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Dave:
Hey everyone. Welcome to On the Market. I’m your host, Dave Meyer. Joined today by James Dainard. James, what’s going on?

James:
Just hanging in there with the confusion in life. I feel like I’m constantly confused right now.

Dave:
Right before we turned the recording on, I asked James if he had seen that GDP actually went up in Q3 of 2022. I think I’ve scrambled Jim’s brain.

James:
I felt like I just got smacked in the head. I was like, wait, what? When you’re blank out for a second. I’m going to go digging deep now and figuring out what’s going on, because that I would not expect that this morning.

Dave:
No, I was not expecting it at all. And just for context for anyone listening to this, GDP, just a measure of the total output of the US economy, it went down in the first two quarters of 2022, mostly driven by inflation because the economy is growing but not enough to overcome inflation basically. And that definition, two consecutive declines of GDP is, some people consider to be the traditional definition of a recession. It’s not. I’ve done a show all about this, the way a recession is defined is super complicated by the National Bureau of Economic Research. And they do it retroactively. They’re not even trying to do it in real time. But it’s funny because a lot of people, myself included, when you see two quarters of GDP growth, you’re like, this is a recession or something. But now nothing’s really changed in the economy. It still feels as daunting as it has for the last six months. But now we’re seeing GDP growth. It’s super confusing.

James:
Tomorrow they’re going to come out and say rates fell two points. I don’t know. Every morning I’m like, what’s going on?

Dave:
You know when you’re a kid and you have opposite day and you just start doing everything the opposite of what you’re supposed to be doing.

James:
Yes.

Dave:
I feel like that’s where we’re at right now. My partner Jane was asking me something about what I thought was going to happen and I was like, well, this is what I actually think, but since nothing makes any sense anymore, I’m just going to go with the complete opposite and just start betting against myself because nothing makes sense.

James:
Everything’s going against the predictions. Nothing logically makes sense right now. It’s like opposite day and Groundhogs day every day. You’re like, wait, what happened this morning? Does it make sense?

Dave:
Well, I wish we had more to tell you about why this was going on, but this news just dropped and we’re just confounded by it. With that, let’s get into our guest today. AJ Osborne, who’s a good friend of yours I know and is one of the premier self storage investors in the entire country. He just dropped some knowledge. I really enjoyed this conversation. What did you learn about on this one and what do you think people should be listening out for?

James:
Well, I learned that there is an oversupply of self storage coming just like everything else. With all the upzoning and the need for all the stuff that people bought over the last two years, I thought that was going to keep going up. But just like everything, everything got overbuilt and it could come backwards. But very interesting conversation, I love AJ, me and him to work long hours and live off energy drinks. He’s like the-

Dave:
Kindred spirits.

James:
The fix and flip in multi and he’s self storage. But we’re very, very similar.

Dave:
Awesome. Well we’re going to take a quick break, but after that we will bring on AJ Osborne to talk about self storage. AJ Osborne, welcome to On the Market. Thank you for being here.

AJ:
Thanks for having me guys. I’m excited. This is going to be fun.

Dave:
It’s going to be a great time. Well, for those people who haven’t heard you, I know you’re a regular on the real estate podcast Circuit. But for people who haven’t heard you before, can you give us a little background about your investing experience?

AJ:
100%. I got started a long time ago, pre 08, and I was in insurance sales. So we managed companies, health benefits, dollars. We would do work with self-funding, things like that. But it was like sales. We were out selling corporate clients like B2B sales, and that meant we had really unstable incomes. I got paid only by, I didn’t have a base income. I got paid on commissions. It was good gig, but we were taxed at the highest rate and we also had wildly fluctuating income. We were making good money, but we had to live on very little. Me and my wife had to literally live on 30% of our income because we didn’t know what it was. That was life that we were living at the time and it was like, we got to offset this. We got to do something here.
I guess I thought this is financial freedom because I was in control of my time and everything else, but it really turned out to be more of a slave because I had all these bosses. And so we were just trying to get out of that rat race and try to protect my family with actually steady income. We needed some tax benefits because we were hit at the highest rate you could possibly imagine of anybody. We started to get into real estate. When we were looking at real estate, everything I did, because we were on commission basis, was cash flow. It was just all cash flow basis. I didn’t understand anything about this real estate world and equity. When we started looking at deals, we were looking at single family homes, multifamily. I didn’t understand how people were buying them. It didn’t make sense to me how people were making money when I’m like, I haven’t seen one deal that cash flows.

Dave:
And what year was that?

AJ:
This was 2005.

Dave:
Okay. Yeah.

AJ:
It was right in the heart of it. The real estate world made no sense at all to me. We looked and thought, how can we get our, we were used to having an effect on income through sales. I understood that. I want to be able to effect revenue. But I also needed that passivity and everything of real estate. We found an asset class called self storage at the time. Nobody invested in storage. It was literally when we told people, we’re like, we’re buying these little storage facilities in these dinky towns on the middle of nowhere, people are like, you’re a slum lord? They were considered junkyards and banks didn’t like them. We did a lot of solar financing. It was although we were buying purely on cash flow. It needed to make us good cash on cash returns and we couldn’t use a lot of leverage.
We did that. We started in 04, then 07 we stopped and started back in 2010 and we kept going and we built a great portfolio. We were doing essentially a commercial BRRRR, which we call it the bird. I call it the bird because what we’re doing is we’re buying, we’re improving, but then we can do something you can’t do, unlike single family homes, and that’s, we can reduce risk in two forms. We can take our capital out. So the money that we put in, we go in, we buy it, we put 30% down. That’s what you have to do for self storage facilities. You take that leverage out, we get no prepayment penalties on it. We would then buy assets. We could affect the revenue through rate increases, marketing a whole bunch of other stuff that we were doing. We treated it like a business. We didn’t view it as an asset.
Lift that in income up. Three years later we’d refinance our money out of it. We’d get our capital back. It would still cash flow at the same debt ratio, so 30% equity. But we would then move that into a non-recourse loan. I would have my money out plus my profits and then I got that off my liability and we were non-recourse, which means we didn’t sign on the debt. So if it went under, they couldn’t take us. And then we would use that money and reinvest it back into another storage facility while still owning the one while not having the risk. We did this for a long period of time while I was selling insurance, me and my dad, I followed in my dad’s footsteps to sell insurance. He was born in extreme poverty, so he didn’t have running water, he had to poach for food. Literally he had an outhouse in the high rule deserts of Idaho that he’d have to walk to at negative 20 degrees. They were extreme poverty, no food.
And so he used sales to get out of it. We were both doing this. Right? It was great. I was with my dad. We were selling together, we’re doing everything. We were buying real estate, and we thought, man, we just hit it. Right? This is amazing. I get to work with my best friend, I get to do all this cool stuff. And we were doing really good in selling insurance. And out of the blue I became a quadriplegic, paralyzed from head to toe. I was taken to the hospital by my wife because one night my leg stopped working. I was put into a coma and they put me onto life support, hooked me to tubes. And when I woke up I was paralyzed from the eyes down and I was in extreme pain. I didn’t even get to say goodbye to my kids. It was like that. And then I laid there for months on life support, hooked up to tubes. I couldn’t eat, speak, drink, nothing. I communicated through blinking and these little plastic things and I was fired from my job in the hospital.
I worked for a big Fortune 500 company based out Chicago. I was let go and was. At the time I was literally, it was Christmas Eve and I’ll never, ever forget it because I was in the hospital looking outside. It was a rehab facility at the time. I went in there when it was warm and I’d moved from hospital to LTACH, long-term care. Then they finally moved me to a rehab facility. It was Christmas Eve, the snow was falling. I was going to get go home for the first time to see my kids. They were going to open up their presents. The hospital was letting me go with an escort home. And I was so excited and I was like, I know my wife’s spoiling my kids. I just knew it. I was like, she’s totally going to spoil. Dad’s been gone forever.
I thought, I’m not worried about losing my house. I’m not worried about my wife leaving our now four kids. We just had a baby, to go work while she has a paralyzed husband and someone else has to take care of our kids. That was all because of that real estate. It became something that was, it became my why. Then after that I said, I’m going to teach this. We’re going to allow other people to invest with us. I started the private equity side and we’ve been doing that for over five years now. That’s my story. That’s what I do and why I do it.

Dave:
It’s an incredible story AJ, I’ve heard you tell it once or twice before, but every time you do it’s just incredibly inspiring that you were able to overcome an incredibly challenging situation and are helping other people achieve the same level of financial freedom that you have achieved. Thanks for telling that story. I’m sure it’s somewhat of a painful memory but also you’re using it for good now.

AJ:
It was hard to talk about for the first few years but I think talking about it actually helps. And I wish people would talk more about that because that’s what people relate to. We’re all struggling, we’re all going through it. And honestly real estate is great. It is, but we’re all doing it for a reason. At the end of the day as much as I love storage and I do, I’m a total storage nerd. I know everything about it. I own tech companies in the storage space. Started founding member of the largest co-op in the world in self storage. I sit on boards. I have the largest communication platform including the book and the largest podcast in the self storage space. But at the end of the day they’re metal boxes that people rent. And so it’s really more of what this vehicle or this asset class does for us.
I know everybody fills that way and once you get that attachment to what the asset does for me and what the game is and how we’re playing the game, that’s when it becomes really, really fun and people really fall in love. That gets you over all the frustrating times, all the hard times, because it is, real estate is hard, it’s not easy. There’s things that come up and everybody likes to say how passive it is and you can make it passive if you’re investing with somebody else. But when you’re doing it on your own, it is not that passive. And building a real estate company is definitely not passive. So you got to understand it and love it and it’s got to have meaning.

Dave:
I love that. Absolutely. Doing what you both do is entrepreneurship. There’s no easy route to entrepreneurship. It is definitely a difficult business and hopefully you achieve at some point being able to invest with other people. But you both are actively working and hustling really hard. But yeah, like you said, that why and having a really solid reason to do it I’m sure helps you push through it. You’ve told us your incredible story. I’d love to hear you’re talking about how the game. Tell us what’s going on in the self storage game these days, what’s the landscape for self storage at this point in 2022?

AJ:
So self storage, it’s so weird, I really do love this asset class. And one of the reasons I think I love it so much is how misunderstood it is. A lot of people really don’t get self storage. They just don’t. It’s this weird asset class that people look at and they think it’s something but it’s not. And so it’s fun for me, because I get to educate and people are like, wow, this is incredible. This part of it, I didn’t even know this. And then also, oh wow, there’s a lot of misconceptions around it. I think some of the first things you have to think about storage is a lot of people think, it’s just because people are storing their junk. And that misconception led to a lot of people prior to 2008, nobody wanted to invest in it. There’s a lot of things that people perceived that it was risky.
Prior to 2008, self storage is the newest commercial real estate asset in the commercial real estate asset groups. It came about really in the 80s and started to take hold in the 90s and exploded after 2008. And what a lot of people don’t realize is prior to 2008, institutions did not play in self storage. Banks weren’t majorly involved in it, you didn’t have funds, you didn’t have any of those things that were in self storage. And one of the reasons why was, well not one, the two reasons why, was first, the inability to manage and operate them. Self storage is a business, it’s not a real estate asset. In fact it mirrors much closer to a retailer or a hotel than it does anything else. Why? We have short term contracts, we have lots of products, meaning units that have different people. There’s different reasons that people utilize it from businesses to everything else.
Operationally it looks super passive when you’re comparing it to an apartment complex because nobody’s living in it. But business operationally, it’s much more complicated. I look at apartment buildings and I’m like, wow, that is so passive. What do you do all day when you own one? Because it’s just we’re marketing, you have to do all this stuff all the time. So prior to 2008 there was no institutional grade, third party management. If I’m a fund and I want to put 100 million or a billion dollars into that asset class, what am I supposed to do with it? How do I manage it? And then second, it had never been through a debt cycle. It had never been through a major cycle, so the banks and institutions and funds, they couldn’t underwrite this asset class.
So during the 90s you had a boom in development of all the other commercial real estate assets. Everything from hotels to retail centers to the super Kmarts and Walmarts and you had all of it, right? Everything from housing in the late 90s, it all exploded and developed. Self storage didn’t. It didn’t go through a major development cycle. After 2008 you had companies like Extra Space, that’s a REIT. They developed institutional grade, third party management and it had now been through a real estate cycle. More importantly it was the best performing asset during the great recession. And all of a sudden everybody took notice, because it wasn’t just the best performing, it blew every other asset out of the water. As of right now, still to this day, 26 years later, it is the top performing and the lowest defaulting commercial real estate asset.
After 2008, everybody had just gotten slaughtered in all these asset classes. They went bankrupt. And they were like, we got to find somewhere to put it. I know real estate, I don’t know, where do we go? And self storage became the winner and the landscape changed. Once institutions came in, people started to realize you win this game through business and technology. Technology started to come in, big money came in and the self storage development boom started and that started in 2016. We went from the highest point ever on development, was about a billion dollars prior. Every single year after that it was five times that. We hit two, three billion, then we were hitting five billion a year. So since 2015 we’ve not even eclipse, we’ve blown out the development of any previous high ever known. And from there, self storage was changed forever.

James:
So prior to 2008, because that’s interesting that the banking became easier in 2008 and nine for this product considering what was going on in the banking market. The banks were melting down during that time. How were those deals? When you guys started looking at these in 2005, right? You guys were looking for asset classes to invest in, you wanted a higher yield, you ended up selecting self storage over even other things that could also be high yield. How were those things debted though? If it wasn’t big institution, was it all local banks, how did you take a deal down prior to 2008?

AJ:
Credit unions, local banks and seller financing is how we did it. We did a mixture of local banks, credit unions, seller financing, but it was really predicated on our income. Banks really viewed it like a home, not a commercial real estate asset. They were like, you got to pay this back, so we’re looking at your income, we want to see how much money you have. And that really changed what we could do. We had to go to cities that no one’s ever heard of. We went to, our first facility that we did was Bonners Ferry, Idaho, which is literally a population of 400, nobody’s ever heard of this place. There’s more grizzly bears than there are people there. Just out in the middle of nowhere so we could buy a cheap asset, we had to put a lot of money down and the banks looked at our assets.
I want to see your home, I want to see your bank account. Whereas today the banks don’t really look at our assets. And in commercial real estate, financing is viewed much more on the asset than it is the person. From there we’d go, but they’d cap us out. They didn’t want to lend a lot of money to us on storage where other real estate asset classes, like multi-family or whatnot, they didn’t care what your debt to income was. That was irrelevant, right? Storage it wasn’t at the time. So then we would have to go negotiate with sellers, do seller financing. But to give you an idea of how much people didn’t want this asset, we were sitting down on one of our deals prior to 08, and we were in negotiations with the lady that owned it and she’s like, I want a 10 cap.
And we’re like, we’ll pay you a 12 cap, and two you’re going to seller finance this and we’re not going to have recourse. It’s going to be at 3%. It was just like, we’re the only people here to buy this, there’s nobody else coming. And so we had all the ability to basically set what we were doing it. Those banking terms were like that. Think about this, we’re buying nine caps, 10 caps and banks didn’t want to lend money to it, but they were lending to homes, duplexes, multifamily at negative carry. And so crazy.

James:
Is that because, because I remember in 2008 there was a lot of defaults going on in small storage facilities. To be honest I just blew it on a couple because it was hard to get debt on them. But do you think 2008 reset the market as far as, because what a lot of the operators back then were just mom and pop, small owners and they kept really poor books. It was like you couldn’t get leases, you didn’t know what it was. The rent rolls were all over the place. Do you think that’s when that all changed, 2008 the defaults went up and then the institutions and investors like you cleaned up the whole business and that’s why there’s more financing available? Because I remember, we look at things and people are like, we don’t have leases. The PNLs would be all over the place and we couldn’t get a loan for anything just because there was no substance. It was just like you said, a 10 box on a piece of land with no real true income. I almost feel like 2008 reset a lot of things.

AJ:
Mom and pop is an understatement. You’re exactly right. Seriously dude. And still we find these. I’m negotiating with a guy, get this, we’re negotiating with a guy with 500,000 net rentable square feet. Can you send us over your printout on your management summary? We keep it all by hand, by paper in the office. You have to come here to our location and go through the paper.

James:
Xerox it.

AJ:
Yeah. Because that’s what it was done prior to 2008. And one of the reasons that was done was because banks wouldn’t loan on it. So the people that were buying them and building them, it was almost all cash. One of the things that people don’t realize, self storage had such a low default rate. Well at the time, self storage debt to income or debt to value, it was like 30% debt. So they survived. They had no debt. So of course they survived. But the ones that did default were ones that couldn’t refinance and needed to, right? Because then like you were saying they have all this paper stuff, banks were gone and we couldn’t get bank financing for self storage for, it didn’t become easy until like 2014, 15. So it still took a while, because that’s when institutions came. After 2008 we had years where we couldn’t get financing.
And then you have all these people that either needed to refinance, they couldn’t or they had just developed storage and they were done. It was out. We bought a lot of those people up. And so yeah, it’s very important to recognize even though it was the lowest defaulting doesn’t mean there was not defaults. People get that confused. There was, and there were defaults at astronomically low debt. When we’re buying them, our whole business model, Jimmy, to your point is we’re going out and we’re buying these things that are ran like that and we’re turning them around, we’re updating them on technology. Our original business plan was this, we’re going to actually pick up the phone and we’re going to collect bills. That’s it. We’ll just pick up the phone and we’ll make people pay their rent. And that was a winning strategy in the space. It was very mom and pop.

Dave:
Who was even developing these things back in the 90s and early 2000s before some of the institutions got in?

AJ:
It was mostly home developers that were developing huge neighborhoods and they would have these pieces of land that they didn’t know what to do with and storage was really cheap. And so they’d be like, well we have this land, we’re developing this, so we’ll go throw these on. Or it had a few of the large players. There were handfuls of large players, but 90% of the industry when we got into it was mom and pop, single operator owned. Then 10% were large guys. That has dramatically changed now. Through this, everybody, what we’re all talking about here, what James, David and me are talking about is consolidation. Consolidation happened due to the change in financing the players and the leverage of operations and technology in the space. And that’s what we did. That’s why we got into it. We went into it to consolidate the space in the industry. That’s what we do.
We’re trying to buy them all up, turn them around, package them in. We’re in the top 70 self storage operators in the world. Our portfolio is that, we did it here yesterday, we actually had to line it up, at a five cap it’s over 300 million. We have 33% debt to equity on average and over 60% of them I own with my partner individually. And so when you look at the bigger players, which I don’t even consider myself one. Now if you went back to 2008, we would’ve been one of the biggest in the world, in the top 10 probably. But that changed fast.

Dave:
I’m curious about that because there’s a lot of fear in the single family and multifamily residential space about the entrance of technology and institutional investors and Wall Street. And it sounds like something similar has happened here, but are you afraid of that or do you see them as competition or how has that changed your business?

AJ:
I do see them as competition, but that just means we were innovative and that’s why I own a tech company. That’s why we started the tech company. That’s why we started the co-op. And it was to just combat with that. Now, I’m a lot more worried about that in storage than I am single family houses. The reason is branding and how you attract your customers. You should be concerned about institutional market consolidation when you’re in an industry like a hotel. So prior to the 80s, right? Hotels were outrageously fragmented. Now they’re all under five brands. And why? Because of customer acquisition. So self storage, 85% of our customers are acquired from online. That means if you win the online space and you can attract it, you own the market. So if you look at two self storage facilities on a street, they dramatically perform differently.
Even if they’re the exact same unit, same size, same location, the operators change the performance. You don’t have that kind of leverage and that change in single family homes. Consolidating single family homes, you change the buyers, right? That’s what you’re changing. Somebody is buying more than another person. But the person that’s buying more isn’t fundamentally changing the business model or the acquisition of customers or anything else that they can leverage and outperform their neighbor by leaps and bounds. Market rents are fairly set for us. We do things like dynamic pricing, meaning every day all my rates are changing. We’re acquiring different types of customers, we’re doing all this lead stuff, we’re generating, it’s a big machine that we can use and leverage data and we can actually beat our competitors.
That’s not really how that works in an asset like that. Storage, we were worried about it. We’ve invested a ton in it because we didn’t want to end up like hotels. But even Sam Zell tried to do that with apartments and it didn’t work.

Dave:
To brand them.

AJ:
Tried to brand. It didn’t work, right? Because nobody cared about those things. Where it’s different in certain types of asset classes.

James:
What AJ’s talking about right there is so important as investors try to scale and get into bigger projects, running the business side, because a lot of people think of real estate is just an asset you buy, you manage it and you collect cash flow. But the business side is where your whole portfolio can change and what AJ’s talking about, running self storage I think is so unique because you really do have to operate your business well not just by the real estate, but as you scale up with apartments, apartments have gotten in that same categories. Well as we’re going out and getting debt on these large sites, we’re buying an 80 unit building. The bank is going through all of our websites. They want to see that we are an actual business though, that we are not just real estate investors.
And that is really, really key and important for people to realize as we go into some sort of recessionary market, it’s so important that you actually build the business because the bank will give you more leverage, they’ll give you better terms and they will actually, they’ll commit to you more if you do run professional websites, managed it well. For us we’re building a master website right now for all of our apartments. They all tie in together and it shows the infrastructure behind it and that’s where the whole leverage game changes and that’s why that changed 2008. As people get more professional there’s more money available. But self storage or apartments, if you want to scale, you need to invest in the infrastructure.

Dave:
It’s a totally different skill. It’s not the same as going out and finding an underwriting deals like customer acquisition, marketing, following up. Collecting rent. Like you said, it’s a different business and you need to find, I assume you have a whole team AJ, of people who are helping you building this marketing engine that you’re required.

AJ:
I have over 80 employees. When we look at this on just that self storage side, that’s not the tech companies, anything else, that’s my, we would call direct reports. What you guys are talking about, what Jimmy’s talking about is really important. When people are like, well is it easy to get debt? Would that bank want self storage? Would they want to lend to self storage? I’m like, I don’t know if the bank would want to lend to self storage but the bank would want to lend to me. And it’s not because of my financial stance, It’s not because they go you have a lot of money in the bank. That’s not it at all. It’s because of what Jimmy said. They’re looking and say you have the infrastructure to pull it off. That’s the difference.

Dave:
So they’re looking at your customer acquisition cost?

AJ:
Yes. They don’t ask, hey AJ, how much money do you have in a bank? Now we’re going to loan you. No. They say, what’s your site look like? What’s your customer acquisition process look like? What’s going to happen if we are in a high vacancy area? They’re looking at the execution on commercial assets. That’s what they want to see. It’s not nearly about, you could have somebody that has way more money than I have, way more money in the bank, and they went to get a loan on a self storage and the bank’s going to be a lot more hesitant to give them money if at all than they would be for me. Or anybody else that creates a plan to really execute and has the right business partners, has the right business associated with them to get this done. The better you can showcase how you are professional, what you’re doing to build a business, how you look, create a business plan, that is going to help you infinitely in getting loans.

Dave:
That’s incredible advice. I think that’s something people truly overlook all the time. It’s sort of like the operational piece. Everyone wants to go out and just find the deal because it’s fun. It’s definitely fun doing that. But you have to back that up with operational excellence, especially if you’re trying to get the debt you’re looking at. You said something… Yeah, go ahead.

AJ:
I want to make sure it’s very clear. People are like, well if I don’t have that, that doesn’t mean I can’t get the loan. That’s not what we’re saying. There are third party management companies, there are ways that you can set up. Do you have an LLC? Do you have a website? Do you have a professional looking presence? Do you have a presentation and a business plan full of partners, abilities, strategy that you’re going to execute that you can explain? That’s what I’m talking about. Going in and saying this is a good deal and I want money for it. They go, okay, I’m a bank. I don’t know if it’s a good deal. I don’t know anything about storage. Is it a good deal? I have to know that you know, you’re going to show me why it’s a good deal and what you’re going to do to make sure it’s safe and profitable.
The more that you can teach me as the bank and explain to me your business plan in a professional manner, the more trust I gain for you to execute on something that I don’t know. It doesn’t matter if you have zero employees, it doesn’t matter if you have any experience, you need to be able to show them you have a plan. And a lot of people treat it like they’re buying their personal residence, and it’s like, well here’s my income, what will you give me as a loan? It’s not how this works. And people need to, whether you’re buying a duplex, a single family, you got to start changing your mind about how you talk to banks, what your value proposition is to banks. A lot of people don’t realize that and they don’t understand why banks don’t want to give them money but they’re giving Bob down the street money and you’re like, I make more money than Bob. Why are you giving him money? Right?
Well it’s because Bob has it together. He’s got a business plan, he has an execution strategy, he’s partnered up with so and so. He knows what he’s talking about or at least looks like he does.

Dave:
That’s great advice. I want to ask you about something you said where you said that two different storage spaces on the same street will perform really differently largely based on brand. I’ve just noticed this in Denver where I used to live that the self storage facilities we’re building in I would think higher and higher priced places. And I was always curious about that in urban infill instead of on the outskirts. I was just curious, what is it about or how location dependent is storage and why would they be willing to pay that high price for the dirt when seemingly you can put them anywhere?

AJ:
Self storage left the industrial parks, they left the back alleys and they went to the corners. Self storage is now being considered more infrastructure. It’s also now being considered more key type real estate assets. But in order for cities to recognize that, which has taken them a long time, you had to show and you’ve probably noticed and a lot of people have, they look different today.

Dave:
They’re swanky now. They’re nice.

AJ:
They’re swanky. They’ve got lights.

Dave:
Expecting like a cocktail bar in the self storage facility.

AJ:
Oh yeah. We put a lot of money into those things. I’m developing a $40 million storage facility right now and it’s when we’re working with cities, when we’re working with county commissioners and residents, you’re showing them something that looks better than the office buildings and everything around. So self storage has changed and what you find is customers really care about, first of all how it looks, how it feels, safety and security, convenience. You’re not going to drive past three facilities to get to a storage facility. That’s not how it works. Convenience trumps everything. And self storage is outrageously sensitive to supply and demand. The more that you can get with the people, that is your target market that will pay the right places and generate that product offering, self storage is competitive, right? You will stop all those customers from going down to the other facility or the ones you want.
So in self storage we have three different types of customers. You have customers that care about price, you have customers that care about location and you have customers that care about quality. The price driven ones, I don’t want. Those can go to the infill, the junkyard, everything else. They can go to the industrial and they can drive to pay that $5 difference or whatever it is. That’s actually I think the smallest class of people. That’s a very small one. Most people care about location and quality. Over 60% of all of the decision makers on renting a storage unit are female. Now they may not be the ones that are doing it, but they’re the ones that have the end say on, I’m not renting there because I’m not going to go drive in there. I don’t feel safe.
That really changed the way and when you look at a model that is driven on operations and you can leverage it and different product offering and types to different types of people, it changed the way we look at where they should be. It changed the way once they started building nice ones that looked like hotels and office buildings, it changed the way the city accepted and would allow them to be as part of the community. Now, generally speaking, cities don’t like storage for a few reasons. The first reason is they are the lowest tax basis of any commercial asset. No one’s living there. You have no businesses that are there. As far as a per square foot basis, it is astronomically low tax revenue to the city and it doesn’t hire anybody.
Cities don’t generally like it because of that reason. But it is now in most places considered infrastructure and cities know they need to have them, they need to have them somewhere and they’re working with them.

James:
There’s also the human nature starts to evolve. In 1990s we had had a lot of big mansions getting built, big homes, big lots, oversized. And then over the last 20 years, I just saw that California came out with something where you can actually go, you can condominiumize any lot, single family lot in all of California and it doesn’t even matter if you have an HOA and the HOA says you can’t do it, it supersedes it. So now affordable housing and these little cottages are popping up everywhere. I know in Seattle we’re building a bunch, we had Thomas James Homes on not too long ago and they’re building a lot of cottages and they’re maximizing the ratio of what you can cover on these lots.
And so a property that had one house on it now can have three to four, but the space is also substantially smaller. Also Washington, the governments are going through the trouble of making sure these big houses aren’t built anymore. They’ve maximized the far coverage to where if we have a 5,000 square foot lot in Seattle, we can only build a 2,500 square foot house where we used to be able to build a 4,000. And so it’s shrinking the structure of these buildings. I also think that’s why the trend is you’re seeing these storage units come more infill. Because before it was for toys and random junk in the middle of nowhere. Now it’s at a necessity. If you have an 800 square foot, two bedroom, one bath house, you’re going to need space to stick your stuff. Because a lot of these also don’t have garages either.
And so with that transition going on and we’re seeing this evolve, where’s the forecasting at for that with all this affordable, condominiumize small lot housing? It almost feels like the hedge funds might have known about this prior because I started seeing all these structures go up everywhere in Seattle and they weren’t getting filled and now they’re in high demand. I was actually really confused when I saw them going up everywhere. I’m like, why are these things going up everywhere? There’s no demand. And then all of a sudden they start filling in. Well, what’s the forecast for that? Because people are going to need to put their stuff somewhere. Either they’re not going to buy stuff or they’re going to need to put it somewhere.

AJ:
When I said a lot of people don’t understand storage, this is the thing that is the most misunderstood part of storage, is demand. And the reason being is most people view storage as a product of excess. It’s because we’re hoarders. Everybody in America just spends lots of money and they just buy tons of crap. Which it’s partially true, it’s not like that’s totally not true, but actually that’s not the main driver. It is an economic as well as a regulatory function that is creating demand. So as you said, people are downsizing, people are going into smaller areas, but also the homes, even the McMansions. When you’re in a McMansion today, you have an HOA. That HOA doesn’t let you put an RV out front. When you want to go build a shop on the side, you can’t do that.
We are more regulated over our real estate than we’ve ever been. Back in the 80s when my dad wanted to buy a bunch of stuff, he went and built a shed out in the backyard and we would put our bikes in there, we’d put everything else in there, he can’t do that. Or Bob would work out of his backyard. Bob ran a plumbing company and he would take his truck in the backyard, in the shed and go, you can’t do any of that anymore. Space is regulated and it’s downsizing and it’s expensive. The price per square foot to build on the equivalent of a 10 by 20 for the average American makes no sense, especially at debt levels like this. Now all of a sudden it’s cheaper to go rent a 10 by 20. Then you also have the fact you have regulatory issues, you have building constraints and cost. You have more densely living people, but you have utilization.
In America, at the same time that price of real estate has skyrocketed, our ability to consume has dropped dramatically and the way that we consume has changed. Instead of localizing goods, services and products, we have now fragmented that distribution process through the internet where we know we don’t need to go to set locations to do that type of service. This fragmentation of supply chains and the way that customers interact creates last mile problems. We’ve seen a surge in business utilization, not only in industrial but also self storage. And also now people can consume at a whim, they can buy what they want. I know that I can live and I can have cheaper rent in an apartment because I live by myself, but I can still have my motorcycle, my skis and everything else. So now why wouldn’t I?
Now in the 80s you couldn’t, where were you going to put it? That wasn’t even an option. And two, your price per unit on anything, a motorcycle, anything else was astronomically higher in comparison to your relative income. Businesses now, they know that if I’m renting an office, I have my office here, right? Why in the world would I take up an office space that as an individual that is a revenue generating and producing individual to store files? That makes no business sense whatsoever because that space is so expensive and I can utilize that space to generate revenue from a worker or whatever it is. I use a storage unit, we stash all our files, everything else over there. This economic change, this supply change, this consumer change and business, that has fueled self storage. Right? Now, self storage is probably overdone at this point.
It just is. Everyone’s noticed it. It’s been the talk over the last three, four years, right? They’re everywhere. Everywhere. Now that is correlated with a rise in utilization, but it’s about a point. On average we’ve remained about nine, 9.5% utilization of storage in the general population, that’s gone up to 10.5. But a lot of that increase was due to COVID. I call it the COVID bump. On average right now, for the last three years we’ve seen 96% occupancy rates. The next previous high ever was 86%. That’s an abnormality that is not, I think consistent with long term use trends and demand for self storage. There’s a lot of people that are going to get burned by that because they all rushed into high, high growth markets. They were building it up. But that infill and that utilization and demand was being driven from growth.
And once that growth is gone, you have vacancies. I think that will hit certain markets hard because it was just overdone, it was overbuilt. I think we will have a disparity in the coming years in performance and self storage. And that is going to be something, I think that’ll happen in a lot of asset classes. Right? But I think it’ll happen in storage in a way that it hasn’t happened before, principally because we didn’t go through our development cycle. We never went through a development boom in self storage until after 2015. We are on the tail end of a development boom that had never been seen before. Well, of course that creates excess and supply. I think storage is incredible. People get it. We have 40% margins. It’s low capital, expense intensity, all the wonderful things that people already know about it and say these things are cash cows.
But then you also have the downside of that, that demand surged from investors. They’re easy to build, they have lower barriers of entry than most commercial assets of that size. If you had, let’s say a multi-family unit. So let’s say James, you’re going to like, okay, I’m going to go build a multifamily unit that has 500 doors, right? What’s that going to cost you in Washington?

James:
That big of a project is like five to 600 a foot. That’s because that’s commercial. That’s an expensive build out.

AJ:
You’re like six, seven times what it would cost me. I could build something like that for under 10 million and have 500 doors. A lot of people, and I don’t need plumbing, I don’t have all the issues, all that stuff. A lot of people turned to self storage and said this is easy to develop, it’s in high demand and it will fill up. And the market bailed people out. Meaning as the market went up, people could over build and they were okay, that’s not normal. Right? Now, it may have had to do something with the $3 trillion the government spent, I’m not sure, but it’s probably something to do with that. And so that not normal market cycle encouraged bad behavior because people were rewarded for it. And that’s across all asset classes. But storage, I think it’s going to be new because people didn’t get previously burned in storage.
So housing was constrained because people were scarred from it, housing is still constrained. There is an actual delta from houses needed to houses on the market. We don’t have that in storage. When everybody else was burned from housing or whatever it was, retail, anything else prior, they weren’t burned from self storage. They just thought this is an easy asset and some of those markets are going to fill that, hey, when markets don’t go up, you don’t just get bailed out for bad decisions.

James:
You’re saying self storage is no different than every other asset class that has just been pumped in juice on the performance. I actually thought a little bit, I didn’t really think of it that way because I just thought it was more smaller class so it couldn’t get as pumped as much.

AJ:
No, it got juiced.

Dave:
AJ, do you recommend people who are listening to this get into self storage? And if so, what words of advice would you give anyone who is interested in this asset class?

AJ:
I think self storage is the best asset class for an individual to get into in commercial real estate. The reason being is this, even though it has all the same problems now that all the other real estate asset classes have, none of those go away. I think there was a common theme that self storage is recession proof, which is idiotic, but that’s what people said. I think they’re going to learn that that’s not true. And so all that means now is, does that mean that people shouldn’t get it? It just means it’s like every other asset and you need to be smart when you’re building and pick on demand. But what self storage has that a lot of real estate asset classes don’t have. The vast majority are mom and pop individual owned that are vastly underperforming their potential from decades of people owning these things that had no business in actual operating the facility, anything else like that.
It’s still over 50%. Compare that to multifamily, right? Well the vast majority, 80% of multifamily is owned by institutions. And two, self storage, they’re everywhere. There’s more self storage than there are McDonald’s, Starbucks combined plus some, right? The inventory, the ability for me as an individual to get into the self storage game and buy it from a person that is not institutional grade and do very little easy fill ups and fix up to massively improve that, I still think is better than any other commercial real estate asset class out there. You can buy them in markets where institutions aren’t there. You can get them and they cash flow great. You need to watch out for the downsides to self storage. I’m not here to simply prop up storage and say, yeah, everybody needs to get into it and it’s recession resistant and all the same crap you hear from everybody else talking about storage that’s just trying to get investors or somebody else.
That’s just not true and people are going to learn it. But if you understand what makes the downside in self storage, it’s easy to avoid. Don’t do stupid things. Don’t go into a city where they’re building 20% new inventory coming onto the market and think that you can understand demand and demand won’t change. As long as you understand the downsides and you can avoid them, which you can, it’s very easy to do, I think self storage is the greatest commercial asset for an individual to start out in and get into.

Dave:
All right. That is great advice AJ. I have about 20 more questions on my list I wanted to get to, but we do have to get out of here unfortunately. That was a great way to wrap up. Any last thoughts and can you tell us also where to find you if anyone is interested in learning more about you? I know you have a book and your own podcast. Where should people find you?

AJ:
Easiest way, you can go onto Instagram, AJ Osborne, self storage. We do all things related Self Storage Income, that’s the website, the podcast, you can go jump on there and we just do infinite free information. It’s all out there on YouTube. Everything else that you can go consume to learn more. You can message us, email us directly from Self Storage Income website and you can DM me on Instagram.

Dave:
Awesome. Well, AJ Osborne, thank you so much for joining us.

AJ:
Thank you for having me on. Appreciate it guys.

James:
Good to see you buddy.

AJ:
You too, man.

Dave:
That was so fun. I did not know a lot about self storage and I just learned so much. What did you think of all that? I know you know AJ pretty well, but what’d you think of what he was saying?

James:
I love AJ. Me and him go down the rabbit hole. When me and him hop on the phone, it’s usually a long conversation, hours in going down rabbit holes. But yeah, no, I learned a lot. That is an asset class that I’ve always been interested in. Those high yield, the mobile home parks, the self storage, and just really you do think about just going and buying this stuff, but you need to run it like a business. If you’re not geared up to manage it, then he reiterated that make sure you put all the pieces together before you just jump into any type of asset class. Because I was thinking about getting in, and like, I should buy one of these and see what it is, but I got a lot more work to do before I go down that road.

Dave:
Totally. It actually reminded me when I first started at BiggerPockets, my first job here was in growth marketing, which is a lot of what he is talking about. Using data to try and figure out how to acquire users, trying to find the right people who are interested in our stuff and communicating to them effectively. Doesn’t sound like a real estate business. It sounds like much more like a software business or an operational business where you need a very different skill set than I think you do just to purely buy residential.

James:
You know when you look at a multifamily deal and they give you the performa and then their answer is, well why is this a good deal? It’s poorly managed. That’s their number one broker con.

Dave:
Yes, exactly.

James:
Poorly managed. That is true in self storage and that’s what he reiterated. That’s maybe not always the case in apartments, that’s their excuse out. But if you do not run your business right, you’re not going to get money and it is not going to run correctly.

Dave:
I could totally see it. Right? I have this short term rental, it’s in the middle of nowhere, and the town probably is like, I don’t know, 15 structures in the whole town. And two of them are self storage facilities and they look like they’ve been there for like 200 years. I don’t even know how they got to that place. But they’re full. There’s always people going in and out of them and I’m just like, who manages that place? It has to be someone who’s lived on that property probably for 30 or 40 years and has probably not the best, I’m just making some judgments, but probably not the best operational skill set to actually be running that business.

James:
Oh yeah. I’ve looked under the hood a couple times on these deals and you’re like, I’ve seen some operators that are really just handshake. They’re like, well, they pay me cash every month. And you’re like, what? I can’t get financing on this. And so yeah, the operation is a big deal. Banks don’t like to see backdoor cash deals with no leases. It’s usually not a good way to get your financing.

Dave:
Totally. I was glad to hear him talk at the end about the oversaturation because that was my number one question going into this. You go to just even talk to people who are new to real estate and they’re buying self storage facilities, and that’s great, but it just seems like everyone’s been doing it over the last two or three years. It’s got insanely popular and I was worried about this overbuilding, but just like he said, and just like we talk about all the time on the show, it’s super market dependent. It sounds like there’s still, he said, what? 50% of the self storage units in the country are still owned by those mom and pops. It seems like there’s still opportunity, but just like with everything these days, you need to be a little bit cautious, especially in those oversaturated markets.

James:
Yes. Watch the supply and demand. It’s always supply and demand, whether you’re going to eat your metrics or not.

Dave:
All right, sweet James, thank you as always for being here. Where can people find you if they want to ask you anything?

James:
Best way to find me is on Instagram at jdainflips or our YouTube channel at ProjectRE. We do lots of free flip tips and you get to look at all the weird stuff we see on a daily basis. So check us out.

Dave:
You got a lot of weird stuff going on, man.

James:
Oh man. I think half the reason I’m a little bit sick is just from these houses. Like this one house I bought, it’s hung onto me for three weeks, I think.

Dave:
You got to start wearing a hazmat suit in some of those places. All right, sweet. Well thanks man. Appreciate you being here. If you want to reach out to me on Instagram at thedatadeli. We will see you all 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, research by Pooja Jindal, and a big thanks to the entire BiggerPockets team. The content on the show On the Market are opinions only. All listeners should independently verify data points, opinions, and investment strategies.

David:
This is the BiggerPockets Podcast, show 685.

Justin:
The way that I look at Invelo and what we’re trying to design is, we’re not just trying to create a product, a software product. We’re combining software, education and community. Because I really feel like all of those pieces are really important. Now, on the software side, we are a true end-to-end solution for a sales journey. So you can pull lists, you can manage prospects, you can manage leads, you can manage deals, you can market out to potential home sellers.

David:
What’s going on everyone? This is David Greene, your host of the BiggerPockets Real Estate Podcast here today with my co-host, Roberto Abasolo, and we’ve got an amazing episode for ya. Today, Rob and I are interviewing Justin Silverio, the creator of Invelo, a software that helps you find off market properties and reach out to the owners to get stuff locked up at well below market rates through the targeting of motivated sellers. Justin explains the system that he created, how it can help you as an investor, and how to use it, which is pretty freaking cool. Rob, what were some of your favorite parts of today’s show?

Rob:
Well, first of all, I’m hurt that you didn’t notice that I was wearing the t-shirt that accompanies my favorite book in the world, BRRRR, by prolific author, David Greene. But secondly, this show’s awesome. I think it’s a really cool platform for literally any type of investor out there. I think it applies to wholesalers, flippers, short-term rental people. Really, if you’re just looking to acquire assets, and if you want to get them under market, this seems to be a very, very comprehensive tool that can help you do that.

David:
Absolutely, and if you’re watching on YouTube, Rob and I are both wearing our custom made BiggerPockets t-shirt. His says, BRRRR Recycle with the recycling emblem. And mine says, Will You Be My Mentor? So if you’re not following us on YouTube, consider checking that out. You get to see all the facial expressions, the nuances, and Rob’s coif, which has its own personality, and it shows up differently on every episode. So a matter of time before that coif gets its own Instagram. So until then, check it out on YouTube.
Before we bring in Justin, today’s quick dip is, listen all the way to the end of the show. Because if you want to ramp up your investing success, BiggerPockets can help you do that. We are going to give you a discount code for a Pro membership, as well as explain all the new things that make Pro better that we at BiggerPockets have put into place for you. And I can promise, you will be impressed when you hear about this. So listen all the way to the end and get that discount code if you are not a Pro member. Rob, any last words before we bring in Justin?

Rob:
Yes, I have a quick, quick tip number two, and that’s, if you want to buy these awesome t-shirts, you can order them. They’re linked on YouTube in the description of this video, so be sure to do that. Which one you’ll get, that will be up to you. But they’re both great shirts, very comfortable, very soft cotton on my skin, Dave.

David:
That must be why you are in such a good mood today. Makes sense. If you want to be in a good mood like Rob, get one of these t-shirts. All right, let’s bring in Justin. Justin, welcome back to the BiggerPockets Podcast. How many times is this now? How many times have you been on?

Justin:
This is three. This is three. Very exciting. Each one of them is all very exciting to be on.

David:
And they go back pretty far. So you were on episodes 58 and 194, you must have just been a puppy back then in episode 58. What was going on in your life when you did your first BiggerPockets interview, and what’s going on now?

Justin:
It’s funny. At the time, I didn’t think I was a pup, but now looking back, yes, absolutely. Back then on the first one that I was on, I was still building out my investment business, and flipping homes. And trying to get into the routine and just learning through the process of buying properties, the right finishes to do, the renovation, selling. So still really learning and growing the business.

David:
I don’t know that we’ve ever dug super deep into your story. I’m curious though, what was going on in your life that made you say, I’m going to do this crazy, beautiful, frustrating, no idea where it’s going to take me journey of real estate investing, and then what made you stick to it?

Justin:
Yeah. Growing up, I was always around entrepreneurs, my father, my brother, my uncles. I always knew I wanted to do something on my own, but I didn’t know what that was. And it was when I was working at my accounting job in a private equity venture capital shop, that I got a lot of exposure to larger companies. And I always wanted to be on the deal side, but I just didn’t know what it was. And then I came across, it might have been HGTV, flipping properties, and looking at it and saying, “You know what? This is actually really interesting.” Growing up, my father was in construction, so I always thought construction was amazing. There was an art to it that he was building these properties from raw materials, and I loved that, but I didn’t have exposure to it, knew how to build, but I knew numbers really well.
So I said, you know what? This kind of combines both aspects of what I enjoyed, numbers and learning more about construction. So I asked my father, I said, “Hey, you want to team up and start buying properties, renovating them, and then selling them?” And he agreed. And he was always very supportive in the fact of, hey, let’s try something out that you enjoy. And if you love it, take over and keep running. So that’s really was my first step into entrepreneurship and I absolutely loved it. I just fell in love with real estate, just the ways that you could structure deals, how you can help sellers in really challenging situations. That aspect, I only learned when I started to buy properties of how much I can help a person’s life out by doing this. And that is I think what really got me invested even more and excited about the industry, and then it just kind of spiraled from there.

Rob:
So now since actually developing your real estate portfolio, would you say… Because you started a couple of companies, so you were developing your real estate side of things, that’s probably crazy. And then you’re like, hey, you know what? I should make my life a little crazier, I want to start a company. What led to that decision?

Justin:
That’s just how I am. And it’s funny, my wife always says that. She’s like, “For as long as I’ve known you, you’ve always had two things going on. You’ve been working or you’ve been studying for this and studying for the CPA. You’re working and then starting real estate business. And then when you left your full-time job, now you opened another business.” And for me, it’s more, I love business and working, and identifying challenges and trying to solve them. So as I was going through my real estate investment journey and purchasing properties. And the tactical way that I would always market is I would send direct mail. And that method of marketing worked really well for me, and I really understood the strategy behind it, how to stand out from your competition, and really looking at all the numbers.
And I did it in a way that was very unique to anything else that was on the market or offered to real estate investors. So that’s when I said, you know what? I see a huge void in the market of how to market properly to home sellers and help other investors become more successful. So that’s when I started my other business, my marketing business, Open Letter Marketing. And really it was just solving an issue or a big void in the market that led me to that business, and now ultimately to Invelo on the technology side, solving another huge need in the industry.

Rob:
So yeah, you build this company, because Open Letter Marketing is rather successful. One would most of the time think, I’m good, I did it. I’ve built a great company and a great real estate portfolio, but you did it again. So from an entrepreneurial standpoint, when you’re starting companies, do you feel like you want to fulfill a need for a large group of people, or is it just an internal desire to also do more? What actually drives the idea of starting completely fresh when you’re already pretty established?

Justin:
Yeah, I think it’s a little bit of both. For me, once I have a company up and running, and it reaches the level of I guess “success,” or the company is systematized and you have people running the business. For me, I can never really sit back, I always want to do more, or get into something different, or add onto that. And that also kind of combines with, if there’s a huge void in the market, and if I’ve had a challenge going through that, and I see that other people have that same challenge, I want to create a solution. And I will not stop until I find that solution. And if I can help other investors or other people in the industry out by solving that problem, then that’s kind of what I’m looking to do. And that’s where I find the most success is when I can see that people are becoming successful because of either using our product or service. That makes me so happy to be able to offer that, and to share those successes with other clients and customers.

David:
You know I love that. I love that your motivation is to help other people win, and that you understand business in America is accomplished by creating something that helps other people do better in life. It’s not accomplished by taking something away. It’s this opposite of the predatory education person that says, “Pay me a $100,000, I’ll teach you how to flip a house.” You’re like, “Hey, one of the hardest parts of flipping a house is finding a deal. You can find better deals if you go off market. Here’s the system that you can use to go there.” And I wish we had more people in the space that took that approach. I’m curious, before we move on to more about your system, just about the motivations itself. Do you find yourself frustrated with elements of our business, and that frustration is what motivates you to create the solution to the problem? Or is it a different motivation that’s driving you?

Justin:
No, I think it comes from the frustration within our industry. Our industry has skyrocketed since I started investing, there are so many more people, and technology has grown and things have shifted. But I would still say that technology, while it’s grown, it still hasn’t had a huge effect on us, and people haven’t leveraged it to the point that they should really be able to utilize. And for no other fact that there’s just not a lot of companies coming into this industry and really trying to take that on. But seeing from the front line with a lot of our customers at Open Letter, just the frustrations that they go through in their day-to-day lives, and their business, and even same with me. And I can easily relate with them, and we can talk about the nitty gritty of how much time it takes to do such a simple task, and why that is, that shouldn’t even be around in 2022. And making sure really if all these other people have these issues, it’s keeping them back from really truly getting to success where they want to be.
So just trying to get through those struggles, and give them a little bit more of a direct line to success. Rather than going up and down and trying to figure out how things are working. So for me, it’s always, again, it goes back to education. I can provide anybody the same tool, but everybody’s going to use it differently. It’s providing them with the education and the best practices of what I’ve learned through my journey, and even a lot of other investors through their journeys, that we connect with our customers. I always want to provide that education and the best practices to get people to their goal faster.

David:
Can you give me an example of a problem you encountered, a frustration specific to the business, that you then said, okay, I’m going to figure out how to solve this and then make it part of one of my companies?

Justin:
Yeah, I would say the first one with Open Letter Marketing is direct mail. Most everyone was utilizing yellow letters. That was the biggest name, that’s what everybody used when they started. So I said, all right, well, everybody’s using that product, that’s awesome. Because I’m going to use something completely different. And I’m going to stand out from everybody else, and I’m going to understand not only the strategy or not only what to send people, but the strategy behind it. How we can send specific pieces in different messaging to get people to call us back. And I’m going to do it in a way and test and try, and track, and adjust until I feel like I have a really solid strategy down. And only at that point when I fully understood that I did, and tested it against other competitors and what other people were using, that’s only when I started to form Open Letter Marketing.
And really it transpired into the same thing with Invelo. Hearing a lot of people talk about how challenging it is to manage their databases, to make sure that they remove people that sold their homes out of their database so they’re not marketing to them, or people that say, take me off your list. Or when they refresh your list, how do you update all your records in your databases? And if they have multiple databases that they’re managing, how do you get these all in sync? Just hearing that over and over and over again, I was like, there has to be a better way. And not seeing that solution out there, I said, I’m going to make sure that I solve that, not only for myself but just for the real estate investor community.

Rob:
That’s awesome, man. I have been workshopping, and I know you probably don’t want to give too many tips to a competitor. But I’ve been workshopping like a marketing company where I send letters out, but they’re all printed on headshots of Dave, but I’m still kind of wire framing what that could look like. Dave won’t sign over the rights to his headshot to me yet. But moving on here. So we’ve kind of established you were kind of a pup getting started out, and now you’re a bit of a Rottweiler here in the service industry. And then now you started Invelo. You started talking about some of those frustrations that led to why you started that company. But can you just give us an overview of what it is? And then from there, I want to dive in a little bit more behind some of those frustrations that you’re solving with your service.

Justin:
Yeah, sure. So the way that I look at Invelo and what we’re trying to design is, we’re not just trying to create a product, a software product. We’re combining software, education and community. Because I really feel like all of those pieces are really important. Now on the software side, we are a true end-to-end solution, for a sales journey. So you can pull lists, you can manage prospects, you can manage leads, you can manage deals, you can market out to potential home sellers. So you can do all that within the database. Now the unique thing that we do is, we offer that complete package under one umbrella, which gives you so much more than just the one off those individual components. From there, you have one database to manage, everything’s in sync. You can understand analytics and KPIs from beginning to end.
So I’ll give you an example. Most investors that market direct-to-seller, they usually have different phone numbers for each list that they market to. And they do that because they want to understand when somebody calls me on this phone number, they’re an absentee owner, or they’re driving for dollars, they’re on my driving for dollars list. With our system, because it’s all in one, you don’t need those additional phone numbers because from when you started to pull the list all the way to when you have a deal, that list is always attached to it. So now you don’t need to purchase different phone numbers just to identify the list that they’re on. It’s done for you all in the system. And right now, because most investors have to manage their whole sales journey through multiple databases, they don’t talk to each other and they’re not in sync. So they still need those kind of little nuanced issues and complexities in their system. So that’s kind of what we’ve been working on to solve.

Rob:
Yeah, I think that this would really hit home for… it hits home for me because I remember getting started out, there really was no level of organization, not even a little bit. So most new investors are very frantic, frenetic, they’re just trying to figure it out. They’ve got like a notepad. I probably have notepads on my desk here with information. So purely from an organizational standpoint, I could see how this could be a game changer for having an actual system. I guess what would you say, how could a newbie getting into real estate? What would probably be the game changer here for them? Is it just giving them a system and a CRM to actually get started on? How would this really be a game changer for someone starting today?

Justin:
Yeah, so going back to how we developed the system, we always wanted to help walk the user through best practices. So whether that’s from pulling a list or creating a prospects database, we are guiding them through the process. And we do that on the technology side with giving them easy preset list that they can click one button, enter in their geography, and then they can see a list of all those records that meet that criteria. And these lists that we’re providing, they’re not just the basic lists that you can pull anywhere else. They’re done over the years. They’re implemented from experts analyzing and making sure that we have the right criteria for them. Very unique lists that other people aren’t using. We do all that, so the user, really the goal is for them to navigate the platform and think, oh my God, I am the smartest person. I know exactly what I’m doing. But really it’s the intelligence and pushing people through that process.
But also, it’s from the education standpoint. So we have created many, many videos that teach people from step one all the way through putting a deal together. So we talk about all the things, like where should your farm area be? What should you look at? What are the stats that you should look at to identify if it’s the right area? How do you pull lists? Why is it important to pull lists? How do you market to sellers, how do you talk to them? How do you put a deal together? So we walk through everything and share all of the tips and best practices, so they can really go step-by-step, and utilize the education with the platform, so it’s a much easier and straightforward process.

David:
All right. I have two questions that I’m just chomping at the bit to ask you. The first, because I just don’t want to forget, is going to be, how do I want to phrase this? I’ve noticed anytime there’s a system, there’s two components to a system, and we tend to only focus on the first one, which is the actual steps that are needed. So oftentimes when someone is given a system or taught a way to do things, it’s very similar to a checklist. Here you go, here’s your system, just go do this. But the second part of the system is even more important, and it’s the skill in the execution. If it was so simple that it was just a bunch of checklists, a monkey could do it, and then everyone would be successful. But there’s actually a skill that is necessary to be able to accomplish whatever the said system would be.
So the first question that I’m going to want to ask is, what skills do you find are necessary to make a system like this work? Because you got to have some ability to talk to people, you got to have some creativeness in your brain to be able to put these things together. And the second question, which is what I’m really getting at, is for someone like me, a little bit more established of an investor, I’m probably not going to send out letters and talk to every incoming call myself, right? I’m going to want to leverage this out to other people. Is there a way that this could be implemented, and what would be the pieces that I would need if I wanted to add this to my ecosystem for investing? So we’ll start with what skills are needed and then could this be leveraged?

Justin:
And on skills that you needed, you’re talking from a user standpoint, from an investor standpoint or?

David:
If somebody says, hey, I want to take Justin’s system and I want to go put it into place and execute it, what are the skills they need to know walking in, that they have to be able to perform?

Justin:
With our education, we really look at this system as anywhere from a new investor to an intermediate, to experienced investors. So we try to identify and outline all of the different pieces. And our plans are even outlined that way. So for our free plan, that is mainly used for beginners. And we give them a path that’s going to be much easier and kind of more of the starter plan, where there’s presets, they don’t really have to do much kind of thinking through the process, like what lists, what marketing to be able to pull, it’s done for them. So with that, I would say that investor has to understand the process of a real estate deal. How to make offers, all of that, those tactical skills. We do provide that education along the way. But really if somebody’s new coming into this, and they have never done any direct-to-seller marketing or used Excel spreadsheets or anything like that, from a fundamental understanding standpoint, they have to understand how technology works and how a CRM works.
And we try to do that through the onboarding process of teaching them the different aspects. But we try to guide them through that process of step-by-step. But I think from a technology standpoint, that’s probably the biggest thing that they have to learn or understand. From a real estate investor perspective, they should understand the whole acquisition side. So they should understand how to put a deal together and structure. And really the path that we have them go through in the system is very much in line in a seamless process.

Rob:
That’s really cool.

Justin:
Again, our plans offer, you can have teams in place. So for instance, as you’re going through and if you have somebody that just does your marketing or just works on pulling lists, or you have an acquisitions manager. You can actually create a team and assign different records to different team members, so they can make sure that they’re going after the right properties that they’re assigned to. You can have notes back and forth to your team members, so you have different pipelines. The system is really broken down into three main kind of databases, prospects, leads, and deals. Prospects are the people that you have a property that you want to reach out to. Leads are people that raise their hand and say, hey, I might be interested in selling. And deals are the one you purchase, but now you need to do something to make money.
So when I break it down like that, the prospects and the marketing are really your marketing team. Your marketing team, they would be pulling the list, they would be managing your prospects database, they’d be marketing to those prospects. And then your acquisitions team would be only looking at your leads pipeline. And the leads pipeline can be broken out. So people can be assigned different records, you can make sure that they’re communicating with those prospects. And if they’re not, you can get updated the record or the lead has gone stale. So you can send followup marketing to them.
And then the deal is you can have a dispositions manager. So if you have a dispositions person and you just purchased a property, and now maybe you want to assign it or you need to renovate it, you can still bring that property through the deals pipeline, and have your dispositions manager manage that aspect of the system. So we broke it down into three main pieces of the system, because that’s ultimately how much larger investment companies are built out. You have your marketing team, and you have your acquisitions people and dispositions people.

Rob:
Let me see if I’m understanding this, because it seems like a relatively… When you lay it out, it seems very straightforward in a good way. So with the first bucket, you’re saying that, that’s your marketing and outreach. Are the actual tools in there… You’re saying you’re pulling lists. And when you say pulling lists, you mean lists of properties and everything of people that you want to reach out to?

Justin:
Yes. So motivated tellers. Yeah, and the features. So we broke it out into those three sections, because there’s features and functionality that are going to vary based on where your property is in that pipeline. So for prospects, we have a list builder aspect, so you can pull lists and bring them into your prospects database. And when you have prospects, before you start to go market, really the skill behind that and what we train people and show them in the platform, is to really understand their prospects before they even spend any marketing dollars. And we see this from investors that are even doing tens or hundreds of thousands of dollars of marketing a month. We see this all the time with Open Letter Marketing, that they’re still not really understanding their prospects before they go to market. And what that creates is they spend a lot more money than they need to, to get a conversion on their marketing dollars.
And just to give you an example, we’re able to identify in your prospects database, which records are high, medium, and low quality, right? Who’s more motivated to sell? And we can do that through sifting and sorting, and understanding, list stacking, all those kind of segmentation filters. But the importance behind that is because if you have a marketing budget, and now you spend 70% of your budget toward your high quality records, 10% to your low quality, 20% to your medium quality, you still have the same marketing budget, but you’re allocating your funds much more appropriately, and you’re going to actually increase your ROI by doing that.
So that’s just one aspect of the prospects database that we really hone in on because we don’t want to just offer a prospects database, we want to show you how to maximize your dollar, your marketing dollars. So helping people through that and getting them to understand that, there’s a lot of education in it. But that’s the big piece, we want to educate people. We don’t want to just give them the tool and say, here you go, good luck. We want to help guide them through that.

Rob:
And by the way, for everyone at home, we’re actually going to do a product demo where we show you the tactical aspect of the platform. So stay tuned for that. Because it’ll help visualize what we’re talking about. But Justin, when you’re talking about the list, I want to make sure that I’m clear. Because you’re saying a lot of the times people are just burning cash because they’ve got, let’s say a 30,000 person-list, and so they’re marketing to 30,000 people. When in reality, if they just really shaved down that list to people that actually might convert, they could spend way less money just focusing on a much smaller set of people?

Justin:
That’s correct, yes. And the way we do that too is by pulling different lists in our list builders. So we have the ability, really we have hundreds of different filters, but we narrow it in and offer seven different lists that people can just basically click one of the presets, enter in their geography, and pull that list so that it comes into your prospects database. And if they pull all those seven different lists and bring them in, one of the tactics that we use is saying, hey, which properties are on two or three or more lists? And by doing that, we can identify which records are on multiple lists because they’re potentially more motivated because maybe they’re an absentee owner, their property is vacant, and they have a lot of equity in their house.

Rob:
Okay, that’s what I wanted to know because you mentioned that you can find the motivated sellers. Is it simply because they sort of check the box on a lot of things that might be criteria for what’s considered a motivated seller? So I’d even imagine something like, and maybe this is a feature, maybe it’s not. But someone who’s delinquent on taxes for example, is that a filter that would tend to show someone is a bit more motivated or would be a more motivated buyer?

Justin:
Yes, absolutely. So as you pull in lists into the database, you can specify the quality of the list that you’re importing because for tax delinquent, vacant properties, driving for dollars, to me, those would all be high quality lists because they’re generally more challenging to pull. So it thereby would make it a little bit of a better list as well as it’s more situational. If somebody has tax liens on their house, then they have a more desire or more of a need to sell. Somebody that just has equity in their house. I don’t see that as a high quality, that’s more of a lower quality list. But then if you start to stack all these lists together and identify which properties are on one of these high quality lists and multiple other lists, and then you can segment all those records into a high quality or your high quality records list, and then you can start creating a marketing campaign specifically for those people.

David:
That is a principle that I find… I’m really glad to hear that you’re incorporating that. It works in many ways, in many forms of business. In general, what you’re looking for is, each of these lists have some properties that are more likely to be a motivated seller than other lists. And by combining them all, and what’s that graph where there’s circles that intersect, there’s a name for that.

Rob:
Like a Venn diagram?

David:
You know what I’m talking about?

Rob:
Yeah.

David:
Is that what this is, a Venn diagram? Where it’s like you’ve got this and you’ve got this where they intersect-

Rob:
Big circle and then there’s like a little middle in there.

David:
Yeah, yeah.

Rob:
Yeah.

David:
There we go. Thank you Rob for being a nerd.

Rob:
You’re okay.

David:
A Venn diagram. The more list that you add into this and the more intersection points are, the higher the likelihood starts to become that you’re going to get the motivated seller, which is the deal. It’s very similar when you’re looking at a property itself, where I’m looking at, okay, I’m probably not going to get a house for a 50% of what it’s worth, but can I find a house that has several elements that all come together in the same property that are all base hits? So is there a way I can add value? And then can I get it for less than market value? And then can I get some perk from the seller that’s going to make this deal better? Is this in an area that’s going to appreciate more than other areas?
Is this in a tax advantaged strategy that’s going to save me money somewhere else? And if you put six of these things together in the same deal, what looked like a boring deal that was in plain sight to everybody is actually very, very exciting because they didn’t see all the different elements of it. It almost sounds like you’ve created software that’s doing the same thing with finding motivated people. Any of those properties on a list on its own doesn’t necessarily jump out, but when you combine it all together, you start to get a very attractive asset to pursue.

Justin:
Absolutely. And that can vary depending on your investment strategy. And at one point, there was a time that I was doing wholesaling in suburban areas, and then I was doing infill new construction in the city where I was doing multifamily condo conversions and whatnot. So in the suburbs, it would be looking at absentee, they have tax delinquents. But in the city, it would be a house or a property that was one or two units, but was on a lot of over 5,000 square feet. And if it was, that means that I can convert that as well as it was on a specific zoning, but I can convert that to a three or a four unit now. They’re completely different strategies, but really understanding where the threshold and what you can actually do with the property that’s on different lists, was the key to everything.

Rob:
Oh, I actually had a quick question on your list. You find it, you find the prospects, and then when you reach out to them, you’re saying that, that’s your first set of people, that’s your first someone on your team that could do that. Is that then done through another platform, or is it still, can the outreach actually happen from Invelo?

Justin:
Yeah, the outreach can still happen through Invelo. So we have direct mail, we have ringless voicemail, we have email that is offered within the platform. And then if you are using a system outside, we do offer integrations and exporting from the system into other databases. But the important thing is you’re still capturing the cost to do that marketing outside of the system. So again, we can still funnel back the KPIs and record that information in our system, so you know which marketing activity is actually performing the best.

Rob:
Okay, that’s very cool. So you’re saying the integrations, if there are other tools that are part of your ecosystem, they can possibly be I guess connected or integrated like you said?

Justin:
Yes.

Rob:
So that you don’t have to actually walk away from a current ecosystem that you’ve worked. Because that’s always a hard thing for me. I do different tech stacks and everything like that. So whenever a new software that seems cool comes about, I’m always like, oh, can it actually connect with everything? And when it does, I’m like, oh. It’s a pretty easy sell for me whenever I do that, because I’m like, all right, I get to keep everything in my dashboard and then connect all the tools and make my life a little bit easier.

Justin:
Yep, absolutely. Absolutely. And that’s a big thing. We’re working on the Zapier connection as well as direct connections to many different platforms that investors use. And that’s really critical for us, like you mentioned, is for it to be a very simple integration, so people can access different platforms that they use for maybe different segments of their system. So it’s really all contained within Invelo, but then it can talk to all those other platforms.

Rob:
I see that. Okay, that’s cool. Yeah, I’m in now because… Oh, I was in before, but let me just say I am a big fan of Zapier because I’m an automation nerd. I am trying to automate so many aspects of my business and of my life, and Zapier’s what I use to literally, it automates with my Slack channel, with all my CRMs, with my emails, with my payment channels. It really does help connect the ecosystem. So that’s cool. All right. So it is a way of even adding to automation if that’s what you want in your business.

Justin:
Yes.

Rob:
Which you should, if you want to scale up. Automation is king.

Justin:
Yeah, automation is critical. Automation is critical, and we really try to leverage that within the platform. So the complexities that I was mentioning before, if you’re marketing to a bunch of records or sellers, if one of them sells their home, you don’t want to continue to market to them. And neither should the investor really have to go back and scrub all of their records to see who sold their house. The system can just do it for them. Our database, our properties database that Invelo holds, is updated every single day. So if a house sells, we immediately get notified, and then we move their record out of the marketing for the user. So really you don’t have to think about that stuff.

David:
So you’ve been in the game for a long time, Justin. In your opinion, what’s the right avatar of investor, the person who’s listening to this, how does someone know if this strategy is the right strategy for them?

Justin:
So as far as strategy, I mean this system can be utilized for anybody that’s going direct-to-seller, that is marketing off market, or even people that are working with other wholesalers or real estate agents, and they want to manage all of their leads and records into one database, it could be used for either one. But the real value comes on the direct-to-seller marketing. And we really look at people that are doing single family, to small to mid multi-family, that’s kind of the investment focus that this system was built out for.
And anybody that’s either a newbie to an advanced investor, the newbie investor, we have a lot of that education to help train them or educate them on best practices. And the functionality and features that we have in the system will work not only for beginners, but also advanced investors. So when they really get deep down to understanding, hey, I want to be able to skip trace my records or find other people because this person hasn’t called me back. And I want to find who else owns the property or is associated with the property, they can even do that in the system as well.

David:
Now what about geographic locations? Is it going to work the same in Manhattan, New York or San Diego, California as it’s going to work in Columbus, Ohio? Or do you find that certain price points of certain areas have more success than others?

Justin:
No, I would say this system will work… Again, this system is for management of records. So we have access to all properties throughout the whole United States. I believe it’s over 155 million records that we have access to. And we have data points on all of those properties. So anyone who’s doing it in Manhattan or somebody else who’s in Ohio, the system will work for them. Now, with data, there’s always going to be, as you get to the larger commercial size properties, the data’s a little bit more challenging when they’re going and standardizing all that data. So that’s why I look at our system as really single family to mid level multi-family owners, or investors.

Rob:
Yeah. I’m wondering about the use cases for this, because we talked about the size of the homes that really thrive within the platform, but the actual type of investor as well. Outside of the experience level, are you seeing a correlation between wholesaling or flippers, or are there even opportunities for people in other more niche areas like short term rentals for example? Is this something that can work for basically every type of asset class?

Justin:
Yes, absolutely. So it’s a lot on the acquisition side. So when I look at what people are doing or what the investment focus is, or strategy is, whether it’s wholesaling, rehabbing, short-term rentals. I look at that more of what you’re going to do with the property afterwards. So in order to acquire the properties, you still need a system and you need a proper process in order to go through to acquire those properties. What you do with it on the back end, that can be anything that you want, but you can still manage everything within the system.

Rob:
Okay, that makes total sense. I think I really am so curious about getting into this world because I do typically get stuff off the MLS, and so I’m often paying market prices. I mean, obviously of course it’s possible to get below market prices too, but I’ve been really giving a lot of thought to basically my acquisition strategy, and if there is a way to get in the door for less than market, especially right now. So that’s really cool. Effectively, it’s a kind of pick your poison afterwards. You find the house, you acquire it, and then however you actually want to use it, that just depends on your individual investment strategy.

Justin:
And I’m really excited to go through the demo with you guys because that’s going to help clarify because there’s so many points and so many details that go along this process, that sometimes it seems like it’s over complicating things, or it’s really confusing. But the way that we designed the platform, it’s extremely intuitive, and the step-by-step process is actually much easier than you think. The system does a lot of the complicated pieces in the back end, so the user doesn’t even have to think about it, like those automations that I mentioned before.

Rob:
Very cool. Well, if you’re cool with it, I’d love to actually jump in and check it out.

Justin:
Absolutely.

Anson:
All right. So we’ve learned a bit about how Justin created Invelo and the whole process of that. I’m super excited to have a demo of the entire thing and how it works. Again, if you don’t know me, I’m Anson Young. I wrote Finding and Funding Great Deals out through BiggerPockets, I’m a rehabber, a wholesaler, a BRRRR investor. And technology, CRM, list building, skip tracing, marketing. All of these things are so integral to my business and how I can be successful and how I’ve been successful, that I’m very excited to learn how all these kind of snap in together and hopefully make my life easier. I think we can start there, and get this demo rolling.

Justin:
Awesome. Yeah, I’m excited to show you what we have going on with Invelo. So we’re first going to start off with the dashboard. You jump into Invelo, and this is kind of your home screen of where you land. So you get some basic KPIs about what’s happening in your database through the different aspects of prospects, leads, how many records are in your database. You get this nice product navigation over to the right for a little help desk, academy and education. And then you can also see any tasks or marketing campaigns that you have currently going on. So again, just a step back, this platform is a true end-to-end solution.
So you can build your lists, you can manage prospects, leads and deals, you can market out of this platform. So it really can do everything. So you can house all the information in this one platform, so you’re not going back and forth between multiple software platforms or databases. So this is the primary spot. And then I’m really just going to take us through the natural progression of a sales journey, from building lists to managing prospects, leads and deals, and also show you some marketing and some additional bells and whistles that we have with Invelo.

Anson:
Nice. I like that you land just right on the screen, and you can see all kinds of things. I like that.

Justin:
And the big thing to call out here that you don’t really see if you just land in here, is the sold records and the vacant records. So Invelo will automatically update this information every single day, because our prospects database is updated daily. So any properties that sell or go vacant in your prospects database, we will actually identify those. And not only that, if you’re marketing to those prospects and those houses sell, we’ll actually push them off of your marketing campaign so you don’t continue to market to them. And they’ll actually land on a sub database called Removed Records, which I’ll show you in a little bit. So let’s start off over on the left hand side. If we click on List Builder, now you can see the screen of how to pull list. So we make this very easy for people either starting out with real estate investing, and we also have the flexibility to get really advanced functionality and criteria.
So just starting out on the easy side, you can see down here we have these Invelo presets. These are all presets that we have identified to be the very best list that you can pull from this system. And there might be some that you recognize and some called related party, and some other ones that you might not recognize. But we actually have found through our own research that these lists perform exceptionally well. So really to get started, all you have to do is click the button, and you can see on the left hand side we have all of this criteria.
Now you can go into this criteria and you can just remove anything that doesn’t meet what you’re looking for. And then the only other thing that you really have to do is you can add a geography. Now you can do this based on city, state, and county or ZIP code. I’m just going to click on a city here. And then if you do want to get a little bit more advanced, we can go into the properties, MLS and owner info to really scale down and look at other filters like vacancy or owner type. Under property, you can see we have tons of different filters that you can really utilize.

Anson:
So if you’re just starting out and you just need one of these seven or six quick starts, you can just click on one of those, then put in your geography, your ZIP code or whatever, and it’ll just basically kind of get you a good place to start.

Justin:
Yeah, exactly. Because the two biggest things that new investors and even some experienced investors have, is they don’t know how to pull a list properly, and they struggle with creating a really good marketing strategy. So in this system, we really set everyone up for success by creating these presets. So you really don’t have to think about what to pull. And we just automatically have them here, so it’s basically a one click away.

Anson:
Yeah, it’s great.

Justin:
Once I click to apply filters, we have a list of all the properties that meet the criteria, and we also have this map. And within the map you can see the different colors. And this shows you the saturation of properties that meet your criteria in the specific area. So if I actually click on this, we can zoom in, and then we can get down to where we see the individual properties and see some basic information about the property. From there, we can actually import the list.
And the great thing with Invelo is that, you can see up here, you already have 47 out of 50 records. So when you have Invelo, you can import records into your database and you get a quota every month. But if we find that you already have the records in your database, we’re not going to apply those against your quota. We’re already going to identify you have 47 out of the 50 that meet this criteria. So we’re only going to import three of them, and we’re going to apply the lists and tags, whatever we select here, to all 50 records, whether they’re already existing in your database or you’re importing them new.

Anson:
So if you’re doing list and tags, is that just a way to organize this, or does it serve some other function?

Justin:
Yes, the list will always identify. When you’re selecting a list, you’re telling the system where these records are on which list. So because we pulled an absentee list, we’re actually going to go in and as you saw, I just clicked absentee from the dropdown menu to acknowledge that these records are part of an absentee list. And then tags, there’s various tagging strategies, which probably would take another video to shoot that. But we’re basically just identifying where these records came from, they came from the Invelo database.
And also if it’s in a specific area, what my investment opportunity or objective is. So I can select both of those. The only last thing that I want to show is the auto ad. So this is a really unique feature to Invelo, where you only have to pull a list one time, and Invelo will automatically add new properties that meet this criteria to your database, anytime a new property meets this criteria. So again, because our database updates daily, your absentee list that you’re pulling here will always be up-to-date. And you don’t have to do anything else but enable, name it as a preset, save it and import the records. And in the future, your database will always be up-to-date.

Anson:
So you’re not just scrubbing these lists, now you’re automatically adding new prospects to your database. So if a new absentee owner pops up, you don’t have to go search for it, and then add it to your marketing list or something.

Justin:
That’s correct.

Anson:
This just automatically adds it in.

Justin:
Yes, yes.

Anson:
What in the world?

Justin:
As you know, pulling lists and refreshing lists, and making sure that you’re not duplicating those records that are already in your database. A lot of people struggle with that. And this solves that issue.

Anson:
Yeah, that is so much work saved. And then automatically just adding it means that you can just market. You market to that same audience so to speak. And you know that it’s the most up-to-date, your solds are knocked off of there, and then you have new ones added to it. Yeah, that’s pretty crazy.

Justin:
And when we get into marketing, you’ll see how this whole system is automated from when it gets into prospects to when you actually market to them, everything is actually automated. So I’m going to just cancel out of here and just jump into our prospects database. So over here on the left hand side, I’m going to click on Prospects. And you’ll notice that the left side menu is in the order in which your sales journey generally moves, right? You first have to-

Anson:
Yeah, you build your lists.

Justin:
Yep. Build your lists.

Anson:
You push them into your CRM or some sort of database, and then you’re off to the races, right?

Justin:
Exactly. And we break it down by prospects, leads, and deals. You’ll notice that there’s different database for each of the three. And that’s critical for us because we understand that there is different features and functionality that you’ll need throughout the journey. And I’ll show you a couple of those when we jump into prospects here. So here is our prospects database. You’ll notice on the left hand side, we have active and we have removed. And again, this is what I was talking about. If any record is identified that it’s sold, then they’re going to be pushed to the removed database. And by them being in the removed database, you will not be able to market to them.
You can only push them manually back into active in order to get them back on your marketing. So let’s jump into one of these records. You’ll see anytime that you import, whether it’s through List Builder or through your own CSV, your own list, whether or not you just use your property address to import. And again, importing can just be done by a single click. Selecting one of your lists, and quickly importing the list. You can go through this process, you just add the lists and tags, and you can import.

Anson:
Because a lot of times, you might have a driving for dollars list or something that you want to add into your marketing. And this is just telling Invelo like, hey, this is my list. You’re tagging it differently from maybe the Invelo list. And then now you can differentiate, you can sort it, you can organize it.

Justin:
Exactly. Exactly. And the cool thing is Invelo uses its properties database. So if you only import the property address, we’re actually going to fill in all the details relating to that property. So here’s an example of what you can see. Just by using a property address when you import, we’re going to tell you all of the different building details, property characteristics, land info, estimated value, tax info, last sale date.
And if it is on the MLS, we’ll actually show you listing price, listing date. In addition to that, we’ll also show you the contact that’s associated with this property. And with Invelo, you can even skip trace. So we can skip trace not only this person here, but we can actually skip trace additional people who may own this property. So you can see I just skip traced, and it just added a number of records. And at the top is going to be the best match that we found.

Anson:
So it’s got a star next to it, so you know-

Justin:
Exactly.

Anson:
Okay.

Justin:
Yes. So as you start to market to this person, and let’s say that you send a direct mail piece to this address here, but it kicks back. So we’ll even show you that it is deliverable, but let’s say that it gets kicked back. You can click on Don’t Mail, and you can change the primary mailing address to the next one. So there’s always opportunities to continue to market, and use different details within the record. Again, the phone numbers, we’ll provide you with the phone numbers if they’re on the DNC or do not call list, we’ll give you email addresses if we have them on the person. And we’ll also identify if they are a litigator. So a potential person that can potentially sue you for soliciting to them, which is really, really important.

Anson:
That’s very important. So it automatically tells you basically, hey, this is DNC, do not call list. This is a litigator list. It also tells you if it’s deliverable or undeliverable based on the USPS records or however you guys do it, right?

Justin:
That’s correct. Yep.

Anson:
Wow.

Justin:
So again, the litigator list is really identifying which people are either attorneys or have litigated against other people who have solicited to them in the past. So this tells you do not market to them because they could potentially sue you if you cold call or send them a text message. So that’s really important information, because it can save you thousands or tens of thousands of dollars so you don’t market to those people.

Anson:
Makes sense.

Justin:
And then if we have any marketing related to this person, the marketing campaign would show up here in this record as well.

Anson:
Very nice.

Justin:
Now, just going back again, the prospects database, the important thing with prospects that many investors don’t do that really need to understand is being able to segment your prospects. So you can see we have this Quality column here, and what we’re trying to do is we’re trying to really show people that they should narrow their records down into their highest quality prospects bucket, so that they can actually send out more marketing or be very focused on the marketing to those specific people. So for instance, I have 17,000 records in my database. I can come in here, and I can just manipulate with some filters, and pluck out the top quality records based on either by lists or by list count.
So right here, I’m just creating lists saying, I want to see all the records that are on my tax lien list, or driving for dollars list, because I know that those are two of my best lists. And anyone that is on three… Actually, let me slide this up, three or more lists. So you can see there’s 2,300 people out of 17,000 people that are on my two best lists, and that are on three or more lists. And again, that’s critical that they’re on multiple lists, because they potentially have a higher need to sell because they’re on an equity absentee and tax lien list.

Anson:
Wow. So it’s automatically list stacking for you.

Justin:
Yes.

Anson:
Just by moving the slider over, telling you, hey, if I want two lists, three lists, four lists, these people who’ll show up on multiple lists, it’s just automatically stacking them and telling you these are the highest priority, right?

Justin:
That’s correct. Yep, that’s right.

Anson:
Okay.

Justin:
So we can even save this highest quality. I could share it with my team if I’m on a team plan, and I’ll show you what we can do with this list in a minute when we get to marketing. So those are some of the features and functionality. There’s a lot more features that go into prospects and automations, but I’m going to continue to move on so we can show you a little bit more of the platform. Moving on to leads. So once you have a prospect that you’re marketing to, raise their hand and say, hey, I’m interested in selling. Now, you convert them to a lead. And the leads pipeline you can see is set up a little bit differently, although you can always get back to your list view. But the card-

Anson:
This is like a CardView, right?

Justin:
Yes, exactly. CardView, Kanban style view. So you can actually move your records along the natural pipeline or path. We always have the ability to change the column headers, move them around, add new ones.

Anson:
Oh, so it’s not set, you could customize it.

Justin:
Absolutely, yes. You can customize it.

Anson:
Yeah, that’s huge. Wow.

Justin:
So let me take you into one of these records, but before actually I do, you can see the organization of all these records. On the top right hand side, I could actually change this so I can say, show me all the people that have the highest motivation to the lowest motivation. So these are the ones that I really want to focus on. Or I can say, let me see all of the people that have the oldest activity, I haven’t touched them in the longest amount of time. So now your acquisitions team or even yourself, can really start from top down and make sure that you followup with the records that you haven’t communicated with in the longest time.

Anson:
Yeah, that makes sense. You got to prioritize that.

Justin:
Absolutely. So if we jump into one of these records, you’ll now see that the lead tab is available, and the lead tab allows you to provide a little bit more information in the logical progression of communicating with the person, the seller. So we can identify motivation, last time you contacted, occupancy, reasons for selling. So really everything that you’re naturally going to ask them from your first conversation about just getting a sense of how motivated they are, and what the potential repairs are, condition of the property and their situation. You can even identify or put in a projected analysis, so you can enter in all the information about what you can sell the property for, your construction costs, and come back to a projected profit. And you’ll see why that is going to be a nice feature for when you actually convert them to a deal.

Anson:
So it’s like a little calculator based on what you put in there.

Justin:
Yes. Yep.

Anson:
Awesome. Yeah, that’s great.

Justin:
So as you move these records through and you can convert them to a deal, you can actually even call out who is the owner for the deal. So you can actually have an owner for a lead, you have a lead owner, and you can have someone for a deal. Basically, your acquisitions and your dispositions team. So if you’re in a team plan, you can assign people different properties that they’re focused on.

Anson:
Yeah, that’s great. Yeah, take ownership of it, and it’s up to them to followup or sell that deal.

Justin:
Yes. So I’m going to convert this. I’ll say that I am the owner, and now I’m logged into my deals. And again, you’ll see that the deals section has kind of its own information. And again, we’re trying to identify and provide you with all the information that you need for purchase when you purchase the property, any terms, your closing agent who you’re using, your holding costs. And eventually when you sell, you can enter in the actual costs. And then we provide an analysis down below. Now, before when we were in the leads, we showed you our projected profit. So even here, we show you a projected profit. So we can show you an actual budgeted versus actual profit.

Anson:
So you’re moving from traditional CRM to now you’re analyzing KPIs, and being able to really break down numbers inside of your business, inside of just the one platform.

Justin:
Yes, that’s right. That’s right.

Anson:
Okay.

Justin:
So just going back out again, you can see the deals board looks very similar to the leads board, but now you’re managing what happens after you purchase the property or after you get it under contract. Because as we know as investors, we don’t make our money once we purchase the property, we have to do something to it to actually make the money. Whether that’s selling it, renting it, building, and then selling. So you can manage your deals through this pipeline as well. So again, just going back to the dashboard over on the left hand side, you can see that there’s additional tabs here that are grayed out, which we will be exploring and adding more KPIs. Because as the system we add… And we’re adding features all the time, but we will be able to go really deep into the analysis of every step of your journey to show you and highlight areas of improvement or different KPIs that you really need to keep an eye on.

Anson:
And if you’re following along, you don’t know key performance indicators, KPIs, basically all the numbers that are attached to your business. If you want to know cost per deal, basically there’s a hundred ways to break that down. But if you’re looking at your business as an overview, KPIs or key performance indicators are probably the best way to know what you’re doing and the best practices to get there. So yeah, just wanted to clear that up.

Justin:
Thank you. So the last piece that I want to go into, and again, there’s other parts of the system that we could go into, but these are kind of the top ones. This last piece here is marketing. So if we look at marketing, and I’m just going to show you the active. We have two ways to market. We can market to prospects and leads. So prospects, think of it as you’re blasting your marketing out to all of your prospects, or at least the highest quality prospects and leads are more like a followup.

Anson:
So that was the list that you pulled through Invelo, and then the list that you uploaded for driving for dollars or wherever you’re getting your lists, those are your prospects that you’re kind of blasting out a bunch of marketing to. And then your leads are the ones that they’ve already raised their hand and said, I might potentially be interested in selling. And then you’re just following up with them or you’re touching them with a different piece or something, right?

Justin:
That’s right. That’s right. Yes. Yes. So when I click on ad campaign here, again, you’ll see that we have a number of presets for both prospects as well as leads. And again, we’ve created these based on a lot of testing and functionality through my investment business and many other investors around the country. So we know that these ones, these marketing campaigns are the best of the best. We know they work, we understand the strategy behind them. So for a lot of investors that are coming into the platform that might not have done marketing before, they can really just click one of these, and move forward. And we actually take them through the steps of how to create this campaign.

Anson:
So it’s all in one.

Justin:
Exactly. And again, if I just go back out. You have the ability to send direct mail, ringless voicemail, email, and you can also create custom sequences within a marketing campaign. So you can actually take the list that’s in your marketing campaign of those records, and upload them to a cold calling platform or a ringless voice, or text messaging platform. So there’s many various ways that you can do that. But again, all of the data, all of the information is stored within Invelo, so we can provide you with those KPIs.

Anson:
Which is huge. Because even if you’re not using something that you don’t provide in here, like texting. You could still track those KPIs inside of here, which is huge. It used to be a huge pain in the butt to try to do this with any other CRM that I’ve used anyways.

Justin:
Right. And with our Zapier connection that we’re adding into the system, you’ll be able to actually send those Zaps to the third-party platform, so it’s a lot more seamless and automated.

Anson:
So from the very top, you’re automatically adding things to your marketing list and you’re automatically scrubbing them, which is awesome, which then go into your prospects. But now you’re continuously updating your marketing if it meets those same criteria, and then starting them the right way inside of the sequence. So if something becomes vacant two months into the sequence, it’ll automatically just put them to the top, and send them the first thing instead of the third thing.

Justin:
That’s correct.

Anson:
Is that-

Justin:
Yes.

Anson:
Does that make sense?

Justin:
Yes.

Anson:
Wow. So yeah, that makes sense. That’s like all the way down, making it super easy for you because this used to be crazy to try to do multi-touch campaign. And then you had a bunch of new leads that come in or a bunch of new prospects that you’re pulling in, and then you’re trying to start them from the top while you’re trying to keep these at the third one. Oh man.

Justin:
And this is a huge issue for a lot of people that are doing driving for dollars and getting a couple of 100 a week, or they have tax liens that they pull every month, and they’re like, all right, well, I have a new list and I want to put it through this campaign, but how do I? Do I create another campaign with just a couple of 100? Or do I put them into the existing campaign and inject them into wherever they are in that campaign in the sequence? So it was always a struggle for investors on how to figure that out and make sure that they were moving it along the same flow as any other record that would be in this campaign.

Anson:
Yeah, that’s a huge headache. I mean, especially on that driving for dollars example, now all you have to have is just the address. You push it into Invelo, it automatically fills in the mailing address info and any of the other information that you would go manually look up. But now all the way down to marketing, the new ones that you’re adding are in the correct sequence, and they’re automatically just being pushed into your marketing funnel.

Justin:
Again, there’s a lot more features and functionality behind marketing. It gets pretty advanced, but we can also keep it very simplistic so the user can go through nice and easy, select which preset they want, follow the prompts, and start the campaign very quickly.

Anson:
Just go do one touch postcard or set up a three mailing sequence to see how their driving for dollars list is performing.

Justin:
Right. And as you can see, if I click this drop down here, we can also get access to all of the active leads’ followup campaigns. So you can also-

Anson:
Oh, that’s right. Because the leads had a different sequence or a different set of marketing just automatically in there.

Justin:
Yes.

Anson:
Okay.

Justin:
You can even set it up so you can create a status that says followup needed. And any time a record goes into that status, it automatically triggers the followup campaign.

Anson:
Oh wow. Okay. So you don’t even have to think about it, you just move the card over, and then they’re just added to the marketing. And you don’t have to really think about it as long as you’ve set it up the way that you like it.

Justin:
Absolutely.

Anson:
Oh wow. Okay.

Justin:
So again, there’s a lot of functionality that goes behind the marketing, but we try to make it and automate it so it’s very easy. So the things that most investors have to really think about and the inconvenience or inefficiencies of thinking about, did I remove the solds? Which campaign do I add these people to? We really try to take that away from the investors, because we know you’re busy doing other stuff, you shouldn’t have to be thinking about this. We really automate the whole process for you.

Anson:
Yeah, my brain’s already turning because I can see a bunch of time is saved through this system. And then also where you can scale a little bit quicker and not have to maybe even hire somebody to watch your marketing like a hawk. Because if you set this up, you can get pretty far with just automation, and having it scrub your list, and then having it automatically send out mail based on followup or based on added prospects, you can actually save a bunch of time and money by just having this already set up in here.

Justin:
Yes. Yeah, there’s countless times where I hear investors talking about hiring virtual assistants just to scrub the sold properties off of their database, and this just does it automatically for you. That’s just one little area-

Anson:
Yeah, I’ve been there.

Justin:
… of where the automation can take over, and really help out and save a lot of time.

Anson:
Yeah, I think anybody who’s done any kind of amount of marketing has been there, where they’re trying to hire this out or trying to beat up an Excel spreadsheet to do it for you. But none of us know how to program those things.

Justin:
The only one last area that I just want to show you is our education portal, because this is something that we are truly passionate about and really try to provide additional value to our users. Because the goal for us is to provide best practices, and help them through the platform through education. So we’re not just giving everybody a software and say, hey, good luck. We really want to provide them with the education and understanding of how the logical step should be to go through and be as successful as they possibly can. So within the academy, we have Invelo training, that really goes through every aspect of starting out, to mindset, to how to find properties, how to talk to sellers, how to put deals together. So we go through all of these, we have all these videos. In addition to that, we have industry experts teaching all master classes.
We have new master classes coming in the pipeline every single month, from people within the real estate investment industry and even outside. So we know that entrepreneurship, it’s more than just focused on real estate investing, it takes over your whole life. So we really focus on, and we have fitness experts, health experts, psychologists coming in, people talking about how to manage being a great parent and a spouse while trying to start a business or run a business. So we understand that people have all those challenges and we really try to get advocate and show people that these are how people get through it. These are how really successful people that have built amazing businesses have done it. And you’re not the only one. Other people have these challenges, and you are within the community that people really value this.

Anson:
Yeah, I see just a ton of names, big names here. I think that, that’s what a lot of companies are missing is this holistic approach to not only teaching the platform, which is a no-brainer, like this is how you use Invelo. But now you’re talking about how to talk to sellers, and then how to keep talent. How women in investing, the different roadblocks. It is this whole thing where, yeah, you just going through these master classes alone is totally worth it. That’s crazy.

Justin:
You nailed it. Holistically, our approach is a holistic approach. We’re not just really honing in on just real estate investing. There’s so many other aspects to entrepreneurship, so we really want to provide that value. And that’s the approach that we take is, how do we get all the users successful? And that’s really where we hone in on for our Invelo training is, this is how to become a successful investor, and here’s how Invelo can help you get there faster. So we always try to provide that value first and foremost, and then how the platform can help you get there.

Anson:
That’s huge. Not a lot of companies think about that whole investor, because it’s not just sending out mail, it’s all those other things, like you’re also a parent and you need to go work out or do whatever you need to do. And then if the investor is successful, of course you as a company’s going to be successful because you’ve helped them get there, and they’re going to remember that of course.

Justin:
So that’s everything. That’s the demo that I wanted to take you through. Hopefully you enjoyed that, and you got a lot from it.

Anson:
Yeah, absolutely. This is crazy. So just from A to Z, just the little bit that you showed me, and I’ll be going back through the Invelo training too, to learn how to do some of these other things. But I’m super excited because this solves a lot of problems that I didn’t even know I had, and now I know that they could be solved. All right, Justin, thanks for that demo. That was hugely helpful. Where can people go to find out more about you and contact you?

Justin:
The best area is to go to our website, inveloapp.com. And it’s I-N-V-E-L-O A-P-P.com. That is the best place that they can go to learn more about Invelo.

Anson:
Nice.

Justin:
How about you Anson? How can people get a hold of you?

Anson:
You can find me on BiggerPockets, Anson Young there, or on Instagram @younganson, or on YouTube or wherever else you can find my name. So I’m out there somewhere.

Justin:
Awesome.

Anson:
All right, so back to you guys over there, and we’ll wrap up here.

Rob:
Okay. Well, that’s a really cool tool, man. I feel like I’m ready to go out and get really just discounted off market deals. That’s legitimately my new mission for 2022. So this comes at a pretty good time.

David:
I’ll tell you what, BiggerPockets is getting… we’re getting better and better at finding the tools that somebody needs to achieve what they want. I remember a couple of years ago, just only a couple of years ago, we were having these conversations with people to say, how are you doing this? And they were just grinding their way. They were calling the city and requesting a list of people that were in violation of not paying their taxes, or had unpaid utility bills or something, and they were physically calling those people. And then we had a robo dialer for the first time ever, they could automatically dial, and it would save you time. And that was amazing technology. And now, we’re putting together a list that you have the highest likelihood of hitting a motivated seller, and the software’s doing all of it for you. It’s almost unfair how easy this is becoming compared to how people had to do this five or 10 years ago.

Rob:
That’s right. Yeah, technology makes things a lot easier. And a really cool thing, probably the coolest thing about Invelo is that it is now included in the all new BiggerPockets Pro membership. So if you sign up for BiggerPockets Pro, they just supercharge it with all these insane benefits. And you’ll get free access plus $50 in marketing credits to in Invelo, which is awesome.

David:
When it comes to real estate, I live my life one quarter mile at a time, and BiggerPockets is my 10-second car. That’s exactly right. People thought if you’re not being teased by what everything Invelo can do, you can get access to this if you become a BiggerPockets Pro member, as well as several other cool things. They have a rehab estimator tool that’s simply fantastic. That’s one of the number one questions that we get asked is, how do I calculate the cost of rehab? There’s now a calculator that can do that for you. So you can go find the deal, you can put the deal under contract, you can close on the deal, you can estimate it, you can get all the numbers that you need for what the rehab’s going to cost, what the rent’s going to be, all within the BiggerPockets ecosystem.

Rob:
But wait, David. But wait, there is more. I know you were like, are we done? I’m like, no, there is more my friend. You also get Rent Ready’s property management software with the all new BiggerPockets Pro, which is awesome too. So you’re getting a ton of value. And if you use promo code New Pro, you’ll actually get 20% off your first year of the Pro annual membership, which again, supercharged here and it’s now your one stop shop to get to start scale and manage your whole real estate portfolio, which is, that’s a dream come true for all of us just getting our start here, man.

David:
It’s a dream come true if you want a better life. That’s absolutely true. If you want the same life you have. If you want a boring life, if you want to be grinding away at a job you probably don’t love until you’re too old, and bent over, and aged to enjoy life, well, hey, keep doing what you’re doing. But if you want a better life and if you want to have a haircut like Rob’s, this is how I’d recommend you get there.

Rob:
That’s right. So again, so if you use promo code New Pro, N-E-W P-R-O, you’ll get 20% off your first year of a Pro annual membership. Other than that, Dave, where can people find out more about you online?

David:
Well, they can use that promo code at biggerpockets.com/proupgrade, and you can get all the information there. And then like Rob said, use the code New Pro. And then once you do that, go online and tell me that you signed up for a Pro. You can find me on social media @davidgreene24, LinkedIn, Instagram, Facebook, everywhere. And you can find me on YouTube at David Greene Real Estate. This is David Greene for Rob Headshot Abasolo, signing out.

Throughout 2022, mortgage rates have more than doubled, sending affordability and demand in the housing market down sharply. With lower demand, lower prices often follow, which is why we’re in the midst of a housing market correction. I believe this correction has been caused primarily by rapidly rising mortgage rates and will last for as long as rates keep rising. The question, then, is, what will happen to mortgage rates next year? 

Given that the Fed announced another 75 basis point hike in the Federal Funds Rate (FFR) last week, many are expecting mortgage rates to keep rising. The Fed has stated that they intend to keep raising the FFR through this year and at least into the beginning of next year. This has many expecting mortgage rates to shoot up to 8% or perhaps even higher in 2023 (the average mortgage rate is about 7.1% as of writing). 

However, many prominent forecasters are calling for mortgage rates to drop in 2023. The Mortgage Bankers Association expects rates to end in 2023 at around 5.4%. Economist Mark Zandi expects rates to fall modestly to 6.5%. Rick Sharga of ATTOM data sees rates peaking around 8%, then falling to below 6% by the end of 2023. Logan Motashami thinks it’s feasible that mortgage rates will come down next year. 

What’s that all about? If the Fed has told us they’re raising rates, and there is all this economic uncertainty, how could rates fall? I know this seems crazy, but this forecast has economic logic, so we should look into it.

The Fed Doesn’t Directly Control Mortgage Rates

First, we must remember that the Fed does not control mortgage rates. When the Fed says they’re “raising rates,” they’re talking about the Federal Funds Rate (FFR), which informs, but does not control mortgage rates (or credit cards, car loans, etc.). So while the Fed only indirectly impacts mortgage rates, they are directly impacted by the yield on the 10-year Treasury bond. 

I measured the correlation between the yield on the bond and mortgage rates, and it’s super high at .99. But you don’t need to do any math to understand this. You can see this in the chart below—mortgage rates and the yield on the 10-year bond move together. 

The 10-year yield and mortgage rates move in lockstep because of how banks make money and manage their risk/reward profile. Imagine you’re a bank with billions of dollars to loan out. Every day you have to evaluate who to loan your money to, how risky each potential loan is, and what profit (interest rate) you need to earn in order to compensate for the risk. The interest rate on a loan goes up according to how risky the lender deems the loan. 

The least risky loan in the world is lending to the U.S. government in the form of a bond (called a Treasury Bill). That’s all a Treasury Bill is—a loan to the U.S. government. And it’s very low risk because the U.S. government has never defaulted on its debts. To date, the U.S. has made every single bond payment it’s obligated to pay, so it’s very low risk for a bank or any other investor to hold U.S. bonds. 

Right now, the yield you earn on a 10-year Treasury security is about 4%. So a bank can earn 4% interest with pretty much no risk. But banks want to earn more than 4%, so they make loans to businesses and individuals, often in the form of mortgages, in addition to buying treasuries and lending to the U.S. government. 

Mortgages are not particularly risky in the grand scheme of things, but any person taking out a mortgage is still less creditworthy than the U.S. government. So, if the bank is going to lend money for a mortgage, they are taking on more risk than they would if they instead lent that money to the U.S. government. To compensate for that increased risk, the bank is going to charge you a higher interest rate. Typically, banks charge about 170 basis points (a basis point equals 0.01, so 170 basis points equals 1.7%) over the yield on the 10-year Treasury bond for a 30-year fixed-rate mortgage. 

How Could Mortgage Rates Fall in 2023?

There are two theories: 

First, bond yields could fall and take mortgage rates down with them. Many economists are predicting a global recession in 2023. During a recession, investors tend to look for low-risk investments, and as we’ve discussed, the lowest-risk investment in the world is a U.S. Treasury bill. This surge of demand for U.S. Treasuries could drive up the price of bonds (more demand equals higher prices), which drives down yields because bond prices and yields are inversely related. 

So the main reason mortgage rates could fall in 2023 is because we could enter a global recession, raising demand for U.S. Treasuries, which sends bond yields and mortgage rates down. 

The second reason mortgage rates could fall in 2023 is due to the current spread between yields and mortgage rates. Remember when I said that banks charge mortgage borrowers a premium on top of bond yields due to excess risk, and that premium is usually 170 basis points? Well, right now, that premium is 292 basis points, 72% above the normal spread! 

The spread tends to increase when there is a lot of economic uncertainty. Just check out the graph below. Since 2000, the spread has gone significantly above 200 basis points just three times: the Great Recession, the beginning of the pandemic, and now. The current spread is the highest it’s been since 1986. 

We’re still in an uncertain period, but over the course of 2023, things could become more clear (let’s hope). If inflation starts to come down and the Fed pauses or even reverses its rate hikes, I would expect the spread between the 10-year yield and mortgage rates to normalize a bit, which could bring down mortgage rates, even if yields stay high. 

Conclusion

Of course, we don’t know exactly what will happen, but it’s important to understand that there is a reasonable scenario where mortgage rates fall in 2023. 

Nadia Evangelou, the Senior Economist and Director of Real Estate Research for the National Association of Realtors, summarized the situation well when she said there are three likely scenarios in 2023. “In scenario #1, inflation continues to remain high, forcing the Fed to raise interest rates repeatedly. That means mortgage rates will keep climbing, possibly near 8.5 percent. In scenario #2, the consumer price index responds more to the Fed’s rate hikes, and there is a gradual deceleration of inflation, causing mortgage rates to stabilize near 7 percent to 7.5 percent for 2023. In scenario #3, the Fed raises rates repeatedly to curb inflation and the economy falls into a recession. This could cause rates to likely drop to 5 percent.” 

This makes sense to me. It means we’re just going to have to see what happens with inflation to know which way mortgage rates (and potentially housing prices) will head next year. 

Do any of these scenarios make sense to you? What do you think is the most likely outcome in 2023? Let me know in the comments below! 

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

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

Downsides of Owning Real Estate

Being a landlord

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

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

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

Being the asset manager

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

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

Here are some responsibilities as an asset manager:

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

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

Starting small

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

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

House hacking

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

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

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

Smarter Ways To Build Wealth

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

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

Investing in a syndication

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

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

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

Being a general partner

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

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

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

Diversification

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

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

What’s Your Passion?

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

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

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

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

David:
This is the BiggerPockets Podcast show 684.

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

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

Parker:
Yes, sir.

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

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

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

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

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

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

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

Parker:
Yes.

David:
Okay. All right. Continue.

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

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

Parker:
Yeah.

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

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

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

Parker:
100, yes.

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

Parker:
No.

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

Parker:
Mm-hmm.

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

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

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

Parker:
Yes, I think so.

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

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

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

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

David:
Can you do that and have another job?

Parker:
Oh, I think so.

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

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

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

Parker:
Okay.

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

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

David:
Yes. No. Take your guess.

Parker:
Well, why only three bedrooms?

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

Parker:
Yeah.

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

Parker:
Yeah. Yeah.

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

Parker:
Yeah. That’s fair.

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

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

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

Parker:
Yeah.

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

Parker:
I have. Yes.

David:
Are you a high C?

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

David:
D. What was your second trait?

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

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

Parker:
Yeah.

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

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

David:
You’re going to house hack?

Parker:
Oh, I’m going to house hack.

David:
Well, would you rent by the room?

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

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

Parker:
Yeah.

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

Parker:
Yeah.

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

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

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

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

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

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

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