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Mindy:
Welcome to the BiggerPockets Money podcast, show number 338, finance Friday edition, where we interview James and Bianca and talk about large student loan debts, early retirement and real estate investing like always.

James:
One thing is, I’m fearful of creating just a new job for us. Right now we’re doing all the maintenance, we’re doing all the property management, everything, it’s all us. And so it feels like time is tight already. And so I always have this fear of growing and figuring out systems to make sure that we’re not just creating a new job on top of our jobs we already have.

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

Scott:
Thank you, Mindy. Great to be here.

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

Scott:
That’s right. Whether you want to retire early and travel the world, go on to make big time investments in assets like real estate, start your own business, or pay off hundreds of thousands of dollars in student loan debt, we’ll help you reach your financial goals and get money out of the way. So you can launch yourself towards those dreams.

Mindy:
Okay, Scott, this is actually one of my favorite episodes ever, and it didn’t start off that way. We have a guest, we have two guests actually, who have quite a bit of student loan debt. When I was first reviewing their numbers, I thought this is a really big problem. As we started talking to them I realized that they have an income based repayment plan, but they make a lot of money. And at first I was like, this is interesting. And then we started talking to them and the whole situation changes, the direction we were going to go in actually gets changed quite a bit. I can hear people saying, I don’t want to listen to income based repayment programs. This is an awesome episode. We went in a completely different direction than what our guests were expecting and really opened their eyes to different opportunities.

Scott:
I think the elephant in the room when it comes to James and Bianca’s financial situation is Bianca’s student loan debt. Now, because she took on so much student loan debt and has a relatively modest income, relative to the size of that debt burden, they actually separate their finances, they feel trapped in their current location and they’re waiting 19 to 24 years for the repayment programs to come in. And they’re worried about an income based problem from a forgiveness perspective after 19 years, some of those loans may be forgiven and because they’re not federal programs, that repayment program may actually count as income for Bianca.
So major long term problems, I think we were able to avoid those entirely based on their financial situation. I hope that this is eye-opening for folks that are in similar situations or who may find themselves in similar situations in a few years.

Mindy:
Scott, I just love this episode, because very soon in the beginning of this show, we change tunes. It’s just a lot of fun. Now from my attorney, the contents of this podcast are informational in nature and are not legal or tax advice, and neither Scott nor I, nor bigger pockets 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 financial implications of any financial decision you contemplate. All right. Let’s bring in Bianca and James. James and Bianca have a fairly good financial situation until you look at the debt.
Bianca was a human chiropractor and took some additional coursework to become an animal chiropractor. She’s sitting on about $278,000 in student loan debt, which has been in forbearance for the last few years, but will go back to about 6.8% interest once the repayment pause is lifted. But back to the good, they have 10 cash flowing rental units across four properties. They spend significantly less than they earn, and their only debt is mortgages and that pesky little student loan thing we talked about. Bianca and James, welcome to the BiggerPockets Money podcast.

Bianca:
Thank you. Thank you for having us.

James:
Thank you for having us.

Mindy:
I’m super excited to talk to you today. Before we jump into that, let’s look at your numbers. You make a whopping $17,310 a month, and this is across both salaries, bonuses, and rental property cash flow. That is a great.

James:
That’s after deductions. Yes.

Mindy:
That’s net income. Their expenses are $7,300. So approximately saving $10,000 a month, which is fabulous. I do see some room for improvement on those expenses. We have a car at 765 a month. That includes gas, insurance, maintenance, registration, all of those things, but it’s still 765 a month. And if we’re going to round up, that’s almost $1,000. Clothing at 250, dogs at $360. Entertainment at 825, gifts 500, groceries 845, healthcare 265, miscellaneous needs 300, personal care 570, travel 2415. I think I see a place we can cut. Utilities 260, for a grant total of $7,300, 7355. Again you’re making $17,000 a month, not a year, a month. So spending $7,000 isn’t such a big deal until we go back to the beginning where we have that $278,000 student loan. I’m not done. I’ve got more things to talk about.
We have that’s 9,955 leftover, which is not really leftover. I think that number can be a bit misleading because you’ve been using it lately to cash flow one of the rehabs on your properties. Investments, we have 401(k) for James at 120,000, HSA at 4,000 traditional IRA at 298,000 Roth IRA at 59,000 after tax brokerage at 368,000, cash savings at 105,000, which normally I would be like, wow, that’s a lot of money in cash, but you do have 10 units over four rental properties. I think that that’s maybe a smidge high instead of grossly high. Subtotal on that is $954,000, which I think is really great allocated, very, very diverse.
Four rental properties total 1.5 million. Hooray for you. Bianca has $7,000 in her Roth IRA, $14,000 in her brokerage account, $5,000 in cash, for a total of $26,000 in total investments. But you put those all together and you have $2.5 million. It seems like you’re doing fairly well. We go back over to the debt side and we have $847,000 in debts, for a grand total of 1.6 million in net worth. So again, it seems like you’re doing fairly well once we don’t look at those student loans. Why is healthcare so expensive? We have a shortage of healthcare and then it’s so expensive to become a healthcare provider. It seems like that’s a self-fulfilling prophecy. Hey, it’s so expensive. We’re not going to allow you to get in there and learn this.
So of course the challenges that I see are the student loans. Clearly if you are allocating so much to that travel fund, you probably like to travel. Bianca and James, what can we help you with today?

James:
Well, I think there’s a couple things and you hit the nail on the head. Obviously the student loans are a big part of what’s out there and and has been weighing on us and how to handle it. We’ve got some ideas based on the program that Bianca’s on for repayment, but also I think that we’re looking at three to four years to try to find a little more flexibility in what we’re doing. I don’t dislike my job, but it’s not something that lights me up every day. It’s not something that I go to work and I just can’t wait to do. And I know that if we look to do something else, it’s going to mean a big step back in salary, right?
Because I’d be leaving the industry that I’m in completely to look for something new, and to be able to do that I want to make sure that we’re in a solid position. I don’t think either of us has a dramatic urge to retire in the next couple years. I don’t think that’s what we’re looking for, but understanding that our income could potentially dramatically decrease if I were to explore something else, we want to make sure we’re in a good position going forward.

Mindy:
Sure. Okay. Let’s talk about this student loan repayment plan.

Bianca:
I’m on an income driven repayment plan. We spoke to some-

James:
Some consultants.

Bianca:
Some consultants, to kind of figure out the best path forward with that. Because obviously it’s quite a lot of debt. Currently on an income driven repayment plan. Started working with them during the pandemic. But basically my income driven repayment plan allows me to pay as little as possible. I’m paying after forbearance ends here, I’ll be paying close to $0 a month or very low. And then after 25 years my debt will be forgiven, but I’ll have to pay income tax on the amount that was forgiven. I’ve been saving for that, putting money away each month and just prepping for that giant tax bill at the end, but still there’s a lot of fear and anxiety around, is that plan going to work? Is this the best plan forward? What should we be doing?

Scott:
How far away is the 25 year forgiveness event?

James:
The loans are split technically between two loans. The first one is about 19 years away and that’s really going to be, I think that one’s the bigger, the bulk of it, it’s the most of it. It’s over 200. There’s about 70 with the interest left for the other one. And that one is additional five years. So looking at it like 24 years.

Scott:
Just to frame what I understand here, the goal here is for James to have flexibility with in a general sense specifically to pursue an entrepreneurial venture, it sounds like in the next couple of years. Is that really the high level goal here? And to deal with the student loans and the context of that?

James:
I think so. I think that that level of flexibility, while also hopefully not taking a huge hit to our lifestyle. We’re looking for whatever that path is to be at least semi location independent too. Because we have family and friends across the country, wouldn’t mind living by for bits of times. We’re also trying to keep that in mind with whatever path we go forward with.

Scott:
Great. And let’s call it some good here. If I were to frame your situation at a high level, let’s pretend that the student loans are just part of your rental property portfolio for a second, right? If you include them in that you’ve got 847 grand in debts against a 1.5 million rental portfolio, that’s not so bad. And your blended interest rate on that is usually 3% for the mortgages and on the 6.8% on the student loans, is that right?

James:
That’s right in exact terms, but there is some caveats to that percentage on the student loans. The program that she’s on, the government offers forgiveness, the negative that occurs each year. So the fact that she’s not paying really anything, and then we have the interest at the end of the year, they actually forgive 50% of that. So really it’s a 3.4% equivalent interest rate, which changes the picture as to what do we do, because we get start getting that interest at low. Is it worth aggressively paying versus possibly saving for the end?

Scott:
Well, even better then in that situation. Bianca, what do you want to do over the next couple of years? Do you have any specific goals around flexibility or outcomes for you?

Bianca:
I would also like some flexibility. I enjoy my work currently, but it is very location dependent and that’s the thing I don’t enjoy about it I guess, because James and I do like to travel a lot. My work does not allow me to just up and leave for extended periods of time unless I really want to impact my business.

Scott:
Awesome. And what happens if you do up and leave from that job, is there any impact on the student loan program?

Bianca:
Yes and no, I guess, because it’s income based. So my income would change drastically. It would drop to zero technically. I’m not sure what would happen if I were just unemployed, what that would do to my income driven repayment plan. But I don’t really want to be unemployed. I like working, even if I wasn’t doing this, I’m a busy body and would want to be doing something.

James:
I think it’d be a lot harder for us to certify that she does not have access to my income or my saved money if she is completely unemployed as well.

Bianca:
And that’s part of what allows my income based repayments to be as low as they are. Is that we’re keeping our finances so separate.

Scott:
That makes sense. I’m calling this out because I think that when I look at your position at a very high level, the student loans are really, they probably feel like a big, the big, I think the story here, but I don’t think are. The story is that you guys are worth 1.6 million, have a cash flowing rental portfolio and save $10,000 a month and have a very responsible debt to equity position across your overall portfolio in a general sense. I think what I’d hope to do at a first point is to free you from this mindset that the student loans are really this crutch that are holding back your financial position.
Here’s several ways to frame it. One is, yes, there are advantages you currently have with this. But in the worst case scenario you have a 6.8% student loan debt that you need to pay off. You can crush that in about two years with your current cash flow situation. So you have a two year debt here from that, and you could also cash out, refinance your rental properties, probably at a similar debt at this point, that level at this point, to pay that off at any point as well. I just want to call those things out because the trade off there of spending 19 years with this as a boogeyman in your financial profile may be fairly steep. Yes, that’s advantageous, but you may not need to do that and you may find that there’s freedom from just being rid of this thing in an earlier time period.
Not to say that’s what we’re going to end up on, I just want to paint that perspective because it’s really not that big of a deal in the context of your financial position. It would be a huge deal to someone else, but when we combine your finances for the purpose of this show, you got a really strong position. What’s your reaction to just that observation?

James:
It comes back, I think for me, the math versus the personal finance side of it, right? Because it’s a weight off your shoulders to think about having it paid off and having it gone, not having it sitting there and worrying about it for the next 19 years to see what happens. But then I sit down and do the math based on what the interest rate is and what we could do with that money and what the opportunity cost is, and I feel like, well, if I could just somehow ignore it and pretend it isn’t there, we may end up in a much better position down the line.

Mindy:
But down the line isn’t five miles down the line, it’s 19 years down the line. How much of your current job do you want to deal with so that you don’t have to pay this off? I was looking at this and I saw $278,000, as a first glance I’m like, that’s a lot of money. And then I’m like, wait a second, you have 10,000 extra dollars every month. And there’s no such thing as extra dollars, but you have 10,000 currently unallocated dollars every month. What is 200,000 divided by 10,000? Because I think that’s not that much. And I did the math on the calculator just to double check myself. That’s 20 months. That’s less than two years. Then you’ve got 17 years to build up the biggest pile of cash you can and you still come out so far ahead without the stress.
You don’t have to do it for 19 years if you don’t want to. Whereas if you go with the income driven repayment plan, you have to do it for 19 years and 24 years for the additional $50,000, which you could then just knock out whatever. But I really would encourage you to sit down with the spreadsheets and talk about your goals. This isn’t a decision you have to make in the next 27 minutes while we’re recording this show. It’s just something to think about. Why do you want to spend 19 years at a job very location dependent, and even though we’re not sharing publicly where you live, I know where you live and sometimes it’s not the most delightful to be outside where you live.
So you would have to be there for 19 years or take some time off, which will further, I think that’s something that’s really worth sitting down with a calculator and a spreadsheet and a lot of different scenarios and just look at it. How could we make this happen? Could we buy another house that solely pays off these loads? Could we buy another house that helps us figure this out a little bit more? I just think that that’s really worth pursuing.

Scott:
Another way to think about this is, let’s look it this way, you spend about 7,300 bucks a month, that’s a little over 80 grand a year. I’m probably doing that wrong. Someone will correct me. I’m going to do it real quick. That’s 87 grand a year. Right? You crush these student loans in the next two years and you just pay them off with your cash flow, you’re at $2 million in net worth because you’ve reduced your student loan balanced by that much. You’re now FI at the 4% rule. Right? So boom, there it is. That’s one way to think about it from a simplistic standpoint, to potentially reframe that. So yes, there’s optimization in the student loan program and we can definitely go there and talk with that.
But my instinctive read on your situation, if just a few minutes in, is that this is the boogeyman that we need to tackle. And if you had knocked this thing out, then all of a sudden you can combine finances. You can think, okay, in three years I could be sitting on a beach for six months out of the year in this beautiful location and the other six months fixing animal backs, those types of things, doing what I love in this area. And we’re done. That’s a freeing thing and that’s the power of personal finance and the privilege that you guys have built because of the incredibly strong financial situation that you have this item aside.
So with that, would you like to talk about that angle or do you want to talk about how to optimize this student loan debt paid off or both, next step here?

James:
I don’t know. You’ve thrown a little bit of a wrench in things in terms of, I guess I was coming the mindset of how are we going to do this most efficiently, but there’s something that I can’t quantify in the idea of it being gone.

Bianca:
Right. I agree.

James:
You can’t see it in a spreadsheet. You tell me to look at the spreadsheets, but I can’t see that in a spreadsheet, the feeling of just not having it there.

Mindy:
I wonder if there’s a way to set up some sort of, some spreadsheet genius that’ll do this in a minute. It’s not me. But you have your 250 and your interest payment. And I think it would be a lot like a mortgage calculator where it shows you, I’m paying 10,000 a month or 8,000, give yourself some buffer. I’m paying 8,000 or 5,000 a month towards this debt. Watch this debt just go away. It’s not 200,000 for a super long time. It’s 200,000 and then all of a sudden it’s only 185. And that is like, wow, I paid off a lot. And then it’s 175 and then it’s 150 and then it’s 100. And you’re like, holy cow, I just paid off so much debt. And my time horizon now isn’t 19 years, it’s another year and I can be debt free.

James:
You mentioned in the intro that maybe we’re sitting at a little more cash than is necessary or that maybe we div. Part of the question comes to, is it worthwhile dipping into that a bit and running a little thinner on cash? Because that would make a big dent. We could make a pretty big dent right away if that’s the route we went.

Mindy:
Yeah, like a 50% dent. Look, now you’re one year away from combining finances and quitting your job and living on a beach. To go from 105 cash to zero cash might give you a little bit of heebie-jeebies, although you make $17,000 a month and you spend $7,000 a month, you actually only spend $5,000 a month unless you’re traveling all over the place. Look at what you could knock out. Gosh, I know that this is not where you were thinking this was going to go, but I like that a whole lot more. Is it awesome to pay $200,000 when you could just spend 19 short years of your prime life working in a place that isn’t always awesome weather-wise, when you could just have it for free? But no. What kind of stress is going to go through? What kind of life changes have happened in the last 19 years that you didn’t account for, that you didn’t plan for, that just kind of happened?
You can’t predict what’s going to happen in the next 19 years. Get it over with, pay it off and then go nuts. You look at your position.

Scott:
I’m becoming more and more convinced that this is the way I view the situation here, because it’s just like, this is your boss. This is your bad boss that you have to deal with on a regular basis, that’s just always there with this. I said, two and a half years earlier, we have $110,000 in cash. So 100%, that’s a great option right there. You also have 401(k)s and those types of things you can borrow against to do that, if you want to arbitrage the interest rates a little bit with that. That could free up a lot of this. And then all of a sudden now you’re combining. I think that a good exercise here for this would be, where do you like to travel? What’s your favorite place to travel to?

James:
I don’t know that we have favorites.

Bianca:
We haven’t picked a favorite yet.

James:
We try to do different things all the time.

Mindy:
How would you like to go to so many different places that you could finally pick a favorite?

Scott:
What’s one of your favorites, the beach, mountains, what’s your go to?

James:
I’m beach, she’s mountains.

Bianca:
I like the beach too though. We can say beach.

Scott:
Okay, great. I’ve now done this a few times, so I probably sound like a broken record on a couple of the recent shows. But go to the beach. When’s your next beach trip?

Bianca:
I guess we have to plan one because-

James:
We don’t have one planned right now.

Mindy:
Permission to plan one.

Scott:
Go plan a beach trip and spend a few grand, and go there and sit there and have your coffee in the morning or whatever. 10 o’clock you’re on the beach, someone’s bringing you a coffee, maybe your first drink of the day or whatever. And then write down where do I want to be in two years, three years from now? Right? Put three years. This is where we want to be. And just write a half page. If you want to use a planner, you can bring a draft, call it draft on there and encourage the other one to manage that and say, what do I want to be in three years? I think that that exercise will be really powerful here, because you’re thinking, where do I want to be in 19 years? Right? 19 years, life’s going to be a whole lot different. There’s going to be a whole different capability set that you’re going to have physically going to all these places.
I think if you think about it in a three year picture, a lot of this will become crystal clear and I’ll be pretty surprised if you don’t find a way to it. I don’t know if you pay off this student loan, but to free yourself from it as a constraint in your situation, it could be paying it off as the easiest way. But I think combined finances where we don’t have to do this, Bianca doesn’t have to work all year round for or most of the year in order to keep qualifying for that to be a factor in constraint. I think that without that without the student loan debt, you’ll have a position that’s two million and or two and a half million in equities between real estate and stocks and in cash and 500,000 in mortgage debt, super conservative position.
That’s a position that’s really strong from which to start a business for example, without student loans over hanging. One income is probably going to come pretty darn close to covering all of your expenses, from Bianca. And I think your rental properties will easily cover the remainder with that. I think that will be a really helpful exercise to come through and say three years from now, this is where I want to be. Maybe those are some starter thoughts, but only you guys can decide that. But I would not do it from where I want to be in 20 years. That’s way too far out. You’re going to be way wrong on that. No one knows what they want 20 years from now, right? Mindy’s laughing at me because I went too far again.

James:
One question I have though as we look at that, if that was a route we were to try to aggressively tackle these and pay them off, is then it comes back to allocating where the money is going right now. Right now I max out my 401(k) every year. There’s slight details on mine. I have a 3% dollar for dollar match. And then at the end of the year if I’m still employed, my company adds an additional 3%, regardless of my contribution. Given what our cashflow is, is it worth backing off on those contributions, if we were to go this route or do I still want to take those tax advantages to put that money away?

Scott:
I think math is math, but I don’t think we have a math problem here. I think we have a boogeyman problem with the student loan. Sorry I’m using that word, I think it’s funny. But I think that’s the real issue here, is that this student loan has too much power in your life from that. But I think that that’s a balancing act. Right? There’s an art to that. One school of thought is if you chose to pay off the student loan debt to just go all in and stop everything else and crush that, and that’s effective. For a lot of people that’s better than a math approach. For you guys it may be I like my match, I’m going to take the match. There’s a couple other things here.
If I have a great rental property deal, I’m going to pounce on it in the meantime, maybe one or whatever, because that’s our portfolio. We’re obviously very proficient at generating income and building wealth through real estate. Maybe there’s a balance there. That comes down to this exercise of just figuring out, where do I want to be in three years? Do I want that so badly that I’m willing to just accelerate it and forget math? Or am I willing to take a more balanced approach to get there, that’s right for us? I don’t think there’s a right answer to that, there will be a mathematically right answer to that. But again, I don’t think you have a math problem here.

Mindy:
James, how old are you?

James:
I’m 41.

Mindy:
And Bianca, how old are you?

Bianca:
35.

Mindy:
Okay. At that age you still have several years before traditional retirement. I would absolutely contribute as much to get the full match as possible. I think you’re in such a great position. Let’s look at, you’ve got the 110K, you throw that at your debt and now you’ve cut your debt essentially in half, I’m just looking at the 200. I should also consider the 50. So 250. Now you’ve got 140 left over. That is now 14 months of your super crazy payments. I’m sure that Bianca might be able to work more hours. Maybe you could pick up, only if it’s worth it, don’t do side hustles that are going to pay you an extra $5, that’s not worth it. But if you can find ways to generate more income to get this paid off, I think you could do it in 14 months. Now we’re talking one year of not making 401(k) contributions.
The market’s been all crazy. I don’t know how frequently you can change your contributions if you see that the market has just been going down, down, down, maybe you do want to jump in and buy when it’s on sale, maybe you want to stick with it and say, you know what, for this next year I’m just doing my 3% to get my total match from them. And that’s all I’m going to do. And every single dollar’s going to go to the debt. And then now in one year, at the end of 2023, you are debt free and you can do whatever you want. Instead of 19 years and 24 years for the 50,000, you now have to reevaluate what you’re going to do in one year. And that is just, I know that’s not the way you thought the show was going to go. It’s not the way I thought it was going to go either, but I’m so excited for the possibility of you being from $278,000 in debt to $0 in debt, because I don’t count mortgages, in one year.

Scott:
I think if you came in and you said we’re making $80,000 a year combined, and we’re saving $400 a month on that, we’d be like, okay, we need to cut the spending a little bit and move things forward there. And then we’re going to figure out how to optimize around this student loan situation. It’s not your reality. Your reality is that this is not 10 times multiple times your income, this is one and a half times your income, maybe two times your after tax.

James:
Framing it in terms of one year changes a lot in my mentality, in terms of every time we’ve talked about it, and every time we’ve looked at it, even the thought of aggressively paying it down, it’s always been, boy, it’s going to be five years. It’s going to be eight years. We’re going to have to skimp by and completely back off in any lifestyle inflation we’ve allowed to happen. That’s been something that’s been really difficult to swallow for me. Framing in terms of well in 12 to 16 months starts to change that picture.

Scott:
Great. That’s our job, right? Hopefully that’s helpful. I think that’s honestly how I feel here. Again, it’s probably going to cost you money in the sense that you could optimize your finances more by doing the plan you came in with, around how we’re going to keep our finances separate. But I think you’re going to miss out on the point of personal finance, which is flexibility with this hanging over you. Life is going to be much better without it.

Mindy:
You said it’s going to cost them money, it’s going to cost them so much less time. They’re going to get so much time back. Here, let’s place some more financial monkey business, just throwing it out there. Scott suggested you have a 401(k) you can take a loan from, I believe you can borrow up to $50,000. So now you have 110 plus 50, that’s $160,000. So now you’re left with, what? $120,000 in debt, 160,000. You pay off right now. And now you are, what is it? 220, 250, 160, now you’re $90,000. Now you are paying off your loan in nine months.

Bianca:
That’s wild.

Mindy:
What if you could do it before next June? What if you were debt free before next June? And is that something that you’re comfortable with? Maybe, maybe not. That’s a conversation that you guys have to have outside of this phone call. How huge is that? Next June you have no more student loan debt. And then of course you would have to replenish your cash reserve. There may be some things that come up, and like Scott said, if you made $80,000 a year, I wouldn’t be telling you all of this, but you make a lot more. Let’s say, let’s go nuclear and say, okay, all four properties, the HVAC system all blew and the roof’s all blew off and now you need to put stuff back on there. You have places you can go to borrow.
Maybe you don’t borrow from your 401(k), and now you’re back up to the end of 2023 and all of that happens, and now you can borrow from your 401(k) to cover that expense. Or you take 75 of this, 105, 110 that you have and put it towards that, and you keep a little bit more of a buffer.

Scott:
Is the reverse true here? Are there sources of income that could be bonuses, like an annual bonus, or these things that could come in above plan or is the cash flow in your rental properties conservatively calculated and could be better in the next year?

James:
The bonus is accounted for in those numbers that we provided. It’s paid pretty well the last couple years and maybe a little less next year based on how we’re trending, but it turns out it’s not going to be as significant less as I thought it was going to be. That’s already accounted for. I think that the properties it’s reasonably conservative on that cash flow. I think we have a little room for rank growth that we haven’t completely taken advantage of. We’ve jumped up because we’ve taken on some new properties in the last two years and we’ve been working on getting rents fully to market. I think we were a little too conservative on this rehab and where we came in on rents. It turns out we have one unit left and when that’s done, I think we’ll get more for it than we expected. There’s some opportunity there as well.

Scott:
I’m not surprised with that. When your financial position looks like this, it seems very likely that you’re conservatively estimating general things when you’ve built this much cash and have this much monthly cash flow and this much wealth. James, what do you for work?

James:
I am in an administrative role for healthcare. Operations role where I have a P&L responsibility for several locations that roll up to me. It’s healthcare as well as it’s been stressed for the last couple years, which is part of the reason where again, thinking about, is there something else that maybe is fun that I could do instead of dealing with healthcare? I don’t know, it’s tough to think about rotating out of that because it’s what I’ve done for so many years, but I think I’ve done my best here.

Scott:
What would you do instead? What’s your inkling?

James:
That’s the problem, is I feel like I invest so much of my time into this job that I haven’t even explored the possibilities or the hobbies to really know what that looks like, which is why we talk about the position I want to be in, and I want to be in a position where we have a lot of flexibility, knowing that likely there’ll be almost no income for me for a little while, till I figure out what that looks like.

Scott:
That sounds like a good exercise for your vacation that you’re going to schedule after this call. It’s to figure out what that looks like and start noodling on that. I think it’s a hard problem, right? Because your head is down, it sounds like you’re fairly successful at that role and it’s got a lot of responsibility and it’s heads down and that’s where your mind share goes. But you’re like, I don’t know if I want to do that for long term. Again, I think that coming back to beating a dead horse here and painting the picture, in two, three years, this debt is paid is off, you’ve rebuilt your cash position to 50 to $100,000. That’s super reasonable with a $2 million net worth. The greenfield from there is going to look pretty open to you at that point in time.

Mindy:
I have a comment, it’s more of a homework assignment for you, James. I was at Camp Moustache and somebody was giving a presentation and she said she was talking to a counselor and she wasn’t sure what she wanted to do. And they said, okay, write down the list of 100 ways to make money. I want to say that this came from the Sheryl Sandberg book, but I think I spaced out when she said that particular part. I don’t want to not give credit, but I don’t know where it came from. But anyway, so I want to give you the same assignment, 100 things that you want to do. And you’re not going to put down 100 things because you’ll put it down like five and you’re like, I can’t write fast enough. And then you get to number 14 and you’re like, I can’t think of anything else, but just what are things you like? Do you want to go teach horseback riding or you’re allergic to horses or do you want to go be an animal chiropractor with your wife? Or do you want to-

Bianca:
Don’t do it. You’ll be in a lot of debt.

Mindy:
Yeah. Don’t go to school.

Scott:
If you want to take off another 300 grand to do that. Yeah.

Mindy:
I’m definitely not recommending that, but you could go work for her. Maybe that would help generate a lot of income that you’re not paying somebody else. Maybe you want to learn how to knit or go skydiving, there’s all sorts of ways that you can generate income when you can think about it. Take a huge vacation, take a whole week. Not a huge vacation a whole week. But really think about this. What are some ways I can generate income or what are some ways that I want to spend my time when I no longer have this job? I don’t think you’ve even given yourself permission to think about that yet, because you’ve got 19 years to pay off this debt. But now we’re paying off your debt in nine months, now you can think about it a little bit more. I do think that nine months is super aggressive.
I don’t know that nine months is actually the right choice for you. Now you’ve got two things to start with. Here’s nine months and here’s 19 years. Now you can figure out where your comfortable repayment plan fits, because I like two years, three years, way more than 19 years. I love this so much. I’m so excited. I’m sending notes to our producer. I’m like, this is going to be the best show ever.

Scott:
We had the Lifeonaire guys on recently and that might be a good read for you as well. That’s a good book. It’s a short, quick read and it has a short little quick perspective changing of get rid of the math problem and start introduced to life problem with that. Go ahead. Mindy.

Mindy:
Do you own one property free and clear?

James:
Yes. Yes. We own one property free and clear.

Mindy:
Oh my goodness. Could you get a mortgage on that property?

James:
Yes. This has been part of the conversation where I thought we were going. Would’ve been something like that or realizing, we’re really conservative as far as our loan to value position in general, overall with real estate. I think we’d actually like to do is dump that property and leverage into something larger. But I understand where you’re going. We could leverage that and just use that to pay off and then have our tenants pay off that loan.

Mindy:
Have your tenants pay off your student loan debt. That’s another thing, what are the crazy things we can do to pay off this student loan debt? Because then your freedom is so tangible. It’s right there. We’re not celebrating enough the fact that you have a fantastic financial position, the fact that you are so conservative in your numbers, I really get the heebie-jeebies when people come on the show and they’re like, I’m going to make $1,000 a month in this property, even though everybody else is only renting theirs for 750. I’m like, you’re not going to make $1,000 a month on that property. I love that you’re conservative.

Scott:
Do you have any properties that you don’t like?

James:
I wouldn’t say that I don’t like, but the property that is fully paid off would be the property that we like the least.

Bianca:
It’s a nice property. It’s just [inaudible 00:40:48].

James:
Out of all the four properties, it’s probably in the least favorable area. Not that it’s in battery, it’s just in the least favorable area and we probably would dump that one before any of the others.

Scott:
That’s another angle, is you dump that one, buy another property that you’d like a lot and then use some of the proceeds for that down payment. Some of the proceeds for the student loan debt as well. Just repositioning some of your assets. It’s the same, is no different than the other things that we just discussed around using your cash flow for the next couple of years. Although it’s a lot harder to be comfortable with that concept intellectually or in practice with that, but that would be yet another angle here to be potentially arrive at that outcome soon.

James:
I think our original plan, not for student loans debt actually, but original plan was to refinance the units we’re currently working on once they are finished, but that was going to also be part of my questions to you. Is it worthwhile at this point, given where mortgage rates currently sit and knowing that one is, I forgot what it’s like, four foreign change right now, would it be worth pulling that equity out at the end?

Scott:
What do you think the mortgage rate would be when you pull it out?

James:
Probably mid to upper fives, 5.5, 7.5, somewhere in there.

Scott:
And so the interest rate and the student loan debt is 6.8, but effectively 3%, with the way you have that. So you’re arbitraging 200 basis points.

Mindy:
It’s only effectively 3% if you do the student loan repayment, right?

James:
Yes. As long as we stay on that program.

Mindy:
The student plan, the income based repayment plan.

Scott:
What would be the cash flow of the property after you do that?

James:
I have to do the math on that. I haven’t done that yet.

Mindy:
Homework assignment.

Scott:
I think it’s really hard because you technically have a 3% interest rate, but you really have a 6.8% interest rate just with the game that you’re playing around the finances there. I think from your life freedom perspective, I’m already mentally bucketing it as a 6.8% interest rate. So that’s positive arbitrage in my opinion, because you then immediately after doing that can merge your finances and do whatever the heck you want. Almost whatever the heck you want. You’re like almostfy once that’s completed. You still have probably another two to three years to finish the play with your current run rate on things. But I think that there’s advantages in that. I don’t know, I think you have a two or three year play to fully finish the game here with your current situation. I don’t know. That’s interesting.

Mindy:
Would that be an owner occupied?

James:
No, no. We are owner occupying one of the properties. That’s the one that’s sitting at the lowest rate that you see there.

Mindy:
Okay. I would say, I’m not sure that you can get a 5, 7.5 rate on a non-owner occupied property unless you’ve gotten a quote really recently, the quotes that I’m getting are high 6s, low 7s. I’m not in the same state, but they are preventing me from getting a loan on my property.

Scott:
I think that’s really hard right now. I think you’re going to get a better interest rate as a source of debt from your IRA. And I think you might have a better one from your personal residence.

Mindy:
Could he borrow from his IRA? He has a 401(k) and an IRA. But can he borrow from his IRA as well? Because then you’ve got your 110 now, 50 from your 401(k), 50 from your IRA, that’s 210. You’re practically debt free by September.

Scott:
Well, you still have the debt against the IRA.

Mindy:
But you’re paying that back to yourself. That’s a way different debt than paying student loan debt for 19 years or working for 19 years. Just more options to think about.

Scott:
What are your thoughts here? What’s are some other things that we can help you out with today?

Bianca:
I know before we went this direction, we were also talking a little bit about looking into bigger investment properties at some point. We don’t really have experience with anything larger than a four unit, but we would like to, and just any thoughts that you might have on that.

James:
One thing is I’m fearful of creating just a new job for us. Right now we’re doing all the maintenance, we’re doing all the property management, everything, it’s all us. And so it feels like time is tight already. And so I always have this fear of growing and figuring out systems to make sure that we’re not just creating a new job on top of our jobs we already have.

Scott:
Well, I think that property management is a great one to start. One of the issues here is, what was your financial position like when you bought your first property?

James:
I was not far out of school at that time, so it wasn’t great. It wasn’t bad by any means. I was fortunate enough to pretty much have no student loan debts myself. When I saved up the down payment, I bought the duplex that we currently live in. That was the first property, the only property that I owned for probably 15 years. And then we just happened in the other ones really in recent history.

Scott:
Here’s going on right now, you earn, I would imagine 25K a month before taxes.

James:
Might be a little aggressive, but close.

Scott:
Okay. Let’s call it 250.

James:
Little less, but yeah, close to that. Yeah. We can call it 250.

Scott:
Okay. Then we have another 100K at least in wealth accumulation from your portfolio on average, that’s going to completely depend on the market conditions and other things. But on average we can at least expect 100K. The value of your time, if you were emerging as an individual, that’s $350,000 per year in wealth accumulation, and you divide that by 2000 hours, what is that? That’s going to be $175 an hour. When you started your journey, you were not earning $175 an hour. You were earning substantially less than that, probably 20 or $25 an hour. And so it made perfect sense to do all of these things yourself, right? Property management, managing contractors, those types of things. But you have at some point in the last five, 10 years, clearly crossed a hurdle where you’re probably doing too much of the work yourself and negatively arbitraging the value of your time, at least as it’s currently valued for some of these activities.
And so I think that would be a really good exercise to say, what am I doing right now? Let’s cut you in half because you’re two people. But what are you doing right now that’s less than $100 an hour in terms of value of time? And how do you make sure that that gets outsourced? You start hiring that out. You can maybe take a tax discount and say it’s 80 bucks an hour. Okay, I’m going to hire all those items out. And when I have items that are above $100 an hour, I’m going to make sure I’m doing those personally. I think that will be a good mental model for you on that. And you should start underwriting your properties to that. Putting that management cost, for example, into the property analysis, especially when you underwrite the next larger property.
Otherwise, you’re right, you’re going to continue compounding this problem of more and more income and less and less time. Which again, I think is a solution that you can solve for with your nice vacation, coming up and saying, here’s exactly what I would like my life to look like on a day-to-day basis in two or three years. I think that framework will be helpful.

James:
I think so. I think that she has opportunity with her business too, on a dollar per hour average, we should probably be looking at that too.

Scott:
That’s true as well. Bianca, do you own this business or do you have control over the income generation?

Bianca:
Yeah, I own the business.

Scott:
Awesome. That’s perfect. Right? That’s a great framework for that, to think about how to do exactly that same activity set. I think it’s a common problem that entrepreneurs have, Bianca, where folks are continuing to do work that is not very high value when they could be outsourcing that and doing the things that are high value. Constant struggle that everybody faces when they go into business for themselves.

Bianca:
I struggle to give up that control too, which is, I think part of why you want to be an entrepreneur, but then it’s hard to give up control when the time comes to take advantage of that.

Scott:
And the first time you do it, or the first couple of times, you’re taking a big risk and you may very well have it be more expensive than if you’re doing it yourself, but over the long run it’ll be cheaper. What else can we help you with? Did that answer your question about real estate?

James:
I think so. I think that part of what we were struggling with is time management and trying to understand when is it appropriate for us to start allowing somebody else to do some of this, right? I think that we have an exercise look through and try to figure out when we could start, or maybe now we start hiring some of that out instead of doing it all ourselves.

Scott:
You’re in an interesting sweet spot. You’re not in an area where you can outsource everything, you’re in an area where you should outsource some things and do other things yourself. Still that hurdle where it’s obvious you should outsource everything, you’ve have not crossed that yet, but you’re not too far away.

James:
I realize this might not make the podcast, but can I take a minute to celebrate my wife and what she’s contributed? Because if you look at just the numbers, you’re looking at, she’s only got $20,000 at about $278,000 of debt that she’s brought into the relationship. I want to be very clear about how she’s also contributed in other ways. In two aspects really. For me personally, my job, I was at crossroads probably about three or four years ago, and I could have either stayed with the company I was at and advanced or jumped to a different company. And for me, level of comfort, I’m like I’m just going to stay at med, even though I know that that company was not long for this world. She encouraged me to leave, which led to multiple relationships and changes that led me to where I’m at now.
And probably in the last three years I’ve seen a 35% increase in my income based on those changes. That was a huge contribution alone. But also then somehow with real estate, she convinced me to buy duplex a couple years ago, that was well beyond my comfort level.

Bianca:
It was a real dump. It was a real dump.

James:
Well beyond my level of expertise to fix it up. And somehow she convinced me to buy it and with her help and with some very generous family members we did fix that one up. We ended up selling it last year, 1031 into the 40 unit that we just bought, which she also identified that property through a client. Through both of those things, I just want to make sure I give her props for everything she’s brought financially. Honestly we’ve probably turned about 200,000 in equity to about 400,000 in equity in those two moves of real estate.

Bianca:
Trying to make up for all the money that cost you. Thank you.

Scott:
I love it. And for what it’s worth, I don’t think Mindy or I, hopefully no one listening to this has had any doubt about the fact that this is a partnership that has contributed to the wonderful situation that you have right now and you are a great couple and great team on this journey. The only reason we’re looking at the finances separate is for the-

James:
Absolutely.

Scott:
… because of the boogeyman that we’ve identified, that we’re going to try to conquer soon, hopefully.

Mindy:
I knew the only reason you were successful is because of Bianca That’s absolutely going into the show. That’s awesome. That’s lovely. But yes, I think that it can sometimes seem a little impersonal with the show where, hey, we’re really only looking at the numbers. I could make this a 19 hour show and talk about lots of different things. I love that you celebrated her and I love that you shared this, that’s very, very important, and that says a lot about your relationship. It’s not just, wow, I think of her as this burden. She’s so great, here’s all the things she’s doing. I don’t think of this as a financial issue at all. So, yay. I love this. I am making notes all over the place. I love this show. I am so excited for this show.
It definitely went in a different direction and I’m so happy for the opportunities that you have. I think that it would be a lot of fun to just sit down. I am very visual, so I would want to sit down with the big opportunities, that, okay, we can pull 50,000 from this account and 100 from this account and 20 from this account, and we can mix and match and be out of debt tomorrow. Or we can do it a little bit slower and be out of debt in two years. All these different ways we can do it and just think, how would that free up all this time? How would that free up all this mental head space? I really think it would be fairly easy to be out of debt conservatively in two years without making a ton of changes, but you could be out of debt like tomorrow if you really wanted to pull the nuclear option, without really changing a whole lot of your future trajectory.
Because you’ve got $4,000 in monthly income from your rentals and you’ve got the almost, and that’s, let’s see, that’s more than half of what you would need for your spending. And then you’ve got the other half in your brokerage accounts.

Scott:
I completely agree with Mindy. And I would just say that the three year picture is probably the easiest one to start with, because it’s so believable to have it all paid off and have a strong cash position and have your 4,000 in rental income. And if Bianca wants to keep running her business, between the 4,000 in rental income and the income from her business, and easily a 50 to $100,000 cash position if you choose to maintain that or rebuild that. You have complete freedom from there to consider doing something entrepreneurial with an infinite runway and a nice cash reserve. And that could be in real estate, it could be whatever else your exploration of your passions takes you over the next couple of years.
I think that’s a really realistic position. And then you can just say, how do I accelerate that bit by bit? Is there acceleration that I’m comfortable with that I would be willing to make that happen faster? Because you just let the current run rate happen, and that will happen to you if you just allocate it towards those outcomes.

Mindy:
This was so much fun. I’m so excited for all of the options you have. Thank you so much for your time today. I really appreciate you taking the time to chat with us because this is a really, really fun show.

Bianca:
Thank you for having us. This was really eye opening and helpful, and it gave us both a lot of peace of mind I think, to look at it that way.

Mindy:
Awesome. Well, send us a postcard from your beach vacation, where you’re going to talk about all of these things.

Bianca:
We’ll do.

Mindy:
Okay. Well, talk to you soon. Scott, that was such an awesome episode. I loved how we started down one path and then we’re like, wait a second, you could just pay this off now, in the next couple of years, and then you get 17 years of your life back to do whatever you want. And yes, you only can spend a dollar once, so you are going to pay off the student loan instead of buying a house, but you’re only, they have potentially the ability to repay all of these loans in one year with all the financial monkey business that I suggested. And yes, that would put them in a slightly less than super, super secure position by using up all their current cash savings. But they make so much income, I don’t really have a problem with that.
There are other options I would’ve given people in different situations if they had three years left on their repayment plan, if they were making $80,000 a year or $50,000 a year, if they were in all sorts of other debt, but they’re not. For this particular situation I think aggressively paying off these loans is the best choice for them, so that they can get this huge amount of time back in their lives.

Scott:
I think that the ultimate goal here, and it probably comes after around two million plus in net worth. Mr. Money Mustache has a great analogy. He says, the way you feel about money should be like how you feel about tap water, right? You’re not going to turn on the faucet and waste it and all that kind of stuff, but it’s just the utility that you’re going to access here. And these guys, James and Bianca are so close or should be, they’re just on the cusp of being able to view money through that lens. They just need a little bit more work. They’re almost there with their current spending. In a couple more years they’re going to easily crest that threshold just by paying down the student loan, for example.
You get to that point, and instead coming into today’s show, they were thinking I’ve got this monkey on my back for 19 more years or 24 more years for the second part of the student loan debt. It’s like, no, we can so easily just zoom out, take your whole portfolio. Say, where do I want to get to? What’s holding me back? And reallocate, right? And think through, reallocate both your existing portfolio or reallocate where you’re sending the cash that you accumulate on a monthly basis.

Mindy:
Okay, Scott, that is great. I can’t argue with that at all. Should we get out of here?

Scott:
Let’s do it.

Mindy:
From episode 338 of the BiggerPockets Money podcast, he is Scott Trench and I am Mindy Jensen saying, take the money and run.

CNBC’s Robert Frank reports on America’s most expensive home listing and the luxury real-estate market.

David:
This is the BiggerPockets Podcast, show 666. In basketball, we had this concept called a four point swing. So imagine that you’re on a fast break, you got a wide open layup. You miss it. The other team gets the rebound, they throw the ball the other side, and then they get an open layup. It’s not that they score two points. It’s that you lost two points and they score two points equally, a four point swing. That’s like the worst thing that can happen. The same is true if you don’t house hack. Not only are you not raising rents on your tenants, but you are having them raised on you. That doubles the impact of the power of real estate, but it’s working against you. When you own the asset, you’re getting the four point swing in your favor. Hey, everyone, this is David Green, your host of the BiggerPockets Real Estate Podcast, here today with a Seeing Green episode.
If you haven’t heard one of these before, on these episodes we take questions from you, the BiggerPockets community, and have me answer them with my experience with investing in real estate. I try to teach, I try to share, and I try to give advice to the people who are submitting questions so that they could grow their wealth in real estate, similar to how I was able to do for myself and get out of that job you hate and into a life you love. Today’s show’s pretty awesome. I bring some clarity to house hacking in an expensive market. This is a question that comes up all the time. People don’t quite understand the right way to house hack or how it could be so powerful. I get to kind of expand on that point and give some really good advice to one of our listeners who is in Sacramento, California, and having a hard time finding a deal that works.
We talk about what to consider when you are an agent and you are also trying to wholesale or wholetail a deal, the right way to get into that. And then we talk about scaling using DSCR products. So DSCR products are loans that take into account the income from the property, very much like commercial property is evaluated, not the income of the borrower. And I come up with kind of an entire plan for a firefighter who’s trying to scale their portfolio, but concerned about pre-payment penalties. All that and more on today’s show.
Before we get into it, today’s quick tip is we’re nearing the end of September, which means right around the corner is October. And October, from a realtor’s perspective, is when the market starts to slow. We find less buyers are active in the market during the winter months, especially during the holidays. Let’s say you’ve been sitting on the fence. Let’s say you want to buy a primary residence, but you’re tired of being outbid because every house gets so much attention. Now is the time that I would recommend you reach out to your agent and you put a search together and you start looking again.
There are going to be a lot less buyers for every existing house than there was before, which means you have less competition, which means if you’re buying, that’s good for you. If you’re selling, you may want to wait until springtime when there’s more buyers that are looking and you’re more likely to get multiple offers, unless you need the equity now so you can go reinvest it into the slower market.
As an investor myself, I totally take advantages of seasonal fluctuations. I do not think that that’s urban legend. I’ve seen from my experience it’s very true. I often tell the David Green Team clients, “If you want to get top dollar, let’s wait till spring. If you want to get the best deal possible, let start looking for you in the wintertime.” And I increase my own buying during the wintertime. And if I’m going to sell, I try to wait till spring. So just wanted to pass that along to you so you could take advantage as well. Okay. Let’s get to our first video.

Jessica:
Hello. My name’s Jessica and I live in Dayton, Ohio. I’m a relatively new listener, but I love the Seeing Green episodes the most. So, David, I’m really hoping you can help me with this question. We are looking to get into the real estate investment market. Both work full time. Our home has really appreciated, and so we took out a home equity fixed loan for about $53,000 in hopes that we could then have money to put down towards a rental property. We’re finding that a lot of the homes that are within our price range, which we’re trying to stay as close to $100,000 as possible, which in this market, in the Dayton area, isn’t unheard of, but it’s definitely difficult.
Our realtor mentioned that another client she’s been working with recently started Airbnb their property as a long-term extended stay Airbnb. She said they had a lot of success renting it out to families who are looking to move, but who haven’t secured a new home yet and need a place to live for a couple of months. Or, the other thing that is really, really popular around here, we have several large healthcare organizations in the area and they’re growing. They’re massively growing. So that’s booming. My thought too is what stops us from using a long-term, turning it into an extended stay short-term rental? I haven’t heard you guys talk a lot about that. I don’t know what your guys’ thoughts are. It seems that the profit is a lot easier to get a property to cash flow in today’s market using that strategy. And so I just was curious what your thoughts were on that.

David:
All right. Thank you, Jessica, for that question. Also, please give your dog a high five or a high paw for me. We saw a little cameo there in the back, very cute. Wanted to get into show business, I see, and it worked. Also, thanks for saying the Seeing Green is your favorite of the BiggerPockets Podcast. I appreciate that. Mostly because I’m hearing your Seeing Green.
All right, let’s get into your question. I like it. You’re talking about I think what you call them more extended stay short-term rentals. There’s all kinds of names. I typically refer to them as mid-term rentals. If you’ve never heard of these before, basically mid-term rentals is something to have on your radar because I think that this is sort of the next wave, the next common trend. There’s always a trend in real estate that people do really well with, this is the next one.
I’ve got 13 units that I’m working on rehabbing right now to bring online. And when that happens, I will have more information for you guys about how to run them efficiently, how to run them productively. I’ll be able to bring all the education that I can. If I talked about it right now, the problem is I would be speculating. I’d be telling you what I think works and what I’m planning on happening, but I don’t have the data yet to support it. I don’t like to talk until I know for sure, it’s just my personality, so keep an eye on that.
The reason mid-term rentals have sort of become popular and are becoming popular is because many areas are outlying short-term rentals. And when they say you can’t do short-term rentals, they’re typically putting a limit on how long someone can stay in the place as the minimum amount of time. They’ll say they got to be there 30 days or more. You can’t rent your unit out for less than 30 days. This is the case in many parts of Hawaii, where I own real estate, where Brandon lives. And then other municipalities are sort of adopting this because the neighbors don’t like these people coming in for two days and throwing big parties and kind of bringing a bad name on short-term rentals.
Because there’s moratoriums put in place and laws being changed that force someone to stay in a rental for 30 days or more, you’re seeing a lot of people that are owning real estate are getting into catering to people that would stay somewhere for that long. And who is that going to be? Traveling professionals like nurses or corporate executives, people that are maybe moving near a hospital, because they have a sick family member that’s going to be there for a long period of time and they want to be close by, somebody taking a temp job sometimes. Maybe someone who’s moving to an area, but isn’t sure if they want to buy or if they want to rent. Sometimes you take a job somewhere and you don’t know if you want to buy a house. Well, you don’t want to pay the expensive rate of a short-term rental, you don’t want to live in a hotel.
So you’ve got these medium-term rentals, which is what I’m calling. I’ve also heard them called long shorts, extended stay short-term rentals was the phrase that you came up with there. And that’s what we’re doing is they’re furnished just like a short-term rental. They operate just like a short-term rental, but you don’t charge as much because you’re not renting them out nightly. And they’re a little bit less work. On the spectrum of tons of work versus very little work, tons of work tends to have higher profit margins. Maybe I’d look at short-term rentals are the very, very end where you get the most profit but the most work.
Long-term rentals or traditional rentals are on the other side, the least amount of work and the least profit. And mid-term are right there in the middle. I’d like to be able to tell you more about it. I don’t know for sure. I’m anticipating it’s going to be very good. I’ve got three properties that are all in California that I currently bought. And two of them are BRRRRs and one of them is not. But I still had to do a rehab to basically get the houses ready to be in really good shape so that I can rent them out to traveling professionals.
I think in areas like California, that allow ADUs… We have a lot in California where you were not allowed to restrict homeowner’s ability to have an ADU. Cities can’t say you can’t build an ADU. We’re actually allowed to have up to three: a regular house, an ADU and a junior ADU. Of course there’s permitting and code requirements you have to follow, but this is a great market for something like that because you can turn one property into three different units and rent them out to traveling professionals and get much more rent than traditional rentals.
Now, before I get into the details I can’t share, because I don’t know yet, I do want to bring this up as a point to be aware of. I would anticipate that you knew that short-term rentals weren’t going to last because the neighbors complain. If you were paying attention, you would have anticipated, like I did, that medium term rentals would be the next phase. My guess here, and I don’t know this, this is me trying to put on my crystal ball, which looks a lot like my head, is that you’re going to start to see a lot of tenants that start complaining that there are no places left that are affordable to rent. Because all of the real estate investors that we’re using existing inventory that they own to rent to traditional rentals, long-term, many of them have moved into short-term and now you’re going to see them getting into medium term, which means of the rentals that were out there, there’s less supply for long-term tenants and they’re going to start complaining.
When that happens, you typically see politicians pass laws either at the federal state or local levels that restrict your ability to use rentals maybe as a medium-term or short-term. So again, there is no quick answer to real estate. You always have to be adapting. You need to be listening to podcasts like this and staying ahead of the information curve so you don’t get stuck with an asset that you can’t use the way you intended.
I would expect some backlash from the tenant pool that had been renters for a long time as they see their ability to find places to rent is diminishing and the rents are going up on those significantly, because the supply is restrained. So to sum up what I just said, I think the future is mid-term rentals. I think after that, you’re going to see laws that are passed that force landlords to rent their places out as long-term rentals. And that if we don’t build some more freaking houses in some of the busiest areas, this is going to constantly come back to make investors look bad. And it looks like you had a follow-up to your original question that I missed. So we’re going to air it now, and I will reply.

Jessica:
The other thought that I have, that I wanted to throw by you guys and see what you thought, we have several friends who are also interested in getting into the game. Accumulatively, we could probably put money down on a very nice or multi-home property and do a long-term rental that way. And we have friends who have a little bit more experience than we do, who are interested in partnering, but honestly… And it sounds great. We’re very interested. We trust these guys. They have more experience, so we would love to learn from them. I don’t know where to start with the partnership.
What kinds of things should a person be considering when partnering on a real estate investment? I guess I’m just curious, is there a contract template or how have you guys done that in the past to make everybody feel secure in the plan? You guys talk a lot about partnering and so I know you have these answers. I think it’s one of those things that when you’re a newbie, you have no idea where to start. But when you’ve done it a few times, you don’t realize the little details that the newbies are wondering. I’d love to know your thoughts. We can’t wait to hear what you think about these things. Thank you so much.

David:
When it comes to partnerships, first off let me say everybody at BiggerPockets, all the different hosts and personalities and advisors, we all have a different perspective on this. And a lot of that comes down to different personalities, different business goals, different perspectives. There is no right or wrong answer. There is a right or wrong answer for you. Now this may come as a surprise, even though I do talk about partnerships, I tend to err towards not being in favor of them. In fact, I have people that reach out to me about partnerships and it just always seems to go wrong whenever I take that road. I recently did one with someone that I didn’t know and something came up right after the partnership that caused me to question how much I can trust this person, but I’ve already got the money and the deal. I don’t really love that.
Other times I’ve partnered with somebody and they’ve wanted… They’re fascinated by real estate. They have a million questions and I’m more like, “I want less time put. That deal’s already done. Let it sit. Let’s look at the next one.” So we have different goals. If I do partner, there’s a couple rules of thumb. The deal has to be big enough that it makes sense. I’m typically only going to partner on very expensive residential real estate or multi-family real estate. I don’t want to partner on a smaller deal because instead of the work getting cut in half, you just have to do all the work twice, as both sides want a say and some control over how things go down and it’s not worth my time if it’s not a big deal.
Or, the deal has to be something I’m getting in and out of, I would definitely partner on a flip. I would definitely partner on if it was like a big deal and a BRRRR where I thought I could go in, get my money out and be okay. Those are some of the qualifications that I would say I have when I’m going to partner with somebody else. The right reason to do it is because you have complimentary skill sets. Somebody’s great at finding deals, someone’s great at managing deals. Somebody has construction contacts, the other person has management experience.
The wrong reason is for emotional ones. You don’t want to partner with someone just because you’re afraid to do it on your own. I know what you asked for was tactical stuff to make sure you’re doing in a partnership. What I’m going to say is you’re probably better off, if this isn’t a very big deal, to do it on your own without the partner, because I haven’t had the person yet who came back and said, “This deal I did with a partner went well.” I’ve always heard it didn’t go well and then they’re not partnering on future deals. The only exception is if you are going to partner in a company, and that company is going to own several properties, and this is someone you’ve known for a long time and you trust.
In that case, the tactical advice I’ll give you is spell out in the operating agreement exactly who will be responsibility for which parts of the managing it. Talk with that person about how long they’re okay having their money and their equity in this partnership. Some people are letting it ride for 40 years, other people want to get that money in and out in six months or two years, and you will have conflict with your partner if you’re not on the same page as far as the time horizon of the velocity of that money, how soon you want to see it returned to you.
Thank you for reaching out. This is also a really good question to put in the forums and see what different people on BiggerPockets have to say about partnerships that they’ve had that went well or went poorly. Last pieces of advice that I will give you, take all the questions that you’re asking me right now, put them in a Google document and sit down with your partner and say, “Here’s what my questions are. How do you think we should handle each of these things?” And then see how many things you’re on the same page with the partner. It’s way better to ask more questions than less.
And then finally you can search BiggerPockets for partnerships. We’ve done episodes with Rob and I talking about the house that we bought in Scottsdale together. Tony and Ashley on the Rookie Podcast have done several episodes on partnerships. There’s much more available to you than I could possibly answer on an episode like this. If you go to BiggerPockets and search both the forums and the podcast for partnerships, let us know what you find.
All right, our next question comes from Tommy C. in Georgia. Tommy says, “I’m a real estate broker in Georgia and an investor. My favorite people to represent our other investors. I’ve grown my business like crazy over the last five years. I did 27 million last year and over 160 transactions. The first quarter, I’m already at 63 transactions and 8 million in sales. My question is, how do I grow a team of agents that want to work with investors to help me serve more clients? What should I look for in those agents? Currently I’m struggling to get to everyone. I don’t want let anyone down, but there’s not enough time in the day. Any thoughts? Thanks.”
Well, Tommy, a very similar problem to what I have run into, is you have a whole bunch of people that want your help, because there’s not very many people that understand how to help clients build wealth of real estate. There’s tons of agents that will help you find a cute kitchen or be near the school district that you want. There’s not many that understand the way that money is built within real estate. Once you get good at that, you start to find that there are more clients coming your way than you have time in the day, which is definitely the case because you look like you’re doing awesome.
The problem is the reason all those clients are coming to you is because there’s not many people that could do what you do, which is the irony in your inability to grow because you can’t find agents that can help those people because there’s not as many people they can do what you can do. I’ve had several different ways I’ve tried to approach this problem. They’ve all been serviceable. None have been amazing. One way is I’ve tried to train agents how to do what I do. The problem with that is you’ll often spend a ton of your time and energy training the agents instead of helping the clients, and then those agents either won’t get it figured out or they will get the information and leave. This happens all the time.
Another one is that they will understand the information, but they won’t have the same work ethic or integrity that you do. They will know how to run the numbers, they’ll know how to find the houses, but they treat the clients like a transaction. You’re just a number I’m here to get you in and out the clients don’t like how that feels, you lose your future business. The reality is it is very difficult to grow real estate sales team. One of the hardest things that there is to grow, and that’s because the people that you’re hiring tend to have different motivations. They just want to get paid more. They want someone to teach them. They want someone to hold their hand. They want someone to help them grow. Then you have, which is you want them to treat your clients as if it’s their own.
There is no easy way around this, and this is why most of the advice that I give to the investors and the buyers is quit expecting your agent to be able to do everything you need them to do. You almost have to train your agent. If the people that you work with know how to run numbers, know how to figure out the ARV and they can just tell the agent what they need and the agent could go and gets it, that’s typically the best situation for all parties involved. I wish I had an easy answer to give you, but I’m in the same boat. We constantly hire agents train them and then they leave. Or it was harder to make money than what they thought they were going to make.
Now I’m in California where one, even if we have the information, people trying to buy the best houses that are getting tons of competition, get out bid. It’s very frustrating. I think in Georgia, where your price-to-rent ratio is a little more solid, finding cash flowing deals is probably a little bit easier for you. In fact, I like your model so much I’m actually going across the country, I just got back from traveling for 30 days, and meeting with different agents to try to find David Green Team expansion agents in the markets that cash flow strong, so when people come to me and want to buy investment property, I can say, “Boom, I’ve already got this person that I’ve trained.” It might be worth you and I having a talk at some point in the future.
But that’s really the challenge that you’re having, is that we have to figure out a way to serve our clients. That’s the ultimate goal. And doing that is something you’ve done well, that’s why you’ve grown the brokerage so big. Finding the people that are going to have the same level of care that you do is very challenging. So, my ultimate or my last response for you would be probably focus a little bit less on the knowledge they already have and focus on the integrity of the person that you’re hiring. You can always teach them the knowledge, but you can’t change their character. And focus on hiring agents that also own property.
It’s part of why you work so well with investors, is you are an investor. You understand when you’re looking at the deal what you would be doing for yourself, so you know how to help the clients. If you find agents that also own real estate, they are much more likely to be looking at that opportunity for the client from the lens that they would be looking at it themselves. And we always do better when we’re thinking about what benefits us than when we’re thinking about what benefits other people. If you can get those interests aligned, that will help. Thank you for your question. Let us know how that goes.
All right. We’ve had some great questions so far and I want to thank everyone for submitting them. Please take a minute to make sure to like, comment and subscribe to the YouTube channel if you’re listening to us on YouTube. I got all dressed up for you guys today. What do you think about the clothes that I’m wearing on today’s show? Here are some comments from our previous episodes I’d like to share with you.
Matheus Chaves says, “Thank you, David Green. I listen every day to your podcast.” Well, first off, thank you for thinking it’s my podcast, but I’m really just a humble servant of the podcast itself. “I’m finally going to get myself into real estate and this was the show that gave me the final push.” Okay, that makes me feel good. I’m very glad to hear that I helped you get over that hump. Have very low expectations for your first deal, slightly lower expectations on your second deal. By your third deal, you can expect to be doing pretty good. And by the fourth, fifth and sixth deal, you’ll probably be good at it. That’s the best piece of advice I could give you.
Next comment comes from Rea Vera. “I love the long answers. Love David with and without the others, the entire show with all of his personalities is incredible.” Well thank you for that. I’ve often wondered if I need to keep my answers shorter or if I should go on the longer stream of consciousness so you guys can kind of understand the logic behind why I give the answer. Glad to hear that you like it when I take a little bit more time and effort to answer the questions.
Tim Kauflin says, “What happened to the green background? How am I supposed to know that this is really Seeing Green?” Funny you say that, Tim, sometimes I forget to change the light that’s behind my head because I am so excited to start sharing information with all of our audience. Today’s shows was one of those shows. And because I saw this comment, I went back and rerecorded everything with the green light instead of the blue. That’s one of the telltale signs that it’s a Seeing Green episode. A few other telltale signs you can know, it says Seeing Green in the title, there’s no other podcast host with me, and it’s me playing videos and listening to them and commenting on those videos. If you don’t see the green light, or you’re listening to this on iTunes or Spotify or Stitcher and you don’t see the background, you can still feel assured that you’re listening to the Seeing Green episode if it fits any of those qualifications. And lastly, if you’re seeing me, you’re already seeing Green, so it doesn’t matter what color the light is.
Angelo comments, “Thank you for reading my question, Dave, very much appreciated. Even missing fine detail, like we all do, your points come across crystal clear, great skill that you have. I like the longer form answers, the creative ideas on how to approach all of the questions people have. You take time to answer, give examples and provide analogies.” Well, thank you for that, Angelo. I’m glad that you like it. Make sure you subscribe to this channel so you get notified when we put out future Seeing Green episodes.
And our last comment comes from Karl Hackman. “I love your content and the way you break it down so anyone can understand. Would love if you would show your book collection, favorite book.” So bit of an Easter egg there. I’ve got my book collection right here. However, they’re too blurry for you to actually read, because I’m doing that cool thing that YouTubers do where we’re in focus but what is behind us is not. So you can’t really see what those books are. However, if you want to actually submit a question on Seeing Green and say, “David, what are some of your favorite books that are behind you?” Maybe I’ll take a minute and make a segment where I pull those books out and show them to the camera so you can all see what some of my favorite books are.
All right, are these questions and are these comments resonating with you? Do you have situations that are similar and you’d like me to answer? I need to know. Tell me in the comments. Tell me what type of stuff you’d like us to cover, what we can change to make the show better, what you didn’t like about or what your favorite parts are. Or, just say something really funny, because I read them and so does the staff at BiggerPockets, and we love to see what you guys are thinking. The comments section is the best way to get your point of view across, so please go there and leave comments and hopefully we read one of them in a future show.
All right, let’s get to our next question from Shaun Nichols.

Shaun:
Hey David, thank you so much for taking this question. Essentially, my question boils down to what tips tricks or pitfalls do I need to watch out for when wholetailing or essentially working as an iBuyer? I’m a real estate agent and investor in the Columbia, South Carolina markets. And I actually work with an investor who runs an iBuyer program. And essentially what we do is I go in as his local rep and make an offer on a property, 100% of market value, no repairs, no showings, all that good stuff, for like a 12% fee plus the 6% realtor fee. Or, we give them the option, “Hey, you can either sell it to my investor, or I can put it on the market for you at just a 6% fee and he’s willing to do it for any property under $1 million.”
Essentially I’m wanting to do the same thing. I’m wanting to be able to go in and tell a client or a potential client, “Hey, I’m willing to buy your house at 100% of market value, as is, for a 12% fee. Or, I’ll list your property for a 6% fee,” and give them both options to see whatever works for them. If they do decide to sell the property to me, I’m just planning on putting it right back on the market for the exact same price that they sold it to me for.
What things do I need to be watching out for with this? Obviously it’s going to take a lot of cash, a lot of capital, to be able to do something like this, especially if you’re planning on buying the house in cash. But I’d love your opinion on things I need to watch out for. Obviously, I don’t want to be like Zillow and go in and offer what this estimate is and go broke. So any advice or feedback you can provide me, I’d really appreciate it. Thanks. Talk to you soon.

David:
All right. Thank you, Sean. A few things that you are indeed going to need to look out for. The first is you’re blurring the line pretty significantly here between the fiduciary duty of a licensed real estate agent and the non-fiduciary duty of buying a house for yourself. I would have a long and well thought out conversation with your broker to find out what forms they would need you to get signed, to where it was disclosed to the person when you’re acting in the capacity of an agent and when you’re buying it for yourself. One angry family member could get you in a lot of hot water with a lawsuit when you buy grandma’s house for what ends up being a discount and they feel like you could have sold it for more on the open market. And even though you explained this to them, in your opinion, they thought that as a licensed real estate agent you were telling them that the iBuyer option was her best option.
This can happen. This is one of the reasons that wholesaling is, in some ways, considered to be illegal in a lot of different markets. It’s especially troublesome the person’s a licensed agent. Now, I understand how frustrating this is, because as a licensed agent, there’s a bazillion hoops that they make you jump through. And then as a wholesaler, it’s the Wild West, you could do whatever you want. Personally, I think that there needs to be some legislation passed to bring some clarity on this because it’s not fair that people who play the game fairly and go get their real estate license have so much more restrictions, so much more regulation and so much more exposure to being sued than the person who doesn’t have their license, isn’t representing the client is just going there to buy the house for themselves.
But as the way it stands now, in many areas, you are able to do both. So talking to your broker to make sure you don’t get in trouble with the state or the governing board over your license would be the first thing that you should do. Having disclosures to fill out would be another thing for you to consider. Now the third piece would just be your personal exposure. If you’re going in and you’re paying fair market value for houses, like what the iBuyer person you work for is doing, or if you’re trying to get them at lower priced houses, but you don’t have cash, you actually have to think about you’re taking on some risk.
If you’re going to borrow money from a hard money lender, if you are going to borrow private money, if you’re going to take out a HELOC. Where’s this cash going to come from? Because if you try to refinance out of these houses that you buy, you’re only going to probably pull 75 to 80% of the value of the home out. That’s about the LTV that you’re going to get. If you use cash to buy the property for 100% of the appraise value, and then you go get a loan on it, you’re still going to be stuck with 20 to 25% of the money you borrowed from the hard money lender that you can’t get out when you go to refinance into conventional loan. Which means that you probably have to be buying them at 20 to 25% under market value to not run out of capital, which now puts you back in the tricky spot where you’re offering them significantly less to buy it yourself versus if you go sell it and put it on the market.
I don’t know for sure, and I can’t give you legal advice, but here’s what my gut is thinking if I was in your spot. I would find a different license person to refer business to when you find a person that wants to sell it and put it on the market and focus more on buying the houses that you want to buy yourself, than trying to do both and sort of remove yourself from that legal problem that you can run into when you’re trying to act in two different capacities. Thank you for your question and let us know how that goes.
And our next question comes from Tony Spencer. Tony asks about scaling using DSCR loans. If you haven’t heard of these DSCR, stands for Debt Service Coverage Ratio. And it’s a fancy way of saying a loan that is based off income that the property makes, not income that the borrower makes themselves. “Hello, David, I wanted to ask you a question about scaling a portfolio, specifically investing in short-term rentals. My understanding is that a DSCR loan has a five year prepay penalty.” I’ll say most of them do, Tony. A five year prepay penalty means if you refinance or sell that loan or pay it off in any way within five years, you typically are going to receive a penalty and money that you have to pay back to the lender because they gave you that loan expecting to receive interest on it for at least five years.
“Right now I’m BRRRRing an investment property with about 400,000 in equity once it’s done. My debt-to-income ratio is now maxed, so a DSCR loan for my first out-of-state short-term rental makes the most sense.” Like I said earlier, DSCR loans take into consideration the income from the property, not the income from the borrower. So if Tony’s debt-to-income ratio is maxed out and he can’t get a loan with his own income, he still can with the property’s income. “But then how do I buy the next few deals after that? I’m sure I can just save up the cash for another down payment, but that could easily take two to three years. Is it possible to do a HELOC on a DSCR property or do I just bite the bullet and pay the penalty once I’ve got the equity needed? I do have roughly 750,000 in equity in my primary residence, but my wife and I are really not comfortable pulling that out.”
“Another possibility I’ve considered is some type of partnership deal, but that is totally foreign to me. And that’s definitely not my preference. Side note, I’m basically working two jobs right now, a full-time 24-hour shifts as a firefighter, and remodeling an investment property on my days off. In addition to that, I’ve got a one-year-old and a three-year-old at home, but I still make sure to schedule time to listen to this podcast and interact with the BP community. That’s how much value represents me. It’s such an amazing platform and source of information.” Amazing. Well, Tony, thank you. And let me just give a shout out to your fire department. I don’t know the name of it, but if you guys are working with Tony and you listen to this, thank you for the service that you do. I hope all you firefighters out there are eating healthy food and getting workouts with weights and getting to sleep at work like us police officers never got to.
All right, now let’s get to your actual question here, how do you keep buying properties when there’s a pre-payment penalty and you have to use the DSCR loans? Well, the first thing I would say here is you can usually avoid the pre-payment penalty if you pay more upfront for the loan. So if you increase your closing costs, usually a couple points, you can have that prepayment penalty waived. If not, yeah, you might just have to pay it. When you go to refinance. It’s better than not getting a deal at all if your personal debt to income ratio is maxed out. Another thing you could do is use these DSCR loans while it paying down your own debt and increasing your income so that you can use your DTI to get a conventional loan when it’s clear, and use DSCR loans for whatever periods of time it’s not.
Is it possible to do a HELOC on a DSCR property? It’s possible to do a HELOC on any property. It doesn’t really matter what loan you get against the property, because the bank giving the HELOC is just concerned with the equity that you have in the property. They don’t care what type of loan you have in first position. A HELOC is a second position loan basically, that’s qualified based off of your ability to make the payment and the equity that is in the house, so they end up in second position to the first. In that case, your problem isn’t going to be because it’s a DSCR loan. Your problem is going to be because HELOCs are notoriously difficult to get on investment property. They are much easier to get on a primary residence, which is why it would make more sense for you to pull it out of your primary. But then you say that your wife and I are not really comfortable pulling it out.
Here’s my question to your wife and you, does it matter if you’re pulling the equity out of your primary residents versus the investment property? Are you planning on not making the payment for either one? If you’re a firefighter, I’m assuming that means that you can work overtime if you end up in some kind of financial jam and you have to pay back the loan that you took out. So if you’re going to take a HELOC on investment property, why wouldn’t you just take a HELOC on your primary residence? You’re going to get a better rate and it’ll be easier. In my mind, it doesn’t really make a difference which asset you take the HELOC out against, especially if you have so much equity in your primary.
Let’s go worst case scenario. Let’s say you take the HELOC on your primary and someone steals your money, you buy the worst deal ever, aliens come and take your house and fly away with it and you have no collateral. Something crazy happens. Well, you didn’t borrow against the whole 750,000 that you had in your primary. You probably didn’t need that much cash. So worst, worst, worst case scenario, you can’t work overtime and pay back that money over a longer period of time, you can’t afford the payment. You sell your house, because it still has a lot of equity. You pay off all the debt you have. You and your wife go house [inaudible 00:33:18], get a smaller house. Okay? That’s not ideal, but that’s not bad for a worse case scenario when you could be buying more real estate with the money that came from that, growing a portfolio that will pay your mortgage for you and your HELOC for you with the rental income that comes in.
I’d probably have the conversation about why are we afraid about taking a HELOC on our primary? See if you can get to the bottom of where those fears come from, and maybe look at that differently. And then yeah, you’re probably going to have to use DSCR loans until your DTI is changed. And that’s okay. If you got to pay a prepayment penalty, that’s okay. If you don’t want to pay the prepayment penalty, get the loan in the beginning and pay to not have it. You’re going to have to pay a little bit more upfront. Thanks for that question. And I hope work goes well and you stay safe out there, brother.
Next question comes from Chris Roberts in Chattanooga it’s funny. I was just in Chattanooga not too long ago flying out of their airport. “Hi, David. BP has become sort of therapy hour for me lately and I appreciate it. I’ve spent my life in the food industry and need to be doing something different. My wife and I bought a second home to fix up, got a HELOC on our primary residence to finance the rehab. And now I’m trying to figure out if we should sell the primary when we’re moved in, walk away after the HELOC is paid back with maybe 15,000, or keep it and rent it out. That’ll give me about 450 a month in cash flow, considering the HELOC payment in this equation and then the journey could start. I’m also a real estate agent here and love working on project homes. I’m just feeling a little lost in the direction to take with my life, but feel like BP could be a part of it. Thanks for all you offer. And Rob is awesome to, Chris.”
All right, Chris, I think I can actually make this question very simple for you. You took out of HELOC on your primary. You used that to buy the second house you’re fixing up and now you’re trying to figure out, should you pay off the HELOC or should you sell your home and use the proceeds to pay it off and walk away with about $15,000? The question that you got to ask yourself is would you rather have your house you have now, or would you rather have $15,000 in cash? Now when I say the house you have now, what I’m referring to is the house with the HELOC against it. When you consider keeping the house, it looks like you’re saying that you could rent it out for $450 a month extra, that’s the cash flow you’re going to make after your primary mortgage is paid and your HELOC is paid. So now the question becomes even more simple. Would I rather have $450 a month or would I rather have $15,000 in the bank?
Let’s do a little calculation to see what kind of a return 450 is on 15,000. We’re going to take 450 times 12, which is 5,400 divide that by 15,000 and that’s a 36% return on that money. Do you think you can sell that house, take 15 grand and get more than a 36% return on the money? Probably not. Makes it pretty clear that you need to keep that house as a rental property, rent it out and go buy a different house to live in. I especially like that idea because now you get to use an FHA loan or a primary residence loan, somewhere between three and a half to 5% down, to get your next house, which means you don’t need a ton of capital to do it. And that house could become your next rental property after you’re done living there. You are in a great position. You shouldn’t feel bad at all. Well done my friend, keep going.

JD:
Hi David. My question is about the three or 5% down. You’ve mentioned several times that your suggestion is to take great funding, put three or 5% down, house hack, and then just rinse and repeat that. My question lies in the fact that I live in California. I live in Sacramento and properties are quite expensive out here, like 400,000 easy. I hate where I live, so it doesn’t do me any good to buy something super cheap just to end up in a crummy neighborhood like where I’m currently living. I’m looking to purchase something in a nicer neighborhood. You’re 500,000, 600,000. If I want to house hack or create a situation where I can generate some income, then it’s definitely going to be in the higher price point.
I don’t understand how I can make this work according to your suggestion, because putting three or 5% down makes the mortgage unpayable. Can you give an example or give some specifics on how I can make this work in my California market? That would be awesome. Thank you.”

David:
All right. Thank you, JD. Now I understand that you actually had a little bit of trouble getting acknowledgement for the video submission that you put in here. I can see that you are very eager to make some progress, so a few words of suggestion for you. One, if you ever have a question like this, that you feel is very urgent and you need answered, please consider in addition to spinning it to us here at biggerpockets.com/David, go to the BiggerPockets forums and ask it there. Also, I have an agent on my team. He’s been interviewed on the BiggerPockets, money show. He’s been on the BiggerPockets YouTube general, Kyle Rankie, he and Brandon Turner are my two best friends. He works in the Sacramento market. You should reach out to him. He would be happy to help you with this question because we know that market very well.
Now I’m really glad you asked this question because it gives me each chance to clarify a few things for you. You said that it’s very difficult to find a property that will generate income as a house hack when you’re only putting three and a half to 5% down. That is right. It’s notoriously difficult, almost impossible most of the time. Here’s where I think you got confused. House hacking is not meant to generate income. House hacking is meant to save money that you were spending on rent. It’s not something that you should be approaching thinking, “How much money am I going to make?” It’s something you should be approaching with the idea of how much money can I save.
So for instance, if rent in Sacramento where you’re living is $2,500 a month and we can get you a house hack that after your tenant pays you rent, you’re only paying 500 a month or a thousand a month, you’re actually saving 1500 to $2000 a month. Now you’re not making anything because you’re still coming out of pocket somewhere between 500 to 1000, but that is significantly less than what your rent would be. Now you may say, “Well, I’m living in a house. I’m not paying rent.” That’s true, but you have a mortgage still. If you’re able to move out of the one you’re in, if you own it, rent it to someone else, break even or make some cash flow on that and then drop the payment that you are making of maybe 2,500 a month or 3000 a month, down to the 500 to $1000 a month that you’re coming out of pocket to house hack, you’re saving money and you’re adding an additional property to your portfolio.
Now I’m really glad that you submitted this question and we selected it specifically because I need to highlight I’m always telling people to house hack. But the assumption is I should be able to live in a property which takes up one of the units that would normally be rented, put very little money down, three and a half to 5% instead of 20%, and still have it cash flow. And this is why house hackers get so frustrated. In some markets that might work. If you’re in the South, if you’re in the Midwest, if you’re in a place with very low price-to-rent ratios and it’s a fourplex or a triplex, you might be able to house hack and still make a little bit of money. But if you’re in expensive market like California, Sacramento, Northern California, the value is not that you’re making money every month. The value is that you’re owning real estate that’s going to go up in value. The rents are going to be going up in value. The price of the asset’s going to be going up in value. And most importantly, the rent that your landlord is charging you isn’t happening anymore because when you’re renting, your rents go up every year.
Just like when you own the home and you get to increase the rents every year, when you don’t own the home, the rents get increased on you. In basketball, we had this concept called a four point swing. Imagine that you’re on a fast break, you’ve got a wide open layup. You miss it. The other team gets the rebound, the throw the ball the other side and then they get an open layup. It’s not that they scored two points, it’s that you lost four points and they scored two points, equaling a four point swing. That’s like the worst thing that can happen.
The same is true of you don’t house hack, not only are you not raising rents on your tenants, but you’re having them raised on you. That doubles the impact of the power of real estate but it’s working against you. When you own the asset, you’re getting the four point swing in your favor. You’re getting to increase the rents every year and you’re not having them increased on you at the same time that the value of your asset is going up over time, and you’re adding another home to your portfolio. What I’m getting at here is house hacking is incredibly powerful, but it doesn’t work if you’re trying to force it to cash flow. Don’t just think about making money every month, think about the money you’re saving and doing this.
And the last piece of advice I’ll give, if you go make $500 in cash flow investing out of state somewhere else, that’s going to be taxed. Let’s say you get to keep 350 out of that $500. Okay? If you save $500 in rent, it’s not taxed. You’re actually keeping the full 500. So you’re only taxed on money you earn, you’re not taxed on money you save. And this is why I constantly tell people that are trying to build wealth, “Start with what you’re spending. Start by spending less. Start by decreasing the amount of money you spend all the time, because you’re not getting taxed on what you save. It has a bigger impact.” Okay?
If you want to actually make 500 bucks, maybe you have to earn 700 because you are only going to keep a percentage of it. So saving 500 in rent is the equivalent of making $700 in an out-of-state market, which is very difficult to do. Hope that helps answer your question. Thank you for your patience and working with this and get on those BiggerPockets, forums and ask more questions there. All right. I am very glad we got another episode of Seeing Green on the books.
I went pretty quickly here, but that let me bring more value to you by answering more questions. Hope you guys enjoyed this. And I hope that if you’d like to be considered to be on this show, please go to BiggerPockets.com/David and submit your question. Also, if you’re not following us on YouTube, please do that there where you can like, comment and subscribe and we can see what you have to say about the show.
If you’d like to follow me on social media, I’m @DavidGreen24. You can find me there. But your best chance of getting ahold of me is to submit a question here through BiggerPockets and hopefully be on the podcast yourself. Thanks again for giving me your attention and for coming here to get your information about wealth building through real estate. I appreciate that I am the one that gets to lead you through this journey. Thank you for your support and we’ll catch you on the next episode.

Dave:
Hi, everyone. Welcome to On The Market. I’m your host, Dave Meyer, joined today by Kathy Fettke. Kathy, how are you?

Kathy:
I’m great. This is going to be a great interview. I can’t wait.

Dave:
I know. I love talking about these future technologies in the housing industry. It’s so much fun to imagine what might come of all of this.

Kathy:
A lot of people, fear technology thinking it will take away jobs and oftentimes it does, but oftentimes it brings on new jobs that people like even more. All I can say is the next 10 years are going to be really exciting, big technological advances, and I think this is going to be one of them.

Dave:
Absolutely. I think for our audience it’s especially important to pay attention to just some of the trends that Chris is talking about and how efficiency and productivity are huge barriers to progress in the housing market and to developers and to investors who are frustrated by the high cost of building new homes or just existing homes have gotten really expensive because there is a lack of supply. Chris presents a really interesting idea about how we might be able to add more housing supply at a cheaper cost, and there’s some other really interesting benefits to this method of construction that you’re probably going to be very interested in.

Kathy:
Absolutely.

Dave:
All right. Let’s jump into it. Let’s bring on Chris Anderson, but first we’re going to take a quick break. Chris Anderson, CEO of Vantem, thank you so much for joining us here On The Market. It’s a pleasure to have you.

Chris:
Well, Dave, thank you so much. Hi, Kathy. Good to see you too. I really appreciate you having me on.

Dave:
Could you just start by giving our audience a little bit of background on how you’re involved in the real estate industry?

Chris:
Sure. So Vantem, we have a proprietary technology that allows us to build affordable energy-efficient homes and the way that we do that is through volumetric modular construction. It means that we’re building homes in factories, doing it in a unique way and working with developers to deliver products that are more affordable and have a higher energy efficiency than traditional construction.

Dave:
I know Kathy and I are both chomping at the bit to ask questions about that, but we’d just love to know about you personally. Did you found Vantem, were you in real estate or how did you come to be the CEO of this company?

Chris:
Yeah, the long and winding road. This is my second entrepreneurial endeavor. I was the co-founder of another company, woo, about 30 years ago now, and we were in the business of manufacturing, construction products made from sustainably harvested hardwood. So we were making things like doors and windows, flooring with factories around the world and shipping them to places like Home Depot and Lowe’s and into Europe and so forth. The idea of what is now Vantem came out of that company because we’d travel around and we’d look and see these job sites where our windows and doors were being installed, and here we had this really modern factory making product within a thousandth of an inch tolerance. You derived to the construction site and the window opening would be three inches off. Everything was being done in a really old school way like it had been done 100 years ago and all this stuff that we saw in terms of productivity and tight tolerances that were so prevalent in other industries just were not present in construction.
So we figured there had to be a better way of doing it, put together a really talented team to try to figure out, “How can we rethink this system, the whole construction system and address the issues, productivity, later also, energy efficiency?” That’s how we came up with what is the core of the proprietary technology that Vantem now is deploying. After we had a good exit from our first company, I started what is today Vantem and came together with just a great private equity fund by the name of TIM Capital, who has been along with us since, and we’ve been deploying this technology into the space.

Dave:
Well, congratulations on your success of your first company. That’s incredible. I’m curious, when I hear modular homes, I know they’re more modern, but I think a lot of people associate it with Sears track homes and this old school and a certain type of product. Can you tell us a little bit about what your mission is and how you’re trying to evolve the idea of modular homes?

Chris:
Sure. Yeah. Unfortunately, a lot of people do think of modular as something that’s really boxy and simple and that’s absolutely not the case. When we started out along this road, one of the key things that we set out as a goal for ourselves was that whatever technology we developed would be one that when you were done, the home that we would deliver would look and feel like a traditional home that people are used to living in and used to seeing. So a Vantem home, even though it’s been made in a factory, when you see it finalized it would not be one that you would recognize as anything different than a traditional home. I think that’s just really an important difference, because just because you’re building something more efficiently doesn’t necessarily mean people are going to really want to live in the home and aesthetics are important. So we’re really proud that what we’re able to do meets all the different architectural demands that creative architects might have.

Kathy:
Chris, I’ve been covering stories on modular homes and new techniques for building more sustainably and more affordably, and yet, it just doesn’t seem to be getting traction. It’s not catching on. If anything, it’s got a bad rap. I’m in California where you’d think that we’d be all over this, sustainable, affordable, we need it. You probably heard the story in LA that we’re trying to build affordable housing and it was what, $837,000 per house for the homeless-

Chris:
My God.

Kathy:
So is modular getting more acceptable now?

Chris:
Well, let me step back a little bit. I think that the biggest problem, my critique would be that as people have tried to address how to do modular construction or be more efficient by automating construction, they didn’t step back and rethink the entire system. What I mean by that, it’s like people have said, “All right, let’s automate agriculture,” and they set out to design a mechanical four-legged horse instead of designing something completely different with a tractor with wheels and that’s just a much more efficient way of doing things. Most of the modular manufacturing or factory built manufacturing still is trying to build using wood framing or steel framing. These are complex systems, and so you bring them into a factory and yes, you have the efficiencies of building in a factory, but you have so many parts that you’ve got to put together that automating all that is extremely complex and extremely expensive.
The equipment to automate all that suddenly is a tremendous ticket, and that starts to filter its way into the cost structure. There’ve been examples of companies, I won’t name names, but that have not made it because they just absolutely over-automated these traditional systems instead of stepping back. So the way that we have approached it is to really rethink that system, and we don’t use frames. We don’t use wood framing. We don’t use steel framing. We don’t use bricks. We don’t use cement. We replace all of that with a very simple structural panel that replaces absolutely all of that. So suddenly, you have a product that is much simpler to build.
It has a lot less parts. We build these big panels. I imagine they’re four foot by 10 foot panels that are the walls, they’re the floor, they’re the roof of the modules that we make, and they’re the final surfaces. They don’t require more cladding because they’re fireproof and they’re moisture proof and weatherproof, so you don’t have all these extra layers, all this complex system to deal with. When you bring that into a factory automating that suddenly is also simple. The equipment that we have is so much less expensive and faster than what you would see in a traditional volumetric modular factory. I think that’s at the core of the difference between what Vantem is doing and what some of the other folks in the field that maybe are experiencing some problems have been doing.

Kathy:
What seems even more outdated than today’s construction is the whole process, the planning departments, the elected officials who know absolutely nothing about construction. How are you going to be able to get this through the system so that it’s accepted with the cities and with lenders? Let’s start with the planning departments.

Chris:
All right. Well, so we have been facing those exact challenges for years and other markets. We started our rollout in 2008 and because of what was going on in our home market of the U.S. in 2008, which we all remember, not a great time to be building in the U.S. We started our rollout overseas. So we started in south America and all the same issues that we have in the States are present there and to a certain extent, even more so. They’re even more complicated to get your approvals and whatnot. Now, the way that we have gotten across those hurdles is number one. The product that we designed from day one had code approvals in mind, so when we designed these panels and we designed the way that we were going to do this system, we were thinking, “How are we going to meet the fire code, the specific testing for the fire code? How are we going to meet the acoustical codes? How are we going to do all these things?” That’s baked into the way that the product was designed.
As we’ve rolled this out in other countries, we’ve been really successful in being able to get the code approvals and get the code officials to understand how all of these systems work. Now that we’re rolling out in the U.S., I expect it to be quite similar. Now, the other advantage when you do volumetric module and you’re doing about 80% of the whole job in a factory, rather than on-site, the inspections are happening in the factory. So if you do have a new product and a new system, one of the advantages is that you are working usually with one code official that comes into your factory and is looking at the product while it’s in process.
You’re not dealing with every little town’s code officials, which is really where you run into the problems, because those folks are usually less informed, particularly as you’re looking at new innovative systems. So volumetric modular gets inspected inside the factory, and when it relieves the factory, it leaves with this approval tag that already shows that it’s code approved, that it meets the codes. When it arrives to the job site, the only thing that the local code officials really are having to deal with is inspecting things like the foundations and the more normal part of the job site. It actually is not as complicated as it would be if we were site building all this product.

Kathy:
What about lenders, getting them on board? Have you seen any momentum there?

Chris:
We’re not seeing any pushback. I think the main reason is we’ve got more than three million square feet of product that’s been built in all kinds of places. We have homes that we’ve built in the driest desert in the world. We have structures we’ve built on the South Pole. We have structures that have survived the strongest hurricane on record, Hurricane Dorian in The Bahamas and structures that have survived 8.2 magnitude earthquakes in Northern Chile.

Kathy:
Wow. That’s amazing.

Dave:
Pretty good record.

Chris:
Well, and I think that’s what people want to see. That’s what banks want to see. Right?

Kathy:
Yeah.

Chris:
They want to see that resiliency. They want to understand that these are structures that’ll be around, and so we have structures that have been around many, many years and a lot of testing. We’re not getting any push back from lenders on that front because of that positive track record.

Kathy:
And fireproof, I think I read?

Chris:
Well, very. If we want to get back to the wonky side of this, we build using these structural panels, again, four foot by say 10 foot size panels and those panels are made by with three parts. They have a special skin on each side of the panel. It’s a special cementitious skin, and then the whole middle layer of these panels is insulation. So those two outer layers, the cementitious outer layers, they’re actually a type of ceramic and they’re in the family of ceramics that was used on the nose of the space shuttle. This is some very, very, to use a technical term, very refractory products, very fire-resistant products. We were able to hit extremely demanding fire codes because that outer layer that protects our panels has been designed to do so.

Dave:
I just learned several new words during that answer. I don’t think I’ve ever heard the word cementitious before. It’s a cool word. I like that. So Chris, that’s super impressive and you keep alluding to efficiency here and it does make sense. Could you share some numbers with us? How much more efficient is a modular home than a traditionally built, let’s say, single-family home.

Chris:
Yeah. Let’s start with talking about a pet peeve of mine in construction, which is productivity growth, kind of another economists’ wonky terms. But so when you look at construction overall, of the major industries it is the one that has had the less productivity growth of all. It’s almost zero over the last 30 years. When you look at the average productivity growth of all the other industries like car industry, et cetera, they’ve experienced up to 30% productivity growth. What does that mean? That means that for every man hour spent making something other industries today are making 30% more of that something with the same number of people; whereas construction is not. It’s taking the same number of people to do the same thing as it has over the last 30 years.
So to your question of efficiencies, well, the main thing to focus on is productivity. How do you achieve productivity? Well, you achieve it by simplifying the system, what I preach constantly in hammer at. So you make it simpler, so you have less man hours to accomplish the same job. Then the other thing you typically would do is automate it to make that same workforce produce more units. That’s what you’re doing in a factory setting. You are employing the same number of people that you would be employing in construction. It’s not that you’re reducing the number of jobs. What you’re doing is you’re increasing the number of square feet of living space that that same number of people are able to produce.

Dave:
So what kind of output increases it, so you’re saying you have the same, let’s say, 100 people, are you going from building whatever, five houses a year to six or five to 10? What is the increase in productivity that modular provides?

Chris:
So yeah, so let me put it this way. A typical Vantem factory has about 150 people and we are able to produce a million square feet a year of apartments or houses. All right. So that’s, let’s say, 1000 houses or 1000 apartments of 1000 square feet a piece with about 150 people. You would need approximately 10 times that roughly, depending on what you’re doing, the number of people to accomplish the same task. You would have all the other headaches involved of moving those people from job site to job site and all the other costs that are involved in site construction. So the productivity gains by doing offsite construction well are really enormous.

Dave:
Wow. That’s incredible.

Kathy:
That is incredible. What about the material shortages that we’re facing in the construction industry? Do you have those same challenges?

Chris:
Well, so the main product that we build with is our own, it’s our own panel, which we produce. Fortunately, the materials that we use to produce that cementitious skin, that Dave liked the term for, those are readily available materials. That those are not materials that have these big fluctuations and costs or availabilities. So we, in the core manufacturing of our modules, have not experienced things like the huge spike in wood prices, for example, that I think that other people have. Now, that said, we’re all subject to other constraints like, we all use windows, we all use doors, those kind of things. We have had to plan out a little bit more than we have in the past, but on our core business, we haven’t had the same pressures.

Kathy:
Where are you starting in the U.S.? Where are you getting traction? Which cities are allowing this?

Chris:
Well, yeah. Our business model is to partner with strong developers in key markets, so what we do is come in and put a factory in a local market along with a developer who has a strong pipeline to build affordable housing. We originally expected to maybe close two deals this year to put factories in next year and we’ve already closed on four. I think that by the time we’re done this year, we might be somewhere in the neighborhood of six to eight, so the interest level from the developers has really exceeded our expectations. The first factories, the first deals “that we have,” the first partnerships we have are for the Dakotas and Minnesota, Arizona, Texas, particularly in the Austin and Houston areas, Alabama, Florida Panhandle, mid to Southern Florida. Those are already on the board and we’re working through how we’re going to stage all that. There’s a lot of work to be done there, and we’ve had a lot of interest also in other areas like California and in the Northeast, but we’ll be addressing those as the next steps.

Dave:
I imagine all the developers are interested because it provides significant cost savings to them. With all that increased efficiency you were talking about, can you share any numbers about the cost per square foot to develop, let’s say, an apartment or a single-family home and how that compares to a traditional home?

Chris:
Yeah. On average, our solution is about 20% lower than traditional costs. That varies a lot depending on the markets. So Kathy talking about California, in California, our difference is much higher just because the local costs are so much higher. Other areas like the Southeast of the United States where costs of construction aren’t quite as high, we’re close to that 15 to 20%. So overall average, it’s at least 20%, with a big, big, big difference though, because there’s an apples to oranges comparison here. The Vantem product, even though it’s 20% less in cost than traditional, it is much more energy-efficient and is a net zero ready product, meaning it is so energy-efficient that we can turn it into net zero by just adding solar panels to the structure. Again, net zero, meaning that with a fairly modest solar array, you will generate as much electricity as the home uses, so at the end of the day, you are using no net energy from the grid. So despite that huge benefit, we are about 20% less expensive than traditional construction. For developers, that’s a huge draw, but there are others.
Another important draw is that offsite construction greatly accelerates your time to complete a project. It’s around 50% of the time that it would take to do a regular project. So for developers that typically measure return on investment, when you reduce time, it increases your return on investment tremendously, and so it really increases that ROI for them a lot. Then the third part, which I think is as important and sometimes more so is that it reduces the risk profile for developers. Where do developers have the biggest risk? It’s the site construction, it’s the cost overrun. It’s the time overrun, right? That’s where they get hammered. By taking those risks offsite and putting them into a factory setting, they’re controlled. Now, you don’t have rain, you don’t have issues with labor having to show up on the job site or not. It’s all really controlled in the factory, and so for the developer, it’s not only a cost savings issue and a time savings issue, but it’s also a risk mitigation measure that makes it really attractive for them.

Kathy:
A 10 to 20% reduction is huge because many builders, their profit is maybe 10%. Are you seeing any national builders showing interest?

Chris:
Yes, we are in conversations, although our first partners are mostly very strong, very large, but regional players, but yeah, we’ve entered into some conversation with some of the national players here recently as well.

Dave:
Are most of what you’re building single-family homes or are you also building retail, multi-family across different asset classes?

Chris:
We have built it, in our initial rollout in South America, a lot of different things. We’ve built single-family homes, multi-family homes. We’ve actually built over 200 schools. We’ve built university, we’ve built commercial, we’ve built a lot of things, but one of the things one needs to do in business is focus to be maximally successful. In the U.S., our focus is very much affordable housing. We’re focused very much on housing, and within that it’s single-family homes, multi-family townhome configurations and multi-family apartment buildings up to three floors. That’s our real focus currently.

Dave:
Why’d you choose that focus?

Chris:
Another important goal, business goal, especially when you have a factory is repetition. Factories, love repetition, that’s why originally Henry Ford said, “You can have any color you want as long as it’s black.” He took it to the extreme, and so repetition is really important. In home building, single-family homes and especially in multi-family, you have that repetition. You have multiple units that you can produce that are the same, and that’s where you really achieve the largest effect in terms of decreasing costs and leading to a final product that is more affordable for everybody.

Kathy:
Plus there’s nobody out there doing it. It’s very, very difficult, if not impossible, to build affordable housing today. A lot of people don’t realize that developers are required to provide generally some affordable housing. In our projects, it’s usually 30% and that’s usually a loss to the developer. We had to build the affordable housing first and you’ve got to come up with a funding for that and you don’t make your profit to the very, very end. So I would just think that every developer would want to at least have that portion of their development at least break even. Wouldn’t that be amazing?

Chris:
Right. Right. Well, I think that what we’re seeing is that the goal our partners have, and I think it’s a realistic goal, is that it will definitely not be just break even. They’ll be making money on them.

Kathy:
Again, oh man, that’s a game changer for developers, because more and more city councils will vote for your project if you’re able to bring on that affordable housing.

Chris:
Right, but let’s not forget it’s not just the affordable side of it, but that energy efficiency, that’s the other thing that city councils are really excited about. So the effect of energy efficiency, it’s so multifaceted. We have the macro part in terms of the benefit that it has to carbon reduction and climate change, which is really a critical and important goal, I think, for everybody. But there’s also the aspect that if you have a net zero home, that’s doesn’t have a light bill, suddenly the family has more disposable income that can go towards paying for a mortgage, paying for a slightly bigger house perhaps, or just being able to buy the house period because maybe they didn’t have enough of an income otherwise to be able to purchase that house.
Then to the local communities, the other thing that it helps with in and that city councils and state governments like is that you’re not adding a draw to the energy grid, so they’re not having to add more power plants. They’re not having to add to the infrastructure, which is really, really expensive. When you’re looking at adding thousands of housing units to meet that housing need, that housing deficit that we have, the one thing that I think that Vantem allows is that we don’t put additional pressure on the local governments to have to raise more money to put infrastructure in, electrical infrastructure in particular. That’s just a massive benefit also for that community.

Kathy:
How are insurance companies responding to this? Because I would think if these homes are more resistant to earthquakes fires, wind storms, I would think insurance companies would be all over it. What’s been their support for this?

Chris:
That’s been really interesting. We’ve actually been approached by an insurance company to develop a specific product for disaster-prone areas in the Gulf area, or the Gulf area of the United States for Louisiana in particular. That’s been a real challenge for a lot of insurance companies. Many of them is, I think we all know they’ve tried to exit or have exited a lot of these markets where climate change is starting to change the risk profile so much that it’s just not economical for them to be involved anymore. In this case, we’re working on a program to offer a turnkey solution, which is Vantem apartment complexes that have an insurance already baked in pre-approved by the insurance company for areas where otherwise, currently building is uninsurable.

Kathy:
That’s amazing.

Dave:
That is incredible. Chris, I had a question. You were talking about net zero and as someone who lives in Europe and our energy costs just keep going up like crazy right now, would love a net zero home right now, another component of climate change and housing and construction’s contribution to that is the construction process itself, not just once the homeowner is in the home. How does your construction process compare to traditional building in terms of emissions during the construction process?

Chris:
Right. Yeah. That’s a great question. Vantem, we brought onboard a really important investor several months ago, a fund by the name of Breakthrough Energy and it’s Bill Gates’ fund for CO2 reduction, climate change issues. The reason that they invested in Vantem is that they clearly see the potential impact that we can have on carbon reduction, and that comes from two areas, like you said. One of them is the energy savings that Vantem allows over the lifetime of the home. But the other point that they really loved about what we’re doing is what they call the embodied carbon of a Vantem house is much, much lower than traditional construction. What does that mean?
Well, it means that the total amount of energy it takes to make all the materials that go into a Vantem house and to build that house is translated into how much carbon emission does that mean. Well, in our case, it’s about 80% less than the traditional construction methods being used globally, internationally, not only the United States, but everywhere else in the world. Now, in the U.S. where we use materials, we’re not building with as much concrete, for example, which and concrete is a very, very energy- intensive carbon emitter. Our carbon reduction is a bit less than 80%, but on average globally, we’re about 80% more efficient than how homes are being built elsewhere.

Dave:
Wow. That’s incredible. Chris, I think I would love to spend here more time here learning about your process, but we do have to start wrapping up and our audience is primarily real estate investors. Everyone from people who are aspiring to get their first deal to people like Kathy, who are professionals and doing development, if anyone in our audience wants to get involved with modular homes, is that possible right now, or is it only for people, developers and large scale builders at this point?

Chris:
I think there are certainly opportunities in modular homes in general, available to everybody. I think the demands on modular home builders are high right now. There’s a demand outstrips supply pretty much, so it might be a little bit difficult honestly, to go out there and buy a modular home right now off the shelf, if you will, from other manufacturers. From a Vantem standpoint, our first factories will be coming online at the end of next year. As I mentioned before South Dakota, Arizona, Texas, and Alabama, Florida, keep your eyes peeled. We’ll be letting everybody know as those come on board and we’ll be generating quite a bit of capacity. Some of that capacity is, in fact, reserved for about 30% of the capacity of each one of these factories is reserved for third parties, including individuals that might be interested in buying Vantem modular homes.

Dave:
Great. Thank you, Chris. Is there anything you think our audience of real estate investors should know about modular homes and how it might be changing the future of the housing market or the way Americans find housing, find and build housing, I guess I should say?

Chris:
Yeah. Listen, as an investor, I really urge people to think about the energy efficiency and the impact that has on their returns, and there are many angles to that. The appreciation of your asset is greater the more energy efficient it is. Also, with time, what we’re going to start seeing as investors in real estate is that there’s really a great appetite by banks for lending to projects that have a very high energy efficiency. We’re already seeing it perhaps on a developer scale, maybe not so much individual yet, but we’re seeing it at a developer scale where banks are lending at rates that are lower than market for projects that are more energy-efficient than others. I foresee, because we are talking to banks that are trying to figure out how to offer mortgages to individuals that are lower than market rate because of the energy efficiency. So as an investor, I really would urge everybody to focus on that as a really interesting opportunity in the future as we’re looking to build our portfolio.

Dave:
Great. Well, Chris, thank you so much for joining us. If people want to learn more about you or connect with Vantem, where can they do that?

Chris:
Best place to look would be on our website, vantem.com. That’s V as in Victor, A, N as in Nancy, T as in Tom, E, M as in Mike, vantem.com. Dave, thank you so much for your interest and Kathy, really a pleasure talking to you both, okay?

Kathy:
Likewise, I can’t wait to see where this all is, say, 10 years from now. I think it’s going to be a different world.

Chris:
Thanks again. Appreciate that.

Dave:
All right, Kathy, what did you think about our conversation with Chris?

Kathy:
I have mixed feelings because I just know how much change is needed in the construction industry and in the whole process of bringing on affordable housing. We need support in this country. We need the governments to get on board, and so I’m mixed because I want it to happen. I hope this is the company that can do it, because many have failed, like you said.

Dave:
Yeah. The technology sounds really interesting, but you’re more concerned the bureaucracy, red tape, not as concerned about the technology or are you concerned about both?

Kathy:
I’m not been concerned about the technology. To me, it’s always made sense that if you can build a house in a factory, how much easier is it than, like our Utah project? We can’t build during half of the year. If that could be just done in a factory and you can control it and it’s the same thing every time, you’ve dealt with construction workers, sometimes they don’t show up or with COVID, the site would be shut down for two weeks if one person tested positive. So the efficiencies have always made sense to me, and I couldn’t understand why it wasn’t catching on. Just even locally, I’m in one of the most liberal places on earth, and you would think they would be adopting this idea, and I’ve tried to build modular housing. In California, it’s really hard. Even after the fires when thousands of houses are gone, you’d think they’d all come back modular, but it’s just not been the case.

Dave:
That’s why you were so interested in the fireproofing.

Kathy:
Yes, I am. Well, again, California’s always burning. It’s just either people have to stop living here or we need fireproof housing, because insurance companies aren’t going to keep insuring and they’re starting not to. We’re only half insured on our house. We’d only-

Dave:
Really?

Kathy:
Yeah, they won’t do it. Wow. How many times are they going to rebuild? Most of California or a lot of California’s in a fire zone. So then you’ve got lots of Texas, and like you said, Louisiana and Florida in a flood zone, flood zone or in a hurricane zone? So these solutions are coming. I get really excited about the technologies that are coming and I just think, “Wow, what’s this world going to be 10 years from now?” I know some people want us to be more negative, but it’s like all I can see is that technology is going to change things. It’s going to be a different world and it’s exciting. Look at just 10 years ago, we didn’t have Uber.

Dave:
Right. Right.

Kathy:
It was brand new. We didn’t have Airbnb and now we just take it for granted like it, “Of course, of course, you’re going to just let a stranger in your car or in your home.” This weren’t thoughts we had 10 years ago.

Dave:
Yeah. It’s just inevitable, it has to happen. We had Chris on today, when we had the 3D printing company, Alquist, on recently, it’s these ideas that make so much sense logically. But unfortunately, you know that the technology and intent is only half the battle with development and bureaucracy, logistics. Some of the boring stuff really can get in the way of some of these exciting things, but I have to believe it’s just a matter of time and hopefully it’ll be sooner rather than later.

Kathy:
Yes, absolutely. Yep. Housing just happens to be one of the last dinosaurs. We’re still doing it the way we’ve done it forever, so I think that that brings investors in when they say, “Oh, here’s some opportunity.” It does sound like he’s really well-funded, I hope that’s the case. That’s what it’s going to take.

Dave:
Maybe one of the silver linings to the really difficult affordability challenges we’re seeing across the U.S. is hopefully, governmental and policy support for building more affordable homes like this, because like you’ve said everyone wants the price of housing to go down, but you’re a developer and you’re trying to build affordable homes right now and you can’t even do it, so something has to change. Whether it’s the technology or a policy, it’s not like you’re out there trying to price gouge people, you’re literally trying to build affordable homes and the policy and economy doesn’t support it right now.

Kathy:
No, it doesn’t. Is it the developer’s responsibility? That’s always been the question. On our Park City, the only way we could even get the project through was by offering affordable housing, which I was thrilled to do. The way we explained it is, “Wouldn’t you like to have teachers and firefighters and police officers be here and not an hour away?” So that’s how we got the project through, but those homes, they cost us twice as much to build than what we sold them for because they wouldn’t let us go over 375,000. It costs 750 to build them, so that hurts. That’s hard to do, but if there was an option for us to be able to build it cheaper, wouldn’t that be amazing, and fireproof and earthquake-proof? All these things is wonderful. I hope it works.

Dave:
All right. Cool. Well, we’ll keep an eye on it. Hopefully, we’ll see some progress over the next couple of years and if we do, we will definitely update you on a future episode of the podcast. Kathy, thank you so much for joining me. I’m looking forward to seeing you in a couple of weeks at BP Con.

Kathy:
Can’t wait, it’s going to be so fun. You have to get a larger space. You got to look at a larger space, because it’s sold out and people are now trading these tickets.

Dave:
I know. We sold out and I think the team here at BiggerPockets who’s responsible for it is getting a lot of desperate emails, but we can’t. They have fire codes and a certain amount of tickets we can sell, so I guess next year we’re going to have to go even bigger.

Kathy:
It’s going to have to be Las Vegas Convention Center.

Dave:
Yeah. Yeah. 100,000 people there.

Kathy:
Yeah, 100,000.

Dave:
All right. Well, Kathy, it’s always a pleasure. You always ask such great questions. It’s a lot of fun having you here and we’ll see you again real soon.

Kathy:
Thank you so much.

Dave:
All right. Thanks, everyone, for listening. We’ll see you on the next episode of On The Market. On The Market is created by me, Dave Meyer and Kaitlin Bennett; produced by Kaitlin 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.