Month: November 2022

Dave:
Hey, what’s up everyone? Welcome to On The Market. My name’s Dave Meyer. I will be your host today, and we have a pretty cool special show for you today. If you listen to this show, we have a normal rotating cast of characters who come on and share their opinions, but we were bringing in an entirely new crew for this episode to talk about short-term rentals. You probably know this is one of the most popular, fastest growing investment asset classes in the entire industry and with a lot of regulation or recession, all this stuff going on right now, we wanted to bring in some experts to talk about this show.
So we have really good panel. We have Avery Carl on the show. She wrote the book about Short-Term Rentals for BiggerPockets. She’s been on one of our shows earlier. We have Tony Robinson, who is the host of the Real Estate Rookie Show, and we have a new newcomer on the Market, Jenny Ye, who is an incredible investor and also has a really unique business in the short-term rental space. So you’re going to want check this one out. It’s super helpful. I learned a ton and I think you will too. So stick around for this one. But first we’re going to take a quick break.
Let me quickly just introduce our panel. First, we have Tony Robinson, who it’s your first time and on the market. I can’t believe it’s been this long since you haven’t been on yet, but host of the Real Estate Rookie Show. Tony, could you just briefly introduce yourself for people who might not know you yet?

Tony:
Yeah. Absolutely, man. We’re excited to be on Dave, like you said, Tony J. Robinson co-host the Real Estate Rookie Podcast. I am an investor based out of Southern California. My wife is also my business partner, and we’ve got, I think 30 properties now across a few different states. So it’s been a busy couple years for us. But dude, I’m excited to come here to talk shop, and we got some other heavy hitters on the show here. So it’s going to be fun.

Dave:
Awesome. Well, thank you for joining. We also have Avery Carl, who you probably remember as the undisputed winner of the last Strategy Showdown. Made it through all of Jamil and David’s dad jokes and we She did so well. We invited her back. Avery, can you just remind everyone who you are if they haven’t heard from you yet?

Avery:
Yeah, absolutely. And I always appreciate you having me on. Always happy to do it. So my name’s Avery Carl. I’m a real estate investor first, I have 240 doors currently. No partners, just my husband and I am the CEO and founder of the Short-Term Shop, which is a real estate team that focuses on selling and buying short-term rentals or working with clients to sell and buy short-term rentals. I wrote the BiggerPockets book on short-term rental investing called Short-Term Rental, Long-Term Wealth, and I think that’s everything.

Dave:
Nice. Yes, wrote the book on Short-Term Rentals. It’s a good claim to fame for the show. And then our third guest today is an on the market newcomer. Jenny Ye, welcome to the show. Could you please introduce yourself to everyone?

Jenny:
Absolutely. Thank you for having me. I’m Jenny Ye, I’m a flipper, turned long-term investor. Turned short-term investor, and now my team travels the country and soon to be internationally. And we specialize in product sourcing, designing and setting up hospitality. So short-term and hotel convergence, two short-term models and helping the everyday investor figure out how to put their budget towards the best use.

Dave:
All right, great. Well, thank you all for being here. We’re going to dive into everything about term rentals. All right. Avery, I’d love to start with you being both an agent and an investor. Can you just give us an overview of what you’re seeing in the short-term rental market right now?

Avery:
Yeah. So I only focus on one type of market. I focus both in my own investing and with the short-term shop in the regional, drivable, mature vacation rental market. So it’s hard to give a state of the market in terms of short-term rentals. It’s more of a state of each market. So there’s different things going on in each market. I know in metro markets it can be pretty tough. As of late, just with regulations and the whole hurting the local economies saying vacation markets is a little bit different. What we’re seeing is the people who bought right and in the right market are continuing to do well. And the people who bought stuff that was on maybe too far out in the outskirts or maybe a weird property just because they really, really wanted to get something while interest rates are low, those are the folks that are struggling now because definitely inflation and the economy is a factor.
But I think what’s more of a factor is that last year and the year before, you could have bought basically anything and never paid attention to it again, and never decorated it and just rented it, just basically like a crock pot said it and forget it and don fine. But now that we’re moving back into what I would call more of a normal market, you do actually have to pay attention to your listing. You do have to make sure that the decor is what it needs to be and that you’re getting in there and tweaking your pricing here and there to make sure that you’re keeping up with things. So I think not only the economy, but people who bought things that and just quit paying attention and thought that that was going to continue forever, the not having to pay attention thing. Those are the ones that we’re seeing struggle.

Dave:
And I mean, I guess you could just say that not paying attention to any investment is bound to not do well.

Avery:
Yeah. You have to pay attention long-term.

Dave:
What about the agent side of things? Are you still seeing demand for short-term rentals? Are investors still buying?

Avery:
Yes, they are. So what we’re seeing now is because interest rates are high, there is a lot of opportunity in terms of getting discounts on deals, but that interest rate still does make that monthly payment quite a bit higher. So what we’re seeing is most of our investors pivoting out of our more blue chip markets. And by blue chip, I mean the markets that are always going to be great places to own the Smokies, Destin in Florida, et cetera. These areas that get millions and millions of tourists a year, they’re really established, always going to be great, but you’re going to pay to get into those markets. They’re more expensive.
We’re seeing people pivot out of those into cheaper markets that are also mature vacation markets like the Western North Carolina Mountains or the Forgotten Coast in Florida rather than the Panama City Beach, Destin area. So people are still buying, because there’s a lot of opportunity in terms of being able to get deals because sellers are scared too. Nobody knows what’s going to happen with the economy, if anything. So it’s a really good time to capitalize on that. But you do have to pay attention to those interest rates. So what people are doing are just pivoting from more expensive markets to get into cheaper markets to get into.

Dave:
Tony, you’re mostly in vacation hotspots?

Tony:
That’s correct, yeah.

Dave:
And how are you seeing things play out in where you own your short-term rentals?

Tony:
Yeah. I think very similar to what Avery hinted at already. So we have a few cabins out in Tennessee. We actually use [inaudible 00:07:11] seam for all those. And then we have quite a few properties out in California near Joshua Tree where branched out to Branson and some other states as well. And I think a lot of what Avery said is true is we are starting to see some of these people that were, we’re dabbling in short-term rentals, they’re probably the ones that are getting beat up the most. So when you look at all the different asset classes across real estate investing over the last couple of years, short-term rentals have been like this gold rush where everyone was making a bunch of money. All these other investors who had no desire really to be short-term rental operators, saw other people making money. So they jumped in and you’re seeing this influx of demand.
But here’s what I think will happen. And I don’t have a crystal ball, but here’s what I think will happen. The people who weren’t committed to being world class as short-term rental operators, they’re eventually going to exit the space. And I’m already seeing it happen. Investors that I know, they’re like, “Yeah, I bought an Airbnb. It was the worst experience ever. I’m never doing that again.” And I think we’ll continue to see that and you’ll eventually start to see things level out across probably most big markets.

Dave:
Yeah, that makes sense. What about on the demand side? Are you still seeing strong demand for all of your properties? Is revenue still doing pretty good?

Tony:
Yeah. So I would say 2021 was probably an anomaly in terms of revenue for a lot of markets. You had this a tremendous amount of pint up demand from COVID. And what we’ve seen in 2022 so far is that most of our properties are slightly lower than 2021. However, when you look at aggregate data, 2022 is still better than 2019, it’s still better than 2018. So there was a spike in 2021. Things are normalized in 2022. So I’d say all of our properties are still profitable, we’re still making really good returns on our money. But the first cabin that I purchased, I spent $60,000 to purchase that property. It was fully furnished, five bedroom cabin in the Smoky Mountains. I profited $84,000 in that cabin last year. I’m probably not going to hit that same number again this year, but it’s still going to be a pretty solid return.

Dave:
I think that’s super important context, not just with short-term rentals but just everything in the housing market over the last couple years is that the last two years have just been anomalous. It’s not normal data. So if you see occupancy like we were preparing for this show looking at occupancy, it is down over 2021, but it’s still well above where it was in 2019 and 2020. So it’s important to take these things in context and understand as investors in 2021, all of us across strategies probably did better than normal. And some reversion back to regular performance is not just to be expected is probably better in the long run. Jenny, can you tell me a little bit about what you’re seeing both with your own investments and your clients that you’re working with to set up their own short-term rentals?

Jenny:
Absolutely. Honestly, I’m going to reiterate what’s already been said. There’s so much talk right now, especially in the social media and in the groups where a host and owners are basically panicking and saying that there’s a shift in the market. I don’t believe that there’s a shift in the market. I think there’s a normalization of the market. So if you take the whole concept of what Airbnb and short-term rental is supposed to be is this idea of taking the bed and breakfast, which has always been around since hotels have been around because there’s always going to be that population of people who just don’t like to stay in hotels. So you take the concept of the bed and breakfast, you combine it with technology and you get easy access. That was the whole purpose of creating these apps for people to have easy access to this model.
Investors jumped on it because of great interest rates, because of COVID, because of a prime opportunity. But they thought that they could just purchase a property and literally set it and forget it. That’s not the type of set it and forget it that we want. For a while when you have this mass influx of travel, yes, it worked, but now what you see in this “shift” as you see basically competition because that’s what this is at the end of the day, is these are competitions between properties just like it is capitalism. You see the best properties, the best cultivated properties, the people who had taken to the business of hospitality, those are rising to the top. So the market itself and competition is normalizing, not necessarily in some chaos. So in order to succeed, you really have to, as an investor, assess whether or not this is the business model that you want to be in.
So for every strategy, whether it’s long-term, whether it’s short-term, buy and hold, short-term is a strategy. And in order to be successful, you have to understand the business. You can still be passive, but you have to be willing to invest the models and the people who are also willing to work on your behalf in the business of hospitality in order to be successful. And that can be in high range markets, that can be in local markets. It’s just all about who your population and who your guest experience is going to be. And if you can nail that down, those are the people that are rising to the top instead of your people that are just buying a house and listing it for the mere sake of listing it.

Dave:
So because of that, because the professionals are just as active or maybe more active, are you seeing that reflected in your business? Is business still pretty strong for people who want to put in these high end furnishings and create this luxury experience?

Jenny:
Well, and it’s funny because I would say about half of our clients are actually still in the luxury market. They’re putting in about five figures into the setups. The other half of the clients are actually investing really local. So what they’re doing is they’re seeing, for example, we just finished a property out in the middle of dangerous Tennessee, which most people have never heard of dangerous Tennessee. It’s literally an hour outside of Knoxville. You would never know but this particular lake is the go-to lake for this vast pro fishing contest that happens every year. So it is to go to for your local people to go and stay.
So there’s this shift of, “Okay. If you don’t have the ability and you don’t have the money to buy luxury, if you don’t have the thousands of dollars to dump into a property, you can still get into the game by looking local. You can still get into the game by seeing how the average person vacations,” because most people will actually never leave their state, believe it or not, when they’re traveling elsewhere. So if we look at these numbers and we look at these trends that existed pre COVID, that was the trend. People vacation in their own state. So half of my clients are only spending less than 10 grand to set up properties, but they’re capitalizing on the local scene versus trying to overextend themselves in a market that they know that they’re not willing to put their money into.

Tony:
Dave, I just want to add one comment on that. Jenny, I love that point because I do think that especially for new investors in this space, everyone does want to go towards those blue chip markets. But what we’ve seen is that the price increases in those markets over the last couple of years haven’t been met with revenue increases. So the first cabin we bought, it’s almost doubled in value, but my revenue hasn’t almost doubled in valued over that same time. So I think there are definitely a lot of opportunities in some of these secondary and tertiary markets.
So we went on a world tour of the United States this summer. I submitted offers in Cloudcroft, New Mexico, Dundee, New York, different parts of Missouri, like Arkansas. We’ve been all over the place trying to identify what are some of these up and coming more secondary markets that maybe five years from now will have some of the same amenities and attractions and things that we saw in some of these more popular blue chip markets like Avery talked about.

Dave:
All right. Tony, I have to ask you about Dundee, New York. I might be one of three people in the world who have ever been there.

Tony:
Have you really been there?

Dave:
Yeah. So yeah, I went to college in Rochester, which is not far from there. And after you graduate college, everyone’s waiting around to graduate and just getting drunk. And they arranged for us to take these chartered bus to… There’s all these wineries, near Finger Lake. And everyone was just faced, and I probably can’t curse on the podcast but just puking out the windows. It’s like the last day of pod. So that’s why I was in Dundee, New York and it was just a nightmare.

Tony:
As someone who lives in California, I had never heard of Dundee, but we stumbled across the Finger Lakes and we start looking at properties over there. And like you said, there’s a massive amount of wineries and breweries and wedding venues and there’s just this burgeoning scene of attractions drawing people in. So we said, “Man, if we can get a property here as things start developed, we could be in a really good spot.” So I think for a lot of the new investors, trying to find those upcoming markets is where we should be focusing our time right now.

Dave:
Tony, how did you identify some of these markets? You all are saying that some of these blue chip markets they’re overheated, what are the things that attracted you to some of those markets you went and looked at?

Tony:
That’s a great question, Dave. So for us, it’s part research and it’s part networking. I found another investor. I met this guy who vacationed in the Finger Lakes. He’s from New York somewhere. He was like, “Yeah, every summer we go out to the Finger Lakes.” I was like, “What is the Finger Lakes?” I’d never even heard of before. After doing my research, I saw what the draw was. So part of it is just talking to other investors, seeing where they vacation, where they’re thinking about investing, what’s like the local hotspots near them. The other piece is a more data driven approach where we’re just like, okay, what are some of the big draws in each state. If I go to Arkansas, what are people doing in Arkansas? And then, okay, where are some of the markets where the price to revenue ratio is really strong? So we use both approaches where it’s subjective talking to people. Then a little bit more objective, we’re looking at data based on price points and revenue.

Avery:
I just wanted to hit on something that Tony said. So he met a friend who gave him or introduced him to this market because it’s somewhere that he vacations. So I think that’s really important. And anybody who listens to anything that I say gets tired of me saying the market is almost more important. The market that you choose is almost more important than the property you choose. And to avoid regulation issues you always want to start with other than, I mean you could Google, but you want to start with where have I vacation or where someone I know vacation on a regular basis where they stayed in a single family home rather than a hotel pre Airbnb? So before Airbnb.
So I grew up living in Mississippi. We went to Destin, Florida every single year. My grandmother went to Destin, Florida every single year since 1937. So you start there to figure out, okay, this is an area where short-term rentals are not a new thing. They’ve been around for a while. So it’s probably, again, there are exceptions to every rule and you’re going to have to do your research, but it’s probably going to be more friendly than, “Yeah, I live in Nashville and this house down the street from me is cute. I’m going to buy that in short-term rent it.”

Dave:
That’s a really good point. I love that way of finding it. Actually, I only own one short-term rental. I’m just a baby. But I did it because there’s this place I love skiing and I would go up there and there’s just no hotels. There was nowhere you could stay and you would have to just take day trips. And I did it selfishly so that I could go ski. But I was like, there’s going to be huge demand for this because there’s not anywhere you can stay. And they have refrain from regulating don’t. That’s just one data point. But that brings up a great point, Avery, that I wanted to talk about, which is regulation. Because a lot of major metros right now are starting to regulate STR or outright ban them.
I think Dallas just put in something pretty strict. Atlanta was doing it’s all over the country. But there has been this prevailing thought process that these markets that are more vacation centric that need the short-term rentals economically. But at the same time, we’re seeing these housing affordability problems in these markets. So you do see a lot of local… I wouldn’t say backlash, but concern about the role that short-term rentals are playing in housing affordability and availability in some of these housing markets. So I’m curious if you’re seeing that play out in some of the markets where you operate.

Avery:
Yeah. So again, it goes back to you really have to choose your market well. Like in Destin, where I live, their short-term rentals have been so woven into the local economy for so long that we couldn’t live without them. There are not really any hotels and say something came along in short-term, you couldn’t rent anything in Destin anymore. There aren’t enough locals to fill all of what those would be open long-term rentals. So it’s not a situation where it’s taking housing away from people who would be living here locally, because there’s just so many and it’s always been that way. And then also the way the regulations work. So there’s a highway that runs through the entire Emerald Coast called Highway 98 all the way from Destin to Panama City. It goes further than that, but we’re stopping at the Emerald Coast.
So in Destin, one of the main cities there, you’re only allowed to short-term rent south of Highway 98, not north of Highway 98. So south is where you would want to be as a short-term rental owner anyway because south is walkable to the beach. That’s where the tourists are going. North is more, I mean you’ve got every level of housing from really affordable to 10 million houses up north. So there’s plenty of different types of housing for whatever you might want to have. But there is that limit as to where the short-term rentals can be. So it can never just be all short-term rentals and nobody can live here.
So regulations are important. I don’t want people to take away from this conversation that regulations are bad. Regulations are really good. You need to have regulations. So where I live in Walton County, just east of Destin, the 38 area, there are no regulations, but it operates very similar to Destin. And there’s actually a bunch of stuff with the city council right now where they want to add some regulations to Walton County, which I vote yes on every time because right now it’s the wild west and nobody knows who to call if there’s a problem or if something’s on fire. They need to know who it’s registered to, who they’re calling if there’s a problem.
So it’s good to have regulations, but there’s a fine line. You don’t want to go over the top to where you’re buying in a market that they don’t want you there. That’s where you have to deal with a lot of fighting back. But as long as you’re buying in markets where you’re not necessarily taking housing away from locals, because there just wouldn’t be enough locals to fill all of that housing, then you’re going to be in good shape.

Tony:
Avery, you make so many good points. And I just want to piggyback off of that there, there’s really two things that I think of when it comes to regulations. The first thing, and this is I think a really important fact for new investors to understand, is that demand and regulations are no way correlated with one another. So if you think about a super popular market like Destin. If the local government said short-term rentals are no longer allowed in Destin, does that mean that as soon as that policy passes that all the people who have been vacationing in Destin every year for their entire lives no longer want to go to Destin? It doesn’t.
So if we understand that the demand and policies are not necessarily connected to one another, just because a market is highly regulated doesn’t mean that it’s a bad place for you to invest in. As long as you can understand what those regulations are, abide by them, then you actually might benefit from that increased regulation because it means supply might stay low and if supply stays low while demand goes high, basic of economic means, we can charge most host in those cities.
So as an example, we invest near Joshua Tree National Park, and there are three cities that’s around that national park. One of them is 29 Palms and 29 Palms recently revamped their regulations to where they put a hard cap on the number of permits that they’ll issue. Now, most people will look at that and say, “Man, that’s a terrible thing,” but what happens if you’re one of the people that is admitted under that cap and we have three properties in 29 palms that now doesn’t matter how popular that market gets, demand is going to be held at a certain level. So it’s great for us because we play by the rules we got and it’s working for us.
So that’s the first thing. And the second piece, you touched on this too, Avery, was the economic dependency. We really do try and focus on markets that are primarily driven by vacation and tourism. I live close to Los Angeles, you mentioned Atlanta, Dave. LA and Atlanta, some of the biggest markets in the country, they have every single type of industry business you can think of. There’s film, there’s television, there’s radio, there’s business headquarters, universities, port, every economic driver exists within those two cities. So what incentive do they have to protect short-term rentals? So every market that we go into, we want to make sure that there’s a strong economic dependency on short-term rentals because it doesn’t necessarily mean that there won’t be regulations, but it means that those regulations will still allow you to operate profitably in those markets

Dave:
In some ways, I mean, I totally get the idea of trying to make more affordable housing. It’s just not affordable for many people. And that’s just a nationwide problem. That is not necessarily a short-term rental problem. And I get the instinct to blame short-term rentals. But just for people knowing the total supply of short-term rentals in the United States makes up about 1% of the housing stock in the entire country. So there are places where it’s more concentrated. So there are communities where it is more impactful.
This is just my opinion, if you turn to every short-term rental into a long-term rental, it probably wouldn’t have that big of an impact on prices in that neighborhood. There are more structural fundamental problems, mainly really unaffordable housing, a supply shortage that goes across the entire country that are contributing to that. But I do think there is going to continue be this instinct by governments who are probably just trying to do right by their constituents to regulate, even though it might not necessarily work.

Jenny:
Well, and that’s also a good point too, because we have to understand that a lot of these regulations that are coming out are in response to the boom that we just had in all these purchases. So it doesn’t mean that they’re here to stay. They are experimenting with the balance just as much as investors are experimenting with the balance. So it’s going to be ever changing. So just because there’s a regulation in the market, just like Avery and Tony said, doesn’t necessarily mean that you don’t invest there. It acts as a filter quite honestly for you to determine as an investor how much you’re willing to be in this game. Are you willing to be in the hospitality game?
So this regulation is now acting as a filter, which you are willing to play by the rules, which you are willing to put up the capital time wise, not just monetarily to put the right systems in place so that you can be part of a successful area that’s regulated? Or do you want to play in a market that’s completely different? Both of them are very different strategies. Both of them have their plus and minuses, but just because there’s regulation doesn’t mean that there’s going to be regulation a year from now. It’s ever changing. And that’s something that we have to monitor as investors and both as people helping our clients.

Dave:
Okay. That’s a great question, Jenny, and it’s something I want bring up because a lot of times when I hear these conversations about short-term rentals, someone’s like, “Well, they’ve only regulated… I used to live in and invest in Denver. And they put in a regulation that you can only short-term rental your primary residence. So if you have an ADU or for me, I moved out of the country, still have primary residence, I could short-term rental that but no one else can. So people are like, “I’m going to buy everything that’s just outside Denver because that’s going to be the perfect spot.” But I’m always like, “But that city could just add a regulation a couple weeks from now.” Or they’re like, “You can only do it more than seven days. So we’re only letting people for eight days.” So now my strategy is fail proof. I’m like, “Yeah, but the city council could just change it to nine days.” They could always keep changing it. So Jenny, how do you plan a business when you’re constantly in this risk of changing environment and regulations?

Jenny:
Absolutely, and it’s a fair question and it goes back to how much skin do you want in the game? So when my clients come to me, most of the clients that I have, have already purchased a property, but I do have some clients who are like, “I don’t know where to purchase a property. I don’t know where to begin.” And a question I often get is the regulations piece. So for example, I’m normally based out of Austin whenever I’m home. Austin is a regulated city when it comes STR and it’s known, but that hasn’t necessarily affected demand. People who do STR here are really successful because the mere fact that Austin is also a hub for everything. The number of music festivals here, the number of business professionals that come here, the number of extras, it’s the assessment of your return based on the market that’s coming in and how much you want to put into that.
So the clients who choose and who have been very successful in Austin are willing to take that trade off because they know there’s so many reasons to invest in Austin. Now there are other clients who are like, “I don’t want to deal with regulations. I don’t want to have to predict changes. I don’t want to have to make changes or even up my licenses or take care of the legal end and make sure that I’m checking the boxes.” That’s just not something that they want to be invested in.
So then we start to look at different markets, we start to look at outside colleges, we start to look at outside military bases where we know there’s going to be a high influx and transitions of populations, things that we know that we can basically guarantee turnovers and that are stable and always there with less concerns about actual regulation. And again, it goes back to your passive participation versus how much you really want to be invested in the hospitality aspect of the market.

Tony:
Dave, can I just share one anecdote? So I mentioned we were in Dundee, New York over the summer and Ithaca New York is a place that’s not too far from Dundee and we’re just trying to do research around other cities around the Finger Lakes. And Ithaca instituted new short-term rental ordinances over the summer. Before you could rent your property out, all 365 days out of the year. After this ordinance passed, and I just looked it up, the new limitation was that you could only rent your property for 29 nights out of the year if you were non lakefront and you got 245 if you were actually on the lake.
So could you imagine the people who purchased in Ithaca that were renting their properties out 365 days out of the year to now only be able to do that for one month. 29 nights out of the entire years. So that’s why my focus on there, being that economic driver, that economic impact of short-term rentals is so important because even if it was the Wild West before, once that regulation comes down, it’s hard to know where it’s going to land.

Dave:
Man, the people on the city council must own all those lakefront properties. Yeah, we’re just going to take this for ourselves.
All right. So I want to switch gears a little bit because there’s obviously a lot of fear about recession and economic downturn right now. And just over the last couple of weeks we’ve gotten a lot of conflicting weird economic data. GDP grew in Q3, job market was strong, but just the last week really, we’re starting to see a lot of layoffs in the job market. Big companies like Meta and Stripe and Twitter all laying off people. And there is fear, I think rightfully, that we’re entering… We don’t know if we’re in a recession right now, maybe not whatever that will be for the Economist to decide.
But we might be entering this job loss phase where unemployment might start to come up. And I think there is some fear, and I believe this, that demand could start to falter and people might be taking less vacation. And I was googling around to try and understand this, and I actually found research you did Tony about this, about how and I was like, “Perfect, I could ask him about it on the show.” So I was curious, could you just tell everyone who’s listening about the research you did about vacation spending during a recession?

Tony:
Yeah. You’re putting me on the spot here, man. I wish I had those numbers memorized off the top of my head. But here’s what I remember. I did a bunch of research and we posted this on our YouTube channel because I was having these same questions as the economy was starting to shift. And I looked back at every recession going back to the mid 1900s and it was like six months, 16 months, nine months, eight months. And obviously 2008 was the big one, it was a year and a half. But every single recession lasted excluded in 2008, between six and 14 months, somewhere around there. And what I saw was that even during these recessions, vacation spending didn’t go to zero. People were still spending money going on vacations. The amount of money they were spending obviously decreased, and the number of people who were taking vacations decreased.
But it wasn’t like Hilton and Marriott’s occupancy just went to zero because of a recession. And when I saw that data, it was comforting for me for a few reasons. One, it let me know that even if we hit some really turbulent times in the middle of a recession, we will still have people come into places like Joshua Tree and the Smoky Mountains, these are places that people will probably continue to travel to.
Second, can my property sustain a six to 14, 16 month slowdown and then recover afterwards? And my thought was like, “Yeah.” Our properties have enough wiggle room between what we typically generate in revenue and what those expenses are. So even if we just break even for 12 months, I can live with that because I know on the other side, the economy always continues to grow on the other side of a recession. So when I looked at all these different factors, Dave, it was reassuring to me to say, “I’m investing for the long-term and I can weather a six month to 12 month to 14 month storm in my business.”

Dave:
Well, I’ll bail you out because I read this today. So you said that the worst one was about a 9% decrease in vacation spending. So yeah, it could be… But most businesses you should be able to weather a five to 8% drop in revenue if you buy correctly and have a solid investment. Avery, did you want to jump in on that?

Avery:
Yeah, I do. Again, Tony and I have a lot of the same philosophies on investing in short-term rentals. So I’m going to use the word piggyback again, but to piggyback off what Tony said, so I think in times of recession, that’s when those blue chip markets that we talked about earlier come back into play. So I took a quick look at my price labs and all of my… I have eight short-term rentals, all of them except for one are in what I would call blue chip markets. And my revenue this year is actually up 5% from last year. So it’s not like a banner year or anything, but a little fluctuation.
But I think that you can have a lot of success in right now if you’re choosing to buy right now and maybe looking for value add opportunities in the blue chip market. So you’re not paying those turnkey prices necessarily, but finding some force appreciation because in downturns, those blue chip markets, they’re blue chip for a reason. They’ve been through every economic cycle, they’ve been through multiple natural disasters, they’ve seen it all, and there’s still millions and millions of people coming every year. So again, I’m say it again, why choosing the market is really important, buying in the right market.

Jenny:
Well, to play off that, I think there’s also the concept of what we think of blue chip, because again, this goes back to earlier in our conversation about the buy-in price point for those blue chip markets that everybody also needs to understand, and this does tend to come out in a recession, is that every state has their own version of a blue chip market and that caters to the people that never leave the state. And that caters to the people that are most likely to be affected by a recession because they can’t actually afford to leave outside the state.
So even though we talk about places like Joshua Tree and we talk about places like Gatlinburg, again, those have survived millennia and they will continue to survive millennia. But if your price point isn’t there, this is the perfect time to start looking and finding your blue chip market in your state where your locality is going to continue to go even in a recession.

Dave:
That’s such a good point. Yeah. I think as Tony showed, the total amount of spending goes down but it might just be shifting to a different spending. If you look at inflation data, for example, one of the things that has been driving inflation the most is airline costs, super expensive to fly right now. It’s gone up 20 or 30% year over year. So you can really imagine a scenario where people might just, instead of flying to another state or internationally, just decide to drive to that local blue chip market that you’re talking about, Jenny.
I tend to agree people still do spend money, but there is, I think, risk in the market and certain markets might see a decline in occupancy or revenue because we’re also seeing an increase of supply still. There are more Airbnb listings coming online. That is slowing down a little bit but I think there is a risk over the next couple of years. So Jenny, I’m curious, do you have any advice for anyone listening to who is currently operating a short-term rental? If they start to see revenue decline, maybe a few less bookings, what are some tricks that they could think about or strategies that they can use to survive a potential downturn?

Jenny:
Absolutely. I think the reality is that this day and age. So if we talk about what COVID did to the market aspect of STR, we need to also talk about what it did to our societal aspect in general. So people during COVID, we were inundated with HGTV, most people just sat there and literally they could probably watch every single show that was on HGTV or A&E and people that were investing in. So we have this perception of what is pretty, what is attractive, and that’s the baseline now. So if you’re going into the short-term market and you think the mere fact of just putting a property out just for the sake of putting a property out is going to get you your nightly rate, it’s not. And now we are even at the point where the expectation is your HGTV staged home.
So that no longer in itself is even good enough to be the competition. So instead what I tell my clients is that assume that Airbnb, assume that VRBO assume that all these apps are basically a gigantic magazine rack. What’s going to catch their eyes, the most attractive one, they’re going to look at it. And then people want experiences nowadays. They don’t just want to go to some pretty house, they don’t just want to go to some place. They’re looking for a new way of being, a new way of interacting with people, a new way of interacting with locals, a new way of experiencing wherever it is that they’re going.
So from the get go curated design, not just pretty, but design that is meant to make a person feel like they’ve escaped wherever they’ve gone is going to get your nightly rate up. And then from there, you don’t have to dump in millions of dollars or thousands of dollars or even just tons of money to be in this game. You just have to spend your money. Well, so people are spending their money to create these stage homes that again, are beautiful, but they’re not booking the same way that someone who has spent less, that has spent the money on hosting, who has spent the money on the experience, who has sourced local artists, who has curated localities and examples and suggestions of where to go and what to be.
And if your bottom line is, if you places looks like a dorm room, but you’ve spent the money to put a wall mural on it, people aren’t going to book your place just because it’s a wall mural. They’re wanting the entire experience of everything. So it’s all about the whole thing and it’s all about looking at it from a hospitality standpoint, not just in mere investment standpoint.

Dave:
That’s so true. I’m going with my partner Jane, to stay at an Airbnb starting to tomorrow, and our host sent us this beautiful welcome kit and I personally just don’t even read this stuff, but Jane’s like eyes lit up. She’s like, “Oh my god. They’re so thoughtful. They love us.” It’s one of those things, it really is a whole experience and you do really feel like you’re going to be cared for. I know going into that now that it’s going to be a positive experience. I haven’t even set foot in it yet, so Totally agree. Tony or Avery, either of you have some advice on how to mitigate or navigate a potential downturn that might come next year?

Avery:
Yeah. So I don’t want to state the obvious here, but cash reserves are as important as they have ever been. And what’s the saying about when the tide goes out, you see who’s been swimming naked, you really have to make sure… I think a lot of people over the past few years jumped into short-term rentals because it was the new sexy thing to do. And apartment buildings are boring and they have leveraged themselves. Here locking one thing to finance another thing without any space or any margin in between so that if one property goes under, then all the properties are going under.
So I think just your whole classic managing your money well and having enough cash reserves to weather any potential storm, because it’s unlikely that something’s going to come along. If anything was going to do it was going to be COVID, but something’s going to come along and make you have no bookings for months at a time. You should be able to have enough to break even. But if not, those cash reserves should be in place to get you through and to the end of that recession.

Tony:
Yeah. All fantastic points. I think design, cash reserves, those are incredibly important things you should all be focusing on. But when I think about the things that might help someone weather this storm that may or may not be coming, three things really. It’s location, amenities and price. Location is something that you can’t really fix what you’ve purchased the property. But I think that every market probably has a spot where if you’re in that zone, you’re going to do well almost no matter what the first property that we purchased, it’s literally a two minute drive from the main drag in the Smoky Mountains and people rave about that location. It’s a cool cabin, but I’ve seen cooler cabins that don’t do as well as ours, but for us it’s that location. So I think location’s one of the most important things you should be focusing on, especially if you’re sourcing new properties.
The second thing, and this touches what Jenny was speaking about, is the amenity standpoint. Every market has almost a baseline of what guests expect when they book in that market. So for example, if you’re in the Smoky Mountains, you need to have a hot tub. Every big cabin has a hot tub. Additionally, most big cabins have either a game room over or a movie theater room. That’s just the barrier to entry in that market. So if you really want to stand out, you have to find a way to go above and beyond.
Now in some other markets, for example, in Joshua Tree, when we first started investing there, almost no one had a hot tub. And since we came from the Smoky Mountains, we’re like, “Why is no one else doing this?”

Dave:
You get dehydrated. Yeah, it’s too damn hot.

Tony:
But now a lot of these listings now have the water features. So it’s like you want start identifying what are some of the amenities that will allow you to be competitive in your market. And sometimes maybe instead of going out and buying another property, maybe you reinvest those funds into your existing properties to increase your ADR, to increase your amenities and to increase your return. And then the last thing you can do is obviously focus on price. And our portfolio, we try and compete on price last. Because I think that’s a slippery slope for all of us. If I start undercutting people in my market, they start undercutting me. Now we’re all charging less and at the end of the day, none of us are winning.
So we want to try and compete on price last. But I do think there is a way to, I don’t know, to use price in a way that’s still smart. If you have an opening over the next seven days, maybe get a little bit more aggressive with that price. If you’re seeing that the booking lead time for your other properties are at like 21 days and you’re at 12, it means that you’re overpricing. So there are some data points you can look at to try and adjust your price and to be a little bit more competitive. But overall, location, amenities and price are the three things you really look at.

Avery:
Brilliant.

Dave:
All right. Yeah. That is excellent advice. I totally agree about the amenities thing. It’s just like you have to think if you don’t have those key things like a hot tub that you mentioned or a movie theater, people click those filters on Airbnb and yours just don’t even wind up showing up in the results. So you have to be competitive. I think generally just in real estate, you have to think of your properties as a product and you have to compete against the people who are offering better products than you, and you need to make sure that you’re positioning yourself accordingly.
All right. The last thing I want to talk about before we get out of here today is I have a theory and I’d like to tell it to you and you can tell me if I’m an idiot or if you agree. Pull no punches. So my theory, I’ve talked about this on the show and it’s not really that radical, is that the vacation rentals hotspots, some of the stuff that we’ve been talking about over the course of the show are going to see the largest decline in property prices over the next year or two in this housing market correction.
My theory is not necessarily even driven entirely by short-term rentals, but we saw this huge spike in second home demand during the pandemic where wealthy people were just buying these second homes. And it’s often in a market that overlaps with short-term rentals. We’ve now seen that demand not just come back to normal, but is below pre pandemic levels. At the same time, there are some of these headwinds for just investors in general. So I think demand is falling off across all asset classes.
So I don’t necessarily think this will impact existing short-term rentals. I actually think it means that there might be really good opportunity, and I’m always skeptical the time the market, but this is one or of really tempted to time the market. I think that prices in these really very expensive, really great vacation rental properties might come down 10 or 20% over the next couple of years. So I’m just curious what you all think of this theory.

Avery:
I’m ready to buy them if and when they do. I don’t know what to think about if they will actually. I think they’ll come down some, I don’t know if they’ll come down 20% but it’s hard to say because at the end of the day, short-term rentals are still what I would call an emerging asset class. I don’t think that they’re finished growing yet. The vacation industry as a whole is continuing to grow. And I don’t know if I agree that it’ll come down that much. I think there’s no question things are going to come down some, but I mean I’m waiting for when they do, I’ll buy some more.

Dave:
Yeah, me too. Maybe this is just wishful thinking on my part.

Tony:
Yeah. I mean Dave, I think you’re bring up a good point, but here, here’s… I’m going to try and be as articulate with this idea as I can.

Dave:
You could tell me it’s stupid straight up.

Tony:
No. I mean, there’s one thing that I think is the lunch pin. And if this continues to develop, I don’t think you’ll be right. And I think it is the loan products surrounding the short-term rental space. So if you think about every other asset class excluding single family long-term rentals, they all trade or they all sell based off of their NOI. If you look at an apartment complex, if you look at self storage, mobile home parks, like all of these other big non single family type properties, they all trade based off their NOI. And typically when you go get debt for those kinds of properties, they’re basing it off of their NOI. So the ability to get approved for a loan on something like a self storage facility or a small apartment complex is based on how much revenue that property generates.
In the short-term rental space, we don’t quite have those same abundance of loan products. I think we’re now starting to see more of the DSCR based options where they are looking at the revenue that the property generates. But I think the bigger constraint to pricing in these markets right now isn’t necessarily that people aren’t willing to pay those prices. It’s that they can’t get approved for the debt to buy those things. And we saw, especially last year where a lot of properties were going way over asking, people were paying all kinds of crazy money to bridge that gap between the appraised value and the purchase price. And I think we’re starting to run out of those people that have those deep pockets to do that. But if we continue to see the evolving of the loan products for short-term rentals where it’s based on what those properties can generate, then I think you’re going to be wrong. But you’re the numbers guy. I’m just a podcast host that talks about short-term rentals.

Dave:
No way more about this than I do. Honestly, it’s not a super data driven, a lot of speculation on my part and it’s pure theory. Jenny, what do you think?

Jenny:
I think just in general, going to see, and we have been seeing a shift back to again, the normalization of the market. So in that aspect, do I think that that is not going to affect the vacation rental markets? Absolutely not. Because at the end of the day, these are also properties so they will be affected. Do I think it’s going to be this drastic decrease? Not necessarily. And I do think that Tony brings up a good point in the fact that if a particular market, especially these blue chip markets that we’re talking about, where 80, 90% of the properties that are in a specific area are only used for short-term rentals or only used for vacation properties and that’s the only amount of loans that are going into it, then of course they’re in an isolated bubble that I don’t think is affected by the general market. But if you start to talk about the markets that are a good mix of both short-term rentals, vacations, and your regular properties, then by default they’re going to see the decrease just because the market, again is normalizing itself.

Dave:
All right. Well, thank you. I appreciate your feedback. We’ll see. We’ll have to do this again a year from now and we’ll see what happened. I’ll probably be wrong.

Avery:
Yeah. So I think that Tony makes a really, really good point about the loans, because right now, short-term rentals sit in this weird middle ground of, are they residential or are they commercial? So they get appraised like a residential house. So your short-term rental that makes $100,000 a year for appraisal purposes with a bank is worth the same amount as the house next door that makes $0 a year. That’s not a rental. So what’s a commercial short-term rental? It’s a hotel. Well, there’s lots of commercial banks out there doing financing for hotels. It’s just that one of them has to figure out how to step into the single family game and treat a single family short-term rental as a hotel. And then I think that will actually drive prices up in a lot of markets because the markets where the income is higher, will drive that up. But somebody’s going to have to figure out how to do that before it can get there.

Dave:
All right. Great. Well, thank you all so much. This has been super helpful. We do have to wrap this up though. Where can people find all of you, Avery, if they want to connect with you or should people do that?

Avery:
You can do that on our website, www.theshorttermshop.com or on Instagram @theshorttermshop.

Dave:
All right. Tony, I know we have a friendly rivalry about our podcast, but I will give you some space to talk about your own podcast.

Tony:
All right. But I will admit that we are officially the number two podcast behind you guys. So no-

Dave:
No way.

Tony:
So you guys can find me on the other BiggerPockets Podcast, Real Estate Rookie. We drop episodes every Wednesday and Saturday. My wife and I have a YouTube channel called The Real Estate Robinsons. We talk all things short-term rentals. So if you guys want to check us out there, it’s the Real Estate Robinsons. Instagram, Tony J. Robinson. And if you guys want to learn more about our investment company, it’s alphageekcapital.com.

Dave:
Awesome. What about you, Jenny?

Jenny:
You can find us on social media, Jenny, J-E-N-N-Y. Look for our tip Tuesdays with BiggerPockets on Instagram, where we give all our recommendations for how to set up your STRs. And then Instagram is Jenny Designs and websites, jennydesigns.com.

Dave:
All right, great. And I am @thedatadeli on Instagram if you have any questions for me. Thank you all so much for joining. This was a lot of fun. We’ll have to do this regularly since short-term rentals are so popular. And despite my doomsday predictions are probably going to be… Now they’re going to be growing 20% next year, so we’ll have to keep you all updated. Thank you all for listening. If you enjoyed the show, please make sure to give us a great review on either Apple or Spotify and subscribe on YouTube. We’ll see you next time for On The Market. On The Market is created by me, Dave Meyer and Kailyn Bennett. Produced by Kailyn Bennett, editing by Joel Esparza and Onyx Media. Research by Pusher Janedoll and 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.

 

The Ontario Real Estate Association, otherwise known as OREA held its first Reality+ convention in two years at the Beanfield Centre this past week. If I could sum it up in one word, it would be pick-up. If that’s causing you to scratch your head, then please allow me to explain. Like many conventions, there was the trade show and the speaker series. OREA did things a bit differently than in past years. At previous iterations of the Reality+ Conference, there were more options. Often, in a single timeslot, there were two or more workshops that an attendee could visit. 

Workshopping One Message

At the 2022 Reality+ Conference, there was generally one speaker- the main stage and the trade show and that, as they say, was that.

Did OREA pull it off? Yes, at least for me. 

With one speaker, it felt more focused and more purposeful. As an attendee, you were better able to be present at the moment without fear of what you may have been missing in the workshop not attended. You got a sense, at least I did, that this message was so important that it wasn’t going to be watered down by being relegated to a second stage; that this is where you need to be. To quote the great Marshall McLuhan, “the medium is the message”. Not only was this message being delivered from the mainstage giving it tremendous value, but the fact that it was the only message in that hot moment meant it was one for which we must all stand up (or in this case, sit down) and take notice. OREA cleverly was giving the message reverence. 

Okay so they’ve whetted our appetite, but did they deliver the goods? 

The individual messaging was an overall better one. To pull another turn of phrase from Canadian Philosopher and Media Theorist, Marshall McLuhan, the Ontario Real Estate Association took a “Global village” approach to their content, enlisting more diverse speakers. This approach lends itself to a little bit of criticism in that by putting all your proverbial eggs in one messaging basket, you run the risk of your single point of view not resonating. However, cleverly by leveraging speakers that were from a more global village, we had a unique point of view. Thus, we were engaged in hearing diverse perspectives beyond our own. 

Global Village

While we’re on the subject of diversity, I applaud OREA for bringing a clear diversity, equity, and inclusion message by leaning into the conversation on racism in real estate. Much of this discussion centred around racism in the rental market, but it’s a start. As the audience was largely REALTORS ®, there was a healthy level of discussion focused on solutions at the provincial, brokerage, and individual levels, as well as speaking to gaps in the educational material and uptick. Could OREA dove headfirst into it and dug deeper? Certainly so, but would they have lost their audience? To be perfectly honest, it’s possible. Nonetheless, it’s an important message, and one upon which I look forward to seeing OREA continue to build upon in the frank and direct way that it did this past week.

Often when we engage different speakers, we gain the benefit of different perspectives through discussion; but the marrow is when we get to respectful and hearty debate.  On the Beanfield Stage, during a segment called The Great Housing Debate that healthy discourse was around the future of the economy. On one side were economists like Benjamin Taj, Managing Director and Deputy Chief Economist for CIBC, and David Rosenberg, President of Rosenberg Research and Associates Inc., and on the other side were Desmond Brown of The Desmond Brown Real Estate Team and Melanie Piche, Broker/Co-Owner of The BREL Team. The main thesis that I gleaned from Mr. Taj and Mr. Rosenberg was that the Bank of Canada is making the right moves to prevent or minimize a recession. In so doing, although it may feel painful to the Canadian people, it’s positioning us better than many other nations across the globe facing the same issues. On the other side of the fence are the REALTORS ® who are advocating for a positive outlook on all things economic. The parties on both sides of the fence are looking at the issue through their own lens and I believe doing so in earnest. It’s beneficial for real estate professionals to regard the economic situation as temporary and they’re correct- real estate and economics are closely linked- and both are cyclical phenomena. So, this too shall pass but not immediately and not without some pain for gain, which is where the economists have landed. I believe that they’re correct in that we’ll close out 2022 with another small interest rate increase. Of all of the important information, one phrase stood out, “You date the interest rate, you marry the price.” I know this resonated with other attendees as well as this was picked up by several other presenters.

We Need to Talk About Bill

Former President, Bill Clinton was one of many several heavy-hitter speakers at the OREA’s Reality+ Conference. Don’t let the slow lilt of “aww shucks” Arkansas accent make you forget that Mr. Clinton didn’t get to the presidency by mistake; He earned his place there. William Jefferson Clinton, which I think we can all admit is a very presidential name, attended Georgetown University and graduated from Yale University Law School. Mr. Clinton received a Rhodes Scholarship to study at University College, Oxford. He has overhauled entire education systems and presided over the longest period of peacetime economic expansion in U.S. history.  By his own admission, Clinton feels like what separated him from his opponents each time he won was he paid attention to the people no one had paid any attention to before. He used this as a springboard to speak to the difference between how politicians see politics, almost like a chess match and citizens see politics as the betterment or lessening of their day-to-day life. By taking on the second philosophy, Bill Clinton has looked back at a career that he is proud of that has made a difference but also leans into our common humanity. When asked about the role of government, Mr. Clinton said the government’s role, on a macro level, is to keep capitalism from destroying itself.  Two of the most resounding soundbites Bill Clinton shared with the OREA conference attendees were messages of optimism, so pick these up: Firstly, practice gratitude as a discipline. Secondly, we need to get back, be it REALTORS ®, investors, butchers, or bakers, we need to get back to relating to people. When we don’t, we lose our humanity and the whole system collapses.

As the OREA Reality+ 2022 conference wound to a close, it was clear that the focus was a strategic one, not filled with ‘boots on the ground’ workshops to change the mechanics of real estate for agents but to send messages of hope and optimism for us to sink our teeth into. So apart from the trade partners’ wares and network connections that you made, one thing that hopefully everyone picked up at the conference is investing in yourself and others and enjoy the financial dividends but also the myriad of human-connective ones even more so.

David:
This is the BiggerPockets Podcast, show 693 buying equity. This is when you buy below market value and when you combine all this together, you start getting home runs, go after properties that you can buy equity in. So you bought up the low market value, you then added equity too through some form of rehab. You then change the way that you used it, which increased the value as well, changing it into a short-term rental, something like that. And you do that in an area that’s growing. Then you watch your return on equity and once you’ve accumulated a decent amount of equity like that, sell it and 1031 into something that cash flows naturally like an apartment complex. What’s going on everyone? This is David Greene, your host of the BiggerPockets Podcast. And I just realized I’m getting much better at these numbers that we flash up every time we do this that used to be a pretty hard part of the show.
But with everything else, the more you practice it, the better you become. And I want to help you guys practice getting better at building wealth through real estate because it’s freaking and fun. Today’s episode is Seeing Greene episode where you get to look at real estate through my eyes, but not just mine because I brought in some help, several other different BiggerPockets personalities and authors are here to help answer questions from the people like you that are listening, give their advice on how to build wealth. And I chime in with that. So what can you expect from today’s show? Well, an amazing topic was the time value of money that Dave Meyers gets into. And I throw my two cents onto how a dollar invested today is worth significantly more than that same dollar invested 10, 15, 20 years from now.
You definitely are going to enjoy that. We clarify what a HELOC is, how to use it when it’s good, and what’s actually happening as far as the type of loan that you’re getting. We talk about buying for equity and then converting that money into cash flow as opposed to buying for cash and then trying to store up all the wealth that comes from that is actually much easier to create equity and then turn it into cash flow than to just start off trying to get cash flow, which is a thing that many experienced investors figure out later in their career. And I’d like to introduce you to that earlier in the career. All that and more. We also have a live guess with the unique situation and you’re really going to enjoy hearing the problems that they’re having and the advice that they are giving.
Today’s quick tip, the sale is almost over BiggerPockets Cyber Monday Sale is November 28th and everything is up to 60% off. This includes the not yet released book, the Real Estate Rookie: 90 Days to Your First Investment, which is available for pre-order until tomorrow. Please note the author name codes that you are hearing on this and other episodes will work for every other time of the year, but they don’t work during this sale because the discounts are way bigger than 10%. And if you’d like to get your hands on a copy of the Real Estate Rookie: 90 Days to Your First Investment, which is a book that has not yet been released written by Ashley Kehr, you can also pre-order that by going to biggerpockets.com/store.
All right. We’re going to get to our first caller, but before we do, I’d like to ask, if you’re listening to this on YouTube, please open the comment section and have your thumbs and fingers ready to type something out for me. Let me know what you’re thinking. If you were to want another book from me or another, couple books, tell me what you would want them to be written about. What would you want the title to be? What would you want the topic to be? What do you want to hear more of from me? And I’ll work on writing a book on those topics. All right. Let’s get to our first caller. Okay, I have no idea what we’re going to be talking about. So do you have your question lined up or do you…

Erin:
Yeah, so I had sent, so basically a year ago I bought a triplex in Savannah in Georgia, and I had been listening to the podcast for a couple of years. And originally, I was planning on buying in Florida and then the pandemic happened, and all the prices went crazy with everyone moving to Florida, buying everything up. A girlfriend of mine was buying in Savannah, and she said, here meet my realtor. And she was awesome. So I started looking at places. I checked out three or four and we settled on this triplex. So I closed on that last year.
So it’ll be a year in December, which is amazing. It’s got long-term tenants, its cash flowing for me nicely. But being a foreigner, I had to put down 25%, which was $110,000 plus closing costs. So it’s a fairly decent chunk of money and I think as a foreigner, from what I’m understanding from the lenders that I’ve been speaking to since then, speaking to a couple at the moment, trying to see what the different requirements are going to be, everyone’s more or less still going to want 20 to 25 to 30% from me.
And I’m wondering if there’s ever going to be any circumstances where that’s not going to be the case. At some point in time in my journey, if I buy a few more properties and I prove myself with my longevity and paying everything in the correct manner, that they’ll say, okay, well you are proven and we’re going to expect less of a deposit for you. Or if there’s any other foreign friendly lenders out there that I’d be able to get in touch with that wouldn’t require so much. I have plenty of reserves in Australia. I do meet all the requirements. The mortgage that I got is here in the US through my own industry, through the marine accountants. They hooked me up with someone here, so that was all great. I’m just wondering what to do next as well. Do I keep saving until I can put down another $110,000 and then go with your sort of stacking method and do another triplex or a quad or a couple of duplexes or something like that?
Because I want to keep building, my primary goal is to create as much cash flow for myself because I eventually want to be able to supplement my income. I want to be able to step back from working as much as I do. I work 16-hour days for months at a time, sometimes long periods away from my family. I want more family time, I want more time for myself to have a personal life and I’m just trying to figure out what my next best move is. And I’m trying to figure it out by myself, and I so appreciate your time. I didn’t expect to hear back from BiggerPockets. This was special.

David:
Well, I’m glad to hear that and this is a very cool story. It sounds like your biggest challenge is how do I continue buying real estate without having to put a $100,000 down every time? Is that the gist of what your problem is right now?

Erin:
Yeah, because I like small multifamily that makes sense for me. So do I do keep doing that saving so much or… I listen to an episode today and he’s talking about creative financing, so I need to maybe learn more about that.

David:
Well, everybody talks about creative financing. It’s always like, “Oh, you don’t have money, go do this.” In practice, it’s much more difficult than how it sounds when you hear someone talking about it. Let me ask you before we get too deep into this, what are you doing for work?

Erin:
I work as a stewardess. I’m the chief stewardess on a private motor yacht that’s based here in the US, and I’ve been traveling a lot this past year. We’ve just gotten back from Alaska. I’ve been at sea since August. It’s October now. So I’ve been working in and out on this vessel for the past six years and I’m just trying to figure out how to supplement my income or how to increase my income with rental properties so then I can keep putting down more money and eventually be able to step away from this and have a life again.

David:
Okay, so here is my personal take on the situation you’re in. This is probably the biggest hurdle for the average stereotypical American investor. It’s the down payment. You got to figure out a way to make more money or put less money down. At a certain point you will start to see this, your properties will be producing more equity, which becomes the down payment for future properties. It’s very slow going at first and then you hit a rhythm where you don’t have to worry about capital because it’s coming from stuff you bought eight, nine years ago. It takes a long time to get to that point. So at that stage in your investing journey is kind of where we’re starting right now. The short answer is there’s not going to be a lender who lets you put down less than 20% just because you have a good track record.
In fact, 20% is like the least you could probably ever expect to pay. My company had a period of time where we were getting 15% down for investment property. It’s kind of nice. It doesn’t last forever. It comes and it goes 20% usually your minimum and 25 to 30 becomes what they actually want. So the question is how do we get to the point where that isn’t a problem? Because you’re not going to do better than that and in other countries it’s actually worse.
One solution is if you become a good enough investor, you can borrow money from other individuals. That’s a form of creative finance. We would call that private money lending where you go to someone else, another person you work with who’s got 75,000 sitting in the bank and is doing nothing for them and you say, I’ll pay 8% on that money. And you take it and that becomes the lion’s share of your down payment. Once you have a track record and you feel very comfortable with the specific market, that’s one option you can use. Another one is going to be called house hacking. You familiar with that phrase?

Erin:
I think I’ve been listening to all of the strategies, and I think that would work I suppose except for I live on board this yacht and I don’t pay any rent. It covers all my expenses. I suppose I could set it up, so it was going to be my house and I was living in it, but I’m still living on the boat. But then renting out the other spaces.

David:
That’s exactly how we would do it. So I’d have you reach out to us, we would figure out which area. Where are you currently making home? Do you have a city?

Erin:
I spend quite a lot of time in Florida because we are loosely based here. I’m in Fort Lauderdale at the moment, but Savannah-

David:
That’s where I’ve been buying real estate. That’s funny.

Erin:
Nice. Well, I’m just getting ready for the boat show. So it’s going to be a busy week. But I bought in Savannah, Georgia and I love Savannah for lots of reasons for, like short-term rentals for medium term rentals, traveling professionals, film and TV crew, yacht crew. I think it’s a great market for that. So I’m wondering if I should be trying to get into short-term rentals and single family or something and then perhaps just generating cash flow like that to make myself my money for my next deposits.

David:
Well, the reason I ask is because the city that you make, your hometown will dictate where you’re allowed to buy with a primary residence loan. The reason we want to get you a primary residence loan is you can put three and a half percent down, 5% down. You have options that are not this 20%, a $100,000 you’re struggling with. If you could get by putting $20,000 down, you could buy a lot more real estate. You could start to build that equity that you could then tap into later to put towards these bigger deals you’re used to. So let’s say for instance that you bought something in Fort Lauderdale. There’s a lot of travel that’s going there. That’s why I’ve been investing there. We get you a loan as a primary residence loan, you buy a property, you rent it on Airbnb when you’re on the boat, you manage it remotely or you find another person that will manage it and then when you’re going to be staying in town, you just don’t book it.
You live in the house, then you’re leaving again. You put it right out there. I think this is a fantastic way of balancing… It has to be my primary residence, but I also want to make income off of it because nobody’s like someone like you, you’re not home very often. So why have it sitting there vacant? You rent it out. Now obviously there’s things you’d have to do, you’d keep a separate owner’s closet with separate linens and stuff so that you’ve got your own things there. There’s also properties you could buy where what I do in Fort Lauderdale is I buy a really nice property that has a garage because as you know, not every property out there has a garage. I will convert the garage into a separate, like a one bedroom or a studio apartment. You could stay in that, and you could rent out the main house.
They would never know that’s your primary residence. You wouldn’t have to share space with any of those people. It’s not that expensive compared to putting a 100,000 down on something. That’s a strategy I would recommend you look into. And the last one would just be the BRRRR strategy. That’s one of the ways that you don’t have to keep dumping a $100,000 into deal after deal. If you can go find a fixer upper in Fort Lauderdale, convert the garage, make it worth more, maybe you got it at a really good price because right now you’re seeing that the prices are coming down in a lot of areas. Like I was at an Imperial Point, that neighborhood a couple, couple weeks ago, looking at properties out there. You do that, you make it worth more, you refinance it into a primary residence loan, you get a big chunk of your capital back.
You’ve got a place you can rent as a short-term rental, and you can live in the studio by combining all of these methods together. You can make this work. You’ve got the primary residence loan, you’ve got the BRRRR method, you’ve got converting the garage to make it worth more. And now you don’t have to share space with somebody else. If there are people that you trust, other stewardesses that you work with, maybe that they’re on a separate, maybe they miss this trip, they’re stay at home. You can rent it out to them while you’re, you’re out there. And then this is nice to repeat because you can do it every year.
I think this is just my opinion here. Erin, this is the future of investing for that amount of demand we have in the real estate market in the United States and the lack of supply. People have to get used to the fact that they’re going to need to buy a house as a primary residence and make it work as an investment property. Gone are the days that just go buy a triplex and never have to think about it. They’re so expensive, there’s so much competition for them. You have to be able to think creatively. So what are you thinking after hearing that?

Erin:
I mean I think that’s fantastic. I didn’t realize, I suppose that I would qualify for anything like that. Being a foreign, I thought that those sorts of loans just wouldn’t be available to me because so far all I’ve discussed I suppose is real estate investing properties for rentals. And these were the terms that I needed to meet, and I just assumed that that was going to be across the board always. But if I could qualify for something like that, that’s definitely a strategy that I would be so into doing. And I know that I could run an Airbnb. I mean I run a super yacht. So for me, I write checklists all day long. I have daily weekly task list. I manage a team of cleaners and guest interaction and high-end service. So that’s something for me, that’s my skillset, that’s where I live.

David:
And that’s why I asked about your job because literally the way that you invest should be a reflection of the skill you have. And most people’s skill set was developed at their job. So you just telling me what you did, answered so many questions that I would’ve had. It tells me that you’re organized. It tells me you’re not afraid of a challenge. It tells me you’re used to having to think ahead and anticipate what could go wrong. It tells me you’re not unfamiliar with a schedule. All of those things are like you said, exactly what it takes to manage a short-term rental.
To you this will be easy. To the person listening to this who’s never done a job like that, it would seem daunting to have to try to manage a short-term rental. And so the advice I’m giving you is going to be geared towards what I think you’d be good at. And in fact, I think that you might be someone who could manage properties for somebody else in the future. You may be managing my short-term rentals because I think you’re just going to be like, “Yeah, this is so easy.”

Erin:
I would love to mean eventually-

David:
Prepare to be in on a super yacht, right?

Erin:
I love it. It’s been such an incredible adventure. But event, I do want to step back from it at some point in time and beyond that life, what is there for me? And I feel like that is the natural transition for me into managing rental properties, having my own and I want to set myself up for the future so I can actually afford to travel I want to and not on someone else’s time. And I can go home and see my family more often than every two years or so.

David:
Yeah. So here’s what you got to keep in mind. That is a worthy goal. Don’t buy in any hype that it’s easy to get there. That if you just buy someone’s course in six months, your goal will be completed because that’s a worthy goal. It’s going to take a lot of effort, a lot of sweat equity, a lot of challenge, a lot of emotional sacrifice to get to that goal. But once you get past that first maybe six, seven, eight-year period of time where you’re grinding stuff just starts to fall in the place and becomes so easy. It’s not a linear progression, it’s an exponential. It will feel like you’re not getting anywhere. And then you hit this inflection point and it starts to take off. So I would recommend first off, reach out to us. We will figure out how you could get a primary residence loan as a foreign national, which lenders are offering that, what programs are available?
Then we’ll come up with a strategy like what we just said by a short-term rental that you can live in when you’re there. You’re not there very often, so you’re going to be renting it out, you’re going to be making some money from that and then scale that every year. Every year you get to buy another one of these primary residences. And then in addition to that, once you get pretty good at it, you can probably start borrowing money from other people who don’t know what to do with their money. They’re getting 2% interest on it, maybe they start lending it to you. You pay them 8%, 10%. Now you’ve got your down payments figured out and you can start to scale pretty good.

Erin:
That all sounds so good. I love it.

David:
All right, well thank you Erin. We appreciate you being here and bring in this question. We’ll make sure we stay in touch.

Erin:
Yeah, thank you so much for your time. It was an honor. Enjoy the rest of your day. Thank you, David.

David:
All right. On this segment of this show, we review comments left by people who have commented on the BiggerPockets YouTube channel from previous shows. Our first comment comes from Randy Robinson Knight. I absolutely love this market. I have agents sending invites for brunch, champagne, and gift card offers. That is hilarious. It’s absolutely true. When the market gets tough, you start seeing agents and loan officers spoiling you a little bit. Take advantage of that. Our next comment comes from DDREI mentor. When I’m finding in Chicago is a lot of agents are removing listings and re-listing somehow removing the old price. You can’t easily see how long it’s been on the market, and you can’t see how much they lowered the price. I just keep seeing new listings of stuff I saw in May, and it will say that’s been on the market for two days with a listing history that has all blank prices.
All right, so DDREI mentor. Here’s what’s going on with that. When a listing agent puts a house in the MLS, there is a timer that starts that we call days on market. Houses have the most leverage possible when they first go on the market and then every day that they sit there that don’t get a buyer, they slowly lose leverage. It’s very rare you will ever find a house that’s been on the market a 100 days that’s going to get an over asking price offer. But it’s very likely if someone writes an offer two days in that they’re going to get an over asking price offer. So agents have figured out some kind of sneaky ways they can make it look like this house hasn’t been on the market for a long time and it’s not stale product. Like every good homicide detective knows your chances of solving a murder significantly decrease after the first 48 hours.
So real estate agents have just learned, let’s keep restarting a new 48 hours by taking it completely off the market, waiting a predetermined period of time and putting it back on the market. They’re making it look like it’s a new listing and that will help their clients in several ways. For one, it gets rid of that timer that was counting, making it look like it’s a house that nobody wants for. Two, it hits all the buyer’s email lists again as a new listing. So once you’ve seen all the new listings, the MLS stops sending you the stuff you’ve already seen by taking it off and putting it back on. It gets in everybody’s inbox again as a new property. And it also allows a listing agent to say, oh no, no, no, that offer’s not nearly good enough. We’ve only been on the market five days.
You’re going to have to do better. Here’s my advice to you. Who cares what the cumulative days on market or the days on market says or what the listing agent says? Write the offer. You’re willing to pay for the house, follow up with the agents to see if they’re willing to take it and continue that follow up eventually when no one’s buying this house, the sellers are going to take the offer that they don’t like because it’s not about the offer that they want. It’s about the best offer they can get. And every one of them eventually gets to the point where they realize this is the best offer I’m going to get, so I might as well take it. You want to be the first person in line when that happens.
All right, next comment comes from New Way Home. Excellent chat guys. I can almost imagine home buyers dancing and excitement with watching this keep up the good work. Well, I hope so, because home buyers for a very long time have not been able to dance about anything. They basically just had to take a deal that they didn’t like and pay way more than they wanted to and sort of put their tail between their legs when they got the keys to their new home, and they couldn’t be excited and just eat it. Well, that’s how it started. At least until three or four years later when they have over a $100,000 in equity in that property that they didn’t do anything to earn other than just wait. It’s one of the ways that the market cycle works. When you’re very rough to get the deal you like, you usually end up really liking that deal three, four, five years later when you love the deal you got right away, you probably aren’t going to have the same upsides so that yes, buyers right now are dancing in excitement.
It doesn’t mean that they’re going to be just as happy in five years if the market continues to stay where it’s at. There’s no right or wrong way to do real estate. There’s just the way that it’s working based on supply and demand and we hear a BiggerPockets want to give you the information to play the game based of what the defense has given you. Our last comment comes from Charles Granger. This video seems dishonest and geared towards bulls. I don’t think they’re appropriately displaying risk to investors. Additionally, you comment about your deals to display authenticity slash authority, but you have a different means of acquisition than the traditional investor. All right. Charles let’s start with different means of acquisition. I’m still using money just like everybody else is, so that’s not any different. I’m not buying properties, I’m not like finding properties off market.
I think that there’s some people that are doing that and they’re like, I just got this million-dollar house for $500,000 because they spent two years and a bunch of money sending out letters to find the deal of century. I’m not doing that. Almost everything that I buy comes right off the MLS just like anyone else. If what you meant that I have different means of acquisition is that I have more money than other investors, that could be true. I mean I definitely have don’t have more money than all of them. I have more money than what you’re calling a traditional investor. If you’re assuming it’s a person who’s just getting started. But I don’t think that’s a traditional investor that’s a newbie trying to crack into the game.
Most of the money that I have comes from properties I bought previously that I refinanced or pulled equity out of to buy the next round, which meant I bought and waited, which nobody wants to do or from businesses I started where I helped other people build wealth through real estate representing them as a real estate agent or a loan officer, which other people don’t want to do.
So rather than being mad about it, why don’t you just take my advice and do the same thing for yourself. Start a business in real estate or buy some real estate and wait and then pull that money out to buy more properties. Regarding the part where you’re saying you don’t think that I’m appropriately displaying risk to investors. I don’t know how to, because there’s two kinds of risk. There’s the risk of buying a property and then losing it because you couldn’t make the payment or there’s the risk of not doing anything and missing out on all the money you could have made. I want to just bring up a point that nobody really likes to talk about, but it’s very important. Let’s go back in time to 2014. Everyone’s telling you that the market is too hot. Now let’s even go forward. Let’s go 2016. The market’s even hotter and everyone’s saying don’t buy.
There’s no way that this can continue. The prices have to come back down. We just had a crash. Another one is coming, and you don’t buy a house. The money you lost from not buying in 2016 to 2022 is so much more than the money that you could have lost if you bought and then the market went down some. One of the cool things about real estate is that even if the market does go down, we still continue to collect rent, so we don’t lose the property. So there’s risk on both sides. We just only tend to focus on the part of risk that would lose something we already have. I’ll give you a little example of this. Let’s say I said to you, there’s an opportunity for you to make $200. It’s just about guaranteed. You got to drive four hours in that direction, pick up your $200 and then drive back home.
And it might be a little bit difficult. They’re going to ask you to do some pushups when you get there, but other than that, the money’s yours. And then I said, on a scale of one to 10, how urgent are you looking for that opportunity to go get that $200? Would you be like, whatever it takes, man, I’m going to fight through a hungry cage of tigers to get to my car so I can go get that money. Probably not. Most people would consider it, but they wouldn’t jump at the chance. Now in this same example say hey, there’s somebody in your office right now stealing $20 out of your wallet. You’d probably do anything in the world to get there and fight like hell to keep that $20 from being stolen from you. Why do we put so much effort into saving $20 but not into gaining $200?
I don’t know myself, it’s a thing of human nature. I don’t work any different than that, but I do want to call attention to it because oftentimes when we talk about risk, we’re only talking about what could go wrong. We’re not talking about missing out on what could go right. Think about this advice and anything else in life. Don’t go talk to that girl, man. She might not like you. It might hurt really bad. There’s risk involved in putting yourself out there. Don’t go tell her how you feel. Well yeah, there’s some risk you could get rejected, but consider the risk of spending your whole life never being with someone that you really, really love and always wondering what that person did. Which of those things is riskier? The last part is when you’re saying it’s dishonest and geared towards bulls. No one knows if this is a bull or a bear market.
I’m very, very clear with explaining to you guys why I think what I do, not just what I think. Do I think the market’s going to continue to go down? Yes. Do I think it’s going to be long-term? No. Do I think it’s natural? No, I think it’s artificial. I think we’ve raised rates artificially to slow down the market. It has worked, it’s pushed prices down, but it hasn’t necessarily pushed affordability down because the Fed isn’t doing this for real estate investors or for real estate. They’re doing it for the economy as a whole. And lastly, I do believe very deeply that when rates come back down, the prices are going to shoot back up and I don’t want people to miss out on that. So I hope you guys don’t think that there’s anything dishonest about the information that we’re giving you here. I do tend to have a bullish outlook on real estate long-term because when I look back for 500 years, that’s all it’s been.
Is this been going up constantly when I see all the money that’s being printed, I think it’s going to continue even more. Only time will tell, but I will say this, in order to protect against your downside, I’ve said it a million times, I’ll say it again. Keep more money in reserves than you need. Do not quit your job right now. Continue to work and continue to save and by smart cash flowing deals. All right, we love it, and we appreciate the engagement, even the negativity. I love that stuff guys. If you have something negative to say, if you’re sitting there grumbling saying, David always says to buyer, David says not to buy these markets, but I like these markets. Whatever it is, it’s okay. I’m not mad. I want to hear what you have to say. It actually leads to a better discussion and more depth being shared as to the inner workings of what makes wealth being built. And I want more people to hear it.
So please get on YouTube right now and tell me what you like and what you don’t like. Tell me what you don’t agree with. Tell me what questions you have that are not getting answered and we will do our best to address those on a future Seeing Greene episode. All right, our next question comes from Dave Meyer answering Travis in South Carolina.

Dave:
Hey, what’s going on everyone? My name’s Dave Meyer. I’m the host of the BiggerPockets Podcast on the market and I am the author of the new book Real Estate by the Numbers that teaches you to analyze deals like a pro. Today I’m going to be answering a question from Travis who invests in South Carolina and his question is about the time value of money. Travis writes, I am in the process of rehabbing a two bed, one bath home that I plan on renting out after this rehab. I’ll be totally out of funds making me unable to purchase another property that could come across my radar, thus losing money, which is why I bring up the time value of money. So my question is, should I free up funds now in case some great opportunity presents itself in the future? I generally don’t know that I want to do a cash out refinance because of rates going up.
And what if the deal never comes? It took me nine months of searching, waiting to get hold of this property and it’s hard to justify doing a refinance when there’s no guarantee I will find a property to invest in anytime soon. But at the same time, the house I’m rehabbing now has a 6.5% interest rate. So I suppose it’s definitely a possibility of burring this one and getting my cash out and keeping a relatively similar interest rate. What do you recommend? So Travis is basically in a BRRRR right now and is facing two options. He can either take the equity that he has generated by improving the property and leave it in the current deal, earning him some cash flow, or he can take the option of doing a refinance where he takes the money out and then hopefully invest in another deal. But as Travis says, he doesn’t know if he’s going to be able to invest in a good deal right away.
And he asks about the time value of money and how you analyze this question through the lens of the time value of money. And if you’ve never heard of this concept, it’s a little bit complicated, but the easiest way to think of the time value of money is that money that you generate now or that you have now is worth more than money that you have in the future because you can reinvest it. So as investors, we shouldn’t just be thinking about how much money can we generate by a deal. You want to think about how much money can you generate as quickly as possible. You want to get those returns and pull them up as close to now as you can so that you can reinvest them at a high rate of return. And so with this question, you basically have to determine which option between keeping your money in the deal or refinancing is going to generate you more cash faster.
And there are metrics that take the time value of money into account. You can do a discounted cash flow analysis, you can do a net present value or IRR, which is a very popular metric for real estate investors. And you can measure which one of these options is going to earn you the better return with the time value of money factored in. But just as with the math aside, just logically, what I would recommend doing here, Travis, is you should go out and see what kind of deals you can get right now. I’m sure you have a real estate agent, contact them and go run the numbers on five or 10 deals and figure out if you were to even before, don’t do the refinance, but just pretend that you’re doing the refinance and go run the numbers on five to 10 deals and see if that option would earn you a better return than keeping your money in the deal.
Because I generally don’t recommend pulling money out, especially at a higher interest rate to just sit on it because you don’t know if you’re going to get a deal. So the only reason I would refinance if I were in your position is if you knew that you were going to be able to reinvest that money at a higher rate of return than you’re earning with your current deal. Hopefully that helps Travis appreciate the question. Now I’ll throw it back to David.

David:
Man, that was some good stuff. I want to make sure we don’t gloss over. This idea of time value of money is very important. There was a lot of big words that were used there. Dave Meyer is obviously a data guy, so I want to make sure that people who are not data people don’t just have their eyes gloss over and say, I’m going to wait for something to be said that makes more sense to me. Here’s another way of looking at time value of money. We’ve all heard the story of would you rather be given a million dollars or a penny every day that doubles. So you get one penny the next day it’s two pennies and it’s four cents, then eight, then 16, then 32 and it goes on and on and on. And basically, right around the time you hit like day 30, it’s a whole bunch more money than a million dollars.
That is a story to illustrate the power of compound interest. When you invest money, and it compounds, and you reinvest the money that was added and that gets invested even more comes back and it grows at an exponential rate. Albert Einstein was once quoted as calling compound interest the eighth wonder of the world. To be fair, I think Albert Einstein is credited for saying a bunch of things that who knows if he ever said, but it’s still true that it’s a pretty impressive thing. If you want to understand the time value of money, here’s a good way to look at it. If I was to give you a penny on day one, would that be worth significantly more than a penny on day 27 of this 30-day compounding slide, right? Obviously, the penny is worth a lot more the further back you go and that’s what the time value of money is really trying to demonstrate.
If you invest your money at 15 years old, 20 years old, and it keeps doubling, that’s massively more powerful than doing the same thing at 80 years old because you’re going to die before the money has time to keep growing. And that’s all that the time value of money is really getting at. So from a overall perspective, that’s what I want you to take out of this video. Now, from a tactical perspective with the person saying, “Hey, I don’t buy deals very often. I really, really, really look for the perfect deal. It took me nine years to find the house I have.” If I do a cash out refi, the downside is I lose my good rate, so the property becomes more expensive. The upside is I have more money to invest, but the upside isn’t worth anything to me or it’s not worth much because it takes me nine years to buy a property.
So I see that the dilemma that this person’s in, here’s the advice that I would give. Put a HELOC on the property that has the equity but don’t pull the money out. Okay? Start looking for properties. Hopefully it doesn’t take you nine years to find the next one. Maybe you’re more comfortable. So it only takes four and a half this time find the property and then buy it with the money from the HELOC. Put that as your down payment to buy this new property. Now, you’ve got two properties, okay? Once you’ve got the second property bought, now refinance the first property that has the HELOC on it to pay off the HELOC. So do your cash out refi, pay off the HELOC and your original note, get the money back that compensates you for the money that you took out on the HELOC that you put into the next house.
This way the money doesn’t sit in the bank doing nothing for you while you’re spending nine years looking for your next house. You have access to it but you’re not paying for it because you don’t pay money on a HELOC until you pull the money out, which you won’t have to do till you find the next property. I hope that makes sense. That’s a way that you can avoid the situation that you’re in, where you don’t have to pick your poison. You’ve got an option that is not poisonous.
All right. I just was contacted by the producer of the podcast, Eric, here with a question that I want to include in the show. So Eric sort of jumped in. He is like, I don’t quite understand exactly how the HELOC works When you’re borrowing money off a property as a HELOC, I know you can get access to the equity, but how is that recorded?
So here’s the simplicity. A HELOC is really just a fancy word for a second position note. So you buy a property worth a million dollars and you put say $600,000 down. So you have a first position lien or a note in first position for $600,000, which means if there was a foreclosure, the first position person gets paid back first a HELOC, let’s say you took out another $200,000 on a HELOC. So you’ve got a first position for 600,000. A HELOC is just a second position note for $200,000. So you’ve got a total of $800,000 of debt against your million-dollar property. You’re still at an 80% loan to value when you go refinance and you say, “Hey, I want to do a cash out refinance.” And they say, “Great, we’ll let you take out 80% of the value of the home.” The money they give you on the refinance goes to pay off your first position note, which was in this case 600,000 at the lower rate and it pays off the HELOC, which was your second position note.
And now you just have one new first position note for $800,000 on your million-dollar property. And the $200,000 that you had taken out originally on that HELOC was the down payment for the second property that you went to go buy, which has now been paid off on your cash out refi. Thank you, Eric for asking for some question there and for helping me bring some clarity. Anytime we say HELOC, that’s just a fancy phrase. For a second position lien with an adjustable-rate mortgage by doing a cash out refinance, you’re turning first position, fixed rate, and a second position adjustable and replacing it with is one loan at a fixed rate that is no longer having the adjustable component. That’s the downside of a HELOC. Our next question comes from, Will and is answered by Pat and I will give my two cents on that.

Pat:
All right. Got a question here from a Will in California. How do I determine the correct amount of equity keyword equity here in this question? How do I determine the correct amount of equity needed to replace my W-2 income so that I can invest in real estate full-time? And how would I restructure my real estate portfolio to provide the cash flow I need in the most tax efficient man manner while preserving as much capital as possible to continue scaling up? And he goes on to say he’s got a duplex, one single family and one duplex both in Texas and he bought both of them with negative cash flow. Rents have increased since he’s bought them, but he’s barely getting any monthly income at this point. He says, I am getting a slight monthly positive on the single and the duplex is still a negative. So this is a great question and I’m seeing this more and more. It’s quite fascinating.
In the years past, people bought real estate based on cash flow and I don’t think that it’s smart to say that that has gone out of style. I think it’s interesting to see that some people stopped buying based on cash flow. I have never bought anything with negative cash flow or break even. I don’t understand the logic behind that, but I’m the one not answer asking the question, I’m answering it. So my answer is you need to get into things that cash flow. You’re in things that don’t cash flow, so get out of them. And here’s a rule for when you know should get out of an investment. If you could sell the property today and make more than seven times what your yearly cash flow is, you need to get out. So what that means is if your yearly cash flow is, let’s say it’s 500 a month and your yearly cash flow is $6,000, if you can sell the property and make more than $42,000, you need to get out because that’s around 10 or 11% return that you’re getting on equity.
And you need to be able to do better than that. When you’re buying these things new, you really should be shooting for 15% cash on cash. Worst case, 10% cash on cash. And what that means is if you’re spending, let’s say a $100,000 as a down payment on a property and you’re making $10,000 a year cash flow, that means you’re getting 10% cash on your cash that you put in. So you’re getting 10,000 out of a 100, you’re getting 10% cash on cash. That’s kind of like your bare minimum. Will, you’re way below bare minimum. You don’t even start above line. I think that you’re never going to be able to quit your job buying houses like this, never the next couple of years. Most likely they’re not going to give you any sort of appreciation like you’ve seen in the last five years.
Matter of fact, you might lose as the next year, two years, go on. If something’s worth 300 for you now, it could be worth 270 this time next year. I mean it’s possible. So you really got to look at this number, the seven X number and that’s going to be the case in both of these because you don’t make enough money on them. I would suggest you selling them and then getting into something that does cash flow. It might not be as close to your house as you want it to be. Might not be in as comfortable as a neighborhood as you want it to be. It might be uncomfortable for you. But first and foremost, most important thing, in my opinion in investing and trust, we have done this for over 30 years now. I have lots of investment is cash flow. That’s what you buy for first and foremost.

David:
Well, that was a journey down at Intellectual Highway, wasn’t it? Lots of good stuff to chew on with that one. That might be one you want to go back and rewind and listen to again. So let’s see. Pat gave some really insightful information about metrics you can use when trying to hit cash flow. Hitting a 15% ROI is very difficult to do in a market like this. My guess is Pat’s got access to some business opportunities and some bigger apartment complexes that are getting him a 15% return based on the internal rate of return. That’s probably not cash flow right off the bat. Now I don’t want to take too much time to answer this question, but I kind of see what’s going on here. Pat’s looking at, hey, if I invest my money in an apartment or something like that, that we’re going to buy hold for five years and sell.
And he’s incorporating all the ways that money are made through that investment, which is what the IRR does, the cash flows, the loan pay down, the selling at the end, the revenue that’s generated from the capital raising, whatever that would be, 15% possible. But most of our listeners are sitting here as you’re hearing this, you’re like, you’re only looking at the cash-on-cash return in year one to determine your ROI. There’s almost nothing out there that’s hitting 15% cash on cash return year one. So don’t get confused by what’s being said here. If you said, “Hey, I’m going to buy a property that rents are going to go up every year, there’s a big value add component to it, I’m going to add equity to it’s going to go up in value and rents are going to go up and at the end of five years I’m going to sell it.”
And you looked at the entire money you made from every single component I mentioned, 15% totally doable. You could do better than that with single family residential property. Like I’m getting over a 100% returns on a lot of the stuff that I’m buying when you look at the internal rate of return. Okay, that being said, that wasn’t exactly the question that was being asked by the caller. The caller was saying, look, I’ve got a W-2 job that makes good money. I want to replace it with investment income. You’re on the right place so far. How much cash flow or what’s the best way to build up cash flow to replace my job? And I think the subtlety that might have been missed was the person asking the question here, Will. Will, understood that it’s very difficult to build cash flow.
It’s much easier to build equity. So I think what will was getting at is what can I buy that will build equity that can be converted into cash flow that can be used to replace my W-2 income. He’s sort of breaking this into a couple steps and I do like that approach. Now, Will mentioned that his properties are not cash flowing really solid. And Pat heard that, and he said that’s not good. You shouldn’t be buying stuff that doesn’t cash. What Will didn’t say is how much equity is in those properties. Pat’s advice might have been different if Will had said they’re only making a little bit of money every month, but I’ve got $200,000 in equity because I waited three years. Rents just haven’t kept up with the value increasing. You see how this changes the scenario that we’re looking at here. So, Will here’s my advice to you.
This is the same strategy that I use for investing myself. Of course, I want cash flow, but I get cash flow, not by focusing on cash flow. You go after equity. There’s several ways you can do it. One is you invest in the right area, which you’re probably onto investing in Texas. So keep doing that by an area that’s going to grow. Number two, buy something that you can add equity to. You can rehab it, you can add square footage, you can improve it cosmetically, you can turn it from a long term into a short-term rental. Anything that will make the property worth more. That’s step number two, three. It’s what I call buying equity. This is when you buy below market value and when you combine all this together, you start getting home runs, go after properties that you can buy equity in. So you bought it below market value, you then added equity to through some form of rehab.
You then change the way that you used it, which increased the value as well, changing it into a short-term rental, something like that. And you do that in an area that’s growing. Then you watch your return on equity and once you’ve accumulated a decent amount of equity like that, sell it and 1031 into something that cash flows naturally like an apartment complex, okay? That’s my advice for you for how to get from, I have a job and I want to replace my income. You’re not going to get it by buying $110,000 duplexes in the Midwest. You’ll be doing that for a 100 years before you get the income that you’re getting from your job. You do it by adding value and equity in properties that still at least break even like you’re doing. And then exchanging the equity for cash flow in the future. So you want to be having both things going on.
You’re doing a 1031 exchange from existing equity into a cash flowing asset like an apartment complex, a triple net complex, a big short-term rental that’s going to make you more cash. And at the same time, you’re buying new properties and you’re adding value to them. And if you do it the way that I’m describing, you will never run out of capital, which was one of the concerns that you expressed. So first off, thank you Will for asking a good question. And second off, thank you Pat for bringing up some really good information that will help everybody else. All right, we have time for one more question and this one comes from J Scott reading a question from Cheryl.

J:
Hey everybody, I am J Scott. I currently own about 50 single family houses all around the country, including in the sunshine state of Florida, which is good because today’s question comes from Cheryl who is asking about buying rental properties in Florida. Specifically, she wants to know about how rising insurance costs in the state along with things like hurricanes and the potential for global warming are likely to impact investors who are looking to buy and hold in various parts of the state. Now, she specifically mentions Tampa, which is on the East Coast, or I’m sorry, the West Coast of Florida and Orlando, which is in the center of the state. Now, why I don’t have a crystal ball to know exactly what might happen in the future, I do agree with her that rising insurance rates over the past few years is making it really difficult to find good cash flowing properties in many parts of the state.
And there’s certainly risk, both short term risk from other storms and long-term risk from things like global warming that Florida might become a really expensive and a really difficult place to invest at some point in the future. Now, that said, Florida also has a lot of things going for it. There’s large population growth coming into the state, which is likely to push rents higher over the next few years, and there’s a lot of building going on in many parts of the state, which means that a lot more housing supply could keep prices reasonable for the next few years. Not to mention that while hurricane damage is horrendous and really has impacted tens of thousands of families, honestly, it does provide some opportunities for investors, especially those investors who are willing and able to do renovations. Now, all in all as a Florida investor myself, my recommendations are the following.
First, ensure that your flood risk before buying any property in the state and make sure that the insurance costs still makes sense given that flood risk. Second, if you’re going to buy in Florida, I would suggest diversifying across different parts of the state so that you face less risk from any single storm or any single weather event. And third, I would highly consider looking at property in the middle of the state off the coasts, which will help reduce the likelihood of storms and reduce your insurance risk. All in all, I believe that there’s a lot of opportunity left in Florida, but I don’t recommend putting all your eggs in one Florida basket. Anyway, thanks so much, everybody. I’m going to hand it back to David now.

David:
All right, thank you, Jay for that very insightful commentary. I’m going to second a lot of what you said and maybe just expand on some of your points a little bit. There’s pros and cons of investing everywhere, everywhere, and it… I get a little bit of a bee in my bonnet if you will, that people tend to ask questions that insinuate that they’re looking for an area to invest in that has all pros and no cons. It doesn’t exist. In fact, if you had the perfect area that had all pros and no, everyone else would be investing there, it’d be very hard to get a deal and that would become a con, right? So a lot of people look for areas with the lowest price point homes that they think are going to get them the highest cash on cash return and there’s no other investor competition.
They end up in areas that have no long-term growth and don’t build any kind of wealth. That’s what I’m trying to get at is you’re always balancing pros and cons. You don’t make wealth by trying to avoid cons. Now, let’s talk about some of the Florida pros and cons. J mentioned several of these things, the pros, massive population growth. Everyone’s moving there. I’ve said it before, if you just took like a table of the United States and you shifted it down into the right, that’s where all the population tends to be going towards right now and I think they will continue to for the future. Long-term population growth means you can expect increasing rents. You can expect a increasing tenant pool. You should have more people to choose from. When picking your tenants, you’ll have an overall better experience. Another pro is that businesses are moving into Florida.
I’m a Florida investor and this is one of the reasons that I’m putting money into that market is I’m watching a lot of businesses leaving New York and going into South Florida and that’s going to lead to increased rents in the future because people make more money and they have better jobs so they can pay more rent, they can pay more for a house, which both drives the price of my home and the rent that I can get for that home up. What else is good about Florida overall? It’s pretty good weather. You get a lot of rain and you do get hurricanes, but you don’t have the snow and the freezing cold issues like pipes bursting that can cause you some problems investing in real estate now, that’s why everyone wants to invest there. This is why so many people are talking about they like the pros, but you got to look at the cons too that Cheryl brought up and J highlighted.
Number one, insurance is ridiculous. It is insane. I’m getting hammered on insurance that is over three to four times as much as what my highest guess what it could be was the hurricanes have absolutely changed the way that homes are insured there. In fact, I have one house that I bought there during a 1031 exchange that blew me away. I didn’t even think this was possible. The lowest quote I could get on homeowner’s insurance for this property. Now it’s a big nice house, it’s near the beach, it’s over a million dollars. It’s 5,000, 6,000 square feet home. But still the premium to insure it as a short-term rental was $26,000 a year. That’s a down payment on a house in some places. So this insurance thing is legit. That’s a pretty big con. Another con, the actual hurricanes that cause these high insurance premiums are real and they do happen.
And that’s why J is saying consider investing in the middle of the state because you get less of that type of activity going on. Now, there’s a con to investing in the middle and you tend to make more money on the coastlines. That’s why we’re looking to want to buy there. We want to be near the beach. So you have to factor that into your choices. Another con for investing in Florida is that it’s very competitive in the best areas. There’s a lot of other people that are trying to buy now, let’s say for Orlando for instance, that is in the middle of the state. It’s going to be safer. Hurricanes don’t tend to hit that part as hard. You do have a good economy, but it’s very dependent on Disneyland. That’s why most people are buying short-term rentals or houses in Orlando. They don’t have a ton of industry outside of Disneyland.
And that makes me nervous. I’m not saying don’t do it, I’m probably overthinking it, okay. But part of my long-distance investing strategy is to not have too much of your assets in any area that’s dependent on one thing for its economic base. Most of the people that are living in Orlando are going to be like Disneyland employees. The people that are visiting it have something to do with Disneyland. Of course, there’s other businesses there, but Disneyland’s the biggest one. What happens if, God forbid there’s some scandal that comes out from Disney executives, knock on wood, right? And it gets canceled, it’s canceled Disney and nobody goes there because now it’s politically unpopular to go visit Disney World. I think I’ve been saying Disneyland, I meant Disney World. You see what I’m getting at? If that park shuts down or people stop visiting there, you now have an investment that no one is trying to use.
No one’s going to our Orlando to visit the swamp. They were going there to visit Disney World. So I get very nervous. I don’t think anyone saw Detroit collapsing the way that it did until it happened. So I’m not saying don’t invest in those areas. I’m saying be aware of the pros and the cons. I think a lot of good ones were highlighted in J’s response. I just want to bring a couple more, but the bigger point I want to make here is don’t get stuck only looking at cons. There always is going to be a con in any area. You’re going to just make sure that the pros outweigh them. All right. That is our show for today and I really hope you enjoyed it. We had another show where I brought in some backup to help answer questions because what’s important is that you guys get the knowledge and the experience that in our heads into yours.
If you’d like to buy one of the BiggerPockets books, simply head over to biggerpockets.com/store and use the discount code DAVID, and you can get 10% off any book that you’re buying there. I’ve got a couple in there to check out and new ones that should be coming. But more important than that, tell me what you think about the show. Go to YouTube and leave us a comment, subscribe to the page while you’re there, make sure you like the video, so the YouTube algorithm knows to keep showing you something along those lines. And if you want to follow me, you can do that @davidgreene24. I’m most active on Instagram, but you can follow me on Facebook, on LinkedIn, on TikTok, I think I’m officialdavidgreene and at YouTube I’m @davidgreene24. And I forgot to mention that tomorrow is Cyber Monday. So that 10% discount code that I worked will work at any time except for Cyber Monday because you’re going to get a bigger discount tomorrow up to 60% off on many BiggerPockets books.
Go check that out. If you’re listening to this after Cyber Monday, that 10% code will work. As I mentioned, follow me on social media, let me know what you thought of the shows and what I can do to help you build well through real estate. If you live near me in California, I definitely want to know about you because we put on meetups where we teach people about real estate investing and I’d like to invite you to them. Do me a favor, go leave a review, a five-star review on Apple Podcast, on Spotify and Stitcher, wherever you’re listening to this. And when you come to the meetup, show me the phone with your review because you deserve a high five. All right, everybody that wraps up our show for today. Please check out another BiggerPockets video, keep learning and keep making money through real estate.

 

 

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Winter might seem like an unusual time to undertake a renovation, but with the right knowledge and a bit of preparation, it can be a great time to add value to your home.

The secret to a successful winter renovation is good planning and working closely with your renovator, says RenoMark renovator Sam Lapidus. Talking to your renovator in advance about potential challenges can help you save time and money in the long run. Snow and cold weather are two of the biggest factors that can hamper a winter renovation, and they require precautionary measures so nothing’s left to chance.

Major renovations often require you to vacate your home for a few weeks. To ensure that your contractor has easy access to and from your home, arrange for snow shovelling and salting of steps and walkways in your absence. Some renovation companies may offer the service for an additional cost, so ask about this in advance and ensure that it’s included in your renovation contract.

When you move out of your home, it will likely cool down significantly, even if the heat is still on. This increases the chance of water freezing inside your pipes, which could cause them to burst. To minimize the risk, have a plumber heat the water line coming into your house or call your municipality to shut the water off at the street side.

Homeowners doing a winter renovation in semi-detached houses or townhomes should be mindful of how it may affect their neighbours. These types of homes have shared walls, and if the temperature in your home drops significantly it can affect the comfort level of those living on the other side of the wall. If the shared wall is not properly insulated, talk to your renovator about installing some temporary insulation to prevent heat loss. This is another issue that should be discussed in advance, as it may result in additional fees.

Special precautions may be required when renovating homes with flat roofs. Major renovations or additions may compromise the structural durability of the home. Snow can build up on the roof and if your home is not structurally finished, it may not hold up the weight. For an added fee, your renovator can have someone shovel the snow or have an electrician install a specialized heater. After the renovation, you can choose whether to remove the heater or leave it to prevent snow permanently.

Ensure your renovation contract outlines the full scope of work and all associated costs. Avoid renovators who urge you to forego a written contract. It’s a sign that you’re not working with a professional. Verbal agreements make it hard for you to hold your renovator accountable for sub-par work, and you will not have a point of reference if there is a conflict over payment.

Make sure you always work with a professional renovator. A good place to find one is at renomark.ca – home of the national RenoMark program. All RenoMark renovators agree to abide by a Code of Conduct, which holds them to a number of obligations. In addition to providing a written contract, they offer a minimum two-year warranty, are covered by at least $2 million worth of liability insurance, and carry all applicable licenses and permits.

Your home is your largest asset so it deserves a pro, no matter what time of year it is.

Ashley Kehr:
This is Real Estate Rookie, Episode 238.

Ashley Hamilton:
If you are new and you’re just wanting to get started and you want that cash flow, it’s not a situation where if you make a mistake and fail that you could lose your shirt. Obviously nobody wants to lose money, but I’d rather lose a couple thousand then a $100,000 or something like that. But again, with Detroit, we’re very cash flow heavy. There’s a lot of demand and especially in Section 8, so I feel like it’s a great market for rookies to infiltrate because it’s so low risk with the guarantee rents and things like that.

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

Tony:
Welcome to the Real Estate Rookie Podcast where every week, twice a week, we bring you the inspiration, information, stories you need to hear to kickstart your investing journey. I want to start this podcast by shouting out some folks in the Rookie audience. Today we have a podcast review from someone with the username Owen Warren. Owen says, “Total game changer!!! I started out listening to the OG Bigger Pockets Podcast which gave me a plethora of information, but sometimes so much that it can lead to analysis paralysis.” I know we’ve all been there. “While I still enjoy the OG Podcast, my focus has shifted more so to the Real Estate Rookie Podcast, due to the fact that I’m still relatively new to real estate investing and have only completed a handful of deals. So whether you’re brand new or have a well-balanced real estate portfolio, I believe Tony and Ashley, along with their guests, have great content to share with you guys. Thank you all for everything.”
Man, that’s one of the nicer reviews I think we’ve got in a while. If you haven’t yet, please leave us an honest rating and review on whatever platform that you’re listening to. The more reviews we get, the more folks we can help. And that’s always our goal here. So Ashley Kerr, what’s up? How you doing today?

Ashley Kehr:
Good, good. I got a child sick from school today. Sick or skipping school, still not sure yet what the consensus is. Yeah, it’s been pretty busy. The end of the year is coming, and we actually have an episode coming up for you guys in the next couple weeks that’s going to be about goal setting. So how did Tony and I do on our goals last year? What are our goals going to be for 2023? Now is the time to start thinking about that and kind of putting your action steps and your most important next steps in place.

Tony:
Yeah, I think a lot of people almost wait too long to start having that discussion, so I am excited to get into that. Yesterday I had an hour and a half long call with my CPA, just kind of like game planning for next year. We’re in October right now, so I think it is helpful to start thinking about the next year before the next year actually gets here, that way you’re kind of one step ahead of the game. We’re doing the same thing in our business as well. We’re already now trying to identify what some of the blockers and the obstacles might be for our real estate business next year as well. So for all of our Rookies that are listening, if you guys haven’t taken some time to start thinking about the oncoming year and what it looks like for you, you should definitely, definitely set aside a day to start putting that game plan in place.

Ashley Kehr:
And a great point, too, with talking to your CPA is even reviewing the past year, and see if there’s anything you need to do before the end of the year hit.

Tony:
Yeah, totally.

Ashley Kehr:
Because you can only write off things in 2022 for this year. So you can’t wait until the year is over and then talk to your accountant and be like, “Oh man, I should have done this differently, or maybe I should have bought this,” blah, blah, blah.

Tony:
I just want to share something that I learned in that conversation with my CPA. Cost segregation is one of the big benefits of buying real estate, and I always thought that you could only perform a cost segregation in the year that you purchased the property. So if I buy a property in 2022, I have to complete the cost segregation in 2022. But she corrected me and told me that you’re not limited to the year that you purchased it.
So if I purchased a property in 2022, as long as I put it into service in 2022, I can still get all of the cost segregation benefits that come along with buying that property in 2022. So for example, at the end of this year, bonus depreciation goes from 100% in the first year to 80% in the first year, and then the last 20% is spread out over five years. So before, if I have a, I don’t know, $160,000 cost segregation depreciation I was able to use, I could use all of that in one year in 2022. But moving forward, I only get 80% of that in the first year, and then a decrease every year there afterwards. So I was like, “Man, I got to do a bunch of cost segregation this year to get all of that benefit.” She’s like, “Well, Tony, not necessarily.” She’s like, “Any property that you put into service in 2022 will still have the ability to use 100% bonus appreciation even if you do that cost segregation a year from now or two years from now.” That was something that was news to me that honestly made me pretty happy, because we put quite a few properties into service this year.

Ashley Kehr:
Yeah, and to kind of spread it out so that you’re not taking it all in one year when maybe you don’t even need it. So you could transfer that, do a little the next year, and then some the following year too. Yeah, that’s really interesting. I didn’t know that either that you could do it later on.

Tony:
Yeah.

Ashley Kehr:
Well, today we have another special Rookie Reply format for you guys. We have Ashley Hamilton with us. She is a Detroit investor. You may have seen her on Instagram or the Bigger Pockets Podcast. She just had her second debut on there. Her first episode I think was one of the best performing episodes ever on the OG podcast, so you guys will have to check it out. But Ashley comes on with us live at BPCON. Yes, that’s right. Me and Tony are still giving you guys interviews that we did in the basement of the hotel at BPCON. We want to bring Ashley on and we’re going to talk a little bit about her, but she’s also going to walk us through how she invests in properties, and as a Rookie what is the best way that you can get started that she thinks of. She kind of goes through these steps that she implements and thinks that will be beneficial to you guys to help you get started. Before we bring Ashley on though, we are going to do an actual Rookie Reply.

Tony:
This week’s Ricky Reply comes from Cullen Lewis. Cullen’s question is, “Real estate rookie here. My wife and I are really wanting to buy real estate properties, but the market where we live is currently too expensive for us. Is it a bad idea to invest in properties out of state where the housing market is cheaper and more affordable for us? Or, would it be better to save more money and just invest in the market we are currently living in?”
I’ll take a stab at this first, Ashley, and then I’ll pass it over to you. I think a lot of it depends on what your goals are, Cullen. If your goals are to maximize your tax benefits and appreciation, then maybe investing in a market that’s more expensive might actually be a good thing, right? Because historically markets that are more expensive, like California, parts of New York, they tend to appreciate more than some of the more Midwestern or more affordable states. If the appreciation is a big motivating factor for you, then maybe investing in your own market does make sense.
If cash flow is what’s most important to you, then yes, there might be a benefit to going into a market that’s less expensive and can probably give you a better cash on cash return.
I think there are some things to balance there, but if you do decide to go out of state first, read David Greene’s book on out of state investing. It’s a great, great resource for both new and seasoned investors on how to build the team to invest out of state. But second, I think, don’t just chase the markets that are super, super inexpensive, because sometimes you can find yourself in the wrong neighborhood. If you don’t know that state, you don’t know that city, you can find yourself with a property that’s difficult to manage. We’ll bring Ashley on here in a second, Ashley Hamilton, and she’ll talk a little bit about how she’s been able to invest in Detroit, but it’s because she knows that area and she knows how to find the right tenants in that market. So I think if you do go into a market that’s historically less expensive, you really want to do your homework to make sure you’re investing in the right part of town.

Ashley Kehr:
Yeah, and I think a great way to find another one of those markets is to look where other people are investing, and then do your own research from there. Because how many markets are there across the US? There’s a lot. So look where other people are investing, and then go and do your market research from there. Like Tony had said, what is your goal? Is it cash flow? Are these cash flow performing assets? Are you going to be buying properties that are super old on the east coast? We just had a guest on who was buying houses in the early 1900s, late 1800s, and those may come with a lot of continuous repairs or updates because they’re just such old properties. Or, would you rather buy something new and that’s more turnkey? There’s a lot of factors to look at when you’re analyzing a market. I think that it’s 100% doable to go ahead and invest out of the area that you live in. There’s millions of people doing it every day.
Go into to the Bigger Pockets forums and just ask people, “Who is the first person you connected with in a market to start on your team?” It’s most likely going to be maybe a real estate agent, or a handyman, or a property manager that can help you through the process. That’s going to be a crucial part of it is finding your boots on the ground too to build that team for this.
Let’s bring on Ashley Hamilton though, who’s actually going to have a lot to say towards this question, too. I think we’ll provide a lot of valuable information for you guys. Ashley, welcome to the Real Estate Rookie Podcast. Thank you so much for joining us here at BPCON. We’re super excited to have you. You have one of the most amazing episodes on the Bigger Pockets OG Podcast, and you were just recently back on again with that podcast. For anyone who doesn’t know who you are, please tell a little bit about yourself and how you got started in real estate.

Ashley Hamilton:
Absolutely. My name is Ashley Hamilton from Detroit, Michigan, as if nobody knows, right? Because it’s always blasted everywhere. I really got my start I feel like in a very common way, where a lot of real estate professionals are people that want to get started in real estate where they’re at. Obviously a lot of us don’t have a six figure job or corporate America or a rich family we can borrow money to, so I was one of those people that really had to get in really creative. I literally started purchasing real estate using my tax return. I was fortunate enough to be in a market that was more affordable and easy to get into, where if I took a big risk because I didn’t know anything, if I did have a loss or make a mistake, it would’ve been easier to bounce back from because the capital requirements were so low. I chose Detroit as my market, and I started using my tax return to purchase properties.

Tony:
That’s amazing. Because most people, they get that tax return, and it’s like, “What are we buying? What are we shopping for?” And instead, you use it as a way to build your financial future. Can you just give us a quick overview of what your portfolio looks like today?

Ashley Hamilton:
Yes, absolutely. So today I’m super blessed to be a proud owner of 35 doors. They’re all located in the city of Detroit, but because the capital requirements are so low, I have a ton of deals that I purchase all cash. So I was able to have a lot of equity in my properties, and when I started to leverage that, that helped me almost tripled my portfolio in one year. So I’m at 35 doors right now, and cash is always my number one. There’s no wrong or right way to invest. Some people might invest for appreciation. But I really wanted the cash flow because I really wanted to spend time with my children. So that’s where I’m at right now and I’m excited.

Tony:
A lot of investors, they hear Detroit, they think that, “Is it the right place to invest? Is it the best place to invest?” What has your experience been, and why do you think it might be a good place for new investors to get started?

Ashley Hamilton:
Absolutely. My answer’s always yes, it definitely is. So one thing, I know a lot of people when they talk bad about Detroit, they was like, “Oh, you can buy a property there for $5,000,” and they kind of played it as if it was a negative. So even if I lived in California, if somebody got on the news and said, “You can buy a property for $5,000,” I’m going to instantly do some research.
But yes, it’s a great place to invest. We always had the automotive industry, so the big three auto companies, so they’re still there. Now there’s a lot of tech companies coming there, so that’s really improving. But the best thing about Detroit is it’s still affordable. So even now after the big COVID boom and all that inflation, you can still purchase a property all in for about $80,000, and that property will still generate at least $1,300 to $1,400 a month in rent.
The reason I feel like it’s so important, especially for rookies, is because obviously there’s no rule book or a way to do real estate. So if you are new and you’re just wanting to get started and you want that cash flow, it’s not a situation where if you make a mistake and fail that you could lose your shirt. Obviously nobody wants to lose money, but I’d rather lose a couple thousand than $100,000 or something like that. But again, with Detroit, we’re very cash flow heavy. There’s a lot of demand, and especially in Section 8. So I feel like it’s a great market for rookies to infiltrate because it’s so low risk with the guarantee rents and things like that.

Ashley Kehr:
Let’s walk through that process kind of. So you’re recommending that a rookie investor start out with more affordable housing, so these properties. What are kind of the action steps someone can take to identify a market? Maybe they’re looking at other markets besides Detroit. What are some of the things that you looked for to find these $80,000 houses that were generating that amount of rental income?

Ashley Hamilton:
Yes, absolutely. I do have a four step process. But before I go into that, I want to talk to the listeners about, step away from the business a little bit and think about your customer. I feel like as a business owner, even though real estate is a property, it’s still a business, and we kind of go technical. But I always think about my customer. So if you’re servicing an affordable market like Detroit or a lower income market, I’m thinking about who’s going to going to live in this property? So nine times out of 10, it’s going to be a single mother like I was, or a small young family, maybe a husband and wife and one small child.
When I was growing up, my parents always said, “Hey, stay where I can see you. Don’t be running up and down the block, just stay where I can see you.” When I look for a property, the first thing I do is look at the street view. As long as the seven adjacent properties to my subject property is good, that’s one step off my checklist. And again, my logic behind that is the kids, they’re not going to be all the way down the street. So if there is a smaller or a vacant property down the street, as long as the surrounding areas is good, that’s going to be safe for my family, and they’ll have neighbors and things like that.
So number one, when you’re looking in Detroit, the first thing you want to do is look at the street view and try to eliminate properties that have blighted, burnt down, or vacant properties directly next to it. The next thing is you want to check to see what the rental amount is. That’s also going to tell you what the neighborhood supports. On average in Detroit, even the worst houses you can get about a thousand dollars a month. If I’m looking at the average rents, and I do use Bigger Pockets all the time, they have a great rental estimator and it’s really accurate. It’s hard because Detroit normally is not accurate, but I give props to Bigger Pockets for that. So if I can look and see that the rent in that area is going to be $1,000, that’s letting me know it’s a greater area.
Next you want to just check and see, make sure that there’s comps. If you’re going to be all in for $80,000, as long as you can identify one property that’s sold in the last six months for $80,000, that would be the fourth step. After that, I would just reach out to real estate agents, making sure that property managers is readily available in that area.

Ashley Kehr:
That’s great advice, and those four steps you can do in any market.

Ashley Hamilton:
Absolutely.

Ashley Kehr:
So building out your buy box, building out your criteria. If your budget is at $80,000, you’re going to be looking for that. If you have a certain rent to price ratio that you want to meet, then you’re going to look, “Do the rents meet what you’re purchasing the property for?” Then doing the Google Street view, that’s also a great tip, especially if you’re investing out of state and you can’t physically go and drive and actually view these neighborhoods to do that. So that’s awesome.
After you’ve identified the neighborhood you want to be in, what kind of happens next when you’re ready to make an offer on a property? Are most of your deals through the MLS?

Ashley Hamilton:
Yeah, so to be honest, I feel like I’ve been an investor that’s capitalized on the people saying what you can’t do. So you can’t find good deals on the MLS. During my one explosive year where I purchase 11 properties, nine of them were straight off the MLS. I don’t know if it was people weren’t checking there, the flippers weren’t, if that’s how. So for sure you can use MLS, but I’m a firm believer in networking, especially with wholesalers. And if you are really savvy, or if you’re really interested in really exponential growth and profit, really look at properties that need a little work. Doesn’t have to be a full rehab, but if you’re willing to do the work, that’s going to force the appreciation and give you a bigger outcome, especially in a city like Detroit. Because if it’s 90% complete, obviously there’s not going to be any savings on the offer. So for sure, that would be a couple things that I would look for as well.

Ashley Kehr:
Okay. So then what’s your process after you’ve put the offer in and you’re under contract? Are you doing inspections on these properties?

Ashley Hamilton:
Yeah. So to be honest, for sure, I always recommend that every investor get an inspection, but my philosophy is I buy neighborhoods, so just always considering my customer. And just also, if you pick a market, you want to know the statistics. So in Michigan, I know that there’s 30,000 voucher holders that don’t have a place to live because there’s a housing shortage. So I know, okay, great, that could be a market I can service with a Section 8 and guaranteed rent, so that’s why I’m putting my mind in the consumer again. Once I buy the property, I start to look at and analyze properties similar to that to make sure that I’m doing repairs that’s going to make a Section 8 tenant want the property and feel lucky for it. Sorry.

Ashley Kehr:
With that Section 8, I want to go into this because I don’t think we’ve really talked about this before, is what are some of the things that you do to your properties that’s attractive for somebody with a voucher, or even the housing authority likes to see? Because they kind of walk through, because they do an inspection too of the property, correct?

Ashley Hamilton:
Yes, absolutely. So for sure, so to be honest, they do do an inspection, but it’s a really basic inspection. You don’t have to have the nicest property; they just want to make sure that it’s safe. But for me, I want to stand out in my market. I know all the requirements that they ask, and you can easily do that by just reaching out to your local agencies. But I like to go a step over and beyond, because my philosophy is cash flow helps you quit your job, and tenant turnovers kills cash flow. So my goal is to eliminate tenant turnovers. So I know that if every property in my neighborhood is Section 8 and they just have the basic Formica Home Depot countertops, I might go in there and put a granite in there. I might spend $1,400 more, but I have a tenant that’s going to stay three more years, and that’s guaranteed rent. Those are some of the things that I do now.
And then also the cheapest way, if you guys don’t want to commit to the granite, there is these faucets at Home Depot. They’re literally $60. You can also get them on Amazon. And literally when you turn them on, it lights up. I run all the kids when I’m doing a showing to the bathroom and show them that. That $60 faucet has literally made so many Section 8 people pick my properties over other, and it’s not even that expensive.
When you think, always think of the consumer in mind. And me being someone that was on Section 8 when I was younger, and I saw how people treated me and my family. We had the basic minimum. We were never excited to show people our homes. I really want my tenants, whether it’s Section 8 or not, to be excited to show people their homes. And again, that’s going to make them want to stay longer and keeping my cash flow alive. So that’s just some philosophies and a quick cheap tip. Like I said, it doesn’t have to be the granite of $1,400. It can be a $60 faucet that you can put in there that really make an impact and really help your rentals occupy.

Tony:
Ashley, you talked a little bit about your experience as someone who lived in subsidized housing and some of the, I guess, stigma, or maybe the mindset the landlords had about their tenants. I think that is something that happens for a lot of new investors is that there is a stigma around investing in Section 8 or in lower income neighborhoods. Have you found any of those misconceptions to be true or those ideas to be true? Or maybe, what challenges have you seen, and how have you overcome those?

Ashley Hamilton:
Yeah, absolutely. I haven’t found any of those to be true, because I truly believe that no matter if you make a $100,000 a year or $100,000,000, or $10,000 a year, because I’ve probably been a little bit of both of those, you’re still human. At the end of the day, I’ve had people that work at making $100,000 a year at a factory that won’t pay me rent at all. So it’s really the judgment of character, and just giving people the benefit of the doubt. So for sure, even if you’re having Section 8, a lot of landlords, they’ll skim on their criteria or their screening process because they’re thinking it’s the guaranteed rent, and they just overlook that there was already red flags. So now when they get the tenant, they’re like, “Oh, these tenants are bad. All Section 8 is bad.” But no, you didn’t do your proper screening because you just automatically assumed now that would’ve just happened regardless if it was the government assistant or a regular paying.
It’s definitely important to do screening no matter where your tenant is coming from. Just some of my obstacles, again, it’s just showing that my prospects that, “Hey, I’m human. I’ve been there before.” I think that really resonates with them and let them support me more, and kind of remove me from the big old evil landlord like I guess some people would think of it, because they know I’ve been there before and things like that. So that’s really helped me.
But again, I feel like just kind of removing the business like straight and narrow, and being understanding and say, “Hey, listen, I know you’re a single mother, but don’t worry. If you stay here three or four years, I have connections with a great realtor, and maybe I can refer you to a home buying program.” So letting them know that, “Hey, as long as the communication is good, I’m here to help you,” that really has helped me in my journey as well.

Tony:
Yeah, I think it’s kind of an unfair characterization to say just because someone makes less money that they’re less of a qualified person to rent your property, right?

Ashley Hamilton:
Yes.

Tony:
A lot of times, someone on a voucher program, Section 8 or otherwise, they might be your best tenants because they know that there’s a long line of people waiting behind them to get that unit. So it’s like, “If I know if I disrespect this place, or if I’m not a good tenant and I lose this voucher, where am I going to go?” They’re almost incentivized to be your best tenants because of the value that comes along with that voucher program.

Ashley Hamilton:
Yes, absolutely. I agree. And they stay longer too, typically. And especially if it’s a nice place where they’re just bragging to their whole family they never want to leave. I feel like also what I’ve noticed is the nicer I make my rentals and the care that I show, the tenants reciprocate that as well. I mean, some of my tenants have better grasp than me. They’re hiring companies, and I’m like, “Wow.” But they saw the care and respect that I put into the property, and they see me grinding and in the business. They reciprocate that with the property.

Tony:
You talked a little bit about your screening process. Can you elaborate on what that looks like?

Ashley Hamilton:
Yes, absolutely. This just is based off experience; obviously every market is a little different. But early on what I would get, the people that worked at the Big Three and the automotive that I just thought, “Oh, they’re so successful.” They would come in and they were the worst payers. I don’t always just shoot for the income situation. My number one criteria is previous rental history. I feel like if you’ve been renting a property for five years and you move into my properties, chances are you’re going to continue to do right. If you don’t have that rental history, that’s when I kind of look deeper into your credit to try to build up that, see how your payment history is. But my number one is previous rental history. Obviously you want to make sure they can afford it because you’ll be doing them a disservice just as much as yourself if every dime they get has to go to rent. I also make sure that their income is three times the rent amount. And then also, I really don’t like people that had evictions in the last three years.
That’s typically my biggest criteria. So no evictions in the last three years, must make three times the rent in income, and have previous rental history. Now, if it’s a Section 8 tenant, then the income aspect, it’ll just be three times whatever your allotment is. Some people, their rent might be $1,600, but they’re only paying $300. So as long as they make $900 a month, then that would be a good candidate.
But if you all can notice, I didn’t really say credit. And again, obviously if you don’t have rental history, then I look at the credit. But I do realize that even though credit is good, but if these people had a 700 credit score, a perfect employment history, they’ll probably be buying a house. They wouldn’t be looking. So I always wanted to be a little bit lenient on people who didn’t have the best credit, but as long as they have demonstrated positive pay history with their previous landlords, that’s the biggest referral I can get.

Ashley Kehr:
What kind of software are you using, if any, to manage these properties?

Ashley Hamilton:
Yeah, so if I told you guys what I do, you all would think I’m a crazy person. I’m definitely blessed. I’m hoping to be able to use software and stuff, but it slows me down. So to be honest, I’ve been running my businesses on spreadsheets. But for the last six months, I have been using Building, the property management software. I’m going to sit here and say it live publicly. Don’t use spreadsheets, just invest. It took so much time to set it up. I’m not going to lie, it did take three weeks of me really getting in there. But now that it’s going, it’s literally the best thing. If it’s just one or two units, you can do it on spreadsheets, but I highly recommend you using a property management software.

Ashley Kehr:
Yeah, I was in the same boat too. With anything really, my businesses, I waited too long to implement it.

Ashley Hamilton:
Yes.

Ashley Kehr:
Do it now while you’re a rookie investor, and put it in place and build your systems up. You can change them as you move along, but starting from the beginning, instead of when you have, how many doors do you have now?

Ashley Hamilton:
35.

Ashley Kehr:
Yeah, trying to onboard 35 units does take a long time and it’s time consuming.

Ashley Hamilton:
Yes, for sure.

Ashley Kehr:
What last piece of advice do you have for us for rookie investors? What would be your number one thing?

Ashley Hamilton:
I know it maybe sound cliche or maybe something that you guys would never thought, but to be honest, it’s really getting crystal clear on what you want. I can’t say that enough. I know it seems easy, but it’s really important. Because I’ll get people that call me up and say, “Hey, I want to be an investor. I want to quit my job in three years, so show me how to flip properties.” That right there says you’re clearly not clear on what you want. Because even though I love flipping, flipping is not a means to quit your job, right? Because you are using that $40,000 in profit, which really turns into $30,000 once you have to pay Uncle Sam that everybody forgets about. That profit, you’re going to use that to sustain your life. So just really getting crystal clear.
Now, maybe you do want to be a flipper, and that’s totally fine because you’ll get the experience. But if you want to quit your job, you’re going to want to look for cash flow. I feel like that’s the number one thing, is getting crystal clear on what you want. Because a lot of us think like, “Oh, we want a hundred doors,” or, “We want 20 units.” But if that’s not your goal and your goal is just to quit your job and have a better cash flow, then that’s probably what you want to go after.

Ashley Kehr:
Ashley, thank you so much for joining us. Can you let everyone know where they can reach out to you and find out some more information about you?

Ashley Hamilton:
Absolutely. They can reach me on Instagram at @Detroit_Investor. I share tips and show a lot of my rehabs right there, and truly just here to help and give back. I’ve been so grateful for the Bigger Pockets family and literally just this whole community. I’m so passionate about giving back because you can do this, guys. It doesn’t have to be complicated. It really is simple. You just want to figure out what you really want and find people that are doing it. Shoot them a DM, right? Instagram is so good. Or just social media in general, because you have opportunities to DM and email your mentors and people that you might want to seek guidance from. Instagram is definitely the best place, @Detroit_Investor.

Ashley Kehr:
Well, thank you so much for joining us live from BPCON. I’m Ashley @wealthfromrentals. He’s Tony @TonyJRobinson. Thank you guys so much for listening, and we’ll be back on Wednesday with a guest.

Speaker 4:
(Singing).

 

Energy bills can get dramatically high, especially during Canada’s cold winter months. There are, however, steps you can take to conserve energy and save money at the same time. Below are our top eight Winter Home Energy Solutions.

8 – Turn Down the Temperature

When you’re away from your house for a few days, you don’t need to keep the heat cranked up. By reducing the temperature when you’re out of the house, you can save money on heating costs.

Another idea is to add an extra blanket on your bed and reduce the temperature by a couple of degrees at night.

7 – Seal Unwanted Leaks

Caulking and sealing leaks will insulate your home better, which will save you money in the long run.

You’ll want to make sure you’re buying the correct type of caulk, depending on what specifically needs to be sealed, and whether it is interior or exterior.

6 – Replace Furnace Filters

It’s a good idea to keep your furnace properly adjusted with annual maintenance.

This will include cleaning or replacing your filters every couple of months to improve efficiency.

5 – Save Money on Water

There are several ways you minimize water consumption. Low-flow shower heads and smaller toilets will minimize water output.

You’ll also want to make sure you fix any leaky taps that might be constantly wasting water.

4 – Update Old Appliances

Refrigerators, freezers, dishwashers and washing machines that are a couple of decades old may be using significantly more energy than newer models.

Sometimes the investment in a new major appliance will save you money in the long run.

3 – Use an Area Rug

We like to be barefoot in our own space, but when our feet are cold, so is the rest of our body.

Consider purchasing an area rug for rooms in your home that have cold floors.

2 – Unplug Electronics

Electronics that are plugged in still use energy, even when you’re not using them.

By unplugging electronics and small appliances when you’re not using them, you will ensure that there is not additional energy being used up.

1 – Switch Lights Off

One of the simplest ways to reduce your energy use is by flicking off lights when you leave a room.

It’s also a good idea to switch to energy-efficient lighting.

During the covid-19 pandemic, public health officials restricted the rights of sellers to host open houses for potential real estate transactions. While these measures were intended to protect the health of Canadians, they were highly restrictive for people trying to sell houses.

Luckily, in March of 2022, public health officials ended mask mandates and began allowing open houses once more. This means that now people wishing to host an open house for selling their homes are once again free to do so.

For Ontarians who are still concerned with potential health risks involving covid-19, the government maintains a list of guidelines for safely hosting open houses and other real estate activities, such as a recommendation to maintain physical distancing.

Keep reading to find information on hosting an open house in Ontario, as well as some tips on how to get the most out of an open house.

How to Find Open Houses in Toronto

Although it’s fairly easy to explore homes for sale online, attending an open house is the best way to get the entire picture.

A home can be seen in person by potential purchasers during an open house. These normally take place on a Saturday or Sunday for a few hours. During that time anyone, regardless of how serious a buyer you might be, is welcome to drop by and take a tour.

The real estate agent will be available to answer any queries even though the sellers are typically absent. Finding open houses will assist you to see what’s currently available and closely inspect potential properties.

Due to Covid-19, open houses these days can be a little challenging. However, it’s important to remember that they can also be held online through services such as Zoom.

For those that take place in person, further safety precautions could be necessary, like capping the number of visitors permitted inside at once and mandating mask use.

However, there are numerous open houses accessible and several ways to find them if you’re interested in going.

Agents have access to a registry called the Multiple Listing Service (MLS). Real estate brokers use it largely to exchange details about their listings with one another, making it simpler for them to connect with potential clients.

Can Anyone Go to an Open House?

Anyone can join public open houses from curious neighbors to buyers who are actively looking to move. Children are typically welcome but parents are advised to use discretion as to whether or not their children should be in attendance.

Unfortunately, dogs are not allowed at most open house visits. If it’s your first trip and you are just curious, make sure to tell your agent you are not actually buying. While open house visits are open to the public, being up-front can help sellers focus on actual potential buyers.

Being a curious neighbour is acceptable; you are still welcome. If you aren’t really friends with the sellers, you don’t have to pretend to be looking for a house.

Everyone wants to know how much their house is worth, and a good way to do so is to look at the competition in the neighbourhood.

Is It Necessary to Register for Real Estate Open Houses?

Most agents ask that you bring identification to an open house before visiting. Mostly for safety, as the homeowner wants information on who was going through their house. Realtors will generally ask you to sign in when in attendance for the purpose of contact tracing.

If you get sick after attending an open house, you should contact the agent to inform them that other people in attendance may have been exposed. This helps keep everybody safe and prevents the spread of airborne illnesses.

Posting Signage on The Property Entryway Door Stating Health Concerns

Although the government no longer forces people to wear masks while attending real estate open houses, the agent can still ask that visitors do so. They are also free to employ other safety measures, such as having an assistant manage physical distancing and capacity limits.

If you wish to maintain physical distancing while showing your home, it’s best to post a sign on the front door with details about your expectations. The sign should include any mask requirements or request self-screening for visitors before they enter.

Keep in mind, however, that you are not permitted to discriminate against individuals protected under human rights laws. For example, special accommodations must be made for those who cannot wear masks for health reasons.

Things to Look Out for at an Open House

Attending an open house is one of the best ways to get to see a property up close. It’s important to know what you’re looking for in order to get the best out of it. The average open house visitor spends 10 to 20 minutes exploring a home. You should consider:

• Room dimensions and type
• The rooms’ design and flow
• A home’s quality and condition, as well as the condition of the front and rear yards, decks, and fences
• possibilities for parking

If the house piques your interest, pay close attention to the number of open house guests and the questions they are posing; this information may be useful if you end up bidding against other potential buyers.

Is There Anything I Should Avoid at an Open House?

There are some etiquette guidelines that you should adhere to when attending an open house. Here is some relevant and applicable advice for things to avoid:

• Utilizing any restroom (particularly in an “emergency”)
• Making a video or taking photos.
• Speaking negatively of the house or the seller’s possessions.
• Opening all the interior doors, dresser drawers, or closet doors
• Handling sculptures, handling children’s toys, and lying on mattresses.
• Touching the Seller’s personal items.
• Bringing your dog
• Exploring the house alone; keep in mind that you are a guest and it is advisable to let the agent take the initiative until instructed otherwise.
• If you aren’t truly interested in the house, don’t take up all the agent’s time at a crowded open house.
• Arriving before or after the specified hour.
• Informing the host realtor about your financial situation, aspirations, and private life. Keep in mind that the agent coordinating the open house is the seller’s agent, and whatever you tell them could be used against you if you decide to show interest in the property.

Tips for Getting the Most Out of an Open House

Make a travel plan in advance. Plan to visit houses that are somewhat close to one another so that you can walk there; you’ll enjoy the time and trouble you’ll save by not having to park several times.

Shun the throngs. Crowds can make it difficult to really get a good look at the property. If you want to avoid crowds, try to arrive towards the beginning of an open house because that is typically when it will be busiest.

Be honest with the building management about whether or not you are working with an agency. The listing agent will be able to reach your REALTOR before the Sellers accept another offer if the house receives an offer at 8 p.m. on Saturday. When a house you’re interested in is sold out from under you, it’s never fun.

Final Thoughts

The process of house hunting can be extremely stressful. Additionally, if you see multiple properties over a few days, the specifics may become hazy. It’s best to come prepared and make the most of your open house tours.

Some things you might want to consider are bringing a notebook, taking pictures (with the realtor’s permission), and making sure to grab the realtor’s contact information.

Mindy:
Welcome to the BiggerPockets Money Podcast, Finance Friday edition where we interview Zoe and talk about how to invest for the future.

Scott:
The tool I would recommend there for you is a one page investment philosophy, and I think that to put that together, you have a lot of homework to do because the investment philosophy follows you for a long period of time and you’ve got to make some hard choices when you get into that. If you had come in and said, I believe in Google, Amazon, Facebook for these reasons, and I have these stocks, I think that over 30 years they’re going to do phenomenally well and I’m ready to ride the ups and downs that come with investing in tech stocks in good times and bad, that’d be totally fine. That’s not your viewpoint. You’re like, I invested in them because they’re the type of list in Robinhood and now that they’re down, I want to pull out. That means that that philosophy is not yet developed.

Mindy:
Hello. Hello. Hello. My name is Mindy Jensen and with me as always is my forward thinking co-host Scott Trench.

Scott:
That was an introduction for the future, Mindy. That was terrible. Whatever. We’ll just keep going.

Mindy:
They can’t all be winners, Scott. 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 and assets like real estate, start your own business or come up with an investment philosophy. We’ll help you reach your financial goals and get money out of the way so you can launch yourself towards those dreams.

Mindy:
Scott, I am excited to talk to Zoe today because I think she’s facing something that a lot of people are facing for the first time, a downward trending market. And I really want to hammer home the thought that just because your stocks are down, just because your portfolio total value is down doesn’t mean you have lost money unless you sell the stocks. And yes, you have sort of lost money. Help me figure this out, Scott, help me enunciate this correctly. Because you haven’t lost money unless you sold, you still own X number of shares of this individual stock or that index fund. It’s just not worth as much as it was last month.

Scott:
At least in the accumulation phase of building wealth, you never spend the principle, so if I invest a hundred bucks, I’m never going to spend it. It’s just not part of my life. It’s not something I consider as part of my wealth or that I that I’m able to access. I’d only ever spend the returns generated by that hundred dollars. So the dividends for example, or the appreciation over the long term, but I’m going to stick with that investment for 30 years or maybe forever.
I may never sell the index funds that I purchase, and so, am I going to lose money? Sometimes the paper value of that will go up or down, but I just keep buying, right? Who we interview Nick Maggiulli a few weeks ago, he wrote a book called Just Keep Buying. That’s literally the title of the book and it tells you all you need to know about my index fund strategy and my real estate strategy. Now, real estate, you do have to sell at some point because you lose the depreciation benefits and there are tax reasons, so you can’t hold it for more than 27 and a half years. But if that didn’t exist, I would literally hold my properties until they fell down as well, because that’s my investment philosophy.

Mindy:
You can hold them if it’s a great performing cash flowing property, you don’t have to just sell it because you can’t appreciate it anymore, Scott.

Scott:
That’s true. Yes, but I will probably sell it because the ROI does get compressed when you have to start paying a lot more in taxes.

Mindy:
Yes, but the way you phrased it made it sound like you have to sell after 27 and a half years.

Scott:
That’s true. Yeah. Anyways, yeah, and that’s the big piece here and I think that’s hard to accept until you’ve really internalized your investment philosophy and that takes dozens, maybe hundreds, maybe thousands of hours of reinforcement of your investment philosophy through books, read different perspectives. I told Zoe our guest today to read books on how to pick stocks and books on why index funds are so valuable because that will help solidify whichever approach she chooses to take.
I’ve read them both and I’ve decided that index funds are the approach that are best for me. And because I have that perspective and because I believe I have at least a journeyman’s baseline understanding of how to pick stocks, I’ve decided to invest in index funds and that allows me to stick with my approach for the long run without having to be fearful in a market like 2022.

Mindy:
Yep. I think that your investment philosophy sheet is really helpful or will be really helpful for people who are experiencing their first down market. If you don’t know what you’re investing for, if you don’t know what your philosophy is, you’re going to have a hard time weathering the storm. Also, if you are having a hard time weathering the storm and you are a buy and hold investor and you don’t plan on selling your stocks, stop looking at your portfolio. If you’re not going to sell it anyway, what does it matter if it’s down a dollar today or up $2 tomorrow, stop looking at it until the market evens out.
Before we get into today’s show, let’s take a quick break and we are back. Before we bring in Zoe, let’s remind you what my attorneys make me say. The contents of this podcast are informational nature and are not legal or tax advice and neither Scott nor I nor BiggerPockets is engage in the provision of legal tax or any other advice. You should seek advice from professional advisors such as CPAs and accountants and attorneys before making any financial decisions. I think I did that pretty good for memory.
All right, let’s welcome Zoe to the show. Zoe is our guest today. She’s single and looking for steady income to cover her expenses and also help with her parents’ retirement. She’d like to live in a big city, which means a higher cost of living, but she lost money in the stock market due to inexperience and lack of research, which is something that happens all the time. So I hope she hasn’t beat herself up over that. Before we chat with her today, let’s look at her money snapshot. Here is a general view of where her finances are. We’ve got a salary of 5,100, yay Zoe, plus additional income of $1,400 a month from her house hacking roommates and $200 additional for utilities.
She’s projecting a 10% bonus from work and she has a side hustle that brought in $2,500 in October that is lumped together to bring us a nice great big total. Now, she sent in her expenses, but honestly they total up to $3,300 and I don’t see this as being a big problem for Zoe. If these expenses are accurate, this is a great amount of expenses for her in her situation. Of course you can always cut out expenses and you can always reduce expenses, but Zoe has a delta of $1,800 before the 1650 from her roommates for their portion of the housing expenses. So again, I don’t think spending is her problem. My advice here would be just to make sure that these are your true expenses and that if you do have approximately $1,800 left over at the end of the month, then these are your true expenses. If you have significantly less than it’s time to start looking at where your money is actually going.

Scott:
And I’ll just point out a few things there as well to follow up on what you said, Mindy, we have 1450 a month coming from house hacking roommates and a mortgage of 1630. So you’re paying $200 to live plus your share of utilities essentially, and that leaves all the other expenses that are adding up to the 3,300. So I mean you’re spending less than what, $1,700 a month on everything besides housing and 200 a month on housing. It’s phenomenal situation. So I think we’re going to have a lot of fun today. You’re going to have a lot of really good options.

Mindy:
Yeah, I think we have a lot of fun today. Zoe did send in a detailed spreadsheet, so I am fairly certain of her numbers here, more of a comment to those who are listening. Something I see frequently is people think that they’re spending X, but then they also don’t have any money left over at the end of the month. And if this is the situation you find yourself in, I encourage you to track your spending as granularly as you possibly can to make sure that you are in fact spending that much. What we find frequently is people forget about, oh yeah, I’ve got that one expense and that one expense and all of a sudden there’s where all the extra money is being eaten up.
Zoe’s also doing really good on the investment front. She has a current 401K of $1,500, but that’s because she just started a new job. She has Roth IRA of $15,000, Roth 401K of 2,900 ESPP employee stock purchase plan of $200 right now. But again, brand new in this, a previous Roth 401K of $15,000 two after tax brokerage accounts that are approximately $20,000 and cash savings of $31,000. So she’s sitting really pretty.

Scott:
Plus the house hack.

Mindy:
Plus the house hack. I mean, yeah, we didn’t even include that and we don’t have equity in that investment. We have equity, we don’t have it listed here. So Zoe, let’s look at your money story really quickly. How did you get to this phenomenal position and what on earth can Scott and I help you with today?

Zoe:
Yeah, so I grew up, I would say below the poverty line and so expenses and money problems was always prevalent in my early life. And so seeing my family struggle and pinch pennies and not having a clear goal or idea where they want to be really resonated with me. So I guess early on I was always really careful with what I spent my money on, always negotiating expenses and so as a result I’ve kind of really put myself in a position where I’m always thinking about how can I make sure I will never go in reverse, essentially. Make sure that I will never be in a position that I was growing up and making sure building wealth for I guess future generations to come in my family.

Scott:
Awesome. How long has the current situation been going on? Could you give us an overview of the recent past you you’re saving $3000, $4,000 a month it seems like when your side hustles are kicking in and has that been continuing for a long time or is that a relatively new phenomena?

Zoe:
So the side hustle started in September. So before that I wasn’t saving as much. I was closer probably to the 2K mark, but now with this additional income, I’m really struggling to decide where should I put my money and can I move on to better things, move to a bigger city like Mindy spoke to. When I graduated in 2019, I only had 5K to my name and I think 3000 of it was in a CD account so I couldn’t even touch it.
And my first position that I had a career-wise, they had us go to essentially a convention for onboarding and you’re supposed to pay for your own expenses and they would reimburse you in the next pay period. So I remember being scared because I had almost three grand on my credit card and I was like, how am I going to pay this off? How am I going to last until I get reimbursed for everything, like the plane ticket, the stay, the hotel expense, the food? And so that was kind of a wake up call, like okay, this is what it’s like to go out into the corporate world, you know, really got to focus on how you’re going to be able to give yourself that cushion. So I’m never going to be in that position again of fear.

Mindy:
I like your mindset, I want to call out all the employers that make you do this. This is so stupid. If you are hiring fresh out of high school or fresh out of college graduates, don’t make them buy their own plane tickets. That’s just mean. Okay, sorry.

Scott:
From the employer perspective, I’ll just say that sometimes employees prefer that because they get to rack up, all the credit card points and they’re getting reimbursed. So yeah, I think it’s wise to provide the option either way.

Mindy:
Yes, the option, I prefer it and I’m kind of miffed that BiggerPockets took that away recently. However, I also am not right out of college. I know it’s hard to tell, but I graduated from college a couple years ago.

Scott:
So your employer wasn’t evil, it just scared you in that situation. But that’s a really good reason to be like, you know what, I’m never going to have to worry about that again. I don’t think you will have to ever worry about that again, by the way, as we get into your numbers here, I think that’s immediately clear from the financial profile you’ve shown us so far.

Zoe:
That’s what I like to hear. Yeah.

Mindy:
Okay, well let’s talk about that initial Robinhood and E-Trade investment that you think you lost money on. Did you sell the stocks or did the stocks just go down? Because right now everybody’s losing money and it’s losing money in air quotes you still own X number of shares, it’s just worth less than it was a year ago or six months ago or whatever, but you don’t lose money until you sell. So did you sell or what were you doing with this investment?

Zoe:
That’s a good question. So I’m a buy and hold kind of investor, so I have not sold and that’s one of the questions I was going to ask. Like hey, these are all losing money, should I sell and try to invest in something safer like an index fund versus the kind of ignorant decisions I made early on with my investments. So yeah, haven’t, I’m just holding onto them.

Scott:
What are your investments? Can you give us a very quick overview of what got you into those investments, why you chose them?

Zoe:
So I think the breakdown is I have 91% in stocks, 4% bonds and 5% in crypto. So Bitcoin.

Scott:
Which Stocks?

Zoe:
So I would say the majority is in ETFs and then I would say the Robinhood amount is in individual stocks. So big names like Google, Amazon, and then when I first started, I think Robinhood has a list of top stocks to invest in were most popular and that’s kind of what I looked at and I would briefly look at the profile and Yahoo Finance and oh think this is a great investment and buy some of that stock and that’s kind of the early mistakes that I made.

Scott:
So most of your loss, so you had previously $14,000, $15,000 in Robinhood, now you have $8,500 because of a big drop in Google, Amazon, other of these name brand tech stocks, is that right?
Yeah.

Zoe:
Okay. And then the E-trade portfolio, you lost less, you had 15,000, now you have 12 and a half, 15, 16, now you have 12 and a half and that’s because those were largely an ETFs and index funds.
Only ETFs. I think only my Roth IRA has mutual funds because that’s the first thing I opened when I graduated was my own personal Roth. But all my recent investments have only been in ETFs.

Scott:
Awesome. If you were to assess what is the total number of hours that you’ve spent learning about investing?

Zoe:
I’ve been listening to BiggerPockets for the past two years, so once a week, that’s probably less than two hours a week.

Scott:
But you spent about a hundred hours learning about money but not really. How about specific to stock investing?

Zoe:
Oh, so I went to school for finance and so I kind of have an idea of how to read the numbers on Fidelity, understand what that means and some YouTube as well. So just watching some general videos and just my experience from school and what I learned in class and that’s just kind of how I did it. Also, when I first started, when I first got my 401k, I looked at Fidelity and they have ratings, so I ignorantly kind of trusted those ratings. Okay, this is rated really high so it would be in good, a good investment. But looking back I should have done further research into those, not just like what is just rated as popular or as a good investment, but really understand what historically has been the best investing strategy and what performs the best historically versus a short term period.

Scott:
Well I think there’s two issues here with this and I think again, your personal situation is fantastic because you’re spending so much less than you earn, you’ve got a great income, your house hacking, you have the side hustle that’s adding up to it, you’re going to get rich. You just need to figure out where you want to put that money from an investment standpoint. And that’s what I think you’re struggling with at the highest level is you don’t know where you want to allocate all of these funds. I think that your first issue you brought to us was asset allocation, which is exactly right. And the tool I would recommend there for you is this one page investment philosophy and I think that to put that together, you have a lot of homework to do because the investment philosophy follows you for a long period of time and you’ve got to make some hard choices when you get into that.
It’s not just like, oh, I’m going to buy some Google, that’s great, that’s what Robinhood says, that could work, but it’s not something that I think you’re able to live with. If you had come in and said, I believe in Google, Amazon, Facebook for these reasons and I have these stocks and I think that over 30 years they’re going to do phenomenally well and I’m ready to ride the ups and downs that come with investing in tech stocks in good times and bad, that’d be totally fine.
That’s not your viewpoint. You’re like, I invested in them because they were the top of the list in Robinhood and now that they’re down I want to pull out. That means that philosophy is not yet developed. So I would recommend that first you start with the framework, I’m going to get started and I’m not going to diversify, right?
I’m going to pick one asset class and I’m going to go heavy in that asset class for the first few hundred thousand dollars in net worth. Why is that? Because diversification is a great, great way to protect wealth, but I think it’s a less good way to build wealth. Now people will disagree with me, but I really like the real estate house hacking that you’re doing. I personally like index funds with that. That gives me heavy exposure into real estate and stocks, very little exposure in other markets. I don’t bother to pick stocks personally, but you could. So if you were to look at my investment philosophy and I actually posted a template which we can put in the show notes here and I’ll send to you after this. It says in five years I want to have multiple asset classes, stocks, real estate, private businesses, BiggerPockets.
I do want to get into lending at some point, but I did these one by one heavy, heavy real estate for the first 5, 6, 7 years because I felt that house hacking multiple times was a really powerful way to build wealth. But I’m 95% real estate while I’m doing that slowly moving into other investments. But I think that you need to build to frame something like that and that’s going to take some research. So I have four books to recommend to you on that topic and I’ll send you all four of these books, the titles with them. One Up on Wall Street by Peter Lynch, The Intelligent Investor by Ben Graham. If you studied finance, that book was very, very dry, but very, very important. Those books will tell you how to pick stocks, which I don’t recommend, but I think you need to learn that in order to feel comfortable with your investment philosophy, you need to see what the experts who have advice on that have to say.
And then I think that the other two books I recommend are a Simple Path to Wealth by J. L. Collins and a Random Walk Down Wall Street by Burton Malkiel. And I think that those four books will help you get a really strong grounding. And if you read those four like I did, you might come to the conclusion that index fund investing and putting all the that into Vanguard or Fidelity in one of their total market index funds is the right approach. But that at least give you the framework to approach the problem from a position, a belief set that you can actually invest with for many, many years.

Mindy:
So I have a slightly different approach. I still believe in real estate like Scott does. I still believe in index funds very much, but my husband and I invest in individual stocks heavy in the tech sector. All of the ones that you listed, some of the ones that we have, we have others as well. But here’s the difference, my husband wakes up in the morning and reads every article that came out yesterday about every stock that we own and every company that he finds interesting, he reads, and let me tell you how much, I don’t want to hear more about Tesla, I talk about this a lot because he talks about it a lot, but I would not feel comfortable investing in individual stocks if I was the one driving the boat 100% because I’m not willing to do the research, I don’t have the time, I don’t have the inclination, I would just set it and forget it with index funds.
He is fascinated by this. He wants to invest in the individual companies, he does the research. So another thing to think about is I don’t think you’re doing a bad job picking individual stocks, but I think you need to have, like Scott said, I think you need to have a reason for picking them. So I’ve been invested in Google since their IPO and it’s been a great, mostly up, but every once in a while it goes down stock, it’s a tech stock and they’re volatile more so than your blue chip stocks.
But another thing to think about is we’ve had what a 12 year run up and there’s been some downs but it’s been up, up, up this is a more, I don’t want to say more normal market, but the market moves up and down a lot and if you’re in it for the long term, stop looking at your stocks, that’ll give you a lot more peace of mind.
Just you want to hold onto this stock for a long time, then buy it and then don’t look at it again and then buy more and don’t look at it again. I mean even index funds are going to be volatile, but if you believe in the long term strength of the United States economy, which I do, then you will see it go up. I truly believe that the stock market will go up again and past performance is not indicative of future gains, but I do believe that the stock market will go up in the future.

Zoe:
Yeah, that’s helpful. I think going off of that, I have some mutual funds and I bought them early on and I didn’t really look at the expense ratios. I was thinking like oh 0.9%, that’s nothing. But then now I’m switching over to ETFs and the expense ratios are much lower like 0.03. So I’m thinking I would like to buy and hold, but is this to a point where I should sell now and reinvest what I can recoup into lower index funds because as I’m waiting for the market to recover, I’m paying these expense ratios over that period of time.

Scott:
So first we need a long-term plan in three to five years online portfolio to look like this, not like this. You need to be able to articulate that and that’s where the investment philosophy comes in. And starting with the end in mind. You’re already doing half of this right. I’m almost all of it. You have a strong cash position, you’ve got Roth, you’ve got a heavy Roth allocation, you’ve got after tax stocks, you’re building a position that’s going to support financial freedom if you continue what you’re doing with this because your asset allocation, you need to pick the investments that you’re comfortable with.
If you decide that index funds, for example are the way you want to go, then yes, I like the idea of taking the opportunity now to sell these high fee actively managed mutual funds and move that into passively managed index funds because you’re probably not going to have a big capital gain problem from them going up in value. If you’ve been doing this for 10 years, you might have to harvest $200,000 in capital gains and move it over. I don’t think you’ll have that problem, although you should do the math and check. You’ll have some homework there.

Mindy:
Yeah, I just downloaded Scott’s investment philosophy one page template and I think this is going to be really helpful for you to go through and fill out and it’ll help guide you when you are choosing your investments in the future.

Zoe:
Yeah, I think if I could start over, I would just dump all my money in index funds for long-term goals. I can change all the mistakes I’ve made in the past. And so I guess that’s kind of what my issue is now is like do I take action now or do I wait to see before I can change my portfolio to match what my goals are?

Scott:
I think now’s a great time. I think you probably have a loss, so sell, take the loss if you have one, do that homework first and move it into the investment that you believe in, right? Only don’t do that if there’s some sort of barrier, like a large capital gain you have to harvest and think about from a tax perspective, which I doubt will be the case in this situation. So I think you could easily do that now and you’ll have a benefit tax benefit if you do it correctly. That might play out in future years.

Zoe:
To offset, like the loss to offset the gains.

Scott:
You came to us with three questions, asset allocation and then the second one was around maximizing your revenue streams and the third was around reducing taxes. Let’s talk about the revenue streams. Tell us a little bit about your job, your real estate, your and your site hustles.

Zoe:
Yeah, so I work as a financial analyst for an exchange operator and I love my job. I have no intention of really leaving. I’m interested in moving up in the company and it’s a really great company to work for. I have a pretty flexible schedule and it allows me to pursue interests outside of my nine to five. And as a result I attended a lot of networking events like local real estate events, meeting, even people who have been on the BiggerPockets podcast will come to Kansas City and have a speaking engagement.
So all of those activities have inspired me to essentially pursue real estate. I started with my owner occupied home that I’m house hacking and the reason I have such a large cash reserve was because I was trying to buy an investment property and I kind of backed out of that deal because I just trusted my gut, ran the numbers as a long term rental and it just didn’t work out out.
So I kind of exited that opportunity and at this point I’m not really pursuing it unless something falls in my lap and so I doubt that’s going to happen. And now trying to understand what should I do with such a large cash reserve because it definitely covers my expenses for up to a year and just trying to understand what I should do with excess.
As far as my side hustle, I work for real estate syndication, it’s a team here in Kansas City, so essentially I’m their intern. I work about 10 to 15 hours a week, sometimes more, sometimes less, just doing it outside of my normal hours for my W2. And it’s been a really an eyeopening process to deal with tenants and to deal with underwriting and sourcing deals. I think these were all issues I had on my own. How do I understand the numbers of this property?
If I see something I like on MLS, how do I know if it’s going to work? And so that deal analysis was something that I kind of struggled with and that’s kind of why I do regret this home purchase. It wasn’t the best purchase line of numbers now that I look back at. Initially wanted to buy duplex with an FHA but there was just none on the market and I didn’t really understand how to look for off market deals or how to pursue those.
So I just feel like I kind of settled with the home that I bought. I pay HOA and they have restrictions, so definitely would not want to pursue another real estate investment inside an HOA. And with my roommates I looked at just market rents for my area and just kind of settled on a number and it’s been good so far. It pays for most of my mortgage. I think my total monthly payment for both my mortgage and utilities on my end is around 600 to 700, 700 being the max I’ll ever have to pay just from what I look at utilities and such. And I do pay a little bit more principle for my monthly payment. I’m just wondering if I should contribute more.

Scott:
Walk us through the numbers on this deal because I think that a lot of folks, myself and Mindy included are going, what is she talking about? This sounds like a great housing choice and house hack move. What are the numbers and why do you think it’s not ideal?

Zoe:
So I would say I kind of bought towards the end of when interest rates are great, I have a 4.875% and if I would’ve started earlier or maybe if I should have waited and held all my cash on hand to even have a larger cash reserve to contribute to something more like cash flowing or higher appreciation just because I feel like I kind of overpaid. I think I went 20K over and it’s technically a town home, so it’s not a single family, it’s not going to appreciate as much and there’s so many rules with the HOA, so it’s more a little bit both. I would’ve ideally liked a situation where roommates covering my entire mortgage, not just some of it.
And also the area, it’s a very good school district is what I found, but that’s not kind of what I’m looking for. I don’t have kids, I don’t need to be in a good school district. Instead I can buy the beat up house on the Missouri side and be able to put more money into it and get a higher return or build even more equity for that home.

Scott:
Your mortgage payment’s? $1,630, right?

Zoe:
It’s $1,630, my HOA is 10 and I pay an additional $46 to even it out to 1800 a month.

Scott:
Interesting. And what would the rents be if you moved out?

Zoe:
It really, I think depends. If I were to rent out each room individually versus the whole house, I think I would definitely get more if I were to rent out each room by itself versus into an entire family. I think market rents are 1,900 to 2,100 and I have three bedrooms and two nonconforming. So other goals to finish the basement. But there is a rule in the county that I live in that you can’t have more than four unrelated persons living inside a home. So there’s that to be aware of as well.

Scott:
What do you think you’ll get for rent by the room?

Zoe:
If I were to move out, my room is the largest, it’s the master and I have a master bath and it’s furnished, so I’m thinking I could probably get 1100 to 1200 a month for.

Scott:
So you bring in 2,500 without even finishing the basement.

Zoe:
Actually one of my roommates does live in the basement. She has cats, so she’s nervous that they’re going to scratch up the carpet in the upstairs bedroom. So I have a guest bed. So it’s not being used.

Scott:
You have, in my opinion, a very satisfactory investment. I don’t know if it’s going to be a home run or not. A lot of folks are scared. Everyone’s scared about their first purchase in 2022. You’ve got a good interest rate. Not the fantastic one we had two years ago, but a good one, not one that’s as high as currently. You have the ability to cash flow this. If you were to move out in a substantial way without having to finish the basement, you have more opportunity if you do finish the basement and you are sitting real pretty, in my opinion, in this particular investment you bought with a position of financial strength, I would not be fretting over this decision. If you keep making mistakes like this, you’re going to become a millionaire pretty quick.

Zoe:
In hindsight, I wish I would’ve bought earlier. I wanted to get my credit score to 740 to get the lowest rate, but because I waited for the six months that it took to get to that 740 mark, I lost out on a 2% interest rate. So in hindsight, I wish I would’ve started looking earlier even though I had an apartment lease and I would’ve had to break it, but it would’ve been worth it.

Scott:
I think we all wish we bought more earlier.

Zoe:
Yeah.

Mindy:
Yes. But you are learning by doing. Scott says maybe this isn’t a home run. I think this is at least a double and probably a triple. This is a good investment and yes, your interest rate is higher than 2%. Well so is mine and I work here. Don’t beat yourself up about this, but you are doing so you’re learning how to be a landlord. You are learning how to be a property owner and then now you know what you want and what you don’t want. Oh, you know what? I wish I would’ve done this. So the next time do that. When did you buy this property?

Zoe:
Around my birthday. So I think May 12th.

Mindy:
Of this year?

Zoe:
Yeah.

Mindy:
Okay. So you can start looking again for a property when the new year turns, maybe in February

Zoe:
Counting down days.

Mindy:
Start looking and see what you can find. You wanted a duplex and you bought a townhouse in an HOA. So don’t look for townhouses in HOAs, look for properties that are duplexes and just wait for that to pop up or keep an eye on single family homes that have the ability to finish off the basement and then you can rent it out to four unrelated people and make so much money that you are living for free and also making money as you are living there for free. I mean you’re doing a really great job on this property and you, you’re too hard on yourself. Be nice to Zoe.

Scott:
Yeah. So Zoe, a couple more questions about this property. You got three bedrooms upstairs and one of your roommates uses the basement for their cats is what I’m hearing.

Zoe:
Well there’s two nonconforming bedrooms in the basement and so she has both of those rooms. One’s for her cats and one’s for her. They’re nonconforming because they don’t have the egress window.

Scott:
How much does it cost to put an egress window into one of those bedrooms?

Zoe:
3K to 5k.

Scott:
3K to 5k. And how much more rent will you get or how much rent would you get if you rented out four rooms, the three upstairs and the two at the bottom as a suite with one conforming bedroom?

Zoe:
I think that’s a personal preference that I don’t want another roommate. I’m happy with two and I think-

Scott:
You’re going to move in February.

Mindy:
She’s going to move in May because she has to honor her one year owner occupancy agreement.

Scott:
You’re going to move in May. So forget about your personal preference right now and treat this as a coldblooded mathematical house ROI decision. You’re gone in May, you have three bedrooms upstairs and you have a suite downstairs. You can’t have five bedrooms because there’s no point in having five bedrooms to rent by the room because the statute prevents you from having more than four unrelated people on the lease. So my thoughts are one bedroom, one, two, and three upstairs, get rented, basement gets finished and becomes a suite with one conforming bedroom on there. How much would you get for rent in that scenario? Does that sound possible or practical given the setup at your house?

Zoe:
Well the two full bathrooms are all on the top floor. So one’s connected to the master bedroom and one is just a hall. So if there were three roommates outside the master, they would all share one bathroom. Essentially there is a half bath, but as long as there’s three roommates who are okay with sharing one full bath, then it would be possible. I think I could probably get 2,800 and just charge a little more for the larger bedrooms to make it even.

Scott:
2,800 for those three units plus more for the master.

Zoe:
Yeah.

Scott:
So that would give you 3,900.

Zoe:
I would say 2,800 in total with the master and then having to reduce the rents for the other three tenants just because they’re all sharing a bathroom.

Scott:
Okay, that’s close. I don’t know how much of a cost to finish the basement and put in that it may not be worth it in that scenario.

Zoe:
I think it’s 15K to 20K I think it was what I was quoted already looked into.

Scott:
Nice.

Mindy:
Are there any rough ins in the basement to make a bathroom down there?

Zoe:
So it is possible to put a bathroom in the basement, but it would be a 10K to 15K investment. It’s a small basement, so there’s not much room to work with. There’s already two bedrooms in there and then just the area where the laundry is. And so there’s not really practical layout, so I don’t think I would put a bathroom down there.

Mindy:
So then in your future properties. Keep that in mind, how can I expand this property so that I can get three roommates in here for one year and then I can move out into my next property and expand that one to get three roommates in for one year and then you’ve maximizing the four roommates in each one to maximize the amount of money that you’re making on each property. And then when you decide that you don’t want to have roommates anymore, you can find your last property and that’ll be whatever you want.

Scott:
Okay, so at the highest level I’m seeing you made a solid investment here from position of financial strength. I’m sure you have some things you would’ve changed about it, but again, this is not a disaster. This isn’t even a mistake. This is going to be I think a reasonable investment for you based on the numbers you shared with us. After you move out, you’re going to have 2,500 give or take in income on 1700 in expenses if you can charge the utilities through to your tenants. So that’s really good. I like that. I would invest that personally. So that sounds pretty good.

Zoe:
I was told that I can’t do a duplex situation unless I have 25% equity in my current home. So if I were to like come May, I wanted to buy a duplex, I would have to have 25%.

Scott:
Who told you this?

Zoe:
A lender.

Scott:
How many lenders have you talked to?

Zoe:
Four.

Scott:
And they all said the same thing.

Zoe:
I really only asked two of them and they said, I believe only one of them said about the 25% if I wanted to do an FHA with 3.5% down in May. And so with my current home I only put 5% down.

Scott:
And what type of loan product did you use?

Zoe:
I used conventional.

Scott:
Okay, so FHA is going to require you to put 25% down in May.

Zoe:
Yeah.

Scott:
That doesn’t smell right to me.

Zoe:
Well like 25% equity stake in my current home, I have to have a 25% equity position in my current home in order to use an FHA loan to purchase a duplex in May.

Scott:
Interesting. Mindy, have you heard of this?

Mindy:
I haven’t, but I think this is a research opportunity right now. Lenders are real open with their time, so I would call up your favorite lender and ask them to explain this to you. Why do I need 25% down? They could be an FHA rule, it could be what this lender specifically wants if only one of them is telling you this. But that is an interesting question. Also, if there’s a lender listening, if you want to reach out to me, [email protected] and explain what’s going on, or we can go over to the Facebook group and at facebook.com/groups/bpmoney and we can chat about this there as well.

Scott:
I am skeptical that that will be the case after you talk to more lenders and we get some feedback. But let’s presume that lender is correct and we have to use 25% down. How much does a duplex in your area cost you?

Zoe:
Oh, I meant like 25% in my current home. So if I wanted to put 3.5% down duplex, I could just need a 25% equity and I only have like 5%.

Scott:
But our other option is for you to put 25% down on the next property and avoid that entirely.

Zoe:
I would say like it’s 3.50, size of a duplex.

Scott:
So that’d be like $75,000 down. So 80,000, am I doing that right? 75,000 to a 100,000. You are saving $4,000 or $5,000 a month now that we have your side hustle in place between all of that. So 5,000 times six is another $30,000. You’re not going to be far away from being able to put 25% down in May. So you’re looking at August to be able to do that just based on the way your cash position is. You could do it sooner if you’re willing to take some of your investments out. So you have opportunities here if you would like to, I mean you have a decision at the strategic level for asset allocation first to make, do I want to be in real estate this heavy or do I want to go into stocks in something more passive?
But if you chose to do real estate, you would have the option to do this with a traditional down payment relatively soon within the next year. So then that’s a luxury of the fact that you have such a strong personal financial position and such a strong savings rate. So you have really good options here is kind of what we’re highlighting and you’ll either be able to do it with another low down payment loan or with a traditional down payment.

Mindy:
I would talk to lenders about all of your options. You are bringing up the FHA loan several times. Is that because it has such a low down payment? I would talk to them about other options that are available to you. I don’t know if there are any USDA locations near where you’re at, but the USDA loan is up to 0% down or down to 0% down. I don’t know how you say that right. That’s the only 0% down loan that I know of that isn’t the VA loan.
The FHA loan is an consumable loan. So somebody who got an FHA loan in that 2% and then needs to sell. You could assume that loan. There’s a lot of ins and outs with regards to that. If anybody is looking to assume an FHA loan, definitely talk to a lender. I need to talk to a lender about this as well so that we can get the information out there correct. But the FHA product is an consumable loan. You do have to bring money to closing to cover the delta between what they had left on their loan and the amount that you’re paying for it. That’s an option.

Scott:
I really like what Mindy’s saying there as an option for you. We’ve had other folks, and I don’t want to get people excited about assuming mortgages in a general sense because there’s risks and creativity things and all that other stuff that you really need to be smart with. But you Zoe are in a strong financial position, save a lot of money, have a good investment property, currently have plenty of cash and are piling up savings on a monthly basis.
You are in position where if you wanted to researching how to assume mortgages for folks and making your next house hack one where you just take over somebody else’s mortgage that maybe that was in that low low rate may be a great option for you to think about if you can be opportunistic in the next year. So I really like that a lot, but I don’t want to get other people too excited about that. If you have don’t have a strong financial position, then you’re just assuming hundreds of thousands of dollars more in risk that you maybe shouldn’t from that, but it’s a good option for you potentially.
Let’s talk about the other income streams for the last few minutes here. Walk us through your part-time hustle with the fund and then your photography side hustle.

Zoe:
My photography side hustle is literally like nonexistent. I stopped doing it earlier this year just because it’s slowly become more work and less more of a passion. I just started it because I wanted to capture family memories and occasionally a friend would ask me to take their photos and that’s what I did. But I’m not pursuing it as a legit side hustle, if you will. As far as the real estate syndication, actually I do enjoy that. There is some difficult parts to doing some of the property management, but it’s been very worthwhile of my time and that’s something I definitely want to pursue if my W2 will allow it.

Scott:
You made $2,500 last month from this activity, right?

Zoe:
It’s kind of like a paid position hourly. So that 2,500 was from September 15th to October 31st. That was the check for that. So normally it is around 1600 a month.

Scott:
Great. And what is the hourly rate?

Zoe:
17.

Scott:
And what do you earn at your day job?

Zoe:
I don’t know what the hourly is.

Scott:
What’s the annual

Zoe:
85.

Scott:
Okay, so your hourly rate at your day job is 42.50. You can just divide the annual by 2000 and that will give you that but that’s assuming you’re working 40 hours so that there’s not a great arbitrage on this, but you’re probably learning a good skill while you’re doing this side hustle. So I like it a lot but I do think that there would be opportunity over time to figure out how do I try to make sure that if I’m going to earn side hustle income dollars, that it’s around the same rate as my W2.

Zoe:
And it’s more of an internship position. So I just started and we’ve already had discussions of increasing my, increasing my scope of responsibilities. So that’s definitely something I’m very aware of and we’ll keep in mind moving forward.

Mindy:
With regards to that. I’m going to say that everybody and their mother wants to invest in syndications right now and you working for a syndication gives you so much educational opportunity while they are paying you to learn about syndications that I really hate to disagree with Scott, but I think it’s just fine to make less than what you’re making at your W2 because this is an educational experience in a field that you want to learn more about. If you were working at the gas station for $17 an hour, I would agree with Scott, but you are learning more about real estate and how to find deals, how to analyze deals, how to do property management, how to do a lot of different things. I think it’s a great use of your time, especially given your age and the fact that you are not married, you don’t have kids, you have the time right now to put into learning about this investment strategy, which you want to do anyway so you’re getting paid to learn. I think that’s great.

Zoe:
And to me it’s not like a job, it’s more of an interest I’m pursuing. So that kind of makes it worthwhile. I think when I was thinking of the pay, I did look at market rates and that’s kind of aligns with the market rate here in Kansas City and so there’s no really no leverage to give or negotiation. So pretty content with it and it will increase.

Mindy:
Yeah, I think that’s great. The last thing you wanted to talk about was reducing taxes. I don’t have a lot of really helpful tips for reducing taxes contributing to your 401k as much as possible.

Zoe:
Since I submitted those numbers, I did talk to a CPA and just to see how can I reduce my taxable income because my side hustle income is pretax. I’m like I’m going to have a fat tax bill at the end of the year if I don’t plan and budget for owing taxes. And that’s one of the questions that I’ve been thinking about is how do I track my expenses? I’ve just taken pictures of every receipt expense that I’ve had and is there a more efficient way of doing it? If there’s the app, I know you guys are really great at recommending finance tools. I’ve utilized like Mint and I tried, you need a budget as well. I prefer using my own spreadsheet for budgeting, but just trying to figure out the best way to consolidate all of my expenses and have a clear idea of where I’m going to land at the end of the year.

Scott:
The easiest way to do it would be to open up another bank account for that business. So just, hey, I am an intern here for this and I’m going to just put everything on the debit card for that business and then it’s all in that one bank account. You don’t have to worry about it. It’ll be super clean that way. So that would be my recommendation is the easy button to resolve that problem.

Mindy:
I think that’s great. Either a bank account or a credit card depending on what sort of expenses you have for there. I like the credit card to get miles, but if the debit card works better for you, then that’s one that I would do. I actually write on my credit card, I do have a credit card for my house investment purchases and I just write the address right on the card so that I don’t forget to use that card for just that one thing.

Scott:
I got three credit cards in my pocket or three cards. One is my personal one. One is BiggerPockets credit card when you purchase things for the company and third is my rental property debit card, which I just spent out of the bank account. I could get a credit card for the company but that would just create another complication point for me. So I do it on a debit card.

Zoe:
I do have five credit cards and each one has its own purpose. So the six too much or I actually thought about getting rid of one or two just because I do try to keep track of all five of them, but sometimes I think it might be easier to reduce the number of credit cards I have, but I kind of went credit card crazy at one point and trying to see if it’s a good idea to reduce that.

Mindy:
I would say make sure that you keep the first credit card that you ever opened open forever. It is your length of credit history and the credit giving institutions really care about that. Every other card you can look at and see is this really giving me the benefit that I thought it was when I first opened it. I have a bunch of different credit cards. One, I have for hotels, one I have, it’s the Costco card and I get cash back when I shop at Costco and cash back, back on gas one I have for airlines. So there’s a purpose for each one of them, but if they also all have zero annual fees, if there were annual fees, I would have a different outlook on them.

Zoe:
So you would not recommend getting the Chase Sapphire or?

Mindy:
It depends on how much you travel. I had the Sapphire and then we got rid of it and because of the annual fee and I think that my husband and I should have had a bigger conversation about that instead of just saying, okay, because it’s a $300 annual fee, but then you get $300 back or a $400 annual fee and you get $300 in travel benefits back every year.

Scott:
I think the fee is $95 for the preferred card and that’s the one I have. So I keep it simple with that. But I think the reserve with 495, you got to use those benefits if you’re going to pay that much.

Mindy:
Exactly, yeah, it’s not worth it if you’re not going to use the benefits.

Scott:
I want to just kind of frame a couple of things as we get ready to wrap up here. You are doing great. You’re house hacking, you make a great income. You said you’re 26.

Zoe:
24.

Scott:
24. Yeah, you’re completely crushing it. So you got a hundred thousand dollars net worth. Not even counting your real estate. That’s 75,000 net worth.

Zoe:
Got like 5K in equity in my house now.

Scott:
But great, you’re paying off a mortgage and you’re living for close to free, so you’re absolutely crushing it with this. You have not made a mistake with the rental property, even if you had the worst timing in the world and prices do come down. If that does happen, you still made a smart investment from a position of financial strength if you hold long enough and operate well based on the numbers you provided. So you’ve done fine there. What you’re missing is two things here. You’re missing a structure for how to get rich over the next 5 to 10 years. First, you need to think about the end in mind. What does that portfolio look like? I like what you’re doing right now. You have a strong cash position and most of your wealth, or a big percentage of it is outside of those retirement accounts.
If you’re in 10 years, all that wealth is trapped in retirement accounts and home equity. You’re not financially free. You have a big net worth on paper, but no actual freedom. If you keep doing what you’re doing at the highest level, you’re going to be have freedom and the ability to use those assets to live a life that you want. So keep doing that, but put together an investment philosophy that enables you to get there, whether it’s index funds, real estate or something else. So that’s a formula piece. You’re missing the formula that you’ve committed to mentally to build wealth over the long run. And your big buckets with your massive sets of asset allocation. That’s some homework for you to do. The other part is the pot shots. You have different side hustles. You have your real estate, you have these things.
What I’d recommend there is that you spend 90 days and focus on one of them at a time. I think we’ve ruled out real estate for the next 90 days. It doesn’t sound like there’s a lot of value to be added by finishing the basement or doing additional work with your property. So I like the fact that you’re doing this side hustle for this indication. I think that’s perfect. Go all in on that. Make sure that whatever you’re trying to get out of this job, this internship actually comes to fruition or begin thinking about switching it some point in the new year, right? Some sort of education, some sort of increased earning power, some sort of opportunity should materialize from this bet that you’re making with a significant chunk of your time. And if you do this 10 times over two and a half years, that’s 10 quarters.
10 90 days chunks, something will materialize for you. So opportunities will blossom, right? One of those 90 days could be buying your next property. One of them could be the next stage of the… you could just take the internship for three quarters because a new opportunity roll each time you could bring back your photography business. But if you do that 10 times and each quarter set out intentionally to make use of this extra time, you’re going to hit a winner at some point that’s going to produce a couple hundred or maybe even a thousand dollars a month in cash flow or produce a chance at significant wealth. So I like doing that, but think about it as a formula and build a system or architect a program that’s going to automatically get you wealthy with where you deposit your cash, and then that is actually scientific about taking these shots with your opportunities. Is that helpful framing?

Zoe:
Yes. I think that kind of answers some of my biggest questions that I have to take that initiative to decide what I want, and there’s not one fits all kind of a solution. Before this, I thought I had a good idea of what I wanted to invest in and just kind of reaffirming, just put everything in index funds. But I do want some short term gains. I don’t want to wait three to five years to see the money. So I think that’s my biggest hurdle to overcome is that it’s not a quick solution. It’s going to take some time.

Scott:
I agree. You could be a millionaire in three to five years if you play your cards right and have a little bit of luck on that and make a couple of big plays, probably more realistically, seven to 10 years at your current pace, given how early you are in your career and the likely future income potentially you have. I would sit back and I would say, what do I want that million dollar portfolio to look like when I get there? That’s the freedom point. It’s going to be a grind until you get there. So grind it out and be ready to do that, but don’t grind your way towards a portfolio that’s not going to actually get you what you want in the end state.
Make sure that that’s designed intentionally right now. So you’re backing into that and you’re rounding that out and it’s the three properties in the same corner that are really easy to manage in all of the same thing. Instead of a property in Kansas City, a property in Denver and a property in Seattle, whatever. It’s an intentional portfolio that is exactly what you want. Make sure you’re backing into that and you’re going to be fine. You just need to do that work and your fundamentals are so strong, it’ll probably carry you to a great outcome somewhere in that timeframe, in my opinion. Hopefully that’s good news.

Zoe:
Hopefully. Yeah, we’ll see.

Mindy:
The only thing that I would add is, Scott is saying that real estate isn’t the right thing to focus on in the next 90 days. And I agree with that to a certain extent, but I would like to see you talk to a lender now during their very slow time to see what are the options that are there. And one of the guys that works at BiggerPockets, Austin had a really interesting journey to buying his house. And he would talk to a lender and they would give him a little bit of information and then he would talk to a different lender and they’d give him another little snippet of something and he was able to piece things together and then he could start asking questions and they’re like, oh yeah, there’s this too.
So ask all the questions you can think of to ask what are some plans? What are some loan products that I can get into as a young person, as a second time home buyer, as a landlord, as all these different options. Maybe there’s something available that they don’t think that you would be interested in until you share with them what your plans are. Oh, there’s this plan, there’s this product, there’s this opportunity. Sometimes they’re just not aware of what your intentions are. So right now they have a lot of time to talk, so call them up and have a big chat.

Zoe:
Yeah, definitely.

Mindy:
Okay, well, Zoe, this was a lot of fun and I really appreciate your time today. Thank you so much for coming on this show, and we’ll talk to you soon.

Zoe:
Thanks so much for having me. Take care.

Mindy:
All right, Scott, that was Zoe. And that was, I think some very great advice for her. I think some very great advice for a lot of people listening, we are in a squidgy market and it’s going to go up, it’s going to go down, it’s going to go down some more. It’s going to go down some more and then it’ll go up a little bit and then it might go down again. And for those of you who are in it for the long haul, just buckle up and enjoy the ride. And if your investment philosophy says, I’m going to keep buying every single week, then buy every single week or month or quarter or whatever. And if your investment philosophy says, I’m going to buy when the stock reaches this price, then buy then, but have an investment philosophy and be investing for specific reasons, not on a whim.

Scott:
And after the recording was over, we asked, hey, was this helpful? We always do that because folks always say one thing on the recording and then you know, always went with the opinion. And she said, yes, of course. But what she wanted really was specific, what exactly should I do in this situation? And we’re really not supposed to do that, but I’m the CEO, so I’m going to go ahead and break that rule. And I’m going to say, what I did is my situation mirrored Zoe’s almost in an eerie fashion, right? She’s 24. When I was 24, I was making less than her, but I had a house hack. I had around that same level of savings. I had lost money by investing in stocks that I had picked, a Chinese fruit juice company that reported their financials inappropriately, all those kinds of things.
It was a very similar set of circumstances there. And what I did is I tried to maintain that cash position of $25,000, $30,000. I took my 401K match, I maxed out my Roth, I dumped everything else into after tax brokerage savings, and I serial house hacked for a few years. And then I took pot shots every 90 days on various items that would advance my career, like getting my agent’s license, like buying a property.
I started, I floated the idea at least of a winter tire rentals business, which would be a horrible plan to a local mastermind group. But I did exactly what I told Zoe there. And my portfolio today is these five rental properties, a large portfolio that is essentially all index funds, Vanguard index funds, and then my position here at BiggerPockets. That’s it. Like that’s the portfolio. And it’s that simple from that perspective.
And you just every week get a little better at your job or a little better with the side hustles or move that next project forward. And you let that compound for eight years and it’s this feeling of monotony or grind, and you look up every couple of months, you’re like, whoa, I came a long way with that by waking up every day and going a little bit further forward. So there’s nothing to be afraid of. It’s a long term investment. It could start with a plan about where you want your portfolio to be in a future state. Work the plan, make the formula work for you in a very simple way, and then allow yourself the opportunity to get lucky by taking the chances that you think are roll around, but don’t say yes to everything. Say yes to one thing at a time and move forward with it.
And that’s what you do in order to do this. And I think she’s got that all, she’s so strong in every part of her financial position, in her framework. She just hasn’t completely solidified it into a crystal clear plan yet. And so I think that’s giving her a lack of confidence in a couple of things. She’s making very minor mistakes that are almost irrelevant in the scheme of the overall story of her personal finance journey when she looks back in 10 years. But she’s perseverating over them because she just hasn’t quite solidified all that into one cohesive philosophy and framework. She’s very close though, and I will not be shocked if she’s not a millionaire within seven years, let’s call it.

Mindy:
I agree 100%. I will be shocked if she is not a millionaire in 7 to 10 years, depending on what the stock market does. But yeah, I think you need a plan. I think anybody listening needs a plan and the investment philosophy document will be in the show notes for this episode. The link to it will be in the show notes for this episode. So if you are struggling with your investment philosophy, Scott’s document can help you out.
All right. That wraps up this episode of the BiggerPockets Money Podcast. Thank you for listening. We really appreciate you. He is Scott Trench, and I am Mindy Jensen saying, got to go Buffalo.

 

Dave:
Hey, what’s going on, everyone? Welcome to On The Market. I’m your host, Dave Meyer. I hope you all had a great Thanksgiving, and had the opportunity to spend some time with friends and family, hopefully eat some amazing food, and take some time to reflect on all the things that all of us have to be grateful for. I have so many things that I am thankful for, friends, family, getting to work at BiggerPockets. But one of the things that came up this year for me when I was thinking about the things I am thankful for is all of you. We started On The Market just seven months ago. We’ve already surpassed 50 episodes.
We have more than a million downloads already, and it’s all because of all of you. So, thank you all so much for being a part of our community, for listening, for sharing the episodes, for writing us great reviews. We greatly appreciate everything that you do to be a part of On the Market community. Today, we have a great episode for you. It’s just going to be me today. We gave the rest of the panel the holidays off, but I have some really important updates about the two biggest topics of 2022, which is inflation and interest rates. If you’ve been paying attention over the last couple of weeks, some big news has come out about both inflation and interest rates.
I actually think there’s a lot of evidence that inflation has peaked, which I’m going to talk a lot about. We’ve seen mortgage rates go down in the last few weeks, then they’re back up. They’re all over the place, and we’ve seen the Fed come out with some additional guidance on what they’re thinking for the next couple of years. Get ready for a great episode. I do have one suggestion for you if you are going to listen to this episode, and that is to take this opportunity on the day after Thanksgiving to make what is possibly the greatest sandwich of the entire year.
If you follow me on Instagram, my handle is called the data deli. the reason I do that is because two things I really love are data and sandwiches. I love the day after Thanksgiving, which is the day this episode comes out, because it gives you the only opportunity of the year to make the Thanksgiving leftover sandwich, which is basically you take everything you got in your fridge from the day before, and stick it on some bread. I like going and getting a huge Italian loaf of bread, throw in some Turkey. You got stuffing, mashed potatoes.
You got carrots. Whatever you got, throw it on there. Drizzle some grazing on it. Have yourself a sandwich. Sit down and listen to this episode of On The Market about inflation and interest rates, which we’ll get to in just a second. But first, we’re going to take a quick break.
So first things first, back on November 10th, we got new inflation data. Inflation data comes out once per month in terms of the CPI at least. On November 10th, we got data for October. The news was very, very encouraging. This is one of the best, most encouraging inflation reports that we’ve seen in quite a while. The top line consumer price index, which is measured on a year over year basis fell from 8.2%. That’s what it was back in September to 7.7% in October. Now, make no mistake about it. 7.7% inflation is still incredibly unacceptably high. It is way, way, way too high.
Remember, the target for the Fed is about 2%, so 7.7% is nuts. But this is really encouraging, because it’s the lowest it’s been since January of 2022, and was a pretty significant beat for what people were expecting. A lot of experts were thinking that inflation would go down just a little bit, and having it go down from 8.2% to 7.7% in just one month is very, very encouraging. The other thing I love to see is that the core CPI, which is basically a subsection of the consumer price index, but it removes food prices and energy prices like gasoline and electricity, because it’s really volatile.
Those go up and down a lot, and so just to understand what core prices are doing, they have this number called the Core CPI. That is really, I think, what the Fed cares the most about. The Core CPI also fell. It had gone up in September, and it fell in October from 6.6% to 6.3%, so both very encouraging things. But just remember, I just want to be very clear that 7.7 is still very, very unacceptably high. No one should be cheering about 7.7% inflation, but we can be cheering the fact that inflation seems to be on a downward trend, and it is quite possible that the worst of inflation is behind us.
I’m going to take a few minutes now just to explain that, because I think a lot of people are probably wondering what am I basing that off of. There’s three things, but the biggest thing is just math. I’m not projecting any policy changes, that anything in the political climate or economic climate is really even going to change. I’m just going to explain the math behind how the consumer price index is calculated, and why it is probably going to go down in 2023. First, let’s talk about the first two things. I said there are three reasons why I think inflation has peaked and is going to start to come down.
The first is, of course, interest rate hikes. Back in March, we saw the Federal Reserve start to raise interest rates. They’ve been doing it really, really rapidly, and it went from a federal funds rate, which is what the Federal Reserve controls. The federal funds rate went from 0% up to 4% where it is now. That is one of the fastest rate hikes in history, but the truth is that rate hikes, which are designed to help curb inflation, take a little bit of time to ripple through the economy. The whole idea about raising interest rates to cool inflation is that it slows down demand.
When money is cheap, when interest rates are low, people want to buy, right? If you can borrow money at almost no interest, it makes a lot of sense to buy a new car that you’re financing, or to buy a house, or if you’re a business to expand and hire people, and acquire a new company, whatever it is. There’s a lot of demand when interest rates are low. When interest rates go up, that dissuades people from buying things, and that lowers demand, but demand doesn’t just turn off overnight. It’s not like all of a sudden, “Oh, the Fed raises interest rates 75 basis points. We’re no longer spending money.”
That takes time, and it usually takes at least six months or even longer for the impact of interest rate hikes to hit the demand side of the economy, and cool inflation. Now, we are probably now, because rates started rising back in March, just starting to see the first effects of the first rate hikes. Now going forward, we’re going to continue to see the impact of more and more rate hikes. They’re still raising rates. They raised rates two weeks ago in the beginning of November. The impact of that most recent rate hike is not going to be felt until probably the second quarter of 2023.
So, we should expect demand to continue to taper off in a lot of areas, particularly for leveraged assets, so things that you use a loan to buy is a leveraged asset like real estate or a car or for businesses if they’re going to take on a small business loan to expand or whatever. Demand for those leveraged assets should continue to decline for the foreseeable future as long as the Fed keeps raising interest rate. When there’s less demand, that cools inflation. We’re also starting to see the effect of these rate hikes in the labor market. This is a really important thing, because having really tight labor market like we have right now is one of the core drivers of inflation.
The Fed has stated that they basically want the unemployment rate to go up. I know that sounds terrible, because no one really wants people to lose their jobs, but the Fed believes economically that it is important. It is so important to lower inflation that they are willing to accept job losses, and they are going to keep pushing the boundary of how much they can raise rates until the labor market starts to crack, and we see significant job losses. They’ll tolerate a bit of job losses, but probably not a lot. The data that we’ve seen so far is that the labor market is still really, really strong.
I know there have been a lot of media headlines about some high-profile layoffs. Companies like Meta, and Amazon, Twitter, Stripe, really big tech companies, banks, are laying off a lot of people. Those are big high-profile things,` but in the aggregate in the country, the labor market is still really strong. The last numbers that came out showed that there is still 1.9 jobs available for everyone who is looking for a job. The labor market still has a long way to go, but the sign that we’re starting to see high profile layoffs and specifically in the tech industry might be a sign of things to come.
That could mean that we’re going to see more layoffs tick up in the unemployment rate, probably not anytime in the next one or two months, but maybe in 2023, and that could further cool inflation. That’s the first reason why I think inflation has peaked is that the impact of interest rate hikes have only just started to be felt, and it’s probably going to keep intensifying the impact of those interest rate hikes over the next at least six months. The second reason has to do with supply shock. Now, inflation goes up for a few reasons, but it’s often described as too much money chasing too few goods.
What the Fed is doing in raising interest rates is trying to address the too much money part. By lowering demand, they’re pulling money out of the system, and that will help inflation, but there’s a whole other side of this equation, which is the supply side, right? Too much money chasing too few goods. A big part of why inflation has been so high over the last year is that too few goods part, right? Everyone’s experienced this, right? We’ve had back orders on everything from garage doors to appliances to just regular everyday items like baby formula or all sorts of different things.
A lot of this is really nothing to do with America. Yes, we had shut downs in the United States that caused lags in manufacturing, but so much of American goods are manufactured overseas in places like China, which has continued to have a no-COVID policy, and they’ve continued with lockdowns well beyond much, much longer than the United States has. That means that China and their manufacturing, which supplies a lot of the United States, has continued to have supply side shock, which means we have fewer goods in the U.S. than we would want that would meet demand. That has continued, but is tapering off.
We’re seeing the cost of goods to ship stuff from China to the U.S. has gone down. We’re seeing a lot more output from China so we’re going to see an easing of the supply side shocks. The second thing about supply side shocks is the Russian invasion of Ukraine created havoc, particularly on the energy and food markets. Ukraine and Russia are huge exporters of wheat in particular and a lot of other food products. With the sanctions that the U.S. and western country and NATO basically have put on to Russia, we no longer have access to those large markets, and so that creates more supply shock.
Just at the time back in February when we were starting to see some supply shock start to ease, then Russia invaded Ukraine. Now, we’re seeing huge supply issues both in food and energy, which is a big reason why the CPI spiked up so much in the second quarter, third quarter of 2022. Those are not going away right away, but the world and the economy eventually adjusts to that. The other manufacturers, other producers start to produce more when there’s a supply shock. Now that the Russian invasion is nine months old, we’re starting to see the world react. Other producers are producing more, and so across the board supply shock is starting to come down.
Those are the first two reasons why I think inflation has peaked. One is, again, the Fed raising interest rates, the effects are starting to be felt. The second is that supply side shocks are starting to come down. Now, the third and perhaps most important reason is because of what is known as the base effect. This is just basically math, right? It’s regardless of policy, geopolitical situations like what’s going on in Russia and China. This doesn’t even factor in any of that. It’s just basically the way that the consumer price index is measured, and how the numbers work out.
Let me just explain this quickly, because this is super important and, I think, is perhaps the most compelling of any of the reasons why I think inflation has peaked. When we talk about inflation, when I say that inflation was at 7.7%, what I’m really saying is that inflation went up 7.7% year over year. Year over year basically just means comparing the same month for two years. What happened is in October of 2022, the prices in the United States as measured by the consumer price index were higher by 7.7% than they were the previous year in October 2021. They went up 7.7 over the course of a year.
Because of that, it doesn’t just matter what inflation is right now, right? That’s one part of the equation. What’s inflation in October 2022? It also matters what inflation was a year ago. What happened in October of 2021? In 2021, inflation started to tick up, and it was starting to go up, then it started to go crazy. Prices really started to get insane towards the second half of 2021. So for most of 2022, so most of this year, when we were comparing this year to last year from inflation, we were comparing really high numbers for 2022 to relatively low numbers in 2021.
They weren’t super low. They were well above what they should be, but they were relatively lower. That makes the gap, the difference really high. Now as we’ve gotten into later 2022, we’re comparing high numbers in October of 2022 to numbers in October of 2021 that were already high. That makes the comparison relatively lower. Hopefully that makes sense to you guys. Basically, we were comparing a high number to a low number. Now, we’re comparing a high number to a high number, and so the difference between the two numbers, which is how we measure inflation, is going down. It’s important to note that what I’m not saying, I am not saying that prices are going to go down, and that’s not actually what we’re expecting.
It’s not what you want. Inflation is not a good thing for an economy. You don’t want prices across the board to go down. If it goes down for housing, or it goes down for cars in an individual sector of the economy, that’s fine, but you don’t want widespread deflation. We could talk about that in another time. The Fed actually wants 2% inflation. That’s what we’re trying to get to is 2% year over year inflation. What I’m saying is that if we continue at the pace that we are at right now, year over year inflation is going to keep going down because we’re already at these high numbers, and the rate of inflation, of price increases is not going up.
I actually did the math to figure out what this looks like over the next year or so. Let me explain to you why I believe so strongly that inflation has peaked is because the math really checks out. Over the last month, just this past month, inflation, prices went up. Not year over year, I’m talking about month over month. Now, they went up 0.4%. Just in a month from September to October, prices in the CPI went up 0.4%, right? If we continue at that monthly trajectory, the CPI, the year over year CPI will get down to about 4.9% by this time next year.
I want to be clear about what I’m saying here. If we continue at the same rate of price increases as we are doing right now, we will be at a 4.8 inflation rate a year from now. Remember, we’re at 7.7% right now. As long as we stay even, we’re going down to 4.8, 4.9%. That is why I think it’s going to decline, because it would actually take inflation to accelerate on a monthly basis for inflation on a year over year basis to go up above where we are right now. Now, that .4% month over month inflation that I’m talking about is high. Over the last couple of months, we’ve actually averaged closer to 0.3%.
I did the math for that too. If we averaged 0.3% like we have for the last quarter, if we average that going forward for a year, a year from now, we’ll have inflation of 3.66%. That is still higher than the Fed’s target of about two to 3%, but way, way, way better than where we are today. Now, if inflation actually starts to fall, which is what people are expecting due to the supply side fixes and the interest rate hikes that I was just talking about, if they fall 2.2%, which is not that crazy, we’re at 0.4% right now. If it goes down to 0.2%, then year over year inflation will get down to 2.4% next year.
That’s right in the Fed’s target rate. All that really needs to happen is if we stay at current inflation rates, or go slightly lower than we are right now, we should expect that inflation ends somewhere between the 2% to 4.5% by the end of next year. Now, that’s not saying necessarily we’re going to get to the Fed’s target rate. In fact, we would have to see inflation month over month go to about 0.15% to get to the Fed’s target rate next year. But over the course of 2023, we should expect inflation to go down. That is just simple math. It has nothing to do with anything else.
Just to summarize why I think inflation is going down or has peaked is, one, it has actually peaked because it hit its highest point year over year back in June where it was about 9%. Now, it’s at 7.7%, and the math and all of the major indicators are showing that it’s going to continue to go down. That’s our inflation update. But next, let’s move on to mortgage rates and interest rates, because what everyone wants to know is, “Are mortgage rates going up or down?” We all know that the housing market is in a correction. The reason the housing market is in a correction is because mortgage rates continue to skyrocket. That lowers demand. That lowers affordability, and that sends housing prices down.
Now, I personally believe that this housing correction will last as long as mortgage rates continue to go up or stay above 6% or 7%. If they start to come back down, that will probably end the housing correction. That’s just my opinion. But the question is, “What is going to happen to mortgage rates next year?” Now ,the prevailing logic, the prevailing belief is that mortgage rates are going to go up, because interest rates for the Fed are going up. We’ve seen the Fed started raising rates in March, and since then, interest rates have more than doubled. There are 3.1% was the average 30-year fixed rate loan back in January.
Now, we’re at some time… I’m recording this on November 16th. The average 30-year fixed rate today is about 6.7%, which is down from where it was a few weeks ago, which was 7.1% or 7.2%. Most people believe that the interest rates will at least stay this high or keep going up. There’s definitely logic to that, right? It seems to make sense. The Fed has said they’re going to keep raising interest rates, and so perhaps mortgage rates will stay where they are right now, or continue to go up. The idea there is that as the Fed raise interest rates, bond yields tend to go up.
Mortgage rates are based off bond yields, and so over time, if the Fed keeps raising rates, bond yields will actually continue to increase, and therefore mortgage rates will go up. Now, a lot of people think that mortgage rates will go up to 9% or 10%. I personally don’t. I think that if they continue to go up, they’ll probably go somewhere around… They could surpass 8%, maybe get somewhere between 8% and 8.5%, but based on what the Fed has said, and where they intend to pause interest rate hikes, it makes more sense that it will peak somewhere around 8%, presuming bond yields continue to go up.
Now, that’s the prevailing logic, and a lot of people think that, but over the last couple of weeks, there’s actually been more and more economists and housing market analysts who believe that mortgage rates are actually going to go down next year. I know that’s super confusing, because I just said the Fed was raising interest rates well into next year. But there is actually some very sound economic logic to this, and let me just take a couple minutes to explain it, because I think it’s super important and could really impact prices in the housing market next year. Let me just quickly recap how mortgage rates are set. The Fed does not control mortgage rates.
They control the federal funds rate, which is the interest rate at which banks lend to each other. It’s wonky. It doesn’t matter, but right now, it’s up to 4%. That 4% is not dictating mortgage rates or car loans or student loans or whatever. It basically sets the baseline for interest rates across the entire economy. So if the federal funds rate is at 4%, it is almost impossible to find a loan less than 4%. That’s just how it works. Now, mortgage rates are correlated to the federal funds rate. When the federal funds rate goes up, mortgage rates tend to go up too, but they’re actually not directly tied together.
In fact, mortgage rates are much more closely tied to the yield on a 10 year treasury. A 10 year treasury is a U.S. government bond, and a U.S. government bond is basically you or an investor lending money to the U.S. Government. A 10 year treasury specifically is you’re lending the U.S. government money for 10 years. Now, mortgage rates and the yield, which is the interest rate, the profit that you earn on a 10-year bond are almost exactly correlated. They have a 0.98 correlation. That means they move together. When bond yields go up, so do mortgage rates. When bond yields go down, so do mortgage rates. They work in lockstep.
It’s pretty incredible how closely tied they are to each other. This happens for a very logical reason. It’s basically because of the way that banks make their money. Imagine for a second that you’re a bank. Imagine you have billions and billions and billions and billions of dollars to lend out. It must be very nice. You choose who to lend it to. That’s how you make your money. Now, the bank is sitting there thinking, “All right, I can lend my money to the government, the U.S. government, at 4% interest.” Remember, the yield on a 10 year treasury right now is 4%. I can earn 4% with basically no risks.
Lending to the U.S. government in the form of treasury bills is basically the safest investment in the world. Generally speaking, the U.S. has never defaulted on its loan. It’s the most creditworthy entity in the entire world according to all the credit rating agencies. Therefore, a bank can say, “I’m going to lend my money to the U.S. government for 4% interest.” Now, they want to earn more than 4%, don’t we all? So, they take riskier loans. They’re going to also make riskier loans, but to make a riskier loan, they’re going to charge more in interest. They have to have more potential for reward to take on that risk. That’s how risk and reward work.
So when someone goes and applies for a mortgage, let’s just say me, Dave goes and applies to a mortgage, the bank is thinking, “I can lend…” Let’s say I want a mortgage for $500,000.” I can lend Dave $500,000, or I can lend the government $500,000, and earn 4% interest. I know the government’s going to pay me back 4% every single… 4% a year. That’s locked in. That is guaranteed. Dave, even though he has a good credit score, and he’s paid his mortgage rate every single month that he’s had a mortgage, which is a long time, I still think he’s just a normal dude.
He could default on his mortgage. So because of that increased risk, we’re going to charge him more. This is why they move in lockstep. Basically, when the opportunity to lend to the government goes up, banks are like, “Well, that’s great. We can earn 4% lending to the government. Now, we have to raise interest rates on mortgages to compensate for the additional risk on top of that 4%.” That’s why the 10 year treasury and mortgage rates are almost directly correlated with one another. There is typically a spread, right? Yields are 4% right now.
Normally, the difference between a 10 year yield and a mortgage rate is about 1.9%. So if you had a yield of 4% like we have now, you would expect mortgage rates to be 5.9%, but they’re at 6.7% or 7% right now. That’s because there’s all sorts of uncertainty. This difference between the yield and mortgages are due to uncertainty. When there is a lot of uncertainty in the economy, banks are basically saying, “We have to charge even more than normal for that risk premium. We don’t know what’s going to happen to the economy. Are people going to lose their jobs? Is there going to be more inflation?
To cover our asses, instead of charging 1.9% above yields, we’re going to charge 2.5, or we’re going to charge 3%. Actually right now, the spread between a yield and a mortgage rate is the highest it has been since 1986. Normally, remember, it is 1.9%. Right now, it is about 2.9%, so significantly, significantly higher. That’s how mortgage rates are basically set. Now, remember at the beginning of this rant than I am on, I said that there are two reasons why interest rates might actually fall this year. Now that I’ve explained that, you should be able to understand this.
The first scenario where interest rates fall in 2023 is because of a global recession. We don’t know if we’re in a recession right now. The National Bureau of Economic Research gets to decide that. A lot of people believe we were in a recession, because we had two consecutive quarters of GDP decline. Now, GDP went up. It’s all very confusing. Honestly, I don’t really know what to even say about it at this point, but the idea here, and the reason that a lot of prominent economists and analysts are saying that mortgage rates can go down next year is because we enter a global recession where the entire global economy takes a big dip, and that will have these serious impacts on interest rates.
Here’s how it works. When there is a recession, investors from across the globe tend to seek really safe assets. Remember, I just said that treasuries, government bonds are the safest investment in the entire World. So when there is a global recession, there tends to be this flock, this huge increase in demand for bonds. Everyone around the world wants to get into bonds because they can earn 4% guaranteed when no one knows what’s going to happen with the stock market, the real estate market, the crypto market, whatever. When there is an increase in demand, just like for anything else, it actually sends up prices. When demand goes up, prices go up.
The thing about bonds, which I’m not going to get into, is when prices go up, the yield goes down. Just in short, basically, more people want the bonds, so the government’s like, “Great. Everyone wants these magical bonds that we’re giving out. We’re going to give you less interest rate. We’re going to pay you less to borrow the money from you,” and people still want it, so they’re like, “Okay,” and they’ll take a lower yield, and yields tend to go down. Just to recap, recession means there’s more demand for bonds. When more demand for bonds, yields go down. Now remember when I said when yields go down, so do mortgage rates, right?
The Fed does not control mortgage rates. What controls mortgage rates almost directly is the yield on a 10 year treasury. So, that’s scenario number one. There’s a global recession. People from around the world are like, “Give me some of that safe, safe bond yield from the U.S. government that drives up demand, sends down yields, and takes down mortgage rates with it.” That’s scenario number one. Scenario number two is that the spread declines. Remember, I just said that the spread between bond yield and mortgage rates are at the highest they have been since 1986, and that is because we’re in this period of extreme economic uncertainty.
The spread between these two things between yields and mortgage rates really spiked during uncertainty. There have actually been only three times in the last 22 years since the year 2000 where the spread is above 2%. That’s during the great recession, the first few months of COVID, and right now. So, hopefully, let’s all hope that over the course of 2023, the economic picture, the economic outlook becomes a bit more clear. That means the spread could come down. This could come from the Fed deciding to pause their interest rate hikes. It could come from inflation continuing to trend downward or perhaps the end to the war in Russia or something like that.
Any of these reasons, if for any reason over the course of 2023, the economic picture becomes more clear, and banks have a better sense of what’s going to happen over the next couple of year, the spread might start to come down. Although I’m not saying interest rates are going to come down next year, I think it’s important for everyone listening to understand that there are two very, very plausible scenarios where mortgage rates do come down next year. That’s because a recession comes, and then bond yields fall, or because the uncertainty in the economy starts to be mitigated, and the spread between bond yields and mortgage rates comes down.
Now, make no mistake about this. I am not saying that any of this means that the Fed is going to pause raising interest rates anytime soon. They have been very, very clear that they are going to keep raising interest rates. And for that reason, mortgage rates could go up. I just want to explain that it is not as cut and dry as people are saying. A lot of people say, “See, interest rates… The Fed raising their federal funds rate,” and say, “oh my God, the mortgage rates are going up to 8%, 9%, 10%.” It is not clear. That, personally, I don’t see them hitting 9%, nevermind 10%. I could see them hitting 8%, but I could also see them going down to 6%.
It is really unclear. If you want to follow this, I highly recommend you keep an eye on the yield on a 10 year treasury and what is going on there. That is one of the most important things you can do to understand what’s going to happen in the housing market over the next couple of years. Because if the yield on 10 years stays where they are or starts to decline, mortgage rates will probably go down, and that will really help us end the housing correction, and maybe send prices the other way. If bond yields continue to rise, we will see mortgage rates continue to rise, and that will put more downward pressure on housing prices, and deepen the housing correction, so really important thing to watch.
Now, another thing to watch is the Fed is going to meet, again, in December just a couple weeks from now, and most analysts expect a 50 basis points hike rather than the 75 basis point hikes we’ve seen over the last couple of months. That’s nice. It’s cool, whatever, but it doesn’t really matter, right? To me, what really matters is where the federal funds rate ultimately settles, and where bond yields ultimately settle in the next year. That is going to dictate mortgage rates, and that is going to dictate bond yields. What happens with bond yields is going to dictate mortgage rates.
So, just pay attention to this stuff, guys. I know everyone wants to know what’s going to happen, and you want just someone to tell you. Unfortunately, no one really knows, but you can look at some of these lead indicators that will help you predict what’s going to happen over the next couple months. To me, the two things that you need to be looking at are inflation, which we talked about, and the yield on a 10 year treasury, because that is going to dictate what happens to mortgage rates and affordability in the housing market.
All right, that is the end of my rant. I hope you all learn something. Hopefully you ate a delicious Thanksgiving sandwich while we were listening to this, and you learned something, filled your belly, had a great time off from work, hopefully. Thank you all so much for listening to this. If you have any questions about this… I know this is a wonky, complicated topic. If you have any questions about it, you can hit me up on BiggerPockets, or you can find me on Instagram where I’m @thedatadeli. If you like this episode, please share it with a friend, or give us a five-star review on Apple or Spotify. We really appreciate it. Thank you so much for listening, and we’ll see you next week for more episodes of On The Market.
On The Market is created by me, Dave Meyer, and Kailyn Bennett, produced by Kailyn Bennett, by Joel Esparza and Onyx Media, research by Pooja Jindal, and a big thanks to the entire BiggerPockets team. The content on the show, On The Market, are opinions only. All listeners should independently verify data points, opinions, and investment strategies.

Speaker 2:
Come on.