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Month: July 2022

What the Experts Warn Against Before You Lend

Is private money lending the next best way to invest? To the everyday landlord, home flipper, or once-in-a-while investor, private lending seems completely foreign. Why would you lend money when you can put it into your deals? And even if you wanted to, wouldn’t it take millions, or at least a few hundred thousand dollars to get started? Surprisingly, private money lending is available to more people than you think, and it could be your next way to make truly passive income.

Alex Breshears and Beth Johnson were neither millionaires nor active investors when they started lending private money. Over time, they realized that they had grown relationships with active real estate investors, many of which always needed funding for the next deal. While swinging hammers and painting baseboards may sound fun to active BRRRRers or flippers, to Alex and Beth, the passive income that came in from private money lending was even better.

They’re now so ingrained in the world of private money lending that they’ve written the newest BiggerPockets book, Lend to Live, where they talk about how to build “hassle-free passive income” by lending private money. In this episode, they go over how a new investor can start lending, what to look out for in a lender when you need money for deals, and how even with a few thousand dollars, you too can start building truly passive income streams.

David:
This is the BiggerPockets Podcast show 642.

Beth:
I think a lot of people say they have to have a specific structured mindset, and they got to be really goal oriented, and put out into the universe what they want. Oftentimes, for some people, they’re so over engineered in their goal setting, that they may not be… They might have blinders on to what kind of opportunity exists out there. I think, both Alex and I shared our stories about how we just happened upon private lending, and every aspect of real estate investing involves some chance encounter with someone with some opportunities.

David:
What’s going on, everyone? This is David Greene, your host of the BiggerPockets Real Estate podcast here today with my good friend and amazing co-host Rob Abasolo, where we are interviewing two of the authors of BiggerPockets’ newest book called Lend2Live. We get into it with Alex and Beth, the authors of the book about private money lending, lots of things that you probably had no idea that go on behind the scenes, how to vet a private money lender to make sure that they’re the right one for you, what to look for, what questions you should ask, and how this whole thing works so that you can scale or supercharge your business.
Rob, what did you think about today’s show?

Rob:
This was a… The wheels turn very often for me on BiggerPockets, but today was a very special one, because I know this wasn’t… The intention for today’s video is to really talk about the world of private money lending, and how to vet your private money lenders. That’s honestly the largest part of this episode, but I was super interested in actually becoming a private money lender. I think this is a really cool avenue to diversify in, and so I really like learning a lot of the mechanics of that.

David:
I’ll spend your money. Happy to pay you interest on that. You just let me know, my man.

Rob:
Hey, a solid 20% for you, my friend, and you got it.

David:
All right. Today’s podcast is brought to you by Rob and Rob’s mustache. Let’s see which one of us becomes the best private money lender. Before we bring in the guests, we’re going to get to today’s quick dip, which is consider buying the book that we’re talking about today. You could get it at biggerpockets.com/store. It’s called Lend2Live. The idea is to invest passively so you can live actively, and today’s guests do a very good job of spelling out in detail how you can achieve the same for yourself. Biggerpockets.com/lend2live, two as in the number two, lend number two live.

Rob:
Well, I actually have a… I have a second quick tip for today. This is really important too. This is going to change a lot of real estate journeys just by listening to this tip. It’s to set a reminder on your phone to remind you to take out your trash every week, because I’ll tell you what, David, I forgot to take out my trash last week, and I am paying dearly for it with a trashcan full of maggots. It’s caused some divides in my household. I’ll be honest. It’s not been a pretty week for us, because we don’t have anywhere to put our trash.

David:
It’s funny that you say that because two weeks ago, for whatever reason, my credit card stopped making the automatic payment to the city where I live for both the water bill and the trash. Trash guys apparently have a chart or something that tells them, “Don’t pick up this person’s trash, because they didn’t pay their bill.” I was taking my trash out. The first time, I’m like, “Oh, they just missed it.” Then next week, it’s getting pretty full. They skip it again because now I’m not paying. It wasn’t until I saw that there was a letter that got sent saying, “We’re going to turn off your water.”
I’m like, “Oh, I don’t know why my credit card does that every once in a while,” but paid it. Now, they’re taking the trash, but it is a little stressful as you’re trying to figure out. It does fill up with maggots surprisingly fast.

Rob:
I walked in so defeated. My wife’s like, “What’s wrong?” I was like, “I forgot to take out the trash yesterday. Honey, this is the first time this has happened, but there’s maggots in there.” She was like, “Oh my.” The whole mustache is my redemption story to her, because she’s like, “Mustache or you’re sleeping in the doghouse tonight,” so here we are. Here we are.

David:
Very resourceful of you. All right, let’s bring in Alex and Beth. Alex and Beth, welcome to the BiggerPockets Podcast. I understand that you two are the newest authors in the stable of BiggerPockets publishing, so congratulations and welcome to the family. Alex, can you tell us a little bit about the book that you two wrote?

Alex:
Yes, absolutely. The book was really a… It started off a little bit as a passion project, because we kept getting asked, “What’s a good book to read? What’s some resources?” There just really wasn’t anything solid out there. I think we had just gotten asked one too many times, and we were like, “You know what, we’re just going to do it. We’re going to make something.” Because we had talked to so many new private lenders or new people wanting to use private money, that we’re like, “We got a good idea of what the common questions are.”
What are the common pitfalls? What don’t they know? What are they asking questions about? Then we put all of that as action items into the book.

David:
All right. Then Beth, in your opinion, who is this book best suited for?

Beth:
I think this book is best suited for anybody that wants to learn more about private money lending, whether you’re a borrower who just really wants to become more engaged, and build your acumen around private money so that you can raise capital better, trying to understand how to learn about private money from the point of view of the lender, but it’s also for people who just don’t really want to be an active investor. Maybe they don’t like flipping or wholesaling, and so they choose a more passive route to creating some cash flow by becoming the bank.

David:
I’m curious before we get too deep into this, as the market is shifting, how do you see the need for private lending movie? Do you think we’re going to see more people that say, “You know what, I don’t want to own the real estate. This is a little scarier now that values are actually going down again,” or do you think that people are going to be saying, “Hey, I need to borrow money. Who’s going to give me money,” or some combination of the two?

Beth:
I think it’s coming to more into light right now more than ever. I think we saw this in 2020 happening as well, where a lot of investors who might be a little bit more bearish are pausing on their projects, and waiting and seeing what will happen next. We see really understanding where your source of capital becoming more important, because the volatility in rates, the underwriting requirements, shifting, understanding where you can get capital very quickly and easily is making private money lenders become more and more important right now.

Alex:
I think it’s probably going to only increase the demand for private lending right now, because those people have nowhere to go. I literally ended up in private lending because a friend of mine, his hard money lender called him right when the world was shutting down with COVID. The hard money lender said, “Sorry, dude, you’re out of luck. We aren’t funding any more deals.” Fortunately, we just knew each other, and we said, “Okay, let’s make a go of it.”
That’s happening in a more increasing pace now, because some of these hard money lenders aren’t necessarily closing their doors to pause. They’re closing their doors for good.

Rob:
Oh yeah. I just actually wanted to establish a baseline here, because we’re going to be talking about private money lenders, private money in general. Can we just start with a simple definition of what private money is and how it differs from traditional money?

Alex:
I think you just asked a loaded question there, Rob.

Rob:
Great. We’ve got one hour, so play it on me.

Alex:
The way we define private money is capital that someone directly has control over. There’s not strings attached. It’s the easiest way to think about it. I have a pool of capital potentially sitting in a bank account, retirement account, and I am the decision maker. I am underwriting the deals, and then I am moving those deals forward with clear to close. What is currently happening in our industry is hard money lenders are now trying to rebrand themselves as private lenders, direct correspondent lenders.
They have all these phrases that include the word private lender. I don’t want to sound like I’m making something bad out of hard money lenders. They’re just different, because their source of capital comes with strings attached. Either they’re a debt fund, and there’s legal obligations to their passive investor that says, “We won’t do this. We will do this. We will do this,” or maybe they have a warehouse line of credit with a bank somewhere. So again, they’ve sold the bank on this business model saying, “We’re going to check all these boxes,” or they’re selling the loans on the secondary market saying, “What is the secondary market buying?”
They have yet another person dictating what they can actually close on. All of those things, in a good environment, good market, bull market, not a problem. But now that we’re starting to hit that rocky road, like Beth mentioned earlier, knowing what your source of capital is when you’re talking to a lender is going to become vitally important for a lot, especially active investors, because they need to know that if they get that preapproval that it’s actually going to close, because otherwise, the preapproval is just a piece of paper with letter typed on it.

Rob:
That wasn’t so bad. I think that was a nice intro to the topic. Hard money lenders, there is a little bit of a, not necessarily, branding issue, but there are people who would consider that private money. It’s just really important to be clear on where the actual source of that money is, because it dictates some of the, I suppose, legalities around how that lending takes place. Is that correct?

Beth:
Well, it’s not just legality. It’s also how you are able to loan your money out. If you’re a truly private money lender like Alex and I lend out our own money, I can call the shots. It’s basically like a choose your own adventure. I can dictate the rates. I can dictate the terms. I can pick the partner or the borrower that I want, but when you’re a hard money lender or traditionally a hard money lender, maybe you pull capital together. Then you have a private placement memo, a PPM that dictates how and what you can lend on.
It’ll say maybe you can only do first. Maybe you can only do up to 80% loan to value, or an appraisal or a BPO is required, some sort of stipulations for the underwriting so that they can sell it out or to appease their capital investors, but true private money does not have those kind of stipulations, specifically if you’re not going to be backed by the institutional capital that Alex was speaking about. If you don’t sell out your loans, or you’re not going to get it funded by Wall Street, then you can do whatever you want.

David:
That’s a great point. You sort of… It’s much more a relationship-based business versus metrics and guidelines like you’re going to come into with hard money. Do you feel that that is more of a benefit to the person who’s lending money or the person borrowing money or both?

Alex:
I’m going to say it’s definitely both. Beth and I like to play this jockey versus the horse game, where which one do you bet on? Do you bet on the jockey? Do you bet on the horse? I tend to be more along the lines of the jockey, which would be the borrower. Beth is more along the lines of the horse. It’s not to say we’re ignoring the other one, but in Pareto’s principle, the 80/20, I’m going to look at the person 80%, maybe the property 20%, and Beth is probably going to be doing the opposite.

David:
This is really interesting. Can you guys explain that a little bit more? Beth, maybe let us know why you go down that direction. Then Alex, I’ll ask you the same question.

Beth:
Well, in very simple terms, I feel like properties don’t disappoint me, but people can, and so the most important thing for me in terms is especially scaling private money, because Alex and I both started out lending out our own money. Over time, you become really the most popular person in the room, because borrowers want to know who you are. People want to invest through you, because they hear about your great rates of return and so on and so forth being the bank. So, I like being able to have the ability to put a large equity buffer on any loan.
So if the market shifts, if a GC just goes dark, because that’s never happened on any project, then I can accommodate some of those variables that might not even be a borrower problem per se. It just helps protect me, and lets me sleep well at night. Relationships are important, but as you start to lend out more and more, you have to scale what you’re going to look at, because you can’t look at everything under the sun. You have to make the best decision you can with a very limited amount of information, so I choose the property.

David:
That’s a good point. Alex, what do you think? Why do you choose the person?

Alex:
I am definitely person, because I feel like no matter how good the deal is that if you have someone who can’t make timely decisions, doesn’t communicate, has a really crappy partner, choose a crappy partner, whatever that happens, it doesn’t matter if you hand them a deal on a silver platter. If they don’t have those fundamental skills in place, then nothing’s going to happen. I also base on the relationship, where do I feel this particular investor is going to do everything in their power to make me whole?
If this deal goes sideways, are they the type of person that’s going to make me whole? Because it might feel like everybody you know is involved in real estate, but it tends to be a pretty small circle. So if you burn one private lender, I guarantee you that you’re somewhere in the cage and underground is going to be found out that you burn one private lender, and then nobody’s going to lend to you again. That’s why I really base it on the relationship, because it’s like, “If this is a good deal, and I have faith you’re going to make me whole, then we’re good to go.”

David:
Beth, when you’re looking at the property, what are the key metrics that you are like, “This is what I need to see, that if I get this right, the deal’s probably going to be okay?”

Beth:
Well, as I mentioned before, equity buffers everything. From a lender point of view, we talk about it in terms of loan to value, whether that’s looking at it from a loan to purchase price or loan to as is value. We’re also looking at the loan to ARV, the after repair value, implementing formulas like the 70-30 rule, which you guys have explained it very well on biggerpockets.com. We want to be able to make sure that there’s enough profit margin that is going to make sure that our principal’s going to be returned, and that we can make some interests on it too.
But really, principle preservation is the primary objective for private lenders, and so that equity buffer, traditionally for my loans, I like to keep it around 65% to 70% loan to value. That feels pretty conservative compared to a lot of other lenders. But as a small private lender, I have a whole lot more to lose than some of these larger corporations, right? So, I want to keep a real nice equity buffer protection.

David:
Then how about you, Alex? What do you look for in the person?

Alex:
I would say I totally agree with everything Beth said, but in my evaluation of the person, since we were talking about books earlier, I don’t know if anybody’s ever read Extreme Ownership by Jocko. That is me. I want to see that in an individual. I want to have a conversation with them, and I want to see are they blaming past partners for poor performance? See, you got the book, David.

David:
Best book ever, such a good book.

Alex:
That is really me. I want to see someone who’s going to step up and take ownership of what they could have done better. Your last deal, you might have lost $10,000 doing your first flip, but I bet you learned a lot. If they’re saying it in front of me going, “This is my next flip. This is my second flip,” and they go, “This is what I screwed up on. I hired the wrong general contractor. I picked out the wrong flooring. I didn’t pull the permits.” But if they’re constantly saying, “Oh, the contractor was crappy. They didn’t do this. They didn’t do that.”
It’s just excuse after excuse after excuse. To me, that’s a red flag, because me as a lender, I’m basing on that person, that relationship, and so I want to see some ownership of what you’ve done. It doesn’t have to be… You don’t have to paint me rainbows and unicorns, but I just want an accurate representation of how you thought this deal went and why.

Rob:
It’s an accountability, right? Owning that accountability, I think, it… I mean, especially in a relationship, I think there’s probably a lot of trust that is built if you are held accountable, and you do take the ownership. So clearly, both of you have done this for a while. You guys are experts in the world of private money lending and everything like that. I have to imagine. It didn’t always start out this way, so can you tell us a little bit about how you got into this world?

Beth:
I’ll go first. I was set up on a date with my now husband. We talked casually about real estate. I grew up around real estate. My parents did it on the side as a hustle, flipping and owning rentals. He talked about getting into private money lending again. He hadn’t done it since before 2008. Truthfully, even though I knew a lot about real estate, I had never heard the term before. I’m pretty sure after that date, I went back home, and I Googled it just so I could understand it better.
I’m not going to lie. I think that a lot of private lenders just happen into this, because they have casual conversations over a glass of wine, which Matt and I did. Then it piqued my interest because how could you possibly become the bank? How could you actually invest in real estate without having to get your hands dirty, and build sweat equity? It piqued my interest, and he asked me to help him. I had a lot of marketing, and project, and program management background, so I got into it that way. Just all by chance.

Rob:
What about you, Alex?

Alex:
I’m laughing so hard, because my story is very similar. I went to a RIA meeting, a local RIA meeting. My spouse is active duty, so we were stationed in Florida at the time. Just Southern person. I’ve never met a stranger. This guy walks up and starts chatting. He’s like, “Have you ever thought about being a loan officer?” I’m like, “No. I’m in college to be a chemist. That wasn’t in the radar.” He goes, “Oh, so you must be good with numbers.” I’m like, “Yeah. I took calc three. We’re doing okay. My math has more letters than numbers in it these days, but I could do it.”
He explained a little bit about what the process was. This was 20 years ago. This is back before phones were smart. Everybody was faxing stuff. I was like, “Okay, cool. We’ll give this a go.” It actually turned out that he was a private lender, and he was also a hard money loan broker. So, this being Florida, everybody golfs. He was routinely out of the golf course, and I was the one running applications out to borrowers. I was taking phone calls. I was a person in the office accepting the checks when the mortgage payments were coming in.
I really got to see real estate from what I call the other side, because I’m going to these RIA meetings. I’m going to these landlord meetings, and you keep hearing the same recurring things. People are talking about contractors. People are talking about tenants not paying, but they were in this guy’s office every time on the first with their mortgage payment in hand. My guy’s out on the golf course, and I’m like, “I like this side better. I don’t have to deal with tenants. I’ll do that. I’ll go…” I don’t golf, but I’ll come up with something to take up my time.

Rob:
I guess it’s safe to say you’re a financial chemist now.

Alex:
That’s right.

Rob:
You’re working a number on that end, right? So I have a question here on the technicalities, because I’m still trying to wrap my head around hard money versus private money. I understand a little bit from the standpoint that you were saying hard money, they have different sources of income. They’re pulling it together, might be a fund. We’re not totally sure. So if me, Rob, if I want to go and lend $100,000 to people, am I a private money lender simply because it’s my own money that I’m lending out, or is there some other technicality that would make me a hard money lender in that instance?

Alex:
I would say that terms are a little nebulous. There’s not a clear cut definition. That’s why we say what we are considering private lenders. But in my opinion, in your scenario, you would be a private lender because it’s your own capital. You can hit the clear to close button and say, “Let’s do this deal. I like it. Here’s where we go.”

Beth:
Private money lenders are like a speakeasy. You don’t know where they exist. You’re not sure where the door is, but you know they’re out there, whereas hard money traditionally has a brick and mortar storefront. They actually operate it as an active business, where true private lenders are really doing this on the side mostly. That’s why you don’t know them. They’re not advertising. They don’t actively run a business around it, and so they’re a little bit more elusive.

Rob:
That actually helps quite a bit, because it sounds like the average person that has money stashed the way they could just be a private money lender. If they’re like, “I want to make X amount return on my money. I’m going to go find an investor to partner up with lend out money.” When you were starting out in this world, did you lend out your personal money just right out the gate, and fund people’s deals 100% of the time, or… Alex, you said that you were working with somebody, learning the ropes. Did you partner up with someone on your first private money deal to lend out the whole sum to an investor? I mean…

Alex:
I did not. We funded our first deal entirely from our own capital, but to give someone… I think, one of the misunderstandings of private money is everybody thinks you need to start with a million dollars. You can’t do anything in lending unless you have a million dollars. My first loan was actually about 32,000. The reason it was is because my particular borrower actually ended up taking the property subject too. The first lien was already in place. He paid the cash to the seller. The seller walked away. Then I actually came in in the second lien position, and paid for the renovations.
My very first loan on my own, not with a hard money broker that I used to work with, was actually in the second lien position. It was with another military member, again, falling back on that relationship. If he’s an active duty service member, he can’t get in financial trouble because then his clearance will be pulled. I was definitely hitting the relationship, I believe, button on that one.

Rob:
Cool. Beth, what about you? What was your first deal like?

Beth:
It was very similar. It was basically… Matt, my boyfriend at the time, had a little bit of his own money. He actually had two investors, a golf friend and another school dad that wanted to invest because he was always talking about private lending. Then I had a legacy 401k from an old employer, and rolled that over into a solo 401k, and started lending it out that way. It was also about 60 grand. It was on a legal 502 cannabis grow operation in Seattle, but it was in second position.
The loan to value on that building was less than 40%, so it was a really safe opportunity for me to really get my feet wet and understand the whole process end to end with my own capital.

Rob:
Cool. This is really… I’m actually really… I’m super intrigued by this, specifically because I actually now am starting to understand. This is not really anything I would’ve considered, to be honest, previous to now. I think I’m understanding a really big benefit is that it… Is a lot of this money that you’re lending out oftentimes short-term debt? Is it something that you can get repaid? Can you find deals that are usually three months long or six months long, or are you typically targeting something that’s a 30-year amortization?

Beth:
Always short term.

Alex:
Yep. Always short term most of the time. There are some individuals that they don’t want that churn. They don’t want to continue to underwrite deals, so maybe they’ll do a five-year loan because they just want the capital deployed. They just want the cash flow. They don’t necessarily want the whole figuring out the documents, and doing the due diligence and underwriting. But I would say the vast majority of private lenders are going to be a year or under as far as loan terms.

Rob:
That was interesting to me, because I am in this situation where I do have capital, but I always have to keep it. I want to not stashed away for a certain reason, right? My position, I have to keep a lot of money available for taxes, right? Taxes are coming… Well, taxes, I filed an extension, but in October, that tax bill’s going to be due, and so I know I cannot spend that money. However, if I were to work out an arrangement where I can lend it for, let’s say, six months, a couple months ago, I could have planned for this.
I could have been making money on my money that I have to pay uncle Sam, or I have other projects that take me anywhere from six to 12 months to permit, like different glamp sites or tiny house village, for example. I know I got to keep that saved for an instance whenever I’m actually going to break ground out there, but I can’t use that money because I know I have to section it off for that. I’m starting to understand that aspect of it, but for someone getting started out in this whole world, I got it.
It seems scary. It seems scary to just be like, “All right, you need 200K. I got it.” Let’s say even $36,000. If you’re first starting out, $36,000 is a lot. What protections do you have as a private money lender if any?

Beth:
What we offer our private lenders because… Just a little bit about my background, as we grew, and friends of friends heard what I was doing, they would ask if we would lend out their money, and so it just grew organically. Now, it’s that we lend out quite a few different people’s capital. The way that we can safeguard it is by helping them underwrite it for them. Of course, we’ll do due diligence on the property itself, but we’ll add things in like a title policy for the lender. We’ll order insurance binder on behalf of the lender as the mortgagee.
There are quite a few safeguards that you can do in addition to that equity buffer that makes the lending scenario really safe, really short term, and really secure.

Alex:
I would definitely add to that, that for me, private lending is one of the few things where someone else is going to pay to cover my butt, and I can go into the deal and know exactly how much I’m going to make, because we’ve already dictated the terms. We’ve said, “I’m going to get 10% annualized. I’m going to get two points upfront.” It’s one of the few ways that I’ve ever found an investing period where I’m protected. I don’t have to pay for the protection, and I already know how much I’m going to be making out of the deal.

Rob:
Right, because I think one of the things that you hear very often is with the hard money lender, they say, “Oh yeah, the house is collateral,” but we don’t really ever talk about the opposite side. We’re like, “Okay. Well, if I mess up, the lender will get my house as collateral.” But now when we’re talking about, “Hey, I could actually be the lender if I’m getting the house “as collateral” in that instance.” Now, I’m like, “Is it a headache? Is it a headache to really go through that process, or do all the different failsafe that you were talking about really, I don’t know, make this process easier?”
I’m curious. Since, Beth, you were saying that, that was what was coming through my mind.

Beth:
I mean, I deal more in volume now, so I’m kind of like a hybrid. I call myself a private money matchmaker, because people know us. I have a brand presence in my market, but I’m still dealing with truly private individual capital. We’re a little bit in the middle on that. We do more volume now that we’re growing in our private money, and letting out other people’s capital, but we try to safeguard it again through that equity buffer, and by being able to put the rates and terms against the overall risk tolerance of our clients, right?
So if you want to have a lower risk, then maybe we get you into a lower loan to value. Then maybe your interest rate’s a little bit lower on that too, but we have some that will take on a much higher risk. So, if it does get into a situation where it ends up defaulting, it’s not really a bad scenario. I mean, we have less than a 4% default rate year over year, and we’ve never had a principle loss, thank goodness, because we’re putting in some added protection with that equity buffer, right?
Even if you lend $150,000, and the property’s worth 200, well, if I have to charge default interest, and I have to engage an attorney to help force a sale or force them to make payment, I’m still going to be covered overall. It’s a little bit hassle logistically, because you have to go through that foreclosure process. Alex says… I can let her speak to it, but she calls that the nuclear option. There are plenty of ways to mitigate that risk, and to prevent that default from becoming really scary for a lender. I’ll let her touch on that a little bit.

Alex:
I also wanted to bring in another angle from this is that title insurance and hazard insurance are not going to necessarily protect you from a loan default. Title insurance is making sure that the buyer actually has clear title to the property, that there’s no other liens, for example, if you’re in a first lien position. There’s lots of things to protect against other than just the borrower defaulting. Because if you don’t have lender’s title insurance, and it turns out this was a fraudulent sale, wholesaler did something. They forged grandma’s signature, and now the cousin’s coming back and saying, “Hey, this property was never actually legally sold.”
Your lien gets washed away if you don’t have lender’s title insurance in place. I don’t want listeners to think that the only thing that could go wrong is foreclosure. There’s lots of things. The property could burn down the day before it’s supposed to go out on MLS. So if they don’t have adequate hazard insurance that covered the property at its ARV value, they just went with the cheapest thing they could find, and they got coverage just for the amount that it was in as is condition. Then you’re in a similar situation.
When I say protect yourself, and I’m not necessarily negating default, because there are other risks to a loan process other than just the borrower defaulting.

David:
In each of your businesses… We’ll start with you Beth, and then I’ll ask you, Alex. How often is a default something that actually happens? Do you have the numbers of like a percentage or maybe even just a rough idea of how often you have to foreclose and sell properties?

Beth:
Well, like I said, our default rate is less than 4%. We’re really proud of that. Some lenders are much higher than that. For our volume, we’re still considered relatively small. Since 2020, when COVID hit, you would think that there’s more. I’ve actually only had three. Two of them actually went to auction. We were able to recover all of the principle, all of the interest, late fees, default interest as well as legal fees that were incurred associated with having to take it to auction.
Prior to that, I only had a handful in eight years, originating hundreds and millions of loans. It just doesn’t happen very often so long as you put those precautions in place while you’re originating it, and not taking care of it afterwards.

Alex:
I would say for me, I haven’t had anything necessarily default to the point where the loan… We had to go to foreclosure. I’ve had a borrower that was… Basically, the loan needed to go a little longer because of the supply chain problems during COVID. This guy ordered windows the day he closed. He showed me the invoice. It took four months for windows to show up. They had a contract on the property contract on MLS, and said, “Hey, we’re good to go. We’re just literally waiting on windows to be installed,” so we had to extend the loan.
He was very upfront and very communicative about it, so it really wasn’t a problem. It’s just nothing we could do. We can only get windows so quickly, especially during the early parts of COVID. I think, again, going back to what most people would consider the nuclear option of foreclosure, yes, technically, his loan was in default. We had reached the end of the six-month term, but because he was open with communication, he was always very forefront like, “Hey, this is what I’ve done. I knew this is going to be a problem.”
At that point, we elected to modify the loan, and just extend it for a couple more months until, “If the windows could be installed, we could close escrow and get repaid.” That’s why I called the nuclear option foreclosure.

David:
That’s what I wanted to point out, because I think a lot of people hear this, and they’re thinking like, “If I go one day past what we agreed on, they’re foreclosing right away.” But you two are both saying, “No, I take pride in the fact that I don’t have to do that very often. We don’t want to have to foreclose.” I’m sure it also was nice when you can get repeat business. You get the same people coming back. You build a relationship. They know how you work. You know how they work.
So on that note, when someone’s vetting the private money lender that they’re going to borrow money from, what are some things that they should look for? I’ll start with you this time, alex.

Alex:
For me, I’m going to say the first thing above all, never, ever, ever send them any money. There is no private lender, a legitimate private lender. They are not going to request thousands and thousands of dollars upfront. They’re not going to request some $5,000 as an application fee, whatever their BS they’re trying to sell you. If you take away anything from this episode, please do not send a “private money lender” thousands of dollars upfront. That’s a no.
There’s a couple different industry associations that are not necessarily compulsory to be a member of, but if they are a member, that does show that they legitimately care about the ethics, best practices in lending. One of them is the American Association of Private Lenders. You can go on their website. You can search for the person’s name or company. If they are a member, it will pop up. Another is lenders are sometimes required to have what’s called an NMLS number. Anybody… Again, it’s a licensing thing. You don’t necessarily need to be licensed, so they might not have that.
Not having that doesn’t necessarily, again, exclude them. But another thing that you could do, most private lenders tend to be very hyper local. They’re going to either lend where they live, or they’re going to lend in a very small market if they’re a distant investor. You could ask them, “Have you closed any loans in this area?” They go, “Sure.” Then you can ask what’s the name that you closed under? You can actually search public records for past deeds of trust or mortgages depending on the state you’re in, and see what they have funded. How long was it?
You can see when it was paid off. You could see how much it was. There’s a lot of information on public records that a potential active investor go and say, “I just want to see a couple other deals that you funded. What’s that information?”

Beth:
I would add in that, I think, performance is more important than rates and terms. Especially when you’re dealing with truly private lenders, a lot of them, as I mentioned before, they don’t really do this every single day. It’s not their active day job, and so you really want to make sure that a private lender understands the nature of your business, that understands the project, and isn’t going to hamper in any way. When you’re dealing with novice lenders, there can be a tendency for them to maybe stall or not meet your immediate needs, especially if you put maybe some money on a draw and you want to see performance.
From an investor’s standpoint, I would caution about shopping just rates and terms, and really making sure that the private lender can truly perform the way that you need them to, as you would, if you were going to a traditional hard money lender.

Rob:
When you’re vetting the performance, what if it’s a new relationship? If you’ve never met this lender before, if you haven’t really worked with them, obviously, you’re going to interview them a bit, talk to them about their process and their experience and everything. But on your very first deal with the private money lender, is there a little bit of a leap of faith with that, because you don’t have the historical knowledge of what their performance is?

Beth:
There really is. I mean, I think that the best way to raise private capital, like I mentioned before, is to understand what private money lending is from the point of view of the lender. Especially as you’re trying to draw novice capital into your network, into the fold, the more that you can really educate them on how to safely and secure their private investment in you, in your project is a good way to be able to get them to buy into what you’re doing, and to gain that confidence.
So even though you’re going to try and ask questions to understand their level of competence as a private lender, if you’re talking with somebody that’s completely new, then they don’t really have a history, right? But you might want to gauge their overall conversation, those nonverbal cues, like do they ask a lot of questions? Do they maybe come off as a little needy? Are they getting really into the weeds? Which there’s a balance to that, right? You want to be able to give them just enough information, but you don’t want them to be maybe overly nitpicky about things.
If I’m an investor trying to seek private capital, I just don’t want someone that I feel is going to not trust me, and end up meddling, and maybe stifling my project. I want to make sure that they feel confident in me and in my project so that they can leave me alone, and let me go do what I do best.

David:
That’s a good point. I was just thinking about this. There’s oftentimes where I’m working with a professional in any space. It could be a lender. It could be a license broker. It could be a real estate agent, where you will have a question, and you will ask that email, text, whatever. Some of them take two to three days to get back to you. I’ve particularly noticed this with attorneys. I recently was looking for someone to draw me up an operating agreement. I sent four different attorneys an email, and I got random spread answers over the next seven days.
I’m like, “Good God, why is it so hard?” For something that they probably have a template for that they can just edit, but then there’s the people who immediately respond back to you, set expectations, ask questions to see what you’re looking for to see if they would be a good fit. I’ve just, over the years of doing this, have learned, pay attention to those ones. The response rate they have and the decisiveness and the confidence that they have gives me a good feeling if I want to work with them as opposed to what I think the amateur mistake is, which is just to say, “What’s your rate? What’s your terms?”
Almost every time you do that, you end up finding the best price ever at Walmart, and then you get Walmart quality, and then you complain about real estate investing as a whole, because you had the really bad experience. Do you two have a similar way of looking at this where you try to respond very quickly, and you’re looking for clients to do the same? What’s your advice regarding when they don’t know anyone at all? They’re not coming via a referral, or maybe they just heard about one of you through the grapevine.
What specifically do you think you can give our listeners as really good tips to look for in that communication?

Alex:
I would say the first thing is ask them what they’re willing to lend on, and so just a very simple question, because for example, they might only lend on fix and flips. They might only lend on something you’re going to bur. It just really depends. I’d ask them what they are comfortable lending on. They might not be comfortable doing a renovation down to the studs as their first loan, for example. They just might want something like a paint and carpet cosmetic rehab as their first loan, so if you can paint them a picture or have them paint you a picture if you’re the active investor on what they’re willing to lend on.
Is it single family homes in their local market that are only needing paint and carpet rehab, versus a major renovation of a multi-family? That’s two very different projects. I think if you lead with that, you’re already trying to narrow down whether or not they’re a fit for you, and you’re a fit for them.

Beth:
I would add on to that. How much money do you have to lend if… Making sure that they understand that if there’s going to be project overruns or, God forbid, we have another shelter in place, and timelines get elongated. Do they have enough extra capital to potentially infuse into your project to help you get across the finish line? Because one of the problems about potentially working with some novice private lenders that may not understand projects and real estate investments in general is that they may not have additional capital, or they may not want to.
Then from an investor’s standpoint, you’re stuck having to go out and raise capital or refinance your entire loan elsewhere just to get across the finish line. That’s probably what you don’t want to do is, again, it’s trying to do your due diligence as a borrower and as a lender before that loan closes, and not having to have so many issues after when it’s in service.

Rob:
Is it a fair game to ask that, or is that a… I’m always nervous to ask for referrals when it feels like I’m interrogating them a little bit. That’s totally fair game. No private money lenders really are going to take offense to that question of, “How much money do you really have in case I need it?” I feel like that is a possibly a red flag for me to ask simply because it sounds like maybe I will need it.

Alex:
Well, a softer way, in my opinion, to ask something like that is, “Hey, the properties I’m generally looking at, my purchase price is around 200,000. Would that be a loan that you could fund?” Then they just say yes or no, so you could come up with tell them about, and that also indicates to them that you’ve thought about your business model, that you know the numbers of your real estate business. So if you come afford and say, “Hey, my usual purchase price is somewhere between 200,000 and 300,000. Is that something you can work with even for one or two loans?”
They can either declare yes or no, and then that way, know what you would consider sensitive information has been relayed.

David:
What do you think about closing quickly? How much should a borrower value how quickly that you can get funds for the deal that they’re doing?

Alex:
I think that really is going to be very, very important moving forward, because there’s going to be as the market’s correcting potentially in some places, potentially all places, being able to close quickly, get things renovated quickly, get it back on the market quickly is going to be paramount. Because even though real estate tends to be a slower moving asset valuation, it’s still moving. Understanding that it’s moving and potentially it’s moving downwards, going back to best point about having that healthy equity buffer, that right now is of utmost importance, because potentially, your equity buffer could be going down quarter by quarter the longer this project goes.

Beth:
Now, being able to perform and get to close is extremely important, so I think borrowers really need to understand and pick, right? It’s all about managing trade-offs. Do you want quality? Do you want speed, or do you want it to be cheap? To your point, people don’t come to me expecting Walmart prices. I’m going to be priced a little bit higher than some of your national hard money lenders out there that have access to really stupid low cost of capital. But, I’m also going to provide them a value add that these national lenders can’t.
I can do hyper local in-house valuations, and do it really quickly. I can provide full service from end to end, have access to a key decision maker, the owner. It’s a lot different. I think that borrowers really need to understand based on the project, based on their individual needs what’s going to be the most important for you. Is it going to be speed? Is it going to be quality? Do you need it to be cheap, because your margins are tight? It’s up to the borrower to figure that out first, and then go find and right fit the lender that they need to match that.

Alex:
I would say on top of that, Beth and I both have people in our networks that an established borrower can literally text information to that private lender, and say, “Hey, look. I got this deal. I just got this contract. I need to close next week. That’s why I got the contract, because I had a quick close and no contingencies. Can we do this?” We have private lenders in our network, and maybe 20, 30 minutes worth of underwriting. Like she mentioned, these quick valuation processes, they can go, “Sure. Just let me know where to wire the capital.” That speaks to, again, having that relationship with someone.
If you’ve completed a private loan with somebody, you’ve done well. You’ve communicated. A lot of times, the active investor, at least in my case, is going to come back and call dibs on that money, because they’re like, “Hey, don’t lend that out anywhere. I got deal number two in the work.” So as soon as that closes, we’re closing on something else. It ends up being a little bit of just a recycling program if anything. It’s less work on me as a lender to work with the same borrower over and over and over again as long as the metrics aren’t changing. It becomes less work for both of us as the active investor and the lender.

Rob:
Awesome. Is there anything that we’re missing here? I mean, I don’t really deal with a lot of private money lenders. What else can I ask here to properly vet my private money lender?

Beth:
One thing I would ask is are you… Because some people put themselves out there as private money lending, or they say that they’re a direct lender, but they really, in fact, aren’t. They might actually be a broker. Brokers are great for certain scenarios. Maybe have a really complex project. Maybe it’s a large commercial deal or some issues with a sponsor or something like that. That might require a broker to really get creative and have access to a wide network of financing, but most deals don’t necessarily need to be that way. So when you work with a broker, you can just add additional costs.
Not to mention you don’t get access to the key decision maker, the actual underwriter. When you’re working with truly private money, the person lending out those funds, if you talk to Alex, or you talk to me, we’re lending out our own capital. We’re doing our own underwriting. We’re doing our own property valuations, so you know that we’re going to… What we say, our word is our bond, and we’re going to get to close, and we’re going to fund that deal. We won’t change at midstream. I would ask whether or not they’re a direct lender or broker, because it can make a difference, not only in terms of cost, but in performance as well.

Alex:
Oh, absolutely. I think if anybody’s coming forward in the forums or on a Facebook group or LinkedIn or something, and they’re like, “Hey, I’m a lender.” I see it all the time. Somebody will post somewhere that, “Hey, I need a lender. I need a private lender in Pennsylvania.” Then they’ll just go, and it’ll just be comment, comment, comment, comment like, “Hey, here’s our rates and term sheet. Here’s our link. Here’s our application.” A lot of private lenders that we are talking about, they might not be that formalized. They’re not likely to have a rates and term sheet, for example.
That’s usually hallmarks for something that’s going to be a hard money lender or even a broker. That’s not to say every private lender acts that way, but the vast majority of private lenders that are in our space, they’re not going to have a formalized rate and term sheet. They may have an application online. That’s pretty simple to do these days. They might have a website, but if you start seeing things where rates and terms, and they have fax numbers, and they have phone numbers, and they have… It’s probably not the decision maker. You’re probably not talking to the person who can hit the clear to close button.

David:
All right. That is fantastic, ladies. This has been incredibly informative. I think that quite a few people are going to be taking notes on this episode. You two are both very good at what you do. I can see why we tapped you to write the book here at BiggerPockets on this topic. I’m going to move us on to the last segment of our show. This is the world famous…

Speaker 5:
Famous Four.

David:
This segment of the show, we ask the same four questions to every guest, but this is going to be a remix, so you guys are going to get slightly different versions of those questions. Question number one, what is your favorite real estate book? Beth, we’ll start with you.

Beth:
My favorite is Cashflow Quadrant. While it’s not specifically real estate, it’s all about investments, and it just really resonated with me.

Alex:
I would say mine is it’s not, again, directly real estate. It’s actually Psycho-Cybernetics by Dr. Maxwell Maltz. The reason I say that is because all the decisions you make in your life, including investing in real estate, come from home base, come from foundation. So if you don’t have those personal beliefs in place, or you have a crap ton of limiting beliefs that are directing your life that you don’t even know are there, that’s going to affect your real estate investing. For me, it’s all about the person, so that’s my favorite book.

Rob:
Question number two, favorite lending or finance book.

Alex:
Oh, is it too catchy to say it’s ours?

Rob:
No.

Alex:
We’ve read all the private lending books on the market, and they’re not that wonderful. I would say for me that it was actually… I’ll tell you what got me started in this whole thing. Years ago in high school, I read Robert Allen’s Note Buying book that he had back in a bright blue cover with white lettering. I actually got sent to the detention in high school for reading this book during class. I think that really opened my eyes to the other side of real estate investing.

Beth:
I would say our book too. I wouldn’t say that the other books weren’t necessarily not wonderful, but as I was building up our private lending business, I was really at a loss for how to locate best practices or how to really understand the entire loan life cycle from getting a loan, finding, and funding it, and making it safe and secure. There wasn’t a whole lot of tactical information. There was a lot of conceptual information, and so I think our book just takes it one step further and helps make it actionable for a lot of really the layperson that just wants to learn more about it and how to get into it and do it safely.

Rob:
Question number three, cool tips when you’re getting started. Do you have any tips for the people that are looking to get into this world?

Alex:
My number one tip is when you’re talking to other people, don’t ask them about the technical details. You can find that on YouTube. Instead, ask them if they would choose this method of investing again and why, or what didn’t they like, or what have they tried before from their personal standpoint, because you can learn how to flip a house. There’s books about it. There’s YouTube videos about it, but the opportunity to get to talk to an actual flipper and be like, “Dude, what is this really like?”
Ask their personal experiences, because I think you’re going to learn far more doing that than coming to people and saying, “Teach me all you know about flipping,” because that’s available out there. That’s online. That’s in books. The personal experiences are not.

Beth:
I would say just be open. Network, of course, but I think a lot of people say they have to have a specific structured mindset, and they got to be really goal oriented, and put out into the universe what they want. Oftentimes, for some people, they’re so overengineered in their goal setting that they might have blinders on to what kind of opportunity exists out there. I think, both Alex and I shared our stories about how we just happened upon private lending, and every aspect of real estate investing involves some chance encounter with someone with some opportunity. So, just be open minded, and get out there, and start mixing and mingling because you never know what you’re going to find.

David:
I have seen this happen so many times what you just said there, Beth, with the overengineering. I’ve done it myself starting different businesses. I’ve seen other people that come into these businesses, and they’re starting their own little mini business working on one of my teams, where the human brain wants to know exactly what is going to happen. Give me the blueprints of the house. I want to know every angle, every piece of what exactly where it’s going to go. You don’t want to move until you know that.
The reality is you take a couple steps and go, “I’m going in that direction, but it’s not actually going to be the path I thought. It’s going to be this way.” Then you take a couple steps down that road, and you go, “Whoa, I didn’t even see this thing from where I started. That’s way better. Let me go in that direction.” You’re constantly pivoting. You do have the overall idea of what you want to accomplish, but you’ve got to hold it with the loose hand. The insistence that real estate investing or wealth building is going to work the same way following blueprints or a chemical engineer would do their job is a fallacy, and so many people get frustrated.
I just love that you brought that up as people getting in their own way by looking for that. Thank you for mentioning it. Last question from me. Alex, in your opinion, what sets apart successful investors from those who give up, fail, or never get started?

Alex:
It’s going to be having an abundance mindset. You have to be able to walk in and go, “How can I add value to someone else in this room?” Because you’re going to automatically attract other people that also have that same mindset, because people want to invest with people they know, like, and trust. So if you walk into the room going, “What can I add?” You’re going to attract those other people that are, “What can I add?” Then potentially, you’re going to find business partners like Beth and I have managed to find each other.
You’re going to find deals that way, because someone’s going to be like, “Hey, this person really helped me out with referring me to a good insurance agent. Hey, let me come back to this person,” because you’re top of mind because you left them with a good feeling like, “They really added some value to my life. They gave me a referral,” whatever that is. I would definitely say walk into the room with what you can add.

David:
Preach it, sister. That is so, so good. What the world look like if everyone had that, because everyone ask the question of, “What’s in it for me? What can they do for me?” In fact, Rob has been going through a breakthrough in this area of his life, because he’s now growing out his mustache as a way to try to add more values to the world around him.

Rob:
It’s true. It’s not working, but I’m going to keep growing it out, and hopefully… It’s adding value to my marriage. My wife likes my mustache. It’s actually her request. She’s got a thing for Tom Selleck. I’m like, “Well, I guess you can call me Juan Selleck. I don’t…”

David:
It was inspired by Top Gun, right? She’s like [crosstalk 00:51:38] Miles Teller.

Alex:
Oh my God.

Rob:
[crosstalk 00:51:44].

Beth:
Happy wife. Happy life.

Rob:
That’s right. I’m a Millas Teller. That’s how you say Miles in Spanish.

David:
That’s very funny. Beth, if you still remember the question to you. If not, I could restate it, because we took that out on a tangent.

Beth:
I think I remember it. I think that perseverance is really important. When you become a private money lender or when you go into real estate investing in general, you’re a business owner. You’re an entrepreneur, so you really have to stick through it because you’re going to build up. You’re going to get knocked down, and you have to have a survivor mentality so that you can keep plowing forward even in the biggest times of trial. If you don’t have that in you, you’re probably not going to make it.

David:
Rob, keep that in mind. Just stick with the mustache. It will keep coming in. It’s going to get stronger. It’s going to get better. You’re bringing more value.

Rob:
Well, noted. It’s on my vision board.

David:
Thank you for that, Beth. He really needed this. Before we started recording today, we had a 25-minute conversation of just Rob wondering if he should stick with it, or if he should throw in the towel.

Rob:
Right. I was tapping myself in the mirror all morning saying, “You can do this, man. You got this.”

Beth:
My husband says, Rob, no one likes a quitter, so keep going for it.

Rob:
That’s right.

David:
Well, thank you very much, ladies. If you don’t mind, tell us where can people find the book to buy it, and then how can they each get ahold of you?

Alex:
The book is available on BiggerPockets’ website as the ebook and the paperback book. There will be an audible version, I think, available on Amazon for those that like to listen on the go. You can reach us. We have a pretty easy email address. It’s [email protected], the number two in there, .com, so [email protected]

David:
Then where can people get ahold of you, Beth?

Beth:
Likewise. You can reach me out at my company. It’s Flynn Family Lending. We’re based in Washington state. You can also reach me at [email protected]

David:
All right. Rob, where can people get a hold of you?

Rob:
Oh, you can find me on the YouTube over at the Robuilt channel, R-O-B-U-I-L-T, and on Instagram as well, Robuilt, R-O-B-U-I-L-T. Not really changing the spelling, except on TikTok where I’m Robuilto.

David:
You really shot yourself in the foot with that, because now, people are building fake accounts saying Robuilto on Instagram, and it’s just confusing.

Rob:
Oh, I know. It’s so frustrating. I just didn’t think… Listen, I didn’t think this was going to be my life. I realized all these things. The mustache grew, and then the spam accounts came out. I don’t know. What am I supposed to do?

David:
Maybe we need to get your mustache its own page. That’s probably what we need, your mustache, Brandon’s beard.

Rob:
That would honestly solve-

David:
I don’t know what my trademark would be. I’m a pretty boring guy.

Rob:
You got mutton chops a little bit when you grow them out.

David:
I don’t know if you could have a page for mutton chops, or if they’d qualify.

Rob:
Why not?

David:
All right. Well, thank you very much, ladies. This has been fantastic. If you guys would like a copy of the book, go to biggerpockets.com/store. You can find it there. Leave a review. Let us know what you think. Anything you guys want to leave us with before we get you out of here?

Alex:
I would say just realize that private money lending can be something that anybody can do. Like I said, you don’t need to start with millions of dollars. You can start with a very low amount or even none of your own money. Just do brokering. It’s not as high a hurdle as most people make it out to be.

Beth:
To add onto what Alex says, it allows you to invest passively so you can live actively.

David:
If anyone would like to get into the lending business, hit me up because we are hiring brokers for my company. I think that if you love real estate, this is something I’d tell people all the time. It’s not work a full-time job or become a full-time investor. There is a huge spectrum of stuff that you can do in between that you two are a great example of, where you’re working in real estate. You can also own some real estate. You make money from real estate, and you don’t have to sit in that three-hour commute that is draining your soul with the hopes of, “If I just buy enough property, I can finally get out of it.” There’s a lot of stuff in between.
Thank you for sharing and painting a picture for us of exactly how that worked for each of you. Wonderful stories, had a great time. Thank you very much. This is David Greene for Rob Juan Selleck Abasolo signing off.

 

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

2022-07-31 06:02:02

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What Are the Monthly Expenses of Carrying a Home?





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2022-07-30 13:21:20

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Do New Short-Term Rental Regulations Make Investing Risky?

15% ROI”,”imageURL”:”https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2021\/05\/large_Extra_large_logo-1.jpg”,”imageAlt”:””,”title”:”SFR, MF & New Builds!”,”body”:”Invest in the best markets to maximize Cash Flow, Appreciation & Equity with a team of professional investors!”,”linkURL”:”https:\/\/renttoretirement.com\/”,”linkTitle”:”Contact us to learn more!”,”id”:”60b8f8de7b0c5″,”impressionCount”:”194533″,”dailyImpressionCount”:”644″,”impressionLimit”:”350000″,”dailyImpressionLimit”:”1040″},{“sponsor”:”Azibo”,”description”:”Smart landlords use Azibo”,”imageURL”:”https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2021\/11\/Logo-512×512-1.png”,”imageAlt”:””,”title”:”One-stop-shop for landlords”,”body”:”Rent collection, banking, bill pay and access to competitive loans and insurance – all free for landlords.”,”linkURL”:”https:\/\/www.azibo.com\/biggerpockets\/?utm_source=biggerpockets&utm_campaign=biggerpock ets&utm_medium=affiliate&utm_content=blog”,”linkTitle”:”Get started, it\u2019s free”,”id”:”618d372984d4f”,”impressionCount”:”262962″,”dailyImpressionCount”:”424″,”impressionLimit”:”300000″,”dailyImpressionLimit”:0},{“sponsor”:”The Entrust Group”,”description”:”Self-Directed IRAs”,”imageURL”:”https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2021\/11\/TEG-Logo-512×512-1.png”,”imageAlt”:””,”title”:”Spring Into investing”,”body”:”Using your retirement funds. Get your step-by-step guide and learn how to use an old 401(k) or existing IRA to invest in real estate.\r\n”,”linkURL”:”https:\/\/www.theentrustgroup.com\/real-estate-ira-report-bp-awareness-lp?utm_campaign=5%20Steps%20to%20Investing%20in%20Real%20Estate%20with%20a%20SDIRA%20Report&utm_source=Bigger_Pockets&utm_medium=April_2022_Blog_Ads”,”linkTitle”:”Get Your Free Download”,”id”:”61952968628d5″,”impressionCount”:”398974″,”dailyImpressionCount”:”394″,”impressionLimit”:”600000″,”dailyImpressionLimit”:0},{“sponsor”:”Steadily”,”description”:”Best-Rated Landlord Insurance\r\n”,”imageURL”:”https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2021\/11\/STEADILY.png”,”imageAlt”:””,”title”:”Fast, Affordable Landlord Insurance”,”body”:”Affordable insurance for rental properties of all kinds, including fix n\u2019 flip. Multi-property discounts available. \r\n”,”linkURL”:”https:\/\/bit.ly\/3FUfGgE”,”linkTitle”:”Get a free quote today”,”id”:”61a51c5a6182e”,”impressionCount”:”153159″,”dailyImpressionCount”:”466″,”impressionLimit”:”390000″,”dailyImpressionLimit”:”3250″},{“sponsor”:”Guaranteed Rate”,”description”:”One-Stop Mortgage Lender”,”imageURL”:”https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2022\/01\/927596_CB_BiggerPockets-January-2022-Assets-512×512-1.png”,”imageAlt”:””,”title”:”$1,440 Mortgage Savings*”,”body”:”Whether you\u2019re buying new or cash-out refinancing to upscale the old \u2013 get started today and we\u2019ll help you save!\r\n\r\n”,”linkURL”:”https:\/\/www.rate.com\/biggerpockets?adtrk=|display|corporatebenefits|biggerpockets|july2022_blog||||||||||&utm_source=corporatebenefits&utm_medium=display&utm_campaign=biggerpockets&utm_content=july2022-blog “,”linkTitle”:”Buy or Cash-Out Refi”,”id”:”61ccd6a886805″,”impressionCount”:”93636″,”dailyImpressionCount”:”326″,”impressionLimit”:”200000″,”dailyImpressionLimit”:”2222″},{“sponsor”:”Roofstock”,”description”:”Real estate investing”,”imageURL”:”https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2022\/02\/roofstock1644.jpeg”,”imageAlt”:””,”title”:”SFR Marketplace”,”body”:”Build wealth through single-family rental (SFR) investing. Roofstock makes it radically accessible.\r\n\r\n”,”linkURL”:”https:\/\/www.roofstock.com\/bp”,”linkTitle”:”Visit the Marketplace”,”id”:”6217d101980a8″,”impressionCount”:”136560″,”dailyImpressionCount”:”344″,”impressionLimit”:”490000″,”dailyImpressionLimit”:”1633″},{“sponsor”:”Roofstock One”,”description”:”Meet the SFR asset class”,”imageURL”:”https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2022\/02\/MicrosoftTeams-image-2.png”,”imageAlt”:””,”title”:”Expand your portfolio”,”body”:”Accredited investors: Access investments in the single-family rental (SFR) sector\u2014no property management required. “,”linkURL”:”https:\/\/www.roofstock.com\/one?utm_campaign=BiggerPockets-Podcast&utm_source=sponsorships&utm_medium=podcast”,”linkTitle”:”Explore Roofstock One”,”id”:”6217fa9c588dd”,”impressionCount”:”142264″,”dailyImpressionCount”:”341″,”impressionLimit”:”490000″,”dailyImpressionLimit”:”1633″},{“sponsor”:”Stessa, a Roofstock company”,”description”:”Keep your houses in order”,”imageURL”:”https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2022\/02\/MicrosoftTeams-image-3.png”,”imageAlt”:””,”title”:”Track properties for free”,”body”:”Manage and report on your investment properties with asset management software purpose-built for real estate investors.”,”linkURL”:”https:\/\/www.stessa.com\/bp”,”linkTitle”:”Claim your free account”,”id”:”6217fa9c6258f”,”impressionCount”:”151337″,”dailyImpressionCount”:”385″,”impressionLimit”:”490000″,”dailyImpressionLimit”:”1633″},{“sponsor”:”BAM Capital”,”description”:”Multifamily Syndicator\r\n\r\n”,”imageURL”:”https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2022\/02\/Bigger-Pockets-Forum-Ad-Logo-512×512-2.png”,”imageAlt”:””,”title”:”$100M FUND III NOW OPEN”,”body”:”Earn truly passive income with known assets in an award-winning market. Confidently targeting 2.0x-2.5x MOIC.\r\n\r\n\r\n”,”linkURL”:”https:\/\/capital.thebamcompanies.com\/offerings\/?utm_source=bigger-pockets&utm_medium=paid-ad&utm_campaign=bigger-pockets-blog-feb-2022&utm_content=fund-iii-now-open”,”linkTitle”:”Learn more”,”id”:”621d250b8f6bd”,”impressionCount”:”118561″,”dailyImpressionCount”:”269″,”impressionLimit”:”150000″,”dailyImpressionLimit”:”2500″},{“sponsor”:”Walker & Dunlop”,”description”:” Apartment lending. Simplified.”,”imageURL”:”https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2022\/03\/WDStacked512.jpg”,”imageAlt”:””,”title”:”Multifamily Property Financing”,”body”:”Are you leaving money on the table? Get the Insider\u0027s Guide.”,”linkURL”:”https:\/\/explore.walkerdunlop.com\/sbl-financing-guide-bp-blog-ad”,”linkTitle”:”Download Now.”,”id”:”6232000fc6ed3″,”impressionCount”:”118663″,”dailyImpressionCount”:”230″,”impressionLimit”:”200000″,”dailyImpressionLimit”:”6500″},{“sponsor”:”SimpliSafe Home Security”,”description”:”Trusted by 4M+ Americans”,”imageURL”:”https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2022\/03\/SS-Logo-.png”,”imageAlt”:””,”title”:”Security that saves you $”,”body”:”24\/7 protection against break-ins, floods, and fires. SimpliSafe users may even save up to 15%\r\non home insurance.”,”linkURL”:”https:\/\/simplisafe.com\/pockets?utm_medium=podcast&utm_source=biggerpockets&utm_campa ign=2022_blogpost”,”linkTitle”:”Protect your asset today!”,”id”:”624347af8d01a”,”impressionCount”:”89066″,”dailyImpressionCount”:”270″,”impressionLimit”:”200000″,”dailyImpressionLimit”:”2222″},{“sponsor”:”Delta Build Services, Inc.”,”description”:”New Construction in SWFL!”,”imageURL”:”https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2022\/04\/Image-4-14-22-at-11.59-AM.jpg”,”imageAlt”:””,”title”:”Build To Rent”,”body”:”Tired of the Money Pits and aging \u201cturnkey\u201d properties? Invest with confidence, Build To\r\nRent is the way to go!”,”linkURL”:”https:\/\/deltabuildservicesinc.com\/floor-plans-elevations”,”linkTitle”:”Look at our floor plans!”,”id”:”6258570a45e3e”,”impressionCount”:”80013″,”dailyImpressionCount”:”263″,”impressionLimit”:”160000″,”dailyImpressionLimit”:”2163″},{“sponsor”:”RentRedi”,”description”:”Choose The Right Tenant”,”imageURL”:”https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2022\/05\/rentredi-logo-512×512-1.png”,”imageAlt”:””,”title”:”Best App for Rentals”,”body”:”Protect your rental property investment. Find & screen tenants: get full credit, criminal, and eviction reports.”,”linkURL”:”http:\/\/www.rentredi.com\/?utm_source=biggerpockets&utm_medium=paid&utm_campaign=BP_Blog.05.02.22&utm_content=button&utm_term=findtenants”,”linkTitle”:”Get Started Today!”,”id”:”62740e9d48a85″,”impressionCount”:”64138″,”dailyImpressionCount”:”276″,”impressionLimit”:”150000″,”dailyImpressionLimit”:”5556″},{“sponsor”:”PadSplit”,”description”:”Co-Living Marketplace”,”imageURL”:”https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2022\/05\/Picture1.jpg”,”imageAlt”:””,”title”:”Double your cash flow”,”body”:”Join hundreds of investors on the largest co-living marketplace. Improve your return and help the housing shortage.”,”linkURL”:”http:\/\/www.padsplit.com\/biggerpockets?utm_campaign=H-Host_Content&utm_source=Biggerpockets&utm_medium=referral&utm_content=bp_blog&utm_term=hyperlink-landing_page”,”linkTitle”:”Get a Free Consultation!”,”id”:”628e464abfe5f”,”impressionCount”:”47741″,”dailyImpressionCount”:”302″,”impressionLimit”:”50000″,”dailyImpressionLimit”:”1667″},{“sponsor”:”Guaranteed Rate”,”description”:”One-Stop Mortgage Lender”,”imageURL”:”https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2022\/06\/GR-512×512-1.png”,”imageAlt”:””,”title”:”$1,440 Mortgage Savings”,”body”:”Whether you\u2019re buying new or cash-out refinancing to upscale the old \u2013 get started today and we\u2019ll help you save!”,”linkURL”:”https:\/\/www.rate.com\/biggerpockets?adtrk=|display|corporatebenefits|biggerpockets|july2022_blog||||||||||&utm_source=corporatebenefits&utm_medium=display&utm_campaign=biggerpockets&utm_content=july2022-blog%20%20%20″,”linkTitle”:”Buy or Cash-Out Refi”,”id”:”62ba1bfaae3fd”,”impressionCount”:”20413″,”dailyImpressionCount”:”298″,”impressionLimit”:”70000″,”dailyImpressionLimit”:”761″},{“sponsor”:”Avail”,”description”:”#1 Tool for Landlords”,”imageURL”:”https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2022\/06\/512×512-Logo.png”,”imageAlt”:””,”title”:”Hassle-Free Landlording”,”body”:”One tool for all your rental management needs — find & screen tenants, sign leases, collect rent, and more.”,”linkURL”:”https:\/\/www.avail.co\/?ref=biggerpockets&source= biggerpockets&utm_medium=blog+forum+ad&utm _campaign=homepage&utm_channel=sponsorshi p &utm_content=biggerpockets+blog+ad+fy23+1h”,”linkTitle”:”Start for FREE Today”,”id”:”62bc8a7c568d3″,”impressionCount”:”22672″,”dailyImpressionCount”:”350″,”impressionLimit”:”200000″,”dailyImpressionLimit”:”1087″},{“sponsor”:”Steadily”,”description”:”Easy landlord insurance”,”imageURL”:”https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2022\/06\/facebook-business-page-picture.png”,”imageAlt”:””,”title”:”Rated 4.8 Out of 5 Stars”,”body”:”Quotes online in minutes. Single-family, fix n\u2019 flips, short-term rentals, and more. Great prices and discounts.”,”linkURL”:”http:\/\/www.steadily.com\/?utm_source=blog&utm_medium=ad&utm_campaign=biggerpockets “,”linkTitle”:”Get a Quote”,”id”:”62bdc3f8a48b4″,”impressionCount”:”23830″,”dailyImpressionCount”:”326″,”impressionLimit”:”200000″,”dailyImpressionLimit”:”1627″},{“sponsor”:”MoFin Lending”,”description”:”Direct Hard Money Lender”,”imageURL”:”https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2022\/06\/[email protected]”,”imageAlt”:””,”title”:”Flip, Rehab & Rental Loans”,”body”:”Fast funding for your next flip, BRRRR, or rental with MoFin! Close quickly, low rates\/fees,\r\nsimple process!”,”linkURL”:”https:\/\/mofinloans.com\/scenario-builder?utm_source=biggerpockets&utm_medium=cpc&utm_campaign=bp_blog_july2022″,”linkTitle”:”Get a Quote-EASILY!”,”id”:”62be4cadcfe65″,”impressionCount”:”27099″,”dailyImpressionCount”:”366″,”impressionLimit”:”100000″,”dailyImpressionLimit”:”3334″},{“sponsor”:”REI Nation”,”description”:”Premier Turnkey Investing”,”imageURL”:”https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2022\/07\/REI-Nation-Updated-Logo.png”,”imageAlt”:””,”title”:”Fearful of Today\u2019s Market?”,”body”:”Don\u2019t be! REI Nation is your experienced partner to weather today\u2019s economic conditions and come out on top.”,”linkURL”:”https:\/\/hubs.ly\/Q01gKqxt0 “,”linkTitle”:”Get to know us”,”id”:”62d04e6b05177″,”impressionCount”:”13608″,”dailyImpressionCount”:”493″,”impressionLimit”:”195000″,”dailyImpressionLimit”:”6360″}])” class=”sm:grid sm:grid-cols-2 sm:gap-8 lg:block”>

2022-07-30 06:02:29

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Landlording Isn’t For Everyone — Become a Passive Real Estate Investor Instead

15% ROI”,”imageURL”:”https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2021\/05\/large_Extra_large_logo-1.jpg”,”imageAlt”:””,”title”:”SFR, MF & New Builds!”,”body”:”Invest in the best markets to maximize Cash Flow, Appreciation & Equity with a team of professional investors!”,”linkURL”:”https:\/\/renttoretirement.com\/”,”linkTitle”:”Contact us to learn more!”,”id”:”60b8f8de7b0c5″,”impressionCount”:”194038″,”dailyImpressionCount”:”149″,”impressionLimit”:”350000″,”dailyImpressionLimit”:”1040″},{“sponsor”:”Azibo”,”description”:”Smart landlords use Azibo”,”imageURL”:”https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2021\/11\/Logo-512×512-1.png”,”imageAlt”:””,”title”:”One-stop-shop for landlords”,”body”:”Rent collection, banking, bill pay and access to competitive loans and insurance – all free for landlords.”,”linkURL”:”https:\/\/www.azibo.com\/biggerpockets\/?utm_source=biggerpockets&utm_campaign=biggerpock ets&utm_medium=affiliate&utm_content=blog”,”linkTitle”:”Get started, it\u2019s free”,”id”:”618d372984d4f”,”impressionCount”:”262962″,”dailyImpressionCount”:”99″,”impressionLimit”:”300000″,”dailyImpressionLimit”:0},{“sponsor”:”The Entrust Group”,”description”:”Self-Directed IRAs”,”imageURL”:”https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2021\/11\/TEG-Logo-512×512-1.png”,”imageAlt”:””,”title”:”Spring Into investing”,”body”:”Using your retirement funds. Get your step-by-step guide and learn how to use an old 401(k) or existing IRA to invest in real estate.\r\n”,”linkURL”:”https:\/\/www.theentrustgroup.com\/real-estate-ira-report-bp-awareness-lp?utm_campaign=5%20Steps%20to%20Investing%20in%20Real%20Estate%20with%20a%20SDIRA%20Report&utm_source=Bigger_Pockets&utm_medium=April_2022_Blog_Ads”,”linkTitle”:”Get Your Free Download”,”id”:”61952968628d5″,”impressionCount”:”398974″,”dailyImpressionCount”:”108″,”impressionLimit”:”600000″,”dailyImpressionLimit”:0},{“sponsor”:”Steadily”,”description”:”Best-Rated Landlord Insurance\r\n”,”imageURL”:”https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2021\/11\/STEADILY.png”,”imageAlt”:””,”title”:”Fast, Affordable Landlord Insurance”,”body”:”Affordable insurance for rental properties of all kinds, including fix n\u2019 flip. Multi-property discounts available. \r\n”,”linkURL”:”https:\/\/bit.ly\/3FUfGgE”,”linkTitle”:”Get a free quote today”,”id”:”61a51c5a6182e”,”impressionCount”:”152787″,”dailyImpressionCount”:”94″,”impressionLimit”:”390000″,”dailyImpressionLimit”:”3250″},{“sponsor”:”Guaranteed Rate”,”description”:”One-Stop Mortgage Lender”,”imageURL”:”https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2022\/01\/927596_CB_BiggerPockets-January-2022-Assets-512×512-1.png”,”imageAlt”:””,”title”:”$1,440 Mortgage Savings*”,”body”:”Whether you\u2019re buying new or cash-out refinancing to upscale the old \u2013 get started today and we\u2019ll help you save!\r\n\r\n”,”linkURL”:”https:\/\/www.rate.com\/biggerpockets?adtrk=|display|corporatebenefits|biggerpockets|july2022_blog||||||||||&utm_source=corporatebenefits&utm_medium=display&utm_campaign=biggerpockets&utm_content=july2022-blog “,”linkTitle”:”Buy or Cash-Out Refi”,”id”:”61ccd6a886805″,”impressionCount”:”93379″,”dailyImpressionCount”:”69″,”impressionLimit”:”200000″,”dailyImpressionLimit”:”2222″},{“sponsor”:”Roofstock”,”description”:”Real estate investing”,”imageURL”:”https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2022\/02\/roofstock1644.jpeg”,”imageAlt”:””,”title”:”SFR Marketplace”,”body”:”Build wealth through single-family rental (SFR) investing. Roofstock makes it radically accessible.\r\n\r\n”,”linkURL”:”https:\/\/www.roofstock.com\/bp”,”linkTitle”:”Visit the Marketplace”,”id”:”6217d101980a8″,”impressionCount”:”136287″,”dailyImpressionCount”:”71″,”impressionLimit”:”490000″,”dailyImpressionLimit”:”1633″},{“sponsor”:”Roofstock One”,”description”:”Meet the SFR asset class”,”imageURL”:”https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2022\/02\/MicrosoftTeams-image-2.png”,”imageAlt”:””,”title”:”Expand your portfolio”,”body”:”Accredited investors: Access investments in the single-family rental (SFR) sector\u2014no property management required. “,”linkURL”:”https:\/\/www.roofstock.com\/one?utm_campaign=BiggerPockets-Podcast&utm_source=sponsorships&utm_medium=podcast”,”linkTitle”:”Explore Roofstock One”,”id”:”6217fa9c588dd”,”impressionCount”:”141988″,”dailyImpressionCount”:”65″,”impressionLimit”:”490000″,”dailyImpressionLimit”:”1633″},{“sponsor”:”Stessa, a Roofstock company”,”description”:”Keep your houses in order”,”imageURL”:”https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2022\/02\/MicrosoftTeams-image-3.png”,”imageAlt”:””,”title”:”Track properties for free”,”body”:”Manage and report on your investment properties with asset management software purpose-built for real estate investors.”,”linkURL”:”https:\/\/www.stessa.com\/bp”,”linkTitle”:”Claim your free account”,”id”:”6217fa9c6258f”,”impressionCount”:”151027″,”dailyImpressionCount”:”75″,”impressionLimit”:”490000″,”dailyImpressionLimit”:”1633″},{“sponsor”:”BAM Capital”,”description”:”Multifamily Syndicator\r\n\r\n”,”imageURL”:”https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2022\/02\/Bigger-Pockets-Forum-Ad-Logo-512×512-2.png”,”imageAlt”:””,”title”:”$100M FUND III NOW OPEN”,”body”:”Earn truly passive income with known assets in an award-winning market. Confidently targeting 2.0x-2.5x MOIC.\r\n\r\n\r\n”,”linkURL”:”https:\/\/capital.thebamcompanies.com\/offerings\/?utm_source=bigger-pockets&utm_medium=paid-ad&utm_campaign=bigger-pockets-blog-feb-2022&utm_content=fund-iii-now-open”,”linkTitle”:”Learn more”,”id”:”621d250b8f6bd”,”impressionCount”:”118345″,”dailyImpressionCount”:”53″,”impressionLimit”:”150000″,”dailyImpressionLimit”:”2500″},{“sponsor”:”Walker & Dunlop”,”description”:” Apartment lending. Simplified.”,”imageURL”:”https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2022\/03\/WDStacked512.jpg”,”imageAlt”:””,”title”:”Multifamily Property Financing”,”body”:”Are you leaving money on the table? Get the Insider\u0027s Guide.”,”linkURL”:”https:\/\/explore.walkerdunlop.com\/sbl-financing-guide-bp-blog-ad”,”linkTitle”:”Download Now.”,”id”:”6232000fc6ed3″,”impressionCount”:”118482″,”dailyImpressionCount”:”49″,”impressionLimit”:”200000″,”dailyImpressionLimit”:”6500″},{“sponsor”:”SimpliSafe Home Security”,”description”:”Trusted by 4M+ Americans”,”imageURL”:”https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2022\/03\/SS-Logo-.png”,”imageAlt”:””,”title”:”Security that saves you $”,”body”:”24\/7 protection against break-ins, floods, and fires. SimpliSafe users may even save up to 15%\r\non home insurance.”,”linkURL”:”https:\/\/simplisafe.com\/pockets?utm_medium=podcast&utm_source=biggerpockets&utm_campa ign=2022_blogpost”,”linkTitle”:”Protect your asset today!”,”id”:”624347af8d01a”,”impressionCount”:”88846″,”dailyImpressionCount”:”50″,”impressionLimit”:”200000″,”dailyImpressionLimit”:”2222″},{“sponsor”:”Delta Build Services, Inc.”,”description”:”New Construction in SWFL!”,”imageURL”:”https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2022\/04\/Image-4-14-22-at-11.59-AM.jpg”,”imageAlt”:””,”title”:”Build To Rent”,”body”:”Tired of the Money Pits and aging \u201cturnkey\u201d properties? Invest with confidence, Build To\r\nRent is the way to go!”,”linkURL”:”https:\/\/deltabuildservicesinc.com\/floor-plans-elevations”,”linkTitle”:”Look at our floor plans!”,”id”:”6258570a45e3e”,”impressionCount”:”79811″,”dailyImpressionCount”:”61″,”impressionLimit”:”160000″,”dailyImpressionLimit”:”2163″},{“sponsor”:”RentRedi”,”description”:”Choose The Right Tenant”,”imageURL”:”https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2022\/05\/rentredi-logo-512×512-1.png”,”imageAlt”:””,”title”:”Best App for Rentals”,”body”:”Protect your rental property investment. Find & screen tenants: get full credit, criminal, and eviction reports.”,”linkURL”:”http:\/\/www.rentredi.com\/?utm_source=biggerpockets&utm_medium=paid&utm_campaign=BP_Blog.05.02.22&utm_content=button&utm_term=findtenants”,”linkTitle”:”Get Started Today!”,”id”:”62740e9d48a85″,”impressionCount”:”63922″,”dailyImpressionCount”:”60″,”impressionLimit”:”150000″,”dailyImpressionLimit”:”5556″},{“sponsor”:”PadSplit”,”description”:”Co-Living Marketplace”,”imageURL”:”https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2022\/05\/Picture1.jpg”,”imageAlt”:””,”title”:”Double your cash flow”,”body”:”Join hundreds of investors on the largest co-living marketplace. Improve your return and help the housing shortage.”,”linkURL”:”http:\/\/www.padsplit.com\/biggerpockets?utm_campaign=H-Host_Content&utm_source=Biggerpockets&utm_medium=referral&utm_content=bp_blog&utm_term=hyperlink-landing_page”,”linkTitle”:”Get a Free Consultation!”,”id”:”628e464abfe5f”,”impressionCount”:”47513″,”dailyImpressionCount”:”74″,”impressionLimit”:”50000″,”dailyImpressionLimit”:”1667″},{“sponsor”:”Guaranteed Rate”,”description”:”One-Stop Mortgage Lender”,”imageURL”:”https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2022\/06\/GR-512×512-1.png”,”imageAlt”:””,”title”:”$1,440 Mortgage Savings”,”body”:”Whether you\u2019re buying new or cash-out refinancing to upscale the old \u2013 get started today and we\u2019ll help you save!”,”linkURL”:”https:\/\/www.rate.com\/biggerpockets?adtrk=|display|corporatebenefits|biggerpockets|july2022_blog||||||||||&utm_source=corporatebenefits&utm_medium=display&utm_campaign=biggerpockets&utm_content=july2022-blog%20%20%20″,”linkTitle”:”Buy or Cash-Out Refi”,”id”:”62ba1bfaae3fd”,”impressionCount”:”20178″,”dailyImpressionCount”:”63″,”impressionLimit”:”70000″,”dailyImpressionLimit”:”761″},{“sponsor”:”Avail”,”description”:”#1 Tool for Landlords”,”imageURL”:”https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2022\/06\/512×512-Logo.png”,”imageAlt”:””,”title”:”Hassle-Free Landlording”,”body”:”One tool for all your rental management needs — find & screen tenants, sign leases, collect rent, and more.”,”linkURL”:”https:\/\/www.avail.co\/?ref=biggerpockets&source= biggerpockets&utm_medium=blog+forum+ad&utm _campaign=homepage&utm_channel=sponsorshi p &utm_content=biggerpockets+blog+ad+fy23+1h”,”linkTitle”:”Start for FREE Today”,”id”:”62bc8a7c568d3″,”impressionCount”:”22397″,”dailyImpressionCount”:”75″,”impressionLimit”:”200000″,”dailyImpressionLimit”:”1087″},{“sponsor”:”Steadily”,”description”:”Easy landlord insurance”,”imageURL”:”https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2022\/06\/facebook-business-page-picture.png”,”imageAlt”:””,”title”:”Rated 4.8 Out of 5 Stars”,”body”:”Quotes online in minutes. 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2022-07-29 18:28:53

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Living Paycheck-to-Paycheck with 9 Rental Properties

Rental property cash flow is one of the most important metrics to calculate when analyzing real estate. Your cash flow not only helps you make a little extra money every month but also keeps your property afloat during months of heavy expenses or when large repairs need to take place. If you don’t do the correct cash flow calculations, you could find yourself with a cash-hemorrhaging property.

This is why running (and re-running) your “true cash flow” number is so important. It’s also what Pam, today’s guest, might need to do to figure out which rentals to sell and which to keep in her portfolio. Pam owns nine rental properties, which is doubly impressive since she declared bankruptcy just a decade ago. She’s been able to rebuild a financial position that many would envy. And even though Pam and her husband make a great income, they’re struggling to figure out where it’s going every month.

As six-figure earners, they’re barely breaking even on some months and overspending on others. Is Pam being too relaxed with some of her budget categories, or is there another cash flow leak coming from somewhere she isn’t looking? Scott and Mindy go through Pam’s current financial situation and quite quickly come up with a solution that could save her thousands every month.

Mindy:
Welcome to the BiggerPockets Money Podcast show number 322, Finance Friday edition, where we interview Pam and talk about taking a deep look at the true cash flow scenario of your rental portfolio.

Pam:
My husband and I, we talk a lot about, well, do we want to do the cash out or do we want to keep them paid off for increased cash flow. We do have four properties paid off right now. We were toying with the idea of refinancing two or three of them to help pay off the private lender.

Mindy:
Hello, hello, hello. My name is Mindy Jensen and with me as always is my sunshine on a cloudy day cohost, Scott Trench.

Scott:
That’s me beaming, Mindy.

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

Scott:
That’s right. Whether you want to retire early and travel the world, go on to make big time investments in assets like real estate, start your own business, or analyze your portfolio and consider selling some of that real estate, 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, today we are talking to Pam and she has a very interesting set of circumstances with regards to her investment portfolio. She has been investing over the last three years, gathering, collecting real estate properties. And now it’s time to analyze those and see if they are worth holding onto.

Scott:
That’s right. Pam has a very, I would imagine, a very common situation for investors who have been using variations of the BRRRR methodology where they’ve got build up a lot of equity, but it’s a little hard to cash flow in some situations, and maybe some of the properties don’t cash flow because we haven’t been doing enough of a rigorous analysis on that cash flow and really accounting for things that are phantom expenses, that don’t show up every month but you have to plan for like vacancy, like maintenance, like CapEx. Run those numbers all the way through on every property in your existing portfolio and any property you’re considering buying and make sure that your cash flow positive. You don’t have to get a 10 or 20% cash on cash return, but you have to be positive in order to sustain it in this business with conservative assumptions over the long term, in my opinion.

Mindy:
Yes. And you said the V word, Scott, vacancy. We didn’t even talk about vacancy on this episode because she has really great properties that don’t have any vacancy. She said that she’s got people that have been there since 2015. But that is something that we forgot to talk about. Vacancy should be estimated at 8%. A lot of people will say 5%. It should be estimated at 8% because 1 divided by 12 is 8. I don’t know. A whole month’s vacancy is 8%. And hey, if you estimate high and then you come in a little bit lower, you win.

Scott:
Yeah.

Mindy:
If you estimate low, then you lose.

Scott:
And what do you do if you can’t get the numbers to work on a cash flow basis with conservative assumptions? You use less leverage. Or you wait. Or you pick your different market or different strategy with that. You don’t have to make, again, 10, 15, 20% cash flow each month to get into this game. There are appreciation and amortization benefits, but you can’t cash flow negative because it’ll just suck money out of your life and make things miserable in the downturns, the handful of downturns we are going to experience over the next 50 years.

Mindy:
You just said the G word, Scott. You said “This game. To get into this game.” Real estate investing is not a game. It is a business. And if you treat it as a game, you will lose every single time. But you’re not the only person who calls it a game. Everybody calls it a game and it’s a huge pet peeve of mine.

Scott:
I call it a game. I just am so competitive, I take my games very seriously, Mindy.

Mindy:
Okay. You know what? I will give you that, but everybody else does not get a pass on this. You cannot call it a game. It’s a business and you have to treat it as such. All right. Now, before we get into Pam, 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.
Pam is a real estate investor who’s been focused on increasing her real estate holdings the past three years. She and her husband have a great income and have been reinvesting their cash flow back into their real estate portfolio along with using a hard money lender to fund more purchases. But now they’re at a crossroads, continue with the BRRRR strategy in single family homes or pivot to multifamily. Pam, welcome to the BiggerPockets Money Podcast. I’m so excited to talk to you today.

Pam:
Hi, thank you for having me.

Mindy:
Thank you for coming on.

Scott:
Oh, welcome.

Mindy:
This is going to be so much fun because we’re going to talk about our favorite topic, money and real estate. So let’s jump right in. What do you make? Where does it go? And then let’s talk real estate.

Pam:
Okay. Well, I have a couple of businesses. I used to teach writing lessons. So I still have a little bit of that going on so it brings in a little money, play money, every month. I have a bookkeeping business that brings in net about 1,800, 1,900 a month. My husband and I work for a property management company. He does the maintenance. He’s maintenance director. I’m the CFO, so I do a lot of numbers. So together… Let’s see. He’s a 1099 pay. And then with my net that total’s roughly 12,000 a month. The average of the rental income as it stands now is about 7,500 a month. That increased. We just signed a lease, so maybe 8,500 a month. And then just sales. If we’ve decided to sell one over some time, I just averaged that out to be about 4,800 a month.

Scott:
Oh, you’re saying when you redeploy the proceeds, you might be able to generate an addition of 4,500?

Pam:
Well, I maybe I didn’t explain that well enough. Okay. So for the house sale, there was initially supposed to be a rental. But five months later of not being rented, the best strategy with the way the prices were, we decided to sell. So we made some money there and I just averaged that out to be about 4,800 a month.

Scott:
Oh, okay. What’s the lump amount of that sale proceeds? Is that sitting in your bank account?

Pam:
Some of it is. We paid a big chunk to our private lender, about 50,000. We walked away with 108,000.

Scott:
Okay.

Pam:
We bought another house. I’m sorry. We bought a rental. Turnkey. It had a tenant. That was 33,000. Paid our private lender 50,000. And then we paid a credit card off, the business credit card. That was maybe 10,000. And then we still have 20 left of it, which we are planning to purchase another property that will be a pretty big renovation project to be a rental.

Scott:
If I were to summarize your monthly income, excluding this sale, I could say that your wage income, the dollars you’re earning is $12,000 a month. Your bookkeeping business is bringing in $2,000 a month, and your rental business is bringing in $8,500 per month. Once you get that next place up with the new tenant. And that’s a net cash flow. That’s not gross rent. That’s the cash flow you’re able to spend on an average basis from the rental property portfolio.

Pam:
I believe so. Yes.

Scott:
Okay. That’s awesome. That’s $22,000, $23,000 per month pre-tax. That’s phenomenal. So big incomes.

Pam:
Yes, but I feel like we’re paycheck to paycheck.

Scott:
Well, that’s why we’re here.

Pam:
Yes, exactly.

Mindy:
Yes. I just want to point out before we go any further, if you’re spending every dime that comes in, you are paycheck to paycheck. It doesn’t matter how much of that is coming in. So let’s look at where that’s going and see. I saw something. So we do get your numbers ahead of time and I did see something that I’d like to maybe reframe as we’re going through your numbers.

Pam:
Okay.

Mindy:
So let’s look at your numbers the way that you’ve shared them and see if they still are how I am thinking about them. So what are your expenses look like?

Pam:
I separated it category, like personal and business, because that’s where it gets a little confusing. We usually always have some sort of remodel going on, which is where a big chunk of all that money goes. And like I said, we just recently finished one remodel. We have a signed lease. We did receive our first rent check from them that is through a management company. So I feel like the business miscellaneous category that I have will trim down quite a bit. So for personal side, our mortgage for our primary home is 1,400 and that’s taxes insurance. Our insurance bills every month are 1,475. Big one is health insurance because I’m a W-2, but they don’t have medical. My husband is the 1099 side so he doesn’t have medical. So that’s about a thousand. And the rest is life insurance which is we have the term policies, and that’s in car.

Scott:
Awesome.

Pam:
Travel’s a big one for us. I just averaged that out for the year and that was about 800 a month, mainly because we have properties in out of state. So we do go a few times a year. My general category needs to slim down. General merchandise and clothing, 866. Yes, it does include some Amazon. Also trips to, I don’t know, if we have to go get a card or just general items needed for the house. That’s my big lump category. We do have a boat that we own. Part of that boat money is where we house it at the Marina. It’s called the dockominium. I don’t know if you guys have heard of that, but it’s like a condo for the boat. So that monthly payment is in there. That includes dues. It includes property tax, our payment to the dockominium. We bought that on land contract. That ends in September. So that’s roughly about 750 a month for a year. It also includes other maintenance with it. It’s basically our cottage.

Scott:
So we were trying to tie this up, but we’re… How much is this coming out to per month?

Pam:
9,500.

Scott:
9,500 per month. Okay. And you’re bringing in 22,000 per month. So while there’s a lot there and there are things to cut, you should be not living paycheck to paycheck based on that spending and your income, which is what we’re going to investigate today with that. So you should be able to accumulate a lot of those things. Many of the things you said there are perfect. Like this is not a, “Oh, cut your boat” thing with that. You’re in enough income to pay for some of these luxuries with that because you guys are doing so well. Let’s go through your net worth and balance sheet here. And let’s start with cash. How much cash do you guys have?

Pam:
Personal cash, 12,000. I know we have about 18,000 to 20,000 in the business account, in the real estate account.

Scott:
And then is the biggest portion of net worth the real estate?

Pam:
Yes.

Scott:
Let’s walk through that. What does that look like?

Pam:
We have nine rental properties valuing 1.5 and it is equity.

Scott:
Where is it located?

Pam:
We have three in Scottsdale, two condos and a house that are Airbnbs. And then we have properties in Flint, Michigan that we use for long term rentals.

Scott:
And those are six properties there?

Pam:
Yeah, and counting. We are under contract for another one and just signed another contract today for a quick wholesale flip.

Scott:
Yeah, it looks like we’ve got about $200,000 in retirement accounts and then maybe another 5,000 to 10,000 in after tax brokerage accounts there. Does that sound about right?

Pam:
Yeah, I use personal capital, so I have everything in there. And yes, that sounds right.

Scott:
Before we get into what’s the best way we can help you today, I’d love to hear a quick story about how you got into this position. Can we do a quick background on your journey with money?

Pam:
We grew up not poor, but lower middle class. My dad was dealing with layoffs. I worked for the big three. So there were times where we had to pinch quite a bit. And then fast forward college, I went to college student loans, that kind of thing, got married quickly after school. And then that didn’t end very well. I did have a 401(k) at that time that I lost after the marriage. So I was starting over basically at 28. I did have my horse training business, which paid for my lifestyle, but I wasn’t able to put anything away. Then my husband and I met. He has a very similar money background as I, so we got along great. We decided we’d be a great team to do some real estate because he was a builder. So we loved all those shows that came out in 2005 and ’06. So we thought flipping was it, this was great. Then the market crashed. So we kind of lost that.
Got some very bad advice from our real estate agent that said, “Just let them go back to the bank like everybody else, because I can’t sell them. Had no clue about renting. No clue. No clue that there was even property managers that could handle everything for you. So that kind of was a harsh learning lesson. We had to file bankruptcy in 2011, but it’s kind of been the best thing that’s happened and we’ve learned from that. We lived with cash for forever. Gosh, probably until 2018. So we went seven years just if we didn’t have the cash, we didn’t buy it. We had no credit. We had no loans. We had nothing. We did start building from there with the prepaid credit card. We each had a $300 prepaid credit card and we lived off of that surprisingly. But he had done some car sales at that time while his remodeling kind of was going under with the economy the way it was during that time.
And then fast forward 2018, we decided… Actually let me back up. When we were going through that bankruptcy, we lost all of our properties. Our primary home, I had a condo that went back to the bank. We have this private lender who my husband had done some business with before. He was our saving grace. We were able to buy a home with him on land contract. So he paid cash for it. So we found a nice home and fixed it up, that kind of thing. We stayed there for three and a half years. Sold in 2013. Had a nice lump sum. Walked away with some money. So like our first live-in flip I suppose.
And then we found this great property, 2014, 2015. Also, our plan was a live-in flip because we did well with that other one. We had a five year plan for that house. And we stuck to it pretty well. We used that chunk from the first house, did the remodel. Lived there for six years. Sold that in 2020. And then 2018, ’19 was when we started buying real estate.
I learned about a thing called cash out refi. I had no idea what that even was. I had no idea if we could even qualify for a mortgage. And they qualified us and we walked away with a check of 230 some thousand dollars. We’re like, “I can’t believe that just happened.” So we paid our private lender off and we had money left over to buy our first rental. We bought a turnkey rental. It was the wonderful first property. And that’s how we got going. Our private lender said, “Why did you pay me off? Do you want more money?” So we borrowed more money and did it again. We bought some more turnkey rentals and that’s where we ended up here.

Scott:
Awesome. Has most of the rentals been financed with cash out refinances or have you been accumulating cash in a substantial way over the last 3, 4, 5 years as well from your saving and incomes and job?

Pam:
I would say yes to both of that. Yes to both of that. We did get a line of credit on those three properties because on paper we looked like we owned them all. And we bought some more properties, paid him off again. So a bit of the BRRRR strategy.

Scott:
Okay.

Pam:
I don’t know that a lot came from our income honestly. I think a lot of it was just the moving of the properties.

Scott:
Well, great. Well, let’s unpack this. That background was really helpful. I think we’ll have some clues in that background as to opportunity areas that we can begin attacking. My belief is that your situation that you articulated to us is one where you’ve got really strong income, you have all these rental properties, you’re living paycheck to paycheck and you can’t figure out why cash is leaking out of the system instead of depositing into the system on a regular basis. And I think I’ve got some hunches about why that may be happening. And let start with the real estate portfolio. Let’s talk about the types of properties you own. Are these properties in good condition when you buy them?

Pam:
Most of them no, which is why I think we had been leaking so much money into the renovations. For instance, the one we just finished, we paid 40,000. I think we only put maybe 15,000 or 20,000 into it. I don’t even think that much. 13,000 to 15,000. We’re in the process of refinancing that right now. And it appraised for 101,000.

Scott:
What would $101,000 property rent for in that area? This is Flint, Michigan, right?

Pam:
Yes. A thousand. We just signed the lease.

Scott:
Near Detroit?

Pam:
It’s an hour on 20 north.

Scott:
So you’re getting a close to 1% rule property here. How do you think about expenses on that property? What are you paying on a monthly basis?

Pam:
So before the refinance, all of my Flint properties are usually about 285 a month. That’s insurance and tax and utilities, because I had to pay the water and electrical. Maybe at the most in the summer 350. Actually the winter because that’s with the heat.

Scott:
So 285 to 350. Do you have a mortgage on these properties?

Pam:
When we do the cash out? Yes. And that payment will be 612 and that includes everything.

Scott:
Okay, great. And that includes everything, that principal, interest, taxes, insurance?

Pam:
Correct.

Scott:
And then utilities and water come on top of that. What are utilities and water?

Pam:
Well, that will be covered by… The tenant will pay that.

Scott:
Okay.

Pam:
But previously, winter is usually the most expensive at 130 a month. but most of these properties don’t have a lot of insulation so they leak hot air. So you pay for that. The water we generally don’t even use, but there’s a service fee. So our bill is always $57 a month.

Scott:
Any other expenses that go along with that property? So 612 in PITI. Insurance goes to the tenant. And then $57 per month for water. I’m sorry. Utilities go to the tenant. And then the water is $57 per month.

Pam:
So my expenses will just be the mortgage PITI, 612.

Scott:
Great. And then what do you pay your property manager?

Pam:
10%.

Scott:
10%. So we have a hundred bucks a month for the property manager. And what’s the placement fee on that?

Pam:
A half a month rent.

Scott:
Okay. So you’re going to place 500 bucks?

Pam:
I’m pretty sure.

Scott:
That’s only every two years?

Pam:
Actually, what’s interesting about this area, it’s so popular for rent that nobody moves. We have tenants that have been in those turnkey houses we bought, they’ve lived there since 2015, 2016. So knock on wood, we haven’t had a turnover yet, which is pretty amazing. So hats off to our property managers for finding great tenants as well because I think that has a lot to do with it.

Scott:
Okay, great. What do you budget for maintenance expenses?

Pam:
Well, I have a live-in maintenance guy. That’s my husband. So it’s just time really. Maybe materials.

Scott:
Okay. I would recommend you put 5% away for maintenance at the minimum. Maybe 10%. Go ahead, Mindy.

Mindy:
I was just going to say with a move planned in the next year or so, you’re going to need to have maintenance scheduled or accounted for. And also I would start looking for maintenance people now so you can have them working on your properties in conjunction with your husband so you can test them out because things will break. Things will break more frequently when your husband isn’t there to fix them it will seem and you’ll be like, “Why is this so expensive all the time?” Because on paper, $1,000 in rent and 612 in mortgage payment is almost $400 in my pocket, but it’s not. It is now you’re a hundred dollars for the property manager, “Okay, now it’s $300 in my pocket.” Well now you’ve got a hundred dollars for maintenance, “Now it’s $200 in my pocket.” These were rehabbed, right? These we’re turnkey. What is the state of the roof? The big systems? If everything’s brand new, you need a whole lot less in CapEx. But if the roof was 15 years old when you bought it, you’re going to have to budget for a roof a lot faster.

Scott:
Yeah.

Pam:
Correct.

Scott:
That’s a good thought exercise here. So we have maintenance, which is costing you something. It’s not nothing because you have materials that you have to pay for. But you will have to budget for the maintenance person when you move. And then the other part of this is CapEx. And this is what’s going to kill your cash flow when I tell you this. This is not going to be good news with this. On a property in Denver, Colorado, I would not estimate less than about $250 per month, per month, is a CapEx allocation because every year I’m going to have some problem with one of my units across my portfolio. And that problem is not going to be three grand. It’s going to be 5 to 10 grand, right? When I got to turn a unit because the tenant’s trashed it, it’s 10 grand to fix the floors and the walls or whatever with that.
And that’s going to happen every… In your case, let’s call it every five years because you have a long tenant. But you’re still going to have to plan for the 10 grand each unit every five years at the minimum, which will come out to $250 a month. And that I believe is what’s killing your cash flow here and why your business is not actually spitting out cash into your bank account on a regular basis and the way that you’re anticipating with it. Do you have a reserve for that? Do you account for that CapEx piece in the cash flow?

Pam:
I do have a reserve as far as we do have a line of credit that has 45,000 available if we need to tap into that. I do have my private lender and we do have some cash. But I do feel like I need a whole bunch more sitting aside for that kind of stuff.

Scott:
I agree with that and we’ll come back to the cash position in a second. But right now I’m trying to point out the cash flow on this unit. So let’s go through the numbers that we just put in place, right? We have a thousand dollars in rent. We have $612 in your principal, interest, taxes, and insurance. So now you have $388 in cash flow per month, right? A hundred dollars of that is going to the property manager. So now you have $288 per month. I would bet that between CapEx and maintenance, you should be budgeting $300 per month because I don’t think you can get away with less than that over the long term.
So right now your cash flow is not positive on this property. On an average basis over a three to five year period, you’re going to have many months where it will be positive and will deposit money in your bank account, but you’ll also have those big turns where $5,000 is going into that property and that wipes out all of that overall. And so that’s the major problem here. I would estimate that the same situation could be going on in other of your properties with that. Do you think that’s a… What’s your reaction to that?

Pam:
Well, that’s a very good observation because my husband and I, we talk a lot about, well, do we want to do the cash out or do we want to keep them paid off for increased cash flow? We do have four properties paid off right now. We were toying with the idea of refinancing two or three of them to help pay off the private lender. So that comes into play I would think based on the cash flow on the other properties. So so I just start analyzing each one like this and or do we do it as a whole?

Mindy:
I would analyze each one like this. And I would go a little bit further and say because the numbers that you shared with us were personal and business all together, I’m wondering if your personal income of $12,000 a month is subsidizing your rental properties and that’s-

Pam:
Oh, it does sometimes.

Mindy:
… also making you feel like you’re living paycheck to paycheck.

Pam:
Yeah.

Mindy:
Because $12,000 a month in a relatively low cost of area living should be… I don’t want to say knocking it out of the park, but it should be really, really comfortable. I think that each individual property should be… I don’t want to argue with Scott had totally derail this conversation, but I would challenge you to figure out CapEx for each one of your properties. What is 123 Main Street’s roof age and systems age and appliances and see, “Oh, okay. A roof is $15,000 and I have 10 years left on this roof. So 10 times 12 months is 120 months. And-”

Scott:
15,000 divided 120 is 125 bucks a month.

Mindy:
Yeah. So you need to save $125 a month for the roof. If the furnace is about to go out, that’s $5,000. Let’s say you have a year left on that, now you have 5,000 divided by 12. You need to save $416 a month to replace the furnace. I don’t know if you can get a $5,000 furnace, because do you have to have AC where you’re at? I’m not sure. I mean, you need it. Are you required?

Pam:
The furnace with most of our houses, they’re in really good shape.

Mindy:
Okay.

Pam:
We do have a few that need a roof maybe in five years like you’re saying. Several, we put in AC units, those were 1,600 new. So those are good for a while as part of our remodels. Also most of the furnaces are in great shape, but there are several properties that we need to start thinking about that in the future. But we can get a new furnace in them for… They’re not giant houses, so maybe 2,000, 2,400 is what I would start thinking about.

Mindy:
Okay. I think it’s a good thought exercise to see,-

Pam:
Okay.

Mindy:
… “I have nine rentals. Six of them are awesome and three of them aren’t.” Dump those three or think about dumping those three and looking at different properties that would be better for your bottom line. There is an investor out there who will think that those three are amazing properties.

Pam:
Yeah. That’s funny you mention that because there’s one condo in Arizona that we use. It could really use a remodel to really be attractive. I mean, it’s a little workhorse, but I feel like it is negative cash flow. And with the values where they are in Scottsdale, I was thinking about maybe listing that one. We do have some of our private lender money wrapped into that one at 10% interest only. So it’s very hefty, which is why we were toying with refinancing some of our paid off rentals in Flint to pay him down because of the interest rate.

Scott:
I think that what the homework assignment Mindy and I would have for you is to, one, analyze each of your properties for cash flow right now. Pretend you’re buying it and go through the exercise. When we go through that exercise, make an estimation for vacancy. I would recommend you estimate five to 10% vacancy or 5 to 7% if you think your market’s really good because that’s one month of vacancy per year with that. And I think that that’s a good conservative estimate. I would put in a thousand dollars a year at minimum for the home maintenance. These are not CapEx. This is like problems you’re fixing, ant infestation, AC broke, fridge, ice machine broke, whatever with that, right? You’re going to have to send somebody there once a year per unit, maybe once or twice a year to fix things up.
And then I would do the CapEx exercise that Mindy just suggested. Think about all the things you might have to replace in the property and back into them. It will probably come out to well over a hundred, $200 per month on the property for that. And that will inform you. So when you get that, and let’s just use those numbers, we’ve got a thousand dollars in rent, we’ve got $612 in principal, interest, taxes, and insurance. I think you’re going to be underwater from a negative cash flow perspective on at least this property and maybe some other ones. And that’s a really good thing to think about, “Okay, I want to own the property free and clear and not have a debt on it. And then that will improve my cash flow. That’s one way to resolve that. Or I can sell it and try to redeploy into a property that will cash flow on a standalone basis.” But I think this is a root cause of why you’re feeling like cash is never filling up the coffers on a monthly basis.

Pam:
In this property, during the refinance which was recent, I got hit with the interest rate going up. What I was usually getting these cash outs for 5.5 To 6%. They were tolerable for business loans. Now that one was 7%. In my mind, it’s still cheaper than the 10% I’m paying. So it was worth paying him a chunk, but we haven’t closed on that yet. But that is in underwriting.

Scott:
Yeah. Well, it sounds like you have some… I mean the financing situation is also a concern. So how much do you have in total outstanding debt across your portfolio to the private money lender?

Pam:
200,000.

Scott:
200,000? At 10% interest you’re going to pay $20,000 in interest per year on that.

Pam:
Correct. Yes. Our payment to him is 1,600 right now.

Scott:
Great. You said the asset value is 1.6 million?

Pam:
Yeah. Yes, of those nine. Yes. 1.5 and some change.

Scott:
How do you feel about that valuation? Are you being spot on? Are you a little conservative? Are you a little aggressive?

Pam:
A little conservative because I try to be conservative when it comes to that, but I don’t want to be over leveraged. I think the last I looked, that puts us at about 50% equity based on the liabilities that we have.

Scott:
Okay. So you have 200,000 in this private loan. And then you have how much in mortgages against those properties?

Pam:
690,000.

Scott:
Okay. So you’ve got $900,000 in debt, $890,000 in debt and 1.5 million portfolio. So you have 600,000?

Pam:
Yeah, that’s not 50%.

Scott:
Well, it’s a little over 50%. But you have hundreds of thousands of dollars in equity.

Pam:
Yeah.

Scott:
[inaudible 00:35:22] 600,000.

Pam:
Okay.

Scott:
So when you said that your business is generating $8,500 per month, how did you derive that number?

Pam:
I think it’s in my income statement. I did divided that out per month. So for the year, like for 2021, gross rents were 77,000.

Scott:
Okay. So you divided that by 12?

Pam:
Yeah. And then I was thinking more about… I think with that number I originally gave you on the spreadsheet was the rents coming in, like our net coming in from property management.

Scott:
Okay. So you have a certain amount of rent coming in each month and then your property manager is taking a chunk 10% out of that and then distributing the balance to you on a monthly basis. And that’s what you’re calling the 8,500 a month?

Pam:
Yes. Yes, that’s after property management. Correct.

Scott:
Okay, great. So here’s the issue with that. You’re not generating $20,000 a month in profit. You’re generating $12,000 a month from your jobs. And then you’re generating perhaps even a negative balance on these rental properties because we talked about how that’s $690,000 in debt that you have will easily be costing you 4,000 to $5,000 per month in the principal, interest, taxes and insurance payments. And then you also have $1,600 on top of that going to the private lender. So that leaves you with 6,000 or so in total expenses. And then you have $2,500 to cover the maintenance and CapEx and vacancy expenses on your nine property portfolio. So I think that my hunt share is that this portfolio is costing you money on a monthly basis, not putting money into your pocket on a monthly basis.

Pam:
That’s what I’m feeling.

Scott:
Yep. So what do we do about that, right? Well, what we do the first thing is go through the exercise that mind just described and get the CapEx allocation on each one of these properties. Then we will give you a free pro membership for BiggerPockets. Use the calculator. You can keep using your own spreadsheet or whatever, but use our calculator and run the numbers on each one of those properties with those CapEx assumptions and determine which ones are going to be cash flow positive and which ones are killing you. Because I bet you, you have two or three that are killing you and a handful that are cash flow positive.

Pam:
So I can do that in my accounting software per property.

Scott:
Okay.

Pam:
I can run a P&L on each one and then just add that CapEx. So I can do that as my exercise.

Scott:
I’d also encourage you to do it in the calculator because the calculator will be forward looking. It’ll allow you to make assumptions about that.

Pam:
Okay.

Scott:
And you can ask people about… Do it in both, but it’ll be easy there. And I think that will help you say, “Forget about what the numbers are telling me. Experienced investors say this is what it should be on a go forward basis,” right?

Pam:
Okay. Gotcha. Okay.

Scott:
And that will allow you to then take a, “Okay. That’s what I’m probably going to average, is that driving with the reality that I’m getting in my accounting software downstream here with that over time.” I think that will be helpful and that will give you a sell refinance or hold decision on each of your properties. And I bet you, you will sell several of them with that.

Pam:
Yeah. We have a lot of our own capital into the Arizona properties based on selling some… We had a few flips, sold a rental, and then deployed that into the Arizona properties. So I liked the idea of maybe selling the one condo, getting that money back and paying down that lender to get rid of that large payment. Because really, they only performed really well in February and March. The rest I thought was break even, but I don’t think they were break even when we add the portion that we pay our private lender.

Scott:
And their short term rentals, right?

Pam:
We were underwater. Yeah. Mm-hmm.

Scott:
I ain’t going to Scottsdale in July.

Pam:
Exactly. That’s three very slow months.

Mindy:
So another thing that I would challenge you to do is to completely separate your personal finances and your business finances. So your W-2 income, your husband’s 1099 income and all the personal expenses come out of your one bank account. And then all the business loans, the business expenses, the business everything, run those completely separate and see you do… Okay. I’m just getting the numbers that you shared and it’s like all at once. But like Scott said, I really think that these properties aren’t doing you many favors. And we’re still in a position with the real estate market that you could sell them to someone else and find a different property. If you purchase them as a rental, you could use a 1031 exchange to find a better property.
You had talked about continuing on with single families or transitioning into multi-families. Maybe there’s a really awesome multi-family out there waiting for you to buy it that will cash flow, that will be closer to where you want to live, that will be even with all of the numbers, work for you in a much better capacity. But I’m wondering… And you don’t have to sell all of your properties. If you’ve got one or two that are amazing or six that are amazing, keep the ones that really work well. But if they don’t work, get rid of them. You don’t have to keep a property just because you own it.

Pam:
Right. And I think the other flip side to that, we have a little internal debate, my husband and I. He thinks, “Well, even if they’re not really making much money, the mortgage is getting paid down and it’s our retirement plan,” you know? So is there truth to that?

Scott:
Yeah, it’s a true statement, but that’s not a good way to live your life, in my opinion, over the next five to 10 years, because this portfolio is going to be sucking money out of your life. And if you have a problem from a market perspective, you’re going to be sucking even more money out of your life on an ongoing basis. The way I would totally reframe the approach and say, “Guys, we’re doing great. We’re making $12,000 a year a month from our jobs here. We’ve got a couple of side hustles. We’ve got some properties. We’ve got some assets. We can play this game, right? Let’s sell off all the properties that are sucking cash out of our life and say, ‘Period. The property must, with conservative assumptions, put cash into our pockets on a monthly basis.’ We’re not going to lever up past the point that allows for that. We’re not going to take more debt against that property if it doesn’t at least conservatively put a few dollars in our pockets every month on an ongoing basis.”
“Let’s sell off a couple of these properties. Pay off this private money lender, which is killing us.” This is a great deal for your private money lender. He’s loving life right now. He has 1,600 bucks in passive income. You don’t with that.

Pam:
Right.

Scott:
So let’s pay him off with this. Let’s build a cash reserve. You don’t have enough cash, in my opinion, to capitalize your personal situation or your business in a comfortable way. You’re going to be very stressed month to month because you’re spending 9,500 a month, but you only have $12,000 in personal cash. And your business is spending 8,500 a month. And you only have two months of reserve there with 18,000, two and a half months.
So I would pile those up and I’d say, “I want to have three to six…” In your case, probably six months of expenses because you have so much going on in cash. That’s an absurd amount of money right now. That’ll be be like $120,000. So now, how do we fix that problem? We got to cut expenses. One way you cut expenses is by unloading a couple of your cash flow negative properties. So that will reduce that amount required to get to six months reserve substantially. The other way is to go into the personal life and groom the personal budget. So earlier I was saying you guys make good money, no need to cut these things. Well, I think we’ve said you’re making good money, but you’re not making $22,000 a month. You’re making closer to $12,000 per month because the portfolio is not actually putting that cash flow into your pocket. So let’s accept that reality and say what’s a reasonable spending amount on a $12,000 per month. Is that pre-tax or post-tax for 12,000?

Pam:
So my salary is post tax, but my husband’s is pre-tax.

Scott:
Okay. How much do you think you’re bringing in after tax between the two of you per month?

Pam:
Well, we’ve changed to a really great accountant that got us a nice tax return, maybe because we’ve been moving properties around. So it’s hard to say on his income what to budget for tax, because he could also qualify as the real estate professional.

Scott:
Yeah. You have real losses that are going into the rental property business. That’s why you probably had a great tax return.

Pam:
Okay.

Scott:
So just be careful around planning around that because you’re probably putting a lot of cash into the properties and your accountant’s able to either immediately depreciate all of that for some of those repairs or he is able to do that… And your income, your AGI based on that will probably be below 150. So you’re probably able to claim that all as losses against your ordinary income. So don’t count on that. Count on getting rich and say, “What’s my after tax income in that situation real estate separate?’ And then I’ll take those benefits downstream.

Pam:
Okay.

Mindy:
Pam, you just said that he qualified as a real estate professional.

Pam:
Yes.

Mindy:
But then he also has a 1099?

Pam:
Well, in the real estate world, yeah. Which is what I think they told me that he was able to do.

Mindy:
I only know enough to be dangerous. But in general, if you have a full-time job, you’re not going to qualify to be a real estate professional. Now, you said it’s in the real estate world, but is he working basically for himself as a 1099?

Pam:
Yes. Yes.

Mindy:
Is that how that works?

Pam:
Yep.

Mindy:
Okay. You know what? I’m going to check in with one of my real estate-focused CPA friends and just double check that this sounds cool because the real estate professional designation is awesome, but it’s so hard to qualify for. And that is one of the things that flags your tax return, is when you qualify for that, you could-

Scott:
But let’s assume that he is. I think that Mindy’s wise-

Mindy:
Yes. I want to assume that he is.

Scott:
Mindy’s wise to put a caution and go in there and get a second opinion. That’d be probably wise to make sure that you’re not doing that. But it sounds like your husband is doing a lot of work on the properties and doing some of these things, so you may be fine with that. But the reason you’re getting a huge tax break is because you are generating real losses that you are having to fund from your cash flow from your jobs, right? And so that’s not good strategy. That’s good that the accountant should absolutely do that. The accountant did their job it sounds like with that. Because not only are you losing money on your P&L, you’re also getting benefits from depreciation on these properties that are offsetting that. And because your husband’s a real estate professional, that’s helping you net all of that even if you were above the AGI threshold against [inaudible 00:47:17].

Pam:
We had several sales last year. And I think that’s on the income statement where that was. The gain on sales was 154,000 for ’21. But again, yeah, it’s offsetting the negative cash flow that you see.

Scott:
Let’s do some takeaways here and then see if there’s any other issues you want us to help with. So the take first takeaway is you guys are generating $12,000 a month give or take post tax. You’re spending $9,500 per month. You have to ask yourself, “Is that an acceptable savings rate?” It could be. That’s not bad. You could be saving more than 10% of your income excluding your real estate or other activities with that, with the spending you share with us. And that could be fine. If you want to save more and kind of approach that 50% savings rate, you might need to groom the budget on your personal expense side. And there are items there that appear like they could be cut if you wanted to make some changes.
So you can afford many of the things you want in there, but you can’t afford all of the things that you have in that list if you want to save a huge chunk of your income each month. Your real estate business is not generating $8,500 a month in cash flow. It’s probably sucking money out on a net-net basis. We can detect that by just doing very simple math with the PITI on a $690,000 mortgage. If we assume that was one big mortgage and you did PITI on it, it’d probably be like a 4,000-ish plus per month mortgage on that even at a 3 or 4% rate. And then you have the 1,600 on the debt on top of that, plus-

Pam:
That’s pretty good, because I think it was 4,600 actually with all the mortgage payments.

Scott:
Yeah, I’m a nerd. I’m sorry. So 4,600 plus 1,600 would be 6,200. That lays you with 22,000 before you even get to any other expenses. And you know you have a ton to unpack there in that. And so that’s the big problem there, is go unpack that property by property, CapEx by CapEx. It could be most of your properties, our sell situations at this point in time. And if so, that’s great. You guys just won. You bought a bunch of properties the last couple years, market appreciated a ton. You can cash out on those properties. It’s probably not the plan that you and your husband were initially coming in with. But guess what? Take your $600,000 in winnings and use that to be the seed for the financial foundation that will help you move towards your real long term goals.
So let’s assume that you were able to cash out 300 grand from that. I’m making this up. I would take that 300 grand and I’d use a chunk of it to fortify your financial position and get to a six month cash reserve on that. Maybe that’s 50 to a hundred grand. You’ll feel way better if you just have that sitting in the bank ready to be used for your personal life and those types of things. And now you’ll also have a business that is hopefully cash flowing positive on an average monthly basis.
Now, we got to figure out what to do with the other $200,000, plus the 25 to $50,000 per year that you’re generating from cash flow from your jobs and your business. That’s the question that I think we’ll have to leave dangling, well not dangling here, or come back to maybe another time because I think we’re running up on time here today. How does that feel? I rambled for a while there.

Pam:
Yeah, we’ve tried a couple of local lenders and they say we don’t cash flow and I’m like, “I don’t understand. Why?” They’re seeing something I’m not seeing and they don’t explain it at all. So hence why I filled out my application.

Mindy:
I would also go back to the personal spending. I have been publicly tracking my spending and I track it very granularly because I want to know all these different categories. I have basically necessary categories and frivolous categories. Some people say that travel is necessary and some people say that travel is frivolous. And in Maslow’s Hierarchy of Needs I don’t think travel appears at all. But you do have $800 a month in travel expenses. Those are business expenses if you’re visiting your properties. Of course I’m not a CPA. Talk to your CPA to make sure that you can write them off and that you are planning them properly so that they are write offs. But you have general as at 866. I would challenge you to go in and see what exactly are you throwing in that general category?
The last thing I want to bring up is the boat that we didn’t talk about. I used to live on a lake. I had a boat in my backyard and we never used it. The two happiest days in a boat owner’s life are the day they buy and the day they sell. I don’t have any judgment if you want to keep your boat because you use it all the time, but keep track of how frequently you use your boat. And at $750 a month, could you go and rent it on a weekend if you’re just doing it like once a week? Or once a month, could you rent it for less than that and not have your very own boat?

Pam:
Well, the ultimate five plan was that we will be living on the boat back in Michigan in the summers and [inaudible 00:53:01]-

Mindy:
Oh, how big is it?

Pam:
It’s got two berths they call them, like bedrooms.

Mindy:
Oh.

Pam:
So it’s like 35 foot.

Mindy:
Okay.

Pam:
It’s a cabin cruiser. It’s our mobile cottage.

Mindy:
Okay.

Pam:
And with the dockominium, that’s the summer home, the ultimate goal. And then Arizona for eight or nine months.

Mindy:
Okay. So then that is a conscious expense. Great. Perfect.

Pam:
It will go down as of September by 500 bucks.

Mindy:
So that’ll be 250 a month?

Pam:
Yes.

Mindy:
Okay.

Scott:
Yeah. I don’t know about the boat specifically with that, but I agree with everything Mindy just said there. I think the reality of your situation is you need to go back to fundamental analysis on each one of those rental properties and then your personal P&L, which is even more important. It actually generates way more. You can generate way more cash flow from your personal P&L than you can from rental property portfolio right now. So that’s the cash flow situation. And when you’re sitting on $50,000, if in a few months you’re sitting on 50,000 to $100,000 in cash in your bank account and you’re like, “I’m confident that I’m generating 4,000 to $5,000 a month in free cash flow,” I guarantee you, things will be much better from overall perspective. You’ll be like, “Okay, I have a path to doing this. I don’t have to get to fly tomorrow and live on the boat” but if this will automatically happen and life is good.
But there will be a lot of analytical homework that I think you should do this week because the market is turning right now, right? Some properties are going up and down. Do it now. Figure out those properties. This is not going to be a fun 40 hour week for you. Put your 80 hours or 100 hours in and get this done and then make some plans. Get your husband on the same page with that and say, “We’re not going to hold cash flow negative assets. That is not a good plan.” That’s a good plan if you can hold on for 30 years, but who knows what’s going to happen in 30 years? You know you can hold onto a cash flow positive asset for 30 years.

Pam:
Right. I think one big thing that you pointed out, we weren’t considering the CapEx in the future because what if we do reach our FI, but then five years in, we have thousands of dollars worth of expenses on these houses? So that was a good eye opener.

Scott:
As a real estate investor, your business is your properties, the debts, the assets and liabilities in that portfolio, the cash flow they’re producing and your reserve, right? Cash is the asset that is negatively correlated with real estate, right? When real estate prices are plunging, the value of your cash is going up in that case. So you got to capitalize the business conservatively. And I think a good rule of thumb… Everyone disagrees with this. You go in the forums and you’ll get 50 different people saying 50 different things. But my rule of thumb would be 15,000 to $20,000 for that first property in reserve and adding on a buffer of 5,000 to 10,000 for each additional property that sits in that business bank account. That’s comfortable capitalization for a rental property portfolio.
Go on BiggerPockets right now and ask, “Where can I find a HELOC on my rental properties?” Nobody can find one because the market is not there. So all these people who are like, “Oh, I’m going to capitalize my investment portfolio with a rental property HELOC.” Nobody can find one. If anyone who has a lender that can do a HELOC on investment portfolio, please send it to me at [email protected] We’re going to make them rich, because no one can find a solution.

Pam:
Try to.

Scott:
Yeah. So you need the cash because it’s when the market is… That was all dry up when interest rates are rising with this. And that’s just part of your plan. So your five plan is, “I’ve got a hundred thousand dollars in cash across my 15 units, and then they produce as much cash flow and I take the cash out whenever it gets above a hundred grand. And that’s how I’m casual in my life.”

Pam:
Gotcha. Okay. Gotcha.

Mindy:
Awesome. Well, Pam, this was a lot of fun. I think this is going to be helpful for a lot of people. I think there’s multiple people in a similar position where they think that their property is a rockstar property, and yet they can’t really figure out why it’s not quite as rockstar in real life. I think you’re in a great position to sell. And 1031, I want to give you some words of caution. Get a qualified intermediary ahead of time. Do not close on the first property until you have found the second property. It’s still a hot property, it’s still a hot market, but really make intelligent choices with your 1031 because there’s very strict timelines. If you miss a timeline, if you take possession of the money yourself, there’s so many ways to below a 1031 exchange.
And then you’re paying capital gains taxes. Long term capital gains on the ones you’ve held for more than two years, shorter term capital… Or more than a year? Scott, is it more than a year? It’s more than a year. Short term capital gains on the ones that you have held for less than a year. And just if you can avoid those taxes and just kick that can down the road, do that instead. So yeah, lots of great people.

Scott:
I’d advise doing this quickly, this is overwhelming. You’re going to have a long week, maybe two, of figuring this out. Analyze those properties. Mindy’s absolutely right and I completely forgot about that. There are tax consequences of that. The tax and 1031 stuff should not wag… The tax tail does not wag the business dog.

Pam:
Plus buyback depreciation I have to consider as well.

Scott:
That’s right. So the 1031 exchange will help you avoid that.

Pam:
Oh, good. Okay, I see.

Scott:
Or at least defer it. But that should not affect your decision whether to sell or not. The decision whether to sell or not comes from your analysis. If it’s cashflow negative and it’s going to take significant money out of your life every month for the next 10 years, I would recommend selling that property regardless of whether you’re able to complete a 1031 exchange. But talk to the accountant to see if the 1031 exchange can be a beneficial way to defer those taxes.

Pam:
Okay. Yes. And he’s amazing.

Mindy:
Awesome. Well, thank you, Pam.

Pam:
Thank you so much for your word of advice here.

Scott:
Yeah. Hopefully this was helpful. I know it was overwhelming. There’s a lot going on here. We were trying to be as valuable as possible with that. I know there’s big changes there we’d be interested to see.

Pam:
Yeah, no, it was super helpful. The BiggerPockets community is, “Buy more. Buy more. Buy more.” Well, now what? We buy it. We bought a bunch. Now, what do we do? And it’s exactly that. Analyze

Scott:
You want to buy more when your financial position is strong, you’ve got a really good found foundation with that, plenty of cash, you can hold onto the asset for the long term and it produces… Yeah, there’s argument about whether cash flow or appreciation is more important. I invest in Denver because I believe that appreciation is more important over the long term. But none of my properties negatively cash flow. They just produce less cash flow than I would get in a market like Detroit perhaps, or the Midwest in a general sense.

Mindy:
Okay. Pam, thank you so much. We will talk to you soon.

Pam:
Thank you. Bye.

Mindy:
Okay, Scott, that was Pam. I thought you gave her some really excellent advice on just going through and making sure that the properties are actually cash flowing. I think people see the rent and the mortgage payment and think that what’s left over is their cash flow. And really diving deep into the numbers is so important to make sure that you’ve got a really great rental property.

Scott:
Yeah, I can’t stress enough that Pam won here, right? The market has carried up the value of those properties. Hundreds of thousands of dollars in wealth has been created. Equity has been created due to their activities. But the fundamentals are not, in my opinion, strong enough in that business where I would want to hold onto it for the next five to 10 years. I think that I would want to hold onto a business where I believe in the value of that property going up over time and where I believe that it will put money into my pocket on average every month for the next several years with a strong capitalized position, with a cash reserve that can hold the buffers for when I inevitably will have that. That roof is supposed to last me 15 more years. It may only last me eight. I need to have that cash ready ahead of time to be prepared for that event, right? It may go out tomorrow. I may have her leak tomorrow and have to fix it. So I think that’s really, really important when we go through this.
To recap the overall situation, Pam and her husband are making 12,000 bucks a month and spending 9,500. There may be puts and takes before and after tax. So on average, they’re probably only accumulating 1,000, $2,000 per month which would be fine except for their rental businesses probably taking that out of their position because of the negative cash flow. We said just from the debt we’re spending $6,200 a month in debt service. Principal, interest, taxes, insurance, and then interest payments on the private loan. And that doesn’t even account for the vacancy, CapEx, maintenance, utilities when they’re rent the properties aren’t rented. Those types of expenses that are definitely hitting them and sucking cash out of their lives. So the way we solve that is we do a unit analysis by each property and say, “What’s this property performing like today? What’s it going to perform like over the next couple of years?” And that will tell me to buy, hold or refinance each one of those properties. And I believe just at the highest level that they’re going to have work to do.
And then lastly, I think it’s important to have that framework in mind about what I want to do and what a strong financial position looks like, and then move quickly to get to it. Not because we’re terrified of the market or anything like that, but because that market volatility, they’re all dependent I guess because of the market, right? Because they’re dependent on the market to produce wealth gains or decreases, that’s a position that’s very volatile compared to the investor’s going to hold for 20 years a cash flowing asset. So I think they should move very quickly. I think there’s a lot of homework to be done there. And I’m excited to see how it turns out for them. So again, all in the context of a big win. Don’t want to overshadow that.

Mindy:
Yes, I think we didn’t do enough to celebrate the fact that she has done really well so far, but now is the time to reevaluate what she’s got. I will say that I think my advice might have been a little bit different if she was investing in a different market, but Michigan is not known to be a rapidly appreciating market.

Scott:
And the advice would be different if she had already refinanced those properties at low interest rates. So if these were on 30 year fixed rate mortgages at 3.5% because she refinanced or bought them in 2016, 2015 and we’re cash flowing, no way we’d be selling right now, right? I’m not selling property. That’s how my portfolio looks with that. I’m not selling that. But because she has to refinance the properties at probably 6.5, 7% interest rates at this point in time to pay off her 10% private loan, that’s where the sell decision I think becomes that much more of a factor.

Mindy:
Okay, Scott, should we get out of here?

Scott:
Let’s do it.

Mindy:
From episode 322 of the BiggerPockets Money Podcast, he is Scott Trench and I am Mindy Jensen saying stay out of trouble.

 

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

2022-07-29 06:01:21

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A Supply-Starved Market and How Investors Taking Advantage

Is some alleviation from inflated home prices headed our way? Over the past two years, sellers have taken the housing market for a ride, getting dozens of offers on every listed house. No matter the condition, area, or age of the property, buyers were filling open houses every weekend just to make an over-asking offer on what should be a reasonably priced house. Now, the tables are starting to turn, and as a result, sellers are getting desperate.

Interest rates are rising and buyers are backing out of the market by the dozen. Instead of twenty offers in a weekend, sellers are looking at two, and none of them are over asking price. This is good news for home buyers and great news for investors, as deals are becoming easier to come by while the housing market hysteria takes a breather.

We brought the entire On The Market panel in this week to see where they’re finding deals, how their own markets are fairing, and what investors should look for on the horizon as demand steadily starts to slow. We also go into the future of housing inventory and how another inventory crisis could be coming soon.

Dave:
Hey, everyone, and welcome to On The Market. Today, we have a great episode in store for you where I am joined by the full cast of On The Market. We’ve got Henry, James, Jamil and Kathy to talk about the state of the market. Basically, if you have been paying attention, the market is starting to shift and we thought that it would be a great idea to have everyone from the cast join us to just talk about what they’re seeing in the market, what data are they tracking and how they are finding deals. And just a quick spoiler, they are finding deals. They’re finding more deals. So if you are curious about how to get into this market, you definitely want to listen to this episode, and we have an extra good data drop so definitely stick around to the end. Hey, everyone. Welcome to On The Market. Today, it’s like a family reunion. We have everyone here. We’ve got Kathy, Jamil, Henry and James. The entire crew. It’s been a while since we all were together. I missed you guys.

Kathy:
It’s a podcast party.

Henry:
Yeah.

Jamil:
The pajama jam-a-jam.

Dave:
Pajama jam.

Henry:
We could have worn pajamas.

Dave:
Wait, we got to do an episode where we’re all in our jamies.

Kathy:
Well, I have my pajama bottoms on, of course.

Dave:
Yes.

Henry:
I don’t have any bottoms on.

Dave:
All right. Henry, would you like to add to that?

Henry:
No, I think I’m good.

Dave:
Okay.

Henry:
Appropriately clothed for this podcast.

Jamil:
Just trying to wade past all the mental images right now, probably just move on.

Dave:
Awesome. Well, as much fun as it is to just get you all together for fun, we decided that because maybe you think differently, but to me it seems like the market has really started to shift. We had the first half of the year, we all knew or sort of were thinking that the market was starting to shift, and a lot of the data, a lot of the anecdotal stories we’re all hearing is that the market is changing. And so I wanted to get the entire crew together, the full force of On The Market to talk about how the market is shifting and how investors, people who are listening to this, can adapt.
So what we’re going to do is I’m going to first read through some market data and we’ll hear from everyone about what data you all feel is the most important. Then we’ll go into just some stories. I’d love to hear from you all about what’s happening in your individual businesses. And then we’ll talk about different strategies and how they’re impacted by the market shifts. Y’all ready?

Jamil:
Let’s do it.

Kathy:
Yeah.

Henry:
I’m ready.

Kathy:
Let’s go.

Dave:
All right. Sweet. So June data came back. This is going to air at the end of July, but as everyone knows, data comes about a month in arrears. And so we were talking about June data and the headline numbers haven’t changed all that much. Media and sales price still up an enormous amount, but it did drop. It’s down to 11.2% year-over-year. It was at 15% in May, so that represents a slowdown. And for anyone who is listening to this, if you saw 11% year-over-year growth in any pre pandemic time, you would be flipping out and extremely excited or concerned. I don’t even know, but it would be very anomalous. So just seeing it go down to 11% does represent that things are cooling, but it’s certainly not any sort of time to panic. So that’s what’s going on with sales price.
We’re also seeing that inventory, which I believe is one of the most important metrics, are starting to change. So inventory, for anyone who isn’t aware, dropped dramatically over the last couple of years and when inventory is low and demand is high, like it’s been, that can push up prices. So we see that inventory is starting to recover and it’s going up and up and up. In May, we started to see the trend of year-over-year growth. It was at 9%, now it’s at 15%. So that sounds great, but inventory, just if you look at it in absolute levels, is just a complete joke. It’s at 913,000 houses on the market in June. Just for the record, in June of 2019, pre pandemic, it was 1.6 million. So we’re still down 44% over pre pandemic level. So changing, but still really crazy.
Two of my other favorite things are month’s supply at 1.7 months. Up from a low of 1.3, but less than half of where we were in June of 2019. Days on market, only at 23 days. Normal is considered about 45, 50, depending on who you believe. So all of this data suggests that we’re still super low. We haven’t gotten anywhere near to what’s normal, but things are starting to change. So Henry, let’s start with you. What do you think of all this data that’s coming in? What are the things that you think are the most important and that you’re going to be paying attention to through the rest of this year?

Henry:
So the thing that I’m watching the most is really, one of the things I’m watching the most is days on market. So we have a lot of property right now in our business that we’re putting on the market, literally actively as we speak. And to take the numbers that you said and bring them down to a micro level in my market, we’re adding about a hundred homes a week. And so each week our competition for other homes on the market is rising. And so getting homes on the market sooner is of more of a benefit because there’s a little less competition each week that it’s out there. And so we are kind of in a push to get everything listed as quickly as possible. And we also have the expectation that those properties are going to sit on the market a little longer than they were than even six months ago.
But that’s not really doom and gloom, because things are still selling because of exactly what you said. The numbers have come down, but they’ve come down for these such extreme highs that even the numbers they’ve come down to, if those were just a blip and none of the other things that happened before that, and we saw that, like you said, 11%, we’d be like, oh man, things are crazy, 11%, that’s nuts. And so houses are still selling. They’re taking a little longer to sell, but it’s the last couple of homes I sold, I would say we got… I think the last home I sold, we got two offers and it took us about three weeks to get both those offers. And then one of them was at asking price.
And so what does that mean? We still priced that house at what we thought we would get pre pandemic. So I probably priced it higher than what it typically should go for in a normal market, because I was betting on things we’re still selling at premiums. And I didn’t get pre pandemic… I mean, I didn’t get offers like in the last six months where we would’ve got seven offers in the first hour it was on the market. It took two weeks to get two offers and I still got an asking price offer, which is higher than what I anticipated selling the house for. And so the market is still strong for someone like me, who’s an investor who’s buying, rehabbing, and then selling. But yes, things are shifting and to me, all that’s equated to is it’s just slowing down a little bit.

Dave:
You’re selling flips, right, or things you were already planning to sell or are you selling now because of market conditions things that you were originally intending to buy and hold?

Henry:
No, we’re only selling things we were planning to sell regardless of the market conditions. I mean, that’s just, that’s how we operate anyway. Even in the peak months where things were going for top dollar, we were still only selling things we were planning to sell. I’m always going to be a buy and hold investor. Now I did trim a little bit of the fat on my portfolio during that time. Meaning, there were some properties that were a little more maintenance intensive than I anticipated, and we were able to sell those at a premium and then take that money and redeploy it into other buy and holds.
But right now all the market is telling me is that there’s two things, I just need to plan for a little bit longer time and I didn’t really adjust my plan when things were crazy. It was just super cool to sell a house in a day. But things are going to take a little longer and I just want to keep an eye on that supply. That how much competition is there going to be for me? But the benefit to me now is because market conditions are changing, more deals are coming my way that I didn’t have to go market for and so I’m actually able to buy properties cheaper.

Dave:
All right. Great. I do want to hear more about how you’re getting properties cheaper in just a little bit. But Kathy, what do you make of this data? What are you tracking right now?

Kathy:
Supply and demand of course is a really important thing to look at, but it can change. It can change pretty quickly. And it surprises me when people are surprised at the changes or when these headlines acting as if this was some kind of shock. It reminds me of that scene in Austin Powers where the roller’s like a hundred feet away and he’s freaking out, all the other. The Fed had gave us warning and gave us warning a long time ago that there were going to be seven rate hikes this year, about, and that meant that their intent was to slow down the economy and that means the economy’s going to slow down. So the economy’s doing what the Fed wants it to do, which is to slow down. And honestly, it’s what most people want the housing market to slow down because it was getting out of control.
So this is what we’re getting, a slower market, and people had time to prepare for it. I would hope. I would hope people paid attention to that. So we know that there’s going to be two more rate hikes, one maybe, well, we think anyway, we don’t know, but they’re saying, and so it’s going to continue to slow of course, because inflation was high. So we do need to prepare for more, more of a slow down. And at the same time we have all the elements are still in place that were there last year, which is this massive group of people who want to buy and not enough inventory, as you said. With all these rate hikes, it still hasn’t really made that much of a difference in inventory. I just looked up where my daughter bought because I really encouraged her to buy a property just near me because she had a baby and I needed to be near that baby.
So she’s about 30 minutes away and she paid a lot. She paid probably too much for that house, but with the low rate she’s able to stay there. So I was a little worried and I looked at comps just to see, oh boy, is her house under water now? Not at all. It’s still up $75,000 from when she bought it six months ago. And this is in the LA area where they’re saying that things are slowing down, but there were only three properties in her price range on the market and they were an awful condition. So that’s just kind of an example of there’s just not houses available and if you want a place to live, you’re either going to pay high rent or you’re going to pay high mortgage, which one are you going to choose?
And if you’re able to buy, people might choose that because at least the rent, at least the monthly payment is going towards paying down that loan and not paying somebody else. So what do I look like? Look like? This is what I look like. What do I look at is definitely supply and demand. And we know it’s changing, but currently there’s still just not enough supply and still massive demand. With that said, we’re in the rental business. So we’re seeing multiple offers on rental properties because the same problem exists in rental properties. That’s why I’m so glad even though my daughter paid so much, she’s locked in and her mortgage is lower than the rents. And that’s happening a lot of places. People aren’t going to leave their homes because their current payment is much lower than the rents out there, unless they’re in a really distressed situation.
So supply, demand, that’s what we’re focused on. We’re having a hard time finding cash flow, although it’s starting to ease up and we’re starting to be able to buy properties at auctions again, and find properties we can renovate, and we’re starting to see price cuts. So from my vantage point, it’s a wonderful thing. We’re seeing more opportunity. I’m extremely excited about this market and the next six months, because there is so much fear that people who are looking for something other than not just focused on pricing or price cuts, but are really looking at a long term investment, for cash flow in a market that’s rental starved this is an incredible opportunity.

Dave:
That’s a great point. And I actually, I read it. I don’t know if you saw this article as well. I think it was in the Wall Street Journal that bidding wars are now happening for rentals.

Kathy:
Yes.

Dave:
It’s shifted from the housing market where you put a house on the market, they were seeing multiple offers. Now landlords and property managers who are just putting a normal rental, people are bidding up the price of rent where, I mean, you guys do this more than me, but I’ve been a landlord for 12 years, I’ve never had that happen in my life.

James:
It’s definitely been a trend the last 24 though. The last 12, 24 months, we’ve definitely been getting a lot more aggressive rental applications. You just have to watch out for the city you’re in because some cities don’t let you do it.

Kathy:
Yeah. For the last two years, we actually have been seeing that in the certain markets that we’ve been in, because they just couldn’t bring on supply fast enough in parts of Florida and these areas that are growing so fast and it’s been so hard to build. Now, we also have a business of syndications where we’re building single family homes and that is affected. That’s been hard for us because we’ve gone through a time where prices have gone up so much, just the cost to build a home has increased so much that in many cases builders are just hoping to break even, and if they have to lower prices now, it’s going to hurt a lot of builders. I know we’re starting to feel it. Most of our projects are already sold, so we’re getting out of them, but there will be opportunity with new homes. It’s just unfortunate for the builders. Some of our projects where we thought projects like that were hitting a 16% to 20% IRR, hit 8%. So still not horrible, but definitely not close to what we expected because of how expensive everything got and now with prices softening.

Dave:
James, I wanted to turn to you because I know you’ve been relatively, I don’t want to say bearish, but you’ve been warning and thinking that prices were going to decline for a few months now, do you see this recent data as a reflection of that, and do you think prices are going down, I guess you could say nationally, but also in your market in the Seattle area?

James:
Yeah, I think we’re definitely seeing a trend where things are coming off peak. I mean the data that you just talked about is almost identical for what’s going on in our market or nationally that’s about 35% less on the median home price down. What I’ve been tracking is I’m tracking median sale prices in specific neighborhoods from March. I want to see what was happening in February, March. And then what I’m seeing in all these markets that were jumping, the red hot markets, Boise, Scottsdale, Seattle, Austin, they skyrocketed about 20% to 25% in one single month in February. And what we’re seeing is right now pricing’s down about 10% to 11% on median home pricing on the ones that hockey sticked up, so that’s a little bit more aggressive.
The ones that over accelerated are actually down more like 50%. And so those are data trends that we’re really watching right now because we write about 30 to 40 offers a month or a week and then we’re also listing about five to seven properties a week as well. And so we have constant inventory coming on the market and so those are things that we’re trying to track. What is going on in each specific neighborhood on that median home price and then also what’s the inventory levels? For me, I can’t just use one stat, one fact. I got to take it all and put it into this, I got to mix it all up and then kind of come up with my own analysis, because what we’re seeing here is we’re seeing a trend coming down and it’s a slower trend, which is a great sign for real estate.
They jacked up the cost of money by 35% to 40% and we’ve only seen like a 10% pullback off peak, not even off of really what the median home price is. And so these rates have slowed everything down, but we are seeing homes take longer to sell. We sold five homes this weekend. Five went pending. One went pending in the first week, the other four took anywhere between 20 and 35 days and we sold those homes for about 2% to 3% off list just because we’re giving some concessions. The biggest key stat that I watch and it’s hard because the only way to do it is to make phone calls is actually traffic on listings right now. As we’re going to dispositions for fix and flip, as we’re going for development projects in new construction, we are spending a ton of time calling every broker to see how many bodies are coming through because what some of the stats aren’t telling people, besides the mortgage app request stat, is there’s a very few amount of people looking right now.
It’s not just that the transactions are down. The bodies are down by about 90% at least in our local market and so it’s very key for anything that you’re selling that you have to price well. You can’t price off what your proforma is, you have to price off the now. And what we’re doing to move properties is we’re calling through all the brokers, we’re seeing where the traffic is, we want to know where the most amount of bodies are because that will click that sale, and then we’re pricing in the cluster of all the comps. And you can do that by checking median home price, you want to check inventory levels, days on market and then making that right phone call. And you can kind of get all these magical numbers in, but as you put it together that’s how we’re writing these offers out is based on each city, whatever that trend is, we’re baking into our proforma.
So if Seattle came down, a specific neighborhood in Seattle came down 10% and we have a couple listings in the market that the brokers are saying that the showings are still one to two a week, we’re going to actually proforma in a little bit more depreciation because that’s just naturally what’s happening with the cost of money increasing so rapidly. And the good thing is we’ve seen the Fed, the banks have already kind of baked in a lot of these rates into the current cost, and so these next couple hikes shouldn’t raise rates too much more so you can kind of get these little sweet spots in the market around the median home price where the action is and then price accordingly. But we’re still selling a lot of property on market right now. Things are definitely slow, but you just have to put the right plan on it and things sell. They always sell.

Dave:
That’s great advice. That’s a data point that is not easily attainable just by Googling around, trying to figure out what the foot traffic is in a door. I’ve never heard of someone really calling around and trying to get that. That’s a really good tip. Just in absolute terms, what numbers are they giving you? Is it like a hundred people a week were touring and now it’s 10 or what are the numbers you’re seeing?

James:
We’re seeing about a 95% drop off. So if we were seeing 25 to 30 showings in a weekend, which is pretty common especially these markets that jumped 10% to 20% in a single month, it was about 25 to 30 showings on average through those properties. We are seeing about two to three showings now on those properties and it’s steady. And the only stuff that we’re seeing high traffic on is what was referenced is these bidding wars on rental cheap product. People are trying to place money, they want to beat inflation, the cheap stuff you can still cash flow with the high interest rates right now. That stuff’s still crazy on that side. We’re writing a lot of offers on the other side and it’s almost like we’re seeing the margins just get more and more compressed or people don’t want to look at the data downstream because on the buy side, if it’s cheap, it’s getting bid up.
Now the expensive opportunities there’s nobody playing. At least in our market no one is playing in that zone because what the biggest fear is a 10% drop, let’s say the mark comes down another 10% and decompresses another 10%. On 300 grand that’s 30 grand. That’s not good, but that’s doable. On a $3 million property that’s $300,000. And so I think we’re seeing the multiple offers on the rental properties because it’s safe. You can play with a flip, you can play with a rental and you can kind of put together a really bulletproof strategy for that property. So people are chasing safeness and they’re just being cautious. Those 10%, 15% swings are detrimental and that’s why those markets just aren’t moving right now.

Dave:
Yeah, that’s really good insight. Jamil, are you seeing the same sort of thing? Because Phoenix is also a pretty high price market like Seattle and I guess, one, if you were just looking at it on the face value of how rapidly it increased could be at risk for some sort of correction. What are you seeing?

Jamil:
So I’m listening to everybody talk and it feels like they’ve been just staring at the market that I live in and reporting it exactly as it’s been going. So super accurate representations of what they’re seeing. I’m actually living in that as well. For us, I have two businesses, it’s wholesale and fix and flip. For my wholesale business what we found has happened is there was an absolute pause. So just as you saw, people were kind of like looking, oh, what’s going to happen in the market, are my flips going to sell, are they going to go under contract, how long am I going to have to hold this? Well, those investors they paused for about two weeks. They weren’t really bullish on pulling the trigger on getting any other inventory because they wanted to see what was happening.
Well, all of those, if they were priced well, went under contract and those buyers have all come back to the wholesale business and they’re ready to deploy and ready to go again. So just as James has said, just as Henry said, just as Kathy said, if you are in that median home price range, if you’re in the affordability area, you are absolutely fine. The luxury. So we do some luxury flips and the luxury flips have absolutely, just as James has said, the traffic has gone down significantly. We would get multiple calls a day. Right now we’re getting maybe one or two a week. And I think it has a lot to do with the psychology of the type of buyer. So you guys know I’m on a television show, I have a production crew that’s following us around, and a lot of the people in the production crew it’s like regular jobs.
So they go and they wanted to participate in the housing market because they were seeing what we’re doing. Well, all that time when inventory was just flying off the shelves, they couldn’t even compete. They couldn’t write offers, they just couldn’t make it work. Everything was cash and these guys are financed. And so what we saw happen is as prices or as rates went up, the really, really sophisticated buyer or the wealthy person, they kind of stepped back and said, I’m going to wait a moment. I’m just going to wait a moment and I’m not going to make my move right now. I’m going to wait for things to sort of settle down. But it left a huge opportunity for other people who had been frustrated because they couldn’t participate in the market to step in. And so now they’re taking advantage of their turn at property that’s in the median home price.
Now with respect to pricing, what we found is what you and I discussed with Rick, where I had categorized this spike in value, which I called emotional equity, that’s the money that people overpaid for property that wasn’t backed by a lender appraisal. So this is stuff where if the appraisal came in at one price and people bid up another $100,000, I call that emotional equity because it’s not lender backed. It’s not appraised. That stuff has disappeared. Whatever that run up was, so you might have a couple of high comps in a neighborhood, whatever that extra 150,000, 25,000 that sold above list, that pricing is gone. So people are just coming back to normality. They’re just coming back to, and it’s still high, but they’re coming back and now the flippers are pricing in at where that number should actually be. They’re not overpricing the way that they might have been a couple of months ago.
And so as you just heard Henry say, we’re rushing, rushing, rushing to get everything on the market right now. My prediction is we’re going to see something really interesting happen because that mentality, that sentiment is what many investors are doing, they’re rushing. And even homeowners that need to sell, that need to move, they’re rushing, rushing, rushing. But guys, look at inventory. Right now, even with that rush inventory at a month and a half. It’s still a seller’s market up to three months of supply. So we are seeing this huge rush of all these sophisticated people trying to get the top dollar for their property. That’s like squeezing the end of a toothpaste tube.
Guys, we’re just getting the last bits of it right now and I think that the result that we’re going to see here is going to be something we really won’t understand until we’re in it. Because we’re literally pushing out all of these homes, all of this inventory right now, and this rush to capitalize on the high price and whatever buyer activity is still there, and you’re going to find that inventory, just because what Kathy said, the builders are being killed right now because of cost going up and rates going up, they’re slowing down. I feel another perfect storm coming. That’s my opinion. I think that I’m tracking right now to see if this storm is actually going to hit. Days on market, months supply, and I’m watching it like a hawk.

Dave:
Are you saying a perfect storm for prices to go up again?

Jamil:
To increase again, again, again. I know this sounds nutty and maybe I’m contrarian here, but I think what you’re going to see coming out the other side of that, and yes, it’s going to have a momentary dip, just like when the pandemic happened houses pricing started to go down, but from where? We were at ridiculously high prices, of course, it’s going to come down from the psychosis. But there’s still no inventory. It’s a joke. And you’ve got all these people rushing to put inventory on the market right now. I think the result of that, we’re going to feel it.

James:
One thing about the inventory that I think there is very little supply right now, but people do need to follow this trend. It is increasing every month and the bodies are low. And as you’re doing development, as you’re doing fix and flip, you are performing out your deals 6 to 12 months down the road, by the time you get there and that’s where you want to hedge a little bit. The short term investments are riskier. Wholesaling is a great thing to be in right now. You get in and out of a deal.
Speed is key in a market that’s a little bit transitioning. But I do hear a lot from people, it’s like, oh, well, there’s no inventory. There’s no inventory, but you have to track the trend because by the time you get into the… You’re going to be drowning by the time you realize what’s going on. And we are seeing that steady increase, we are seeing a limited amount of bodies, and we know that the Fed is saying that rates are going to increase. I think the inventory levels are going to be up to three to four months in the next three. It’s just, that is what the trend is.

Jamil:
It gets there, James, and I’m in an agreement that we’re going to see that bump, we’re going to see that bump in inventory, but I don’t know that the inventory’s actually there to support that bump. That’s my worry. My worry is that we still haven’t built enough houses to satisfy demand in a normal market. And I think what’s happening is as you’re saying right now we have fewer bodies, but those bodies are only going to sit on the sideline for so long. There’s going to be a point where they’re just going to say, I got to get back into it. Look at rent. They’re bidding up. Rent is going up and up and up and up. And just to rent a house in Phoenix right now to have a decent home, you’re talking $4,000 to $5,000 a month.
I mean, that’s a lot of money, right? So people are going to say that, they’re going to look at that, they’re going to be like, I’m not renting. This is trash. I’m going to go buy a house, even though the rate’s 6.5% right now makes way more sense for me to go buy a house. And I know I’m going to sound crazy to a lot of people, this guy just said, housing prices are going to go up again. I don’t think it’s going to happen right now, but I think that coming around the bend, that’s a definite risk. The way that we’re seeing activity right now, it’s a definite risk.

Kathy:
It makes so much sense when you describe it that way, because as people see that maybe those headlines aren’t correct and maybe there’s not going to be a housing crash, and then they realize that 5% is maybe a normal mortgage rate. It was there just a couple of years ago. So people will adjust. It’s scary to buy a house if you think the prices are going to go down, but when people start to see that’s not happening, you’re right, they could come flooding in again.

Dave:
So then what’s happening? Are you seeing the same thing in the luxury market, Kathy and Jamil, that James is seeing? And do you think what you’re saying about prices continuing to increase is going to happen across the spectrum of asset classes or housing classes?

Kathy:
I can just speak from what I see in Park City where inventory has increased dramatically. So there is opportunity in Park City right now, in fact, in our own development we’ve reduced prices. So it’s a great opportunity because areas like that always come back. There’s very few places that have the kind of snow that Park City has. It’s like gold. It’s so fluffy. So that doesn’t go out of style and so this is a great opportunity to get into luxury because there is an increased inventory, whereas literally a few months ago there was nothing to buy. There was nothing. Now there’s something to buy.

Dave:
Well, I’m going to do my best Kathy imitation and say that there is no national housing market and it depends on where you are. And as such, we actually have another data drop for you this week. This one is really good. I’m very excited about this. We put together lead indicator data for pretty much every market in the US, and it shows two things or it shows a bunch of things. So I put a bunch of metrics on there. It has median sales price, days on market, new listings, active listings, and price drops. All super important. And then what we did was compare it year-over-year, which normally in normal market conditions, I don’t know about you guys, year-over-year is sort of the reliable thing that you look at because there’s a lot of seasonality in the housing market and you want to see how, for example, June 2022 compared to June 2021.
There’s this thing called base effect in data analysis where if last years data was really crazy for some reason, you can’t really look at year-over-year data. And so that’s another factor that’s going on here and why you see these things in some markets price drops went up 400% this last year. It’s because they were at nothing and so proportionally it looks really high. And so in this data drop, not only do we give you year-over-year data, but we give you pre pandemic comparison. So you can look at data from 2019 to 2022. And of course, no analysis is perfect, but this should help you looking at those two things combined, in my opinion, help you understand, okay, what’s the recent trend and what is it compared to normal times? How does this track?
And so you’ll see it’s really different. It’s really different depending on where you are in the market. So you can download that. I should probably give you the URL. It’s biggerpockets.com/datadrop5. So you can check that out. I’m going to go on record and say, I think Boise is the riskiest housing market in the entire country right now, because not only are active listings up like 200%, they’re higher than they were pre pandemic, and so that to me is a huge shift in what’s going on. But meanwhile, places in Florida and North Carolina look great. They look completely great. So as an investor, as we always say here, you have to be a market expert and this data drop should help you become a local expert.
All right. Let’s switch gears a little bit because I do want to talk about deals. It sounds like you guys are finding deals and I want to know how you’re finding those deals and what kind of deals are working for you. Henry, you mentioned you’re finding cheaper deals. Can you tell us a little bit more about what you’re into right now?

Henry:
Yeah, that’s a great question. So deal flow for us has always been about finding off market deals. And off market deals essentially means that we’re buying things that aren’t listed from people who need to sell more than they want to sell. So there’s usually some type of distress involved and that distress is leading them to have to, or to want to, or need to cash out of their home to either go handle some situation or whatever the case may be. And so when you have this perfect storm of the economic environment is uncertain, inflation is super high, people are starting to maybe lose jobs, or get laid off, or can’t find work that they want, and then you have also interest rates rising in the housing market and you’ve got some volatility there, or from the retail buyer may not fully understand what’s happening in the real estate market and that creates some uncertainty.
You’ve got this perfect storm of people just saying, you know what? I got to get out of this house. I got to get out of it quick. I had thought about selling it six months ago, but I didn’t want to do it and now I’ve got to get rid of it. And what’s happening now is typically I’m in the business of marketing or sending out information to people and then they can reach out to me if they’re interested in an offer I might have. And I’m seeing a whole lot more of people just reaching out to me based on word of mouth. One of the last deals I bought was my title company literally called me and said, Hey, I got a lady who just wants to sell her house, she needs it gone right now, can you call her? And that’s happened twice in the past six months where people have just reached out to me and said, Hey, I heard you buy houses, can you come by my house?
And I’ve ended up buying those properties and so I’m getting a whole lot more people looking for me than me looking for people, and I think that’s due to both the real estate market uncertainty and the economy uncertainty. And so the last one I bought, it was in great shape. I told the lady to sell it with the real estate agent and she’d probably be okay. She didn’t want to take that risk. She needed it gone now. And she felt like she would get more money from me than if she listed it. And so we went ahead and we bought that property. But I try to educate everybody that I come into contact with and let them know, Hey, these are your options. And these two options here are probably going to net you more money, they just won’t be with me, but I’m happy to connect you with them. And people still even knowing that are like, well, just tell me what you can do. And to me that says that there’s uncertainty for them and they want to go with something that’s certain and quick.

Dave:
Jamil, are you seeing the same thing? Because I know in the wholesaling business you’re typically looking for these types of distress selling situations.

Jamil:
Yeah. So interesting, one of our primary lead generation techniques is actually direct to seller through agent. So we really leverage agent relationships to get a lot of opportunities. What we’ve seen is realtors six months ago were basically all on ecstasy. They were out of their mind. They’re like, oh my God, it feels so good. Wow, the housing market is crazy I don’t even have to work and give some water. That’s what was happening and they were out of their mind and totally just off their rockers with pricing. They were like, oh, price? A billion dollars. Let’s try it. And so that’s kind of what happened. And so that has absolutely shifted. The thing that we notice is that the regular home owner isn’t as up to date on market trends and stats and data as we are and we want them to be. Because they’re not really paying attention. They’re in their own bubbles, they’re in their own worlds, and until it affects them, they’re not going to read about a headline about this and that with the market.
Agents, however, absolutely have their finger on it. And they’re right now suffering the hangover from their really, really interesting party nights that they had for the last six months. And so right now, they’re in a depressed state. When we talk to them, they’re like, oh my God, everything is so bad. I can’t. I’m like, what are we going to do? So they’re so open to hearing from us what number we want to pay and they’re going and selling that price to their sellers, because they’re fearful. They’re like, look, I have no idea what’s happening right now. The rates are high, there’s no buyers, my phone’s not ringing, you should take their offer. And so we’ve been actually cleaning up because there is so many opportunities.
I feel like we literally can name our price and it’s happening. I had an agent who we have a great relationship with, but she had a property listed on the market, it was an original condition and happens sometimes, because the market was so hot, she listed it at what should be ARV, which didn’t make any sense to us because you’re looking at it and you’re like, how would you do that? This house needs a full renovation to justify that price. And she’s like, well, this is what the seller wants. And so it sat for 30 days and then she reached out to us and said, Hey, where would you guys be? And it was legitimately $250,000 below what her list price was. Done. She would’ve not had that conversation with us 60 days ago. So guys, if you have not taken advantage of the agent finder program here at BiggerPockets do so, because they will help you connect the dots on some incredible deals, work with the realtors. I’m telling you right now, they know better than anybody and they are the most fearful pack that exists right now.

Dave:
And if you want to check out what Jamil’s talking about, we have this tool on biggerpockets.com. You can go to biggerpockets.com/af and you can get matched with a investor friendly agent. It’s completely free. There’s tons of great agents on there. So you should definitely go check that out. Kathy, so you said earlier that your buying patterns are changing a little bit, right? You even mentioned that some things were coming up on auction. Is that how you’re pursuing deals right now?

Kathy:
Yeah. We weren’t able to really find cash flow properties over the last six months in some of the markets we were in and in the cash flowing markets there just wasn’t the inventory. So it was a little bit hard to find that and now it’s coming back again. So we’re back in sort of those Midwest markets, which I think you mentioned those are kind of hot right now because it’s the one place that’s affordable still. So we’re looking at that. We are also about to start… I’ve been looking at multifamily, I’ve been looking at commercial properties, and single family and it’s kind of interesting when I’ve looked that multifamily hasn’t quite come down yet. I don’t think the way it might and I could be wrong. I was wrong two years ago. I should have bought every single multifamily I could get my hands on, but in 2020 I really wasn’t too sure how that was going to go, but some people really made out well.
Now we’re looking at some of those properties and people are still really, a lot of proformas are still betting on rents going up quite dramatically and they might, but they also might not and it just makes me a little bit nervous. And even so, even with these really high rents that are being projected, the returns are just okay. But when we were looking at another single family fund, we had a single family rental fund for the last five years, the numbers were actually pretty good and better than the multifamily that we had been looking at. So we’re looking at parts of Texas for that fund and then parts of the Central Florida area for single family. And it’s just exciting to be able to negotiate again. That was just not something you could do before for a while. Maybe Jamil and James and Henry could, but we didn’t know how to do it over the last six months.

Dave:
It’s interesting that you said about the Midwest. I was looking something this morning on realtor.com. They have this thing called the hotness ranking, which sounds like it should be on a dating app and not on real estate.

Jamil:
It’s so good. I love that. They call it hotness. Oh my gosh. Look at Wisconsin, it has a duck face.

Dave:
Well, unfortunately it’s just actually housing market data, but I think your app might take off, Jamil. And what it’s showing is that the hottest markets, and again, every one of these websites that does this has their own methodologies so you should go look at what they’re actually doing to rank these markets, but the hottest markets right now are in the Midwest and in the Northeast. It’s been years since I’ve seen hot markets in Massachusetts, in Connecticut, New Hampshire, Vermont, Maine. Central Florida is still very hot, Kathy, don’t worry. So we’re still seeing a lot of that, but it’s just, I think it’s the impact of the migration over the last few years. People have been moving out of those places or the markets have gone up, but not 40% or 50% in the last two years. And so relatively speaking, the Midwest and the Northeast are becoming more affordable and probably at least have less competition than in Florida and Texas and you might be able as a buyer to look around and actually pick a house you like, which sounds crazy given what’s happened over the last two years.

Kathy:
It’s kind of normal. It’s cyclical where the super hot markets that are where people really want to live, they’ll go up and up and up in price until they hit a peak, and then that’s as high as they can go. They hit an affordability ceiling and then we start to see the more linear markets take off. So it seems to be kind of the same as when we were buying in Texas in 2005 where that was the place to be. That’s where it was about to take off again. But if you’re starting a family and maybe you do have the ability to work from home or you could get a job, there’s so many job openings, and you’re looking around and just getting really depressed at rent and home prices, you might just start looking in markets that you hadn’t thought of before, so that could be what the trends are.

Henry:
So the super hot states are dying off and the dad bod states are starting to win, huh? There’s a chance for me yet.

Dave:
Is that a dad bod state? I’ve ever heard of that. Is that real?

James:
There’s always a trickle down effect. In 2008, the hot markets, the ones that appreciate the fastest, the hockey stick up, are the first ones that hit the brakes. The other ones keep limping along and then eventually they follow the same trends, to be honest. In 2008, every market trended with the expensive markets after about six months. And so it’s just, the expensive markets are the leaders, they kind of show you what’s going to happen. They forecast the rest of the markets six months down the road.

Dave:
I think what you’re saying too is right, Kathy, and is interesting that unfortunately for a lot of people housing in their city, whether you rent or buy, is becoming unaffordable. And if these trends continue at least there’s likely going to see some reversal in migration patterns, or maybe just some migration to some of these cheaper places like the Midwest. You look at cities like Chicago, it’s the third largest city in the United States, it’s way, way below average in terms of housing market appreciation over the last couple years, but still has a really great economy. So you could imagine places like that starting to see a revival again or at least I can.

Kathy:
Yeah. And it’s funny, I’ll just say that we mostly did our events in California and I would ask the room with hundreds of people, Hey, how many of you have been to say Indianapolis, or Birmingham, or Cincinnati or Cleveland? And maybe a couple hands would go up. So it was really funny so many Californians don’t really go east of I don’t know, Nevada. And so I would take just busloads of people from California to go see these areas and they still had this idea that it was like wheat fields or something in these cities.

James:
I just have this vision of all these Californian tourists wearing Hawaiian shirts with cameras looking like, wow, look at how they live where there’s corn.

Henry:
What’s the Piggly Wiggly?

Kathy:
I swear if we blindfolded them, they wouldn’t know they weren’t in San Francisco. And in fact, some of the areas like Cleveland their downtown has been revitalized, it’s beautiful, it’s a medical leader with the Cleveland Clinic, and it’s nicer in some ways than some of the areas that they’re living in California that haven’t been updated or upgraded. So a lot of people were shocked and we saw a lot of people actually move. So I’m sorry for being part of the California migration issue.

Dave:
Oh my gosh.

Kathy:
It was like-

Dave:
Apologize on behalf of all Californians who moved, Kathy. It’s your responsibility.

Kathy:
… but it’s like they really didn’t know that there was really nice places to live outside of California that it’s just kind of funny. Now, maybe after living a winter they might change their mind.

Dave:
That’s a Rick and Morty episode. I got to call Dan Harmon. James, I did want to ask you about the flipping market because I think that’s the only one we haven’t really touched on here. And just curious how you’re finding deals in flip? Sounds like you’re probably staying away from the luxury market or what are you targeting right now?

James:
No, we don’t stay away from any market. We just buy differently and adjust the proformas. So with our luxury stuff, we’re definitely going for much higher returns, 25% or to 30%. Or with leverage we’re targeting 50% to 60%, because we need that extra padding if the market does correct more. And also we’re just not using peak comps. We only use comps within 30 days or pendings and we’re talking to every broker. And if the comps are higher 30 days ago, than we’re using the pendings. But the best way that we are getting deals done, we’re definitely seeing sellers are adjusting their numbers, there is a slight panic going on I can tell with brokers and sellers, and so what we’re doing is we’re making mass contacts, getting in front of people, talking to as many people as possible.
As you grow your network, you’re going to get more deal flow. But the biggest thing to do is as we’re trying to get more deals done is because we have to put on a new pair of glasses. How we were flipping homes or developing or buying rental properties for the last 24 months is an old strategy. You have to switch your strategy up. We just bought a home and we closed on it about 60 days ago. It was an expensive property. We’re going to be targeting 1.9 million as the exit. We had a $250,000 budget on it to go a lot more higher end. I just re snapped my budget and we are now at $65,000 because we are going for a different thing. We saw what is trading, what is not trading.
As flippers, people got a little bit spoiled. They’re like, we can have as much fun with this, spend as much money as we want on this, and we are going to crush it and I’m going to look like a genius. Those days are over. Investors responsibilities or my responsibility is if there’s a tight market, I have to invent that return. I have to come up with the right plan that is going to make me money or rack me a return. And so that’s all we’re doing is we’re getting more deals done because everyone else is still looking at these deals the same way like, oh, well it costs 200 grand to do it that way. Yes, if you’re going to go for peak pricing, but in a market that’s not affordable, I’m not going for peak pricing anymore. We are getting back down and dirty, shopping at clearance stores, keeping what we can keep, not changing out floor plans, keeping things moving quicker and we are just making them less nice, because that’s what the market is asking for.
They want more affordability but livable product. And so again, we are just putting on a new pair of glasses, we’re hitting mass amounts of contacts and we’re just looking at deals differently. And if you don’t look at them differently and you buy on the old, it’s going to be hard to get a deal done because your rehab costs are going to be high, you’re going to be cautious on your exit price because you were using peak comps before, and you just have to change things up. So everything that we’re doing, buy and hold, we’re buying cheaper or differently, doing less work on them. Our rental properties, we’re targeting ones that we have that if the margins are still tight, we’re going for ones that have upside, development upside.
One thing we have seen is builders… Multi-family we’ve increased our buying because builders have pulled back a lot. And so the multi-family with development upside is this no man’s land to where we can buy and still get a decent cash flow, but it has a major kicker on it. And then with our syndication and development stuff, we’re just closing on permit only. And syndicating, we are not waving feasibility or large multi-family if we’re buying ourself, unless we have that secondary loan locked in. We do a lot of value add where we’re setting up a two step loan. If it is not a hundred percent commitment, we’re walking from the deal. We won’t even ask for a haircut. We need that commitment on the financing, because that can be detrimental. So we’re just changing how we look at things, how we structure our deals, and we’re doing just as many properties, if not more, than we were doing the 90 days ago.

Dave:
That’s great. I think I just want to summarize for people who are listening to this everything we’ve talked about today. The market is shifting, but none of you seem scared. None of you seem like you’re stopping or are concerned really about your own businesses performance.

Jamil:
No.

James:
I mean, there’s always the painful transition time where everyone’s like, what’s going on? And as long as you prepare for that, but at the end of the day we’re buying off math. The math’s going to work one way or the other. You just have to put the right math on it and submit accordingly. Just create your buy box, put your math on it and you’ll keep buying. You will still make money. We’ve made money 2008, or 2005 to now we’ve always made money.

Kathy:
Yeah. And I would say, I am concerned about some of the projects that we’ve been in for the last few years. It’s been difficult with the new home builds, but it’s forcing me to look at other options like what can we do with these high end homes in Park City? And I kind of put a post on Facebook and said, Hey, is there anyone out there that would want to share a vacation home in Park City and kind of do a Picasso type thing where there’s four or five or six owners and everybody kind of picks their weeks and then you short term rental it otherwise. And if we had three or four of those, then people in the industry who are doing masterminds and they want a place where there’s a bunch of homes next to each other, it’s just different kinds of ways to deal with struggle. When things don’t turn out the way you think then kind of there’s other ways to look at it and other opportunities. So that’s what we’re doing now and we had a huge response. We had like 250 people respond that they wanted that. So now I’m going to learn how to do that, how to do shared vacation rentals.

Dave:
Yeah. It’s just about being creative in any market. Over the last few years it was just so easy. You could just sort of throw a dart at the dart board and that, like James said, it’s over. But that does not mean that there are not opportunities. You just have to be a little more cautious or a little bit more creative. And thank you all for giving such good input onto some of the ways that you are adjusting your strategies and thinking about how to benefit and still grow your businesses during this transitionary time.
All right, guys, this was very fun. It’s always fun having all of you here. So for Jamil, Henry, Kathy, and James, I’m Dave Meyer, and we will see you all next week. On The Market is created by me, Dave Meyer, and Kaylin Bennett, produced by Kaylin Bennett, editing by Joel [inaudible 00:54:23] and Onyx Media, copywriting by Nate Weintraub. And a very special thanks to the entire BiggerPockets team. The content on the show On The Market are opinions only. All listeners should independently verify data points, opinions, and investment strategies.

 

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

2022-07-29 06:02:41

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How to Make an Offer on a House





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Regardless of where you’re buying or the market conditions, there’s one thing every homebuyer has in common: you have to make an offer to purchase a home. Whether you’re still in the browsing stages or have started to put your plan into action, as a prospective buyer, it is wise to do some legwork and gain insight into the process of making an offer. While your real estate agent is there to guide you, the more you know about the home-buying process, the smoother it will be. A smooth process is especially pivotal in a seller’s market, where you’ll need to act fast and take quick and decisive action when you find a property that interests you. This makes understanding how to make an offer on a house essential.

How to Make an Offer on a House

Mortgage Pre-Approval:

New home buyers often wonder if they need pre-approval before making an offer on a house. Unless you’re planning to pay cash for the house, you’ll need to secure financing. It’s a good idea to get pre-approved for a mortgage before making an offer.

In case you have to move quickly with your offer, you’ll be ready in terms of your financing. As a buyer, you’ll know exactly how much you can spend, and the seller also wants the reassurance that you will not back out of the purchase based on financing.

A pre-approval also locks in the current interest rate for up to 120 days, so you can shop with peace of mind knowing that you’re insulated from rate hikes in the near future. If the rate drops, your lender should honour the new lower mortgage rate when you’re ready to make your purchase.

Real Estate Paperwork:

When you’re ready to put an offer on a house, your agent will draw up the necessary paperwork, typically referred to as a Real Estate Purchase Agreement, though its name differs across the country. To be valid, your offer documents much include some specific details, according to Canada Mortgage and Housing Corp.:

  • your legal name, the name of the seller and the address of the property
  • the amount you’re offering to pay (the purchase price) and the amount of your deposit
  • inclusions and exclusions (for example, are the window coverings included in the purchase?)
  • the date you want to take possession (“closing day”)
  • a request for a current land survey
  • the date the offer expires
  • any other conditions that must be met before the contract is finalized (for example, a satisfactory home inspection)

The Price:

When making an offer on a house, be prepared to negotiate. Your negotiating power will depend on a few factors. The current market conditions in the immediate neighbourhood will dictate whether you can make a lowball offer – a likely scenario in a buyer’s market – or perhaps an offer that’s higher than the asking price, which has happened over the last two years in the record-breaking seller’s market brought on by the pandemic.

Deposit:

While “deposit” and “down payment” are often used interchangeably, they are different. At the time of the offer, the buyer should come prepared to put a deposit on the home they hope to buy.

The deposit will be rolled in with your down payment, showing the seller that you’re serious about buying the home and have your finances in order. If the buyer walks away from the deal, they will forfeit their deposit in most cases.

There’s no standard deposit amount. It will vary based on the property type and the buyer’s desire for this particular home. The deposit is generally given to the seller’s agent to be held in trust until the deal is firm.

Down Payment:

A down payment is the amount of money paid up-front as a lump sum when you buy a home. It is calculated as a percentage of the total purchase price. The minimum down payment in Canada is five percent. Keep in mind that this is the bare minimum required to qualify for a mortgage. However, anything below 20 percent is a high-ratio mortgage and requires mortgage loan insurance.

Firm versus Conditional Offer in Real Estate:

With the competitive market brought on by the pandemic, it was common to hear of bidding wars where buyers would make an offer without any conditions. This is called a firm offer. The buyer is 100 per cent certain of the purchase. They do not require any conditions for a home inspection or financing. Once the offer is made, the buyer can’t back out of the deal.

Conversely, a conditional offer requires specific terms to be satisfied for the offer to be valid. These conditions protect the buyer; some common conditions include:

  • Purchase conditional on financing: This is a common condition for first-time homebuyers making an offer on a house, and it requires the sign-off of the mortgage lender for the deal to go through. The buyer will have a few days to get this, and the process will include a home appraisal. If the lender does not agree to finance the property, the buyer will notify the seller, and the offer becomes null and void.
  • Purchase conditional on home inspection: A home is likely the biggest purchase you’ll make in your lifetime, so it’s always recommended that the offer be dependent on a satisfactory home inspection. A professional home inspector will look at things in and around the home that are openly visible (that’s right, they will not be opening up walls or floors). The inspector will examine the structure, roof, plumbing, heating and electrical systems to ensure the house is in good condition. If the home isn’t up to par, this condition allows the buyer to return to the seller and request repairs, a reduction in the price, or can rescind the offer entirely.
  • Purchase conditional on the sale of a home: If a prospective homebuyer already owns a home, they may want to ensure that it is sold before agreeing to purchase a new property. This isn’t ideal for the seller, as every condition has a potential domino effect.

A firm offer is typical in a hot market. With all other things being equal, a seller is more likely to accept the unconditional offer over one that could fall through for several reasons.

Negotiations:

An experienced real estate agent will be able to advise you on what you can realistically negotiate, depending on the market conditions. In a buyer’s market, you hold the cards knowing that there are plenty of other options on the market. In a seller’s market, you compete with other buyers vying for the same property, so quick action and a strong offer are more likely to work in your favour.

Legal:

Your offer is a legal document, so ensure you read and understand everything outlined in the paperwork. The buyer can take the offer to a lawyer for review before signing anything. And remember, if you don’t understand it, don’t sign it.

Buying a home is a big deal, from the shopping and vetting process to the financial and emotional commitment you’re about to make. The offer is also a legally binding document. All your questions about making an offer on a house are valid. These seemingly small details will have a domino effect throughout the rest of the purchasing process and even long after you’ve taken possession. Work with an experienced real estate agent and an excellent lawyer to ensure your best interests come first.

DOWNLOAD THE RE/MAX HOME BUYER’S GUIDE

Have more questions about the home-buying process, or ready to move forward with your purchase? Contact a RE/MAX agent today.

Lydia McNutt

Public Relations & Content Manager | RE/MAX Canada

Lydia McNutt is an award-winning writer, editor and public relations professional, with a focus on all things real estate. At RE/MAX Canada, Lydia translates market data and trends into educational and entertaining content for homebuyers and sellers, while furthering the RE/MAX brand reach, nationally and globally. Explore timely news articles, market trend reports and thought-leadership on blog.remax.ca. Lydia has been published nationally on topics ranging from real estate to architecture, design and decor, finance, business, technology, entertainment and lifestyle topics. Email Lydia at [email protected]