Month: June 2022

As the Federal Reserve aggressively raises interest rates and bond yields climb, we are leaving behind the era of ultra-low mortgage rates that prevailed from 2020 through the end of 2021. 

Over the past several years, we’ve become accustomed to mortgage rates below 4%, with the average rate on a 30-year fixed-rate mortgage (for an owner occupant) dipping as low as 2.65% in January of 2021. Those are extremely low in a historical context. As of this writing, the average rate on the same loan is about 5.3%.

For at least the next several months and perhaps for years to come, we will experience a higher interest rate environment. However, the lingering impact of these years of ultra-low interest rates could be felt for the next several years or even decades to come due to what has recently been coined the “Lock-In Effect.” 

In the short-term, rising interest rates will do what it always does to demand—curtail it. Over the last several months, we’ve seen this happening as mortgage purchase applications are down about 15% through May 13 from the same period in 2021. Rising rates reduce affordability, pricing would-be homebuyers out of the market. As long as interest rates continue to increase, they will continue to put downward pressure on demand—nothing new here. 

However, what is potentially new is how rising interest rates could negatively impact inventory. 

Recent data from Redfin shows that 51% of homeowners with a mortgage have an interest rate below 4%. With so many homeowners locked into super low rates, there could be a disincentive for homeowners to sell. 

Think, if you have a home with a mortgage rate under 4%, why would you choose to sell that home and enter a super competitive housing market with high prices, only to pay more interest on your next loan? It’s not a very attractive proposition. 

To put it in perspective, consider a $425k house. If you had a 3.5% mortgage rate, your monthly payment would be around $1,910. If you rebought a home at a similar price with an interest rate of 5.3%, your monthly payment would be about $2,360. That comes out to roughly $450 more per month or $5,400 per year. 

Or consider someone looking to downsize. Perhaps an aging couple wants to sell the home they raised a family in, get some cash to invest with, and reduce their monthly expenses. 

If this couple downsized from a home worth $425,000 to a home worth $350,000—they would be saving approximately $0 per month. That’s right, they could buy a cheaper, smaller home, and still be paying the same amount. Sure, they’d get some equity on the trade, but their monthly costs would be the same, which is super important for people in retirement. Again, not a super attractive proposition. 

It’s for this reason the term “Lock-In Effect” has been coined. Many economists and analysts believe the number of new listings could remain low for a few years while homeowners feel “locked in” to their unusually low mortgage rates. 

It is worth mentioning that the number of homeowners who may be “locked in” varies considerably. According to the same Redfin report, Utah, Colorado, and Washington, D.C. have the highest proportion of homeowners with low rates. Oklahoma and Mississippi have the fewest. 

While we don’t know if this Lock-In Effect will happen, the logic checks out. If it does materialize, it could have profound impacts on the housing market for years, if not decades to come.

It all comes down to inventory. If fewer homeowners put their homes up for sale, it could prevent inventory from recovering to more normal, pre-covid levels when the housing market was more balanced. 

As I wrote recently, inventory needs to increase for prices to moderate or go down (or whatever you think will happen). 

There are a lot of different metrics related to inventory, so let me explain. 

Inventory is defined as the total number of homes on the market at the end of a given month. It is a very useful metric because it combines both supply and demand. It factors in how many people put their house on the market (known as New Listings) as well as how many and how quickly those homes are being sold (demand). 

This is where inventory is as of March 2022. 

There’s a pretty dramatic story depicted in this chart. Pre-pandemic, we expected about 1.8M units of inventory over the busy summer months. Now, we’re at 600k. 

As other housing market analysts and I believe, this number needs to increase for the housing market to return to a healthier and more normal level (or to crash). Prices were still appreciating when inventory was at 1.8M, so you can bet they’ll go up with dramatically lower supply. 

As demand moderates, inventory could start to pick up, but we’ll likely need to see more new listings. As of now, that’s not happening, as New Listings are down on a seasonally-adjusted basis. 

But, New Listings could increase from three places: homeowners selling, new construction, or foreclosures. 

New construction could add to new inventory, but supply chain issues have suppressed completions, and new permits started to drop as of April 2022. 

Many people believe a wave of foreclosures is coming and will add inventory, but that’s not going to happen. You can watch my other interviews and videos about that, but to put it shortly, mortgage delinquencies have dropped for seven straight quarters. Homeowners are not defaulting. Could a recession change this? Sure, but the inventory from a potential increase in foreclosures would be gradual and take years to play out. 

The last and the most important source of New Listings are homeowners. Normally, as COVID-19 becomes a receding part of our lives, I would think that New Listings from existing homeowners would increase. But this is where the Lock-In Effect could come into play. If over 50% of homeowners with a mortgage have ultra-low mortgage rates, we may not see many homeowners list their homes for sale. 

If fewer homeowners put their homes up for sale, that will put upward pressure on housing prices. Of course, some, or maybe all of that upward pressure, could be offset by the downward force of rising interest rates, but the impact of years of ultra-low rates will be a super important factor in the housing market, likely for many years. 

I can even see a scenario where this Lock-In Effect impacts the market for decades. Again, interest rates during the pandemic were the lowest they’ve ever been, and it’s not clear if rates will ever get as low as they just were. Ever. And even if it does happen, it could be a long time before it does. 

Personally, I think rates will rise for another year or so, but then we’ll see a gradual easing of interest rates. After all, the Fed has pursued easy money policies for about 15 years under four different administrations. While the Fed is temporarily raising rates, I don’t currently think we’re going back to an era of double-digit mortgage rates. At the same time, I also don’t know if we’ll see a 2.7% fixed-rate mortgage again in our lifetimes. It’s only happened once and took a very unique set of circumstances to get there. 

Of course, no one knows what happens next. But if you’re like me and want to get a sense of where the housing market is heading, keep an eye on the Lock-In Effect. It will be very interesting to see if the predictions of lower inventory come true. To keep track, just look at new listing and inventory numbers each month. 

If you want more data-driven information about the housing market, investing, and the economy, check out On The Market, BiggerPockets’ newest podcast, where I’m the host. Every Monday, you can find new episodes on Apple, Spotify, or YouTube. 

Ashley:
This is The Real Estate Rookie Podcast episode 187.

Welby:
Every state has a area, several areas outside of the major city that everybody wants to play in, every state. I don’t care what state, throw a dart on the wall, there’s going to be areas just outside of your area where you can play. So it’s okay to humble yourself and admit the truth that you can’t move in the manner how you want to move because the market is too aggressive.

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

Tony:
And welcome to the real estate rookie podcast, where every week, twice a week, we bring you the inspiration, information, and stories you need to hear to kickstart your real estate investing journey. So Ashley Kehr, the wonderful co-host from the beautiful state of New York, what’s going on?

Ashley:
Well, first of all, talking about beautiful. I just checked the weather for next week, and finally we’re going to get in the eighties.

Tony
There you go.

Ashley:
High of 78, high of 80 a couple days next week.

Tony:
That’s funny.

Ashley:
Yeah, I guess I’m looking forward to that. And I’m looking at myself right now in the recording here and I feel like I’m pretty washed out. I got my white sweater on, I got a white background, my white AirPods, and then my white pale skin, so I’m looking more to some sun.

Tony:
When you said speaking of beautiful I checked out, I thought you were going to say a mirror or something, and that you were blown away with how beautiful you felt about yourself, but you were just talking about the weather. Well, how are things on the business side? What’s cooking?

Ashley:
Yeah, doing good. We’re getting pretty close to finishing our A-frame cabin, which is so exciting.

Tony:
Awesome.

Ashley:
I finished the tile selections today, so that project I can’t wait to be done because it’s the first project that I tackled with my new business partner, so it’ll be his first investment property under his belt, so I’m really excited to see that finish.

Tony:
And you’ve been doing a great job of sharing that on your Instagram, so if you guys aren’t following Ashley, be sure to follow her @wealthfromrentals, you guys can follow me @TonyJRobinson, but I’ve loved seeing that one come along. How much more time do you think you guys need before it’s live and up and running?

Ashley:
I would say we probably have a month left on it.

Tony:
Okay, all right, that’s awesome.

Ashley:
What about you, what’s new with your projects? Because you have how many flips going on right now? Or rehabs?

Tony:
Yeah, we have four active rehabs going on right now. We literally just walked a property yesterday that I think they’re going to accept our offer on, that’ll put us at five. And it’s been a challenge. We’ve got a crew that we work with out in Joshua Tree, but he’s running at the red line right now as well, so he’s been struggling to find more guys for his crew. So he came back to us yesterday and said, “Hey, I think the most that I can handle at one time is three flips.” So he’s already over capacity. We’ve experimented with some other crews out in Joshua Tree, and none of them have really worked out. The last one we literally had to pull him from the job halfway through just because it wasn’t working out. So finding good people has been a big challenge for us, but we’re not going to let that stop us, we just got to go out there, keep looking for more folks, and hopefully we’ll get lucky and find somebody.

Ashley:
I know we have an episode to get into, but let me ask you, when you pulled that contractor, how hard was it, or how did you find somebody to replace him immediately to get in there?

Tony:
So we pulled him, and then we had our main crew that were working on other houses, and we just pulled them and said, “Hey, don’t touch anything on the houses you’re working on, just please come finish this job first and then go back to the other one.” So we literally had to stop work on our other projects to free up that manpower, so it’s been a challenge for sure. All the joys of being a real estate investor, right?

Ashley:
Yeah, yeah.

Tony:
Yeah. But that does tie into today’s episode, because today’s episode, we have Welby Accely, and he’s an investor who lives in New York but invests in Connecticut, and his whole strategy is flipping houses to build capital, and then dumping that flip capital into buy and hold rentals, and he does a really good job of talking about how he chose his market, how he built his team and expanded his team, how he manages his rehabs, and just really listen for the part too where he talks about the mindset and the discipline that goes into his business and how that’s allowed him to scale the way that he has.

Ashley:
Yeah, this is definitely in an episode to get you guys pumped up and motivated. Welby, you can tell, you can feel his passion as he’s talking about real estate investing. So make sure you guys have a notepad ready, take notes, he does go through a lot of numbers on deals to give you guys examples, so I think that’s great. You can see how he actually figures out what his numbers are, and figure out the ARV on a property before he’s even putting in offers, and how that’s really important to him, the ARV, which is the after repair value of a property.

Tony:
Yeah, so before we bring him in, also if you guys haven’t yet, please do us a big favor, leave us an honest rating and review on whatever platform it is you’re listening to this podcast, whether that’s Apple Podcast, Spotify, wherever, the more reviews we get the more people we’re able to reach, and obviously that’s a big goal of us here on the podcast, is to help more rookie investors just like you. So do us a favor, leave an honest rating and review.

Ashley:
Welby, welcome to the show, thank you for coming on. Obviously you are not a rookie investor. We’re not going to get too much into your backstory, if anyone wants to check out your BiggerPockets OG episode, that can be found on episode number 464. But today we have brought you on because we want your expertise on your strategy, so you want to start off just telling us what your strategy is?

Welby:
Well, I’m mostly known for flipping properties, so I’d say in last three and a half, four years I’ve done well over 100 plus flips, and the strategy basically for me is that in real estate you need money, even though there’s a narrative that you don’t need money, but you need to have the money come from somewhere. So where I found, where I can get the money is I flip properties, generated income from those properties. I stay disciplined enough not to spend that money on frivolous things, like buying a new car, or lavish trips, and I stay disciplined to then utilize that monies as down payment monies to acquire rental properties. So that’s basically the gist of that, and then I’m sure we could go into more details about what I do in that process.

Ashley:
Before we even get into that, I want to know how do you have the discipline to do that? Did you always have a strong financial foundation? What was your personal finances like that when you started to get into real estate, you knew that you had to save, you had to save that capital from the flip houses to invest into long term rentals?

Welby:
Well, you’re too kind, because I’m not as smart as people might think that I am. I’m not, it’s a lot of trial and error. When I first started in this real estate business, I talk about the good, the bad, the ugly of real estate, which is why a lot of people in our line of business gets turned off by me, because I give the people the truth, and I give the people my experiences. So as I said, again, I’m not the smartest person in the room, I took a lot of the information that was presented to me, I started back in 2004 and it looked simple. It’s supposed to be, hey, you want to get up tomorrow morning and be a real estate investor, then just get up and be a real estate investor, it’s going to work.
So when I bought my first property, my first initial properties, I was buying them basically with 106% financing. If anybody understands what happened with the subprime mortgages, I was buying them with 106% financing. I didn’t understand cash flow, I didn’t understand ROI, I didn’t understand purchasing correctly, I was buying just to buy, and I felt that because I was able to get qualified to get a mortgage I won, like a lot of people do today, they think that they won because they were able to get qualified. So I lost, if you guys go to my BiggerPockets interview, number 464, shameless plug, if you guys go to that I talk in detail about how it took me, from my initial start, 13 years to start realizing the mistakes that I was making, and within those mistakes, to answer your question, the importance of being disciplined, having cash reserves, the importance of having down payment, understanding your numbers was so important. So it was a lot of me losing trial and error, making major mistakes is what gave me the discipline to understand the importance of what I’m doing today.

Tony:
There’s a lot of important lessons to be learned when you’re getting beat up by life, and we talk about that a lot in the podcast, how sometimes those darkest moments give you the momentum you need to go forward and find success eventually. Before we keep going Welby. Can you just give us an overview of where your business looks today? So I know you’ve mentioned that you did 100 flips in the last four years, which is incredible, but what about on the holding side? How many units do you have currently?

Welby:
Here’s the thing, right now I go up and down as far as the holdings that I have. So I still continue flipping, last year, 2021 was last year, I did just about 20 flips last year. This year it’s a little bit slow because obviously you guys to see what’s going on with the after effects of the pandemic, so I’m only around maybe six or so, seven, I got to check. As far as my rental portfolio, I go up and down and I fluctuate, but here’s the thing I want to say, the reason why I don’t promote “doors” is because it’s a misrepresentation to people.

Tony:
Totally.

Welby:
What happens is is that people are more concerned about being sensational on saying, “Hey, I got $1000, I got $1,000,000, I got $500, I got $50.” I know people that have triple the amount of doors that I have, and don’t make half the money in net income, and it’s very important that people understand net income is what you put in your pocket, don’t make half the net income that I make. So I don’t really push that narrative of, hey, I have X amount of doors, because it’s a false representation to people, especially for the new investors walking in the business not understanding the business, that it’s not about the quantity, it’s more about the quality.

Tony:
I love that breakdown, Welby, because I think that is a misconception that a lot of new investors have is that they’re just focused on how many doors can I get to? But like you said, if I could have $1000 in net cash flow with two units, versus $1000 in net cash flow with 20, I’m probably going to go with two because it’s less headache. So if you can maximize the revenue per unit, there’s something to be had there.

Welby:
That’s my primary focus, is the quality of what I have in relations to what it cost me to acquire it, to how fast I could recoup that initial investment, to then basically have infinite return, not having none of my own money in that actual property. So if I could give a really quick example, the reason why I state that, I’m from New York, but I do most of my business in Connecticut. I have a good friend of mine who’s in the real estate business as well. I have a four unit building that after all expenses I’m netting roughly around $3,600 a month. Well actually it’s a six unit I’m talking about now, I’m netting in that six unit just over $5,000 a month. I purchased that property at 270,000, but its value is well over 550-600,000. So I have a 50% appreciation on that property.
A good friend of mine was looking at a property that was a 12 unit. He was paying 1.2 million for that property, and all he kept thinking about is that he got a property that he paid 1.2 million and it’s so big, it’s 12 units. By the time he finished breaking everything down and putting down a down payment, his down payment would’ve been 20%, roughly about 200-220,000, give or take. He was going to be netting roughly $5,000 a month in net income. So now it took him to make that $5,000 in net income $200,000 of down payment money, while it cost me $70,000 of down payment money to make the same money in net income, which means if I would’ve duplicated what I did times three to match how much he spent, I would be making roughly $15,000 for the same debt that he’s making 5,000.
So it goes right back to the point I’m saying about the quantities doesn’t mean that you have a better quality, but he could not wrap it around in his mind because all he kept saying in his mind is he’s got a 12 unit building. Well I could tell you now, as he’s owned it, how many years now he’s owned it, we both bought ours roughly simultaneously, he wished that he’d bought what I bought now because now he understands. So I hope that breakdown helps you out a little bit.

Ashley:
That was a great example, I think you really broke that down and gave two really good examples of different door amounts, different price points, but really, at the end, that’s what you care about. And I think if you are going to set a goal of say you want 100 doors, you’re setting that goal because you know you’re purchasing properties where the cash flow is $300 per door and you’re putting 20% down, or you’re doing a burn, you’re not putting any money in. So if you are setting that goal of how many doors you want, make sure you’re working, you’re starting with a dollar amount, or something, that’s your goal, but then you’re working backwards and saying, okay, I need 100 doors to get to that dollar amount, and not just saying, I want 100 doors, just to accumulate.

Welby:
You just make my heart skip. I love that. The reason why I love it is because I’m so passionate about this business. I’m so passionate about educating the people, because those fundamentals, people don’t understand the importance of the fundamentals that you, what you just said. And people that are in the industry that are doing this business to scale, if you asked a question, the odds are we’re going to come up with roughly the same answer, maybe presented differently, but the result will be the same answer because we understand the fundamentals of that. So you saying that is wonderful, I love it, that’s beautiful.

Ashley:
Welby, what kind of properties are you actually going after? So you mentioned you had a six unit, are you doing single family flips and then small multi-family on the rental side? What does that look like?

Welby:
Well, I focus on what my market gives me. So this is why I tell people you have to understand, which I think we’ll talk about when I say I do, excuse my word, if I’m saying it right, reconnaissance, somebody that’s in the army, or whatever, I go and I scope out the environment I’m looking to invest in, and based off of the environment I’m looking to invest in, I deal with what the environment gives me. I don’t force it. So in areas that I’m investing in, so if I’m buying a single family home, I already know from out the door I’m buying a single family home with the intent of flipping it to sell for profit. If it doesn’t align up with what I have to acquire the property for, to what it’s going to cost me to rehab it, to what I’ll be ultimately able to sell it for, I’m not buying it. If I do buy it, and I know, with a strong estimate, I project to be able to profit X amount of money after all expenses are paid.
I might even do the same approach on a duplex, because I’m not looking to keep even a duplex, my intent is to purchase that property with intentions of fixing it, acquiring it correctly to renovate it to ultimately sell it to flip, but then I’ll be looking for a different type of client because the odds are the person that will be buying that property might be a person that’s looking to move in one unit as their primary residents, and then rent out the other for the assistance of what the rental unit can provide them. Outside of that, anything that I purchased, three units or more, I already know my intentions is to keep it. So that’s pretty much it, anything that’s one or two, one, I’m definitely flipping it, two, I’m pretty much flipping it, three units, four units, five units, six units, seven units, I’m keeping those for long term holds.

Tony:
So Welby, I want to get into the nitty gritty of your strategy here because I think it’s a really powerful one for a lot of new investors to leverage, and I think your point at the beginning of the episode about there being this misunderstanding in the world of real estate investment that you don’t need capital, but you do need money, it doesn’t always necessarily have to be your money, but the money has to come from somewhere. So I definitely want to get into how you’re leveraging that piece, but I think if we take a big step back and we just go 30,000-

Welby:
Can I say something please? You make my heart skip as well. You make my heart skip as well, I love it, man, I just love it. Yes, yes, go ahead, yes, correct.

Tony Robinson:
The money’s got to come from somewhere, right?

Welby:
Yes.

Tony:
But I want to take a 30,000 foot view of your strategy, maybe you can walk us through step by step. So if I’m a complete rookie, and I just want to clarify this as well, so you’re in New York, but you said you’re investing in Connecticut, so you’re investing out of state. So if I’m a rookie, how do I go about choosing which markets to even get started in? I guess walk us through your decision making, why not invest in your own backyard versus going to Connecticut?

Welby:
Well, here’s the trick though, Connecticut is my backyard. It’s literally an hour, hour and a half tops drive. So it is my backyard. So people have a misconception of investing out of state means that you have to catch a flight to go and look at your properties. So I used to invest in Atlanta while I was living in New York. One of my downfalls of why that wasn’t a success, one is because of the lack of knowledge that I had, and two, to be frank, it was just too far away from me to mind my business, to handle my business, to take care of my business. I was depending on other people i.e. property managers and out-of-state realtors, that I can’t keep my pulse on the finger of my business to confirm what was being represented to me, especially as a new investor at the time.
So of course now everybody know New York is one of the most expensive cities in the world. I did a lot of business in New York, but then what happened is I had realized that with all of my mistakes, all of my losses, because I got wiped out multiple times trying to build this business up to zero, I realized that New York was the big fishes out here and I was a bit too small to play in the manner that I wanted to play. But I had made enough experience, I made enough money, and I realized that I don’t have to go too far away from my backyard to find other markets that can allow me to walk in at the financial level that I’m at, at that time.
So I looked around, and I could have went upstate New York. Just like any other state that you want to, every state has an area, several areas outside of the major city that everybody wants to play in, every state, I don’t care what state, throw a dart on the wall, there’s going to be areas just outside of your area where you can play. So it’s okay to humble yourself and admit the truth that you can’t move in the manner how you want to move because the market is too aggressive. That’s one. Two, New York is predominantly great for appreciation, aggressive appreciation. What people don’t want to accept, what a lot of influences are putting out to the country, is that they want people to believe that the way that things are appreciating in New York, Los Angeles, Seattle, California, big cities, most of America does not appreciate like that.
So you have to understand, I had to understand that I had to start focusing on cash flow. I had to start focusing on cash flow, and the cash flow in the manner how I wanted it I was not going to get it here in New York. So then by accident I would say, friend of mine said to me, “Hey, why don’t you come to Connecticut?” He’s lived in Connecticut, and it was really by accident, by the grace of God, by me talking and conversing with people, networking, I was told, “Why don’t you come out to Connecticut?” When I went out to Connecticut is when I started doing my investigating, looking at all the different towns, the different opportunities, then I realized that I could play here, because I had bigger city money, I could do it in Connecticut. So that’s what I started doing.

Tony:
So Welby, you mentioned something I think that is super, super important, and you said that even though you could get appreciation in New York, that wasn’t what your goal was initially for real estate investing. So as a rookie you have to think about what is your goal as you get into this. Is your goal to build long term appreciation so that when you retire, you have a multimillion dollar net worth? Or is your goal to build up cash flow in the short term so that maybe you can walk away from your job, because those two goals are going to dictate very different approaches and strategies when it comes to real estate investing. So it was a really important lesson, Welby, so I wanted to make sure we didn’t skip that.

Welby:
May I add to that too, if you don’t mind? I give examples, everything I speak on I have world examples, because this is what I’ve been through. Anything I talk to you guys about is not what I heard, this is what I do, did, or I’m going through. So I have another friend of mine in the New York area, because everybody wants to invest with me now, he bought himself a, I think it was a three unit building in Long Island. He paid 700,000 for the property. The mortgage on it, I can’t tell you off the top of my head, but with taxes and everything his mortgage and everything had to be close to $6-7,000. He had three units, everything’s about the math for me, he was renting out each floor for roughly $2,500. $2,500 times three is $7,500 a month, so he was netting, netting after all expenses, I don’t know off the top of my head, roughly $1,500.
Now that’s cool, I’m not telling you that you’re right or wrong. But then I gave him another example of exactly a property that I have in Connecticut that was a three unit, that at the time I purchased it I paid $120,000, at the time. When I’m looking at properties I’m looking at properties this way, it has to be distressed and or underperforming. Those are the two things for me, distressed and or underperforming. So I bought a property for 120 that was worth, by the time I would be done to it, at that time, 300,000. So I had over 50% of potential appreciation by the time I start adding value to that property.
But before I even owned the property I already knew that that property, that was a three family, there was a street level basement, which I knew I could convert to a legal apartment. So now that three family I knew I could make it a four family. Before I even own that property, with the relationships I have with the city, with the programs that I have, I knew off the top I was going to be able to generate out of that building well over 5,000 plus on that property. That property today is worth over 400 something thousand. Remember, I bought it for 120, I put 20% down, I was financing 90,000 on a property that’s worth three quarters the price that I purchased it originally. The net cash flow on that building to date is $3,600 a month. So I got right now over 300,000 in equity, with a cash flow of over $3,500 a month.
My net worth, compared to the two buildings, is higher than his, yet he paid way more than mine. You understand? So this is why it’s so important, everything in this real estate business is about the numbers. Everything is about the numbers, and what Ashley had broken down when she said, which was beautiful, on how you calculate what you can rent out each apartment for, to what it cost you with your mortgage taxes, insurance, and everything, subtracted by whatever, that’s what you got to do, and if the numbers don’t add up, you have to have the strength to say, this is not a deal for me, I’m going to walk away.

Ashley:
Welby, that’s a great point, don’t get emotionally attached just to get that unit count too.

Welby:
That’s right.

Ashley:
It’s that emotional side of it like, oh I haven’t gotten a deal this month, I’m just going to buy this and I’ll make it work.

Welby:
Absolutely.

Ashley:
And also don’t fudge the numbers either to make the deal work, make sure that you’re using accurate numbers that you verify. So I want to know about your team. What kind of team have you put in place, and what advice would you give to rookie listeners as to the first person, or maybe couple people, they need to add to their team if they want to start doing flips and purchasing buy and hold property?

Tony:
And how to find them, if you can, Welby, I think that’s a really critical piece today too.

Welby:
Believe it or not, my team started out with just a father and son. That’s how I started with my team. To date now we grew the team to, I would say consistently six, seven people, but then we have an extension of the team from subcontractors that we use. So how I started out with it’s okay, stop trying to chase everybody else, what everybody else is supposedly doing. I’ve met a lot of these people, and listen, I’m sure you guys have met them too, and you know what I’m trying to say, it’s not what you think it is. You understand? So it’s okay to humble yourself and understand that this is a marathon, it’s not a race.
So I started off with a father and son. When I start off with a father and son, it’s so important as an investor, so all you new investors understand that this ship, this car, this boat does not move without you, so I need you to be empowered to understand that this ship, this car, this boat does not move without you. Given the fact that you understand that you need to make sure that you educate yourself enough to then be the captain of your ship, to direct the people that work for you.
So given the fact that I understood the process of what to look for when I was looking for my first flip, how much I should buy that property for, then I went through the process of understanding a rough estimate of how much it’s going to cost me to rehab, I made sure I purchased the property correctly. Then I started with my friend’s father and his son, and those were the two guys that essentially renovated a lipstick property for me. I didn’t get a gut job, I didn’t get a property that was destroyed, I just got a property that you’re just going to show it a little bit of love, put it back on the market, and sell. So we actually grew together. So in our first year we-

Tony:
Let me ask this, Welby, let me ask this before you go on. So how did you find those two guys? Because you said you started with those-

Welby:
We were friends, we were friends, and they had ambition not to do what I do, they wanted to do construction. They knew how to do Sheetrock work, they knew how to do little bit of electrical, stuff like that. Listen, we all understand in this business there’s gray areas. You got to do what you got to do. So that’s how it started, I had to get in and get started. But what I had to do too is I had to understand that that was the two first people I started with, then I had to get introduced to realtors in the area. Most realtors will not understand the mindset of an investor. Every realtor thinks that they do because most realtors just understand if it’s for an investor, selling it to him hopefully low so that he can sell it high. No, it’s more than that.
So I had to educate the realtors, even the realtors that had more years on this planet than I did, in the business, had to explain to them, I need you to give me what that value of that home is going to be when I beautify it to the standards of what you’re telling me it needs to be. I need you to give me the ARV of this property. When they would tell me what the ARV of this property is, I would know roughly, I’m sure most of you people know what the 70% rule is, it works, I would calculate the numbers and then present to her, this is what my offer is. Most realtors, if they understand the way that us as investors have to move, they’re not going to want to work with you, that’s the truth, because most realtors do not want to work as hard as you need them to work with you to accomplish the goals that you want. So you have to kiss a lot of frogs in this business, people, you’re going to have to kiss a whole lots of them.

Tony:
And Welby, that’s true for every person that you bring on your team, right? You’re probably going to have to go through several contractors, you’re going to have to go through several insurance agents, title companies. I’ve cycled through all those different people as we’ve built our business. But when you find the people that work, you got to make sure that you treat them right, that you make it a mutually beneficial relationship.

Welby:
And if you understand the root of it for everybody else, it’s about money. Hopefully we’re going to be become friends, and maybe family, but everybody’s coming to this table because they see you as an opportunity to make money from you. Some people, some realtors want to make you believe it’s a partnership, some mortgage people want you to believe that it’s a partnership. No, it’s not. No, it’s not. Let’s be real about it, you guys all work for the investor, because the investor is the only one that has a calculated risk in this equation. The only one. Nobody else has to sign that contract, nobody else has to guarantee that loan, nobody else but that investor. So I want to empower investors, new investors, old investors, that this does not move without you.

Tony:
Yeah, so Welby, but you gave a really good example of how you’ve built your team out in that market, and obviously the realtor is an important piece to that because they’re the ones that are helping you find the deals that are going to make sense. And you mentioned the 70% rule, I just want to recap what that is really quick for our listeners. So ideally if you’re able to purchase a distressed property where the purchase price and the rehab come to about 70% of the after repair value, then typically you know that you’re going to be able to turn a decent profit on that. So, Welby, as you’re working with these realtors, what kind of properties are you telling them to look for for your business? What is your criteria when searching for a new flip?

Welby:
I’m not limited to anything. I don’t care if it’s a auction property, because you got a lot of people that get caught up about the source of where you find that property. That’s irrelevant. The process of you evaluating a property to understand if it’s a good deal or not is irrelevant to the source of where you getting that property. So I don’t care if it’s an auction, I don’t care if it’s coming from a family friend, I don’t care if it’s word of mouth, I don’t care if it’s off the MLS, and give you guys a secret, 90% of the properties that I buy that I flipped has come off the MLS. So the source of where I get the properties are irrelevant.
The number one question that needs to be answered, and I tell every investor, please listen to me with this, you have to lead with ARV. That’s your number one question that you have to ask at all times. The ARV gives you the follow through on everything else that you need to be able to calculate to determine what your maximum offer is going to be. So who cares what they telling you that you could rehab it for if you don’t know what the ARV is, who cares what you can do with anything involving that property if you don’t understand that. So I tell everybody, always lead with the question of what is the ARV of that property, especially when we’re talking about a flip.

Ashley:
Welby, when you are analyzing your deals, when you’re going through… Well first of all, before even that, I want to know about the MLS. You said 90% of your deals are from there, and I think very common thing we hear is there’s no deals on the MLS, how can I find deals? So can you let us know what is your secret, and how are you making deals work on the MLS? Is it just throwing out low ball offers? Is it looking for listings that have been on the market for a long time? Why do you think that you’re getting so many deals on MLS?

Welby:
Well, if you look at the amount of offers that I put out to how many I get told no to, excuse me, that I actually… Let me say that again. If you look at how many offers I put out to how many I get a yes to, I’m doing horrible, but that’s the nature of the business. So new investors don’t understand that, you have to put in, especially in a regular market, you have to put in, sometimes I put in 100 offers and I get told no to all 100 of them, but I just need that one yes. Now as far as what do I look for, I don’t look for anything. What I do is, here’s the thing. For everybody to ask as an investor do you need to be licensed? No, you don’t. I don’t have a license to do anything in this business, I just have a legal right to be in this business as an American. So everybody has a right to be in this business.
Now everybody that’s going to be working with you, i.e. what I call my starting five, my realtor, my contractor, my attorney, my accountant, my… Where’s the last figure? I wrote it down because I know I was going to forget, my funding source, my mortgage lenders, whomever. Every one of those people that are wrapped around you have to be licensed to be able to provide that service to you, except you. Given the fact that these people, so we talking about the realtor, I don’t have to do anything. Let the subject matter expert, which is your realtor, do the job. You give them the criteria of where you need to be at, after a while of you working with your realtor, your realtor is going to see a property on the MLS, or see a property driving and just know, Welby’s going to buy that property if I sell it to him. You understand?
So let your realtor do the job, let your realtor go through, break down to your realtor what your quick criteria are going to be, so in my area I’m looking for properties I can add value to. I’m not looking for a property that was listed by an owner that’s looking just to sell at retail price, I’m not looking for anything to be purchased at retail price. I need the realtor one day present it to me, my realtor has to present to me real simple, “Hey Welby, I found another property in the area that you’re in, the ARV is this.” That’s all I need. That’s all I need. Based off of that basic information, we all have these cell phones, let the cell phone work for you.
We all have, the same way we have Twitter, Instagram, and all those other apps, we also have apps for us investors. What are they called? Zillow, Redfin, Realtor.com. Use the app, click on the app and look at the photos through the app. Look at the square footage of the property that you’re looking to buy, look at the area that the property is in. If you start doing enough work in the area you’re going to be able to come up with a strong, which I talk about in my courses, and I talk about in my books and stuff, you’ll be able to come with a strong estimate so that you could put your offer in. Put your offer in and leave it to God. At least you in the game because you put your offer in. Now as an investor, the odds are you’re going to be told no. That’s just the odds, you’re going to be told no more than you’re going to be told yes. That’s okay, keep going. Eventually you’re going to get a phone call from your realtor, “Guess what? They took your offer.”

Tony:
Yes, right.

Welby:
You keep pushing it hard enough, believe it or not, I’ve had weeks where I’ve gotten accepted offers of 10 houses. I don’t know what the hell I’m going to do with all 10. So you got to keep pushing, pushing, pushing, you just can’t stop.

Tony:
So Welby, we talked a little bit about how you chose your market, how you’ve built this team of your starting five around you, but what about actually managing the rehabs? Are you going to the job sites every week? Or do you have your team doing that? Are you picking the materials? And if so, how are you determining between your flip houses versus your rentals? Just walk us through your process for managing your rehabs.

Welby:
You’re never going to do this business to scale if you’re doing everything by yourself. When I first started I was out in the field, I’m still out in the field, but I was more out in the field involved in a project. While I was caught up in a project I could not go out there to get more projects, which meant I couldn’t keep the guys that’s working for me busy. So what I did is the position that I was in in the field with my guys, I talked to my guy, his name is Jeff, Loosa Home Improvement for everybody, and I said to Jeff, “Jeff, you are going to have to take my position, what I’m doing with you out here, you’re going to have to pull in whomever, your father, whomever, into your position, and you’re going to have to pull someone else outside and find somebody to stand in a position your father was in.” That’s how we started doing it, so that I could slowly wean myself away so I could focus on scaling.
So because, once again, we got these smartphones, if there’s an issue you better call me on WhatsApp, FaceTime, show me where you at with things. When you start building up enough with that, they start to understand. When you start doing enough with these flips, it’s not HGTV, we’re not building theme houses, we’re not building the Count Dracula house today and the princess house tomorrow, every property that you’re going to do, the formula’s going to be the same. The gray tone walls with the white trim is what’s been in style for the last 10 years, so we have buckets of those in our warehouse, so we already know, when we bought the property, this is what we coloring all the walls with after we fix all the walls.
If the kitchen layout can be an open floor plan, you don’t have to ask me, “Welby, should we open up a floor plan or not?” We’ve done enough, you already know, we knocking down these walls. We have to renovate the bathrooms, we have to renovate the floors, or resurface the floors. When you start doing enough of these, the same thing you did in the first one is what you’re going to do in the second, third, fourth, fifth, et cetera. So you want to try to automate your business as much as possible so that the people that are working for you don’t have to think too much, they already know what they have to do. So that’s what I do, and I maintain a lot of my business through my phone, so I keep up with them through video chats and updates, and things of that nature.

Ashley:
Is there any software or apps that you’re using that correlate with just keeping up on everything on your cell phone? I mean, are you using spreadsheets to track the rehabs? Do you have a dashboard you can look at?

Welby:
I have a program, I can’t remember it off the top of my name, where it’s an online software, I paid a bunch of money for it, but it’s great when it coming to flips, that I am able to keep track of what was spent, and I could tell you to the penny, by the time the project is done, how much I made. Years before if you would’ve asked me, “Welby, when you sold that flip, how much money you made?” It was guessing, I didn’t know. I could tell you to the penny how much that I made on each of my properties. Also too I learned how to simplify my process. So I give an example, most of the rookies that you guys are going to be speaking to are going to be utilizing hard money. Hard money is going to be based off of, they’re going to be re… What’s the word? Not-

Ashley:
Refinance?

Welby:
Not refinance, drawing you the monies that you pay when you’re rehabbing, they’re going to draw you X amount of funds for the rehab that was done. Reimbursed, that’s what I want to say, I’m sorry. They’re going to reimburse you based off of the monies that you spent off the draws. I show the people how sometimes new investors make the scope of work too complicated. I show you how to simplify the scope of work so that you can get your monies from the hard money lender faster while you’re doing your project. So everything for me is to make everything as simple as possible, which is why people think, when they watch me on Instagram, that I make it look easy. No, it’s just I’ve been through a lot where I’m trying to simplify my process as much as possible so that I could make my life a lot easier.

Tony:
Can you elaborate on that a bit, Welby? So you say simplifying the scope of work and just simplifying the process. Does that mean that you’re, are you just paying the contractors more money up front, that way that your draws are easier? Or what does that process look like?

Welby:
For myself, with a scope of work, when I was saying that you’ll see a rookie when they’ll give a scope of work to a hard money lender, they will give, it’s basically a spreadsheet with lines on it, and obviously to the left you’ll see 1, 2, 3, 4, 5, 6, and let’s say hypothetically the scope of work was going to add up to $60,000. The rookie will have 50 lines, and they would break down the screws, the hand fixtures, the Sheetrock, and they make it complicated. So now what’ll happen is now when you now want to do a draw, the inspector that’s coming to the property, they’re going to have to go based off of the scope of work, and they’re not going to reimburse you until you 100% completed based off of the areas of the scope of work.
Myself, with the same scope of work that would’ve been 60,000, my lines of scope of work might be eight, maybe 10 lines scope of work. So I want to be as generic as possible so that when the inspector comes, he’s looking at a generic wording that I have there so that I know he’s going to give me that monies that I need to continue what I’m doing so I can get my project moving forward. But for myself, I don’t really do draws, we can maybe talk about that a little later, my draws is a bit done differently because normally I do one draw and that’s normally at the end of the project, but we can talk about that in a little bit if you want.

Ashley:
Welby, is that just the scope of work that you’re minimizing, is that just for the bank or the hard money lender, and do you have a separate scope of work with the contractor that really itemizes everything that needs to be done?

Welby:
Yes and no. I know that the way I deal with contractors I think is a bit unorthodox to most people, because obviously dealing with contractors, they can make or break your business, and a lot of the fears that people have, which I’ve gone through when contractors either ran off with the money, or did not do the quality of work that I needed them to be done, and there was no recourse for getting your moneys back, and also dealing with a contractor that gave you a price initially and then through the process of doing the work they then wanted to change the pricing, and if you weren’t willing to that, they would either say they’re not continuing, or you have to come up with the money. So I approach contractors and I deal with them a bit differently, that keeps them in line so I don’t have problems with contractors, as far as getting my jobs done.

Ashley:
So you think just because of how you build that first relationship with them, you don’t have to go into a huge detail scope of work because you’ve already built that trust, is that what you’re saying, I guess?

Welby:
Yes and no. Here’s the thing, once again it’s all about the money. That’s what the people are here for, it’s not because they like you, they’re here to make money. If you know and understand how to control the money, you going to control your project. And the manner in which I talk in my courses, and stuff like that too, the manner in how I handle a contractor, the contractor can’t do nothing to me. They can’t Rob a penny from me, and I’ll even pay a contract 100% upfront, I don’t care.

Tony:
So, Welby, you’ve given us so much information on how you’ve put everything together, I think the last piece that I want to go back to before we wrap up here, is just the financing piece. So you talked a lot about hard money, is that how you’re funding most of your flips?

Welby:
Most of my flips I’m doing hard money, correct, and then now I have private money that I started introducing to my business as well. So they give me better terms, and I’m able to cut a lot of the red tape, so I do a mixture of both. And sometimes, if it’s necessary, I have cash as well, I have plenty of cash, so sometimes I’ll even use that temporarily, so those are some of the options that I have.

Tony:
So I think every new investor’s dream, especially for those that are flipping houses, is to use private money. It’s typically easier, like you said, less red tape than hard money. So can you just give us a quick crash course on how you were able to find that hard money lender, and then what those terms look like and how you’re able to manage that relationship.

Welby:
To be easy, a good friend of mine, Mark McMahon, Mahone, Mark, and it’s another couple of guys, Dan USA Land Ventures and Full Auto, Gerald, we actually have a mentorship group that we’ve put together called Campfire Feal Estate, so watch out for that, it’s going to be amazing. But Mark, he’s actually the one that educated me. Once again, I don’t know everything, I like to be in a room with people that are smarter than me or I respect, and he’s the one that educated me on the private money side of the business. So what happened is I train a lot of people in this business, I’ve trained a lot of people, and a lot of people I’ve helped train are multimillionaires themselves in this business now. One of my students, believe it or not, has become my private money lender, one of my private money lenders.
So you imagine, for everybody that doesn’t think that this real estate business is possible for you, one of my students was brand new, just like you guys, he put his head down and worked, worked, worked, and he put himself in a position to become one of my private money lenders. The way we structured that business deal, I was actually able to buy two multi-units actually the beginning of this year, sometime early February, I was able to buy one commercial property and a four unit building, but the commercial property is also residential, and I was able to buy both of those properties for $495,000 using all private money. So I was able to walk into that property not coming out of pocket a single dime out of my own pocket, the private money lender funded that for me.
Reason I was able to do that is because the value of those properties combined is going to be roughly around 1.1, 1.2 million for the two properties that I purchased. So I put him on the insurance, but the contractual agreement that we had was 10% on an annual percentage rate, between those two properties. So the mortgage on that, interest only was roughly $4,125 per month interest only. But don’t forget, I didn’t put up any money buying these properties. The four family just got finished renovated, and I’m actually putting a mortgage on it now, and then the commercial unit building should hopefully be done in the next month, and I’ll be putting a mortgage on those.
Given the fact of how I was able to buy them, if I could break those two down separately, the four unit building that I bought for the 240 is valued at 400,000. The banks will be willing to give me a mortgage of 70% of the 400,000, which I can’t remember off the top of my head, but it’s roughly around 280,000. But I’m all out of pocket 240,000. So all I want is the 240,000. I don’t care about doing the bird strategy, or doing any of the cash out refi.

Tony:
Cash out refi, mm-hmm.

Welby:
I don’t do that, I focus on what my cash flow is. So that building is going be netting me with a mortgage of around $1,700, with none of my own money out of pocket that mortgage will be around $1,700 on a building that’s going to be cash flowing $4,800 per month. So I think that’s a beautiful win. The five unit building, which is a commercial building which I paid 255,000, the structure was exactly the same, that building is going to be grossing me over $6,350 a month on a mortgage of $1,800.

Ashley:
I just want to ask real quick, what are, for our rookie listeners, what are the main upgrades or the main value ads they should be doing so that they’re getting these great returns that you are?

Welby:
What I would tell people to do in the rentals is have the attitude, would you live here? Too many rookie people, too many landlords, have an attitude of I’m not going to live here so I don’t care. So they think it’s sufficient enough to just slap paint on the wall and who cares, I’m not living here. That’s going to give you the quality of the tenants that you’re going to have, and it’s also going to then limit to the increase of the rents that you’re going to have. My apartments, when I’m acquiring these properties, these apartments, are distressed, one more time, and or underperforming. So these same apartments that I bought, for example, the four family were being rented for $625 three months ago. By the time I finished, the apartment is pretty much fully rented now, and everybody’s paying $1,250, for the same apartment that was being rented for half that price.
I put in updated kitchens. If the kitchens can be refurbished, I don’t rip them out, I clean them up and I do professional paints on them. I put laminate floors, waterproof laminate flooring. One of the big things I tell everybody to do, install recess lights throughout the apartment. It’s inexpensive, but what the effects will be at the tenant when they walk into the apartment, it brightens everything up. Then I don’t rip down walls, I try to fix what’s existing. So I’m sure a lot of the rookies that are going to go into these apartments, you’re going to see these wood panel walls, people are going to rip those out. I never rip them out, I fix them. After I fix them I get them primered and then I do a beautiful paint job on them. What happens is is that it beautifies the apartment, and because of the wood paneling, it gives character to the walls.
I change all the outlets and switches, and I give love. That’s what I honestly do. So my attitude is, would I live here by the time I’m done? And it’s yeah, I would live here. Also, I want to give something else that’s very important. My business model for how I do, because people are going to ask me how much is it that I’m looking for in terms of cash flow. In a manner of how I’m buying in the area that I’m in, I put 20, well today’s market’s going to be 25%, I put a minimum of 25% down. I’m looking for a property that’s distressed and or underperforming so I can add value to it. Given the fact I’m buying the rental distressed and or underperforming, the value of it, the equity is already built in because I bought it for the right price.
I invest the money to rehab that property, pretty much all of my rental properties that are three units or more, one third of the property covers all expenses. The other two thirds is pure profit. So I give an example of a three family that I have, I purchased the property, the property was worth 300,000, I bought it for 150. I put down 20% down, I financed 130,000. The mortgage, especially before the interest rate went up, the mortgage is $947. I got receipts people, I could show you exactly what I’m talking about. I got receipts.

Tony:
And I like how well you know your numbers too, Welby, and there’s so many.

Welby:
Before you own it, before I own the property, I can tell you how much money I’m going to make off of that property in my pocket. So that building, my mortgage on it is $947, that’s including taxes, insurance, maintenance, everything. So let’s just round it to $1000. The first floor, I’m getting $1,500 on the first floor. So just of that one unit I’m already netting $600 a month. Second floor I get $1,300. The third floor I get $1,300. So just off of that building alone, in my pocket, after all expenses, I’m putting 3000 plus in my pocket.
Now here’s the trick. Remember I told you guys, I put down $30,000 to acquire that property. The way I handle my contractors, what will cost the average person to rehab that property costs me minimal. This takes time, of building these relationships. Now here’s the beautiful thing about it, my goal is I got to recoup back the money it costs me to acquire this property. I’m not making no money until that $30,000, let’s make it $40,000 to make it even better, I’m not making any money until that $40,000 is back in my account. You talk to the average person, that $40,000, based off of the way that they’re acquiring and buying, is going to take them on average six, seven years, barring no issues. Tenants not paying, roof not leaking, boiler breaks. On average it’s taking me roughly around 18 months or less to recoup back my initial investment.
So now I had to go look, about six months ago I look at the last seven properties that I own, I have none of my money in those properties. Every one of those properties have given me back what it cost me to acquire them, and then some, so in the last year, two years, all the monies I make is pure profit. And then you know what I’m doing now, with the money that is generating I don’t have to flip as many houses as often as I was having to do before, because what it costs me to acquire a rental, I’m doing it monthly, more than that. So you want to know what? You know what I’m going to do when we talk about sacrificing, I’m not going to buy me a new car this month, or I’m not going to go on that trip this month. I’m not going to do for the next two months. I’m going to save up X amount of money based off of my cash flow so I can buy me another baby so I can add to the cash flow.

Tony:
Yeah, that’s the machine, and as you start to build it it starts to feed itself, it starts to feed itself. But like you said, Welby, you got to to sacrifice for that short term to be able to reach that point, because I think so many people, they see the cash flow, they see the number of doors, but they don’t see the sacrifice that happened behind closed doors to be able to get to that point.

Welby:
It’s worth it, it’s worth it. I tell everybody, it’s worth it. I encourage everybody, it’s worth it, it’s worth the fight, it’s worth the long days, it’s worth the arguments, it’s worth the doubt, it’s worth it, just don’t stop.

Tony:
So Welby, before we wrap here, first, we just want to thank you, man. You’ve been like a wealth of knowledge, and again, I just think your strategy of flipping to create capital, using hard money, using private money, and just using that to build this machine, is a strategy that every rookie should seriously, seriously consider. So before we wrap up, though, we have a few more things we want to hit with you, first is our rookie exam. So this is the test that we make every guest pass, and if you don’t pass, well fingers crossed. But we’re going to jump into it. So the first question is, what’s one actionable thing that rookies should do after listening to this episode?

Welby:
Right now go download my free ebook. That’s the first thing that you should do. I give a really strong play on exactly what I do. So I would definitely do that, and I would say the most important thing, getting the money is the easy part, buying the property is the easy part, anybody can do that. Please educate yourself, educate yourself, educate yourself, that should be the first thing.

Ashley:
Okay, Welby, the second question is, what is one tool, software app, or system in your business that you can’t live without? Is it your phone?

Welby:
Oh yeah, yeah, yeah, definitely. Yeah, my phone, my phone, my phone, it’s everything, definitely my phone.

Ashley:
You had mentioned an app or a software that you use earlier too for your business. Maybe you can email that to us later and we can include it into the show notes.

Welby:
I remembered it now, the program is called Flipper Force.

Ashley:
Okay, thank you.

Welby:
That’s very good for keeping track of your expenses. And then what’s beautiful at the end of it, when you’re completed with the project, it’ll tally up for you and it’ll tell you exactly how much money is it that you’re going to profit after you finish selling, paying the realtor, and everything else like that. So Flipper Force.

Ashley:
Okay, awesome, thank you.

Tony:
All right. And then last question for you, Welby, where do you plan on being, or where do you see yourself five years from now?

Welby:
I just want to do what I want to do, when I want to do it, how I want to do it. That’s it. I’m not trying to be bigger and better than anybody else, I just want to run my own race, I want to take care of the people that I love. I like cars, so if I want to go and get that Lamborghini truck, I just want to just go get it. That’s what I want to do, and I want to help, I want to help people. I really believe that the market is going to be changing, horribly, soon, and they’re going to need people that’s going to navigate them through this, so I hope I can be a beacon for a lot of people to help them navigate through this, because it’s going to be a great, great, great, great opportunity for people to really become wealthy in this business if they position themselves and take advantage of the opportunity that’s coming, because if you’re not, you’re going to get ran right over. So I hope I could be a beacon to a lot of people.

Ashley:
I think so, because you definitely passed our rookie exam there, Welby, so thank you for sharing.

Welby:
Yes.

Ashley:
We want to give a shout out before we end to this week’s rookie rockstar, who is Mason M. So Mason finally officially closed on his first flip, he used private money to do so, and he ended up actually losing $1000 on this flip.

Welby:
Congratulations.

Ashley:
So the purchase price was 30,000, the rehab was 20,000, and he sold it for 70,000 cash, but there’s an opportunity cost here because Mason learned some lessons, rural markets are harder to comp for ARV due to fewer recent sales, and he should have spent more time on his own numbers instead of trusting the realtors’ numbers. And although he is handy and could do all the work himself, he made a rookie mistake that caused redundancies, and the value of time has never been more clear to him than it is now after completing this flip. So Mason, first of all, we made you the rookie rockstar because you actually told us about a loss, a deal that went bad, but you took the positives out of it, the lessons learned in that opportunity cost, so I hope that you’re sharing this with us because you’re going to keep going and you’re going to do the next one and use the lessons that you learned to continue, so thanks for sharing that with us, Mason.

Welby:
Congratulations.

Ashley:
Yeah, taking action, getting that experience. Think about how much people pay for courses and material to learn how to flip a house, and you just paid $1000 to get that hands on experience. Well, Welby, thank you so much for joining us today. Can you tell everyone where they can find out a little bit more information about you, and possibly reach out to you?

Welby:
My Instagram is @atmybest197, that’s A-T-M-Y-B-E-S-T-1-9-7, and you can also click the link in my bio and you’ll be able to see all of the courses that I have, the free ebook, definitely go check out the free ebook, and you can also go to my website, atmybest197.com, and yeah, that’s how you can find me.

Ashley:
Rookie listeners, thank you so much for joining us this week, I hope you took a lot of value from this episode. I’m Ashley @Wealthfromrentals, he’s Tony @TonyJRobinson on Instagram, and we’ll be back on Saturday with a rookie reply.

 

 

As a short-term rental investor, I’ve been asking if it’s still profitable to invest in short-term rentals (STR) with rising interest rates? 

There is a lot of uncertainty in the market right now, and many are asking if certain real estate assets are still profitable with rising interest rates. We’re all quick to jump to the Great Recession and compare it to what we’re currently or soon could be facing. 

Though it is important to study market cycles to figure out if we could be moving into a recession, I would caution you to understand that every market cycle is unique. Many of the attributes that caused the last recession probably won’t cause the next recession.

According to AirDNA’s 2022 Vacation Rental Outlook Report, “The pandemic has accelerated STRs into the mainstream. Demand is already 10% higher than during the pandemic, the industry is generating 40% more revenue, all with 10% fewer listings. As more investors add supply to capture the growing demand of the industry, it will evolve and adapt to changing consumer trends. Expect to see more unique properties in off-the-beaten-path locations providing one-of-a-kind experiences that will accommodate guests seeking an alternative to traditional lodging options.”

According to the graph, the average revenue for short-term rentals is climbing higher and higher. While the projection shows revenue evening out and moving into a slight decline, it’s still higher than in years past.

Another interesting statistic that the report highlights is the rise of remote work during the pandemic. 60% of workers returning to the office are expected to choose a hybrid approach for returning to the office. Most of the guests who book my properties on the weekdays work remotely during the day and explore the city at night. 

In essence, a lack of STR supply and the rising popularity of remote work will be the driving factors in the continued demand for short-term rentals throughout the rest of 2022 and into 2023. 

If anything, the competition will become fiercer, and property owners will be looking to differentiate themselves from the crowd. The most significant trend I see is developers building unique properties such as log cabins, A-Frames, treehouses, and tiny houses to differentiate themselves from “normal-looking” properties on the market.

Case Study: What Doubling Your Interest Rate Could Do To Your Cash Flow

The first short-term rental I ever invested in was a 900-square-foot A-Frame that I did a ground-up construction on. After renting it out for nearly three years, plus appreciation, I had built a good amount of equity. 

This led me to a cash-out refinance to pull some of the equity out as working capital in some of the future short-term rental development deals I had going on with my partners. 

I knew that the new interest rate would not be as good as the current rate I had because I was transferring from a residential loan to a more commercial-like loan.

After shopping for lenders, I chose one that specialized in short-term rental loans, and we started the process of getting an appraisal on the property. 

The current rate I was operating with stood at 3.25%. After working through the details, my 30-year rate became 4.25%. Unfortunately, it was variable too.

However, the property was grossing about $82,000 per year and netting over $50,000, so I was not worried about the extra percent on the interest rate. I was slightly concerned about the variable part, but the refinance proceeded. 

Fast forward a couple of weeks, and we had completed the appraisal and scheduled a closing date. It seemed as if everything was good to go until two days before closing, when I received the closing disclosure stating that the interest rate was hiked to 6.9%.

I called the lender wondering what happened to the 4.25%. It turned out that there had been three interest rate increases over the 45 days leading up to closing. I was speechless. 

Going from a 3.25% to a 4.25% interest rate was fine. But to go from 3.25% to 6.9% seemed like a major problem. I was ready to step away from the deal because I could not fathom more than doubling my interest rate. 

Before scrapping, though, I was curious to see if the property would still cash flow at 6.9% interest. I ran the numbers based on the 3.25% rate, the 4.25% rate, and the new 6.9% rate, and even plugged in an 8% interest rate. 

To my surprise, the property at the 6.9% and 8% rates still had significant cash flow. The loan amount increased from $178,000 to $225,000. The difference in the mortgage payment between the original rate I was quoted (4.25%) and the new rate of 6.9% was only $375 extra. 

I was already charging $270 as the daily rate for that rental. I could make up the difference with just two extra bookings. Given that occupancy over the past three years hovered around 95% on average, I felt comfortable going through with closing. 

Final Thoughts

The best part of this case study is that I learned a valuable lesson. 

As we dip into a period with rising interest rates (albeit still low historically), short-term rentals will be one of the most resilient real estate investments to rate hikes, making this one of the best times to invest in them. 

Do not let the sticker shock of higher interest rates discourage you from moving forward with a deal. Don’t sit on the sidelines and wait for interest rates to drop back to where they were over the past two years. If you do that, you’ll probably never invest in real estate. It took a unique set of circumstances for interest rates to become the lowest they had ever been in history. But as inflation grows and takes a tough toll on the economy, you’ll find that those same easy money policies are well behind us.

Interest rates are increasing. Don’t let that be why you aren’t going out and looking for good deals, even if they double. With a well-placed STR, you’ll find it easy to make up the difference.

Skip to content

Page load link

David:
This is the BiggerPockets podcast show, 617.

Rich:
For me, it’s really looking at what is my unique ability, what are my greatest strengths, and what is it that I love doing? What am I really good at, and how can I do more of that? And the only way for me to do more of that personally, is to have someone else handle the other stuff. And there’s people who love bookkeeping. I can do it, but I don’t love it. So hiring someone who is a bookkeeper who loves bookkeeping, who is totally into reconciling and getting everything right.

David:
What’s going on, everyone. This is David Green, your host of the BiggerPockets real estate podcast, joined today by my co-host, Rob Abasolo. In today’s show, Rob and I are interviewing Rich Fettke, one of the owners of the RealWealth network, along with his wife, Kathy Fettke, who are both sort of in the BiggerPockets world now, as contributors and influencers. And we talk a lot about leadership, about scaling, and a little bit about where you could be putting your money. Rob, how are you doing today?

Rob:
I want to flip this around and ask, how are you doing, man? That was a very, very soft intro. Very asthma of you.

David:
Less energy than I typically bring. I’m actually experimenting with this. I typically have one speed. I come in like a Tasmanian devil and I hammer away, and I’m wondering if a softer approach might be good at times. How’s it coming across so far?

Rob:
It’s good. It’s good. It’s a little different. It’s a little different than normal, but it’s very soothing, I guess. I wouldn’t mind it.

David:
The fear is I’m going to put our audience to sleep being too soothing, rather than hammering them in the face with value.

Rob:
That’s true. But they would sleep like a baby though. So I’m going to listen to this podcast after it comes out and I’ll report back, I’ll let you know. I’ll let you know how my sleep was.

David:
You don’t actually don’t have to, I can tell what you think, you don’t like it, because you’re doing that thing you do when you’re like, I don’t hate it.

Rob:
No, I didn’t say that.

David:
Which is not saying I don’t like it.

Rob:
I didn’t say that, no.

David:
Yeah, I know, but your tone said it, Rob. It’s okay. I’m sorry [crosstalk 00:01:56]

Rob:
I love it, man. I love it, okay?

David:
Yeah.

Rob:
I love it.

David:
I did a show with the Real Estate Rookie podcast yesterday, which will probably be coming out around the same time as this one. And it was just very high energy. And when I got done I’m like, man, I seem to only have one gear. In my regular life, I don’t go that hard. So it opened up these doors of like, well, how should I be interacting? Because if this was a three hour podcast, I probably would be more like this, but we’re trying to hammer out as much value as we can in a short… so maybe our guests could let us know in the comments below, do you like high energy Dave or low energy Dave?

Rob:
All right. Well, speaking of delivering value, I think we’ve got quite the show today with Rich, man. He just wrote a book, it’s called The Wise Investor. It’s out now. You can go and buy the ebook on Amazon, I believe. And yeah, man, it was a really good conversation. We talked about setting your mindset, just I think that’s really important whenever you’re scaling a company. And he really talked about not just scaling the operations of the company, but scaling the actual culture of it, which is something that a lot of people don’t talk about. And that resonated a lot with me, because I’m scaling a lot of my own real estate operations now, and so I’m definitely going to be taking a lot of that to heart.
We also talked about confronting your inner gremlin, which was an interesting approach, which is just like, to put it simply, not just listening to that voice in your head that tells you not to do something, but legitimately confronting it. So if it says, no, don’t do that, you ask it back. You then become the voice in that voice’s head and say, why not? You tell me, why not? And then from there, actually getting an answer and clarity as to what’s actually preventing you from moving on in your real estate journey. So a lot of good little tidbits all throughout.

David:
Yeah. And Rich has been in the game for a little bit, so this isn’t a spring chicken. He’s kind of giving us a good experienced sage perspective on how to get started, how to scale, what type of people you want in your organization. And I really liked how we talked about the values the person brings. It’s hire and fire according to the value. So this is a really relevant episode if you’ve had a little bit of success, you’ve got a couple properties, and now you’re like, how can I get more?
And that is a good segue into today’s quick tip. So today Rich talked about how before he can hire someone to know if they’re the right fit for the company, they have to know what their values are. He frequently talked about asking questions of the people that work for you, saying, what do you want? Well, if you don’t know what you want and you don’t know what your values are, how can you make sure that you’re aligned with the right group? So what Rob and I are recommending is that you take a minute to sit down and you ask yourself, what are the things that I value? What do I want out of this relationship? And get clear on who you are and who you want to be, so you can make a better choice about where you should be.

Rob:
That’s really good. Couldn’t say it better.

David:
All right, Rob, before we get into the show, anything you want to add?

Rob:
No, that’s a really good quick tip. You know why? Because I think, look, man, for me, I’m just like, my mind is just like a floating ether of ideas. And so literally bringing some level of organization to your life and to your values, and actually writing stuff out can really just clarify who you actually are as an investor.

David:
Yeah.

Rob:
Didn’t mean to get so profound in the intro, but here we are.

David:
Sometimes you can’t help it. A man like you, with the wisdom of Seneca mixed with Marcus Aurelius, can’t really help but be profound and sage in most of what you say.

Rob:
There you have it.

David:
You’re uncomfortable with compliments. Look at you. You blushed a little bit there.

Rob:
No, no, no. That’s the purple light. It looks like I’m blushing, but it’s the hair light that I use for my studio.

David:
Fair enough. All right, let’s bring in Rich. Rich Fettke, welcome to the BiggerPockets Podcast. How are you today?

Rich:
I’m doing awesome, man. I started the day with a morning surf session with Kathy, my wife, so I’m pretty stoked right now. And great to be here.

David:
So is this a Jocko thing, where you wake up at 4:00 AM, you go get a workout in, then you go surfing. You save an indigenous people from a horrible tribal warlord, you play some guitar, you do some jujitsu, and then it’s 9:30 and you go have your coffee and the rest of the world’s waking up?

Rich:
Exactly. Well, I also take a picture of my watch and I post it, and then I do a picture of all the sweat on the floor too. So, yeah.

David:
And then put aftermath or get some as your caption.

Rich:
Yeah, exactly. Get after it.

David:
Yeah. Rob, I never… are you a morning person, Rob?

Rob:
Not really. I’m kind of forced into it, because I have kids. My youngest today, Brooke, he started crying at 7:30, and then my wife gave me the morning swat, the you’re up.

David:
You go do it.

Rob:
It’s your turn. And so I was a morning person today, but not by choice.

Rich:
That’s how I learned to be a morning person, was having kids.

Rob:
Yeah, the morning swat.

David:
Maybe that’s how I’ve been able to avoid it for so long. Don’t have kids, so I get to…

Rich:
There you go.

David:
… avoid that. So, Rich, for people that haven’t heard about you, can you give us a little bit of a summary of what you do, the role that you and your wife play in your business, and then we’ll get into our show today?

Rich:
Absolutely, yeah. So my main role is the leadership of the business, as far as overseeing the culture, our core values, our purpose, our mission, making sure we’re on track, that everyone’s communicating effectively. That’s been the main focus, definitely on the marketing side too. When RealWealth started, I was, my official title was chief support guy. So when Kathy needed a website, I created the first website, and then the second website. When iTunes came out with this thing called podcasts, I took her radio show and burned the CD into an MP3 and uploaded it to iTunes. And so that’s kind of been my role, kind of chief support guy.

Rob:
Every company needs a CSG.

Rich:
That’s exactly it. That’s a nice title.

David:
How would you describe what your company does?

Rich:
RealWealth, two things really. We basically help people create real wealth, financial freedom through investing in real estate. So basically, the way we do it is we… I’m a broker, so we refer people to other brokers in markets, emerging markets, where they can buy mostly single family properties, one to four units, and that cash flow. Because we started in California, and it’s kind of hard to cash flow around here. So helping investors move out of California, move their money into usually the Southeast and things like that. So that’s one part of the business. And then the other part of the business is syndicating mostly ground up residential development.

Rob:
Wow. Okay, so you get to A, advise people on it, but B, you’re still really quite heavily invested in the real estate space.

Rich:
Oh, very much. Yeah. Very much. And Kathy and I invest too, and we walk the talk. Yeah, and we’re GPs in these syndications, so we invest in those. And yeah, we love it.

Rob:
About how many syndications are you guys… how has that changed over the course of this company? Are you guys doing more and more now? Are you doing less now, but much bigger deals? How has that really shifted since… how long has RealWealth sort of been a company?

Rich:
We started in 2003. I can tell you the story about that. But started way back then, and started in the kind of the mortgage space. Kathy was a mortgage broker, so we started to help people get into properties that way, mostly for the mortgage. Helped them to… so Kathy [inaudible 00:08:46] the mortgage. And then we started to help people get in with the referral system.
But with the syndications, that wasn’t until 2010 that we started doing that. Broke all the rules. So we didn’t realize SEC rules and everything back then. But it went well. So we usually do two or three good size projects a year. Lately, right now we don’t have a really good acquisitions person, so everything’s on pause. If you don’t have a good acquisitions person who can really underwrite a deal, which we’ve learned from our mistakes, don’t do it. So right now, that’s kind of on pause. We’re just managing the current syndications that we have.

Rob:
That’s awesome, man. So, I mean, it starts really stacking up. Three syndications a year, you do that over and over and over again, I mean, that really starts snowballing at a very alarming rate.

Rich:
Yeah. Because investors bring their capital back when they get their capital returned, and they say, okay, I want to invest in this next project. Yeah, it’s really cool.

Rob:
It’s a very exciting thing. I’m finally starting to syndicate and doing funds and everything. And I’m really year one on all this, but you can start to see the trajectory of it. And you start to really understand that a team, you need a team, right? A team is so pivotal to actually successfully doing this.

Rich:
100%, Yeah. Yeah. The only thing more important than a good idea is a team that can see it through. I constantly say that to my team.

Rob:
Yeah. Anyone can think of an idea, but not everyone can execute.

David:
God, that’s such a good line. Rob, that should be on your tombstone, because that’s the truth. I think we always tell people, like where I see this come up is people say, you need a system. So everyone writes down, need systems. Or I’ll hear people say, I need to work on my systems. And I think what that typically appears to us as, is I need to write down all the stuff that needs to be done and create a spreadsheet, a checklist, some framework to operate off. And that is important. You do need that. But the fallacy is when people believe, well, it’s done once you did that. That you’re just going to hand it to someone and they’re going to do it. Half of a system is having the framework. The other half is getting a human being that is good at executing that system.
And I don’t know why that’s, we don’t think of it naturally, but everything’s in life like that. You can tell a baseball player, okay, your job is to hit the ball, but he gets paid on how well he can hit the ball. And that’s what it’s like in a business, is you need a human being that can actually execute the system that you created. And that is hard. This is one of the things that stops people from scaling. So I know, Rich, you’re really big in leadership. You’re really big in delegating this stuff and keeping things running. Can you share with us some of the things you’ve learned about what it takes to make a team work, and maybe what some of the common misconceptions that people believe are that turned out not to be true?

Rich:
Absolutely. Yeah. No, it’s absolutely huge. It’s like we, as real estate investors, we’re always looking at creating freedom, right? Freedom of time, freedom of money. And if you don’t have a team, you’re not going to create freedom of time. You’re going to try to do everything yourself. And I think that’s the big mistake that so many people do. Like you said, they try to create systems, but they’re systems for them. And they’re trying to do it, and trying to do all the work. They’re not letting go.
And honestly, it’s finding people who are better and more talented and more skilled and more knowledgeable in areas. Like we have an amazing girl who does our SEO, she’s phenomenal, and I don’t know anything about it. We have someone else who just goes out and is our property team director, and he oversees our property team. So yeah, it’s key. It’s the only way to create leverage, the only way to grow something beyond yourself, and the only way to leave a legacy, is to have a good team that can follow through, that are connected. And the only way you’re going to have that is to have a really strong, solid culture. I think that’s key.

David:
So how are we defining culture? If someone says like, well, what is it I’m actually trying to do, how would you describe that?

Rich:
Culture, to me, it’s the vibe, right?

Rob:
Nice.

Rich:
So it’s kind of the vibe, the way everyone kind of connects, and they feel good. And not just feel good around, just happy, you want that, but feel good in that… one of our core values at RealWealth is connection. That’s one of our core values. It’s very important to it. Not only do we connect people with properties and connect people with education, but we are connected as a team. That’s really huge. So we’re like family, we’re stronger and better together.
So that’s what I see it as culture, it’s when people love coming to work. We’re a remote company. We’ve been a remote company for about 12 years now. Our employees are all over the country. We’ve been as many as 27 employees. Right now we’re about 22. So empowering people to be leaders and to have that culture of accountability, I think that’s key too, where people do what they say they’re going to do, they do it on time, but they don’t have someone looking over their shoulder just being that jerk manager.

Rob:
Definitely. Well, actually I kind of want to ask you about this, because the actual culture of working has shifted significantly in the past two years. So can you tell us a little bit about how you felt the culture of your company was going, and then how did the pandemic change that? What kind of changes did that spur on in your philosophy and the way you ran the company?

Rich:
That’s a great question. It was reaffirming, the pandemic. Because it was interesting, because I was doing an interview soon after the pandemic hit now, and the interviewer’s basically just like, so how is it being a remote company now because of the pandemic? And I’ve been like, we’ve been practicing for 10 years. It’s really cool. And in the beginning, there was some growing pains, for sure, but there’s something around… So going into the pandemic, we were like, oh, we got this.
The only shift for us is we used to do live events, two live events every month. We’d do one in San Francisco area, one down in Southern California. And obviously we had to call those off and stop. We haven’t done a live event for two and a half years now. We’re doing our first live event next month, so excited about that. But that was a big one. It was just shifting from that. And then we’re like, okay, so how are we going to do events? How are we going to have people feel connected? How are they going to get to meet the property teams or learn more about a syndication? And we’re great technology, it’s amazing. So we use Basecamp for all our project management. We use GoTo Meeting and Zoom for our meetings. Everyone has our cameras on, just like this, so we can see each other. So I think that’s a big part of the culture.

Rob:
So I know you talk a lot about mindset, that’s one of your big philosophies. Can you tell us a little bit about that pillar in your philosophy of culture, or kind of in your investing strategy. Walk us through your philosophy on how mindset impacts the overall culture and your personal investing strategy?

Rich:
I think it even goes beyond mindset. It’s definitely mindset is huge. That is absolutely massive, and how we think creates our life. There’s no doubt about it. I think it’s more about becoming the best version of yourself. To run a good solid company, you have to be a good solid leader. And for everyone in the company, for them to be their best, and show up the best work-wise, it’s them becoming the best version of themselves.
I mean, the bottom line is like, when we get better, everything around us gets better, right? It’s like when you work on yourself and you really get clear about what is that best version of me, how do I want to show up, how do I want to give? If an obstacle comes at me, a challenge, do I crumble? Do I, woe is me? Or do I look at that challenge as an opportunity, as an adventure, as something that’s going to make me stronger and better? And so I think it starts with you, and getting really clear on who are you at your best? Who is that best self, and what are those core values that are important to you? What do you really believe in? What do you focus on? Get that solid first, and then that carries over to your business.
So Kathy and I got really clear on what are our core values. We met in a personal development workshop, so we did a lot of work on this, core values and goals and all that stuff. So we carried that over. And when we set the core values for our company, we didn’t just do that from us just saying, these are the core values, we came at it and said, these are the core values that are most important to us. What about you guys? This is when our team was like 10 people, but we had everyone… we had a whiteboard, we were writing all the core values, what’s important. And we did the combining them all into one, and then boil it down to just a handful of core values. So I think it starts with that. It’s that mindset of becoming the best version of yourself first, and then that shows up, and then you create a great company based on awesome core values.

Rob:
So when you’re looking at challenges as problems, that’s kind of one of the things that you’re talking about here, and looking to them as a challenge as an adventure, is there an actionable tip that you can give someone here? Because on the surface, it’s pretty easy to say like, Hey, face your challenge here and make it an adventure. But is there kind of a tip you can lend to the audience for actually being able to run full force towards this mindset, if you will?

Rich:
Oh, yeah, absolutely. So before we created RealWealth, I was a business and personal coach. I got into that industry early, 1995. And because of that, just getting into it early and really learning as a baseline. And the one thing I’ve seen, it doesn’t matter, I’ve coached CEOs and homemakers, and everything from artists to attorneys, and every single person I’ve ever coached, including me, has this little voice in their head. It’s this little, I like to call it the gremlin. It’s this itty bitty committee inside our head, right? It beats us up. It tells us, you’re not enough. You can’t do that. You’re going to fail. Look at this person invested over here, and they failed. Same thing’s going to happen to you. All this stuff. Every single person.
So I think it really comes down to that first, it’s identifying what is that gremlin? And the gremlin’s super powerful when it’s in our subconscious mind, right? And it’s always been there to try to protect us. Protect us from embarrassment and failure and loss. But sometimes it over protects. So I think it’s just, for me, I think the best process is to just kind of check in on a regular basis. If you’re feeling something in your body, you’re feeling butterflies or you’re feeling you’re clenching your jaw. I mean, obviously I had some gremlins before this interview. It’s like, Rich, you’re going to be on BiggerPockets. My gremlin starts saying, you don’t know enough about multifamily. You don’t know enough about the economy. It’s like, okay. So I just stop. You take a super deep breath in, which actually stimulates your vagus nerve, and it affects your prefrontal cortex of your brain. It slows down your heart rate. It calms you, and it has you see things in a different way.
So I think that way of processing that gremlin, and just taking a deep breath and saying, okay, Hey, Mr. Gremlin, or Ms. Gremlin, what’s going on here? What do you need from me? What are you trying to protect me from? What’s the warning signal here? And most often, that little voice will just say, I’m afraid of this. Or you need to do this, or you need to be aware of this. And then you say, okay, cool, anything else? And it seems weird. It seems kind of hokey or woo-woo or something. But when you do it, you get that answer from your subconscious mind, which is so much more powerful than that conscious mind, and you start to get these new answers about, oh, I see how I can move into this. So I think that’s a really powerful tool that I’ve seen work over the last 25 years as a coach.

David:
So Rich, if I know, Hey, I need to figure out what my core values are before I know what the right team to join or the right company to work for or investment strategy pursue is, but I’ve got shiny object syndrome. Which typically is like, I don’t like where I am, so everything feels better than this. Right? What advice do you have for somebody who could figure out what will be the right road for them, when at that point, when they’re that hungry, everything looks good?

Rich:
That’s a really good point. Yeah. So core values are like, they’re intrinsic. They’re almost born with us, and kind of built into us, and they evolve over our life. They get deeper and stronger. So I mean, one way to look at core values is like, look at what pisses you off. What pisses you off? What frustrates you? What really gets you going? And then flip that over, and on the other side of that is a core value.
So if dishonest people really piss you off, people who lie, people who are manipulating stuff. You flip that over, and there’s going to be a core value of either honesty or integrity or both. It could be something like that. For me, one of my core values is optimism. Seeing a brighter future, having hope. Let’s look for the good, let’s look for this is where things are going. That’s a core value of me, because flip that over, I hate it, it drives me crazy when people are victims, when they complain, when they focus on the negative. So I flipped that over, and it’s like optimism. And that’s one of our core values at RealWealth.

David:
In the last year or so, when did it start? I think it started with the whole COVID thing, because everybody got so entrenched in their side. Rob and I were talking about this when we were in Scottsdale.

Rich:
It’s crazy, yeah.

David:
It’s clearly polarizing, to say the least, everything that happens, right? Like it’s very uncommon that two people will sit down and be like, this is what I see. And someone else says, I see it like this. Oh, that’s interesting. How do you deal with this element of it? I do it this way. Right? It’s always just, you start screaming at the other side and digging yourself in deeper.

Rich:
Yeah.

David:
And I noticed that when I watch the news, I never really see somebody make something up out of thin air that is not true at all. It’s more that they take a nuanced issue, they highlight the side of it that supports that opinion, and then they just pound that side and ignore the other side. Right? And I’ve kind of come to the understanding that as a human being, this is the way people lie, is they don’t just make something up. You don’t say things like, the sky is green, and just expect people to believe you. You take out the part of the argument that shows a different side than what you see, and you just keep hammering that one side.
So applying that to other parts of life, your optimism argument starts to make sense. Is life good or is life bad? It’s both. There’s horrible things that happen all the time. There’s beautiful things that happen all the time. It’s which side we choose to focus on that determines the reality we’re going to have. Right? So there’s always a reason to be negative, and there’s also always a reason to be positive. So I wanted to kind of get… so you seem like you’re interested in this topic. Can you share some of the things that you’ve had to overcome to get to the point you’re at, where you are able to use that muscle that can see the positive in a situation?

Rich:
Absolutely. Yeah. I mean, there’s two things that are coming up big. One is that book, Think Different? Think Again. It’s called Think Again.

David:
Adam Grant?

Rich:
It’s so good. Adam Grant, yeah, exactly. Think Again. And I just love the… I can’t remember it exactly, but there’s the three Ps. There’s the politician… it’s like where people come from. They’re either the politician, they’re trying to work it to manipulate and get their way. There’s the preacher, who’s just like, this is the way it is, and they’re preaching it and they just don’t want to hear anything else. I forget what the third P is now. Oh, the prosecutor. Yeah. So there’s the prosecutor, they have all their facts and they come at it and they just start drilling down with all their facts that they’ve memorized, and trying to make you wrong and then write and all that.
And so his fourth one, he says is to be a scientist. Be a scientist, where you look at things more neutrally. You don’t take that side, and you’re just like, okay. So I think that’s a powerful one. That was a great book for me, to have me just going through the whole COVID and just everything. I mean, just the craziness. It’s like the social dilemma, right? We get these feeds, and they just start feeding us on social media and everything, with all the stuff that’s click bait. And then people start seeing their whole story, their whole narrative goes down this way or this way. So I think that’s huge.
And then it goes way back into stoicism, 2000 years ago, that was inspired Victor Frankel. And he said something about… if I can remember that, he said, between stimulus and response, there’s a pause. And then it’s that moment, and we have the moment, in that moment is our power to choose our response. So you get the stimulus and then you get the response. But in that moment between those, you get to choose how you want show up, how you want it to affect you. And I think that’s huge. He says something about in that moment, in that response lies our power and our freedom.
So that is huge for me, and it has affected me in a big way going through this. And yeah, it gets heated. Heated with relatives, heated with friends, people with their opinions. And they’re so committed to being right, and they get into these arguments. And to be able to just pause and do the same thing, use that vagus nerve and to breathe deeply and calm down and just be like, huh, and just be curious. So I’m actually going to get a tattoo, my first tattoo on my wrist of a question mark, because it’s the one thing that I’ve learned, is being curious is the most powerful response to anything. Instead of being like, I’m right. I’m trying to prove myself right. Talking too much and all that stuff. So it’s coming back to being curious. I think that’s the way to handle it.

Rob:
Yeah, for sure. Well, I mean, I think we’re all recalibrating, and we’re finally at a place where we’re back a little bit. We can all converse, and I think there’s a lot more positivity that comes from conversing in person too. That’s actually one of the things that I really miss, one of the only things I really miss about my nine to five, was the interacting with people and talking to people and meeting with people. That was a very important aspect of the culture of my company.

Rich:
Yeah.

Rob:
I was really just a big fan of that. So I actually kind of want to jump back into that a little bit, and sort of talk about, it seems like you have a relatively decent staff, with 22 people. So I’m kind of curious, are you effectively… like when is the next hire come for you? Because I know that a big part about scaling, A, both the company and the culture, there’s got to be some delegation that comes along. So is every new hire for you, is that just another way for you to delegate something that you can’t do? Or is it just a numbers game, where you just need more people to kind of handle some of the smaller tasks?

Rich:
For me, it’s really looking at what is my unique ability, what are my greatest strengths, and what is it that I love doing? What am I really good at, and how can I do more of that? And the only way for me to do more of that personally, is to have someone else handle the other stuff. And there’s people who love bookkeeping. I can do it, but I don’t love it. So hiring someone who is a bookkeeper who loves bookkeeping, who is totally into reconciling and getting everything right, I mean, it’s a move like that. So yeah, we’re hiring right now too. Like I said, I’m looking for a really good underwriter for our syndication. Someone who really understands ground up development, residential development, to really underwrite these deals. So that’s a big one, and that’s an area where I’m pretty lost in. Don’t have me do the underwriting, it’s not going to work out too well.
And then we’re looking for someone who is managing some of the property teams. These properties that we refer, and the brokers refer people to for buying investment properties, hiring another person who’s kind of like the boots on the ground, out in that market, where they can actually go and look at the quality of the properties, qualities of the rehab if it’s a rehab, or the quality of a new build if it’s a new build. So yeah, I think that’s it. And when we do hire, we hire to our values. And when we fire, we fire to our values. So we look at, when we’re doing an interview, we might say something like, tell me about a time in your life when you were challenged on the integrity side of things, when you really had to apply this core value of integrity. And boom, you put them right on the spot and see what they come up with, and see where they are with that.

Rob:
Sure. Yeah, hire and fire based on your values. I really like that. And I think this is a really interesting topic, certainly because I imagine when you’re a little bit smaller, like myself, it’s really tough to let go of control. Because my operation runs well, but it does require me to be there. Right? And so I feel like every new person I bring on to the team, it’s letting go a little bit of the… it seems like the quality, but I know that’s not really how it goes. For you, can you tell me about your thoughts here? Like when you hire someone and you’re saying you don’t want to do the underwriting or you don’t want to do the bookkeeping, do you ever feel like you’re just letting go of a small aspect of control of your company?

Rich:
Yes, absolutely. That’s part of the whole dilemma, right? Letting go of the vine, and then letting go and trusting. But there’s no way to scale a company. You’re not an entrepreneur if you’re not letting go, and you’re not building a company, you’re not building a business if you’re not letting go, because you’re going to be just stuck. And you only have so many hours in the day, and if you’re trying to do it all yourself, there’s just no way you’re going to do it. So that’s where it’s like, that’s letting go of control, but it’s not letting go of quality.
So I think the quality piece is really onboarding someone really well. So if there’s something that you’re doing now, Rob, right? It’s like, basically, you mentor that person. You have them right there, kind of, there mirroring you. And then, one of the most powerful things, I think, is to say, instead of saying, do it this way, do it this way, you give them some basic training, but then you say, okay, if you’re going to do this on your own and I wasn’t here, what would you do? And see what they come up with. And then they might say, oh, I would do it this way. And you’re like, oh, that’s good, that’s better than I thought of. Or they might say, I’d do it this way. You go, well, okay, what’s another way you could do it. Right? What’s another way.
But that empowers them to really see this new hire as someone who’s creative and resourceful, and not make the assumption that you have to micromanage them and tell them how to do everything. So that’s our whole culture at RealWealth. And that’s coming from a coaching background and seeing my clients as creative and resourceful and whole, knowing that they can find the answers. We carry that. And Kathy’s a certified coach as well. We carry that same thing over into our training and our development of our team, where we empower people to just really figure it out on their own, and ask for help when they need it. But often you get surprised. You’re like, whoa, okay, you figured it out. You did a better job than I would’ve done.

Rob:
So would you say then you’re a relatively large believer in the idea of autonomy then?

Rich:
Huge. Yeah. Yeah. I wanted to create a company that I would want to work at. I’ve always been self-employed. I’ve never had a regular nine to five. Never been a W2. And I just could not create a company where people felt like they were stuck. Feeling stuck, feeling talked down to, being told what to do. Freedom’s a huge value for me, so basically that’s the approach we took. And Kathy’s the same way, don’t tell her what to do. So it’s just kind of like empowering people. There’s the autonomy. And everyone has their three or four big goals every quarter, and their deliverables every week. So there is accountability. There’s no doubt about it. So we know, and it’s not like we’re waiting until the end of the year and being like, whoa, you didn’t do anything. We’re very clear on what people are doing and what they’re up to, and that they’re moving the needle.

Rob:
100%. I think one of the biggest… this is where I’m not really great. I’m working on this, right? I’m working on hiring and delegating and building out my team. I think what can really just make a big difference in that autonomy, is you just really have to… actually, I think David told me this, you have to develop, not delegate. And so I think there’s a really important aspect of onboarding someone and actually developing them and setting them up. Right? So it’s not just like, all right, go figure it out. It’s a pretty intensive training for the first week, two, three, whatever you feel is appropriate, and then you give the autonomy. Because there have been many times where I’ve been hired in a company, it was my first day, and they’re like, well, here you go.

Rich:
Go figure it out.

Rob:
And I’m like, I literally don’t know what this is. And I was an advertising copywriter, so you can imagine if I get dropped into a, I don’t know, a Peloton group, and they’re like, oh, go, write an ad for this. I’m like, I don’t know anything about Peloton.

Rich:
Right, yeah.

Rob:
So I think developing someone right out the gate, for me, seems to be what can really be the game changer and the idea of autonomy.

Rich:
Yeah. It’s the more time you put up front, and clarity, and constantly asking that person, like I was saying, how would you do this, and show me what you’ve done, and do you have any questions for me? Anything you need? Am I giving you the training and development and the resources that you need? Yeah, I think a lot of time upfront and all of a sudden, then it’s amazing. And then you empower this person, and they learn how to be a leader. And then you got a whole culture of awesome leaders who can figure things out on their own and they don’t need you.

David:
Yeah. I’ve gotten over that. I’m pretty happy not being needed now. It’s hard when I’m always needed.

Rich:
Good.

David:
But yeah, there is a point, absolutely, where it feels good to be needed about something, and when that’s best for the business, to let go becomes a personal challenge. I wanted to ask you, let’s say somebody that works with you and Kathy, they’re a part of the RealWealth network, and they decide they need to start hiring because they’re doing so well with buying some single family homes. What do you think is a good first hire for that investor that’s picking up some steam?

Rich:
Oh, I mean, it really is dependent on them, but overall, just broad sweep, bookkeeper. Honestly, I think a lot of people don’t track their numbers well, they don’t know their numbers. They get behind on it. It’s a should. It’s like, I should really get in there and really go over my portfolio. I should really be crunching these numbers. I should really be looking at how I’m doing with returns and all this stuff. So, I mean, next to a property manager, that’s number one, having a property manager, but I would say the bookkeeper would be number two. Someone who’s really good at it.

David:
Rob, what about you? What have you found was the hire that made the biggest difference for you in scaling?

Rob:
An assistant.

David:
Okay, nice.

Rob:
I was really just bursting at the seams here, just doing everything, right? Managing emails and responding to people on my rentals on Airbnb, and writing YouTube descriptions and titles. And oh, man, it just got to the point where I really just felt underwater all the time. And everyone always talks about how an assistant is pivotal, right? And can really change a lot for you. And I knew it, but the problem with hiring my assistant was that I had to train her on everything that I do as good as I do it. And that’s always the hard and the scary part, because you’re like, can I do that?

Rich:
Right.

Rob:
And I did. She’s really great. She’s really, really, really great. And now that I don’t have to worry about a lot of these much smaller tasks in my life, every single day, and she’s kind of rocking and rolling with that every day, it opens up my brain power to be able to just focus on some of the bigger deals that I have. Right? Syndications and funds and new builds and constructions. And now that I’ve got that time back, it’s a game changer for me. Sometimes I want to hire another one.

Rich:
Now I’m asking the questions, but what’s the biggest challenge for you around kind of onboarding and working with an assistant? Has it been easy?

Rob:
Only because she has been really great about being like, Hey, I need this. You tell me this now.

Rich:
Forced accountability.

Rob:
Yeah. I mean, I told her that it’s her job literally to annoy me, because I was like, I don’t ever want you to feel like you’re annoying me. Because that is very common, right? I’ve had another assistant before, and she was great too, but it was always meant to be a two month thing. And she was always like, oh, I just didn’t want to bother you. I’m like, no, no, no, no, you need to bother me.

Rich:
Awesome.

Rob:
If you don’t bother me, things will not get done, and I will just ignore you. So I think the hard part with hiring somebody, just in general, especially someone like an assistant, is that it forces a level of organization that I just don’t have. Detailing the systems, right? I know the systems, I made them up, but I never wrote them down.

Rich:
Yeah.

Rob:
And so now I sort of have to write them down, or do a loom and record a lot of just things that are so easy, but I’m like, I can’t believe I have to show them how to log to this website. But I know that by doing that, that means they’ll never ask me about it again. And so it’s just been really hard. And this is kind of like one of the things even with on YouTube, I had a lot of sponsors, like I had 12 in a row, and that’s usually a really good thing, right? Because it provides good income and everything.

Rich:
Yeah.

Rob:
But it required a level of organization out of me that I didn’t have, because I had to be ahead of schedule with outlining and editing and getting things back to them. And so that’s where I’m always most uncomfortable when I’m put in a position to… I guess it’s really just delegating, when I have to give something over and actually organize my thoughts in a way that makes sense, because usually it only has to make sense to me.

Rich:
Yeah. I mean, we’re huge at our company on documented processes. So just what you’re saying is… and thank goodness, because when we have someone leave or someone has to move or they take a different job or something like that, having all those documented processes. And that’s why I was saying we use Basecamp, we put all of those documented processes in there. And yeah, like you said, loom videos and screen captures and documented step one, step two and checklists, using the checklist manifesto book, kind of following that and having everything in checklist. That’s been a game changer for us.

Rob:
I mean, it’s a necessary evil, right?

Rich:
Yeah.

Rob:
I mean, I definitely recognize that too, because I often think, she’s not going anywhere, but if she did, I’d be like, oh, no, I have to redocument everything and teach them. Because even now she’s learning all the things that… now she’s documenting stuff for herself.

Rich:
Nice.

Rob:
So it’s very pivotable… not pivotable. That’s a new word that I’m working on. I’m work shopping it still. But it’s very pivotal to document stuff, that way when you do scale, the idea is she’s going to be my assistant right now, but as we continue to scale and get dozens of more properties every single year, I want her to start leading a lot of that and training the people that are coming onto the team, and training them on property management and bookkeeping and all that type of stuff. And so the idea is, if she can be really good at that, she will eventually move into the bigger role. Right? And so that does require some level of organization from both of us, so just make sure that we’re all happy and we’re all in the clear.

Rich:
And that’s huge. And one thing I’d highly recommend, and maybe you have done this already, but checking in with her and asking, where do you see yourself in three years, with me in this company? What position would you like to be in? What do you see? What do you envision? That can be huge. Well, I do that every single quarter with all the people who report to me, the five leaders in our company, and then they do the same with the people that report to them, and they ask the same thing, where do you see yourself in three years? And sometimes you’re surprised, because it’s not the same as the last quarterly conversation. They’ll say something else. But having that picture of where this person wants to go can really help you connect into that and support that dream.

Rob:
No, you’re right. We definitely don’t check in as much as we should. It is hard. Look, first of all, it’s hard to be a boss. Okay? That’s one of the difficult things with hiring a team. It’s like, okay, even if you find the correct hire, being a good boss is hard. And I recognize that. And that’s why I don’t purposely just go out and hire five people, because I could, but I want to just kind of master being decent at this whole…

Rich:
Good for you. Awesome.

Rob:
… management thing.

Rich:
Yeah.

Rob:
But it’s hard to be a boss. So we do check in. I mean, and the same thing, I have a business partner that’s running my whole real estate kind of operation, and he talks with the investors and he briefs them and he’s the one that’s sourcing deals and doing everything. And we check in a lot, but it’s hard because when you’re loosey goosey for years, it’s hard to start saying, Hey, every Monday at 2:00, we’re going to check in. And when we do, you’re right, everyone’s answers seem to be different, because I think in the world of real estate, as you grow, your goals change daily.

Rich:
Oh, for sure.

Rob:
So it’s very true that I always hear different things. I’m like, oh, I didn’t know you wanted to do that. Let me help you with that.

Rich:
Super cool. Yeah, I had a mentor who said, do you know why leaders are paid so well, and what are they paid to do? And I was like, I’m trying to think of that. He said, leaders are paid to have effective conversations. That’s the most important thing that a good leader can do. So I was like, whoa. When I really thought about it, leaders are paid to have effective conversations. So it’s exactly what you’re doing with her, what you’ll do with future employees, is have those effective conversations.

David:
So, Rich, shifting gears here a little bit, you mentioned earlier that you help people decide where to place their money. I’m assuming as leader, you have conversations with them about what their goals are and where they want to return. Can you share a little bit about which parts of the country you are most bullish on, and what types of properties you’re finding success with in those areas?

Rich:
Ever since 2003, it’s been single family homes. It’s one to four units, and we do some small apartment buildings, little ones, kind of one offs. A lot of times it’s a 1031 exchange. We help people get into those. But mostly it’s one to four units. And mostly it’s in the south Southeast, honestly. It’s like, Florida’s been huge. The Dallas area’s been great for us for many, many years. We’ve done a bunch of stuff in Pennsylvania, Ohio, North Carolina has been really good. Indianapolis. Yeah, mostly just Southeast. It’s where the people are going, where people are moving, where businesses are moving.

David:
Yeah, that’s a thing that I feel like 10 years ago, even maybe five years ago, in our space where we teach about real estate investing, the strategies were based on getting the property, the actual home or house, and how to find the right ones. You’re kind of like sifting through garbage until you’re like, there’s something valuable, and then going after it.
And with as much as the world has changed, with people moving as frequently as they move, with people traveling a lot more than they used to, it seems like more and more, we are having to stay ahead of where the crowds are going. So it’s not just about the deal, now it’s about finding the area and the deal in the area, and then trying to be a couple years ahead of the curve before all the other investors catch up and then they start buying there and then you got to go find another place. Have you noticed a similar pattern?

Rich:
Definitely, yeah. It’s like location, location, location, but timing, timing, timing. Right? So that’s the huge thing. But we really, most of the people that come to RealWealth are busy working professionals who are making a good income. They’re making a solid six figures. A lot of times they’re the Henrys, the high earners, not rich yet people, right? Because they haven’t invested their money. They haven’t put their money to work for them.
So most of the people that we work with are buy and hold for the long term. And they have a long pictured, a long vision on where they want to go with their investing. And they just want to… a lot of people come in and all they’ve done is the 401k and the stock markets, some crypto, a little of this, but they’re wanting to get out of that volatility and they’re wanting something that’s going to be a good, hard asset. And honestly, they also want the tax benefits and the depreciation. So most of the people we work with aren’t so much about the timing of the market or exact… they don’t have to be so concerned about that, because in the markets we’re going into and helping them get into, it’s just a long term, 10, 20, 30 year vision for these people.

David:
Yeah, and that, if we’re being completely honest, I think that’s the best strategy right now. Because there’s going to be some short-term volatility, interest rates are going up.

Rich:
Yeah.

David:
As human beings, anytime there is change, there’s typically like a pause. It’s kind of how we’re wired. So you’re walking through the forest, you hear a sound you’ve never heard, the first thing everyone does is freeze. What was that, right? And then, okay, nothing killed me. You start walking forward, you hear a different sound, you freeze again. And from what it looks like to me, we’re starting to see these changes happening more and more and more frequently, right? There’s a virus that’s going to kill everybody, and then that’s all we’re doing. And now that’s done. And then do we have world war III coming up?
And that while that’s going on, well, now interest rates are coming up. And at the same time, they’re printing a bunch of money. And at the same time, other countries are doing things too. And now the news is spreading this around. So we hear about it constantly much more than we ever did. So there’s a lot more pauses that are occurring. And when you take that five, 10, ideally 15, 20 year perspective, failure becomes almost impossible. It’s very difficult to fail when you go that long. But not everyone has that luxury, right? If you don’t already have a decent amount of wealth and you can play the long game, it can be really tough. Do you have any advice to the investor who’s trying to get their way into the real estate market, and this is the market that they’re trying to cut their chops on?

Rich:
Yeah, absolutely. That’s how Kathy and I got into real estate. It’s like, when in 1997, her dad had to do a 1031 exchange. He had partners who sold the apartment building he was invested in. They didn’t tell him until too late, so he didn’t have much time. And so he was at the end of his 45 days to identify a property, or he was going to pay massive taxes. So he called his five kids and just said, look, I need to buy something. And if you can find it, I’ll put the down payment, you can live in it as my tenant for now, and then later on you’ll inherit the property.
And so Kathy jumped on it. Her siblings didn’t take any action. She jumped on it, and she found a place in the San Francisco bay area that was a 4,200 square foot home, way more than we needed. We had one daughter at the time. But we house hacked back then, 1997. And this was right before, as you know, right before a nice uptick in real estate, and especially in the bay area. So we converted the lower level of that house into two different units. We even locked off the master bedroom that had an outside entrance, and turned that into a unit. So we had three units in there, and we were able to cover our mortgage and pay for that home. And that’s how we basically got into real estate, being a landlord and learning the lessons of that.
And then that house appreciated about over a hundred grand a year, year after year after year, and it went from… we got it for $547,000, that was in 1997, and when it was 2003, it got up to $1.8 million. So we did a cash out refi. We were able to pay her dad back all that money. He put the money back into the trust. And then we were able to use some of that cash to go and buy investment properties. So I think that, I think house hacking is just an awesome way to do it. It’s what we tell our daughters too, get a duplex or get a quad or something like that, and rent out the other ones. I think that’s the best way, especially when you can get an FHA loan.

Rob:
Oh, yeah. It’s so affordable to get into it these days.

Rich:
It all depends on where you are in that journey and how much money you’re making. Right?

Rob:
100%. So I actually have a bit of a tactical question here, I guess, in regards to scaling a bit, because I was actually talking to someone earlier and she was like, Hey, how do I scale? And I was like, okay, well, let’s unpack this a little bit. So we talked about sort of just establishing your initial portfolio. Try to just get into your first five properties. Right? She’s into her first one now, so I’m like, five is going to be that goal. I think that’s a good way to think about it. But at a certain point, then you’ll get to 10, and you’ll start to realize that going out and acquiring single family residences are really tough. It’s really tough to just do it all the time. It’s not super, super scalable.
And so I was like, at a certain point, like for me, where I’m at in my journey, I’m starting to run more syndications and starting funds and everything. That, to me, is the biggest way to scale in the real estate world, and really just kind of explode your portfolio, if you will.

Rich:
For sure.

Rob:
So I’m kind of curious for you, considering you do so many syndications and you’re rocking and rolling here, what is a very tactical step? Like what does that look like for someone that wants to go from, let’s say a 1031 purchase, or a single family residence, or maybe even a duplex or a house hack, how does one get to that next level of syndication? Is there a tactical way to do that, or is it just all luck? Do you just fall into a syndication?

Rich:
That’s funny. For us, it was more luck, because we had a developer come to us and say, Hey, this is after 2008, and it was this project in Portland, and the guy who was building these town homes right on the river in Portland, he had about $20 million into it. He was almost done. He owed $8 million to the bank, Lehman brothers collapsed, and we were able to come in and raise $3 million to buy him out and then finish that project. And it was incredible. Investors got over 20% return on their money.
So that was kind of like the luck one. But coming back to your question, I think the bottom line, it’s learning. It’s learning and being around people that know what they’re doing. So I think, like you said, that one person you were talking to, she’s got her first investment property, that is a game changer. That is the mindset shifter of buying your first property.

Rob:
Oh, yeah.

Rich:
For so many people. And yeah, you know this, it’s like that’s when you flick the switch and all of a sudden you go from not owning a property to being a landlord, or owning an investment property. Something happens here. And then you start to get this new self-belief about, oh, I’m going to do my second, do my third. Yeah. And single families are scalable. I mean, I know people who own a hundred single family properties and they got it all dialed in stuff, but way more than I would want. I’m happy with 20. It’s cool.

Rob:
Right. Right.

Rich:
And then you can go… Yeah. So I think a single family is a great way to start and to learn and to get your chops and all that stuff. And then it’s growing little by little. It’s like going and saying, okay, I’m going to get a small apartment. But before you do that, it’s going to these conferences, it’s listening to the podcasts. It’s reading the books. It’s not signing up for the $100,000 mastermind, it’s taking that… it’s amazing what people put in, so much knowledge and education into a book that costs 20 bucks. It drives me crazy when people are spending massive amounts of money. I have one member who came to RealWealth, and she had spent over 50 grand just on education and didn’t own a single investment property. It makes me so sad. So I think it’s getting into that first property, then learning, connecting, talking to people, going to these conferences and saying, what are you doing? And getting a mentor, honestly. That’s what it comes down to, get someone who…

Rob:
100%.

Rich:
Yeah, that’s a huge [crosstalk 00:52:59]

Rob:
Well, and I told her the same thing. I was like, look, because she was like, well, yeah, I mean, you can do a syndication, but how do I? I’m like, well, yeah, it’s going to be different for everybody, but you may not be the GP on your first syndication. You may just be an LP.

Rich:
Right.

Rob:
Put some money in it.

Rich:
Yep.

Rob:
And then, maybe on the next one you ask, Hey, can I play a very small role in that next syndication, whether maybe it’s the bookkeeping or maybe it’s the admin side of it. And you kind of work your way up. You don’t have to just start with a $50 million fund or anything like that.

Rich:
You shouldn’t. Yeah.

Rob:
You kind of go accordingly. Right, you shouldn’t.

Rich:
Yeah.

Rob:
It doesn’t work super well for the people that just jump right in. Although, I mean obviously there have been some rock stars out there.

Rich:
Yeah. But usually if you look at their backstory, it’s usually they didn’t do a $50 million syndication on day one. Right? Yeah.

Rob:
Right.

Rich:
And also there’s people who’ve done that and they’re in jail.

David:
I’ll throw this in there too. There’s more of those success stories from inexperienced people in the last five to 10 years than any other time.

Rich:
100%.

David:
Because this has been the best market ever. You can make a lot of mistakes and still make it out. And this has been known, but it’s just, you live in there long enough and it starts to feel normal. We could be coming into a time with interest rates going up, and some of the stuff we were talking about earlier with inflation making assets more expensive, but the renters that you’re going to be renting to, their ability to pay could be shrinking as their wages aren’t going up at work, but everything that they have to spend money on, gas, food, their rent, all that is going up.
I would not be surprised if we continue to see the fed raising rates. And we’re already seeing in the multifamily space, a lot of deals are falling out of escrow. People are like, yep, doesn’t work anymore. Can’t get the financing I was going to get. And just like that, either it’s re trading or it’s falling out at a pretty big level. And I would expect to see more of that. And this is kind of where that Warren Buffett quote, when the tide falls you see who’s been swimming naked. I wouldn’t be surprised if things keep going like they are, to where you see which syndicators were actually doing good work and which of these 26 year old want-trepreneurs were convincing people to lend them money, and they completely crashed and burned. So it’s kind of something the market’s been eating for a while, because it’s just been nonstop. Everyone’s hitting over and over and over.

Rich:
True.

David:
I mean, have you noticed the same thing, Rich, in the world that you operate in, just younger people without experience are still having success?

Rich:
Oh, so much. Yeah. And there’s just, being and speaking at conferences and meeting them, they come up and they say what they’re doing. And honestly it’s like, I’ve talked to some friends, like Ken McElroy is a good friend of mine, and he’s talking about how he was offloading stuff before all this started to happen. And he had sold one of his deals, and then it was a few months later and someone was pitching him on buying this deal and talking about how great it is and how he can improve it, and he can improve management and all this stuff. And it was one of the deals he sold. So it’s so crazy what’s happening. And yeah, I’m really concerned for a lot of people, especially the ones with the short term financing. That, I think, is where it’s going to really just punch them in the gut.

David:
Yeah. Well, Rich, this has been great. I really appreciate you sharing your expertise and some of your experience here. We’re going to move on to the last segment of our show. It is the world famous, famous four. In this segment of the show, we ask every guest the same four questions, and Rob and I will take turns firing them off at you.

Rich:
Nice.

David:
Question number one. What is your favorite real estate related book?

Rich:
I was going to say the book on rental property investing. I thought it was awesome. I think Brandon did a great job on that book. But my new book that just came out on 4/20, is called The Wise Investor. And it’s a modern parable about creating financial freedom and living your best life, honestly. So it’s different than a typical non-fiction. It’s a parable, it’s a story. It’s kind of like rich dad and poor dad meets the Alchemist, and Robert Kiyosaki wrote the forward for it. I’m super stoked on that.

Rob:
Oh, wow. That’s a bragging right.

Rich:
Yeah, it’s doing really well. It’s been out for a month now, more than a month, and it’s been on the best seller list every day since it came out. I’m blown away.

Rob:
All right. Question number two. Favorite business book?

Rich:
This is kind of a little bit of an unknown book, but it’s by Jim Collins and it’s called Beyond Entrepreneurship. He just came out with a new edition, but it’s been out for a long time. But it was the… a lot of these things like EOS was born from a lot of Jim Collins’ work, and a lot of [inaudible 00:57:27] work. But Beyond Entrepreneurship, by Jim Collins.

Rob:
Awesome. When you’re not writing books, scaling the culture of your company, or running syndications, what are some of your favorite hobbies?

Rich:
Oh, adventure sports. I’ve been hooked on them ever since I was little. But skiing, mountain biking, surfing, skydiving, all that fun stuff. Yeah, I just love it.

David:
In your opinion, what makes successful investors different from those who give up, fail, or never get started?

Rich:
It’s fear. It’s fear. Absolutely. Yeah. Not being able to manage fear and move forward. It’s like letting that inner gremlin run the show, and having it be in the dark and control things and pull the strings and all that stuff. So yeah, that’s it. Bottom line. It’s that inner fear. It’s that inner gremlin.

Rob:
And lastly, Rich, can you tell us about where people can find out more about you and your book, if they want to reach out to you on the internet? How can people learn more about you?

Rich:
Sure. The book is just The Wise Investor book. I’ve got my cover right here. It’s not printed yet, but that’s what it looks like.

Rob:
Oh, I love that, man. That’s a great cover.

Rich:
Thank you. So yeah, thewiseinvestorbook.com has all the information about the book. And then Instagram is just Rich Fettke, which is F-E-T-T-K-E. @RichFetkke.

Rob:
Awesome. What about you, David?

David:
You can find me @DavidGreen24, or YouTube at David Green Real Estate. I hired a company to run my social media and help make YouTube channel, so please let me have some feedback on what you guys think about how they’re doing.

Rob:
Awesome.

David:
I got to tell you, it was a huge… there’s a gremlin in my head about using emojis in my videos. Every time they would edit it and it would be like, do you want to make money? And they’d put like a little dollar sign emoji. Do you have any good ideas? And a little light bulb emoji. I was cringing. I cannot stand this. But everyone says that they like it, so I’m just curious if people could share their thoughts on how well I wear emojis is what I’m saying.

Rob:
That is TikTok speak, man. That is how it goes. I know it’s weird, but it’s the way of the millennials and the gen-Z.

David:
I had to do the same thing with my Instagram, right? It was like realtor, little house thing. Loan officer, little paper thing. And I was like, oh, I can’t stand this. But it was so many people that all said the same thing, like you have to set it up like this, that I finally gave in.

Rich:
You got to simplify though. I just watched one of your videos yesterday and it actually works because it sends that quick little signal. It just makes it easy for the brain to take in. And that’s why I wrote a parable, because it just communicates information, but it connects it in an emotional way, and so that allows it to stimulate a real change. You can just read a nonfiction book and it just kind of sometimes goes in one ear out the other, but a story completely shifts sometimes your mindset and how you see things.

David:
Oh, I totally agree with that. That’s one of the reasons I love The Richest Man in Babylon. That book is so, so good, because it communicates these principles in a way through story, which makes them stick, versus my natural communication style is just to kind of say, this is the way to do it, bam, smack you in the face with it. But it doesn’t really sink in like a story can.

Rich:
Absolutely. Yeah. Yeah, I love parables.

David:
And Rob, if people want to know more about you, the most interesting man in the world, this mysterious vibe that you have, how they can get a cough like yours, where can they find out more about you?

Rob:
Well, I’m very mysterious, so I’m not going to give that information out. But if I weren’t mysterious, what I would say is you can find me on Robuylt on YouTube, R-O-B-U-Y-L-T. Robuylt on Instagram, and Robuylt on the old TikTokers.

David:
Rich, I appreciate you being here. Any last words you want to leave us with before we let you go?

Rich:
Oh, last words. That’s a good one. I mean, I’m just going to come back to what I said earlier. Just being in business for as long as I have, and being a coach for as many years as I’ve been, there’s no special secret to business or growth or scaling beyond what I shared earlier, and it’s become the best version of you. When you get better, everything gets better. So work on yourself, develop yourself and grow, and then everything starts to get better.

David:
Thank you very much. Rob. Any last words from you?

Rob:
No. No, I can’t top that. That’s great.

David:
You didn’t think I was going to ask you what you thought, did you? Surprised you, and you weren’t ready, so next time you’ll have [crosstalk 01:01:44]

Rob:
Okay, how about this? My final thought, I’ll leave you with an emoji, and it’s the mind blown emoji from how much I learned from this podcast.

David:
This is why Rob is a millennial and can’t communicate a final thought, because he could only do it if he could use text so he could send an emoji. He’s like, I don’t know how to put that in words, so he literally just tried to take the picture of a mind blown thing and turn it into English, which was very difficult to do.

Rob:
It worked. It worked.

David:
We’re defaulting back into hieroglyphics as a society. [crosstalk 01:02:14] I’m waiting for the day when instead of laughing people just say LOL. That’s going to come. It’s happening. It’s on the way. Yeah.

Rob:
LOL.

Rich:
LOL.

Rob:
Oh, we do that sometimes. We’ll say LOL sometimes.

David:
All right. Well, thank you guys very much. We’ll let you get out of here. This is David Green for Rob LOL Abasolo, signing off.

 

There’s a lot of uncertainty surrounding the economy, real estate market, and the role of inflation in the economic environment.

When it comes to inflation, it’s important to identify how we got here. By here, I mean on the verge of an economic downturn with near record high inflation.

The Cyclical Nature of the Economy

Our economy is cyclical. It goes up. It goes down. And repeats. If you’re familiar with historical economic cycles in the United States, it should be no surprise that after a nine-year bull run, things were poised to peak back in 2019 and 2020. That nine-year run was historically long and, in many ways, driven by the fact that inflation was low for most of the decade.

Typically, a cycle results in a downturn after economic growth leads to inflation, triggering the Federal Reserve to raise interest rates. A rise in interest rates makes it more costly to borrow and more beneficial to save, so people stop spending, start saving, and the economy slows down, which alleviates inflation.

But we weren’t seeing much inflation, so interest rates stayed relatively steady for much of the decade, and things kept chugging along. Who knows for how long they might have kept going. Then the pandemic happened.

The economy came to a screeching halt, and it looked like we were on the verge of an economic depression. So the Fed stepped in again.

The Fed controls interest rates and the money supply. They use these two things to manipulate the economy in an attempt to avoid large swings or catastrophic events. At least that’s the goal.

Unfortunately, when it comes to avoiding economic risk, the Fed historically over-corrects. They move too much or too quickly. That’s exactly what happened here. COVID-19 caused panic over what could become an economic catastrophe, and the Fed reacted by over-correcting.
They lowered rates excessively and quickly, released a bunch of new money into the system, loosened banking regulations, and more.

Those actions stimulated economic growth, which led to inflation, which drove the fed to raise interest rates, which is now (likely) leading us into the downturn.

A recession at this point should surprise nobody. I’m surprised we didn’t see it sooner. But again, we weren’t seeing huge inflation levels prior to last year, so the cycle got stretched out.

Why is Inflation as High as It is Now?

We came dangerously close to a severe economic catastrophe in 2008. Back then, the Fed also released a bunch of new money into the system and lowered interest rates, but we didn’t see sky-high inflation.
What’s the difference between then and now? Why was inflation at 2% for much of the decade after the Great Recession and now at 8% a year after this latest round of interest rate drops and money printing?

Inflation is all about supply and demand, so there are really two sides to inflation. The supply side—when supply is low, prices go up. And the demand side—when demand is high, prices go up.

This time around, we’re seeing inflationary pressure from both sides. On the supply side, thanks to global shutdowns, many small businesses going bankrupt, raw material and transportation pipelines getting sent into a tailspin, and a host of other things, supply chains have been a global mess for two years now.

You might be looking around and saying that the pandemic is over and things are back to normal, so there shouldn’t be any more supply chain issues. But, the U.S. is a very consumer-centric nation, not a producer-centric nation. We import stuff. We don’t produce stuff.

It doesn’t matter what you see when you look around the country regarding shutdowns and businesses operating. What matters is what you see in those countries where we get most of our products. There are still lockdowns, war, and political unrest in those countries.

Shipping logistics are upside down, energy prices are in the sky, chip manufacturing is slowed, there are global labor shortages, and while we don’t talk much about the trade war anymore, that 20-year-old battle is still an issue.

Long story short, supply is still constrained, which will naturally drive prices up.

The even bigger issue is on the demand side, though. Where’s the demand coming from? It’s coming from people, companies, and institutions spending the $9T that was created over the last several years.

Why is Inflation Higher Now Than It Was After the Great Recession?

In 2008, the Fed and the Treasury infused a lot of liquidity/money into the economy. But they did it indirectly. They mostly gave it to the banks, allowing them to open up their lending to businesses and consumers. That allowed all the extra money to trickle into the economy slowly.

This time around, after the pandemic began, we did things differently. Instead of putting money into the banking system and allowing it to trickle into the economy over time, the Fed decided that they needed to get the money out there much more quickly.

The Fed pumped a lot of that $9T into equities directly, companies through PPP loans, and sending checks to all Americans.
Injecting directly into the economy’s bloodstream was effective for its intended purpose. People had direct access to cash and didn’t have to work through banks. But, the aftershock is what we’re dealing with now. Off the rails inflation, making day-to-day life for the average American more and more difficult.

Long story short, the injection of cash directly into the economy served its purpose. It effectively stimulated everything to the point that there was no economic collapse. But, as usual, the Fed overcorrected, didn’t let off the gas soon enough, and here we are.

Of course, there is a solution, but it’s not pretty. We must manually contract the economy by raising interest rates, which has already begun. You can read more about that here.

Mindy:
Welcome to the BiggerPockets Money Podcast Show number 306 Finance Friday Edition, where we interview Chelsea and Wade and talk about budgeting with variable income.

Chelsea:
I own my own business because I want to have the flexibility and the autonomy and the freedom to do whatever I want. And that’s sort of my personality anyway, is I don’t really want people to tell me what to do. Having the flexibility to do that is really cool, because I can work three days a week and do the amount of number of sessions that I want versus somebody telling me, “I need you to do 35 sessions a week,” and then me just walking around as a burnt out zombie.

Mindy:
Hello, hello, hello. My name is Mindy Jensen and with me as always is my Obi Wan Keknowitall host, Scott Trench/

Scott:
Ooh, the force is strong with our recommendations in this episode, Mindy.

Mindy:
That came from our Facebook group. Somebody suggested that and I love it. Okay, 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’re 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, or start and scale your own business, we’ll help you reach your financial goals and get money out of the way, so you can launch yourself towards those dreams.

Mindy:
Scott, I am super excited to talk to Chelsea and Wade today because they have a problem that a lot of people have. They have variable income, widely variable income, and it can sometimes be difficult to budget when your income is up one month and down one month, or down two months in a row, or down even three months in a row. You can start to feel like, I’m not really doing it right. Today, we talk to them and give them some ideas for how to handle their variable income.

Scott:
Yep, love it. I think it was a great discussion. They’re doing a lot of things really right, and I hope that it’s an interesting perspective on what life is like in building wealth from a self-employed perspective with two spouses who are self-employed.

Mindy:
Yes. Before we bring them in, let me satisfy my attorney by saying the contents of this podcast are informational in nature and are not legal or tax advice. And neither Scott, nor I, nor BiggerPockets is engaged in the provision of legal, tax, or any other advice. You should seek your own advice from professional advisors, including lawyers and accountants, regarding the legal tax and financial implications of any financial decision you contemplate. I don’t think I would be a very good auctioneer, do you, Scott?

Scott:
No, but I think you satisfied our attorney.

Mindy:
I did. Chelsea and Wade are on the path to financial independence, but they have widely variable, monthly income, anywhere between $5,000 a month and $26,000 a month. Coupled with ever changing monthly expenses, they’ve been having difficulty creating a budget. And on top of that, they’re both self-employed making insurance another wrinkle to iron out. Wade and Chelsea, welcome to the BiggerPockets Money Podcast. I’m so excited to talk to you guys today.

Chelsea:
Thank you so much for having us. This is a dream come true.

Mindy:
Well, let’s get into this because we have a lot to unpack. What is your income and where does it go?

Chelsea:
Okay, so we are both self-employed, like you said, and I’m a professional counselor with a private practice. My income varies, but it’s more consistent than his. Last year I brought home $51,000 and that came out to about like 4,000 a month.

Scott:
And that’s net income after tax.

Chelsea:
Yes.

Scott:
Hitting your bank account.

Chelsea:
Mm-hmm (affirmative).

Scott:
Great.

Wade:
Yeah. My income varies a lot more, because I’m a filmmaker. I do projects where sometimes I’ll make like $26,000 in a month and sometimes I will make $0 in a month. It also gets a little more complicated on the business side because I have a really high gross income. Last year, my business gross was like $225,000, but that’s because I’m paying lots of contractors. It may look like I’m making a lot of money, but after expenses and contractors, my income for my net is much lower.

Scott:
Awesome. What does that kind of come out to annualized?

Wade:
My net income is $86,000 for my business.

Scott:
And that’s again after tax.

Wade:
After tax, yes.

Scott:
Awesome. Okay, great. That’s not bad. It’s about 137,000 in total annual income.

Wade:
Yep.

Scott:
Any other sources of income throughout the year?

Wade:
Nope. Nope. Not right now.

Scott:
Great. What about expenses? Where’s that money going?

Chelsea:
Okay. We’ll kind of go through everything. Our mortgage insurance taxes comes out to $1,684 a month. Utilities range from 250 to 350 a month. Groceries are 850. Eating out, 120. Household products like cleaning stuff, sometimes kids stuff is in there too, 300. Gym, 170. Gas, around 300. That varies too. Subscriptions like Netflix, 27. Health insurance, 488.

Chelsea:
Because we don’t have traditional health insurance, we pay for a lot of extra medical things out of pocket, so that can really vary from like zero to sometimes 700 or more a month. Car insurance is a hundred. Life insurance is 31. We budget for entertainment around 200 a month, miscellaneous, 200, kids stuff, 200. These vary a lot. Childcare, we aren’t currently paying for childcare, but we will be in the summer. That’s looking like it’ll be around 850 a month for the summer.

Chelsea:
But then both our kids will be in school, so we won’t pay during the school year for childcare. We give $500 a month. We save $300 a month for our kids’ college. Then we each have a spending money of $50 a month. And then we have a dog and she requires most of the time very little, but around $45 a month.

Wade:
Total, that is $6,000.

Chelsea:
Around 6,000, yeah.

Wade:
Yeah, around 6,000 is our monthly expenses.

Scott:
Awesome. That seems like a super reasonable budget from my seat, from that with maybe a little room, but not much from a cut perspective. Is that kind of how you’re feeling about it?

Chelsea:
Yeah, absolutely. I have been tracking our spending with Mindy’s recommendations since October-ish. We’ve always kind of had a budget or more. It’s been like an outline of like, this is what we’re kind of planning. But because our income is variable and there’s lots going on, it’s sort of like this is the best guess. We just kind of go for it.

Scott:
Well, let’s go through your assets and liabilities. Can you walk us through where you’re putting that money?

Wade:
Yeah. Chelsea has a Roth IRA. She’s got 10,000 in there. Her SEP IRA has 26,000. I have a Roth that’s five, and then a SEP that is 7,500. Total retirement savings right now is 48,000, and that is… That’s our retirement. And then you can go through the others.

Chelsea:
And then right now we have two kids. We have a four year old and a seven year old, and we have about 6,000 saved for college. It’s about 3,000 each right now. We have an emergency fund of 30,000. We have other cash savings in a savings account, just a general savings account, of 34,000. And then we have our current home equity at 140,000. We also have money in our separate business accounts, but that’s for like…

Chelsea:
Some of it’s going to go to pay us, but some of it’s going to go to the business. I don’t know how you want to do that.

Wade:
It’s mainly business savings, or it’s for cash flow for business.

Chelsea:
For paying ourselves.

Wade:
Our total net worth is around 300,000.

Scott:
Awesome. Essentially half of that’s in your home equity, another third is in cash, and the rest is in various retirement accounts is how to think about that.

Wade:
Yep.

Chelsea:
Yep.

Mindy:
Does that 300,000 include the business account money?

Chelsea:
Right now, yes.

Wade:
Yes, that does. Right now, Chelsea has about 11,000 in business savings, and then I have right now about 40,000 in business savings. That does kind of equal more to the 300,000.

Scott:
You said you had 225,000 in revenue for your business last year, and then you had like 130,000 in expenses between contractors and taxes?

Wade:
Mm-hmm (affirmative). Yep.

Scott:
Okay. Yeah, that seems super reasonable there. What are your goals and how can we help you?

Chelsea:
We just wanted to chat with you guys a little bit about if you had any suggestions on our variable income situation. We have come a long way with that, and we’ve actually gotten the opportunity to achieve a lot of goals while we have been on this journey, because Wade’s income has been variable for most of our marriage for the last 12 years. I’ve been in school for a lot of that. It’s really within the last five years that I finally started making money, which has helped us achieve paying off debt.

Chelsea:
We paid off $50,000 in student loans. We saved up a ton of money last year to put a down payment down on a house for us. We have like a lot of good momentum going, but we just want some help with kind of… If you have any suggestions on the variable income. And then we’re really long-term looking to be financially independent. We would like to start moving into real estate and specifically investing into short-term rental real estate so we can have some residual income.

Scott:
How long did you say you’ve been both generating income at this level?

Chelsea:
At this level, probably three years.

Scott:
Okay, great. You’re not going to have any problem from a debt perspective. You might have to talk to a couple of lenders who are going to be more comfortable with self-employed folks, but you’ll have enough income history with both of your professions to be able to qualify on that front. Well, just kind of like looking at this, great job. You’ve got a great situation. You’ve got a really strong financial foundation. You’ve got $300,000 in net worth.

Scott:
You have no consumer debt, it sounds like, aside from your mortgage on this. You’ve got a huge cash position and are beginning to invest. You have a very good start from an investment standpoint in these things. I love the fact that you have a lot of cash. You may have slightly too much cash. We can think about that from there, but it makes a lot of sense to do that when you’re self-employed and to have separate business and personal items there.

Scott:
You generate 50 or 60 or $70,000 per year, although it is lumpy, seasonal, or perhaps periodic, I’m not sure which is the right term to describe your income. But I mean, this is a great position here. Like the fundamentals, I think, are all super strong as an outside observer about what you’re currently doing right now.

Chelsea:
Thank you. I really appreciate that.

Scott:
Where would you like to start with the next steps here?

Mindy:
I want to start. I’m going to look at this as Chelsea brings in 4,000 a month and Wade is bringing in on average 7,000 a month. That’s $11,000 a month with approximately a $6,000 a month spend. That’s a $5,000 a month delta that you have. That’s great. We don’t spend enough time celebrating. Yay! That’s fantastic that you guys are spending so much less than what you are bringing in. But on those months when you’re only bringing in $5,000, it’s not going to feel like that.

Mindy:
If there’s several months like that in a row, it can feel like there’s this huge deficit when… Then Wade brings in the, boom, here’s 26,000. Yay! That’s great. I would suggest if I was in this situation, I would have a savings account or a bucket where I put extra money from these $26,000 months, where there’s extra funds over and above what you’re spending that you know you will need for the lead months and have money in there available for when there’s not enough.

Mindy:
Go back through your spending and your income statements and look and see is that three months a year that you have less income than what you’re spending, or is it more like six months and then you get this one giant month? That’s a research opportunity for you guys to look into where you’re going to feel comfortable having that extra bucket. You do have this $34,000 in other cash savings. Does that have an earmark, or is that just a random bucket for whatever comes up?

Wade:
That is the money that we’re saving for a short-term rental. Our goal is to basically put as much money into that as possible so that we can have a down payment for a short-term rental in the next year. That is our goal to be able to purchase some real estate in the next year. That is why that number is pretty high.

Mindy:
And then the emergency fund, like on a month where you’re coming in lower than you’re spending, where is that money coming from?

Wade:
It’s the emergency fund. I mean, typically that $30,000 savings account is our emergency fund. If we have a low month, we take money out of that 30,000 to pay for personal expenses. And then when we have a bigger month, we recoup it and then put it back so it stays at 30 as best as we can.

Mindy:
Does that feel mentally comfortable to have that emergency fund ebbing and flowing like that? Or would it feel better mentally to have this bucket where the emergency fund is $30,000 and then the light income this month fund is $10,000 because you know you’re going to put more in when you need it, but that’s not coming out of your specific emergency fund. A lot of this personal finance stuff is a mental game where you have to just kind of convince yourself that this is how it’s going to be.

Mindy:
Sometimes you can’t, so you have to allow it to be the way that your mind wants it best. I mean, that’s so like floofy to say, but if your mind is having a hard time wrapping around the fact that you can pull from your emergency fund, maybe having an income bucket will allow you to be okay with it. Does that make sense?

Chelsea:
Yeah, absolutely.

Mindy:
That’s something to consider. Take some out of the emergency fund and put it into your income bucket, or maybe you’ve got a $26,000 a month coming up and then you can fill up that little extra emergency bucket, because you’re not doing bad at all. You’re doing really great. Number one, you’ve got a great average income and you’re spending far less than that.

Mindy:
But again, three months in a row of less than average income is going to not make it feel like you’re doing all that great. That’s that mental game that your mind can’t like… Sometimes you can’t see the forest for the trees.

Scott:
I mean, look, there’s lots of right ways to do your cash. Yours is among the most right I’ve ever seen. I love this. You have a lot of variable expenses in your business account, Wade. You have 40,000 bucks. Chelsea, you have it sounds like probably much less. You have 11,000 bucks in that business account. Those seem like reasonable numbers. I’m sure you arrived at that through similar logic. You have 30,000 as your number for emergency reserve.

Scott:
You’re probably feeling really uncomfortable if that ever dips below like 15, and it probably never does is what would be my guess. You’re just like pull a little bit out, replenish it. That’s the point. That’s exactly how you do it. And then everything else goes into… You’ve already made your determination. Your prioritization is short-term mental. It’s not index funds. It’s not your 401(k)s. You’ve already determined that. That’s why everything else is going to the investment for that.

Scott:
I think it’s perfect, and I think your next step is you can fiddle with that if you need to, but it’s a great system. I love it. And now you’ve got the surplus going, ready to be invested into real estate in your short-term rental. Can we hear about what you’re thinking from the short-term side?

Chelsea:
Yeah. Something I wanted to say about that. Currently, I am also investing into retirement and so is Wade. I feel that we are in our early thirties and we are just starting our “traditional retirement savings.” This was something I wanted to ask you guys. We feel like we just started. I’m like, do we need to be… Right now I put in about $1,000 a month into either a Roth IRA or the SEP IRA. I don’t know. How much do you put in?

Wade:
It depends. Right now I’m putting most of my extra money towards the savings towards the short-term rental. But when we don’t have a big goal, I do about 20% of my net income will go towards my retirement accounts. That’s kind of what I’ve been doing for the last six months or I guess last year.

Wade:
What Chelsea’s saying is like we’re trying to figure out, do we try to come at this goal of a short-term rental in a more balanced perspective of still putting money towards our retirement accounts, our index funds essentially, and save up as best as we can for the short-term rental, or do we go like all in and put in all of our extra cash towards saving for the short-term rental so that we can buy it sooner than later?

Scott:
Well, I think that… As long as you get the money in, in the calendar year into your retirement vehicles, it shouldn’t… It’s kind of six of one, half a dozen of the other, as my mom used to say. It’s the same thing. I think it doesn’t quite matter there. I think it’s whatever you feel is the one that’s going to get you to your goals faster, which my instincts based on what we’ve talked about just this far is going to be the short-term rental. Let’s think about it.

Scott:
Over the course of 2022, if things go the same as last year, you’re going to generate 60,000 additional dollars or let’s call it 45, 40,000 additional dollars, because we’re now at the end of April with this, right? That’s going to be $74,000 that you can add to your other cash savings to buy the short-term rental. How much do you need from a down payment to buy that property?

Wade:
We’re still kind of in the research phase right now. We’ve thought about probably a property around 600 or 700,000. In order to get to like the 10%, we’re going to need 60 to $80,000 in cash. But with closing expenses and all there is with the short-term rental, maybe a little bit more, so maybe like 90 is probably more realistic of what we would really want.

Chelsea:
And just to clarify, we’re looking to buy a short-term rental in a traditional sort of short-term rental market, like Smoky Mountains or Florida, Joshua Tree. We’re kind of looking at some of these more traditional places and willing to put quite a bit down so that we can see more residual income every month from it.

Scott:
Okay. Well, you are in position to do that right now. Your cash position would allow for that if you were to pull that from these other places. You’re probably uncomfortable with doing that, which I think is great. It’s a great mentality to have with the way you manage your cash, but you have $110,000 in cash right now to buy that short-term rental.

Scott:
One way to reframe that would be to bucket all of your cash together into one lump and say, “What is the lump amount that would make me feel comfortable with my overall cash position to move towards that?” The other option is keep doing what you’re doing and pile on that amount. You know that you’ll get there within 12 months, you’ll be able to generate about $60,000 and be probably at the minimum threshold to comfortably buy that investment with your outside cash position. I see Mindy shaking her head here.

Mindy:
That gives me the heebie-jeebies to suggest that because that’s every single penny that they have thrown into one investment, and then there’s not really a buffer.

Scott:
I’m not saying they should do that. I’m saying that they could do that, right? It’s their conservative nature that is going to put them in there, probably appropriately to some degree. It doesn’t have to be a year from now. You could look at your situation and say it is reasonably responsible for you guys to have $50,000 in cash across all of your cash accounts based on the numbers you provided us instead of $110,000 in cash, right, across all of those different accounts.

Scott:
To run your life out of one big bucket, because there’s nothing preventing you at the end of the day from taking a distribution from your businesses or committing capital back into your business, right? You literally just move the money from one bank to the next if you want to do it in order to take care of that. That’s more what I’m saying is you can do that right away and you can probably still contribute something to your retirement accounts this year because of the surplus cash that you currently have and the cash flow that you’re going to generate.

Scott:
I think this is one of those cases where you have to prioritize to some degree. You can’t probably max out your contributions to I guess your SEP IRAs and your Roths this year, but you can do some good damage there and still probably accumulate… Put yourself in position to buy that short-term rental by the end of the year, I would think.

Chelsea:
Yeah. That’s what kind of we were thinking too is by the end of the year.

Wade:
I guess another question I have for you guys too is, do you think it’s like smart for us to try to purchase a home that’s a little bit more money, that has the potential to have higher earnings, or do we be more conservative and purchase a home maybe in the 400 range, but has way less earning potential? Is it worth that risk of spending more for more money?

Scott:
Well, I think you invest for ROI, right? And in your case, that’s just a matter of delaying by a few months if you think to stock up more cash, right? You save up 400 versus 600, that’s a third bigger, so you need to save a third more cash in order to put that down to generate that. As long as you’re not going to be crushed by the mortgage payment, which you have to underwrite too, but I like investing for ROI.

Scott:
I’d rather have one investment that produces a great return that’s a little bigger than a smaller investment that produces less net return, less ROI, less IRR.

Chelsea:
Yeah, that was kind of our thought too.

Mindy:
My thought with regards to demand is I have a really, really big family, like enormously big family, and there aren’t that many properties that we can all fit into comfortably. There’s like six in America that can fit us all and they’re always booked up because there’s only… I’m talking they sleep 60 people, where it’s a huge house that sleeps 60 people. Those are always booked up. Yes, it’s going to cost like a lot more than $600,000, but there’s a huge demand because there’s no supply.

Mindy:
That’s something to consider. I mean, obviously not a 60 sleeper, but maybe there’s people that are looking for 14 or 20 sleepers that you can… A little bit more initially may yield a lot more… A lot less vacancy because somebody is always looking for that. Oh, well, I’ll just reschedule my vacation for when this is available. I know that’s how we scheduled our vacation is when they actually had a weekend that was available for us.

Mindy:
I wouldn’t have thought that there were a lot of demand for big properties like that.

Scott:
I think it’ll 100% vary by market, right? If you’re interested in investing anywhere in the country, there’s no reason why you can’t find a similar ROI at 400,000 price point as 600,000 price point. If there are specific markets that you’re studying and know really well, that may well be the case and that may splay your decision there.

Scott:
For example, I wonder aloud right now like the best way to generate ROI in like Denver, Colorado would be to buy a million dollar property with an ADU and a single family house on it and live in the ADU and Airbnb at the single family house, because you can’t Airbnb property in Denver, unless you live in the property as your primary residence. Probably very few people who can actually purchase a million dollar single family residents are willing to do that.

Scott:
Therefore, there’s going to be very limited competition and lots of demand for that property. There may be something like that that gives you an advantage in whatever market you’re in. For Mindy’s point, bigger, better, nicer property, more amenities. I think you’re thinking about it great.

Mindy:
Another thing to think about is the taxes. You’re looking at Florida. Are the Smoky Mountains in Tennessee or Kentucky? I get those two…

Wade:
Tennessee is the area that we’re looking at. Tennessee, yeah.

Mindy:
I get those states confused. Florida, Tennessee, and California, not knowing anything about any of these, I know California’s going to have super high taxes. I know they’re going to have income taxes. I know they’re going to have, if you do an LLC in California, they’re going to have LLC taxes. Not doing any research at all, that’s going to be at the bottom of my list simply for the taxes. It doesn’t matter if you live there or not, I believe. Florida is very tax friendly. I think they have lower taxes.

Mindy:
I know that Smoky Mountains is the number one most visited national park in the country because it’s so close to like two-thirds of the population of the country or something like that. That’s a really great market. They had a fire a few years ago that like wiped out all of everything. They don’t have a ton of property. They’ve been rebuilding, but their rules are more relaxed I believe with regards to rental properties like this. I think it took out a lot of hotels too, but it’s been long enough that I can’t really remember now.

Mindy:
Of these three areas, I like the Smoky Mountains best. I would reach out to a real estate agent and just ask like, “What can I expect from a property in this area? What am I looking to pay? What is my vacancy rate going to be? And what are my taxes going to be?” If I can make the same amount of money in Florida as I can Smoky Mountains, but for half the price, then maybe Florida’s looking better.

Mindy:
If I have less occupancy in Florida, then maybe Smoky Mountains looks better. I’m sorry to throw California under the bus. I love it.

Scott:
Where do you live right now?

Chelsea:
We in Western, Colorado.

Scott:
We’re in Colorado.

Chelsea:
Oh, Grand Junction. Grand Junction.

Scott:
Grand Junction. Why not consider the areas local to Grand Junction like Palisade? Why go out of state?

Chelsea:
We’ve definitely thought about that. We’re just kind of doing… Kind of in the beginning of this journey too with even just reading general things about having a short-term rental. I just don’t know the market of short-term rental here very well, but I know that tons of people actually obviously come to Palisade for the wineries and tons of people come to Fruita for the mountain biking.

Chelsea:
There’s definitely need here, I think, but it would be a good, like Mindy says, research opportunity to look into, because that could be a really great route to go, especially maybe for our first property. Because it’s local, we maybe have that comfort that we could just zoom over if we needed to kind of thing.

Mindy:
Don’t they have world class fishing and elk hunting over near Fruita and Craig and like all that area? I was talking to somebody who was saying that there’s a need for that as well. That’s not my thing, so I don’t know. But somebody else…

Wade:
Definitely on the Colorado River there’s lots of fly fishing that’s hugely popular. More towards the mountainous areas, like the hunting lodges are super popular for sure. In Fruita, like in like the city like Grand Junction and then there’s Palisade and Fruita, there’s not a ton of like hunting tourists that come to the town. In Fruita, there’s the bike riders and then hikers, outdoorsy people, and then Palisade is the wine. There’s lots of wineries. There is definitely lots of potential where we live.

Wade:
The hard part is there’s not a whole lot of houses available. It’s just that the market’s super hot right now. Everybody wants to buy stuff. When we bought our house last year, we sold our old home and I think we had 10 offers in the matter of like 24 hours. We got like $30,000 over asking price. In Colorado, in general, it’s just a really hot market. I think that’s why we’re like, do we want to like try to buy in this crazy market right now. But in a sense, it’s kind of like that everywhere really.

Scott:
I think that’s how I would think about it. It’s going to be like the whole nation has got issues around those types of things. What it comes down to is I think in terms of ROI, right? The major advantage to investing 20 minutes, 30 minutes away from where you live is going to be the ability for you to self-manage the property in the early days and learn a bunch of those things instead of paying that fee to somebody else. And that’s not going to be a 10% management fee for a short-term rental.

Scott:
It’s going to be 18% or a significantly higher one. And that’s not including the cleaning fee, by the way. This is not saying you’re going to go and clean the prop… Although you can do that as well to save money, but that’s the… The management costs will be significant for a lot of these short-term rentals. If you can at least get started with that, you’re going to be able to…

Scott:
By the way, just trying to self-manage something in the Rocky Mountains, you don’t know if there’s like certain times of year that have actually really high tourist activity in the Rocky Mountains because of this event that happens at this point in the year or whatever. You do know that for Palisade, so you’re going to be able to put in place the right pricing at those times of the year. Oh, this is my heavy demand time where I need to make all my money, and this is the light demand time where I’m going to make less.

Scott:
I want to pounce on a long-term… Someone who wants to stay there for three months in this part of the year, or whatever that is. Those will be advantages that you’ll get, especially in the early years, I think from investing locally as a bias as opposed to somewhere you don’t know as well, because you don’t live in there. It all comes down to ROI. If it’s close, the tie goes, in my opinion, to something that’s highly local to you. If it’s not close, then you go out of state. That would be how I bias you to think.

Chelsea:
Yeah, we also have Moab like an hour away and a lot of people go to Moab. There’s a lot of opportunity.

Mindy:
Moab’s kind of expensive too.

Scott:
Who’d we talk to that wanted to build huts next to Moab?

Mindy:
Oh yeah, I can’t remember. We thought about that, like build a tiny house somewhere.

Scott:
I think there’s a lot of stuff in your back door that is maybe not your back door, but I think lots of people around the country are probably thinking like, “Well, Colorado is a great place for short-term rentals for a whole bunch of reasons,” even as you guys are thinking about going somewhere else. Something to think about. I would at least explore it. If it doesn’t work out, go somewhere else.

Scott:
What I am gathering at the strategic level is you’re still early into this journey and you probably have six more months of research and self-education to do before buying your first property. What that might do is you’re probably going to accumulate that cash that’s going to put you in position to buy that within the next six to 12 months, regardless of whether you max out your retirement accounts or not.

Scott:
If you’re not sure, and you’re still in the research phase, maybe you do bias more towards the retirement accounts and those types of things for this year or for the next couple of months, and then kind of get more aggressive about stockpiling the cash when you have much more clarity on what you want to do from a real estate investment standpoint. That’d be maybe one takeaway from this conversation that might be worth considering.

Wade:
Yeah, I think that’s good. Like you were saying, not quite at the point where we have all of our ducks in a row as far as our education. We’ve been researching the Smoky Mountains and like Destin, Florida, Emerald Coast area quite a bit. We know a lot about that, and we’ve looked at kind of just online, just looked at properties and what the ROI would be and that kind of stuff, but we have not really looked around us at all. I think that is a really good suggestion for sure.

Scott:
I think there will be… If you’re going to find an inefficiency or, another way of putting that, a good deal, it’s probably going to be local to you as well. There will be something that, “Oh, this is exactly what the market needs and I need to make these changes and that’s how I’ll do it.” That’s going to be a lot harder in Destin for you, unless you’re from there, for example. I know that market particularly well for some reason.

Chelsea:
Yeah, cool.

Scott:
All right. Are there any other areas that we want to explore here and talk about?

Chelsea:
Yeah. There was one more area of regarding our kids’ college fund. I haven’t really heard a lot of talk about this, so I think this would be a great conversation to have. I’m not sure that our kids will go to college. Times are changing. Things are changing. You can do so much now without going to college. Wade didn’t go to college. I went to a ridiculous amount of college.

Chelsea:
I think we need to kind of figure out a direction to go with this because we’ve kind of just been putting some money in a college savings thinking, okay, we want to save something for our kids, but we don’t really know what to do. I think ideally I would like to save in an account that’s more flexible than a college account, even if it doesn’t have the super, super tax benefits to it, just so that we can utilize that money how we need to at that point for them.

Chelsea:
I don’t know. Do you guys have any thoughts on this for saving for kids?

Wade:
And our kids are seven and four.

Mindy:
I have lots of thoughts on this. I have two kids. They are 15 and 12, so way closer to college age than yours are. You have saved $6,000 for your kids, and that is $6,000 more than I have saved for my kids for college. I do believe that my kids are going to go to college, at least the older one, but that’s not for sure, for sure because you never know what your kids are going to do.

Mindy:
I didn’t want to save in a 529 plan because if I put in $10,000 and then she doesn’t go to college, but it has grown to $29,000 over the course of her life, I only have $10,000 for me. If I want to pull it back out, all I get is what I put in. I don’t get all those gains. I don’t know where they go, but they don’t go to meet. They don’t go to her. I could reallocate that to her little sister if she was going to go. I could give it to a niece or a nephew, but I don’t get them back.

Mindy:
Whereas if I put that money into an investment account, all of that money is mine, or I can use it for her college, or I can put her through wedding planner school or film school or whatever she wants to do. I can use that money how I choose, or she can say, “I’m leaving the house that I’m never going to talk to you again, and then it’s still my money.” That’s a horrible situation to be in, but I don’t want to give that control to somebody else. Because you have $6,000 in there, I would just opt to leave it…

Mindy:
If I was in your position, I would opt to leave it, and I would open up an after tax brokerage account in my name, not in the child’s name, and put money into there for their college or just put money in there and use it for college when it comes up or use it however you want because it’s your money. Now, that is going to… Because it’s an after tax brokerage account, that’s going to count against your income or assets for FAFSA, but that’s a problem for 10 years down the road.

Scott:
I completely agree with Mindy I think at the highest level in principle there. I’ll add in that I speculate that college education costs are going to come down in real dollars relative to inflation over the next 10, 15, 20 years. The reasons why I think that will happen first have to do with the amount of student loan debt out there. Either one political party is going to come in and forgive a large amount of that debt.

Scott:
After that happens, you’d think that there will be new restrictions on new access to debt to fund college, which will reduce ease of which people can get loans and therefore bring costs down, demand down, right? Another party may not do that and there will be a reform of student loan debt at some point in the future regardless, if some of those events happen. I think there’s going to be a student loan restructuring at some point in the next decade or two that will impact college affordability.

Scott:
We are also becoming more and more, I think, cognizant as a society about the ROI of college and how it may not be necessary for a lot of things. I think it will be less of a you’re going to college and more of a calculated decision depending on your career field. I think for those reasons it may be a risk that folks are over saving for college, not in the short-term, not in three to five years, but maybe in 10 to 15 years perhaps. That’s a speculation.

Scott:
I don’t know if that’s right, but that’s what I’m going to speculate on personally for my family. And then second, I think that if you do want to pay for college, a better way to pay for college… Well, a way to do that in conjunction with what I just said is just build wealth in general in real estate or stock accounts or whatever it is that you’re investing in.

Scott:
And then use that wealth to provide benefits for your family like private school if your kid ever needs that for some reason, for a special reason, or a college, or a trip around the world, or tuba lessons if they’re superstar at that, whatever it is. That I think is a more beneficial way to just build general flexibility. The 529 plan does not offer that for the most part. I probably won’t contribute much at all to a 529 plan with a possible exception of I know my kid’s going to college.

Scott:
I’m two years away from college. I’ve got a pretty good, clear idea of what college is going to cost, and I’m going to take advantage of that plan in the short-term here to put that money in and take it right back out for college in a few years. I might do that at the ending stages if I’m getting really close to college. That would be how I think about the 529 plan and saving it for college at a high level.

Chelsea:
Yeah, I really like that.

Mindy:
And just a couple of weeks ago, we released an episode with Robert Farrington from thecollegeinvestor.com episode 297, where we talk about paying for college and saving for college in lots of different avenues. I think it was episode 41 or 44 with Zach Gautier where we talked about different ways to pay for college as well. Both of those are really great episodes to listen to.

Mindy:
And we had episode 251 with Preston Cooper, where he talked about the ROI of a college degree, something to consider before you put yourself or your children through college. He was just back last week on episode 293, or a few weeks ago on episode 293, talking about the ROI of a graduate degree. Things to consider as you’re getting closer to college age.

Mindy:
I mean, that’s not imminent for you, but those are just different ways to save. In both of those episodes, there’s longer term and shorter term ways to save for college.

Chelsea:
Cool. I like that.

Scott:
It would just be a shame to have a lot of money in the 529 plan and then not use it for that. That’s not the worst problem in the world. There’s other ways to deal with it. You can just be like, if I’m going to build a couple hundred thousand dollars in wealth over the next 10 years via investment vehicles, like short-term rentals, I’d rather just be able to use that for whatever the heck I want, including college, and take a little bit of a tax hit or less tax advantage situation than have it all kind of locked up in there and then have to get creative in terms of dealing with it once it’s in the plan.

Chelsea:
Yeah, I agree. Absolutely.

Mindy:
Is there anything else you wanted to talk about?

Chelsea:
Yeah. I was curious about if you guys had any thoughts on the health insurance situation. I know that that was something you mentioned in the intro, Mindy. Maybe you had some ideas about that. Currently we do not have health insurance and we have a medical sharing plan, as well as a membership to a general family doctor that we pay for monthly.

Chelsea:
We have had some health issues actually come up in our family within the last year, where it’s looking like we are going to need some sort of traditional ongoing insurance. We have some kids that need some speech therapy and occupational therapy and meds and regular therapy and all the things. It is looking like more of a traditional plan is going to be something we will be moving towards within the next year or two.

Mindy:
I was going to say, when I first saw this in your notes, I was reminded of a recent bankruptcy by Sharity Ministries, which was formerly known as Trinity Healthcare. They basically just said, “We can’t afford all of this, so we’re shutting down.” The healthcare system in America is broken and needs to be fixed, but the health sharing… I have friends who really love health shares, and I have friends who have been stuck with big bills because the health sharing decided not to pay it.

Mindy:
I don’t like traditional insurance, but I think that’s going to be the best way to go about it. I don’t know if a health savings account and a high deductible plan is going to be best for you. Somebody was listening to the show a few months ago and said that in almost every case, a health sharing plan is better than a traditional plan when you take into account the premiums and the premium deductible and the fact that the health sharing account can grow. That’s another reason-

Scott:
You mean HSA plan.

Mindy:
An HSA, yes. I’m sorry.

Scott:
Health savings, yeah.

Mindy:
Yeah, health savings plan. Yes. Thank you, Scott. That’s what I was thinking.

Scott:
I’d agree with that. You guys have a great cash position, so there’s no… You don’t want to get crushed by a huge medical bill with that, but you can have a high deductible, I think, given your cash position and probably will be able to arbitrage that, although that will depend on the specifics of your personal situation. Let me zoom back out for a second here though and say this why do you guys work in your own businesses instead of one of you taking a job that pays similar?

Scott:
What’s the rationale for that? There could be further reason. There’s a lot of advantages. I just want to hear you guys think through it.

Wade:
Yeah, I think that’s a great question. Yeah, for sure. I’ve run my own business for about 12 years, so I don’t really know what it’s like, honestly, to work for a staff position. I have a lot of benefits to running my own business where I can make my own schedule. I don’t have to answer to somebody. I don’t feel like I have a glass ceiling above me as far as my income goes. And just my personality. I like to work on various projects a lot.

Wade:
I feel like if I work on the same thing over and over again, I get bored and I don’t put a ton of my creative energy into it. I would say that for me, I just really like the benefits of having my own business more than having the security of a staff position. That’s for me.

Chelsea:
For me, I could easily go out and get a job with the degree that I have for an agency doing mental health counseling. That would be very easy to do. That’s a lot though. Working in mental health is a very hard job. I own my own business because I want to have the flexibility and the autonomy and the freedom to do whatever I want. That’s sort of my personality anyway, is I don’t really want people to tell me what to do.

Chelsea:
Having the flexibility to do that is really cool, because I can work three days a week and do the amount of number of sessions that I want versus somebody telling me, “I need you to do 35 sessions a week,” and then me just walking around as a burnt out zombie. It would be really hard. That’s kind of why.

Scott:
I think that’s great. I will just say that’s another one I would just challenge you to at least explore, right? Corporate life maybe isn’t so bad as what you’re making it out to be in some of these cases with it. You might be able to negotiate some flexibility, for example, or find a position that gives you some of those benefits and that would solve your healthcare problem to a large degree if one of you guys were to consider that.

Scott:
Not a deal breaker. You clearly are working around that right now with things, but you will have expensive options from a self-employed perspective, the same challenges that people who are just financially free or full-time real estate investors or full-time agents will face from an expense standpoint.

Chelsea:
Yeah, I think that’s a good point to really think about. Because with the even trying to go into real estate, it is harder for us to get a loan because we are self-employed. Even if we do have the years of income to back it up, it’s still a lengthier and more difficult process. At least it was when we were buying our two primary residences that we’ve bought before. So that.

Chelsea:
And then I think looking at the specifics of if I were to make… Because it would probably be me. If I were to make a certain amount of money working for somebody else, how much money that would be with the healthcare already taken care of in a sense. I know I’d have to pay some versus how much we’re going to have to pay out of pocket for healthcare.

Scott:
I think there will be a decision to make there. Absolutely, you will have to make your employer much more money than you cost, which is the deal with that. But it could be that it brings in more income, provides similar flexibility, and gives you healthcare options depending on how that goes. It may provide financing opportunities. If those trade-offs are unacceptable from a time perspective, you guys are going to get rich one way or the other.

Scott:
You spend a lot less than you earn and have a really strong position. But just something to think about as we’re doing that is maybe revisit that assumption and at least explore it because it would make a lot of these issues easier in the short run.

Chelsea:
Yeah, absolutely.

Wade:
Yeah, it makes sense.

Mindy:
That’s kind of what I was thinking too, Scott. I’m glad you brought it up because now you’re the bad guy.

Scott:
We’re supposed to tell you how to quit your job, right, on the show? Is that how that works?

Mindy:
Yeah, exactly.

Scott:
Instead of go get a job.

Mindy:
Yeah.

Chelsea:
But I wonder if there could be flexibility to that, because just because I work for somebody doesn’t mean I could also not own my own business on the side. The goal for me actually is to not be a therapist when our kids graduate from high school and to move into more of maybe like an online business or a coaching type position so that there’s even more flexibility, because I anticipate Wade probably traveling a lot more at that point once his career starts moving and he doesn’t have to be home all the time because we have kids.

Scott:
Something to think about, I will tell you at BiggerPockets, some of our team members work 32 hours a week or 30 hours a week or whatever with that. There will be some rules like, if you’re not full-time, we can’t give you the full benefits. There’s some legal things and all that stuff. You’ll probably have to meet some minimum cutoffs in order to qualify for certain benefits with that, but there may be plenty of flexibility and opportunities out there, depending on what you’re interested in.

Mindy:
This was a lot of fun. I had a great time talking to you guys. I think you’ve got a lot of opportunities available.

Scott:
We want to keep going until you’re you’re feeling good.

Chelsea:
Do you have questions?

Wade:
No.

Chelsea:
Do you guys have questions for us?

Scott:
No, I think we got a great snapshot of your position. It sounds like you had a great journey to get here. You’ve got a very disciplined budget, consistent income in spite of the being self-employed. That speaks to a lot of discipline and hustle over a long period of time. It appears to me that you’ve come into this like position of having this surplus and having some of the options to begin exploring more serious investments, I’ll call it, in a very recent past and really have all your ducks in a row at this point.

Scott:
And now it’s kind of a directional thing. Do I want to go into short terms? Do I want to go into long-term investing in my 401(k)? Those types of things. I think there’s an art to that. There’s not really a right answer. I think we got through a good amount of that. I think you’ve got big assumptions. The challenge is the self-employment always the right path. Certainly it’s working for you guys, but it could be reassessed to make it easier.

Scott:
If one of you were to get a job, that would solve some of your problems here, or at least go a long way towards that. And then I think that the college savings, we gave our opinion on that. We don’t really have a right answer. I love the way you manage your cash for the most part. I think it’s a really smart way given your current situation. If one of you were to get a job, that would change because you would not likely need to have quite as much cash either in your businesses or in your personal reserve.

Mindy:
Okay. Well, thank you so much for your time today, Wade and Chelsea, and we will talk to you soon.

Chelsea:
All right. Thank you.

Mindy:
That was Chelsea and Wade, and I think they have a lot of things going for them. First of all, we didn’t celebrate enough that they’re literally spending like 50% of their income. It just may not seem like it when they’re in the middle of the month or two or three in a row where they have less than what they’re thinking about spending.

Scott:
I mean, they’ve crushed it. This is something that we see now fairly frequently on the Money Show where we’ve got a couple who’s really mastered the basics of money, have a good framework in place, and are just kind of popping up after several years of having paid off debt and built this stable financial position. They’re like, “What do I do now?” That’s a great thing. It’s exciting because you’ve paid off that debt. You’ve got the cash position. You’re starting to do the retirement accounts.

Scott:
The surplus is there, and now the ocean of opportunities is exploding in front of you and it’s overwhelming. Do I go into real estate? Do I do this with my business? Do I invest in this avenue? Do I invest in this one? Because the path has opened up so much because of the good habits that you’ve put in place. I think that’s really fun, because it’s kind of hard to see that other side while you’re in the grind of paying off the debt, for example, which it seems like they popped up out of fairly recently the last couple years.

Scott:
That’s exciting and fun. And now it’s about kind of forming a plan and prioritizing that and being comfortable with the choices. Those choices can involve investing in 401(k)s or self-directed IRAs or SEP IRAs, depending on whether you’re self-employed or employed, investing in real estate, investing in stocks, yada, yada. It’s just about what you want and how you’re going to back into that.

Mindy:
I really liked your suggestion to look a little bit more local for their first property. I thought that was a great idea. I think that there’s going to be a lot of opportunity that maybe they don’t really… They hadn’t considered just because it’s so close and our market is expensive, but it’s also really desirable. There’s people that are coming here all the time to take advantage of what we’ve got here.

Mindy:
When your property is an hour away, you’re not necessarily going to drive to it all the time, but you could drive to it if you had to. It’s a lot easier to drive an hour than it is to hop on a plane to go to Florida to check out your property.

Scott:
Yeah. My wife and I vacation in Palisade, which is like right where they go, and we stay at an Airbnb. We spend lots of money there and think it’s a great experience. It’s just kind of funny to me. Oh, great. I’m going to go out of state to the Rocky Mountain. I’ve never been to the Rocky Mountain. What was it? The Smoky Mountains to vacation before. Maybe I’ll go there someday, but that’s like a… It’s just like, oh, this is in our back door. People come from all over to go hang out where you live at various times in the year.

Mindy:
Yeah, I like that idea. I hope they look into it a lot more. Scott, should we get out of here?

Scott:
Let’s do it.

Mindy:
You know what? Before we do, I want to invite people to apply to be on the show. If you would like us to review your finances, please apply at biggerpockets.com/financereview. And if you would like to tell your money story, apply at biggerpockets.com/guest. Okay, now, from episode 306 of the BiggerPockets Money Podcast, he is Scott Trench and I am Mindy Jensen saying grab your pillow, armadillo.

 

At the start of the year, amidst rising real estate prices and ballooning inflation, a hike of the Bank of Canada’s key interest rate seemed like an inevitability. Now, nearly six months down the line, and with multiple hikes behind us, hikes seem like a regular occurrence.

Today, the central bank has made it clear they intend to remain on course and continue to increase its rates even further.

This week, the Bank of Canada announced an increase to their policy interest rate of 50 basis points, amounting to a total of 1.50%. That means interest rates are now six times higher than they were at the start of the year, though they still remain below pre-pandemic levels.

The bank has also announced they plan to continue Quantitative Tightening (QT), a program under which the bank will allow the many bond holdings accumulate during Quantitative Easing to mature without replacing them, which will drive bond prices down and put upward pressure on bond yields.

The policy interest rate affects the price of borrowing in many different areas of the Canadian economy. The current hikes are primarily a tool to help curb inflation, which hit 6.8% in the month of May. Most importantly for our readers, the interest rate plays a big role in how mortgage rates are set. Let’s explore in a bit more detail what the recent hike might mean for you.

What happens when the bank raises its rates?

The Bank of Canada notably does not take on regular Canadians as clients. Instead, they are mostly involved in influencing the major banks and directing monetary policy. This means the first effect of the bank raising its policy rate will be an increase in the cost of borrowing for banks and financial institutions.

Canadians can expect the cost of borrowing from banks and financial institutions to rise in a couple of days if it hasn’t happened already. This increased cost will be passed on to consumers in the form of an increased prime rate. Thie prime rate serves as the foundation for many consumer interest rates, including some mortgages.

How do rates affect my mortgage?

The Bank of Canada policy rate plays a major role in how banks determine their variable interest rates. Fixed rates, on the other hand, are more closely tied to government bond yields, which will be affected by the ongoing QT program.

The good news is that if you have a fixed rate, your interest rate won’t change until your mortgage is up for renewal at the end of the term—or if you decide to refinance.

Depending on when you started your mortgage term, and when you are up for renewal, an increased interest rate will affect you differently. Those who began or renewed mortgages amid the record low rates of the last two years will see the biggest increase in interest when it comes time to renew while mortgage terms that started prior to 2020 may not see as large of a change.

For variable-rate mortgages, your interest rates will be rising shortly, if they haven’t already, and will continue to follow the policy interest rate as it moves upwards. While variable rates were very popular during our previous low-rate environment, these borrowers will quickly feel the burn of rising interest rates. Many may choose to convert to a more stable fixed rate to ride out the shifting market.

Those who are just looking to buy a home now will also be affected by the rate increase. When rates were low during the last two years, it allowed prices to shoot up as borrowers could more easily service their large mortgage debts. Now, new buyers will have to face these higher rates, while prices in many areas still remain much higher than the last time rates were at this level. Buyers will be faced with either buying now at high prices to lock in a relatively lower rate while they can, or waiting an undetermined amount of time and hoping prices correct in response to higher interest rates.

How much further will they go?

No one but the Bank of Canada themselves can definitively say just how far rising interest rates will need to go, though analysts are predicting more still to come.

Despite the recent hikes, the rate of inflation has continued to go up in recent months and is predicted to continue to rise even further before it falls. Clearly, the Bank must still do more if they hope to rein in inflation. Yet, even with the rapid increases we have seen, they must still try to avoid moving too fast.

Our current interest rate is still below pre-pandemic levels, though it is higher than it was for much of the 2010s when inflation hovered around 2%. And, looking even further back, we are still far from the highest interest rates ever seen in Canada (though comparing with the past is not apples-to-apples).

Looking forward to the rest of the year, many economists are predicting yet another 50 basis point increase in July, while RBC Economics forecasts a policy rate of 2.5% to end the year. With just four potential hikes remaining on the BOC’s 2022 schedule, they will need to continue at a pace of at least 25 basis points per increase to hit that forecast. Based on their recent clip, that seems more than doable.

Rental properties have tremendous potential to generate revenue. However, the success of your investment rests heavily on the quality of your property management. Finding a quality property manager (PM) isn’t as cut and dry as one might think. Many factors must be considered when assessing a property’s needs.

This article will explain what a property manager is, why they are important, and how to find the right one to maximize your rental property’s earning potential. 

What is a Property Manager?

A property manager is defined as any person or firm that carries out the various tasks involved in operating a residential or commercial rental property in exchange for a fee. In short, you pay them to take care of the grunt work so that you can invest your time elsewhere. 

The tasks involved in managing property will vary depending on the type of property, size, location, and personal preferences. That being said, here are a few of the general responsibilities of a property manager:

• Listing and advertising 
• Scheduling showings 
• Screening potential tenants
• Leasing agreements/contracts
• Collecting deposits and rents
• Property maintenance 
• Responding to tenant requests and emergencies 
• Handling evictions

Not all property managers are the same. In many cases, a property manager or management firm will specialize in a specific area of expertise. Not all experienced property managers are suited for the same role. For example, a PM may have years of experience managing single-family residential properties but may fall short when managing a multi-family unit such as a residential apartment complex. 

PM responsibilities also depend on what role you’d like them to assume. You can appoint specific duties, such as responding to tenant emergencies, scheduling routine maintenance, and rent collection, while outsourcing other tasks like leasing, marketing, and legal matters. Or, you can choose to hire a management firm that can handle 100% of your property’s needs. 

Why Hire a Property Manager? 

If you have the time and resources to manage a property on your own, you can save yourself a little money. However, managing a property can be a full-time responsibility. Many investors don’t have the time or desire to manage a rental property’s nuances. Here are a few common reasons to hire a property manager.

Time

As I mentioned before, rental properties are time-consuming. Whether you have a full-time job or simply prefer to invest your time elsewhere, hiring a PM will free up your schedule. If you want to avoid 3:00 A.M. maintenance emergencies, requesting quotes from vendors, or trying to squeeze showings into your busy schedule, you’ll need a property manager. Delegating the property’s responsibilities to a PM will allow you the freedom to earn without the hassle. 

Stress

Managing a rental property means spending a great deal of time solving problems. Rental properties are not all fun and games. Sometimes you’ll find yourself in uncomfortable and challenging situations. You may face expensive repairs, storm damage, difficult tenants who don’t pay rent, or complicated evictions. It’s easier to make logical decisions when removed from a potentially emotional or stressful situation. A good PM can take some of the burdens off of your shoulders. 

Location

It is common for investors to purchase rental properties outside the state or town they reside in. Distance can make it challenging to respond to emergency maintenance requests or ensure that tenants honor lease agreements. Out-of-state investors prefer to choose a property manager that is local to the rental property. It is beneficial to hire a local PM because they know the area, can assess the property in person, have vetted lists of vendors, and can respond quickly if any issues arise.

Efficiency

A quality property manager can help to maximize your property’s earning potential. Many PMs have the expertise and reliable resources to work efficiently and prevent loss. Most PMs will know tenant/landlord laws and regulations and can handle legal disputes, leases, and money handling. They will have vetted vendors to handle maintenance and repairs efficiently. Most importantly, they will likely have established processes for vetting tenants to reduce turnover or vacancies. 

What to Look For in a Property Manager

Choosing a property manager to handle your investment property can be tricky. You’ll want to be sure that whoever takes on this vital role will meet your needs and expectations and do so efficiently. 

Here are some of the essential qualities to look for in a property manager.

Integrity 

Choosing a property manager with a reputation for trustworthiness and integrity is vital. You should feel confident that your PM will make decisions in your best interest and conduct themselves to reflect your values. Choose a property manager that you’re confident will treat your tenants with respect and fairness and make financial decisions to optimize your property’s success. A property manager who cuts corners to cut costs can negatively affect your revenue when tenants decide to take their money elsewhere. 

Expertise 

Too often, people confuse experience with expertise. Unfortunately, the amount of time a person has spent in an industry is not a reliable way to gauge their competency. 

Rather than focusing on the number of years they have under their belt, focus on these key indicators:

• What professional licenses and certifications do they possess?
• Do they have a good reputation?
• What are their vacancy rates?
• Do they have established policies and processes?
• What does their client base look like? Do they have properties similar to yours?
• Are their contracts transparent and accurate?
• Do they have insurance, and what does it cover?

Communication and compatibility

Communication style & compatibility are not qualities that you can screen for on a job application. This is something that can be easily overlooked during the hiring process. However, the quality of your communication and compatibility with your property manager is key to successful management.

Think about it, a vast majority of the conversations you will have with your PM will be regarding some sort of problem that needs to be solved. In my experience, communication and compatibility play a pretty substantial role in the ability to work with someone towards a solution. 

You may find someone that checks off all the qualities of a great property manager. Still, if you cannot effectively communicate or work together, it can become a burden or even a liability. 

How to Find the Best Property Manager

Now that you have a better idea of what qualities to look for in a property manager, you may be wondering where to start. Here are a few tips to get you started with your search.   

Consult with your broker

One of the best ways to build a trusted property management team is to establish a strong relationship with a local real estate broker. Brokers can provide valuable insights and referrals. 

Ask for referrals

It never hurts to ask trusted colleagues and other investors for referrals. Be sure to get specific details about why they recommend a particular property manager. 

Do your research 

When interviewing property managers, make sure to request references. Research the PM online, read reviews, and speak to their references. Have a list of specific questions to ensure the PM fits all your needs. 

Warning Signs to Watch Out For

Unfortunately, there are bad seeds in every industry. Things can go downhill quickly when property managers aren’t upholding their end of the deal. You’ll want to pay attention to avoid a property manager that isn’t up to snuff.

Here are a few red flags when searching for a property manager:

• Poor communication: If the PM you’re interviewing is slow to respond, late to appointments, or unwilling to meet in person, this behavior will likely be the norm.
• Spelling and grammar mistakes: If you’re receiving emails riddled with spelling and grammar mistakes—that’s a bad sign. It shows that the PM does not pay attention to details.
• Unprofessional behavior: Ensure that the PM you hire represents you in the highest light. Pay close attention to how they conduct themselves during meetings. Imagine how they will treat your tenants if they speak, dress, or act unprofessionally with you.
• Lack of references: If a potential PM does not have references or refuses to provide them due to “confidentiality,” it’s best to cross them off your list. A lack of references means they are inexperienced or don’t have any good references to provide. Either way, it’s not a good look.
• Services are not 24/7: Life happens. Water damage, burst pipes, and broken HVAC systems don’t wait for business hours to cause issues. If a PM does not have an emergency line with 24/7 assistance, move on down the line. Waiting to address maintenance emergencies can have serious consequences. Not only must tenants be provided a habitable living space, but your property can sustain severe and costly damages.

Conclusion

Hiring a property manager can help alleviate stress, free up your time, and keep your property in tip-top shape so that you can reap the appreciation benefits. However, every investor will have unique goals, preferences, and resources, and a PM might not be for everyone. Before deciding to take on landlord responsibilities or hand it off to a property manager, I recommend assessing your availability, resources, and industry knowledge.

Skip to content

Page load link