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Anne-Marie Gulde, deputy director of Asia and Pacific department at the International Monetary Fund, explains why it cut China’s growth forecast to 3.2% for this year, and to 4.4% for 2023.

Dave:
Hey, what’s going on everyone? Welcome to On the Market. I’m your host, Dave Meyer. Today, I am going to be doing a semi deep dive into a topic that has really been interesting me recently. And yes, it is nerdy, it’s a little wonky, but it is demographics. And I know that probably doesn’t sound like the most exciting topic, but I’m going to try and make this fun. We have a great interview for you and I want to also just make sure you know that demographics are actually a really important part of investing, particularly with real estate investing because it makes up a lot of demand, right? On this show, we talk a lot about supply and demand and how that really impacts the price of assets.
It impacts where rent is going to grow, where vacancy is going to be, and demand is in large part, comprised of demographics like how many people are there in the entire generation or how many renters are there total. And today we’re going to focus in on a subsection of those demographics, which is Gen Z. They are the cool kids, the youngest generation starting to enter the workforce right now. And we’re going to just talk about what they’re doing and how that impacts the housing market. So this is important. One, if you’re in Gen Z, this could really help you figure out where you’re going to live, how you’re going to maximize your financial position, how you can get started investing in real estate. But also if you’re not in Gen Z, and most of us are not going to be, this episode is still designed for you because it’s going to help you understand where demand. And I think this is critical because we’ll get into this demand not just for houses, but where demand for rent is going over the next couple of years.
Because millennials, I am one of them, sadly, we are all getting older and soon it’s going to be Gen Z that’s pushing some of the trends in the housing market a few years out. So you’re going to want to pay attention to this because as investors we want to plan several years into the future. And if you understand some of the trends that are going on with this younger generation, it could help you make more informed investing decision. So that’s what we’re going to look at today. I’m going to do 15, 20 minutes just talking, giving you a background. And then we have an excellent guest coming on to join us. Her name is Soli Cayetano.
She is the personality behind a really popular Instagram account called Lattes and Leases. She is an excellent investor. She’s only 24 years old, has something like 20 or 30 units, it’s really cool, very impressive to hear how she got started. She’s investing out of state. So I think people who are young and maybe can’t afford in their market or if you’re just like me interested in investing in out of state, she has some really good tips for you. So that’s what we’re going to get into today and hopefully this will help you understand what’s going on in the younger generation and how that’s impacting the housing market. But before we get into that, we are going to take a very quick break.
If you listen to the show or any economics, you know that millennials have really been the drivers of demand and economics over the last couple of years. And that is because household formation, basically a lot of economic activity starts when someone forms a household. And that basically means when you move out and start your own house. So that might mean maybe you’re moving out from your parents and you’re renting something for the first time or maybe two people have been living together as roommates and then they both go on and form their own household. That is this really important thing in economics because it drives demand, right? When there’s more households, that’s more demand for rental units, it’s more demand for owner occupied houses. And so millennials have been driving a huge amount of household formation over the last couple of years and that’s just based off simple things like birth rate.
So for the last couple of years, for generations we’ve always talked about the baby boomers, how they are the biggest generation and what they did had these cascading effects throughout the economy. And that was true for quite some time, but recently millennials, which are largely the children of baby boomers, so it makes sense that they are now the biggest generation. Millennials are now the biggest generation in the United States and that means that what they do economically is going to impact the rest of the country. And what’s been happening that has impacted the housing market in particular is that they’re reaching family formation years. So people who are millennials are generally now starting to reach at the high end or around 40 years old, at the low end are like 25 years old. And the peak age where people start to form families, like what I’m talking about, is 30.
So you can imagine that if we have the biggest generation of people in the United States entering this household formation years, that’s going to have a big impact. And this is one of the reasons why over the last few years when we’ve seen an increase in housing prices, and of course that’s been fueled by inflation and low interest rates, but one of the really strong foundational things that have pushed up housing prices and rent prices is that household formation has really started to take off. It was really low in the early 2000s and even in the early half of the 2010s. But over the last five to 10 years, we’ve had this huge boom of people who want to start households. And that is a powerful force because as investors we’re often trying to time the market and saying like, “Oh it’s a great time to buy interest rates, I’m going to wait for this and that.”
But if you are ready to start a family, if you want to have a child, maybe you’re even having children, that is a pretty strong motivator and people tend to form households whether regardless of financial conditions. Of course not everyone can do that, but people try and find a way to make it work. And so we’ve seen millennials driving a lot of this over the last couple of years and this is likely to continue for at least another four or five years because as I said, millennials, biggest generation, peak family formation around 30, the youngest millennials are around 25 right now. And so we still have a few more years of millennials and it does start to tail off a little bit, but I think it’s safe to say three to five years we still have a lot of millennial demand for housing in the United States.
This of course for anyone who invests long term as most of us do, begs the question what is going to happen next? What happens when Gen Z comes? Because it’s the driving force in the economy because Gen Z is smaller than the millennial generation, but at the same time it still makes up currently 20% of the US population that’s pretty sizeable. And more notably by the end of next year, by the end of 2023, Gen Z is forecasted to make up 30% of the labor force in the US. So if you’re talking about who’s earning money, who’s spending a lot of money, Gen Z is sort of the up and coming player. And even though they might not be leading household formation, they will be leading the demand for housing and a lot of economic activity over the next couple of years.
I actually found this chart that is really helpful by a company called Yardeni Research, we’ll put a link in the bio, and it basically shows that people under 35 have a home ownership rate of about 39%. And that sounds pretty good and that’s probably mostly millennials. But if you look at the next generation people who are 35 to 44, that home ownership rate jumps up to 62%. So that’s pretty serious. That means that millennials and Gen Z combine could increase their home ownership rate by 50% just to get to where the next generation is because millennials and Gen Z generally speaking have faced a lot of economic challenges that weren’t there in previous generations. Just speaking for myself, I graduated in 2009, which was right into the great recession. We all know that it took years and years for wages to come back after that.
Just as wages were starting to rebound, we’ve faced this whole COVID fiasco over the last couple of years, which has created further economic difficulty. And so even though we see data that shows that these two generations, millennial and Gen Z, both want to buy homes, their home ownership rates are much lower than they are for previous generations were at the same age. So that is a good sign for housing demand in my mind because that means people still want to buy homes, they expect to buy homes but they haven’t been able to yet. And so that means that they still want to and hopefully if affordability improves over the next couple of years, they will be able to. So that just shows that this is an important demographic to pay attention to because this generation could be fueling demand. When you look at Gen Z, a staggering amount of them want to buy homes.
And I think there’s this media narrative that says, “Millennials, they don’t want to buy home. Gen Z, they’re renters forever, they don’t want to own anything.” Honestly, I think that’s nonsense. I think that just is a reflection that they can’t afford to buy homes right now, but everyone wants to buy homes. There’s been data that shows that 86% of people in Gen Z want to purchase a home. They want to, and 45% of Gen Z wants to purchase a home in the next five years. So that is encouraging for the housing market demand. This idea that people don’t want to buy homes and are content being renters, I think is really honestly pretty dumb. And that is just not necessarily true. And which is why I wanted to get into this episode again is because what Gen Z prefers, what they like, where they’re moving, what they’re doing does really matter.
That said, I think it’s going to be tough for Gen Z to start becoming a force in the housing market over the next couple of years because of affordability. It’s just so low. When you look at that same survey I was talking about, it shows that 66% of people who want to buy home say that they will face significant financial obstacles in buying that home with over 20% saying that they don’t have enough savings for a down payment, 18% saying that they won’t be able to find a home in their price range. So those are the same thing. Honestly, I don’t know if that was just a bad survey question. 16% said they don’t have a good enough credit, which could be a huge problem with rising interest rates. And lastly, 11% saying they have too much student loan debt. I do think this was taken before the debt forgiveness thing, so I don’t know how that was impacted.
But again, I can see why Gen Z, even though they want to buy home, are facing some of these affordability issues. If you look at Gen Z’s just medium income, it’s lower. And of course that makes sense because they’re less experienced and they’re in entry level jobs. The oldest Gen Z I think is 24 right now. So they’re still in entry level jobs, but just to contextualize this, the median income for someone in Gen Z is about $46,000. Whereas if you jump up to millennials, just one generation above, it’s $76,000. So that’s a lot more, right? You’re talking not double but 60, 70% more income. And so that means in this era of super high home rates, we’re probably going to see difficulty for Gen Z in buying a home. Furthermore, so just you guys could say basically what I’m trying to say is they’re going to have a hard time and I think that really matters for the housing market and for these people because it could fuel rent demand, which we’ll talk about in a minute.
But according to Rocket Homes, I don’t know if you’re heard of Rocket Mortgage, but they’re one of these big mortgage companies, they did the survey, and they show that 81% of Gen Z underestimates how much it costs to purchase a home. So not only are they already forecasting problems and earning less, but they’re also underestimating how much it costs at the same time. And this company who did this survey, Rocket Homes, estimated that it will take them on average six years longer than it would given what they think it’s going to take. So it could take six years longer than it would. So to me that’s really interesting because I said millennial demand will probably keep up for four to five years. But if Gen Z demand starts to lag, that could put downward pressure on asset prices and home appreciation in that lag period.
And that is a very broad generalization because what we’re talking about here specifically is only entry level homes. As millennials age, the demand for move up homes, more luxurious, bigger homes is going to still increase, right? They’re going to keep making waves throughout the economy as they age. I’m just talking about entry level homes here when I’m talking about Gen Z. But it’s something to note and I don’t think we’re already going to see this glut and crash in those prices because there aren’t enough entry level homes right now. But I think it is just important to know that demand in that area could slow down over the next couple of years and would have some impact. That is a long way away. I think it’s hard to really forecast the exact impact of that, but it’s just something to take note of because basically 45% of the people who of Gen Z say they’re going to buy home in the next five years.
But the same time that Rocket Homes thing is saying that on average it’s going to take them six years longer than they’re expecting. And so that might actually just push all this Gen Z home buying activity. So that is really interesting because basically Gen Z, again, they want to buy homes but they face these large affordability issues already. And I think where we are in the economic climate is going to make it even harder because wages have been going up a lot over the last couple of years, not compared to inflation, they are not keeping up with inflation. But just in absolute terms, they have been going up. Now with the Fed raising interest rates and probably a recession that we’re either in currently or coming pretty soon, we are probably going to see wages peak because the labor market is starting to soften a little. The most recent jobs data is actually quite good given where we’re at.
But I do think we will start to see wage growth come down. The same time, the Fed is saying that they’re going to keep interest rates high, and housing prices, they’re probably going to come down but I think it’s unlikely that they’re going to come down on a national level more than 10%. In certain markets, people are forecasting 20%, 25% in some of the hottest markets. And that could come true, but I think generally speaking, 10% with high interest rates, 10% decline in prices with elevated interest rates isn’t going to make it way easier for Gen Z to start buying homes. So I think this is something to keep an eye on is can our newest generation of workers afford homes? Because that’s important for society and for the housing market in general. So that’s just something to watch. Generally speaking, you are seeing Gen Z react to this by buying houses but only in less expensive cities.
So according to this data that I just found, it was an article from a site called moveBuddha. They did this analysis of some data that showed where Gen Z is buying homes and the top five markets that I’ve seen are pretty small cities. They’re not the names that you hear a lot about. Number one is Madison, Wisconsin, and that’s been a trendy city, but it’s a lot less expensive. Fargo, North Dakota, that one came out of left field for me. Columbus, Ohio, that’s been a hot market recently because of that affordability. Lincoln, Nebraska and Missoula, Montana. So again, smaller cities, some of these have gotten really expensive as everything has, but relatively to the Seattles, the New Yorks, the Austins, that is not as expensive. After you get out of the top five, you do see some of the bigger, more expensive cities. So San Francisco’s six, Denver is seven, Minneapolis, which is expensive, is nine, and Washington D.C. is 10.
But you have Burlington, Vermont, another small city there in there at eight. And then in the top 15, you see cities like Pittsburgh and Cincinnati. Pittsburgh, if you listen to our recent show about affordability, is the most affordable city in the entire world according to some analysis. So I think if you’re looking for where Gen Z and some of the demand for entry level homes might be over the next five to 10 years, I would look at these affordable cities because you look at this combination of economic factors where you’re seeing work from home, low affordability, but people can work from anywhere. They might start moving to these cities where they can actually afford a home and start gaining some of the benefits of either investing in real estate or home ownership. If you are a Gen Z investor, these are some markets that you should consider house hacking or buying in.
Our guest, Soli Cayetano, who’s going to be coming on in just a minute, invests in Cincinnati but lives and grew up in the Bay Area. So she found a place where she could buy and research something more affordable. And I think this is of one of these generational trends that is likely to continue that for many years, people primarily invest in where they live and through resources, like this show and BiggerPockets in general, and because of this work remote trend and the internet just in general, people can invest anywhere.
And so I think we’re going to start seeing Gen Z investors as well as Gen Z home buyers gravitate towards these cities that are a lot more at affordable because they are facing pretty stiff challenges in the more expensive cities. Now the second point before we bring Soli on I want to make is this trend that makes home ownership more difficult for Gen Z will likely bolster demand for rent for longer because people have to live somewhere and they’re becoming a larger and larger part of the workforce in the US and if they can’t afford homes, unfortunately, they’re going to have to rent.
And when you look at rent, I wanted to find some of the cities where Gen Z was moving so you can see some of these demographic shifts and I was surprised because if you listen to the show that a lot of the demographic trends, a lot of the migration has been out of big cities and towards the Southeast, sometimes towards the Midwest, these more affordable cities, especially since COVID. So you see places like Florida and Texas, Alabama, Tennessee has been the hotspots for demographics and growing population. But when you look at Gen Z, that is not necessarily the case. And this is cool and interesting because as an investor you should pay attention. I’m going to share two surveys with you. New York Times partnered with a company called CommercialCafe.
It’s a commercial real estate company that provided the data, New York Times published it. And basically they took the top 20 cities where Gen Z renters are best for Gen Z renters. And this is based on affordability, recreational opportunity, unemployment rate, commuting options, the Gen Z population and other metrics. The number one city is Atlanta. That has definitely been a boom city over the next couple of years. But number two is Minneapolis, which I was surprised by. Definitely not the profile of some of the other cities that have seen big population growth followed by Boston. Again, not really one that’s been up there. Then you have Tucson, Raleigh, and Columbus, all big popular destinations. Then you see Seattle, a very expensive city. Austin, a very expensive city. New York is up there. So you really see different trends with rent demand and it’s really the theme that I would say is economic growth.
This isn’t based what we see, this is based off affordability and everything, but the trend I see across these cities is places where there are a lot of jobs. Atlanta, Minneapolis, I think Minneapolis has more Dow 500, top hundred, whatever, companies than anywhere else in the [inaudible 00:20:40], Fortune 500, something like that. Minneapolis has more headquarters there. That’s a huge economic powerhouse. Boston has a huge biotech, it has a lot of banking. Seattle with tech. Austin, all these tech companies are moving to Austin. New York’s still the center of finance for the entire globe. Houston with oil and gas. These are the cities Gen Z appears still to be attracted to and moving towards the cities where economic growth is the biggest, at least in rental terms. Remember, I’m not talking about home demand because when we looked at home demand, we saw smaller cities that were more affordable.
But when we look at rent demand, we’re seeing bigger cities that are less affordable but have the biggest economic growth and I guess that makes sense. If you’re young, you’re ambitious, you’re trying to make more money, get your career started, you want to go to one of these big cities where the job opportunities are the best. I also looked at this other survey that showed the trending cities for Gen Z renters and the number one was San Francisco, number two, Jersey City, which is right outside New York City. Number three is New York City, Manhattan. Then we have Philadelphia, Boston, Arlington, Virginia. So six cities leading the way in the northeast. I mean I guess Virginia’s not northeast, but whatever. It’s on the East Coast. So that’s really interesting because we’ve had this talk about how a lot of people have been moving to the southeast and I think this is more like millennial Gen X.
People are a little bit older maybe of families, but the younger generation, rental wise, are moving to the places that the other are being left. So after those top six, we have San Jose, California, that’s where Google and Silicon Valley. Then we have Seattle, Minneapolis, LA, Peoria, I don’t even know where that is, Arizona, Long Beach, San Diego. Some of these big more expensive cities are still attracting young people. Maybe they’re attracted to the nightlife. But I think that really makes a lot of sense because people want to start their career in a place where they can have fun and where they can also have some of the highest paying jobs in the entire country. So that is something just to pay attention to as an investor. If you’re thinking everyone’s moving to affordable places, that might be true for Gen Z when it comes to home prices.
But when it comes to rent demand, so low vacancy, higher rent growth, it’s still the big cities that the youngest people who will drive rental demand over the next decade are moving to the big cities. So I think that is a different narrative than we’ve been hearing about other migration patterns and one of the things I wanted to make sure that we talked about on today’s episode. So with that, let’s just summarize what I just said. Basically, Gen Z, just like every generation, they want to buy homes but they’re facing really difficult economic conditions. And so I don’t expect that they’re going to be fueling a lot of demand in some of the more expensive cities. For home buying, they probably will be active but in some of the less expensive cities. But they are fueling rental demand in big population centers, big economic centers.
And that’s going to probably play out over the next 10 years and bode well for the rental markets probably, if I had to guess, best for multifamily rental markets over the next couple of years in some of those bigger cities like Seattle, New York, Austin, Minneapolis, keep showing up on those lists. So it’s super cool, really interesting thing to pay attention to. But in addition to just talking about data and numbers, I do want to get some context from a member of Gen Z who is investing and has a pulse on what’s going on with her peers. So let’s bring in Soli Cayetano from Lattes and Leases to talk about what it’s like to be a Gen Z member in today’s housing market. Soli Cayetano, welcome to On the Market.

Soli:
Thanks for having me.

Dave:
Well, thanks for being here. I have to say, I think this is the most intimidated I’ve been for an interview. Gen Z people, I’m scared of them generally.

Soli:
Why?

Dave:
I don’t know. You’re cooler than me. I know you’re just cooler than me. I don’t know any of the trends or don’t know how to talk to Gen Z people. So hopefully I can pull this off.

Soli:
We’ll teach you some. I’m like the oldest Gen Z-er you can get. So we might have to bring a younger person on the show.

Dave:
Oh God, that’ll make me just feel terrible. I’m already feeling old.

Soli:
18 years old. 18 is usually free.

Dave:
So people listening to this might know Soli from her great Instagram account, Lattes and Leases. But, Soli, could you tell our audience just a little bit about yourself and how you’re involved in real estate investing?

Soli:
Sure. So I am 24, the oldest Gen Z-er you can be. And I’m located in the Bay Area, California right now. I got started investing just over two years ago and obviously it’s very expensive to invest in the Bay Area. So I built my portfolio in Cincinnati, Ohio. So right now I have about 29 units between Cincinnati and a small town in Georgia into combination of long term, midterm, and short term rentals.

Dave:
That is incredibly impressive. How did you get started with this at such a young age? What inspired you to get into real estate investing?

Soli:
So I was always surrounded by real estate. So I was in the real estate association in college. When I was 19, I was a sophomore in college, I needed a job really badly because I had no money and ended up getting a job at a commercial brokerage firm. So I worked pretty much full time in an office leasing position through college as well as eventually leading the real estate association. So those are my two touch points. I listened to BiggerPockets, had some friends who bought some out of state rentals, but I was always so busy between working full time and going to school that I never really considered investing until the pandemic hit.
So pandemic, wiped out office leasing, obviously no one wanted to lease office spaces at the time and also school shut down, I was a senior in college. And when everything shut down I rediscovered real estate investing and decided it was now or never that I’d have the chance to really focus on investing and that’s when I committed to buy my first property. So from that commitment day, I believe it was 12 weeks till I closed on my first property in Cincinnati.

Dave:
Wow, good for you. That’s unbelievable. That is super fast. How did you pick Cincinnati?

Soli:
I went for work actually. So the year before, I was moving a client over to Cincinnati and I had the best time. We were wined and dined. The food was incredible, a lot of young people. It was super lively, beautiful waterfront. And then I looked on Zillow and the houses were a hundred thousand dollars and I was shocked. So I met an investor while I was out there who had a couple single families and I didn’t really have any, I guess, what I like to call competitive advantage in any other markets and I didn’t know how to research markets. It’s really, I guess, just ignorance that I chose the market but ended up working out really well.

Dave:
Yeah, you’re a prophet. I think Cincinnati has some of the highest appreciation rates right now, even in, we’re recording this, in late September 2022. Even as a lot of markets are starting to come off their highs, we’re seeing that Cincinnati’s doing really well and has some of the strongest rent growth in the entire country. So you picked well.

Soli:
It kept floating. Yeah, no, I mean I learned this later, but they spent over a billion dollars I think in the last 10 years really revitalizing their downtown because they were having trouble retaining students and so they reinvested, made it an amazing place to live, and that’s why a bunch of people are sticking around.

Dave:
I feel like everyone I know who is from Cincinnati just passionately love Cincinnati. I’ve never been, but it’s one of those places that if you’ve been there or you’re from there, you absolutely love it.

Soli:
Have you tried their chili?

Dave:
No. That’s a thing?

Soli:
Also passionately love their chili. I personally think it’s gross, but it’s like cinnamon chocolate chili. You’ll have to try it sometime.

Dave:
Oh wow. Kailyn, our producer, knows my dream in life is to somehow merge real estate investing and being Anthony Bourdain and travel around and invest in real estate and eat so that maybe I’ll get to do that one day. So we do want to talk about being in Gen Z and being able to invest. So do you have peers who are also investing or are you one of the only people in your age group you know that are investing in real estate right now?

Soli:
So I’d say that it’s a little bit regional. So in the Bay Area, I honestly don’t know that many people who invest in real estate because I think that a lot of people have the perception that you have to invest where you live. And so here it’s million dollars, 2 million properties, it’s really difficult for young people to invest. But I actually lived in Cincinnati for about four months this year and there are tons of young real estate investors. I would go to young real estate meetups, there was a ton of house hackers, a lot of people who own maybe two properties. It was a lot more common over there because the houses are a lot more affordable.

Dave:
That’s encouraging to hear. I got started relatively early out of necessity, not a great job market when I graduated college. And you hear in the media that Gen Z is not as interested in home ownership or investing. It sounds like that’s not what you’re seeing in your experience.

Soli:
I think it depends. I think that Gen Z-ers love to consume content. They’re content consumers from TikTok, from Instagram, usually from social media, from YouTube. And so the algorithms have gotten so good at showing you more of what you’re interested in. And so if you are interested in investing they will continue to feed you content. That’s how it happened for me. So I started following couple, I created at my real estate Instagram, I was following investors and so what did they do? They showed me more people who were interested in investing. They kept feeding me more real estate investing content. And so I think that made me think, oh, this is normal. Everybody’s investing in real estate. I’m the weird one. And that what really propelled me to keep buying real estate. If someone were to curate their feed to be about shopping or about news or about other things, I think the algorithms and what you feed yourself with content tends to take you in a different direction and then that becomes your world. Does that make sense?

Dave:
Yeah, yeah, absolutely. It’s great when it feeds you helpful content, but it’s terrifying that you could get in this spiral of either negative or unproductive content and you get consumed by it.

Soli:
It’s choose your own adventure. So I think that before when Instagram had a chronological feed, you could follow one person who was interested in finance and you could follow one person interested in clothes, you could follow your friends too. Now it’s not really no longer the case. It is based off of your likes and your views and how long you spend looking at things. And so they can really curate based off of just one thing. It’s hard to get more diversity.

Dave:
Yeah, yeah, that’s definitely true. It’s very interesting new frontier and I’m sure it will shape your generation for the next couple years or for the rest of your lives around how you interact with these social media platforms. It’s pretty crazy. In terms of your peers, you said you’re from the Bay Area, do most of your friends, peers still rent or are people trying to buy homes? Because one of the things I’m really interested in is, I don’t know if you’ve heard this, but millennials are now the driving force behind demand in the housing market and there’s always media that says, “Gen Z, they don’t want to buy houses, they’re going to be renters forever, they don’t want to be tied down.” We have some data around that, but I’m just wondering anecdotally, do you see any truth in that?

Soli:
Again, I think it’s a little bit regional. So I think in the Bay Area, a lot of people stay renters for a really long time, if not forever. My parents are still renting because they can’t afford to purchase a house. And so I was doing some calculations. Right now, I’m in Sausalito where the average home is $2 million. And so if you want to purchase a house, you can’t use an FHA, you can’t use a first home buyer’s loan, you got to put down half a million dollars. And for me as an investor even I feel like if I had half a million dollars, I’d probably invest in real estate then put it into a $2 million primary residence.
And so I think locally where a lot of my friends are, it is people will be renters for a long time as well as a lot of the digital nomad. I guess everyone during the pandemic wanted to travel more, they wanted more experiences, they wanted to not be tied down like you said. And so I think for the short term, there might be a lot more traveling, less home ownership, especially with people very discouraged about the housing market and how difficult it was to actually win an offer. So I think it’s mixed. Again, the country is so diverse. I think the Bay Area is in a bubble. We live in a bubble and the rest of the country is not like us, most of the country. But locally I would say primarily renters especially because it’s just unaffordable to live here.

Dave:
That makes a lot of sense. I actually pulled some data that showed where Gen Z people are buying homes. And this isn’t investors necessarily, this is home buyers as well, but it’s a lot of these smaller cities and less expensive cities that you’re talking about. So the number one was Salt Lake City, which has a higher average price, but then after that it’s Louisville, Kentucky, Oklahoma, Cincinnati, where you invest, Indianapolis, Phoenix and Minneapolis, which are both expensive, but Birmingham, St. Louis, and Virginia Beach. And it just makes me wonder, this is just speculation if we’re going to start to see those places start to grow faster because this is where Gen Z, not just as investors but as home buyers in general are going to be more attracted to these they’re almost like tertiary cities because they’re just more affordable and everything else is so expensive right now.

Soli:
And you can also work remotely a lot now. And so I know a lot of people in Cincinnati who have remote jobs getting paid Bay Area salaries to live in a place where you could buy a home for one year’s worth of your salary. So I think that that has really changed the playing field as well with a lot of companies being okay with you working wherever you want to work or living wherever you want to live.

Dave:
Totally, yeah, I mean it’s really going to be interesting to see, because we’ve talked about on this show and like Soli just said the amount you can earn is no longer tied to your proximity to these economic hubs anymore. We’ll see what happens, because I know a lot of companies are starting to call people back to the office so it’ll be interesting to see what happens there but I generally think you’re right.

Soli:
I actually worked in office leasing and so that was a question that we talked about all the time is, are company is going to force people back into the office? And what we saw a lot of the time is that if they tried to force people back into the office, people would just quit and try to find remote work. And so I don’t know where the future of the office holds. I think that there’s a lot of community to be built in offices, but I think people value flexibility a little bit more. And so I’m not really sure people will come back.

Dave:
Yeah, it’s interesting. I saw some data that showed that 30%… The amount of days total across the country that are worked remote have leveled off at 30%. But not to name the companies or people, but two people I’m close with both work for these large publicly traded companies that both said they’re never going to call people back and have both been called back to work in the last six weeks. So it’s interesting, I’m just curious what will happen. But I agree. I mean I’m all for the flexibility, so I personally like it, but I also sometimes really miss being in an office. So I think the hybrid solution is going to be popular and can support moving to some of these other cities. So on your Instagram, I know you often give advice to other Gen Z potential investors. What are some of the main pieces of advice you give to people who are your age and younger who are looking to get into real estate investing?

Soli:
Yeah, I think that house hacking is a very good place to start. So if you can buy a home with three and a half percent down, I think oftentimes Gen Z-ers don’t have that much money to start investing. And so it’s like how can I invest with not that much time and not that much money and house hacking is an easy way to start. So put three and a half percent down, honestly not very much money if you live in a lower cost area and then rent out the other rooms or the other units. So I think that’s a great way. If you do live in a really expensive market like me and maybe doesn’t make sense to house hacked, look at a state. So I would say those are the two options I give people is either looking at more cost effective market that cash flows or house hack.

Dave:
That’s very, very good advice in both things that work pretty well, even in down market conditions or confusing market conditions like the one we’re in today or the ones we’re in today. So you have, what did you say, 29 units now. What’s next for you? What are you planning? What are your ambitions in real estate investing?

Soli:
Honestly, I haven’t bought very many this year, so I think I’ve only bought maybe five units because I’ve been really busy stabilizing my portfolio. And now that it’s almost completely stabilized it, I feel like it is on the verge of re-exploding, which I’m really excited about. And so I’ve been looking making tons of offers on right now portfolios of single families and small mall ties. So not single families but portfolios of them as well as dipping my toes into office buildings, which is what I used to work in. So have put offers in on offices, warehouses and actually should hear back on one today, so cross [inaudible 00:39:21].

Dave:
Oh, awesome. Well, good luck. Is that in Cincinnati as well?

Soli:
Those ones are in Augusta, Georgia. So Augusta’s another, I guess, tertiary market where the Masters tournament is held and two hours outside of Atlanta. Same kind of landscape as Cincinnati. Very cash flowing, but good amount of appreciation as well.

Dave:
Nice. That’s great. Well good luck. Well, thank you for joining us. Is there anything else you think our listeners should know either about investing as a Gen Z investor or about your peers and how their preferences about the economy or their living preferences might come to shape the housing market in the coming years?

Soli:
Yeah, I mean I think there are a lot of Gen Z-ers who are probably interested but feel alone because they don’t have peers who are interested in investing locally or friends that they talk to often, which was my case. And so I had to really build my community online, but then I found hundreds of thousands of people who also shared the same interests and thousands of people who are my age or even younger. And so I would say that if Gen Z-ers are interested and they do feel a little bit alone or lost, that there’s a giant community online of people who are excited for you and there to support you.

Dave:
All right, great. Well, thank you. I mentioned it at the top of the show, but where should people who want to connect with you do that?

Soli:
Yeah, Instagram is probably the best place. So my Instagram name is @lattes.and.leases.

Dave:
All right, great. Soli Cayetano, thank you so much for joining us today.

Soli:
Yeah, thanks for having me, Dave.

Dave:
All right, big thanks to Soli. She is a really, honestly, an inspiration. If you’re 24, if you’re young, it’s incredible what she’s doing. I think it’s really interesting to see and just prove that out of state rental investing is possible. A lot of people are intimidated by it. I have been in the past, but it shows like if you build systems, you find a great agent, which you can do on BiggerPockets. There’s a great agent finder tool. If you can build a team, you can find markets that are growing where there is Gen Z demand, where there’s millennial demand, but it is more affordable and it’s more reasonable, more practical for you to get involved. And as a non Gen Z member, someone who’s an investor, I think it’s really important to listen to what Soli is talking about how location dependent this demand is going to be.
I think we talked about that in the beginning where we saw certain markets are going to capture Gen Z demand for home purchases while other markets are going to capture demand for Gen Z rent. And so this is just something you should consider in your investing strategy is what’s coming down the pipe of the next couple of years. Are you buying multifamily? Because buying multifamily in a place where home sales are going up is great, but if rent prices aren’t going up, that’s how commercial properties are valued. So you want to find the place where rent demand is going to be really strong, not just where there’s population growth all by itself. So that is something to pay attention to and I think Soli did a great job explaining that to us. Thank you, guys. Hopefully this was helpful to us. If you have any questions about this episode, please hit me up on Instagram where I am @thedatadeli. If you want to connect with me at all, you can do that there.
Ask me questions, give me feedback. If not, I welcome you to check out my brand new book. I’ve been talking about it a lot, but I’m pretty excited about it. It’s called Real Estate by the Numbers, helps you understand how to be an analytical real estate investor. I think that’s the only way to be a real estate investor, but of course I’m biased, so you can check that out. I wrote it with J Scott. It’s available on biggerpockets.com/store. Thank you all so much for listening. I will see you next time for On The Market. On The Market is created by me, Dave Meyer and Kailyn Bennett, produced by Kailyn Bennett, editing by Joel Esparza and Onyx Media, copywriting by Nate Weintraub, and a very special thanks to the entire BiggerPockets team. The content on the show On The Market are opinions only. All listeners should independently verify data points, opinions, and investment strategies.

Andy Walden, Black Knight vice president of enterprise research, joins ‘The Exchange” to discuss how Walden would summarize the mortgage market right now, what happens if rates stay where they are for the rest of the year, and insights into home-seller activity.

The housing market is in an unfamiliar place. After several years of appreciation and a few years of massive booms across the U.S., the train is finally losing steam.

With affordability maxing out, prices are on the decline, along with increasing inventory, median days on market, and migration patterns that are disproportionately affecting the way markets rise and fall.

Here are six charts that characterize the current housing market.

Affordability Is Lower Than Ever

First things first, mortgage rates have skyrocketed this year from an exceptionally low 3% to just over 7% as of early October. While 7% is still lower than historical rates that flirted with 20% in the 1980s, it has still created sticker shock for prospective homebuyers calculating their would-be monthly payments and has led to the fastest declining affordability rate ever seen.

Of course, we have the Fed to blame for this. Chairman Jerome Powell’s ultimate goal is to defeat inflation. Raising interest rates, especially at the pace they’ve been doing so, is meant to quell spending and slow down the economy. Housing prices are just one piece of the puzzle.

The combination of historically high real estate prices, rapidly rising interest rates, and 40-year highs in inflation have made this the least affordable market we could imagine. According to the NAHB/Wells Fargo Housing Opportunity Index, which measures the relationship between household income and housing cost, the index is at the lowest its ever been.

Prices Are Starting To Soften

Speaking of prices, the S&P/Case-Shiller Index has looked wild since the beginning of the pandemic. Would you believe me if I told you that it had its first recorded month-to-month drop since December 2018 to January 2019? Look for yourself.

Of course, a one-point drop isn’t the beginning of housing armageddon, but it breaks the trend and shows that we’re moving into a softer market. It’s also important to note that this data hasn’t been updated since July, so when August’s data comes out, we’re expecting to see this fall even more. 

Overall, appreciation has been rising since 2012 and really hit the gas in 2020. This is the first time many new investors are seeing any sort of drop in prices, which is a significant development. It’s important to note that home prices are still up year-over-year (YoY). Redfin’s data from August suggests we’re still up 6.7%YoY. However, this is expected to change as the months roll by. 

Supply And Demand Remains Complicated

BiggerPockets’ VP of Data and Analytics, Dave Meyer (who also just happened to write this book), spoke about the “lock-in” effect several months ago before mortgage rates were increasing as fast as they are now. The idea is that as mortgage rates increase, homeowners will be less inclined to sell their homes as they likely have lower fixed rates and may find it harder to afford their next home. They’ll also find themselves selling in a market with falling prices yet higher costs of living. 

While statistics suggest that the average length of time a homeowner stays in their home is eight years, the odds of them selling right now are low anyway if they locked in a 3% rate within the past couple of years. 

I’ll also remind you that mortgage rates still hovered around 4% in 2014. As rates increase, you may find that many would-be equity-rich sellers who have lived in their homes for a long time will hold out until rates come back down. It’s also important to note that homeowners who may have had high rates probably refinanced within the last two years, resetting the clock.

Regardless, inventory, while rising, is still staying within cyclical norms.

However, new listings are down, which is a sign of what’s to come. 

Here’s the conundrum. If supply decreases, demand remains higher, despite it decreasing. I think it’s pretty evident that demand will remain higher than supply for the foreseeable future. The question is how well it paces against supply, as that will be a big factor in how much home prices rise and fall. And, even more importantly, where.

Migration Patterns Are Distinct

The question of where brings me to my final analysis for this article. Migration patterns are ever-present, but there were some big-time winners during the pandemic. 

Austin, Texas; Boise, Idaho; Tampa, Florida; Phoenix, Arizona; and many other cities saw tremendous growth during the pandemic. Meanwhile, juggernaut cities like San Francisco and New York City lost some of their population.

During the pandemic, many of those boom towns saw the highest appreciation rates in the country. Austin’s median sales price capped out at $670,000 in May, up 15.5% YoY. Boise got up to $585,000, nearly 21% YoY.

But now, those same markets are softening, both taking $100,000 median sales price tumbles since their peaks.

What does this mean? A couple of things. One, it proves the affordability crisis is real and is either pushing people out of markets or preventing them from coming in. Second, it means that some markets will continue to appreciate while others will decline. 

Most importantly, the markets that experienced the most rapid appreciation stand to lose the most, as some may have overinflated well beyond their intrinsic values. Picking and choosing which markets will wind up like this is easier said than done. However, by looking at the regional migration patterns below, you can get a pretty good idea of what homeowners are thinking.

Real estate is local. Therefore, keeping track of local trends is just as critical to making sound investments as any national trend can show. One of the more overlooked but essential elements of market analysis is recognizing and understanding population trends. 

If a state’s population is growing, is that because the state is experiencing an influx of newcomers? Or is it just a product of birth rates?

Furthermore, does the state offer business or tax incentives that would lead folks to move from places with higher taxes or poor business incentives? Exhibit A is the migration from California to Florida. California, one of the country’s highest-taxed states, versus tax-free Florida.

With enough research, you can make well-educated bets on what markets stand the most to gain—and lose.

Conclusion

As the housing market shifts, staying informed is the best way to protect yourself and your investments. These charts paint a picture of where we’re at right now, but things can change quickly.

However, even if the market you’re in (or want to be in) is starting to soften, it could still be a decent bet in the long run if the intrinsic economic factors are in line. If the population is growing and business and wage growth are solid, you wouldn’t be out of your mind to invest during the dip and ride out the wave.

After all, real estate is considered one of the safest investments you can make. And most of the time, when markets fall, they rise again.

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

Ashley:
This is Real Estate Rookie.

Josiah:
Yeah. And so that is the thing, a lot of people, they just see the end result and so they don’t see the work. It’s just like with my out-of-state rental, I did spend five months just researching different markets and digging in and making offers on properties before I finally found something that worked out. And when we started looking at the Airbnb, I mean it was about a year from the time we started looking at them to when we finally got it on our property and all set up and stuff.

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

Tony:
And welcome to The Real Estate Rookie Podcast where every week, twice a week, we bring you the inspiration, information and stories you need to hear to kickstart your investing journey. And we oftentimes like to start the podcast with some reviews from folks in our Rookie audience.
And today’s review comes from Ashley Nichols and she says, “To give this podcast less than a five star review is pure insanity.” I appreciate that enthusiasm, Ashley. Ashley says, “I’ve listened to every single episode and every single one is full of so many gems. Tony and Ashley are literally out here giving out free game and changing people’s lives. If you’re a rookie investor, the information they’re exposing you to is exactly what you need to help master your mindset and take action to achieve your real estate investing goals.”
Ashley, we appreciate you for the kind words. And if you are listening and you haven’t left us an honest rating or review on whatever platform it is you’re listening to, do it right now. The more reviews we get, the more folks we reach, the more folks we reach, the more folks we can help. And that’s our goal here, isn’t that right, Ashley Kehr? We want to help people, right?

Ashley:
Tony, you are so ethical by saying an honest review when I say a five star review.

Tony:
Leave us a five star review. Five stars, we don’t need one. I think because I also get joy from reading the mean tweets about us too. So it’s like, if you guys want to say something mean, we can do that too.
But it’s so funny, every time that I get with people in person, we host our meetups here locally, we were just together in Denver, and every single time since I’ve started reading the mean reviews, people always come up to me and they’re so offended that people will write such mean things about us. And they’re like, “I couldn’t believe that person said that. Don’t listen to what they’re saying.” So even the bad reviews, I think they help bring the community together.

Ashley:
But they also hurt the podcast and my feelings. So next time, they should just slide into my DMs with their hurtful comments. And I will just leave it at that.

Tony:
There you go. Fair enough, fair enough.

Ashley:
So today on our episode we have Josiah, and this is really exciting because he talks about how he added a short-term rental into his property where he lives without having to get permits, without having to get utilities because they were already there, just all these different things and how he pieced it together to make this perfect short-term rental and also didn’t affect his property taxes, which we all love.

Tony:
People always ask me, “Tony, hey, how do you choose which market to invest in?” And a lot of times honestly it’s just having conversations with people. So listening to Josiah’s episode, he talks a lot about the success he’s had in this market that a lot of people wouldn’t think about investing in.
But the other thing that Josiah talks about is going out of state, one of his properties is out of state, and how he built that team and manages it remotely. So if you’re thinking about investing not in your backyard, you’ll definitely want to listen through to the end to hear how Josiah manages that part of his business as well.
Josiah, welcome to The Real Estate Rookie Podcast. We’re super excited to have you on. So if you wouldn’t mind just share with us, with the listeners a little bit about who you are and how you got started in real estate investing.

Josiah:
Okay. So my name is Josiah Hein. I’m 36 years old. And my wife and I are actually an investing team. And so we started real estate investing basically in 2020 right before COVID hit. But if you back up a little bit before that, I started really digging into real estate investing and learning about real estate investing in 2019. I actually got hit by a drunk driver while at work. They were going 100 miles an hour and rear ended me and it messed up my neck and back pretty bad.
And so I actually have a pool and spa cleaning and repair business and it’s a lot of upper body work and being bent over and stuff. And so for about two years after that I was able to do very little physically within my business, and so I really had to lean heavily on my employees at that point.
But because I was basically incapacitated, I got out on YouTube and started searching about real estate investing and found BiggerPockets and was just hooked. And so I would watch two to four podcasts a day literally just because I had a lot of spare time on my hands all of a sudden. So that’s what started with the whole education piece of it, and then from there it led in.

Ashley:
How did you even start thinking about real estate investing? Did someone talk to you about it? Did you come across a video? What even intrigued you to start searching?

Josiah:
Well, when I started my business, I learned everything online about business. And so watching YouTube videos primarily, everything from how to set up corporations and how to structure businesses to how to run systems and help manage everything.
And so I knew that my wife’s dad did real estate and so we knew real estate was something we wanted to do as a long term goal. We weren’t really looking to dive into it in depth, but after getting hit by the drunk driver and being all messed up, I wasn’t sure if I was going to be able to continue my business going forward.
And so I just got online and I was like, “What else can I do? What can I do in real estate especially to make money?” And just started digging in and learning about it because I wasn’t sure if I was going to be able to keep going with my business.
And so it was her family and then it was just something we knew we wanted to do long term as a retirement strategy. But then I kind of got forced into it a lot sooner than I was planning and my shift focus for my business specifically to real estate because that’s what I felt like I could probably do at the time.

Ashley:
Okay. So you had something really, really crappy happen to you, something unexpected and instead of getting into the mindset of this sucks, pity me, you took advantage of your time by learning about real estate and researching. That right there just shows the type of person you are, that mindset, because it would be so easy to feel sorry for yourself and that my life sucks.
But instead you took that horrible thing and you somehow found one little tiny piece of advantage is that now you had time to research and watch those YouTube videos. And that is awesome that you did that because I’m sure that was not easy to do, to get into a mindset of, okay, I have to figure something else out, I have to do this. And to have that kind of endurance is really awesome.

Tony:
And Ash, it kind of reminds me of AJ Osborne’s story where it’s this really debilitating or discouraging thing happens and like you said, they use it. They use that additional time and just that epiphany to say, “Hey, real estate is the thing that I really want to invest in to be able to provide for my family in case I’m ever not able to myself.” So we all have those moments, Josiah, and I’m glad that moment turned out to be a positive one for you in the long run.

Josiah:
Yeah, thank you. I really appreciate that. And I mean, I have a wife and three kids now, but at the time I had two kids and when I got hit, it was just a week after my second daughter was born. And so it was traumatic, but I walked away from it, thank God. I was happy about that, but I was like, “I need to keep making money for my family and keep pushing forward if we want to be okay.”
My wife was working and stuff as well, but I really need to feel like I’m bringing value to the family and stuff and to our relationship. And I’ve always just been someone who’s really driven and motivated to keep going and going and going. And so it’s hard for me to just stop and give up or not do anything. It’s just not really in my DNA or who I am I guess.

Tony:
Josiah, can I ask one follow up question? You said you started investing in 2020, so this is in the middle of COVID. I think there was a lot of uncertainty in the world in general, but especially around just making big investments. Were you at all concerned about investing during such uncertain times? And if so, how did you work past that fear and uncertainty?

Josiah:
So that’s a good question. So basically it was February 2020 when we started, so right before COVID hit and it definitely was a big fear. I wasn’t sure if it was going to derail everything we were working on, but we had already started and we started by buying a new house for our family to live in.
Our family was growing. Our first house that we bought together, my wife and I, was getting a little cramped and stuff and I was starting to feel a little anxious. And so we ended up buying a second house and then we were able to keep our first house and turn that into a rental actually.
So we did a remodel on it, basically just a long-term BRRRR. We lived in it for a couple years, remodeled it, rented it out, and then refinanced it and repeat. But yeah, starting all that whole process in COVID, it definitely made us pretty anxious for sure.

Tony:
We recently interviewed another guest, Nick Troutman. He was on episode 223 I want to say it was. And he had this really beautiful, not even an analogy but just distinction between danger and fear. And his whole premise was that people oftentimes confuse danger and fear.
Danger is something that can hurt you. Danger is something that you should avoid, but fear is something that exists only within your mind. And sometimes it could represent danger, other times it could just represent you stepping outside of your comfort zone and being fearful of the unknown.
So it sounds like you were able to make the distinction between the two versus actual danger and what was just fear that might be holding you back.

Josiah:
Yeah, and so it was pretty crazy. As soon as COVID kicked off, it seemed like the whole world just paused because they didn’t know what was going to happen, and so we did the same as well. I mean we were still working on remodeling our previous house, but we didn’t know how any of that was going to look or any of the stuff with the eviction moratoriums or what the government was going to do, if they were going to start printing money like they did, trying to bail people out, keep things afloat.
And so we did pause a little bit, but we were already in the process also at the same time with our first house. So we got it remodeled and then rented out. And it took us a while to remodel it. We got it rented out basically in September of 2020. And so we were full in on COVID then and the rent moratoriums were getting put in place already.
And so I mean the main thing was we just made sure that we really vetted our prospective tenants and stuff and went through and checked that they were paying rent, taking care of the places they were in and had a good credit score still and was just staying on top of everything. And so basically just really the core fundamentals of real estate.
And so anyway, that was our first place. We got it rented out almost immediately. We live in southern Oregon and so it’s a really hot market, I mean pretty much anywhere on the West Coast is right now. And so had lots of applications and stuff, got it rented out.
And then did some work around our own house, meandered for a bit. And then finally got to the point where we could do that cash out refinance to pull our equity back out of it. And so we got to that point in the spring of 2021 and we were basically able to pull out $60,000 to go towards our next deal.

Tony:
60 grand? That-

Josiah:
Yeah.

Tony:
You say that so casually, Josiah, but that’s a big number, man. I mean that is the ultimate goal for every new investor, especially the ones that want to use the BRRRR strategy, is to be able to buy a property, put some love and a little bit of money, time and effort into it and then get back the majority if not all of what you put into it.
But before we keep going, Josiah, if you can just set the table for us, how big is your portfolio with your wife today and what markets are you guys invested in?

Josiah:
So it’s actually pretty small still. We’ve only done three deals so far. And so we started with our single family home that we lived in and then did a BRRRR, pulled out the 60,000 and then we also did a HELOC on our house because we remodeled it and then refinanced it and then we did a HELOC on it as well because we didn’t pull any money out when we refinanced. We wanted to keep something that was easier to stay liquid with so we could keep using that money in the future to invest with, and so we did a $60,000 HELOC as well.
And then pretty much other than refinance stuff in 2021, that was all we did. I did start searching in September for our next deal and after reading David Greene’s book on out-of-state real estate investing, I decided that that’s what I wanted to look at because Oregon is a really expensive market.
And so I spent about five months just going from market to market. I started in Ohio, like Akron area and stuff, looking in cheaper markets. And I’d get on Google Maps there and start looking around and see a bunch of boarded up windows and some houses half burnt down and that kind of scared me.
And so ended up getting some advice from our lender actually and she was investing in North Carolina. And so I started looking in North Carolina. After that, reached out, got on BiggerPockets, found a property management company and a realtor, reached out to them, started looking around. And that market was just so crazy and such a hot market that we made multiple offers, couldn’t get anything locked up and I was looking there for months.
And so it was getting around Christmas time or just before Christmas and my mom was telling me that I should look around Tulsa, Oklahoma, because they just moved there a couple years ago and she’s like, “Oh, it’s a good market. It’s seen good growth and the property prices are pretty affordable.” And so switched to my third market, Tulsa, Oklahoma.
And again I got on biggerpockets.com and I searched property management companies in Tulsa and I found this amazing one and they had a 4.7 star review on Google and 300 or 400 reviews that were … So lots of reviews to say that they were actually a good company.
And so I got online on Zillow and just started looking for deals and stuff and going through. And as before, I even reached out to the property management company and then I found our two bedroom, one and a half bath that we ended up purchasing there.
And so we bought that there and it was actually being listed by the property management company that I wanted to use and it had been recently remodeled by them and had a long-term tenant that was placed in six months before that was on a two year lease.
And so I called them up, the manager of the property management company that was also a listing agent, answered right away. And I just expressed to him, “Hey, I want to look at purchasing this property.” And I told him I wanted to continue working with the property management company and use him for the transaction for both me and the seller. And I think he really liked hearing that being a dual agent and stuff.
And so everything honestly went really easy. The purchase price on that property was $80,000. So we ended up buying in cash, doing a quick close and then we did a cash out refinance on that as well. And so because that tenant was in there already, we were able to just make that happen immediately after the purchase.

Tony:
So you guys have the one in Oregon, the one in Tulsa, and then where’s the third unit at?

Josiah:
So it’s actually on our property in Shady Cove, Oregon, and it’s an Airbnb. And so we set up a little tiny home that one of my clients that I met through my pool cleaning business makes. And it’s just a really high-end tiny home built on a trailer. And I had this concrete pad and I was trying to figure out what I wanted to do with it. It already had utilities down there.
And so initially I was thinking I could put a shop down there and then do an apartment or something above it to rent out. And then one day I went to my client’s house to clean his pool and I saw him building it there and I was like, “Oh my gosh, what is this?” And he shows me it and I’m just like, “This is amazing. I have a perfect spot for one of these.” And so that was in the summer of 2021.
And so we knew we wanted to get another long-term rental just because we weren’t sure about the whole short-term rental thing yet, but we also knew we wanted to try it. And so we ended up staying in contact and going back and forth with him. He built a couple of them and we ended up, after we did the cash out refinance on the Oklahoma property, being able to make the timing happen to where we could purchase one from him. And so-

Tony:
That’s amazing.

Josiah:
And so we ended up … I watch Rob’s channel a lot, Robuilt, and I watch you in the Real Estate Robinsons as well. And so taking a little play from Rob, we ended up naming the tiny home Casita De Venado, which means tiny house of deer basically is how it translates because we have a bunch of deer all around the property.
And since we launched it, it’s just been doing phenomenal. It’s been probably 95 plus percent booked. We just launched it on May 18th and I mean it’s doing probably a $100 a night more than we ever thought it would also. So it’s been pretty phenomenal for us.

Ashley:
That’s awesome. Are you guys self-managing it then and do you want to talk about the operations of it? Because getting a short-term rental up and running, I’m currently sitting in one right now of getting everything ready to make it go live. But even once it’s live and it’s bringing money in, how are you handling the actual management of it?

Josiah:
So yeah, we are self-managing it and we do most of the stuff just through the Airbnb and Vrbo platform, but my wife handles that mostly. She actually ended up leaving her job that she was at back in May and so now she manages it full time, turns it over for us and runs everything from that aspect.
It was funny though because while we were getting it set up and started, we knew it would take a couple days for it to go live on Airbnb and Vrbo, and so we were just almost done with it and we go ahead and we go to post to get it live and stuff and a couple days goes by and then it goes live. And we didn’t know anything about the platforms or how they worked yet even really, and so we had instant booking on. And so we got a booking for the same day that it went live on Airbnb, an instant booking.

Tony:
That’s good news. That’s a good thing.

Ashley:
Yeah. So did you have to rush to get some things finished?

Josiah:
Oh yeah. So we were thinking, “Oh, it’s going to get booked out and then it’s going to be maybe worst case scenario a couple days before someone comes and stays in it, so we can get all the finishing touches done.” And no, it got the instant booking. My wife’s like, “Well, we might as well accept it and just see how this works out.”
And so I was at work and it was on a Friday and they said that they wanted to come. They were traveling from Seattle to the Bay Area and they wanted to stay the weekend when they came through. And so we were up until midnight just scrambling to get it done. I mean I was putting fake grass out in front of it because it was just a concrete pad in front of it and doing the final cleanup stuff.

Tony:
I mean, Josiah, these are the stories that you don’t usually hear. People see the Instagram flex of people, “Hey I got the keys from our first,” but they don’t see the staying up till midnight laying down some grass for your guests. They don’t see you recording podcasts in your new Airbnb unit because you got to stay there to get it set up. Or they don’t see you renting a U-haul and driving all the furniture and everything from your house to your Airbnb and staying there for three days.
So it’s easy to glamorize the idea of becoming an Airbnb host or a real estate investor in general, but there’s so much hard work that goes into it as well. So I’m glad you shared that battle story with us.

Josiah:
Yeah. And so that is the thing, like a lot of people, they just see the end result and so they don’t see the work. It’s just like with my out-of-state rental, I did spend five months just researching different markets and digging in and making offers on properties before I finally found something that worked out.
And when we started looking at the Airbnb, I mean it was about a year from the time we started looking at them to when we finally got it on our property and all set up and stuff. And I mean with our first house that we remodeled even, I did a lot of that myself with a messed up neck and back after getting hit by the drunk driver. And I demoed out all the old carpet and stuff and was repainting the house on the inside.
And it was really hard and that’s why it took so long. It took I think four months to get the whole thing done, start to finish. And it was because I didn’t have the money to just pay someone to get it done for me and I was having to grind out and do it on my own even though I was injured.
And it’s like there’s always struggles and stuff that people go through, and especially as real estate investors, people don’t see all the struggles. And it’s just the main thing you got to do is just keep going and keep on grinding and never give up. And so-

Ashley:
What was it like for you, Josiah, when you went from doing all that work into your first property to doing an out-of-state property where you did no work for it? How did that feel? Was it almost like you’ve lost control as you’re not doing it anymore? Or was it like, this is amazing, I never want to rehab a property again?

Josiah:
So I actually really did like the out-of-state investing and I do want to continue doing the out-state investing and long-term rentals in the future just because it is so passive. But it was a lot on my phone and a lot of communication back and forth with the realtor and the lenders and stuff.
And even, because the property has an HOA in Oklahoma and they take care of the outside. And so the inside was completely remodeled, but the outside really needed some repairs done and completely repainted.
And so when we were in the process of doing the refinance on the Oklahoma property, I was actually involved with managing, trying to help manage the HOA company or the people doing the remodel from the HOA, keep them going and on their toes. And so I was a property manager. So it wasn’t completely hands off in that sense, but ever since we did get it up and running, I mean it’s just been cash-flowing good for us and super smooth.
And so yeah, I definitely enjoy that aspect of it and so want to continue that. But also, I mean the cash flow of short-term rentals is just phenomenal. And so I think the goal is to just keep the short-term rentals building for now and then maybe in a couple years do some multi-family that’s out of state.

Ashley:
That’s awesome. With your short-term rental, the one behind your house there, the tiny home, how does that affect your property taxes? Since it is mobile, does it not count into the assessment on your property taxes at all? That’s something I’ve always wondered about.

Josiah:
Yeah. So the tiny home is actually built and certified as an RV. And so I plug it right into an RV outlet and it’s got the same hookups for sewage and because of that it’s just an RV trailer essentially. And so it is on the line in a gray area as far as codes go and stuff, but as long as no one’s staying in it more than two weeks, then it’s not really considered a rental, and so it works out really well because of that. But there wasn’t any heavy permitting to do. It is allowed within the county. And I mean it was really easy for the most part to get it all done.

Tony:
Josiah, one follow up question on the tiny home piece. I know you said it’s been booked like 95% of the time, but are you getting a lot of people that are coming to actually visit that area or is it more so people, like you mentioned, that are road tripping from one part of the country down and you’re just a stop in the middle? Have you noticed a trend there?

Josiah:
Because we’re so new with it, I couldn’t really … It’s been a mix of both, actually. A pretty decent mix of people traveling from northern California to the Bend area, that’s a big vacation area and then also just up and down the I-5 corridor.
But we’re also about, well, we’re exactly an hour from Crater Lake National Park. And so it’s the deepest lake in the world and it’s absolutely beautiful park. It’s up on top of an inactive volcano that erupted I think almost a quarter million years ago.
And then this area has tons of lakes. We’re a quarter mile from a boat ramp for a river that is huge for rafting and stuff in the summer and tons of waterfalls and hiking areas as well. It’s really just an ideal Pacific Northwest area.

Tony:
Crater Lake, I’ve actually never heard of Crater Lake before, so I’m going to look into that. Who knows, maybe we’ll be neighbors here in the future. I’m always looking for that next market to invest in. So Josiah, I mean first, congratulations to you and your wife on the success you guys have had. That’s awesome. But I want to talk a little bit about the funding aspect of these units that you’ve purchased.
What are you guys doing to be able to afford all of these properties? You’ve purchased three properties in about two years. Is it all money that you guys have saved up? Were you guys partnering with other investors? Just walk us through what that journey has been like.

Josiah:
Okay. Previously, I mean up to this point it’s just been my wife and I. And I’ve had my pool cleaning business and that’s done really well. I started that in 2016 and it pretty much just exploded. There’s a ton of pools in this area, a ton of demand.
And then my wife did accounting actually. Well, she was a bookkeeper at a school for about five years and then she worked for a payroll company for another five years. And so when we’re doing all these deals and taking things down, she’s been imperative because I am terrible on computers and that paperwork and keeping stuff organized and stuff.
And so she’s the backbone there with sending emails back and forth to the lender and stuff and I’m the one that finds the deals and tries to manage them and get them across the finish line in that sense.
But yeah, we’ve done it just working regular jobs, just regular people. Like I said, we did the cash out refinance on our first house and then the HELOC on our personal home. And so other than buying our first house and our second house just using conventional financing, we’ve used some fundamentals of real estate to get the rest of our cash.
And then moving forward though, I mean we did spend all of our money on the tiny home and stuff and that’s been going great, but I do think we’re going to try to partner with people.

Tony:
For the tiny home, so did you use your cash from your HELOC to fund that construction or did you get some kind of construction loan to fund that project?

Josiah:
Oh, okay. So yeah, we did all cash with that. And so it was $76,000 for the tiny home and then all in we’re about a $100,000 on it because we had some unexpected paving for the driveway. It was too steep for cars to get in and out of. And then we did a Trex deck. That was more expensive than we thought as well. Both of those things were about 6,000 each. And then we did a hot tub and a gazebo and a fire table and stuff. And so that’s all on the deck at the end of the tiny home. That’s all underneath the gazebo.
And then actually where it’s at, my property is shaped like an L and it’s only an acre, but you have your own private hillside where the tiny home’s at. And so because of that it makes it really private. You’re looking at mountaintops and tree tops and stuff when you’re sitting either at the fire table or in the hot tub and it really just gives you a feel that there’s no one else around even though there are a couple houses, a hundred yards behind you and then a couple hundred yards down the hill in front of you and stuff.
But yeah, in the future we definitely want to partner with some investors and I have a deal that I’m looking at putting together right now.

Ashley:
You said that the land is an acre that your house is on?

Josiah:
Yeah, that is correct.

Ashley:
Okay, so one acre, I mean, that’s not a huge amount of land, but you were able to put another unit on there, produce income off of that. So I’m super curious now, okay, so you’re a $100,000 in, what are you cash flowing off of this and what do your expenses look like on it? What are you actually paying for? You paid for the property in cash. Your utilities, are they separately metered or do they connect to your house utilities on the same meter, so you don’t really know how much is exactly going to that unit?

Josiah:
Yeah. So the gross on that property right now in the tiny home is about $6,000 a month.

Tony:
That’s great. That’s fantastic, Josiah.

Josiah:
Yeah.

Tony:
For a $100,000, I mean, that’s great.

Josiah:
Yeah, it’s pretty phenomenal. When I was running the numbers for it, I was estimating, I was being really conservative, but I was thinking it’d do at least $3,000 a month, which would still be a way better cash on cash return than anything else we did. But it’s been steady, 95% booked anywhere from 180 to I think to 240 a night with a $50 cleaning fee.
And so self-managing and doing the cleanings ourselves, we’ve been able to keep pretty much all of that. Even the hot tub running constantly and it’s got a mini split air conditioning unit in it, with it being 100 degrees almost every day, 95 to a 100, it’s only been about a $100 a month for power.
And so we clean all of the bedding ourselves and then we do provide just a couple water bottles for each person or couple that stays. We do a couple little snack bars and stuff and then we do a bottle of wine as well. And so it’s just a nice little welcome pack.
And then one thing we do actually for a little bit of extra income is we’ll do these special little setup packages where my wife will go in and decorate for anniversaries and stuff. And then she even had a college graduation a few months ago that she did. And so we’ll do little charcuterie boxes and stuff and some flowers and even flower petals up on the bed. And then get a couple …
Well, we did one that was an anniversary and then one that was actually for a honeymoon. And so it was a honeymoon that was delayed due to COVID. And so we just had congratulations and stuff hanging on the wall and really spruced it up a little bit.

Tony:
So Josiah, I mean, just congratulations again, man, to be doing that well on the tiny home. I’m super pumped for you guys. I actually have one follow up question. What city did you say your property is in?

Josiah:
It’s in Shady Cove, Oregon.

Tony:
Shady Cove.

Josiah:
So it’s a very small town.

Tony:
And how far is that from Crater Lake?

Josiah:
It’s literally an hour from the lake itself.

Tony:
Oh, it’s still an hour. Wow. That’s amazing. So to be that far from the main attraction, but still gather that much interest and demand to do six grand a month on a tiny home is super, super impressive.
I guess one last question for you. Do you know, in that area, is there a limit to how many short-term rentals you can have on your property? Because you’ve got some land, you could probably slap on a few more tiny homes with the acreage that you have, right?

Josiah:
I can’t because it’s a hillside and it’s pretty rough, it’s a lot of river rock and stuff being right up above the river. And so it would just be hard to keep it such a good experience for the customers of the tiny home right now, if you have multiple just units on it. I feel part of the thing that people really enjoy is just how secluded it feels and how private it feels. And so I don’t really want to take away from that.
As far as being by Crater Lake National Park, so there’s not much else any closer. It’s a lot of national Forest and stuff around it. And so there’s only one even smaller town that’s closer to it and there’s probably only a handful of short-term rentals there. And so this is a pretty prime spot to be for that.

Tony:
But from a permitting perspective, for example in Joshua Tree, we can only put two short-term rentals per parcel. Are you limited in that same way near Crater Lake in shady Cove?

Josiah:
Yeah, there is a law. And so the way I did it on the RV pad, you can’t have multiple RV pads and RVs on your property in Shady Cove, but there is no law saying how many short-term rentals you can actually have. And so they’re pretty relaxed. Shady Cove is primarily a tourist town, especially in the summer. And so that’s where most of its revenue comes from, is just people traveling in the spring, summer, and fall.

Tony:
Interesting. I’m sold. You sold me, Josiah. I’m going to Shady Cove. I’m writing it down. I’m booking my flight.

Ashley:
He just booked your Airbnb.

Josiah:
There we go. Do it.

Tony:
So I want to move on to our next segment, Josiah, which is our Rookie Request Line. So for those of you that are listening, if you guys would like to get your questions featured on the show, give us a call at 8885-rookie and we just might use your question on the show. So Josiah, are you ready for today’s question?

Josiah:
Yeah, I’ll do my best.

Tony:
All right. So here’s today’s question from Corey.

Corey Robinson:
Hey guys, my name is Corey Robinson. I just had a quick question for you guys. I was thinking about the turnkey rental route, but have you guys ever thought about doing turnkey rentals and using those rentals as short-term rentals for either travel nurse rentals or Airbnb? I’d just like to know your thoughts on that, if you guys think it’s a good route to go or if you think it’s not a good route to go. Thank you. Appreciate you guys. Later.

Josiah:
I think that’s a great route to go, honestly. It’s not something I’ve looked at a whole lot specifically with the travel nurses. I do know that’s a huge industry though, and a lot of people in my area that do the travel nurse short-term rentals, it’ll often be they’ll be making like 20, 25% more income off their property. And so I feel like that is a really good route to go just because you just have to buy some furniture and stuff, but other than that, do a little bit of decorating, it’s good to go.

Tony:
And Corey, I mean honestly it’s slightly a personal preference, but I mean if you don’t have the time or ability to find a good deal, find a good property manager, get it set up, then turnkey could be the route to go. But typically your returns on turnkey investment are going to be lower than what you get if you did that work yourself. So there’s some give and take.
But is it a good way to break into the world of real estate investing for someone that’s new? Absolutely. I think you just got to ask yourself if it’s worth it or not. So thank you for that awesome advice, Josiah.
I want to move on to our next segment, which is the Rookie Exam. These are the three most important questions that you will ever be asked in your entire life, Josiah. So are you ready for the exam?

Josiah:
I think so. We’ll have to wait and see.

Tony:
All right. So question number one, what’s one actionable thing a rookie should do after listening to your episode, Josiah?

Josiah:
One actionable thing? I would say the biggest thing is just learn to run numbers. And so learn the numbers on the type of deal you want to do, whether that’s short-term rentals or long term rentals or out-of-state rentals even. But if you can learn to run the numbers, that’s about 90% of it, I mean as far as having the confidence to know what you need to do.
And that’s what’s helped me so much. I’ve learned to run the numbers in different scenarios and because of that it’s given me the confidence to just keep moving forward even through uncertainty and the pandemic and stuff like that. And if you can do that, that’s number one that’s going to help you just get started in your career for real estate.

Ashley:
Josiah, what is one tool, software app or system in your business that you use?

Josiah:
So one that I use a lot to actually help me run the numbers is a rental calculator. And it is a long-term rental calculator, you could use it for short term as well, and it’s called CDS Rental Calculator. It was actually developed by Chandler David Smith who was on the main BiggerPockets podcast I think about a year ago.
And it’s really good for just going through quickly on your phone and analyzing deals. You can put in purchase price, percent down, taxes, insurance, I mean it has every single metric you can think of basically. And then you process it and it’ll go to a cash on cash return and a total return on investment and stuff.
And so that’s what I used with the out-of-state purchase and with the out-of-state property and it’s just been … I analyzed hundreds and hundreds of properties. So that was such a big key. And then when I go into the long term, once I find a deal that looks like it’s going to make sense, then I’ll get on BiggerPockets and use the BiggerPockets calculator for a more in depth analysis.

Tony:
Awesome. That’s great advice. Obviously we love the BiggerPockets calculators as well, but I’ve heard good things about Chandler David Smith as well. Awesome. Last question, Josiah, where do you plan on being in five years?

Josiah:
In five years? Hopefully on a beach somewhere, just taking it easy. No, seriously though, in five years I’m hoping to be able to spend a lot more time with my family and have a good portfolio of both short-term and long-term rentals.
And so like I said earlier, I would like to grow the short-term rental side of things pretty quick because it is so scalable and get the income up pretty quick, but then invest in multi-family out of state and do that using both partners and maybe even some private investors along the way.
So the ultimate goal would be to get to about $20,000 per month income from our real estate investments. And then at that point I feel like we could comfortably just do real estate full time and not have to worry about much else. I would want to keep doing deals and growing and stuff, but not feel like I have to push myself as hard as I can basically to keep going. I

Tony:
I mean, Josiah, you’ve already had success with your pool cleaning business, so obviously you’re a smart, savvy business person, so I’m sure you’ll be able to take a lot of those skills that you learned in that business and apply it to your real estate deal as well. So five years from now you’ll be on the Real Estate Podcast with Rob and David talking about all the great things you’ve done, man.
So we appreciate you answering those questions for us. And just a heads up, you passed the exam, your answers were phenomenal. So you’re in our good books, man. So before we wrap up, I just want to highlight our Rookie Rockstar for this week. So this week’s Rookie Rockstar is Andrew Reese.
And Andrew says, “Today my fiance and I closed on our first real estate deal. 35 days ago we went under agreements on a three family near Boston, but the story doesn’t start there. Two years ago, I lost my job and I literally couldn’t afford my own rent. Now I’m engaged, have a great job and achieved my goal of acquiring a three family in the town of our choice. I started working with my agent 18 months ago looking at houses before I became even preapproved. Then we got squeezed with the rising interest rates, but when this listing went live, we were ready.”
And Andrew finishes this by saying, “Let this be inspiration to all of you who think it’s too difficult to get your first rental in this market. It is possible and don’t lose hope. Don’t lose your vision of what you want and your dream of building towards your goals and becoming wealthy.”
So Andrew, major congratulations to both you and your fiance on taking this amazing first step in building your real estate business.

Ashley:
And great advice too, Andrew, at the end there. Josiah, thank you so much for all of your advice and your knowledge that you shared with us today. Can you let everyone know where they can find out some more information about you and reach out to you?

Josiah:
Yeah, so I’m just Alpha REI LLC on Instagram and then we also have Casita De Venado on Instagram. And then outside of that, we’re not really too active on any other platforms and so you can find our tiny home at just if you search Casita De Venado around Shady Cove, Oregon as well, if you want to book that out.

Ashley:
Well, thank you so much for joining us. I’m Ashley, @wealthfromrentals, and he’s Tony, @tonyjrobinson on Instagram. And we’ll be back on Saturday with a Rookie Reply. (singing)

Rob:
This is the BiggerPocketS show, episode 67-

David:
Rob, thanks for trying, but that was so bad. I cannot let that stand. Let’s take this, and do it the right way. Watch and learn, my man. This is the BiggerPockets Podcast, show 673.

Dave:
You can’t just lock in on one metric. You have to just learn to think like an investor. There’s no magic formula. It’s not like appreciation plus cash flow minus taxes divided by amortization. There’s no magic formula. It’s a mindset that you have to develop by understanding the concepts that underpin investing. These are not super complicated topics. This is not calculus. It’s stuff like compound interest. It’s stuff like depreciation, like J said. It’s stuff like amortization.

David:
All right, I will let you guys take it from here, but before I do, one quick tip for everyone listening. This show was recorded before the book is released, so you have an opportunity to go buy the new book that we’re going to be talking about on the show today, Real Estate by the Numbers, written by BiggerPockets personalities, Dave Meyer and J Scott. If you go order it before it’s released, you will get all of the bonus goodies that come with the pre-order as well as your opportunity to get a coaching call with J and Dave specifically just for you.
That’s incredibly valuable. I would encourage you guys to go get the book. You can head on over to biggerpockets.com/store, and look for Real Estate by the Numbers.

Rob:
Today, I am joined by my co-host, Dave Meyer. How you doing, man?

Dave:
I’m great. I’m super excited to be here. I have the very unique and weird position to be hosting this show, but I’m also the guest on the show, so hopefully this goes well.

Rob:
Oh, listen, spoiler alert, I’ve already lived through the interview, and I think it went pretty well, man. What are we going to be talking about today?

Dave:
We’re going to be talking about how to think like an investor, which is what we should all be aspiring to, to not just think about an individual metric or anything like that, but to think more holistically. The reason that we are talking about this today, and we are bringing on my friend J Scott, is because Jay and I actually wrote a book about this. It is called Real Estate by the Numbers. In addition to the formulas and things you should be thinking about, we really aspire to just teach people how to think like an investor.
What are all the concepts and different elements of being a real estate investor, and how can you combine those many different things into a holistic strategy that works for you to pursue your financial goals?

Rob:
I’m really excited to get into this one, man. I feel like I really took a journey through my own investment career over the last five years with this one. So really excited for people to learn more about this book. Before we get into today’s podcast, let’s get into today’s quick tip. That’s my David impression.

Dave:
You are good at it.

Rob:
I know. That’s his Batman. I think I’m working on it little by little.

Dave:
I like that.

Rob:
All right, so today’s quick tip is to think more like an investor, don’t just think of yourself as a short-term rental operator or a flipper or multifamily expert. You got to think of yourself as a more elevated investor, and think through more than just your cash on cash. Every investment is not about getting a 10%, 15%, 20%, 30% cash on cash. There are so many other variables in any investment that can make it a good investment, such as debt paydown, appreciation, tax benefits, and of course cash-on-cash return.
When you think through all those components, it can radically shift if a deal works for you, if not. With that, let’s get into today’s show. J Scott and Dave Meyer, how are you guys doing today?

J:
Doing great. Thanks for having me. Having us.

Dave:
Happy to be here. Thanks for having us on.

Rob:
I know it’s our first time formally meeting here in the BP family, so this is an exciting day for me. Can you tell the listeners at home a little bit about your background? I mean, I’m sure a lot of people are pretty familiar with both of you two. But for anyone that’s just tuning in today for the first time, give us the scoop here.

Dave:
Oh, all right. Well, if you don’t know me, my name’s Dave Meyer. I do work at BiggerPockets full time. I’m the vice president of data and analytics. In addition to that, I have been an investor since 2010. I mostly invest in Denver, but moved to Europe about three years ago, and have been getting into passive and multifamily investing over the last couple of years, and generally just love data and numbers. That’s why I had the great honor of writing the book we’re going to talk a little bit about today with J.

J:
For those that don’t know who I am, I am J Scott. I don’t work at BiggerPockets, though a lot of people think I do. I’ve been involved with BiggerPockets since, wow, 2008 when I did my first deal. I actually found BiggerPockets when I was looking for information about flipping my first house, became friends with Josh Dorkin, the founder, and been involved with BiggerPockets in lots of different ways over the past 15 years, written four books for BiggerPockets, and here to talk about the fifth.
I guess for those that don’t know my backstory, I’m an engineer and business guy by education, worked in the tech space for a long time. I’m basically just a geeky engineer who got into real estate 15 years ago, and has done a bunch of flips, and bought a bunch of rentals, and now owns a whole bunch of multi-family.

Rob:
Well, J, even if you don’t work at BiggerPockets, I think it’s safe to say you’re an honorary part of the family here. Tell us a little bit about the book. Hey, let’s start. What’s it called, and where did it come from?

J:
The book is called Real Estate by the Numbers. It was something that I started thinking about probably a decade ago, but I actually started writing about five years ago. The whole idea behind the book was basically the math and the numbers behind real estate are something that confuse a lot of people. While there’s lots of books out there that talk about the math and the numbers, there’s flipping books by BiggerPockets, and rental books by BiggerPockets, and plenty of other books by BiggerPockets that talk about the math behind real estate investing.
I never felt like there was anything that was really holistic and captured, soup to nuts, all the math that we needed to know and the reasons behind the math that we needed to know. So, I started writing this book, I think 2017 or ’18. I got about two years in, and very, very little done. It was just a really tough book for me to write. What I realized was I wasn’t smart enough to write this book by myself. I don’t like to write unless I feel like I’m really an expert on every topic that I’m writing about, and so I realized about half this book, I felt like I might have been smart enough to write, but the other half of the book, it just felt a little bit out of my wheelhouse.
So, sat down with the folks at BiggerPockets, and it took about two seconds for us to realize that Dave was the right guy to be writing this book with me. Two or three years ago, literally two or three years ago, Dave and I teamed up. From there, the book took shape really quickly. What we realized was we had a great set of complimentary skills. The stuff that I know really, really well is maybe not the stuff Dave cares about or is good at. The stuff Dave knows really, really well is not necessarily the stuff that I’m really good at. But between us, we had all the knowledge that it took to put together this book that delves into all the math, all the finance, all the deal analysis that goes on with real estate.
Now, when we started writing the book, the original concept was let’s teach people how to do deal analysis, how to analyze deals. But as we got in, what we realized was that was a way too narrow topic. It’s real easy to give people formulas, and give people math, and give people tools, spreadsheets to plug numbers in and get numbers out. But until you really understand what those numbers mean, it doesn’t do you any good. I’ve had plenty of times where somebody has given me a great spreadsheet. I plug a bunch of numbers in. I get a bunch of numbers out, and I still have no idea if I should be doing the deal.
I can say I analyze the deal. I can say I have all the numbers, but I still don’t know, “Is this a good deal? Does it make sense for me? Does it fit into my portfolio?” So Dave and I, a couple years ago… It took a long time to write this book. It’s, I think, the biggest book BiggerPockets has published. It’s over 400 pages. But a couple years ago at the beginning, we came to this idea that knowing the numbers doesn’t really matter if you don’t know what you’re trying to answer, if you don’t know what information you’re trying to get.
So, we approached the book from this perspective of, “What’s the right questions to be asking every time you go into a deal, and then how do you use the math and the tools and all the other concepts to answer those questions?” As we’ll talk about, basically, the book is written from the perspective of, “What’s the right questions to be asking, and then how do we use the math and the tools that we have available to us to answer those questions?”

Rob:
Wow, that sounds very, very comprehensive. 400 pages, man, I’m excited to dive into that, because I think that analyzing deals, oh man, that’s such a big conversation point. I think you’re right. I think there’s certainly a process that has to be taken when you’re analyzing deals, because it’s also very important to learn from someone as well who can teach you that. Because I remember I had someone that analyzed a deal, and they’re like, “This is a 50% cash-on-cash return,” but they weren’t asking all the right questions, right? They were just looking at it on the surface of the deal. But I was like, “Well, what about this, and what about snow removal, and what about this, and what about this?”
By the end of our just back of the napkin calculation, it went from being a 50% cash-on-cash return to an 8% or something like that. There’s definitely multiple layers of analysis that you can take when you’re analyzing a deal. I’m curious. I mean, when you’re getting into one of your very first deals or just whatever deal that comes across your desk, do you feel like there’s just one moment in which you’re analyzing that deal, or is it a consistent level or a consistent mindset of analyzation from the day that you put an offer in to the day that you actually close?

Dave:
I’m happy to answer that, but first, I just want people not to be scared. 400 pages, there’s a lot of pictures. We got a lot of graphs in there. It’s a very approachable book, and so we do talk a lot about math, but J and I… I think honestly the reason why it took so long to write is because we wanted to make it understandable and digestible for people of all experience levels. So even if you’re not good at math, even if you are a new investor who haven’t done a deal before, you’re going to learn a lot from this book. It’s not going to be overwhelming.
J and I spent hours banging our heads against walls to make sure that everyone could understand that. I love the idea of what you just asked, Rob, because, I think, people treat deal analysis and portfolio analysis as a point in time, and they want to just know a rule of thumb, or they just want to get an answer like, “Is this a good cash-on-cash return?” Unfortunately, at least this is the way I see it, is it’s not that simple. You can’t just look at a deal, and say, “It’s good at this point,” because even if it’s good at the point of purchase, you need to be continually evaluating the performance of that deal to make sure that it’s still working for you.
A good example is a situation where your equity in the property goes up significantly. We’ve seen this over the last few years. People are generating a huge amount of equity. That means that although they might be generating good cash flow, they might not be generating a great return on equity, which means that their money invested into that deal isn’t generating cash flow as efficiently as it could. So, you need to be continuously evaluating and determining how you should be redeploying your capital.
I’ve definitely made this mistake in the past. There’s actually an example in the book where I talk about my first deal. It kept going up in value and value, and I was so proud of that, but I wasn’t reinvesting the money at the rate that I should have been. As a result, I was not building my portfolio as effectively as I could have. I think that’s something that we talk a lot about in the book, and I think people listening to this should be thinking about is it’s not just about the point of acquisition. It’s about continuously evaluating your entire portfolio, and making sure that it’s aligned to your own personal financial objectives.

J:
Just to add to that a little bit, like Dave said, it’s not just about, “Is this a good deal, or a bad deal?” Is this the right deal for me is often the question we need to be asking, because I’m sure Dave and I could look at the same deal, and Dave might say, “Yeah, this deal doesn’t fit in my portfolio, because here are my goals, and here’s how much cash I have, and here’s how much time I have.” Here’s where I need to be in five, 10, 15 years.
I look at the same deal, and I say, “Well, based on my portfolio, and based on my goals, and based on everything that I have going on, that deal’s perfect for me.” So, we’re looking at the same exact deal, and it doesn’t mean that the deal is good or bad. It means that the deal may not be good for him. It may be good for me, and so a lot of the times that we’re looking at deals, it’s not about objectively a good or a bad deal. It’s, “Is it good or bad for me?”

Speaker 5:
Now, to our Real Estate by the Numbers correspondent, what are you seeing out there, David?

David:
I just wanted to give you guys a practical example of how this information can be applied to your own wealth building. Now, the first thing that I think people should acknowledge is that it’s better to buy real estate than not buy real estate. You’ll often hear it say take action, get in the game, buy real estate. It’s almost always better unless you buy a terrible deal that you bought something that you didn’t. But there comes a point where the rules of the game switch, and instead of saying, “Should I buy it or not buy it?” You’ve overcome that fear, and the question becomes, “What is the best deal for me?”
You heard J talking about that. That deal may have worked at one point in your career. It doesn’t work now. It may work for a different person with different goals, but it doesn’t work for you. Then sometimes, that will evolve as you progress. I’ve got some good examples I can share of how this concept works in practical terms. I bought a house in Buckeye, Arizona probably seven or eight years ago. Now, that house was a goodbye. It gained in equity and appreciated, but the rents didn’t keep up with the value of the home. That’s because they were building new homes in the area.
So if people could choose between renting my home or a brand new one, they would rent the brand new one, so my rents didn’t go up. However, the value of the home went up, because I was comparing it to homes that were brand new that were selling for more. So I realized my return on equity on this property was very low, and it no longer fit for the portfolio I had even though it fit when I bought it. I sold that house. I used the money to buy my first BRRRR property in north Florida. I got the money out of that property. I bought another one. I went on to buy about 10 properties with the equity that came out of that one sale.
Now, I’ve got a presence in north Florida, so I kept buying. I built up to 25 homes in that area. That was jump started from the first house that I sold that no longer worked for me. Now, it continues to evolve. I now have 25 to 30 homes in North Florida that are all somewhere around $100,000 to $250,000 in value, and they’re not appreciating at the level I want them to. I also want to take on more debt because I think inflation’s coming. I sell the entire portfolio, and I 1031 into 10 much more expensive short-term rental vacation properties. The 10 properties are much easier to manage than the 25.
Less things are going wrong. It takes less of my time. I quadrupled the amount of debt I had on the original portfolio to the new one, and I put myself in a position where appreciation will be much greater, and the cash flow was greater as well because I went into short-term rentals. Now, if you had brought the end result to me eight years ago when I bought the Buckeye house, and said, “Do you want to buy this 1.2 million vacation rental?” I would’ve said no. The Buckeye house made sense for me then. But by continually evaluating the portfolio, and saying, “Does this make sense for where I am right now? Can I get more out of this equity? Can I make my money work harder for me?”
You take steps, and you can climb to great lengths when you just take it one step at a time. So now that I am redoing my portfolio, or at least big chunks of them, I’m selling off the properties that weren’t performing at the level I want them to now, and reinvesting into new properties. I’m putting together a new spreadsheet that will make it easier for me to track the cash flow of every individual property as well as the equity that’s in every single property, as well as the money that I have put into that deal. With that information, I can track the return on my equity.
If I can see what cash flow I’m getting with the equity that’s in every deal, and have that turn into a number on a spreadsheet, I can quickly look at what I call my investment property tracker, and determine which properties have equity that’s working hard, and which properties have equity that is being lazy. It makes it very easy when the next opportunity to come around, if I don’t have enough capital, to say, “These are the three homes that I’m going to sell, because the return on equity is the lowest.” Then I know it’s time to make this money work harder for me.
Now, if I’m at a point in my business where I’m not looking to evaluate new properties, and buy new stuff, and I’m busy with other things, I could just keep on tracking the progress, and making sure that they’re cash flowing, and I’m not losing money on them. But when I want to ramp up my buying, it’s very easy to see which ones I’m going to sell first. In this way, your portfolio continues to evolve to meet the new requirements and goals that you have for your life. I will now throw it back to J to finish his thought.

J:
The other thing to keep in mind is that it’s not just one technique or tool or concept that works for every deal. I can look at a rental property, and I can analyze the deal and say, “Here’s all the return metrics,” and that’s great for a rental property. But what happens if somebody now hands me two different deals? Somebody hands me a rental property, and then they also hand me this note deal. Both of them are going to cost me $100,000, and all I have access to is $100,000. Well, what deal is better for me? Again, we can look at all the numbers, and Dave might decide that the note deal is better for him based on whatever criteria he’s using to look at his portfolio right now.
I might look and say, “No, the rental deal is better for me,” and so we need a way of not just being able to analyze deals, but we also need a way to compare deals. We need a way to make decisions. Sometimes, we have to make a decision. I have a story in the book about how I had been flipping houses for a couple years. I was flipping 30, 40, 50 houses a year. One day, I’m looking at my expenses for my business, and I realized that I’m paying literally $100,000, $150,000 a year in insurance costs for my flips. So I said to myself, “Well, do I need to be paying for that? Is the amount of expense that I’m seeing in terms of property insurance I need, do I really need all this insurance?”
So, I used a decision-making tool called Expected Value. I know it’s a term that… Again, I’m not trying to get into the math. We want to explain these terms in real-life terms. Expected value, this concept, allowed me to plug in a couple numbers, and realize that I was losing tens of thousands of dollars a year by paying for insurance. Even if I had insurance claims, I would’ve saved money by not insuring my products, and just paying for those costs out of pocket. So we have all these tools out here that allow us to make these decisions, to compare investments, to look at an individual investment, and look and see if it fits into our portfolio.
It’s not one size fits all, “Here’s a formula that you plug everything into.” Again, it’s knowing what questions to ask, and then figuring out how to look at a problem based on the question you’re trying to answer.

Rob:
That’s really great. Here’s what I love about that, especially for me where I am in my real estate journey. It’s that yes, no deal is perfect for you, and when you’re analyzing a deal, everyone has their own… I’m going to put quotes on this “system,” but for I would say the majority, especially the majority of new investors, we have systems. We have processes and everything, but they’re not really written out. They’re not… There’s no terms assigned to them. It’s always floating around in the ether, and so you have a way of doing things, but you don’t have terms and analogies assigned to them.
This is why I really like David, because David’s really great at bringing home an analogy that makes this very complicated real estate term very simple, right? The term you just talked about, expected value, and then Dave just talked about return on equity. These are really important concepts that I think the moment you assign a term and some system behind it and why it’s important, it really starts making you analyze deals a lot differently. The return on equity is something that was really big for me recently, because a lot of people get scared to use the equity in their homes because they’ve got a very cheap interest rate.
I’ve got a house in LA. It’s got, I don’t know, half a million dollars of equity in it, but it’s got a 3.25% interest rate. I’m like, “Oh, man, I don’t want to touch that, because it’s such a great rate.” But when you think about what you could do with that, and how you could leverage that into other deals, I’ve never actually done the analysis on the return of equity up until recently where now I’m like, “Oh, yeah. I mean, it makes a lot of sense to pay the extra 1% or 2% every single year if that means that I’m actually going to be able to make more money in the long run in my real estate portfolio.”
This is really great. This comes at a great time, because I think for me, I found myself really in love with single family acquisitions. That’s how I was building up my portfolio for a long time. Then now, I really do have to ask myself every single time a deal comes across my desk, “Is this right for me? Does it make sense in my scaling model?” A lot of the times, the answer is no, unless there’s something very cool about the single family acquisition. Someone sent me a house that had a cave underneath, and they’re like, “This would be an awesome Airbnb.” I was like, “All right, that one makes sense for me only because it’s very cool.
But other than that, I’m turning down so many things because I’m at this point now where the actual scaling side of my strategy, it really does demand a lot of analysis outside of just analyzing an acquisition.” Dave, I’m curious on your end, what kind of deals are coming across your desk now that wouldn’t really be a great fit for you that might have been a better fit for you maybe two or three years ago?

Dave:
That’s a great question. I think you raised a great point, Rob, just about building up your own knowledge base. Like you just said, you started to learn and now you understand return on investment. I think we all follow this pattern in our investing career, where we fall in love with a couple of metrics that we might like, and don’t fully understand and understand how to evaluate each individual thing. I totally identify with that. I just want to say that, because I really missed out on a lot of potentially beneficial analysis over my career.
Now, I’ve gotten to the point to your question about where you can really have a well-defined buy box, and you understand exactly what you want to invest in. I think a good example is over the last couple of years, there has been this exception to the rule where you don’t invest for market appreciation. Most people, most investors believe that appreciation is icing on the cake. I think for the last couple years, I even personally got away from that for a couple years when you look at short-term holds, because the market conditions were really favorable for market appreciation.
But now looking at new market conditions, I think that the type of deals that I would look for have to be much more fundamentally sound than what they were over the last couple years where you’re looking for a better cash-on-cash return, for example. So for me, I am mostly a passive investor at this point. I am just looking for places that have a really strong cash on cash return right now. I still think value add opportunities, where you can get forced appreciation, are probably the best deals that I’m seeing in these current market conditions. But I’m curious J’s answer, because he is a much more prolific investor than I am.

J:
It’s not so much being prolific. Again, it’s knowing what each of us is looking for at this particular point in time. I’m at the point in my career where I don’t necessarily need cash flow every month. I have enough cash flow coming in from other sources that if I bought a rental property today that was generating no cash flow, would it make sense? It might. I’m not saying it would, but it might. So, I like to look at things in addition to cash flow for me because, again, it’s not all about… I’m not at a point where I need to quit my job, and I need to replace an income.
So what are some of those other things I look for? Number one, I do look at appreciation, but I’m not a fan of natural appreciation. This is one of the things that Dave and I have talked about a whole lot, investing for appreciation. I tend to invest in places that don’t see a ton of natural appreciation. The market doesn’t just go up over the last 100 years in the places where I invest. The markets tend to reflect inflation. If inflation’s been at 2%, or 3%, or 4%, real estate values have gone up at 2%, or 3%, or 4%.
Now, maybe in the last two years, that’s not been the case. Everything’s skyrocketed. But again, if you look over the last 100 years, I can expect 2%, or 3%, or 4% increase in value in my property every year. If I’m not looking at natural appreciation, why do I like appreciation? Because I’m somebody that I have the ability to renovate properties. I’ve done a lot of flips, and because I’m not scared to renovate properties, I have the ability to do this thing called forced depreciation, which means I can buy a property that’s worth $100,000 today. I can put $50,000 into it, and now it’s worth $200,000 tomorrow.
So, this property that I’ve put up total of $150,000 into is now worth $200,000. I’ve basically forced the increase in value of $50,000 on that property. Now, that’s something that I can do, because I have time to do it. I have the knowledge to do it. Not everybody does. Dave mentioned he likes passive investing. He may not want to buy a fixer upper. He lives out of the country. He may not have the ability to manage a project from far away. So again, what might be a good deal for me may not be a good deal for Dave, but I’m going to look at cash flow, number one.
I’m going to look at that forced appreciation and even natural appreciation, so those are things I definitely look at. But in addition, I also look at two other things. I look at this thing called amateurization, and that’s just a fancy word for principle paydown. When I buy a property, and I get a loan against it, let’s say I get $100,000 loan, every month, my tenants are paying down part of that loan. After the first year, that $100,000 loan may only be a $98,000 loan. After year two, it may be a $96,000 loan. So every year, I’m building up equity because my tenants are paying down the loan.
That’s money that even though it’s not cash flow, I’m not getting that money in my pocket every month when I sell, I get to capture all of that extra equity that my tenants are paying down every month. That’s the third thing, so cash flow, appreciation, principle pay down. Then the fourth thing is tax benefits. Let me tell you something. For a long time, I didn’t appreciate the value of tax benefits. I think that’s the way it works with a lot of investors. You’re starting out. You buy a property. Maybe you’re saving $600 a year in taxes, or you get depreciation of 600, so you’re actually only saving 100 or 150.
But as your portfolio starts to scale, as you start doing larger deals, which what you realize is that you pay a lot of money in taxes, and real estate is literally the best way to hedge those, or defer or completely eliminate that tax burden. So for me, this year, I’m likely to have over a million dollars in depreciation, which means I can make a million dollars in profit in all my businesses this year, and I’m going to pay zero tax. Now, I’m not going to not pay tax forever. Eventually, I’m going to pay it. But if I can put off paying that tax for five years or 10 years, or best case, I put it off till I die, and now it’s my kids’ problem, literally, I’m now saving literally hundreds of thousands of dollars this year in taxes.
If I can do that every year, I’m going to make millions of dollars over my career just in not paying taxes. So, one of the topics that we focus on in the book is it’s not just about cash flow. It’s not just about appreciation. It’s not just about principal paydown. It’s not just about tax savings, but it’s all of these things put together that really help you define, “Is this deal good? Is this deal not good?” Again, more importantly, is this deal good for you or me, or not good for you or me?

David:
This is one of my favorite topics to get into with real estate investing. I love it. Dave makes a very good point that in the last couple years, the environment was geared more towards market appreciation. My opinion about that is because the government has printed more money through quantitative easing, and houses went up in value, but not necessarily because their value increased, but because the value of money decreased, which led to appreciation. J makes a really good point that at this stage in his career, some deals could make sense if they don’t cash flow.
Let me give an example of a deal that I bought six years ago, and see if you do the same. I had opportunity to buy a house that had to be an all-cash purchase of $150,000 from a wholesaler that had to close in I believe three weeks. The ARV on the property… No, sorry, not even the ARV, just the value as is was $250,000. Now, when I ran my numbers on this, it was going to lose about 125 bucks a month for the first year, and the next year, it was probably going to lose about 25 bucks a month. Then in year three, it was going to make $50 to $75 a month.
Would you buy a deal that you were walking into with a little over $100,000 in equity if you are going to lose money on it every single month to the tune of 125? Would you do the same thing if you were going to lose 300 a month? What if you were going to lose 500 a month? You were not going to lose that money forever, but just for a couple years until the rents caught up with what your mortgage was. Now, for me, that made a ton of sense, because I could afford to lose $125 a month on a property because the rest of my portfolio would cover that, or the money that I made at my job would cover that. I wanted that $100,000 of equity. My guess is most of you would too.
But what if you were in a position that you could not afford to lose 125 bucks a month? You’re living paycheck to paycheck. Now, of course in this example, you’d probably buy that house, and then sell it, and get the money. You turn it into a flip to someone else, but you see my point. There are stages in your investing career where it doesn’t make sense unless it cash flows incredibly strong. That’s usually the time where you have a job, and you’re trying to get enough cash flow to quit your job, to get your time back, to focus more on finding more deals or becoming a better real estate investor.
Then there’s other times in your career, like J mentioned, where he has cash flow coming in from businesses he owns, previous real estate, books that he’s written, different things that he does that the cash flow from a specific property just isn’t as important. He has cash flow from other places, so he could buy a deal that has a lot of equity but doesn’t cash flow, and it’s not irresponsible. The point here is evaluating where you are in your journey, and looking at every deal on its own merits.
Dave Meyer made the point there that he wants to find a house with a stronger cash-on-cash return because he doesn’t think it’s going to appreciate. That is a solid point. However, let’s expand it a little bit. Are we assuming that the only way that you gain equity in a property is by market appreciation? That’s surely one way the value of the property going up. Well, you also have natural appreciation, which is you could buy a house anywhere, and it’s going to go up in value because we diminish our money supply. Then you have what I call market appreciation, which is you buy a house that has geographic barriers, limitations, unique amenities, so it’s forced to go up more than houses around it.
This could be a house on a beach. This could be a house in a city like Austin that only has so much ground actually within the city limits that you can build on. You certainly increase your odds for appreciation by playing the market appreciation game, but then there’s other kinds like forced appreciation. That’s where you add value to the property, and make it worth more by executing a vision. Surely, we shouldn’t throw that out and just lump it into the category of appreciation is risky, and cash flow isn’t. Then you also have what I call buying equity. It’s not even based on appreciation.
You just got to deal at a lower price than what it’s worth, because you found a deal with a motivated seller that was marketed. You negotiated really well. I use that all the time. Appreciation comes in many forms. It’s not just I hope the price goes up. There’s things you can do to make the price go up. There’s things you can do to put the odds in your favor that the price will go up. I just want to highlight that there’s lots of different ways to execute on this, and at times, cash flow is important, but cash appreciates also.
If you bought a house in Malibu 30 years ago, I’m pretty sure the cash flow would be much higher than it is right now. If you bought a house 30 years ago in a low appreciation market like somewhere in Indiana or the Midwest, the cash flow would not have gone up to the same degree that a beach house in Malibu might have. These are all things to take into consideration, and like J says, “Ask yourself where are you in your journey? What is most important to you?” Then what I will add into the conversation is plan ahead. Don’t assume that you’re going to be in the same place in five years.
The house you’re buying right now in Ohio might make a ton of sense for you, but be planning your exit strategy when you buy it. Assume you’ll be in a different situation with different needs and different goals, so have a way that you can sell that property later. That’s why I always look for value add. I want to know that I added value to this property so that if I want to sell it or if I want to refinance, I can get my equity back out, put it into the next deal. These are BRRRR principles that don’t always work into a specific BRRRR deal, but they’ll benefit you all the same.
Let me give you a quick example of how I use the principles that I just described in my own investing journey. I’m buying a property right now that’s going to be a short-term rental in Georgia, where people from Atlanta would visit to if they wanted to stay in the mountains as a vacation rental. I don’t know that I’m going to want to own that property forever, because short term rentals are a lot of work. The cash flow is great, but the work is going to be very high. So, I’m buying a property that I don’t know if I’m going to hold forever, because I can add value to it.
I’m basically going to be able to turn a two-and-a-half acre property with two structures on it. One is a home. The other is a garage into two different homes. Now, that will add a ton of square footage to the property. It will also add a ton of cash flow to the property. If I ever get sick of owning it, and having to manage it, and the pain that comes from managing a short-term rental, I can either sell it, and it’s worth much more because there’s now two homes on it. I can reparcel it, and sell it as two different homes, and get more money, or I can sell it to another investor who’s going to buy it based on the cash flows of the property, which I will also have increased by adding the second structure.
If I want to keep it, I can keep it. If I want to exit, I can exit. I know in a couple years when I’m looking at my goals, time may be more important to me, and I may want that time back. By adding value to the property, and thinking ahead, I put myself in a position where I can get that time back if I want without actually losing money on the deal.

Rob:
This is huge. I mean, this is… You just touched upon… Even with just those four things, I think the biggest thing that most investors really don’t think about… I’ve been talking about this a lot, because I’ve had this really big renaissance, a big revelation and evolution in my journey where cash on cash, that’s all I cared about. Give me that 20%, 30%, 40%, 50% in short-term rental’s cash flow. Let’s do this thing. But you’re so right because when you think about your tax deductions, and paydown and all the other things associated with the actual return on the investment of your property, your actual ROI can double from that cash on cash when you think about all the money that you are making or depreciating and all that kind of stuff.
For me, J, you just really… You triggered a little PTSD here, because this year was the first year that I’ve had to pay a substantial amount of taxes, multiple six figures. The only reason I didn’t pay, I don’t know, a lot more, let’s say two times more in taxes was because of depreciation and cost segregation. Had I even known about that, I didn’t even know really about it too much until about a year, a year and a half ago, and now that I’ve figured this out, I’m like, “Oh my goodness, I feel like I’ve just unlocked the greatest real estate superpower of all time, and it’s depreciation.”
Had I really thought about that when I analyzed some of these deals, I really started to think about all the deals that I walked away from, because I just didn’t understand how many layers of things could benefit me from that specific deal, or how many deals I’ve taken simply because the cash flow “was really good,” and I didn’t really think about any of the quadrants, right? I’m really glad to hear you talk about that, because I think that this is something that really anyone can learn. Real estate is about making money, right?
If you’re not paying in taxes like we’re talking about, if we’re kicking them down, we’re making that money that we can then use and reinvest in real estate, and do it over and over and over again.

Speaker 5:
Let’s head over to depreciation station. David?

David:
Now if I may, I’d like to give you an example that introduces just how powerful depreciation and specifically bonus depreciation through real estate can be. It ties into the whole cash flow argument that we’re going back and forth with. Last year, I bought a property near the beginning of the year. That was a triple net property. That was the most expensive property I bought. You guys have heard me talk about this on podcast where the mortgage was just so high. I think it was around $80,000 a month. I took a lot of fear to get over buying a property that was that expensive.
Now, it doesn’t cash flow amazing. It’s a triple net property. They typically don’t cash flow super solid, because they’re very hands off. But it covered all of the taxes that I’m going to make for the next two years. This property saved me almost three million in taxes by buying it. If I only looked at the cash flow, I would’ve said, “No. Why would I buy that? The ROI is too low.” But when I look at holistically how much wealth it saves me over time, that’s a lot of money. You may not be in a position where it’s going to save you $3 million over a couple years, but you might be in a position where buying a property and using the bonus appreciation could save you $50,000 to $75,000 a year.
Now, keeping $50,000 to $75,000 is making at a W2 job $75,000 to $100,000. So buying a property under the right tax conditions could be the equivalent of getting a job that pays you $75,000 to $100,000 a year that you barely have to work at. When you start to look at it from that perspective, it really jumps out at you that this is how people build big wealth through real estate. When you’re only looking at ROI, cash-on-cash return, I should say, and cash flow, you miss some of these opportunities.

J:
It’s interesting when you think about the different ways of making money in real estate. I have conversations all the time with a bunch of non-real estate investor friends, and we have this debate between the stock market and real estate, or real estate and crypto, or real estate and precious metals, or real estate and whatever it is. They always come back to stock market is typically 8% to 10% per year. Obviously, it’s volatile, but on average over time, it’s 8% to 10% a year. These days, in real estate, cash flow is near zero. I mean, over the last couple years, we just weren’t making a lot of money because we were paying a lot for our properties.
I don’t want to say near zero. Some people are doing a great job of finding properties that are generating 6%, 8%, 10%, 12%. But me personally, somebody that doesn’t hunt for properties that much anymore, I’m not getting a lot of cash flow. Likewise, these days, I mean, I’ve been getting appreciation over the last couple years, but I expect anything I’d buy today probably isn’t going to appreciate much over the next couple years. So if we look at a deal that’s essentially very low cash flow, essentially no appreciation over the next couple years, shouldn’t it be obvious that the stock market’s a better place to put your money if you’re going to get 8% to 10%?
Well, at first glance, it might be. But if you take just those other two things I talked about, the principal paydown and the tax benefits, and we talk about this a lot in the book, just those two things, especially in our low interest rate environment. I mean, things are higher… Interest rates are higher now than they were six months ago, but they’re still low. In our low interest rate environment, we’re building up a lot of principal every month right from the beginning of the investment. So even if you ignore cash flow, even if you ignore appreciation, and you just look at principle paydown and tax benefits, I’m getting more than 8% on every single one of my rental properties that I’ve bought over the last couple years.
So, I’m beating the stock market without cash flow and without appreciation. So if I get that cash flow, which I will, I’ll get more cash flow over time, and appreciation, eventually, we’re going to be in a better economic situation, and we’re going to see values rising again. At that point, I’m going to be much higher than 8%. So again, if you only look at cash flow, or you only look at appreciation, or you only look at the two of those, it really gives you a stunted view of what the investment’s really returning. But when you take a holistic view, and you look at all the return metrics, and you look at it again relative to your entire portfolio and what you’re trying to achieve, a lot of times, the obvious answer is real estate is better than other investments, or it’s better than you think it is.
I’m not saying there isn’t the right time to be buying stocks or bonds or crypto or other things, but what I’m saying is don’t take a myopic view of real estate, and not really understand all the benefits it’s providing because a lot of times, it’s performing even better than you think it is because you’re not looking at each of these factors.

Dave:
That’s such a good point. It’s such a false comparison too because like, “Oh, the stock market gets 8% or 9% cash flow, and real estate is bad,” but the stock market generally doesn’t produce cash flow. The best dividend stocks produce one, maybe a 2% yield. If you’re looking at the total return of the stock market, and comparing it to cash flow in real estate, that’s not an apt comparison. I think what I love about what J was just talking about, and Rob, you before, is you can’t just lock in on a single metric. I’m sure you guys get these questions on social media or wherever where people are like, “Is a 4% cash-on-cash return good?”
It’s like, “I don’t know.” You have to explain so much more. I think that’s what J and I really… After debating how to structure this book, we kept coming back to this idea is that you can’t just lock in on one metric. You have to just learn to think like an investor. You have to… What Jay is talking about combining these four different topics, there’s no magic formula. It’s not like appreciation plus cash flow minus taxes divided by amortization. There’s no magic formula. It’s a mindset that you have to develop by understanding the concepts that underpin investing. These are not super complicated topics. This is not calculus. It’s stuff like compound interest.
It’s stuff like depreciation, like J said. It’s stuff like amortization. If you can educate yourself to the point where you at least have an understanding of these concepts, and you don’t need to be able to calculate every single metric in your head… There are calculators. There are spreadsheets that can do it. But if you can learn the concepts, then when you’re evaluating deal, the numbers start to make a lot more sense, and you can combine them, and get a fuel for the deal, and how it’s going to help build your portfolio and how to compare them against one another, because they’re not always apples to apples.
There’s going to be… A multifamily deal might be better in cash flow and amortization, but like J said, it could be in a low appreciation area, or you can invest in somewhere. I invest in Denver where… Not anymore, I agree with J on that. Over the last couple years, there was a good chance of market appreciation but, maybe it didn’t have as much cash flow. But since we understand the concepts, you can think about them holistically, and just honestly feel more confident about your investing decisions.

David:
This is a very solid point that is particularly applicable to the market that we’re in right now. One of the things that I’ve noticed that can be very misleading is that people are starting to use cash flow and ROI synonymously. So, return on investment has been reduced to being what is the property cash flow in a month? I just think it’s inaccurate, because the return on your investment incorporates a lot of things. It incorporates your loan paydown. It incorporates appreciation that you’ve had in the deal. It incorporates the fact that cash flow over a five or 10-year period of time should be increasing every single year.
I’m on a mission right now to differentiate cash-on-cash return versus ROI, because they’re not the same thing. I think J is highlighting that. Now, part of the reason that you’ll hear us say cash flow isn’t great, man, we’re not trying to say don’t buy cash flow and properties. The fear is that cash flow tends to be stronger at the lower end of quality and price. The higher end properties that you get that tend to build wealth over time better, and tend to appreciate more, and tend to have better tenants, they don’t cash flow as strong because they’re priced higher.
Now, the problem is when the market gets competitive like it is right now, and more people are chasing after cash flow. There’s this pressure that pushes you further and further down into markets that can become like a D class neighborhood. They’re the areas that you don’t want to own rental property, but the price to rent ratios are so strong that they make cash flow look good. This is why we give warnings about don’t only look at cash flow. It’s not that cash flow is bad. So many people hear this, and they just get defensive.
It’s that if you chase cash flow, and you only look at cash flow, it will push you into these markets that you don’t want to own long term where all the headaches come from, that will make you not like real estate investing. So the great advice that we can offer to you is to look at it holistically, and include in your analysis, “How much time would this take, and how much headache would this give me?”

J:
To add on to that, Dave used the term think like an investor. If we were to retitle this book, I like the title Real Estate by the Numbers. It says what the book is, but if I had to go with a different… If we had to go with a different title, I think, Think Like An Investor is the title of this book. Because this book, while we do focus on real estate, and basically, 95% of the examples are real estate related. Everything we teach in this book is applicable to any type of investing you might do. So again, this book isn’t just about analyzing rental properties, or analyzing flip deals. It’s learning to think like an investor.

Rob:
That’s awesome. There are a lot of tools like the BiggerPockets calculators out there that make deal analysis relatively simple. What do you think is missing from this?

Dave:
I don’t know if there’s anything necessarily missing. It depends on the deal, but I think we’re trying to inject two things into the conversation. First and foremost is context. I got my start in investing or in real estate I should say. I got an internship in college just randomly at a construction management company. I was building financial models, and I learned how to calculate something called internal rate of return or IRR. We talk about this in the book. I could calculate it. I could throw it out there, and I had no idea what it meant.
I couldn’t have any less concept of what a good IRR was. Even if I knew a 20% higher IRR is better than 14%, I couldn’t really understand what that meant. So while there are great calculators out there, like the BiggerPockets ones, if you don’t really understand what the numbers mean, it’s hard to judge whether or not a deal is good for you and if it’s going to help you meet your financial goals. Then on top of that, I do think the BiggerPockets calculators are excellent for rental property analysis, but there are some things… J gives some really good examples of this in the book where a traditional rental, like cash-on-cash return or just the annualized rate of return doesn’t help you understand rates of return when you have a lot of inputs and outputs.
So, J gives us… J, you could probably give a better example, but this deal where he has to put some money in, and he does a ReFi, then he does another renovation. It’s like, “How much money is even invested in that deal? What’s the rate of return?” It’s a little bit more complicated when you’re doing value-add deals, when you’re doing development deals, when you’re doing multi-family deals. I think in this book, we introduce some new concepts and formulas that aren’t traditionally covered in the calculators that you can apply to some more advanced deals.

J:
In addition to what Dave said, and let me address this, so it’s a good question like, “Is there things lacking in the BiggerPockets’ calculators?” There are things lacking in every calculator, and the BiggerPockets calculators are the best in the world. When somebody hands you a rental property and says, “Analyze this deal,” or somebody hands you a flip property and says, “Analyze this deal,” or somebody hand you a BRRR property, and says, “Analyze this deal.” The problem is a lot of the decisions that we make as investors aren’t going to be covered by one of those three or five calculators.
I give an example in the book of a deal. I did a flip deal. I listed the deal. I don’t remember exactly. It might have been, let’s say, $100,000 I listed it at. I got two offers pretty quickly. First offer was an all cash offer at list price. This was a long time ago. I got to offer all cash at list price. Then I got another offer from an investor who said to me, “I really want this property. I’m going to hold it as a rental, but I can’t pay for it for seven months. I have another deal that’s closing in seven months. I’m getting money back from…” I think it was a syndication or something in about seven months.
“I’ll buy it now, but I want you to sell or finance it to me. I basically want you to hold the note. I want you to not take money from me for seven months. I’ll pay you in seven months, and I’ll pay you more than the $100,000. Just tell me how much you want, and I’ll pay you more. I just can’t pay you for seven months.” So, if I said that to you, what do you do with that information? How much more does he need to pay me in seven months so that his offer’s better than that $100,000 today?
There’s this whole concept called time value of money, this idea that money today is worth more than money tomorrow or next week or next year, because I can invest it if I get it today or that tomorrow or next week or next year. So, I now have seven months that I can’t do anything with the money until I get the money, so how much more does he need to pay me in seven months for that to be better than getting $100,000 today? That was a real problem that I had to answer the question. It turns out there’s a pretty simple formula for me to figure out how much he needed to pay me. So if he would pay me at least that much or more, his offer was better than the guy that was going to give me $100,000 today.
These are the types of questions that you get asked all the time that you can’t just go to a BiggerPockets calculator or any other calculator, and just plug the information in. You have to understand, “Well, what is this concept of time value of money? What is this concept of seven months from now is a worse time to be getting money than today, so I need more of it in seven months than I need today, and exactly how much more do I need?” So, by understanding, by thinking like an investor, we can answer questions like that. Then you can’t just plug into a calculator, because calculators weren’t designed to answer questions like that.

Rob:
Oh, I see. So basically, what you’re saying is there are the tangibles of every deal, things that are very objective. That’s like, “What’s the property price? What’s the rehab price? What’s the interest rate?” But then there’s also the intangibles, like what you’re talking about, which is the value of your money over time. Money’s going to be less valuable in seven months than it is today. You really have to consider the impact of your money just sitting in a bank account for that amount of time, or money that’s owed to you.
I totally understand that. There really is an intangible aspect of analysis. This is something that David and I talk about quite a bit on the podcast, which is that analyzing a deal is, oh man, I don’t know, it’s part art. It’s part science. That’s how we feel. But I’m curious, what’s your POV on that, Dave? Is that something that you’d agree with, or do you feel like analysis is somewhat objective?

Dave:
I think there’s two sides to it. The numbers… One of the reasons I just love math is because it is objective and you can get real numbers. To J’s point, if you just put in good numbers into a calculator like BiggerPockets, you’re going to get the right answer, but there are assumptions in every deal that there is some art to. That’s something like rent growth. We’ve seen rent going up over the last couple of years, and we can look at data to look at historical trends, but no one knows for certain what’s going to happen in the future.
You need to use some art, a lot of experience talking to other investors to figure out what assumptions to put into those deals. I think there’s an even bigger subjectivity into what J was talking about, which is what is a good deal for you? You can get an objective answer about what a good cash-on-cash return is, but that doesn’t necessarily mean it’s good for you. I think there’s a good example, especially now with rising interest rates. It’s like, “What kind of loan should you use? Should you be putting more down on a deal right now?”
Should I use a HELOC instead of a conventional mortgage? The calculator, if you tell it what to do, it will give you the answer, but you sometimes don’t even know what questions to ask yourself, and the analyses that you could do to optimize a deal even further beyond the objective numbers unless you understand some of these concepts. I do think there is both a subjective and objective part, and that’s honestly what we’re hoping to help teach people in this book is how to answer both sides of that.

Rob:
Certainly. I mean, let me clarify. I mean, part art, part science. What we mean by art is not just, “Oh, I viscerally feel this way about a house.” What we mean is the strategy behind real estate investing. However, when you say part art, part science, that sounds a lot better than saying part strategy, part science.

David:
A frequent theme of this episode is asking yourself what are the right questions to ask? Here’s an example of a great question you should be asking. In five years, what will this property look like, and how will it be performing? In five years, what will my goals be, and how will they be different from today? Here’s an example of if you take the bait of the high cash flowing property right out the gate, you go buy in some Midwest state where there’s not a whole lot of rental demand, but there’s tons of properties that meet the 1% rule. You buy that property that’s going to cash flow, let’s say, $100 a month.
In five years, it’s going to be cash flowing $150 a month. There could be a scenario where inflation has been so great over a five-year period that $150 in five years is worth less than $100 today. So even though it looks like your cash flow has grown by 50%, which would be a healthy number, the actual value of that money has diminished so long over time that it’s worth less. Your return has actually gone down. Now, this becomes even more clear when you compare it to investing in a growing area. That might have been harder to find the deal. You might have to work longer and harder to get it, but your cash flow has gone from $100 a month to $500 a month or $400 a month over a five-year period, which is not uncommon in areas that I invest in at all, particularly coastal markets.
If you’re asking the question of what’s it going to look like in five years, the right answer becomes really, really clear. If you’re asking the question what’s it going to look like right now, it can become muddy because the cash flow looks much more solid than where you can get anywhere else, and the deal is easier to find. Then to further elaborate on this, you’ve got the art and the science position that Rob talked about, and that Dave Meyer supported. Real estate is part art and part science. You can’t focus too much on either end. The people that focus only on the art, they miss out on opportunities, because they don’t understand if the property’s going to actually pencil out.
They don’t rent it by the numbers. The people that focus only on the science miss all the ways that they can improve the way a property is valued. Particularly in the short-term rental space, I see this a lot. There’s a lot of creativity that you have in the art side with the short-term rental that can actually increase the science side, which are the numbers. You got to understand both, and you got to be good at both. But man, real estate is nothing else because when you do well at this, it grossly, grossly beats all of its competition.
J mentioned earlier in the show that his friends want to compare crypto to precious metals, to real estate to stocks. It’s really not a fair comparison. Real estate is going to be all of them, but that’s because they’re not apples to apples. When you buy precious metals or stocks or crypto, there’s no work that goes into it. You just click a button on a computer. There’s none of your time that’s involved. Real estate does involve some of your time. It’s not as passive as those investments, which is why it outperforms them, just like most of the time, running a business will outperform real estate from a cash-on-cash perspective, but there’s way more effort and way more risk that goes into running the business than real estate.
So again, asking the right question, “Is this a property, or is this an opportunity that’s going to make me money without a lot of time, or is this an opportunity that’s going to have a higher ROI, but a lot of my time will be required?”

Rob:
I really love what you guys talked about here, which is thinking like an investor, because I think this is also something where we pigeonhole ourselves very quickly in our real estate careers, where we brand ourselves as a house flipper or a short-term rental operator, or a multifamily expert. But really, what we are is we’re investors. I’m very guilty of this. As someone that I’m very pro short-term rentals, I’m like, “I’m a short-term rental investor, and this and that.”
But really, I do think that it devalues the fact that I am an investor, and should be thinking a lot more broadly than what we talked about earlier, the cash-on-cash metric. So, what are ways that our audience can be thinking like investors?

J:
I think, again, it goes back to figuring out what the question you’re trying to answer is. Don’t just stick numbers into a calculator, and get numbers out. Start with what are you trying to figure out? Here’s just something that I think was fun that we added in the book. On social media, if anybody is on Facebook, or I guess mostly Facebook, people like to pose this question. I don’t know why they do it, but I guess it gets interaction. They pose this question, “If you could have $2 million today, or you could have $200,000 every year for the rest of your life, which one would you rather have?”
I mean, we’ve all gone on Facebook, and seen somebody post that question, and then there’s hundreds of responses. Half the responses are like, “I’d rather have the $2 million today, because I’ll turn it into $100 million tomorrow.” The other half are like, “I’d rather have $200,000 today, because then I never have to work again the rest of my life.” Then people will argue, “Well, this one’s objectively better than this one,” but nobody ever gives any reasons. The interesting thing is you can actually do the math to figure out what one is better.
This is very analogous to a lot of situations we run into in the investing world where you have the choice of a lump sum amount of money today, or cash payments every month, or every quarter, or every year for some amount of time into the future. If you think about it, that’s all investing is. If I buy a rental property today, all I’m doing is taking this lump sum. I’m trading this lump sum for monthly cash flow. So, it’s the equivalent of saying, “Would you rather have $2 million today or $200,000 per year for the rest of your life?” Well, if I’m looking to buy a $2 million rental property that’s generating $200,000 a year in cash flow, that’s the same question.
So, when you look at people on the internet, and they can’t answer this question with any objective response, they just say, “Two million sounds better, or 200,000 sounds better,” if you don’t understand that question in that form, you’re also not going to understand the question in the form of, “Is a $2 million rental property that generates $200,000 per year in income, is it worth it?” So, you have to learn to recognize that these are the types of questions that are universal in investing. There are a whole bunch of questions that are universal in investing.
So instead of asking the question, should I buy this rental property? The bigger question is, “Should I be willing to spend X amount of dollars in order to generate X cash flow over the next however many years?” That’s the more generic question. Chapter eight in the book is literally, how do you answer the question, “Should I invest X dollars for Y amount of cash flow over the next number of years, or how much should I invest for this much cash flow over the next couple of years?” Now, once you learn the concepts and the math and the formula behind answering that question, you can now apply that to a whole bunch of situations.
You can apply it to buying a rental property where you pay money now, and you get cash flow over the next couple of years. You can apply it to life insurance, where you might pay money now. You live a certain number of years, and then you get money later. You might be able to apply it to a note. Let’s say somebody’s going to sell you a note. I have this note that’s going to pay $312 a month for the next eight years. How much are you willing to pay for that note today? These are all questions that are predicated on the same… or these are all situations that are predicated on the same question, which is, “How much should I be willing to pay today for a set of cash flow in the future?”
Once you start thinking about things in that question-answer, that more generic format, it allows you to start thinking like an investor, because now you don’t just need a formula for rental properties and a formula for notes and a formula… You get the idea that all of these things to some degree are the same, and I can use this one formula for all these things. Then there’s a whole bucket of other things over here that fit into the same different category, and we can use these techniques for that category. There are all these categories.
Once you start to recognize these patterns of different types of investments, you’ll also start to recognize how we evaluate these investments, and compare them to each other.

Rob:
Makes a lot of sense. I was just… I’ve had this troubling deal that’s really haunted me since the day we sold it. We had a property that we built from the ground up. We operated it for maybe, I don’t know, two or three months. We sold it for… I think it was around a $400,000 profit, me and my business partner. It was set to gross between 130. I think our net on that was going to be 100 to 110. We sold it. Not really sure, right? It’s like what you’re talking about. There’s all these different levers, but we just didn’t have a system or a methodology to think through the ramifications of both sides keeping it or taking the lump sum.
In that moment, I think for us, we thought, “If we sell it for a profit, we can 1031 that into more properties,” which we ultimately ended up doing. We ended up buying four more properties. Then we’ve sold some of those properties, and now we’re 1031-ing that into other properties. Overall, our portfolio is growing, but it was something that really troubled us for a long time, because we just weren’t really sure how to analyze that deal. This is something that definitely… Some kind of system, some methodology to how to think through this would’ve really helped me sleep better at night, because I think him and I…
We switched back and forth every month. One month, we regret it. The next month, we’re like, “Oh, this was a great decision.” Where we’re at now in that philosophy, I’m not sure. I’m not sure. We’ll let you know pretty soon. I think we’re still flip flopping on that one. But Dave, what about you? I’m curious, is there any other way that the audience can be thinking more like investors?

Dave:
The first one that I think a lot of people overlook is how to keep score. There’s this idea. You might have heard this term in business. It’s like, “What gets measured gets done.” Honestly, I didn’t really do this for first years of investing. I kept a P&L. I knew profit and loss for my individual properties, but I wasn’t keeping track of my net worth and how much equity I had out into different deals, and how much cashflow I was really generating on a holistic sense, and whether or not my… All these individual things about my investments were all over the place. I think that is a key component to being an investor.
If you don’t know how to keep score… We talk about this creating your own personal financial statement where you track your net worth. How much money’s coming in? How much money’s going out right now? How do you know if you’re doing better or worse? If you don’t know to keep score, how do you decide on a particular deal if you need more cash flow? Maybe you can take a long-term approach, and look for more appreciation over time. I think that’s one concept is learning how to keep track of where you are in your investment journey in a real numbers quantifiable way is super important.
We already talked a little bit about the time value of money. Man, I feel like learning the time value of money at some point in your career is like a superpower. Once you really understand the time value of money, your life will change. I promise you that. You will not think about any purchase you make in your life the same ever again. Once you learned that $10,000 today, if you went out and bought a new car or whatever, how much that could be in your retirement, I promise you, you’ll stop buying stuff now, and you’ll start investing it. Those are two-

J:
Let me interrupt you real quick, Dave. I’m sorry to interrupt, but this is so important. This whole time value of money thing, this concept, we’ve all heard that term, time value of money. But honestly, the difference in my experience between successful investors and not successful investors in a lot of cases is literally the understanding of that concept in more detail than just the term time value of money. I found… One of the reasons why we devote a lot… There’s five parts of the book, and we devote three quarters of one part of the book to this time value of money concept, because there are so many different aspects to investing and measuring investment returns, and analyzing deals that’s related to it that literally, it’s probably 10% of the entire book focused on time value of money.
The reason for that is because I’ve seen so many articles, and texts, and blog posts, and books that talk about time value of money, but they talk about it from a formula standpoint. They talk about it from, “Plug the numbers in. Get the numbers out.” I’m lucky that… Again, I have an engineering background, so I understand time value of money, but let me tell you something. If I handed one of these texts that’s out there to the average, non-mathy person, their eyes are going to glaze over. It’s like they don’t want the formulas. They want to understand what does time value of money mean.
Obviously, the formulas are important, and we need to include that as well, but we also need to tell stories about why this is important. We need to tell stories so that people can understand why this matters. So, a very large part of this book was focused on just that concept of time value of money, but telling it over many chapters so that people really get why it’s important. Again, I honestly believe that just that concept in and of itself is going to make a lot of people better investors, and is going to differentiate the not so good investors from the good investors. I apologize, Dave, for interrupting.

Dave:
No. No, you’re totally right. I genuinely believe, once I understood, that it completely literally changed my life. J gave a brief example of what it means. It means money now is worth more than money in the future, because you can invest it. But once you really… It’s not just knowing that. It’s like once you see the numbers, and almost can feel it, I know that sounds weird, but can really internalize it in a way that it becomes a part of your decision making in almost everything that you do. It will change your life, so I totally agree with you, J.
Then there are so many in the book, but the last one I really think people should understand the concept of is leverage too, because it’s unique to real… It’s not unique to real estate, but it is more common in real estate, and that’s the concept of borrowing money to purchase an asset like a home. We talk a lot about that too, which is another thing that I think really is a mindset thing that helps people. It’s not really about the formulas. We do go on the formulas, and it’s helpful, but that’s another thing, I think, learning to think about leverage and how to use your financing strategically, and not just treating it as this hurdle across.
I think a lot of new investors are like, “I need to just find a loan.” They’ll take any loan. For your first deal, that could be okay. But I think over time, you learn to think strategically about how to use your financing to create better deals. We do talk about that a lot. I think those are three of the highlights in the book. There’s plenty more in there, but those are three that I really like.

Rob:
I mean, all of those really do hit home for me truly. I mean, I wish I would’ve had this book five years ago when I got started, because one thing that people really did try to… I don’t know. They saw the bullet train heading towards me, and they’re like, “I can save you. Just listen to me. Keep track. Do proper bookkeeping. Have a personal finance statement.” Because when I was starting out, it’s no big deal. I was keeping track of expenses on a spreadsheet. That even worked for the first two properties, maybe even the first three.
But very quickly, the bolts start falling off the tires there once you actually have to get really into the nuts and bolts of taxes, and getting all that information to your CPA. So, for me now, I scaled so quickly that I remember my CPA was basically like, “Hey, we need to get you on doing proper books and QuickBooks.” We did that. Then last year, he was just like, “Hey, that QuickBook file, we need to throw that away. I want to put that into the trashcan. Pour gas on it. Light it on fire, because you need to be keeping track of your books this way.”
It’s a very specific way that’s going to actually inform you on cash coming into your account and cash coming out. That’s very, very important because a lot of the times, you think that you’re making a lot of money, but then once you actually track it correctly, you realize that maybe you’re not. That can drastically change that investment. So if you’re not keeping track of all those different things, you’re not able to cut costs at all, because you don’t know what’s crucial and what’s not, what’s eating your budget.
For me, keeping track of your finances, that’s a huge one. I cannot overstate how important it is to do proper bookkeeping. Start it from the very beginning, pay a bookkeeper, learn how to do it, however you have to do it, but it’s going to be so crucial. I promise you, it’s going to save you so much time and money with your CPA, because CPAs could be… They could be a very costly expense. The other thing you talked about is leveraging too. I mean, we talked about that one for hours.

J:
We tried to make this book. Again, it’s a thick book. It’s 40 some chapters. We wanted to devote at least a few chapters to the bigger picture. It was just what you and Dave were talking about, this whole idea of tracking your business’s success, not just on a per deal basis but on a business basis. Because when you think like an investor, it’s not just thinking about making everyday decisions. It’s thinking about making decisions for a year out or five years out or 10 years out. The way we do that is we understand how our business is performing.
Just like you just said, Rob, understanding how your business is performing is all about creating these financial statements, and doing accounting correctly. For a lot of us, that whole idea of accounting and financial statements is just like your eyes glaze over when you hear about it, but we spend several chapters basically talking about breaking down financial statements in a way that makes it really simple to understand. We give an example of a fictitious flipping business, and we say, “This is what a financial statement for this business would look like. Here’s how you categorize income. Here’s how you categorize different expenses.”
Then how you can then look at that, and then say, “Is my business operating efficiently? Is it operating efficiently from a business standpoint? Is it operating efficiently from a project standpoint? Is it operating efficiently from a people in a labor standpoint?” Basically, by keeping that accounting and creating those financial statements, it doesn’t just give your CPA or your account the ability to do your taxes at the end of the year, but it gives you insight into how efficiently your business is running. It gives you insight into, “What can I do today to make my business more efficient?”
It gives you insight into, “Is my business…” This is the most important thing, “Is my business running as efficiently as 99% of other flipping businesses out there?” Because really, at the end of the day, we have this thing called profit margin. It’s a division of a couple different numbers in your financial statement, but this idea of a profit margin is a way for you to compare the efficiency and the success of your business to somebody else’s business, or somebody else’s business, or all the businesses in the industry as a whole.
So again, it’s not just about analyzing a deal for today, or analyzing a flip deal over six months, or a rental deal over five years. It’s really analyzing your business over the lifetime of your business, and forecasting and planning to get to some place. We’re all doing this. We’re not doing this because… Well, maybe some people are. I’m not doing this because I love flipping houses. I’m not doing this because I love buying rental properties. I’m doing this to get to financial freedom, and to provide a legacy, a financial legacy for my kids. The only way I can do that is to have a plan, and I can’t have a plan from today until 20 years from now unless I know what 20 years from now looks like.
So, I need to figure out what 20 years from now looks like, and then I need to design my business so that I can get from today to that point. So, using financial statements, using the correct accounting techniques, understanding the income and the expenses in your business and how they work together is how you get from today to whatever your 20 years from now looks like.

Rob:
Awesome. Yep. I’ve just learned a lot of this stuff the hard way. I think most people learn this stuff the hard way.

J:
We all have.

Dave:
Totally.

Rob:
But here’s the good news, you don’t have to.

Dave:
Honestly, when we’re talking about this book, I realized maybe the value of this book is it just speeds up all the painful lessons by five to 10 years. You get there eventually, but it’s through some pain. We’ve all probably seen a tax bill, and you’re like, “Man, I could have done that better.” For me, I told you earlier about failing to reinvest. I think that was a consistent problem I had for the first few years of my investing career. I’m sure you guys have your own as well, but there are so many things to think about as a new investor. We hopefully can help you consolidate the things that you should be thinking about to optimize your investing through the course of this book.

Rob:
This is really great because I’ve really just developed the emotional roller coaster of breaking out in hives, sweating the PTSD of doing it all the wrong way, and then knowing that there is a light at the end of the tunnel here where I could have just probably, like you said, saved five years of gray hairs on my head. But that’s okay, because I’m still going to pick it up. There’s still so much to learn. Even talking in this conversation, I’m like, “There’s actually a concept to this whole thing like return on equity.” Who would’ve known that that’s a thing, right?
You don’t really think about some of those more advanced concepts, so thank you guys so much. Is there something that we didn’t cover in this book? Is there one final nugget that you guys want to leave the audience with before we end today’s podcast?

Dave:
Obviously published through BiggerPockets, and you can go to numbersbook.com, and you can buy it there. I do also want to add. In addition to this book, it also comes with a bunch of bonuses. We talked about a personal financial statement, how to create a balance sheet. Those kinds of things are in the book. We do have some downloadable Excel documents that come with the book for free. So if you are wondering, that is… We make it easy for you. We explain the concepts, and then we give you some tools to do this for yourself.
Check it out if you want to learn how to think an investor. We’re really excited and proud of the book, and think that whether you’re a newbie or an experienced investor, there’s a lot in here for everyone.

J:
Everybody’s asking me, “Is there an audio version of the book available?” There is, I believe already, or there will be an audio version of the book, but what I recommend to anybody is definitely get a physical copy of this. You may want to get a hard copy as well.

Rob:
Great tip. The models and everything like that, the Excel, that stuff is worth as weighted gold. I’m excited to start plugging and playing with that kind of stuff. Dave, can you tell us where people can find out more about you on the internet?

Dave:
Sure. Well, you can find me on Instagram, where I’m at the DataDeli. I also host a BiggerPockets podcast called On the Market where we talk about news, data, and trends that impact the lives of investors. You can definitely check that out as well.

Rob:
Awesome. What about you, J? Where can people find out more about you?

J:
Real easy. If you go to www.connectwithjscott, just letter J, scott.com. Connect with jscott.com. That’ll link you out everywhere you need to go.

Rob:
Awesome. Well, thank you guys for your time. I’m really excited for the book. I guess, let’s see. David always does this much better than I, but I’ll give it a shot. This is Rob, for Rob missing Dave Greene, Abasolo out. I think that’s how he does it. Bye, everybody.