $5,000 to frame this whole house up, and I’m going to charge you another six to drywall the whole place.” The guy didn’t show up. We paid him the five, he framed the whole house up from top to bottom. Knowing what I know now, he framed the house up with the foundation messed up, that’s one, on the inside the bathroom. The bathroom floor was still kind of caved a little bit and the back windows were still… The brick in the back was kind of falling. The molding was falling. So, he framed the property and basically just didn’t show up.

Tony:
So, after that happened?

Ashley:
Yeah, what do you do after that?

Sahleem:
I quit. I quit real estate after that. I quit real estate after that. I did not want to get back into real estate at all. I didn’t want to touch anything with real estate. I hated it.

Ashley:
What happened with the property or with this guy? I mean, did ever see him again or he’s just gone in the wind?

Sahleem:
The contractor, we did not see again. My partner, we’re still good friends to this day. I let him keep the property and he went on. He sold the property, an as is condition as it was. I kind of got a few thousand back and that was it. I did not touch anything with real estate after that until 2018, 2019.

Tony:
So, how much time had elapsed, Sahleem, between when that deal-

Sahleem:
Three years.

Tony:
Okay. Wow. You were that kind of emotionally beat that you said, “I need a full three years off before I even think about investing again.” So, what was that moment then, Sahleem, where you said, “Let me see if I can give this real estate investing another shot”?

Sahleem:
So, enlisted into the military in January 2019. I went to Fort Sill, Oklahoma. I was there in my barracks room for I want to say a good four months, good four to five months I was in my barracks room. During the second month there, I ran across a YouTube video about wholesaling. Again, oddly, wholesaling pops up in my face three years later when I don’t have anything to do. Along with that, the next day, literally the next day, I saw a video about wholesaling. A guy I was talking to just about business, he handed me Rich Dad Poor Dad, and I’m telling you, this book was ripped up. I still have this book to this day. The book was ripped up. It had all types of drawings in the back. On the front page, it had all types of drawings. There was so many things that were there. I’m like, “I’m not reading this book.”
So, I went back into my barracks room and I opened up YouTube again and I started learning wholesaling. I don’t know the guy’s name exactly, but he had 20 videos in wholesaling from top to bottom. Literally the first video was step one, the last video was step 20. That was it. So, the guy basically, hey, he kind of gave me the juice of kind of wholesaling, and then he mentioned Rich Dad Poor Dad. He said, “Hey, you need to change your mindset,” and he mentioned Rich Dad Poor Dad while this ripped up book is sitting right on my desk.

Ashley:
Isn’t it funny how the universe works, that sometimes it just comes full circle, yeah.

Sahleem:
It’s amazing. So, I picked this book up, and I’m telling you, I’m reading this book in between lunch breaks, on the weekend, after class. I’m reading this book, I’m just so intrigued. This book is attracting, it’s taken so much of me not to read this book. I have to read this book. I got to read it from front to back. So, I completed this book front to back, and from there, I kind of got this bug. I’m like, “Hey, I have to do something with real estate. I have to do something that’s going to free me or that’s going to allow me to have some type of freedom in my life when I get older,” because when I first started, all I was thinking was, “Hey, get you a few rentals for when you retire so you don’t have to work anymore.”
I wasn’t thinking about using real estate at that point, even though the book was kind of telling me, “Hey, use real estate as freedom while you’re young, or in your ages, use this book as some type of freedom.” I did not pick that up until I start actually wholesaling. Until I actually start wholesaling and going to REI meetups and all types of things, I did not pick up what the book gave to me, but I always had it instilled in my mind that I’ve wanted some type of freedom at a age.

Ashley:
What do you think makes you different than people who are just working a nine to five and waiting for retirement? Why do you think that you decided, “I want financial freedom”?

Sahleem:
Because there was a point in time when an employer had a check coming to me and they cut it. They cut my check. They were in control of my income, and that, I didn’t want anymore.

Ashley:
I think that’s a great reason right there, and the fact that you can think of that moment, because I can think of that moment too. For me, it was I was working as an accountant and I was an intern through college, and then I got my first job offer with this company I’ve been interning for, for two years. I was just, I waited and waited for this day when I’d finally be making big money, I was graduating college, and I opened the letter and I was like, “Wait, what?” It was not even that much more that I was making as an intern, but now instead of working 10 hours a week, I had to work 50 hours a week, and I was just like…
It was that moment right there, and I remember when… So, I lasted six months on that new salary and I decided to quit, and I remember walking into the office of the partner at the CPA firm and I just said, “I’m putting in my two weeks’ notice, and I just, I thought it was going to be a lot more money than I thought it was going to be.” And she said, “Well, you know what? Look at me. I wish I was making a lot more money too, and I’m a partner.” I was like, “You literally just proved my point. I don’t want to be like you, I don’t want to be here for 20 more years and still not be happy with what I’m making.” That was kind of my aha moment there. Tony, what about you? Did you have one of those moments?

Tony:
I did. And it’s funny, I just got interviewed on one of my friend’s podcast and they asked me that same question, and it was very similar to your situation, Ashley, where it was my first big boy job after college, and it was my first review cycle in your reviews where you get your first raise and everything like that, and I remember I sat down with my boss at the time and she said, “Tony, you’ve done a fantastic job this last year. Everyone’s super thrilled to have you. We see you doing really big things with this company. We’re excited to give you your raise this year, and it’s a one and a half percent raise over what you made last year.” So, I think I went from making $60,000 a year to 61,500 or something crazy, something stupid small, right? After the taxes in the inflation, I was like, “I could buy myself an extra cup of coffee every month.” Right?
When that moment happened, I was like, “I gave so much of my mind, my time, my energy into this company,” and they felt, they determined that I was only worth an additional one and a half percent, and when that happened, I was like, “Man, I never want my value in the marketplace to be driven or determined by someone else. I want the amount of money that I’m able to make to be dependent on me and the value that I provide, not what someone else feels I should be worth.”

Sahleem:
I think that’s amazing that we all share the same mindset as real estate investors.

Ashley:
Yeah, it’s that time freedom, and having that moment can really trigger that motivation to… And even thinking back on that moment can even get you more amped up to be like, “Wow, I actually got out of the rat race. I got out of that nine to five. Look what I’m doing. I control my income now.” It can be so powerful.

Sahleem:
Yeah.

Ashley:
So, you were sitting in the barracks and you were researching wholesaling. When did you actually take action? Did you have some analysis paralysis as to how do I even get started in this, or did you just go ahead and jump both feet or jump right out of the airplane?

Sahleem:
So, I jumped out the airplane, but this time I had a parachute.

Tony:
There you go.

Sahleem:
So, I want to say during probably the 10th video, I literally downloaded an REI, REI Skip. I don’t know if it was REI Skip or Need to Skip or something. I downloaded a skip-tracing software.

Ashley:
Can you just explain what that is for anyone that doesn’t know?

Sahleem:
Yeah, so skip tracing is exactly what it sounds like. You’re going to trace the owner of that property. That’s all. Skip tracing actually comes from the court system. The courts used to use that when they couldn’t find people who were out on bond and they tried to change their number or change their address. That’s exactly where skip tracing came from. So, I actually skip traced somebody who had a house on the Philadelphia vacant list. I think they were going to put the property up for auction or something like that.

Ashley:
Okay, hold on. I want to break this down nitty-gritty, okay? So, where did you get that vacant list from?

Sahleem:
Okay, so the Philadelphia sheriff cell, they actually had, so this is different, I didn’t pull this from any records or something like that, from like Podio, not Podio, sorry, PropStream or something. I didn’t pull that from there. I pulled that directly from the Philadelphia, pa.org website. They had a list of vacant properties, properties that were overdue on water bills, electric bills, or anything that was overdue, they had judgment to all types of stuff. I actually went on that property and I kind of closed my eyes and I just picked the property literally, and from there, I entered his name. I forgot his name. Let’s call him T.J. I literally put his information into the software, and he had a number that popped up. I was so afraid to call this guy. I had his number for about two days before I called him because I didn’t know how to approach him.

Ashley:
That would be me too.

Sahleem:
He had three numbers. I didn’t know. He had three numbers, and I believe the third number was him. I got to him on the third number. The first two numbers, I kind of got cursed out because I guess people were calling, they kept calling trying to find this guy, and on the third try I got to him, and the guy had two other wholesalers or investors looking to purchase the property. But somehow, I took the script that the guy gave me from YouTube, YouTube University, I took that script, and he was ready to sell the property to me. I believe it was like two weeks. I was talking to him for a good two weeks.
Unfortunately, he didn’t contact me back after I kind of sent him over a contract. I think I had the purchase price was at $60,000. When I ran my numbers through my ARV, it was like 320,000. So, I’m like, “Hey, this is a home run deal. I need this deal. I need this house. I know people who are buying houses in this area just because of me being in Philadelphia. I know the real estate investors there. Let me try to see if I can buy this house.” So, the guy said, “Hey, yeah, he offered me 120, this guy offered me 120,000. You’re offering me 60,000.” So, after that day, I didn’t hear from him again. I kept calling back and kept calling back and I got nothing. That was it.

Tony:
So, I just want to before we go too far, you said you were nervous kind of reaching out to these sellers, but what did you actually say? So, this owner picks up the phone. How do you break the ice? How do you go from being a complete stranger to this person eventually being willing to sell you probably one of their most expensive assets that they own?

Sahleem:
So, I knew his hurt point from the video. From videos I was watching on YouTube University, I knew his pain points because his property was on the list to be up for auction. So, I kind of knew his pain points. I knew he was in a crunch time. He needed to sell this property. So, when I called him, I asked him, “Hey, are you the owner of 123 Main Street?” He proceeds to yes. And then from there, I don’t remember the conversation exactly, but what I do remember is because I’m from Philadelphia and he’s from Philadelphia, we start talking about sports.
I kind of made the conversation personable. I shied away from talking about business. I didn’t want to come to him, because I knew he was kind of going through something, I didn’t want to approach him talking about business because when somebody’s in that, it’s very emotional. Somebody’s going to lose their property and they don’t have the funds to cover the bills or whatever it is so they can keep their property. So, I kind of made that conversation personable. I’ve always been a very personable kind of person when it comes to business or just a conversation in general.
So, I took the conversation away from business and we start talking about other things and then from there, “Hey, how about those Eagles, right?” So, I come back, “How about those Eagles?” So, I come back in there, I’m say, “Hey, so what are your plans with the property?” After I ask him that and he say, “Hey, the Eagles won last night or something.” After that, I might come back and say, “Hey, what are your plans with the property?” I do remember this. He said, “Hey, I don’t have the money to cover this property. It’s going to go up for auction.” So, from there, he was still in conversation with two other wholesalers and somebody already offered him. At that time, I didn’t know the number that they offered him. So, he was okay with the 60,000 at first because he actually might have got that number after I gave him my number. He got that number after. That’s why he didn’t call me back. But I believe I approached the situation being very personable and taking it away from business.

Tony:
Got it. So, walk through how you ended up closing that deal then, Sahleem.

Sahleem:
So, I actually didn’t close that deal. That deal wasn’t closed.

Ashley:
But it was the learning experience.

Sahleem:
Yes.

Ashley:
It was like that first call that got you over that fear of making many more calls.

Sahleem:
Yes. So, I didn’t get my first deal until I got to Fort Campbell, Kentucky where I was stationed at. That’s where I got my first wholesale deal at.

Ashley:
Yeah. How long was that from that first call with this guy until you actually got your first deal?

Sahleem:
Okay, so that happened, so, I left Fort Campbell, Kentucky, I’m sorry, I left Fort Sill, Oklahoma in August of 2019. Literally, it took me to January of 2020 to get my first deal, to get my first wholesale deal, and I was fronting the whole time.

Ashley:
That’s what I was going to ask next is, okay, did you only have five calls in between that or continuously going?

Sahleem:
So, from August of 2019 to January 2020, I was driving for dollars. I was cold calling. I was literally writing out… I write so sloppy. I write so sloppy. So, I was actually, I was writing letters. I was sending letters out to people. I was reaching out to people on Facebook. I was doing so much marketing that my fingers would’ve burned off the amount of marketing I was doing every day. So, from August 2019 to January 2020, I probably spent most of my checks on marketing.

Ashley:
Was it worth it?

Sahleem:
It was very much worth it, very much worth it.

Ashley:
For somebody who’s maybe grinding it right now, has not got their first deal yet, what advice do you give them to keep going?

Sahleem:
So, I think a lot of us, well, just people in general, sometimes we expect instant gratification, and I knew that instant gratification wasn’t going to come. I used to be a track runner and literally I was doing a four by four, and I ran off the track because I was so out of breath. I thought I was going to pass out when I was in high school. And ever since that day when my track coach kind of got on me, I never quit anything else that I’ve ever done, except the real estate part because I lost a lot of money then.
But I knew I wasn’t going to get anywhere without continuous work. I knew I was going to be stuck somewhere if I didn’t continue to do this same thing over and over again. I listened to podcasts. I literally went on YouTube and listened to so many people who were doing what I wanted to do, and they all said, “Keep going, keep going, just keep going,” and I kept going. I was motivated by so many other people who were doing what I wanted to do that I just kept going. I even drove Uber and Lyft sometimes to fund my marketing campaign.

Ashley:
Sahleem, that first deal, that bad deal where you say that you quit, what was your reason for doing that? At that time, was that because you wanted the time freedom, you wanted financial freedom, or was it just because you wanted to flip a house? What was the motivating factor behind that one?

Sahleem:
So, two things. I wanted time freedom, but I also wanted, I was 20, 21 around that time, I wanted material things. I wanted material things around that time.

Ashley:
It wasn’t actually just flipping a house.

Sahleem:
It was also flipping a house.

Ashley:
But what you were striving for was something that you have now.

Sahleem:
Yes.

Ashley:
So, did you really actually quit? I don’t think so. You pivoted, you changed, you took a leave of absence, you did some more research, and you figured out what would actually suit you better, and then you ran off with it and did it. So, I think it’s very unfair to say that you quit because you didn’t quit. Look at where you are now. And so, what has happened since you got that first wholesale deal January 2020? 2020, right, it was?

Sahleem:
Yes.

Ashley:
What’s happened since then in that time period?

Sahleem:
Okay. So, January 2020, I get this property under contract. I reach out, I use one of my marketing strategies of reaching out to somebody on Facebook. The actual owner of the property, I couldn’t get through to him so I found his wife. I saw that she was married to this guy, and I messaged her and said, “Hey, 123 Main Street, do you guys own this property?” I knew it was vacant, high grass, broken windows, rails all busted up. So, I proceed to send her a message. I did not get a message back from her until like a week later. She messaged me back and she said, “Hey, what’s your number? My husband is interested in selling this property.” He said, “This property, we had it as a rental, but the tenant trashed the property and we never got back down to Kentucky to come fix this property.”
So, I literally gave the lady my number, I want to say 10 minutes after I gave her my number, her husband calls me. He was overseas somewhere. He was stationed in… I’m not sure exactly who he was stationed at, but I know it was somewhere in the eastern region. He was over there, and I walked through the property. I did not know anything about numbers around this time. I walked through the property. I think I got it under contract for like 45,000 or something like that, maybe like 50 I think it was at that time. I sent them over a contract. I had got a contract off Google. I got a purchase and sales agreement off of Google. It was a blank, hey, address, property, price, and just all the laws and stuff like that, that are incorporated.

Tony:
Bills, yeah.

Sahleem:
Yeah, just everything that was incorporated with the contract. So, I proceed to send him a contract, he sends it right back. I send it through DocuSign, he sends it right back, and I was so shocked. I was so amazed. So, now I’m like, “Hey, I got this property now. How am I going to get in it?” He had a property manager who still had the key, but the lady was trying to convince the guy to keep the property, but we were already under contract so it really didn’t matter at that point. She gave me the property, she gave me the key to the property, and I didn’t know what to do with the property after that. I did not know at all. So, I was stuck with this property for about a good four days before I actually got this property under contract.

Ashley:
Okay, the I was stuck with it, I thought you were going to say four months. Four days before you [inaudible 00:43:26] for it. Okay.

Tony:
That’s pretty fast.

Ashley:
That’s great.

Sahleem:
In my sleep, I couldn’t get any sleep at that point because I’m just like, “Hey,” I know in this contract I had to give him $500, earn this money deposit. So, I’m like, “Hey, I’m going to lose my $500 if I don’t get a buyer on this property.” So, I posted the property on Craigslist. I posted property on OfferUp and Craigslist, and at that time I didn’t know about, we had in Clarksville… So, actually, let me just explain this real quick. In Tennessee and Kentucky, they’re right on the border. So, where the base is, you can be in Kentucky if you step across the street, or you can be in Tennessee if you step across the street. So, Clarksville, Tennessee, they have a page, we have a CREIG page. It’s the Clarksville Real Estate Investors Group. I didn’t know about that page at the time. So, I only posted the property on Craigslist and OfferUp.
So, I posted the property on Craigslist and I was just waiting. I’m twiddling my fingers. I could not get any sleep at all because I’m like, “Hey, I’m going to lose my $500. This guy’s going to sue me. He’s going to think I’m a fraud. What did I get myself into?” So, at this time, on the fourth day, I was on lunch break and this guy, he called me out of nowhere. He said, “Hey, I saw your property on Craigslist.” So, I’m like, “All right, I got somebody. Finally.” My pictures were all messed up. I only had a picture of the front of the house, not a picture of the inside or nothing. So, he’s like, “Hey, I want to come by and take a look at your property.”
So, the next day on my lunch break, no, sorry, actually after work that day, I met this guy at the property and he’s like, “Hey, okay, I want it.” He walks through the property. There’s a big hole in the wall. The floors are all messed up. They were laminate floors or whatever and that was all peeled up. There were water stains on the ceiling. I’m like, “All right, this guy’s not going to buy this property.”

Tony:
That was like an investor’s dream.

Sahleem:
It was his dream. He made it his dream. So, from there, he walked and he said, “Hey, I’ll give you 50,000 for the property.” I said, “Okay, cool.” Well, actually, no, no. My assignment price was like 53 or something like that. I don’t know. I have to look back. I had like a $3,000 assignment fee.

Tony:
Yeah, you made a few thousand bucks on the thread.

Sahleem:
Right. But his thing was, “Hey, I’ll give you right now,” he said, “I’ll give you a $2,000 assignment fee now and then I’ll give you $1,000 once the actual deal was done. Once I flip this property, I’ll give you $1,000.” I was just like, “Okay.” I didn’t care at all. I’m like, “Hey, I’m about to make $2,000.” Well, actually, at that time, $1,500 because I had $500 owner’s money. So, I’m like, “I’m okay. I’m going to make some money.” So, we went under contract, and from there, one day I just drove past the property and his car was outside, and I was like, “You know what? Let me stop in here. Let me go say hi to him.” So, I stop in and I knock on the door. He has his dog in there. He has all his tools spread out all over the place. Next thing I know, I’m working in a property with him. I say, “Hey, do you mind if I come back and come learn some of these things?” I was just so intrigued by him. He had the whole place ripped out. I wanted the walls ripped out.

Tony:
So, Sahleem, I want to pause you for a second because I want to make sure our rookies are following along with what you’re explaining here. So, you found your first deal, you marketed it on online, you found your buyer. What your buyer said was, “I’ll give you a portion of your assignment fee today when we close, and I’ll give you the rest once I sell this property after the rehab is complete.” You said, “Okay.” After that first transaction closes, you stop by, check in on this guy, and then you end up working with him on the rehab. Man, what a tremendous way for you as a new investor to learn the skills of rehabbing a property, right? This guy’s invested in you because you brought him this deal which is a great way to build that relationship, and now you’re able to make it mutually beneficial because now you’re learning the part of his business. Did you learn a lot on that deal? Have you repeated that process with other folks?

Sahleem:
So, this guy’s still my partner to this day.

Tony:
Wow.

Sahleem:
He’s the one that I’ve been investing with for the last three years from, well, for the last two and a half years. From January 2020, he’s still my partner to this day. Everything I do within real estate now, me and him, we do together.

Tony:
I just want to say, Ashley, we get the question all the time, how do I provide value, or how can I find a mentor, or how can I pick someone’s brain, or how can I X, Y, Z, and I think most people almost go about it the wrong way, where it’s like they ask for value before providing any in return, where Sahleem, you did it the exact-

Ashley:
Or they ask what they can do.

Tony:
Right, which is also difficult.

Ashley:
They’ll just jump in and grab a tool and start hammering away.

Tony:
Yeah, and, Sahleem, you did it the other way where you provided value first. You brought this investor a great deal, you gave him a break on your assignment fee, so when you came around and then offered to work with him in exchange for him teaching you, there was already that rapport there. You’d already given him so much value that the law of reciprocity starts to kick in. So, I mean, what would your advice be, Sahleem, for our rookies that are listening, that are looking for mentors as they start down this path of real estate investing?

Sahleem:
I’m going to say first one, be willing to learn. Always be a student. Never learn something and feel like that’s the end-all, be-all. Never learn something and feel like you don’t have room to grow. That’s first and foremost. Always pick up a book. Always listen to podcasts. Always write down your goals. Always reach out to other investors or just other people who are doing things that you want to do in your life. Always reach out. That’s first and foremost starting. And I’m going to say the next thing is provide, like you said, provide some type of effort towards your goals. You have to be able to bring something to the table. Right? You can’t just come empty-handed because there a thousand other people who may want to come and work with you, Ashley, who may want to come and work with you, Tony, but you may not be missing what they’re offering.
You have to get to know the person and provide some type of value to them. You can’t just come to the table empty-handed because we’re all so busy, right? Sometimes we might get so busy that we don’t have time to sit down and talk to you for an hour, two hours, or even bring you along some walk-alongs. We don’t have time to do that type of stuff. So, if you were to come in a walk-along and hey, I want to build up a museum, right? You know how to find the deal. So, I want this land. Hey, I want to build a museum. You know how to find the deal. I know how to do the construction. Hey, let’s mesh. Let’s make our operation a thing. And that’s what I did with my partner to this day.

Tony:
We need to coin that phrase, Sahleem, where it’s a mutual mentorship, right, because you mentored that person in the art of finding a good deal and then he in turn mentored you in here’s how you manage rehab and flip a home, and I think if more rookies can kind of approach you with that mutual mentorship, they might find more success, but they can only do that if they first invest in a skill themselves. You spent the time to learn how to find off-market deals which then became a value that you could provide to other people.

Sahleem:
Yes.

Ashley:
Sahleem, before we wrap it up here and go into our segments, I just want to ask, how many wholesale deals have you actually done though?

Sahleem:
So, wholesale deals, I’ve done about 30, 32 wholesale deals I believe it was. I got to go back and look.

Ashley:
That’s awesome.

Sahleem:
About 32, 33.

Ashley:
I mean, yeah, you don’t have to tell us exactly. And then have you kept any of them to flip or to turn into long-term rentals? Okay, cool.

Sahleem:
Yes, so I have three long-term rentals now.

Ashley:
Are they still in the market?

Sahleem:
Yes. I have two in Clarksville, Tennessee, and then one in New London, Connecticut, and then also I have two and a half acres of land that I’m going to be building 22 units on.

Ashley:
Wow, awesome. Congratulations.

Sahleem:
Thank you.

Ashley:
We’ll have to have you come back on to talk about doing this new development.

Sahleem:
Yes, I’m so happy, so ready, but also so nervous because of the interest rates.

Ashley:
Yeah, yeah.

Sahleem:
But overall, we’re going to break ground pretty soon on the 22 units. We literally have all the plans approved. We have everything we need. The lot is already purchased. We purchased a lot first. That’s kind of a mistake that we made, but not really because we have everything else approved already. But yeah, that’s what I have now in my portfolio, three property, three single family homes, and two and a half acres of land.

Tony:
Well, Sahleem, congratulations.

Sahleem:
Thank you. Thank you.

Tony:
Well, Ash, should we head into our rookie request line, got anything else recently before we jump into that?

Ashley:
No, go ahead.

Tony:
All right. So, if you guys are listening, you guys can always give us a call at 8885-ROOKIE if you would like your question featured on the Real Estate Rookie podcast. But today’s question comes from Ladi in Brooklyn. So, Sahleem, are you ready for today’s question?

Ashley:
I’m ready.

Ladi Sonibare:
Good evening. My name is Ladi Sonibare from Brooklyn, New York, and my question is regarding wholesaling. I am trying to use wholesaling as a way of getting enough money together for my first cash purchase, and I’d like to know what the most cost effective way to wholesale properties would be. I’m not sure if it’d be necessary for me to have to hire a contractor to tour the property and give me a rehab estimate every time. I don’t know if that’d be wise or cost-effective. So, any help you could offer would be greatly appreciated. Also, if you can offer any book recommendations, I’d appreciate that as well. Thanks a lot for your help and take care.

Sahleem:
Okay. So, I started off by cold calling myself. I think it’s the most cost-effective way that you can do anything. You already pay for your phone every month. You can download Google Voice. You don’t have to use your phone number. You download Google Voice. You can get a dialer. If you don’t want to get a dialer, dialers are about like $99 a month, dialers will help you with a list of numbers. So, think about it this way, you’re already paying a hundred bucks for your cell phone bill every month and you’re going to pay another a hundred bucks for your cold calling software. You can use that and pay $200 a month so you can make an affinity amount. I believe that you should always start off with those types of things first, very low cost-effective, and you won’t pull a lot of money out of your pocket from then. What was the second half of that question?

Ashley:
What was a book recommendation?

Sahleem:
Okay. So, right now, I’m actually, so I’m going to start off, I think every real estate investor should read Rich Dad Poor Dad. That’s it. Plain and sample. That’s like our bible as real estate investors and as entrepreneurs, period. Right now, I’m actually reading Twelve and a Half. Twelve and a Half is a very good book. I’m reading that right now. I think I’m like on chapter two or three right now, and it’s a very good book for leaders. And I think that all of us should have some type, well, we all need some type of leadership to run our businesses, right? Because now you’re going to step up from you cold calling to you hiring a virtual assistant, to you having contractors, to you having lenders, to you having all types of people, you need some type of leadership skill to help you progress through your business. There’s not going to be much things that you can do without leadership. You need some type of leadership in your life so you can progress.

Ashley:
Okay. So, this week I actually called dibs on shouting out the Rookie Rockstar. So, our Rookie Rockstar is selected for us and each week we get the honor of kind of showcasing this rookie that has had this win or maybe is just sharing a lesson with us. So, this week, I started laughing when I saw who the Rookie Rockstar is because it is actually my friend Ryan Dossey who is far from an actual rookie. But the coolest thing is, is that these are mostly pulled from the Real Estate Rookie Facebook group, and Ryan has put kind of his deal in here to kind of showcase everyone five things that he wishes people would’ve told him before he started. This is just a prime example of why joining the Real estate Rookie Facebook group is so just motivating and inspirational, and you’re getting tons of advice from not only other rookie investors who are like-minded like you, but there are a ton of experienced investors in the Facebook group too sharing their journey.
So, Ryan said this one deal was three times what he made in a year as a W2 employee. So, five things he wishes people had told him before he started marketing for off-market deals. So, the first thing is, most of the people who’ve sold me houses over the years were unrealistic, unmotivated sellers who I motivated to sell. The sellers asking price is meaningless. Three, if they say no, follow up anyway. Four, do not give your max offer initially unless there is competition. And then number five, people will get offended by anything and everything. You’re not going to be for everyone.
So, he got his deal under contract in March, closed in April, and rented it back to himself while he found a place. So, all in for 141,000, sold for 215,000, and he netted 65,400. So, amazing, Ryan, as always. It’s awesome to have you share your experiences in the Real Estate Rookie, and especially that you’re not just saying your win, but you are actually providing tremendous value to all the rookies. So, thank you very much. So, Ryan Dossey is this week’s Rookie Rockstar. If you want to be featured as a Rookie Rockstar, makes sure you guys post in the Real Estate Rookie Facebook group, and you can also leave us messages on YouTube in the comments below, or send us a DM, @wealthfromrentals or @tonyjrobinson. Sahleem, thank you so much for joining us. Can you let everyone know where they can reach out to you and find out some more information about you?

Sahleem:
Yes. So, I’m on Instagram as invest.w.lee, invest.w.L-E-E, Lee, investwithlee on Instagram. You can find me on Facebook as Sahleem Lee, S-A-H-L-E-E-M, last name Lee, L-E-E, and on Facebook as well, invest.w.lee

Ashley:
Thank you so much for joining us. We really enjoyed recording with you and appreciate you taking the time to join us. I’m Ashley, @wealthfromrentals. He’s Tony, @tonyjrobinson, and we’ll be back on Saturday with a Rookie Reply.
(singing)

The San Diego metropolitan area features a robust housing market—with some of the highest historical rent and price appreciation in the United States. Anchored by a growing economy, low unemployment, and a significant military presence, the San Diego real estate market offers investors a stable base with strong long-term growth prospects.

Economic Overview

San Diego, located in Southern California, is the eighth largest metropolitan area in the United States, with a population of about 3.3M people. From 2010-2022, San Diego County grew nearly 7%, but recent estimates show a 0.4% decline in population from 2020-2021. For context, the state of California overall had an estimated decline of 0.8% during the same period.

Wages in San Diego are very high, with the median household income coming in at just above $82,000, compared to a national average of $65,000. Poverty rates are relatively low at 9.5% compared to the national average of 11.6%. These strong economic indicators are partially driven by a highly educated workforce, with nearly 40% of citizens holding a bachelor’s degree or higher. 

One of San Diego’s greatest strengths is its labor market. Unemployment rates remained solidly below the national average for many years pre-pandemic and have returned to very low lows in 2022.

An important economic factor for real estate investors is the diversification of employment in a target market. When an area is highly dependent on one industry, it makes the market more susceptible to economic cycles. San Diego, however, has a well-diversified economy with a strong representation in education, hospitality, trade, professional services, and government.

Housing Prices

San Diego has a strong track record of property appreciation, growing a staggering 270% from the lows of the great recession in 2009 to current day, according to the S&P/Case-Shiller Index. As a result, San Diego has a relatively high entry point with a median sale price of almost $828,000 as of October 2022.

As with many markets, the San Diego market is showing signs of changing course. Since June, inventory (as measured by months of supply) has increased from pandemic lows and has started to level off near pre-pandemic averages.

This shift presents both opportunity and risk for real estate investors. With high-priced markets that appreciated rapidly during the pandemic, the risk of price corrections is considerable. It’s likely that prices will come down in San Diego in 2023. 

However, increasing inventory and price declines mean that the San Diego market has shifted from a seller’s to a buyer’s market. When buyers have pricing power, they should focus on buying properties below asking price to insulate themselves against potential future price declines. 

Rent Trends 

For investors, one of the most attractive reasons to invest in San Diego is the strong rent growth. The median rent in San Diego is above $3,100 and has grown 10% in just the last year alone. While rent growth is starting to slow down, San Diego still has one of the country’s highest year-over-year rental growth rates. It’s a highly desirable place to live, and the demand for rental units is strong.

Find a San Diego Agent in Minutes

Connect with market expert David Greene and other investor-friendly agents who can help you find, analyze, and close your next deal:

• Search “San Diego”
• Enter your investment criteria
• Select David Greene or other agents you want to contact

Cash Flow Prospects

With potentially falling home values combined with high rents, cash flow prospects in San Diego are likely to increase in the coming months. That said, cash flow is relatively hard to come by as measured by the rent-to-price ratio (RTP). 

Generally speaking, the higher the RTP, the better. Anything with an RTP close to 1% is considered an excellent area for cash flow, but it’s not a hard and fast rule. But that doesn’t mean cash flow cannot be found. There are good strategies for real estate investors to employ to generate excellent returns in San Diego.

Winning Strategies 

According to David Greene, a local market expert, short-term rentals, medium-term rentals, and house hacking are all excellent ways to find cash flow in this market. Traditional buy-and-hold investing can still work but will likely require some value-add work to make the numbers pencil out.

If you can generate a good cash-on-cash return with some of the strategies mentioned above, San Diego could be a winning market for investors, given its reputation for great appreciation. Appreciation might slow down or reverse in 2023, but the long-term prospects remain very strong. 

Getting Started: Invest in San Diego 

To learn about investing in San Diego, partner with a local investor-friendly real estate agent like David Greene, who can help you find, analyze, and close the right deal. 

Here’s how to contact David on Agent Finder. It’s easy:

• Search “San Diego” 
• Enter your investment criteria
• Select David Greene or other agents you want to contact

David is a nationally recognized authority on real estate—he’s an agent, lender, investor, author, and co-host of the BiggerPockets Real Estate Podcast. He’s been featured on CNN, Forbes, HGTV, and more. David is the first to know which strategies work, when the market shifts, and the best areas for investing that will meet your goals.

Find an Agent in Minutes

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

• Streamline your search.
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Jim Egan, Morgan Stanley U.S. housing strategist, joins ‘Power Lunch’ to discuss why the housing market is going to get worse, why housing starts and sales are poised to fall even lower and how insurance prices play into the housing market.

David:
This is the BiggerPockets podcast show 697.

Dave:
Are you then recommending mostly long-term buy and hold-type deals for your clients?

Dahlia:
I do. I mean, I just feel like it’s the safest route because people always need a place to live, right? And so your long term rental is just going to be the most stable. And not only that, especially in these markets where you are seeing a lot of short-term rentals and then not enough properties for just regular renters, which is why I’m sure they’ve implemented these restrictions for you guys.

David:
What’s going on, everyone? This is David Greene, your host of the BiggerPockets podcast. And in case you’ve been living under a rock, we are the best, the biggest, and the baddest real estate podcast in the world. The show’s being hijacked today by my co-host and friend, Dave Meyer, who joins me from Amsterdam to bring you guys an awesome show with a little bit different of a situation than we normally have. Dave, welcome.

Dave:
Thank you so much. Yeah, it’s a little bit of a hijacking, but we also just want to bring some of the things that we’ve been doing on my podcast on the market to this episode to help everyone listening to this episode get some knowledge about what’s going on in the market. We do these regular panel episodes where we get experts from across the industry and do sort of a round table discussion. And so today we’re going to do one with different agents. So we’ve brought in two new real estate agents who are going to be coming to provide their insight, and David is going to switch roles and instead of being the host as he usually is, I’m going to sort of moderate the conversation and Dave’s going to put on his agent hat and help us understand what’s going on in the markets that he operates in.

David:
That’s exactly right. I love getting to do this, I’ve been a real estate agent for a while now, and I’m still intimately involved in the details of the David Greene team and what’s going on in the market. And I buy houses in these markets too, so it’s fun when I get to jump in and give the advice and the council of someone who’s leading others towards building wealth the same way that I have.

Dave:
Were you an agent or an investor first?

David:
Investor.

Dave:
Really?

David:
I’m probably the only one dumb enough to go from being the investor to willingly getting into the real estate agent space. Almost everybody in our market does it the other way. They’re like, “This is driving me crazy. I want to be the person to own the real estate, not sell it.” But it’s that drive to want to share the information, and there’s not really a better way to share information about how to wealth build than jumping in the mix with your clients and walking them through that process.

Dave:
Yeah, good point. It seems to have worked out well for you. And yeah, it’s the best situation for an investor, right? If you are an investor and you willingly became an agent because you knew you had something to offer, I mean, that’s exactly as an investor who you want to be working with. And that brings us perfectly to today’s quick tip. Quick tip. Do I have to say it weird? Do I have to say it like-

David:
Brandon made me say it weird for years and I can make you say it deeper. Yeah. But no, that PTSD that I have from those high pitch quick tips I did, I would never wish that on my worst enemy, so no.

Dave:
Okay, we’re liberated now.

David:
That’s exactly right.

Dave:
Than you, thank you.

David:
Free market.

Dave:
All right, today’s quick tip. There we go. That was as boring-

David:
That’s such a Dave Meyer way of saying it. That’s how you’d expect a data analyst to say quick.

Dave:
I calculated the most efficient way to say quick tip, and then I said it that way. All right. Well, today’s quick tip is to check out the BiggerPockets agent finder. It’s completely free. And as you’re going to learn over the course of this episode, having a great agent is not just about doing all the transactional stuff that is involved in being a real estate investor and buying a property, but it’s also someone who’s a partner with you and helps you navigate these challenging times that we’re going through. David, I’m guessing you agree, but I personally believe you can make money in any type of economic cycle, it’s just about adapting your strategy accordingly. And in this type of environment, it’s more important than ever to find a good partner who’s usually an agent to help you adapt your strategy to meet what’s going on in your market.
So if you want to do that, you want to find a great investor-friendly agent, you can do that for free on BiggerPockets, just go to biggerpockets.com/agentfinder, you put in your market like San Diego, Washington, D.C., or Tulsa. Those are where our guests are from today. You just enter in what you’re looking for, put your investment criteria in, and then you can get matched with agents who can help you succeed. So that is the quick tip. I guess I’ll give a second quick tip because you said I can do whatever I want. And that’s if you like this type of market-based information, these panel discussions, check out BiggerPockets’ other podcast, it’s called On the Market. You can find it anywhere you listen to podcasts, Spotify, Apple, whatever. David, anything else before we get into this episode?

David:
Yeah, last thing I’ll leave people with is when you’re using the agent finder, you’re still going to have to vet the agent to make sure this is a person that you want representing you, so take the conversations that we’re having here today and use them as a form of template or a model that you want to be able to have a similar conversation with the agent that you’re choosing. If you have an agent on there that’s never sold a house, just because they’re on the deal finder doesn’t necessarily mean they’re going to be amazing. It also doesn’t mean that they’re going to suck. You don’t know. You got to have the conversation with them and figure out what they know about the market, what strategies they can recommend, and what they can do to help you on your goal. A lot of people always say, “What am I supposed to ask my agent?” Well, listen to today’s show, hear the conversations we are having, and try to find the closest thing you can to that.

Dave:
David, I love that advice because I just think that’s true of anything. Like finding an agent or anything people, you need to just vet whoever you’re working with in real estate investing. Even if you hire a turnkey company, you do a syndication, make sure you do your due diligence that’s an important part of being an investor. Okay, one more thing, sorry, you told me that I could do what I want with the quick tip and now I’m drunk with power and I’m going to give one more tip. And that’s if you like this show, if you like On The Market, please give us a positive review. We really appreciate them. It really helps us make these great shows that you all love and rely on to become informed and successful investors.
With no further ado, let’s get to today’s interview. All right, well thank you all so much for being here. Super excited for this show. Let’s just start with a round of introductions. Rob Chevez, could you please tell everyone listening a little bit about yourself?

Rob:
Thanks for having me guys. I appreciate it. I’m Rob Chevez out of the Washington D.C. Metro market. I have the honor and privilege of leading The CAZA Group. We’re a team within Keller Williams that will do around $180 million in volume this year. And I run one of the largest real estate investment networks in the country called GRID. And I’m just happy to be here. I’m happy to participate, so I appreciate it guys.

Dave:
Great, thank you so much. Next we have Dahlia Khalaf. Dahlia, could you please introduce yourself?

Dahlia:
Yes. Well, also thanks for having me. I am so excited to be here. So my name is Dahlia Khalaf, I am the owner and managing broker of ASN Realty Group. I’ve been an agent for about 15 years and then a broker for the last two. I also have my own investment portfolio that I personally manage and I primarily work with investors and my real estate firm has just kind of naturally evolved into an investment firm and it’s kind of our niche. And that’s pretty much me in a nutshell, and I’m just super thankful to be here.

Dave:
All right, great. I feel kind of weird asking you to introduce yourself, David, but just for giggles, why don’t you introduce yourself to everyone who probably already knows you?

David:
I am the other David in the David and David shows here, often called Dave and David by real estate connoisseurs who are a little more cultured. But I’m a real estate gadfly. I do a whole bunch of different stuff. I run the David Greene team, so we sell homes all throughout California looking to continue helping the BP community, representing them out here. I have a mortgage company called The One Brokerage, where we help people financial estate all across the country. And then I buy rentals all over the place, write books about real estate, and host the BiggerPockets podcast, which is what people already probably know if they’re listening to this.

Dave:
Let’s hope so. Today we’re going to be talking to all of you. All have a lot of experience, but talking to you in the context of being real estate agents because so much of what’s going on right now in the market is very fast paced and it’s sort of hard to keep up. Even someone like me who looks at a lot of data, data is always in arrears, it’s backward looking. And so we want to hear from all of you about what you’re seeing on the ground in your respective markets and what you’re counseling your clients with and how you’re preparing yourself for this shifting market dynamic. So Rob, I’d love to start with you. Can you quickly just tell me a little bit about the D.C. market over the last couple of years? What happened during the pandemic and has anything changed recently?

Rob:
Well, a lot has changed, but let’s go back in time a little bit. Let’s start from 2017 to 2019. We saw just kind of this modest appreciation at 3% to 4%, which was normal. Same volume of properties was selling year over year. And then in 2020 we saw an 8.5% spike in appreciation, and then we also saw a 5% increase in the number of homes that were selling, so more home sold for 8.5% more. But then the next year was super interesting, 2021, we saw a massive spike. We saw another 8.5% or 8.2% growth in the D.C. Metro market, but there was a 13% year-over-year increase in the volume of homes, the number of homes that sold. So we just had a lot more homes sold, it’s almost like we pulled some of those future sales into the present.
And then year to date, it’s been fascinating because year to date we still have experienced about a 6% appreciation, but we’ve seen a 19% drop in the number of homes sold. So pretty significant. And really we know it’s the second half of this year, it’s really been the second half of this year. When I compared the Q3 of this year compared to Q3 of last year, it’s pretty fascinating. I mean, it’s like a 26% drop in the volume of homes, but we still had a 3% appreciation. So there’s still low inventory in our market was about 24 average days, our market’s 24 days and there’s about a month and a half supply in the D.C. Metro area.
But if you drill even, go down a little bit deeper, what’s fascinating is that D.C., D.C. proper is actually having kind of its worst five-year cycle. And so D.C. is experiencing longer days on market, more inventory than the historical five-year average. And it’ll be interesting to see how this plays out over the next couple years. I think what we’ve done is we’ve gotten to the other side and so we hit this inflection point and now over the next quarter to two, we’re going to start seeing a significant drop in my opinion.

Dave:
All right. That’s great. I want to get to the point where you tell us a little bit more about what you think is happening. So it sounds like you had solid growth for five years with the last two years seeing above average appreciations, I think you said 8.5% in 2020, 2021, which in a normal year in times is pretty high. I mean, that’s extraordinary, but not necessarily compared to some other markets like David in San Diego. What were appreciation rates like over the pandemic? I mean, I assume it was double digits, right?

David:
Well, before the pandemic things were humming along really, really well in that market. California’s a big market, we like to call it California around here. And so a lot of people don’t realize Northern California and Southern California could be different states. They might as well be like North Carolina, South Carolina. So every city’s different, you can’t look at this state and say this is what’s happening, but San Diego’s been one of our crown jewels for as long as I’ve been around. It is massively popular. There’s hardly any reason to see why that would change, the industry’s very solid there, the weather’s incredible there. And so before the pandemic, days on market was at less than two weeks, like houses, even an old ugly house was just flying off the shelves because everybody wants to be in San Diego and inventory was always the biggest problem that we had there.
Now with rates going up, I’ve talked about this before, the higher that a price point is in San Diego, the average price point in the city is about a million, and if it’s in the county it’s about 800,000. But higher price points, the markets become very sensitive to interest rate hikes. When you get a higher rate, if it’s a $200,000 house, it doesn’t have a big effect. But on a million dollar house, that’s massive. And so you sort of see a point where a market can only get to be so expensive if people are using loans to buy the properties.
Now, you also have a couple areas in California where people just pay cash. They don’t care. They’ve got $8 million, they go throw it down on a house, they’re not going to be using financing, so those markets are different than these, that’s just pure comparable sales. And they actually can do better in down markets because people want to throw their money onto a beachfront property in Southern California. If they’re worried that the market’s going to crash, that’s a safe place to hold it. But San Diego in particular has slowed down from what it was like pre-pandemic. It’s actually growing in about 1%, which is not amazing, but that’s actually an incredible good opportunity if you’re looking to buy in San Diego, because it’s been very, very difficult. It’s not crashing by any means, but days on market have about doubled in the last year. So they were around two weeks, now they’re sitting just under four weeks right now, which means buyers actually have a chance to get into one of the most solid markets in the country.

Dave:
Awesome, great. Well, that’s super helpful to understand because already we’re seeing different dynamics in certain types of markets. D.C., it seems like has sort of been the last five years, slow and steady, hasn’t started to come down so much yet, but is maybe at the precipice, whereas San Diego saw this explosive growth and now is, I guess at least approaching flat.
Dahlia, how is it in Tulsa? I think that’s probably one of the markets I’m personally not as familiar with. So curious to learn what’s been happening in your area over the last few years.

Dahlia:
Yeah. So Tulsa is going to be very different from you guys’ markets. We are always a very stable market as long as I’ve been in real estate. So even things that are affecting you guys on the coast and you’re seeing a lot more in terms of price drops and that kind of thing or huge inflate appreciations and that kind of thing, we see some of those things, but on a much smaller scale just because we’re just so stable there in the Midwest. So we saw our median sales price back in 2020 was around $200,000. And now we’re at around $250,000. That’s our median sales price right now. So we saw some really good appreciation these last two years, but what a lot of us in the real estate business here are saying is that this is Tulsa playing catch-up. We were so undervalued for so long and now we feel like we’re getting to where we should have been and just stabilizing.
And then as far as days on market, obviously in 2020 things were just flying, our average days on market was less than eight days. Now we’re around two weeks. So things have slowed down, but they’re still moving fairly well, especially in certain price points. Our inventory is still low back in 2020, it’s still very low. We have less than two months worth of inventory right now. And then obviously the interest rates are the huge factor that we’re seeing between 2020 and now is how that has impacted buyer demand. So those are the main things. I would say, especially our under $200,000 is still moving very well. Once you get over the 220, 230 price point, and I think that’s obviously because it’s closer to our median sales price, things are not moving as much, staying on the market longer.

Dave:
Well, just for context for everyone listening, going from eight days of days on market to two weeks is a dramatic shift percentage-wise, but is still remarkably low in any historical context. Anything really under, I don’t know, 30 days is still pretty low, I guess depending on the market. So it sounds like things generally in Tulsa are still, would you say it’s still a seller’s market or how would you categorize the environment now?

Dahlia:
Now, when I’m talking about that eight days on market, we’re talking about in 2020. Now, if we’re talking about prior to that, it probably was closer to around 30 days, but this was once we started seeing the inventory shortages and all of that. Now, as far as buyer’s market, seller’s market, I feel like under $200,000 is a seller’s market still. That’s a competitive price point. I mean, think about what your entry level price point is in your markets versus ours is just so much lower. But once you get to that 230, 240 and up, it’s definitely become more of a buyer’s market.

Dave:
So, Rob, you mentioned that in your market in D.C., that you think at least D.C. proper, and I know D.C. is a pretty diverse group metro area, it’s comprised of Virginia, West Virginia, Maryland, all over the place?

Rob:
It’s got a lot of facets to it, kind of like California.

Dave:
Yeah. And so you mentioned that you think things are going down. Can you tell us first why you think that? And then secondly, if that’s the case, how do you advise your clients right now about what to buy and how to invest wisely?

Rob:
I feel like what we’ve experienced is tons of momentum and inertia. So we have all this inertia that pulled us, has been pulling us through in 2022, and we start seeing a slow-down. I’m hearing Dahlia say the same thing, there’s a little bit of a slow-down in her market. Same thing with David. And that inertia will start going the other way. And we are already seeing it in D.C. proper, it’s still… Here’s the thing guys, seriously, it’s still a seller’s market. There is in Virginia, in Northern Virginia, there’s a month and a half of inventory, some sub-markets it’s under 30-day inventory. In D.C. proper it’s like 2.4 months, so that is still a seller’s market. It just feels so much different than the 15 days. I think that was the lowest that we had, Dahlia, in our market was like 15 days. It’s now crept back up.
But what I’m seeing is that just like there was momentum going up, there’s now momentum going the other way and there’s no way to time a market like Dave, I believe that if the numbers work for somebody, and depending on what their hypothesis is, and the numbers work, they should buy. And if somebody’s looking to hold onto an asset long term, that they should buy if they can make the numbers work. Rentals increased quite a bit, so it helped calibrate some of those higher prices. And within our market, people have gone just an hour away in places like Front Royal or in Winchester. And the Airbnb market is thriving in that market right now. And so what we do is we just kind of look at where can we get the return and how can we help clients win over the long haul? And over the long haul, things look great, right?
Employment in this area is ridiculously amazing. We’re like a tech hub in this area, we’ve got the government that’s in our backyard. I mean, that’s the thing with the Washington D.C. Metro market is that we’ve always had the government that kind of helps stabilize us and is a backbone to the business. And then we’ve got all these tech companies that are generating a lot of new jobs. And so even though we’re going to see a dip in pricing, which I believe we’ll see a dip in pricing toward Q1 of next year, still incredibly good market over the long haul to buy it. And I went through the whole 2007, 2008 craziness and values came right back and past that. So long term, still a great market for us to be buying into.

Dave:
I’m glad you brought up 2008, Rob, because I wanted to ask you about that. D.C. strikes me as one of those markets that are relatively recession-resilient, I would say, if that’s a term.

Rob:
Sure.

Dave:
And just because of the government public sector jobs, they’re less cyclical and volatile than a lot of private sector jobs. So did D.C. bounce back faster than other areas of the country? Was the dip as severe or how did it compare to other markets back then?

Rob:
So it held better than other markets for sure, especially compared to a lot of the Sand States that are out there, but we still got whacked in certain areas in the D.C. Metro market, like 30%, 35% off market highs. But then by 2009, 2010, you started seeing values come back up. And Dave, I remember in 2012, 2013, because we bought, I’m an active buyer as well, we bought things at such discount. When things started rebounding in 2012, 2013, I felt like things were overpriced and I kind of pulled back some of my buying a little bit, shame on me for doing that, right? But there’d been a 30%, 35% drop and I just bought at pretty low prices, but it came back pretty quickly.

Dave:
All right, cool. Thank you, Rob. That’s super helpful. I mean, think over time, I’ve just seen this dynamic where certain markets are a little bit more volatile, they spike up, they come down, they peak and valley a little bit more, but certain markets, it sounds like D.C. is more of like a slow and steady kind of thing, but that can be very beneficial, especially for long-term investors. David, what about you? You said appreciation’s out to 1%, which is obviously still up, but a pretty big shift. I was actually… Well, I’ll share something I read the other day after, but just what do you think the play is in San Diego right now? What are you advising your clients?

David:
You’re probably not going to, your average person isn’t going to go get nine San Diego rental properties. They’re going to have to put $200,000, $250,000 down on every one of them, then you got to just look for the needle in the haystack to make it work as far as the cash flow is concerned. It’s not really a market where you’re going to make this the meat and potatoes of your portfolio, but I’m very big on what I call understanding portfolio architecture. How do you add properties to your portfolio that compliment each other, that make up for the weaknesses of other properties with the strengths of this and vice versa? San Diego is very resilient. To me, I think it’s the best weather I’ve ever seen and it might be the best weather in the entire world. We just had BPCON there. Every time I go, I’m like, “I could never live here because I would never work. It’s the Bermuda Triangle.”

Dave:
It’s so nice.

David:
It’s so nice. Yeah. People that have money are going to want to be there. There’s no way around that. And weather is not dependent on industry or population trends or whatever technology company happened to go there and bring all the jobs with them and they can’t really build a ton because the city’s built out really far. So the play for San Diego in my opinion, is that if you’re a resident there, you need to be buying a property in house hacking. I think this is the best house hacking market in the entire country as far as what I know. And it’s because it’s got all the pieces that you need, a bunch of people that want to live there that will never be able to afford a home, so they got to be able to rent something.
We all know somebody who moved to San Diego after high school and never came back and they’re still working at a bar, working at a restaurant. They’re not ever going to be a homeowner because they’re stuck in that Bermuda Triangle, they need a place to rent. Then you’ve got the rents that are crazy expensive for you if you’re trying to live there. So house hacking works best in areas where housing is expensive, it gives you this added benefit of doing it. And then you’ve got the fact that it’s got a strong short-term rental market, but it’s very difficult to get a short-term rental occupancy deal from the city. They limit how many people can actually do short-term rentals, so if you want to try to just go buy a property and throw it up as an STR, the odds of you getting picked are low and that’s a very expensive property to hold while you’re waiting, but if you live in the property yourself, you can rent out another part of it as a short-term rental.
It’s sort of a back door that you can get in, which is just another benefit to house hacking. So I don’t think that you’re going to build your entire portfolio full of San Diego properties, but you definitely should have one or a couple if you can get it over a span of a couple years because the appreciation is going to be incredible and it’s not an investment you’re going to have to have significant worry about losing. It’s not an area like, “Oh, fracking went away. So all these properties in North Dakota that were exploding at one point cut off completely.”

Rob:
Dave, the D.C. Metro market is similar. It’s a house hacking kind of market for investors. But then if you just go an hour and a half outside of D.C., you’ve got some beautiful country, you’ve got the Blue Mountains, you’ve got the Shenandoah River, and STRs are where I’m seeing a lot of investors go out to those markets and making the numbers work. And it doesn’t sound like there’s the same hurdles that you have to go through compared to a place like California. One of the rules is in the Warren County area, you just have to be a hundred feet away from your neighbor. That’s it. If you’re a hundred feet away from your surrounding neighbors, if you go through the process, pretty easy to get a permit for an STR.

Dave:
Yeah, that’s awesome. Dahlia, I want to check in with you. What are the top three strategies you recommend right now given what’s going on in Tulsa?

Dahlia:
So Tulsa’s definitely more successful when it comes to long-term rentals right now. Surprisingly, we do have quite a few short-term rentals, although we’re not necessarily a vacation destination. I think the culture has just changed, especially in the last two years, where people would just rather rent a house or a town home or whatever than stay in a hotel to accommodate their family or just to be more comfortable. So we did see quite a bit of saturation with STRs here. And we don’t have all those limitations in terms of getting a license here, it’s very easy. It’s basically, I think $300 for a license for the year. There’s no inspection, there’s no process you go through other than just applying and paying the license fee.
So we saw a huge influx of STRs in the last, I’d say four years. And so now we’re pretty saturated. So I had clients purchase STR in the last couple years, now I’m advising it’s always great to purchase something that would serve great as both, something that’s in a location that would do well as an STR or an LTR so that you have the flexibility to flip back and forth if you need to, you have an exit strategy.

Dave:
Yeah. I mean, I love that point about creating that flexibility. That’s a great way to protect yourself and mitigate risk. I was just curious though, how are you seeing, how is this oversaturation in STRs manifesting itself? What are you seeing that is telling you that there’s too many right now?

Dahlia:
Vacancy.

Dave:
Okay. And are you seeing clients that have bought STRs struggle to make their numbers work?

Dahlia:
And I try to keep in contact with my clients after they purchase. We stay connected. I try to keep a pulse on what’s going on. So far, the ones that had STRs, they’re doing okay, the ones especially that are in more high-demand locations. But I’ll tell you where I saw more of a flip is my clients that bought midterm rentals, specifically catering to traveling nurses, which we saw an influx of those during COVID. But then as things calmed down, those contracts got canceled. And so I did see multiple clients of mine that had bought midterm flip to either short term or long term.

Dave:
Got it. That’s super helpful to know. Honestly, I think you hear a lot about the things that are working, which is always helpful, but it’s great to hear the things that you would recommend people stay away from. That’s really helpful for our audience. So are you then recommending mostly long-term buy and hold-type deals for your clients?

Dahlia:
I do. I mean, if you’re going into it, I just feel like it’s the safest route because people always need a place to live, and so your long-term rental is just going to be the most stable. And not only that, especially in these markets, so especially for you guys, where you are seeing a lot of short-term rentals and then not enough properties for just regular renters, which is why I’m sure they’ve implemented these restrictions for you guys.

Dave:
Yeah, that’s super interesting. And yeah, personally, I know this is a boring thing to say, but I just think you can’t go wrong with buy-and-hold investing. It just works as long as you hold onto it through the cycle.

Dahlia:
If it’s not broke, don’t fix it.

Dave:
Yeah, exactly. David, I’m curious. There is this dynamic where I mostly invest in Denver and there’s this dynamic where they put in a lot of short-term rental restrictions where it has to be your primary residence. So basically you need an ADU or I have a primary, I live out of the country so I could rent out my primary. But for the people who have it, it actually turns out to be even more lucrative in those markets because there’s constrained supply. So do you see people who do this house hacking strategy really do well with their short-term rentals?

David:
Yeah. And you made such a good point. The fact that it’s a constraint supply to many people is a reason they don’t want to invest in the market. “Oh, it’s hard. I wrote an offer I didn’t get accepted. I wrote two, it just isn’t going to work. I’m just going to go out of state. I’m going to go find a market where I can get a house and a contract right away.” But there’s this rhythm to life, I need to come up with a name. If Brandon Turner was here, he’d come up with a name. He was very good at that.

Dave:
Brands everything.

David:
Yes. If it’s easy on the front end, it’s hard on the back end. If it’s easy on the back end, it’s hard on the front end. And human beings have this erroneous belief that they can have both. They think like, “All right, it’s a market where real estate’s appreciating rapidly. It should be easy to get into that market.” No, the fact it’s appreciating rapidly is why it’s hard to get in. And if it was easy to get in, you wouldn’t get on the back end all the appreciation, all the increasing rents. Every real estate agent understands this, you can’t have a buyer’s market and a seller’s market at the same time. You have to learn what makes this market appealing. So if for instance, in the city of San Diego or the area, it is the fact that supply is very constrained, there’s massive demand for it, and it’s very expensive.
So the stakes are high. You can make good money if you do it well, but you can’t just go buy a tract house. It’s got to be a place that’s got an ADU or ideally two ADUs or play you could turn something into an ADU that other people aren’t seeing. It’s got to have something unique about that. And then when you buy it, you’re going to do great on the short-term rental market. There’s a lot of conferences that happen in the San Diego area that a lot of people travel to, there’s a lot of vacationing. I mean, the weather’s so nice, there’s people that don’t go to Mexico, they’ll just go to San Diego even though it’s right there because it’s so, so nice.
But the key that I think every good agent understands is helping their clients see the angle that works on their market. You can’t hear about what works in Tulsa, Oklahoma and go try to do the exact same thing in Washington, D.C. And vice versa, there’s very specific strategies that we talk about on these podcasts that work better in certain locations and in better cycles in the market. And the right agent who’s listening to BiggerPockets, who owns investment properties, who’s working with investors all the time, they’re like the Sherpa that can lead you to the top of your own market’s Mount Everest, that can help you find the deals.
And so those are the questions I just think people should ask. If you’re going to work with us in San Diego, you want to know, “Well, what are your other clients doing that’s working? What are some things you’re figuring out?” The same would go for Tulsa and for Washington, D.C. Don’t try to take that basic understanding that, “Well, I heard this strategy on the podcast, so go make it work,” when the market is not applicable to that specific set of circumstances that the market’s facing. Or, “Well, I want to be a short-term rental investor, but I want to invest in this area because it has the best something else.” Sometimes they’re in conflict with each other and they don’t work.

Rob:
I don’t know if you guys are seeing this in your market, but in our market we’re seeing a lot more sub-twos and lease options, a lot of creative financing. There’s a lot of that happening right now because we’ve had all of these really low interest rates that people have locked in for some time and yet life happens. Death, divorce, drugs, like all the rest and people need solutions. And so I’m seeing a number of my investors kind of shift to some of these strategies. And we just put a property at a contract, it’s a lease option at $1.2 million and they put down $100,000 non-refundable deposit because they just couldn’t settle straight away, but they still wanted to lock-in the property.
And so we’re seeing some of these strategies kind of come back and an agent that understands how to navigate those strategies or has done this before, is more valuable in this marketplace. They see real estate from a 360 standpoint versus just kind of the narrow lens of helping somebody buy and sell, you’re literally becoming a problem solver in a market where people are going to face problems and the right agent’s going to know how to solve those problems for their clients.

Dave:
Rob, can you explain quickly what sub-two is and why it’s becoming more popular?

Rob:
Sure. Well, we all know interest rates had been really low for a long time. People locked in at 2%, 2.25%, 3%. And these loans are out there and life happens where somebody for whatever reason might lose a job. You see all these tech companies that did lay off thousands of people and now they have an asset, not only the physical asset, but the mortgage, the underlying mortgage itself is an asset that becomes valuable to somebody. And sub-two is merely just taking over the payments for somebody in exchange for the deed of that property. And you might pay them some of the equity up front, you might be able to structure it so you pay them some of the equity on the back end. But it’s a way to solve somebody’s problem if, let’s say, not even if they’re behind. Let’s just say they were an expired person who failed to sell the first time, but they need to sell because there’s a job relocation happening and it’s a pretty house.
Well, if they’ve got a really good loan on that asset, an investor like myself might be able to put that property under contract and essentially buy that property with the underlying debt that’s there, so effectively the loan stays in that seller’s name. We effectively almost become partners together in that respect. And so I know our team has completed a couple this past month, we’ve helped navigate that process with some of our sellers. We personally have bought, I bought one last year in the process of buying one right now that way. And it’s just one additional strategy, Dave, that people can use in a shifting market like we’re in today. And as long as you can create a win-win-win for everybody, then you should employ.

Dave:
Thank you, that’s super helpful. Yeah. And you can find those types of deals super beneficial right now and hopefully there’s more sellers willing to do that for investors out there who are interested in it. Dahlia, David mentioned earlier about people trying to find great agents, and I think it’s a perfect example, especially in these types of markets, over the last couple of years, you could just buy anything and it would go up and it looked great, but these are more challenging times. Do you have any advice to people who are trying to find a good agent to work with to help them navigate these times? What should they be looking for in an investor-friendly agent?

Dahlia:
Sure. So I think one important thing is are they an investor themself? Do they own investment property? It just gives them what Rob was talking about. It just gives them insight that a non-investor just most likely doesn’t know. I’ve had, I don’t know how many times where I have someone come to me and they say, “Hey, I was working with this other agent, they were great, but they just don’t get it. I need someone that understands the investment world.” As an investor agent, you just have such a pulse on what’s going on, or at least you should. You should know what the rental rates are like, you should know how long properties are sitting, rental properties are sitting on the market. Is this a good area? Is this a rentable area?
You’re going to have an understanding about, you’re going to have resources, contractors, property managers, creative financing lenders. All these things that a non-investor agent just doesn’t have access to because it’s just not part of their niche. So that’s why I just think it’s imperative to have somebody who is an investor themself and just very familiar with what’s going on in the investment world.

Dave:
Dahlia, were you agent first or a real estate investor first?

Dahlia:
So I was an agent first. I got my license about 15 years ago. It just kind of happened by chance. And not only that, my dad’s an investor, so I always knew that at some point I was going to go that route, it was just getting financially ready for it. But I grew up around it, grew up with my dad buying rental properties, so it’s just always been around me.

Dave:
That’s awesome. Was it hard, did you have to learn or do anything extra to start catering and working with investors once you were already an agent?

Dahlia:
I mean, I feel like it just happened organically because I was already an agent and an investor. I was getting referrals, people that were just referring people to me because they knew that I was doing both and that I was knowledgeable. And so it just kind of naturally happened that way. As far as doing anything extra, not really. I just gained experience working with a lot of investors, especially the out-of-state investors. I’ve pretty much created a very seamless process for them now since I’m eyes and ears for those out-of-state folks that a lot of time never even set foot in the property they purchase. So it’s really just experience.

Dave:
Awesome. What about you, Rob? How have you built out your expertise as an investor-friendly agent and what other advice do you have for people who are looking to find a great partner to work with?

Rob:
So a couple things. One, I love… Actually, I’m going to say it right now, the investor-friendly agent Moniker. Hate that Moniker.

Dave:
Really?

Rob:
Yeah. Only because I feel like what you are, it almost sounds like GoFetch. GoFetch is a friendly investor agent, but really the Moniker is really more of a consultant, like helping somebody understand all of real estate from a 360 standpoint. So I know everybody uses it, it’s just one of my things. But I started off as an investor first, so as an investor first, my wife and I would buy 20 to 25 houses a year, we’d fix up small multi-family properties, we’d then sell them to investor’s turnkey, then we would manage assets for other investors, and we learned the game there. And what I realized was that we had a skill set at that point to be able to guide other people to be able to do the same.
When you put your own money where your mouth is to sell your own asset and to manage your own asset, you understand all the little nuances that help you make a better return on the investments that you buy. And so I really feel that a great agent investor understands those nuances. They’re consultants, like David said, they’re Sherpas, they’re literally guides in the marketplace that can help you build massive wealth. And I think the only way that you’re going to learn how to do that is by doing it yourself. How could you possibly take anybody on a wealth journey if you haven’t gone on the wealth journey yourself? And so I think that that’s a critical component of being able to help other people. You just got to do it yourself.

Dave:
Got it. That’s great advice. And I will never call you an investor-friendly agent again. It’s [inaudible 00:43:50].

Rob:
No, it’s fine. Everybody uses it, can’t escape it. David, you got to come up with something that’s better than that.

Dave:
Sherpa.

David:
Yeah, the Sherpa. We tell our agents, “You’re not an order taker. This isn’t a restaurant where someone says, ‘Can I have a Coke?’ And you run and get it and bring and say, ‘What else would you like?’” All that is people absolving themselves of the responsibility of leadership. It’s easier if someone tells you what to do, you don’t have to think. You want the person at the best restaurants, I used to work in fine dining places when I was in college, where I don’t say, “What do you want?” I say, “Would you like wine tonight?” “Maybe. What do you have?” And then I show them the list and I say, “If you’re looking for something like this, this would be a good pick, but if you want something like this, that would be.” And then you ask me questions and then I show you I know about wine, so now my suggestion sounds like something you’d want to trust.
Real estate should work the same way just with higher stakes and more details. If you’re an agent and you don’t know what’s happening in your market, it’s like being a person that is trying to sell wine and you don’t know anything about wine. You want to be recommending things to people, you want to be advising them, leading them in a sense. And you got to have confidence to do it. And I love the point you made that you should be building wealth for yourself. Ideally, you want an agent that owns properties in that market and is very comfortable with it, because if your motive to become an agent was, “I hate my job, I hate my life, I just want a different one. Maybe I’ll strike it rich.” You’re like the person that move out to California for the gold rush and try to figure out like, “Maybe the face will bless me.”
Those were not the people that did well. The ones that did well had a plan. They were the people that went out there, they sold the picks and the shovels to the gold miners. That’s what you need. You need to be the agent who has a plan, who’s doing it yourself, who’s in it for the right reasons. You have the right motives, you’re trying to help people build wealth because you’re also building wealth. Nobody wants a personal trainer that looks terrible. If you pick a personal trainer, that looks really nice. So if you’re financially unfit, then you’re going to have a very hard time being the Sherpa that can get people to the top of that mountain.

Rob:
Yeah, the agent investor advisor or something. I don’t know.

Dave:
Yeah, you need to lead by example, David. It’s like you can’t just spit theory, you have to also be able to walk the walk a little bit.

David:
Yes, absolutely.

Dave:
Well, this has been super fun, but we do have to get out of here soon. But I would love for you all to leave us with one piece of advice. So could you each give me 60 seconds or less on why you think your market is a great place for investors to consider investing right now? David, your experience. I’ll make you go first. Experience at podcasting, I know you’re all experienced investors and agents. I could just make David, put him on the hot seat first.

David:
Yeah, I dropped so many mics that they actually put it on a stand so that I can’t drop it anymore. I was breaking material with all these great clips. My advice is don’t think I’m too busy to help you with getting a house. That’s something that people just stop reaching out to me when I started hosting the podcast. I’m like, “I have an entire freaking company that’s designed just to help you make money with real estate, with all of the information that I’ve learned that I’ve tried to pass on to my agents to help you. So reach out.”
The second piece of advice that I’ll give is stop looking at what’s right in front of your nose. Whenever we talk about strategies that work, people that built wealth, unless they invested in FTX and they thought that they were really rich, which they’re now regretting, it’s people that took a long-term perspective. The people that made money real estate did it over 20 years, over 30 years, they didn’t buy a house and when one fence board broke, they thought, “Ah, this isn’t worth it. There’s an expense I didn’t know.” They played the long game.
So stop zooming in on what’s happening right now or how to get the perfect deal or waiting for the perfect market. And then 10 years go by and it never came and you lost hundreds of thousands of dollars that you could have made had you just found the best deal you could in the situation that you were in right there and then went and recapitalized so that you could do it again and let time does what it does with real estate. So I’m constantly just trying to be an evangelist for this zoom out perspective that I have. No one remembers what was in their inspection report 30 years ago. You can all ask your parents or your grandparents what freaked you out about buying the house, and they don’t remember. They don’t know the escrow officer’s name, they don’t know the inspection report, they don’t know what interest rates were. What they know is how much money that they made in real estate holding it over a period of time, letting the loan get paid off, and letting inflation appreciate the asset.

Dave:
Love it. And I assume you believe that San Diego’s a great place for that long term, right?

David:
Yeah.

Dave:
There’s been a lot of exodus from California or people say like that, but you still believe San Diego long term is going to perform well.

David:
Yeah, that’s a good point too. Your agent should be able to guide you. I would tell San Diego’s very strong, Orange County’s very strong. There’s a lot of places in San Francisco that are still strong. Like Downtown LA, not very strong. That’s not a place that I’d be aggressively routing offers right now. So not every path to the top of Mount Everest, to use that analogy, is the same. And when weather changes, you’re going to take different paths. Sherpa’s know all of them, so that’s why you want to have an agent that knows your market, so we can guide you away from the wrong areas and into the right.
San Diego’s one where I’m happy to talk about on a show like this because that is as resilient and bulletproof of a market as I’m aware of. And when things are slowing down like they are right now, you want to be in the grade A places. This is not a time to get into D neighborhoods or even C-minus neighborhoods. You can get away with that when the market’s going up, up, up or right after you’ve already had a crash, not when we’re sitting at a point where we don’t know where things are going like right now.

Dave:
Great advice. Dahlia, what about you? What would you say for people who are considering Tulsa, what’s your pitch?

Dahlia:
I mean, the great thing about Tulsa is affordability. I mean, you can get a great single family rental for under $200,000. And stability. Like I said, we’re not seeing the crazy ups and downs, it’s you park your money there. Just like what David was saying, this is not a sprint, this is a marathon. So Tulsa is a great growing market, we are seeing some really good appreciation catch up, it’s just the perfect time to invest here. A few things that I would just like to touch on is if you’re looking to get started, just take that first step. Nobody regrets their first investment purchase, they regret not doing it sooner. So there’s never a better time than now. Get your finances in place, get your lending figured out, find the right agent, which is hopefully why you’re watching this, and learning about all of this great agents on here. And run your numbers, use those BiggerPockets tools. They make it so easy for you to run the numbers and then just take the emotion out of it. And if the numbers make sense, do it.

Dave:
All right, thank you. And Rob, what about the D.C. area?

Rob:
Well, this is our nation’s capital. We’ve got the federal government that’s kind of like the backstop here in this market. We’ve got a lot of growth, a lot of technology growth happening in this market. And I echo what David said. I mean, long term this market has just been stable, just keeps growing, keeps getting bigger and bigger. I mean, a couple years ago I listed my dad’s best friend’s home. His family, his mom and dad had passed. And this was in Arlington, Arlington is a ridiculously hot market in our backyard, and they bought the house, they’d bought their house for $45,000. And I remember talking to him. He said, “I felt like I overpaid for the house when I bought it. And today that dirt was worth $850,000.” So just time, time and a growth market. This is a business that plays out over time. So I echo everything that David said and this market is just a great market to see it play out over time.

David:
Yeah, let me say one last piece before I get out of here. It’s not always about, “Do I invest in San Diego, or Tulsa, or Washington D.C.?” I think that there is absolutely a way you construct a portfolio where you invest in all of those markets and you just construct it in a way that the long-term appreciation you get in San Diego is going to be paired with the short-term cash flow that you can get in Washington D.C., and the cash flow paired with actual odds of scoring and being successful investing in Tulsa.
You find the best properties for what you want to do in each one, you put them together, they all sort of make up for the weaknesses of the others with the strengths that they provide, and you continue to build momentum buying in the right markets and putting it together like a puzzle piece versus thinking, “Ah, I got to pick the best one.” And then you stay in analysis paralysis for six years and then just beat yourself up because you never bought a house for six years. And then every time you listen to the podcast you get guilt and you feel terrible and then you don’t want to do it. You see, this is the spiral that I’m talking about getting into. That’s what we want people to avoid.

Rob:
David, do people have to… Do you think they have to leave San Diego to build that portfolio? I mean, not San Diego, but California’s huge, right? I mean, Northern California is considerably different than Southern California. Can you construct that same portfolio properties there and never leave the state?

David:
You absolutely could because the principles are the same. And in places versus California, you could grab one from this city, or this city, or this strategy and this strategy. It’s a principle that will work. And it doesn’t have to be across the country. The idea would be in Dahlia’s market, you could get something that cash flows, you’re not going to be fighting with a hundred other people, the price points are not going to be massively high, so you’re not making a million dollar mistake, you’re making a $200,000 mistake as you’re learning. And then once you’ve got some momentum, you’re like, “Hey, now I want to go invest in one of these other markets where the stakes are a little bit higher and I could take the training wheels off. Maybe I don’t want to start off there.”
And then the same would be true of individual properties in those individual markets. We all know the markets within our own city where this is where the big boys play, and this is the shallow end of the pool where you can get your feet wet and you can get into with an FHA loan and relatively reduce your risk as you learn the rhythm here, but it’s breaking out of that mindset. “I got to be perfect, I got to find the perfect deal at the perfect time in history with the perfect tenant.” And when nothing is Perfect, and you don’t take any action.

Rob:
I have one more question. I’m sorry, Dave. Just my question for Dahlia because where were most of your investors coming from? Like California?

Dahlia:
Yes.

Rob:
Okay.

Dahlia:
Most of my investors are from California. I have some from Colorado, Texas, some other places, but the bread and butter is California.

Dave:
Okay, great. Well, thank you all, first of all, so much for being here. I would love for you to just tell our listeners where they can connect with you if they want to do that. Rob, where should people find you?

Rob:
Sure. They can go to gridinvestor.com or just find me on Instagram. Rob Chevez, @RobChevez. Pretty simple.

Dave:
All right. What about you, Dahlia?

Dahlia:
So my website is asnrealtygroup.com. You can also find me on my Facebook page @ASNRealtyGroup, and then of course on BiggerPockets.

Dave:
All right, great. And then David, I know you’re pretty tough to find, but where could people seek you out?

David:
I will give you an email that you are guaranteed to get an answer at. Email us at [email protected] [email protected] There’s an E at the end of there, I have a person monitoring that email all day long. We would love to help you with buyer selling in California. I am not too busy to help you buy or sell a house, that’s actually why I exist. So please, like the biggest sting ever is when somebody uses another agent and comes to me and they say, “They screwed it all up. What do I do?” I say, “Why didn’t you ask me?” “I thought you were too busy.” “But I wasn’t too busy to come ask me how to fix it, huh?” So reach out to us first.

Dave:
All right. Well, David, Rob, and Dahlia, thank you all so much. This was really insightful, and hopefully everyone listening can learn a little bit about how to navigate the current market, what’s going on, and what to look for in building when you’re building your team in this correcting transitionary market that we’re in. Thank you all so much for being here.

Dahlia:
Thank you.

Rob:
Thank you.

Dave:
All right. Thank you so much to our panel for joining us today. They all abandoned me, so it’s just me here, Dave, now. And I’ll just remind you that if you do want to connect with any of our panelists today, David, Dahlia, or Rob, or any of the great investor-friendly agents who are on BiggerPockets, all you have to do is go to biggerpockets.com/agentfinder, search for a market like San Diego, Washington, D.C., Tulsa, any other market. Enter your investment criteria, and pick agents that you want to connect with, all of whom are investor-friendly agents.
Lastly, remember, if you do want to learn more about the current events data, news that is impacting the real estate investing market, make sure to check out BiggerPockets’ other podcast called On the Market. You can find that on Apple or Spotify. And lastly, for David, the Gadfly Greene, David Meyer. And just so everyone knows, I had to look up, I Googled what gadfly means, and it means it’s a fly that bites livestock, especially a horse-fly, warble fly, or botfly, or an annoying person, especially one who provokes others into action by criticism. I don’t think David really meant that because he is neither of those things, but I just wanted to poke fun at him. So thank you all for listening. We’ll see you next time.

David:
It seems like everybody got a haircut today. All of you guys’ hair is looking really good.

Dave:
Oh, thank you.

Rob:
This is how I rolled out of bed.

CNBC’s Jim Cramer and the ‘Squawk on the Street’ team discuss shares of Blackstone after the company limited withdrawals from its real estate investment trust.

Dave:
Hey, what’s going on everyone? Welcome to On the Market. I’m your host, Dave Meyer, joined by Jamil Damji today. I was going to ask how you’re doing, but now I know you’re dancing, you’re singing already.

Jamil:
I’m super good. Yeah, this is fun.

Dave:
Last time I saw you, we had a team call on Monday, you were going to Disney World. How was it?

Jamil:
It was incredible. I went to Disneyland with six 16 year olds and I survived. Actually, I have a beautiful family and I got a great kid, and well, we had a lot of fun. I got to ride some rise. I ate Turkey leg, had some Dole Whip, what could be better in life.

Dave:
Yeah, that sounds lovely and I’m glad you had a good time. Well, today we have an episode that we’ve been talking about and wanting to do for a long time, and that’s talking about iBuyers and we have one of the foremost experts I think in the world talking about real estate technology in general. Mike DelPrete, he’s not an investor, but he’s a professor of real estate technology. He knows everything about this, and we had a great conversation, but the conversation, we obviously already filmed it. We sort of go right into it. So before we go into the interview, I’d love to just quickly explain what iBuying is. You’re pretty familiar with the topic, right?

Jamil:
Sure. So what I have seen iBuying as, how it works is, it’s essentially a convenience purchase. So a company will come in and give a homeowner a convenience offer, typically a cash offer, and they’ll provide all of the ease and flexibility that that offer should provide. So cash, quick closing or flexible closing, flexible terms, lease backs, post-possessions, all of the ways that a homeowner can get maximum flexibility, and in return for that convenience, they trade value, they trade some equity.

Dave:
Yeah. And so basically as a seller, you could go on Zillow, sort of the famous one, but there are several Offerpad and Opendoor publicly traded companies. Redfin was doing this for a while. You can go on these websites and it’s like if you’ve ever seen that instant offer kind of thing, like Jamil was saying, they’re just making this convenient for you. And it’s been this sort of hot topic, especially I think in the real estate investing community over the last couple of years because in some ways, and I think people can argue this and we’ll talk about this, it does threaten or you could make an argument that it threatens real estate investors because they’re going after some of the, let’s call, the motivated sellers that real estate investors typically target.
And I’m not going to spoil it, but that’s sort the framework of why we wanted to have the conversation here with Mike and talk about iBuyers because it is a really important trend impacting the world of real estate investing. And I think he sheds a lot of light on how as an investor you should be thinking about this industry. Is there anything else you think our listeners should know before we jump into the interview?

Jamil:
I think, just take notes, because this is an incredibly intelligent conversation about where real estate has been, where it’s currently at, and where it could possibly be going. If you are the kind of person right now that’s trying to determine where should I be, how can I be more forward thinking, how can I be the next innovator? You might find the idea on this episode.

Dave:
Awesome. Well, that’s a great setup. We’re going to get into our interview with Mike DelPrete, but first we’re going to take a quick break. Mike DelPrete, welcome to On the Market. Thank you so much for joining us.

Mike:
My pleasure. Thanks for having me.

Dave:
So can you tell our audience just a little bit about the work you do related to the real estate industry?

Mike:
Yeah, sure. So if we go back in time a little bit, I worked at an internet business that owned a real estate portal, kind of like the Zillow, but it was in New Zealand, so it was the Zillow of New Zealand. And since I left there and returned back to the states, I’ve been studying, well, there’s this question in my mind, which is what are some new ways, new business models that might change how people buy and sell homes? I assume you and a lot of your listeners, people buy and sell homes, it feels antiquated. You’re like, why does it work like this? How come it doesn’t do that? Concurrently, billions of dollars have poured into the space over the past couple years, and there’s a lot of investors and companies and entrepreneurs trying to change that.
So that’s what I’ve been interested in, and all of my work stems from that. So I’m looking for businesses, business models, companies, entrepreneurs that are trying to change how people buy and sell homes. And a lot of that work just comes out as research, reports. I’m a data guy, so I try to find evidence, it’s who’s raised money or issued a press release, but what’s actually working? And then trying to connect the dots between those different data points to enlighten what the trends are, what the insights are, what’s working, what’s not working, and why.

Dave:
Awesome. You’re our kind of guy. That’s going to be a great interview. I’m looking forward to this. But before we jump into some of the recent stuff, I’m just curious, were you in real estate before working in that portal? Were you a tech person or how did this interest pique in you?

Mike:
It’s a good question, and my family asks me that all the time. What are you doing and why? After I went to college, I started a tech business. So I was a tech entrepreneur. I didn’t raise any money, but I built up a company, 40-50 people, and sold it. And that was a good exit and that gave me the freedom to explore my passions a little bit more. And some of that was moving to New Zealand and experiencing a different culture and a work environment. And that’s where I first got interested in real estate or technology in real estate. I’ve always been a tech guy. I haven’t really been into real estate. I’m not that into real estate. I don’t own any rentals. I don’t have a property portfolio. I’m not invested in any real estate stocks, but I think it’s a fantastic area that suits me because it’s huge.
There’s a huge opportunity. There’s a lot of data, just a lot of data all over the place, and it’s hard. The path forward is not clear and it wasn’t clear to me five years ago. I could look at other industries and you can chart out how you think it’ll go. Video on demand or cable television, it’s clear where this is going. But real estate, no idea, all bets are off. And I have a busy brain that doesn’t like to sit around idle and I wanted something, a hard problem to think about. And nothing to me seemed harder at the time than figuring out, okay, what’s going to happen in this space? What are we going to see going forward?

Dave:
All right, great. Well, you seem like just the person for the questions that we have. I actually first stumbled upon your research last year when I’m sure it was a very busy time for you with Zillow’s iBuyer program, famously, infamously, whatever, shut down. So we’re curious just to learn a little bit more about the state of iBuyers right now, because as real estate investors, there’s been, I don’t know, Jamil, what do we call it? Paranoia, fear, something.

Jamil:
I call it paranoia. I would call it fear. I think there’s a lot of misunderstanding about the space and I’ve looked in and dove into a little bit of Michael’s research. And again, just understanding how little of the market right now, it’s actually affecting. It’s such a overestimated fear. The real estate professionals in general don’t understand how to utilize this resource that’s available there. And so I think it’s all of it. I think it’s misunderstanding. I think it’s fear. And I also believe that if we had a better understanding of what their model was and what they were actually trying to accomplish, then we could have a better narrative about it. Because real estate agents think that they’re there to take away their jobs. It’s not the case.

Mike:
Yes and no.

Jamil:
Okay, well, let’s hear it.

Mike:
Yeah, I mean, think, so, if we go back to my question, what are some new models that may change how people buy and sell homes? iBuying is one of many. So we can talk all about iBuyers, we can talk about other stuff. But iBuyers are a clear answer to that question. They’re probably the largest, the most well-funded. And fundamentally, they represent this really radical change to the status quo. At the time when Opendoor, the biggest iBuyer first came to the scene and raised some money, there were other companies, but they were all taking the existing real estate process and just digitizing parts of it. If we can bring this online or automate that, that’s disruption, that’s real estate tech. Opendoor came to the party and they cleared the table and said, nope, there’s a totally different way from A to B.
Instead of listing your home the traditional way, we’ll go in, we’ll buy it from you almost site unseen. You could get a check in the mail by the end of the week and then we’re going to fix it up and sell it off when we’re done. That was a radical proposition at the time. So iBuyers are part of real estate tech disruption, but real estate tech disruption is not just iBuyers, there’s plenty of other companies out there. But to answer your question, I mean, there’s so much to unpack there, but just to pick one topic of what you asked and happy to talk about the business model, but I think if we talk about agents, Opendoor is the largest iBuyer, and they came out of the gate with a bit of an anti-agent message. I mean, the marketing is really clear.
It’s like the traditional process is broken, we’re going to fix it. If you’re an agent, you are the traditional process. Opendoor spends, I mean, even up until earlier this year, they spend tens of millions of dollars on TV advertising campaigns. And the messaging there is sell your home the new fashioned way. So if you follow that train of thought, the old-fashioned way is the traditional way, and that’s agents. So every real estate agent is old fashioned. So there is a bit, to be fair, there has been a bit of antagonism between iBuyers and real estate agents from the get go and continuing to today.

Dave:
So how does that work with a company like Zillow or Redfin, that those are two, I guess, previous iBuyers now that both of them have thrown in the towel. But how was that working and is that part of the problem is that they sort of had this iBuyer business that is potentially antagonistic or adversarial towards agents? At the same time I know Zillow, the vast majority of the revenue comes from agents. I don’t know exactly how Redfin’s revenue comes in, but.

Jamil:
Well, they’re a brokerage as well. And so Redfin is representing buyers hand over fist.

Mike:
Well, let’s get the easy one out of the way first, Redfin. Redfin was technically an iBuyer but just exponentially smaller than anyone else. They’re also their own brokerage. Redfin employs their own real estate agents. So Redfin can go out there, do whatever they want and say, this is what we’re doing, like it or leave it. They can just force their organization to accept this. So it wasn’t a big deal for them. So we’ll put that to the side. But Zillow, yeah. I mean, I think Zillow’s entry into iBuying and their messaging and how they pitched that to agents, it’s a master stroke in good communication. There was such little backlash from that that often gets forgotten. Because so much has happened since then, but it was really well done. And the way that Zillow got around it was they said, yeah, there’s another iBuyer out there, Opendoor, and they don’t want to use agents, but we do.
So we’re Zillow, we want to come in, we want to offer iBuying because we think that’s a pretty valuable solution for today’s homeowners. But we also, we want to work with the industry, we want to work with you, our valued partners, our valued agents, and the way we’re going to do that is we’re actually, we’re going to continue to use an agent on every single one of our transactions and we’re going to pay you a commission on it. Whereas, with Opendoor, consumers would go to Opendoor directly, they wouldn’t use an agent. It was a zero-sum game. The agents lose because Opendoor wins. Zillow was saying, Hey, we’re going to still use agents, we’ll still pay a commission.
And the way that financially transpired was almost this tax that Zillow had to pay agents for every transaction. I forget it, that it was like one and a half percent just to pay those agent commissions. So if you look at the unit economics, Zillow’s were always worse than Opendoor because Zillow continued to pay that agent tax to use agents in order to not upset their existing client base. Zillow generates a billion dollars a year in revenue from agents, they can’t afford to go out there and upset them.

Jamil:
I think in addition to that, though, there’s an important piece to the equation that having a homeowner have an advocate in the conversation. When you look at the way that, I mean, I’ve transacted with Opendoor before and it’s interesting, though, just the way the contracts read. You’ve got your first line item, which is your purchase price or their purchase price, and then all of their credits come out on the last page of the document where you’ve got their technology fee, you’ve got their market risk fee, you’ve got all the different ways that they’re going to change the settlement statement when the deal actually closes. The property then records at a much higher price than what they actually pay for the property. And it’s confusing. It’s confusing to people when they’re looking at the settlement statement.
They say, wait, hold on, you said you were going to pay me 225,000. I’m looking at my settlement statement now, it says 165. So inserting an advocate into that conversation so that the technology can be explained so that the contracts can be explained so that how everybody’s being monetized is explained and people can make an informed decision. I don’t think that’s a terrible thing to have.

Mike:
No, and I think that’s symptomatic of the psychology of this whole space. We’re talking about real estate, somebody’s single largest transaction they will likely undertake in their lifetime. And I mean, I’ve talked about this, right? This idea of loss aversion and whatnot, but fundamentally, the larger a transaction, the more conservative human beings are; the less we want to make a mistake. If I want to try a new coffee shop that opened up down the street, I’ll try it out one day, I spend $5, and if I don’t like it, what did I lose? I lost five bucks. I’ll just go to my normal place tomorrow. I want to try video streaming service. I sign up for Disney plus the first month is either free or 10 bucks. What do I get if I don’t like it? I just lost 10 bucks. Not a big deal. But with real estate, what’s the potential downside if you make a mistake? It’s huge.
Your example, it could be tens of thousands of dollars. We’re talking about video streaming services and coffee are not on Maslow’s Hierarchy of needs shelter is. So, I mean, coffee is on my hierarchy of needs, but real estate, shelter is right. We’re talking about being in the right school district at the right time. We’re talking about safety, we’re talking about being near my parents or something. It’s all wrapped up into that. And that’s why on these high value transactions, people are much more conservative and they have a specialist help them. That’s why we have financial advisors to help with financial planning and wealth management. That’s why there’s divorce lawyers. That’s why there’s M&A attorneys and investment bankers to help out with these high transaction, low frequency transactions where they can be the specialist and provide that expertise. And in real estate, that’s the real estate agent. So bring it all back. That’s why we still have agents, that’s why agents are not going away anytime soon. And that’s why it feels funny to outsource that advocacy to the for profit company you are working with.

Dave:
Yeah, it seems a little bit like a conflict of interest, I guess, when it’s all sort of vertically integrated and they don’t have that much objectivity. I would like to jump back, I guess, a foundational question here, particularly for real estate investors. Because as a group, I guess, I’ll speak for everyone and say felt like iBuyers are competition, too. They were coming in making offers on a lot of the types of distressed properties or value add opportunities that traditionally smaller investors really liked. And that sort has been a threat. But one thing I’ve always just been curious about, and Jamil hinted at this, is what is the volume even? Are they even making a dent in the national scheme of housing transactions or is this sort of overblown and they’re really just of this niche thing?

Mike:
It all comes down to perspective and the tyranny of percentages. So if we start way at the top, I think Opendoor, it’s either Opendoor or all iBuyers, but Opendoor’s market share last year was something like 1.3%. So out of all the homes that were purchased, Opendoor purchased maybe 1.3, it actually sounds too high. I think that was all iBuyers. So anyway, you’re talking like a percent, right? So you can look at that and you can say, oh a percent, that’s a rounding error. It’s totally niche, not a big deal. But then if you translate that percent into an actual number of transactions, you’re talking about 40, 50, 60, 70,000 houses. That’s 40, 50, 60, 70,000 houses. That’s 40, 50, 60, 70,000 families that are looking to move. So there’s a big deal there. And then if we go a little bit further, because that’s national. The iBuyers are not, they’re not really national.
I mean, they kind of are but they’re not, right? So they’ve issued press releases and launched in 50 markets around the country. So there is a growing national presence, but not all markets are created equal. There’s a very high concentration in these top four-ish markets. Phoenix, Atlanta, Texas, and kind of the Carolinas. So Phoenix is ground zero for iBuyers and Atlanta is very close number, well, they go back and forth. So if you look at one of those, Phoenix or Atlanta at times market share, the iBuyer market share maybe five, six, 7%, but it’s peaked above 10

Jamil:
10, yeah.

Mike:
So there’s times when those markets where they have 10% share the markets, one out of every 10 homes is going on Opendoor’s, books. So that’s a big deal. And then you can even get narrower and you can say, okay, there’s a neighborhood in Atlanta and you know what? In there that market share number is closer to 20, 30, it could be even 40%, right? The denominator’s getting pretty small at that point. And Bloomberg has done some research on that in the past. So it really all depends. If you’re a property investor in Minneapolis or Indianapolis, this is not a big deal. They’re not doing anything right. But if you’re a property investor in Phoenix or Atlanta, this is absolutely a big deal.

Jamil:
And I’ll speak to that real, real quickly because I’m in Phoenix, Arizona, and I felt Opendoor coming into the market. I’m a investor. I buy and sell houses. I wholesale traditionally. And when Opendoor came into the space, they were the Silicon Valley wholesaler. They were the wholesaler in a suit and that was what everybody got fearful of. Because they thought, wow, these guys are, they’re sophisticated, they got billions of dollars, they’re going to come in and they’re going to completely disrupt what our business model is. And was there a dent, and did it affect us in the early parts? It did, absolutely. Everybody’s volumes adjusted and we had to get more engineered with our marketing. We had to get more boots on the ground. Everybody had to pivot. If you were going to survive when you had an 800 pound gorilla in your backyard, you were going to have to do better.
You’re going to have to offer more solutions. You were going to have to offer more service, you were going to have to offer more transparency. There was going to need to be a shift in the market. And I think that what Opendoor effectively did for us in Phoenix is it made everybody better. We all had to work harder and do better in order to compete with Opendoor. I’m also going to say this, there are parts about it that I don’t think got better.
For instance, when you look at some of the product, and I’m not knocking Opendoor, I think they’re a wonderful company and I like the people involved in it, and God bless them. But when you look at the product and you see what has come down from flipping houses from the sky, I did a whole YouTube exposé on it and I looked at what does it look like when a mom and pop rehabber whose heart and soul goes into a project when they care about where are we going to put the placement of this shelf because we’re thinking about the family that’s going to live here and where they’re going to put their things and how people are actually going to live in this home.
And when you changed it from the perspective of somebody coming in and their livelihood being the business versus an algorithm deciding that they were going to buy this house and that they were allowed to spend 1% of purchase price in order to renovate it, which is the typical amount of money that they want to spend in a property, what did that project look like when it came back onto the open market? And when you look at how that affects neighborhoods that they’re investing in, I think that the ultimate result wasn’t super positive. And to me, I think that’s a piece that we all need to understand and look at is that when somebody has the choice of selling their home, you might get X dollars from Opendoor and you might get X dollars from this wholesaler or this rehabber, but what is that impact on the community when it’s done?

Mike:
It’s a really good point. It reminds me of a chat I had the other day with an agent friend of mine who was showing their buyer a bunch of homes. Some of those homes were Opendoor homes. And the feedback, again, this is one data point, but it reinforces that. The feedback from the buyer after touring that Opendoor home was, “It doesn’t have any soul.”

Jamil:
Exactly.

Mike:
Right. They don’t-

Jamil:
It’s missing the soul. Michael, you hit it.

Mike:
Yeah, they don’t stage the houses, which is fine. This is what happens when you have, like you said, an algorithm running the business. It’s very data driven and when that occurs, you don’t stage the home. All the paint colors are the same, all the rugs and carpets are the same. Everything’s the same. But that the buyer was looking, they want to live there. I want some character. I want to know what is in the soul of this home and do we connect or not? Yeah, I think that’s a tough proposition.

Dave:
Interesting. Yeah, I mean, I think that’s really helpful context too, to understand the localized concentration here. Obviously, 10% is a lot, especially if you live in those communities, you feel that, and it feels, I’m sure, pretty weird as both an investor and just a home buyer. So that’s helpful in helping everyone understand that if you’re a real estate investor, unless you’re in one of these major markets, you’re probably not competing that directly against some of these iBuyers. Which sort of brings me to my next question is are there going to be any iBuyers in the near future? Because now we’ve seen Zillow drop out, we’ve seen Redfin, which you just explained is not a huge player anyway, but one of the bigger names, at least in the industry. So I guess, Opendoor, Offerpad is still around, are those the two big ones? Because from what I read, they’re not doing great either.

Mike:
Those are the two pure play iBuyers left Opendoor and Offerpad. And Opendoor is about four times as big as Offerpad and by volume. And Offerpads always played by the beat of their own drum. I’ve done some research on this, it’s all online and free. So if you want, you can look at it. But Opendoor is founded by a bunch of Silicon Valley Tech folks. Offerpad was founded by a bunch of real estate folks. And Offerpad has had a different philosophy. It’s not pedal to the metal, let’s get as big as we can, as fast as we can. It’s a little bit more moderate and they’re willing to put more time and money into the rehab of the houses. They’re real estate people. So they get that a bit more and they have a different model. And the result of that is, I think, Offerpad, at least, is just, let’s call it, more moderate. When the market’s swinging wildly up and down, Offerpad’s not going to go up as far and it’s not going to go down as far.
So in the last quarter, Opendoor, lost a lot of money, Offerpad, lost a little bit of money. Yeah. Anyway, I don’t know what the next, I mean, the next 12 to 18 months is a free-for-all. I’m not sure what’s going to happen. Surviving it is simply a matter of how much money do you have in the bank and how much are you spending every month and do you have enough to weather this financial and real estate market storm. I think Opendoor is in the process of pivoting or evolving their model a bit. They’ve launched more asset-like products. So they’re basically Opendoor’s trying to be an iBuyer without actually buying the home. They have this exclusive marketplace and they’re going to sellers and saying, if you want to sell your home, come to us. We’ll charge you a fee, 5% fee.
And right now we’ll rebate 2% of that back to you, but we’ll charge you a fee, we’ll give you a cash offer. And remember, Opendoor only buys a percent of the homes. They don’t have to, nobody’s holding a gun to their head and forcing them to buy every home. But we’ll give you a cash offer and then we’ll advertise your home in our exclusive non-MLS marketplace. And if you’re a property investor, this is where you should start paying attention and we’re going to try to find you buyers. And that could be individuals or that can be institutional investors. And I made this point a couple days ago on a webinar, what I’ve just described sounds a lot like a real estate agent.

Jamil:
Or a wholesaler.

Dave:
Horse to mil, yeah, try to turn you into a robot.

Jamil:
Let’s be real. This is what we do is we sell equitable interest in the house, and that’s exactly what Opendoor is proposing. And rather than coming and the whole thing, oh, we actually have the money to back up what we’re going to do, we’re actually going to close. All these promises go out the window. Now all of a sudden they realize that, hold on a second, we can’t take everything down. Maybe it’s time that we just start selling equitable interest. I mean, that’s what happened, right? It was always the better model anyways, right? Because I’ll tell you what? I didn’t lose money any quarter.

Mike:
Yeah. So they’re pivoting around. I mean, will we have iBuyers in a year, two years, five years? I don’t know. I sure hope so, because if we don’t, that means a tidal wave has swept over this industry and washed away everything new. And we’re back with the 1990s again. And it feels like that shouldn’t be the case. Traditional iBuying is a great proposition for a certain segment of players. I’d like to see more options for consumers, more options for people to buy and sell homes. But it’s definitely, I’d say this, it’s funny in real estate, I think the phrase existential threat gets overused. But this is the existential threat. This is the crisis moment.

Jamil:
It’s not a nuclear disaster guys, we’re talking about houses, right?

Mike:
Well, for these companies it is, it is life or death. And that’s where we’re at now. Opendoor got punched in the face really bad in Q3. They guided to an even worse Q4 and Q1. I mean, the next six months are just going to be pretty brutal. So we have to wait and see.

Jamil:
Well, I’ve got a piece to add to that, because looking at some of the numbers that shook out. Because I was looking at your research, Michael, and again, it’s phenomenal research for anybody that hasn’t dove into what Mike DelPrete is actually doing out there, read it. Read what he’s talking about. Because when you look at the business model in itself, they haven’t accounted for operations. There’s no money to operate. They can’t pay anybody if they’re just looking at the margins that we’re looking at here, it makes no sense. So then I started to think about, well, let’s look at some of the transactions that I’ve in fact been involved in where Opendoor was either a buyer or a seller. And it was interesting because when the market was doing what it was doing, when things were getting a little heated here in Phoenix, Arizona, I’m buying and selling houses.
I’m fixing and flipping houses, I’m wholesaling houses, I’m active. I’m in a deal. And I put this nice remodel, we did a good job on the remodel. I think we over improve for the neighborhood, we put it on the market and of course, market was hot and we started getting multiple offers, but they were reasonable multiple offers, just super reasonable $5,000, $7,000 above list. It made some sense for the market and the heat. Then all of a sudden we get this one offer and it was $75,000 above list. And I thought, who the heck would do that and why? I just needed to know why. So we look and it’s Opendoor buying our fully remodeled house. And I said, if these guys want to buy this house at $75,000 above list, sell it to them. But I need to know why. And so I started looking at who owned the houses in the neighborhood, and a lot of them were Opendoor.
And so it made sense to me that would Opendoor not want to buy this house at $75,000 above list price and set a new comp so that they could add money or equity to all of the other holdings that they had there. And then is that not part of the bigger problem that we’re talking about affordability here in the United States. When you look at the practices and how these things are shaking out, when they don’t make sense, understand why? And that’s the reason I had to look at that whole offer and that whole situation, because it made no sense to me. And the only reason you would want to overpay once is if it was going to make you money 30 times behind it. So how do we make sense of that, and how does the public digest that?

Mike:
We can’t make sense of it. We don’t. I think it’s the question, what’s really interesting here, it’s not so much the question of is Opendoor doing that on purpose or not? Because I think there was some Zillow conspiracy theory about Zillow doing the same thing. It’s the fact that we have to ask ourselves the question. Are they? That’s new. We’ve never been in this position before. We’ve never had a for-profit Wall Street-backed company with billions of dollars and tens of thousands of houses operating like this in the housing market. Effectively like short sellers, because I think institutional investors are long, long term investors.
You buy some AT&T or GE stock, you hold it for 10 years, 20 years, 30 years, that’s it. But now we’ve got day traders, and you see what happens with day traders, with Game Stop and Bed Bath and Beyond and all this craziness, that didn’t exist before. That wasn’t a possibility. But now it is. So the same thing is true in real estate. Now that we have Opendoor operating effectively as a real estate day trader, what are the unintended consequences now? What are the questions we have to ask ourselves now that we didn’t have to five years ago or 10 years ago? And this is exactly one of them.

Dave:
So I’m very curious because during the run-up in prices, the recent rapid appreciation, some of them, Zillow being the notable one, but even Opendoor, they weren’t doing that well in a market that just seemed perfect for them. Absolutely perfect. You could buy something, do literally nothing, and then sell it six months later and make a killing. And they were somehow losing money off this. And to me, it seems like what is the problem? Because is it operational? Because that seems like one problem. The other one that me, Mike, just so you know, I have some training in data science and machine learning. The other part of me is how in hell can they not predict the prices of these houses a little bit better? Because, like you said at the top of the show, there’s just so much data with which you can build AVMs, an automatic valuation model. It just seems like they should be better at this. So do you have any idea why they’re struggling so much?

Mike:
Yeah, the short answer, and I don’t mean to be curt and we can expand, is just their expense base is too high. I mean, at the high points of 2022, home price appreciation is crazy. You look at the numbers of Opendoor and I mean, don’t mean to keep picking on Opendoor but any iBuyer, but the problem is Zillow was out of the game. But you look at what they bought a home for and what they sold it for, and I published this research, it was record high. The difference between what they bought it for and sold it for was like 20%.

Jamil:
And Michael, that didn’t even take into consideration the way that they manipulate those contracts, right? Because it’s not, the recorded buy price is not actually the purchase price. So it was even higher than what you were thinking.

Mike:
If there’s other costs in there or other takeouts then yeah, absolutely. And I mean, they still charge a 5% service fee, but 20%. And you’d look at that and you’d say, wow, you bought something for 300, and then I mean, literally the amount of time between when they take possession of something and then re-list it as about 10 days. So it’s unfair to say the price appreciates 20% and 10 days because there’s a closing period. There’s a lot of time in here. But even if you say two months, three months, that’s crazy home price appreciation. Now the reason that doesn’t fall to the bottom line is because it doesn’t include all of the expenses. So any expense these companies have, all their hundreds of millions of dollars, employees, technology, office rent, salary, all that stuff. It adds up. And I think that’s the fundamental challenge for profitability of these businesses.
It’s also, it’s symptomatic of the fact that it’s real estate and you need boots on the ground. I mean, you guys get this. You just can’t manage this business from your basement. You need hundreds, thousands of people in the field. They’re buying, I forget what it was, 150 houses a day at their peak. There’s so many people in trucks with ladders driving around Phoenix that you can get to fix things up. I mean, you really hit these real world situations. But just to wind it back, I mean, they’re making money. Homes are appreciating, but it’s pretty simple math, it doesn’t flow to the bottom line because there’s just a huge pot of expenses here.

Dave:
That’s crazy. Because that makes me feel like they’re not going to succeed ever. Because if they couldn’t make it work during a time when they were getting all of these market tailwinds, how are they going to make it work in the future when hopefully we get back to a housing market in the next year or two that just grows around the pace of inflation?

Mike:
Well, here’s the thing, and we might not have even talked about this today in this chat unless I brought it up, which is, again, showing the problem. But the thing is, everybody is so focused on the short-term crisis of the iBuyers that we’re all forgetting to take a step back and look at the long term view. We’re like, oh, my God, are they going to survive? Is there enough cash? They’re making so much money on home brace appreciation now everything’s tanking. Are they going to weather the next six months? But we have to remember, if we go back to pre-pandemic times before the market got crazy, the biggest question for iBuyers, and this is something I harped on time and time again, is there wasn’t a credible path to profitability. These businesses were still, they were losing money. It’s like, okay, that’s fine, but what is the path to profitability?
How will you become profitable one day? And that had not been proven yet. There were arguments to say once we get to scale, we’ll be profitable. We can grow our revenues and the expenses grow slower and ta-da, we’re another Amazon. Or we can make money by selling adjacent services, primarily mortgage, title, and escrow. So we get a bigger slice of the pie for each transaction. That was it, right? And we’re going to automate stuff and use technology to bring our expenses down. So you look at all those and I love looking at those, and the evidence wasn’t there. It was like, yeah, I see maybe a little bit on the scale thing, but it’s still too early to tell. And the other ones, I’m just, it’s not flowing through on the data yet. So if we put aside the short term, are they going to survive? I’m thinking we still have that same problem that is still the same problem. We saw what happened when they get to scale and the market goes bananas, that you lose a billion dollars. So there’s a big problem.

Jamil:
The only way they survive, Dave, is through the marketplace.

Dave:
What do you mean? Coming after you, basically.

Jamil:
100%. The only way they survive is buying my company. No, no. Really, the only way they survive is the marketplace. Because, look, if you can change the model where you don’t have to be so cash-intensive, you don’t have to take title down, you don’t have to take title to all these properties. You’re not paying commissions multiple times because, Michael just said, it’s a 10 day turn. They are doing nothing to these houses. You accomplish the exact same. In fact, the house might look better the day before they close and the day they list. Okay, so with that said, the marketplace makes sense. It makes sense, right? It’s like if you look at the car industry, how many of us have traded in a car? All three of us, I bet. We’ve all traded in a car. We all know that we were leaving money on the table.
Every one of us understood that there was a convenience situation here that we were taking advantage of. So what if that becomes the proposition, the value proposition of the consumer? Listen guys, we are becoming your marketplace, you know that we’re just going to take your car and put it on the dealer auction. That’s exactly what’s going to happen with the house, you know that we’re just going to take your house, we’re going to put it in the marketplace auction, you’re going to get what you’re going to get. We’re going to take our fee, bada-bing, bada-boom. We didn’t have to come up with any extra money, we didn’t have to raise funds, there was no cost in capital, operations completely come down. And this starts to make sense.

Mike:
I think there’s a different factor in there. You asked how many of us traded our car in, I traded my car in. I went to a dealer and I traded it in and I was done. That’s different than me going to a dealer, giving them my car. What is that called?

Jamil:
Consignment.

Mike:
Yeah, consignment. Giving them my car on consignment and then seeing what happens with it.

Jamil:
True.

Mike:
So iBuying is the first. They buy your home, done. What you’re talking about now, this marketplace, that’s consignment, and it may be great, but it’s less speedy, it’s less certain, and it’s less simple than the iBuyer proposition. So I don’t know how that’s going to pan out, but we can’t kid ourselves. It is different. It is a different proposition. And sorry, just one more thing. When I trade in my car and I give it to the dealership on consignment, the dealer’s saying, oh, actually, we’re going to sell this to our exclusive network. We’re not going to expose this to everybody. We actually have a set number of buyers.

Jamil:
I think that changes, too. I think eventually what ends up happening is it’s the network and the MLS. I think essentially what’s going to end up happening is they’re just going to become the full scale wholesale operation.

Dave:
Interesting.

Jamil:
And they’re going to change their name to Keyglee, that’s what’s up.

Dave:
Well, it’s funny, Mike, when you were describing these paths to profitability or proposals. It sounds like these companies and it makes sense, given their backing, are following almost more of a venture capital model where it’s like just go rapidly after market share, worry about profitability later. You hear about companies like Uber that was doing this, they were taking a loss. They were subsidizing rides for people just to capture market share. But Uber didn’t own the cars, they didn’t have assets, they weren’t stock holding anything in case things went wrong. And this, it doesn’t seem like, there’s so much risk just going after that market share approach before you have profitability when you’re buying literally billions or tens of billions of dollars worth of assets often leveraged. That just seems crazy. And so what you’re saying, Jamil, is more of the Silicon Valley approach to this, right? They would not touch owning the asset. They would set up a marketplace, like Uber did between drivers and rider. And they’re basically going to take the same approach to real estate.

Jamil:
Imagine if Uber had to own every car.

Dave:
They wouldn’t do it.

Jamil:
I mean, the model wouldn’t make any sense, right?

Dave:
Yeah.

Jamil:
So it’s got to evolve. It’s got to evolve. And listen, I congratulate them for the amount of bravery it took to do what they’ve accomplished. It’s incredible. It’s a great disruption to the business. I think that evolution is necessary in everything. We want to see things change; we want to see things get more efficient, we want to see things become more fluid. I can see that looking at the way that this is panned out right now, that there’s not enough money in the pie to operate. So what’s next? And you hit the nail on the head in the biggest appreciation we’ve seen in the history of housing, it couldn’t survive. So what’s next?

Dave:
Well, Mike, I’m curious. Yeah, we’ve asked you a lot about iBuyers, but is there something else coming down? Is it sounds like iBuyers are trying to evolve or is there something else you see coming down the pipe in terms of real estate tech that might be impacting the industry?

Mike:
Yeah, before we get to that, I want to come back to the marketplace thing as well. The challenge that Opendoor and any other company faces in trying to create a marketplace in real estate is that one already exists, right? It’s the MLS systems everywhere. There is a marketplace, it functions, it’s efficient. Could it be more efficient? Yes, but it does work. There is one place you can go to find all the houses for sale. There’s not one place I can go to find all apartments for rent. There’s not one place I can go to find all cars, there isn’t. And that’s why there’s not one place I can go to find all taxis available in my area. Those things don’t exist. But the challenge is in real estate that does exist, it’s the MLS system. And I get it, you bump into 10 people and you’re going to get 10 different opinions about why the MLS system is broken.
It sucks, it doesn’t work. But at the end of the day, it is a marketplace. It could be more efficient, it’s operating. But I don’t know about you guys, but I’ve bought homes, I’ve sold homes, it works. The MLS system, it does work. I can go to Zillow and have a high degree of confidence. I’m looking at all the properties for sale. So anyway, that’s the marketplace. What’s next? Well, listen, I think the crisis of the moment is home affordability. And I think that will be a new category in prop tech, real estate tech that we’re going to see created over the next six to 18 months. There’s a variety of different ways to address that from rent to own to shared equity-

Dave:
Fractional ownership.

Mike:
Fractional ownership. And I hate fractional ownership if we’re thinking about blockchain and owning like $100,000 worth of a house. But if you can can’t afford 100% of the home, maybe you can afford 70% of it. And some investors come along for the other 30% and they’re in it for the long term ride. There’s a number of different ways companies are starting to do this and I’m excited and hopeful about what the future is there because home affordability is a problem and it’d be great to get some Wall Street money funding companies to solve the problem created by Wall Street money in the real estate market. But that’s kind of where we are. So I think that’s next and I’m interested in that and I’m starting to advise some companies in that area and dig a little bit deeper because I want to be smarter in that and do what I can.
But for all the other, there’s iBuyers, there’s a classic company called Power Buyers that do cash offer and buy before you sell. There’s W2 brokerages, real estate brokers that employ their agents like Redfin, instead of the contractor model. There’s a lot of new models out there and I think there is absolutely value in that model for consumers. The idea of buying before you’re selling that sounds really cool. Why isn’t that the status quo? But the challenges in the current financial markets and real estate markets, those companies are all bleeding. They’ve yet to reach escape velocity. They’re not profitable and it’s going to be really tight. So my hope is that that category survives, and I think it will, but depends how bleak the next year is. I hope it survives. I hope the iBuyers survive and I hope we have some new models that once things start picking up again, they can keep going and keep offering new ideas into the space.

Jamil:
And I wanted to add one little defining piece to the marketplace conversation because I’m stuck there.

Mike:
We can’t get away.

Jamil:
No, but I don’t think it’s just the overall marketplace. I think it’s the cash buyer marketplace. I think the piece of the pie or the piece of the puzzle here, that Opendoor, when they say the word exclusive, what they’re trying to say is this is not going to be subject to a retail mortgage. This is not going to take the time that a regular sale would take. This is going to be a speed and convenience situation. That’s why you’re coming to the cash buyer marketplace. And this is going to be different from your multiple listing system, where you’re going to be subject to all of the nuance that regular retail sale would have.

Mike:
I meanm I can’t help it, but my mind goes to, well, okay, so-

Jamil:
Let’s start it.

Mike:
Opendoor’s going to… No, no, just who has the cash? Opendoor has the cash. So you’re going to be using their cash. So it’s not going to be on Opendoor’s balance sheet, but you’re still using their cash. There’s other companies that are doing that and they’ve announced they have to stop, their lending facilities are drying up or interest rates are becoming too high. There’s too much risk. Like, okay, Dave, I’ll give you my cash, buy your home. But my God, what happens if you work for Meta or Amazon and you just got laid off and you lose your job? It’s too risky right now. So there’s still this huge, I believe, I mean, there’s still a really huge financial risk for that company providing that at the moment.

Dave:
Yeah, it’s going to be really interesting to see what shakes out over the next couple of years. Because you look at publicly traded real estate companies and the best ones are down 30 to 40% like REITs often. Redfin is down 90%. And so these are big well-funded companies. You think, I’m sure, Mike, some of the companies you like or research startups, pre-revenue companies, it’s going to be pretty tough for them to survive. I totally agree with you. I hope they do because I do think there is need for some innovation in real estate and I think there’s so many interesting ideas out there, but none of them have been able to really make a dent yet. And so I’m with you. I hope they survive and I hope that we start to see some interesting new trends emerge as we hopefully in the next 12 to 18 months come out of this correction and into a new era for the housing market.

Jamil:
I think the next thing that we’re going to watch is the feast. There was another brilliant article that Michael wrote where he talks about predators and prey. And I think the next show is going to be a National Geographic basic show where we’re going to watch a whole bunch of companies get devoured by the companies with the money, and that’s the next six to 18 months. We’re going to watch the feast, who’s going to survive and who’s going to get eaten?

Dave:
Basically all the big companies with cash are going to roll up these smaller companies.

Mike:
Yeah. And the asterisk is, but these smaller companies are all losing money, and some of them are encumbered with debt. So it’s like, right now, I’d hate to be in Zillow’s boardroom saying, yeah, I think we should drop 500 million and acquire this business that’s losing money. Really? Can you justify that? And there’s also this question of what are you buying?
Even Opendoor, if we were to buy Opendoor, what they own, I mean, geez, they ended Q3, they own 16,000 homes. That’s pretty good. And they have technology, but these transactional things, it’s not a subscription as a service that it’s not a SaaS model. You don’t have recurring revenue. What kind of do you have there? You’ve got a brand and technology. So I think you’re right. I mean, yes, you’re right and referencing me, yes, there is going to be a feast. I do agree with that, but I’m worried about companies just zapping out of existence or fire sales rather than a smart amalgamation of existing players into something new here. Because there’s questions. Where’s the value? What am I actually buying? What can I value?

Dave:
All right, well, with that grim ending to this episode, I think we have to get out of here. Well, I guess real estate investors will probably be happy to hear that they are not facing tremendous competition from iBuyers, but it remains to be seen what sort of real estate tech we might be hearing about next. But Mike, this was tremendously helpful. You’re a wealth of knowledge. We really appreciate you being here. For anyone who wants to find out more about you or connect with you, where should they do that?

Mike:
Just go to mikedp.com. Look me up on Google, got a website, all my material is there. You can have a lot of fun reading things; mikedp.com.

Dave:
All right, great. Well, thank you, Mike. We appreciate it and hopefully we’ll have you back sometime soon when there’s some new exciting trends to talk about.

Mike:
Sounds good. Thanks for having me. A pleasure everyone. And yeah, have a good one.

Dave:
All right, that was fun. I’ve wanted Mike to come on the show forever and he did not disappoint.

Jamil:
He is a really intelligent person. I loved his perspectives and it gave me a lot of insight and obviously, he’s researched what he’s talking about. He knows intrinsically what’s going on in this business model. And when you see somebody that is so well versed in the data and the model itself, it’s really valuable to listen to them.

Dave:
Totally. I like it because he’s also not an investor, he’s not an agent, he doesn’t work for any of these companies. He approaches it from a much more academic standpoint. And I know he does consulting and private practice stuff, but he is also a professor at CU Boulder, so yeah. Yeah, it’s really cool to just hear this research-based analysis of it and it took a turn. I was not expecting. I did not. I was excited to have you on the show. I was like always am because of the Phoenix iBuyer connection. But I didn’t realize that there is a sort of idea that they’re going to go into and try and automate the wholesaling industry.

Jamil:
It’s exactly what’s happening. It’s exactly what’s happening. And I’ve been, it’s funny, I’ve been calling it for a while. I figured that this evolution was going to take place. I couldn’t see how taking properties down, doing minimal repairs to them, and then trying to get retail value for it was going to pencil out. I didn’t see this playing out well. I’ve gotten a lot of flack. I’ve been making videos about this conversation for a few years and I’ve had multiple people reach out to me and say, “Why are you taking shots?” And I’m not taking shots. I’m just literally expressing what’s obviously happening in the market and we’ve got to look at it, we’ve got to call it what it is. And we’ve got to then assume that a pivot is in place. They are going to have to evolve. What they’re doing right now isn’t going to work. And I think what Michael talks about in this episode was really important.

Dave:
My big prediction now is that the CEO of Opendoor in 2024 is going to be Jamil Damji. You are going to be tapped for that job because it seems like-

Jamil:
I would do a fantastic job of it, to be honest. I think they need to learn from the scrappiness of wholesale. They’ve got to understand this instrument that we’ve made millions of dollars on. And listen, look, I’ve been profitable through the down, and even as the market’s doing what it’s doing right now, we’re still crushing it, right? So iBuyers take notes. Equitable interest is an incredible tool. And figuring out how to monetize that is probably your parachute out of this.

Dave:
Totally. Well, first of all, you should just get a consultant gig and make a lot of money from them, but you don’t seem nervous about it. Why is that?

Jamil:
I don’t seem nervous about it because I have no reason to be. I’m looking at our balance sheets, I’m looking at what we’re accomplishing right now, and while everybody is bleeding because we don’t hold property, because we are truly just delivering the information that exists. Look, your house can trade at this price right now. It is what it is. And buyer, this is how low you can pay right now. Are you interested in purchasing? Yes. Let’s connect the dots. Let’s do the deal. And because of that, we’re still transacting. People still need shelter. He talked about Maslow’s Hierarchy of Needs. Shelter is still there and it doesn’t matter what if we’re in a recession, if we’re in a boom economy, that hierarchy of needs will always be the same. Housing is inevitable because we need somewhere to live.

Dave:
Totally. First of all, never thought Maslow’s Hierarchy of Needs would be referenced on this show, but here we are. And then, secondly, but are you nervous that they might eat into your business? They’re active in Phoenix. If they start trying to mimic wholesalers, Phoenix might be their first choice.

Jamil:
I think there’s a conversation that we have. I truly do. I think there’s going to be a point in time in the future where Opendoor and Keyglee sit down, and I think it’s going to be a good conversation because I think that they could gain so much from what we do. They really could. And if we melded the business model of what we do and the business model of what they do, and we brought those things together, I think you actually have the perfect iBuyer. So I’m not nervous about it. I’m excited for the conversation.

Dave:
Nice. All right. Well, thanks a lot for coming, man. This was a lot of fun. I really enjoyed this episode a lot.

Jamil:
Likewise.

Dave:
All right. Well, Jamil, where should people connect with you if they want to be a part of the Opendoor Keyglee mashup?

Jamil:
You guys can find me on my YouTube channel. There’s a great video that you should check out from back in the day. I posted it with Max Maxwell and I on my YouTube channel. It’s just Jamil Damji or youtube.com/jamildamji. And also follow me an IG. I make funny videos there.

Dave:
You definitely do. You can also follow me on Instagram where I’m @thedatadeli. Thank you all so much for watching. We’ll see you for next episode of On The Market.
On The Market is created by me, Dave Meyer and Kailyn Bennett. Produced by Kailyn Bennett, editing by Joel Esparza and Onyx Media, researched by Pusher Janedoll, and a big thanks to the entire BiggerPockets team. The content on the show, On The Market, are opinions only. All listeners should independently verify data points, opinions, and investment strategies.

Mindy:
Welcome to the BiggerPockets Money podcast, Finance Friday edition, where we interview Josh and talk about rehab overruns, borrowing costs, and the grind it out versus sell your property decision.

Josh:
Really in the last year have had to learn a lot about tracking my own expenses and my own cash flows through the construction process. And with that, because I took out a construction HELOC, there was some flexibility even there too. But now that I have really substantial housing expenses in the mortgage and the HELOC, I am projecting, I am foreseeing that it’s, I’m basically breaking even for the most part when it comes to after tax and stuff like that.

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

Scott:
Mindy, the show always takes my breath away.

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

Scott:
That’s right. Whether you want to retire early and travel the world, go on to make big time investments in assets like real estate, start your own business or decide whether to grind it out and pay off a HELOC or sell your property and start over. We’ll help you reach your financial goals and get money out of the way so you can launch yourself towards your dreams.

Mindy:
Scott, today we’re talking to Josh and I’m really excited to talk to him. He is a younger guy who is on his path to financial independence. He bought a house hack, as we say, you should house hack your way to financial independence, house hack your way to get started investing in real estate, which he did. And he ran into some cost overruns and some time overruns, which happens frequently when you are doing your very first rehab. He has, he’s on the end of that now and now he needs to rent out his property. But he is faced with kind of a big decision. He borrowed a lot of money to rehab the property and now he needs to pay it back. And I think you have some good things for him to look at today, things to consider when he’s running his numbers.
I mean, a lot of our answers lately seem to be now you’re in the grind and we’ve talked to so many people on this show and it seems like 10 years is the sweet spot to go from zero to financially independent, 10 years, 15 years. And I just, I want to make sure that people realize 10 years is kind of a long time. There is a grind aspect to becoming financially independent. We cover it in an hour, but it does take a long time. It is multiple years except for that one guy in California last week who won the $2 billion lottery by himself or herself, I should say him or herself, not to be sexist.

Scott:
Yeah, they’re set for life.

Mindy:
They are set for life.

Scott:
They should write a book.

Mindy:
Their book is much shorter than yours.

Scott:
Yeah. Well, great. Should we bring Josh in?

Mindy:
Yes. Before we do, let’s hear a note from my attorney who says the contents of this podcast are informational in nature and are not legal or tax advice. And neither Scott nor I nor BiggerPockets is engaged in the provision of legal, tax or any other advice. You should seek your own advice from professional advisors, including lawyers and accountants regarding the legal, tax and financial implications of any financial decision you contemplate. Today we’re speaking with Josh, a fairly recent college graduate who bought his first house hack 12 months ago and has been renovating it ever since. Renovations went over budget and over time as they tend to do, but he’s just about finished and we’ll start collecting rent in the new year. Josh, welcome to the BiggerPockets Money podcast. I’m super excited to talk to you today.

Josh:
Thank you. Thank you. Yeah, I’m stoked to be with you all. Thank you very much. Let’s get going.

Mindy:
Let’s get going. So we want to give a quick snapshot of your money situation. We have a salary of about $5,800 a month and additional income from hockey and CrossFit coaching of about $20,000 a year. I’m showing monthly expenses around 4,100, so that’s a $1,400 mortgage, a $1,400 HELOC payment, $131 in gas and electric, $35 wash, 29 water, $29 trash. No vehicle payment, good for you. $147 in insurance, $280 in gas, $193 for trips and adventures. A bunch of random, I’m going to call it $250 in random. I don’t see anything weird there. $317 a month for groceries, $214 for restaurants, bars, and coffee for a grand total of $4,100 in your spending. And then you’ve got additional, oh, and let’s move to investments. We have $21,000 in a Roth. Hooray. And $6,000 in a TSP, $3,300 in a 401k, $21,000 in cash in various earmarked buckets. We have a house hack that is in progress. What would you estimate your equity to be in that property?

Josh:
Yeah, good question. I’ve estimated it at 75%, the after rehab value is 490 and my all in debt on the house is now 382, 383 with the mortgage in HELOC. So about 75% is the all in loan to value. So 20 to 25% equity.

Mindy:
We’ve got the outstanding mortgage of $227,000 at 3.375 fixed rate, which is awesome. A HELOC of 135,000, a family loan of 20,000.

Scott:
What’s the interest rate on HELOC?

Josh:
The HELOCs on a three month float. So for the first three months here it’s on seven and a quarter, and then it’ll go up obviously with rates so.

Mindy:
$20,000 for a family loan, 12,500 in student loans, and then 20% interest credit cards, one at Home Depot with $4,500 on it and one at Lowes with $9,800 on it. And I think that you are sitting in a pretty good situation. Let’s look at your money story. Let’s get a quick little overview of how you got to where you are.

Josh:
Yeah, absolutely. And I’m not sure if it came through or not that student loans is down to only about $2,000. I think you might have said 12,000 there, but just about 2000.

Mindy:
2000, that’s even better. Okay.

Josh:
Yep. About 1900 left in student loans. So thankfully got an employment recruitment and retention bonus that went towards that student loan, student loan debt. So I took advantage of that and so that’s been great. But my money story is pretty complex. My parents got divorced between second and fourth grade. There was a lot that was kind of fallen out during that time along with my dad’s construction business that also fell out. And then there was a recession there as well. So the foundation is a reasonable level of insecurity, but my parents did the best job that they could to teach us money lessons along the way, figure out how to adapt and overcome with your situation. We got taught the envelope method. My mom for a while had the need, seed and greed method. So anything that we absolutely needed, four walls, food, shelter, all that kind of stuff would go in one bucket.
The seeds would be investments for the future and we would kind of share those 50/50, but then if there was any soda or candy or anything that we wanted, anything that we just wanted, we didn’t actually need or wasn’t an investment for the future, that would fall in the greed bucket and we would have to come up with our own funds to spend in the greed bucket. And so that was a good framework. And then I didn’t start college right away after high school. I played a couple years of junior hockey. I fell into a business relationship with a mentor who taught me business. He exposed me to real estate. He really was an influential force in growing my money story.
We would have road trips all the time, crisscrossing the country for our hockey business and just listening to TED Talks and BiggerPockets podcasts and just going through and thinking and dreaming about how to build a real estate empire. So really my interest in real estate got started with that. And then I went to college for finance because I figured that it was applicable throughout life, not just for a job. I wanted to learn how to account, how to manage my own money and know more the ins and outs of the financial world. So that brings me to today I’m a financial analyst for work and I got myself into, like you said, a pretty big bird there so that’s my money story.

Scott:
Well walk us through. So you’re, to understand your position, we got $20,000 in cash. We got about $30,000 in investments and then about $510,000 in property. And that’s your position there. And we just levered against the property we have a couple of personal loans here. Walk me through your cash accumulation rate. Do you feel like cash is regularly stockpiling in your life? You gave us the 5,000 a month in income plus a bonus here and there, plus the side businesses. Is cash tending to pile up and you generally have a surplus that you’re looking to deploy or is that not happening for some reason?

Josh:
I ran the numbers to come up with a three month average, and those are the financial budget numbers that I gave to you guys was kind of a three month average. But before that, quite honestly it was just kind of a hey, I’ll look at my credit card statement at the end of each month, and if it was under $800, I knew that it would put more money in my bank account than what I was spending. So it was a little more running gun up until more recently when I’ve really in the last year have had to learn a lot about tracking my own expenses and my own cash flows through the construction process. And with that, because I took out a construction HELOC, there was some flexibility even there too. So up until recently, yes, I would just kind of come into having enough cash to then reinvest or to put into my IRA or to pay down debt.
But now that I have really substantial housing expenses in the mortgage and the HELOC, I am projecting, I am foreseeing that it’s, I’m basically breaking even for the most part when it comes to after tax and stuff like that. So I’ve been running break even through the construction period and I’m looking forward to when, like Mindy said, in January, hopefully here getting some rents in to then be a surplus. But for really the last year I’ve been running about break even. I wouldn’t say that I’m clearing a surplus each month. A lot of the retirement accounts are from deductions, right. So paycheck, W-2 deductions, so that all hits before I even touch that money so.

Scott:
Great. And I assume fundamentally that’s the first thing we want to solve today is get into a positive situation.

Josh:
Yeah, I want to get into a positive situation. There’s also a question about with my HELOC I have a little bit of room, it’s up to 150. I obviously have those couple credit cards still outstanding. So those are on 0% promotional rates for now. One will clear in January where that’ll start occurring interest, the other will take until next July. But a question I had is, should I draw 6,000 from my HELOC to invest my personal IRA at the start of the year and then kind of cash flow it throughout the year, or should I continue to break even? My break even also is essentially including a break even of $500 a month to that IRA so should I just put that lump sum into the IRA to start the year or should I kind of just still dollar cost average it throughout the year.

Scott:
Well, let me ask you this, your mortgage payment, what is your PITI?

Josh:
The principal interest tax and insurance is 1442.

Scott:
1442. Okay. And what do you expect to rent this place out? Walk me through the math of the house hack once you have tenants in place.

Josh:
Yeah, so I converted it from a two bed, one and a half bath to a three bed, three bath and so both of the bedrooms upstairs have their own ensuite bathrooms in them.

Scott:
How long did that take you and how much did you put into it?

Josh:
I’ve put in almost, I mean, it’s essentially 150,000 from all in on debt and it has taken me, I started rehab really intensely in middle of October, 2021. So it’s been 12, 13 months that we’ve been cooking on this thing.

Scott:
This is a big project. I bet you learned a lot.

Josh:
It’s a big project. I didn’t know what I was getting into. I didn’t know what I was getting into to be completely frank, and I know you’ll ask about my money mistake, but that it was a big project. There’s a lot of learning curve that comes with that. There were some losses for sure, just by not knowing what I was getting into. An example where I didn’t do my due diligence on research to figure out what it actually cost to get an interior of a house painted and so I got ripped off. I got charged too much for an inadequate job, but that’s being naive and being new and figuring it out. Hopefully as you learn, those losses get fewer and fewer and less and less. But yeah, it’s been a big, big process. It’s got new electrical, new HVAC, new plumbing. I took down a wall, I put up a wall, I moved a wall to add another bathroom in one of the bedrooms.
And above all that, then there were structural issues. We opened up one of the ceilings to put in new lights and we found that the joist had cracked. And so the joist had split for the upper floor and so we had to reinforce those and there was a turnbuckle running through the middle of the house. We didn’t know where it was coming from or where it was going. So there were a lot of weird things about it. It’s an 1876 house, but on the back end, those two rooms upstairs, those two rooms upstairs, I’m anticipating very conservatively 750 each and that’s super conservative. Upwards of 1200 for one of them and a thousand for the other. The one has a little bit better and bigger of a bathroom. So on the high end, 2200 a month, on the low end, 1500 a month.

Scott:
Okay, awesome. So let’s plug it in the middle and say 18 for our purposes of discussion today. Does that work for you for?

Josh:
Yep, works.

Scott:
Okay. So you’re going to get 18 and your PITI is 1430. Is that what I heard?

Josh:
Yep.

Scott:
So that’s great. That’s going to make a major difference in your cash flow in a month or two. What is left that needs to be done to get this project completed? How much is it going to cost and how long is it going to take? You say January, but can you walk us through that?

Josh:
Yeah, good question. What I have left is trim work and molding and included in that is a little bit of finished carpentry to install four custom doors to close off another room. So all in, I already have the material purchase for that. It’s just someone’s labor for a week for 40 hours and then it’s essentially done. We’re finished.

Scott:
And do you have a plan to contract that labor? Is that all lined up or what’s going on with it?

Josh:
Yep, that’s all lined up. They’re coming here in two and a half weeks.

Scott:
Awesome. Start to put the property up for rent today.

Josh:
Okay.

Scott:
So start marketing it for tenants. Give them, get the move in date with that. If you feel like you’re actually certain that in three and a half weeks this will be done, put the listing up. Worst case, you just list it, you get it in January, but that’s $1,800 that’s going to evaporate every month that you don’t have a tenant in there. So it’s like an expense going out. So that would be my first advice there. What would the property rent for if you moved out?

Josh:
If I moved out, it would be in probably 2,750 to 3000 range. I’m in a small town just outside the Twin Cities with good access to the city’s industrial centers and business centers. But it’s really a destination town within the Twin Cities. So it has really strong supports for home values. A big lesson I learned is that if you’re going to do a [inaudible 00:17:33], make sure that you do it in an area that can support the housing values, if you go on overruns. My original project, I was only hoping to turn a $250,000 house into a 325. That was the original project. But then walls started getting opened up and the vision started to come more through of what the house could be and obviously that totally changed where plumbing needed to go. And we found that they had cut joists in weird spots to add plumbing upstairs.
And so if we were going to have to move plumbing anyway, we might as well make it really functional. And so I didn’t ever end up, I didn’t intend for it to be this big. I only wanted a base hit and to have a modest rental a year ago, but it’s turned into this bigger project. But I definitely hear you on getting rents in as quick as possible. I’ve actually ordered the next medium term rental book. I think I got the notice that it was getting shipped yesterday. So my plan is to put it up on Furnished Finder. There’s a hospital that’s a mile away and so I was, that was the plan for sourcing tenants come January.

Mindy:
Okay, so you said Furnished Finder, you’re going to furnish these units?

Josh:
Yep. Two bedrooms, I already have the furnish for.

Mindy:
Okay.

Josh:
I already have beds and dressers for, and then the rest of the space been living in it, so. Well I actually only moved, funny story, I borrowed my mom’s camper throughout the summer so that I could live in the camper while they were doing all the sheet rock and painting and stuff inside. So I only moved back inside around Labor Day just in time for the cold weather to set in. But that was a fun experience. Anyway, I’m sorry I interrupted you.

Mindy:
That’s okay. I want to say this delicately, if you don’t have design skills it might be a very good use of your money to hire somebody with design skills because people will look at the pictures of your property and say, oh, it’s just an old IKEA bed with some random old comforter on there and there’s no pictures on the wall or it’s painted some random color. I don’t have design skills so I ask people who do have design skills to help me out with my medium term rental. So I’m not accusing you of not having design skills, I’m just saying if you don’t, you could greatly improve the amount of rent you’re getting per month and the amount of people who want to stay at your house at all just by having a super cute instagramy site.

Josh:
Yeah, absolutely. That’s a great tip.

Scott:
Yeah, I think that’s really good. You’re already in this project for 150, what’s another two grand and advice, whatever to actually have a good chance at bumping those rents? And I wouldn’t just do those rooms. I’d do some of the common areas if you’re going to do rent by the room as well.

Mindy:
Okay. I think that we have covered the rental pretty well. Let’s talk about your HELOC strategy.

Josh:
Yeah, yeah, absolutely. So I’m going, I wasn’t sure if it was a common term to be called velocity banking. I know it as velocity banking. That’s something that I came into my real estate agent slash friend, really friend first real estate agent second who represented me on the project, he just rolled his mortgage into a HELOC as well. And his wife are funneling their entire salaries into the HELOC and then only pulling out little bits of their expenses each month. So every month their property debt goes down a large degree and then it only comes back up with their expenses. I’m not doing it with two salaries, I’m only doing it with my one W-2. But the idea is that my entire W-2 will go into the HELOC and then every month when it comes time to pay water and utilities and pay off the credit card that I use for food that then I only pull out the expenses for that and the rest of the W-2 stays in the HELOC.
So that the idea is that the balance goes down consistently and frequently and it’ll be little by little, but once I add the rents to it, then it’s going down by 1500, 1800, $2,000 a month. And so when I did the math, it works out. Really the question was do I get another HELOC? Do I, or excuse me, refinance my construction HELOC or do I refinance the entire thing into a seven and a half percent mortgage? This was a decision that I was trying to make a month ago because I only had my original construction HELOC was for only 100,000, 105,000, but it was $150,000 project so I had to float a lot of the expenses on credit cards. So I was trying to refinance all of that. And so the decision was trying to figure out, refinance the HELOC into another HELOC or just do the whole thing as a cashout ReFi kind of a thing.

Scott:
Did you use the HELOC to finance construction or have you used the HELOC at any point so far to pay down the mortgage early?

Josh:
Haven’t done that. Haven’t done that because I’ve had construction costs to repay.

Scott:
Okay, so you have not used the HELOC to pay down your fixed rate 30 year mortgage of three-

Josh:
No, no, no, no.

Scott:
Okay.

Josh:
The fixed rate 30 would be paying down 3.3% versus the 7% HELOC. I figure every dollar that I put towards the HELOC earns seven and a quarter.

Mindy:
Okay. So if I was in your specific situation I would not cash out ReFi because you have the 3.3 whatever on your 30 year fixed mortgage. I would leave that alone. That’s $227,000 at 3%. You’re not going to get a 3% mortgage again. So don’t touch that. If I were you, I would not touch that. The HELOC is what, seven and a quarter right now that is going to go up and I would make it a point to pay that down as much as possible. I don’t know about putting my W-2 and rental income into the HELOC and then pulling expenses out. That seems like an awful lot of extra work. I would just spend my money, my W-2 and my rental income on my expenses and everything left over the HELOC as fast as possible. I think that it is creating a lot of extra mental head space.
To be fair, I’m not a fan of velocity banking and I’m not sure that you’re using velocity banking in the way that it is taught, in quotes, taught online where it is specifically for taking out a HELOC, throwing giant chunks at your mortgage and then putting your W-2 back into the HELOC and pulling little bits out for spending. So you’re doing part of it, but you’re not using it to pay off your mortgage. And again, I wouldn’t recommend paying off your mortgage right now simply because you have such a low rate that will probably never come around again.

Scott:
Yeah, when I first saw this I thought you were using velocity banking and I thought we were going to have a long discussion on it. You’re not using velocity banking. Velocity banking is when you use your HELOC to prepay your mortgage earlier. And if you time it correctly, you may be able to save a few thousand dollars in mortgage interest over a long period of time because of the timing of the cash flows and the way that you’re using, the way you can strategically use the HELOC. In my opinion, that is also, that is a very unintelligent move because while you can save a few thousand dollars in interest payments using that, you destroy optionality of your great 30 year fixed rate Fannie Mae insured mortgage with that.
You would never use your HELOC at seven and a quarter to pay off your home mortgage. Perfect. You’re not using velocity banking and you’re using the term incorrectly. Go ahead and keep using that if you want to. Then you and I will have slightly differing opinions on that, but that was my big, you got to stop doing that right away if you’re using the HELOC to pay off your mortgage with velocity banking. It may have been a interesting complex kind of bad trick previously. Now it’s a really bad trick because they swap your mortgage rate for a HELOC.

Josh:
Yep, yep, I hear that. I hear that.

Mindy:
Yep. So should you get a cash out ReFi? No. What I would like to address is the Home Depot 0% card that ends in January and the Lowes 0% card that ends in July. I’ve done these promotions, I’m assuming it was the promotional period where you spend X number of dollars and then there’s no interest as long as you’re making your minimum payments for 6, 12, 24 months. And I’ve done those. If you pay off the entire amount before the end of the promotional period, you will pay 0% interest for the whole thing. If you don’t pay off the entire amount before the promotional period ends, you will owe interest on the entire amount from the very first day you made the payment or made the purchase for the entire time that it takes you to pay off all of the amount. So the way that these promotions work best is if you can pay it off in time.
If you can’t pay it off in time, you’re it, there’s no promotion at all. It’s not like you get a discount or you don’t pay interest on the time for six months when you have it. I’m really flubbing over my words here, but what I want to say is make sure you pay off that Home Depot card before the due date in January simply because, and even if you have to take money out of the HELOC, which I don’t love, but that’s at 7% for however long it takes to you to pay off, what was that, $4,500 and then pay that off as fast as possible. But you’ll be paying much more for the last six months or 24 months or whatever for the entire amount if you don’t pay it off in January. And then the same with the Lowe’s card. I would do both of those and I would make that my top priority to pay off because I like paying 0% interest when I can or 7.25 on the two months that you have to pay because you’ve borrowed from your HELOC.

Scott:
In terms of the way you’re managing your overall cash, you got $20,000 in cash in various buckets and you’ve got a bunch of different debt including the HELOC, you’re almost done with the student loans. What were the interest rate on the student loans again?

Josh:
Four and a half or 5%.

Scott:
And why are you paying off those ahead of the HELOC?

Josh:
I’m really not. They’re just in deferral status right now so they’re not accruing any interest.

Scott:
But didn’t you say you just got a bonus and you paid off the student loans with them?

Josh:
Oh yeah, it was an earmarked bonus. Right. So it was for student loans, it was a student loan forgiveness bonus of sorts.

Scott:
Great. So that makes sense then. Okay, so these are all fundamentals that you’re comfortable with and familiar with. So you’re not having an issue with those types of decisions. Your cash flow management strategies confuse me at first, but makes perfect sense. This HELOC is ruling your life. You are using that to fund your personal expenses and every dollar of income is going into the HELOC and you are, and it is bouncing around but hopefully tending to go down or should start tending to go down once the trim and carpentry work is completed at your house. Is that right?

Josh:
Yeah. Yeah.

Scott:
That’s fine. I don’t think you have a better option than that HELOC in the near term and so I wouldn’t necessarily change what you’re doing there. Is there a reason why you have all the cash into all these different buckets versus just saying, I’m going to have a $5,000 balance or a $2,000 balance, put all the rest into the HELOC, save my seven and half percent on annual basis on that and then continue to use that as my revolver?

Josh:
Yeah, you know that’s a really good question. I’ve thought about that as well myself because all of that cash has an implied loss of seven and a quarter by not being used. And so I’ve thought about that a lot. Keeping those accounts as they are, if anything is just psychological to just know that I have those buckets, but I mean it would be really easy to just throw a big chunk at the HELOC as well so that’s a good point.

Mindy:
Rather than throwing it at the HELOC, I would take the, out of the $21,000 in cash, I would take some and throw it at the Home Depot card.

Josh:
Oh yeah, of course.

Mindy:
Before January. So we’ve got another month and then before January pay that one off. And then with the Lowe’s card, again, make the minimum payments until you said July, pay that one off in July. But then yes, any additional cash that you have, I would throw at the HELOC.

Josh:
And I’m essentially trying to use the HELOC as a checking account. It is, funds are kind of flowing in and out of that. At least that’s the concept, it’s a new setup. So I haven’t actually tested it over months and months and months. So check my thinking too if that’s a good setup or if that’s a little bit of a sketchy setup. I’m trying to flow as many dollars to that seven and a quarter percent as possible and so.

Scott:
I don’t think you have another option that’s economical here. So I need to double check on this. Make sure that you do actually have access to that liquidity because it would be a real struggle if you ran out of liquidity. But if you can, if you have kind of pretty high assurance that you’re going to be able to access that HELOC, then consider winding down that cash position to something smaller, putting it all towards the HELOC and then to Mindy’s point, bumping up the HELOC to pay off the credit cards as they start coming, bumping into that higher interest rate range with that. And then once that’s set up, your game becomes extremely simple and a little tough, but nothing you probably can’t handle. You’re going to be grinding out paying this thing, paying this HELOC down for the next two or three years. And I think you knew that coming into the call.
But that’s the reality of your situation. You got to get that place rented, you got to bust it on these side hustles and keep working real hard at your day job. And you have the potential it looks like on paper here to accumulate somewhere in the ballpark of 30, 40, 50 grand a year with that hustle after tax. 10 of that is going to go to interest on your HELOC over the next year. That’s brutal. And then I always think of the HELOC as a short term so five year debt. So if you have $60,000 in a HELOC, 60 months is five years, that’s a thousand dollars a month. So you have $2,000 a month on top of that you want to pay in order to stay on top of that.
That would be the rule of thumb. And I’d be, I’d say I, Josh am going to feel very uncomfortable about my position if I am not paying down that HELOC by $2,000 a month handily each month next year. Something’s got to change and I got to start using my free time to pay that down because your position is not bad. It’s just you’re into a pretty, you’re into like a grind mode for a year or two here with what you’ve done. And it’s not like you made it, the house hack bet sounds like it was a reasonable bet, it just went way over budget resulting in this big HELOC.

Josh:
Absolutely. I totally over leveraged because of the reconstruction on the house hack right, over leveraged relative to my own income. I need rents to really drive down the balance of the HELOC. That’s really what it comes down to. So yeah, I agree.

Scott:
Now on the flip side of this, do you believe me that, that’s realistic? You could pay 30, 40, 50 this a year starting next year?

Josh:
Oh yes. Yeah, absolutely. I did a whole breakdown of what the cost would be to refinance into another traditional 30 year versus doing the HELOC path and yeah, I totally see that.

Scott:
Yeah, I, interesting. I don’t like the refinance option for you. I would’ve liked it-

Josh:
I don’t, I didn’t either.

Scott:
If we’re talking this time last year I would’ve said definitely do that because then you would’ve refinanced the whole loan into that. But now, you’re not going to get that on the second position mortgage, so you’re going to lose your three and a quarter on your first position mortgage. So that leaves you with the grind solution, which is no fun. But I think it’s something you can handle in this situation and you’re going to come out smiling on the other side of this in two years with mostly pay down HELOC, wonderful mortgage rate, not paying very, very low living expenses and likely a big skill set with which to take on a future project from where you don’t move six walls.

Josh:
Yeah, that’s a good point you make. I mean at what point that this is getting into real estate is something that I want to pursue more and pull more rental properties into the portfolio. What would some indicators be that you would recommend I wait for or look for to go after the next property? At what point would it be too aggressive or at what point would it be just right based on my situation now looking forward?

Scott:
Here’s how I think about it. This property needs to be putting in cash in your pocket on a standalone basis as a true rental if you’re not living in there and here’s how you analyze that. You have to analyze it harshly here. Your mortgage is 1400. Your HELOC is producing $10,000, that’s called $800 a month in interest. And if you believe what I said, you got to pay a little over $2,000 a month in principal reduction on the HELOC because it’s short term financing. That’s a subjective call. I believe that’s how you should treat the HELOC. So if you put those numbers together, that’s 1400 plus 800 is 22, plus 2000 is $4,200 a month, that’s before utilities and all the other kind of stuff. So those numbers look dramatically better if you’re getting 3000, $3,500 a month in rents and you’re not living in there and you just have that mortgage, right. Now, you’ve got a great rental property with this.
The issue with this property is the rehab budget and the HELOC expense that came with it, not the fundamental of the investment. And so what you have to do, what I think you do is okay, if you’re sitting in that position now you’ve got $3,000 a month coming in, you’ve got a $1,400 HELOC and you are easily cash flowing, this property is a standalone investment at the end state unless rents collapse in your area, which is probably unlikely. So that’s a strong position from which to attack the next investment. Is that logic make sense to you? Do you agree with that?

Josh:
Yep, I hear that. And because I’m ambitious and I like to look at the market and I like to think about the next steps, the next plays, the only way I could start this deal was with leverage and to get myself in with leverage. And the only way to do the next deal I see is by doing seller financing and just trying to get someone to, I would need to do a bigger deal than just a single family, but to get additional cash flow to then throw at the HELOC. But even then I would be taking on additional landlord and other responsibilities and so I hear you, I hear you that the plan is aggressive pay down, finding cash as much as possible to drive that HELOC down and then it’s a strong rental after that.

Scott:
And I think if you’re going to take risks, take them on the income side in the next couple, you’ve got the side hustle that sounds pretty strong here. You’ve got job opportunities you can pursue, you’ve got those types of things. Get your agent license, think about things like that, that you can churn and burn hours for income on in the next two years at a higher and higher rate because in my opinion, buying another rental property in this situation, it can work if things go up, but it can also begin compounding against you and your position is not, your position is not one where, oh the next property either accelerates my position or it really will put you in a tough spot if the next property does not go well right now. Versus if you didn’t have a HELOC then I’d be telling you buy another property right now because you’ve lived in the property for a year, it’s time to go to the next house hack, go do the deal.

Josh:
Yeah. But the rehab took a year and now because of the leverage on that, it’s going to take 2, 3, 4 to get out of the debt of it. I hear you.

Mindy:
I agree with most of what you’re saying. I was looking at his situation and wondering what sort of side hustle additional money you could generate. How much does your current side hustle take to generate that $20,000 a year with the hockey and the CrossFit coaching?

Josh:
Yeah, good question. The CrossFit coaching is nice because I go anyway to work out myself, so what’s another hour of being there to coach when I was going to be there anyway. And then hockey coaching is mornings once or twice a week and weekends every, weekends every week I go through their video and I give them practice plans and I talk with them on FaceTime. They’re not in the city. The other team that I coach is in South Dakota, so I coach them remotely and I travel out there once every month or six weeks or so. So it’s pretty easy to scale because I can, as far as private lessons go and coaching goes on the hockey side I can kind of scale that up during the season if I need to and do more lessons in the morning and stuff like that. So that’s relatively easy to scale during the year.

Mindy:
I would say look into that and scale that if it’s relatively easy. I mean if you’re remotely coaching a team in South Dakota, remotely coach a team in North Dakota, remotely coach, there’s 48 other states you can remotely, 49 other states you could remotely coach a team in and I mean that might start to take up too much time, but if you could generate income while watching videos of hockey stuff, clearly I’m not a hockey coach remote, but there’s easy ways to generate more income and there’s really difficult ways to generate more income and I don’t think that signing up to be a Lyft driver is going to be the best use of your time.
But we talked, I can’t remember who we talked to, he was a remote, I want to say remote tennis coach making quite a bit of money just watching people’s or maybe swimming. I don’t remember what he was doing, but he was watching people’s technique and coaching them on that completely remotely. And you can do that as well. Clearly you already are. So add another team or two or three or add another couple of CrossFit days or you’re doing it in the morning, do it after work too or teach a CrossFit class. Is that what you’re doing or are you doing individual coaching?

Josh:
Yeah, it’s with the group sessions. I don’t do any individual coaching for CrossFit, just for hockey.

Mindy:
Ooh, maybe you could. Start your own CrossFit videos where you’ve got a YouTube channel and you’re teaching CrossFit videos and then you are growing that. Do one for, January’s coming up and that is a huge New Year’s resolution is to get in shape. So you start your video business now, you start pumping out videos. Are there workout videos for people who are just starting to get off the couch? I mean focus on people like that. Everybody’s heard about CrossFit, here’s how you do it from a beginner standpoint. I don’t know, I’m not a CrossFitter clearly.

Scott:
I think that all this is correct that now, this is all true. The answer here is earn more income, keep the expenses low, get the rooms filled and grind this debt down over the next two years. Give yourself a two year target, 18 months if you can. And then it’s a hundred dollars a week at a time. A hundred dollars a week is 10 grand over the, five grand, sorry, excuse me, over the course of a year. So if you can get the 500 extra, that’s 25 grand. Surely you can do that with some combination of just the two side hustles we talked about and over time, if you keep this front and center, maybe additional opportunities emerge to that extent so this is not fun. I can give you a path out of this whole situation if you want to hear that as well. So you don’t have to do that for the next year and a half, would you like to hear that one?

Josh:
A path. Yeah, sure. Hit me.

Scott:
Sell the property.

Mindy:
I knew he was going to say that.

Josh:
I’ve… Yeah. Okay, tell me more. I’ve thought of it. I’ve thought of that too, but not in a lot of depth.

Scott:
What’s the property worth?

Josh:
490.

Scott:
And your total debt is as far as I can see, 362.

Josh:
380. Because of the personal family loan too. So yeah, 380, 382.

Scott:
It’ll cost you 7% to sell the property. So what are we looking at? That’s 7%, 35 grand. Sell the property that leaves you with 180 to cover all of the, 80 grand leftover after you pay all the expenses associated with this thing, right?

Josh:
Yeah.

Scott:
Then you have 80 grand, you can pay off the mortgage, the HELOC, your two credit cards that you have there and your student loans. Start fresh with a pile of 50 grand, not have to grind for two years to pay off this HELOC and you can start with anew with a new house hack potentially, you’d have to get creative, you’ll be trading the low mortgage rate for something else, but that would be a path out of this situation. I don’t know what would put you in a better situation in two years, but you’d definitely be more flexible in January if you decided to sell the property today. So there is a path out immediately if you’re actually sure on that property value. Property values are declining in many markets right now, and so I think that would be a conviction test for you on that property value. What’s your reaction to that?

Josh:
Yeah, that’s an interesting thought. I had considered that as well in the summertime when I was realizing just how high the construction costs were going and trying to figure out what that break even had to be and get nervous about if the appraisal was going to hit it, the appraisal hit it, yes. But I listened to the BiggerPockets, I think it was the daily, whichever one’s the little short clips, I think it’s the daily one. They were talking about how rents are not, they’ve peaked, they’re not crashing, but they’re just mellowing out except in four cities and two of those cities are Minneapolis and St. Paul.
And so how much do I want to push that letter? I don’t know. Part of this whole thing was just about exploring and figuring out what I could learn and see if rehabbing and flipping a house was something that was for me and figuring out if being a landlord was something for me. We’ve learned a lot on the rehab and flipping side, but I still don’t know about the house hacking side and being a landlord and renting. So I hear that as an option. I absolutely hear that. I also, I don’t know if I need to be flexible in January, so it’s a good point that you make that I could be more flexible. I don’t know if I need to be.

Scott:
I think that’s right, but I think your choices here are sell it or grind. And I don’t think either’s a bad decision. We talked to another individual similar in many ways to you a few weeks ago, and that individual had like $900,000 in debt across two properties and a ton of consumer debt. And in that case it was clear, we got to sell everything and start over because this is, you’re going to drown in the situation. You aren’t going to drown. You have the ability to side hustle and figure this thing out. You have the ability to get tenants in this place. You can grind your way out of this, no problem, if you choose to, it’s going to be a year or a year and a half, maybe two of hard work and you’re going to be coming out the other side probably in a reasonable position.
Although prices may come down, I would bet rents are not going to fall a lot, but they might fall a little in the next year, yada, yada. Or you could say, I’m going to take this cash, clean up my position and go start another project right now. Both are fine. Just make that a decision, make that a conscious choice and be ready to be happy with it either way you go. I don’t know what the right answer is. You can do both because your fundamentals are going to be strong in about two months here when you get those tenants.

Josh:
Yep, I hear that. Thanks for that, thanks for that idea. And it’s definitely, I hear you about making it a conscious decision instead of just being, hey, this is the plan, this is what I wanted to do, so I’m going to stick with it. But I hear that. I’ll give that some more thought.

Scott:
And you’re not going to come out of it as a loser if you do decide to sell because you’ve got a year of experience and you should, I hope, take on a few more projects like this in the future using the lessons you’ve learned. You’ve been given a very thorough education in this kind of project, so don’t ponder that. Do it a couple more times in future years here.

Josh:
Oh yeah, I’ve learned a lot. It’s been a great journey and a great path through it. I’m definitely glad to be on the better end of exposed walls and new plumbing and to have things put back and looking better so.

Scott:
Well, anything else we can help you with here today, Josh?

Josh:
I don’t think so. We kind of hit all the big topics, big concepts for me. I appreciate both of your time.

Mindy:
I want to make one more comment. So if you are considering selling and you’ve already owned it since October of 2021, now we’re at a year and a month and then that’s two, three months. If you sell it a year and three months if you sell it in January. If you wait another nine months, you could earn some landlording expertise experience in nine months and then sell it and pay no taxes on the capital gains because it is your primary residence, up to $250,000. I believe you’re single.

Josh:
Yes.

Mindy:
Okay. And up to 500,000 if you were to be married. So that is a lot of money to not pay taxes on. It’s also, depending on who you listen to, either the market is going to go nuts next year or it’s going to decline further next year. So maybe it will be better and maybe it will be worse in October of next year. And that two year is to the day. So if you close on October 23rd, don’t close again before October 23rd. And we have a leap year, so give yourself an extra day just in case.

Josh:
I appreciate both of your times and perspectives and this is, it’s fun to hear other ideas and it’s what you guys bring all the time. So I really appreciate you guys and all you do.

Scott:
Awesome. Well thank you Josh. We appreciate it. You have a wonderful rest of your week and we look forward to hearing what you did decide. Please let us know.

Josh:
Yeah. You got it. Thanks.

Mindy:
All right. That was Josh and that was an interesting story. Scott, I have to be honest, when he first applied for the show, I thought we were going to be covering a lot about velocity banking, which is not my favorite way to manage money, but it turns out that he’s just using a HELOC to fund rehab, which I don’t think is our super favorite way to fund rehab. But he did and now we’ve given him a couple of options. I mean, his property sounds great and I think that if he wants to rent it out, I think he’ll be able to generate some good income while he is waiting to either hit the two year mark to pay no capital gains on his, no taxes on his capital gains or sell it now and pay a little bit of capital gains. He’s got a lot of options. He could keep it and generate, start the grind that you were describing.

Scott:
Yeah, Josh is a winning individual here. I really liked talking to Josh and really liked his approach. Now that I can understand it from the end of the episode here, the guy bought a house hack around this time last year, crushed it. Well it went way over his budget, but at the end of the day he added hundreds of thousands of dollars in value to the property, got it appraised at that amount and is on his way to doing a house hack. This is a risk that I think I would’ve taken almost identically to him in the same set of circumstances. It just, it went over budget and the project evolved in a way that got beyond his grasp. Probably would like to stay away from 1870s homes on your first house hack and remodeling project. That’s probably a wise move that folks can learn from, maybe stick to 1950 at the earliest, if not much more recently built.
But those learning things and he now has a really good experience set. The fundamental issue, and I don’t mind him using the HELOC to fund construction costs, the alternative to a HELOC is hard money, and I’ll do that all day. I don’t think there is a better source of construction funds other than cash maybe, although you can argue that’s not good than a HELOC. So I think he did it all right. He’s just now stuck with the reality of this property is going to, if you believe my assessment that a HELOC should be paid back in five years, then that property is going to suck cash out of his life until that HELOC is paid off. And I don’t think you should be buying more property when your current portfolio is sucking cash out of your life. I think you should fix that problem and then buy more property such that each property adds cash into your life.
And if every investor thought that way, I don’t think that they’d be having that much fear of short term market cycles or anything like that because you’re just like, no, every incremental property adds to my net cash flow. I finance it in such a way that, that’s always true. Never using HELOCs without understanding the payback considerations and the short term nature of that debt. And you’re going to be fine to be able to snowball it. And so he’s going to be just fine. I bet you he decides to go and just grind it out for a year or two because he can, because he can hustle and earn that extra income and pay it off.

Mindy:
Yeah, that would be my choice. If I was in his same position, I would first focus on paying off those big box home improvement store credit cards that are at the 0% and making sure that I get the 0% rate, so paying those off before they’re due. And then I agree with what you’re saying, Scott, don’t go buy another property until this one isn’t sucking cash out of your pockets. I would increase my side hustle income, my hockey coaching, and my CrossFit coaching to as many days as I possibly can so that I can generate as much income to throw at that HELOC.
I think that as long, that was a good point that you made to make sure that he does still have access to the money. As long as he has access to the money that could be his emergency fund. He could use that as an emergency fund while he is throwing every single dime he has at that HELOC to bring it down as fast as possible. I would put all the rent that he collects in there. I would put everything in there. And I want to just underline what you said one more time, an 1870s home is not a good first investment.

Scott:
And I agree with everything you said Mindy. While I’m doing that, I’d be extremely uncomfortable about the fact that I’m relying on the HELOC as my emergency fund. So I would not be comfortable or sit or restful or feel like I have a good financial position until that HELOC was largely paid off and I’m not relying on a HELOC as my emergency reserve because that can evaporate with a market downturn. So I’d keep two or $3,000 in cash, but seven and a quarter is high interest rate debt, I’d pay it down. I think that’s right. And I don’t think, I think there’s trade offs involved in not stockpiling cash and not paying it down early.
And as long as his cash flow is strong enough that’s probably going to work for him. So yeah, not a great option. But look, that’s all in the context again of the $80,000 in equity value he created out of 12,000 actionable, that’s after transaction costs, not before taxes. It’s a great point you brought up there. It’s actually a significant tax hit if he sells now. So I wouldn’t be surprised if he does wait until next year.

Mindy:
I would, yeah, I would at least wait the two years if I was going to sell it. But I mean, it could be a really great property if it’s close to the hospital and he can do month to month rentals for travel nurses or other people that are, I’m totally blanking on who uses month to month rentals. If only I had a book like 30-Day Stay Scott. The new book from BiggerPockets Publishing. You can get it wherever books are sold or at biggerpockets.com/store.

Scott:
Awesome. Well that [inaudible 00:55:59] should we get out of here?

Mindy:
Yes. Okay, that wraps up this episode of the BiggerPockets Money podcast. He is Scott Trench and I am Mindy Jensen saying, see you in an hour sunflower.

Jason Snipe, Steve Weiss, Jenny Harrington and Jim Lebenthal join the ‘Halftime Report’ to discuss investment in real estate, the commercial real estate sectors impact on REIT sector and where opportunity lies.