David:
This is the BiggerPockets podcast show, 670.
Kathy:
This is a wonderful time to get in. And you might even find that the metrics you’re searching for are the same, because if interest rates are up, the prices are down, the cash flow might be the same as if prices were high and interest rates low. The difference is you’re getting the asset for less, so over time, if you’re able to re-fi at some point, whenever that day comes, when it makes sense to re-fi, your cash flow increases even more.
David:
What’s going on everyone? I am David Green, your host of the BiggerPockets real estate podcast. Here today with a special episode for you. We’re doing BiggerNews with my co-host Dave Meyer. Dave, what’s going on?
Dave:
Not much, man. It’s great to be back. You still have me laughing from before the recording. I’m still trying to get my act together.
David:
We have a lot of fun here and that will translate into the show. But in addition to fun, you’re going to get a lot of amazing information. So in the BiggerNews episodes, we have created these to bring you what’s going on in the current state of the market, what’s happening with interest rates, what’s going on with the Fed, what’s happening with the country as a whole, which markets are exploding, which ones are shrinking, the information you need to make the best decisions possible for yourself all backed by data. Which is why we’ve got Dave Meyer here, because he’s the data guy. In today’s show, we have a special guest. We have Kathy Fettke of Real Wealth Network returning. She was our first ever guest on the BiggerNews podcast. And she comes in to talk about a term that I think is fantastic that my co-host, Dave Meyer here came up with, defensive investing.
So in our show we’re going to talk about how to invest in a defensive way, which I recommend doing when the market starts to turn like it is now. Before we get to Kathy, today’s quick tip is you got three options. And Dave Meyer brought this up, I thought it was brilliant, you can either play offense, you could play defense, or you can just not play the game. When it comes to investing, I don’t think this is the best time to be offensive. You don’t want to be just buying stuff in droves without looking at it very closely. You don’t want to buy any kind of real estate or buy it anywhere. You also don’t want to just sit out and not play at all, because you don’t know if you’re going to have a window to buy, like we have right now, this is one of the best buying opportunities that we’ve had period, in the last 10 years.
So what we recommend is defensive investing and we get into that in today’s show. But basically, you want to make calculated, careful and somewhat… I don’t want… Nothing in real estate is ever guaranteed, but you put the odds in your favor that this will be a very solid long-term investment based on strong fundamentals as opposed to speculation. Another important topic in today’s show that you want to make sure you listen all the way to the end to hear about, is time manage management or budgeting your time. Both Kathy, Dave and I give some really good information about how we get the most out of our day, how we stay productive and how we get as much done as possible.
Dave:
Yeah, it’s a great episode. Kathy’s one of the best, smartest investors out there, so you definitely want to stick around. But before we get into that great discussion with Kathy, let’s talk about some of the headlines recently, David, because if anyone is out there, you all know there’s just so much crazy economic news going on right now. But the number one thing has to be the Fed’s decision last week. And probably everyone has heard that the Fed raised their interest rate by 75 basis points, which is basically 0.75% and that’s pretty well known, that was expected. But there’s something more to this press conference and the announcement. And it really to me at least, was a showcase that the Fed is not messing around. They released some forward guidance that showed that they think rates are going to go up even more before the end of the year and even more into 2023. So that shows that we’re going to be in a higher interest rate environment for a while.
And if you look at Jerome Powell’s press conference, he was not pulling any punches. He was basically saying, “We are going full send, we are not stopping. We are going to basically go after inflation, even if it causes a recession, even if it causes job losses or a decline in the housing market.” And people have always speculated about this, but he basically said it more clearly than I think we’ve heard it articulated in the past. So I’m curious, David, what do you think of this really emphatic release by the Fed and what this means for real estate investors?
David:
Well, this was clearly a warning shot. When you see a warning shot you know things are getting serious. It’s not, “Oh we might be coming into the enemy or a battle.” It’s likely going to happen. So it doesn’t mean to run, tuck your tail and hide and panic and let fear overwhelm you, because we still live, in my opinion, the best country in the entire world. And we’ve got more tools to get ourselves out of a deep depression than anyone else. But it means that the current standard of living that we’ve been enjoying and some of the perks that we’ve had, probably are going to be going away. So if you’ve got a job, I would count that as a blessing and I would work very hard at keeping that job, more layoffs could be coming.
If you’re working in an industry that’s not really forward leading or maybe you’re in the blockbuster of whatever space you’re in, look for a different industry. This is a time where I think big economic changes are going to be happening. What I like about what Jerome Powell did, was he was clear and upfront about the fact they’re going to continue raising interest rates. When there’s uncertainty, when they don’t tell you exactly what’s going to happen, it leads to a lot of speculation in the stock market, in the mortgage backed securities market, in the economy as a whole. So by just coming out and saying, here’s what is going to happen, it does give us a little bit of an advantage as to how we can prepare for what’s to come.
Dave:
Yeah, I totally agree. It’s not what I think most people want to hear, but at least we know, because people have been speculating for a while that the Fed was going to “pivot.” Basically, they were going to start raising the rates up until the point where they got to a neutral interest rate and then they would maybe slow down, see what’s going happen. But now the Fed is just telling us that we should expect things to keep going up. That tells me a couple things, like mortgage rates are probably going to go up a little bit more over the next couple months. So if you could get a rate lock now that might not be the worst idea.
But that this is going to put a lot of downward pressure on housing prices for a while. If we were in this place where the Fed was going to take their foot off the gas, maybe coast for a while, more markets would probably be able to be resilient against that. Now, if we see two years of high rates, I think that’s going to put a lot of pressure on housing prices. But like David was saying, that just means you just need to change your strategy, it doesn’t mean that you need to get out of the game at all.
David:
And there’s a few areas that this might benefit us. It’d be nice to see food prices stop going up so fast. Asset classes that are highly financable, like cars and homes, it should keep the prices from going up faster, maybe even push them down. And the last piece I’ll say is savers could finally be rewarded. When is the last time that putting money in the bank and saving it was actually a viable option? It’d be nice to see some of that come back, especially for the aging part of the demographics, where people have retired and they’re living on fixed incomes. They were planning on getting return on that money and it’s been a big goose egg for a long time.
Dave:
That’s a really very good point, I totally agree. And for people who haven’t been able to afford houses, some markets might decline and you might be able to get into that. So that’s in my mind, going to put sustained downward pressure on prices. On the other side though, there’s this other dynamic in the housing market that might put upward pressure on the housing market. And again, the housing market, there’s all these forces. Some put downward pressure, some put upward pressure, no one knows exactly what the mix is going to be. But I just want to present that not everything is pointing down. So this is other dynamic that’s going on where new listings, which is basically just the number of properties that are put up for sale, are down 18% year over year, which is a lot.
People do not want to sell their houses right now, and we’ve been speculating about this for a couple months, this idea of the rate lock where people are going to be locked into these low mortgages. They don’t want to sell into a declining market to only get a mortgage at a higher rate and that doesn’t sound very good to me, so I understand why they would do that. And if inventory flattens out, which it is already in some markets or starts to decline, that could at least put a backstop on some of the declines that we might see or level it out, I don’t really know. But it’s just this really interesting phenomenon that’s going on, because right now everything is so weird and interesting. But curious, are you seeing this in your market and what do you make of this?
David:
I’m seeing this in a lot of markets, because as you know, I invest long distance. So I study a lot of the different markets and I’ll say if real estate has a relationship status on Facebook, it’s complicated.
Dave:
It’s super complicated.
David:
There’s a lot of things that factor into this and that’s why I get frustrated if someone says, “Oh, rates are going up, prices are going down.” No, rates going up affects demand, but a lot of other things affect demand. And then you’ve got supply, you actually got to balance both of these. So this is a clear indication that supply is not increasing. So even if demand is decreasing, it doesn’t necessarily turn into a difference in size.
Dave:
Exactly.
David:
Because supplies are… And why wouldn’t supply stay the same? Do you want to go sell your house at your 2.99 rate and go get into one that’s seven and a half and probably not that much cheaper of a price? It’s no reason for people to go put their house on the market and sell it. So what I would tend to see when this phenomena happens, what I observe, is that less houses come on the market, but they also don’t sell as fast. So at this point you’ve still got the majority of buyers that are hanging out in the background saying, “I want to see your prices come down.” Sellers are over there, like, “Well, the Cop show my house is worth this.” The days on market starts to go up. So you’re in a bit of a standoff, it doesn’t necessarily mean prices drop. And my strategy in that standoff, like I talked about in today’s show is that I go after the houses that I want the most with a very aggressive offer. And I look for the seller that isn’t getting interest from anyone else or who just flinches before I do.
Dave:
That’s very good perspective. Man, I love your analysis saying that Facebook, it’s complicated. It’s like, why did I pick this year to start a podcast about the economy? It’s so complicated. I guess in some ways now, it’s needed to more than ever. And I hope to people listening to this, this is helpful. But it’s like, why couldn’t I start a podcast about predicting the housing market five years ago? It’s like what’s going to happen? It’s going to go up. What’s going to happen? It’s going to go up.
David:
Real estate used to be like the Golden Girls, you knew what you were going to get every episode.
Dave:
Exactly.
David:
It was fairly predictable, right? It’s turned into Game of Thrones. Every episode you’re like, what radical, amazing change is going to happen between one podcast and the next one?
Dave:
Nothing is safe.
David:
Yeah.
Dave:
Nothing is safe. We have no idea what’s going to happen next, it’s just a free for all. But like you said, that’s why this episode is so good. It doesn’t necessarily mean… Oftentimes when there’s more risk, there’s more opportunity. When people are afraid, that’s when you often have less competition. So there’s pros and cons to the situation.
David:
Right.
Dave:
So that’s why it’s all about just staying informed and knowing what’s happening and adjusting your strategy, because there are good things about what was happening a year ago and there were bad things about that. Right now there are good things about what’s happening right now and there are bad things about that. It’s just about being cognizant of which way the wind is blowing and adjusting accordingly.
David:
Yeah, if you missed an episode of Golden Girls, you could still watch the next one and you’d be fine. You missed an episode of Game of Thrones, you’re lost. So don’t miss an episode of the BiggerNews podcast or any of the other podcasts, because things are changing rapidly.
Dave:
Yeah, if you missed an episode of Game of Thrones, I would call in sick to work, because you couldn’t go, because everyone would be talking about it and you’d missed the whole thing. Yeah, you can’t go.
David:
If you don’t know what Jerome Powell said, you are way behind what everything else is happening in the market.
Dave:
Exactly.
David:
All right. Our third headline to bring up has to do with you Mr. Dave Meyer and your new book Real Estate by the Numbers, analyze like a pro and get a holistic view of your portfolio. Tell me a little about this book and why you wrote it.
Dave:
Well, thanks man. So I wrote this book with Jay Scott. You know Jay, right?
David:
Mm-hmm.
Dave:
Yeah, so Jay and I wrote this book, because we are both numbers nerds. No, but really, basically we looked at the market and I get a lot of questions about analyzing deals, about learning some of the math, some of the formulas that help you analyze deals. And I didn’t find any one resource that was helping people holistically understand it’s not about math and formulas, it’s really about the concepts and the ideas behind investing, compounding the time value of money and using all the tools that your disposal as an investor to be able to look at a deal holistically. I don’t know if you see this, but sometimes I talk to people and they’re like, “Cash on cash return, cash on cash return.” That’s all they care about. Or they talk about force appreciation, force appreciation, that’s all they care about. Both are good things, but you have to be able to look at deals and real estate in this holistic sense.
And so that’s what the book’s about. Super excited about it and thanks for letting me talk about it quickly. We’re also going to have a couple of shows about this. Jay’s coming on, I think next week or something, so we’re all going to talk about the economy. Jay is super knowledgeable about recession investing, so definitely stick around for that. But yeah, I should just mention that it’s in presale right now and if you’re interested in the book, you should buy now, because you’ll get 10% off if you use the code Dave. And Jay and I are both giving away coaching. We’re doing a webinar for anyone who does a presale. So definitely check that out if you’re interested.
David:
Well, I want to thank you for writing that book, because I can’t say how excited I am enough that you’re bringing attention to the fact that real estate is about more than just cash on cash return.
Dave:
This is your thing.
David:
We typically call cash on cash return, ROI. Yeah, because if you’re just looking at it, real estate’s not much more appealing than stocks or some bonds or NFTs or crypto or a lot of other things that are out there, that all provided cash on cash return. Real estate makes you money in so many different ways that if you’re only focusing on one out of those, I basically have 10 ways that I think real estate makes you money, you’re missing out on 90% of the benefits of it, theoretically. So I’m glad that somebody is bringing attention. It’s not that cash on catch return doesn’t matter, it’s that it’s not all that matters. You don’t want to miss the forest for the trees.
Dave:
Exactly.
David:
And as I understand it, Dave, you’ve been doing a little bit of a tour talking about the book and the information that’s in it. So if you guys would like to hear Dave on the Rookie podcast, keep an eye out for the October 8th release. And then he will also be on the regular Bigger podcast show on October 11th, where he gets into how to think an investor. And Jay Scott’s on that interview with Rob, it’s really good. And if you guys like, I throw my 2 cents in there after the fact, a little bit of a reaction style to the interview that you all recorded. So everybody keep an eye out for October 8th and October 11th releases that have to do with Dave’s book. And Dave, if people want to get the book, where can they go?
Dave:
Just to the BiggerPockets bookstore, go to biggerpockets.com/numbers. And again, if you do it now, you can get 10% off, which is great. And yeah, thank you guys for having me and Jay on the 10th and 11th. We’re both super excited and proud of the book, think that there’s a lot of value there. So thanks for letting us come talk about it.
David:
Right on. I’m sure it’s a great book. Can you give the code if people want to get a discount?
Dave:
Oh yeah, it’s Dave like my name, D-A-V-E.
David:
D-A-V-E, there it is. All right, let’s bring in Kathy and let’s talk some real estate.
Dave:
All right, well Kathy Fette, welcome back to the Real Estate podcast for BiggerPockets. Thanks for coming here.
Kathy:
Oh, it’s always an honor to be with you guys.
Dave:
Well, I have the pleasure of seeing you all the time Kathy, because we’re on the other BiggerPockets podcast, On the Market together. But this is a reunion, because I think it was maybe about a year ago you were our first guest ever for BiggerNews. And since then, David and I have been doing these shows once a month and we’ve been having a great time bringing market data and trends to the masses. So thank you for helping us start this part of BiggerPockets.
Kathy:
Oh it’s so fun. On the Market show is just a blast, but I also learn a lot every time from the other co-hosts.
Dave:
Well, today we are going to talk about defensive investing. And David, this is something I hear you talk about a lot on the show, about the differences between defensive and offensive investing. For anyone who hasn’t heard this framework that you use, could you recap it for us briefly?
David:
Yeah, a lot of it comes from my personality. I think I’m perceived by people as being aggressive, go buy, I often get told, “Well, he’s a real estate agent, of course he says you should buy houses.” But I’m buying them myself at the same time. My personality just tends to be more conservative. I always look at the what could go wrong. I’m always thinking about the downside, I’m trying to protect against it. And when I’m investing, I’m typically not chasing after the highest return I can get. I’m usually looking for the safest option. But because I look at the property itself, the area, the asset class, whatever it is as being safer, it allows me to take action more freely. I don’t have that little, what we call the drunk monkey in your head screaming at you saying, “Don’t do it, this could happen. What if this? Everyone’s going to think that.”
By literally choosing asset classes that are more recession resistant or areas of the country that have stronger, long term outlooks, even if they don’t look as desirable right now, I find areas where other people are not flocking to, so I don’t have as much competition. I don’t get into that situation where 12 people want the same house. And I can also invest with confidence that I’m going to feel really good about this investment in five to 10 years versus really good right away. I find that when I analyze deals, this is not always true, but in general, you usually have a tortoise or the hare approach. There’s deals that on the spreadsheet look amazing in year one, you’ve got a 20% ROI, 15% ROI, sometimes short term rentals that can get into 40, 50% ROI.
But over a long period of time they’re in areas that are not growth oriented. People are not moving there, businesses are not moving there, wages are not increasing there, supply is not constricted, so they can just keep building more homes. And you find that in 15 or 20 years your house is worth very close to what you paid for it before. Versus areas that don’t look amazing up front. This would be the tortoise approach, that a lot of people see the cash on cash return and just gloss right over. Those over the long term can look really, really good. A hyper example I could give you would be investing in Malibu. Kathy knows that area, she’s in Southern California. It’s very difficult to find anything that would cash flow probably at all, let alone solid in an area like Malibu. But if you hold it for 10 years, it’s very difficult to find anything that isn’t going to make you obscene amounts of money.
Now I’m not advocating everyone goes and invests in Malibu, obviously that’s for a very specific avatar of investor, but it does highlight the point. And on the other end of that spectrum could be a turnkey property. “Oh this looks great, we’re just going to go into someplace in the Midwest, there’s houses everywhere. They just build them nonstop. I’ll go buy one of those and my cash on cash return can look really good.” And then as the house is falling apart, it’s not appreciating, you can’t pull money out of it to fix up the roof, fix up some of the capital expenditures you have. Rents are not going up, because there’s so much supply that demand never outpaces it and you hit the opposite results. So I try to avoid either extreme, right. It’s a spectrum and you want to figure out where to fit, but defensive investing is this idea that you are looking at long term fundamentals and delaying gratification and making investment choices with that perspective.
Dave:
And is this something you do always or is this a reaction to current market conditions?
David:
That’s a really good question too. In general, I lean more that way, but in different markets I play the game very differently. So in a market like this one, which we never know if a market’s going to crash or if it’s going to climb, you can’t tell and I’ve just made peace with the fact that I don’t know. But there are markets where odds are, like the one we’re in now, it’s likely to go down more before it goes up at least significantly. The Fed is announced they’re going to continue rising rates, they’re trying to slow things down. You’re getting an issue where home sellers don’t want to put their house back on the market, we can go into that later, because they’re going to lose that 2.99 rate that they have. They’re going to have to get into a higher rate. And then there’s not a lot of inventory to choose from. So when I think we are more likely to be headed down, I tend to invest more conservatively.
This is where I would pick the areas that I think are going to be safer long term where I see people moving to, even if the cash on cash return doesn’t blow me away. If I see that’s an area that in general Americans are trending towards moving into, it’s got a favorable tax environment, it’s got a favorable business environment, the demographics show that people and businesses are moving in that direction, I will favor that over an area, maybe a C class neighborhood. Now if we’ve just had a crash like what we had in 2009, 2010, 2011, I feel much better if I’m going to get into some of those C or C minus neighborhoods because you’re almost at the point where you’ve got nowhere to go but up. So in general, the philosophy that I preach is if it’s post crash, you can be much more liberal with what you buy.
You can go after areas where price points are lower and it’s easier to get into that area and the cash on cash return looks really good, because even if for some reason you don’t love it, you’re going to ride the elevator up and you can exit if you have to. But if you’re at a point where you’re thinking it might crash, you actually have to get extra conservative, because those A class properties, those A class locations, they don’t get hammered like the D class areas do. If you just think about whoever’s listening from wherever they live, the best neighborhoods in your city or the best cities in your state, the last time we had a crash, they had a dip. The worst areas were decimated. So we’re at that point where we’re looking like we could be heading over a cliff, nobody’s really sure, I want to be extra conservative about the areas and the asset class that I invest in at a time like this.
Dave:
Kathy, what do you think about this framework of defensive versus offensive investing?
Kathy:
A hundred percent, everything he just said. But I’m opposite by nature, I tend to jump into things. I’m a quick start, if you follow the Kolbe personality test. I need enough research and then I’m ready to jump in. Fortunately, I’m married to someone who needs all the information, so we help each other out, he slows me down and I speed him up. Otherwise, we probably wouldn’t own hardly any real estate if I weren’t in the picture, so that’s good. Listen to your spouse and listen to each other and each other’s fears and that can actually help you both move forward, that’s just my little marital advice. But back in 2005 when I didn’t know anything about out-of-state investing, I did have Robert Kiyosaki on the show and he gave me some fundamentals that I’ve stuck with since then, which is almost 20 years. And of course, if you don’t know who that is, that’s the author of Rich Dad, Poor Dad who’s changed many lives.
So I was lucky enough to have him on my show and at the time it was a San Francisco radio show before podcasts. And he was really explaining the dynamics of what was coming and it was so shocking that nobody could see what he could see when it was so obvious. And David, I was a mortgage broker back then and I knew something was wrong, it didn’t pass the sniff test at all. Being able to give teaser rates, not even the full payment to qualify people, knowing that when that payment adjusted, they would never ever be able to make that payment. But those were the loans, that’s what people were getting. So it’s intuitively like, this is going to fall apart. But the headlines were saying the opposite and even real estate experts were saying it, that it was going to be fine. But Kiyosaki was saying, “Oh no, no, no, these are going to reset in 2007.” So he had already sold all of his high price real estate. He made a killing in the growth markets.
But then when he knew when these loans were going to reset, it was in the books. People knew when that was going to happen. He just sold everything in the high price markets and bought in Texas. So I was like, “Why Texas?” And he explained it’s the biggest job growth in the country, the biggest population growth as a result. And yet home prices are still 26% undervalued compared to incomes there. The prices had not gone up as fast as the incomes, I mean, what a scenario. So it made sense to me and being a quick start, I’m like, “Rich, I want to go to Texas-”
David:
“I’m moving to Texas.”
Kathy:
And [inaudible 00:24:56]. Not even moving, I just was like, “Let’s go.” We ended up coming home with five properties, because if you remember, you could get loaned on investment properties an unlimited number with no money down. So yeah, I bought five of them in that trip. We went back and bought more and this was at the top of the market, it was 2005, 2006. And yet when everything crashed a few years later, those properties stayed rented, because like you were saying, we bought in really good neighborhoods. We had A class schools, it was near jobs, it was near new infrastructure growth. This is really important to me, if you know that a city is investing billions of dollars, billions of dollars in their infrastructure, they have been studying that for decades of where growth is going, they know. That when you see that new infrastructure coming in, it’s like, “Oh okay, this is a really a growth area.”
So it just made sense to us, we helped thousands of people do the same. And it was like being on a, I don’t know, if you’re in a movie and you’re watching this earthquake happen and some people are in the middle of it that it caves in and the there’s other people on the side just watching them fall. That’s what it felt like on those Texas properties. The ground was shaking but we were fine except for the properties that we didn’t follow that advice on. The California properties we kept or we bought three properties in Boise where there was two employers at the time, it didn’t make it through that.
Dave:
Wrong bubble for that one.
Kathy:
Wrong bubble, yeah. It would’ve been better to wait, yeah.
Dave:
This bubble would’ve been good.
Kathy:
Exactly. So those fundamentals we’ve carried, that’s really how we built our company and the foundation of look for those things, look for where the job growth is. And I don’t mean a little, I made the mistake and Dave knows, of following job growth to North Dakota during the oil boom. But I tell everybody, never invest in an area that’s dependent on one industry. Well, I did and then the rug got pulled out, oil prices crashed and I’m stuck with land in North Dakota. So when you go to other places, you look at, we really still like Florida, Orlando, Jacksonville, these areas have diversified employment centers now. They didn’t 10 years ago, it’s a different market today. So really sticking with those dynamics of job growth, population growth and affordability and infrastructure, I feel really comfortable even investing today and we are, we’re going big actually. We think there’s some amazing opportunities today.
Dave:
Can you tell us a little bit about, obviously not the specific opportunities if you don’t want to, but just the characteristics, what are the trends and the data points that get you excited about opportunities in this type of market?
Kathy:
Well, I like to see, like I said, I think the government controls a lot more than we realize, this is not your parents economy and is not your grandparents’ economy. This is a very manipulated economy and a lot of it is, we’re just the puppets of the puppeteers who control the levers. And right now those levers are saying we’re going to crash this economy. I mean, Jerome Powell just came right out last week. I was way more positive a month ago as you know, Dave.
Dave:
Same.
Kathy:
And then he comes out and he is like, “No, we’re going to kill it. We’re going to kill jobs.”
Dave:
He’s not messing around anymore, yeah. That was like, “Anyone thinks I’m messing around, I’m going to crush your dreams right now.”
Kathy:
Oh, he’s really totally fine with that.
Dave:
But honestly, as an investor it’s better, right? Now you know where we stand. It’s obviously not great for prices in the housing market, but personally, at least for me, especially if you’re trying to be defensive like we’re talking about today, it’s better to know what they’re intending to do rather than being in limbo.
Kathy:
Yeah, I really had this rosy belief that the central banking system wasn’t on a mission to make lives worse. And again, I know that bigger picture, maybe they don’t, maybe that’s not their intention. But for the Federal Reserve, which is the banking system, it is not a government entity, for them to just flood the market with so much money and buy mortgage backed securities to keep rates low for so long, to stimulate a housing market that was already stimulated, it didn’t need that help, to then just drive… Everybody knows if you keep rates low, it’s going to make prices higher, because payments are low, people can afford more. And you also know that when you pull that back, it’s going to do the opposite. So they’re the ones who flooded the market with money and kept rates low and now they’re like, “Oh, maybe we shouldn’t do that. We’re going to take all that away from you. Sorry, I gave you some candy, I’m going to have to take that back. You can’t keep that.” And you’re just like, I already maybe swallowed it.
Anyway, these are interesting times and I follow what the Fed says and I believe them. And this time we’ve got to be really defensive, way more defensive. I’m already defensive now, because I’m older and I think that my natural tendency is to dive in and just go for it. But as you get older and you’ve taken losses and you’ve had to start over and I’ve had to start over several times, once you get to my age, you don’t want to start over. So already I was being careful for the past decade, because it was really hard going through 2008, I never want to do that again. Anyone who did doesn’t want to do it again. So I was already staying low leverage. This is defensive to me, low leverage. I got sometimes no debt and sometimes super cheap debt, long term rates, 30 year fixed.
Rich and I would have these fights, I’d be like, “Honey, why don’t we just get a lower rate at a 10 year arm?” And he’s like, “No, the 30 years not that much more, just lock it in then you don’t have to worry, we’re old.” It’s basically what he is saying. So low leverage, long-term debt that’s fixed so you don’t have to worry about that variable. And lots of reserves on hand, lots of reserves and I personally either want to buy properties that are fixed up like new or brand new, because then you don’t have so much of those issues of repairs to worry about. And believe me, I bought plenty of old houses that cash flowed great until they didn’t, I guess plumbing broke and I spent 20 grand fixing it. So those are the keys to me in defensive investing. I’m not worried about this, because we’re super low leverage and have reserves and we’re in strong markets and in good properties in those markets that people want to live in.
Dave:
So David, I know you just went on a buying spree I think, I don’t know if that’s what you would call it, but it seems like it. What defensive tactics did you use to make sure that you were cushioning yourself against potential price declines?
David:
I’m still on that spree actually. It slowed down from where it was, but I put a property contract yesterday-
Dave:
Nice.
David:
That I’ve been working on for about a month and a half. And another one I’m really close on. So part of my strategy has been, rather than seeing a property and going after it with everything you have, that was the way you had to do it the last seven years. There was no light stepping around this thing, you couldn’t throw jabs, you had to throw in your offer a knockout punch and if you didn’t get the deal, you weren’t getting another chance. I look at it now I got a lot of lines in the water and I’ve got some sellers that are interested and I’m waiting as the news tips in my favor I guess there’s so much to say, I want to make sure I don’t just go in rabbit trails all over the place, because we’re talking about defensive tactics here.
But I guess one of them would be not falling in love with any one particular deal. I’ve got a lot of them that I’m interested in. They’re all A class properties, I probably never would’ve even had a chance to get in the last seven to eight years, because they got so much interest, everybody wanted it, that I can go after them now. And I’m not writing an offer with the intention of getting it accepted on the first try. I used to do the opposite, I would tell people, if you want that asset, if this is a good asset, give it everything you got, you one chance. You’re like Eminem in Eight Mile. This is your shot, do not miss your chance to blow. Now I really look at if an offer is a jab, I’m looking to see how my opponent reacts to that offer. I want to know what the seller does. If they accept my offer on the first one in the markets I’m investing, at least I went too aggressive, right? That was a mistake.
So I’m writing them low and I’m waiting to see who’s going to come back. And so this particular deal was listed at $1,175,000, it’s a 5,000 square foot cabin in a really, really good location in Blue Ridge, Georgia, which is where people in Atlanta would go to visit if they want to go to the mountains. A beautiful property, several acres of stream running through it. And it has a massive four car garage with a livable, two bedroom, one bathroom space above it, that garage can be converted in the living space and I basically could double the square footage of the house. It’s a really good borough opportunity, in a really good location, in incredible condition. Like what Kathy said, I don’t think that there’s one thing that I would need to fix about this property other than a couple mosquitoes that hang around that stream that seem to love me.
But I’m not just going in and writing a strong offer. They were listed at $1,175,000 and I wrote an offer at $1,000,050 and I asked for about $35,000 in closing cost credits and they said no. And so I waited and I waited and I waited and what do you know? Jerome Powell comes out and says, “Interest rates are going up, unemployment’s going to go up. The economy’s going to take a hit.” Fear courses through the entire seller’s market. This property and three others that I had offers in all came back that same day and said, “We’ll accept your offer that you wrote a month and a half ago.” So you have the combination of sellers sitting on the market realizing that their house isn’t selling, with this news coming out, that it’s going to be even worse. And then I’m in a position I can say, “Well, that was my offer a month and a half ago. Rates have gone up, their house has been sitting longer.”
I have my agents go back and try to negotiate it down. So instead of the $1,000,50, I ended up getting it at £1,000,025 with even more closing costs. So now I’m getting it a little bit under a million when it was originally listed a little under $1,200,000. And this is a property that is going to bring in a ton of short term rental. I’m going to double the size of it. The cash on cash return will not look incredible right off the bat, because short term rentals typically need a little bit of time to build up your client base. You have to get some tweaks, this one was currently not being used as a short term rental, so it doesn’t have reviews. But it’s in an area seven minutes from downtown that everybody wants to visit. Basically, I’ll almost double the revenue by taking that other structure and converting it into living space.
There’s a ton of things about it that I really like, but I just was patient. It’s like this aggressive defensiveness. I wrote a lot of offers, I wrote them aggressively, they said no. I said, “That’s fine, we’ll check in every week or two.” Sellers are sitting there marinating in their own juices right now. They’re worried, I would be too. No one’s buying houses like they used to be. Now I don’t want to go after the worst inventory. I don’t want to go after the same properties that all the rest of my competition going after, they’re still selling. I don’t want go buy a short-term rental that has 500 other cabins or properties that look just like it. Or buy into an area where I don’t think people are going to be continually vacationing into, or even worse an area where regulation laws could be impacted that would not let you use a short-term rental. So I’m going to safer spots, no one’s going to shut down short-term rentals in these vacation destinations, where everybody’s renting cabins and the whole economy is dependent upon tourism.
So right off the bat’s, that’s a little bit of a safer shot. And then I’m going after a bird deal that I can add a lot of value. I would imagine just based on the square footage in the area, I’m probably going to add close to $300,000 of equity to this property, putting $60,000 into the rehab. And then the last piece is just how many different offers I have out there. You can take your time, you can wait and see which seller is most motivated, frankly. And I really like this, if I’m going after grade A real estate. I don’t like this method as much if I’m trying to buy into C class areas or states or locations that people are not moving to.
Because even if you get the deal, it’s not a guarantee. It doesn’t have a big upside. You don’t know what’s going to happen. We might be in this situation for two to three more years before we lower rates. No one really knows what’s going to happen. So when there’s uncertainty like that, I want to follow the ancient principles of real estate, location, location, location. Where are people moving? Where are wages rising? Where is the highest demand going to be? And when I look backwards, what’s the property I’m going to say I’m so glad I own this, I love having this in my portfolio?
Dave:
That’s great, great tactical advice. I’d love to keep asking more questions about this, but we don’t have that much more time. And I have a couple other questions I definitely want to get to here. So Kathy, I’ll ask you this, in defensive investing, we’re talking about long term buying, but when we are potentially going to see increased unemployment, I mean, the Fed basically predict an increase in unemployment, we could be in a recession right now or we’re probably heading towards one. How do you square defensive investing with the fact that this might impact tenants and renters? Are you afraid that rents could soften or vacancies will go up? And is there any way that you can mitigate against that?
Kathy:
Yeah, I absolutely think there will be an uptick in foreclosures and in evictions, because again, it was Jerome Powell’s really, really harsh words of just last week that I think has everybody going, “Oh, he’s going to go for it.” So again, it just comes back to those fundamentals I said. If you’re in an area that has a big diversification of employment and different kinds of employers, so for example, we know that baby boomers are aging, so the medical industry is strong. I think it will continue to be strong. We are in a situation where we have a shortage of energy. So I really do believe that areas like Texas are going to stay strong. They’re not dependent on energy by any means, they’ve got every kind of employer is there, makes me feel comfortable. Florida, I’m comfortable there, because you have still a lot, like I said, these baby boomers and now younger people retiring, now they are retiring, they weren’t 10 years ago, now they are. And it’s a lot cheaper and it’s really pleasant in Florida and the Carolinas and Georgia and the southeast in general.
So a lot of demographic shifts happening in those areas. And diversification that wasn’t there 10 years ago in terms of employment. So first of all, stop underwriting as if you know that rents are going to go up, because you don’t know that. And when I see these multi-family deals come across my desk and they’re like, “Oh yeah, rents are going to go up.” Well, you know what? You could find yourself in a big problem if you’re wrong. And especially if you take an investor money and you’re wrong. So just underwrite things with the possibility that maybe rents will go down and that there could be evictions. And if you’re in an area where it’s hard to evict people, you need to keep that in mind too. I live in California where, and David you know, people can be very savvy and stay in your property for a year if they know what they’re doing.
So I want to be in an area like Texas or Florida where that’s not the case, where there are landlord laws and you do need to pay your rent and if you don’t, you have to leave. Don’t make the assumption that landlords can handle paying everybody’s rent, it’s not the case. So it’s all about the underwriting and making sure you’re in a landlord friendly area and that there’s huge job diversification and a big renter pool, because again, I try to keep my properties in the median price range of what the average person can afford. And so if you’re in a big market with a million renters and you’re in that median price range that the most people in that area can afford what you’re offering, again, I think you’re really setting yourself up defensively.
David:
I think you made a really good point as particularly about rents rising in the multi-family space. And I just want to highlight it, because the assumption if we say rents are rising, that would mean rents rise everywhere in the entire country over every asset class and that’s not how it works. Rents rise when demand grows higher than supply and wages increase to the point it can support a higher rent payment. Well, we’ve been having builders creating multifamily properties, particularly in inner city for years. I mean, if you were in any big city in the country, you saw these cranes all over the place creating multifamily housing in downtown areas. There’s a lot more supply in those spaces than demand. And so multifamily particularly is one asset that I think is exposed in more areas than single family, because we’ve been building more of those units. We haven’t been building as much single family housing in those same spaces.
Dave:
Yeah, I was actually looking at some data recently that showed that although construction permits and units are declining, David, that’s actually more in single family, they’re really starting to fall off. And the amounts of permits for multi-family units are pretty steady, probably because multifamily operators know it’s going to take them two or three years to build something and maybe we’ll be through the worst of this. But just something to note that more supply is continuing to come online there faster than single family homes.
David:
And when you hear us talk about rents are going up, that does not mean in every asset class everywhere, it’s highly localized.
Dave:
And it’s Kathy’s favorite saying, right? There is no national housing market. She’s completely right.
Kathy:
And there were boom markets that everyone just went frenzied over. So one example is Phoenix where there’s 19,000 new single family units coming online that may be able to be absorbed. But some areas didn’t get that action, where isn’t a lot of national builders going in. They don’t have that new inventory coming in. So always looking at permits and new starts versus job growth, I think is really important.
Dave:
That’s great advice. Well, we do have to wrap up here, but Kathy, do you have any last word about how to be defensive in this market?
Kathy:
Well, I know that people are probably really scared, but I really want to leave this saying, this is an exciting time to get in. As much as it might feel like, oh this is scary, when you look at headlines, you’ve got to look at, how do I interpret this? So if you are seeing prices go down, well who’s that good for? That’s good for the buyer. So if you’re just getting in and you’re a buyer, this is such a better time than last year when you had to overpay and get in line and not be able to negotiate, now you can, you don’t have competition. This is a wonderful time to get in. And you might even find that the metrics you’re searching for are the same, because if interest rates are up but prices are down, the cash flow might be the same as if prices were high and interest rates low. The difference is you’re getting the asset for less. So over time, if you’re able to re-fi at some point, whenever that day comes, when it makes sense to re-fi your cash flow increases even more.
Dave:
That’s great. That’s a great point. I mean, I didn’t experience the 2008 crash. I started buying in about 2010, but that was before the bottom of the market and it feels the same vibe. No one really knows what’s going to happen, but things when you look at them on paper, this makes sense. And you’re just looking around, everyone’s really nervous, but this is actually pencils out and it’s starting to feel like the same vibe, at least to me. David, any last words for you on this?
David:
I like Kathy’s point, if you had to choose between a high price and a low rate and a low rate and a high price, you’re better off getting it at a lower price. Your property taxes will be lower plus you have the ability to refinance in the future. And even though we’re all doom and gloom, because rates are high and the market has slowed down a little bit, still we all know that at a certain point rates are going to go back down. The Fed is purposely trying to raise them to slow the economy down and what’s going to happen to the price of assets when rates go back down? It’s not a shocker, we all know what’s going to happen.
And we will be talking about this moment in time, like, oh, I wish I had bought when I had the chance, that was a nice little window and now prices are high and all of these buyers are back in the game and there’s multiple offers and iBuyers and hedge funds are going to come right back in. It’s going to push out the mom and pop. So you can look at higher rates as a curse or you could look at it like a blessing, it’s a bit of both. But the key is when you’re following podcasts like this one, getting information like this, that you play your hand according to the cards that you’re dealt at the time. Right now we have higher rates, we have an opportunity to get houses at much less than I think what their inherent value would be. It won’t be that way forever. When rates do go back down these properties that we’re talking about buying right now, they’re going to be worth a lot more.
Dave:
All right. Great advice from both of you, thank you. I think this is super helpful. I mean, what you’re saying makes total sense, I notice more opportunity. Every single investor I speak to says there’s more opportunity right now. I think this is just a universal observation by people who are super active in the market. But at the same time, because there’s so much uncertainty, it makes very logical sense to be a defensively minded investor at this period of time. All right, so we’re going to move on to another segment. It’s a little bit different.
It’s not about real estate per se, but it’s about sort getting your mindset right to be a real estate investor. And we’re going to talk about time management. Both of you obviously very busy people, David, you host this podcast, Kathy, you’re on two podcasts, you’re both actively investing, running businesses, You speak at every conference in the country. Kathy, we’ll throw this to you first, could you give us a quick tip on how do you manage all this stuff? You’re doing so much stuff. How do you manage your time in a way that allows you to accomplish all your goals?
Kathy:
Well, have to look at leaders of large corporations and ask how do they get it all done? And they get it done, because they have good people. So that started 15 years ago when we started growing Real Wealth and my first person was a bookkeeper, because I was just like, I handed her box of stuff, I’m like, “I don’t do this part.” And that was like, “Oh my gosh, she does this better and she’s good at it.” So I was like, “What else can I offload?” And so that’s been the key to success, is getting people that are better than you at certain things you’re not good at. Instead of like, “Oh, I’m going to go hire my mom or my sister for this thing that they don’t know anything about.” I’ve done that a few times, not my mom, but friends. And it’s like, “No, get someone who’s really good at it, has done it before.” I wouldn’t want to hire a new bookkeeper who has never done that, I was going to get a really good one.
So I have a personal assistant, she handles my email, she handles my scheduling. We ended up hiring investment counselors to talk to investors, because there’s no way I could talk to thousands and they’re… So it’s good people. On a personal level, one of the big changes that Rich and I have made lately is your day starts the night before. It’s an interesting philosophy and I forget who said it or what book we read about that. But we were getting a little lazy, having a lot of wine at night and watching a movie and it was probably a COVID thing and up till midnight. But we both wake up naturally around five, so we weren’t getting enough sleep. We were a little hungover, I mean, not really, but even just a glass of wine affects me. So now we go to bed early, we don’t watch TV only on the weekends, don’t drink wine midweek. And get up early, fresh, able to focus, do some yoga, some meditation, exercise, and just start the day looking at the calendar, what do I have planned? Structure it properly and that works way better.
Dave:
That’s great. Still like those wine nights every once in a while.
Kathy:
Oh yeah, for sure.
Dave:
You got it, you still got to do it, but for the most part-
Kathy:
Weekends.
Dave:
You got to be disciplined.
Kathy:
Yeah.
Dave:
What about you, David? How do you manage this?
David:
All right, I’ve got four tips that I can share for time management.
Dave:
Ooh.
David:
So the first thing I’ll say is to be completely transparent, it is pretty much every day that I have 20 things to do and enough time to do 12. So part of my life is just accepting that eight of those things are not going to be done. So you have to figure out how you can get a little bit of progress done to buy yourself some time. Or prioritize what needs to be done or see what action can be done that might cover two of these things, because sometimes that’s the case too. Tip number one, don’t be reactive. This is how most people live their lives. They wait for something to come to them and they go, “Oh, there’s a fire I got to put out.” And they just jump right into it, okay? It’s very common for everyone else in the world to feel that whatever their issue is, should be as much of a priority to you as it is to them, even if it’s their own fault that they got into that mess.
So when someone comes and says, “Hey David, can you look at this? Can you do that? Can you fix this problem? This just happened, ah.” I immediately say, “This needs to be scheduled on the calendar. This is not a thing that I have to stop what I’m doing and jump into this, just because emotionally it would make you feel really good if I prioritize this over what I’m doing.” Which leads me to tip number two. Schedule everything. I have times in the day scheduled to bring me all of these problems that popped up that someone needs help with. I tend to tell the leaders in my company that they do this with me and then they also do it with the people that are subordinate to them. You don’t want someone texting you to say, “What do you do when a buyer does this? What do you do when the contractor says this?” You write that in a Google document.
You have a scheduled 15 minute meeting and you go over every bullet point that’s in that document that was written down, at one time as efficiently as possible. And then oftentimes we will share that document before the meeting. And so you can answer some of the stuff without even getting on a call. It’s much faster to type in an answer than it is to have a conversation where you get a bunch of background details, that don’t really matter. And a bunch of non-essentials when you’re just trying to solve a problem. So schedule everything that you do, if it’s not on your schedule, it doesn’t exist. Number three, you got to know what moves the needle. Not everything we do is the same. If you’re just a pure investor and you’re saying, “How do I find time to analyze deals?” If I sat and watched you analyze deals, you’re probably analyzing a deal that I would look at before you even started and say it will never work.
This is why we have rules of thumb, stuff like the 1% rule, stuff like buying in areas where you shouldn’t be buying, stuff like buying a property that’s already occupied by tenants and you’d be basically buying an eviction. There’s certain things that automatically disqualify a deal and just putting a little bit of effort before you jump into it will help you. I personally think people that like analyzing deals do it just because it’s fun. These are the high C’s on the DiSC profile, the analytical people, they will sit there. And I’ve had these buyers before that want to go over on a spreadsheet, all nine deals and look at every one of them in depth when they’ve already decided they don’t want to buy any of them. Stop doing that, if you’re not going to buy it, stop looking at it. And then the fourth one is use different muscles. So what I mean by that is, if you go to the gym and you are working out, there’s several different ways you’re burning energy.
So if I’m just doing bicep curls, I can only do it for so long before my bicep wears out. Well, I also have overall glucose in my bloodstream that I need to burn as energy to make that muscle contract. I could burn my bicep muscle out but still have glucose left over to work out another muscle system. And then I go do legs or I go do shoulders or something and all of a sudden I’m not fatigued and tired anymore, I can work out that muscle. When I run out of glucose, I’m completely done. So you have an amount of energy you can burn in a day that your attention can actually hold and focus on certain things and that’s going to determine when you’re done.
So you have to make sure you don’t go into a dead sprint and burn all of that by just getting into really tough meetings to start your day, with really difficult, problematic people. Got to be careful who you let into your life in the first place that burns all of your glucose to where you’re just done by lunchtime. “I just don’t even want to make money anymore. This is not worth it.” And the other thing is I break up my day by using different muscles. I don’t sit there and hammer the same muscle, because it wears out. I can’t write a book for 12 hours a day. I can’t be in meetings for 12 hours a day. I can’t solve difficult problems and I can’t review emails, I can’t do any of those one thing, because I’ll just get tired.
But I can break it up, so I will often record a podcast like this get done, use a different muscle by answering emails, use a different muscle by working on an outline for a book. Go step outside and take a walk while I call a couple people and talk. Get some sunshine, get some fresh air, come back in, grab a quick bite to eat, record the next piece of content I’m making. And basically, I don’t work out every muscle through the gym. I bounce around between the machines so that I can get more out of myself throughout the day.
Dave:
Wow, that’s great advice. I like that idea. Sometimes if you do two or three podcasts in a row, which I think we’re all doing today, it’s hard. I know people probably think, “Oh, they just talk on a podcast.” It’s like you have to pay a lot of attention, it’s exhausting. It’s nice to break it up a little bit.
David:
How about you, Dave? Do you have any tips?
Dave:
Yeah, I actually do. So one thing I think I do, I don’t know if I made this up, I’ve never heard anyone else do it, but I have something I consider my time budget. Everyone has a budget where they allocate dollars to certain things and they’re rigid about that. I have to confess, I’ve never had a financial budget in my whole life. But I do try to keep a time budget and I identify things that I want to do that are non-negotiable for me. So every item on my time budget has an amount of time I’m going to put towards it per week and then a priority level. So sleep, non-negotiable, got to do it. Time with my partner, got to do it. For me, I really like to exercise, so that’s something that’s nonnegotiable for me. But then everything else is a little bit below that.
And so for example, something that I had, some budgeting changes I had to make recently, is this year in 2022, I launched a podcast. Kathy’s on it, you guys have both been on it. And I also wrote a book and that’s on top of my full-time job at BiggerPockets. And so I had to look at my budget and say, “There are only so many hours in a week, how am I going to add to this?” And I basically decided no more active real estate deals. I’m only going to invest passively this year. And when I hear you guys talk about all your deals, I get a lot of FOMO.
But it’s a decision and a commitment I made to be able to do the other things I want to do in my life right now. And it helps you stay focused, at least for me, it helps me stay focused and not chase every opportunity, because ultimately, there is a lot of opportunity. And when you see markets like this, you guys are talking about, there’s a lot of different things. And I think you just need to be very intentional and deliberate about how you’re going to spend your time. And that gives you a better chance of achieving the fewer things that you decide to do. So I don’t know if anyone else does it, but it works for me.
David:
That’s pretty good.
Dave:
Well, thank you both for being here. This was a fun reunion. Kathy, we’re going to have to do this every Fall. We’re going to do a one year anniversary of BiggerNews. And so we appreciate you being here and looking forward to having you obviously on On the Market and seeing you both in San Diego. We’re filming this right before the conference, and we’ll see if one glass of wine really does it for Kathy.
Kathy:
Oh no, it’s going to be a weekend, I’m going to be drinking then.
Dave:
All right, great. Well, Kathy, where can people find you if they want to connect?
Kathy:
realwealth.com is our brokerage where we help people acquire investment properties nationwide. And then Grow Developments, growdevelopments.com is my syndication company.
Dave:
Awesome. And as if anyone listening to this doesn’t know where to find you, David, but what’s your Instagram and YouTube?
David:
It’s still not nearly as much as Brandon Turners. And even though he’s off the podcast, he’s still [inaudible 00:58:21].
Dave:
We got to get you up there, man.
David:
That’s what I’m saying, man.
Dave:
Yeah.
David:
I’ll take a pity follow. I’m not too proud to beg, not at all. I don’t want to have to grow a beard down to my belly button just to get attention like Brandon did. So please, if you like my content, go follow me at davidgreene24 and I’m on YouTube at David Greene Real Estate. And Dave, what about you?
Dave:
I am mostly on Instagram where you can find me at thedatadeli.
David:
All right. And last, for all of our listeners, please do us a favor, if you like this content, let us know in YouTube on the comments. We actually read those and we do take them seriously. So if you wish the show was longer, let us know. If you like the speed and the pace that we’re doing it at, the length, let us know that too. If you wish we had covered a certain point in depth more, let us know. We just may do a future show to satisfy your desires at a later date. Thank you guys, both Dave and Kathy for having me on and for sharing your knowledge. I think you both gave some really good, insightful things and I will get us out of here. This is David Greene for Kathy Real Wealth Fettke. And Dave, the Derek Jeter of Real Estate Meyers signing off.
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