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Mindy:
Welcome to the BiggerPockets Money podcast where we interview Katie Gatti Tassin from the Money with Katie podcast and talk about financial awakening, questioning conventional money wisdom, and also, have a good old-fashioned pre-tax versus Roth debate.

Katie:
In either case, having all tax-deferred or all tax-free, both are pigeonholing you, in one case it’s pigeonholing you into now having to figure that out now; whereas, if you went all Roth but wouldn’t have needed to, then you’re being pigeonholed into, you’ve overpaid probably on your tax at the time if you were contributing to a Roth while you were paying a 37% marginal tax rate. That’s cutting out a third of that contribution. I would say having all of either is probably not going to give you the most flexible outcome.

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

Scott:
Great to be here with my 401 okay co-host, Mindy Jensen.

Mindy:
Scott and I are here to make financial independence less scary, less just for somebody else to introduce you to every money story because we truly believe financial freedom is attainable for everyone, no matter when or where you’re 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 just have a financial awakening, we’ll help you reach your financial goals and get money out of the way so you can launch yourself towards those dreams.

Mindy:
Scott, today is a super fun episode. We talk to Katie from Money with Katie the podcast, Money with Katie the blog, Money with Katie the Everything. This is a super, super, super fun episode. I really enjoy talking to her. I enjoy our lively debate at the end, Roth versus traditional 401(k)s. I enjoy her story of her financial awakening where she discovered that you don’t actually have to spend every dime that comes into your pocket. Who would have thought?

Scott:
Yeah, I think Katie is just, she’s brilliant. She has immersed herself in this world of personal finance, built a philosophy of money that I think is really strong, and she’s done it from the ground up. There’s a lot of familiar concepts in there and there’s a lot of brand new and controversial things or challenges to the things that we take for granted in the world of financial independence and early retirement. I think she’s worth listening to, really enjoyed the conversation and loved the debates that we had.

Mindy:
Today, we welcome Katie Getti Tassin to the podcast. Katie is the host of Money with Katie, which you probably have heard of as it is screaming up the money charts. Her podcast focuses on building wealth, questioning conventional wisdom, and creating a great life. Katie, welcome to the BiggerPockets Money podcast. I’m so excited to talk to you today.

Katie:
You so much, Mindy, and Scott, I am honored to be here.

Mindy:
This is going to be so much fun. Let’s learn all about Katie. Katie, where does your journey with money begin?

Katie:
Well, I should caveat everything that I’m about to say by saying the honest, real beginning of my journey with money, and how I think about it is the fact that I was born into a middle-class family with two working college-educated parents who consistently lived beneath their means and clipped coupons and tracked their spending and drove used cars that were 15-years-old. I think it’s impossible to extricate me and my perspectives and my outcomes from that environment in which I was raised. I don’t really think it’s all that surprising that I grew up to be an adult that tracks everything I do in a spreadsheet because those are the two humans that I learned how to be a human from. I also think that the fact that I was never concerned about where my next meal was going to come from or how we were going to pay for my school supplies, that definitely influenced my fundamental sense of security and confidence around finances.
That said, I basically had no inclination to save money whatsoever as an adolescent or young adult. Any money that came my way, whether it was from birthday or Christmas gifts or from part-time work, it really didn’t matter. It basically just got spent it immediately. I had no concept of opportunity cost. When I was graduating from college, I didn’t have any student debt, which was a huge leg up, I now realize in retrospect. At the time I didn’t realize it was that big of a deal, but now I see how impactful that was, but I also had no money. I had less than probably $500 to my name when I walked across the graduation stage. I wasn’t really concerned about it until I started living on my own post-grad and was kicked off that family payroll of, “All right, you have a college degree now and an internship, so here’s the bill for the car insurance.” God speed.
So about six to 12 months into working full-time, I realized, “Oh, my God, I’m just treading water. I don’t really have a plan,” and that didn’t really sit well with me. I think simultaneously around that time I realized that this idea of working in a cubicle for the next 40 years sounded like moderately terrible to me. So that combination of my own insecurity around my ability to manage money, the fact that my paychecks were coming in and then suddenly gone and, “Okay, cool, well, when’s the next one going to get here, because I’m going to use that one to pay off this bill?” That whole sentiment didn’t feel great, combined with my fear of never being able to retire. That was mostly what kicked me into gear and got me interested in personal finance, and knowledge is power, so it all really built from there. But that was probably age 23, I would say, there about.

Scott:
What year is this?

Katie:
This would’ve been mid-2018 probably.

Scott:
Okay. So you graduate college in 2017?

Katie:
Yes.

Scott:
A year later, in 2018 at age 23 you’re like, “I’m out. This is not going to work from a cubicle job for the next 40 years. I’m going to learn about personal finance.”

Katie:
Yeah, I didn’t last very long, did I?

Scott:
Yeah. What was your job?

Katie:
I worked in marketing at an airline. It’s funny because I had a great job, realistically. I worked for one of those employers that’s always on the list for being a great employer. I had a solid income, my starting salary was $52,000, so it wasn’t like I wasn’t making enough money or that I was working some horrible job with toxic people. It was a great gig. I think it was just in general that realization of, “Oh,” I remember down to the moment when this all hit me a ton of bricks, because I was walking into the building one morning, it was 8:00 AM, my heels on, and I got the lunch bag in one hand and the purse and the other.
I’m teetering along and it was just this jarring moment of, “Oh, my God, is this my life for the next 40 years? Is this it?” That was really rattling because I don’t know, I think you go through life and you go through school and there’s always something else on the horizon. There’s another semester or another class with the syllabus that tells you exactly how things are going to unfold and there’s very clear benchmarks. I think that endless expanse of a traditional career was a little bit unnerving to me because I was definitely ambitious and motivated, but I didn’t necessarily feel like I was directing that ambition toward the right thing at the time.

Scott:
Yeah. This is your story, so I’ll only chime in about myself for a moment here, but rewind five years, this was exactly … This is in almost eerie detail the same. I didn’t have the heels in the lunch and the purse piece, but I had the same thing, except I was working at a Fortune 500 company. I was a financial analyst and my company was consistently ranked in the top of the worst companies to work for in America, things there. I guess it took me three months. That was the difference of three months there instead of six months into the job for that. But I remember I had a similar type of moment and discovered in the weeks following concepts like financial independence and Mr. Money Mustache and changed my outlook on how I want to pursue my career.

Katie:
Yeah, I think everyone has a financial awakening. I think it just depends on how, I don’t want to use the word self-aware, but I’m tempted to, how in tune you are with your own happiness and fulfillment and how, I guess, willing you are to question it and to really honestly examine it. I think there’s a good Gary V. quote about this, not that I want to be the one that goes around quoting Gary V. all the time, but something to the effect of, “If you are living for the weekends, your life is broken,” and it’s really harsh.
But what it’s getting at is this same concept that if you are just putting your head down and grinning and bearing it through 75% of your week, 80% of your week, it’s going to be a long 40 years, and there’s probably a better way through. I think that that’s why the Mr. Money Mustache and mad scientist and that old guard of why their messaging is so impactful and like red pill situation because it’s, “Oh, my God, there is another way.” I thought I was trapped, but turns out there is this whole subculture that has figured out a more optimal path.

Scott:
Awesome. What changes once you have your financial awakening, which I think is a great term that I’m going to steal.

Katie:
Yes. My financial awakening, my baptism, and then I turned around and evangelized to everybody I knew. But what changed really was I think the idea that I had before that, “Well what difference does it make if I spend a dollar now or a dollar five years from now, it’s a dollar either way?” That misalignment corrected, because I understood opportunity cost and that, “Oh no, actually a dollar I have today is far more valuable than a dollar I have in five years from now, because I can invest a dollar that I have today.” that shift in how I viewed the money coming in was certainly powerful psychologically, but I think what I really started to notice once I began listening a lot to shows like BiggerPockets and to Choose FI and some of those … I consider them the OG personal finance content, I think I became far more critical of my own unquestioning of just the way things are.
The fact that almost every day my co-workers would go out to lunch and I’d be like, “Sure, I’ll join you,” because you don’t think about it unless someone points at that and says, “That’s probably not what you should be doing. You’re going out and spending 15 or $20 a day on lunch and then maybe going home and picking up food on the way home.” Those little choices that I never really thought much of before are just considered normal because it’s what was modeled to me as normal. That’s what I started to question. Same with I would say some of the more traditional “beauty” or “feminine expenses” of always having to have your hair done and your nails done, and to have trendy clothes and nice things and things like that, again, that I hadn’t really questioned.
I just thought, “Yeah, you have to get your highlights and your gel manicures and you have to have nice makeup on your face every day.” Those are also things that I started to look at through a different lens and say, “Well actually how much am I spending on these things? What percentage?” It turned out it was like 10% of my take home pay was going toward what I now call the hot girl expenses. Sure, now that I’m earning more, I’ve introduced some of them again. I get my hair done again, but at the time it was like, “Oh, my God, that is inexcusable that I would spend 10% of my take home pay just on the way that I look.” But unless someone really shines a flashlight on it for you and points out, “This is the trajectory that you’re putting yourself on with these choices,” it’s very hard to notice or question those things on your own. I think it was just that attitude that shifted.

Mindy:
Yes, and this is why I think Mr. Money Mustache has been so popular and so in a way that who’s the early retirement extreme was not, is that Pete showed you you could do it, “This is something that’s possible. Here’s a math problem, and if you believe in math,” which you should because it’s real, “if you believe in math, I can show you that this works.”

Katie:
Yes.

Mindy:
Where Jacob is wonderful, but he’s showing you that early retirement can be achieved through extreme measures, eat rice and beans every single day and live in an RV, and he’s happy doing that, not everybody would be. So his message misses a lot of people where Pete’s hits a little bit more. Sometimes Pete can be a little bit harsh, so his message misses some people, but-

Katie:
He has that chart, Mindy, it’s infamous now, the chart that shows you your save rate and then years to retirement where he basically just emphasizes, “This is just math. If you are saving this much, that means by definition you are spending that much,” which tells you, it can then spit out the number of years you have. So if you think, “Oh, I’m cool with a five to 10% save rate,” and then you look at that and you’re like, “Oh, I have to work for 48 years, maybe I’m not so cool with that.” It really drives home the time, money, equilibrium and how connected those two concepts are, which I think is an unnatural jump to make on your own. I don’t think we often think about those two things as equalized levers in that way.

Mindy:
Exactly. Like you said, this is what’s modeled for you. I remember working in corporate America. I was one of zero other people who brought their lunch to work. You always went out. I didn’t go out because there weren’t that many restaurants around, and it was such a hassle to go and get something and I’m super cheap, spoiler, everybody who listens already knows that, but-

Katie:
Who would’ve thunk?

Mindy:
It was so much easier just to make lunch and bring it. Every once in a while I’d forget and I’m like, “Man, my entire lunch hour is wasted going out and finding something to bring back and then I have to eat it at my desk anyway. I might as well just eat at my desk and surf the internet or just get more work done.” It seemed like such a waste of time, but when you see everybody else doing this same thing, it’s part of fitting in with your co-workers. It’s part of just life and it’s fun to go out to lunch, so it’s super easy to just do that every single day.

Katie:
You hit on something so interesting about the timing and how I think there is a bit of that misconception, not to drill down too deeply on this one example, but that going out to eat is easier. In reality, what I realized about a lot of these things, going out to eat, going to the gel manicure appointments, going to get your hair done every six weeks, all of these things do not just take money, but they take time and planning and mental energy and brain bandwidth. That’s why finding the financial independence philosophy was a release valve for me, because it just totally gave me the freedom to wash my hands of all of it and be like, “I’m out. I’m going to embrace simplicity and try this.” I was shocked to find that, “Oh, my life is so much easier now. It’s not harder, it’s actually easier, and I don’t really miss many of those things.”

Scott:
What happens next in your financial position? You’ve embraced this mentality. You’re obviously not working at the same job now. How do things progress for your story?

Katie:
Rapid fire.

Scott:
Yeah.

Katie:
Yes, very quickly. I did stay at that same job until 2021. Yeah, last year. I continued to work there for a while, but the key differences that changed things, so the spending definitely got reined in. I instituted a far more strategic and austere plan for myself. Like we had said the first six to 12 months that were loosey-goosey, or I’ve jokingly called them the free love period of my personal finance journey, where I was just like, “Whatever, lunch every day, It doesn’t matter.” That period in that time on that $52,000 a year, and keep in mind, relatively low structural expenses. So the fact that there wasn’t much money left over meant I really was finding a thousand different paper cut ways to spend it. I had saved 10 to $15,000 that year, kind of on accident.
Just that was the money that was left over every month or that accumulated in savings with no real plan. So it took me a year to save 10 to 15K, without my income really changing at all. But with this new strategic spending plan, it took me, I would say 18 to 24 more months to get up to 100,000. It was like once we really got things right and tight, we were off to the races. I also got a side hustle teaching group fitness, and that added another incremental $500-ish per month in income, which pretty much entirely just got saved and invested too. We’re not talking about life changing amounts of money, but as a proportion of the take-home pay I had at the time, it was relatively substantial and it gave me that ability to kick it into high gear.

Scott:
Are we talking about $100,000 in personal net worth or $100,000 in cash here? If-

Katie:
Oh, personal investments.

Scott:
Awesome. Where were you putting that money during this period?

Katie:
It would’ve been 401(k), Roth IRA, and I did have a taxable brokerage account as well that I was contributing to.

Scott:
Awesome. How did you think about cash in your savings account?

Katie:
I think at that point I had my emergency fund in a CD and it was, I want to say $15,000 in that CD. At the time you could get a 3% rate on a CD. So I was like, “All right, that’s fine.” Like I said, because this was pre-pandemic, so I was a little bit naive about how easily someone could be furloughed, but because my expenses were so much lower than my income and I had a lot of margin every month, I never really ran into cash flow issues. It was just because I was just naturally living beneath my means and investing the extra every month, I felt pretty confident with the amount of money coming in, the emergency fund in that CD and in that two-year period, fortunately, I didn’t really ever run into any issues. I don’t know that that’s necessarily recommendable, but for me, it ended up working out okay.

Scott:
I think it’s a paradox. If you spend more, you need a larger emergency reserve because you don’t have any margin. If you spend less, you need a lower emergency reserve because you spend less and you will be able to replenish it very quickly, so it’s a paradox and it’s a huge multiplier. Going back to what you’re talking about earlier with Mr. Money Mustache, that post you’re referring to is called the Shockingly Simple Math Behind Early Retirements, which I think everyone should check out, and it compounds on that. The less you spend, the more you accumulate, the less you need long-term to generate from a passive income perspective, it’s more tax. There’s so many different benefits that come from that single lever in starting your wealth-building journey here.

Katie:
Yeah. Let’s see. I think where things really took a turn for the better, I would say, where are things really shifted, that would’ve been late 2021 because at that point, I had been writing Money with Katie and building up Money with Katie as a side project turned inadvertently into a business for about a year. So we had picked up some steam and we were starting to see, I’m saying we as if there was more than just me, it was me. I was starting to see some really impressive revenue months that gave me a lot of confidence about, “There might actually be something here. This might be worth going all in on.” I had also changed companies to go work for a tech company and effectively doubled my compensation overnight, so that was the point at which it was even just a year earlier, my financial position was unrecognizable.
I think it gives off that aura, now I realize as I’m saying it of, “Oh, overnight success.” It wasn’t really like that. There was a lot of groundwork that had been laid over the last 18 to 24 months to get to that point. But it did, for me, feel as though things were all culminating at the same time and paying off in spades at the same time. That was really cool, because for me it was like I went from being a relatively average earner if we’re talking literal averages for the national scale average earner to being an objectively high earner and realizing, “Oh, wow. There is a lot more you can do when you have so much more investible income to work with,” so that was a very fortunate lucky break. That has been the last, I would say, how the last year or so has been. Not exactly a long-term thing yet, working on making it a long-term thing, but it’s played out really well I would say over the last 12 to 18 months.

Scott:
Awesome. During this three-year period leading up to 2021, how much self-education would you say that you conducted in terms of hours? Is it 10 hours of reading? Is it 100? Is it a thousand? What’s the order of magnitude here?

Katie:
I would say we’re in the thousands by this point, because I was reading every personal finance book I could get my hands on. I was listening to all the podcasts. It went from being like, “Oh, this is something that I should know about to be an adult,” to, “I’m now obsessed with this,” and it has become a hobby in and of itself to learn about it. I, to this day, I’m not really sure why. I’m not sure why it gripped me or continues to grip me as much as it does because growing up, I never really cared.
Even as a young adult, it was not interesting to me. I would say I was just as intimidated and avoidant about it as a lot of people are. I’m not sure why once I got into the weeds, I was like, “Oh, my God, I want to know everything. I want to spend all of my time learning about these things.” Not only do I want to read about them, I want to write about them too and put my own opinions out onto the internet.” Yeah, definitely, I think in the thousands by that point.

Scott:
Yeah. I can completely empathize with this. It’s just like, “Oh, I’ve equated money with freedom and control over my life, and now I’m going to spend thousands of hours mastering this subject because of that is the amount of importance I’ve placed on it.” Then for me, it has transformed into a passion for doing this with my day job over a long period of time, so it’s perhaps similar in your situation?

Katie:
That was a far more succinct and beautiful way to put it, Scott. Yes, that’s exactly correct.

Mindy:
Katie, you pride yourself on questioning conventional wisdom with regards to traditional money concepts. What are some of the big financial truths that you’ve discovered are actually wrong or being preached and there are alternatives that you prefer?

Katie:
Yeah, it’s funny because I think that almost to answer this, I have to contextualize a little bit because I think that there are “truths” out in broader society that when you compare that to the financial independence world, it’s like, “Oh, well, all of that is wrong and this is right, for sure.” But I think within the financial independence world and the things that we teach ourselves and learn about and believe and prescribe to others, I think there are things that maybe lack nuance or miss the mark a little bit. A classic one that I had to reckon with personally was this idea of DIYing everything, and if something breaks, you figure out how to fix it. Basically, if there is even a chance that you can do something yourself, you should do it yourself. You should not be paying somebody else to do it. I think that that makes sense up to a certain point.
If you are me circa 2018 and you’re making $52,000 a year, you should probably be making your own lunch. You should probably be cleaning your own apartment. You’re not there yet. But there did come a point where I was working so much because I was working this new tech job and I was trying to build Money with Katie nights and weekends and the ROI on my time that I was getting for spending an hour or two working on a product launch or impressing my boss at work, the ROI on that time was far higher than the ROI that I was getting from vacuuming my house and mopping my floors. It got to a point where I thought, “All right, I can actually pay somebody else to do this for me. I can buy back my own time that way because now I’ve reached this point in my life where I actually have more money than I do time.
I have more income than I do expendable hours in a week because of the expectations and the workload that I have, so I need to actually give back some money to buy back some time, get those two things a little bit more in equilibrium.” For me, the economic output equivalent was that my income continued to go up and went up at a rate faster than the incremental spend that I had on some of those services, goods and services that I was paying for to buy back that time in my own day. I will say that the flip side of this or the watch out is that it can become very easy to start to see everything through that math equation and to say, “Well I’m going to outsource everything.
I’m not going to do a damn thing for myself. All I’m going to do is work.” Then it flattens your life into this one dimension. So I don’t always recommend that people take that approach and fully run with it because it can mess with if, “Well, if I don’t have to cook, if I don’t have to clean, if I don’t have to watch my own kids, well, now I can sit at a desk for 14 hours a day,” and you get to the point where you’re like, “But is that really the lifestyle that I wanted when I set out on this path? Is that actually the best way to structure a day?” So I think it’s, as with all things, not black and white, but I do think that there does come a time when it makes sense to start exchanging a little bit of money for time again.

Mindy:
Yeah. That first part I feel a little, targeted isn’t the right word, but definitely seen.

Katie:
Attacked?

Mindy:
Attacked is not the right word, although not the wrong word either. I struggle with that though because on the one hand I want to do it myself because I don’t identify with my current bank balance, my current investment balance.

Katie:
Yeah. Yeah.

Mindy:
I am still the kid that has to shop at the thrift store, not wants to shop at the thrift store but has to shop at the thrift store. I’m still the kid that brings lunch from home because that’s the only option there is. You don’t buy lunch at school because that’s more expensive, you bring it from home because that’s what we can afford, and getting over that is really hard. When you can do it yourself, why would you hire it out? Also, can you talk to my husband because he won’t stop DIYing stuff.

Katie:
Good for him. What I thought you were going to say is that all of these things fall on you, which is traditionally how it works in heterosexual couples, particularly, if one person is working from home or whatever, that you’re just, “Oh, that’s odd. I do tend to be the one that does all the laundry and cooks the meals and then cleans up after.” I don’t know, every single time I talk to a woman that’s married to a man I hear the exact same thing, so I’m like, I don’t think this is just me.
That, I think, is the other reason why I’m a fan of this because I think it helps to assign some economic value to these tasks and if someone else isn’t going to come in and get paid to clean the house, I should be getting paid to clean the house because it’s labor. It’s my unpaid labor at this point, but no, that makes sense. I think that’s totally fair. We definitely, I think, inherit and internalize those types of money scripts very early in life and I don’t think that that’s unusual at all to find that your behavior or your feelings about money are not necessarily representative or correlated with the amount of money that you have.

Scott:
Yeah. I think that this is a fantastic framework to think through. A toolkit I would offer up here is to just value your time on a per-hour basis and use that to make a number of decisions about this, because we can’t resist bringing real estate investing into all of this stuff. I’ll use a rental property example where when I first started real estate investing, I self-managed my property and I would fix up everything myself. Then as my income went from $48,000 a year to 75 or $80,000 a year, you need to start hiring out some of those tasks and doing others DIY.
Then as income grows and grows and grows over time and you’re building wealth and investing in those types of things, then you move on and outsource more and more of that. I think the vast majority of folks are going to be in this gray zone for much of their lives if you’re building wealth and you’re going to be constantly having to make those trade offs bit by bit in the general tendency of stopping doing low-value work, whether that’s at work, in your business or at home, and do the things that make you happy, do more of the things that make you happy or that are higher value. That’s an art and a science, to your point.

Katie:
Yes.

Scott:
But at least a good toolkit is valuing your time after tax and saying, I’m not going to pay somebody twice my hourly rate at work to do a task I’m capable of doing. I’m also not going to do a task that I can pay someone half of my hourly rate right at work and I don’t like doing that.” Avoiding those extremes can be a really good way to solve for this, but I think it’s a great framework.

Katie:
I love that.

Scott:
Okay, let’s talk about more of, you’ve put together I think a really robust philosophy about money in a general sense out of those thousands of hours of self-education and writing and creating stuff. I’d love to go into a couple of areas that I think are really interesting that you’ve come up with. The first one I think is the Roth versus 401(k) debate. Can you give us your thoughts on this? You have a very strong stance, I believe, and I love it.

Katie:
I do, as with most things, come out of the gate with a strong opinion. No, I’m going to try to say this as concisely as possible. I’m going to take a page out of the Scott playbook and try to be really tight with this answer. My approach is that I think a very optimal combination is taking full advantage of the traditional 401(k) because it has the highest contribution limit really, of any qualified account that you’re going to have access to, for the most part, to get enough of an upfront tax break every year to then turn around and create more investible income than you would’ve had otherwise. In order to determine how much you are going to save personally by contributing $20,500 to a traditional 401(k), you just look at what your marginal tax rate is and multiply that by 20,500. If I make somewhere in the 24% bracket and I contribute the full 20,500, then I’m going to save almost $5,000 on my taxes, and that’s money that theoretically is staying on my balance sheet because it’s not being turned over to the IRS.
I can then turn around and take that $5,000, theoretically, and invest it in a Roth IRA. I think for me it just comes down to doing more with less and trying to create the most optimal upfront investment to get the most money into the accounts and then you play this out 40 years down the road, you can actually use some pretty … I would consider them relatively simple, I think they sound complex on their face, but I think in reality they’re relatively simple methods of then strategically withdrawing money from these various accounts in such a way that you are minimizing your tax liability on the back end too. I don’t think it’s for everybody, but I do think that to suggest that everyone should just be doing entirely Roth’s strategies ignores a big piece of the puzzle in that upfront tax break. If you’re putting in 20,500 and getting 5,000 back on your taxes as a result of that, that’s what? An upfront 25% ROI right there. I don’t know why we tend to just discount or ignore that.

Scott:
I love it. Now, I’m a big proponent of the Roth IRA as a significant component, so I have a slightly different view on this. But I want to see if I can summarize your position and then give you even more supporting ammunition for the argument including what you said there. First, I think that the argument that you’re positing is you can have both, but if you’re all in a Roth IRA and have no 401(k), you’re missing out on potential tax advantages today and optionality down the line that can only be done from a 401(k) to a Roth, because you can’t go back the other way from a Roth to a 401(k). Is that correct?

Katie:
That is correct. I’d also say that some people will say go do full Roth 401(k) and Roth IRA and again, that making the bet that your effective tax rate in retirement is going to be higher than your marginal tax rate now. In order to make that happen, you got to be spending a lot of money in retirement or not earning very much now. That, I don’t think is very representative of how most people … In order to actually have enough money in retirement to be spending that much in retirement, you’d have to be earning a lot, so I think that’s where the logic breaks down.

Mindy:
Now who’s feeling seen, Scott?

Scott:
No, I love it. I think it’s a great argument and I think that I agree with the premise that having no 401(k) contributions, no tax-deferred retirements and 100% Roth over the course of an entire career is a mistake. I think you’re missing out on those advantages because there should be, over the course of 40 years of a career working or not working, there will be years when your income is very low or you have a large taxable loss, for example, you’re a real estate investor and prices go down or you end up doing a lot of acquisitions one year, that will be a loss. You can use that loss to move the money from a tax deferred account like a 401(k) to something like a Roth IRA. The end goal, however, is to get all the money into a Roth IRA when it’s time to withdraw.
That’s where we want to start with. And for a lot of people, the most efficient way to do that will be to start with most of the contributions in the Roth and then put enough into the 401(k) to harvest some of these tax advantages as they come up. Now, I personally put the vast majority of my stuff into a Roth 401(k) and then into the Roth IRA as well. The reason I do that is because I’m so arrogant about my financial profile over the course of my career, no, literally, that I believe that I’ll be in a high income bracket today and an even higher income bracket in retirement, because I plan to build businesses and own assets that will have passed through income on my tax return at that point in time.

Katie:
Interesting, okay. What I would highlight, though, there is that strategy is a conscious choice and a plan based on your track record of being a successful business person and real estate investor where you have reason to believe that your income in retirement, that you actually may be able to live quite large in retirement if you have a crap ton of income coming in that you want to be spending. I think, so I would really find no fault in that approach. I think where I do find fault is people that do not have that plan and say, “I don’t need the 401(k), I’d rather just take the money now.” “It’s like, “You really don’t want the upfront tax break, are you sure? It’s 5,000, that’s not insignificant.” I think by and large, for most people their spending in retirement will probably be lower than their highest earning years.

Scott:
Mm-hmm. I think that’s great. I think one other question I wanted to ask you about this is you’re keeping the $5,000 in your example on your balance sheet. Yes. But you’re not really doing that unless you have a plan to arbitrage that with using a loss or a low- income year to move that money from the 401(k). You’re just deferring the tax and paying it later. I think one of your arguments that I think is really interesting is that you don’t think it’s necessarily a good bet to bet on income tax brackets increasing over the course of a career if I remember that correctly from one of your posts [inaudible 00:39:26]

Katie:
Like not thinking that the marginal rates are going to go up.?Is that what you’re referring to?

Scott:
Yes, because that’s another big reason why I also contribute to the Roth is because I figure, “Oh, tax brackets have to be higher in 30 years.” Now that’s anybody’s guess, but that, to me, seems unchallengeable until you challenged it, and I love it.

Katie:
Well, I think the reason that I challenge it, well, I say there’s two reasons I challenge it. The first reason is because politically it’s very unpopular to raise tax brackets, marginal rates for the middle class and lower. Obviously this country has an issue with figuring out how to tax billionaires. We haven’t really gotten that straightened out yet, but when you look at even the numbers, or they’re jockeying back and forth, we’re usually talking about, “Should the top marginal rate be 37% or 39%?” We’re not often being like, “Okay, that 10% bracket now it’s 20.” We’re not really changing those lower ones measurably, so I would point to that just the political incentive to keep taxes low in the popular brackets.
The other thing I would point to comes back to that marginal tax rate versus effective tax rate because your income today and the income that you are putting into the Roth account is being taxed at your highest marginal tax rate, and the income that you’re going to be spending in retirement is filtered through bottom up, so you’re going to be looking at your effective tax rate. The marginal rates would actually have to rise quite substantially for your effective rate later, that is, bottom up to be competitive with your personal top marginal rate now when you’re being taxed top-down. That’s the other, I guess, piece of this that I think we … It’s really not apples to apples, I think, in the same way that it would appear on its face.

Scott:
Okay. Final question on this from that, because I think that’s another good argument. If you are middle class today, middle or upper middle class today and you plan on having a portfolio that allows you to live a middle or upper middle class lifestyle at retirement, then it’s reasonable, I think you have a very good argument that there’s a good chance that tax brackets won’t be materially different, inflation-adjusted at that point in time because tax brackets do change with inflation as well.
Now, the one question I would ask is, if you’re 30-years-old and you spend your free time, your commute to work, listening to Money with Katie or BiggerPockets Money or Choose FI or these other things and you’re doing that for a long period of time, is it reasonable to assume that at retirement you won’t be having a middle class level of wealth because you’re going to become financially free fairly early in life, and that financial freedom we find nobody actually starts withdrawing their portfolio when they become financially free. They all find other creative ways to cover their expenses and then some, many go on to make even more money and they have multiple decades of wealth growing and therefore, will have to withdraw more money from their 401(k).

Katie:
From an RMD perspective?

Scott:
From an RMD perspective, so I would love your thoughts on that particular last point.

Katie:
Sure. Figure that one out.

Scott:
Yeah.

Katie:
Okay. I guess for this one I will use myself as the Guinea pig, because I am maxing out that 401(k). I’m like, “Let me get as much pre-tax money in these buckets as I can to try to lower my tax rate this year and pay less taxes this year.” My grand scheme here is that at some point in my, call it early 50s, we’ll say, I would want to start, assuming things are going as well as you’re describing and I’m like, “Yeah, I got more money than I know what to do with. I’ve spent the bulk of my life earning and creatively whatever,” now I’m not sure how having a substantial real estate portfolio would change this, so I don’t want to go as far as to say that this would apply to everybody, but my hope would then to be in a position in my early 50s where I’m sitting on several million dollars, hopefully we’re looking at 8, 9, 10, a lot of money.
At that point, I would want to start doing those RMDs and realistically speaking; not RMDs, I’m sorry, conversions, getting the money out of the 401(k) into the Roth IRA using that standard deduction, using those lower tax brackets, if you will, to start making those Roth conversions at a time when I have more control over the tax bracket because maybe I am living off of income from a taxable brokerage account. This is assuming the 0% capital gains tax bracket sticks around and I’m able to really spend quite a bit of money, up to 80 something thousand this year as a married couple completely tax-free if I want to spend up to 400,000 on paying what, 15%, but really being able to leverage the amount of control that I would have in those years to make those rough conversions and to start chipping away at that 401(k) balance.
Now sure, if you assume that someone is putting in the max for 40 years, they’re probably not going to be able to fully empty or convert away that entire balance by the time they’re 72-and-a-half. But I do think that at that point the “problems,” I’m going to put problems in air quotes, they’re like the tiny violin “problems” of like, “Oh, no. I’m going to have to pay a little bit of money on this RMD out of my $8 million net worth. Like dang. So I think it’s obviously you’re hedging your bets, and I think for me, having money across the different tax statuses, taxable, tax-free and tax-deferred creates the most optimal mix for flexibility later and isn’t placing too big of a bet on any one outcome.

Mindy:
Okay, so I hear what you’re saying. I love all of what you’re saying. I am a couple of months older than you and I find myself in a similar position to what you just described and-

Katie:
Good for you. I’m thrilled to hear that.

Mindy:
Yeah. Yeah. “Oh, my god, this horrible problem.” I am in a position that when I turn 72- and-a-half I will have to take RMDs in, I don’t know what they’re going to be, but they’re going to be a lot. I don’t want to leave them in my retirement accounts because that’s where I want them to be, but the government says that they know better than me and I can’t argue with them. But anyway, I digress. When I chip away, whenever I stop working, I have a W2, I’m a real estate agent, so I have income from there and I’m currently doing pre-tax 401(k). It’s a self-directed solo 401(k), so I can contribute way more-

Katie:
A lot.

Mindy:
Yeah, my company contributes and I have reduced my taxable income by as much as I can, but there’s a big balance that I am going to have to chip away at, and you can chip away, you can convert the whole thing at once, you’re just paying a boatload of taxes on it. If you’re chipping away there’s a lot less that you can … In order to, let’s see, tax advantageously do it, you’re essentially converting what $100,000 a year? When you’ve got a million dollar portfolio, that’s 10 years that you can Roth ladder conversion over and then you’ve taken it all out. But when you’ve got multiple millions, then that’s multiples of 10 and maybe you don’t have that much. If I could go back in time, I would do what you’re doing with the Roth 401(k) and the traditional 401(k), or what Scott is doing with … I would split it because I’m all traditional 401(k). When did the Roth 401(k) come out, because I don’t know that I’ve had the option for a Roth 401(k)?

Katie:
I think early 2000s.

Scott:
BiggerPockets offers a Roth 401(k), Mindy, so you might want to check with the HR team about that following this call.

Mindy:
Yeah. Yeah.

Scott:
I max it out every year.

Katie:
Yeah, but I would say that was a perfect case study of obviously if you’re going to wake up at the age of 65 and get to choose, “Do I want an all Roth portfolio or an all tax- deferred portfolio?” You’re probably going to be like, “I’ll take the Roth, all day, every day.” But I think in either case, having all tax-deferred or all tax-free both are pigeonholing you into … In one case, it’s pigeonholing you into now having to figure that out now; whereas, if you went all Roth but wouldn’t have needed to, or then you’re being pigeonholed into, you overpaid probably on your tax at the time if you were contributing to a Roth while you were paying a 37% marginal tax rate. That’s cutting out a third of that contribution. So I would say having all of either is probably not going to give you the most flexible outcome.

Scott:
I’ll try to wrap this up with one example that I think will highlight Katie’s great point here, which is I think the optimal way to manage this is to max out your 401(k) every year for 35 years. Then right before you hit retirement age and are capable of withdrawing from your Roth, you do some business activity that creates a $10 million loss and then you have that $10 million loss, you move the entirety of your $10 million in your 401(k) to your Roth. That’s no tax because you have a $10 million loss offsetting that income from the distribution, rolling it over and then you have it all in a Roth-

Katie:
You solved it.

Scott:
If you’ve contributed to a Roth the entire time, then you have missed out on an opportunity such as this. To lesser a greater degrees, things like that may occur in your lifetime. A good one to Google, I don’t want to get political or anything, but go Google how MITT Romney was able to get so much money into his Roth IRA, very similar concept to what I just articulated.

Katie:
Oh, he actually did. Oh, wow.

Scott:
Yeah. What I said there is absurd, of course, from a perfection standpoint, but the premise is really applicable and I think it’s a very powerful argument in addition to the other good points that Katie’s made for having something in the 401(k) in the tax- deferred accounts at some point in your career because that is true net worth arbitrage if you ever do have a loss or low income year.

Katie:
Totally. Yeah.

Mindy:
Yeah. I’m hoping that somebody who is listening who is a little bit younger, a little bit farther away from retirement than I am can pick up on this and go with Katie’s method of distributing it a little bit. I definitely recommend maxing out your Roth IRA for as long as you can. Scott, did you say you’re eligible to participate in a Roth IRA?

Scott:
You’re eligible to participate in your company’s Roth 401(k) plan, Mindy-

Mindy:
Oh-

Scott:
I guarantee you, because [inaudible 00:50:39]

Mindy:
No, I know that I am, but I have-

Katie:
She’s like, “What I’m trying to do is go back in time, Scott, so unless you’ve got a time machine.”

Scott:
There’s still time this year.

Mindy:
Well, no, I already maxed out my self-directed solo 401(k) and you can only do one.

Katie:
Wait, can I say something about that?

Mindy:
Yes, please.

Katie:
You could put, Mindy, $61,000 into your solo 401(k) as the employer and make no employee contributions because you’re both, you’re like employer-employee because you’re self-directed. Then you can put 20,500 into your work 401(k) as the employee because they’re two different sources of income. That’s just a little loophole to keep in your back pocket is that as long as your contributions … You may be able to switch them over too, if you’ve already made them as employee contributions. You could just say, “Yo, I’ve got … ” 61,000 would have to be your 20% of your net business income. As long as you’ve got $300,000 of net business income, you could go. “Yo, putting 20% in 61K as the employer, that’s it. No employee contribution.” Turn around, go to BiggerPockets, put 20,500 in.

Mindy:
Oh.

Scott:
Mindy’s got open-mouthed shocked at this advice, which is fantastic, I love it. But I do want to call out Katie’s point here that if you are a business owner and you have very high income, then the Roth argument goes out the window because you can put incredible amounts of money into the tax-deferred plans through this where you should be taking advantage of those. Those are the plan that Katie just described there are profit sharing plans, when you have employees it actually gets even better because you can put even more-

Katie:
Oh, that’s good to know.

Scott:
… more into that, because you can put your spouse, for example, on the plan with those as well. Both of you can max that out and you can do that through profit sharing things. So talk to financial planners and those types of folks when you get into that level.

Katie:
Yeah, definitely.

Mindy:
I have to call up my plan administrator and see if my plan allows for that or what I have to do to make my plan allow for that, because when you’re the boss of your plan, you can change the rules. It’s really nice.

Scott:
We are being told that we’re coming up on our time limit here, which is unfortunate because we’re having a wonderful conversation here. Katie, we’re not going to get a chance to debate another issue here. Can you just bring up one and leave us dangling with your thoughts there and we can discuss that next time we have you back on?

Katie:
Ah, would love to. All right. Dangle away, people. I’m going to go out on a limb and say that all the advice that says that you should never allow any lifestyle creep is, it’s sad and depressing. I think that you should intentionally institute as you earn more money, you should allow yourself to live a slightly nicer, more comfortable life as a result of that, as long as you’re still living beneath your means. Let’s not go crazy, but I do think that there’s a difference between the lifestyle creep that we hear about. We’re like, “Oh, mid-level manager gets a increase in pay and then suddenly finds new ways to spend that money, and is somehow is still not saving very much.” I think there’s a difference between that and being like, “Okay, my increase in income was 20%. I’m going to increase my spending by 5% and invest the rest.” I do think that there’s something very motivating about treating yourself in that way and intentionally scaling up a little bit, just as long as you’re proportionally still in a good spot. That’s my cliffhanger.

Scott:
Interesting. Next week we’ll bring on a guest who is adamant that you should not do that [inaudible 00:54:20] Katie’s point. Katie, this has been wonderful. We really appreciate you coming on. I think you’ve shared a lot of wisdom. Your journey is really fun and the debate is really fun. So where can people find out more about you?

Katie:
If you like podcasts, definitely check out the Money with Katie show. If you go to moneywithkatie.com, I have hundreds of blog posts that you’ll probably enjoy, free resources, downloadables, things of that nature. I’m Money with Katie on Instagram and Twitter, which are the two platforms where I’m the most active, so come follow along for the unhinged fun.

Scott:
Katie, because 500,000 people viewed it and gave you a bajillian likes and all that, can you just share your biggest financial mistake with us before you depart?

Katie:
My biggest financial mistake was being in eighth grade in 2009 when I should have been buying foreclosures.

Scott:
Oh, I don’t know how you can live with yourself after making-

Katie:
How I screwed that one up, right?

Scott:
… after making that kind of mistake.

Mindy:
How can you call yourself qualified to give financial advice with mistakes that big, Katie? You know what? We’re just going to scrap this whole show. Never mind.

Katie:
No, don’t publish it.

Mindy:
Katie, this has been so much fun. Thank you so, so, so much for your time today and we will talk to you soon.

Katie:
Thank you.

Mindy:
Okay, Scott, that was Katie. I love her even more because she is challenging you. She is challenging me. I think we both felt a little seen during her conversation today, and I think that’s awesome.

Scott:
Yeah, I think she’s got really good, smart challenges to a lot of these things that are taken for granted in the financial independence community. I think that a lot of things that Mindy and I and that perhaps other folks that you hear talking about personal finance take for granted are really art decisions, not science. There’s things that have been generated or thought through that are, “Hey, I’m going to make a long-term bet about where tax brackets are going to be 30 years from now, and oh, that’s what I accept as my reality,” and I’ve done that for the Roth versus 401(k) debate. That’s a complete guess. There’s no right answer there. That’s a complete guess. I’ve just made that guess long ago and settled on it, and I just treat it as my stance on a go-forward basis. But it’s good to have those things regularly challenged because there is no right answer and no one can know the right answers to questions like that.

Mindy:
Yeah, I really don’t hear that a lot, question conventional financial wisdom. Do it. Maybe you’ll discover that what people are saying is right. Maybe you’ll discover that what people are saying isn’t right for you, but how many times have I said, “Personal finance is personal?” This is a choose your own adventure scenario and find what works best for you. Maybe what I’m saying doesn’t work best for you. Maybe you identify more with Scott. Maybe you identify more with Katie, or maybe you identify more with somebody who has yet to be on the show, but find what works for you and put that into play because that’s what’s going to help you on your path to financial independence. But yeah, absolutely question what people are saying and make sure that it’s going to work best for where you are at, what your idea of financial independence looks like and how you’re going to get there. Okay, Scott, should we get out of here?

Scott:
Let’s do it.

Mindy:
This is the end of this episode of the BiggerPockets Money podcast. He is Scott Trench and I am Mindy Jensen saying, share your power, you bright little flower.

 

Dave:
Hey, everyone. Welcome to On The Market. I’m your host, Dave Meyer, joined today by James Dainard. James, what’s going on man?

James:
Just grinding it out in the Pacific Northwest right now. We’re dealing with the market, shaking out, so just pivoting, changing things and keeping our nose down and getting things done.

Dave:
I mean, I guess I’m pretending asking you what’s going on. We’ve spent the whole day together, so I’ve talked to you a little bit. But maybe before we jump into the awesome interview we have today, what are you focusing on up there in the Pacific Northwest to keep your business moving during this very strange economic climate?

James:
A lot. We’ve made structural changes at every business. The way we’ve been doing the last 24 months we’ve thrown out the window, and we’ve replaced staff or reposition staff, and we’re just rebuilding the companies, because at the end of the day, every market is a different business and you just have to pivot, change and get things moving.
And as I’m seeing the market kind of slow down, I don’t want to wait until the very end, I want to do it right now. And so make your pivots, build your infrastructure out, and then start looking at the deals you’re going to be buying next.

Dave:
That’s great advice. We also have a great interview today that you dreamed up. This is someone you know. Can you tell us a little bit about Tommy, who’s going to be joining us in a little bit here?

James:
Yeah. I met Tommy actually two years ago, because we’re real estate brokers as sources investment properties. And they came to our town, Seattle, and they changed everything for a while. They came in heavily funded, very good clients, very good builders.
And the cool thing is they built a very high quality home and they spent a lot of time perfecting the layouts for the demographics that want to come in. And for us as brokers, it’s made us very easy to sell. But as an investor, it’s also made me be an admirer, because I’m like, “Hey, I need to kind of do what they’re doing because it’s working so well.”
But they’re a very sharp company, very great organization. They have very good systems in play. Their team is amazing. They build a great product. And the thing I like about him, he’s not just a home builder, he’s an investor guy.
He understands the whole game, he gets the whole big picture. He’s not just putting up two by fours and citing. They’re financially planning and expanding through every market, so it’s just a really exciting company to know in general.

Dave:
Oh, absolutely. It’s great. And I think if you’re thinking, “Oh, I’m not a builder. I’m not a developer,” you’re still going to want to listen to this, because Tommy has an incredible way of explaining how he uses data to find opportunities that’s applicable to people who invest pretty much in anything, particularly in real estate.
We get into a great conversation about how to find product market fit that is applicable to people who invest in any type of asset class. You’re definitely going to want to stick around and hear what Tommy has to say. Anything else you think our audience should listen out for in this interview?

James:
Just understanding the trends. And what I really enjoyed about the conversation was just it’s a simple business when you’re looking at deals. We’re going from a seller’s to a buyer’s market. The true investors like stable. And he wants a stable market, just like I want a stable market. And most of us just this transition is not a bad thing, it’s a good thing, and it allows you to actually grow your business a lot better.

Dave:
Right on. All right. We’re going to take a quick break, but after that we’re going to welcome Tommy Beadel, the CEO of Thomas James Holmes to On The Market. Tommy, welcome to On The Market. Thank you so much for joining us today.

Tom:
Yeah, thanks for having me.

Dave:
Could you start by telling our audience a little bit about how you got into real estate in the first place?

Tom:
How I got in real estate in the first place. Ah, gosh. How deep do you want me to go? I mean, I was sitting on my couch after a late night in college watching an infomercial about a guy who said, “Buy real estate, get rich with no money out of your pocket.” I ended up at a seminar at LAX Airport where they taught you how to leverage up your credit cards or ask for more balance on your credit card so you can go out and buy a home.
And I ended up buying my first home in Long Beach in 2001, 100% financing back when you could get that. I was a full income documentation earner at the time, so it wasn’t one of those crazy stated income loans. But bought a condo, rented one of the rooms out to my brother and my roommate, which functionally paid the entire mortgage payment, I was like, “I live for free. This is amazing. How do I buy more real estate?”
That was my first foray into real estate back then. Then I got into the mortgage business, did mortgages during the mortgage boom from 2001 till 2008. Had started Thomas James Capital, a mortgage company in ’06 was my first kind of foray of starting my own business. And started as a mortgage business and then have had to adapt over the last 16 years to where you can make money doing real estate, and have found myself into the new construction, single lot infill development business.

Dave:
I got to ask you, do you remember how much that seminar cost you back in 2001?

Tom:
It was free actually.

Dave:
What?

Tom:
It was free. I’m convinced though what they told you was ask for more limits on your credit cards because on day two we’re going to sell you the next seminar. Right? I didn’t buy the next seminar. I was like, “Ah, you just told me how to do it.” So no, never spent a dollar on the seminars.

Dave:
Wow. I was thinking to myself, “I’ve never interviewed anyone who has walked out of one of those seminars better off for it.” Congratulations on being someone who did. That’s awesome. Can you tell us a little bit about what you’re doing now and what your construction company does?

Tom:
Well, yeah. Thomas James Holmes, we’re the country’s largest single lot tear down home builder, where what we do is we go into a market and buy a old home in the best neighborhoods to live in. We call it the right home right where people want it. The neighborhoods where people want to live have really old homes.
And so we go and buy that home, tear it down and build a new home in its place. We’re currently operating in Southern California, both in Orange County, Newport Beach area and the west side of Los Angeles, as well as the Silicon Valley.
We’re in the greater neighborhoods of Seattle and the Seattle Market, Kirkland, Bellevue, et cetera. And then we’re in the city of Denver and also in the city of Phoenix. And so we’ve grown a business that enables us to replace functionally obsolete old homes in the best neighborhoods where people want to live.

Dave:
I want to get more into the specific markets that you operate in. But how did you come to settle on that niche of tear down homes, single lot building? What drew you to that niche of new construction?

Tom:
Listen, I would describe myself 16 years ago as a opportunistic real estate investor. Right? 16 years ago I was in the mortgage business because you could make a lot of money doing mortgages. And then in 2008 mortgages stopped and I started buying foreclosures. We were one of the larger foreclosure buyers at the LA County Auctions from 2008 to 2012.
But it’s opportunistic, because that was a finite period of time where there were inefficiencies in the foreclosure market that you could leverage and have an advantage from, but it’s not permanent. Right? The mortgage business where we could make a bunch of money from ’01 to 2006 was not a permanent stable business. The foreclosure business was again a moment in time. And what I found through all of this is businesses have cycles that exist, again, mortgages or foreclosures.
And even fixing and flipping homes, it’s this period of time where there’s a disparity between what you can buy and what you can sell for. What I saw in new construction was a permanent business. It was a business that there is supply of hundreds of thousands of old homes that ultimately need to be torn down. And there’s demand from a consumer for great homes in the neighborhoods where they want to live yet there’s no supply of that home stock in the market.
And when I look at the macro dynamics of the market, the big public builders can never play in those markets because there is no land. If you correlate what we do versus a Toll Brothers, or a NAR, or D.R. Horton, they develop land and they monetize that land through home building efforts. Right?
And what we do in the markets where we are, there is no land to then monetize. What we’re doing is we’re really playing on the arbitrage of square footage that is there and what can be there.
The housing stock that was built in this country in these prime neighborhoods 80 years ago on average was underbuilt for how today’s consumer lives. 80 years ago the consumer lived in a two bedroom, one bath, three bedroom, two bath, ranch style home with a detached garage, single story living, across the country at single story living.
And that you look at these major public master plan builders and they build on smaller lots, they build two story homes where today’s modern family lives in a call it a 2,500, 3000 square foot home with an attached garage in the front and your downstairs comes out to your backyard. It’s just very different the way construction is now 80 years later.
And so what I saw in this business was a resilient business that wasn’t dependent on a moment in time of a real estate market or an economic cycle, right? That there’s always a need or demand for high quality homes in the best neighborhoods and there’s always a supply of these old homes that ultimately need to be torn down in those markets. And so saw this real ability to scale a different type of business to meet the consumer demand in these marketplaces.

James:
Tommy, part of the reason that you went from trustee, or would you say that part of the reason you went from trustee sales to new construction was also the scalability factor? Because I know a lot of people that listen are the smaller flippers and they’re trying to scale their business, and it’s very difficult to scale a remodel flipping business because every house is so different and it’s harder to systemize the construction.
Is that kind of how you guys pivoted? Because I know we went from flipping to now we flip and build. We’re much smaller than you guys it. But the reason we like building is it’s so much easier to actually build a business around, whereas flipping every house is different no matter what systems you have in line. Was it just like the next step?
Because kind of what you described is you are the paperclip investor. You started with a seminar, you essentially did something the BiggerPockets called house hacking, getting your first deal, renting that out, growing it, going in a flipping and now you’re running a extremely large new construction company. I mean, do you think you did that just because you targeted more of the scaling or was it more the investment engine that grew up faster?

Tom:
I think ultimately what you’re saying I describe with the word predictable. And the difference between the different models is predictability. If I go back to how I got into new construction, because I think it’s kind of interesting, Dave, which answers your question, James, is that we were a conduit at the foreclosure sales for other wholesale investors. Right?
Most buyers during the foreclosure boom weren’t able to go to an auction regularly, understand the dynamics happening at the auction guarantee title, all of the things that go along with buying at a foreclosure auction. And so we were a conduit for the smaller investors at these auctions back then.
And I had a partner of ours that was utilizing our services to get access to the foreclosure market and he was buying in neighborhoods that I didn’t understand the value of the real estate. And I looked at only the improvement as the value. Right?
I would look at the property and say it’s a whatever, 2000 square foot home on an 8,000 square foot lot, was built in 1950. And how much will that 2000 foot home be worth if we fixed it up, a typical fix and flip type model? And this gentleman was buying in the valley of Los Angeles in the San Fernando Valley, like in Chino, Sherman Oaks, et cetera.
And I’ll never forget one time we were talking about a property in Sherman Oaks and he said, “I’ll pay a million dollars for it.” And I said, “I can’t lay my money out for you because that house isn’t worth a million dollars. I’m going to be on the hook.” I asked him, “What are you doing? I have to understand why I should feel comfortable.” He said, “Well I’m not buying the house, Tommy, I’m buying the land sitting underneath it,” and this light bulb went off, like, “What do you mean you’re buying the land?”
Well, there’s a math problem that exists to build a home on that lot. The math problem is how much square footage can I build an FAR over the lot area, and then how much does it cost to build that square foot, right? What you’re talking about James on the fix and flip model is one 1950s home versus another 1950s home. I could say it’s a hundred bucks to remodel, but I don’t know until I get in and do I see the foundation and the HVAC and all of these things.
But building a new home on a 10,000 foot lot in this neighborhood on a flat pad versus building a home on this one is the same. It’s predictable, right? And predictable leads to scalability. And so when you can look at a math equation … I mean, I look at real estate as a math equation, right? And when that math equation is simple, pay X scholars for the dirt, pay X dollars for construction, have revenue of Y dollars, that math translates everywhere.
It doesn’t translate to the actual piece of property, which is where you find scalable challenges. Right? When we were doing fix and flip, and we did hundreds and hundreds of these things from ’08 to 2012, you had wildly profitable deals and mediocre deals, and then some really bad apples that you didn’t know what the construction was going to be and they kind of all had a weighted average that was acceptable.
When you go into new construction, we think of it as every deal should be predictable because you go in knowing your cost of construction and knowing if you build that this is the value of what you will be building against. I think scale requires predictability. Scale requires capital. Capital wants predictable returns on their capital, and so that’s how we really push to scale the business.

James:
Got it. Because that makes sense. For us, we’ve been able to scale our … We built town homes has been a lot easier for us to scale that out. And as we’re purchasing, it’s just a simple math equation, which every house is a lot different.
But as you guys are expanding into different markets, how have you guys been able to predict those markets? Because every market is so different. The climate is different, how you build. The cost are different each market. And then also just the value of the market conditions can swing.
You guys are in a desert state, a rainy state in the Pacific Northwest, you get the sunshine in SoCal, and then you get both the perfect climate in Colorado in my opinion. What made you guys want to move into those markets and then whatever you guys had to change to scale around that?

Tom:
Again, we look at supply and demand characteristics in a market on a macro basis. What’s the absorption of real estate? What’s the supply of the land or the old real estate that we can build on? And do the macro trends provide for a market to build in? I can tell you we thought years ago that building homes between the different markets was drastically different in building costs. It’s really not. Right?
Building a home in Arizona is very similar to Seattle, is very similar to Denver. Like as I described to my teams, a two by four in Arizona is the same cost as a two by four in Denver is the same cost as in Seattle. The labor cost of building a home in those markets is also very similar. The labor force in this country is very similar. I mean, you’re going to get slight swings, but the cost of building homes is very similar.
Yes, you have to build different. Every house we build in Denver, the majority of the homes we build in Denver, they have basements because of the climate. The majority of homes we build in Arizona or Phoenix are single story. There’s nuances market to market, but in general the cost of construction is very similar as you build homes in each one of those markets.
And so it’s really then extrapolating that same math problem across into these different regions and looking at where the math equation works. What I love about real estate is the data is so rich. Right? I can see where is land selling at a price that I can pay, because I know what it’s going to cost to build and I know what I then can sell because the data tells me what you can sell homes for in that same zip code. And so we’ve been able to really study how the business works in these different environments very predictably.

Dave:
Tommy, what about the specific markets that you invested in attracted you to them? You said you look at macroeconomic data, and that’s something we focus a lot on this show. You mentioned absorption rates. Are there any other key data points that you look at that you recommend to other investors they look at if they’re trying to expand to new markets?

Tom:
It depends on what you’re looking for. I’m looking to build a business long term that does this compared to investing in an asset today that’s going to have a yield tomorrow or in the next six months. Where am I going to place my capital? I’m making a bet that these markets long term have the financial viability to be in.
It just depends on which investor you are. Right? If you are looking to grow your business into multiple markets, there’s a lot more factors that go into what’s the scalability of that marketplace. What are the job trends happening in that marketplace? What are the regulatory trends happening around densification or additional ability to grow and scale the model?
I think if you’re an investor looking at how do I place my money today, to me it all comes down to supply and demand. Right? I think, and we track this in every one of our markets and markets we’re going into, what is the supply and what’s the demand, right? How many months of inventory are there? How many weeks of inventory are there in these marketplaces?
And where you see supply, outpacing demand and supply growing, you have caution, right? It’s basic simple economic function of supply and demand. And I think that it’s so key that sometimes people forget that if I’m going to place my money here, they’re looking at the deal and the economic terms of that deal, but they’re forgetting that there’s a broader market that they’re competing with on that deal. Right?
There’s a lot of times where people will look at, well, I’m going to be new so I’m only going to compare to new. I think we forget so many times that what is the consumer? Who are we trying to attract? We’re trying to attract a dollar to buy our home. I mean, I correlate it to a car as an example. Take the luxury segment, say it’s a Mercedes, a BMW, an Audi or now a Tesla in that, and I’m trying to attract a customer that has $70,000 to spend on a car, I’m going to look at all my options, right?
Real estate is no different. If I have a million and a half dollars in Seattle, I’m going to say, “Where does my million and a half dollars go best?” Right? If my work center is Downtown Seattle or Bellevue, what’s my pattern to work? Where does the spouse work? And where does my million a half dollars go furthest? Do I get a great town? Do I get an old single family? Do I get a new single family in a more up and coming neighborhood?
Where does my million and a half dollars spend best? And so when you look at supply and demand, I have to say as an investor, what’s the demand for the dollars? The dollars that are out there that I’m trying to attract to the product, what’s the demand and what’s the supply that’s trying to attract those dollars?
And so many times we get very bead focused in a neighborhood and say, “Oh, well, yes, there’s nothing in this neighborhood. Okay, but there’s 10 things in the neighborhood next door, which is the same proximity to work centers as that.” And so again, Dave, I think it sounds more macro the way that I look at it.
We’re managing over a billion dollars worth of real estate in these markets, and so we have to look at these major trends compared to did I buy this singular deal correct? And where do I want to do that singular deal? It really depends on which investor you are and how you want to place that investment of capital into the marketplace.

James:
When you guys are reviewing these trends, I mean, do you guys dig deep into the demographics? With each state there’s a different demand for each type of buyer pool. I was telling Dave before is that you guys spend so much time. You can walk into one of your homes and it could be an 800 to 900 square foot house, but how it’s laid out, they’re so carefully laid out, they feel massive, which is what people are looking for.
They’re looking for space, especially in tight size units. Besides just the normal trends, which are absorption rates, days on market, a median home price, how deep with you guys scaling out are you going into the demographics and going to that next layer of data so you can plan accordingly? Because on a build too, it’s a 12 to 24 month plan a lot of times. How far are you going down the line by digging into even deeper into the data?

Tom:
Yeah, that’s one of the unique parts of only building new construction is we get to design something from scratch every time. We’re not limited by the existing house that we have to remodel. We get to really say what is it that consumers want? Who is our target profile that we’re looking at? Yes, absolutely, James.
We go very deep with that volume of real estate that we own of who are the buyers? What is the life stage of the buyers? Are they empty nesters? Are they young couples? Are they singles? Are they divorcees? What’s the ethnicity of a buyer? Because different ethnicities in different markets want different characteristics of a home, and the layouts of a home, the things that are important to those people.
We do consumer surveys to understand what they’re willing to pay more for or less for, where they’re valuing things that are in excess of the cost to build them. Is yard space more important than a rooftop deck, or just different characteristics of a home that a buyer wants? And really understanding who the consumer is in the market and then how you design the product for the consumer.
And it’s very similar across five markets. You get nuances of demographics, age and ethnicity depending on which market you are in. But the consumer profile is actually very similar. And so then the design to meet that consumer profile is very consistent.
So then once you know who the consumer is, what they value and what they’re willing to spend money on, then we use that data to engage our architects to really design the best home for the market. And so, yes, we definitely go that next step when we get into buying homes.

James:
And so Tommy, how important do you think that is? Obviously we’re going through a market transition right now. Cost of money has gone up, things are slowing down. And one thing that I know Thomas James Homes been able to do is still move a lot of units compared to a lot of builders that are sitting there.
And I do know most local home builders aren’t digging that deep into the demographics. They’re going for that surface level data. And our show is about going to that next level to where you can mitigate risk, protect yourself. Do you think that the extra layer of research on demographics and what people want is helping you guys move the product a little bit better than a lot of different builders?
At least in our local Pacific Northwest market You guys have been able to do that. How important do you think that is for investors to be digging to the extra layer right now as we kind of transition into different types of pricing across the board?

Tom:
Yeah, look, I think a big part of it depends on the volume you’re doing. If I had a few homes to sell at a certain price point, you’d price them correctly, move the inventory. We’ve taken market positions, like in Seattle where we developed those cottages. The cottages were developed very purposely for a very specific part of the market.
We knew that. That’s why we designed them for those. Right? We knew people wanted to not be in towns. The people that are buying our thousand square foot cottages are not town home buyers, because there’s plenty of town homes for those people to buy, but they want to live actually in smaller space, but on two stories compared to three or four stories.
And so we knew that was a void in the market, which is why we developed a product to meet that void. And then knowing that, knowing who we built it for, marketing to that customer, telling them why we built it, telling them what’s great about it for them really helps us be able to move that inventory.
If we went in and built these cottages and just said, “They’re for everybody,” well, they’re not. They were built very purposefully. And so yes, I think understanding our consumer segment is important because it allows us who to focus on to market the product and really tailor our message to the people correctly to show them why we built those homes for them.

Dave:
Tommy, I think this is a great lesson for everyone listening to this. I mean, what you’re describing really sounds like just making sure you find a good product market fit between the product that you’re building and what the demand is. And this is true of obviously pretty much every business out there, and real estate investing is no different.
Even if you’re not a builder like Tommy or James, but even if you are a buy and hold investor, it’s important to consider the properties that you’re buying and if the type of product that you’re buying in a particular market makes sense for the people who are living there. You don’t want to necessarily buy a huge single family really nice home in the middle of a young college town.
There’s just different products that are meant for different types of people. And I think Tommy you did a great job articulating that, but I want to make sure everyone understands that it’s not just for builders here, this is for every type of investor should be thinking about who ultimately is going to be either renting or buying the property that you’re investing in.

Tom:
Well, look, Dave, real estate is an inefficient business real estate. That’s why people can make money in it. Where you get up to these big, huge commercial multi-family type projects, that’s where the efficiencies are gained and you have all the large Wall Street type money going after those things, because there’s no inefficiencies.
What you’re really describing is find the inefficiencies, understand them and beat them. As you were saying that I thought of a rental property. It’s funny, my wife and I actually bought a rental property here in Orange County a few months ago because I saw inefficiencies. I saw that there’s nothing nice and new in the market and there’s demand for somebody to have a nice new single family home and where the disparity of rent people will pay to have something new is.
And so we bought this home, remodeled it, made it beautiful and rented it in 10 days for $5 per square foot when the average in the market is like 350 a foot, because people will pay for that something that’s nice. And so that’s an inefficiency that’s found in the marketplace. And ultimately what I’ve done with new construction is found the largest inefficiency that exists and then taken advantage of that inefficiency in the marketplace for single family new construction.
We actually build rentals in Los Angeles for the same reason. I have about a hundred rental properties with a venture where we build brand new construction rentals in the marketplace for this investor that wants to own that disparity of where there’s demand for new construction living and people want out of a condo or out of a multi-family apartment building, they really want to live in a single family type home. It’s really understanding those different inefficiencies and seeing if there’s an ability to capitalize on them.

Dave:
Tommy, you mentioned earlier that one of the things you look at is of course absorption rate and months of supply. Those have been going up a lot, especially in the new construction market. How is that impacting your outlook over the next couple of years?

Tom:
Without getting into the specific data we track, we all saw what happened when the stock market kind of bottomed in the middle of June and interest rates started to run up, the supply started out pacing the demand for homes. And so what we’re tracking, is that a trend that’s going to continue or is that a trend that comes off?
Well, it’s a trend that happened through July and that trend has come off slightly in terms of supply of new construction homes or the price points where people are selling. And what we’re really tracking is months of absorption or weeks of absorption in the marketplace.
If there’s 70 available homes at the price point you’re trying to sell, and there’s seven selling a week, there’s 10 weeks of absorption in that product. I think what it’s helped us do is really on the buying side as well is where you’re seeing more supply of the input.
The input for us is land. And so if we go into a marketplace saying we’re going to pay a million dollars in this market for land, if we see the weeks of supply going from three weeks to six weeks to 10 weeks, that tells me that land will be cheaper in the coming months. And so then you slow down and you buy correctly, because the land will come down. Right?
It may not come down today, but when we buy a property we’re going to hold them for 18 months or longer. And so it’s really understanding how do we get in at the right basis. And what you really want to track is … I love a market that’s not a buyer’s market and it’s not a seller’s market but it’s just a market. And I feel like where we are right now is just a market.
Five months ago it was a seller’s market. We could demand anything. Through the middle of the summer, it was trending towards a buyer’s market, but that’s come off. And so I just want a normalized market where there’s constant supply of inventory and constant absorption of that same inventory.
The swings is what really causes in both ways. Look, as a seller, I’d love a seller’s market for my inventory, but I don’t want to buy inventory in a seller’s market to build new homes on. We just want a good constant market. And we track these trends by each neighborhood we’re in, by the major metros and across all the metros simultaneously to really see how should we be making decisions on selling homes and then buying new inventory.

James:
As you guys are tracking the data and the absorption rates, one thing that we’ve noticed, especially over the last 90 days or since June, is builders appetites have really backed out. They’re being very, very aggressive. The last 12 to 24 months they’ve calmed down. And then we’ve seen a dramatic drop in building permits and applications over the last 90 days.
I think nationally building permits are down 1.3%, or for single family housing they’re down 5% from last year. Do you see that more is a concern that the builder market is pulling back or more a good opportunity because there is such low supply that there could be this void in the market to where new construction could become this premium product that is expensive just because there’s just not a lot to cover?
I know for us as investors, whether we’re flippers or developers or buy and hold, we’re looking for the gaps. Where are people not kind of playing in? And as people pull back on permits, there is going to be less inventory coming, which for me, I like selling the product that nobody else has. Are you guys looking at that more as something to be cautious of or more something that you’re getting exciting on?

Tom:
Look, the challenge with new construction is we’re buying something today that we’re not going to sell for another year and a half. You’re trying to predict what the absorption of real estate will be at the end of 2023 going into ’24 with your buying patterns today. That you almost need a crystal ball for.
However, what we see is this demand that is not stopping. Right? Has the demand slowed slightly. Sure. But there’s demand for real estate in the markets. And I think it’s hard for me, James, because I have a very myopic view, because the only thing I understand is brand new homes in the best markets. When you look at flipping homes, it’s very hard for me to tell you what that real estate trend will be doing or new construction.
I only look at new construction in the best neighborhoods of Seattle. Seattle versus Tacoma, very different real estate trends. Because the demand in the prime neighborhoods, Northeast Ballard, Queen Anne, et cetera, of Seattle, it’s kind of hard to compare that to the overall global new construction building permits.
My view becomes very myopic in what is new construction in the best marketplaces. If permits in the markets where I am slows, investors are slowing down their buying, it provides more opportunities for me to buy and buy less expensively. But when I get to the back, 18 months from now I’m going to have less competition.
Because if I’m the one buying today, if six months ago we were buying five pieces of inventory to build new, and now I’m the one buying three pieces of inventory and the others have not bought the other two pieces, 18 months from now I’m going to own the only supply in the marketplace.
I kind of like that trend, but I also understand investors, right? I’m a very different investor, more of an institutional investor, invest in capital that is here to play through all market cycles compared to the smaller guy who’s investing friends and family money personally guaranteed on loans. There’s a lot more market factors in play when you’re making those very close to home personal decisions.

James:
And are you guys tracking that in every market that you’re in, like how many building permits are going through? And have you seen any trends stick out more? Because again, you’re in four different types of market, all good markets but different. They have different types of business sectors. Have you seen any drop more than others?

Tom:
Yeah, I’d love if you could share with me the way to track building permits because we have a very hard time tracking new construction building permits. They kind of are all lumped together. And so there’s not a good clean way to aggregate and track that data. Where we’re tracking it more is who’s buying the real estate that we’re not buying and what are they doing with it?
If we have a property that we don’t buy, are they remodeling it? Are they living in it or are they really going in and building a new home? Our number one competitor that we compete with across all five markets that we’re in are actually not other builders.
They’re homeowners buying the real estate to own and live in, or remodel and live in. There’s less development than there is I want that piece of property to own in the marketplace.

James:
Got it. I mean, that makes sense.

Dave:
One thing I wanted to ask you, Tommy, before we let you go is about material costs. It’s something that we’ve been trying to keep track of and I know has scared away some people from flipping, or getting into new construction or development. Have you seen material costs stabilize over the last couple of months or are you still seeing rapid rise … Well, I guess I should ask you, are you seeing rapid rises and sort of what are you seeing in the material costs?

Tom:
No, look, we’ve definitely seen a stabilization in materials. Lumber has come back down. We’re actually seeing a reduction in lumber costs across every market right now. You’re still have inflation. There’s certain cost codes that are inflating along with inflation trends, light fixtures, tile.
There’s a lot of materials that go into building a home that are dependent on oil. And so as oil costs went up, you saw much larger increases in oil cost. The markets that we build in require the labor force to come from outside the area. As oil was up and gas prices were up, you saw a larger influx in your labor cost because the labor had to move themselves to these job sites.
We’ve seen with fuel costs coming back down and lumber coming back down a stabilization, but we still have cost inflation pressures like anyone else does in the market. You got to keep in mind, 40, 50% of every cost to build, whether I think you’re remodeling or building new is labor. And that labor is paying more for their rent, they’re paying more for their groceries, they’re paying more for the fuel and their car, for the clothes that they’re wearing.
And so how do they pay for that? They have to charge more for their labor cost. And so 50% of the cost of construction is really affected by labor. And as a general term, the labor is being affected by CPI index like anybody else. Only about half of it is material cost and that material cost can be all over the place.
But the other major influence is really on labor. What I do think is good is we’re not seeing these drastic spikes anymore. I think we’ve gotten back to some sort of normalization, although now I hear that there’s so many products sitting in warehouses in the US that maybe some of the materials will actually come down over time because we overreacted to the short supply of supply chain issues and filled a bunch of warehouses with stuff here in the US that we need.
We’ll see if we really get cost reductions, I’m not counting on it. And we expect constant inflation due to labor. We just would hope it gets back more normalized than high 8% CPI or inflation index ,and gets back down into the threes and fours, which is pretty normal in construction costs.

James:
Are you guys accounting for more of this in your upfront underwriting, or what have you guys had to do over the last 12 months to kind of battle that labor? I know for us we’ve had to bring in people on staff. We just brought our labor in-house, because it was a way for us to control the cost more. Have you guys had to pivot that way at all or change your systems, or is it more just, “Hey, we got to account for this, build it into the proforma and put the plan in motion.”?

Tom:
Yeah, I think the biggest part for us is having the feedback loop of what it’s costing us to build today. We’re underwriting a new deal based upon our cost today. And so you’re always trying to maintain that feedback loop. If my HVAC is going up today in September, then I know I need to start budgeting more for the jobs that I’m buying that I’ll be putting HVAC in six, seven months from now.
We’re trying to constantly maintain that feedback loop of what’s the cost today and how’s that going to translate when we incur that cost down the road, because there’s a lag time when we buy a new project. The nice part is we don’t buy 400 lots, or buy a big master plan community and cut into foreign lots and locked into our land basis.
We’re always buying new land. And so we are always able to update our underwriting based upon what our current costs are. And so it’s really trying to maintain that feedback loop of different cost codes and where the changes are happening so that you don’t get surprised by them the next time you’re building that home.

Dave:
All right, Tommy, thank you so much. This has been super helpful. Is there anything else you think our audience of new, aspiring and existing real estate investors should know about how to navigate current market conditions or anything else you’d like to share?

Tom:
Yeah, no, look, it just takes taking a little bit of chance and hedging your risk as an investor. I mean, I’m sure some of your investors were like me 15 years ago when you were putting everything into a real estate deal and betting a lot on that.
Sometimes you have to make big bets to go to where you want, and you really have to figure out what it is you are doing. I’ll just share the last thing with you, Dave and James, is that I think you got to figure out as an investor what your goals are and what you’re ultimately trying to accomplish.
Are you trying to build a business? Are you trying to take advantage of a moment in time in a real estate arbitrage? And if you’re going to really build a business and invest capital and take risk, personal, professional, et cetera, why are you doing it? Right?
What’s the bigger, greater goal? If it’s just another dollar, that could be the greater goal. Right? But I love what Simon Sinek says, is, “Figure out your why and the what becomes way easier.” There’s a great YouTube video about it. But as these investors are out there taking risk, going out on a limb, doing deals, building businesses, why are you ultimately doing it at the end of the day?
And figuring out why you’re doing it really helps kind of alleviate all the stress that comes along with the risk that you’re taking in the marketplace. I hope that helps. But Dave and James, appreciate you guys having me on your show today. I really enjoy sharing with you, and hopefully your users learn something from me, and that is don’t pay for real estate seminars at the LAX Airport.

Dave:
Just go to the first day.

Tom:
There you go. There you go.

Dave:
And Tommy, if people want to connect with you, where can they do that?

Tom:
You can message me through LinkedIn, Tommy Beadel, B-E-A-D-E-L. You guys have it spelled L-E, but it’s E-L at the top there. Appreciate any messages you want to send.

James:
If you guys are any deal guys in those markets, look them up. They are great people to work with, a great company to work with. If you got deals, Colorado, Phoenix, Seattle, SoCal, all the new wholesalers out there, reach out to them.

Tom:
Thanks, James. Yes, no, we always like to buy new real estate deals. As a realtor asked me last week, “How do you feel about the market?” And I said, “I can’t find enough land to buy.” And they said, “No, no, but how do you feel about the market?” And I said, “I just said. I can’t find enough land to buy,” which means I feel good about the market. All right guys. Thanks so much. Thanks for having me. See you.

Dave:
All right, take care. All right, James, what’d you think?

James:
Oh, I thought that was awesome. For me as an investor, I’m always looking at how do you scale, how do you kind of move and grow and just … I mean, the fact that these guys can build on all four different areas pretty rapidly in a short amount of time, it really goes back to why people should watch our podcast.
Track the trends, learn what’s going on, and then you can build a business around those trends, not just about your gut feelings. I mean, he’s just taking data, analyzing it, and then putting his motion in play. And I did relate with a lot of what he said.
Scaling as an investor is just, it’s about having the right system, not just the right vision going, “Can I scale this and grow this down the road?” Because that is the hardest part of our business. We start with a certain amount of capital. How do you grow as fast as possible? But it shows that all those house hackers out there, you can go from house hacking to being the largest spot lot builder in the whole nation.

Dave:
Yeah, that was an incredible story. I loved his personal story. What he was talking about in terms of the data was fascinating to me, because we look at a lot of macroeconomic trends, looking at absorption rates, inventory, this sort of stuff makes a lot of sense to me.
What he talked about that I wish I was better at and could do more of is getting that data about what people want, what the consumer is buying. Because I love what he was saying about, generally speaking just about product market fit, and thinking about exactly who the intended buyer is.
But even if you’re a buy and hold investor, think about who the renter is going to be. And is the product that you are buying going to be appealing to the people who live in that area and who want to live in that type of building?
I got to find a better way to find that data. I wonder if he’s just doing like, I should have asked him, surveys or talking to agents. Or do you have any thoughts on how you get that kind of data about what layouts people want, what kind of architecture they want? I’ve never seen anything like that.

James:
Yeah, there’s some cool stuff out there you can do with … We do it actually for off-market tracking, like when we’re more targeting sellers, like who is the demographic that is most likely to sell? You can do the same thing. There’s a lot of different data scientists and analytics companies out there that for us as a wholesaling company we actually hire them, they go through our data and they give us our top list to go off of, and I think they do the same thing.

Dave:
Oh, really?

James:
Oh, yeah. It is not cheap. It’s expensive, but it makes your conversion rate substantially higher. And again, going back to his point, by them taking that extra layer of research and not going off your gut or just the surface to analytics, they’ve been able to sell a lot of units too.
Just like we can get our conversion rate by going to that demographics likeliness to sell or likeliness to buy, you can really kind of plan ahead and not be the odd man out. Because as the market’s transitioning right now, the last thing you want is to be the odd man out property. You don’t want to be the weird rental. You don’t want to be the weird remodeled flip.

Dave:
Totally.

James:
You don’t want to be the new construction lot with a negative impact, and that’s what makes your deal move right now.

Dave:
Yeah, that’s really good advice. I mean, I don’t know if that’s something applicable to our audience if it’s super expensive to buy it, but I mean, maybe it’s as simple as just talking to agents in your area too, just figuring out what type of things people want.
I know when I talk to my agent in Denver, he can always just tell me off the top of his head, “People want ranches right now. People are really digging detached garages,” or, “Renters are looking for this.” Try and gather that data some way. I wish I had some better advice from you other than paying a lot of money. But if you can get it, you’ll definitely have an advantage in the market.

James:
And there is one I do know of that’s not very expensive. It’s called NeighborhoodScout.

Dave:
Oh, yeah.

James:
Yeah. You can pull up every little neighborhood. And they show you the demographics moving in, the demographics moving out. And it’s actually super handy. It does not cost thousands of dollars. And you can buy it just for the little area that you’re in.

Dave:
Oh, perfect. That’s awesome. Thank you. Well, yeah, I’ve used that in the past. I’ve never used it for that purpose, but that’s great advice. Check out NeighborhoodScout if you want to get this kind of data. All right, James, thanks so much. I mean, it’s been a fun day. We’ve been together all day and hopefully I guess we’re going to be together in person real soon.

James:
I’m so excited for BPCON. I think it’s going to be a special one.

Dave:
Yeah. I mean, I feel like we’ve been talking about this for a really long time and now it’s finally here. I’m looking forward to seeing you in a week and a half.

James:
This is my first BiggerPockets conference too.

Dave:
Oh, really? You haven’t been?

James:
Yeah. No, I couldn’t make the last couple because of kids, kid commitment.

Dave:
Oh. Sweet man. Well, we’ll have a great time. And hopefully some of our listeners will be there. But if not, we’ll definitely be posting a lot. We’re going to do a podcast there that we will release so people can hear it.
And yeah, if you want to connect with me at any point about this episode or anything, you could do that on Instagram where I’m @thedatadeli. You can also follow BPCON there. James, what’s your Instagram handle or where should people connect with you?

James:
Yeah, the easiest way to connect with me is definitely on Instagram @jdainflips or our YouTube channel at Project Re. And definitely reach out. I know I’ll be around. And if you catch me at a conference, one thing you do know is I won’t stop talking. Come up, ask me questions, you will get answers. I’m very friendly.

Dave:
That’s a dangerous thing to start telling people.

James:
It’s terrible. I’ll go for eight hours straight. It’s bad.

Dave:
You’re going to be drinking those Rockstars and up till 5:00 in the morning.

James:
Sales juice. Sales juice.

Dave:
All right, thanks man, for being here. And everyone listening, thank you so much for being here and listening to us. Hope you learned a lot today like I did. 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 OnyxMedia. Copywriting by Nate Weintraub. And a very special thanks to the entire BiggerPockets team. The content on the show, On The Market, are opinions only. All listeners should independently verify data points, opinions, and investment strategies.

 

 

David:
This is The BiggerPockets Podcast, show 669. Get yourself around other people that are committed to their goals. And it doesn’t have to be real estate. Get yourself around other people that are committed to staying in the gym. Get yourself around other people that are committed to eating healthier foods. Get yourself around other people that are committed to having better marriages or being better parents or managing their wealth better. The first thing that you can do is when you start telling other people good job for what you did, it will silence the need you have inside yourself to hear it. I don’t know why it works like this, but it’s almost the equivalent of if you’re really hungry but you give someone else food, your hunger can go away. What’s going on everyone? This is David Greene, you are host of the BiggerPockets Real Estate podcast here today with a Seeing Greene episode.
If you’re new to BiggerPockets, you’re going to love it. This is a place where the best real estate investors in the world come to learn how to invest in real estate and build big wealth. And if this is your first time hearing a Seeing Greene episode, you’re in for a treat. In these shows we take questions directly from our community. Areas that they’re stuck in, advice that they need, hurdles they’re having a hard time overcoming or they’ve got a bunch of different options they don’t know which is the best one to take and I do my best to give them advice from my perspective as the person who’s Seeing Greene. In today’s show we’ve got some really good stuff. We get into a very good conversation about the timeline you should give a property manager to turn a property around, as well as what you should look for if you’re going to switch to a new property manager.
We talk about what the IRS considers a real estate professional and how you can take advantage of all the tax benefits that come from that designation. And we get into if real estate syndications are as beneficial as they may seem. All that and more in today’s show. But before we get to our first question, today’s quick tip is, this episode is dropping right when BP Con 2022 is starting. So what are you doing to get out there and make connections or foster the relationships that will take your business to the next level? Do you have a game plan to go demonstrate value to a potential mentor and get someone personally invested in your success? Have you evaluated what skills and talents you’re bringing to the table? Spend some time today to make your next event, conference, or coffee meeting that much more impactful so that you can supercharge the speed that you get through your learning curve and get into making big money and having big success soon. All right, let’s get to our first question.

Collin:
Hey David, thanks so much for taking the time to review my question. My question has to do with the BRRRR strategy. Given how hard it could be these days to lock down a contractor, given how far out in advance contractors tend to be booked, how do you balance the process of sourcing the right property to BRRRR with the process of ensuring that a reliable contractor will be available to perform the rehab process shortly after the property is closed on? The last thing you want to do is have to soak expenses to hold the property while you wait weeks or even months for the contractor to start the job. Thanks so much again for taking the time to respond to my question. Really appreciate all the great content you’re putting out there.

David:
All right. Thank you Collin. Some pretty good questions that you’re asking there. Let’s start with where we are in today’s market. With the interest rate hike we’ve had, we’ve seen a decrease in demand. And not every market’s the same, but in many markets across the country we’re actually seeing a slowdown. So I’m having an easier time finding contractors right now than I have had in recent past because there’s not as many transactions happening. So a contractor’s talents are in less of a state of demand, which means it’s easier to find contractors to do deals. That’s one thing to keep in mind. There’s also contractors out there that are busy and then there’s others that are actually looking for work. So I would say double down on the amount of people that you ask for referrals from different contractors that can do work. Then you’ve got the fact there’s different kinds of contractors.
There’s some contractors that just communicate with you, look really fancy and professional, spend a bunch of money on SEO so that you find their company when you’re googling them, and they sub out all the work to completely different companies. So they might go to a plumbing company and say, “I’ve got a job. What are you going to charge?” And the plumber says, “20 grand.” And the contractor tacks plumbing as 30 grand onto the bid and they make a $10,000 spread because they found the plumber. You’ve got other contractors, and these are the types that I tend to prefer, that have a plumber on in their company or a person that can do plumbing work that comes and does it. And so you’re not paying as much as if they contracted to a completely different company. There’s also the fact that in today’s market when houses are not flying out the shelves in every single market across the country like they have been, that you can get a longer escrow period.
If you put the house in contract and the contractor says, “Well I can’t start for another three weeks.”, you can go back to that seller and say, “Hey, can we close three weeks later? Can we delay escrow? Can I maybe close in a week and a half later?” And you only have to soak the cost of a week and a half instead of the full three weeks. So you’ve got something there. And then another thing that I’ll do … Because I have a couple BRRRRs going on right now and I got a property in contract today as we’re making this episode and that’s going to be a BRRRR. Now, part of that property can be rented out as is and another part of the property needs to be renovated. So in that case, I’m going to rent out the property as is as soon as I close as a short term rental. And when the contractor can start the work, that’s when I’ll shut down renting it out while he takes about 30 days to complete the renovations and I get it back on the market.
So not every property has this problem where you can’t do anything with it until it can be renovated. Now if you’re doing kitchen, bathroom remodeling in a single unit property, yeah, you’re going to be soaking those costs. So what I would do is I would look at building that into your offer. So if you know it’s going to be another three weeks before you can get to the job and you are going to spend $3,000 a month on mortgage, maybe see if you can get the house for $9,000 less or get $9,000 credited back to you from the seller to cover those expenses. Look for some creative ways that you can get the seller to pay for some of those expenses that you’re going to have if they won’t delay the escrow. But in any regard, I’m finding that right now is an easier time to BRRRR than what I’ve seen in the last eight years.
All right, our next question comes from Jake in Pennsylvania. The good old PA. “Are real estate syndications as beneficial as they seem? Would you recommend them for a beginner investor or should I focus more on multi-family rentals to start out?” Okay, let’s dig into this. I don’t know that a syndication will ever be as beneficial as it seems because how it seems is usually going to be the syndicator paying for some kind of sponsored ad on social media or selling you at some kind of a conference to say, invest in my fund, invest in my syndication, because they want your money. So I’ve never looked at it as if they’re as beneficial as they seem. I’ve looked at them as are they as beneficial as buying a house for myself?
And I have invested in syndications, primarily with my partner Andrew Cushman. He and I buy apartment buildings together and we’ve structured some like that. But I also spend more of my money on residential properties that I own myself, not in syndication. So sometimes I’ll invest in a syndication because I’m having a hard time getting a loan. Sometimes I’ll invest in a syndication because there’s not that many good deals out there. Sometimes I’ll invest in a syndication because I’m really busy and I don’t have time to manage a BRRRR, a rehab, getting a property up and off the ground and running so I’ll just give my money into a syndication and get it back in a couple years. I’ve done that a few times. There’s different reasons why I might want to. In general, I would say most people are probably going to be better off investing it themselves.
And here’s why. When you start off buying your own properties, you’re not only getting the return on your money but you’re gaining knowledge. You will learn so much more buying a deal and making mistakes and getting better than you will handing your money to a syndicator who’s going to go buy a deal, make mistakes and get better off of your money. I’d rather see you, Jake, house hacking. If you don’t have a property at all, house hack. I’ve said it before, I will say it again. Everyone listening should be house hacking one house every year. Every single year for at least the next 10 years you should be getting a primary residence, and probably longer because you can often get primary residences after you have 10 properties. If that’s all you did in your whole career, you would be very wealthy at the end of your career if you just bought a house, a year, house hacking, putting 5% down or three and a half percent down sometimes.
Now anything you buy in addition to that, you should weigh, is it better to buy the rental and put 20% down or is it better to put that money into a syndication? If you’re going to focus on multi-family rentals, you’re probably talking small multi-family. That’s going to be two to four units. Just make sure you’re doing that in an area that is not crime ridden, not full of problems from problematic tenants and is an area where you’re seeing population growth. One of the benefits of a syndication if this syndicator is good is they’re more likely to have done their homework on the area that they’re investing in because they have a lot of money going into it. So if the person’s good, they avoid buying into bad areas, which you as a new investor can easily wander into.
And if you look at most problems in real estate, it comes from someone that bought in the wrong area. So it all depends on your goals, how you’re going to vet the performance, if you’re trying to maximize your capital, how much time you have to put into it. There’s active and there’s passive and there’s a scale in between and you have to ask yourself how much you’re willing to do. You also have to be an accredited investor in most syndications, which you may not be. In which case it becomes a very easy answer. You should be buying your own properties. But if you’re looking at a small multi-family and you can buy it on your own and man, house hack is just staring you in the face. Just buy a triplex or a fourplex every single year. Don’t make this complicated. Get the best one that you can. Live in one unit, rent out the rest, then buy another one next year and rent out the one that you were living in right now and you’ll end up accumulating rental properties for five to 10% down instead of 20 to 25% down and your capital will go much further.

Paul:
Hi David. My name is Paul Charbonneau and I live in the Dallas Fort Worth area and I invest in Pittsburgh, Pennsylvania. My partner and I started this about two and a half years ago and over that time we have purchased 20 single family houses and we used private equity to purchase those and right now we’re working on our first refinance. And if we refinance 10 of them, or half of them, that will pay off the note and we will own the other 10 scott free. So, so far, so good. Everything seems to be working according to plan. But my question to you comes from a tax perspective. I work full-time W2 job and right now I could only take the tax loss for the passive income. It cannot offset any of my W2 income the way I’m reading it. And the only way to get past that hurdle is to become a real estate professional.
And I was looking up what that entails. And you can correct me if I’m wrong, but I think it says more than 50% of the personal services you perform in all businesses during the year must be performed in a real estate business you materially participate in. So that would tell me that maybe if I worked at a title company, I’m in real estate, but that’s not anything that I have a personal stake in. So I think that doesn’t qualify, but I would like clarification on that. And then the other thing says that you have to spend at least 750 hours in the calendar year in real estate services or businesses and I think I qualify on that aspect. I could easily do real estate all day. So the question that I have is can I reduce my hours at my W2 job? And let’s say I go part-time to a thousand hours a year. At that point, if I work 1,001 hours on real estate, do I qualify as a real estate professional under the IRS guidelines? And then the second part of that question is going to be, how do they look at the number of hours that you worked? Does scouring Zillow count? Talking to my property management group? I assume that works. What about talking to my realtor? All of those conversation emails. What constitutes as working 750 hours? Look forward to hearing your answer. Thank you.

David:
Hey there Paul. Thank you for this. First off, you’re asking the right questions. I love that you’re saying how do I do this, not am I doing this or can I do this or I can’t do this. You’re asking the right question. You’re also asking it in the right forum. Thank you very much for posting this on Seeing Greene. If you guys would like to also ask a question, just go to biggerpodcast.com/david and you can ask a question just like Paul. Now Paul, I do need to preface this by saying this is not legal advice. I am not a CPA and so I don’t know exactly what the law is. Now, I can understand the law as you read it and that is my understanding of what you said. Very similar to a 1031. I know most of the main stipulations, rules and regulations. Where you get tripped up with legal matters is in case law.
Now, in many cases in the law, if you guys have never heard of the phrase case law before, you have a hard and fast rule such as you have to perform 750 hours a year doing real estate related activities or you have to spend more than 50% of your time on something that you would be materially affected by. Something along those lines. However, sometimes there’s ambiguity in what would be materially affected or what would be considered real estate related activities. That’s where case law comes into effect. Now, case law is when judges look at a specific case and set a precedent saying, hey, in this case we found that this work did not constitute real estate related activity or this case it did. So your question about Zillow is a great question. Would that count? We would have to ask a CPA who knows the case law on that specific situation.
Has there been a person that claimed to the IRS, I’m a real estate professional because I looked at Zillow for houses as part of the acquisition part of my business, and if so, how did the court rule in that specific case? That then determines precedent or what we call case law. Now, coming from law enforcement, I had to study this laboriously. I was constantly learning case law when it came to use of force, evidence, rules when it came to the fourth amendment, which is really big in law enforcement. Search and seizure. If we find evidence of a crime on someone, there’s certain times where it’s admissible in court, there’s other times where it’s not admissible in court and you had to learn the case law to know how to make your case stick. That’s the same in the situation that you’re in here. So I’m going to tell you that you should run this by a CPA before anything that I tell you is something that you go put into practice.
What I can tell you is what I would do if I was in your situation. Part of why I am an entrepreneur now instead of just working the W2 job is because everything that I do is real estate related. I have a real estate sales team. The David Greene Team. I have a real estate loan company, The One Brokerage. I do real estate investing myself. I’m now raising money and helping invest it for other people. That’s Greene Capital. I write books about real estate. I make podcasts about real estate. I make YouTube videos about real estate. I write books about real estate. All of this stuff is real estate related so that it’s not hard for me to qualify as a full-time real estate professional so I save in taxes in a big, big way. You could do the same thing. The question is, is your W2 job holding you back?
And this is the case for so many people, Paul. I think you’re this prototypical, awesome example of a BiggerPockets member. You love real estate, you bleed real estate, you eat and breathe it, you can’t get enough of it. You listen to all the podcasts, you love to talk about it at barbecues. You’re the guy that all your friends come up to you because you have all the real estate answers and they’re fascinated by it. But yet you still have a foot or maybe a foot and a half in the corporate W2 world that stops you from being the full-time professional. I don’t think working at a title company would qualify because that’s still your W2 job. However, what if you started a title company, hired one even part-time person to work in that title company, started talking to realtors or other investors and saying, “Hey, when you buy a house, let me do your title work. This is the offer I can give you. This is the service I can give you. This is the price that I can give you that’s better than other people. Bring me your business.”
Even if that business isn’t making you money hand over fist, what if the hours that you put into running it start to qualify you as a full-time real estate professional? Now again, I don’t know the case law on this so I cannot come out and tell you this is all you got to do. Just go do this. I’m not a full-time professional. I’m not a CPA. I would have to run this by my CPA to ask, but these are the kind of questions that I ask. If I’m acquiring properties, if I’m refinancing properties, if I’m doing X or Y in business, would that qualify? When they tell me this would or this wouldn’t, now I know what direction to put most of my time in and the question becomes how do I make that profitable.
What most people do is they say, what’s profitable? How do I go do that? Well, you often paint yourself into a corner where now you’re not a full-time real estate professional. I don’t think you need to jump completely out of your W2 job, but I do think you can start a side business or a couple and start moving in that direction. And as those companies become more profitable, you can start to take more weight off of the W2 foot and put it onto the foot that’s in the 1099 world until eventually you can jump in all the way. Thank you for asking such a great question. I’m glad that our listeners got to hear a little bit about how that works. If you’re listening to this and you love real estate and you don’t love your W2 job, you’ve got more options than just completely quit your job and go full-time into investing or be stuck in a job you hate forever and never get out of it.
There’s a whole spectrum of stuff that you can do and I’m a really good example of someone who lives inside that spectrum. I’ve got tons of different revenue streams where I make money through real estate because there’s so many different ways that you can do it and I’d like to see more of you doing the same thing. So if you’re not happy with your W2 job, but you also wouldn’t be happy being a complete risk filled full-time investor, find a job that is somewhere in the middle like an escrow officer, a title officer, a loan officer, a loan processor, a real estate agent, a buyer’s agent, a showing assistant, a real estate administrative assistant, a contractor, a handyman, a CPA, a bookkeeper. I could go on, but there’s a lot of different people that work within this industry that serve it where you could start to dip your toe and get involved so you could be closer to real estate but not completely dependent on rental income to pay your bills. Paul, let me know if there’s anything I didn’t answer in your question. Please submit a follow up question if that’s the case. And also I would encourage you to post this on the forums on BiggerPockets so other people can weigh in.
All right. Thank you everyone for your questions so far. We would not be able to do this show without you. And in fact, my love and appreciation for you and those that have submitted their questions to biggerpockets.com/david has reminded me that I needed to turn the light green of everything I do with BiggerPockets. By far, I have the hardest time remembering to change the light from green to blue. So if you’re watching this on YouTube, no, it did not just skip to another video. I just remembered to turn the light on. But hopefully this different ambiance captures your attention and keeps you interested as my monotone, baritone, calming voice may be putting you to sleep so you can get more out of this real estate cornucopia of information that we’ve put together for you.
All right, in this segment of this show I like to read some of the comments that we’ve gotten off of our YouTube channel on previous episodes. A lot of these are funny or nice or sometimes they’re even mean and that’s fun to share too. So as you listen to these, please leave a comment for me on YouTube. Let me know what you liked, what you didn’t like, some insightful information that you got out of this or just something clever and humorous that I can read on the next show because it’s always better when we can spice the information up with a little bit of flavor and funny.
First comes from R. “I will unsubscribe if you ever get rid of the Seeing Greene episodes. These are the best ever.” I love that I get to read comments about me that are always positive. And I’m sure as you guys are listening to this, you’re thinking that. Does David just pick the nicest stuff about himself? Well, you’ll never know unless you go to YouTube and read the comments for yourself and leave one for me. R, I don’t know who you are, but I do know that that was a very nice thing to say. So I will try to make sure that you never unsubscribe and we will continue to make Seeing Greene episodes and hopefully make you a lot of money.
The next comes from Pewmeister, whose name alone has already got me chuckling a little bit. “Awesome episode as usual, David. Also, I ordered your book. I’m currently in law enforcement. I’ve gotten into investing. I’ve developed such a passion for real estate. I’m starting the courses to get my realtor license this week. Thanks for all the value that you have brought to the BiggerPockets community.” There’s something about people getting out of law enforcement and into real estate right now. I’m definitely seeing a trend. I might have been the first person to take the Oregon Trail and now everyone’s following me. I’m not sure what it is about these two professions that end up going hand in hand. My buddy Daniel Delrill told me there was some movie and I think Harrison Ford played a homicide detective that was also a realtor on the side. So he’d be on his phone putting deals together when he was at the crime scene. And there was definitely more than one moment where I was doing something very, very similar. And so if anyone knows the name of that movie, please go into the comments on YouTube and post it so that we can get a feel for what it is about Harrison Ford’s character that is drawing so many BiggerPockets members into taking a similar path.
The negative comment comes from Uli Mooli. We are on a role with the names today. “This was great. Any idea for you for new content would be to review other people’s advice to see what you agree and would improve.” Ooh, Uli Mooli. I got to say I like this. You start having me review other people’s advice and I get to critique it and maybe disagree with it and maybe offer a alternative opinion and you might start seeing a little bit of beef popping up in the real estate community. I’m okay with that. I think that’d be fun if we brought some people in and we had me give commentary and what I thought about their advice. I made reaction videos to people. Like Patrick Bet-David is a guy I respect a lot, but he made a video on how you can’t really trust your realtor because usually your realtor is working with the other realtor more than they’re working for you.
And I made a reaction video that described that happens less than 1% of the time that we even know the realtor that we’re dealing with on the other side. That happens at the ultra high end luxury community where a handful of realtors will sell 20 million houses and they all know each other. But to the general person, the realtor you’re working with probably sells three houses a year and they’re working with someone that sells six houses a year. They never cross paths. But I like it. That’s what I’m getting at. I like this idea. So if you would like, Uli Mooli, you can help us by going to biggerPockets.com/david, giving advice that you’ve received about a question you have and asking me what I think about it. Maybe we can start the trend there.
And our last comment comes from Gerald Smith. “I wish I knew of you years ago. I’m 75. Great advice.” Well dang. Thank you Gerald. I really appreciate that. It’s not every day that you hear a 75 year old tell you that you’re giving good advice so I will take that to heart and you made my day. Thank you for that. We love it and we appreciate your engagement so please keep it up. Like, comment and subscribe on YouTube. And also if you’re listening on your podcast app, whichever one it is, take some time to give us a rating and an honest review. We want to get better and stay relevant, so drop us a line. All right, let’s get to another video question.

Hieu Bui:
Hey David, this is Hieu Bui. I’m from Augusta, Georgia and I just want to say I really enjoy your format here. I’m always looking forward to a Seeing Greene episode. So kudos on that. Very good job. So about me, I am a full-time real estate investor now and I currently own about 20 to 30 doors here in Georgia. And because I’m a full-time real estate investor, I don’t have a high taxable income on paper due to write off and depreciation. So for all of my residential properties, one to four unit, I always used a DSCR lender to finance all of my properties. So that’s my wheelhouse. But recently I purchased a seven unit apartment and I know that my lender will not refinance it. I bought it with private money lender. But the DSCR lender would not refinance it because it is not residential. It would be commercial since it’s more than five units.
So my question for you is how do I go about refinance this property with a commercial loan or some other option when I don’t have a high taxable income? What would my option be in that case? And this property would cash flow really nice because, just some rough numbers, the total income will be 5,500 bucks per month and we currently only owe about $400,000 on it for the private money lender and we also bought it at a very good discount. I think we’re going to be at about 65 to 70% ARV after we fix it up. So the worst can happen, we can always sell it if we cannot refinance it. But I’m curious to see what is your experience with refinance a multi-family, which you don’t have any taxable income. So I appreciate it. Thank you. Have a good day.

David:
Well first off Hieu, I’m sorry to hear you got stuck there. If you were using my team, we would’ve told you not to buy a commercial property to try to use a residential DSCR loan. Maybe next time you can talk with your lender before you close on the property. Even if you’re going to refinance it, I’d give that advice to everyone. Don’t buy the property or do the thing and then run to the professional and say, “Help. I screwed up. What do I do?” Go to them before you close. When you’ve got a contractor who’s going to do the work, run it by the agent and say, “What would the ARV be when we’re finished with this?” Or when the property’s in escrow, ask the person, you’re going to refinance it, “What would you need to know about me?” That’s what I do. I don’t ever walk into it and just hope that the person at the end of the day is going to be able to bail me out.
I want to tell them about what I’m doing. And oftentimes they’ll say, “Well it’s not going to work this way but it would work that way,” and I have time to make the adjustment while it’s an escrow. So that’s a little quick tip for everyone out there. Now, there is some good news here. What I hear you saying is you bought a commercial property that cash flows very strong by commercial terms, that has a very solid loan to value ratio. I don’t see why you can’t just get a commercial loan on this commercial property. I might be missing something because you’re saying that your DTI isn’t that solid, your debt’s income ratio, but it usually doesn’t need to be on a commercial loan. They’re probably not even going to look at that. Much like we don’t look at them on DSCR loans. So I’m just not sure why you wouldn’t be able to refinance this into a commercial loan and maybe even pull out more of the equity than you put in like a commercial BRRRR. Those work too.
I’m racking my brain trying to think about why you wouldn’t be able to do that because I’m wondering … Maybe you just didn’t think about it because you don’t get the 30 year fixed rate. That could be the case. You’re probably going to be looking at a 5/1 ARM, a 7/1 ARM, maybe a 10/1 ARM. That’s just how commercial properties work. Double side note, this is why DSCR loans are so amazing and why we do so many of them. Because you don’t get the adjustable terms with the commercial underwriting. You get the residential 30 year fixed rate terms with the commercial underwriting. So it’s really the best of both worlds and this is why I’m buying so many properties right now specifically with this product because I don’t know how long it’s going to last. At a certain point, lenders will pull this off the market.
The only thing I can think about is you don’t like that adjustable rate. But if you’re going to sell the house now, why not refinance it into an adjustable rate mortgage with a fixed rate for five, seven or 10 years and sell it at the end of that period of time. Unless you think that prices are going to go down over the next 10 years. That’s kind of hard for me to see a scenario like that happening with the inflation rate that we have right now. Man, this would be a great one for us to have you back on with a coaching call so I could dive deeper. But yeah, I would just say find a commercial lender and refinance it that way. You could reach out to us. We’re happy to do it for you. Or you could talk to loan officer that you have already and see if he has a connection with a commercial lender. Just finance it that way and move on to the next property. Thanks Hieu.
All right, our next question comes from John Nunguster. John is from Thousand Oaks and has a rental property here in California. Thousand Oaks is in Southern California if you guys didn’t know that. Has one home and is looking to BRRRR in East Texas. There’s so many Californians that are all looking to invest out of state. It’s almost ironic that I wrote a book called Long Distance Real Estate Investing as a Californian who at one point had to do the same thing. “David, I feel like we are kindred spirits. I’m currently employed as a deputy sheriff. I’m also a blue belt in jujitsu.”
All right, let me just stop you right there, John. I’m a … Not only am a white belt man, I’m a clear belt. I haven’t gone to class in over three months. I’ve been traveling, buying properties and super busy with a 1031. So let me not give this fake impression that I’m a jujitsu master. But thank you because I am interested in it. I just haven’t put enough time into it to say I’m good yet. “I’m currently trying to build a portfolio to replace my current W2 income and I’m really feeling a calling towards building a team of law enforcement officers as private money lenders to buy real estate and become financially free. Do you have any tips on this?” Okay, I’m going to answer the first part of your question then get to the second. You need to look up Brian Burke. Brian Burke was a staple on the BiggerPockets platform when I first started getting into it almost 10 years ago now, and he was a law enforcement officer, I believe in the Santa Rosa area. I don’t remember which police department. It doesn’t really matter.
But he left to become a full-time syndicator. I believe he runs Praxis Capital and he’s a very good investor and more importantly a good guy. Brian’s a person I look up to as a mentor. He’s someone that I go to and say, “Hey, tell me what you think about this,” or, “What do you think I should do different?” I really, really respect Brian and I’ve never heard a bad thing said about him by anybody on the platform. So if you guys are hearing Brian’s name for the first time, give him a call and say that David Greene said he’s an awesome dude and you want to follow him and also search for blogs he’s written or any books that he’s written on the BP platform. He’s a great template of how you can do it.
All right, getting to the rest of your question. “Maybe you get this all the time, but I feel like you would be an amazing guy to grab a beer with and rack your brain for an hour or so.” All right, I do get that all the time. Let me just address this right now. For one, I don’t drink. I never have. It’s not like I’m an alcoholic or I have a conviction against it. I just don’t think it’s a very good idea and I have enough vices in my life like food for one, which is a struggle for many of us all the time. But I don’t need to add more vices by getting into drinking. So for all the people that have offered me a drink or said to go grab a beer, just know I was not rejecting you. I was just rejecting that offer because I don’t drink. And thank you for that. As far as racking my brain, this is the best place to do it. That’s why we do these Seeing Greene episodes so that everybody can rack my brain all at one time.
And this now begs the question, what the heck does rack someone’s brain mean? You hear this a lot. It doesn’t make any logical sense. Does anyone know where this phrase rack your brain comes from? Now I’m worried more about that than I am the question. Let’s get back on the topic here. “I have been an avid follower of BiggerPockets for several months now and even read your book on out-of-state investing.” How funny, I mentioned that earlier. “I’m currently reading Brandon’s book on creative financing and I’d like to know if you have any tips for me. And my question is, do you ever meet with the people one-on-one to chat about real estate and mentor a newbie?” Great question here. This is actually something I get asked all the time, probably several times a day. Maybe more. I’ll get a DM or an email or someone saying, “Hey, will you be my mentor?”
So let’s take a minute to break this apart. First off, BiggerPockets itself functions as the best mentor you could ever have. I’m sure you already know that because you know a lot about me. You know that I like jujitsu, you know that I’m a former law enforcement. So clearly you’re already listening to BiggerPockets and anyone hearing this advice, you’re in the same boat. Otherwise you’re going to be hearing it. Just keep in mind that BiggerPockets was formed to be that mentor you never had. To give you a place to go ask questions like the forums. We write books so that you could go read them so that you wouldn’t have to talk to another human being because all their information is put into their book. This podcast was meant to feel like you’re part of a conversation between a real estate investor and another real estate investor, and you get to be the fly on the wall and listen to what they say.
Seeing Greene particularly is something where you can come in to ask questions just like this. So this is already a form of mentorship. Now, there’s another form of mentorship that goes deeper that’s really more like an apprenticeship. An apprenticeship is a situation where someone experienced and knowledgeable in a skill passes down their knowledge and their skills to someone else to develop that person so that they can then go make money. Now, in my opinion, an apprenticeship is the best way under God’s green earth, no pun intended for Seeing Greene, to learn anything. That’s what jujitsu is. You get this instructor who knows a lot that walks you through the techniques and tells you to move your foot here, move your hips this way, grab here instead of there, grab with this part of your hand and not that. There’s all these details that they have learned over years and years and years of doing it. That’s how martial arts are passed down.
It’s done through the apprenticeship model. Now, the apprenticeship model made sense when the person teaching the apprentice was going to get something out of it because the apprentice was then going to work for them. Now, you may have already understood this, John, but I think a lot of people don’t, and that’s why I’m getting into this at a deeper level. In today’s world, you’re not going to learn the martial art from the black belt so that you can then go teach in the school. Most people are not interested in working for the person that they’re teaching. So instead of compensating them with their labor in the future, they compensate them with money right now. This is why I pay 150 bucks a month to belong to the jujitsu gym. This is why people may pay for courses where someone’s going to teach them, hey, here is how you do what I do in the real estate space.
Now, BiggerPockets is this amazing paradise of awesomeness because very few things here cost money. This is why we do it. We’re giving free information because we have such a big reach that the company can still afford to keep the lights on just by the sheer volume of people that are there, the ads that they sell, stuff like that. But if you’re approaching someone and wanting to be a mentor that you don’t know, it’s very rare that someone’s going to say, “Yeah, I was hoping that I could take some time away from managing all the stuff I already have going on to teach a different person that I don’t know.” And so the odds of you getting a mentor from that approach probably aren’t that great. What I would recommend, what I do, what the successful people I know do is they are more clever than that.
So for instance, I’m going to be in Scottsdale hosting retreats where I’m teaching the people how to invest in real estate. That’s a great way to get to know me better. If you go to BP Con and you see me sitting down somewhere and you come sit down and hang out in the conversation, that’s a great way to get to know me better. If you have a friend of a friend and you end up … There’s a couple guys that literally joined my jujitsu gym just because they were like, “If I’m rolling with the guy, I have to be able to ask him questions.” That literally happens is they will come to me and try to talk about real estate in class. Now, I’m not saying I want a bunch of stalkers. That actually can become problematic. I’m giving you examples of how you can use your creative abilities to build a relationship with someone rather than just emailing them and saying, “Will you be my mentor?” And probably not getting a response.
Another way that I’ve seen that people can do really well is they will go make friends with the people that are in my company that I rely on. All right. So guys like Kyle Renke who’s my chief operating officer or Christian Bachelder who runs the One Brokerage with me. Krista Keller, my assistant. These people contact me every day and play a very big role in my life. If you make yourself valuable to them and one of them is like, “Dude, this person’s been super helpful. They sent us this thing, they gave us this connection, they provided us with this resource that I wouldn’t have been able to get this thing done without them.” You make my friends like you, you’re going to make me like you. So if you really, really want a mentor, you need to think about how you can get in their world.
When we interviewed Alex Hormozi, he said he spent … I don’t remember what it was. It was more than $100,000 to talk to Grant Cardone on the phone for an hour. And he did that several times. Now, he didn’t just get the information that Grant Cardone gave him. Alex got a relationship with Grant Cardone that turned into a friendship. I’ve seen people do this with other people like Ed Mylet where they will pay a lot of money to get coaching from that person, but in the process of coaching, they develop a relationship which turns into the mentorship that isn’t the apprenticeship model. So just this word mentor is … It’s used very ambiguously and I’m trying to become more specific. You’ve got an apprenticeship and then you’ve got a relationship and each of them have different paths to get there.
So if that’s what you’re looking for from me or from someone else that’s in this space, you’re going to have to think how do you set yourself apart from other people? I appreciate the offer to get me a beer, but that beer would cost me so much money if I had to take time away from the other stuff that’s going on, it wouldn’t make a ton of sense. Now you show up at BP Con, you donate money to a charity that I really like, you become friends with someone that I know, you end up at an event that I’m at and something comes up. Now you’re in a position where you can start to develop that relationship that I know so many people here are looking for. This is how I got ahead is I joined GoBundance and I met a lot of the people you guys have heard on the podcast.
I met David Osborne and Tim Rhode and Pat Hiban. I met Andrew Cushman, I met Hal Elrod who wrote The Miracle Morning and wrote the endorsement for Long Distance Real Estate Investing, which we mentioned here. And a whole lot more people that I haven’t mentioned. But I didn’t go up to them and say, can you teach me everything? I joined the group they were in, I sat next to them, I went and rode snowmobiles with them and went wakeboarding with them and jet skiing with them and listened to their problems and tried to help them through it and we developed a relationship through that bonding process. So hope that that helps. I see that you’re in Thousand Oaks, so I have a team in Southern California. If you would reach out to them, that would be a great way to get the ball rolling with getting deeper into my world. Thanks for the question.
All right, for those of you who have also been dying to know, our producer for the show, Eric, has done the heavy lifting and has found the meaning to rack your brain, which I am now going to share with you. The meaning is to think very hard to find an answer. If you rack your brain, you strain mentally to recall or to understand something. The rack was a medieval torture device where the victim was tied to the rack by his arms and legs, which were then practically torn from their bodies. It’s not surprising therefore, that rack soon became a verb meaning to cause pain. The word was used whenever something or someone was under particular stress and a huge variety of things were said to be racked. The first recorded use of this being specifically applied to brains is in William Beveridge’s sermon circa 1680. They rack their brains, they hazard their lives for it. Where else are you going to get this much real estate information, this much direct advice on finding a mentor and this much historical knowledge on the meaning of phrases like rack your brain than BiggerPockets? That alone should get us a like and a subscribe from you on YouTube and your favorite podcast app.
All right, our next question comes from Nathan Nye. Like Bill Nye the Science Guy. “Hi, this is Nathan from Michigan. Not an investor yet, but hoping to change that soon after listening to the podcast for around six months. Can’t say enough how much I appreciate BP. Truly life changing. Anyways, very curious how you all at BiggerPockets navigate the topic of validation. Many people, including myself at times, thrive on someone else telling them good job. But whenever I find myself locked in this mindset, the tie to someone else’s opinion feels unhealthy and almost takes control of my process. That said, I find it hard to tell myself you did it even with tasks or projects in my daily work. How do you tell yourself I’m doing very well, I’m proud of this, even if others are leagues ahead? How does this one conversation play out when millions are watching like on the podcast or even when you just know you know about an event happening? Would love to hear how you think about this topic. Thank you, Nathan.”
Wow. We are going deep here. This is a great question and I’m not even quite sure how I’m going to answer this. I should start off by saying you’re not the only person that feels this and I appreciate you having the courage to say it. Most of our listeners, me included, will struggle with wanting validation. In fact, I was just thinking about this the other day because there’s a trait in people that will irritate me and it’s usually some form of pride.
When people think that they’re better than other people, when they act like they’re better than me … In general, when anyone acts prideful it gets under my skin and almost every prideful person is insecure. So what I was thinking is when I see pride, what I typically want to do is try to humble that person. But the process of trying to humble somebody usually will hit on their insecurity and make their pain even worse. And this is the problem with insecurity, which shows up in pride, but it also shows up in the need for validation. Now, we’re all created and designed to need this. When we’re little kids, we need our parents to say good job. It’s like a wiring that we have inside us. At least this is how I look at it. That is made by either intelligent design or evolutionary biology, however, you tend to look at it, to keep you alive.
If your parent doesn’t tell you good job, you don’t know what to do and you won’t do the right things and then you’ll end up dying. In the same way that when your parent says you have to look both ways before you cross the street and if you don’t do it, they yell at you or they spank you. They’re telling you you did not do a good job. And because that is painful to lose their approval, you’re more likely to remember to look both ways before you cross the street and not be dead. The same thing if you eat your vegetables and they tell you very good job. They are training you to do a healthy thing that is hard and against your willpower. Sorry, against your nature, I should say. Against your will, not your willpower. That will serve you well in life so that they can keep you alive.
So this need for validation is tied to your desire to stay alive, and that’s why it’s so powerful. You can’t just get away, get around it. The key is you’ve got to put yourself around the right people so that they’re giving you the right feedback and not leading you down the wrong path, as well as to put yourself in a position where you’re not completely dependent on it because now we’re not little kids and so now this can become a pain. Sometimes when someone tells me good job for something, I’ll spend more time doing it when it’s not in alignment with my goals. Other time I will be making progress with my goals, but I’m not hearing good job. So this is difficult. Here’s a few things I can tell you right off the bat that will help you. Get yourself around other people that are committed to their goals, and it doesn’t have to be real estate.
Get yourself around other people that are committed to staying in the gym. Get yourself around other people that are committed to eating healthier foods. Get yourself around other people that are committed to having better marriages or being better parents or managing their wealth better. The first thing that you can do is when you start telling other people good job for what you did, it will silence the need you have inside yourself to hear it. I don’t know why it works like this, but it’s almost the equivalent of if you’re really hungry but you give someone else food, your hunger can go away and that will help. The other thing is they’re more likely to feed you if they’re being fed. This is just a philosophy I have in life. Don’t go around trying to find someone to be your friend. Go around looking for someone to be a friend to.
Don’t go around saying, “Why won’t anyone love me? Where do I find someone to love me? How do I make someone love me?” Go around and say, “How can I find someone to love? How do I meet other people’s needs?” Because the people that meet everyone else’s needs, the people that are a friend to others, the people that love others by the law of reciprocity will have that turn back to them. To me, that’s what faith is. It’s knowing if you do the right thing that your needs will be met rather than manipulating a situation to try to get your needs met by doing the wrong thing. It’s trusting that if you do the right thing, that things are going to work out for you and then having eyes to see where it did. So when it comes to being locked in this mindset that you talk about, the tie to someone else’s opinion that feels unhealthy and almost takes control of my process, one really helpful way you can get yourself out of that is to go look at what other people are needing, what other people are craving.
How many talented people do you know that are working a job they hate because they don’t have the confidence to get out of it? How many really awesome people do you know that are stuck in an unhealthy relationship that won’t leave it because there’s not anyone telling them that they can do better? How many people do you know that are not happy with their weight, but they’re just too insecure or shy to go running that you can say, “Hey, why don’t I start walking with you every morning? Then let’s start running together. Then let’s go to the gym together.” How many people do you know that are suffering from the same thing that you are suffering from right now, Nathan, that you can be that person to that you’re looking for for someone to be to you? Now, I don’t know exactly how that’s going to work out for you. I just know that it will.
If you focus on putting other people’s needs first and validating them in the way that they need, people will turn around and do it back to you and the universe or God or whatever you believe, intends to smile on that and push blessings your way. I know this was not the tactical advice that you were probably looking for, but I really hope that you would start taking some actions out of faith here and then either DM or email me and let me know if you’ve seen a positive impact from this advice. All right, we have time for one more question.

Seth:
Hey, David. Seth Stevens with Silverback Investments in Cape Girardeau, Missouri. We own a 12 unit apartment building for about a year at this point. It’s third party managed. We’ve been able to raise rents, but overall, the building doesn’t really seem to be doing a lot better than when we first purchased it. So my questions are how long should you give a property manager to turn a property around and what are some determining factors in deciding to switch property management companies? Thanks for taking questions.

David:
Steven, love it. This is a great question. All right, let’s dive into this. First question. I don’t think the right way to approach it is how much time should I give them to turn it around? I like to take almost every problem I have like what you have and turn it into the flow chart. Is it yes or no, if this, then that, right? So the first question I would ask at the very top is, is this something that can be turned around? If the answer is no, switching property management companies isn’t going to help you. If the answer is yes, now you ask the question, how long should I give them to turn it around as well as what progress am I seeing that they’re making? And then when it comes to the progress, now I’d ask the question of like, well, why are they not making progress? I’d work my way down that flow chart.
If it’s a 12 unit property and it’s not in a great area, it might not be the property manager’s fault. Okay. Now just think about your Phil Jackson. You’re the best coach that the NBA has ever seen. I don’t know who the best coach is. That’s debatable. Let’s just say you’re a very good coach and you’re given the worst players in the league to play with. All of your knowledge, all of your skills with people, all of your handling of personalities, all of your brilliant play calling is worthless if the guy on the floor can’t dribble the ball without turning it over or your players can’t shoot and they can’t score. What I’ve found is that the people that perform at the highest levels have to be surrounded by talent. It does not matter how good you are at anything if you’re not surrounded by talent.
Now, your property manager in this case, let’s call the talent, that might be your actual asset. How nice the units look, what kind of area it’s in. Are there other people that are moving into the area? Companies that are driving up wages and making so people can pay higher rents? Or is there a ton of competition and no one really wants to live in this apartment complex? It might not be the coach’s fault the team isn’t winning. Now, if you’re doing everything right and it’s an amazing unit and everybody wants to live there and you’re getting tons of applications and they’re just mismanaging it, yeah, you need to get another company and need to do it right now. There’s no more time to give them to turn it around. My guess is you’re probably not thinking about if you were in their situation, could you do anything different?
So before you assume it’s the property management company, always start with yourself. What kind of an asset did we give him? What could we be expecting him to do? There’s certain problems that I think anyone just with pure effort and having a good intention can fix. For instance, if they’re having plumbers come out to fix trivial issues and charging you $1,000 when they could be calling a handyman to pay 100, they’re being lazy. Get rid of them. If it’s the expenses are just completely out of control, that’s usually something that the property management has some control over. They’re being lazy. Get rid of them. If everyone that’s applying to live there is willing to pay 895 and you want to bump the rents up to 1200 and no one’s willing to pay it, there’s not much you can do. If tenants are constantly breaking their leases and it’s not just one or two, it’s all the time, well, that may be that they’re choosing the wrong tenants, but it also may be they don’t have much tenants to choose from.
Most of the time, if they have a lot of high qualified tenants, they’re going to pick the ones that are less likely to break the lease. So you’d have to ask some questions. I’d be asking when we have a vacancy, how many people apply for it? I would be saying, how much competition do we have from other units in the area and they should know that. If they don’t even know what their competition is, that’s not a good sign. You might want to move on from them. And then the last piece of advice I’d give you is before you go find another company … Because I feel like you’re moving that direction anyways. You’re just looking for some reason not to at this point. Is ask the company what they would do different than what you’re getting right now.
Okay. So let’s say that you had a house for sale and it wasn’t selling. You had a listing that was the very same scenario you’ve got. You’ve got an apartment complex, it’s not renting for enough. If you came to me as your real estate agent and said, “David, my house isn’t selling. What would you do to sell it?” I would tell you. I would be straightforward. And there’s a very good chance that it wouldn’t be the house’s fault, it’d be your fault. A lot of people list their house too high. They save on not wanting to spend for marketing. They let the house smell bad. They don’t want to have to move their stuff out of it so they’ve got outdated furniture or they’ve got moving boxes, they’ve got stuff that stops the house from showing well, they’re not wanting to actually keep the grass cut or keep it in good condition.
And if you came to me and said, “David, why is my house not selling and what would you do different?” I’d tell you what you don’t want to hear. I’d give you the truth. And I would also say, “I’m not going to drop my commission to make this work for you. You’re going to have to put the work into getting your house sold because my job is to get it sold and this is what it’s going to take.” I want a property management company that would say the same thing to me. “Okay, here’s the problem. You haven’t spent the money on the units that you need to. You’re not marketing it in the right places. The units are not in very good shape. The lighting is really poor and the tenants are going to feel scared coming here at night.” They should have objective information readily available to tell you of what they would do different. If they go, “Well, I don’t know. Let’s just get in here and see what we got. We’ll figure it out.” That’s not the person to hire.
You want them to have a plan going in where they can write out to you specifically, this is what we need to do different. These are the 10 steps we’re going to take if you hire us. If they didn’t have a plan in place, I wouldn’t switch to that company. Thank you for the question there though. I’m really sorry this is what you’re going through. I love it as you struggle with this, once you figure out what it was you needed to change, if you would go in the forums, quote the number to this show and tell people, hey, this was my problem and here’s what I figured out how to solve it.
All right, Thank you again everyone for taking the time to send us questions. This is a wrap to this episode of the Seeing Greene Podcast. As always, if you like these shows, please go to YouTube and leave us a comment letting us know what you like about it, why you like it, and what you want to see more of as well as leave us a review to let us know that you love the show. If you’d like to submit a question, please go to biggerpockets.com/david where you can do so there. And lastly, if you’ve got some more time, please consider checking out another BiggerPockets podcast. We’ve got more Seeing Greene, we’ve got more traditional real estate podcasts. We’ve got a whole library of information on BiggerPockets YouTube channel. We’ve got the State of the Market Podcast, The Rookie Podcast, The Money Show, the Business Show, the Investor Podcast, and probably more that I’m not remembering because there’s so many out there. So check out all of the BiggerPockets podcasts and find the one that resonates with you the most. Thank you very much for your attention and the time that we spent together. I will catch you on another.

 

 

Ashley:
This is Real Estate Rookie, episode 222.
My name is Ashley Kehr, and I’m here with my co-host Tony Robinson.

Tony:
And welcome to the Real Estate Rookie Podcast, where every week, twice a week, we bring you the inspiration, motivation, and stories you need to hear to kickstart your investing journey.
I want to start off today’s episode by shouting out some folks from the Rookie audience. We got another five star review. This one says, “I’m a small time real estate investor with one property, and I want to get to three to five. This podcast is amazing because they focus on the basics.”
So if you haven’t yet, leave us an honest rating and review on whatever podcast platform it is you’re listening to. The more reviews we get, the more folks we reach. The more folks we reach, the more folks we can help. And that is our ultimate goal.
So, with that out the way, Ashley Kehr, what’s up? What’s new? Tell me how things are.

Ashley:
Well, to be honest, today I’m going to use the Rookie Reply as my own confessional. I’ve had something just weigh me down on my shoulders and I just need to get it off my chest, and hopefully it will help some other people and everyone will realize that I am not perfect and bad things can happen. This bothered me so much, and I feel like I just need to get it out there in case it happens to someone else, that you know you’re not alone in this.
So at one point in time in the past year, I hired somebody to do my payables for the business.

Tony:
A bookkeeper.

Ashley:
Not even a bookkeeper, just paying the bills. So not even entering in any of the data, so just paying the bills. They would go and get my mail from the PO box. They would open the mail, they would scan in the mail, and I’d be able to look at it from there. And then they would write the check. They would bring the checks to my house that they wrote, have me look at them, compare them to the bill, sign them, and then they would make the envelope and mail them out.
So, first, I know you guys are all thinking that, “Well, why don’t you set all your things up on autodraft and automatic withdrawal?” Well, when you invest in small rural towns, sometimes there’s no online system. The only form of payment is walking into the place or mailing a check, unfortunately.
So there was things that would come in … or if a contractor, vendor, or something, something that’s an occasional occurrence, or the property tax bills, even the water bills. For in the small towns, the electric bills, they have their own utility company, and they only will mail out a bill and accept a check payment.
Anyways. So I got a letter in the mail about a month ago, and it said that my property taxes were not paid on one of my properties. In bold print across the top, foreclosure, property tax foreclosure, across … I seriously had a heart attack. At this moment I can’t even recall exactly what it said because all I did was panic inside. And it said: past due, nonpayment. These were due, I mean, like six months ago, that this happened.
And at the same exact date that I got that letter, I got an email from my bank that I have the loan with, saying, “Hey Ashley, just wondering what’s going on? This third-party company we check, to make sure things are paid on a property, said that the property taxes were not paid. What’s going on?”
Immediately, I felt embarrassment. I got sick to my stomach. I felt anger. What happened? So this person just did not do what they were supposed to do. So we went through the scanned documents, things like that. There was property taxes that were scanned in. Never paid. There was some that were never scanned in. Did she not get them? Things like that.
So I had to go through a lot of my accounts and just make sure everything was paid. Go through every property and pull up … And it ended up there was two properties that the property taxes were not paid for. Actually, no, I’m sorry, there was three. So one of them, what happened was that the property taxes were actually added to my next round of property taxes, and they were re-levied, they call it. So it was actually included into that bill. So they ended up being paid.
So what I did, was I went online to pay the property tax bill. And it says that they’re no longer accepting online payments. So I go into the town clerk in the small town and I go to pay the property tax bill. She’s like, “Oh no, I can only accept payments until June 30th.” And I was like, “Okay. How should I pay this?” And she goes, “Well, I don’t know. I’ve never been in this situation.” My embarrassment just overloaded even more. I’m like, “Oh my God.”

Tony:
“I’ve never had any bum landlords be this late on their property taxes.”

Ashley:
I know. And I was just like, “Okay. Yeah. I’m sorry, I’m not sure what to do. I was just asking for some guidance.” And she’s like, “Well, I guess I could Google it for you.” And this clerk is the one that you would write your check out to, to pay your property taxes. I just assumed they would know …

Tony:
Know what to do.

Ashley:
… what to do if someone’s paying late. So my embarrassment was awful. I had to work up the nerve to even go into it. I tried to make Darrell do it, but it would’ve had to wait another day until he was available because I didn’t want to walk in there. So it just got 10 times worse.
But what you ended up having to do was … she’s like, “You’ll have to go downtown Buffalo and you’ll have to pay it to the county now,” or whatever. So I got back in the car, I did my own Googling, and they actually accepted the payment online. So I didn’t even have to go into the clerk’s office, I could have paid it online. It was taken care of.
And then I learned that it’s actually two years of back taxes that you need before they will actually come and take your house and put it up for auction. But that was just a horrible, horrible feeling for me, is having that happen. So my biggest things that I learned, is that if you hire and outsource someone to do something … and I learned this with my property management company too … is that that doesn’t mean that you can forget about it. You need to still stay on top of things.
So that was my biggest takeaway from that. And if a bill is not paid, like your property taxes, it’s not the end of the world. But maybe I need to implement some kind of system, where I have a VA that’s going in and: check, check, check. Okay. All these property taxes are paid. Because if I don’t get a bill for something I don’t know to pay it. I can’t remember all of the property tax bills that should be coming in for my properties.
So if there’s anybody else out there who hired somebody that missed a payment, or maybe just forgot or something and missed a bill, I’m right there with you and felt the embarrassment.

Tony:
Yeah. Well, first, thank you for sharing, Ashley. I appreciate you sharing this super embarrassing story. I’m embarrassed for the both of us. I’m embarrassed that we’re even associated with one another now because I don’t want people to think that I don’t pay my property tax bills.
But, I guess, a couple questions. So, for me, I never have to worry about paying my property tax bills because my property taxes are impounded with my insurance payments for literally every single property. Is that not the case for your properties in New York?

Ashley:
So you have them in escrow?

Tony:
Yeah, all my payments are escrowed. Yeah.

Ashley:
Okay. So yeah, I have a lot of commercial lending on my properties, where they usually don’t require you to escrow your property taxes. So the nice thing about that is my monthly payment is low. Yes, I have to save up to make a payment, but a lot of my commercial loans, they don’t offer it or they don’t require it.

Tony:
Have you called to ask them if they would be able to do that on your behalf?

Ashley:
No, because I don’t know if I would actually want to. I mean, maybe now would be a good example. But I like that I’m just paying my insurance bill once. Because I have had it happen … this has actually happened twice now with a hard money lender … where I paid, at closing, for my insurance upfront, and they took the check and they were going to pay the insurance themselves, just for that one year, with the hard money lender.
I got notices stating that they have no record of the insurance, blah, blah, blah. So I’ve had a lot of issues with that recently. But I’m sure if they wanted to … I do have one commercial loan that has it in escrow, but that’s it.

Tony:
Yeah. For me, like you, there’s too many things going on, I think, for me to be able to keep track of that. So, for me, being able to escrow all that stuff has been super helpful.

Ashley:
Maybe that’s something I need to reevaluate going forward, is make sure that they are all escrowed. Yeah.

Tony:
Yeah. So my second question: did they send any notices before then about the nonpayment, and was this person who was in charge of that just not catching that? How do you think it went that far without it being brought to your attention?

Ashley:
So, actually, they would’ve received the bill a month before I let them go. So there was other things that were happening. So I had let them go, and then somebody else took over. And no, there was no bill received. This was the first notice that we got in the mail. And the bank had found out the same information at the same exact time. Which I thought was weird too.
But also, the next round of taxes for that property is coming up due now. So maybe they sent a notice before they re-levy it onto the next set of taxes for that property? So it’s like the school taxes are all coming up now. But yeah, I don’t know. But we thought that was really strange too, was that this was the first notice of it. And coming up too, is the big county auction for properties that they’ve taken for properties tax.

Tony:
So you’re like, “Oh no.”

Ashley:
I was like, “Oh my god, it’s going to be on the list. My LLC.” Oh my God, I was just sweating. People are probably Google satelliting the property, like, “Oh yeah, we want to bid on this one when it comes up to auction.”

Tony:
But luckily you avoided that.

Ashley:
Yeah. Yeah. Yeah.

Tony:
Crisis averted.
So I know you mentioned trust would verify, which I think is a big thing. And for folks, even if you just have one property, if you’re not doing everything yourself, I think there does have to be some kind of checks and balances in place to make sure that the things you’ve delegated to other people are actually getting done.
Just a quick backstory. So, for me, in my old W2 job, I was in a manager level position, so a lot of my information came secondhand from folks who were on my team. And obviously I had to trust them, that they were giving me the right stuff. But a lot of times I would just go back and I would just randomly pick different things that I would double-check, like if they were sending me data on how their shift perform for the last day, I would look at the email they sent me, but then I would just go into the system myself and pull some of that data to see if it all lined up.
So those little spot checks sometimes, I think, help catch some of those issues. And typically, what I’ve found, is that if you have someone that’s a low performing employee, if you find one mistake there’s probably some other mistakes in there as well. So it might be a telltale sign that there’s some other things you might want to dig into.

Ashley:
Yeah. And there’s probably things that are still going to come up from this too, I’m thinking.

Tony:
Yeah.

Ashley:
So we’ll see. But I had to get that off my chest. I had to do a real estate confessional of mistake.

Tony:
Yeah. And like you said, I think it’s helpful for the rookies to hear as well, because they hear our voice, they hear our stories every week. I know there’s this maybe misconception that things just always go right for us.

Ashley:
Yeah.

Tony:
But I shared my story about the Shreveport house that I lost money on. And things like this happen. As you’re building your business, things don’t always go right. So it’s not necessarily about maybe not letting those bad things happen, because sometimes it’s out of your control, but it’s about: how do you respond and how do you take those lessons and put them into your business so you can continue to get better?

Ashley:
And I think those are the people you want to have in your network too, who are open and honest about those things. While I was waiting for my kids to get off the bus today, I was on the phone with my friend Layka, who’s an investor in Seattle, and I was just telling her how some things were going wrong. We just found out this morning we have to put a new well on a property. And just every day there’s new costs, and it’s just like you’re moving money from the good properties to support the bad properties.

Tony:
Totally.

Ashley:
You never seem to have money because you’re always buying stuff.

Tony:
Buying stuff.

Ashley:
She’s like, “Yeah, you really get to enjoy real estate when you actually stop buying things and you just live off your rental income because you’re not putting it towards more properties.”
But she just rattled off all these things that are going wrong with her properties and then things that are going right with some. And it’s like, those are the investors you want to put yourself around, to share the good and the bad.

Tony:
I just want to share one thing that’s gone wrong in our business. So one of our cabins in Tennessee, summer is usually one of the busiest times of the year. Last summer we absolutely crushed it. And our second biggest cabin, there was a small leak, a little pinhole leak, that no one noticed. But we only started to notice because the floor was a little uneven and a floorboard started to pop up.
So our handyman went, he popped up the floorboard, and saw that it had just been leaking for who knows how long. So we had to cut out a big … I don’t know, like eight by eight square. And he replaced the subfloor and then put new flooring down. So this was two weeks ago.
We get a message from our cleaner on the same exact property, a few days ago, that they walk into that same lower level where we just replaced the floor and it’s soaked again. But this time it’s because the bathroom was clogged, the toilet in the bathroom down there was clogged, and literally re-damaged that whole section of floor that we just replaced.
So we had to block the calendar two weeks ago because of that first issue; we have to refund guests. And we have to do it again this week because of the second issue. So things that are totally out of our control. But like you said, it’s all-

Ashley:
And does that hurt getting super host, when you have to cancel people too?

Tony:
Yes, it definitely does. But if you have a cool guest and you just explain to them what happened, it’s like, “Hey, here’s what happened. You can stay if you want to. But just know this little section’s going to be unusable.” And if they cancel on their own, then you’re fine. But if they go to Airbnb and said I canceled on them, then automatically we would lose super host status.

Ashley:
Okay. I think that little tip is worth anyone listening to that episode because that’s great advice. Because my first thing was, wow, you had to cancel all these people. But no, you tell them what’s happening, and then you say, “I’ll give you a full refund if you choose to cancel,” so it’s on them. Ah, that’s a great idea.

Tony:
Yeah.

Ashley:
I mean, hopefully I don’t have any major …

Tony:
Yeah. Fingers crossed you never got to use that one.

Ashley:
Yeah. Yeah. Okay. Well, thank you guys so much for listening to my real estate confessional this week. We will be back on Wednesday with another Rookie Reply.
I am Ashley at WealthFromRentals, and he’s Tony at Tony J. Robinson. Don’t forget to check out our YouTube channel, Real Estate Rookie. And we’ll see you guys next time.

 

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Mindy:
Welcome to The BiggerPockets Money Podcast, Finance Friday edition, where we interview Allen and talk about short term rentals, credit scores, and student loan debt.

Scott:
The other big problem here is your credit score, which is not great right now. So the approach I like the best is to either, just pay down the debt or go good old fashioned index fund investing, instead of sticking all that cash in your bank account. Sit tight for a year or two. You’re going to generate $50,000, $100,000 in free cash flow over the next year, after tax, at the current rate that your life is going. And you’re going to be right back in the same position, but with a cleaner balance sheet at that point in time and a better credit score. And during that year, you can put together some really clear business plans for rental property investing, short term rentals, rent by the room, whatever makes sense in your local areas, that can produce that passive cash flow.

Mindy:
Hello, hello, hello. My name is Mindy Jensen and with me as always, is my real estate loving cohost, Scott Trench. You’re supposed to say thanks.

Scott:
Oh, thanks. Go again. Sorry, I was not paying attention.

Mindy:
Are you new?

Scott:
Yes.

Mindy:
Let’s start over. Hello, hello, hello. My name is Mindy Jensen and with me as always, is my real estate loving cohost, Scott Trench.

Scott:
Ah, and with me as always, is the foundation of our real estate investing firm here.

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

Scott:
That’s right. Whether you want to retire early and travel the world, go on to make big time investments and assets like short term rentals on a lake, or start your own business. We’ll help you reach your financial goals and get money out of the way, so you can launch yourself towards those dreams.

Mindy:
Scott, I am excited to talk to Allen today, because he has a very interesting financial situation. He makes bank, he makes a really great salary, but he has had some past financial mistakes and now has a bit of a debt scenario that he needs to contemplate paying off. And he also is interested in retiring early, which is why we’re talking to people here anyway. And he has a great home situation, where he is able to short-term rental a portion of his house, but if he moves out, he will not be able to do that anymore due to the short-term rental laws of his city. So he’s got some decisions to make, but the best part of his whole situation is that, his income is covered. He is making such a great income and that is one of the biggest problems that we see on this show is that, I want to do all these things but I don’t have any income. Well, he’s got that covered.

Scott:
I think Allen has a really strong set of financial fundamentals in his financial position, but that his goals are not really as well thought through as they could be, and his investment philosophy is not well rounded out. And then compounding that, is the fact that he’s stuck in a pretty good overall position, because of a couple of great decisions he’s made in the past, but that make it almost hard to go back on that. For example, his house is so great, his living situation is so great, how can he possibly leave that and go onto another housing situation? That lever of house hacking or scaling your portfolio through owner occupant strategies is not really available to him, because his current situation is so strong and he won’t be able to replicate it.

Mindy:
That is a problem that I think we’re going to see a lot of people facing in the next few years, just the next year, if you believe some of the reports that are coming out. But with interest rates rising, it’s going to be really hard to find a fantastic deal. And that doesn’t mean that there aren’t deals out there, that doesn’t mean that you can’t be buying real estate now, even with the high interest rates. It just means that finding a fantastic deal is going to be even harder than it was before.

Mindy:
So I am excited to bring in Allen, but before we do, my attorney makes me say that the contents of this podcast are informational in nature and are not legal or tax advice, and neither Scott nor I, nor BiggerPockets is engaged in the provision of legal tax or any other advice. You should seek your own advice from professional advisors, including lawyers and accountants regarding the legal tax and financial implications of any financial decision you contemplate. Someday I will have that memorized, but today is not that day. Allen, welcome to the BiggerPockets Money Podcast. I’m so excited to talk to you today.

Allen:
Thanks, it’s great to be here. Excited to talk to you both.

Mindy:
I am excited to talk to you, because I see some easy wins and some research opportunities for you, right off the bat. So let’s jump in and review your finances. Easy win, huge, huge win that you’re having is your income. Your W2 income gives you approximately $12,000 to $18,000 a month, not a year, a month. Now that’s a huge swing, that’s an entire salary in some cases, swing. So I want to review that in a little bit, but let’s celebrate the fact that you are killing it in the income front. Not only that, but in addition to that, you bring in $2,000 to $4,000 a month as a short-term rental, primary house hack situation.

Mindy:
So that’s another bunch of money coming in. Awesome job. You have $120,000 in savings, which is fantastic. Now let’s look at your debts. You have $100,000 in student loan debts, which are currently deferred and I’m assuming you’re making no payments on, which is a smart decision. You saving the money, and then I’m assuming that you’re going to pay those off as soon as the deferment period ends, but of course we’ll get into that in a little bit.

Mindy:
You have a $290,000 mortgage at 3%, for 30 years. I’m hoping you’re not going to pay a dime more than you need to on that, because 3% is not the current mortgage rate right now and you have $300,000 to $400,000 in equity on this house. So that’s another celebration you bought well, hooray. For expenses, I have $500 a month in utilities, $105 in homeowner’s insurance, $450 a month in property taxes, $65 a month in car insurance and the rest of your average monthly expenses is $7,000. The research opportunity that I see immediately, is to break this down and into really, really small categories to see if there’s any place that you can cut some larger expenses out of. I have, wife’s retirement accounts as traditional IRA, $50,000, Roth IRA, $15,000. I see no, Allen’s retirement accounts. So that’s another thing that we’re going to discuss today, Allen. Can you give us a very brief overview of your money story?

Allen:
Absolutely. So my money story began, I guess we’ll put it in… We’ll start at college. Started in college, just going for a general bachelor’s degree, not really sure exactly what I wanted to do, so just changing my majors around and living off of my student loans essentially. And eventually, I started just working some odd jobs through my early 20s. I was a line cook at a restaurant where my wife and I met. Were working at a daycare making $9 an hour. So I really never made much more than $10 an hour for several years. And so, to supplement that I was using student loans to pay for my expenses and taking out credit cards and racking up bills on those, just to pay for my everyday life. And then I got my act together a little bit and went back to school and started in my career that I’m in now, where I started actually making decent money.

Allen:
I started off making about $30 an hour and working 36 hour weeks. And since COVID, I had an opportunity in healthcare, just because there’s been such a big need for my profession. I’ve been able to increase my hourly income from $30 an hour, to the most I was making recent was $125 an hour. So I’ve definitely really making a lot more money in this field than I ever thought that I would. So that’s where I’m at now. I’m making a lot more money, and because I’ve been making so much more money, I’ve been thinking a lot about where I really want my life to go financially. And I decided that I don’t really want to do the traditional work until I’m 65 thing. So I’m hoping to use this period where I’m making a lot of good W2 income, to try and propel myself into financial independent situation in the near future here.

Mindy:
Okay. And what are your goals for post-work life?

Allen:
Post-work, I would like to not really have to do too much more than just manage my Airbnbs, because the plan is to just get up as many short-term rentals as we can. So I really wouldn’t like to do too much more than whatever I have to do with property management companies. And then, use my free time from there to travel. My wife and I both love traveling a lot. We go places several times a year, so just traveling. And we’d like at some point to open up a farm sanctuary. So I guess that would become our jobs, our retirement jobs would be running something like that. So really, just the freedom to travel and then turn whatever hobbies and interests we have into somewhat of a career, maybe make a little bit of money from that as well.

Scott:
Awesome. So in a couple years, we want to be financially independent with a short-term rental empire that allows you to have a farm sanctuary as your full-time gig.

Allen:
Yeah, exactly.

Scott:
Love it. That’s clear. We can work with that. Is that within three to five years, seven years? What’s your ideal?

Allen:
Yeah, ideally three to five years. That’s my ambitious goal. I’ve given myself a 10 year deadline at the most, because I’d really like to spend no older than 40, I’d really like to continue working. So three to five years ideally, no more than 10. That’s what I’m working with right now.

Scott:
Awesome. Anything else we should know about your financial position?

Allen:
I guess I’ll go into my variable income, which I foresee potentially being a barrier in the future. Right now, the least amount I’m making is $90 bucks an hour. I’m currently making $90 an hour, but starting September I’m going to be going back up to the $125 an hour, but I’m not entirely certain how long I’m going to be making this rate of pay. I’ve currently been making this amount of money for almost two years, but I foresee that eventually going away, once hospital systems… I’m sure they’re trying to figure something out so they can get us back to our original pay rate.

Allen:
So I’m not counting on always having this kind of income. So that’s my biggest barrier. Before I started this new journey towards financial independence, I got a master’s in clinical research, so that was my backup plan. I can make about the same amount of money that I’m making now, in that field. So I could always switch over to that if I needed to. But currently I’m making the same I would, doing that, and I only have to work three days a week. So I’m going to stick with this as long as I can.

Scott:
Could you walk us through your house hack and how that operates? What part of it do you live in? How much are you renting other parts? How much would it rent for if you were to move out and make it a full-time, short-term rental? Can you do that with the laws in your region?

Allen:
Sure, yeah. So we have a house right outside of downtown Portland, Maine and it comes with a two bed, one bath apartment above the garage, and it’s detached. So our guests have their own driveway and their own outdoor area that’s fenced off. So it’s completely separate from our house. We live in the main house, so we’re not doing the complete reversal where we’d be living in the smaller area that I know some people do, to make a bit more money. But we’re giving ourselves the full house, and then just renting out the unit in the back. And the most we’re renting it for is $145 a night, which unfortunately we were rent capped. They’re treating us like we’re a long term rental. So we can only go up by a certain percent each year.

Allen:
I forget what that is exactly, but the main issue is, if we did move out, we would not be able to short-term rental this property full time, because Portland has a law that you can only short-term rental property if it’s owner occupied. So us, staying in our house right now with our low interest mortgage, renting this place out as often as we can, that’s making us a decent amount of money enough that my wife was able to quit her job. But moving forward we would have to find some other properties to short-term rental if we were to move out of this one.

Mindy:
Is that your plan, to move out of this? Or do you plan to retire here?

Allen:
Yeah, we plan on moving out. This is our first home. So we more got it because it had this unit in the back. So we’re like, “Well we want to live in this area and this apartment’s going to help us afford to do that.” But we do plan on moving. We’re not sure exactly where yet, but definitely not our forever home. So eventually, we’ll either sell this place and collect the equity to buy another home, or we might just keep it and turn it into a long term rental, just get, still a decent amount of income from that.

Scott:
When I observe your financial position, the things that jump out at the highest level, are your spending where, oh, we have $500 a month for utilities, a mortgage, property tax, and then $7,000 of other spending. And so, that I think is a really important lever here, to understand where that’s going. In months where you make $12,000, on the lower end of your income range, you’re probably saving almost nothing and your savings are probably coming from the months where you make the higher end of that range, to a large degree on the 12 to 18 K. And I think you should get to a place where, even in the lower months, you’re saving a good percentage of your income, 20 or 30%, and that will involve getting control over that $7,000. So I think that’s one key lever. And I think the second big lever is going to be your house.

Scott:
It sounds like you do not plan to stay in there long term, and that this house is going to have a very different economic profile for your family, the day after you move out, than while you’re living in it. While you live in it, it’s a money making machine and that will evaporate essentially, the day that you move out. And so, you got to figure out what to do with the equity in that house downstream. And then I think, third big point is what you’re doing with all this cash. You’re sitting in a lot of cash, but you don’t have a good way to deploy it right now.

Allen:
Yeah. I do want to add that, the $7,000 a month includes all of those other monthly expenses. So the mortgage and the utilities and all that is lumped in with that $7,000. So it’s not a $7,000 on top of that.

Scott:
Okay. So you do have a good, clear understanding of the household spending and [inaudible 00:15:24]. My mistake there, I apologize.

Allen:
Nope. That’s okay.

Mindy:
Do you know how the $7,000 breaks down? Or is it just, “Well, I know I spent less than $7,000, so I’m doing okay.”

Allen:
It was more like we were just looking at the general breakdown that our bank account homepage showed us for how much we spend every month, and we’re surprised by it. We’re like, “Oh wow, we’re spending $7,000 month. I had no idea we’re spending anywhere near that much.” So we’ve got our general monthly expenses with the mortgage and the utilities and everything, which we can’t control, but it’s not that bad. But then yeah, there’s another $4,000 that we’re spending a month. We don’t really tighten the belt too much. We definitely enjoy ourselves and we travel a lot. So a lot of that money is from travel, booking flights and hotels and whatnot. We also like to go out to eat a lot and we go to events. And so, we just have a very active, on the go lifestyle. So that’s generally where the meat of that $7,000 is going, is just our travel and excessive date nights, I guess.

Mindy:
Okay. So research opportunity number one is, travel points and travel rewards. Do you have a favorite airline? Do you have a favorite hotel? They have a credit card. I can almost guarantee that they have a credit card. I have a Hyatt credit card, I have a Southwest Airlines credit card, and I swipe on my Hyatt credit card for every purchase, because I can pay it off at the end of every month. If you’re not going to pay it off at the end of every month, don’t listen to anything I’m about to say. But assuming that you can, put all of your purchases on one card. This helps you track your spending, it helps you earn a lot of points. I have 60 something free hotel stays coming up, but all of the travel that I’m doing right now is for work. So I’m not using them for work.

Mindy:
I’m going to let work buy me hotel stays, at Hyatts, so I get more free hotel stays. So there’s a way to still travel, but not pay so much for your travel. There’s a way to still go out to eat, without paying so much for going out to eat, by maybe not going out to eat as much. Your local airline, your local airport may not have a ton of airline options. So find an airline that you can get a credit card for and start earning points on those to reduce your travel expenses. You just said something very telling, you said, “We had no idea we were spending $7,000 a month. We know we spend $3,000 for these fixed expenses, but we have no idea what that $4,000 is all about.”

Mindy:
I think that you need to track your spending really carefully for a couple of months, and you may start to see things that shock you or you may start to see things that you’re like, “Yeah, I’m okay with that.” And either way, you’ll at least know where the money’s going. Like Scott said, on an $18,000 month, spending $7,000, you still have $11,000 left over. That’s a lot. On a $12,000 a month, if you’re spending $7,000, that’s technically $5,000, but is that $12,000 in your pocket or 12,000 pretax?

Allen:
That is pretax, yeah.

Mindy:
Pretax. So that’s probably closer to the $7,000 that you’re spending. So like he said, it’s going to be a lot more difficult to save any money when that’s all that’s coming in and you’re spending it. So I definitely want to see some tracking of spending, just to see where it’s going and to make sure that what you’re spending on, is what you value.

Scott:
If you have a bucket of $7,000 in other spending, then I think spending is a big problem. If you’re spending $7,000 in total to fund your life, inclusive of your mortgage payment, utilities, all that kind of good stuff, then I think that there is some belt tightening you could do and I think it would be good to get control over it. But I think that you’re going to accumulate large amounts of cash, in a general sense here. So I think then, I would pivot to how badly and how fast do you want this goal? If you want it in three years, for example, then you got to buckle the belt and move into this unit above your garage and Airbnb out your main house, to get the much higher rents that would come with that.

Scott:
And then, start getting aggressive about the next things. If you want it in seven years, you can probably do exactly what you’re doing from a lifestyle perspective, and then just make some bigger moves there. And if you want it in 10 years, you could probably even increase a little bit and you’ll still get there if you’re able to do a couple of, again, those bigger money moves. Walk me through your short term rental income here. You said you’re locked in at a cap of $150 a night, right?

Allen:
Yes.

Scott:
$149 a night?

Allen:
$145.

Scott:
$145, and how many nights a year are you going to rent that thing out?

Allen:
So let’s see. So pretty much from, let’s say April through October, we’re pretty much booked every single night. Portland’s becoming more and more popular, so we’re booked pretty much every night, as long as we keep it open. Granted, my wife does do all the flipping herself. So when we go on vacations and stuff like that, we just close it down. We’re hoping to eventually find a good property manager that can take care of that for us while we’re out of town. But we’re very concerned about our reviews right now. We’re super hosts, we’ve got a 4.98% on Airbnb. So we don’t want to lose that.

Allen:
We’re concerned that a property manager might lose us some of those points. So I’d say, probably a good five, six months out of the year we’re booked every single night. And then during the off season, in the winter, still booked pretty much every weekend. So it’s better than we thought it would be where we live, just because there’s not too much to do where we are, but we get a lot of local tourists coming to stay with us as well. So that’s been good as well.

Scott:
What would the rates be if you could charge whatever you wanted?

Allen:
If we could charge whatever we wanted, I don’t think we would charge too much more than we’re charging right now. And we might go up to $200 bucks a night at some point during peak season, over the summer. But part of trying to make sure that we have good reviews and people are happy, is making sure that we’re charging a rate that people are happy paying. So we don’t want to overcharge them and make them feel like they’re getting ripped off. So we probably wouldn’t go up too much more than we’re charging right now, at maximum.

Scott:
What I’m trying to get at is, your city is conducting bad policy, taking money out of your pocket and putting it into the guest’s pocket who are from out of state, by capping that price. You cannot control that, but there’s always a blessing with every curse with this. The blessing should be that you are able to get a large amount of occupancy out of this, would be the logical leap I would make, and say, “Okay. My average is going to be $149 a night, but my minimum is going to be seven nights, during these periods of the year.” What games and research can you play throughout the year, so that you’re able to just fill it up to close to 100% occupancy, given the fact that you are artificially capped on your pricing? There should be an opportunity, I would think with that, with some wiggle room. And that would be the only lever that I think you can pull right now, given that you can’t increase price.

Allen:
Just try to fill it up every day.

Scott:
By considering minimum stay requirements. You cannot stay for the weekend, in the off season, you must stay for the week. So during the peak season, you have to fill up the entire block of days that I have available and these times. You cannot stay for these things. And I think that will help you with your scheduling as well. You’ll have fewer unit turn issues for your wife there.

Allen:
Yeah, that’s true. We did end up opening it to one night bookings, which ends up being a lot more work, as you said. But we had noticed when we, because we were originally doing I think, three or four night minimum stays, and then we had all of these little holes throughout the month. That when we opened it up to one night bookings, we went from having 25 nights booked, to having all 30 booked. So just filling in those holes by doing the one night bookings. Over the winter, I’m not sure if we would be able to fill it up for a full seven days, just because most people are just looking for a quick weekend getaway. So I don’t know if we restricted it to you have to stay for a week, if we would get more or less bookings. I’m not sure about that.

Scott:
Okay. What I’m hearing you say is, you feel reasonably optimized in the pricing strategy here and that this isn’t really a major level in your financial position, to get more income out of the current short-term rental. There may be tweaks but it’s not the meat of the journey here.

Allen:
Yeah, I think we’ve optimized the space that we have to work with, just because maybe if it was more of a niche property, people might be more inclined to book it for longer periods of time. But since it is just a unit above a garage, it’s mostly just people who are looking for a quick getaway here and there, and not booking for long periods of time. Granted, we haven’t tried putting the restriction on it to see, what we did if we did restricted to, you have to book it for the full week, to see what would happen there. So that’s definitely something that we could try out this winter.

Mindy:
Something to think about as you contemplate your decisions going forward is, it isn’t just, should I rent out both units long-term when we leave? You could find somebody to rent out the smaller unit as their long-term primary residence, and then they rent out the main unit as their short-term rental, which isn’t getting around the short-term rental laws. It is operating within the short-term rental laws. You’re not renting it out, because it’s not your primary residence, they’re renting it out because it’s their primary residence. And then, you work out some sort of split with them or some sort of higher rent for the whole property. That is an opportunity… Option to look into. I’m not sure exactly the laws, but it’s their primary residents when they’re renting there.

Allen:
Yeah, that’s interesting. I hadn’t thought of that.

Scott:
I think a big challenge for you is going to be, your goal is, you want to get a couple of more short-term rentals. Where do you want the short-term rental to be?

Allen:
Right now we’ve just been looking around our area, just because we know what the market’s like in areas close to us, and at least for the first couple properties, we want to try and manage it ourselves, just to get as much of that income for ourselves as possible. So for instance, right now we’re looking at getting a lake house, which that’s a big market, here in Maine. A lot of people come, rent lake houses over the summer and even over the winter to do ice fishing and snowmobiling and all that. And it’s also a type of property that we feel a little bit more comfortable, just with the way the laws are going, because it seems like everyone’s trying to restrict short-term rentals so much.

Allen:
Just all the neighboring towns as well are putting so many restrictions on short-term rentals, that we’re trying to look at just properties like lake houses that have always been in that market and we think might be less likely that they’ll end up putting restrictions on them in the future. So we’re looking for things like that, and also beach houses as well as another popular spot up here. But we would eventually like to branch out to other states as well. But like I said, for now it’s just easier to manage it in this area, because we know how the market works in each area.

Mindy:
Okay. One of the things that you said about your goals for post-five life is that you want to manage yourself, your short-term rentals, and you want to get as many as possible. And my first thought when I heard you say that is, you should lump your short-term rentals together, because then you can pull upon your current pool of contractors and cleaners and you know the laws and everything here, as opposed to, I’ve got one here and then one over here and one down here, and then you have to find people in every single area. So I don’t know where this lake house is, in relation to your current house. Could your current cleaner, well I guess your wife is your current cleaner, would she be able to go and clean this and turn it over, or would you have to hire somebody to do that?

Mindy:
Because that is the number one problem that I hear short-term rental proprietors, is that the right word for this? Short-term rental proprietors have is that. Hosts, thank you, Scott, that’s a better word. Is that they have a hard time finding cleaners, finding good cleaners, finding reliable cleaners or finding anybody at all to clean the property. And that’s one of the biggest issues that short-term rental tenants or guests, one of their biggest complaints is, “Oh the house wasn’t clean. The house wasn’t as clean as I wanted it to be. There was a hair here or there was schmutz there or whatever.” They get really upset when it’s not perfect.

Allen:
Yeah, exactly. That’s why we’re so afraid to have anyone other than my wife do it, because where that someone else’s version of clean won’t be our same version of clean. And even between me and my wife, whenever I flip the Airbnb for whatever reason, she’ll go double check my work and I’ve left a bunch of hairs in the tub still, that I’m like, “I swear I’ve gone over it three times.” But she’s got a different eye than I do. So yeah, we are trying to find a lake house that’s within an hour of us, so she can just do that herself as well. So we’re definitely looking for places within an hour so she can run over there in a reasonable amount of time and fix any issues and flip it herself without too much trouble.

Scott:
These properties, how much do they bring in?

Allen:
We’ve been looking for quite a while and we were initially starting looking for a place, hoping to find something that we liked around $350, but after about six months of looking for lake houses and striking out, it looks like we’re probably going to have to spend around $450 to $500 minimum, to look for what we’re looking for. Which would be probably a three bed, two bath lake house, that should be able over the summer, should be able to bring in probably $300, $350 a night.

Scott:
And how much annual income is that? You have a very seasonal business here, so what is it going to be on an annual basis?

Allen:
So we’re hoping that it should be able to bring in, if we’re looking at over the summer, we’re hoping it should be able to bring in at least at $7,000 to $10,000 a month over the summer. So we should be able to get a minimum of $50,000 a year on that. Then hopefully if we are able to rent it over the winter, which we’re not positive on how well that’s going to go, but we do see that they do pretty much get booked out a year in advance over the summer. And then in the winter, there’s definitely still more holes. So we’re going to have to play around with that a little bit more, to see how frequently people are coming out in the winter to book those. But I think if we made at least $7,000 to $10,000 a month over the summer, that would at least cover us enough to get us through the full year of mortgage payments and everything.

Scott:
I do not think that this is a winning formula for you to retire early and do this, based on those numbers. So let’s say you get $50,000 in annual short-term rental income from this property, and you’re buying a $500,000 property with $100,000 down, you’re not getting that loan for less than 6%, not in an investment property that’s not your primary. So that’s going to look at a 6% interest rate, you’re looking at about $2,400 a month before taxes and utilities. So that’s $30,000 in principle and interest right there. Plus you have taxes and utilities. What are taxes and utilities going to be in this location?

Allen:
This location will be, the taxes will be less than where we are now in Portland. It looks like they’re usually averaging about $3000 a year in property tax. Utilities, probably be pretty similar, probably would be about $500.

Scott:
So now we’re at $30,000, plus $3000 in taxes, plus $6,000 to $7,200 in utilities. That puts us at $40,000. And then how about insurance?

Allen:
Insurance, I’m not sure what we’d have to pay for home insurance on a lake house. I just know that we’re paying around $105 for our home, probably about the same.

Scott:
That’s $42,000 and that’s before you have to replace the roof for CapEx. That’s before you have to do any maintenance to the property outside of cleaning. The cleaning bill I would not include in the calculation, because I’d pass that to the guests, as a cleaning bill, but you’d still have to find somebody to do that. I do not think your wife would want to drive out an hour, multiple times a week, to clean the property for an $8,000 profit before maintenance and CapEx expenses. But these back of the napkin numbers don’t work for me at the highest level on this property, in a compelling way right now with this. And you contrast that to your current property, where you’re making $2,000 to $4,000 a month on a $1,500 mortgage payment.

Scott:
And you probably could do way better if you rented out the main house instead of the unit above the garage. You’ve got a much bigger winner there, probably because you bought many years ago and have a primary home mortgage on that at 3%. I think this is going to be the real crux of it is, do you have a viable short-term rental strategy here, in this location? And when you actually analyze those numbers all the way down the line, do you get to something compelling? Is for example, the $50,000 annual income estimate way low? Does that feel way lower or do you feel like you can get way more than that?

Allen:
That’s on the lower end. Again, this is just a very rough estimate on how much we’d be making, but that’s my estimate if, subtracting the off season months. So I think that’s about how much we would make during the spring, summer and fall, we’d be able to pull in that much money. And then, however much we’d be able to pull in on top of that over the winter, which I’m not really sure what the market’s like for that. We definitely would have to reduce our nightly rate and probably wouldn’t get rented out as much. So it might be a similar situation where we’re still getting rented pretty regularly, but only on the weekends and only for $200 a night. But yeah, I get what you’re saying.

Allen:
I guess it would be more of a luxury investment, because we definitely like the idea, because it’s something fun for us to utilize as well, but in terms of cash flow, we would definitely be restricted there, like you were saying. It is tough, because like I said, we are restricted so much on our ability to get short-term rentals in Portland. I’d love to get a multifamily here in Portland and Airbnb that out and that’d be perfect. But unfortunately, we’re definitely restricted on that. So we have been looking at neighboring towns that have little leaner laws on that, but we’re not sure if they would get as much tourism.

Scott:
What’s your credit score?

Allen:
It’s about 646 right now, I think is the higher one.

Scott:
Okay. So the interest rate on any loan that we’re talking about, would be even higher than what I just articulated. It’s not terrible, but it would definitely increase it by maybe 100 basis points there.

Allen:
Yeah, I was approved for a loan at 6.57%.

Mindy:
Was that an owner occupied loan or a investment loan?

Allen:
That’s just a standard owner occupied loan.

Mindy:
When you applied to be on the show, you shared some barriers that you have, the poor credit scores, student loan debt, which we mentioned at the beginning of the show and the variable income. Let’s explore the student loan debt. You currently have approximately $100,000, which is at 0% deferred by the government due to COVID. No payments due right now, but once it comes back into undeferrment or whatever that’s called, you’ll have $80,000 at approximately 5% and $20,000 at 6.5%. Scott’s magic theory of interest rates is that, if it’s five and under, you don’t pay it off early. If it’s seven and over, you do pay it off as fast as possible. And both of yours fall in the middle with, do what makes you feel comfortable. So we are of no help there whatsoever. You also have $120,000 in cash that, it sounds like you’re thinking about using for the down payment on a house. What is your plan for your student loans once they become payable again?

Allen:
The plan, well I’ve got my fingers crossed for some sort of forgiveness that may or may not come through. So I’m planning on paying them back when I have to, but there is currently a bill in congress to forgive student loan debt for frontline healthcare workers. So that would be great for me if that does end up going through. So I’ve got my fingers crossed for that. Sounds like Biden may have finally made a decision that would forgive $20,000 of what I currently have, but other than that, my plan would just be, I would just have to start making payments on those and I don’t know if I would pay too much more towards it at the 4.99% interest rate, and I might try and save the rest to still accumulate money for down payments. One of the things I was looking for guidance on was, do you think it’s smarter to pay the absolute minimum on that and just keep moving towards saving up for those down payments? Or would it be best to just get those off my plate entirely?

Scott:
I think we got to start with the end in mind here and zoom back out and say, your goal as you stated, was to in three to five years, retire early and have a farm essentially, here. And you wanted to use that with do that through short-term rentals. And I think that what I’ve uncovered in this is, that is really a wish right now. You don’t have a clear plan to buy those short-term rentals, and what would actually be profitable and how that would make money for you at this point in time. And that needs to be refined. You know you can do it, you know that short-term rentals can be a powerful wealth generator, but you don’t have, “Oh these are the properties I’ve identified. This is the cash flow I can generate throughout the year. This is what my expense profile looks like and this is the return, and this is how I’m going to operate it.”

Scott:
You have, “I kind of have this lake area, maybe my wife can drive out there and clean it a few times in between tenants.” It’s not a business plan right now. And so, I think you should reset what the goal is. I’m going to reframe it for the rest of the conversation today, with your permission of course, if you like this, but I want the most flexible financial position possible in three years from now, that affords me the best, the most amount of life options, among which might be this farm. Does that work for a repositioning standpoint?

Allen:
Yeah, sounds perfect.

Scott:
Okay. So I think if we start with that premise, then we can acknowledge and say, okay, here’s what you got going for you. You make a ton of money, you spend a lot less than you make and you’ve got a great house hack. Your problem is you’re stuck in that house hack, because there’s no conceivable living situation that you could replicate in the near future, that is as good as what you’ve currently got going from probably a lifestyle and cash flow perspective. You’ve got a really low interest rate mortgage, a tremendous amount of equity, which is also another problem.

Scott:
Most of your net worth is in this home equity and then in your wife’s retirement accounts, although you do have $120 K in cash. So you’ve got a flexible position, but yet you’re also stuck, which is a paradox. All of your debt that you have is in this quasi realm of, should I pay? It’s not really bad, it’s not really good, it’s in this quasi realm of, I probably can invest a little bit more. And so, you have all these shades of gray in your financial position that makes it really hard I think, to commit in any one direction. How’s that sound? Is this how you’re feeling about things?

Allen:
Yeah, that’s total nail on the head. For the past couple years, we’ve definitely just felt exactly as you said, stuck. We’re like, “Where do we go?” How can we get a good cash flowing property, where we’ve got the best setup right now, we don’t want to stay in this setup, but there’s not really any place for us to go that’s going to give us more net income than we’re getting at the moment. See, I definitely… What you were saying about getting a clear picture on actually getting a business plan for our short-term rentals as opposed to, yeah, we know short-term rentals are a good idea, but we definitely haven’t refined exactly how we’re going to execute the short-term rental plan and get the highest ROI on that.

Scott:
Let’s also acknowledge that, in spite of having all of this gray zone in, which can be frustrating because you don’t have any clear options, you also have many good options because of the strong fundamentals of your current position. You pay nothing to live, in fact you get paid a lot of money to live in your home, in your area. You make a tremendous amount of money. Your wife is able to operate this really, second job that is putting $2,000 to $4,000 a month in your pocket over the course of the year. And so, life is good there. I don’t think without a clear plan that’s super aggressive, you’re retiring in three years, or five years or seven years. You might, but you’d have to get something aggressive there. But you can have many hundreds of thousands, maybe even close to a million dollars in personal net worth and a position where things are more clear and stabilized.

Scott:
But you’re going to have to go down one of, I think a couple of routes. So the first route, option A that I would recommend is, just pay off the debt. You got $120,000 burning a hole in your pocket, in your bank account making 1.5%. And right now, you’re paying a higher percentage rate on various debt that will come out of deferment soon. Maybe you don’t pay all of it, maybe you pay some of it, but the debt is a guaranteed return, it’s pretty high interest. That’s an easy button. The second would be to, and I would say you spend what, $7,000 a month and that includes all your housing expenses and you get $2,000 to $4,000 of that back. So that’s $3,000 a month from your Airbnb. Really, you’re spending $4,000 a month. If you knock that down to $50,000, your savings, you’ve got a year of financial runway sitting in the bank account, net of your Airbnb income.

Scott:
That’s pretty good. A year is a lot. And you can take that $70,000 and invest it either, in a rental property or start putting it into some stocks there. The other big problem here is your credit score, which is not great right now. So I wonder, now that I’m talking through all of this, if the best approach I like the best is to either, just pay down the debt or go good old fashioned index fund investing, instead of sticking all that cash in your bank account. Sit tight for a year or two, you’re going to generate $50,000, $100,000 in free cash flow over the next year, after tax, at the current rate that your life is going, and you’re going to be right back in the same position but with a cleaner balance sheet at that point in time and a better credit score. And during that year, you can put together some really clear business plans for rental property investing, short-term rentals, rent by the room, whatever makes sense in your local areas that could produce that passive cash flow. That was a long rant. How does any of that sound?

Allen:
No, I like a lot of what you said there, because that was another question that I had was, I’ve been holding back from investing in index funds or stocks at all, played around with crypto a little bit, but I’d never really pulled the trigger on making those stock investments. And that’s been where I’ve been at and was looking for some clarity from you guys, if it is a better idea to put that money into short-term rentals or, like you were saying, it sounds like it might be a better idea to, like you said, clear the slate and put that money into some index funds and clean up my debt a little bit. I do definitely feel stuck in this gray area right now, so it would be nice to be able to just pull out of that instead of struggling to maybe get into a stronger financial position, but without a real clear plan for that.

Allen:
So I guess I’d like… I don’t know. I don’t really know too much about stock investing, so I don’t know what the best way to go around that would be. I opened up a Vanguard account, that’s about as far as I’ve gotten, but my wife, she has some retirement accounts set up back when she was working a W2 job. I mean I’ve been holding off on that and just taking as much money in my paycheck as I can, to just save for a down payment instead of putting anything towards stocks and getting a company match or anything like that. So that’s definitely something I’d like to look into.

Mindy:
I want to say that index fund investing is fantastic. I do it myself. I know that Scott does it. However, we are entering possibly, probably a period of volatility. So just because we suggest index fund investing, please be aware that there will most likely be some volatility coming up, but you’re not investing for tomorrow, you’re not going to take the money out in a week, you’re taking the money out down the road. And past performance is not indicative of future gains, but the stock market goes up and to the right, with a whole lot of little bumps and squiggles, but it goes up and to the right I firmly believe, which is why we sit here and talk about how investing in the stock market is such a great idea. You said you don’t know how to invest in the stock market and that’s valid.

Mindy:
There’s a lot of people who don’t know how to invest. This is something we should be teaching people in schools, and we’re not. And there’s this little book called The Simple Path to Wealth, where JL Collins comes in and tells you, this is how you do it. And you’ve, you’ve started with your Vanguard account, now you need to put some money in there, but that’s not all. Once you put the money in there, you have to tell the money where to go. So make sure you do that as well. I have heard some heartbreaking stories about people who put money in the account and then don’t do anything with it. It will just sit there as cash, generating $0. They thought it was invested, make sure that it is invested. Vanguard should be able to walk you through this. It should be pretty easy to do anyway.

Mindy:
But this book is called The Simple Path to Wealth. It’s by JL Collins. It’s available everywhere books are sold, including Amazon. It’s a wonderful book and I highly recommend getting that. We keep not talking directly about your credit score and I want to, not in a accusatory fashion, but in a helpful manner. When we were talking before we hit record, we asked you what your credit score is and how it is this 646 number. And you said that in your early 20s, you made some credit mistakes and you were late on payments and that is 35%. This is actually shocking. I have a article that I’m going to link to in our show notes, but 35% of your entire credit score is made up of on-time payments. So if you have a late payment that dings you, if you have several late payments, it really dings you.

Mindy:
30% of your credit score is how much you owe. If you have, and that’s more like credit utilization, if you have $1,900 on a credit card that has $2,000 limit, you’re basically using almost all of your limit. For some reason, this looks like a bigger issue than if you had that same $1,900 out on a card that had a $20,000 limit, then you’re doing great. The same $1,900, but when the credit limit is smaller, when you’re utilizing a higher percentage of your available credit, the FICO doesn’t like it and that dings your score. 15% is how long you’ve had your credit. So if you have a credit card that you’ve had open for a long time, keep it open. Every once in a while, charge something on it to make sure that it stays open, because that is your length of credit history.

Mindy:
My husband has a credit card for 25 years. We never use this card, but every once in a while he’ll go charge gas on it, and then go pay it so he doesn’t forget to pay it, just because that’s the card that he’s had opened the longest. 10% is your credit mix and 10% is new credit. But that 35% is your payment history, is the same as your credit mix, your length of credit history and your new credit all at once. So something that you can do to make sure that you’re making your payments on time, is to just schedule automatic pay. If you don’t want to do automatic pay, you can put it in your calendar as a calendar reminder. It’s so important to pay your bills on time. And I had late payments too, don’t get me wrong. The first time I got a mortgage, she was like, “What about this bill that you paid late one time?”

Mindy:
I’m like, “I don’t remember that. I don’t know.” But it was three or four years before that, she was still asking me about this. I’m like, “Why are you asking me about a bill that I paid 30 days late, one time, three years ago?” Another thing that’s really easy, because you have the income, I wouldn’t recommend this to anybody who was a little more paycheck to paycheck, but as soon as the bill arrives, write the check and send it off. If you’re a write a check kind of person, if you’re an online payment, as soon as you see it, go online and pay it, because you have the income, because you have the balance in your account. Just pay it and get it done with. And then, what does it matter, you’re missing that little float for three weeks or whatever? It’s better to pay the bill, than to have that little float. Does that make sense?

Allen:
Yeah. Absolutely.

Mindy:
So that’s for everybody.

Allen:
I have actually been doing that. I’ve been using credit cards the way you’re supposed to be, finally. But I have paid everything down except for, we’ve got the one card now that we earn miles on and we will max it out. So if it goes through Credit Karma at the wrong moment, it might drop the score a bit, but we do pay it off every month. We never carry a balance on it. So going forward, we should be good to go. But like I said, I still have those remarks on my account that are just going to stay there forever, I guess. I was hoping that once they paid them off that they were going to go away, but I guess they stay on regardless.

Mindy:
Oh, they stick around forever. One last thing, is there anybody in your life that has a really great credit score, that could add you to their credit card as an authorized user and you don’t have to ever take possession of the card to be an authorized user. You could just, when you’re added to their card, their good credit score morphs onto your card as well, or your score as well.

Allen:
Well I am on my mom’s card, which is good, because that gives me a much longer credit history also. I’ve thought about asking my in-laws maybe, because I know they have good credit scores, but just been too nervous to pop the question.

Scott:
Yeah.

Mindy:
Have your wife ask, see if she can get on theirs.

Allen:
Well yeah, I know she is on her father’s credit card, but I feel like maybe I should ask if I can get on there too. But yeah, got to work up the courage to ask, I guess.

Scott:
It sounds like there are some tactics here, but the real key is just time needs to pass for this credit score to rebound and to get back up in the 700s, and then eventually, 800s here, and lesson learned. We have some things there, but I don’t think it really changes the strategy at a high level. It just changes the interest rate you might get on an investment property loan. And I don’t know if rental property investing is a move for you right now, because I think there’s a deeper education and business planning issue you need to resolve first, to be very clear on what you would do if you were to pull the trigger and have that become really, really clear. So again, when I zoom out and look at your position at the highest level, you’re in such a strong fundamental position because of your income, fairly low relative spending, and then your house hack, that is a monster of investment for you.

Scott:
And I think you’re stuck in a good way, in your home for that, because I just can’t fathom how you would possibly reproduce that result right now, in a similar set of circumstances because you made some good decisions a few years ago. So I think you ride that and you do one of three things. One, I really like the Dave Ramsey style approach for you and just crushing your debt. And I know you have some question marks around student loan forgiveness and all that kind of stuff, but I think your income is super high and you’re not going to qualify for a lot of those programs. And you’re also taking a lot of power out of your life and giving it to somebody else, the government, over that decision. So I really like the Dave Ramsey approach as option A and I think that’s the easy button.

Scott:
You can feel really good just being like, “You know what? I’m going to pay down the debt and I’m going to rebuild my emergency cushion. And a year from now, I’ll have read 10 more books on investing in personal finance and I’ll be working with a clean slate, high income and a house hack and no debt.” That’s pretty good. No personal debt besides a home mortgage, which I think is a pretty good option. Item B would be to come up with an investing philosophy, which will likely center around what Mindy suggested, in The Simple Path to Wealth. That’s a book about index fund investing and why it’s just such a powerful, long-term way to generate wealth. I think that in 30 years, you’d be slightly richer if you went with a simple path to wealth on average, versus paying off debt in your range.

Scott:
But that it’s so close, that it’s almost immaterial, it’s a 1% spread on this, 1% to 3% spread with a lot more volatility of ups and downs to invest in stocks, rather than pay off debt at 6.5% Interest at this point in time. So that’s option two. And then option three, is to continue getting creative with real estate, which I think could be a really good option for you in about a year or two from now. And I think as your credit score improves and as you get more sophisticated in your business plans and your ambitions for what you want to invest in, why you think it will make a lot of money downstream, and you can articulate that more. I would not buy a vacation home as a, which I think is really one way to frame the strategy you came in with today, as an Airbnb rental.

Scott:
I think that a lot of people have this concept, “Oh, I’m going to buy a short-term rental and a place that I like to stay and that’ll be my second home.” That’s great if you’re already rich and you want to do that as a lifestyle maneuver. But I think that if you want to go and visit this beach house, the best way to do it is to invest your money in the highest income producing, best risk adjusted returns you can, and then spend it, renting from somebody else at the location with that. I think it’s usually going to be a much better economic decision, than trying to turn in really, your favorite, your hobby or the place you want to visit a little bit into an income generator. I think it’s going to be a lot more challenging for a lot of folks.

Scott:
Lake housing is a rental sport like boating, not something to own, unless you’re going to use it all the time, every weekend you’re going out there, maybe you have more cost effective option to buy at that point. Again, that first choice, I think debt repayment is the easy button and where I’d steer you, I think Dave Ramsey would be the phenomenal option here. Maybe index fund investing, and then third, real estate investing. But I’d really think about tackling real estate investing from a position of a better educational framework and when you have a better credit score, maybe a year or two from now, that’ll help you with the rates. What do you think about those as takeaways?

Allen:
Yeah, I’m very comfortable with the idea of educating myself more on the short-term rental front. It sounds like I might need to rethink where I’m going to invest. It sounds like I might not be in a good area for it necessarily, just because there are so many restrictions on short-term rentals. So I might need to do some research as to where I could be investing in that. I’d have to look outside of Portland. And then, it’s really just those really high upfront, $500,000 lake house rentals are the only places that people are going to be short-term rentaling and all in this area.

Scott:
Well let me just chime in here with one comment here, and it’s a lot. We have the same rules that you’ve got in your area, here in Denver, Colorado. People are like, “Oh, it’s a pain. You can’t rent. You can’t make money on short-term rentals unless you’re the owner/occupant.” That is a tremendous advantage. Right now, you have a $1,500 per month mortgage and you bring in $2000 to $4,000 per month and you have no competition, except for other homeowners in your area who have very similar properties. So you are benefiting from an incredible amount of pricing power and a squeeze on supply in your area. And you are the poster child for someone who is benefiting from this type of policy and it’s just this elite house hack. You’re stuck because other options to live are so terrible, compared to the incredible setup that you’ve described to us right now.

Scott:
It sounds like you live in a wonderful house and a prime location, that people pay very good money to vacation in, on your garage. I mean this is wonderful. So I think that’s the benefit. The problem is, you can’t scale it very easily, but that’s a trade off. And so, with one house hack, you’re almost set. You only need that, plus another $3,000 or $4,000 and you’re done. You could just live this lifestyle without having to work either of you, indefinitely with just well under a million dollars in net worth. I just wanted to chime in with that thought and say, that’s a powerful advantage. If you just think about how wonderfully your city is helping you, not hurting you, because of the short-term mental laws.

Allen:
Yeah, that’s true. I definitely wasn’t thinking about that, because we’re in a neighborhood where most people don’t have a little mother-in-law unit in this area. So if you want to stay in this area, we’re pretty much the only option. So that’s definitely a good point. Like you said, it’s hard to move on because we pretty much knocked it out of the park with our first spot, so we can’t really envision our next move, because it’s not going to be as good.

Scott:
So, all you can do next is accumulate cash and go with one of the three good investing alternatives. And your challenge is not that you’re doing anything wrong, it’s just that you have multiple options that are all about as good as one another and you got to pick one and there’s no right answer here. This funky gray zone. And so, I’m excited to see what you pick. I think the worst thing you can do, is just sit on a pile of cash indefinitely. You’ve got better uses for that cash right now, I think, then than letting it pile up in your bank account and you’re going to accumulate another %50,000 to $200,000 over the next 12 months, because of your strong fundamentals.

Allen:
Yeah, absolutely. Because it’s already been sitting there longer than I wanted it to. I was hoping to have invested it a while ago, but we’ve just been having a hard time pulling the trigger, which may have been a good thing because we might have…

Scott:
If you have a hard time pulling the trigger, I’d suggest that by years end, you go Dave Ramsey and pay off that debt. That’s an easy button. It’s not a bad choice. You’re not going to get crushed by doing that. There may be opportunity cost items, but at the very least you’re not getting hosed on the opportunity cost of not doing the other items, and arbitrage the end of high interest rate debt with your 1.5% APR in your savings account. Anything else we can help you with today? Has this been useful?

Allen:
It has. It’s actually been very useful. Especially… I guess I hadn’t really wrapped my head around the numbers for our current short-term rental plan, which you’ve definitely given me a ton to think about in terms of not pulling the trigger on a lake house, which definitely sounds less appealing to me now. So I’m definitely feeling more comfortable with the idea of repurposing my position financially in the next year and focusing on that, to still continue my short-term rental goals, but with better credit score, better understanding of the markets. Like you said earlier, just resetting what our goals are here and looking for that flexibility, but also breaking down the numbers more and getting an actual business plan instead of just lofty daydream of having the perfect lake house that’s making us tons of money when that’s not actually going to be the case. So lots of good info. I’m definitely going to dive into this.

Scott:
I love it. And one thing to think about is, you get a dumpy old warehouse that’s not very, very pretty to look at and that pays you the income, and you just spend that on the lake house. So it’s just, where’s the dollar coming from and what’s the net return? And just think of them as, this is a dollar printing machine. It doesn’t have to be a beautiful lake house on the thing. It could be the most efficient way to harvest cash and generate appreciation long-term. And then I’ll spend that on the way I want to for my lifestyle, long-term. And that’s where the investing philosophy will come in. I don’t know if it’s real estate, I don’t know if it’s stocks, I don’t know if it’s debt pay down long-term, but I know it’s likely one of those three. It could be something else, and you got to decide, I do think that real estate can be a great one, but I think that’s a right one for you to explore next year, when your credit scores eclipsing 750, 725.

Allen:
Yep. Gotcha. Definitely. And it is pretty still new to me. I’ve been doing a lot, listening to you guys and trying to learn more about investing in real estate, but it is still pretty new idea, because just a little under two years ago I was on the set path making $50,000, $60,000 a year and planning on retiring when I’m 65. So I only just changed my way of thinking in terms of investing for financial independence. So still definitely have to do a bit more research and get a more thorough understanding of all that.

Scott:
Love it. It’s the 500 hours of self education. On the other side of that, you feel very confident about what you’re going to do and how you’re going to invest and all that kind of stuff. But until then, it’s all overwhelming and there are a million ideas, but I don’t really know what I don’t know about all that. And the confidence will come, just keep learning passively, listening to podcasts, reading books, whatever, absorbing frameworks and it’ll get clearer for you within the next year, I promise.

Allen:
Yeah. T.

Mindy:
Thank you so much for your time today, Allen. This was very interesting and we will talk to you soon.

Allen:
All right, wonderful. Thank you so much.

Mindy:
Scott, that was Allen. I thought you had some very sound advice for him. I know that’s probably not what he wanted to hear, but I do like that you were able to show him mathematically, rather quickly, that the lake house might not be the best place for him to put his money right now.

Scott:
Yeah, I think that Allen’s central problem, we talked about this a little bit after the recording, is really just, he’s beginning his financial education to a large extent. He’s made some really good choices, he’s got some really good financial fundamentals in place, but he’s not yet sophisticated with his, for example, real estate investing philosophy and strategy and how he wants to go and do that and how to analyze the deals with all those things. And that the price of entry into real estate, as we’ve often said, is 500 hours of self education. And I think that lies ahead of Allen, before investing in real estate. And I think as part of that deal, spending the next year amassing those hours or that self education, he will also improve his credit score and be in position to do that, if he so chooses a year or two from now.

Scott:
And then, I do want to point out that Dave Meyer calls the problem with Allen’s housing situation, the lock in effect. And for Allen, it’s more pronounced than most, because he’s got bad credit. But this problem is this, Allen can’t recreate… Let’s pretend he didn’t have the Airbnb in his house. He has a 3% interest mortgage, he can’t sell that place and go move somewhere else. He’s going to forfeit his 3% mortgage, and then get a 6% mortgage, 6.5% Interest mortgage. That’s what he was quoted for his personal residence. That is a 350 basis point increase. That is over 100% increase in the interest rate for his primary residence, for Allen there. So he’s stuck, he’s got to stay in this house hack, because to move is going to totally change his financial position, or totally change the quality of his lifestyle in a general sense.

Scott:
I think a lot of people are going to experience that with their primary residences right now. And so, that’s an interesting dynamic of 2022 and the Federal Reserve’s intent was to do that. They don’t want people buying more real estate, because that creates inflation. So I think there’s going to be a lot of folks that are in for that and that’s going to be a challenge in terms of scaling portfolios now is, it’s going to be really hard to recreate success with those serial house hacks, especially if you’re in a place where Airbnb is only allowed for owner/occupiers. So an interesting set of conundrums there. And then lastly, one other point I wanted to make was around the choice between paying off debt, investing in stocks, and real estate investing. I think that for Allen, the choice between investing in stocks and paying down his debt, which is typically at a 5%, 6%, 6.5% Interest rate, I think it’s a coin flip.

Scott:
I think in 30 years, it’s going to be really hard to tell which would’ve been the better decision for him. And so, when you have a decision like that, that can lead to analysis paralysis and literally the coin flip decision making protocol might be a better way to make a decision like that, because at least you’re making a decision. Either one of those decisions, paying down debt or investing in stocks for the next 30 years and moving that in there, is probably a better bet than continuing to dump onto the pile of cash that he has sitting in the bank account.

Mindy:
Yeah, absolutely agree. And I like that, a coin flip. So, Allen, grab your quarter, flip a coin. Heads, it is, pay off the student loans once the deferment period comes up. And tails is, continue making the minimum payments once the deferment period comes up and invest your cash into the stock market. And just a bit of advice there if you are going to invest it, the amount that you’re going to invest, put it all in at once. Don’t try to dollar cost average your way in, just put it all in at one time. Michael Kitsis from episode 120 gave us that advice. He said, “Time in the market is better than trying to time the market.” So, Scott, a few things that a listener in a similar situation could do after listening to this episode is, number one, if you find yourself in a position where you are spending money but you don’t know where it’s going, track your expenses. Track your spending and see where your money’s going.

Mindy:
Track it super granularly, track it vaguely, but track it in real-time, to see where your money is going and make sure that’s where you want it to go. It’s super easy to spend, “Oh it’s only a dollar. Oh it’s only $20”. And then all of a sudden, only $20 has added up to an extra $1,000 a month that you didn’t really need to spend. If you find yourself spending a lot of money on travel, look into credit card rewards programs. Go to the Points Guy or NerdWallet and look for what is the best credit card for my specific situation.

Mindy:
If you’re flying a lot, look for an airline card that gives you the most rewards for your buck. If you’re staying in hotels a lot, look for a hotel cart that works for you. Self educate, like you said, Scott, educate yourself before you start investing in something. If you’re going to invest in the stock market, if you’re going to invest in index funds, The Simple Path to Wealth by JL Collins. I think you sold $80 pertrillion copies of that book, for a reason. It’s a really great book. And if you are going to invest in real estate, make sure that you have a good credit score. You will get the best rates, you will get the best rates on your loans when you have good credit. You’ll get better rates on everything when you have good credit.

Scott:
And I would say, whenever you’re thinking about buying a vacation home in a market that you like to visit, run away. Or do that after you are a multimillionaire and want to enjoy the property, outside of investing for financial reasons. I believe that is one of the lower probability ways to build wealth, is to invest in a vacation home, in a market that you would like to stay in. If you want do short-term rentals, invest in a short-term rental market that you think is the best long-term prospects that will make you the most money, and use the profits to stay in a vacation home in the market you want to go in. It’ll be a remarkable coincidence if those two are the same thing.

Mindy:
Absolutely. I have run the numbers in my desired vacation rental market and it does not make any sense for me to buy a house there.

Scott:
You’re not competing with investors in your market. You’re competing with people who are uber rich and want a place to stay whenever they’re going out there. It’s not a investment market. And those towns are experts at extracting money from the people who buy from out of state and who “Invest” from out of state.

Mindy:
That is a really good point, Scott.

Scott:
Not saying don’t invest in short term rentals. I’m saying, don’t do it in that market that you like to go with your family on every vacation, because it’s almost 95% of the time going to be a less lucrative option for you than alternatives.

Mindy:
Okay, Scott, that was a good point and we have gone very long this episode. Should we get out of here?

Scott:
Let’s do it.

Mindy:
We’ve come to the end of this episode of The BiggerPockets Money Podcast. He is Scott Trench, and I am Mindy Jensen saying, shine bright starlight.

 

 

Dave:
Hello, everyone, and welcome to On The Market. I am your host, Dave Meyer. And today, we are going to talk about big news in the investing world. Basically, what happened at the Federal Reserve meeting last week. If you haven’t heard yet, they raised rates, but of course, that was pretty widely expected and was not the big news. But what did happen on top of that headline news was really important and gives us probably the clearest picture yet that we have seen over the last couple of months of where the Fed is intending to go.
I’m not sure if everyone listening to this knows this, but on top of just raising the federal funds rate, which they did, 75 basis points, they also have a press conference, which is really closely followed by investors and nerds like me. And they also release something called the Summary of Economic Projections, where the Fed actually tells you where they think the economy is going and what they’re intending to do about it. And not a lot of people look at that, which I think they should because the Federal Reserve, as we talk about on the show all the time, the Federal Reserve sets the rules for the entire investing world, not just real estate investing, but the stock market and bonds as well. And if the Federal Reserve is telling you what they think is going to happen and what they intend to do about it, you should probably pay attention.
But I know not everyone wants to read through that. So I did, and I will tell you what’s in there and give you some of my opinion and some other analysis about what this Fed announcement means for real estate investors because they have been raising rates for the last couple of months. But, to me, this meeting was probably the most impactful for the future of the housing market, let’s say the next six, 12, 18 months, than any of the other meetings. And I’ll tell you why about that in a minute, but that’s why we’re going to do this show today. That’s why we’re going to go deep into this topic. So you’re definitely going to want to stick around for this. But first, we are going to take a real quick break.
All right, let’s just start with the obvious here, which is about interest rates. Basically, the Fed raised the federal funds rate, which, again, I just want to make this clear that the federal funds rate and what they are raising is not mortgage rates. It’s not really even a interest rate that impacts any consumer directly. It’s actually a short term interest rates that banks use to lend to one another. And this is wonky, but it basically sets like the baseline interest rate. And then, every other interest rate, like the yields on bonds, or what you pay for a mortgage, or a car loan, or credit cards are all in some way based on this federal funds rate. It’s basically the lowest interest rate. And everything else from there goes up based on risk, and reward, and all sorts of things like that.
So what happened was the Fed raised this federal funds rate 75 basis points. And if you don’t want to know what a basis point is, it’s just a weird way of saying 0.01%. So when I say 75 basis points, that basically means 0.75%. So it went from 2.5 to 3.25, that’s 70… Excuse me, sorry. It went from… Yeah, did I say that right? It went from 2.5 to 3.25. That’s 75 basis points. And so, that’s where it is now. And the federal funds rate is actually a range. So now it sits between three and 3.25%.
Now, that, again, was kind of obvious. People actually thought there might be 100 basis point hike after the most recent inflation report because that was so much higher than people were expecting. But the Fed decided to pursue a more predictable course, I would say, and just did the 75 basis point hike. That’s what people were expecting. They typically want to do something that’s not super out of line with the market’s expectation, and that’s what they did. Not a lot of news there.
But in addition to this immediate hike, we now know that rates… And this is the important part. We now know that rates will likely climb higher in the coming months, and actually, into next year, into 2023. And you might be wondering, how do I know this? How do I know what’s going to happen with rates? Well, the Fed just tells us this. It’s not rocket science. I’m not looking into a crystal ball. And like I said at the top of the show, they release something called the summary of economic projections. And after every meeting, they do this. And it tells you they put out expectations for inflation and economic growth. But what we’re looking at today is really what their expectations are for monetary policy. Basically, where are they going to set the federal funds rate.
And to me, the most important part of this entire summary of economic projections, at least for what we’re talking about today, is known as the dot plot. And the dot plot is basically a poll for every Fed official who’s at these meetings, and it asks each individual person where they think interest rates should be over the next couple of years. So they have a vote and they say, “Where do you think interest rates are going to be in 2022, 2023, 2024, 2025?” And they put it all on a dot plot. But the dot plot is a little bit confusing. I think for our purposes here today, it’s actually just easier to look at the median expectation. So, instead of looking at each individual expectation of each Fed official, let’s just take the average of what Fed officials think is coming over the next couple of years. And basically, what that shows is that the people who make this decision, that the Fed officials are the people who decide where the federal funds rates go, and they expect it to go up to 4.4% by the end of 2022.
Now, remember, we just experienced our third 75 basis point hike in a row. And it’s saying that we are still going to go about 125 more basis points by the end of the year. So that could be another 75 point hike and then a 50 point hike. There’s two more meetings this year. So that’s probably what will happen. I think that’s the most likely scenario. So going up significantly more by the end of 2022. And then the Fed thinks it’s going even higher in 2023. The median there is 4.6%, so not much higher. It sounds like the Fed is thinking that what they’re going to do is raise rates aggressively through the end of the year, and then a little bit more in 2023, but not much more.
If you’re wondering around the out years, 2024 and 2025, they do have it coming down to somewhere around 4% in 2024, and then dropping all the way down to below 3% in 2025.
Now, no one knows what’s going to happen, right? If you watch the press conference with Jerome Powell, he basically said he doesn’t know what’s going to happen. So I don’t put a lot of stock in what’s going on in 2024 and 2025. There’s just too many variables. That’s basically the Fed saying they want to get back eventually to what they would call a neutral interest rate. When interest rates are super low like they’ve been for most of the last 10 years, that’s known as easy money. We are now entering a territory where it’s tight money, where it’s hard to borrow. But the Fed has this vague concept of neutral where it’s just like the right amount so there’s not inflation, but there’s economic growth. And that’s what they think the 2.75, 3% rate is. And so, that’s where they want to get to eventually. But I think we should take very seriously what is happening and what they’re saying they’re going to do for the rest of this year and into next year.
So I don’t know what’s going to happen. No one does. But the only data that we have is that the Fed says they’re going to raise rates for the rest of this year and a little bit next year. And I’m going to take their word for it personally. I think that’s going to happen. And higher rates have really big implications for the housing market. But I just want to say it is important to note that when I am saying in this episode, high rates, I’m actually really just speaking relatively. And what I mean is they’re high in a relative context. They are high compared to everything that we have seen since the Great Recession. Since the Great Recession for the vast majority of the last 12 years, the federal funds rate has been at zero, right? It’s been at zero.
So, yes, what if we have a Fed funds rate now at 3.25 like we do, that is low compared to where we were for most of the last century. But what matters here is that it’s a shock to the system. It is still low in a historical context. But if you go from zero to three really quickly like we have, this can be pretty shocking to the economy. And I do think we’re going to see some shocks through the economy. So that’s what happened with the federal funds rate.
The second thing I want to talk about is about mortgage rates because that’s what really is going to impact the housing market directly. And as I said, the federal funds rate is not the mortgage rate. And I just want to explain what that means. So the Fed funds rate, like I said, impacts things like bonds. And most particularly what we want to think about here is the yield on the 10-year treasury bond. This is basically a bond that the US government puts out and they pay an interest rate on it. And yields, when the Fed funds rate goes up, yields on these bonds tend to rise for a lot of reasons I’m not going to get into today, but just know that that happens.
And the reason I’m mentioning this is because mortgage rates are super closely tied to yields for the 10-year treasury. And so, we are seeing yields go up all year and that’s why mortgage rates are going up. So just know that, that they’re mostly tied to bonds. And what you want to look at, if you are trying to predict where mortgage rates are going to go, is that bonds are what matters here, not really the Fed fund rates.
So, my analysis of what’s going on and based on this analysis is that mortgage rates are probably going to go up over the next couple months. I wouldn’t be surprised, let’s say, if we see mortgage rates enter the low sevens over the next couple of months, but I’m not expecting rates to just keep going up linearly. We’ve seen this really aggressive rise in mortgage rates, but I think that is going to slow down even despite this news that the Fed is going to raise rates into 2023. There are actually some analysts who thinks mortgage rates, even with this news, are going to go down next year. And let me explain why.
First and foremost, mortgage lenders, they are forward looking. It’s not like they’re sitting around being like, “Oh, the Fed is probably going to keep raising rates all of 2022, but I’m going to keep my mortgage rates that are dependent on bond yields, and everything else. I’m going to keep them low and wait to see what the Fed does.” No, that is absolutely not what they would do. That is too risky. It’s just bad business. And so, what they do is they base their mortgage rates based on where they think interest rates for bond yield, and the federal fund rates are going to be several years down the load. They want to be able to make money even when the Fed raises rates into the future.
And so, they have been pricing these Fed raises into mortgage rates all year. That’s why mortgage rates went up starting in June. They didn’t wait for the two 75 basis points hikes since we’ve had since June. They went up past six or near six back in June. And now, starting a couple months ago, in August, we were starting to see rates go up again. And that’s because people were anticipating what happened in this fed meeting. So it’s not like all of a sudden the Fed announces that they’re raising rates and mortgage brokers are like, “Oh, damn. We got to catch up. We got to raise rates.” They’ve already done this. They already did it. And so, now they’re, of course, going to adjust a little bit. Yields and bonds are going to adjust based on what the Fed said, but they have already been thinking about this and the adjustments are going to be smaller. And in these times of uncertainty, mortgage brokers are going to err on the side of caution and make rates go higher to cover their basis. They want to make sure that they have good rates even if the Fed keeps raising rates even higher and higher.
The second reason that I think that mortgage rates are not going to just keep skyrocketing is based on what I said before about the 10-year treasury. They are very, very closely correlated. For any other stats nurse out there, the correlation is near one. It is 0.98 from my analysis. So that just means, if you’re wondering what that means, is when one goes up, the other goes up, when one goes down, the other goes down. They’re very tied. They move in lockstep.
But, usually, in normal times, for the last 70 years or so, the spread between yields and mortgage rates, so the yield on a 10-year treasury and the mortgage rate is about 170 basis points or 1.7%. So mortgage rates are always higher than the bond yield. And the reason the spread exists is based on a bank’s business. If you are a bank and you have millions or billions of dollars to lend, you have to decide how to lend it to people. You can lend it to me as a home buyer or you can also lend it to the US government in the form of a bond. After all, that is what a bond is. You’re basically lending the US government money and they are going to pay you back with interest.
And so, if the bank is saying, “Hey, yields on the 20-year treasury are going up, so I can earn nearly 4% on a trend year treasury.” And the government bond is considered by pretty much everyone the safest investment in the entire world. The US government always pays them. They’ve never defaulted. They always pay. And so, it’s considered the safest investment. So if you go to a bank and you’re like, “Hey, you can earn 4% with virtually no risk,” the bank is like, “Yeah, that’s pretty good.” So then when I go and ask for a mortgage and I’m like, “Hey, can I get a mortgage?” They’re not going to lend to me at 4% because I’m not as credit worthy as the US government. So they’re going to charge a premium to me because even though I pay my mortgage every single month, I as an individual homeowner is, unfortunately, a bit less credit worthy than the US government. And so, they charge a premium. And that premium is usually 1.7%. So if a bond yield is about 4%, mortgage rate is about 1.7%.
But I did some analysis, and what’s going on right now is that the spread is actually higher than it is normally. It’s at 232 basis points, so about 2.3%. It’s normally at 1.7%. And that is because there’s all this uncertainty. We don’t know what’s going on with the Fed. We don’t know what’s going on with inflation. Are we in a recession? What’s going to happen? So, mortgage lenders, like I said, are bringing extra causes and they’re increasing the spread between mortgages and bond yields. And that’s probably going to stick around for a little while. But if the Fed holds their line and does what they say they’re going to do and inflation does start to come down, I think people will start to feel a little bit more comfortable. And the spread between bond yields and mortgages might start to come down.
Of course, bond yields could keep going up a lot more, but again, bond yields have largely priced in these Fed decisions. So those two things make me feel that, although I do expect rates to go up, they’re not going to go up like crazy because we could have some reversion to the mean with the spread between bonds and mortgages. And a lot of this has already been priced in for months.
That is why Mark Zandi… You may have heard of him. He works for Moody’s Analytics. He’s one of the most prominent economists in the world. And he expects, even after this week’s news, he expects the average rate for a 30-year fixed rate mortgage to be 5.5% in 2023. He actually thinks it’s going to come down. So that might happen. I don’t really know. I’m not an expert in bond yields. I’m not an expert in mortgage prices, but I do think these two things do suggest that, although they probably will go up, again, I wouldn’t be surprised if we get into the sevens, that we are probably not going to see this linear mortgage rate growth like we’ve seen over the first three quarters of this year continue throughout this year and into 2023.
Okay. So far we’ve talked about interest rates, mortgage rates. Now, let’s talk about the Feds focus because this, to me, was really telling what happened in the press conference afterwards. And nerds like me, economic reporters, finance people, all love the press conference because Jerome Powell, he gets up there, he reads some carefully prepared statement, and it’s all like a game. The Fed has an enormous responsibility in the world. They dictate so much of financial markets and economies, and they’re very careful about what they say. People count how many times he says recession. Or back when they were saying calling inflation transitory, they would count how many times he said transitory to try and understand what’s going to happen next. So people make this huge game out of it. It’s kind of ridiculous.
But the reason I think this it’s important to note right now is because the press conference yesterday, or two days ago… And again, this will come out a week from now, so you’ll hear this a week after, but I’m recording this two days after this news came out. Jerome Powell, he was pretty darn clear about what he is expecting, clearer than he usually is. And I think he said some things that were really noteworthy that tell us the Fed’s intention and where they’re going to go.
So, during the press conference, a Washington Post reporter, named Rachel Siegel, pointed out to Powell that the Fed’s own summary of economic projections… Remember, that’s that data that they just give out when they meet. They are predicting now that unemployment over the next two years is going to rise to 4.4%. And that is a rate at which typically brings about a recession. Remember, we are not technically in a recession. By many people’s definition of a recession, we are, but the National Bureau of Economic Research has not officially declared us in a recession yet. But this reporter was pointing out to Jerome Powell that the Fed is basically predicting a recession.
Here’s what the chairman said back. And I’m going to paraphrase briefly here, but he said, “We have always understood that restoring price stability,” which as an aside just means reducing inflation. So he says, “We have always understood that restoring price stability while achieving a relatively modest increase in unemployment and a soft landing would be very challenging. And we don’t know, no one knows whether this process will lead to a recession, or if so, how significant that recession would be.”
And I know that’s a lot of mumbo jumbo, but basically, what the Fed chairman, the guy in charge of the economy just said is, “We think that controlling inflation is going to bring about at least modest increases in unemployment and no one knows if it’s going to bring about a recession or how bad the recession would be.” He’s basically saying we need to bring down inflation and we don’t care if unemployment goes up a bit, and we don’t care if it goes into a recession because inflation is such a problem that we have to pursue this.
Now, today, I don’t want to get into a debate whether inflation or recession is more important. Everyone has their own opinion about that. I’m just want to tell you what he’s saying and my interpretation of that. So that’s basically what he’s saying is like, “We’re going for it. We’re sending it. We’re going to keep raising rates. Recession be damned. Rising unemployment be damned.” But I do think it is important to note that he was basically saying if unemployment starts to get really bad, that’s when they would back off. But 4.4%, which is a pretty good increase from where we are today, they are comfortable with that. So, no one knows, but that’s basically what they said.
As it relates to housing and the need for the housing market to cool off, Jerome Powell stated, and I quote, “What we need is supply and demand to get better aligned so that housing prices will go up at a reasonable level, at a reasonable pace, and that people can afford houses again. And I think we probably, in the housing market, have to go through a correction to get back to that price.” Okay. What does that mean? It means Gerald Powell is planning on a housing correction. And personally, I think that’s what they want. A big part of inflation has been shelter inflation, both in terms of rents and housing prices. And I think Powell and the Fed know that to get inflation under control, they need housing to go down. So he’s basically saying, “Yeah, I know. Housing market is probably going to cool and probably going to go negative at some point on a national basis, and we’re cool with that.” Basically, all told, the Fed is saying, “Yes, we are willing to risk a recession. Yes, we are willing to risk job losses. And yes, we are willing to see housing market correction in order to bring down inflation.”
If you just read the transcript and I recommend you do, we can put a link to it here, he wants this. This is how you bring down inflation, is you get prices to come down and you get people to stop spending money. So he wants a recession. He wants job losses. He wants a cooler housing market because that would bring inflation under control. Of course, the Fed could change their mind, but this press conference, he said, in very clear terms, that they’re going to hold the line inflation. They’re going to keep rates high there probably, even going to raise rates, even if this is going to cause all the things that I just said.
So that’s my interpretation of Jerome Powell’s speech, is he was not pulling any punches. He is not messing around. He is telling us all in very clear terms what to expect. And, to me, that is high rates, housing market cooling significantly, probably going negative in a lot of markets, not every market, but in a lot of markets. We’re probably going to see unemployment go up. And we are probably going to see a recession officially, even though we’re not officially in one yet.
All in all, everything we’ve talked about today, basically, why I wanted to make this show and why I think this is so significant is because over the course of this year, over the course of 2022, many investors have been hoping for a Fed “pivot.” And basically, a lot of investors had this theory that the Fed would raise rates up to a point where it would slow things down. The housing market would cool like it has been. Companies would probably be hiring less and things would start to cool off. But they wouldn’t risk a deep recession, or a lot of job losses, or huge crash in the housing market, and they would keep it around two and a half, 3% sort of that neutral Fed funds rate that I was talking about.
But, to me, this press conference just completely kills that theory about a pivot. The Fed is extremely careful. And they are very deliberate about what they say. And if they were keeping their options open for a pivot, they wouldn’t have said the stuff that Jerome Powell said yesterday. The data it shares, everything they said right now is that they’re going to stay aggressive in the fight against deflation even if it causes economic pain elsewhere in the economy. And that is what we should expect.
The most notable implication of all this is for housing prices. And we all know by now that as rates have risen over the last couple of months, demand in the housing market is starting to drop off, and prices, that is putting downward pressure on prices. We’ve talked about that a lot in the shows. Most recently, we are seeing a lot of West coast markets start to decline. Most haven’t yet, as of this recording, this is the end of September, have not yet declined year-over-year, but a few, San Francisco and San Jose, have. And that’s where we are.
That’s said, I think, over the course of this year, the housing market has actually held up surprisingly well to downward pressure. We’ve seen rates double. Yeah, we’re seeing prices come off their June highs and their down month-over-month, but year-over-year, almost every major market is up. And that is what I thought. The [inaudible 00:25:39] market is resilient. There are a lot of reasons, fundamental reasons why the housing market is resilient, even in the face of the rising rates that we’ve seen so far.
But now, knowing that a mortgage rates are going to stay high for the foreseeable future is going to be a much bigger test than what we’ve seen so far. Because, if there was a pivot and rates peaked and people could get adjusted to that and maybe come down a little bit, then the housing market, I think it was probably going to hold up pretty well and you could maybe have a decent year in 2023. But now, I mean if you were going to have a year and a half of mortgage rates above five and a half, maybe up to 7%, to me, that is going to put a lot more housing markets at risk for declines. And so, I think everyone needs to keep that in mind. 2023, right now, at least on a national level, is looking like a flat year at best, and is more likely a down year, even on a national level, is what I’m starting to think, by next summer. I don’t think it’s going to come in the next couple months, but I don’t know, I really don’t. These are just my musings that I’m sharing with you right now.
And the reason I say this is just because affordability in the housing market it’s just too low. We did a whole episode if you haven’t listened to that about affordability, but it’s at 40 year lows. That means it’s harder right now for the average American to buy the average priced home than it has been since the ’80s. And that’s not sustainable in my mind. And there’s basically two ways that we could improve affordability. One is rates start to come down because that makes homes more affordable. But we just got told that rates aren’t coming down. And so, the only other way for homes to become more affordable, other than massive wage growth, which we are not going to see, is that housing prices start to come down and make homes more affordable. And so, that’s why I think there’s going to be this sustained downward pressure on the housing market.
And I want to be clear that even given all of this news, I still do not think we are heading for a crash. And I define that as a declines at a national level of more than 20%. I don’t think that is going to happen. The credit quality is still good. Inventory is actually starting to level off. People who know more about this than I do, professional forecasters, think that, really, the downside, the biggest downside is somewhere around 10%, as in on a national level. We don’t know if that’s what’s going to happen, but it is worth noting that that’s what a lot of experts and people who forecast this stuff think.
The second implication other than housing prices is rent growth. And I think, if we do see a recession, if we see job loss, those things, combined with inflation are probably going to lessen demand for apartments. You see in these types of adverse economic conditions, people move in with their friends and their family, and that’s known as like household drop declining. The total number of households people occupy a housing unit could go down, and that lessens demand.
It’s worth noting that rent is pretty stable. It doesn’t really fall that much even during a recession, but I think rank growth is really going to start to come down. It already has in August. It was at 11% year-over-year, which is still really insane, but way lower than it’s been over the last couple of years. So I think that trend is going to continue.
And then, the third thing is that we could see increase foreclosures and evictions, but we’re still a good way off from that, right? If there’s a recession, we don’t know if it’s going to be a bad one. We don’t know what is entailed in that. And right now, the data shows that homeowners are paying their mortgages, renters are paying their rent. And so, I’m not immediately concerned about that, but it’s obviously something we’ll keep an eye on over the course of the next year to make sure that if we see something that changes, I will certainly let you know.
So, that’s what I got for you today. I just want to say that I personally am still investing. I do think that there are opportunities that are going to come over the next couple of months. We’re going to be working on some more shows about how to invest in 2023, different strategies that are going to work, different strategies to avoid, opportunities that might present themselves. So definitely stay tuned for that. We’re going to have a lot more 2023 planning content on this podcast over the next couple of months, but that’s what I have for you today. Hopefully, you guys understand this.
If you’re interested in this, I do recommend at least watch the press conference with Jerome Powell and see what he was talking about. You can look at the summary of economic projections and look at some of the data that the Fed is sharing with you. These are things that you should know if you’re an investor, if you’re risking large amounts of your money and the Fed is this active and they have so much control over what happens. If you were me, I would learn as much as I can.
Thank you all so much for listening. I really appreciate it. If you want to give me any feedback about this show, have any thoughts, you can do that on Instagram where I’m at, thedatadeli. If not, appreciate you all being here. I’ll see you next time.
On The Market is Created by me, Dave Meyer and Kalin Bennett. Produced by Kalin Bennett, editing by Joel Esparza and Onyx Media. Copywriting by Nate Weintraub. And a very special thanks to the entire Bigger Pockets team. The content on the show On the Market are opinions only. All listeners should independently verify data points, opinions, and investment strategies.

 

David:
This is the BiggerPockets podcast, show 668.

Zasha:
I feel like educating people on what exactly it is we do as real estate investors is very important. We’re not out there buying deals for really low price points and then reselling it for really high without doing any work in between. A lot of times people don’t know we buy homes that are incomplete distress. They might have abandoned cars in the front, people might be in some financial situation that they can’t get out of, and we are providing different solution.

David:
What is going on everyone? This is David Greene, your host of the BiggerPockets Real Estate podcast. Here today with my co-host Rob Abasolo. If I sound a little different, you’re not crazy. Today I’m recording from Scottsdale, so I don’t have my normal audio and video equipment. I’m here in the casita of the house that Rob and I built because I freaking love this place and love being in the area. We’re recording the podcast. I’m in Scottsdale. Rob’s at his normal place, but we’re going to have to keep this intro short because somebody has to go to Austin, Texas with his wife because they’re lazy and don’t want to work.

Rob:
That’s true. Listen, listen, we have two children. They’re one in two and a half and we have never vacated. I think that’s how you can, we’ve never vacationed away from them ever. This is going to be our first. We’re going to leave tonight, leave Thursday, we’re going to be back on Friday. We’re scared. We have faith in my parents to pull this off, but to be honest, I’ve been sweating bullets thinking about it, but it’s going to be okay because I’m going to try to relax, which is something I never do.

David:
Today we have an awesome episode for you. We bring in Zasha Smith who is investwithzasha on Instagram. Sort of has a little connection to Brian and Turner out there in Maui. She’s a Maui investor and you want to make sure you listen all the way to the end, because we tell a very funny story of how Zasha took a deal right out of Brandon’s grasp. Recently I’ve become addicted to these horrible short videos on Instagram, which might also be on TikTok of crazy animals in Africa doing insane things. You’ll see like a lion come steal food away from a hyena or a crocodile, take food out of another crocodile’s mouth. And that was what reminded me of with this deal that Zasha talks about, is that Brandon thought that he had it and then boom, at the last minute she got it and she tells us exactly how so you can do it too.
Zasha is passionate about giving back while building wealth, and I love it because she doesn’t have it’s me or you. I have to get ahead or I can help you get ahead. She’s getting ahead while helping others and she does it in several ways. She does it by providing affordable housing to her local community. She does it by providing mentorship and knowledge through the partnerships she’s in and the masterminds that she attends. And she often approaches how to put a deal together in a way that works for everybody with a lot of integrity. If you’re somebody with a strong conscious that wants to find financial freedom, but you worry that doing that is going to make you a bad person, today is a fantastic show for how you can put that to ease and see a path that you can take that helps other people while helping yourself. Rob, what were your favorite parts of today’s show?

Rob:
Well, typically I would add in how the community aspect was great and how she’s questioned it on the content. But my wife did just text me and she said, don’t dilly-dally, you have to pack. I’m just going to say everything that you said was actually my favorite part. It was really nice to honestly legitimately hear the human side of real estate. I think that’s something that is very important for people to learn. Again, we’re all chasing cash flow. We all want that, but she really tells a story about how it’s like human first, right? Be personal with people and treat them like people. And if you do that, you can have really great success in this field.

David:
I want to get a t-shirt made that says chase excellence, not cash flow. The cash flow will follow.

Rob:
How about don’t dilly-dally, chase excellence. We’ll workshop it.

David:
I was actually going to make a reference to your use of dilly-dally, because it’s equally parts impressive and embarrassing that you were able to work that into show. Rob the 28 year old guy going on 77 every time we record. Before we bring in Zasha, today’s quick tip is, consider making real estate your job. There’s so many ways that you can make money in real estate other than just owning it and getting cash flow. You can flip houses, you can work for somebody else. Zasha has an acquisition manager that works for her, who is the hero in the deal that she took from Brandon. You can be a real estate agent, a loan officer, a title officer, a construction person, a bookkeeper. There are so many ways that you can make a living through real estate and the reason that I’m advising you to do it is you want the life that rob lives.
You want to be able to get in a car with your wife and take off to Austin and go to other places and not be thinking the whole time, oh my gosh, I’m using all my PTO. This trip is costing so much money, we can’t stop and get corn nuts on the way because we’re spending all of our money in gas. What you want to be thinking is, I’m going to take a trip and on this trip I’m going to make more money in real estate than I spent to go on it, so I get paid to take a trip. Real estate offers that flexibility.

Rob:
I don’t want brag, okay? I’ve tried to be as humble as I can here, but we are actually taking a bus to Austin, Texas. It’s Vonlane and apparently it’s nice, I don’t know.

David:
I gave you too much credit by saying this.

Rob:
Well you said we’re getting in the car and going. We’re actually taking a bus that apparently serves food and drink. I don’t know, I’ve never heard of it before, but should be fun.

David:
Just want to remind you, ask yourself the question, how can you make an impact as you build your wealth? It makes the journey a lot more fun as well as satisfying in the end. All right, enough of listening to me yak. Let’s bring in Zasha. And Zasha Smith, welcome to the BiggerPockets podcast. This has been a long time coming, so glad to have you today.

Zasha:
Aloha, everybody.

Rob:
Aloha.

David:
For those of you who don’t know, you can follow Zasha on Instagram at, is it investwithzasha? Is that the handle?

Zasha:
Yeah.

David:
Zasha and I have been aware of each other through online things. I think we met briefly in Maui one time and now we get to have her on the show. Zasha, can you tell us how you got started in real estate?

Zasha:
Well, I feel like I’m just the average person who was working there, W2. I had been working as a civil engineer for 10 years and I was working 60 to 70 hour weeks, going in on Saturdays. I seen my boss going in on Sundays and thought to myself, this is going to be my life. I’m now going to be working seven days a week on a 40 hour a week salary. I wanted a change. And so I basically started Googling something silly like, how to get rich and quit your job or what is the top way to build wealth? I found out that majority of the people that had been coming up had some sort of stake in real estate.
And so from there I stumbled upon BiggerPockets, started listening to the podcast, going on the website, connecting with other investors, started attending meetups and really gained that confidence to know that I could buy a rental property, because I live in Maui, Hawaii where the medium home price is over a million dollars. I never thought of owning anything else but my own home. And so that opened up my mind to see that there were other ways to buy these properties. I didn’t just have to qualify using my job or using my income, there are other ways to leverage debt. And so from there I just started buying properties.

Rob:
Okay, that’s awesome. Can you tell us a little bit about what your portfolio looks like today and then just a little bit of that trajectory over time as well?

Zasha:
Right now I have 10 rentals. I have nine long term and one short term, all here on Maui. It averages about $10,000 a month. It’s not $1,000 each property. My short term rental brings in about 3,500 to 4,000 a month, which basically makes up my nine other long term rentals net cash flow, which that ranges between 500 to 1,000 depending on the type of loan that I have on those rentals. And then I also do a lot of fixed and flip. So right now I have six projects going on. One is here on Maui, there’s one on another island, and then the rest are between Arizona, Georgia, Florida. I’ve been partnering as a way to scale the flipping business and have that active income versus trying to do everything myself. In the beginning I think I was a typical investor who was very hands on.
I was working my W2. I bought my first flip, which is a condo here in Maui and I was just using logic at that point. I found it on the MLS, it was listed at 300. I think I was using Zillow at that point. Contacted a realtor who was also an investor and said, hey, what are things selling for in this area? And he said, well, there’s a comp that just sold for 450. So I thought to myself, well, it can’t be that much of a difference between what it takes to fix it up and actually make money. And so that’s my indirect way of getting into real estate without overthinking it. Because I think a lot of first time investors get into that analysis paralysis. But for me it was just thinking logically and then taking action and using the resources that I already had in my circle and basically using the MLS which is available to everyone if you have access to the internet as far as Zillow, Redfin, and those other public sites.
And then from there I bought my first rental. I inherited a tenant, but initially I think it was cash flowing net 300. I bought that also off the MLS, used a conventional loan, and went through the process of trying to find them another place, trying to raise the rent, did it on my own, self managed. I found it to be very rewarding in the end because I was willing to work with them until they were able to qualify for affordable housing and buy a house of their own, versus just kicking them out from the start, giving them the 45 day notice. Even though I now cash flow between eight to $900 a month, it was more so helping these people get to the next step as well.

Rob:
That’s amazing. Can you remind us just for reference, when was that very first deal? How long ago was that?

Zasha:
It was in 2019.

Rob:
Oh wow. So really you’ve built a great portfolio in a few years here. And that very first deal that you were talking about, that was a flip, is that the one that you sold and then you went into a long term rental?

Zasha:
Yes.

Rob:
Awesome. I think this is the question, right? Everyone always says, how do I get started? When you’re getting into your flip, obviously as someone that, you were saying you were going based on the logic and you’re like, all right, it shouldn’t cost that much more to fix it and then make a profit here. Was this all self-funded, getting started? How did you actually get into that very first deal?

Zasha:
That was also used, and this is not advice for anybody getting started, using a conventional loan. I had no idea that you couldn’t use it to flip properties. I qualified-

Rob:
Okay, got it.

Zasha:
… using a conventional loan and then used my own funds for the rehab. It was about 30 grand. That was manageable for us. I was the typical person going to Lowe’s on my lunch break, meeting contractors after work, paying them cash, just doing all the things they tell you not to do. If you’re getting started, definitely look into hard money or private money or something else, because after that point moving forward, when we sold the condo, my lender was like, hey, you said this is going to be a rental? And I was like, yeah, that was the initial plan. However, we pivoted into selling it short term and after that he didn’t give me any more loans.

David:
Well, that’s okay, we’re here for you if that’s what you need. I guess because people don’t realize this, but if you buy a house with a loan or you refinance a house, sorry, if you sell a house that was bought within six months of getting the loan, the lender has to pay back all of the money that they made, but they don’t get compensated for all the time that they put into it. So that’s why people can get a little salty if you end up selling a house or refinancing within the six month timeframe. Little quick tip for everybody out there who may wonder, why did my lender ghost me and get so mad? I don’t understand, I made the right move. They don’t ever want to tell you that, but that’s should what it is.
I am fascinated by an element of your story, Zasha, where you hear everyone talk about wanting to do what you’re doing. There’s people that listen to podcasts, there’s people that see this online, they follow the people taking the action, but they don’t actually get out there and do it. What was it about your personal story that gave you the drive to take action where other people think about it and talk about it but they don’t be about it?

Zasha:
Definitely I think growing up in low income housing and just having that perseverance throughout my life to look for something better, look for a way to give back or help people that were in my position helps to drive me to get to that next level. And so even while I was working my W2, I always thought about what it would be like to have more. I’m getting into this engineering job to be able to live in an expensive market, but is that the only reason why I’m working? Is it to build wealth for my family but have no time with them? I was trying to find that balance or that median in order to be able to basically live a life of perseverance and make an impact at the end of the day. And whether that be to my family or my community, I was trying to find that way to pivot into that from the engineering job.

Rob:
Well first of all, I guess I want some clarity here. Are you still working your W2 job? Are you still in the field of engineering?

Zasha:
After I bought my first flip and my first rental in 2019, at the end I ended up joining a mentorship and then quit right away in January of 2020, right before the pandemic. I don’t know if it was universal timing that said, hey, I’m going to give you the hardest year to try to get into investing and you’re going to run with it or you’re going to fail. It was definitely a challenge getting started. In 2020 I had bought my first multifamily and my whole goal was to wholetail it. I ended up having to pivot because the person who was going to buy it, he shut down his office. He was going to buy it, he was a doctor and going to use it for his nursing staff.
And so during the pandemic shut down and I was forced to keep it. However, that’s one of my best deals yet. I’m cash flowing probably about almost $4,000, and it’s a fourplex. Majority of the people who live there have Section 8 HUD or some sort of rental assistance. It’s a very fulfilling property to have as well. And every time I go past it, I just am happy that I learned to have different exit strategies. So quick tip for everyone, if you’re getting started or if you’re looking at a deal, always look for multiple exit strategies that you could use just in case one doesn’t work out.

Rob:
You mentioned it’s a fulfilling property. Why is that?

Zasha:
I feel like it’s come full circle. Because I came from low income housing, I’m now able to help these people who have low income or maybe fell on hard times and are accepting assistance, because it does take a little extra paperwork working with government offices. And on my part, sometimes I have to wait till the fifth or the 10th of the month to get paid. You have to be willing to wait a little bit longer and put in a little bit extra work to work with these affordable rental assistance programs.

Rob:
Is this something that you, because obviously it relates back to your upbringing and everything on that kind of stuff. Is this Section 8 component of real estate, is this your way of giving back? Is that a big driver for you? Is it something that’s very familiar to you and you want to help others in the way that you were helped when you were growing up? Tell us a little bit about that, because I think it’s really important. I think it sounds like there is purpose behind your story and I’d love to hear that, because I think a lot of us will lose sight of why we’re even doing this in the first place.

Zasha:
When I was growing up in the low income housing, it just taught me very much to be humble, but also to strive for a better life. I know things happen to people in their lives, whether it be death, whether it be some sort of health condition that falls upon them or they get fired from their job and now they don’t have any income. I understand how it can happen to people. And people always are asking me, what do you do to prevent yourself from, I’ve heard all this bad things about Section 8 that they’ll trash your house? I say, they’re like any other renter, you have to vet them. So run your background checks with them, check their credit score, talk to their current employers and previous employers and same for their landlords. If you vet your tenants correctly, then everything should fall in place.
Of course it’s not a hundred proof, but at the same time give them a chance like everyone else and vet them but also stick to your standards. One thing that I do differently with my tenants on Section 8, is I let them know, hey, I understand where you’re coming from. This is my property. If anything happens to it, it directly affects my family. I am hoping that we’ve built enough rapport with each other that you understand where I’m coming from. I’m going to be a great landlord to you if you be a great tenant to me. We’re working together on this. So it’s more so of us working together that will help them sustain a place to live.
Because a lot of people here don’t accept Section 8 and it’s for that exact reason, is they’re worried about drugs, they’re worried about nonpayment, they’re worried about them trashing the home and everything like that. But I don’t look at that first, I look at that after I vet a few of them.

David:
A lot of us came from backgrounds where we didn’t have everything we wanted and the drive to get ahead often comes from pain in our past and everyone has some form of pain they can tap into. It’s not like it’s unique just to you. But then I’ve noticed that while your past can be the fuel that can help you overcome the obstacles to get the future you want, like what you’re describing, there’s also traits that sometimes we develop in our past that do not help us when we’re getting to the next level. I feel like a lot of successful people have to navigate the waters of, what do I hang onto from my past? What do I have to let go of to think differently? Can you explain a little bit about what your specific journey was like with how you reconciled those two things?

Zasha:
I definitely am still working through a lot of things I think I went through during my childhood and then also during my young adult years. But I think I still struggle with that as far as using that as my drive. But now where do I go now that I’ve kind of made it to a level where I don’t have to worry? I’ve reached my financial independence number, I don’t really have to build a bigger portfolio. How do I keep myself driven to wake up every morning and definitely move forward with my journey? It’s definitely something that I’ve always struggled with. However, I feel like I just think about the amount of people that I can help and that has helped push me forward as far as being the driver for me now. So every person that I get to help on their journey, help them even start to think differently.
Because a lot of this I found is your mindset. I never really thought about it until last year. I went through Steve Rosenberg’s mastermind, and he was really heavy on mindset. I didn’t know how much that affected me. I thought I could just do one deal at a time, but he taught me to open up my mind and be like, hey, why don’t you shoot for these bigger goals? I’m like, oh well, I want to know that I can achieve things. And so he really got me to think bigger. I think a lot of people are stuck in that. They’re just looking right directly in front of them instead of ahead. And so I think that helps drive me, is helping other people to see the bigger picture.

Rob:
I love that. It’s a really honest answer and I’m honestly really glad that you said you’re still working through it, because I’m honestly in a similar place. My parents are immigrants from Mexico and they are a lot of what drives me and that is a big part of my story, and people are like, Well why do you still keep working? You don’t need to work. Haven’t you figured it out? You seem like you haven’t figured it out. But I’m like, I don’t know, I’m still working through all this. I just want everybody to be taken care of. But then I have this complex where I’m like, well I want to keep helping people. That’s a big part of my platform as well. And so mindset is definitely something that is constantly evolving for me.
I know that you’re really big into this like you just talked about, but you’re also really big into masterminds and getting help that way and evolving your mindset. What are your thoughts on investing in that type of thing and getting help that way versus learning the hard way?

Zasha:
I feel like if you have a lot of time, definitely go through all these things. You can go through all these things on your own. However, if you’re looking to scale and really cut your learning curve, going to masterminds, being a part of mentorships, going to events will help give you the network and connections that you need in order to get to your goals quicker. For me, I always try to, the biggest tips I can give people is to make connections, whether that be going to virtual or online meetups, whether that be going to paying money and investing in yourself for these programs, it definitely comes back tenfold. Even for me I just went to the Maui Mastermind this last week, met millionaires and billionaires and people making a lot of money, but was also able to connect with them on a personal human level and be like, look, these are things we’re all struggling with and we need to be able to help each other.
I was definitely the smallest fish in the room, but I also had the largest social media following. So you’d be surprised on how many people came up to me asking me about that component. So really think about too how you can add value to other people when you’re going to these meetups or when you’re making connections, think of something you’re good at and how you can use that as a platform for you to help them and in turn they’ll remember you.

Rob:
You know what, I’m so the smallest fish in the pond and I love that. There is so much to gain from being the smallest fish in the pond. Because once you are the biggest fish in the pond, it’s very hard to find anyone that can help you in teaching. So for me, I like surrounding myself by people that are much smarter. There is always the stigma of education and mentorship and masterminds, but I’m just like, no, not really. You want to surround yourself with people that have similar goals, because I think personally there is just nothing more inspiring than being in a room full of people that are as on fire as you are or even more on fire.
I just actually was talking about a similar thing, Zasha, where I was in a room at a conference one time in the green room, in a room full of millionaires and billionaires, and it was so crazy because they were just regular people. I think that’s the crazy thing, because you elevate these people to be super brilliant computers basically. And then you talk to them and you’re like, man, you’re just a regular person and you figured it out and you’re smart. And you’re like, I’m smart too, I think I can figure this out. And I think it’s unlocking that. Right? Are you still a part of masterminds and mentorships or is that something that you continually invest in?

Zasha:
Yes. Every year I try to at least go to four different events. I am a part of a few mentorships and Ryan Pineda’s Future Flipper program is how I started my journey there. The first mentorship I ever joined. I was very hesitant at the time. It was $10,000 to join. I was like, but I could learn all this stuff on YouTube or I could do this on myself using BiggerPockets. It was hard for me to dish it over, but it also gave me more motivation to make sure I made the most out of this program. I was going to come out of it with achieving my goals and just connecting with as many people and making those personal connections as I could, because I was like, oh my gosh, this is a lot of money for me, going from doing it all myself to now dishing out all this money. It makes you motivated to make the most use of whatever program you’re in, especially if it’s a lot of money to you, then why would you waste it?

Rob:
Big time. That’s honestly what it all boils down to. There is so much free content out there, right? There’s the podcast, there’s the YouTube side of it. I think what really the core nugget of it is always, can you take action and is there something that you can do to take action that will really fuel you and really set you on fire to pursue these goals. I know you started scaling up from where you started to now. Can we start talking about, you said that you started partnering up with people, you live in Hawaii and then you said you had a place in Arizona that you’re flipping and then another place somewhere else, how does that all work? Why are you partnering up with people to scale? What is that strategy?

Zasha:
Basically my goal is not to build a big wholesaling or flipping team. I want to essentially split roles by partnering. Right? Majority of the time I do equity split. So whether it’s 50, 50, 70, 30, depending on if I’m the capital partner, capital raiser, or they need me to qualify for the loan because they’ve never done a rehab loan, say they own a few rentals or they need me to manage the contractors or walk them through escrow process. Or they are experienced investors and they say, Zasha, it’s Wednesday and I need $300,000. If you can raise this or bring this by Friday, I’ll give you some equity in this deal. I think there’s a lot of value in being that person that they can come to. And also I never wanted, flipping was never my goal. My goal is the passive income. But along the way, if there’s opportunities to make some active income along the way, then I’m more than willing to do that, and also helping other people get started.
Of course these are people that I’ve connected with, known for a while, met through mentorships or we have connection with each other to hold each other accountable. I’m not partnering with random people, just to be clear, but they’re bringing some sort of value or deal. I’m checking with my network maybe in that area or in that state, in that market, and being like, Hey, this person brought this deal. Is it good or not? They have the CMA from the realtor, they have the contractor bids, so they have all the details of the deal in place in order for me to make an easy decision.

David:
I was just about to ask you, how do you choose the partner you’re going to get with? Because the concept of partnering is very different than the practice of partnering. It sounds like you’re meeting them through these same groups that we’re talking about.

Zasha:
Majority of them I’ve either met through mentorships or my community. And of course each partnership is different. You could have all these numbers align. However, once you start working with them, you’ll see their personality or morals, integrity, where their decisions lie, and then you can decide if you want to continue working with them or not. I think it’s very important, one, whenever you’re thinking about a partnership, to talk about communication, to see where they’re at as far as what decisions they’re going to make or how they would think about a certain situation. And then, two, definitely getting something written down on black and white, what your role is and what their role is and what the expectations are.
Because I think that’s something that’s overlooked, and you’re like, yeah, this would be a good idea for us to partner. However, once you get in it, you thought that person was supposed to do something and they didn’t, however nothing’s written down, then it’s harder to keep each other accountable.

David:
I’ve noticed one of the big hesitations, and to be frank, I was the same way. I didn’t want to join GoBundance because at the time it was like $6,000 a year and I don’t want to spend the money, I don’t have to do that. I can read a book to learn it. I had that mindset for a very long time. But then when I joined GoBundance, I got put in touch with a person who got me a line of credit at a bank in North Florida, that ended up leading to 35 properties that I bought that they finance that I wouldn’t have been able to normally do. And through that process I learned a whole bunch. I wrote the BRRRR book, I taught people about BRRRR. Now every partner that works with me in a deal gets all of the knowledge that I gained from everything I did, brought into what they’re doing.
Like Rob was just talking about a deal we bought, he got to watch me kind of teach our realtor how to negotiate it. And now everything that I know goes into Rob’s head. Rob now applies that to all the deals he does. It builds this exponential momentum when you get around the right people, because everything that they’ve learned and spent money to invest in you get. I didn’t just pay $6,000 to join GoBundance. I paid $6,000 to get access to the hundreds of thousands of dollars of money the other members had spent developing their mindset, learning things. And partnerships sort of function in that way in that same way too. Do you mind sharing with us some of the things that you’ve learned from partners that you’ve brought in, so you didn’t just give up 50% of the equity, but what you gained from the other person and how that helped your business?

Zasha:
Majority of the time I’m the one teaching someone else or helping to bring these newbies up to their first deal. In 2020 I had partnered with someone or became an accountability partner with someone and helped walk them through their first wholesale deal, helped walk them through a first flip partnership together and then now they’re off and doing it on their own. That experience in itself helped this person take off on their own. If you think about, it’s getting to do deals together, but also having someone to walk you through, getting their connections if it’s their contractors, their escrow company, seeing who they use for their lenders, getting access to them and then also having that safety net if anything were to go sideways you know how to get through and problem solve and find a solution.
I think that’s the biggest key takeaway when you’re partnering, is that you get to leverage each other as far as finding a solution for that deal and making it happen.

Rob:
I’ve done a few partnerships. I want to ask you first, maybe I’ll give an example here, but are there any things that you’ve learned the hard way through a partnership? Was there ever a moment where you’re like, probably won’t do that again? It doesn’t necessarily reflect badly on the partnership you have now, but just a learning that you can apply for future partnership.

Zasha:
When partnering it’s very, very important for you to define your roles. And for me, I always thought partnering with contractors would be the greatest idea, because that’s most of the time the biggest headache as far as dealing with projects, is the renovation. I’ve partnered with a few contractors that didn’t really work out because they don’t understand the investing aspect. They see us purchasing a house at 600,000, we’re selling at a million, but we’re also putting 200,000 into the renovation. We’re also paying money costs. There’s a lot of costs that go into these projects that people don’t really understand that. It’s not the sell price minus the purchase price and the renovation, there’s a lot of costs in between.
And so even when you’re partnering with people that are let’s say contractors in the deal, they’re putting their sweat equity in, that’s how they’re contributing to the partnership. But there’s so many other moving parts that they may not understand and no matter how much you try to explain to some people it doesn’t register. And so at the end of the day, they might feel like they’re getting the short end of the stick and vice versa. That’s what I talked about in the beginning, is being very clear on the roles and who’s doing what, so everybody’s on the same page. But at the same time some people think that what they’re bringing to the deal might be worth more than what you are bringing to the deal.
And so that’s what I’ve learned from partnering with other contractors, is that it doesn’t always pan out the way that they really think it is. And once they realize, oh my gosh, you’re not making that much money, then they decide not to do any further deals with you and then vice versa.

Rob:
Totally fair. I’ve been in this situation where we did very clearly lay out roles and expectations and so that partnership has always worked out super, super well. But the one thing that I’ve realized with a lot of the partnerships that I started in, is I just didn’t future proof myself. I didn’t really plan for the future because it was a really good deal at the time. And I was like, great, I’m going to do all the sweat equity, I’m going to do all the work. And at that time it was great, it was gravy. But now with the way that my portfolio has grown and where I’m moving to in real estate, some of those roles and responsibilities really just don’t make as much sense for me. And I just didn’t have the foresight to really know, hey, in two years from now, if I’m successful at this, I’m going to be super busy. I should probably think about that.
And so that’s one thing I always try to tell people, is that exact thing. Because really if any tension ever starts to build up, if you’re not super clear about those roles, if one set of partners believe that they’re doing more work than the other, it can be a little bit tougher to maneuver all the way through. I know that you’ve been doing this a bit and I also wanted to ask a little bit about the mentorship versus partnership component of it. Are you ever going into a partnership specifically with the intention of mentoring? Is that just part of the job? Is that something that you’re doing less now that you’re a more seasoned and experienced investor?

Zasha:
Yes. In the beginning when I first started partnering, because I’d never partnered before, I had done maybe about seven or eight deals before I ever started partnering. For me too, the first partnerships that I had, I didn’t really know what I was doing or how it was supposed to be. And so I took the spot of more so mentoring people into being comfortable investing. Now it’s very clear roles, I bring the capital or I qualify for the capital, I’m the one making the monthly payments, whether it be holding costs, utilities, that sort of stuff, turning on the utilities, coordinating with escrow. And then you are the one who’s the boots on the ground coordinating with the contractor, making sure the timeline and the schedule is on par with where we’re supposed to be.
It’s very clearly defined roles, and if they ever want to know anything about what I’m doing, I definitely share that with them, but not necessarily take them through every single step just because I have way too many deals going on to be doing that with every single person.

Rob:
Obviously that makes a lot more sense getting started and you’re working in. And just for the record, I don’t think that there is any bad partnership when you’re getting started, specifically because you will learn so much. I think the benefit is education. A lot of people they’ll see deals that I’ve done and they’ll say, well, hey, I know that you partnered up with somebody and you gave 50% equity and they got 50 and they put up all the money, I want that too. And I’m like, well, hold on, hold on, hold on little one, you can’t always demand 50% when you’re getting started, especially if you don’t have a track record of an investor comes to you and says, hey, I’ll front the money, I’ll do the financing, but you’re only going to get 25% or 15%.
I’m totally fine for a new investor to take something like that, because it’s the experience of working with an investor and with a partner that’s valuable in your first deal more than the cash flow that you’ll ever make.

Zasha:
I totally agree. Especially when you come at it from a humbling experience. I have a lot of people who want to intern with me, hey, I’ll do this for free. But essentially too you have to think about what are you good at and what value can you bring to this experienced person? Because they probably have VAs ready to do things, they already have systems and processes in place. How can you add value instead of making them work harder to figure out, okay, what are you good at? Where can I fit you into my business? You got to make it easier for that person, but also think about the amount of experience you’re going to get or comfortability and confidence in yourself if you see somebody else doing it, know exactly their process and how they’re making it through this business. You can be a fly on the wall or help them do paperwork or something like that and just be around. That’s extremely valuable.
I wish I had somebody when I first started getting into this business like that, but I didn’t know what I didn’t know. I went to these meetups and I thought everybody was doing their own deals. Especially when you go to competitive lead generation, like going to the courthouse steps, going to auctions, everybody has the mindset of, it’s me against you. Right? That’s the mindset that I had coming in, was everybody was to each their own. And recently after joining mentorships, it really opened my eyes to the power of collaboration and having an abundance mindset. If you can win and I can win, why don’t we work together?
If you have a strength and I can help you with something that the deal needs such as capital, why don’t we work together, do our individual roles, and then we can both make money. If you’re trying to do this whole entire business on your own, you will quickly get burnt out or you will quickly find out that in order to scale you need other people.

Rob:
The abundance mindset, someone wants told me you get nothing out of being competitive with a friend or a partner. There’s enough out there for everybody. I think as soon as I heard that, it just unlocked this like, and I was like, oh man, it’s so true. Because a lot of people, on YouTube I talk about all the stuff that I do. I talk about how much money that those investments make. I talk about markets and I’ve had so many people that are like, are you crazy? Why would you give away all your secrets? Now you’re just creating your own competition. And I’m like, there’s millions of homes in the United States, I think I’ll be okay. I think it benefits people to learn and do it the right way because there’s a little bit of integrity that we have to teach people on how to do this, how to do this the right way, how to real estate correctly, if you will.

David:
Zasha, I think that the mindset work you’ve done has clearly had a very significant impact on how successful you are. It looks like every time I follow you, you’re exponentially increasing how successful things are starting to fall into place. I can see that that investment is starting to pay off. Talk to our community, tell us, what exactly are you doing? What does your day look like as far as how things are structured? And what type of stuff catches your attention, you go, I like that person, or I like that situation, I like that setup, I’m going to put more attention into this, versus the just amount of stuff that hits you in a day that you realize that isn’t worth my time and attention?

Zasha:
What has completely changed my life I feel is a morning routine, because I have a family, I’m a mom, I’m a wife, and I’m also an investor, it is very easy to get run down by the day. So waking up early, I wake up at 4:30 in the morning, then quickly I just jump out of bed and start working out, get that done. Write my affirmations. That gives me confidence going into the day. And then I write down the top three things that I got to get done to help me stay focused. Now, this isn’t always happen, there are days where I take breaks, however, for majority of the time I try to stay consistent with that. And then from there I go into Asana. I use that for my team as far as my social marketing team, my investment team, my VAs, we all coordinate in that platform and figure out, okay, what are these tasks that I need to do for that day? Get that done.
And then from there, if there’s any new deals or new leads that come in, then I evaluate that, see if that’s a market that I want to get into, a strategy I want to use, or maybe it’s potential for long term cash flow. And so recently I’ve been really getting into RV parks, and so I’m entering into a partnership that they live in that area, they already have properties in that area and they want to partner with somebody to bring capital. And so that is where I’m seeing my role as far as an investor goal, is to not necessarily focus on a specific strategy, but focus on a specific role in a deal. And so that’s what my role is going to be moving forward.
I’m trying to see if I can start a fund because it is hard once you sell a property, give the funds back to your private investors and then all of a sudden you contact them for another deal and then the money’s gone or they’ve used it for something else or they decided to renovate their bathroom and their house. I’ve been finding that getting into other bigger, higher level strategies has been the way that I have to go now.

Rob:
That’s really cool. Is that your method for scaling? Because obviously you were doing a lot of the flips, you’re partnering in that capacity, but now you’re looking at RV parks. I’m doing something very similar here. Are you doing that, A, because it’s a really cool, I think RV parks are fascinating, but B, is this just your path towards scaling?

Zasha:
Yes. It’s one of the paths. Last year I bought my first short term rental and it has made almost just as much as nine of my long-term combined. It just opened my eyes to the possibilities of doing these more hospitality sort of investments versus the long-term. I’m still going to do the long-term investments, but it’s been harder. I feel like everyone now it’s a bit more of a struggle to find deals. So if I can get into these hospitality RV parks or Airbnbs that can essentially make the deal still work without it having to be a long term investment, then I’m going to jump into those. I don’t know if that was a good explanation for that, but-

Rob:
No, it’s really good.

Zasha:
… that’s definitely what I’m thinking about. The path to me is being that person, figuring out what role, but not really concentrating on the strategy. I’m still open to bigger multi-unit apartment buildings and other strategies. It’s just focusing on what is my role, what value can I bring to that deal that will benefit everyone.

Rob:
Well it sounds like you’re out there, you’re teaching people in the community, obviously you’re very active on social media, you’re getting information out there and you’re effectively mentoring the masses, so that they often say that you are as good as your reputation. It looks like you’re killing it basically. I wanted to ask, from your perspective, what are you doing in your life and your role in your real estate career to impact the local community?

Zasha:
I feel like educating people on what exactly it is we do as real estate investors is very important. We’re not out there buying deals for really low price points and then reselling it for really high without doing any work in between. A lot of times people don’t know we buy homes that are in complete distress. They might have abandoned cars in the front, people might be in some sort of financial situation that they can’t get out of, and we are providing different solutions. And a lot of times we put hundreds of thousands of dollars into renovating these homes and then of course selling them for a profit. However, when you own a home, you get to choose who you sell it to, so you could potentially sell it to a first time home buyer.
You don’t always have to go for the highest price or the person that has the most money or is coming in for cash, you can choose to work with someone who you feel will bring value to that community. And that’s how I found a lot of people when I do buy these homes, ask me or while we’re in renovation phase, come up and say, hey, we would love for you to put a local family in there because this is the vibe of the community and we want them to contribute and not just move here and then find another place, move out. There’s different ways where you can have an impact without compromising your morals or integrity and also adding value to the community.
And then as well for the rental side, for long term, you can choose a Section 8 tenant versus someone willing to pay a couple hundred dollars more if you’re at the regular rental rate. It all depends on your financial goals and your financial situation. However, I’m at a place where that’s important to me, so it may take a little bit more footwork working with the HUD offices, it may take a little bit more time to get their rents in on time, but I’m willing to work through that in order to keep with my goal in making an impact on the community and adding value.

Rob:
Do you think you’ll continue investing in affordable housing as you continue to develop your real estate portfolio and your career and everything?

Zasha:
That’s definitely my goal, especially being from Hawaii and it being so expensive, I knew that when I was going through high school that I had to go to college and in order to move home, I had to be a doctor, a lawyer, an engineer to be able to afford to live here. And so with that in mind, I definitely want to build an affordable housing project or have affordable housing subdivision here in some sort of capacity. But I know along the way I still have to build wealth and make connections and have that in my, I guess, tool chest in order to do these bigger line items, do these bigger, I guess, envisions of projects.

Rob:
That’s awesome. That’s impact. Again, that comes down to purpose. I think a lot of people, I think if you just always focus on the financials and the money, that’s fine. Obviously you can have a successful career doing that. Doesn’t necessarily mean it’s going to be fulfilling. Right? It’s really encouraging to hear that you’re out there doing this. I’m curious, I know you probably work with a lot of potential sellers, what’s your process for working with different potential sellers out there?

Zasha:
Anything found off market when I’m working direct with the homeowners, I ask them, hey, a lot of times it’s referrals. So people refer me to other people. I’m huge on reputation, especially being from a small community on a small island. How you do one thing is how you do everything. And so when I approached them, I ask them, hey, have you talked to a realtor yet? Have you thought about getting a personal loan? If they’re in some sort of financial situation. Have you talked to your family members? Can they help you? Do you need me to mediate that conversation? I have a network of lenders and of realtors and other people in this business that might be able to help you.
And then if you want to work with me, I’m always the last option. I want to know that you’ve explored everything and I am the reason why you need to sell to me, not just because you know wanting the cash offer. I want to know that not necessarily I’m the last resort, but you’ve checked all the boxes before you came to me.

Rob:
Well, that’s cool. That’s something you don’t hear every day, genuinely. You want to, hey, I want to be the last resort, right? That’s really cool that you’re actually helping people through that process. Again, it’s a human element. Real estate you’re dealing with humans every day. You got to treat people like people. It’s the only way that you’re going to have a fulfilling successful career. Again, I guess you could do it without doing all that and be successful, but it’s like, do you want to make money or do you want to make money and be fulfilled? Why not do that? You can have both. You can have both in this industry, and I think that’s something that people always lose sight of.

Zasha:
When I feel like this is a lot of relationship based, whether it be working with other investors, whether it be working with sellers or other people, the escrow company and the title company, it’s all about relationship and trust. And so my biggest deal for example, came from me partnering with a seller. I had no idea that that was even a thing that you could do as far as being creative with it until I found out later on through mentorships. But the seller actually wanted to partner with me and said, hey, well we get a little bit more money if we hold the loan and then you do the renovations and then we sell it. And so that was an instance. That was my biggest deal honestly, was they had brought this partnership aspect to me. And then now it’s called, a lot of people refer to it as innovation, where the sellers still own the property, they hold it, and then you bring renovation funds.
We had agreed on a price of about 450. I brought 200,000 in private lending funds. We fixed it up and it sold for about 975. And so I had let them know, hey, initially the ARV was eight 50 and now the market has gone way high and now we’re able to sell it for 975. Are you okay with the initial amount that we agreed on? Because if it went the other way and it went down, you would still get that money, and they were fine with it. They are definitely a different type of people. It all depends on the relationship you have with the owner, especially when you’re getting creative like that and you don’t own the home, so you don’t have that much control. However, if your relationship is good with the owner, then that’s a different way to make it work in an expensive market and also partner with sellers.

David:
In your method of making sure that you are giving back more than you ever take, you have three things you’re focusing on. And that would be partnering, which is giving mentorship to people through deals. So you’re sort of pouring into the individuals that are learning the game that we’re playing here. Investing with integrity, which is giving without expectations. And then providing affordable housing for people that are not aware of how the game works, but still need somewhere to live that’s affordable. Right?

Zasha:
Definitely.

David:
I think that’s wonderful.

Zasha:
I want to build wealth and then make an impact too. I think that’s the underlying-

David:
Same time?

Zasha:
Yes. And you don’t have to be perfect, and that’s what I’m saying, is that you can use your resources to go through things. I think there’s been people throughout my life who have given me the insight or courage or confidence to be able, I had no idea about finances or loans or debt other than buying my own home. But as far as investing and doing all these things, it was just people along the way. Maybe lenders, the title company. I had no idea how to partner with sellers until I went through the escrow company. I said, is this a real thing? And so they helped get the legal paperwork together. They said as long as you and the seller are on that same page, then we can draft up whatever legal documentation you need.
I never really thought of that before. I always thought to traditional investors buy things with cash. They use hard or private money, and that’s the only ways. Again, it’s just asking people along the way, being curious. Right? And so I think that’s helped add a lot to my journey as well and helped me scale, because I’m not afraid to ask questions.

David:
This has been very good Zasha, a ton of actual, easily repeatable content that people could follow. I’m going to move us on the next segment of our show is the world famous deal deep dive. In this segment of the show, Rob and I are going to fire questions directly at you one by one and learn about a particular deal that you’ve done. Question number one, what type of property is it?

Zasha:
It’s a single family.

Rob:
Awesome. Question number two, how did you find it?

Zasha:
Driving for dollars with another accountability partner.

David:
This is starting to sound familiar. Question number three, how much was it?

Zasha:
375,000.

Rob:
Question number four, how did you negotiate it?

Zasha:
I had an acquisitions person negotiate the deal and they actually had the house, owned it free and clear, had a few liens on it, but were able to walk them down because they had previously talked to a realtor who said they had to clean up a bunch of the items that were on the property. They didn’t want to do that, so they were open to working with an investor, taking it as is.

David:
Awesome. How did you fund this deal?

Zasha:
All private money.

Rob:
What’d you end up doing with it?

Zasha:
I ended up keeping it using the BRRRR strategy, getting all my money back out, paying back the private lender and essentially just wanting to add another building to the property, it’s called an Ohana. That is our goal right now. We ended up splitting the single family into a duplex. It was a two story, so we split that and then now we’re going to build another duplex on the same property.

David:
An Ohana unit if you haven’t heard of it, is what they call an ADU in Hawaii, it means family. It would be like if you wanted your mom and your dad or your mother-in-law to live in your property, you’d build them in Ohana unit. My last question, what was the outcome on this deal?

Zasha:
We have multiple exit strategies for the deal. And so right now we have two renters living in it. One renter actually is church member of Brandon Turner, which his wife’s best friend lives right next door. And then also on the bottom unit is a lady who is waiting for her Hawaiian homeland’s home to be built up country.

Rob:
Awesome. What lessons did you learn from this deal?

Zasha:
Be quick to act. This deal was actually, when we were driving for dollars, we’d seen it, we got the deal and decided that we’re going to mail them, we’re going to leave our cards there and then eventually coordinated buying the property. After that, whenever I buy a property, this is a good tip for those who are just starting out or maybe seasoned investors, something you never heard about. I give my card to each and every neighbor that is around that area to let them know, hey, if you see something suspicious, please let me know. Or if my contractors have parked in your area or are making too much noise, you can always call me. I’m the new owner of the home and I definitely am trying to add value to your area and also to your home.
And so it was funny because the lady next door, I guess was Brandon Turner’s wife’s best friend and she ended up calling Brandon and saying, hey, do you know this girl Zasha Smith? She just bought this house. And so he messaged me and he said that he was actually looking at that house for a while. They drive past it almost every week. He had been meaning to knock on the door, been meaning to contact the owner, but just didn’t get around to it. I end up getting the house and now have, it’s renting right now for around $6,000 a month. The mortgage on it is about $500,000 a month, $500,000, and we pay about $2,300 a month for the mortgage. And so it ended up being a really good deal and recently just appraised for a little over a million dollars. And so he was a little sour about that.

David:
Everybody listening, go message Brandon on Instagram and tell him to listen to this episode’s deal deep dive and let him see to the victor the spoils. All right, I actually have one last question, I was wrong. Last question from me. In this deal, who was the hero on your team?

Zasha:
Definitely my acquisitions person. It happened to be, she had been wanting to invest and start her investing career, had been in a mentorship but never took action. And so we became accountability partners, because even as a seasoned investor, it’s nice to get out there and be reminded of the different ways you can find deals, not only through cold calling or texting, especially if you haven’t door knocked in a while or you haven’t driven around the neighborhood to go look for deals. And so she had coordinated contact with him, coordinated closing the deal, and I walked her through the steps of the title company, escrow and all of that. Tereva Jacobson is definitely the hero of this deal.

David:
Thank you for that. And be sure to check out the BiggerPockets marketplace where you can find your next hero to help you on your next deal. All right, we’re going to move on to the next segment of the show, famous for. Question number one, what is your favorite real estate book?

Zasha:
Of course, I’m going to say BRRRR Strategy by David Greene. I feel like, don’t reinvent the wheel, right? If it’s working for other people, then just do the same thing.

David:
There you go. That’s a way to bring a little bit of cold.

Rob:
Got to say, I agree. I agree.

David:
Rob agrees because that’s the only real estate book he ever read, which I actually am not mad about, because if he’s only going to have read one, I’m happy that it’s mine.

Rob:
That’s right. It’s also the best real estate book I’ve ever read, so very important. Number two, what’s your favorite business book?

Zasha:
The all so common, Rich Dad Poor Dad by Robert Kiyosaki.

Rob:
Awesome. Question number three, what are some of your hobbies when you’re not building your real estate empire?

Zasha:
Hanging out with my kids, definitely number one. But number two, I just started spear fishing, and so I oftentimes like everybody else get caught up in working, building wealth, looking for the next best thing, investing in other deals and you can’t take me away from my laptop or my computer. So reminding myself to go to the beach, me and my husband started a new hobby of spear fishing together and that has not only got me out of my own way as far as taking a break mentally from work, but then also built our relationship closer.

David:
I’ve always thought that looked like a blast.

Zasha:
It’s really fun.

Rob:
Not for the fish.

David:
I guess the sphere comes out as a blast, so there’s probably a pun in there somewhere. All right. Question number four-

Rob:
That’s right. It is a blast for them technically.

David:
Right. What sets apart successful investors from those who give up, fail or never get started?

Zasha:
Surrounding themselves by like-minded people or people who are ahead of them and also helping other people. And so this is what I try to put forth, especially through social media, educating other people and letting them know that just because people are ahead of you or doing all these great things, doesn’t mean that you can’t. And so putting out little tips like that, connecting with people. Also I had mentioned to you guys before this episode, that you can instantly connect with people on social media. There is a power of providing value through there, that people don’t even realize. I connected with David Greene, with Brandon Turner, I messaged Rob a few times, I don’t know if he’s seen, it might be in his hidden messages.

Rob:
It might be. That’s right. Hey, that’s a call back.

Zasha:
But it’s definitely a way to connect with people that I never even realized had initial power to it. I think if you’re just starting out, of course don’t blast people, but find a way to add value. You can instantly connect on social media, and I know that we all post and add value. So really take in what people are giving out for free and what’s working for them.

Rob:
Awesome. Well, first of all, let me just say that I followed you and I sent you a message and I haven’t heard back from you. I did send that message like 30 minutes ago while we were on the podcast, but it is there. Can you tell us more where people can find you on the internet if they want to learn more about you, connect with you and all that good stuff?

Zasha:
On BiggerPockets, definitely that’s where I keep a profile of all my deals that I have going on now at Zasha Smith is my handle name on there. And then also on Instagram at investwithzasha, where I have a big platform, always down to help. I have people helping me with my messages to get started and guide you on the biggest path. I always speak about BiggerPockets, so it is an honor to be here and be on this podcast and add value, being comfortable being uncomfortable, and just know that you guys are not alone in this journey. It is very hard for me being a civil engineer for 10 years behind the desk to put myself out there and often connect, but I’ve found it to be the most valuable and most rewarding part of this journey and making an impact.

Rob:
That’s so cool. Well, David, what about you man? Where can people find out more with you, connected to you, all that good stuff?

David:
Go follow me at davidgreene24. Very easy screen name to remember, also very boring. I’m pretty much everywhere. And then on YouTube, I’m at David Greene Real Estate, also very boring and very easy. But got a social media company that’s been putting out posts and I try to put new stuff. So when I’m out here in Scottsdale, I try to post things showing what’s going on behind the scenes and I’m doing more of what’s happening in the personal world. Zasha, I think you do a really good job of that actually, I want to mention it. You don’t just post, look at this house, look at this deal, look what I did. There’s like a kind of a mix of this is who I am as a person and this is who I am as an investor, which probably isn’t a coincidence because as you said, you want to give back and you want to build wealth and that comes across with the way that you’re posting. So make sure you go follow, investwithzasha as well as me. And then Rob, where can people find you?

Rob:
You can find me on the You Tubes at Robuilt and then Instagram Robuilt as well. And TikTok, you want me to do funny dances. You want to see me do funny dances? I’ll do it. All right. On the TikTok at Robuilto. I also do them on Instagram every so often. Catch me dancing. They’re not good, but I will dance. I’m not ashamed.

David:
Do you do the robot? Is that where Robuilt comes from?

Rob:
I don’t do the robot. No I don’t. But I just had a video pop off of me conducting a choir and that one was my best performing video ever. Fake choir, not a real choir. Go watch it, it’s funny.

David:
I saw it. It was very intense. I’ve never seen that intense side of you until I saw that.

Rob:
Well, hey, the beast exists within, you just got to let it go.

David:
Don’t let that flower shirt fool you. There’s a beast behind that cloth. Zasha, any last words before we let you get out of here?

Zasha:
Definitely I think the overarching theme is giving back, building wealth, but also making an impact. And if there’s any way that you can make an impact on your community, definitely try to do that. Whether it’s your time or money, just remembering where you came from or that other people don’t have it as good as you and trying to help them elevate.

David:
Thank you for that very much. This has been a great podcast and I hope everybody listening takes that to heart. You can actually win bigger and do better when you help other people along the way. It is not us versus everybody else, it can be us with everybody else working together. Thank you for spreading that message, Zasha. I completely second it. This is David Greene for Rob the beast behind the flower shirt, Abasolo, signing off.

 

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