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By now, you’ve heard about how real estate is a great way to build wealth. I don’t disagree with that. However, before getting started, you should also consider the downsides of owning real estate and the opportunity costs. For most real estate investors, it’s better to be a limited partner or take on roles that don’t involve much of the day-to-day operations, which I’ll discuss in more detail.

Here are some of the downsides of owning your own real estate.

Downsides of Owning Real Estate

Being a landlord

As you already know, being a landlord and doing your own property management is very tough. For one, you’re responsible for the property and everything that goes on. This includes finding and screening tenants, maintaining the property, and dealing with any issues that may arise. 

Additionally, you’re also responsible for collecting rent and ensuring that your tenants are paying on time. If they’re consecutively late, you may have to pursue legal action to get the money you’re owed.

Furthermore, being a landlord also means that you’re responsible for any damages that may occur to the property. This can be a financial burden, as you may have to pay for repairs out of your own pocket. 

Being the asset manager

Let’s say you eliminated these responsibilities by hiring a property manager. This seems like a good idea, but it’s tough to find a great property manager (PM), even for a large apartment building (however, you can find one through BiggerPockets here).

Even with a PM, you ultimately still have to be the asset manager, which has multiple functionalities, including managing the PM and making sure that they’re doing their job.

Here are some responsibilities as an asset manager:

• Making sure that the property remains in good condition.
• Controlling your operating expenses.
• Making sure the rooms are rented at market rate. This sounds simple, but it’s much easier for your PM to rent out the units at 5-10% below market rate, so that’s what they’ll usually do.
• Making sure your PM is not stealing your money, which can happen through leases or by marking up maintenance requests.
• Monitoring the pro forma, including rent growth, vacancy rate, concessions, etc.
• Preparing the asset for sale.
• Dealing with loans and accounting.
• Be prepared to take over PM responsibilities at any moment.

Basically, even if you hire a property manager, your investment is still not considered passive income. There are still many tasks to take care of and plenty of issues to deal with, so don’t assume that your real estate investments will be passive income and you can do it on the side. Some can actually become huge headaches. 

Starting small

Another common misconception that beginning real estate investors have is that “it’s better to start small.” The risks are actually higher when owning smaller properties because having a few bad tenants can really hurt your business. Whereas in a 100-unit apartment complex, two or three bad tenants are only a small portion of the overall building.

Additionally, bigger projects can afford you to hire full-time staff, which will make your job much easier. 

House hacking

House hacking is a popular strategy nowadays. Buying a duplex or triplex and renting out the other units to get a healthy cash flow, refinance this property, then repeat, is a great way to build financial wealth step by step, but there are some major downfalls.

The first downfall is that this will only work in a secondary or tertiary market. It’s almost impossible to cash flow well in a gateway market like New York, Los Angeles, or Seattle. If your rental revenue can cover the debt service, you’re doing well already.

The second downfall is your living quality is limited. Depending on the circumstances, you might be living with strangers inside your own unit, which can be bad if they turn out to be terrible roommates. Obviously, if your screening methods aren’t sound, you could be stuck in a bad situation for a long time.

Smarter Ways To Build Wealth

Although what I’ve been saying seems discouraging, I’m not proclaiming that owning your own property is entirely a terrible idea.

What I want to emphasize is the opportunity cost of your money and time. We all have limited time on this Earth, so let’s think about how we can utilize it to our advantage. Here are some tips on how you can invest smarter.

Investing in a syndication

A good operator can make great profits consistently. I’ve seen portfolios with over 30% historical IRR on average. With this type of return, you can basically double your equity every three years.

It’s very important that you do enough upfront work to understand the operator’s strategy. There are many things to consider when choosing an operator, so here’s an article on this topic.

As a limited partner, there isn’t really anything that you need to do besides waiting for payday. Some operators focus on cash flow, while others focus on doubling your money as quickly as possible. The latter is generally riskier. There aren’t many investments that can beat the returns of a good real estate syndication. Why bother spending hours every week on your own deal when you could achieve better results by spending a few hours a year?

Being a general partner

If you want to be part of a syndication as a general partner but don’t want to deal with the day-to-day operations, such as asset management, construction management, sourcing deals, etc., then here are a few responsibilities that you can take on.

Loan Guarantor – If the syndication requires a recourse loan, then a loan guarantor is needed. The guarantor needs to have enough assets and liquidity. 

Capital Raising – This might be the perfect role for you if you have a strong network. It varies from case to case, but usually, you have to raise at least 30% of the required capital.

Diversification

Even among real estate syndications, there are many ways to diversify your portfolio. In terms of property type, you might want to invest in more than one type of property. For example, COVID-19 halted the hospitality industry but boosted the demand for industrial properties, so don’t put all your eggs in the same basket.

You can still diversify even when investing in the same property type. Multifamily, for example, varies significantly from market to market. An important attribute of a market is its location quotient, which is an indicator of the professional specialization in the area. For example, San Francisco has a very high location quotient in technology, so when many people in technology are suddenly allowed to work from anywhere, the multifamily industry in San Francisco collapsed. Even today, the market is still recovering from the pandemic. On the other hand, the multifamily markets in Austin, Phoenix, and New York have been doing extremely well.

What’s Your Passion?

The majority of real estate investors are here to gain financial freedom. Most people aren’t waking up every day excited about going to The Home Depot and doing another house flip. This is why we should think about what exactly we’re giving up by getting into real estate. Would you rather spend all your hours doing real estate? Or would you rather find a profession that you’re truly passionate about? Excel in your passion, make enough money to invest in real estate passively and build wealth.

I’m personally very passionate about real estate and obsessed with how co-living can bring people together and revolutionize the multifamily industry. I believe in building communities where everyone can feel like they belong, which is why I’m an active developer and don’t want to be on the sidelines.

I hope you’re also passionate about real estate in your own way, so I want to hear about what brought you to real estate. Please comment below.

Run Your Numbers Like a Pro!

Deal analysis is one of the first and most critical steps of real estate investing. Maximize your confidence in each deal with this first-ever ultimate guide to deal analysis. Real Estate by the Numbers makes real estate math easy, and makes real estate success inevitable.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.

Doug Bauer, CEO at Tri Pointe Homes, joins ‘Squawk on the Street’ to discuss sluggish demand in housing, housing as a recession indicator and adjusting price to payment as costs come down.

David:
This is the BiggerPockets Podcast show 684.

Parker:
The goal is to eventually use our business and then any other source of income that we can to invest in real estate. I’d like to get one to two properties each year for the next five years. Then, long-term goal is eventually to have a portfolio that pays for our lifestyle that we can go full time into.

David:
What’s going on everyone? This is David Greene, your host of the BiggerPockets Real Estate Podcast here today with a Seeing Greene episode. If you haven’t seen one of these before or heard them, this is a show where we take questions from listeners just like you that want to know what they can do to be a better investor, improve their wealth, overcome obstacles, fears, concerns, questions, ignorance, whatever it may be. They bring the question, I bring the answers. You get to listen and you get to learn. We call it Seeing Greene because in these episodes, I’m explaining what I think they should do based on my perspective, and my last name is Greene and we’ve got this green light behind us. You know that’s what you’re getting into. Today’s show is a lot of fun. We talk about overcoming interest rate ego. If you’ve ever had that tendency to want to brag about the rate you got, that might be costing you more money than you realize, and we talk about that with one of our callers.
We deal with how to deal with the fear of good debt. Fear is real. It is a part of all of our investing journey. Debt can be scary and I tackle how to overcome that as well as different ways that you can look at debt to change your interaction with it and a different way to look at money. Our relationship with money will have a big impact on the success that we have with it or the lack of success that we have with it. Money is not just a thing, it is a concept, and your relationship with that concept is very important. Several times throughout today’s episode, I challenge conventional thinking and ask you guys to wake up, get out of the matrix and see money for what it really is. We also have a great conversation with a guest who has huge goals and we talk about what can be done to help them achieve it.
All that and more on today’s Seeing Greene episode. Before we start the show, today’s quick tip is we’re approaching the end of the year and I want to help everyone get clarity, focus, and attention. I ask, “What can you do to set yourself up for the new year? Do you have goals? Are you planning them? Do you have actionable steps you can take that are the keys to success as they build on each other?” We will commit to helping you in these areas to see the results you want and change your life trajectory if you commit to doing the work and taking the action to get there. Don’t wait until next year before you start planning for it. Start planning right now. Tell me what you want that year to look like in the comments below and what you’re going to do to make sure that happens. All right. We’re going to start today’s episode with a live call with someone who has questions and I’m going to dig into their scenario and see what I can do to help them. Let’s get into it. Mr. Parker?

Parker:
Yes, sir.

David:
Welcome to Seeing Greene. My man, how are you today?

Parker:
I am doing great, man. I’m excited to be here.

David:
We got a lot of green going on. I’m David Greene. I got a green shirt. We got a green light and we are going to dig into what we can do to making you more green. Tell me what’s your first question here?

Parker:
My wife and I got into real estate the beginning of 2022. We wanted to kind of change our lives and change our situation. We set a goal to get involved in real estate beginning of 2022, and then we found our first property and closed on that in May. That’s what we’re living in right now. We’re house hacking that. It’s actually a single family. We’re living in one bedroom and we’re renting out the other two bedrooms. It’s a play on house hack. It’s not a duplex, but…

David:
No. That’s a house hack. Just a variation.

Parker:
Yeah. Yeah. It’s working out. We’ve enjoyed the process. I guess my question is we’re looking at property number two, but we recently became self-employed after we got our first property.

David:
I’m hearing discouragement in your voice. Are you feeling discouraged?

Parker:
Yes.

David:
Okay. All right. Continue.

Parker:
Yes. I’ll get to that. I really underestimated the difficulty of financing compared from a W2 to being self-employed. I’d like to try Airbnb. I’m actually right now working on going under contract on one that I found. I have found private financing, I think. Private lending for the property. The 20% down payment though is where I get stuck and I’m wondering what strategies people have used or what tips people have used to be able to maybe possibly finance the down payment as well because it’s 20% from what I’m hearing pretty much around the board.

David:
All right. Let’s start with a few things here. Then, I’m going to throw it back to you with some more questions. First off, if you’re going to buy an investment property, it’s almost always going to be minimum of 20%. Now, the one brokerage did have some options of 15% down and those do come back sometimes depending on the appetite for lenders. In general, when there’s a lot of confidence in the economy, we get lenders to give us more favorable loan terms because they want to put their money out into play. They’ll give us 15% down. They’ll give you better interest rates. You’ll get fixed rates instead of adjustable. When there’s nervousness about the economy, lenders pull back and then the lending programs that we offer are worse. You should always assume 20%. A lot of it is 25% and sometimes even 30% because obviously, there’s fear about the economy.
Now, that is good for buying homes. There’s going to be less competition, but the terms you’re going to get are bad. The first lesson I want you to learn here is that you never get at all. There’s a give and a take. Okay? When the defense is giving you an opportunity to run, it’s very hard to pass. You’re not going to get both. You got to take what the market is giving you. The next piece I’m going to say has to do with your concerns with financing because you’re not working a W2 job. You’re self-employed. Right?

Parker:
Yeah.

David:
You probably weren’t anticipating how hard it would be to get financing when you’re self-employed. The reason is the lenders say, “Well, if you don’t have a W2 job, we’re not very confident that you’re going to continue to get paid. We’re not confident you’re going to continue to make your payment to us.” That’s where you’re running into that problem. What motivated you to leave the W2 and to get into the self-employed space?

Parker:
Really, really, really long story short, this same year that we decided to get into real estate investing, I also wanted to become a realtor, so I became a full-time realtor. The company that we were working for, my wife and I actually had the opportunity to work together for the same company. When I stepped away, another really, really important individual stepped away as well and the company actually closed up shop. They actually laid my wife off when that happened, and so we decided to then just open up a business doing the same thing we were doing. It’s dog training, so we’re dog trainers. When I left to become full-time into real estate, we were predicting that she would stay, have our W2 and we could get financed that way. When they laid her off, we opened up our own.

David:
Okay. You had the initial plan correct. One of us keep a W2, one of us venture out. You got one foot in security. You got one foot in adventure. That’s ideal. Then, the security foot fell out so your wife jumped in with you and now you guys are doing this thing together. Okay. First question before we get into real estate, we’re going to talk business. Does your wife’s presence in the company at least double the productivity of said company?

Parker:
100, yes.

David:
Okay. If you took either of you out of it, would there be less than a 50% reduction?

Parker:
No.

David:
Okay. Each of you are so valuable to this company that you both need to be in that position?

Parker:
Mm-hmm.

David:
That’s objectively speaking. There isn’t a level of comfort or fun that you like working together and that’s making your business decision here?

Parker:
Objectively speaking, I could leave. She would be swamped.

David:
Now, if you left and she became swamped and you hired an admin or a virtual assistant or somebody to help, could that business still run?

Parker:
Yes, I think so.

David:
Okay. Is this stuff she’d be swamped by revenue producing activity that she’d be losing leads of people that say, “I want you to train my dog?” Or would it be administrative stuff like making sure dog food is ordered and making sure the kennels are cleaned and… I don’t understand your business, so I’m just saying the stuff that could be leveraged out.

Parker:
She’s very much income producing activities. Yeah. That’s what…

David:
Okay. Who’s handling the majority of the operational stuff, like making sure that you can run the business but not necessarily generating revenue?

Parker:
I guess that’s what I’m doing. I’ll help train and then I’ll also help a lot at the accounting and the numbers and the administrative part of it backend.

David:
Can you do that and have another job?

Parker:
Oh, I think so.

David:
My guess would be you’re a smart dude. You got your license in real estate. You’ve taken action to buy a house. You had a W2 job. You jumped into starting this business. You recognize your wife is better at training and sales and you are better at operations. Those type of people are good at being efficient, meaning you get stuff done faster than the average person who’s doing your same type of work would and I’m that way. I’m very efficient. You give me a job to do. I find a way to get it done better and faster than other people because I just enjoy that. Right? You take your average W2 worker and you give them a job and they’re like, “Okay. How do I stretch this into my eight-hour day?” You give it to me and I’m like, “How do I get the whole thing done in two hours, so I have six hours to help other people at their work or do something else?”
If you’re that way, which it sounds like you are, there’s nothing that would say you can’t do both. Now, you might have to be picky about the type of W2 job you get. Okay? You can’t be driving a truck and doing accounting at the same time, but you could be working at a place where you’re not getting a ton of exposure to customers where your job is to keep the books for somebody else. I’m just making something up, so don’t take any of this direct, but something that you like doing that you could do quickly that will give you time to then also work on this stuff in the business. A lot of the stuff in the dog business can probably be done at night. Right? You don’t want to work 20 hours a day, but there’s certain tasks that have to be done the minute they come in.
There’s other tasks like bookkeeping’s a great one that can be done anytime, right? In my business, if I got to talk to a client, if I got to interview somebody, that has to be done at a certain time of the day. But if I’m writing a book, that’s flexible. I can work that around anything I’m doing. I use that to fill in the gaps. I bet you could approach your situation the same way because somebody needs to be the hero in the situation, Parker. I think it’s you. You need to be able to step up and get that W2 job, which will not only allow you to get loans again, you’re going to make more money. I don’t think your revenue’s going to drop from your business of training dogs and you’re going to start bringing in more revenue from a W2. I always look for the synergy. Okay? What one action can I take that gives me benefits in several ways?
That’s how I came up with this solution. It gets you into buying real estate again, which will make you money. It gets you into making more money for the household, which will make you money. It gives you the opportunity to get the down payments saved up quicker. Right? Everything that you’re trying to accomplish… This is a principle, The ONE Thing. If you’ve ever read that book, what one action could I take that would make everything else easier or unnecessary? If you find the right W2 job, I think that there’s a pretty big opportunity for you there. It’s got to be the right one. You don’t want to just jump into the first opportunity you get. You want to have it being paying well in an industry that has flexibility with you being left alone in a cubicle or something where you’re not being micromanaged and uses your skill set. I think that that’s a big win for you. Now, do you have any questions there before we move on to the actual real estate part of your question?

Parker:
No, but I had not thought about that at all. There’s a lot of thinking I have to do on that because when we moved… Yeah, I could elaborate but for the sake of time, no. No more questions on that.

David:
I irritate people with this type of thinking. If you’re my partner, like my partner Christian and the one brokerage has to deal with this, Kyle Rankie with the David Greene team, I am frequently frustrating them because most humans look at a perspective of like this or that. It’s a binary. I can have a W2 or I can be a full-time investor or I can be a full-time entrepreneur. We hire the person for this reason or that and I will frequently look at it and say, “There is not 40 hours of work for this person to do this thing, but we still need it done.” Right? If we hire them to do this thing, they also have to be able to fill their time in doing other things. Do we have stuff for them to do? You see their brain just go on the fritz like, “Poof. What?” But that’s not their job.
We got to think differently. Their job is to work for the company and help the team win. If that means that you’re our offensive lineman, but you’re also on special teams or you also mentor the younger players, we got to get some value out of these people, so we can pay them what we want. I want to encourage everyone to think that way because this is how entrepreneurs think. This is how problem solvers think. You’re a freaking problem solver, Parker. I could tell right off the bat and I would bet you when we get into your real estate question that that binary kind of thinking, that screwed you up and discouraged you and I’m going to give you some solutions here to break out of that. You’re going to feel better. All right?

Parker:
Okay.

David:
The first thing I wrote down is you bought a house hack with three bedrooms. All right? Before I’ve asked you any other question, do you know what the first thing that went through my mind was when I heard that? It’s okay if you don’t. I’m just curious.

Parker:
No. No. I could guess, but I’ll say no.

David:
Yes. No. Take your guess.

Parker:
Well, why only three bedrooms?

David:
Yes, you’re right. You got it. That’s right off the bat. If you’re going to do rent by the room, then the value is in the rooms.

Parker:
Yeah.

David:
Okay? If you didn’t do it in rent by the room, either you didn’t know or weren’t smart enough to tell that’s the right way to go, which I don’t think is true because you’re intelligent, which means you made the decision based on emotion, meaning maybe your wife or you like this house or like this area or it had the yard that would work for the dog training or something about it that you liked other than the specific business purpose of making money. Am I right so far?

Parker:
Yeah. Yeah.

David:
Okay. I know this is true because when I asked you earlier, is there a way that one of you could leave the company? You’re like, “Absolutely not.” Then, I asked, “Was that objectively true or is that emotional?” You’re like, “No.” Okay. I suppose that I could leave. Right? Emotions factor into your decisions and that does not mean you’re weak. That does not mean you’re bad. It just means you’re being honest. That’s why I asked the question. I’m not shaming you for saying you made an emotional decision, but you are doomed to end up in that state of discouragement where you started if you can’t recognize an emotions weighed into my decision. Like I told you, I frustrate the people that work with me, Kyle, Christian, other people. It’s because I am frequently asking them to do things that are in the best interest of the company that push against emotional comfort.
I’m asking them to become uncomfortable, to look at things a different way, to make a sacrifice they don’t want to make and they don’t like that and our brain will fight us and they’re like, “Nope, I see where he’s going. I don’t want to give up this comfort thing.” Then, we start lying to ourselves and it’s not my bad if you start lying to yourself, it’s your bad if you’re doing that. Right? I just want it to get out of the open, so you realize it’s happening. Because the minute you’re honest about that, solutions will start to make themselves known. Sorry for my coughing, I got sick after BPCON from shaking 2,000 hands or whatever it was when we were there. Now, let’s move into your state of discouragement. That is very expensive. That’s a trait that we have as human beings that will hurt if you get discouraged. If you’d have bought a five-bedroom house instead of a three-bedroom house and you were making more money, you’d probably be a lot more excited about house hacking. Is that fair?

Parker:
Yeah. That’s fair.

David:
Outside of how many bedrooms you got, is there anything else about that deal that you think you screwed up on?

Parker:
It’s a little old. It was built in 1990. Depending on who you ask, it is a little older. There’s some pretty big CapEx expenditures that I’m anticipating in the next, however, so many years like the roof and the HVAC.

David:
That’s normal. Every house you buy is going to have that. Don’t beat yourself up about that either. Here’s what probably happened. After you bought this thing, you’re looking back and seeing what you could have done better. Is that fair?

Parker:
Yeah.

David:
Okay. Have you ever taken a DISC profile assessment?

Parker:
I have. Yes.

David:
Are you a high C?

Parker:
No, I’m actually… I think it’s a D.

David:
D. What was your second trait?

Parker:
Oh, I don’t remember what my second one was.

David:
All right. Ds, I’m also a very high D. We tend to value and evaluate ourself based on where we are in the scoreboard. If you’re looking and saying, “I’m not making enough money on this deal, other people did better. I can’t get a loan.” You start feeling like you’re a failure, right?

Parker:
Yeah.

David:
You’re not a failure. On the first deal, you’re supposed to fail. The first time you try to ride a bike, you fall over. The first time you go snowboarding, it’s miserable. Your first anything, you suck. Okay? That’s the first piece I need you to recognize is you did not screw up. You did everything right. You had way too high of expectations for your first deal, which is why we house hack because you could pay three and a half percent down, which is like putting elbow pads on when you’re riding that bike. It cushions the fall because you’re going to fall. Going into your next deal, what are some things you do different if you bought a house next year?

Parker:
I was going to do the same thing if I was going to rent by the room.

David:
You’re going to house hack?

Parker:
Oh, I’m going to house hack.

David:
Well, would you rent by the room?

Parker:
No, probably not. I think I would try to actually find a multi-unit like a real duplex or triplex.

David:
You find a multi-unit, your numbers are probably going to work out better. You’re probably going to have more comfort. It’s probably not going to be as much stress having strangers in your house. Right off the bat, that’s a better investment than the first one you made. Fair?

Parker:
Yeah.

David:
Okay. If you were going to rent by the room, you’d probably look for something with five bedrooms plus a dining room that could be converted, so you get six bedrooms. You’d probably try to find one that has one bedroom separated from all the other ones, so you guys can be there. Maybe you even add a kitchenette into that part of the house, so you and your wife don’t have to share space. There’s things you could do to improve and that should be encouraging to you. You could only get better. You did not screw up. You just didn’t know as much when you got started. We’ve got a couple things you could take away from this. You need to house hack again.
The worst thing you could ever do is just stick with this one house that you’re not super happy with. The next one’s going to be better than the first one, so you got nowhere to go but up. You have an opportunity to go get a W2 job to make this happen. You don’t need 20% down, 25% down. You could do it again with 5% down or three and a half percent down depending which type of loan you use. If you used FHA in your first house, you could refinance an FHA again or my guess is you got a good rate, so keep that rate. Just put 5% down on the next house and get the W2 job. Okay?
Contact us. We could talk about what it would take to get you approved for this thing and the W2 job is also going to provide more money, which could be the difference in one year of work of the 5% you need to put down. All right? Now, you’ve got another house. Maybe you do this for another couple years, just building the dog business and work in the W2. You get more efficient and your systems get better in time. The next thing you know, you got four or five houses. You’ve got a solid foundation. Then, maybe you have enough income coming in. You can quit the W2. You could go back to work for the dog thing and that business now, training dogs has established enough revenue that you can claim that on your taxes to go get a house. You just have to have at least two years of that income. Is that what you’ve been being told?

Parker:
Yeah.

David:
All right. There is a path here to get out of your problem. All you have to do is take what you were hoping would happen in one shot, quit my job, go start this business and just stretch it out over a couple years, stretch it out over a couple properties. Don’t put so much pressure on you to do it all in one move and all of a sudden, you’re going to be in a good spot.

Parker:
Okay. Man, that is very good advice. I have a lot to think about. Thank you so much. Holy cow.

David:
You do and you should be walking out of here very encouraged, dude. There’s nothing about your situation that I think is discouraging at all. This is why I wanted to bring you back on to talk more.

Parker:
Yeah. No. Thank you for saying that. I needed to hear that. Thank you so much.

David:
All right. If you haven’t already done so, please do me a favor and take a minute to like, share and subscribe this video. If you would be so kind, please head over to your favorite podcast listening app and leave us a review there as well. Those help us out a ton and I really appreciate it. Our first YouTube comment comes from Matthew Van Horn. “David, more analogies than Jim Carrey has faces green. Thank you so much for answering my question about better goal setting. I have listened to your response three times and I am so inspired. It’s exactly what I needed to hear and I will put it into action by becoming the quality of person that can handle the reward of pursuing excellence. I love your mindset and appreciate when you zoom out and have these bigger picture sorts of conversations. In my opinion, these conversations are more valuable than any deal deep dive that you might do because I suspect that you are more successful due to your mindset than because of your raw deal finding talent, though you’re amazing at that too. No doubt. I don’t actually know Dave Van Horn, but I should reach out to him because I’ve never actually met a Van Horn that I’m not related to. Plus, he just sounds like an awesome guy. I look forward to reading your future book that you referenced about goal setting.”
Thank you very much, Matthew. That’s some very kind words that you shared there. Dave Van Horn is an amazing guy and I think you’ll love him. In my opinion, I think you’re right. I think mindset has more to do with the success I’ve had than actual raw talent at any one thing. I tend to look at the world from a different lens than other people do. As a result, I’ve been rewarded from that, so I like to share it with you guys here on these Seeing Greene episodes and hope that you can see some of the same success that I’ve been blessed enough to enjoy.
Our next comment comes from Giselle Morales. “David, I’ve been watching your videos for over a year now. I’ve been investing in real estate for the past 15 years, and almost two years ago, I was able to leave my 9:00 to 5:00 and live off my investments while learning more with people like you who share all their experience. Not only have I found you super knowledgeable in real estate, but now I can see your growth as a person wanting and encouraging others to become better human beings. I loved this episode. We are investors looking for wealth and if we add the ingredients to become better people every single day, then we are successful already as we are now. Thanks for all you do. Really appreciate. I’m 100% with you.”
Wow. I appreciate that as well, Giselle. This is a better response than I was expecting to get from that episode. Thank you for that. I really appreciate the support. Next comment comes from Sylvia Barthel, “Excellent show. Would love to see more of these areas David is in, why you pick them, what drove you to these specific properties, et cetera. Thank you for the fantastic show and education.” Well, I am glad to hear that. It sounds like what you’re saying is you’d like to hear more about what I’m seeing when I look at stuff or how I analyze it, and I will make sure that as we go through the rest of today’s show and future shows, that I continue to make sure I share the why behind the what that I’m teaching.”
Our last comment comes from Charles Holder. “I’ve listened to you guys for years at 1.5 to 2x speed. Your last bit of advice was the single greatest thing I’ve heard. Be the greatest person you can be. I’ve ever played it twice on normal speed.” Well, hey, something tells me if we can get Charles to go from 2x speed to normal speed, we’re doing something right. Maybe that needs to become one of the goals that I have in my life in general is how can I get people to go from two time speed to regular speed without just talking too fast to understand it at 2x speed. Thank you for that, Charles. I hope that this helps you with the goals that you’re trying to set and I hope that everybody listening understands wealth and success is not a result of just following a blueprint. It is a result of pursuing excellence.
It’s being the best person you can be, being the best investor you can be, trying to do your best at everything you do. I talk about this a lot because the people that I see struggle with real estate investing have often taken the wrong approach. They don’t like their job. They don’t like their life. They don’t like the results they’re getting in certain areas of their life and so they look at real estate investing like it’s going to be the magic pill that will fix that like, “Well, if I quit working for someone else and I work for myself, everything’s going to get better.” But that’s not necessarily true because if you’re doing poor work for somebody else, you’re going to do poor work for yourself. That is even worse, because you were at least guaranteed a paycheck when you did poor work for someone else. You’re not guaranteed a paycheck when you do poor work for yourself.
Rather than getting frustrated, let the results you get be a form of a mirror that helps you look deeper into yourself and see things about yourself that maybe you weren’t seeing. When we show up to a W2 job and we don’t give our best, we phone it in, we just go through the motions. We’re not trying. It’s easy to be separated from the results of poor effort because your boss is the one paying the price, not you. But when you start working for yourself and you’re not getting results, you end up being the one that pays the price. Remember, you cannot escape the need to pursue excellence, to work hard to give your best, but it’s a whole lot more fun and rewarding to give your best in real estate investing and for yourself than it is for somebody else where you may not have a clear path to a better life.
Thank you guys for those comments. We love and appreciate this engagement. Please continue to like, comment and subscribe to our YouTube channel as well as leave comments on this episode. Did you like the live coaching call that we had with our first caller? Do you like the additional questions that I’m answering? What did you not like? What do you wish I’d gone into more or what do you want to hear more of? Let us know and we’ll do our best to incorporate that into future shows. All right. Our next question comes from Angela Haddorn in Pittsburgh, Pennsylvania.

Angela:
Hey, David. This is Angela from Pittsburgh, Pennsylvania and my question is how to get over the fear of taking on more good debt. I currently have three properties. I have two long-term rentals and one short-term rental in Utah, Tennessee and Texas. That’s right. I do not own a property in Pennsylvania because I’m currently living with my parents trying to get out of that situation. Anyway, I have a lot of equity in all these houses. The minimum amount I have, I think is probably about $40,000 and although I started investing in 2019, I just wish I was further along in my real estate career at this point. I know I have the equity. I’m just a little bit afraid to use it for the fear of potentially putting myself into more debt if I were to refinance or something like that. Any tips or advice would be greatly appreciated.

David:
Hey, Angela. Thank you. We really appreciate your vulnerability in sharing exactly what you’re worried about and it’s super relevant because many people listening have the exact same concerns, fears, struggles holding them back. You stepped up and you shared that. Not many people are going to benefit. First off, pat yourself on the back because we all benefit from you doing the hard thing. Nobody likes to admit what they’re scared of or what’s holding them back. Second off, the amount of equity you have when you just start investing in 2019 is very impressive. You should feel really good about yourself with what you’re doing. You seem to be a good investor, which means you should be doing more of it. Now, let’s get into the practical advice here. What I hear you saying is that taking on more debt is scary to you, but when you say scary, what I think you’re saying is, “I don’t want to lose everything I have because I got too greedy. I don’t want to refinance these properties, get rid of my equity and then invest into something else and lose the whole thing because I took a bite too big to chew.”
I’ll tell you how I overcome that and it’s because I look at debt differently than what you may be thinking. The first piece that I want to say is equity and capital are essentially the same thing. This is something I only recently started teaching about because it clicked in my head maybe like three months ago at a retreat that I put on in Scottsdale, Arizona. When we have energy in a property, we call it equity. When we have energy in a bank account, we call it capital, but it’s really the same thing. We just have a different name for it depending on where it’s being stored. Is it stored in a property? Is it stored in a bank account? Is it stored in money under my mattress? Money is a storage of energy and energy itself is what we’re talking about. Okay?
My personal philosophy is I would rather keep that energy in my bank account where I can access it and it has more flexibility. I can use money in my bank account for many things, then keep it in a property where it is more difficult to access and I can only use it for certain things. If you want to access the equity in your property, the energy in your property, that is called equity, you’ve got two options. The first is a HELOC, which is sort of like a door into that store of energy where you can go in and then take it out. Once you’ve taken it out, it can go in your bank account and then you pay interest on that money.
The other option is a cash out refinance where you go in and it’s not a door that lets you go back in and out. It’s one trip in where you grab it, you pull it out of the property, you then put it in your bank account and the amount of money that you pay per month to be able to get access to it goes up because your mortgage on your houses went up. Now, I know this might sound like I’m painting a very simplistic picture, but it makes it a lot easier to understand how money works if you can see it like this. The second part of how I’d like you to look at debt a little bit differently is to try and not think about it like a fixed number like I have 200,000 in debt. I have 300,000 in debt. That really isn’t important from the perspective of safety.
If what we’re talking about is wanting to keep your properties, the amount of debt you have, it’s insignificant. Now, it becomes significant for a different purpose if you’re tracking your net worth. If you’re trying to see how much energy do I have access to, the amount of debt you have versus the value of your properties, that is very significant. But right now, we’re only discussing how to make sure you don’t lose them. The amount of debt you have isn’t relevant. What’s relevant in this perspective is the monthly payment of that debt. Okay. When I’m going to borrow money… Now, we’re also assuming this is a fixed rate. For instance, a 30-year fixed rate form of debt is different than a three one arm or something. But if we’re talking about a fixed rate for a long period of time, you need to look at, “I have to pay this much to my lender every single month.”
Okay? It’s $2,000. It’s $3,000. “If I were to refi and access my equity, would it go from 3,000 to 3,500? Would it go to 3,700?” Right? Try to look at it in terms of what your payment’s going to be every month. Now, that is useful because you can’t control the equity of your property. It does what it does, but you can, in some form, control the revenue that it generates because you already know that. You know what your rents are. You know approximately how much you can get on these short term rentals. If you have a fixed number that you have a pretty solid understanding that that property’s going to generate for you every month and you can turn the debt into a fixed number of the same type, meaning they’re both monthly amounts, now you can make a decision if refinancing is risky or not. For instance, if your properties are bringing in $10,000 a month and you have a total of $5,000 a month of debt and you’re going to bump that up to $5,500 a month or $6,500 a month, it’s easy to see that’s not a super risky play.
But if you don’t know how much money you’re making every month, it doesn’t benefit you to convert the debt into a monthly amount. That’s one of the ways that I move forward by taking on larger amounts of debt is I don’t look at it like I just borrowed a million dollars. I look at it like, “I am now on the hook for the next 30 years to pay this much per month. Can the properties support that? Can my lifestyle support that? Can my other business endeavor support that? If for some reason the properties can’t pay that, can I get a job? Can my book royalties cover me there?” What can you do to make money in other ways to keep them afloat? My guess would be if you can turn the daunting idea of, “I am $500,000 in debt,” that sounds terrible into, “I owe four grand every single month,” or whatever the number would be, it won’t feel as scary and you can make an educated, confident decision based on empirical data like numbers that will help you understand if this is a good move or a bad move and only make good moves.
Hope that helps you, Angela. I know that I gave you a long winded response because it had to do with changing the way that you’re looking at something, which takes more words to describe. Let me know what you think about that. Send us another video and let us know what you’ve decided. All right. Our next question comes from Steve Doteri in Fresno, California. “Hi, David. I have five single family homes and a commercial medical office building. My question is how do I determine how much I should have in reserves for repairs and capital expenses such as flooring, HVAC, roofs, et cetera? Is there a formula or a range I can use to gauge where I’m at? I want to ensure that I have enough reserves so I don’t get into a pinch, but not too much that I have excess cash not working for me.”
Steve, that is a very good question to be asking. As investors, we are always balancing this. We don’t want idle cash sitting around, but at the same time, we don’t want to overextend ourselves, so we don’t have cash if we need it. I don’t have a way that I budget this specifically because I just make sure I’m always working so there’s always new money flowing in case I do have something go wrong. But it sounds like that’s not the case with you, right? What I would do if I was in your situation is I would look at my commercial medical office building, for example, which is more than likely a triple net. In that case, you’re probably collecting money from the tenants every single month to repair a roof that needs to be done or an HVAC or if something goes out, maybe you go out and you do a cash call and you say, “Hey, everybody asks to pony up.” Look at your lease or talk to your property manager and have them review your lease to see if you are on the hook for repairs for that specific property or if you’re not, you’re probably not.
Now, these five single family homes. Just to simplify this, if I was in your position, I would look at all of them and I would look and see how long before the air conditioner goes out? How long before the roof goes out? Now, you’re in Fresno, California. Okay? If we’re just being honest with ourselves, it doesn’t rain a whole lot there. You’re probably not going to have to put completely new roofs on most of these houses if you don’t want to. Patches, repair work, you could probably get by with the roof you have for a very long time. Unless you had a situation with a roof that was significantly problematic, I wouldn’t worry too much about that. I would just keep a decent amount of money set aside, so that you could make repairs if were needed.
Another thing you could do is you could get a home warranty on these homes. It might cost you somewhere between four or $500 a year, but if the HVAC goes out, make sure it’s covered by the home warranty and boom, they will be replacing that instead of you. It’s another way that you can have less money set aside for capital expenditures. The last piece I’ll say is you need access to money. You don’t necessarily have to keep in your bank account. Like we just had with our last caller, Angela, you got to learn to look at money as a store of energy. If it’s stored in the property, it’s equity. If it’s stored in your bank account, we call it capital. You don’t have to store it in your bank account. You can put a HELOC on one of these properties, so that in a worst case scenario, if something goes terrible, you can pull money out of the HELOC to make the repair and then slowly pay it back down.
That HELOC is like a portal into the energy that’s stored in one of your properties that if you need, you can go walk that portal. Now, of course, it’s going to come with an interest rate. There’s a cost of travel in this instance or this picture that I’m painting here, but that’s okay. It’s better to do that than to keep the money sitting in your bank account not working for you whatsoever. That’s one thing to keep in mind. The other thing to keep in mind is that if you’re buying properties that you’re adding value to, you’re not being a lazy investor. You’re going after something that you can make worth more, that’s going to appreciate more over time. You’re always in a position where worst case scenario comes. You could sell something and have a lot of capital now that was converted from equity that you can use to cover for your portfolio.
I do expect that the market’s going to get tighter and tighter and tighter every month while we continue to increase interest rates, so it’s going to be harder to sell properties in the near future unless you bought them 10 years ago or 12 years ago or something where you’ve got a ton of equity, but I don’t think it’s going to stay that way forever. I think rates are going to come back down. The market’s going to take off again, and we’re going to look back and talk about this time as one of the great opportunities to buy real estate that we had and wish we’d taken advantage of buying more. Thank you very much for your question there, Steve, and good luck to you. All right. Our next question comes from Greg Seavert in Hawaii. Greg started short-term rental house hacking his primary residence with great success, then took out a HELOC down payment for a second vacation rental in Florida where he’s originally from. Now trying to figure out how to keep buying.
Greg says, “I have a successful vacation rental in Florida with $100,000 in equity and a good fixed rate at less than 3%. As interest rates rise, should I cash out, refi a down payment for the next property at the expense of a higher rate? That would hurt my pride, but do I need to shift my mindset to make the next investment?” All right. I love this. First off, Greg, kudos to you for admitting that it’s about your pride because interest rates always are. It’s like I make a joke that interest rates are the thing that everybody at the cocktail party when they’re sitting around swirling their drink is like, “Oh, what rate did you get? 3.2? That’s not bad, but I got a 2.95,” and it’s how they feel good about themselves, but no wealthy person that I know ever talks about the cost of their debt.
It’s just not a metric that they look at. They don’t sit there and say, “I’ve got this many properties, but this is my interest rate on everyone.” Right? We measure cash flow. We measure equity because that has to do with net worth, but no one talks about rate, so I gave that up a long time ago. When you’re going to get the interest rate, you get the best one you can get, but you don’t let it actually factor into whether it’s a good idea to buy. I’ve told this story before. I will tell it again. I had properties in California, I believe four of them that all had rates below 4%. Right? It ranged between three and a half and 3.75 for these four different properties. I refinanced out of them until like a 5.65. This was several months ago, and it did not feel good.
I did not enjoy it, not one bit. I felt the same thing as everybody else. It felt stupid to go out of a lower rate and into a higher rate. Well, what I did was I pulled over seven figures out of those four properties, and then I reinvested that money. Now, here’s the kicker. I went from say a average of a 3.65 to a 5.65, just to simplify this, about 2%. If I can make more than 2% interest on these houses that I bought, I’ve already improved my cash flow. Furthermore, if those properties go up in value or go up in the return I’m getting, so if I just get a 2% and next year it becomes a three, I win even more. If the houses themselves become worth more, I win even more.
As I pay down this new debt that I took out with my tenant’s money, I continue to win. As I build new resources in new markets, new agents, new contractors, new people that will help me with future deals, I continue to win. If I bought these new properties at less than market value, I continue to win. What’s funny is that I went through a 1031 where I sold properties and I bought new ones, and I added over a million dollars in equity just from the difference in value from what I paid versus what they appraised for on that. Now, I didn’t buy those with the money that came from my refinance, but let’s say that I did. In that scenario, I went to a worse rate, got a million bucks, and then added over a million dollars in equity to my portfolio. I pulled the energy out of the four California houses. I had to pay the price of a higher interest rate.
I put that energy into new properties and doubled it in just right off the bat. Okay? That’s not exactly how it worked out in practical terms, but it does highlight the point of why it’s okay to refinance out of a 2.95. It doesn’t matter. It does not matter. In fact, the higher rates that we’re seeing now are what is leading to the better price of the homes. The cool thing with the interest rates is they function like a ratchet. They only go one direction if you have a fixed rate. If you get a 30-year fixed rate and you have to go out of your 2.95 and you have to get into a 7% or something like that, 7% is the worst case scenario of what you will pay until it’s paid off. There is a high likelihood that over the next 30 years, rates are going to go less than that 7%.
What if they got all the way back down to 3.2 or 3.3 or even 2.95 again? Well, now you took out all the equity. You bought a bunch more real estate. You paid the 7% for a couple years, and then it dropped back down and you refinanced into something close to what you had, but you’ve got five times as much real estate. I think that’s the better way to look at it. Now, don’t go buy dumb stuff. Don’t go buy stuff that costs you money. Make sure you’re buying good solid cashing assets in good areas, getting it at the best price you can, and then let the market dictate what you do. If the market has rates drop, refinance. If rates continue to go up, buy more real estate at better prices. If it hovers, buy better real estate. You’ve got so many options and ways you can build wealth if you can get access to that energy that is currently stored as equity at this 2.95 number.
Don’t let your ego get in the way. Make sure you’re making wise, good long term decisions, and don’t worry about your rate, because at a certain point, they come back down and you can get it back again. All right. Thank you as always to those who submitted questions for us all to learn from. We really appreciate it. We couldn’t do a show like this without you, and I genuinely appreciate you sharing your fears, your questions, and your concerns as well as those of you that are listening, I understand attention is expensive and you could be giving yours to other people in other places, and you’re bringing it here, and I really appreciate that. Please continue to do so. If you’d like to follow me, see more about my mindset, more of what I got going on. I’m online on social media, @davidgreene24. I’m on YouTube at David Greene Real Estate, and I have a free text letter that you can sign up for called Behind the Shine shining on my head, which you can go to davidgreene24.com/textletter and sign up there and check out my website. Let me know what you think of it.
I just had it made and now I’m having another one made, so let me know what you guys think should be in that new one. The last thing I want to leave you with is I strongly urge you to reconsider the way you look at money. Okay? Your relationship with money will have so big of an impact on the decisions you make for things surrounding it. You’re going to work every day. You’re probably working a minimum of eight hours, plus a commute. Money already takes up a huge part of your life and you can’t avoid it. We don’t want to become a slave to money. We don’t want to worship money, but we also don’t want to ignore the impact that it has in the quality of our lives. If you’re spending this much time at work, understand what you’re working for and how to make it work for you because if you can improve the situation of your money life, you can improve the situation of the quality of your life.
I’m going to be talking more about how money is a store of energy and how looking at it differently will change the way that we interact with it. Please consider some of the stuff I said on this show and let me know in the comments what you think, or if it doesn’t make sense to you, tell me what questions you have regarding this concept that money is a store of energy and I will do a good job, as good as I can to explain it in more depth. Thanks a lot, everybody. Check out biggerpockets.com. Forums, books, blogs, everything that you need, we’ve got it to help you build your wealth. I’ll see you on the next one.

Ashley:
This is Real Estate Rookie episode 232.

Zeona:
So actually we compare it mostly to a long term rental. And a lot of the people that are getting into medium term rentals do come from the long term rental side and go, “Ooh, I think I could turn these great rentals that I’ve had for a while into medium term and make them more cash flowing.” So what we say is look at the way that you’re analyzing your long-term rental, but then put in utilities and put in furnishing. So it’s really not that different. The short-term rental, there’s a lot more expenses, and so that complicates it a bit more. And in short term rentals, I don’t account for vacancy, but I do in the medium term rental. So I think long term rental is the easiest way to compare it.

Ashley:
My name is Ashley Kehr and I’m here with my cohost Tony Robinson.

Tony:
And welcome to the Real Estate Rookie Podcast where every week, twice a week, we’re bringing the inspiration, motivation, and stories you need to hear to kickstart your investing journey. And I love to start these real estate rookie podcast episodes by shouting out people from our audience. And today I’m shouting out someone who left a review for us on Apple Podcast. They go by the username, Teohe’s mom, and they said, “This is the go-to podcast for every new investor. This podcast has been so valuable over the last two years for me. Getting to learn from people who are “just like me” and going through similar emotions and situations I’ve been facing has been fascinating.” So Teohe’s mom, we appreciate you. Thanks for leaving us an honest rating and review. And if you haven’t yet, please do leave us a review on whatever platform it is you’re listening to. The more reviews we get, the more folks we can help. And obviously that’s our goal here at the Real Estate Rookie Podcast. So Ashley Kehr, what’s up? How you doing?

Ashley:
Well, I’m super excited about today’s podcast because we just had, on episode 231, we had Jessie on who talked about her house hack and how she is doing a medium term rental in one of the rooms. Well, today we have the co-authors of 30-Day Stay, a new BiggerPockets book where Sarah and Zeona are talking about how to actually analyze, furnish and manage a medium term rental. I almost said short term rental there.

Tony:
As you guys listen to this episode, you’ll hear my excitement building from the beginning towards the end. And by the end, I’m just pretty much convinced that medium term rentals are what we should all be doing. But I mean, Zeona and Sarah, they’re both super experienced. They have multiple properties, both long term, short term, medium term across the United States. And they really give, I think, a great breakdown on how to get started as a rookie in this space. They talk about how medium term rentals give you less risk than a traditional short-term rental, but more cash flow than a traditional long term. They talk about strategies for finding these tenants that stay 30, 60, sometimes 90 plus days at their properties and how they achieve almost 100% occupancy with the medium term rental. So just so many great ideas, tactics, and little tidbits to help you kickstart your medium term investing business as well.

Ashley:
And of course, we never allow anybody to come onto the show unless they have something for you guys. So if you go to biggerpockets.com/pod30 and you pre-order their book, you get all of the bonus content. So you have to pre-order before November 10th, but the bonus content includes a webinar with them, live with them. Then there’s also three interviews that they did talking about how to furnish your rental, how to transition from a short term to a medium term rental. Then they also do… Sorry, my kids just come running in. This is just me recording live if you heard that in the background. But also what they’re giving away too is they’re doing, you are entered to win a one on one with both of them with Sarah and Zeona.
So that is going to be really awesome because you could literally spend time with them learning how to do this strategy. So definitely worth pre-ordering the book before November 10th. Do you want to say hi?

Remington:
Hi.

Ashley:
You got to say it into the microphone.

Remington:
Hi.

Ashley:
That’s the littlest real estate rookie right there, Remington. Okay, so then we got my oldest yelling that he doesn’t have a shirt on. It’s just a chaos over here to finish up the recordings. But anyways, go to biggerpockets.com/pod30 and if you listen all the way through the episode, you will actually get a discount code. So make sure to listen to that so you can get 10% off. Now, Tony, back to you. Take it away.

Tony:
Sarah Weaver and Zeona McIntyre, we are so excited to have both of you join us here on the Real Estate Rookie Podcast. I’ve had the pleasure of meeting both of you in person, following you guys on social, and you guys are here to talk about something really cool that you’re launching for BiggerPockets. But before we get into that, Sarah, we can start with you. Just give us the quick 32nd background and who you are. Zeona will go to you afterwards and if you guys can, just let us know how you came together as partners on this project for BiggerPockets.

Sarah:
Yeah, absolutely. Well, thanks for having us. I’m Sarah Weaver. I’m a real estate investor, coach, speaker, and now author, thanks Zeona for co-authoring this amazing book with me. I met Zeona through a real estate event, which should come as no surprise. And we became fast friends because we realized we loved two things. We loved cash flow from our furnish rentals and traveling. And so you’ll hear a lot about both of those in the book.

Zeona:
And I am Zeona McIntyre. I’ve been doing short-term rentals since 2012. So some of you guys might remember me from the early days of the BiggerPockets Podcast on show 229 if you want to go check it out. But from COVID, I decided that I needed to come up with a new strategy. All of a sudden all of our bookings just fell off the calendar and it was a really scary time for short term rental operators. I imagine, Tony, you can relate. And that was a great pivot for me to realize that wow, this medium term space, there’s actually a lot of demand and it’s easier and I like it more. So it’s been a really great transition for us. And now with just so much expense in the industry, I think it’s nice to have something that still cash flows. So we can talk about that for the rookies.

Ashley:
Well first, can you define what medium term rental is? How is that different from any other investing strategy?

Zeona:
So a medium term rental is over 30 days is the easiest way to put it. So there are short term rentals under 30 days, which are average about three or four nights. And then there’s long term rentals that are unfurnished rentals that are about a year usually. And so the medium term rental is a furnished rental that is month to month and the average stay is about three months.

Ashley:
And then what is the name of your book? Because that’s why we have you guys on here. So tell us a little bit about the book and how it correlates with learning how to do medium term rentals. Is it how to buy the deal? Is it how to manage the deal? Give us a little insight into that.

Sarah:
Yeah, the name of the book is 30-Day Stay: A Real Estate Investor’s Guide to Mastering the Medium-Term Rental. And we love this strategy because it’s applicable to any investor. If you own zero units or 50 units both Zeona and I highlight a lot of incredible investors in the book that own medium term rentals all over the country in rural Iowa to just outside of Seattle to Florida and Georgia. We really love this strategy because it’s possible in so many different markets and as Zeona touched on, it’s really nice right now in beating inflation and fighting higher interest rates.

Zeona:
And just to add to your question, Ashley, we are really thorough in the book, so we do highlight a lot of case studies and we wanted to make it a “how to” first and foremost. So I feel like somebody could pick up that book and go buy a rental because we go deep into analyzing deals. We go deep into finding markets, building your team, furnishing, which is usually the scary point for a lot of people. So there’s a lot of good stuff in it.

Tony:
I don’t have any medium term rentals in my portfolio, but-

Zeona:
Yet.

Tony:
… Yet, right. But leading up to this conversation, and I don’t know if you guys know, Zeona, Sarah, do you know Jessie Dillon? She’s a real estate investor in Massachusetts. So Sarah, I think she connected with you.

Sarah:
Yes, she does permanent makeups for anyone interested in that.

Tony:
Right. Well we just interviewed her earlier today and she’s doing a medium term rental, rents by the room. And after talking with her I was like, “Man, there, there’s so many cool ways to do this.” But after talking with her and leading up to this conversation, I realized that there is this really cool opportunity with the medium term stay because you get almost as much cash flow as a traditional short term rental. But there’s a little less risk associated with it because in most cities or counties or jurisdictions, because the stays are longer than 30 days. And correct me if I’m wrong here, you don’t even need a short term rental permit to do that. So if STR get banned as a medium term rental, you’re still able to make it work. So my mind is spinning. I got a lot of questions for you guys. So on the medium term rental side and Zeona will start with you, if I want to analyze a property as a medium term rental, what does that process look like and is it any different than a short term rental would be?

Zeona:
So actually we compare it mostly to a long term rental and a lot of the people that are getting into medium term rentals do come from the long term rental side and go, “Ooh, I think I could turn these great rentals that I’ve had for a while into medium term and make them more cash flowing.” So what we say is look at the way that you’re analyzing your long-term rental, but then put in utilities and put in furnishing. So it’s really not that different. The short-term rental, there’s a lot more expenses and so that complicates it a bit more. And in short-term rentals, I don’t account for vacancy, but I do in the medium to rental. So I think long term rental is the easiest way to compare it.

Ashley:
What are some of those expenses for a short term rental that are more that you wouldn’t have with a medium term rental? Is it just maybe supplies stocking of toilet paper or what are some examples of those?

Sarah:
Yes, so cleaning fees, which typically you’re going to pass on the tenant anyway, but those are decreased significantly. And then for us, both Zeona and I, we use virtual assistance to help us manage our properties. And there’s significantly less admin cost because you only have a turnover every 90 days rather than every three days. So that’s something to account for, especially if you’re a real estate investor running this like a business, which we highly recommend. And then you’re exactly right, Ashley, the supplies like the toilet paper, paper towels, shampoo, all of those kind of expenses that you have. Every single turnover, you’re only supplying what we call the welcome starter kit for a medium term tenant. And it significantly decreases the cost there.

Tony:
So again, I know when I’m looking at a short term rental, I usually use PriceLabs or AirDNA to do my analysis to understand what my average daily rates, what my occupancies might be for a specific unit. But Zeona, you mentioned earlier that you focus more so on the long term rental approach. So if you can Zeona, breakdown for us, how do I determine what that medium term rent should be for any given unit?

Zeona:
So with medium term rentals, you’re using a site called Furnished Finder. You can still use Airbnb and Vrbo and any other booking platform. But we also use Furnish Finder and on Furnished Finder you can look in their map for whatever town you’re in. And then you can see what all the places are charging around you. So in Airbnb it’s harder to do that because they fluctuate so much, but on Furnished Finder you can see it and so it’s really easy to look through their photos and go, “Oh, my place is so much cuter than that one.” And then it’s around this one and here’s the area. You can figure it out pretty easily from there.

Ashley:
What about as far as the management of it? Is there software for it too that you would use similar to short-term rentals or is that a whole completely different software?

Sarah:
We are using the same software that we use to manage short-term rentals. So we highly recommend using Hospitable, It will tie directly to Airbnb as most people will know. And then for tenants that you find via Furnished Finder, you just manually input them into Hospitable and then they take on the rest.

Ashley:
Awesome. Very cool.

Tony:
I just want to talk a little bit on the tenant screening side. So I know for us on our short term mental portfolio, we don’t do any tenant screening, we don’t do any guest screening. There are also some little boxes you can check, but it’s nothing super in depth. For the medium to rentals and Sarah, I’ll start with you on this one. Do you have a process in place? Are you doing background checks or credit checks or are you just letting the platform decide who can book your place?

Sarah:
Yeah, so one of the most common tenants that we have is a traveling nurse. And the great thing about a traveling nurse is that they are heavily screened both on the federal level and the state level. So when they get a placement in a hospital, they have background checks, fingerprints, criminal background checks, I don’t feel the need to do additional screening on those tenants. Which again, when we’re talking about admin time, if you’re paying $25 for an admin, that saves you a lot of time and money when you can say just send me proof of employment. So I’m asking for three things, I’m asking for their driver’s license, proof of employment and a reference. And I am calling, texting and emailing their landlord reference because you just want to make sure you’re protecting your property. When it’s not a traveling nurse, then I am screening the tenant through an entire background check, eviction check.

Ashley:
What software are you using for that to do the separate screening?

Sarah:
I’m doing it through Avail.

Ashley:
Okay, cool.

Tony:
So if someone wants to book your place Sarah and say it’s on Airbnb and not Furnished Finder, I have Instant Book turned on for all of my properties, which means someone can book without me having to approve them. But it sounds like based on your current process that people can’t instantly book, they can just submit an inquiry and then after that is when you engage and kind of given them the thumbs up or the thumbs down?

Sarah:
Yeah, that’s a great question. I’ve been playing around with it. So actually I got an instant booking yesterday and immediately I panic because I’m like, “Oh no, did they instant book too far out leaving a gap in between medium term tenants?” To my luck, I had already put in parameters, which is the great thing about Airbnb. So they didn’t have the ability to book too far in advance. So what’s great is that I had someone move in, she’s going to be there for 92 days, she moves out on a Thursday and this new tenant moves in on a Saturday and she just booked for 97 days.

Tony:
That’s fantastic. Go Zeona.

Zeona:
Yeah. So just based on the screening, because you were asking about that with Instant Book and there are parameters in Airbnb to say we don’t accept anyone with no reviews and we don’t accept anyone to book that’s not verified. So you have a couple of things that you can put in there for yourself to protect you in that regard. So that’s good. A lot of Sarah’s places you can do short term rental part of the year and then you do medium term if, correct me if I’m wrong, but I have some where you can’t legally short term.
And so that gap is a lot more important to not have, I don’t want to have somebody booked and then have three weeks there that can’t be booked at all. So what I do is I actually only open my calendar five weeks at a time and I don’t have instant book on. So I make people send requests and then I talk to them because a lot of times a traveling nurse is driving to the area and they’ll come out three days ahead or they’ll come a little bit later and so you can massage those dates so that you have less vacancy.

Tony:
Sorry, just one additional question on that piece. Are you guys keeping all of your communication through the platform? Are you picking up the phone and actually talking to them if they’re submitting inquiries through Airbnb? So Zeona, if you want to lead first and Sarah we can go to you after.

Zeona:
Yeah, so if it’s in a platform like Airbnb or Vrbo, I just keep it all in the platform. If it’s something like Furnished Finder, it’s actually not a booking platform in the same way. It’s more of a lead generation. So it actually just gives you a list of tenants and then from there you reach out to them. We do everything on email with them. And the only time I have my assistant call is just to get a feel when we’re doing the tenant screening portion because sometimes I think in short term and medium term, you really want to rely on your sense of somebody. And so if you get a creepy vibe from the way somebody asks you a question, you might just say, “Not worth it, I’m not going to do that.” So I imagine you’ve had that with your short term rentals and then the people you always let through, you’re like, “Dang, that’s the guy who’s going to rip up my carpet or whatever.”

Tony:
And Sarah, what about for you?

Sarah:
Yeah, we have a system where everything’s automated so when someone reaches out, they’re getting an automated email, we’re moving them from Furnished Finder to email and then we are hopping on the phone with them. We do everything through Google Voice. I had at the beginning where they had my phone number and I realized real quickly that that was a mistake.

Tony:
It’s a terrible idea.

Sarah:
It was a terrible idea. So we moved everything to Google Voice.

Tony:
And just one piece on that, I have one follow up question, but we also try and keep the majority of our conversations on platforms. I’m a little bit more like Zeona because we found that if there’s ever any issues with that guest, Airbnb and Vrbo won’t take your word for it if it isn’t in the platform. So we’ve had issues where we had a phone conversation with the guest and we knew that they had done something wrong. But because we didn’t have the proof of it in the platform, Airbnb didn’t have our back. So we try and keep the majority of our communication on platform as well.

Sarah:
That’s a really good point. Regardless of what investing strategy you’re going to use, all of us investors should get used to always sending a follow up email that says, “Per our conversation we have agreed to this and this.” And really ask them please respond and confirm that this is what we agreed to. And then just even having an email correspondence that says, “I agree,” I do that with every tenant I speak to.

Tony:
That’s a great idea, Sarah. So following along with the tenant screening portion. So once you guys have done your work on the front end, do you have these medium term tenants sign any kind of lease agreement as well for the 30, 60, 90 days that they’re staying there? Or is it just what they’ve done through the platform? So Sarah, we can start with you.

Sarah:
When they are going through Airbnb, everything stays in Airbnb. But when they’re coming off of Furnished Finder, I do treat them like a regular tenant and I’m putting them into an actual lease. Having them sign that inside of Avail, telling them the expectations, through Hospitable they’re getting automated messaging. So they’re getting the welcome email and all of these messages are inside of the book. Zeona’s done an incredible job after years of experience with short-term rentals. Really figuring out when’s the best time to send the message, what information to include in it so that you get less communication with the guest. It seems counterintuitive to say you never want to hear from your guest, but it’s incredible once I implemented the messages that Zeona has written, I barely hear from my tenants.

Zeona:
So I have seven emails, I went back and counted them because I have a whole series. So they’re all in the book and I find that to be really helpful. You almost have to think ahead about what they’re going to ask before they ask for it. So we prepare in that way.

Ashley:
Along with the lease agreement. Is there anything that you guys include that would be different from a long-term lease agreement?

Sarah:
The things you want to protect are the items inside of the house. So I’ve even heard of a long-term tenant leaving with the refrigerator because it didn’t have in the lease that the landlord owned the refrigerator. So all of the items that I own are specified in the lease. I think that’s really the biggest difference. Otherwise, I really want to reiterate that this is so similar to a long term rental. So for investors listening, taking the jump from doing long term to medium term aside from furnishing is not that stressful.

Ashley:
So I want to transition us here. We touched in it a little bit, but I want to make sure we walk through this because I think it’s a great starting point as to how do you even decide if you have a desirable market to do a medium term rental to find these nurses? And can you maybe touch on too, who are some other type of workers that you attract to your properties?

Zeona:
Yeah, so I think looking for hospitals is a great place to start and I know you’re saying who else do we rent to? But that is where I go first. And so I was looking around for some clients to see what other markets might be good and I just did a search, 10 largest hospitals in the US and then started looking around those. And so I think that’s a great way to go because you’re always going to have traveling nurses and they’re just really great tenants. But beyond that, we have a lot of digital nomads now, that has been a big thing since COVID that people can work from home anywhere.
And so urban markets in general I think are just going to be really popular because either people are flying in as business travelers to go to that local office or they’re working from home and they want to be able to walk around the city or go explore the sites on their off hours. So we see a lot of that. And then there’s a lot of people now that are actually living full time from Airbnbs. I know Sarah is one of them, even though she’s with a friend right now, she’s mostly in furnished rentals. And that’s actually been a big trend with a lot of retirees and other people that are living abroad, financially independent and such.

Ashley:
Do you see a big correlation with people whose jobs went remote during COVID that are still working remote with traveling around and staying at different places?

Sarah:
Absolutely. One of the things I’m seeing even with my traveling nurses is that they’re bringing their spouse with them because now their spouse has the ability to work remotely. So the spouse, I don’t know how the conversation went, but I always imagine it went, “Hey, you’re a nurse making $35 an hour, why don’t you become a traveling nurse, make $116 an hour and I’ll just follow you around?”

Tony:
It’s not a bad gig. But Zeona, I love what you said about just Googling top 10 biggest hospitals in whatever state you’re in. A lot of times when people ask me what market they should go into for short term rentals, I just say, “Hey, pick any state and Google top things to do in XYZ state. And usually you’ll find some kind of major attractions or things like that.” But to apply that to the medium term rental space, I haven’t thought of that. So I love that approach. Now one other piece along with the market selection, I guess more so property selection. When you guys do your medium term rentals, are you actually going out and purchasing these units or are these more like an arbitrage model that you guys are using?

Zeona:
So I prefer to purchase units. I’m kind of anti arbitrage even though I actually started that way because I didn’t have the money when I got started with Airbnb. But I think that it’s just flipping if you need the cash flow to start, sure arbitrage. But eventually you want to get into something where you’re building wealth and wealth in real estate is built with equity over time appreciation and you just don’t get that. I’m just not that into arbitrage.

Ashley:
And the tax benefits too, you don’t get the tax benefits of not owning the real estate either.

Sarah:
Yeah, I feel the same way. I think it’s a great way to get started, but it’s essentially another way to have a job. I view real estate investing as a way to build wealth. And so I think it’s risky to take on all of the cost of the furniture and a one year lease not knowing if that landlord’s going to renew your lease. I don’t think it’s a very secure business model. With that being said, all of the people out there doing arbitrage and making six figures, more power to you? I think it’s great. However, for a new investor that wouldn’t be the first direction I would point them.

Tony:
Yeah, I’ve always kind of been anti Airbnb or vacation rental in an urban setting because I am afraid of the regulation piece and maybe the predominance of hotels and all these other factors that go into it. But as you guys talk more and more about this, there’s so many hospitals within a 20 mile radius of where I live and I’m like, “Man, I could probably have an Airbnb down the street from my house and do a really good job with it if I rent it out to the right nurse.” So you guys got my gears spinning here a little bit.

Sarah:
And I think what’s so important about what you just said, Tony, is that you can make MTRs work in any market. And I think a lot of people have this preconceived notion that you’re making significantly less than you would as a short term rental. But for those of you that don’t know, I own medium term rentals in Omaha, Nebraska. I like to call it destination hotspot of America. And I make more money when it’s medium term because while the nightly rate is higher as a short term, the vacancies is so high that I actually net more as a medium term rental.

Tony:
Interesting.

Ashley:
Sarah, I just want to ask if maybe you could share the numbers on that just so people can get an idea of how they differ from if this property would’ve been a long term rental or a short term rental and then what it is now as the medium term rental.

Sarah:
Yeah, absolutely. I’ll give the example of a duplex that I own in Des Moines, Iowa. And I do that because one side is long term and one side is medium term. So I purchased the property in April of 2022 and I bought it for 180 500. My PITI, principal interest tax and insurance is 884. My long term tenant pays 850. Market rent is probably a little closer to 975, but she’s an inherited tenant. She’s a great tenant. So she pays 850. My medium term tenant upstairs pays 1900.

Ashley:
Oh My god.

Tony:
Wow.

Ashley:
That’s awesome. What do you expect for vacancy on that? What do you see on average with your units as to what your vacancy rate actually is for a medium term?

Sarah:
So for that particular building, I’m at 97%. And across all of my units I’m at 97% because four of mine are at a hundred percent. So someone moves out at 10:00 AM and someone moves in at 3:00 PM giving me a hundred percent occupancy for the year.

Zeona:
We do still estimate 8% when we’re doing our numbers, just trying to be safe. And then that gives you a month, a year. So you might have a couple days here or there if you end up having a week somewhere. But it’s really rare and we love that because as a long term rental owner, you might have two weeks or a month every turn. Because if they leave often with a long-term rental, they want to repaint the place and change out the carpets and do all these things if you’ve got a property manager and they’re just really slow. So as a short term rental operator, I’m like, “Oh my gosh, they’re the most frustrating properties I have are ones that are long term and operated by someone else.”

Sarah:
And that’s something I learned from Zeona is she is like the queen of asset management. So she treats her rentals like her business. So when she has a vacancy, she’s working her tail off to get someone in there as soon as possible. And sometimes that even means negotiating with them to pay a day early. But what I like is about Zeona’s model is that she doesn’t just sit back and say, “I hope people book.” She’s out there looking for tenants and I definitely learn that from her and I’m happy to say that my occupancy rates are fantastic because I treat it like a business.

Zeona:
I just want to add something to that because when we were at BP CON, I was talking to a lot of people that were starting medium term rentals and they’re like, “Oh I got on Furnished Finder, but actually we haven’t had any requests.” And I’m like, “Oh no, people don’t know how to use Furnished Finder.” Furnished Finder, you can get requests, but that’s not how people reach out to you. They’re just inundated with options and so often they put in their information and then you never hear from them.
So the way that Furnished Finder works is you get a list of tenants and if you are in your period of looking for someone new, you’re not doing this every week, you don’t need to do it more than every three months, but if you’re in that period, you are reaching out to them. And you can have an easy template that you copy paste and then you just blast it to all the people. And if you’ve got multiple units in one town like Sarah does, you can send them links to all the different units. So you don’t have to pay for additional listings on Furnished Finder because you pay for listing, if that’s helpful.

Ashley:
Well Jessie, who we were talking about in the beginning of the episode who was just recently on the podcast, episode 231. She mentioned how her virtual assistant or her assistant actually goes out and goes into Facebook groups and finds her people to place into her medium term rental too. And she’s the same, she doesn’t sit and wait for people to come to her. She has somebody out there actively looking for somebody to come into her unit.

Tony:
I want to touch really quickly on the time in between guests. So for us on the short term rental side, like you said, we have same day turns. Someone checks out at 10:00 AM someone else checks in at 4:00 PM. But what someone who’s been at the property for 30, 60, 90 days have either of you run into a situation where the property maybe was in disrepair and wasn’t ready for that person checking in? So Sarah, we’ll start with you and then Zeona, what will lead to you afterwards.

Sarah:
Oh yeah, my cleaners hate same day turnovers. So while I may brag about the hundred percent occupancy, my cleaner has wanted to quit about five times. And so I highly recommend having at least one day in between because you never know. Especially, I allow pets and I have pets in about 70% of my units that needs to be deep cleaned. The couch cushions need to be completely taken apart. All of the furniture needs to be moved and that takes time. And so I either offer to pay more and have her bring in extra help if it is the same day turnover or I try to have at least one day in between.

Zeona:
Yeah, I would say the same. I just have a day in between generally, you just don’t know what you’re walking into and I don’t allow pets anymore. I used to, but with the nurses, they’re gone all the time and that’s why we love them. But that also means that their pet is left alone a long time and so that leads to problems. And then I have found that the ones that have pets sometimes they won’t clean for an entire six months stay. It just seems like they never moved anything around. So that can be kind of intense with pet hair.

Tony:
But have you guys ever had to cancel on that new person that’s checking in because the last guests did such crazy damage?

Ashley:
That’s just you Tony, I guess. A bear coming up and ripping apart the garbage.

Sarah:
Tony, maybe you should try medium term rental.

Tony:
Yeah, maybe. I think that’s what that’s coming next. So I just want to get some clarity. We probably should ask this earlier in the show, but Zeona, if you can start, what markets are you currently invested in? What cities, what states?

Zeona:
Yeah, so I’m in four states. I am in Florida and I’m in central Florida and in Panama City Beach. So it just depends on what kind of rental it is. The Panama City Beach is a short term rental. The central Florida’s are long term rentals. I’m also in St. Louis, Missouri, and that’s a medium term rental. Then I’ve got Boulder Colorado, Denver Colorado, and Colorado Springs. And those are all medium term. And then I’m in Washington State, on the sound outside of Seattle and that’s a short term rental. So they’re all over the place.

Tony:
How about you Sarah?

Sarah:
I have 19 units in Kansas City, Des Moines and Omaha. And they’re all small multifamily except for one single family. And then all of my medium term rentals are in Omaha and Des Moines. And I would love to own a medium term rental in Kansas City. So if you’re an agent, send me some deals.

Ashley:
Well I want to wrap it up here with asking you guys what is the best piece of advice you can give a rookie listener who’s saying right now, “I want to do this.” Where can they start? So Sarah, let’s start with you.

Sarah:
I think what I see most success with the investors, especially the investors I coach, is you need to pick a market and then just love on that market. I love to use dating analogies like, “It’s okay to date multiple people, but if you’re looking to get married, you should probably pick one person and then wake up every day and love that person.” And it’s the same thing with real estate investing. I see investors all the time looking in nine different markets asking me should I do this? What about this? I read an article here and it’s like, “No, just pick a market and love on that market, growing on the ground team and write some offers and get under contract.”

Zeona:
Yeah, I do strategy sessions with investors all the time and I won’t give them more than two markets. They always ask me for more and I’m like, “No, you go and you do your research and if those really don’t work for you, come back. But I am not giving you more.” My advice is to house hack with this strategy. So that was how Sarah got incredible numbers. She bought a quad in Omaha and just because she was able to have just one vacancy and then slowly turn all of the rest of the units into medium and short term, it’s like her returns are insane on that property.
And so like you’re saying, Tony, where you live you know really well, and so if you can have a basement unit, if you can convert your master bedroom and make a little kitchenette out of it because it has a separate entrance. I mean there’s so many creative ways that where you live you can make another unit out of it. I think that’s the best way to go because you have the low down payment and the low interest rates. There’s just so much advantage to house hacking.

Tony:
Yeah, I love the house hacking idea. I love the idea of the medium term rental in a more urban setting. And I’ve wanted to purchase, I live in California, I’m in the suburbs of Los Angeles. And I’ve wanted to buy something here, but it just almost never makes sense from a cash flow perspective. But now I’m thinking, “Man, if I can go out and find a five or six unit something just above five units or more. Medium term rent every single one of those units, I can take the NOI on that five unit from something abysmally terrible in 510 x that by making it a medium term rental.” Now I’ve doubled the value of that property just by turning to a medium term rental. And if I rent it by the room, imagine if I got a six unit and each unit had two bedrooms, now I’m renting each unit by the room as a medium term rental. Like, “Oh my God,” my mind’s all over the place, before I-

Sarah:
And let me add one thing in there. You could also then buy a vintage trailer or an RV and park it in the driveway. And traveling nurses or medium term tenants will even rent that out. I have a friend and client in Sacramento and that’s exactly what he’s done. He’s house hacked his primary into a duplex and then he even has a cute tiny house parked in his driveway, made a nice little privacy fence. And that is rented as a medium term rental.

Tony:
One of the cool things about being a host for a podcast is that you get to hear so many cool stories and unique strategies. But it’s also like a drug because you hear all these cool things and you just want to go after all of them. So I’ve been telling my wife that we’re going to slow down, but after this episode I feel like that’s a lie now. So I don’t know if my wife’s upset, I’m going to blame Sarah and Zeona. But one last question before we wrap up. Are there any other software that you all use besides Hospitable or Furnished Finder to manage your medium term rentals that some of our rookies should look at? And Zeona we can start with you.

Zeona:
Yeah, so big three, you like to have something like Avail. And Avail is doing leases automatically, which is great. So based on your state, it gives you a template, you just enter in the blanks and then you can do electronic signing, so that’s so great. They also have background checks on there if you needed to go that route. So Avails get a great one stop shop and then they have all the auto payments so you can set people up for monthly payments and their deposit. So that’s really easy. But the thing we didn’t talk about outside of Hospitable, Hospitable is mostly auto messaging. They kind of aggregate stuff altogether. You have a joint calendar, but it’s mostly auto messaging. The last piece is pricing software, which you should be familiar with using short term rentals. And people think they don’t need it. But the thing is that it’s still a seasonal business and if you’re not using pricing software and you’re not changing your prices, you’re missing out on those high season rates. So you definitely want to be using a PriceLabs or Beyond Pricing or at least changing your pricing.

Ashley:
Sarah, did you have anything to add to that or it’s the same for you?

Sarah:
All of those, absolutely. And I’m a huge advocate of a task management software. I don’t know how anyone functions at a high level with a business without some type of fancy to-do list, which is what a task management software is. I personally like Asana. I’ve used Trello, I’ve used Monday, I use Asana and I use it for tenant turnover. I use it for property management repairs. I also use it for furnishing. That’s a big one. Every time you turn a unit there should be a checklist. Every time you furnish a unit, there should be a checklist and all of that lives inside of Asana.

Ashley:
Well thank you guys so much for sharing your wealth of knowledge. And everybody make sure you check out their book. You can get it at the BiggerPockets bookstore at biggerpockets.com/pod30. And if you use any of our names, you guys can actually get 10% off. So we’re doing a contest to see who you guys like the best. So everybody pick Tony’s name because we don’t want his feelings hurt that nobody used his promo code.

Tony:
I have a very soft ego.

Ashley:
Yeah. So Zeona, can you let everyone know where that they can reach out to you and find out some more information about you?

Zeona:
Yeah, so Instagram is the best way I check all my DMs. And so that’s @zeonamcintyre. You’ll have to just check my spelling in the notes.

Sarah:
And I’m @sarahdweaver on Instagram. You can also reach out at sarahdweaver.com.

Ashley:
And you guys, again, that’s biggerpockets.com/pod, P-O-D, 30 to get their new book. And you can use the discount code, use any of our first names to get 10% off. Well thank you guys so much for joining us. And once again, congratulations on your book. What an awesome accomplishment. I’m Ashley @wealthfromrentals. He’s Tony @tonyjrobinson on Instagram and we will see you guys back on Wednesday with a guest.

Mindy:
Welcome to The BiggerPockets Money podcast, where Carl and I give an update on our finances and what we’ve been doing lately. How we funded this deal was super fun. We decided not to get a mortgage on this property, because investor mortgages were 5% in June and I am not paying five whole percent. That’s crazy. Which sitting here at the end of October now looks really, really sweet.
Hello. Hello, Hello. My name is Mindy Jensen. And with me today is Carl Jensen, host of The Mile High FI podcast, editor in chief of 1500days.com and Mr. Mindy Jensen for the last 20 years.

Carl:
Wait, when did I become Mr. Mindy Jensen?

Mindy:
January 19th, 2002. Weren’t you there? You were there.

Carl:
Oh yeah, that was when we got married, right?

Mindy:
Yeah.

Carl:
Okay. I will take that. I am wifi now, which means you are the main income earner. And I look at pictures of dinosaurs online and work on houses. And yeah. So Mr. Mindy Jensen, I’m good with it.

Mindy:
Yeah, good. You should be because you are. Carl 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.

Carl:
Whether you want to retire early and travel the world, go on to make big time investments in assets, like real estate or dinosaurs, or even start your own business, we’ll help you reach your financial goals and get money out of the way so you can launch yourself towards your dreams. Launch yourself, I think of a guy in a cannon ball thing at a circus. Is that what that means? It sounds a little violent. I don’t want to launch myself that hard.

Mindy:
You don’t have to launch yourself that hard. It’s your journey. You can launch yourself at your pace. Also, you slipped in invest in dinosaurs. Do you think that’s a good investment, investing in dinosaur skeletons?

Carl:
We have a triceratops’ skull. That was your idea, not mine.

Mindy:
Well, okay. I would like to make that note that it’s not a real triceratops’ skull.

Carl:
True. Those are like $80,000, I did look. Our fake one was like 2000 or 1000.

Mindy:
It hangs over the fireplace, because why would you put a moose skeleton when you could have a triceratops instead?
Carl, what have we been up to? Certainly not tracking our spending.

Carl:
Yeah. We fell off that bandwagon and we fell off really, really hard. What happened? Why did we stop tracking it? What did we buy that kind of made us stop tracking it?

Mindy:
We bought a small thing called a house.

Carl:
Kind of spontaneously. We were walking down the street, we found the people wanted to sell and we made them an offer. It’s a little bit longer than that, but that’s almost how it went down.

Mindy:
We made them an offer they couldn’t refuse.

Carl:
Yeah. So we’ve been super busy, which I think we’re going to talk about a little bit later in this episode. Super busy. And when we get busy, sometimes things drop off and our tracking, our spending, our general spending dropped off. We did track our spending for this DIY remodel, which we’ll talk about later.

Mindy:
I would like to address the tracking your spending thing. I’m going to throw you under the bus and say it’s all your fault.

Carl:
I’ll take it. I’m Mr. Mindy Jensen. I’ll take whatever abuse you throw at me.

Mindy:
But we believe in, well we believe, we don’t believe in it because we’re not actually doing it, but I believe in tracking your individual expenses in real time. I think it’s very, very helpful for a lot of reasons. Stupid purchases make you think, like a Kirkland tee shirt.

Carl:
It was only $6.

Mindy:
Only $6. We could have put that $6 into VTSAX and in 100 years that would be $60.

Carl:
You’re right. Stupid purchase.

Mindy:
But stupid purchases make you think when you have to enter that into your spending tracker. And when you are sharing that with somebody else, they will potentially call you out. Why did you spend $76 at Bob’s House of Stupid Stuff? And you’ll have to say, well, I really found this amazing tee shirt and I wanted seven of them. And you can also spot trends in real time and make changes in real time, as opposed to at the end of the month when you go into one of the spending trackers that is more of a overview of what you did the past month. Well, it doesn’t give you real time information. It’s like, hey, this is what happened 30 days ago.
And so I like the tracking that we’re doing with the Waffles on Wednesday spending tracker. However, it can be a bit much when you have to remember that every single time you make a purchase. And we were spending a lot, a lot, a lot of money at places like Lowe’s and Home Depot. When we bought this house, we then had to buy a lot of supplies to remodel it because it was ugly. Our specialty.

Carl:
Yeah. I still would have bought this Costco or Kirkland shirt even if we still did the spinning tracker.

Mindy:
Oh, stop. This isn’t about your shirt.

Carl:
Maybe not the triceratops’ skull. That was a big one.

Mindy:
Well, we bought that last year. And I still would’ve let you buy that for me for Christmas. That was my Christmas present. I love it. So another reason that we stopped tracking our spending is that we are in a very fortunate financial position where this spending tracking didn’t change our financial position. If we went over budget, if we went under budget, we are still in a really good financial position. And a few years ago, maybe this would’ve been more important to us. A few decades ago, this definitely would’ve been more important to us. But the exercise doesn’t change our financial position and we are juggling so many balls right now, something has to give. It was really easy to let this one go. My biggest takeaway from this is to not make sweeping public announcements about things like, I’m going to track my spending for a whole year, because circumstances change and then you kind of look like an idiot.

Carl:
I think I would like to do this spending tracker in the future. And I’m curious to hear your thoughts on this, because for me at least it gamifies it. I love looking at numbers. So logging into the spending tracker maybe three or four times a day, yes, I’m obsessive, makes me want to spend less and makes me want to gamify my life. My tendency isn’t to spend willy nilly on something if I know I need to look at those numbers, and that those numbers being smaller excites me. What do you think, would you do this in the future? Next year would be the obvious time to start it back up again.

Mindy:
Oh, I was going to introduce it in November.

Carl:
Okay, cool.

Mindy:
Yeah. Let’s do it in November. November is typically our very most expensive month because I love Thanksgiving. I host Thanksgiving every year. And it’s very, very big. Plus Christmas gifts you start buying in November or December 23rd.

Carl:
Do I get the Tesla? When will that be, a November or December expense? That’s going to blow the spending tracker out of the water. Maybe we should start next year. And we’re actually not buying a Tesla, I don’t think. That was a joke.

Mindy:
Yeah, no we’re not. You ruined it. I was going to say, do I get the Tesla? No.
Okay, so let’s look at this house that threw our whole spending tracking publicly out of the water. What did we purchase this house for?

Carl:
Yeah. Do we have way back machine noises? We need to zoom back to May. So three houses ago I think we looked at each other and said we’re never going to do another rehab. We’re going to buy a nice house and sell sail off into the sunset, raise our children. And that did not happen. We bought another one to fix up. And then that neighborhood ended up not agreeing with us eventually. All our friends and neighbors moved away that we enjoyed, so we moved to another one, which also needed a lot of work, which we’re sitting in right now, which isn’t quite finished. And we said this is going to be our last one.
But before this one was even finished, we went and bought another one. And this all happened in May. We were taking a walk around the neighborhood and I saw what looked like someone moving out of their house. So I chatted up the person, he’s like, “Yeah, the owner is moving out. She’s old. She’s going to go to an assisted living facility. They’re going to put this on the market in June.” We gave them our business card, and sure enough they called us. And I didn’t really expect that, because whenever we’ve done something in the past, it’s kind of like a yellow letter, maybe. What’s that called? Is that the right word?

Mindy:
The yellow letter.

Carl:
Yeah. I should know this, BiggerPockets and all that. But we did that. And they called us back and said, “Yeah, how much?” We said, “How much do you want for the house?” And we got to a number. And boom, we closed in June, right?

Mindy:
We closed in June. What was that number that we got to eventually?

Carl:
And this was interesting. So they said, “What’s the first rule of negotiation? It’s that you never throw out a number.” So we said, “How much do you want for it?” And they’re like, “550.” So I had the number 500 in my head. So we threw that back at them and we came to an agreement on 510. One interesting thing about this number, which we’ll talk about a little bit later, is we agreed on this number and we made this purchase right before everything turned and went south. So it was a completely different time than it is right now. Cue the scary sounds, like the violins. It’s Halloween.

Mindy:
This isn’t coming out on Halloween.

Carl:
When you’re about to get stabbed. Okay, sorry.

Mindy:
But yeah, we purchased it for 510. And we were a little hard ballish on the negotiations because the timing was not right for us at all. And we wanted the house, but we didn’t desperately want the house. And I think that is a really good negotiation tactic is always be willing to walk away. There is, I don’t know, 86 batrillion houses in America or something. So that may not be an accurate statistic, but there’s a lot more houses than just the one that you’re looking at. So if you find a house, and you really like it and you think it’s worth x, offer X. And if they come back and say, oh, we want x plus 20%, just tell them, it’s not worth that to me. So good luck in your search for a buyer and we’ll be here if you want to sell it to us for X. And sometimes they come back at that and sometimes they don’t.
With this particular one, we were able to, we said 500, they said, “Would you go to 510?” And we looked at each other, we said we could do it for 510. We would be fine with that. How we funded this deal was super fun. We decided not to get a mortgage on this property, because investor mortgages were 5% in June and I am not paying five whole percent. That’s crazy. Which sitting here at the end of October now looks really, really sweet. But at the time our margin loan, we have a loan against our stocks, our after tax stock portfolio, kind of like a HELOC for your stocks. And we took a loan out. That rate was what? 1% at the time.

Carl:
It was a little bit more than that. It was 1.2, 1.3%.

Mindy:
Which is much lower than five, so we went that route. Apparently oblivious to the fact that the Fed was going to raise rates significantly in June and our margin loan went up. But even when it went up, it didn’t go up that much in June?

Carl:
No. This was kind of before the whole world went crazy. I don’t remember having these thoughts or worrying about inflation when we did this. So yeah, I thought, ah, it’s 1.2, 1.3%. This is great. 500,000. What is that? 6,000 a year for interest. That’s great. That’s fantastic.

Mindy:
Yeah. So since then, the rates have gone up three times. And that 5% mortgage is looking pretty sweet, which it’s unavailable to us. And what is our margin rate now?

Carl:
It is about 4.5%, but it changes every day. This is a variable rate that depends on a lot of different things, including what a Fed is doing. I know we’re recording this in October, but there are more interest rate raises promised. I think a 0.75 rate. So this is going to continue to go up. So it’s roughly tripled since June. How many months is that? In four months it has tripled. Yeah, the dangers of margin borrowing.

Mindy:
And it goes up every day?

Carl:
Yeah. Yeah, it can change every day.

Mindy:
Oh, wow. I don’t think you told me that when we’ve borrowed this money. We need to have a conversation after we stop recording.

Carl:
Uh oh. I might not be Mr. Mindy Jensen after this.

Mindy:
Nah, you’ll probably still be Mr. Mindy Jensen. I mean, I don’t guarantee it. So we still have margin available. But what about this weird situation with the … Let’s talk about the margin loan and what does that mean?

Carl:
Yeah. And our rate is still great. But yeah, a margin loan means we are borrowing money against our post tax stock portfolio. So the amount we can borrow depends on the value of our stock portfolio. So an interesting thing has been happening, as the rates have been going up, stocks have been going down. I think as of this recording, the S&P 500 is down, it’s over 20%. What is that? Official bear market territory or correction territory? I don’t know those terms. So that has done a couple different things. That has reduced the amount we can borrow and it’s also reduced our options maybe depending on how you look at it. So the first one is reduced what we can borrow, because E*Trade wants to get their money back. They want to make sure that I’m going to be able to pay, that we are going to be able to pay this money back.
So the lower our stocks go, the less money they give us. And if it got too low, they would demand that we start paying it back. So if you do this, stay very, very, very far away from the edges. You don’t want to get called out on margin. Then at the same time, this particular moment in time is kind of difficult for us, because we don’t want to sell stocks because they’re down 25%. So these are the dangers of borrowing on margin. I’m still not worried, because one of the things we’ve always done is we stay very, very far away from that edge. Now it’s gotten a lot closer. I think originally when we took out this loan we had a buffer of about a million, and now it’s down to somewhere like 200,000. So it has decreased a lot and we could get margin called. I don’t think we will. But if you’re going to do this, the lesson to learn from us is to stay very, very, very far away from the edge of that cliff.

Mindy:
Yeah. We had a huge buffer before and it has gone down through no fault of our own, although, well I guess it’s partially our fault. What is our stock mix? It is very tech heavy, isn’t it?

Carl:
Yeah. So we got pretty fortunate, I’m a tech and car nerd. We bought Tesla stock in 2012. And that’s been great. I think our cost is a dollar or something like that and now it’s like 200 bucks. But it’s also very volatile. It’s also been cut in half from its all-time high, which makes the margin loan a little bit riskier. And they’re going to give you less money and give you less margin if you’re in a risky or a more volatile stock like that versus VTSAX, the total market fund.

Mindy:
So that’s a problem. And something we did to try to hedge our bets a little bit is we went out and opened up a HELOC against our primary residence. The problem is we had just refinanced our mortgage on that property and taken out as much as we could. And on that one, right?

Carl:
Yes.

Mindy:
Didn’t we cash out that money on that? So there’s not a lot of opportunity to borrow. I think they gave us 108, $120,000 on the HELOC.

Carl:
Yes.

Mindy:
Which is great if stocks only dip a little bit. But if stocks go into a bit of a free fall, we would most likely just get completely called out. And when they sell, I don’t believe they give us the option of what we want to sell. I believe they sell our stocks for us, which is not ideal. So yeah, like you said before, I want the people listening to take a lesson from us. And I don’t regret at all borrowing against our stock portfolio. I do think that this is going to be a really great property for us when we get it up and running. We are going to take every bit of the cash flow from it and put it into paying off that margin loan as soon as possible. I would do it again, even with the rates.
And while I am lamenting the fact that we didn’t lock in a 30 year fixed rate loan at 5%, we still haven’t paid 5% yet on our margin loans. And the Fed is now indicating that perhaps the rate increases are going to slow down. Remember that article from the other day?

Carl:
Yes.

Mindy:
So that’s exciting. Maybe we will get stopped at 5% or 6% for a little while, which will make this gamble worth it. And I think this was a gamble. I mean, we’re still in a really great position to, if we get called out, we get called out, that’ll stink, but we’ll deal with it at the time.

Carl:
Yeah. I’m not worried at all. I don’t lose sleep over any of this because we still have plenty of margin. Yeah. And soon this is going to start making money instead of consuming our money.

Mindy:
Yes. And we’ll be able to pay it off. Let’s talk about why we bought this house.

Carl:
Yeah. Whenever we’ve bought a property, we’ve always had multiple exit strategies. So we could either flip this house when we’re done with it or we could turn it into some form of a rental. We’re not going to flip it because of what’s happening. Yeah, real estate prices are kind of down a little bit now. It’s not an easy time. So we are going to turn it into a rental, and the form of that rental will be a medium term rental where we’ll do 30 days plus.

Mindy:
But we didn’t purchase it as a flip.

Carl:
No. We thought it would’ve been one of the potential exit, but we had never planned on doing that.

Mindy:
Yeah. It’s an option, but it’s not our primary option. One reason we bought this house is it is right next door to a friend. And it is a ranch style house and we are both getting a little bit older. Sorry, spoiler alert. The current house we live in has stairs everywhere. It’s a split level and there are four different levels in this house. So if you’re 85 years old, this isn’t really the best house for you. That house has a basement, but the only thing in the basement is the furnace and the washer and dryer. We’re making plans to move the washer and dryer upstairs so that there’s never really going to be a reason to have to go downstairs. If there was anything, it would be to change out the furnace filter, which you should do every month. And that’s something that’s easily hired out to a handyman as opposed to making somebody do all of your laundry.

Carl:
Yeah. Should we talk about what we’re going to do with it and more on the month to month rental?

Mindy:
Yeah, we should absolutely talk about what we’re going to do about it. That’s what we’re talking about right now, why did we buy this house and what are we going to do with it? It’s a weird house. It is one giant room with three bedrooms right off of the giant room. The giant room has 16 foot ceilings, and wood floors and drywall everywhere. And you walk in and it is just an echoy sound bouncy mess. So it’s terrible for recording podcasts. It’s also just terrible for children who have to go to sleep when you, the adult, don’t have to go to sleep. And we have two kids who are still in school. So for right now it doesn’t fit our family’s needs, but down the line it will fit our needs when the kids are out of the house. And we wanted to buy it now when prices are low. We wanted to rehab it now while we are still spry and can do it. And we will hold onto it as a medium term rental.And this is different than short term rental. This property actually doesn’t qualify for short-term rental because the HOA that we’re in doesn’t allow for short-term rentals. This is something that you need to know if you’re buying a property and you’re considering short-term rental as an exit strategy or as a investment strategy. If your HOA doesn’t allow it, you can be sure your nosy neighbors will tattle on you to the HOA and you will get shut down. So even though our neighbor lives next door, we are not going to chance it. We are going to follow all the rules and turn it into a medium term rental, which is a minimum of 30 days. BiggerPockets has a brand new book out called 30 Day Stay, which is written by Zeona McIntyre and Sarah Weaver. And it is a great step by step on how to set up a medium term rental.
It has a lot of the benefits of a short term rental with the higher per stay rent, and a lot of the benefits of a long term rental in that you’re not cleaning it all the time and you’re not responsible for all the supplies. And this really worked out for us in the long term, because our area had a fire at the end of last year and 1100 houses burned to the ground. An additional 2 or 300 were severely damaged. So there’s a lot of people in our area who were displaced. And when I was at the BiggerPockets Conference, I spoke with Elizabeth Colgrove, hi, Elizabeth, and she told me about a company called ALE Solutions that connects homeowners like me who have furnished or unfurnished rentals with insurance companies who have displaced tenants and allows them to connect and rent out their properties to these people at a higher rate than I would normally get on a long term rental.
And I think the trade off is that when the tenant’s house is ready, they can just leave. They don’t really give notice, which is fine because I’m making a lot more money on the per month rent. So, oh, you’re done and you’re leaving at the end of the week. Great, see ya. Thanks so much for taking care of my property. So I’m excited about that prospect. It was really, really sad to watch the people who were displaced try to find housing. It’s one thing when one house burns down, but it’s quite another when an entire community burns down. And being able to be part of that solution is going to be really great.

Carl:
Yeah. Should we talk about the rehab a little bit?

Mindy:
Yeah, we absolutely should. What did this rehab look like? What did the house look like before we bought it?

Carl:
It was pretty ugly. This house was built around 1980 and it looked like it was built around 1980. At least the kitchen was all the same. The bathrooms had been redone but not nicely. They looked like 90s bathrooms. Yeah. So far we’ve spent $30,000 on it. And I want to emphasize it that it’s only $30,000 because we’ve done most of the work ourselves. I think it would’ve been at least triple that if we would’ve outsourced the entire thing. Labor is very difficult here. Well, it’s always been difficult, but those fires exacerbated the situation. If you’ve got 1100 homes that need to be rebuilt or built, everyone who knows what they’re doing, everyone who knows how to even hold a hammer is going to be employed for a lot of money. I wouldn’t recommend this strategy if you don’t actually enjoy doing the work. I enjoy the design in doing the work, so it’s okay. And it’s, oh, a temporary part of my life. When did we start on this, in September?

Mindy:
We started this in September.

Carl:
September. Now we’re only in October and we’re almost done, which is pretty, it’s breathtaking actually. We’ve put a lot of work into it and hired a couple friends. But what have we done so far? We’ve gutted a kitchen. This house had carpet in the bedrooms, I don’t like carpet. One of the bedrooms had old icky looking pergo, like the old fake floor, not the nice LVP. So we took all that out. We put in new floors. We completely got to the kitchen. There were a lot of repairs that needed to be done as well. Leaks in the roof. And we’ve gone through and fixed all this.

Mindy:
You say we gutted the kitchen. I don’t think that’s an adequate representation of what we did. I would like to pause here and invite everybody to go over to the YouTube channel and watch right now, just take a peek at the before and after pictures of this kitchen, because holy cow, was it ugly? My friend Ray announced that the kitchen was a one butt kitchen, meaning only one butt could fit into it at a time. And I’m not a very tall person, but I can touch the ceiling in the kitchen before. And now we ripped out that whole soffit and the ceiling goes all the way up to 16 feet. We spread out the kitchen a little bit. So you see the before picture, you see the after picture and they’re just so much different. The home is such a different feeling now because we changed out the kitchen. And this was $11,000 in IKEA cabinets and countertops and $3,600 in appliances.
And we’ve done $4,000 in flooring around the house. That is the wood floor. We wanted to match the oak floor that’s already in the house with the oak floor that we were replacing that gross carpet with. You say you don’t like carpet, this was also industrial grade carpet. It was old and just absolutely filthy. I could not in good conscience keep this carpet in there. And then it would’ve been cheaper to install carpet rather than the hardwood floors, but we went with hardwood floors because we like it better and we wanted to match what was already there. It was about $4,000 because we had to build up the floors. I’m not sure what’s going on. The whole house is just a big, weird house. The floors had to be built up, what? An inch and a half or an inch and three quarter?

Carl:
Yeah. And there was a cement slab underneath. You can’t install hardwood on cement slab. So we had to put a vapor barrier down and then build up plywood to do with the nail down three-quarter inch red oak installation.

Mindy:
Yeah. But we also had to build it up because the other floor was already built up significantly higher. There was a step down into every bedroom. It was just very strange. Every bedroom door, instead of having an actual door on it, it had a sliding glass door, like an outside patio door, but inside the house. And it’s even dumber than it sounds. It was really, really strange to walk in there and you’re like, why are there sliding glass doors all over this whole house?

Carl:
Yeah. Frank Lloyd Wrong designed this house.

Mindy:
So, so far we’ve put in about $30,000. We paid approximately $3,000 to our friends to help us with some of the labor, some of the tearing out of the kitchen, and the installing of the plywood, building up of the floors and things like that. Drywall, installing the doors. I actually installed all of the hardwood floors myself because I am a rockstar hardwood floor installer. Also, it’s not that hard. And I put together all the IKEA cabinets myself because I am a rockstar IKEA cabinet installer. And also, it’s not that hard. Oh, I put them together. They hung them. They’re very heavy and they’re big. So I can’t do that. The guys did that. So, yeah. How much more do you think we’re going to spend on this property?

Carl:
The other thing that we are going to pay for someone to do is to refinish the floors. We’ll probably pay someone to do that and that’ll probably-

Mindy:
There’s no probably about that. We will.

Carl:
Yeah. I’m not sure how much it’ll cost. Probably $3,000, 3 4,000. I’m not sure what the cost per square foot is. But that’ll be the last big expense. Then we just have a lot of finishing stuff, like doorknobs, maybe a little bit more paint. And that’s going to be it. Most of our spending is done, so we’re going to get out of this under $40,000, which is great. And that includes the furnishings as well. Since this is a month to month rental and it’s going to be furnished, and we have bought most of that. It took us a while to do that, but yeah, most of that’s done. And we’ve been able to do it on the cheap, which is good. Cheap, but it looks great.

Mindy:
So we were able to do it on the cheap because we had time. We bought it in June and we knew that we were not going to be turning it right away. But we knew we were going to be turning it into a medium term rental. So we reached out to Zeona McIntyre, the author of 30 Day Stay, a new book from BiggerPockets Publishing, available wherever you buy books. And we asked her to come over. Don’t laugh at me. It’s a good book. We reached out to her and we asked her to come over because she just lives right down the street from us. And she came over and she looked. And she said, “You could furnish this on Craigslist, and Facebook Marketplace and places like that and buy used furniture, but it might take you a while to find everything. So if you’re looking to furnish it quickly, you should buy new things and I can help you with that if you would like.”
And we looked at each other and we thought about it for a bit. And if we needed to do it right away, we would’ve taken her up on the offer. But because we had time, we thought, let’s try this Facebook Marketplace and Craigslist. And were able to find an item here, a bed there. We bought new mattresses, but we bought bed frames on Craigslist and Facebook Marketplace. And I think it turned out really, really well.

Carl:
Yeah. The key to this whole strategy is, and I had to reset a little bit because I had some furniture that we got from neighbors. And Zeona came in and said, “No, you can’t have that. That looks like it should be in a fraternity house or something like that.”

Mindy:
She wasn’t wrong.

Carl:
Yeah. She wasn’t wrong. And I’m like, “Okay, you’re right. I have no style.” Hence my Costco tee shirt. Anyway, so we picked out some furniture we liked. We knew what lines we wanted to buy. And then we just set up an alert on Craigslist and Facebook Marketplace, so as soon as any of these things were listed, we would get an alert and we could jump on it. And some of the items took a month or two to find, but that was okay because we had the time. But that’s a great strategy. Find furniture that you want and then set up an alert that way you’re not scouring the internet, you just check Facebook or your email a couple times a day. And when something shows up, jump on it.

Mindy:
Yeah. And I thought that was a really good strategy. And if by the end of the rehab we didn’t find everything we needed, of course we would’ve gone out and bought new items. We do have one more bed that we’re looking for, but we have all of the drawers, and dressers and the furniture for the living room. The kitchen still needs to be outfitted a little bit. But again, that’s actually probably going to come from just go on target.com and have it all shipped to the house because I don’t need to touch that stuff when we go there. That’s another really great tip is you don’t need to be in the store to buy it. If you know that you need place settings for eight, you can go to target.com or walmart.com and buy place settings for eight.
I don’t really like IKEA dishes. Can I say that? Should I not say that? They always seem to chip, so I would not recommend those. But the furniture is awesome if you like setting up furniture forever. And if you don’t, you can hire somebody on Task Rabbit to set it up for you. One final note that I want to just remind people of, I know I have said this before, if you feel like I’m harping on this point, it’s for a good reason. We didn’t use an owner-occupied mortgage on this property, which would’ve come with a much lower rate, because that is mortgage fraud, which is a felony. And I don’t want to be a felon. And I know that there is a lot of chatter all across online saying, “well, how are they really going to know? How are they going to know if you didn’t move into this property?” And I have not personally known somebody to get caught for mortgage fraud, but that doesn’t mean it doesn’t happen.
And back on episode 303 where we interviewed John Leland, who was my go-to lender until he moved to a new company, he said that he has known many people who have gotten caught for mortgage fraud. And it’s a felony. I’m a real estate agent. If I become a convicted felon, I lose my license. I mean, I don’t want to be a felon for a lot of reasons, but I also don’t want to be a felon because I would lose my real estate license. I don’t want to go to prison. There are a lot of reasons to not commit mortgage fraud. And we had no plans to move into this property, so that’s why we didn’t get an owner-occupied mortgage. You can gamble at your own risk, but I recommend not.

Carl:
Yeah. Financial freedom is pretty great, but just freedom in general is pretty good too.

Mindy:
Yeah. Physical freedom’s even better. Okay. Well that is our update. If you are still wanting to be a real estate investor, I’m still bullish on real estate investing. I think there are still deals to be found out there. Even in this crazy interest rate market that we find ourselves in, I still believe that you can find a great deal, and get a higher interest rate mortgage now and refinance when rates come back down. I do have a lot of confidence that rates are going to come back down. I don’t think you should be investing with the idea that rates are guaranteed to come back down. But my professional opinion, my personal opinion is that rates will come back down.
And talk to your lender about your options before you get a loan. But talk to your lender about recasting your mortgage or a rate and term refinance. Ask them what other options are available. Right now your lender has an awful lot of time to talk to you, so ask them all the questions you can possibly ask about potential refinances, potentially changing the interest rate on your loan. And what are some lower cost options? The rate and term refinance is going to be different than a full refinance. Recasting your mortgage is going to be a different lower charge than a complete refinance. So talk to your lender about your options and see what they have to say.

Carl:
Yeah. We talked a little bit about our margin situation, but this is just a short term crazy world. But you have to be careful too, what’s the Charlie Munger quote? The market could stay irrational longer than you can stay solvent, so you have to be careful. But as long as you’re in it for the long term, just like stocks, everything is going to be okay. We’re in this crazy situation now, but it’ll revert and we’ll be back to normal.
And the other thing I think about situations like this is every time there’s some kind of strife or insanity going on in the world, that’s always an opportunity for someone. It might not be the same opportunity that there was for people six months ago when rates were low. But for example, right now off the top of my head, if you have cash and can come in and buy a house, you’re probably going to be able to find some deals. Yeah. But if I could say anything, it’s just be in it for the long term. And that goes to all kinds of in investing. If you’re in it for the short term, you’re probably not doing something right and you’re more likely to find yourself in a bad situation, because short term trends are very hard to predict, where in the long term, everything’s going to be okay.

Mindy:
Yep. Now is the time to be conservative when you’re running your numbers, but you could find a really great deal just because somebody else needs to get out.

Carl:
Yeah.

Mindy:
Okay. Carl, where can people find you?

Carl:
I’m at 1500days.com, and also the Mile High FI podcast, milehighfi.com.

Mindy:
Thanks. From this episode of the BiggerPockets Money podcast, he is Carl Jensen and I am Mindy Jensen, saying don’t scowl little owl.

Carl:
See you later, dinosaur-ater. That didn’t make any sense.

Mindy:
That didn’t.

Carl:
That was horrible.

Mindy:
Wow. You’re taking the role of suck.

Nick Jones, equity research analyst at JMP securities, joins ‘Power Lunch’ to discuss Opendoor’s warning, the cash needed to navigate near term headwinds and forces needed to normalize the housing market.

Dave:
Hello everyone. Welcome to On the Market. My name’s Dave Meyer, joined today by Kathy Fettke. Kathy, how are you?

Kathy:
I’m doing great. Happy to be here.

Dave:
Good. Well, we’re going to do a new show format today where Kathy and I are just going to talk about a very important topic which is rent growth. I don’t know if any of you listened to this have heard or seen some of the headlines recently that rent growth is starting to stall out, and in certain segments, rent growth is actually starting to come down, or rents are coming to get them down, and there’s a lot of noise out there. So, we’re going to try and make sense of what’s actually going on in the rental market. How’s that sound, Kathy?

Kathy:
Sounds like a very good and important topic.

Dave:
All right. Well, let’s just start and recap what has been going on with rent over the last couple of years. How would you describe in some historical context what we’ve seen in terms of rent growth since the beginning of the pandemic?

Kathy:
Completely manic is the best way I can describe it. A frenzy, a lot of it based on fear that people won’t get anything if they don’t get it now. I’ve seen enough cycles now to know that people think the cycle they’re in will continue forever and don’t see an end to it, or that cycles change pretty regularly, especially when they are caused by something rare like a pandemic. This is going to obviously throw a wrench into typical cycles, and people started to think that maybe it was normal, that low rates were normal for home buying, and that the frenzy and the lack of supply would last forever. So, people act out of fear a lot of times.
So, there was a mixture of people acting out of fear that they would never have a place to live, and also people thinking that the good time, let the good times role forever, that there would be government stimulus forever, low rates forever, and that they could just live remotely and wherever they want and be in control of their employment, tell their boss, “Hey, if you want me, I’m going to work wherever I want.” I mean, it’s just been a very manic couple of years. That’s the best way to I can describe it.

Dave:
How do you think that translates to rents going up in the way that we’ve seen them going up? Because the housing market, that’s one side of it. We’re seeing a lot of people behave in emotional ways, but there’s also this element where seemingly from a renter’s perspective, there’s no winning. Right? You have to either go to a super expensive home or you’re facing super expensive rent. So, have you ever seen anything, or how do you explain why rent has gone up so much?

Kathy:
I have never seen rents go up the way they have over the last couple of years, but I haven’t seen anything like the last couple of years before in my lifetime. With the last couple of years, I would say the kind of mania and the kind of loss of reality that people are experiencing was that they could live anywhere. So, when you have people coming from a high priced market moving into say a vacation area, I mean, maybe not a typical vacation area, but something that they thought, “Maybe I want to retire there someday, but I can do it now. I could do it now. I can move to this area, and it’s cheap.” Right? So, when you have enough people from high priced markets going into more affordable markets, they can pay anything, and rents can go up, especially if that area hasn’t expected that kind of wave, that movement of people. I mean, there were certainly markets that didn’t experience double-digit rent growth, but the sexy markets really did.

Dave:
Oh yeah.

Kathy:
And that’s because a lot of people were migrating to those areas, and it looked cheap to them, and they’d gladly paid 20% over what the market rate was because it’s still cheap. Right? It’s still cheap to them.

Dave:
Totally.

Kathy:
Yeah.

Dave:
Yeah, it’s a great point. People just got in this frenzy where it’s like the desperation to get a place to live which is terrible, I mean, that’s just not a great place to be, but people were overbidding on rent. Just for some numbers here, on average, the rent in the US went up somewhere between 25 and 35% over the last couple of years which is much faster. I don’t know about you, but in Denver where I have some rental properties, it took 10 years to get about 50% rent growth and Denver was one of the fastest growing rent markets in the country. Now we’re seeing that nationwide, we got 30% rent growth in two years. It’s just something that doesn’t seem sustainable, and I’m just, I have some theories about what drove that other than the mania. But I’m curious, do you think there’s any macroeconomic demographic, any other issues that sort of drove this behavior?

Kathy:
Oh, absolutely. I mean, absolutely. After the last great recession when builders were wiped, literally just wiped out from that, they were a no hurry to go build more supply at a time when the demographics were really shifting, and this very large group of millennials, I know we’ve talked about this so many times, who are now 29 to 34 and forming households, that’s the largest segment of the millennials were just coming to household formation age starting in 2020 right when kind of everything shut down. They were given a whole bunch of stimulus checks and didn’t have to go to work. You know what I mean? So, it was a blast. I mean, not for everybody, but for a lot of people, they got to go live in Colorado and ski, or they got to go to Florida and live by the beach and things that they normally wouldn’t get to do. Right?

Dave:
Sounds pretty nice.

Kathy:
I know, right?

Dave:
Yeah, I think it’s a good point. I feel like household formation is one of the most underutilized metrics in economics or at least specifically housing economics, and we’ve talked a lot about that to your point about how millennials, not only are they a big demographic, that matters, but how many of them are going out and trying to start their own home or their own family is equally if not more important because I know for example, for me, I’m a millennial, and for the first many years I was out of college, I live with a roommate or several roommates. And then at a certain point when you reach the level of financial stability or capability or need because you start a family or something, you form a new household, and we’ve talked a lot about that in terms of how that’s driving home prices.
But that’s a great point that it’s also probably driving rent because not only are people more households, they were flush with cash, and so they’re like, “I’m going to form a household, and I’m going to do it with style, and I’m going to go and pay for something,” that maybe they previously couldn’t afford.

Kathy:
Yeah, most people aren’t really thinking long term. And so, if they’re suddenly given a big stimulus check and have some freedom, they’re going to go live their lives and try new things and that’s great. I think there was a record number of new businesses that were created over the last two years. There’s a lot of good that came out of it and a lot of bad, and personally, the bad is something that none of us can really fight against because we have zero control over it. And that is the manipulation of the markets that we’ve talked about with the Federal Reserve who is now, I think it’s pretty common now, I think a lot of people didn’t even know what the Federal Reserve was until now. I’ve been studying for years kind of the control that they have over the economy and over us, and I’ve based a lot of my investing decisions on what they might or might not do.
So, basically, when they’re going to stimulate the economy, you can pretty much count on the economy being stimulated and growing. When they decide to pull that back, you can pretty much count on things reversing and that’s all it is. That’s all it is. When you boil it down, you go up to a bird’s eye view and look down, all it really comes down to is the manipulation of the market from the Federal Reserve. And when we could follow that and follow whether they’re pouring money into the economy or pulling it back out, you can either make a lot of money or you can prepare and get out before they pull the money back out.
It’s really like a gamble, and I hate to say that, but in February when we’re all scratching our heads going, or at least I was, like, “Why are they still stimulating the economy? Why are they still buying mortgage backed securities to keep mortgages low at a time when the housing market did not need stimulation?” There was already lots of reports on the massive price growth and rent growth. Why would they keep stimulating? Why would they keep printing money? You only do that in a downturn. And we were up and we were up high. The economy was booming.
So, in March when they made it real clear, oh, well, we got to stop this train that we put the gas on, we got to slow this train, and they made it real clear early on this year that there would be seven rate hikes to slow it down. That means they’re going to take that money off the table. I’ve said this before and people don’t like to hear it, but the way that that happens is usually through stock market crashes which is what we’ve seen. That’s if that you pull it, there’s a lot of money that’s been pulled out there, a lot less money that people can spend.
I’ll tell you what, we didn’t bring this up yet, but with young people being kind of super savvy now, and I don’t know about savvy is the right word, but able to invest in the stock market just on their phone and play it like it’s a casino, and you’re watching your money grow, and you take some of that out, and you spend it, and you live big. Right?

Dave:
Mm-hmm.

Kathy:
I had a friend that I surf with who was like, “I want to invest in real estate, but I only have 40 grand,” and I was like, “Well, you can do that.” But then I was kind of telling them the returns you can usually get from a $40,000 cash investment, and he’s like, “Nah.” He put it into Tesla stocks. I saw him a year later and he’s like, “I made 400,000.”

Dave:
Oh my god. Yeah, but now, yeah, now where is he?

Kathy:
He’s still-

Dave:
He’s probably still up a lot. I mean, it’s still up way before where it was.

Kathy:
Yeah.

Dave:
I sold Tesla stock in 2020, not all of it, but way too much of it. That is a very big regret of mine.

Kathy:
Yeah, I mean, that’s the kind of mania we were experiencing over the last two years, and it was exciting, and there was money to go do these things and to get these air Airbnbs up and running. That’s part of the reason why rent growth went up is when you have that much money circulating, and it was 7 trillion extra dollars. Right? The amount of money circulating in the last two years, the extra money, was 50% of what had been there, and it was the amount of money that was circulating completely, entirely in 2007. So, $7 trillion added and people were having a good time who could get their hands on that money, and like I said, just invest in something and have it go up 10 x. I mean, that’s amazing. Why would you not gamble it?

Dave:
Yeah, I think it’s interesting because we associate Fed action with housing prices but not necessarily always with rent, but if you look at the pace of rent growth over the last couple of years, it follows the stimulus pretty carefully. At first, even though rents went down, rent actually dropped for the first few years of COVID, but then it just kept going up linearly like a true hockey stick. If you’re watching this on YouTube, it just went straight up the charts. But then when they started to pull off the gas, you see that rent growth started to peak around February/March when people started to realize that the party was coming to an end and we were no longer going to be in this crazy accelerated economy where money was flowing around, and people could pay for everything because their crypto or their stocks or their stimulus checks or enabling them to pay more for rent, and I think that’s what we’re starting to see.
So, as of now, we are starting to see rents, the pace of growth for rent really start to come down. Back in February, it was up 17% year over year which is just insane, but now we’re still up 11% year over year which is still really, really high. But what’s sort of the impetus for this show and why we wanted to talk about this now is because some data has come out that rent is starting to go down. I got a lot of questions about this, like oh, is rent crashing, and let me just first explain that rent going down in September is normal. That is what’s supposed to happen. Just like in the housing market, this type of pricing is seasonal. It always peaks over the summer. That’s when most people are moving. That’s when there’s the most demand for apartments. And then starting in September, October, things trail off. If you’ve ever tried to lease an apartment over the winter, it’s pretty tough. There’s not a lot of tenants looking to move at that point. So, you know you might have to drop your prices.
So, seeing rent come down in September of 2022 is actually, in my mind, it’s kind of a good thing. This is a sign that we are actually returning to normal seasonality and it’s still up 11% year over year. So, Kathy, what do you make of it? Does this worry you or are you sort of on my side of things here thinking that this is actually maybe a great thing?

Kathy:
It’s a great thing. It’s a great thing. Homelessness has increased, and people have been complaining about rents going up 20% in certain areas, 30% in some areas. Absolutely unsustainable, not healthy. Again, a lot of that, like let’s take Phoenix or Austin, a lot of that was California money that, hey, you could double the rent. It could have gone up a hundred percent, it’s super cheap for people coming from California. So, I will blame a lot of it on Californians taking their money and going to a cheaper market.

Dave:
It’s always you guys. It’s always the Californians is just screwing things up for everyone else.

Kathy:
New Jersey and New York helped a little too, but it’s, again, these areas where someone your age is like, “I could live in San Francisco where they have apps showing the poop on the street.” Right? Has it become kind of a dirty city? Or you could move to Phoenix or Austin, I mean, where a lot of millennials are moving. These are the places they’re moving, they’re cool, they’re fun, there’s things to do, there’s young people. You’re not going to probably move to, I don’t know, I’m trying to think of a place, Jackson, I always pick on Jackson, Mississippi, but that’s not on the map. Right? That’s not the city that you’re hearing about. Not a lot of young people are moving there.

Dave:
Never makes one of the lists. It’s never on the top migration lists, yeah.

Kathy:
Never going to make the list.

Dave:
Never been to Mississippi.

Kathy:
People invest there because it’s stable. It’s stable. Right? Doesn’t really change at all no matter what’s going on.

Dave:
Yeah, I don’t know. But yeah, so I think I’m with you. I mean, obviously it makes sense that things are starting to cool down now. Do you worry though that rents are going to start going down in some nonseasonal way where we actually are going to see cash flow for existing properties start to decline?

Kathy:
I’m not worried. I welcome it. I have to look at this data as a human versus an investor because what matters most is the health of our country and of the families that live in this country, and rent needs to stabilize. It can’t keep going up like that, just like home prices can’t either, and it was definitely stimulus based. So, we’re just coming back to where we should be.
Now, at the same time, wages have gone up, wages have gone up in I wouldn’t say an equal rate, but based on the data that we’re seeing, the wages went up enough that some of these higher rents are still affordable, even in the C Class. I kind of was shocked to see that in the data. C Class apartments tend to get hit hard during recessions because that tends to be a group of people that are more transient. Yeah, well, look at what happened during COVID. It was those jobs that got hit the hardest, for sure, anything in hospitality. Of course, they were helped out through the stimulus. But now that those jobs are coming back and wages are up for a lot of people, surprisingly, they’re able to afford rents in a lot of markets because of the higher wages.
But seeing the rent growth slow down is a wonderful thing. It’s a good thing, and we should be rejoicing over that for our country. We should be rejoicing that home price growth has slowed down because a year ago we had a different conversation about that. We didn’t know when it would slow down, and people were scared they wouldn’t have a place to live. There was nothing on the market in some areas. When my daughter bought, she’s a typical millennial, aged 30 with a baby and a husband and two dogs, and there were two properties available in the area that she wanted to live. Two, two, and maybe two for sale and two for rent in the price range she could afford. So, that’s a scary time. Right? It’s like are you going to live with Mom and Dad with your two dogs and your kids? I mean, what are people going to do?
So, that was the story last year. The Fed came in, turned on the lights, took the stimulus away, and here we are going, “Oh, okay, things are going back to normal.” The headline is different. It’s a better headline. It just depends on how you want to interpret that. As an investor, you better be playing defensively. You better not be writing up your pro formas thinking that it’s going to be anything like the last two years. It’s not. Same with home prices. There are going to be areas where there’s still just not enough supply for demand and where it’s still affordable enough because people moving there or living there still have high salaries. Like North Texas, that’s one of the areas we’re looking at, $100,000 jobs moving there. We’re still buying homes for 200,000. So, the numbers work. The numbers work. But as an investors when you see these headlines, you need to be careful, you need to be cautious, you need to make sure that your pro formas makes sense and that the average person in the area can afford your rent.

Dave:
Yeah, that’s a great point. I think that when investors who are looking for existing properties see this, they think that their rents can decline, and that might happen, to be honest. I think there’s a chance that that happens. But just to ease people’s mind, if this is one of you, it is unlikely that rents will fall that far. Unlike housing prices, rent prices are pretty sticky. If you looked at what happened in the Great Recession, housing from peak to trough, so the highest it was during the mid-2000s to the lowest it went where it bottomed out in about 2011, housing prices dropped 27%. Very significant. That is a genuine crash. Rent prices during that time, the worst they went down was 6%. So, we’re talking about a whole different scale here.
I think most people don’t believe that even the price correction for homes will be 27%, but even if it were that bad, rent might only go down a couple percentage points. It’s probably very unlikely that we see double-digit rent drops because like we were saying, people formed new households, and although there was actually an article in the Wall Street Journal yesterday talking about how some people are moving back in with their parents or moving back in with a roommate, they didn’t really provide any data about that, so it’s hard to know, but just knowing from personal experience, I think people are very reluctant to go back and live with their parents. That’s sort of like a thing of last resort right now, and right now people are still employed. We haven’t seen an uptick in job losses. So, I think inflation is hurting people’s spending power, but I think it’s unlikely that we’re going to see just a very significant drop-off in demand for rentals at any time soon.

Kathy:
Yeah, at the end of the day, it always comes down to supply and demand, even when the government is stimulating the economy, and even if mortgages were still at 2%, but we had a glut of inventory. Let’s just say that we had the amount of inventory we had in 2007 which is three times, nearly three times what we have today, it was over 3 million, and mortgages were still at 2%. There might not be the kind of price gains that we’ve seen there. There still would be, right, because people decide, “Well, if mortgages are 2%, I’ll take three, I’ll take four houses, I’ll have one in each city.” So, people get greedy and want more than one.
So, it comes down that we still have a supply issue. We still had a decade of slow building because like I said earlier, builders got wiped out. That is how I got started syndicating. Back in 2009, I had a 40-year veteran developer come to me and say, “Do you know how to raise money?” I’m like, “No, I’ve never done it.” He’s like, “Well, figure it out,” because he would walk into B of A, he would literally walk into the commercial division of B of A, I don’t know if I can, I guess it’s public news now, that he would walk down the aisles and it was boxes to the ceiling of foreclosed subdivisions and foreclosed land, and it was an unbelievable time. So, we were able to buy up all the stuff that builders had lost during that downturn, and it made sense for us because we were paying 10 cents on the dollar.
But you could see why those builders weren’t in a hurry to come back. So, building was so slow over the last decade while our population grew, and this group of millennials that have been given such a hard rap over the last 10 years, basically saying, “Oh they’re just sitting home on Mom’s couch smoking pot.”

Dave:
They’re [inaudible 00:24:21].

Kathy:
Yeah, maybe. But now they’re older. I think anyone who was judging them should ask what they were doing when they were in their early twenties. Now this millennial group is older, and it’s a huge demographic, and there just simply wasn’t supply created for them. Add to it, the baby boomers living longer, feeling healthier.

Dave:
Totally. It’s a really, yeah.

Kathy:
There was all this media headline about boomers dying and of course there’s a segment that are, and that they were going to leave their homes, there’s going to be this glut of inventory from all these old people that die, and that just hasn’t happened. They’re living longer.

Dave:
There’s a very famous real estate person I won’t call out but who has been predicting a crash for years based on this theory that boomers were going to all die off and leave just a huge glut of supply, and clearly that’s not happening.

Kathy:
Just hasn’t happened. So, with those kinds of headlines and that kind of lousy data that was being shared and that I guess builders were listening to, they’re not going to take risks again. They were going to build spec. And so, it’s just we’re behind on supply. I see comments a lot of times on the On the Market podcast of people saying, “What do you mean? Now there is more supply. Thank goodness there’s more supply.” But kind of not really. It just moved down again. Right? At least in home sales, the inventory just went down again. So, it’s not better. There’s a little bit more inventory in rentals, and I don’t know what you saw in that data, but actually absorptions and occupancy is… Wait, let’s see. Vacancy is rising in apartments so it’s something to pay attention to, but home sales and homes on the market, that’s declining again. It’s just, it’s incredible. So, this is still an issue. Inventory is still an issue, not in every market and maybe not in your market, but overall, nationwide, it’s a problem.

Dave:
Oh absolutely. Yeah, just to speak, I do want to get back to the multifamily thing in a minute, but just if you didn’t see the show a couple months ago with Caitlin Walter who’s from the National Multifamily Housing Council, their organization showed that by 2035 we need 4.3 million new apartment units just to keep up with demand. So, yes, I think there might be some short-term things which I do want to talk about in terms of more supply coming on at a time where we might be entering recession, that could create some short-term stuff. But long term, demand for rent is going to be huge. I mean, to your point, we just don’t have enough supply.
The other thing you mentioned quickly that I want to talk about first that bodes well for rents being sticky is that lack of vacancy. Right? We’ve seen in the US that we are now at the point, vacancy’s the lowest it’s been since 1982. So, we’re talking about 40 years since we’ve had vacancy as low as it is now. That’s not just multifamily. That’s across the whole economy. And so, when you’d have rent that, I mean, vacancy that low, it’s kind of hard for rents to fall that much, and yeah, we could see vacancy start to tick up, but at this point there’s not really a sign that we’re going to start seeing this just lack of demand for rentals.

Kathy:
Yeah, my hope is that it just stabilizes and balances out what it did over the last two years so that the next couple of years it’s just flat, and that’s just kind of what we’ve been seeing in the last month that it’s flattening. I don’t think there’s any chance that rents will just collapse or that we’ll have a ton of evictions. That is again, unlikely, although it is very sad that homelessness has increased, and I will 100% blame that on the Fed, I will, for all the stimulus because that really separate the haves and the have-nots. Those who do not own hard assets, like real estate are just, it’s going to be hard to keep up. It’s going to be hard to keep up with inflation. Inflation, they will never tame it. It’s never been tamed. Just look at prices of anything.

Dave:
Yeah, They target 2 to 3%. They want some inflation.

Kathy:
They want inflation.

Dave:
Yeah.

Kathy:
Yeah.

Dave:
So, I totally agree, yeah. A low interest rate environment like this, it inflates asset prices. It’s just a fact. And so, to your point, we’ve been in, what, a 12-year low interest rate environment, 15-year low interest rate environment. That’s going to really create a lot of wealth inequality for the people who do own assets like real estate and the people who don’t.

Kathy:
Yeah, and I imagine those people will start to move to more affordable areas which is again why one of our strategies right now is to focus on those markets, just steady Eddie markets, the markets that don’t do too much. That’s kind of my safe place during times like this.

Dave:
Jackson, Mississippi.

Kathy:
Well, maybe not Jackson. I still want to see growth. I want to know something cool is happening in that area. There’s got to be a big university or big hospital. Like again, Cleveland is a market that we talk about sometimes, huge medical industry. That’s important. We know we do have aging baby boomers. They won’t die, but they’re going to stay alive forever and want hospitals.

Dave:
Exactly. Well, no, I totally agree. We don’t just want to go anywhere. But I think part of the challenge here is that the demographic shifts are creating, everyone wanting to move to Austin, to Portland, to Boise, rents going up crazy there, and a lot of these markets, it’s been above the normal level, but it’s not been double-digits every year for the last two years. I don’t know what Cleveland was off the top of my head, but it wasn’t 30% a year. I can tell you that much.

Kathy:
Exactly. It did go up, definitely, and it was already cheap. Right? So, going up 10% in a market like that is still pretty darn affordable.

Dave:
Yeah, that’s probably not so different from wage growth over the last few years.

Kathy:
True.

Dave:
So, before we move on to the multifamily stuff because I want to pepper you with some questions there because I’m curious, but just so people know, I did do some analysis and we have a data drop for you guys. So, if you’re curious about what rent is doing in your market, we have a data drop that shows for the top hundred markets, largest markets in the US. It’s going to show you how rent has performed over the last five years. We’re going to talk about… It shows you month over month and year over year changes. You can get that by going biggerpockets.com/rentaldata. Again, that’s top hundred markets, all this amazing data for you. Definitely go check it out. It’s free, there’s no reason not to do it, biggerpockets.com/rentaldata.
But I wanted to see if there are any markets that are actually declining, not just month over month because remember, seasonality, not surprised things are going down month over month, but year over year, and there were actually four markets that were. I think I made you guys guess on a recent one, but the number one was Spokane, Washington, went down 6% which I don’t know much about Spokane, but I know it was one of those crazy boom markets over the last couple of years. Reno, Nevada is the second one which I have a friend who bought there at the peak and is very much regretting it right now. And then we have St. Paul and Minneapolis which are kind of interesting because they implemented a couple of rent and price control things and we’re seeing rent start to fall down. So, it’s just those four cities. So, four out of a hundred. Personally, I wouldn’t be too concerned about big drops.

Kathy:
Yeah. I went to school in Spokane.

Dave:
You did?

Kathy:
Whitworth College. Yeah, I know the area.

Dave:
What school?

Kathy:
Whitworth College for two years, yeah.

Dave:
Oh, cool.

Kathy:
It was a small Christian college because I’d partied enough in high school that I just wanted to go to a college that didn’t have it.

Dave:
Wow. Wow. I want to know high school Kathy.

Kathy:
But I know Spokane. It’s just not high income growth area, but I think that nearby in Coeur d’Alene and-

Dave:
Which has gone nuts too.

Kathy:
… went crazy, so Spokane is really just not that far from there, and there were definitely some new businesses moving into Spokane, but I think it was more of a investor frenzy would just be my guess there.

Dave:
Totally. And one of the things I think people get wrong sometimes is when we see, oh, people are leaving big cities like Seattle, the vast majority of them stay within the state, we assume, and you do see people moving to Austin or to Las Vegas or whatever, but most migration is intrastate migration. And so, I’m just guessing, but I would think people are tired of Seattle prices, making a great income. I’ve heard that area of Washington’s really beautiful. So, maybe people are just moving there with their Amazon salaries and moving to Spokane like you’re talking about.

Kathy:
Yeah, yeah. I mean, it’s a quick drive over to Coeur d’Alene. You can still enjoy that, not have to pay those prices. But I think it’s really the millennial cities that pops the most because again, it’s such a big demographic and so high paid. So many of those young people have really high salaries and could go live quite a nice life in some cool, hip areas.

Dave:
Totally. So, those were the only, the four markets that went down, but 96 are still going up at least on a year over year basis. And if you’re curious, do you have a guess about… I wrote out the top three, one of them is kind of obvious, two of them are sort of obscure. Do you have any guesses? Still growing very quickly.

Kathy:
I’m looking at my notes and I’m not sure. Miami?

Dave:
Ah, that’s number three. Very good.

Kathy:
All right.

Dave:
27% still, 27% year over year, Miami. That’s crazy. But that was actually three. So, Lubbock, Texas. You know a lot about Texas. Where’s Lubbock?

Kathy:
I actually have a good friend who owns a ton of rentals in Lubbock. I’ll have to ask him. It’s kind of I think oil related which is not surprising.

Dave:
Oh, okay. West Texas, I don’t know. I’m not good at geography, but your friend is probably enjoying 31% year for year rent growth which is absolutely wild.

Kathy:
Oh yeah. Yeah, I should have listened to him.

Dave:
The second is Jersey City, New Jersey which I’m familiar with, not so far from where I grew up. But I think that’s one of the big stories too is you see cities like Jersey City, which is right across from Manhattan, going up a lot because it was one of the places where rent actually fell in the beginning of the pandemic. So, it’s recovering and then some, but it sort of distorts the data a little bit. But you do see at least the New York metropolitan area rent has recovered and then some at this point,

Kathy:
Yeah, I think in these areas where we did see so much rent growth, what’s important to focus on is which businesses moved there versus which people moved there because that’s what’s going to keep it sticky. And that’s the thing about Miami, that’s why I guessed Miami is I know that many New York financial firms moved to Miami. I’m surprised it took up so long because it’s like-

Dave:
Yeah, Wall Street South.

Kathy:
Exactly. Why would you not choose beaches over snow? I don’t know.

Dave:
And no state income tax.

Kathy:
And no state income tax. So, that to me is an area that I don’t see it dropping substantially because of that. You’ve got New York financial giants moving there and they still think it’s dirt cheap.

Dave:
Totally. I moved out of New York because I always thought it was a little bit of a scam. I love New York, I love visiting there, but people put up with a lot there because they’re like, “Everything’s happening here,” and you have this small apartment that’s super expensive because there is a lot of culture, there’s nightlife, there’s great food, there’s a lot. But I think some people moved during the pandemic, they’re like, “There’s also stuff elsewhere.”

Kathy:
There’s some good food here too.

Dave:
There’s a lot going on in Miami too, and you get a lot more for your money.

Kathy:
Oh, that’s so funny. I’ve been doing this for 20 years. I would bring kind of California snobs, no offense y’all, but you know what I’m talking about, and I would take them to Birmingham or something, and take them to an amazing restaurant where they couldn’t read, they didn’t know what was on the menu, they didn’t know what it was. I was like, “If I blindfolded you, would you think you were in California based on what we’re seeing and the buildings?” And they were like, “We wouldn’t know the difference.”

Dave:
Yeah, exactly. There’s great stuff everywhere.

Kathy:
But they just don’t know. They just don’t know because they hadn’t been. Yeah, and I think people got a chance to go travel a little bit.

Dave:
Yeah, it’s great. So, the last thing I want to talk about before we go is about multifamily rent. So, you have experience with this, but the data I’ve seen is a little bit contradictory. Right? So, we’re looking at some of the similar data. So, one thing that we’ve seen is that occupancy levels in multifamily have gone down. There’s still really high. They’re still like 95%. Just for context, they usually hover between 93, 95 and we’re still at 95%, but they had shot up to like 98% for a couple months now. So, that suggests that there could be an increase in vacancy. When vacancy goes up, rents tend to go down. But at the same time, we’re also seeing that the number of lease renewals, people who are choosing to stay in place has also gone up for multifamilies. So, these are sort of contradictory data points. So, we’d love to just get your read on the multifamily rent market.

Kathy:
You know, I just spoke at several conferences and got to hear and interview a lot of investors. In fact, I’m going to give those interviews to you guys and see if we put together a YouTube video on that-

Dave:
Oh, that’s great.

Kathy:
Yeah, just to hear what people are thinking and what they’re doing in the multifamily space. So, one of the big things I took away from the conference was that we’ve got to compare today’s number to pre-COVID. Every city’s different. Right? Every city has different dynamics, different employers moving into the area, different employers leaving the area, and different dynamics because people are moving in, and they have different political views, and so forth. So, there’s been lots of change.
But to try to guess what’s going to happen when you’re underwriting a deal, especially in multifamily where the difference if you get it wrong could be millions and millions of dollars. We know that. Jamil shared that with us. You do not want to make a mistake in your underwriting with multifamily. So, use numbers in that market. 2018, 2019, you’ll get a better idea of what a typical vacancy rate would be in that area, and even better, take the decade, take the average of the decade starting with 2012 up to 2020, and that will give you a good idea of where we might land in that market.
Now, if something really major changed, and that would be really in Florida and Texas, because the big thing, the major things that have changed in those states is so many businesses moving to those states for, what you just said, the tax benefits, but also they learned a lot during COVID. They learned that there are certain markets that are more job friendly than others. This is something I’ve been focused on for years, I’m sure you have too, because it matters if you’re a landlord. You want to be in a landlord friendly area. So, it’s easier that laws are in your favor, and that’s when a lot of businesses realized, “I want to be in a state where the laws are in my favor and where I can keep my doors open.”
Those two areas, I think you’ve got to taken into consideration the amount of new jobs that have come to the area that are permanent, that are not leaving, factories that have been built and so forth and headquarters where it’s probably not changing anytime soon. But other than that, I would look at the last 10 years and pre-COVVID and just take the average, the vacancy rate, occupancy absorption.

Dave:
Yeah. I mean, I think it’s a great point we don’t talk about that much, but if you miss rent estimation by let’s say 50 bucks on a single family home, you’re going to be fine. It’s not that big deal. Right? I was thinking about this the other day, if you miss rent by 50 bucks on a 300-unit syndication, that’s 600 bucks per year per unit, that’s $180,000 per year in revenue which is a lot, but not crazy. But when you consider that the way that multifamily units are valued is by cap rate, if you then sold that or if you’re selling at a 5% cap rate, that’s $3.6 million in value that you’re wrong by just estimating $50 off on your rent.
So, I think that’s very wise, very wise advice, Kathy, that to be extra conservative right now because there is sort of contradictory data, we don’t know exactly which direction it’s going to move nationally. If you study your market, hopefully you have a better idea of what’s happening locally in your market, but I think it’s true just of generally anything right now. I would personally underwrite anything single family with little to no rent growth for the next year or so.

Kathy:
Absolutely. And I would assume that cap rates are going to increase which generally means that the price is going down.

Dave:
Yeah, definitely. Yes.

Kathy:
Which is great if you’re buying. Right? If you’re buying, that’s great.

Dave:
Right. I mean, I think James said in a recent episode when we were all chatting, he thinks there’s going to be a lot of these opportunities coming on the market too because people are going to be defaulting. So, it does mean there could be opportunity there.

Kathy:
Or just even if they’re not defaulting, just the values are down. If your expenses go up, and again, it’s coming back to the nuances of multifamily and anything commercial, it all comes down to NOI, and so, what is your net operating income, what are your expenses, and that determines basically the value of the property. And so, if the goal is always decrease expenses, increase income, even by little tiny amounts like you said, and that can increase the value by millions. But the reverse is true too. It just goes down ever so slightly if your expenses go up, your rents, your insurance, cost of money.

Dave:
Yeah, cost of debt.

Kathy:
Exactly. That is going to affect the NOI. It’s going to affect the price. So, again, it could be a wonderful opportunity as a buyer and really tough if you’re a seller.

Dave:
Yeah, absolutely. Well, I think that’s really, really good advice. Just generally speaking, just to sum up sort what we’ve talked about today, rents are starting to come down on a month over month basis. That is normal. This is seasonality. This is what we would expect in a normal year. In 2021, that didn’t happen and that’s what’s not normal. That’s the concerning thing in my mind is that it didn’t follow the pattern that exists every other year. But on a year over year basis, rents are still up 11% year over year nationally, and out of the top hundred individual markets, only four of them have seen individual declines. Vacancy is still really low.
But I think anyone who’s following the market understands that there is downside risk right now, and that you should be careful. If you are underwriting any sorts of new deals, you should be very conservative in what rent estimations you’re making, and I think for a couple years honestly, people were buying a deal being like, “Oh, it’s not going to cash flow this year, but next year it’s going to cash flow.” And that probably actually was true for one or two years, but I would not do that anymore. That is not wise. I would personally recommend being conservative because you probably can be because home prices are probably going to come down in many markets and rents are a little bit stickier. So, cash flow prospects are going to be better, and I would recommend just being patient for that. Any other advice you have, Kathy, before we get out of here?

Kathy:
Yeah, I mean, this is really going to be a good opportunity to get into multifamily. I would just be very cautious if you’re investing in somebody else’s syndication or if you are embarking on it yourself that you have somebody on your team that’s been through a down market because most of the people that I meet at these conferences have only been doing it for a few years.

Dave:
Like me

Kathy:
Yeah, maybe the last eight years and haven’t experienced a real recession. We may or may not have a tough recession ahead of us. We don’t know. It could be awful. It could be barely a blip. We just don’t know. It depends a lot on what the Fed is going to do and we have zero control over that, like zero. It’s going to do what they’re going to do. So, just have someone on your team who’s been through a down market and who knows how to navigate that and knows how to underwrite with that stress test in mind.

Dave:
That’s great advice. And again, we don’t know what’s going to happen and no two recessions are alike, but history is your friend too. If you go and look at what happened in previous recessions, in previous job losses, the last time the Fed raised rates like this, you can learn a lot about what might happen and how you can protect yourself and be conservative but still be opportunistic. I think that’s sort of the name of the game. Right? It’s like don’t get ahead of your skis. You want to be careful right now, but there will be opportunities if you’re informed and know how to buy correctly in this market.

Kathy:
It would be really cool, here’s just a little idea for BiggerPockets, but it would be really cool to have some kind of mentorship program where you take these people who have been investing in multifamily for 30, 40 years and are maybe all set. They don’t need to do anything else. They’re raking in the dough from their acquisitions from years ago. But to come and just give some mentorship and advice to people getting into it, it would really help to bring in that wise counsel.

Dave:
Definitely. Well, we do have the bootcamps if you haven’t, I don’t know if you’ve seen any of those, but we have bootcamps where people who are more experienced. I know we have a multifamily bootcamp. Do you know Matt Faircloth?

Kathy:
Yes, of course.

Dave:
Yeah. So, Matt and Liz who host the BiggerPockets InvestHER podcast are both doing those bootcamps and they’re super experienced. But yeah, I think that’s great advice. We’ll have to send those to the higher ups.

Kathy:
Well, it’s just one of the benefits of BiggerPockets is there’s just so much wisdom on the website of people willing to help you and kind of mentor you, sometimes just for free. But yeah, we love Matt, we love the Faircloths. They’re the best.

Dave:
They’re the nicest people. But yeah, honestly, so many people, I don’t do any mentorship or coaching, but people reach out to me on Instagram and they’re like, “Hey, can you answer this question for me, or will you mentor me?” And I’m like, “Did you just ask this on the BiggerPockets forums?” You can for free get dozens of super experienced investors can answer these questions for you and will, and honestly it’s better than having an individual mentor. You’ll get a lot of opinions which is really helpful. So, if anyone’s listening to this, I think a lot of people who listen to BiggerPockets podcasts don’t know we have a website which we need to work on, but if you don’t know, go on the forums and ask questions. It’s an incredible resource for investors, and to Kathy’s point, you can ask people who have been through these types of situations before how they would handle your circumstances or just approach this type of market. Very good advice.

Kathy:
You can even just put the deal that you’re thinking about getting, maybe not the address because someone might snatch it from you, but just you’ll get so much input it. It’s a really an incredible resource.

Dave:
Absolutely. And also, if you’re on the website, download the free data drop that we’re given out this week. It is biggerpockets.com/rentaldata. It’s free and you should absolutely do it. Kathy, thank you for being here. If people want to reach out to you for your sage advice, where should they do that?

Kathy:
Oh, thank you. You can always reach me at, well, @kathyfettke is my Insta, but also realwealth.com is our company where we help people acquire investment property nationwide, and my syndication company is growdevelopments.com.

Dave:
All right, great. And I am Dave Meyer, and @thedatadeli is where you can find me on Instagram. Thank you all so much for listening. This has been On the Market, and we’ll see you next time.
On The Market is Created by me, Dave Meyer, and Kailyn Bennett, produced by Kailyn Bennett, editing by Joel Esparza and Onyx Media, research by Pooja Jindal, and a big thanks to the entire BiggerPockets team. The content on the show On the Market are opinions only. All listeners should independently verify data points, opinions, and investment strategies.