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Dave:
Hey, what’s going on, everyone? Welcome to On The Market. I am super excited that you are all joining me here today for my conversation with Cal Inman, who is the creator and principal of ClimateCheck. ClimateCheck is a website that provides really cool and pretty unique data about what risks exist based on your property for climate. So, whether that’s wildfires or floods or extreme winds or hurricane, basically, every property in the country has some level of risk from natural disaster or climate. And depending on where you live, it could be really different.
Obviously, I talk about this a little bit in the episode. In Colorado, we have a lot of risk of wildfire. I experience that directly with one of my properties, but if you live on the coast, maybe it’s hurricane or wind or flooding or something like that. This data that Cal and his team have created can be a really helpful asset to investors when they’re underwriting their deals. Whether you are predicting or trying to figure out where you want to invest next or if you’re looking at a particular property and want to understand the risk, that is really helpful when you’re trying to understand what you should be buying. That’s what we’re going to talk all about today, as well as some strategies that you can use to mitigate any of those risks.
So, with no further ado, let’s get into my conversation with Cal Inman, the creator and principal at ClimateCheck. Cal Inman, welcome to On The Market. Thank you so much for being here today.

Cal:
Hey, thanks for having me.

Dave:
I’ve previously looked into your background and you are a real estate developer, a real estate investor, a grad school lecturer at UC Berkeley, and the creator and principal at ClimateCheck. So, can you just tell us a little bit about your background briefly and how you got into all these things, being a real estate developer and ultimately the founder of ClimateCheck?

Cal:
Yeah, I guess it sounds like a lot when you put it like that. I have a short attention span, I think, is the executive summary. I grew up in the Bay Area. My father was a journalist and he covered real estate news. So, I got a deep dive into interviewing all these real estate developers and I was just totally intrigued by it, worked for a developer, cut my teeth, learned a lot about the process, went out on my own, started doing small single family, then rolled that into apartments, then did more commercial style buildings, small office, small retail, did that from 2009 to 2016 or so, then started lecturing at UC Berkeley Masters in Real Estate Development. That was cool and I still do that. It’s a great experience. The folks in there are just super excited to go build buildings, invest.
While I was there, I came across this climate data and we had rental properties. Yeah, super curious how they’re going to be affected by climate change. You read about climate change in the news. Iceberg’s melting. This is existential risk that’s going to affect everyone. How are my properties going to be affected? Are my properties in West Oakland along the San Francisco Bay going to flood with sea level rise? Is there going to be another fire in the Oakland Hills that I experienced when I was a kid? Are those rental properties at risk for burning? Tried to search for the information and it wasn’t really available.
And I’d primarily think about it when I was renewing insurance policies, but then I came across these climate risk data sets. And the next thing I found out was that a lot of big institutional developers and investors, big LPs were using this data to inform their real estate decisions, their due diligence, how they’re going to improve properties, what properties they’re going to dispose of, how they’re structuring their insurance policies. It felt like I deserved access to this information too. Smaller single family homeowners deserve access this information. That’s set me on a new trajectory toward climate data and building ClimateCheck.

Dave:
That’s a really interesting story. I do want to get all into to ClimateCheck, but now, I’m curious just about your own real estate investing first. Are you still developing properties and buying rental properties, and are you primarily still doing that in the Bay Area of California?

Cal:
Here in the Bay Area, yield on investments is tough. There’s too much capital in the market and I haven’t been able to really make deals pencil for the last four years. I was early to exit. I still invest in real estate. I still own property, but I’m not an active sponsor in ground up real estate development deals at all. I’m 120% into this data world. I still lecture at UC Berkeley. So, I still keep my foot in it. A lot of friends are still active and I invest in deals still. So, I’d say I’m still active, but I’m not out there boots on the ground, buying parcels, building buildings.

Dave:
Got it. All right. Well, let’s get into the data. Obviously, that is my area of interest and expertise. You said you were lecturing, you were curious. What was your first encounter with this information and what data is it? What are you actually physically looking at when you talk about climate-related data?

Cal:
Yeah, totally. It’s a really good question. So, when we talk about physical climate risk data, we’re looking at how natural hazards are going to increase or decrease in intensity moving into the future. And so, that we look at six hazards, wildfire, flood, which is more complex, we can come back to that, extreme heat, extreme precipitation, drought, and high winds. And so, we look at what’s the risk profile of each of these perils today and then what’s the risk profile in the future and how’s that changing.
So, when we look at something like flood, for instance, we measure what’s the probability it’s going to happen and then what’s the intensity of it. So, in the future, we have a 40% chance of a two-foot flood on your parcel at 123 Main Street. And so, we try to take these very complex concepts and make them easy to understand, because I think most people get basic percent chance of a flood happening that’s a foot deep. So, we give a 1 through 100 score of risk rating, 100 being the riskiest, 1 being the safest, and then we give these metrics alongside it.

Dave:
How do most real estate investors or homeowners for that matter, I assume, both groups use your tool? How do they use this data?

Cal:
Yeah. So, I’d say the primary group using this information are investors, the folks on the equity part of the capital stack, private equity, REITs, and they’re using it the same way they look at any risk data, due diligence of new assets when we buy a new industrial asset that’s across docking station or a multi-family property. Whatever you’re buying, we do a lot of due diligence. I mean, protecting our downside in real estate is 90% of the work and then creating the value is the last 10%. So, when we look at all these factors, are there underground storage tanks? What’s the market risk? What’s the risk of the tenants? What’s the risk of the municipality, climate risk?
The risk of these natural hazards increasing into the future fits nicely into that due diligence process. So, I’d say that’s the first way it’s used. Second way is just overall portfolio analytics. Let’s look at existing portfolios every year and let’s understand what the risk profile of it is. And the last way it’s used is to inform investment thesis. So, we have a portfolio of properties. We might have an outsized exposure to risk to a certain hazard, and we might want to diversify into other regions with different risks or less of that risk.

Dave:
Got it. That makes sense. So, it sounds like people when you’re buying a new asset are using this to understand their own risk. And then when you’re building a portfolio or perhaps even looking for insurance policies, this could be another time to start using this data. So, you mentioned that institutional investors were previously using this data. Have they always been looking at climate risk and now it’s becoming more important or is this a totally new data set to the real estate investing industry?

Cal:
Yeah, I mean, that’s a good question. I mean, it’s a relatively new data set. We’re bringing more and more data. I mean, even when you look at phase one environmental data, this is relatively new, the ’80s and the ’90s. And then by the late ’90s just became completely ubiquitous. Every commercial property we buy, we get a phase one report on. We’re seeing the same progression here for climate risk reports. It’s becoming best practices. I think you’ll find most REITs, big private equity shops are using this data when they’re buying new assets.
And as more and more folks use it, the rest of the investors want to also be looking at it, because possibly, when you’re buying a property that you want to sell in three to seven years, if the buyer of that property is looking at this data, you want to be aware of it before you purchase that property, because it’s going to affect your exit value and ultimately affect your IRR, which is what we’re looking at when we’re investors. What’s the return? That exit, that disposition value is probably the biggest chunk in your IRR calculation as an investor. So, I think to boil it down, I think that’s probably the most important reason and why most people are starting to ingest this data.

Dave:
That’s really interesting. I didn’t think about that, because obviously, as an investor, if you’re at risk for flood or wildfire, you want to know that during your hold period, but especially if you’re buying a multi-family or something that’s going to be purchased by an institutional buyer like a hedge fund or a private equity firm coming in there. If they’re, as you’re saying, looking at this, then you should be basing your valuations off the same thing that they’re going to be basing their valuations off. So, that’s super interesting. Are you creating this data? Do you have your own climate models or are you aggregating other data from sources?

Cal:
Yeah. Yeah. What are the inputs? So, I mean, our team is 100% product focused. So, it’s a team of data scientists, climatologists, and they’re a lot smarter than me. What they do is aggregate all the best climate data, downscaled climate data, academic data, government data, bring it all into one place, synthesize it in some ways. So, we can search it on a parcel level and then query it for the information that’s useful for you when you’re buying a new property. We do some in-house modeling where there’s gaps in that data. But I think if you think about it like a cake, all of the ingredients we get are academic and government sources.

Dave:
Okay. So, you’re taking all these third-party sources, and like you said, connecting them. So, that if I say I have 123 Main Street, you could have all this different data related to that property and as an investor or homeowner, you can get a good sense of what the risk is.

Cal:
Oh, yeah. I tend to oversimplify it. So, if you look at flooding for instance at your property at 123 Main Street, we use government elevation maps, which are topographic maps. We use government information and data around what soil type is at that property. And then we’ll use these projected climate models to understand the future rainfall volumes and then we’ll do a flood model of the entire United States. We’ll understand at your property at 123 Main Street, “Does water accumulate there and what’s the depth of it?” So, there’s a lot of synthesis in modeling into it, but again, all those fundamental building blocks are all government and academic data sources.

Dave:
Got it. I actually came across your company, because I about a year or so ago was investing or looking to invest in a multi-family syndication in Houston. And I talked to a friend who used to live in Houston and he was like, “Man, you got to make sure you’re not in a flood plane in Houston.” And I was like, “Oh, man, I’ve never even thought about something like that.” And so, I started Googling all this information and came across ClimateCheck, but all sorts of data sets that was complicated. It was hard to understand.
So, I definitely appreciate that you and your company are making it easier for people to simply understand what’s going on there. Now, of course, some climate risk has always existed, right? Floods have always existed. There have been wildfires. What does the data tell you about how the quantity and severity of climate risk is changing over time?

Cal:
Yeah. I mean, I think every hazard’s different, first of all, and every region’s different and even every neighborhood’s different. We have different exposure to risk. And I think that’s why it’s really important to understand the data on a granular local level, because the story’s different everywhere. But I’d say overarching themes, we’re seeing an increased frequency and severity of the fundamental pieces of climate change, which are precipitation and heat. We’re seeing more hot days and hotter days moving into the future and talking over a pretty big window of time, 10, 20, 30, 40 years.
We’re also seeing a higher frequency of heavy rainfall events and those two things feed into the rest of these hazards. So, we’re seeing an increased frequency of flooding and deeper floods, more inundation, and same with fire. Some regions are getting better and they’re all changing. That hazards that each community’s exposed to are different, but there is a higher frequency of these events.

Dave:
Have you seen yet that the availability of this data and the increased risk of climate hazards, has it yet impacted home buyer decisions?

Cal:
I think on the home buyer level, there’s a lot going into that transaction and a lot of it’s emotional, but I think it starts with where’s my job. Okay, I’m a remote worker. Where’s my family? What’s the school district? Probably the first question, what’s the price point? There’s all these factors that go in and same with the commercial real estate transaction. We’re looking a lot of things, yield, demographics.
So, this is one data point alongside all these other things that we think about in a transaction, whether you’re a home buyer or whether you’re an investor. But to answer your question, there aren’t strong signals right now impacting value and climate risk. That being said, as more and more people ingest it and particularly once lenders start ingesting the data, we see a world where that does start affecting values and something we need to think about.

Dave:
Interesting. The appraisal, for example, might be impacted on a lender or similar to how a lot of mortgage companies won’t lend on a property that’s not up to code or needs a ton of rehab work. If there is a property that has a significant amount of climate risk, it might be difficult to get a loan. I had not thought about that at all, but that’s a really interesting point. When I was thinking about this show, my immediate thought went to insurance, right? Because you already start to see that, that insurance in places where there’s risk of hurricane or flooding or wildfires or whatever, those have gone up a lot recently and are probably continuing to do so. Do insurance companies use this data currently, your data or any data like this when they’re evaluating properties?

Cal:
Yeah, we don’t license into the insurance industry, but they look at all sorts of data. I think fundamentally, they’re underwriting your policy with something called a catastrophic risk model, which looks at historical data. But if you think about what an insurer is giving you, they’re giving you a policy that covers you for one year into the future. And when we’re looking at these signals and climate risk, the profile of each of these hazards is changing slowly over time.
So, if they’re only going to ensure you for one year, that 10-, 20-year look isn’t so important for insurers and they can adjust their risk as insurer by changing the premium. Exactly what we’ve seen, right? We have a property here in Northern California and insurance has tripled in the last two years because of wildfire risk. So, I think the alignment of the insurer versus the owner and the lender, it’s different. And I think the owner and lender need to take a longer look.

Dave:
That’s interesting. So, the risk that you’re modeling out is over 10 or 20 years. And obviously, it seems like with all things climate, the change is modest on a year-to-year basis, but it’s the long term trend that is concerning. Because the insurer base gets to reset their own risk, they get to re underwrite it once a year. They’re not too concerned about it as long as the consumers are still willing to pay that increased premium.

Cal:
Yeah. Yeah, exactly. And I think in insurers care, I’m not writing them off, but I think it’s customers’ perception, customer education on their end and helping people understand why these premiums are increasing. But I think building it into their model and how they price the premium, I think it’s less important.

Dave:
So, I had this experience, I guess, it was in 2020. I have a short term rental in the Colorado Mountains. Similar to California, a lot of increase in wildfire activity. My sister was actually staying at the property for the first time ever and called me and had to evacuate because there is a wildfire in the area. Fortunately, didn’t lose the house, but it really got me very nervous and got me to beef up my insurance policy.
But for a while, I couldn’t even find an insurance policy that met my criteria. I wanted to make sure I had business interruption insurance. I wanted to make sure that the replacement value was keeping up with the cost of construction and all these things. And it made me worried that in the future, some of these properties that are either like mine in wildfire risk or coastal or in a flood plain, is there a risk in your opinion that they will be uninsurable at any point?

Cal:
Yeah. I mean, we’ve seen that happen in California here. Folks can’t find insurance and the state is having to step in and create policy to help people get insurance. So, yeah, there are these risks. I think ultimately, you can get insurance. What’s the premium you have to pay for that risk? How does that affect us as investors? I mean, insurance is a line item on our cost. It increases our OPEX. If that expands too much, alongside all the other factors, maintenance and repair, which is also affected by these hazards, ultimately affects our net operating income and the yield of these investments. So, I think it’s an important factor to look at.

Dave:
Yeah, that makes a lot of sense. And I guess for me, traditionally, having underwritten deals and analyzing deals, insurance is not something I normally think about that much, to be honest. It is what it is. You assign some standard inflation pegged increase in costs. Premiums go up 5%, 10%. But especially in these riskier areas, I understand that owning a property in the mountains in Colorado is risky and will become riskier over time. I should probably rethink how I’m modeling those premiums and make sure that the numbers still make sense on those kinds of deals.

Cal:
Yeah. And I think also, with the data, I mean for your property in Colorado, you can start understanding the risk, right? You’re aware of it. It’s a tangible risk. You’ve experienced it in evacuation. Next step is quantify the risk, put rails around, understand what the risk really is. Insurance is an impact and line item impact, but there’s CAPEX projects you can do on that property to reduce the risk. That’s really how folks use the data.
We give the risk data and then the next step is, “How do we protect ourselves?” You can clear brush around the building. You could put smaller vents over your roof fence, finer roof fence. So, embers don’t fly in. There’s very simple, inexpensive things you can do to that home, to that rental property to reduce your risk of loss, some type of insurable event happening to that specific property.

Dave:
That’s super interesting.

Cal:
Yeah. More than just quantifying how your insurance is going to increase over time, but what can we do to protect ourselves, protect our homes, protect our communities?

Dave:
Right, right. Yeah. This place in Colorado I have, there’s an HOA. It’s a small HOA, but the HOA basically exist for fire safety and they clear brush. They offer these wood chipping programs, where if you clear brush, they’ll come around and do wood chipping. They put in three cisterns and retention ponds in the community in case there is fire. So, I definitely resonate with what you’re saying. Somehow I get all of that for $20 a month. That’s all the HOA costs. I don’t really know how that happens, but it seems like a great service to me.
So, I’m lucky in that I have some of those resources, but in your effort and your company’s effort to bring this data and information to mom-and-pop investors and not just having these institutional investors use this, is there a place where our audience and listeners can go to learn some of those commonsense ways that they can mitigate risk and protect themselves against climate risks in their area?

Cal:
Yeah, totally. I mean, go to our website, pull a report on your property. We give a 35-page deep dive into climate risk. With each hazard that we cover, we give ways you can mitigate those risks, ways you can adapt your property to prevent damage. They’re pretty easy things. We list them from the least expensive to the most expensive. So, yeah, we want to be a resource for folks to protect their properties. The goal is not to scare you and get you to sell your property in Colorado, but more how can we help you and how can we help you reduce your risk?

Dave:
Got it. Yeah, that makes a lot of sense. Obviously, people are going to live in these places. It’s about adapting and making sure that just like with anything in your business, you understand risk and are taking the proper steps to mitigate it. I want to ask you, because you have experiences as a developer, do you see this increased climate risk and some of this data that’s coming out influencing developers? I guess specifically I’m curious the type of buildings that they’re creating, are they more climate resistance in some way? And the places where they’re building, are they building more in areas where there is less risk or is that something that is just maybe going to come in the future?

Cal:
It’s a really good question. It depends on the hazard and it depends on the developer and the type of development. The safest places in general that we see across the data and particularly for wildfire are urban environments, urban infill, right? We’ve built these natural protections. We have fire departments. We’ve got some space from the wildlife where the trees are, where the burns happen. We did a study with Redfin where a lot of new developments happen in the wildlife urban interface, right? Greenfield, suburban developments, alongside the edge of the forest where fires happen.
So, we are building the newer suburban areas into these higher risk locations for wildfire. So, those development patterns are a little concerning. I think it’s something that folks need to be aware of when they’re thinking about a location for development and what the investment thesis is around where to build.

Dave:
Yeah. That’s always been a question of mine, because you start to hear about honestly, a premium for some of these features. As a consumer, a lot of people want climate neutral or climate safe buildings. Like you said, do they have the vents? Do they have defensible space? I’m not super versed on what the other mitigation strategies are, but it seems like not only is there a societal benefit opportunity, but there is an economic opportunity for developers to be considering these things as they are building new properties.

Cal:
Yeah, completely. Understand the risks, address them, and I think that takes friction out of the transaction. Whether you’re renting the property or selling it to a homeowner or selling it to another investor, this information’s becoming more and more ubiquitous, right? So, the buyer knows, the renter knows about it, but say, “Hey, look, we understand these risks are here and we’ve done these three things to help mitigate the risks.” And then it helps you move on from that point.

Dave:
I’m not sure if you’ve had data about this, but I’ll put you on the spot. It makes me wonder if consumers will be asking for this in a rental situation too, right? I can imagine being a home buyer, it’s your first home. You’re in Colorado or California and you’ve experienced these things. You’re worried about wildfires or floods or whatever. I wonder if renters are going to start approaching their rental decisions with the same type of concerns and demands from their rental properties. Do you know anything about that at all?

Cal:
I mean, you could imagine, right? I mean, it depends on the market. If it’s supply constrained, you’re going to rent what you can get. And I think it’s the same thing from investment, right? Supply constrained, you’re going to chase yield and buy the property you can get. But I think there’s a world where everyone starts looking at this and want to understand it, because look, if there’s a flood event, a renter’s impacted, right? There’s loss to them. There’s displacement. We do find that people search for hazards that they are familiar with, right? You’ve had an experience with wildfire, folks in New Orleans, Houston. Hurricane areas have experiences with flood, whether it’s storm surge or surface flooding.
It’s been part of their life and something they think about. It’s an intuitive risk for them, for their location. So, we’ll see people searching risks that they understand, even if they’re moving to a new market. And so, really, what we’re trying to do is make everyone aware of all the risks, especially as we’re moving to different states, different cities. I think there’s a lot of good information in there that might not be as intuitive for people, but it’s intuitive for the people that live there and have experienced those risks.

Dave:
Yeah. That makes total sense. I mean, now, I’m always thinking about wildfires, because I have this hopefully one-off experience. I lived in Colorado for 10 years. I’m sure in California, you hear about it every summer. You go camping and you can have a fire or you can see the smoke. These experiences, they impact you for sure and they definitely make you think about how you can protect yourself. Do you have any data or high level stats about the general risk in the country? Are most homes at severe risk of some climate emergency or issue, or is this just limited to some of the cities that we’ve talked about so far?

Cal:
Yeah, I think everywhere is impacted. I mean the answer to that is there’s risk everywhere. What is the risk? We think about the Southwest and extreme heat risk, something we haven’t talked about today much, but this is a big risk. There’s going to be a huge increase in the number of extreme hot days. How does that affect you as a renter, as a homeowner, as an investor? There’s going to be increased utility costs for AC. There’s quality of life issues. We think about coastal cities and sea level rise. This is a big one.
Flooding is pretty consistent across the US. A lot of areas are exposed to different types of flooding. Drought in the West, we’re seeing a lot more drought. So, again, it’s really region specific, but everywhere carries some type of change in your exposure to these natural hazards. So, it’s not necessarily one thing everyone’s going to experience, but we all carry some risk to climate change.

Dave:
Yeah, absolutely. It seems like it’s like a Whack-A-Mole thing. You look for one area. It’s like, “I don’t want to be near a flood,” and it’s like, “Okay, you don’t need to be near flood, but you’re going to get some wildfire.” It’s like, “Well, I don’t want wildfire. Well, you’re going to get some extreme risk.” It just shows the breadth of the challenge and the situation we’re all going to be dealing with over the next couple of decades. Are there any areas in the US or even in the world that are more climate… I think the word’s resilient and I don’t mean in terms of infrastructure, how prepared people are. I mean, from a natural sense, are there certain areas that have relatively less climate risk?

Cal:
I think as you move north more, certain risks decrease, get away from the coasts. I think urban core’s probably the safest answer. And I think those community municipal adaptation strategies, building a sea wall, building a fire break around the city, those are really important.
How are we adapting as communities? Because these risks exist and it’s not like everyone’s going to leave the United States and go to Canada or something, but how are we dealing with it as a community? Are we putting bonds in place to create adaptation strategies, to keep the local communities safe? So, I think a lot of this is about just engagement discussion around the risks and figuring out, “What are strategies in individual property level and then what our strategy is as a neighborhood in a community?”

Dave:
Yeah, that makes sense. I don’t know if you know this, I live in the Netherlands, in Amsterdam. I think it’s about 26% of the Netherlands naturally is below sea level. They have reclaimed a lot of land. They pump out water and they dredge. They’ve been doing this for 800 years or something like that. They’re obviously all worried about sea level rise because we’re already below sea level here. And so, it’s interesting to see what mitigation strategies different communities are taking. They’re building huge sea walls and expanding dikes and all of these things.
And it is nice to see that there is some proactivity. It does sound like in the US, we’re starting to see some more proactivity about mitigation strategies, planning in worst case scenarios. Do you have any information that you can share with us about that? How are communities, municipality, states preparing for some of these climate change centric risks?

Cal:
Yeah, I think adaptation’s a big conversation and it’s complex and it is federal level. It is state level and I think we’re seeing most of the stuff happen on a local municipal level. We see it here with how in California where we have built in fire breaks, putting together Cal Fire, making sure it’s well funded to protect from wildfires, educating individual homeowners about what they can do. The same thing in Miami, right? We’re thinking about where you live, sea level rise, and what we’re going to do about that to protect the cities. So, I think it really all comes down to local solutions and so engagement with those politicians and all those stakeholders.

Dave:
Yeah. Well, that’s interesting. I think for our listeners here, if you’re buying properties, in addition to looking at some of the risk that Cal’s been talking about for your individual property, it would be helpful for you to also look at what your municipalities are doing and if they’re acknowledging any risks or how they’re preparing or resources that might be available to you to upgrade your property.
A lot of times municipalities offer tax breaks or incentives to do some of these mitigation strategies. So, that could be a really good option for people out there. When I was researching before this show, I read some article, I don’t even remember where it was from, that said that Duluth, Minnesota is the most climate resilient place. Do you think all of a sudden millions of Americans are going to converge onto Duluth, Minnesota and start moving there?

Cal:
Yeah. I mean, as a company, we try to stay away from the extreme fear and to help people sell your house now and move here, because I don’t think that’s necessarily a solution, but I will say there are a lot of smart people, folks in academia and investors that are looking at these ideas of climate migration, when these big events happen, where are folks going to move and what is safer, and exploring ideas of climate gentrification.
I do think there will be movement of people around when these impactful events happen. We’ve seen it in the past. Big floods, folks get displaced and they go to other communities. So, I think it is something to watch and think about and build into your investment thesis. By no means, are we trying to say, “Sell now. Don’t go to this area,” but I think it’s a factor to consider as you’re going out there.

Dave:
Yeah. Yeah, for sure. I thought it was funny just Duluth just seemed like such a random place with no offense to anyone from Duluth. Yeah, I was curious and actually written down a question for you. Do you think there will be climate migration? Because I read, I think both for Hurricane Katrina back in 2005 and then the Houston flood, I’m blanking on what year that really bad flood was, people got displaced, left, and never really went back. It did strike me that if there is increased risk of wildfire or flood in major metropolitan areas, I don’t know if it’s going to be like a wholesale large migration change, but could have at least some migration and population changes in the US because of some of these risks.

Cal:
Yeah, definitely. I mean, those two events are great examples of folks. Where did they move? They moved to similar cities that had similar job market, similar supply of housing, but it’s adjacent and close to family. So, I think there’s a lot of factors to consider beyond the risk of the event happening when you’re thinking about climate migration. It’s a complex thing to model out and so multifactorial, but it does happen as these events occur. Again, I think it’s an important data point to think about and look at as you’re investing or buying.

Dave:
Great. Well, thank you so much for this information. We do have to get out of here in just a minute, Cal, but is there anything else you think our audience should know about climate risk for real estate investors or anything else just about the data that you think is worth knowing?

Cal:
No. I think, use the information alongside all the other information you look at when you’re doing your due diligence. Information’s now available, accessible. All you have to do is go to our website and go to climatecheck.com. Search an address and try to understand your risk to climate change a little bit while you’re looking at all these other data points in your investments.

Dave:
Awesome. Well, thank you to Cal Inman, who is a real estate developer, investor, and the creator and principal at ClimateCheck. Thank you so much for joining us On The Market.

Cal:
Hey, thank you.

Dave:
Super interesting interview there with Cal Inman. I really enjoyed having the opportunity to talk with him. I personally learned a lot and hope that you all did too. This has been something that I’ve been thinking about. As I said during the interview, I’ve had some experiences recently where a property I had came close to burning down in a wildfire. I’ve invested in some cities that have experienced significant hurricanes, for example. I’ve just been curious to learn more as an investor, “What risks are out there due to climate change and some of the changes in insurance and lending that Cal was talking about?”
I thought Cal did a great job just presenting the data as it is and talking about how to appropriately use it. He’s not saying that you should be going out there and changing all of your plans or to be panicking. What he is saying is just to inform yourself about what risks exist and what you can do to mitigate those risks if there are significant ones that you’re worried about for your particular properties. This is just like when we talk about evaluating an individual market or individual deal, there are tons of data points that you have to think about and factor in and decide which markets are right for you to invest in, which deals are right for you to invest in.
And hopefully, from this episode, you can now add climate data and climate risk to your factors and your underwriting when you’re considering deals. Thank you all so much for listening. I hope you enjoyed this episode. As always, if you have feedback or thoughts on this episode, you can hit me up on Instagram, where I am @thedatadeli. And if not, we will see you on Monday for another episode of On The Market.
On The Market is created by me, Dave Meyer, and Kaylin Bennett, produced by Kaylin Bennett, editing by Joel Esparza and Onyx Media, copywriting by Nate Weintraub, and a very special thanks to the entire BiggerPockets Team. The content on the show On The Market are opinions only. All listeners should independently verify data points, opinions, and investment strategies.

David:
This is the BiggerPockets Podcast Show 645. The way I’ve always approached life or any goal that I have, is that there’s going to be something about me that has to change, to be successful in whatever I want. So if, for instance, I want a better body, I’m going to have to change my eating habits and my workout habits. I’m going to have to go to the gym and develop different muscles or stronger muscles to get what I’m looking for. If you’re looking to save money in taxes, you can use some strategies that work with your current W-2 situation that is much harder. It would be much easier for you if, you found ways to make income that were not beholden to the W-2 world.
What’s going on everyone? This is David Greene, your host of the BiggerPockets Real Estate Podcast. Here, today with a Seeing Greene addition of the podcast on these episodes, we take questions from you, our fan base and those that we are trying to help grow wealth. And I answer them in person, myself, giving the best advice that I possibly can. And then we let everybody else hear how the information was disseminated, what my advice was and most importantly, what I was thinking when I gave it. The goal with this is to help you overcome the obstacles that you’re facing in your investing career, give you information to better, equip you to build wealth and make a connection with you, because I love you guys. And I know you love BiggerPockets, so we’re happy to join.
In today’s show, we get into some really cool stuff. One of the things is we bring in some private lenders and you get a special treat. You’re going to get private lending advice from people who wrote the book on Private Lending for BiggerPockets, so you’re definitely going to enjoy that. I also talk about how to get out of the fear box when you’re scared in every step that you want to take in a different direction gives you something else and be scared about, and it bounces you back to write where you started. And then we get into when to sell, when to hold, when to bail and when to fold. So one of our questions is all about, should I keep my house? Should I sell my house? If I sell it, what should I do with it? What’s happening in this crazy market? And I take my best stab at that. All this along with some tax advice and some other specialists joining me for backup on this episode, you don’t want to miss it really glad you’re here.
But before we get into the show, today’s quick dip, go to biggerpockets.com/podcast. You see all the different, BiggerPockets Podcasts have their own show pages where you can get cool free content. If you want to learn how to build a bigger brand for yourself, well, at biggerpodcast.com/reshow, you can get a masterclass from Brandon Turner and how to do just that. We’ve also got lots of freebees like Scott Trench, the author of Set for Life and the BiggerPocketS CEO has a free rookie checklist. Amy Missouri has information on a four second power pitch for raising money. Dave Meyer has data drops with relevant information that you need to make good decisions investing in this market and more, so visit biggerpockets.com/podcast. Check out your favorite show and see what free goodies we have for you there. All right, let’s bring in our first question.

Tom:
This is Tom Wheelwright. I’m the best selling author of the Win-Win Wealth Strategy: 7 Investments the Government Will Pay You to Make. And we have a question from Parshan, and the question is, “can we use unused depreciation against income from a salary job?” So I’d like to change the question to, how can we use unused depreciation against income from a salary job? The answer is yes, there are certain things that you do have to do. So either for example, you have to be active in the real estate and not have very much income from your salary job, or you could be a real estate professional, those are very specific tests. Or there are a few other things that you can do that are going to require frankly, some work with your tax advisor. The challenge is you can never use more than 500,000 of losses from real estate or business against your salary, that is a strict limitation.

David:
Hey, thank you for that reply, Tom. That is some very good advice and also very specific. So since Tom has handled the specifics of this, I will take a more general approach with my two cents. The way I’ve always approached life or any goal that I have is that there’s going to be something about me that has to change, to be successful in whatever I want. So if, for instance, I want a better body, I’m going to have to change my eating habits and my workout habits. I mean, I have to go to the gym and develop different muscles or stronger muscles to get what I’m looking for. If you’re looking to save money in taxes, you can use some strategies that work with your current W-2 situation, but is much harder. It would be much easier for you if you found ways to make income that were not beholden to the W-2 world.
So I don’t think you have to quit your job and just start a brand new venture. But can you look for ways to earn income that would be reported differently than W-2? That is much easier to shelter with the current tax rules that we have. This is why I’m a big proponent of stop looking at it like, should I go W-2? Or should I go full-time investing? There’s a whole spectrum in between. You could become a loan officer, you could become a real estate agent, you could become a title officer. You could start a construction company, you could get into pool service. You could be like Tom, and become a CPA. There are so many different ways that you can serve in the real estate field and earn income that are different than a W-2 job. And many of these will give you the flexibility to work that opportunity while still having a W-2 job and still investing in real estate.
So if you’re passionate about real estate, find something within the scope of real estate that you really love, like what I’ve done and work that. And if I can help you with that, Parshan, please let me know. I’d be happy to connect you with someone from one of my companies. If you’d like to do that within the world I’m in, and maybe you can reach out to Tom and ask the same. All right, our next question comes from Darby in West Central Missouri, I will summarize Darby’s question. He is currently in his mid ’40s, owns 13 doors made up of single and multi-family properties. His question is rooted in the phrase seasons of life. When Darby started his real estate journey, he was a single man with no children and plenty of free time. Fast forwarding, 20 years, he’s now happily married with three children and a full-time job in healthcare.
He now has an investment portfolio to manage and maintain and a hobby farm to look after needless to say, Darby is very busy, but he’s still hungry and wants to continue scaling his investment portfolio. He loves a passive income stream that has provided, and the increase in equity he’s seen during this inflationary time period that we’re in. Darby has a very solid debt income ratio, still has some cash reserves and a lot of equity that he can deploy from what he’s seen, particularly due to inflation in his portfolio. He doesn’t need cash flow because he has several steady income streams who would like to focus on long term appreciation. Darby also mentions that he prefers investing locally because investing out-of-state appears daunting. He would like to invest in an extremely, but that in all caps “passive way where I can still balance my career in family while also scaling my portfolio, interested in your advice, David, and perspective on my investing future. And I would love to hear your thought on an upcoming podcast. Keep up the good work.”
All right, Darby. So let’s talk about a few things here. You did a very good job of laying out what your goals are. So I appreciate that, you also laid out the challenges. And the bad news in this is that, most of what you’re describing here is you want to have your cake and eat it too. You want to have extremely passive income, you also want it to be something that’s going to grow inflationary and you also don’t need cash flow. And then you don’t want to invest out-of-state, but you mentioned you’re in West Central Missouri. Now I’m not an expert on your area, but when I just think off the top of my head about West Central Missouri, I don’t picture any rapid appreciation type of environment happening in that location.
If you’re looking for appreciation, there’s two ways that you get it. You have forced appreciation, that would be finding a property and adding value to it in the multifamily space. This would be increasing the NOI and you would do that by increasing rents and lowering expenses. That’s going to take quite a bit of your time, which you’ve also mentioned, you don’t want to do. The other way outside of forced appreciation would be natural appreciation. And this would be investing in a market that is seeing increasing demand, but steady supply or restricted supply so that the scarcity of the resources that everybody wants, makes the prices go up. And that is an actual legit concrete method that you can use to put appreciation in your favor. Appreciation is not always the same as speculation, which is just hoping that prices go up. There’s actually things that you can do and decisions that you can make that put the odds in your favor of that happening. That’s one of the ways that I’m investing. And it sounds like you want the same.
The problem with forced appreciation is it’s going to take time and effort, which you’ve said you don’t want to do. The problem with natural appreciation is you’re going to have to pick a market outside of Missouri. That’s also something that you’ve said you don’t want to do. You’re also in a position with golden handcuffs. So you’ve got income coming in. You don’t need to do this, but you’d like to do this. So you are in a position that I often call the fear box. And it’s not the perfect analogy because, I don’t know if you’re necessarily afraid, but it works the same way for people that are. So imagine that you’re in the middle of a box or maybe a field and you don’t like where you are in life.
So you want to go somewhere else and you’re looking outside and you’re like, Ooh, I could go there, anywhere’s better than where I am. Which direction do I want to go? And you start walking in that direction, and then you hit something that scares you. It’s like an electric fence in that field. Ooh, I don’t want to go out of state. Okay, I’m going to come right back to where I was. And then you start walking in a different direction. Ooh, that looks like it’s too much work, I don’t want to go there. And you start backing back to where you were. You start going in a different direction. Ooh, that looks like it’s got a little bit too risk, I don’t want to go there. And you bounce around from all the things that you find that you don’t like. And you find yourself exactly where you started in the very middle of this field. And you’re still not happy with where you’re at.
And I understand that is why you reached out. And you submitted this question to us here at BiggerPockets on the Seeing Greene edition, and I appreciate that. But what I’m getting at is, you’re going to have to let go of something. You’re not going to pull this off with all the restrictions that you’re putting on yourself. If you want something super passive, you’re probably not going to get a lot of appreciation, unless, you go into a market where you can get that. There’s plenty of markets I could give you right now where I’m saying, Hey, you could buy a property, it’s not going to cash flow a ton. It’s probably going to go up a lot in value. And in the future, it’s going to cash flow ridiculously well. But that means investing out of state. Or I could say, Hey, you can create a ton of appreciation by buying a property and adding value to it, but that’s not going to be extremely passive.
So I think rather than trying to find an investment that doesn’t exist, you’d be better off to say, off everything, I’m worried about investing out-of-state, putting a lot of work into what I’m going to be doing, needing appreciation, not wanting a whole bunch of effort to be spent. You’re going to have to let go of something, you have to make peace with that. My advice would be, to let go of the fear of investing out-of-state. I think that’s the easiest hurdle of everything you mentioned to get over. So I think you should find an area that a lot of either Californian or New Yorkers are moving to. This could be like the area of Texas, maybe Dallas or Frisco. You like to see a lot of appreciation there. Austin, I think, still has a lot of room to run.
South Florida is exploding right now, you’ve got a ton of opportunity in that market. You’ve got areas in suburbs around Nashville or around Atlanta, that we’re going to likely continue to see a lot of really strong growth. I think Savannah, Georgia is prime to do really well as more people move there. And both South and North Carolina have a ton of opportunity that I would expect continued appreciation from businesses and people that are moving there. You would then find a property in one of the best neighborhoods that you could and hire a property manager to manage it. Maybe you get a short term rental and you pay somebody 25% of the revenue to manage it for you. And that 25% may have been your profit margin, so you’re not going to cash flow a ton. But by buying in the best neighborhood that you possibly can and getting the best property that you possibly can and waiting the revenue will slowly grow every year. And the property will likely continue to appreciate if you buy in the right area.
That would be the simplest solution that I can recommend to you for how you can achieve the appreciation that you want without a ton of work. But you’re going to have to accept that you’re walking outside of investing in your state. Another option would be investing in someone else’s fund. You could invest in a syndication. You can invest in a fund like Brandon’s at ODC, and just give someone else your money and let them grow it. That’s going to be very passive for you, but I don’t think you could say you’re getting appreciation. You’re getting a return, this is now becoming more like cash flow. So as you can see, there isn’t going to be the perfect investment vehicle for everything that you want. And that’s probably why you’re stuck in the middle of the fear box, because every single direction that you start walking in, there’s something that you don’t like about it.
So in order to create a path for yourself out of it, I’ll summarize my advice here. Figure out what you are most okay with compromising on and go in that direction. My advice would be to invest in a growing market. Don’t worry as much about cash flow because you’ve already got a lot of cash flow, pick the best neighborhood, the best property in the best market that you can and let time do its thing.

Jon:
Hey Dave, Jon Barr from Orlando, Florida here, I’ve been listening to BiggerPockets for roughly about three years now. And I have a question that probably a lot of people are asking, which is, do I sell? So some background, I bought this place just over a year ago. It’s my one and sole property at the moment. However, I bought it for the equity growth and it has grown. I bought a 100K of equity in it at the moment and kind of want to get into a new living situation, cut my living expenses in half. And I want to move into some cash flowing units. However, the market’s so crazy right now. One of the options I see is maybe selling this place, pulling on my liquid asset from keeping it aside and maybe 6 to 12 months when this place looks well. When the market looks a whole lot better, making some big deals on 3, 4, 5 places. My other option’s to refinance, but the numbers aren’t a 100% there. Give me your thoughts, how do I make this market work for me when I have a high equity property? Thank you.

David:
All right. Thank you for that, Jon. Let’s break down some of what you have proposed. First off, if you sell and then rent or live with someone else and wait for the market to what you said, “improve,” which I assume you mean prices are coming down, cashflow opportunities will arise. You’re taking a pretty big gamble that, that’s going to happen. So I know there’s a lot of people out there saying a crash is coming, get out of real estate, wait. And it could happen, I’m not here to say it can’t happen or it won’t happen. But I would ask a couple questions. What would make that happen? A lot of people say, well, interest rates continuing to rise is going to push home values down. Let’s say that’s true, because it very well could be. The reason that it’s pushing home values down is because it’s making it more expensive to own them.
So if that does happen and home values come down, you’re still not going to achieve the cash flow you want because your mortgage payment is going to be that much higher. Like you don’t really avoid the problem of cash flow by just having the market have home values drop. So I don’t know that’s the best strategy. Like even if you do get a house at a cheaper price, your mortgage will be higher, you’re not going to cash flow. And then if it doesn’t happen, well, now you just got out of your asset and now you’ve got nothing and then, the market took off on you. I would probably be looking at hedging your bets. So if I was in your position, I would first ask if I moved out of the house I have now, would it cash flow? I’m assuming the answer is no. And that’s why you’re not talking about that.
So the next question is, what would have to be different about this house so it would cash flow? And oftentimes, the answer to that question is, I would need more units. What if you had a single family home with a garage conversion and a separate unit in the back or a duplex with an ADU. Or a house with two levels with separate entrances that also has an ADU. Something where you could get more than one unit out of your property. In that situation, it probably will cash flow. So what if you sold the house you’re in now, and you found a new property that was like that? Something that had more than one unit that would make more cash flow for you. You could then buy that property with the low down payment as a primary residence homeowner. This would allow you to get out of a house that doesn’t cash flow, into a house that could cash flow if you didn’t live in it and probably will still have a cheaper mortgage than what you have now.
If you are living in it and it would allow you to save that nest egg, that liquidity that you mentioned to the side in case the market does go down. I like that overall approach. Now, what if the market doesn’t go down? Well, you could just look for other properties to buy. You could buy a property that does cash flow. You could buy yourself a short term rental and then you could have two properties instead of one. You’ve basically eliminated all of the things that could go wrong. You don’t have to worry about the market taking off on you. You don’t have to worry about if the market crashes and not having enough capital, you’ve improved your situation. So if you do move out of the new house that you buy, it will cash flow and it will become a rental property.
And you open doors to let yourself buy a new investment property, like a possible short term rental that could earn you more cash and get you more experience investing in real estate. So this is advice that I often give when people are in a either or situation, try to be creative and look for a way to get away from either or to give yourself multiple options. I always feel better having multiple options, especially if you’ve got a lot of equity because you don’t have to move all that equity from one house into a new house. You can often spread it out amongst a couple, like you mentioned. Hope that helps and let us know how that goes. All right, we’ve had some great questions so far and I want to thank everybody for submitting. Please continue to submit your questions at biggerpockets.com/david.
And in addition to doing that, please continue to comment on YouTube and this segment of the show. I like to read some of the comments that you all have left on, BiggerPockets YouTube page and see what you’re thinking. Comment number one, comes from Stephanie Mokris. “I am officially addicted to the BiggerPockets Podcast. I’m a travel nurse with a one hour and 20 minute commute. And I love listening to you guys while driving. Thank you for all the value provided to your audience. I do have a question regarding the series. What is the strategy used to pay the private lenders back? I can see in a flip or a bur, but how about if the borrower used the private money for a turnkey property?” Okay, that’s not just a comment. It’s a comment mixed with a question, that’s pretty cool. We got a little hybrid here. Thank you for that, Stephanie.
All right, when I borrow private money, which I do pretty frequently, there’s been a lot of people that have been sending me money and then I pay them a return. I kind of set it up like a bank. So instead of it, at the end of when I pay them money back, they get it with interest. While I have their money, I just deposit the interest into their account every single month. So they get access to that capital. It almost functions like passive income and it’s as passive as possible because they don’t do anything. They just get a check or actually not even get a check because they’d have to deposit that, they get a direct deposit into their account. All they have to do is pull up the app on their phone and check to see that they made money. And I could pay that money back in several ways. Oftentimes, it could come from the refinance of a property. It could come from the refinance of a different property. And then I could use that money to pay back that person’s loan.
It could also come from the good old fashioned way of me just earning more money, right? I borrow money because I make money in several different ways. And so I have it coming in at all different times and I could pay back loans just by saving up money and paying it back. It could come from money that I have in reserves that in a worst case scenario, I could just pull it out of reserves and I could pay somebody back their capital. It could come from selling a property or a couple other properties. At any given time, I have several properties that I own free and clear. And I could refinance those and reinvest the money, but I’d rather borrow the money from other people, get them paid passively, develop a relationship with them and then keep the equity that I have in my properties as a safety net. So I could always refinance those and pay it back.
To your point, you said, “what if someone borrows money to buy a turnkey property?” That could be dangerous because turnkey properties are typically not coming with any equity. So a refinance is usually not an option. They’re often in areas that don’t appreciate as much, not every one of them, but turnkey companies tend to operate in mass, in low appreciation, but high cash flow markets. So if that’s something that you do, you are going to have a plan for how you get that money back or else you’re going to have to sell, to repay the person and you don’t know where the market’s going to be when you go to sell. Now, that’s becoming risky. In general, if someone isn’t making a lot of income, isn’t saving money and doesn’t have a plan to pay back their investor. They probably shouldn’t be using private money and they definitely shouldn’t be doing it to buy a turnkey property.
Next comment comes from Dakota Slaton. “I love the content, I’m 20 years old. These videos give me great pointers to get my foot in the door, greatest podcast all around.” Ah, thank you for that Dakota, I appreciate your sweet words there. Hopefully we continue to impress you and do our job of holding your attention and giving you value. Last comment comes from PureUnwindASMR. This was related to the Amy Missouri podcast, we just did on raising private money. “This is so powerful and I’m going to re-watch all four when they’re available. Thank you so much for this.” Well, that feels good to hear too. I’m glad we are providing value and helping improve your lives because that’s all that really matters in this entire world of beautiful chaos that we live in.
All right, we love it. And we appreciate your engagement. Please continue to do so, like, comment, subscribe on YouTube. And if you’re listening to this podcast on an app, please give us an honest rating and review there. Whether it’s iTune, Spotify, SoundCloud, Stitcher, let us know what you think about the podcast and give us a rating, it helps us reach more people. Thank you very much for that. I recently had the pleasure of meeting Alex Bashirs and Beth Johnson, BiggerPocket Publishings, newest authors who wrote a book, Invest to Live, about how to raise private capital or use private lenders to grow your portfolio. And I thought it would be a good idea to bring them in as some backup here, to help me answer questions particularly about raising capital, borrowing money to invest in real estate.
So let’s see what they have to say. All right, ladies and gentlemen, thank you for joining me. We are going to jump right into this. So the first question is from Brock Dallas and Brock says, “Hey David, I know you were taking on exclusively debt investors to save yourself some time and effort in terms of getting everyone up to speed. I am curious, what would you consider to be favorable equity payouts on private lending, specifically for high end flipping 1.5 million plus?” Alex, let’s start with you. What do you think about that question?

Alex:
I think that really depends on having a conversation with the person that’s going to be providing the capital because realistically, if you are trying to use someone else’s capital, figuring out what their paying point is, do they want steady cash flow? Are they lending because they need that cash flow to live off of or are they trying to get a big payout lump sum, which it would be more like equity investing? So when you talk about that, really you want to talk with them about what their ultimate goal is and then you can structure the deal in favor of what their goal is.
Since Brock, specifically mentioned equity, the equity side would be something that’s laid out in the operating agreement between you and whoever this other person is. So that can be fully negotiated as far as percentage of equity, you might want to outline and let them know if they are asking for equity that they could get some of the downside too. Equity’s not always up. You know, we’re kind of in a strange time right now. So making them aware that there is a downside to being on the equity side, well, it sounds great. You’re going to get 20% of whatever the net profits are, but you might also be getting 20% of what the net losses are too. So that’s why I say have a conversation with the person first.

David:
So important to acknowledge that. The assumption is how high of a return can I get, or if I can get equity in the deal, I can get it higher. You’re also losing the floor when you lose the ceiling. And so that’s very important to acknowledge. Beth, what say you?

Beth:
I generally like debt more than I like equity. I can see it in some circumstances where they want to offset the actual interest rate so that they can keep carrying costs low and then push that towards the equity side of things. But as an investor, I don’t typically like that simply because, I feel like that leaves too many cooks in the kitchen. And even though there’re supposed to be playing a silent role or a passive role, there’s so much vested into it, that they can sort of metal that I’ve seen in certain circumstances. And then as a lender, I truly like being in a passive role. That’s why I choose being in a debt position as opposed to an equity position. I don’t have to care quite as much. So, there’s ways in which it works well for some people. It’s just not something that I’m a super fan of, just because it creates a little bit of conflict of interest.

David:
So, I think you mentioned saying that you prefer the equity side. Did you mean you prefer the debt side in the beginning?

Beth:
Oh, sorry. Yeah. So the debt side.

David:
I might have heard you wrong, but you’re saying you do prefer to bring in people as debt, oh, sorry, as equity? No, I’m getting myself confused. You prefer to work with people who are coming into your deals as debt investors versus equity, correct?

Beth:
Correct.

David:
Yeah. And you made a very good point that as soon as somebody has equity in the deal, now there’s almost an entitlement, this is my deal too. I want to use this color of flooring or I want to price the house here or can we use my cousin as the real estate agent? Have you seen some problems like that pop up with your deals?

Beth:
I had. I mean, from having that silent partner to show up on the job site, you may not even be there as the active investor. And they’re having conversations with the contractors. They’re trying to make some decisions and insert themselves for calling and texting you from the location and wanting to know this and that. And it just becomes a little bit cumbersome to say the least, right. So I just choose to either be on the debt side or the equity side, just makes things a little cleaner to know what your roles and responsibilities are.

David:
That sounds like you’ve got some good stories there for another time.

Beth:
I have a lot of war stories to share, some buy-in and some from my investors.

David:
Rob, what do you think about this?

Rob:
This is a tough one because I think it can go both ways and it’s obviously going to depend on what kind of transaction we’re talking about. Is it a flip, is it something that you’re trying to buy long term? For example, I just bought a hotel, it’s a 20 unit and we have an investor on that, but he’s an equity partner on that. And that’s a little bit of a different deal because he is incentivized strictly on the IRR and then the sale price that we’ll have in three to five years, once everything is stabilized. And that was really enticing to him, right? The possible cap rate in the exit there. And he wants to be a long term partner too. But on the flip side of this, I guess if I were going to have it my way, debt is always cheaper than equity in the long run, I think, for most successful deals.
And when you have someone in, from an equity standpoint, that investor has a vested interest in the performance of that property. And thus there’s a little bit more emotion that I think can get mixed into that. Which leads to too many cooks in the kitchen, too much micromanaging. Whereas, from a debt standpoint, obviously there’s the vested interest that they want you to pay them back and be successful, but it’s very black and white. You get paid this, this is a guaranteed return from a debt standpoint, you’ll get a 10% on your cash, whatever it is, whatever you agree on. And it’s just a lot simpler and cleaner. I think that you can really keep the emotion out of that, because it’s just a much easier calculation to make and model for, personally.

David:
Okay. Next question from Nadia Chase. “Hello David, I have a family member in Switzerland that is willing to partner with us. She’s about to retire and is able to ask for a lump sum of money in advance. She said, she’s thinking about asking a $100, 000 and either lend us that money as a private lender for us, or be a silent partner in one of our investments. We have some experience with private lending, we are not sure how to structure the silent partner option. And if there are other things we would need to research when working with money that would come from outside the country. Finally, which of these two options would you recommend? Thank you a lot.” Beth, what do you think?

Beth:
Well, I think we already discover that, debt is probably going to be cheaper and easier than having an equity position. That said, I think that there’s some concerns on the legal and the tax side of things that they would need to shore up first, before they entered into some sort of arrangement together legally. And first off, I want to retire and get access to a $100,000 a lump sum. I’m not sure how that works in Switzerland, but I should just call that out there because that’s kind of fun. And so generally speaking, for us, when it comes to creating joint venture agreements, we like to come up with at least an MOU or a memo of understanding that helps outline the implications financially, rules and responsibilities, exit strategies, disillusion, and some sort of structured legal arrangement. But again, I think that there’s some concerns just having them based in Switzerland and the folks being based in America that could have some challenges legally and tax wise.

Rob:
Yeah. I actually want to dive into that a little bit, because I don’t think I’ve really run across an MOU very intriguing. How is that really differing from a joint venture or from like an operating agreement? Because I feel a lot of that stuff is typically in those agreements, but what’s different from that? What differentiates them?

Beth:
Well, I’m not an attorney and we’ve had attorneys draft them up for us before. But I feel like there’s a little bit more of a looser construct in terms of just outlining rules and responsibilities. What the capital inclusion might be. It’s a little looser framework, but it still has some legal parameters around it. I find oftentimes, especially with my borrowers that we lend to, when we see their operating agreements, a lot of the times they’re just canned, their boiler plate templates.
There can be from online or from an attorney, but they don’t really bake into the agreement, what the specific scenario might be in terms of who’s providing what capital, who does the project management? How are you going to get your money back out? Is your capital going to be placed in as debt as opposed to being just your personal part of the project? So MOUs are just how we’ve started the conversation and drafted them up in a legal framework. We’ve either notarized and signed those with the help of an attorney or they’ve been translated into an operating agreement so that, it’s baked into something that’s a little more specific to this particular venture.

David:
Alex, what’s your thoughts on this? And I realize, I read that question a little while ago. So if you need a refresher, let me know.

Alex:
Oh no, I’m good. I think Beth, pretty much handled the kind of the legal aspect. So the way I’m going to look at it, actually is from a relationship standpoint. So anybody, I get questions like this a lot, my best friend’s cousin wants to start a real estate investing business. What do I do? And I always tell people the fastest way to lose friends and family is to lend each other money. So this is someone who’s, in the family and it’s retirement money. So a lot of people take that relationship for granted and be like, “oh, I trust them. Don’t worry about it. You know, this is my aunt, we’re good. We don’t need anything because we inherently trust each other, because we’re a family.” But in reality, that’s probably the situations you need at the most.
So like what Beth mentioned, where the framework’s already in place, it’s on paper, it’s black and white. If this happens, then this other thing happens and you’re taking the emotion of the relationship out. So I would definitely say, anybody that’s thinking about investing with friends and family, even if they’re outside of the country or inside of the country, take that into consideration, how valuable is this relationship to you? So if this goes bad, is that going to make Christmas dinner really awkward for the rest of your life? Because that might not be worth it, it might be cheap capital, but what is it costing you in human capital?

David:
That is a great point. I’ve found the quality of relationship is always based on the expectations of the parties. And when you’re working with someone close to you, in my experience, whether you’re representing them, selling their house, or you’re doing some form of business with them, they tend to look at it like you’re going to give them something extra more than what everybody else gets. And the person who’s using the money is like, “no, we have an agreement in places is a professional relationship.” You’re used to it from people that are expecting it to be professional. And I rarely have ever seen those expectations lower with family. You think it’s going to be easier? It’s quite easier to get into it, but it is much harder once you’re there.
So I like that advice, maybe don’t go with friends and family, unless that’s your only option. It would be better to find someone that you don’t know that has more reasonable expectations. So last question, “hi David and team, my husband and I have contacted several banks regarding lending parameters and have been unable to identify any lender who would provide a multifamily loan for house hacking with less than 20% down. Do you have a product that allows for less than 20% down towards a multifamily that would be our primary residents? Or do you have any advice about how we could go about acquiring one?” Ladies, how do you feel about that?

Beth:
Well, I was going to pun back to David just simply because, I mean, I think that FHA loans can allow, but it’s for one to three units. But it’s not something that you can technically do most often in a hard money or private money role because it has to be non owner occupied.

Alex:
Yeah. I mean, I’m going to say the primary residence part is going to be the sticking point, because that falls underneath federal regulations as opposed to non-owner occupied investment, property falls under state regulations. And it’s very different licensing requirements, very different limits. You know, there’s a lot of consumer protection laws in place for primary residences. So that’s, the difference we are running into.

David:
So, at The One Brokerage, we can do 15% down on a duplex, but three or four units, it’s going to be 20% down, even on a primary residence. That’s a new change that was just made for conventional loans. And then you can still go FHA though. So, or FHA or VA, you can get those terms on multi-family housing. So one thing that people will do is, they’ll use an FHA loan to get in and then they’ll refinance into conventional. Even if the rate isn’t better and then they have another FHA loan that they can use for future properties. So if you’re willing to play that game, you can’t do it, but it is a little trickier because multifamily housing is what everybody wants to do for house hacking. It’s the easiest way to get into that. And then these regulations were just changed, but it didn’t necessarily drop the demand for multifamily housing down because there’s so many people that are trying to park their money somewhere.
They just did a 1031 exchange, they’ve got 400 grand. They have to put somewhere, they’re not going to go buy a single family house. They’re going to buy a triplex, they’re going to buy a fourplex. And so these things, at least in the areas that I invested and work in are just getting sucked off the market so fast, there’s so much demand for those. So it’s tricky for the person that was trying to get into the market, which is what most people that are listening to our podcast are looking to do. So what we recommend people do is instead of just going for multi-family housing, find a house with an ADU, find a house you can convert the garage, find a house that is sort of structured to where it can already be rented out as to units or three units. And many times those are in areas that are zoned for multi-family housing as well.
Very good answers though, I’m impressed with everybody so far. Thank you guys for helping me there. All right, that was our show, I hope you liked it. I know it’s been a while since we’ve had a Seeing Greene. So I just wanted to say we’re back and I appreciate you guys being here. Please, again, let us know on YouTube in the comment section, what you think, what you’d like to see more of, what you enjoyed and maybe what you didn’t enjoy. So we can avoid doing that in the future. You could follow me online, I’m @davidGreene24, check out my Instagram, that’s what I am on Facebook. It’s what I am on Twitter, LinkedIn, pretty much everywhere or I’m on YouTube at David Greene Real Estate, so youtube.com/davidgreenerealestate. And then please like, and share and subscribe to the BiggerPockets YouTube channel. Share this with everyone you know, so that we can reach more people. Appreciate you guys. If you have any questions, you can message me through BiggerPockets or on my social media. And I will see you on the next.

Ashley:
This is Real Estate Rookie, episode 206. My name is Ashley Kehr, and I am here with my co-host, Tony Robinson.

Tony:
Welcome to the Real Estate Rookie podcast, where every week, twice a week, we bring you the inspiration, information and stories you need to hear to kickstart your real estate investing journey. One of the things we love to do on this show is highlight some of the amazing reviews we’ve gotten from the Rookie audience. Today’s review comes from Jesse Bruce. Jesse wrote, “So many gems! I love this podcast. It breaks down people’s journey in a way that is understandable for rookies while still providing value for seasoned investors. So many gems in each of these episodes. I feel like I’m getting a crash course on different aspects of real estate investing every single week.” Jesse, we appreciate you. If you guys haven’t yet, please leave an honest rating and review on whatever platform it is you listen to, Apple, Spotify, iHeartRadio, YouTube. The more reviews we get, the more ratings we get, the more people we can reach.

Ashley:
Yeah. Thank you guys so much. We love it when you guys leave us a great review. Don’t forget, you can also call and leave us a voicemail. The voicemails get sent directly to us. We get to listen to every single one, and we may play your voicemail on the show. You can call in at 18885-ROOKIE. Even if you want to share just a win with us, we would love to listen to that too and play it on the show. That’s 18885-ROOKIE. Today, Tony, I am going to use this as a therapy session, a lesson that I have learned so all of you can also learn this lesson. I fired a contractor, a general contractor, a GC. I had to let him go. We’re probably about 75% done with the project when I let him go, and I know that you have done this too, that you had to let a contractor go during it, so I thought we could do this episode on firing contractors as painful as it is to talk about.

Tony:
Yeah. I’m glad you said that, because so many new investors, I think, one of their biggest concerns is managing that relationship with the contractor. The truth is, it is not always easy. The level of professionalism and business acumen and just integrity in the world of contracting varies quite a bit. There are a lot of people in that industry who are fantastic people. There are a lot of people in that industry who are just full of BS. You’ve got to weed your way through these different folks until you find the right person. Ashley and I both had some of those experience. We thought it would be good to share with you guys. Ashley, why don’t you go first? Tell us about your recent experience. What led up to you firing that contractor and what was the final straw that broke the camel’s back?

Ashley:
Yeah, this is the second time I’ve ever hired a general contractor who’s just going to do the whole project. The first one I hired was actually the builder that built my house, and it’s a one man show and he does everything. He had built my house. He’s also my neighbor. Everything went so smooth with my house project. It was wonderful, so I had him do another property for me, a pretty extensive rehab on that. It went amazing, no oversight. Didn’t have to really keep an eye on him. An idea came up, he would ask before he did it. And so, that was such a great experience for this. It’s my A-frame project, so if you follow me on Instagram, @wealthfromrentals, you’ve seen pictures of this project. And so, when we closed on it, we ended up hiring a contractor.

Ashley:
It was a crew of three people, and then they had one part-time younger kid that would come and help them. Right away, there were red flags that I was so amped up and ready to get this project going that I was blinded by them. The first red flag was that they wanted to be paid hourly. That is something I’ve always gone against, doing that, and I was… They could start right away. They went through the property, were telling me things that needed to be done and looking at… Giving me ideas of how to do it, that I was so blinded by that, and I didn’t stick to what my criteria is with a contractor. And so, they started right away. At first, it was such smooth going. I mean, they started working on the structure of the actual building, and it just seemed like they were flying through. Then after about two and a half months, it’s just like, it went stagnant.

Ashley:
It felt like there was no progress. There was one person on the crew that any time we would say we wanted to change something or do this, he would question us, “Why do you want to do that?” and turn it into this huge conversation. And it’s like, just do what we want to do. And then, there was a couple things that started to come up, questions they were asking that just didn’t make sense, that maybe they didn’t know what they’re doing or they were trying to get us away from… Almost, I don’t want to say gas lighting, but making me question myself that I know what I’m doing. And so, I finally got to the point where I didn’t even want to go to the property because I was so depressed over the slow progress that was happening. And so, my business partner would go and he would update everything and keep an eye on things.

Ashley:
Finally, I just got to the point, I was like, you know what? I think that I’m going to let them go. I went to the property one night when no one was there and I went through stuff and I was like, the bleeding has got to stop at some point. This was, I think, a Friday night I went and I said, okay, Monday morning, when they come, we’re going to cut them their final check and send them off. They can pack up their tools, everything, and send them on their way. That’s what happened. Darrell went to the property Monday morning, let them know that we were going in another direction, it wasn’t working out, sent them on their way with their last check. Since then, it was two weeks, and we hadn’t got anyone else in there and I am very impatient.

Ashley:
I just went in there with two of my kids last weekend, and we started going to town on stuff. We bought everything needed to do the tiling. We got set up for tiling. We cleaned up a ton of the garbage. There was a whole bunch of drywall and everything. My kids hauled it all out. We started working on that. And then now, my business partner, he came in and he’s like, that’s all he’s doing right now, is just getting this cabin to finish, get it to complete. My biggest takeaways, my lessons learned were, first of all, have your contractor criteria and stick to it. If it seems too good to be true, these people fell into our laps the right time, they could start right away, and the hourly rate was only $20 each, we were paying them.

Ashley:
It was not very expensive. It was actually pretty cheap, but it’s just they took so long. Then as I was going through, last Saturday, when I was going through the project with my kids, I was looking at things that even I noticed were wrong. Me, who literally knows nothing about construction rehab. And so, my second thing would be is if you do know something, don’t second guess yourself just because somebody else says that’s not the way it was done. For example, the tile for the back splash was done in the kitchen, and there was about this much gap of drywall, because it’s the A-frame, so the wood slats come down. There was no bull nose, but they had already grouted the tile and everything. That’s one thing Darrell worked on today, was adding the bull nose on top and re-grouting it.

Ashley:
And also, the shower just… I would’ve done Hardie Backer board onto it, and they did a cement board and then they muddied it and then they put primer over it, where I would’ve just put the Hardie Backer board, maybe some Aquaphor on it. All these little things that were happening, I was second guessing myself because I’m not a contractor. My first thing would be stick to your contractor criteria. When you are hiring a contractor, don’t be impatient. Wait. If you can’t get a good contractor, figure that into your holding costs. And then, just don’t let anyone gaslight you. If you stick to your gut, if you think you know something is wrong, speak up and stick to it. Don’t let somebody tell you that it’s not. Those were the biggest things. Honestly, I should have probably let them go earlier. The third thing would be to hire slow, fire fast. That’s my rant. That’s my therapy, my word vomit, going to call it that, mental breakdown of my life. Yeah.

Tony:
But so many good lessons in there.

Ashley:
Yeah.

Tony:
I think your point about, the fact that they could start right away, to me, that in and of itself is a huge red flag because most good crews today are…

Ashley:
So busy.

Tony:
… backed up. Maybe they can say, “Hey, I’ve got a project ending in two weeks, but my next one starts in six weeks. Maybe I can give you four weeks”. But if they’re like, “Yeah, sure. I can start tomorrow”, that means nobody else is thinking about them, and there could be a reason for that. And then, I say this, Ashley, because something similar happened to us as well where we found another crew and they were able to start immediately and they were relatively inexpensive, and we had to fire them. They were about 75% through one job and maybe about 10% through another job.

Tony:
I mean, a lot of the same lessons you spoke to as well, is that… Actually, the one thing that we did that I was proud of is that we did pay them on a milestone basis. It was like a 10% upfront, then I think a 20%, 20%, and the last one was a 60% payment. We were able to withhold that last payment. And then on that first [inaudible 00:10:41], we only gave them 10%. The payment didn’t hurt us as badly, but then we still had to go out, pay another crew to finish the first job, and then pretty much go off and start the second job, so now we’re over budget on both of those flips by a decent amount because we had to pay two crews and all this other stuff. Yeah, really good points on the busy-ness piece and the pay progress. The other thing you said that I thought was interesting that I’ve experienced as well is letting them go sooner.

Tony:
The mistake that I made, we had a… It was this crew, the same crew, it was our first time working with them. We gave them one job, and we already felt like their work was good. The work they were doing was good. We had no concerns with the quality of their work, it was just the speed at which they were moving. The progress was coming way too slow. I felt like it was an issue, but our hands were tied because we didn’t have anybody else. We just got another flip under contract and our go-to contractor was still too busy with our other flips, so we had decisions like, can we find somebody else? We couldn’t find anybody else. It was like, either we sit on it or we give it to this other guy who hadn’t even finished his first flip for us yet.

Tony:
We made the mistake of giving him two properties before he finished one, which is why we ended up having to fire him from both. To your point, and just add on to that, I guess, make a contractor finish a job before you give them a second one. See it all the way through the end, because someone could look amazing on day one, but look very different on day 90. You want to make sure that you see the day 90 version of someone before you give them an opportunity to do a second job for you, because that really came back to bite us in the butt on our flips too. Lots of lessons learned on both sides.

Ashley:
Yeah. I know. It’s frustrating to look back at. It’s like, wow, geez, why did I let this go on for so long? I think that I just… I get busy. So many other things going on that it’s like, “Ugh, I don’t want to have to deal with this, so I’m just going to let it keep going” or “It’s easier to keep them on the job and bleed money in holding costs letting the project drag on than it is to fire them”. But really, all it takes is some work. Okay, me and the kids and even my business partner, he’s in there now working on things. We made some phone calls. We got all the flooring installed by an installer. We have a roofer coming out to take care of the roof. And so, it takes that extra work, but you’re going to get a better product and you’re going to probably save more money than if you do just keep letting the job drag out and hope that they eventually finish.

Tony:
Yeah. It reminds me of this, I don’t know, this saying that I’ve heard recently. I was literally just telling my son this last night, but it was about choosing your hard. I gave him the examples of, it’s hard to study for your test, but it’s even harder to have Fs. It’s hard to get up in the morning and train for basketball, but it’s even harder to not play as much as you want during a game. As a real estate investor, the idea of having to fire a contractor seems hard, but it’s significantly harder to continue to work with a bad contractor.

Ashley:
Yeah.

Tony:
You can fire that contractor and it’s hard for five seconds, five minutes, however long it takes to have that conversation, or you could deal with him for the next four months while you go through this rehab, and that is much, much harder. Just choose your hard. Short sacrifice for the bigger, long term day.

Ashley:
Tony, I remembered before when you had shared stories of things you have told your son, and I wish you would share more, these analogies and lessons that you give him, because I appreciate that. I listen intently. I do. Thank you.

Tony:
I appreciate that. Hopefully, he’s listening as intently as you are.

Ashley:
Yeah. Thank you guys so much for joining us for this week’s Rookie Reply. I’m Ashley, @wealthfromrentals, and he’s Tony, @tonyjrobinson on Instagram. Make sure you guys leave us a review on your favorite podcast platform. We would greatly appreciate it. Check out the Real Estate Rookie on a YouTube channel and make sure you are subscribed. Thank you, guys. We will see you next time.

Stephanie Vitacco, Equity Union Real Estate broker, joins ‘Power Lunch’ to discuss the state of the Los Angeles housing market, who sets pricing and more.

Mindy Jensen:
Welcome to the BiggerPockets Money podcast show number 324, Finance Friday edition, where we interview Gracie and talk about saving money and building wealth even when it doesn’t seem like there’s any easy options.

Gracie:
One of my thoughts was maybe someone just needs to tell me to get over myself and figure this out instead of just spending and then wondering what happens. So I’m good at that, I’ve done that for 10 years, I did the payoff and then we did FI. So I’m a little bit throwing a little tantrum inside because I didn’t want to get to this point and have to continue cutting the budget that much. But if we can do a three year model where I see flexibility opening up in the three years, we could do it, I think.

Mindy Jensen:
Hello, hello, hello. My name is Mindy Jensen. And with me as always is my carefully considering all angles co-host Scott Trench.

Scott Trench:
And with me as always is my thoughtful co-host Mindy. Great to be here.

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

Scott Trench:
That’s right. Whether you want to retire early and travel the world, Coast FI go on to make big time investments in assets like real estate, or start your own business. We’ll help you reach your financial goals and get money out of the way, so you can launch yourself towards your dreams.

Mindy Jensen:
Scott, today, we’re talking to Gracie who has a great financial position if she wanted to do Coast FI as you mentioned, which we talked about on Monday’s episode with Jess, from the pioneers, and it’s funny how sometimes these shows just work out back to back like that.

Scott Trench:
Yeah.

Mindy Jensen:
And she’s she set herself up in a great position, but I think she wants a little bit more. So there are other options she can pursue.

Scott Trench:
Yeah. I think that there are definitely options, but there are no easy options and we want a lot of things. We want to be able to have plenty of time and we want to be able to have a surplus of money. We want to have passive income. We want to save for retirement. And sometimes you can’t do all of those things at once. You have to prioritize and pick and make sacrifices on some of those areas and that’s hard and that’s what we’re going to get into today.

Mindy Jensen:
Yep, absolutely right. So Scott, I want to remind you and our listeners that the contents of this podcast are informational in nature and are not legal or tax advice. And neither Scott, nor I, nor BiggerPockets is engaged in the provision of legal, tax, or any other advice. You should seek your own advice from professional advisors, including lawyers and accountants, regarding the legal, tax, and financial implications of any financial decision you contemplate. Gracie and her husband Frank, live in a high cost of living area. He works full-time while she stays home with currently two, turning to three kids in November. The shift from two incomes to one was a bit of a shock and their initial fine number now seems too low. They’re currently saving 14% of their income after taxes. And Gracie’s wondering if she should go back to work once the baby is born so they can increase their financial cushion. Gracie, welcome to the BiggerPockets Money podcast. I’m so excited to talk to you today.

Gracie:
Hi Scott and Mindy. So excited to talk to you. Thank you.

Mindy Jensen:
So we’re going to do something a bit differently today. I’m going to read Gracie’s financial snapshot. She and her husband make a salary of $101,000. They have additional income of approximately $24,000 for a grand total monthly income after taxes of 8750. Their expenses seem pretty good on this surface at 7135, we’ve got 2000 for mortgage, 400 for utilities, almost a thousand for groceries. So I see a point right there that we could work on, 150 for beverage 300 for home supplies, 115 at restaurants, you’re doing really good there. 125 for gasoline, $457 for giving, $388 for medical, which is really in America a steal, $159 insurance, miscellaneous at $700, $147 for car insurance and maintenance, and average, no questions asked spending fund of $973 a month, travel at 280. So just off the bat, I can see some areas where it would be easy to improve, but I don’t have any backstory on those.

Mindy Jensen:
So we’ll get to that in a moment. As far as investments go, we have retirement funds at $495,000. Nice job at age 35, mutual funds in $206,000. And I do want to clarify what mutual funds means. Other in 16,000, that makes me cringe and think maybe crypto, cash at $23,000.

Gracie:
Thank you. Thank you. Thank you.

Mindy Jensen:
Home equity of $210,000 for a grand total of $950,000. So with our debts at nothing except for a home mortgage, 2.75% interest rate, $490,000. All in all, I see this and I think you’re doing really good at age 35. I mean, you’re doing really good anywhere, Americans aren’t saving money. So this is a great picture of your financial situation, let’s look at how you grew up with your finances?

Gracie:
It will be helpful to go back just a little bit. So starting out, my family had very little money, and the money that we did have, we didn’t do very well with. I started working at the age of 15 and I’ve worked every year of my life. I spent every dollar of that and quickly wrapped up 60K in debt by the age of 24. And that did include about 30 grand in student loans, even though I started out college with a full ride, but they don’t give you a full ride back when you drop out of school and go back later. So anyways, in 2011, I did find Dave Ramsey thankfully, and was halfway through my college degree and actually started just paying off my debt and cash flowing the rest of my education.

Gracie:
I did everything Dave Ramsey suggest, multiple jobs, cash envelopes. The whole thing I even got out of an upside down vehicle loan, which was one of my greatest achievements. Around two years into that, and my original estimate was that would take four years. So about halfway into my process of paying off debt and finishing school, I met my husband, Frank. And he also came from a family without a ton of money. However, they were great with money. They were frugal and good savers. So we have a little bit of difference there. He had no debt other than a mortgage when we met and assets, non-home assets, so it was great. His family only paid for half of his college and he paid the rest with summer jobs. So he was doing well and he was okay with my situation just because I was cleaning up my mess.

Gracie:
So it was great. 2014, we get married, we finish paying off our debt. And I guess we were looking up what to do when you hate your job, because we started making plans to do a mini-retirement. I believe I was listening to Tim Ferris a lot. And I do recall finding, I don’t know how, but I read the Early Retirement Extreme book. I actually read that book. I loved it, but anyways, I haven’t read it in quite a few years. So anyways, we did that. We started our may retirement with a plan of one year of travel around the US and south America. That lasted five months.

Scott Trench:
And this was in 2015.

Gracie:
Yes, we started that trip in 2015, but we ended up moving to where we live now, which is a pretty high cost of living area, not the highest, but pretty up there considering where we both moved from originally.

Scott Trench:
And what state is that?

Gracie:
Colorado? So we moved here, we still continued hating our jobs. And that is when we discovered the infamous Mr. Money Mustache. So we went all in on reading that blog and we were just on the same page to really try this financial independence thing. So we began in 2016, and I think that’s about the time that Mindy and Carl, you guys finished your journey. I do remember we did see the 1500 blog. We knew all of the blogs. We knew everything, but our biggest thing was the Mr. Money Mustache. So we followed that. We set our goal for $1 million. We planned it out, it would take five to seven years. And approximately six years later, we did hit our number in December, 2021. So we hit our $1 million net worth number. Oh, we should celebrate, right? But yes, that was a big year in general. We had our second baby in 2021 February.

Gracie:
I quit my job in June and have been a stay-at-home mom since then. And we also bought a new house in July. So even though I wasn’t working half the year, we still hit our number. Well, now we have hit our goal and we’re in the middle of a potential recession. I know they haven’t declared it yet. And the largest inflation we’ve seen, and we’re not really sure what to do from here.

Scott Trench:
Congratulations, that’s awesome. You hit your goal. You have two kids and another on the way. So you’ve obviously been crushing it. Can I ask you, prior to you quit your job? What is Frank’s and yours profession?

Gracie:
Yeah, so I was an accountant. I have a CPA license, but I worked generally in industry, I did like one tax thing. So I was a general accountant and Frank is an engineer. So he actually works for a construction company and is now doing estimating.

Mindy Jensen:
Okay. So I see lots of awesomeness. And before we get any further, I want to highlight the fact that you are 35 years old, right, you’re 35?

Gracie:
Right, yeah. We are both about the same age. Yeah.

Mindy Jensen:
You’re 35. Yeah, I’m 35 too. You’re 35, you have $1 million in net worth. You have zero debt outside of your mortgage at a 2.5% interest rate. Your house is worth way more than you paid for it. Well, you bought in June of 2021. Your house is worth way more than you paid for it. And you have a marketable skill. So if something happens, people still need CPAs all the time. Worst case scenario, you can go do taxes the first part of next year. There’s a lot of optionality you have, but you’re sitting in a good financial position right now. It may not seem like you’re sitting in a good financial position because you hear from people who come on this show, they’re like, yeah, I’ve got no kids and I’m saving 97% of my income. Well, great that’s their story. Your story still has you at a $1 million net worth. That’s awesome, let’s celebrate that.

Gracie:
Thank you, yeah. And I have to say, accounting was not my favorite thing to do, but I did it for 10 years because we had these goals. And finally, I was like, I don’t think I should stay at a job that I do not like just to make a little more money when I could be with my children, hardest job in the world. But definitely I couldn’t see the trade off anymore. Especially given our position. It’s like, okay, we’re not underwater. We’re not in a bad position. So why trade more money for a job you hate, right?

Scott Trench:
Absolutely. So, what are the goals here? What, can we best help you with today?

Gracie:
So big picture. We want to spend time with our children. Frank works full-time right now. And I will say that he’s in a better position with his job than he used to be, because we live closer to his office. He bikes to work, he has very pretty good hours. I don’t want to say easy, but he is not doing 60 hour week. So he’s in a pretty good place, but he would ideally like more of a flexible work schedule, maybe a four day work week, maybe something partially remote, so that he can spend more time with me and the children. I get to spend lots of time with the children and would love a little bit of maybe regularly scheduled childcare without necessarily putting them in a daycare. So that’s our big picture. More specifically, I would like a little more flexibility with our budget, because yes, we hit a big goal.

Gracie:
However, it’s not nearly as fun as I thought it was going to be to be a millionaire or whatnot. Although we’re a little lower given the market right now, but we still have to really carefully manage our budget and now, and like you said, in the intro, going from a dual income to half was quite a shock and it has taken us a year to adjust. And I still feel like we adjust every month. It’s like, oh my gosh. So I would like to spend more, but that’s like a long term play. Eventually I would like to spend more. Currently, we’re where we are and my questions are around, how do we live on what we’re making and spending? How do we get over the fact that we’re not saving 40 or 50% anymore? And is that okay I know there’s such a thing as Coast FI. Is that something that we should just accept in this position.

Scott Trench:
I think that’s helpful. And I think if I were to rephrase. Well, I think the best place to start would be to reframe or to restate the reality of your situation real quick, right? You are a millionaire or very close. However, almost all of that wealth is in your home equity or in your retirement accounts but the exception of it sounds like 200 grand in mutual funds at this point. So this wealth is not generating any material cash flow for your situation, certainly not more than 10% of monthly spending in a reliable way. Is that right?

Gracie:
That’s right. Yes. And can I just add on to that? In our current spending or saving, it’s a weird way to look at it, but in order to get our employer match, we put a certain amount in to the 401k. So we have as part of our saving, a big chunk going to a 401k and our of course, home principal going into our mortgage payment. So that makes up our savings, which puts us a little upside down. So if you look at the cash flow, we’re actually funding the savings from our currently liquid funds, which is around 200 right now. So it’s almost like we’re going even further into that middle class trap, I guess you would call it, where all of your money is locked away to until traditional retirement.

Scott Trench:
Perfect. I think that’s, I think it’s a great way to state the problem. Let’s go back to income real quick. You said you have a salary of Frank makes 101,000 and you have additional income of 24,000. Is there any more nuance to those two numbers, any bonuses, for example, what is that additional income?

Gracie:
Yes. So you mentioned the salary of 101, and that’s for just the current year and then they give you a medical bonus of a thousand. We discovered we have oil royalties at our current property, which was really amazing. So that’s estimated at about 4,000 per year and then a bonus of 15 and a 401k match of four.

Scott Trench:
Okay. So the 24 is going to be this oil royalty. Never heard of that, that’s awesome, bonus and then 401k match.

Gracie:
That’s right, yeah.

Scott Trench:
What, what I’m trying to understand as well here is we’ve got 8750 coming in per month after tax. So you’re funding your retirement accounts and having all that stuff. And we have spending of 7,100 per month. Are you saying, is that accurate or is the reality coming out differently and spending is more or less matching or even sometimes exceeding the cash inflow from your wage income?

Gracie:
Well, that’s a great question. I could admit that this budget is a little bit more what we would like it to be versus what it is. And so far, like I said in the past year, it’s like sometimes money just comes in and we can cover the deficits. So we haven’t truly had to sell any mutual funds yet. But when you look at the numbers, that’s what’s going to have to happen eventually.

Scott Trench:
What the reality of the situation that I’m hearing is this is an aspirational budget to some extent, and you’re treading water or that’s how it might feel right now from a cash flow standpoint.

Gracie:
That is right. That is definitely how it feels. And if we hit this budget, it’s like, okay, we’re only going to be upside down this amount. And upside down in that, our savings is just being moved around. Not that we’re going into debt, but-

Scott Trench:
Makes sense.

Gracie:
Yeah, it does feel that way.

Mindy Jensen:
Okay. And it can feel that way when you’re used to saving so much money and then you stop, but you also had so much more income and that went down. So the amount that you’re saving is going to go down. You mentioned several things. Number one, that Frank would like more time with the kids, has he asked for a reduced workload?

Gracie:
No, it’s not something he has yet asked for. It’s just something that he’s building his career experience towards that direction. So he used to be someone who was on site for construction projects in a management role that is not something you can do part-time or remotely. So he actually shifted into a role where he could eventually dial it back more. So he has done that, but he’s just trying to build his experience right now. But has he asked for it? No, not yet.

Mindy Jensen:
One of the things that Carl did when he was getting ready to retire, he wasn’t mentally able to wrap his mind around retiring. How can I just leave this? It’s a big step. So he went from full-time to part-time. He asked his boss, can I work three days a week? And his boss said, yeah I don’t care. But he built it up as this huge thing that was going to be this big conversation. And he was prepared for his boss to say no. And then his boss was like, yeah, I don’t care. So perhaps Frank could work it such that he could do for 10 hour days. He’s still getting all of the time in, because really what’s an eight hour day versus a 10 hour day? You’re already there at work. It’s an extra hour on either side or four nines, and then he does a half day on Friday. Or something like that.

Mindy Jensen:
If he could propose several different structures to his boss, maybe his boss would say, hey, that’s awesome. And if Frank’s been there for a month and a half, that timing’s not good. But if Frank’s been there for years and years and years, and is a valuable asset to the company, his boss is going to want to keep him. So that’s more of a research opportunity for Frank to start thinking about, in what ways does he provide value to his company and how can he continue to do that on a reduced workload or reduced days in office kind of thing, because that’s going to give him a lot of mental space to help out. And if Frank is staying home with the kids on Friday, then Gracie can go back to work for one day a week or three days a week and the kids are in childcare for two days a week.

Mindy Jensen:
You’ve got another six years until baby three is in kindergarten, because baby three is in November, baby three’s starting kindergarten late. I have a November baby, but that’s only six years. And then you can start working again. So it’s not like you’re never going to be able to save money, ever, ever, ever, you’re just on hold right now. But then you said you are CPA. Holy cow! Everybody I know is firing all of their clients. All the CPAs I know are firing all of their clients because they’re sick of dealing with all of these pain in the patoot clients. You could be the pain in the patoot CPA. I’ll deal with you, tough people. And I’ll make a lot of money because I only have to deal with 10 clients, and I’m going to do all of your work, and here’s the story.

Mindy Jensen:
And you don’t have to be a full-time CPA to make a lot of money as a CPA. You just say, this is what I charge, I’m that good. If you can’t find anybody else, because you’re such a pain in the butt that everybody’s fired you. Well now you have to pay my rates or do it yourself.

Scott Trench:
When I think about your situation at a high level, zooming out, I think you’re treading water right now from a savings position. You are funding the 401k. That’s great. And you’re paying down the mortgage, so hose are automatically happening, but there’s not a lot of flexibility in your situation right now. And I’m having a hard time seeing how we can get you to that combination of having more time for both of you, with the family and be able to spend more at this point in time, without major creativity and big moves in that situation. So I think we should go through some of those options, major strategic pivots, and then see how any of those feel and what the reality, which path smells right to you that you’d like to think about more.

Scott Trench:
So on the one hand, like Mindy said, you’re in a situation where you’ve done a great job saving for retirement. You’re not accumulating lots of cash in your life or expendable cash flow from your situation. But if you want to just chill on your current situation for the next five years while your kids are young and entering school and then resume working at that point to begin accelerating other types of savings, you’d be fine. You’re way ahead of the pack for in terms of retirement savings, and your financial situation could easily weather that, right? You’re not going to be able to spend a lot more right now or make big shifts unless maybe there’s some tweaks like working four days a week, like Mindy mentioned there, but so that’s one avenue, right? It’s just, hey, we’ve got a good situation. We’re going to hang out here.

Gracie:
Yeah, to like Coast.

Scott Trench:
Yeah. Coast is fine.

Gracie:
And I agree. I think right now when I look at it’s like, well, we’re set up for traditional retirement. Like we can get all of these things when we’re 59. So yeah. So I agree with you that would take a major pivot to do anything right now.

Scott Trench:
So, the second thing would be, let’s look at our assets and how we’ve allocated capital to this point. And right now that has resulted in a situation where you’ve got 700 grand in stocks, most of which are in retirement accounts, you’ve got three months of spending in cash, and you’ve got another 200 grand’ish in your home equity with that. And the framework I used, I like to think about this as, if I were to give you a million dollars after tax right now, what would you do with it? How would you redeploy that? And that would be a great exercise to think through with Frank and say, what would that look like? Would I be feeling much better if my position looked like, for example, 100 grand in cash, and then 200 in the home equity, 200 in after tax stocks, 200 in retirement accounts and 300 in rental properties that are local.

Scott Trench:
Would I feel better about that position or worse? I don’t know. My preference, Scott, my preference here would be something that had a higher cash position, probably six months to a year of that cash reserve. And that had a little bit more real estate or after tax on wealth skew there and a little less pretax because it just gives me more flexibility and optionality to make big moves in a general sense. But that’s a personal decision and I think that would be a good exercise for you to think through. Once you’ve decided, hey, here’s what my portfolio looks like, then take, okay in three years, I’d like my portfolio to look more like this and less like my current state.

Scott Trench:
And that will tell you what to do. For example, if you wanted real estate, you might stop contributing to the 401k and piling up more cash so you can invest in that next rental property, for example. Or you might keep your current home and move into another property to reposition that home equity as rental property wealth, if that made sense. So that would be one area to consider. And the last is going to be on your income statement, right? And right now you’re not bringing in a major cash surplus.

Scott Trench:
And so you could make drastic changes there and say, how do I make some serious changes here? Is there a new way I could reimagine my day-to-day that would enable me to spend, 30% less overall. Is there something I can do with the food budget? Is there something I can do with the mortgage here? Is there something I can do with transportation in a general sense? Although you spend almost nothing there. What does that look like? And maybe we could walk through some of those line items or there’s a move in place, which of those feels right to you? Of those three areas, coasting on the current situation, redoing the net worth position and relocating your capital or focusing on that income statement.

Gracie:
I definitely think relocating our net worth position where everything is. And originally we had planned, we had put more in pretax thinking we would do the Roth conversion ladder, but we haven’t fully stopped working. So it’s not going to happen anytime soon, but I don’t know if I see other way to like reallocate our assets other than what she mentioned about stopping the 401k. And is it worth losing the match, which it’s 4,000. I mean, it’s not like a huge part of our world, but it’s nice to not lose extra money. Is it worth losing that to then redeploy that saving somewhere else? That would give us more flexibility. So it’s something to think about.

Scott Trench:
Are you maxing the 401k or are you taking the match?

Gracie:
Just the match.

Scott Trench:
Okay. I think that’s, yeah. So I think that makes sense. And so you don’t really have much to redeploy from a cashflow perspective, it’s going to the mortgage and to the 401k. So that leaves us with coasting or the P&L.

Gracie:
Yeah. And our biggest thing is, at least from what I’m seeing is this house, it’s a big part of our world right now. So that would be a pretty major thing to change. So I don’t know if that would be worth it, just to give us more flexibility. I mean, and just to be clear, Frank the house that he loves set up it’s close to his work. He has no issues with any of this. So it’s more of me trying to find flexibility in our spending and where we’re going. I know if I called Dave Ramsey, he would be like, sell the house. It’s way too much of your world, budget-wise.

Mindy Jensen:
So knowing the front range market like I do, where are you going to go?

Gracie:
It’s a great question. And actually we were planning to move. So we come from different states. Neither of our families live in Colorado. So we had actually thought we would move closer to family and ended up staying. So there is still the idea that we could move close to family. One of us has family in a lower cost of living state, one of us does not. So it’s just a matter of, now do we pull that trigger? Do we pick one of our families to go live by? And is it worth it to basically location arbitrage, our financial position?

Scott Trench:
Yeah. Well, that compounding, that is probably your incredibly low interest rate on your property that you have right now.

Gracie:
Yeah, what we would buy is probably going to not really change or the payment probably wouldn’t change that much. I haven’t run the numbers, but yeah, you’re probably right. Even in a lower cost of living, I don’t know how much lower of a payment we could get at this point, unless we just pay cash for our house. Yeah. I don’t know if that would give us the flexibility we’re looking for.

Mindy Jensen:
But in a lower cost of living area, what sort of income can you make? And I believe, I know what state is your lower cost of living area. And they have very high property taxes. They have very high sales tax. So you are changing your absurdly low property taxes here for unrealistically high property taxes out there. I don’t know that is-

Gracie:
Are you talking about Wisconsin?

Mindy Jensen:
I am.

Gracie:
Okay. So I actually, I consider that the higher cost of living.

Mindy Jensen:
Oh, okay.

Gracie:
Because of what you’re talking about is the property tax. It’s one of the highest in this country. So it would be very high. But the other option is Tennessee. Oh, so no state income tax, the property tax I think is right around what it is here and we wouldn’t be going to Nashville. So that would be good because they’re crazy over there. Cost of living is high there.

Mindy Jensen:
I would run some spreadsheets, Miss CPA. I would look at all of the things, pro and con it, and see what are the benefits of moving versus the benefits of staying because Tennessee is actually a really nice state. You don’t have your winters. I knew Wisconsin was one of those states. I’m like, oh, Wisconsin’s great, but it’s also like winter last 12 months a year. And I’ve lived in Wisconsin, don’t send me emails about how great Wisconsin is. I know it is. It’s just really hard to live there for seven solid months. But yeah. I mean, there’s a lot of different opportunities. What sort of income would he be making in Tennessee? I’ve never lived there, I’m not sure what their salaries are.

Gracie:
That’s a great question. Yeah, and question on that. Do you think it would be worth trying to get an offer just to see because yeah, Frank has never looked, so how do we know, how do you know what you’re going to make there?

Mindy Jensen:
I think it would certainly be worth a couple of hours of searches on indeed.com to look up, what are salaries in Tennessee for whatever his job is. I can’t remember what his job is, but if he’s making 101 here and he can make 30, there that’s a real easy answer.

Gracie:
Yeah, that’s a hard no.

Mindy Jensen:
But if he’s making 101 here and he could make 85 there, that makes the decision a lot more like neck and neck, and then you’ve got family there, which is really valuable. That’s time away that you can get a breather.

Gracie:
Another big part of our budget, speaking of do we cut our expenses somehow, a big part of that is travel back to see our families. That travel budget is not, oh, let’s go to the beach and rent a hotel and all this, no, we go stay with our families and it’s basically just airplane rides to get back to both of our families. So that would be another win if we did that. But yeah, it’s a little bit outside the scope, because it’s a big lifestyle choice. Do you want to live here or here? So it’s a hard choice to make.

Scott Trench:
I think there are definitely, I don’t think there’s an easy answer to any of these things. The easy answer is, cut that spending down by 30 or 40% and go to town on that. And that solves half of these problems. That’s a painful, methodical, slow grind to do that. And I think that we should acknowledge it as an answer to your situation, that there are probably items to shave and things that you could get more disciplined on with that and really settle on that, not the aspirational 7,100 a month, but actually bring that down to a reality where you’re spending four, or five and a half, six grand a month, and having that net cash accumulation tick back up, that will bring flexibility. So I think that’s something we should acknowledge there because there is no other major life move that you seem like really able or willing to make at this point in time on that front, we can get creative about income on those things. And we can think about a big move here, but I ask you this, do you like Colorado better than Tennessee or Wisconsin?

Gracie:
Well, this is part of the problem is that I glamorize moving back to Tennessee. We actually, Frank and I met there and we had a great time living there, however, he just had to come back to the mountains, the big mountains, he had lived here for a short time. So I don’t really care. I think the mountains are great, but I think this area has its downfalls. For example, it’s getting way busier, you can’t really get into the mountains for under four hours some days. So yeah, so that’s another thing where maybe outside the scope of the show where it’s a marriage negotiation, like where do we live? So there’s that. And then of course the culture, I love that everyone out here is so active and fit. That’s an awesome benefit, and we would love our kids to be raised where it’s normal to go hiking on the weekend or whatnot.

Scott Trench:
And the same is true for everyone in Tennessee, well, you can’t badmouth people in Tennessee.

Mindy Jensen:
No.

Gracie:
And that’s true. That’s true. When we lived there, we had found like the group of outdoors people. So we found them, but it’s not as out here, you just go and you’re being passed on the trail by an 80 year old, and you’re like, oh my gosh. So I think the ideas that I’m hearing that’s coming to mind is maybe we reset another goal of opening up our cash flow for a reason, that’s not spending, but it’s more like opening up our cash flow to invest in a way that we can later access income. Like you said, rental maybe. And to do that, we would need to cut 30 to 40% of our spending. Question is, what areas do you see? What are the biggest red flags when you look at our spending, but you would just be like, get rid of this or work on this really hard.

Mindy Jensen:
Groceries, no questions asked, spending and miscellaneous because I don’t know what’s in miscellaneous.

Scott Trench:
And groceries for example are 978. Miscellaneous is 700 and no questions asked is 973 a month.

Mindy Jensen:
Yes.

Scott Trench:
Just for folks who are-

Mindy Jensen:
So that is $2,700 right there. That’s a third of your budget. I’m making that up, I didn’t do the math, but that’s a third of your budget in three categories. Groceries is going to be high. It’s going to be, and I’m struggling. Everybody’s aware that I am tracking my spending publicly at Mindy’sbiggerpockets.com/Mindy’sbudget. You can see that I am blowing my grocery budget every single month. I am hardly the right person to talk about, about this, but I’m really trying to get my grocery spending under… And my kids are 15 and 12 and they eat like linebackers after a game. So I do think you can get your grocery budget down. Scott, Daphne eats more than you. They’re just hoovers. Nice. But I do think you can get your grocery budget down. I’m wondering if you do anything like grocery planning, meal planning or-

Gracie:
I do. Yeah.

Mindy Jensen:
Where is that thousand dollars going? Is it all organic stuff? Is it grass fed Kobe beef? And is there a reason behind it? Because sometimes people are like, I spend a thousand dollars and it’s very regimented and it’s just, meal, food allergies and things like that. And some people are like, I just spend it because I have no idea where it’s going.

Gracie:
Yeah. And I think we’re neither of those. I actually have starting in December last year, we spent 2000.

Mindy Jensen:
Oh well, that’s great. You’ve done huge improvements.

Gracie:
Well, I was like, we can’t do that. So I started tracking it very detailed. I won’t bore you with that, but I know exactly what we’re spending it on. I do meal plan every week and we don’t eat out. So we are eating a lot home and I will say we have a, three year old and 18 month old. And gosh, I feel like we throw away so much stuff because they don’t eat what I give them, but I don’t think that’s killing us. Diapers aren’t killing us. So even though I know where it’s all going, it’s like, I feel out of control with it still. And every time I buy groceries, I feel shocked. And, I definitely don’t know what to do with that. And you mentioned, is this wild game or organic? No, we do eat a lot of fruit and vegetables.

Gracie:
I make sure we have nice produce, but not like nice, but there’s produce and fruit, but Frank is a hunter and we have a lot of wild game that we use every week. So we don’t even buy that much meat. Probably we could just quit buying meat altogether. So that’s an option, but yeah, I don’t know what to do about it. And I even split out supplies and stuff because I was like, I think this is really inflating my number for groceries. So that number is actually just the food. It’s not even, paper towels and stuff.

Scott Trench:
I think it’s hard. And I think that’s where, I think this is really helpful. I bet you, there are a lot of people who are feeling exactly the way you do about budgets like this, but again, I don’t think it’s going to be… I think that’s why it’s the easy answer is to say, let’s cut back on spending, but we get it. That’s going to be hard. There’s going to be, it sounds like you have great command over these things or at least track it very thoroughly each month with that. It doesn’t change that these are the numbers. And we have to go to where we think the leverage and the numbers are, and there’s no leverage in the income front.

Scott Trench:
And we don’t have too many action notable items on the net worth category. And so what can we do here on that? And so I think I would like to wrap it up with three big points for you for advice. First, I would sit down and I would model out, what is the reality of your situation going to look like over the next three years with a couple of standard assumptions? Spend some time, build out an Excel model or a spreadsheet and go and say, what’s going to happen to us in three years, in five years, in 10 years, if the current trajectory holds? Reasonable assumptions for income growth, expenses, these types of things, and say, how does that change if I was able to make these cuts in these areas, what would have to be the reality?

Scott Trench:
And what does that do to my model over in three to five years? What happens if I move to Tennessee? What happens if we move to Wisconsin for these areas? And then using those numbers, I would sit down with Frank and say, what do we want to do? Are we happy? We want to just keep hanging out here in Colorado and living the good life with this. Do we want to move to Tennessee, do we want to go to Wisconsin? Do we want to make some change? And how does that change my outputs here that are going at, and what do we want to do? And the artifact that you should construct there, the document I think is the vision, right?

Scott Trench:
It’s a half a page or a page log description of where you want to be in three years and you can cascade the goals from there. And I think that will at least give you clarity where you can say, this is the decision we made, and these are the outputs of that decision, what they’re likely to be. And we’re aligned with that. We can live with that from that, and that will help you inform, do I want to go to town, trying to find more in my budget. I probably don’t have much of my groceries. Is there anything in miscellaneous? Is there anything, why am I not actually accumulating the $1,600 per month that my budget says we should be accumulating? Am I forgetting an overhead allocation or a CapEx account equivalent for our lives that should be in that category?

Scott Trench:
Or what is that? So, sorry. We have model, we have money, date and vision, which you can just put as a draft and repopulate every couple of months until you settle on what you want to do there. And then I think you have, the outputs of that will be, do I want to concentrate on spending, do I want to concentrate on income? Do I want to concentrate on capital allocation and realigning my accounts? But unfortunately I think that you have brought us a hard problem here where we can have any of the things you listed, but we can’t have the combination of things that you want without making major financial changes and lifestyle changes most likely with that. And so hopefully this artifact will be the way to negotiate or make those trade offs with Frank. How’s that sound?

Gracie:
I think that makes a lot of sense. And really, halfway to our million dollar number, we did realize, oh, I don’t think this is going to be enough. We’ll figure it out when we get there, what to do next and what we got there. And we never figured out what to do next. And so yeah, I do think that’s where we are stuck is we haven’t done another projection out for three years. Where do we want to be? Now that we’re here, where should we go? It’s more like, well, here we are. So I do think that would be helpful just to run a few scenarios out. And I actually really appreciate hearing your thoughts on cutting 30 to 40%. One of my thoughts was maybe someone just needs to tell me to get over myself and figure this out instead of just spending and then wondering what happened.

Gracie:
So I’m good at that. I’ve done that for 10 years, I did the payoff and then we did FI. So I’m a little bit throwing a little tantrum inside because I didn’t want to get to this point and have to continue cutting the budget that much. But if we can do a three year model where I see flexibility opening up in the three years, we could do it, I think.

Mindy Jensen:
Well, how much money do you want to be saving?

Gracie:
That’s a good question. And, that’s where I think we’ll have to look at what our options are. So for example, if we want to buy a property, I’m just going to throw that in there. I mean, we haven’t fully talked that one out, but if we wanted to buy a property that would increase our cash flow in three years or a couple of properties, I don’t know anything, but then that would help us back into how much to save above the 401k. And so that could give us a new saving goal. So I guess right now we don’t really have a saving goal. It’s like, okay, save enough, hit the match, and then our forced home principle. And so we have no other goal right now.

Scott Trench:
Personally, I revised Set For Life. So, well, I guess that is a shameless plug in this particular show, but, I’m going back and rereading that, and I’m like, good God. When I was five years ago, six years ago, I was another person. I was spending only this much, every day I was doing this, I was reading a book every like two days on this. I was working out five, six times a week. Now I look in the mirror. I’m like, that’s what two beers a night, three nights, four nights a week have done to your stomach there. That’s what this is like. And it just gave me a kick in the pants personally to reignite, what was I doing four or five, six years ago.

Scott Trench:
And I slowly drifted away from some of those things to get into this spot where I’m not really feeling as good about some of those things. And I wonder allowed if maybe some of those things may have happened in your budget to a certain degree? Not obviously the…I just was like, huh, something about what I was doing a few years ago, I was happier in some ways with a couple of things and I was saving more and things were going good.

Scott Trench:
How can I get back to that one step at a time, piece by piece with this? And so that was my goal. And so the last six months I’ve gotten back into that. I’m not a 24 year old Scott that’s for sure. But I’m definitely doing a little better than I was this time last year during the pandemic, when I really let a lot of my best practices about how I run my life, go out. And perhaps some of that is happening to you, I don’t know. But perhaps that’s helpful. If not, you can feel free to leave it.

Gracie:
Oh yeah. I mean, we definitely have slowly slid away from our original, I don’t know, discipline around spending, big time. So yeah, there’s a lot of work we could do there.

Scott Trench:
And, that made me unhappy to realize that, and I’m much happier now that I’m never going to get back to the $3,000 a month or whatever crazy glow number I was spending at that point in time. But I’m definitely getting back into shape in a number of ways right now. And it feels good and it’s a process and it’s definitely, you can give yourself permission and we’ll to wax and wane over those things. But perhaps after you set that vision, you can be like, you know what? This next year, we’re going to continue getting every month, a little better here and getting this thing back into the shape that I was in four or five years ago, which is what got us to this millionaire status in the first place. So perhaps that’s one bit of motivation that could be helpful.

Gracie:
Yes. Thank you. Love it.

Mindy Jensen:
And I’m going to throw back out there, the tracking your spending, because when you’re not consciously tracking every single expense, it is so easy for $20 here and $50 there, and $70 there and $90 there. And all of a sudden, you’re like, why am I not able to save any money? Where is all of this money going? And then looking backwards is one thing, you can see, oh, wow, that was a big $250 expense at Ikea that I really didn’t need. But when you’re in it every single day, and you’re looking at your numbers, go look at my numbers, they add up, thanks to my friend, Mr. Waffles on Wednesday. They add up every single time I put an expense in there. And they turn red when I go over my budget. So that is a great big, Mindy you’re doing it wrong.

Mindy Jensen:
The whole world can see at biggerpockets.com/mindy’sbudget. But then I know, that’s open on my computer screen all the time. And I see it and I think to myself, oh, my budget was 750 for groceries, and I’m at 700 and I’ve got a week left. I am going to do everything I can to eat out of the pantry so I don’t have to go over budget. Or, wow, I already hit 800 and it’s week two of the month. Holy cannoli, I am in a mess. So at least it’s like, it’s conscious. And I can be thinking of other things in my budget that I can, like, oh, I’m definitely not going out to restaurants the rest of this month to try and keep everything more in line. I mean, having it there to see where everything is going can be kind of eye-opening.

Gracie:
Yeah. I agree with that. And we track it all the time, but we still don’t follow. We don’t see the red, oh, we went over because it used to be like, oh, 1% of our income off here or there, no big deal, but now it’s kind of a big deal. So I don’t know how to get back into that. But I do think you’re right. We need together to actually agree on the numbers we don’t want to go over.

Mindy Jensen:
Yeah. And that’s the money date.

Scott Trench:
Pick one and make it the goal and get it back on track. I was tracking my alcohol consumption on a daily basis, I’m like, there’s a four, what the heck am I doing? But then there’s a three this week. There’s a five, it is like, what am I doing? That’s so much booze that I’m consuming. It’s so bad for me. Obviously this is not your issue. You have a baby on the way from that. So I’m using an example that clearly does not apply, but that’s like kind of perhaps, put them on, stare at them, and then pick one and fix that one, and then pick another one and fix that one, and pick another one and fix that one. And give yourself permission to have it be a six month or a year process to do it because you’re not going to be able to go cold Turkey and cut all this stuff out.

Scott Trench:
But perhaps that would be a good way to attack the challenge here. And, you know you can do it because you’ve been there. You’ll never get quite back to the financial shape you were in before you had two kids soon to be three and all these other things going on. But perhaps you can say, I’m going to buckle up here and figure out a couple of these points bit by bit and make it a point of pride to get to where old Gracie would’ve been very admiring of the discipline that’s in there, five, six years later.

Gracie:
Great, love the motivation. Yeah, we need it.

Mindy Jensen:
Awesome. Well, Gracie, thank you so much for sharing your story with us. I thought this was a lot of fun and I really appreciate your time.

Gracie:
Thank you so much. So helpful.

Mindy Jensen:
We’ll talk to you soon.

Gracie:
All right, bye.

Mindy Jensen:
Okay, Scott, I think that the only piece of advice we didn’t give Gracie was maybe she should try winning a lottery, which is actually really crappy advice. I like her story, she has set herself and her husband up in a good financial position. And I think now you’ve said it pretty succinctly, she’s got three options to choose from, which one does she want? Or which combination does she want to use? Which combination of levers does she want to use to move herself forward?

Scott Trench:
And one thing we didn’t touch on during the show, but we talked a little bit afterwards in the post-recording, was this concept of maybe earning more income, perhaps with her tax background, there are seasonal parts of the year where she could work and hire out childcare during those periods of time. And that might help her bring in some seasonal income that might be very high dollar per hour, for example. So a couple of options, that was one option we didn’t discuss in the show, but one that we wanted to call out there. I think that the reality though, is that it’s a tough situation from that. It is a tough mental situation. She’s obviously done really well and has won in some way, she’s a millionaire, and probably is set from a Coast FI perspective.

Scott Trench:
But we couldn’t find a way to say, hey, here’s how to stay home or have both of you guys stay home. And here’s how to spend more in a general sense. And here’s how to accumulate more wealth and produce flexibility. She’ll have to go and make a determination along with Frank about what they want a few years from now and in the presence and be realistic about what will happen if they choose those paths and then live with those choices. So there are a number of good ways to approach things, but none of them get all of the things that we want. And from the goals that she stated at the beginning of the show, hopefully it was still helpful for her and Frank though.

Mindy Jensen:
I think it will be. Yeah, I think they have a lot of things to talk about and what they decide today doesn’t have to be the only thing that they can do forever. Let’s make a plan. And I think that they have been really good at creating a plan to get her out of debt and creating a plan to reach FI, in six years, that’s awesome. And creating a plan for this, but then I think that they don’t currently have a plan and that’s where they are needing to work on. So I think you gave some great ideas and I would love to check back in with her in about six months and see where they pivoted to. Okay, Scott, should we get out of here?

Scott Trench:
Jinx

Mindy Jensen:
From episode 324 of the BiggerPockets Money podcast. He is Scott Trench, and I am Mindy Jensen [inaudible 00:55:01].

Dave:
What’s going on, everyone? Welcome to On The Market. I’m your host, Dave Meyer. If you haven’t heard already, last week, the BEA also known as the Bureau of Economic Analysis announced that real gross domestic product had dropped 0.2% in Q2 of 2022. Now, this is important and really newsworthy for several reasons. First and foremost, anytime GDP declines, it is noteworthy. That means that the US economy is contracting and as investors or just as everyday Americans, we should be wondering why the economy is declining and trying to understand what happens next.
Now, this news is even more noteworthy because this is actually the second consecutive quarter of real GDP decline. And if you were paying attention back in Q1, real GDP dropped 1.6%. And so now two quarters in a row, the first two quarters of 2022, we have seen real GDP decline. And the reason this is so noteworthy is because two consecutive quarters of GDP declines is the most commonly accepted definition of a recession.
I’m going to get all into this today, but obviously this causes some fear and concern because we are now hearing a lot of people saying that the United States is in a recession. I wanted to make this episode because there are a lot of questions about this. There’s a lot of confusion and honestly, there have been a lot of heated arguments I’ve seen about whether or not we are technically in a recession, what this means that we’re in a recession, what we should do about it. And so I decided to make this episode to dive into all this.
We’re going to talk about what actually got announced this last week. We’re going to talk about whether or not we are officially in a recession and then we are going to talk about the history of recessions and the implications for investors about what the current economic environment means. But before we jump into this super important topic, we’re going to take a quick break.
Okay. First things first, let’s just jump into what actually was announced this last week. On July 28th, the Bureau of Economic Analysis released the Q2 GDP data. Now, if you’re not familiar with the term GDP, that’s fine. It stands for Gross Domestic Product. And what it is basically if you added up all of the value of the goods and services produced in the United States in the second quarter of 2022, if you summed all of that information, all of the value created there, that’s what Gross Domestic Product is.
It is generally how economies all across the world are evaluated at the highest level. Now, there are tons of other economic factors that advanced economies use to evaluate production and output, but GDP is basically the most commonly accepted highest level analysis of an economy. So the US government specifically the Bureau of Economic Analysis puts out GDP data every single quarter.
Now, sometimes this announcement, it just goes by and some stock traders and people who like me just follow the economy closely, pay attention to it, but this particular announcement was watched really closely because real GDP declined back in the first quarter of 2022. And if it declined again, it would meet the classic definition of a recession. So a lot of people were eagerly awaiting this announcement to know whether or not the US now falls under this classic definition of a recession.
And what happened? Well, real GDP did decline for the second consecutive quarter. It was actually down 0.2% in Q2 or that’s 0.9% if you annualize that out to an entire year. So the US now meets that classical definition of a recession. And before we get into what this all means, let me just go into a quick note on some terminology here.
Real GDP. If you’ve been noticing, I keep saying real GDP. Real, “real” means inflation adjusted. And this is really important because you see if you looked at the opposite of that which is known as nominal GDP. So that’s not inflation adjusted, they tell totally different stories. So when you have real GDP, inflation adjusted GDP, it went down in Q2. But nominal GDP, which is not inflation adjusted at all, it actually went up. It went up quite a lot. It went up 7.8%.
And this is a super noticeable difference, right? 7.8% growth in GDP during normal times would be enormous. People would be singing its praises and would be so excited, but inflation is so bad right now that it is more than canceling out all of that growth as reflected in real GDP, right? If there was zero inflation, we could look at that nominal 7.8% and be super excited about it.
But the reason we have to look at real GDP is because inflation is devaluing the dollar and that means that when you account for that, the actual growth in the economy was slightly negative in the second quarter. So this is just something that drives me nuts because a lot of like really big reputable data sources, media sources will publish GDP data and not clarify whether it’s real or nominal.
So just as a note if you are looking into this information, make sure to check which one you’re looking at, because they’re both valuable measurements, but they are very different ones. And for the rest of this episode, I am going to be talking about real GDP. Again, that is inflation adjusted GDP because I think that is probably the most important thing that we can all look at this.
Now, I interpret all this information one way. You might interpret it differently. There are so many different variables in the economy, but overall, I mean, I don’t think anyone can really argue that negative real GDP is not a good thing, right? It means that inflation is overshadowing US productivity, right? As I just said, if there was no inflation right now, the US would’ve grown at nearly 8% which is amazing. But instead, when you adjust for inflation, as you should, it is negative.
So this is a really important difference. And again, I think that this shows weakness in the US economy. The big question now seems to be are we actually in a recession? And if you pay attention to the news or to social media, you probably see people arguing about this a lot right now. And it seems like it should be a simple answer, but unfortunately it’s not.
So I did some research just to figure out what is behind this entire debate. And let me just explain to you why it’s not so clear whether we are technically in a recession right now. So first, most people accept that two consecutive quarters of GDP declines equals a recession. Many people believe this makes it officially a recession, but that’s not actually the case.
So again, people generally accept that, but to get, quote-unquote, officially a recession, there is only one group of people who can do that and it is not as simple as two consecutive quarters of GDP decline. In fact, it is done by a group called the National Bureau of Economic Research. And specifically it is done by this very strangely named group called the business cycle dating committee. They put out dates around business cycles. There is no romantic dating that I know of at least going on, and it is just a bunch of academics basically.
This is a bunch of economists from universities across the country, and they look at an overwhelming amount of data to make their determination of whether or not we are in a recession. And as their very strange name indicates, their job is basically to decide when the recession starts and when the recession ends.
So how do they do that, right? Because most of us are walking around thinking two consecutive quarters of GDP decline, that’s a recession, right? Well, they look at it in a more complicated way. They say according to their website and I quote, “A recession involves a significant decline in economic activity that is spread across the economy and lasts more than a few months.”
That’s obviously not as simple a definition as two consecutive quarters. They go on to say, “In our interpretation of this definition, we treat the three criteria, depth, diffusion and duration as somewhat interchangeable. That is while each criterion needs to be met individually to some degree, extreme conditions revealed by one criterion may particularly offset weaker indications from another. Because a recession must influence the economy broadly and not be confined to one sector, the committee emphasizes economy wide measures of economic activity. The determination of the months of peaks and troughs is based on a range of monthly measures of aggregate real economic activity published by the federal statistical agencies.”
Whoa. Okay. That was a lot of big words and random stuff, but basically what they are saying is that they look at a lot of different stuff across the economy. It has to be across different economic activities, right? That’s something that they said that it doesn’t really come down to one standard definition. They are looking at the depth of economic decline. They’re looking at the duration of economic decline and they’re looking at how broadly it is spread across the economy. And they also said that they are basing it off real economic activity.
So they are saying what we were just talking about, that they base it off inflation adjusted numbers. Okay. So I know that’s pretty wonky and it’s notable that these people, the National Bureau of Economic Research, basically the only people allowed to officially call a recession have a very complicated definition of a recession, right? After I read that, we can all agree on that they are not just saying it’s two quarters of GDP decline.
So that is the important piece. The other important piece that I uncovered when I was researching this is something else they said. So they write and I quote, “The committee’s approach to determining the dates of turning points is retrospective in making its peak and trough announcements. It waits until the sufficient data are available to avoid the need for major revisions to the business cycle chronology.”
I know. Another really wonky, big word sentence, but basically what they’re saying is that the only people who are able to make the official recession designation say that they don’t do it in real time. They are not trying to decide right now today, “Are we in a recession?” They like to look backwards and say, “Okay, let’s look at what happened in 2022 and we’re going to decide when the recession really started and when it really ended.”
They always do it retroactively. Listen, I think it’s annoying and frustrating that it is not in real time, but in some way it does make sense because look at their definition, right? They’re saying they have to look at all this crazy data to make the determination. And if they have to look at that much data, according to them, then I understand it’s going to take some time to look at all this data. Unfortunately for us, the debate about whether we are in a recession is going to go on for some time.
Let me just show you something that I found actually on the Wall Street Journal. And it showed that just some recent examples, the 2001 recession, which was some people call like the dot com boom bubble burst, whatever, started in March 2021. That’s when it officially started, but the NBER only announced that in November of 2021. So eight months later. The great recession, which officially started in December of 2007 wasn’t announced until December of 2008. That is a whole year later.
The COVID recession, which is the most recent one, which started in February of 2020 was announced in June of 2020. So that one was actually relatively quick. Only four months later. But I know people get frustrated about this. They argue about this and they say that it’s all political. And there is obviously politicking going on. This is the United States after all. But there is just precedent. This is always what happens. This isn’t a change based on current economic conditions. The official designation of a recession always comes months after it actually starts.
So I actually didn’t know that. I thought that was really interesting. Something to help you all understand why there is still room for people to debate this and why people are debating this so much is because it’s going to be several months until we actually know for sure. So everyone wants to know are we in a recession? Most people would say yes because we have seen two consecutive quarters of GDP declines. Some people are going to say no, and we don’t know officially for sure.
Now, my personal opinion, and I know this is probably going to be different than what most people think is that it doesn’t really matter. I know that sounds counterintuitive, but my point is that the definition and whether the current time period is labeled as a recession, it doesn’t really matter to me.
Let me just be clear. I’m not saying that a decline in economic growth doesn’t matter. That absolutely matters. The fact that GDP, real GDP is declining, absolutely matters that it’s extremely important. What I’m saying is that whether or not we are officially in a recession, whether a group of people have decided that we are going to call this current time a recession or not, honestly doesn’t matter. It doesn’t change anything, right?
Because the broad macroeconomic trends that are underlying our economy that exist today are not exactly new. And whether or not the NBER decides that we are in a recession right now, or maybe in six months, or maybe not at all. I don’t know, but it doesn’t change the underlying facts, right? So let’s review some of those underlying facts. One inflation is outpacing wage growth. And as we’ve discussed has led to a decline in real GDP.
Economic output in the US on an inflation adjusted basis has been down for all of 2022. Whether you want to call this a recession or not, that remains true, and that remains concerning, right? To me, a decline in real economic output is not a good thing. Number two, the stock market and crypto markets are down considerably year to date. I’ve said this before and I want to make a point that the stock market and crypto market or other asset markets are not the economy, but they are part of the economy and they both have been down this year.
That said they have bounced back in July, but they’re still down from early in 2022. So that is a trend that we have been seeing for most of 2022. Whether we call this a recession or not, that is true. Number three, the housing market remains up year over year but is showing signs of slowing. What’s happening in the housing market, the data lines that we’ve been looking at have remained consistent.
Interest rates are going up. Affordability is declining. Demand is going with it and we are starting to see cooling in the housing market. But housing market is still up a lot year over year, but it is showing signs of cooling.
Four, generally speaking, consumer spending remains high. And yes, a lot of consumer spending increasing is a reflection of raised prices, right? So if people are just buying the same stuff and they’re more expensive, of course, consumer spending looks higher because everything costs more. But it is notable that even despite inflation and people spending power going down, they are still spending. So that is an important thing to note and has buoyed some particular retail businesses.
Some businesses continue to show good profit and strong growth. And lastly, the labor market remains strong. And it is true that the labor market, generally speaking, if there is a recession is a lag indicator. And if there is a protracted decline in real GDP, the labor market will probably take a hit. But as of this recording, I’m just looking at the data that I have today, as of this recording, that has not happened yet. Based on basically all the traditional measures of labor out there, people are highly employed right now.
I know there’s people who are going to point to labor force participation and that has declined. That is true. It is a very small amount. It is declined about 1%. So it’s really not that significant. And honestly, if you look at it by most traditional measurements, unemployment is really low right now.
So all these things, there are many other economic factors we could talk about, but these are the ones I just wanted to point out. And if you look at all of these things, like I said, they are true whether or not we call this a recession.
All these things, they can change. They are going to change. All this economic data is released at least a month ago. As of recording, I’m looking at June data for the most part. But these are the economic factors that we know about. And if we’re going to analyze our investments, if we’re going to analyze the market and try and make wise decisions based off it, we need to use the data that is available. And this is the data that is available to us right now.
So all of this is to say that I would advise you not to get too hung up on the definitions here, right? If you understand the underlying forces that are driving the economy, some of the things that I just talked about, then the label of recession, it matters very little, right? If you understand what’s going on with interest rates, the housing market, the stock market, inflation, the labor market. Then what a couple of people decide whether to call it a recession or not, it doesn’t really matter because you’ll be able to make informed decisions about your own financial life.
The fact remains the US economy is not growing on an inflation adjusted basis. And Americans generally speaking are not feeling very good about the economy. Consumer sentiment is extremely low. People are afraid of inflation, and these are the things, at least to me, that really matter. So that, sorry, is my rant about definitions. I just see so many people… Well, I feel like they’re wasting their time just arguing about whether in a recession or not, when really what you should be looking at, and what really matters is the underlying things that impact a recession like GDP, labor market, asset prices, interest rates.
These are the things that we talk about on the show and that I encourage you to pay more attention to than whether or not we are officially in a recession. Sorry, that’s my rant. So, anyway, as I said at the beginning of that I don’t care too much about the definition. What I care about is that declining real GDP is a concern. I wanted to share some historical data about that because I look at that data and I think that’s an economy and decline. I don’t want anyone to panic because recessions happen. That is part of a normal economic cycle.
I just want to share some information about you about what a normal, “recession” looks like. So I looked at some data since World War II and the average recession lasted about 11 months. Not so long. That was actually shorter than I thought it would be. If you’re someone who thinks we are in a recession right now, you follow the two consecutive quarter rule, we’re already at six months, right? Cause Q1, Q2.
So hopefully that means that it might end towards the end of this year. I don’t know. Just something to think about. Interestingly, I also found out that the most recent two recessions that we’ve had in the United States have been outliers. 2020 was the shortest ever recession lasting just two months. So again, that defies the two consecutive months of GDP rule.
It was just two months long. And then the gray recession was an outlier in the other way. Unfortunately, it was the longest post World War II recession and lasted about 18 months. If you look at the severity of these, they really do very pretty considerably. So if you look at the 2001 recession, which again was like the dot com bubble burst, again, it started in March 2021. Only announced in November 2021. And from the peak, the peak of the economy before the recession to the trough, which is the low of the recession, real GDP declined, but it was less than 1%.
So that’s about what we saw in Q2. And so back then, that was a pretty shallow recession. And the stock market took an absolute beating during that time. But real GDP declined less than 1%. And most notably for people listening to this episode, housing prices actually went up over 6% during that recession. So there you go. Pretty interesting. The great recession started in December 27th, 2007. Wasn’t announced for a year after that. And during that time, GDP went down more than 4%.
So that was much more significant recession, as we all know, by most economists and historians standards. The great recession was the worst economic period since the great depression. During that time, the housing prices dropped almost 20%. And as real estate investors, this is the horrible period that a lot of people remember and are afraid that it’ll happen again.
But just to be clear in four of the last six recessions, housing prices actually grew. And so just on an average basis in recessions, that housing prices typically do not go down 20%. And the reason, in my opinion why housing prices went down so much in the great recession is because housing caused that recession, right? In this economy, in this potential recession, housing is not causing it, right? Inflation is mostly causing this one.
So when housing caused the recession back in 2007, there’s a reason housing prices went down so much. That is why personally, I don’t believe even if we are in a recession that we are going to see housing prices decline anywhere close to 20%. I do think that in certain markets we will see housing prices declines, but I don’t think we are really anywhere close to what we saw in terms of macroeconomic conditions around the great recession.
Lastly, I’ll just talk about it quickly because it was barely a recession, but the COVID recession started in February 2020, was announced a couple months later. Only lasted two months and we all remember what happened there, right? The stock market tanked. I think it went down about 30% and then it bounced back quickly and went on an enormous bull run.
Similarly, housing market. It didn’t go down, but the start of this recession, the COVID recession was actually one of the beginning of one of the most aggressive, fastest periods of housing appreciation in American history. So I’m telling you all this because we call this recession, we want to call it a recession, but every recession looks really different. That is part of the reason why it’s hard to define, but it also is part of the reason why the recession label doesn’t matter as much as the underlying fundamentals, right?
What matters is what’s going on with the housing market? What matters is going on with the stock market, with interest rates, with consumer spending, with wage growth, right? These are the things that actually matter. So I obviously can’t say what’s going to happen next, but I wanted to share this information at least because history can be a useful guide for us. And that’s at least what happened over the last three recessions. If you want to look up more, you can just Google it. There’s tons of information about previous recessions that you can look at as well.
Now, we don’t know what’s going to happen, but there are some things that I think are important to watch. And here are a couple things that I personally am going to be watching over the next couple months to get a sense of my own investing but what is likely to happen in the economy.
So what to watch for first thing is employment. The real thing that’s scary about recessions is the unemployment rate rising. As I said earlier, right now the most recent data we have, unemployment is still super low. I am personally curious to see that if we have a sustained period of real GDP declines will unemployment go up? And the reason why I’m thinking about this is because, one, interest rates are going up, which makes it more expensive for businesses to borrow, which means it costs them more to expand, to build the new factory and to hire the people who are going to build stuff in that factory has become more expensive.
Second, if real GDP is down and corporate profits take a hit, they’re less likely to invest. They’re probably not going to raise salaries at the same rate that they have been. And maybe they’ll stall on a couple of new hires or maybe they’ll freeze hiring altogether. I think whether in a recession or not, it is a little too early to understand what is going to happen to the labor market right now.
Right now, it still looks really good, but we don’t know what’s going to happen over the next couple months. And so that’s why it is my number one thing I am going to be keeping an eye on is unemployment rates. The second thing is of course, inflation.
Now, many forecasters are projecting that inflation has actually peaked. And listen, this is not my area of expertise. I don’t have economic models or statistical models to project inflation, but I do follow a lot of different economists from all different types of backgrounds and beliefs. And if you look at commodity prices, this seems plausible.
You look at food prices, you look at energy prices, they are starting to come down. And a lot of that is because of fear of an inflation, but there is a plausible path that inflation has peaked. Now, that does not mean that prices are going to go down. That is just not going to happen. But what it does mean is that inflation may grow less fast, right? We’ve seen it at high eights, 9%. Maybe it goes down to 8% year over year. And then by the end of the year, maybe it’s 7% year over year.
I don’t know. This is just what people are… The majority of economists believe that it is going to start going down. That doesn’t mean the problem is going away because even if it goes down to 7%, 7% is still bad. But it would be a good sign for the economy if it peaked and started to decline. So that is something to watch for because, I guess, the point is if inflation starts to come down and employment, the other thing I’m looking at remains relatively strong, if those two things do happen, then we’ll probably see real GDP and economic confidence start to improve probably towards the end of this year.
If that doesn’t happen and inflation remains high, and we start to see large scale job losses, then we are at risk for a longer term recession and more economic pain. Maybe not quite at the scale of the great recession. I don’t think we’re really looking at something like that, but there is a scenario where this is a short and shallow recession and there is a scenario where this is more of a protractor recession. Personally, I think it is too early to tell one way or another, but these are the things I’m going to be looking at.
The last thing is of course interest rates. I do think this is honestly maybe the most interesting thing that may come of this GDP data that came out is that the federal reserve has obviously been raising interest rates since March in an effort to combat inflation. They’ve been very clear that they’re going to keep doing that. They’ve raised rates by 75 basis points. Two times in a row right now. That is very significant. But the fed also doesn’t want to crater the economy.
Officially, their job is to secure price stability, basically fight inflation and to pursue maximum employment. And if recession comes… And it’s a long recession, like we just talked about employment could start to go down. And so that will put the fed in a really interesting spot where they can’t just be aggressive against inflation because if employment starts to fall, then they have to decide, right? They have to do this balancing act of how do they fight inflation while keeping employment as high as possible.
So that could mean that the fed reverses course a little bit. Now, I don’t think we’re at the point where they’re going to start cutting rates, but my expectation is that they will probably start raising rates slower. And this is just my opinion. I am just speculating here. I think we’re not going to see any more 75 basis points hikes. I think we’ll probably see a 50, maybe 25 basis points hikes through the rest of the year.
A lot of people believe that the fed could start cutting rates in 2023. I don’t know about that. I am not projecting that, predicting that, but people have been talking about that. A lot of people on Wall Street believe that might be the case. So those are things to look at. My top three are employment rates, inflation and interest rates.
Okay. So quickly before we go, I just have a couple of notes and things to point out for real estate investors based on this announcement. First and foremost, as I said before, housing prices have actually risen in four of the last six recessions. And so don’t just assume that there’s going to be a crash because there is a recession. There is a lot more going on in the housing market than just whether GDP is going up or down.
We try and cover this extensively here on this podcast. And you can listen to a lot of our recent episodes if you want to learn more about that. I’m not going to get super into that right now. But lot of episodes. You can listen to one with Logan Mohtashami, Rick Sharga, one we just did with the whole panel. Just talking about what’s going on in the housing market will help you understand what might happen next.
The second thing is that, although, the fed is raising interest rates. The fed does not control mortgage rates. I say this all the time, but I want to just hammer this home. The fed does not control mortgage rates. Rates are much more closely. Mortgage rates are much more closely tied to the 10-year treasury yield, right? So go look on whatever financial data website you like. Go look at the yield on a 10-year treasury.
It peaked back in June and it is starting to go down. In a historical context, it is still extremely low. Now, why is this happening? And just for the record, the yield on the 10-year treasury is starting to decline and that has moderated mortgage prices very considerably.
Now, why is this happen? Well, it’s because of fear of a recession. When there is fear of a recession, investors, generally speaking flock to safer investments. They don’t take as much risk. You see that reflected in really risky stocks, right? They’re getting hammered more than blue chip stocks, for example. So investors flock to safe investments and treasury bonds like the 10-year yield, the 10-year treasury, excuse me, that I am talking about are extremely safe investments because they’re guaranteed by the US government.
So all these people are looking for these bonds because they’re safe and that raises demand, right? There is demand for bonds and it does with everything else, and it’s supply and demand. When there is more demand, prices go up. And the funny thing about bonds just… I’m not going to get super into this. I will do a full episode soon, but when prices for bonds go up, they’re yields fall. They’re inversely correlated.
So demand is up. That increases the price for bonds that pushes down their yields and that means that mortgage rates have gone steady. They’re down from their peak. I don’t know what’s going to happen, but if you are looking to buy real estate, look at what’s going on right now. And you can see that bond yields are a bit lower. They’re not going back to… We’re not going to get 3% mortgages again. We’re not going to get 4% mortgage again anytime soon, but they have stopped growing so quickly and we are starting to see five and a half, 5.75 be the standard right now.
They’re no longer on this like exponential rise that we saw for the first half of the year in mortgage rates, they’re starting to flatten out. And to me, this is really important because it provides more stability to the housing market, right? Investors, homeowners, can all start to make informed decisions if they have a good idea of where mortgage rates are going to be over the next six months or during at least during their buying period.
So that is something to also keep an eye on is mortgage rates because, again, just to reiterate here, although the fed is raising interest rates, fear of a recession is pushing down bond yield and that constrains mortgage rates.
Okay. So that is what I got for you guys. Just to recap, the US is seeing declining output on an inflation adjusted basis. We now have seen real GDP decline for two consecutive quarters. Most people consider this a recession, but we won’t know if it’s officially a recession for at least a few more months.
My personal advice, don’t get too caught up in the definition of a recession. It is the underlying economic forces that matter. Inflation is far too high. Spending is keeping up. We have not yet seen a large scale job losses, but that is going to be a key thing to watch in the coming months. And the housing market is cooling on a national scale, but still up double digits year over year which in any other year would be absolutely massive.
As an investor, you should be understanding all of these forces. That is my recommendation to you. Again, don’t get too caught up into whether we are in a recession or not, whether we’re calling it a recession or not. Try instead to understand the underlying economic forces. This is what this show is all about. Our aim is to help you understand the important trends and data points that have led to the economic conditions we find ourselves in and not get caught up into what words we use to describe them and into some debate that is ultimately going to be settled by a couple of academics a few months from now.
So hopefully, we’ve done that today and we’re going to keep trying to do that twice a week to help you understand the complex economic situation we find ourselves in. Thank you all so much for listening. We really appreciate it. If you have any feedback for me or thoughts about this episode, please reach out to me on Instagram where I am @thedatadeli. Thank you all. We will see you again on Monday.
On The Market is created by me, Dave Meyer and Kailyn Bennett. Produced by Kailyn Bennett. Editing by Joel Esparza and Onyx Media. Copywriting by Nate Weintraub. And a very special thanks to the entire BiggerPockets team.
The content on the show, On The Market are opinions only. All listeners should independently verify data points, opinions, and investment strategies.

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