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Surprising Housing Markets Where Investors Are Seeing the Most Price Growth

November 22, 2024 No Comments

Much of the pandemic-era hotspots have cooled down, namely in Florida. Now, the Northeast is showing strong price appreciation, along with several Midwestern markets that have consistently been the more affordable places to invest in. As we move into 2025, below is a quick look at how prices are looking across the country according to data we pulled from last month.

Florida’s West Coast Takes a Hit

The sun isn’t shining as brightly as it once was in the Sunshine State—at least not for property owners. After years of rampant home price increases, some of Florida’s booming cities have experienced steep declines in home prices. Data from the National Association of Realtors (NAR) shows that Florida’s West Coast metro areas have been hit particularly hard.

Punta Gorda and the surrounding area have seen a 6.5% price drop over the last quarter, bringing down the median to $350,000, the biggest decline since 2011. The once-booming North Port-Sarasota-Bradenton area has dropped 5.8%, pulling the median down to $485,000. Cape Coral-Fort Myers is also down—by 3.7%, on top of earlier declines in the year.

NAR chief economist Lawrence Yun told Bloomberg that the Southeast, in general, is suffering from a trifecta of economic factors: “more inventory, higher insurance costs, and more homebuilding in recent years.”

Tony Barrett, president of the Realtor Association of Sarasota and Manatee, feels that extreme weather in recent months also didn’t help, delaying sales and hurting homebuyer confidence. With increased homebuilding and buyers becoming skittish, particularly in the wake of hurricanes Helene and Milton this fall—the latter storm made landfall just outside Sarasota, taking lives and destroying homes across the state—Florida needs to rebuild emotionally as well as physically.

However, other areas of the Sunbelt have suffered from falling prices due to the aforementioned issues. San Antonio-New Braunfels, Texas, and Durham-Chapel Hill, North Carolina, have all seen year-over-year price drops after huge gains of over 20% in the wake of the pandemic. Despite this, housing is still considerably more expensive than before the pandemic and above the price range of most homebuyers.

The Midwest and Northeast Boast Huge Gains

The Midwest, which has been reliably affordable for many years, has boasted huge gains in home prices. National Association of Realtors (NAR) data shows that the fastest-paced growth was in Racine, Wisconsin, where home prices rose 13.7% from a year earlier, and the Youngstown-Warren-Boardman, Ohio area, where prices climbed 13.1%.

Both metro areas are relatively affordable, with the median home price in Racine at $310,200 in the third quarter. In Youngstown, it was $171,100.

The NAR data showed that Illinois had four cities posting double-digit gains:

Several lower-priced Northeastern cities posted sizeable gains: Syracuse, New York (13%) and Norwich-New London, Connecticut (10.6%).

Data from GOBankingRates.com showed several others:

Smaller Northeastern cities have been hot for a while due to their relatively low prices compared to more expensive surrounding cities, such as Boston and New York, and the influx of new residents and jobs.

The recent gains in the Northeast might be a reaction to the migration of residents to warmer Sunbelt states during the pandemic. This has slowed since the pandemic has waned, with companies calling more people back to the office.

Tech Investment Boosts Northeast Housing Prices and Job Market

One of the biggest drivers of jobs and housing in the Northeast is tech, specifically the billions of dollars the Biden administration has been pumping into U.S. chipmakers to shift the lucrative business away from China. The government just announced an $825 million investment in a new semiconductor research and development facility in Albany, New York. Zillow shows Albany’s house prices are currently up by 6.7% year over year.

Syracuse Prepares for an Economic Hurricane

Nearby, Syracuse is readying itself for a dramatic transformation. In October 2022, Micron Technology, one of the world’s largest semiconductor makers, unveiled plans to build a $100 billion factory complex in the Syracuse area and hire tens of thousands of workers. Plans for new transportation links and housing are already underway.

A flurry of new businesses has also opened in the area. Local officials estimate the Micron facility would require 40,000 more residences to accommodate the expected population increase, about 10,000 of those within the next three years. According to CoStar data, as of November, the average rent for a one-bedroom apartment in Syracuse is $1,156 per month, 26% lower than the national average.

“There’s more demand for home sales than we’ve ever seen in my lifetime” spreading from Clay south to Syracuse,” Christopher Savage, director of sales at Cushman & Wakefield/Pyramid Brokerage, told CoStar News.

The Micron project is so large that it will affect housing in Syracuse and surrounding areas in upstate New York.

“We want some economic growth,” Joe Driscoll, an I-81 project director (the Interstate 81 viaduct is being raised to accommodate new development) for the city of Syracuse and former city council member, told CoStar News. “We want to see mixed-use development, we want to see coffee shops, we want to see restaurants, we want to see retail, but with that balance of affordable housing, too. I don’t think a lot of people realize what a $100 billion investment will look like. There’s a hurricane coming.”

Why Investing in the Northeast and Midwest Makes Sense

According to Warren Buffett’s BusinessWire, a Berkshire Hathaway company, the Northeast and Midwest dominate the top housing markets for 2025, with projected appreciation ranging from 6.3% to 7.7%. The website states:

“These regions offer a blend of strong economies and relatively affordable housing, attracting buyers. Notably, two Pennsylvania cities (Lancaster, Reading); Rochester (NY); Manchester (NH); and six Midwestern metros (Akron & Mansfield, OH; Rockford, IL; Grand Rapids, MI; Topeka, KS; Lafayette, IN) lead the pack.”

It’s worth noting that the forecast is only for 2025 and does not factor in the tech boom that will hit upstate New York cities over several years.

Final Thoughts

You could be forgiven for being confused by housing data in recent years. Immediately after the pandemic, everyone raved about the Sunbelt and predicted the demise of towns and cities in the Northeast as remote workers decamped for warm weather and cheaper housing. Now, companies are demanding a return to work, and it seems the Northeast is hot again.

The reality is that most of the U.S. enjoyed appreciation in 2024, with home prices increasing nationally year over year by 3.4% as of September. There are fluctuations in every market, and investors who invest for equity appreciation take a careful look at the economies in each town and city, their affordability, the new developments and businesses heading their way, and current inventory.

While Florida and the Sunbelt might have taken a dip recently, it will be temporary as inventory and current house prices recalibrate. The new businesses that have relocated there will remain. However, the scale of investment in some Northeastern cities indicates that the upward house price trajectory could continue for a while.

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

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How Much of Your Net Worth Should Each Real Estate Investment Make Up?

November 22, 2024 No Comments

If you invest right, real estate can offer asymmetric returns: high potential returns with relatively low risk. Sure, it requires a degree of skill, but by investing alongside others in an investment club, you can instantly draw on others’ experience.

Skill aside, traditional real estate investments come with another challenge: the money required to invest.

If you buy a rental property, you’ll likely need $50,000 to $100,000 between the down payment, closing costs, cash reserves, and any initial repairs.

If you invest in a real estate syndication, you’ll likely need $50,000 to $100,000 as a minimum investment mandated by the operator.

That makes it hard for the average investor to diversify. It begs the question: How much of your net worth should each real estate investment make up?

In the beginning, it should be small, under 1%. As you gain confidence and expertise, it can grow.

“But in the beginning, I don’t have a high net worth, so investing in real estate will require a high percentage of it!” Not if you can start by investing $500 or $5,000 at a time. But we’re getting ahead of ourselves.

Control Group: Standard Investment Advisors

If we grabbed an average investment advisor off the street and asked them about asset allocation, they’d probably talk only about stocks and bonds.

They might say something like, “Follow the Rule of 100: Subtract your age from 100, and put that percentage of your portfolio in stocks and the rest in bonds.” If they were particularly aggressive, they might bump that to 120 or propose holding 5% to 10% of your portfolio in REITs.

Yawn.

I literally chatted last night with a close friend of mine who’s an investment advisor. I asked her point-blank: “For your high asset management fee, does your team beat the stock market at large?”

Her response: “No, and we’re not trying to beat the market either. Our clients are mostly wealthy people who want to minimize risk so they don’t run out of money before dying.”

Not only does her advisory team not beat the S&P 500, they significantly underperform it, especially after adding in their 1% to 2% advisory fees each year.

It’s hardly a plot twist when I tell you that I invest differently.

My Asset Allocation

I aim for around 50% of my net worth in stocks and the other 50% in real estate. I don’t bother with bonds at all, as a 40-something.

“But Brian, how do you protect against risk?!”

First, I’m not retired, so stock market corrections don’t scare me. Second, bonds aren’t as low risk as you might think. They’re susceptible to inflation risk, for starters. Rewind the clock just two years to when inflation hit 9.1%, and ask someone holding a 2% Treasury bond how they felt about losing 7.1% in real dollars.

Then, there’s interest rate risk, which causes the value of existing bonds to bounce up or down. The Morningstar US Core Bond Index fell 12.1% that year.

Instead of bonds, I invest in real estate. And I expect my real estate investments to earn twice as much as my stocks, with half the risk.

Speaking of stocks, I invest in a mix of ETFs that give me broad exposure to the entire world: small-cap, mid-cap, large-cap, all sectors, all geographical regions, you name it. If you don’t know anything about stocks, try investing in just two funds: VTI (the Vanguard Total Stock Market Index Fund) and VEU (the Vanguard FTSE All-World ex-US ETF).

But how do I manage the risk in my real estate investments?

Concentration Risk Among Real Estate Investments

Imagine you have a net worth of $100,000 as a young investor. If you go the traditional route and invest $50,000 to $100,000 in a real estate investment, it will take up 50% to 100% of your net worth. If that investment goes poorly, it could cripple your finances for the foreseeable future.

You wouldn’t put 100% of your stock investments in one company. Why would you do the same thing in real estate?

Now imagine you put $100 toward loans on Groundfloor (0.1% of your net worth). Then, you put $100 into real estate funds on Fundrise. Then you buy a fractional share of a rental property on Arrived for another $100.

If Fundrise does poorly, like it did in 2022 and 2023, it won’t break you.

After dipping your toe in passive real estate investing with a few crowdfunding platforms, you discover private real estate investments. You start wrapping your head around private partnerships, real estate syndications, and equity funds. You start experimenting with private notes and debt funds for monthly income.

In SparkRental’s Co-Investing Club, I invest $5,000 at a time in these types of passive investments. Yes, that’s higher than the $100 to $1,000 that you can invest in some crowdfunding platforms. But we also aim for higher returns and lower risk than crowdfunding investments.

This is because crowdfunding investments, REITs, stocks, and bonds all share one thing in common: They’re open to the public at large. By definition, you’ll earn average market returns because you’re paying market pricing for public investments.

You can do better—if you’re willing to leave the well-trodden path that the herd follows.

How Your Real Estate Allocation Should Change Over Time

When I first started investing passively in real estate, I aimed for no single investment to take up more than 1% to 3% of my net worth.

Over time, I’ve evolved as an investor. I know more, and so does the investment club of other investors that I vet deals with together. Collectively, we’ve developed deep expertise. It’s almost a “hive mind” as we get together each month to vet investments.

I also have firsthand experience with over 25 operators by now. I feel extremely confident in some of them after having invested with them on multiple investments and seeing their communication style, how they handle hiccups, and so forth.

Today, I feel comfortable investing 5% to 10% of my net worth with some of those operators. I started small and have scaled up some of my real estate investments over time.

That’s the beauty of passive investing: You can invest a little with one operator, see how they do, and then invest more with them if you like them.

The risk is never zero, of course. The principal could die in a plane crash, or a major war could come along and disrupt your real estate and other investments. But I’m comfortable that the risk is low compared to other investments—especially given the high returns.

Start Small, Then Expand

It’s a lot easier to invest small amounts in passive real estate investments than active ones. Despite all those gurus trying to sell you on “zero money down!” real estate investing strategies, most of them require deep expertise if you hope to execute on them without enormous risk.

I mentioned that I aim for twice the returns on real estate with half the risk. That doesn’t start with a $50,000 or $100,000 investment in a single property with an operator you don’t know. It starts with $500 or $5,000, followed by a probation period where you see how that operator performs. In our Co-Investing Club, for example, we aim not to invest with the same operator within one year of our first investment with them.

Small-dollar investing lets you build confidence, trust, and expertise over time before betting on the farm. From there, you can scale up to investing $50,000 with an operator or more.

If you want to keep your risk low and your average returns high, start low and go slow.

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

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Calculating NOI for Real Estate and How to Start Investing with $70K

November 22, 2024 No Comments

Want to estimate your NOI (net operating income) BEFORE you buy a rental property? Calculating NOI in real estate isn’t hard, and after doing this dozens and dozens of times, we’re sharing how to estimate things like taxes, insurance, and maintenance costs so you know you’re buying a killer deal. Speaking of first deals, how much do you need to get started investing? $20K? $50K? $100K? A fellow rookie has $70K ready to invest but doesn’t know the next best move. We’re sharing exactly how they should start, and you can copy these steps no matter how much money you have.

It wouldn’t be a Rookie Reply if we didn’t discuss tricky tenant situations. One investor has a tenant who is FED UP with a broken outlet. Sounds pretty reasonable, right? Well, the tenant is giving the landlord an unreasonable ultimatum. What should the investor do? Let the tenant take care of things on their own (and potentially damage the property) or put their foot down and follow the lease agreement?

Ashley:
Let’s get your questions answered. My name is Ashley Kehr and I’m here with Tony J Robinson.

Tony:
And this is the podcast here to help you kickstart your real estate investing journey. And today we’re diving back into the BiggerPockets Forum to get your questions answered. Now guys, the forums of the absolute best place to quickly get all of your real estate investing questions answered by experts like me, Ashley, and so many others. So what are we going to talk about today? We’ve got a couple of things here. Number one, we’re going to talk about how to calculate your NOI as a first time investor. We’re going to talk about a tenant who has some appliance issues and whether or not you as the landlord should get those fixed for them. And then we’ll finish off by talking about how to get started in real estate with $70,000. Now, before we jump in, we want to give a quick thank you to Corporate Direct. This episode is sponsored by Corporate Direct where you can protect your properties with an LLC and let corporate direct take care of the paperwork. Go to biggerpockets.com/direct for a free 15 minute consultation and 100 bucks off if you mention the Real Estate Rookie podcast. Now, let’s get into the show.

Ashley:
Okay, so our first question here is pulled from the BiggerPockets forums and this question says, hi, I’m a first time investor trying to underwrite to make an all cash offer on a duplex. I’ve always struggled with coming up with operating expenses to calculate my NOI my net operating income, specifically maintenance and insurance. I can find out pretty easily what the property taxes and I can shop around or just guess about 8% to 10% property management fees. But insurance and maintenance is where the NOIs calculation can really confused me. The duplex is located in the Midwest, no flood zone. Is there a landlord policy or what should I actually be shopping for? Also, what should be taken into account when coming up with maintenance for the NOI equation? Okay, so let’s start at the first top of that question of calculating NOI. If you need help figuring out what specifically to add in as expenses to calculate your operating income, you can go to BiggerPockets and go to the calculator reports where it will show you, depending on what strategy you’re using.
If you’re doing a rental, let’s use that for an example. It’ll show you exactly everything you need to analyze a rental property and what kind of expenses you should be looking at. The person that asked this question said they already kind of know they can look up property taxes, which most often you can do online or you can get the actual tax bills from the seller of the property, or sometimes it’s even listed in the MLS listing. Then they did their research for the property management fees. But insurance and maintenance is where they’re getting confused insurance. I will 100% agree it is difficult to estimate, especially on your very first rental property, what the insurance will be because it’ll be different than your homeowner’s insurance because there’s oftentimes more liability because you are a landlord on the policy, but maybe you won’t have as much coverage. So first thing I think to take into account is that it’s really going to vary upon what type of coverage you get onto the property. So are you going to do replacement costs? What other things are on the property that could increase the insurance premium? Is there a pool? Did the tenants have a trampoline on there? Things like that. So Tony, what would you say is your best advice for estimating the insurance on a property?

Tony:
I totally understand where this question’s coming from as well, but honestly I feel like it’s an easier solution than most people give it credit for. You can reach out to an insurance agent and a lot of times same day, they can get back to you with some sort of quote on what they think insurance might be. So if I’m looking in a market, I’m going to reach out, maybe ask your agent, your real estate agent, maybe ask your lender, Hey, who’s a good insurance agent that works in this market? Reach out to that person, say, Hey, I’m thinking about buying three different properties and give them a duplex, give ’em a single family home, give ’em whatever it is else that you’re looking at and say, Hey, can you give me some ballpark quotes on what it’ll cause to insure these? And within a day, maybe a day or two, you can get back some ballpark quotes on what it’ll cause to ensure those things. And now you can kind of use that as a foundation moving forward. So super easy way I think is to just reach out to an agent. And worst case, you can probably go online besides, I don’t know, some of these big insurance companies, Geico, progressive, whoever, punch in some information there and they might be able to give you a quick ballpark online within minutes.

Ashley:
Yeah, the only problem with that is that then you have to input your phone number and then you get a million calls call.

Tony:
It’s like when you apply for a mortgage,

Ashley:
Yeah, have accurate insurance premium numbers for your analysis. It might be worth it to get those phone calls. But yeah, there’s a bunch of different websites that you can go in and you can get a quote. Another thing you can do too is go into the BiggerPockets forums, ask other investors in that market what they’re paying for insurance premiums too. And then I would just increase that and give yourself a little bit of a buffer in case there is something that’s specifically different about your property as far as the coverage of that too.

Tony:
The only other thing I’d add to the insurance piece is also just be aware of where that state is moving in terms of insurance. For example, I’m in California, there are a lot of insurance providers that are leaving California for risk of fire and they’re just not coming back. I was actually talking to someone I know who lives here in Southern California and they had on their primary residence, all of the insurance providers have left. The only coverage they have to choose now is the state sponsored insurance, and it was like $15,000 a year, which is insane for where we’re at here in California. So just make sure that you’re kind of keeping tabs on, hey, is insurance costs kind of getting crazy in this market or is it still pretty reasonable in comparison to the rest of the country?

Ashley:
That’s a great point. And part of the question of this too was does he get a landlord policy? What should he actually be shopping for? And if it is going to be a rental, you’ll want a landlord policy that will cover the property, the building. So the property were to burn down, you would get money to replace that property. Most of the times the landlord policy will not cover any contents or personal items of your tenants. So you could add appliances on there if you own the appliances to that policy, but that’s why it’s important to have your renters have renters insurance because if a devastation occurred, your policy would not cover their contents, which makes sense because you are paying for the policy and not them. So they should get their own. And then the liability piece is a huge thing of the landlord policy because if your tenant does get hurt in your property or does decide to sue you for some reason, you have the liability piece, not just the property coverage on the property.

Tony:
Sorry, you brought something up to you. Ash, as you were saying, liability and what that looks like. I think one of the best things you can do as a rookie is just get multiple quotes and then ask the agent to compare those quotes for you, especially if you’re a first time real estate invest. Even for me, sometimes reading through these is like, what does this mean? What are you saying? What does this actually come with? So take whatever quote you get from these different companies. Say you get three quotes, take all three quotes to insurance provider A and say, Hey, can you compare your quote with these other two and let me know what differences you see. Then take those same through quotes to insurance provider B and then insurance provider C and let them look through what the other coverage options are and actually explain to you why theirs may or may not be the best. But I found a lot of value in putting that work back on the insurance agent.

Ashley:
And I really like going with an insurance broker that shops it out for you too to different insurance companies instead of just an insurance agent. For one company like Geico State Farm, they’re a broker where they can actually shop a whole bunch of different, and a lot of times they’ll know, already know from experience that this company is going to give you the best deal because they love ensuring duplexes and they always have great coverage and blah, blah, blah. Stuff like that can save you some time. So the next piece of this is the maintenance factor, estimating maintenance. So for me, I’m definitely looking at the age of the property, was this property rehabbed, updated, how old are the mechanics of the property? Things like that as to how much I’m allocating as far as a percentage to estimate for maintenance. So on the high side that could be eight to 10% a month. On the low side, I usually always at least put 5% for maintenance. I’ve never built or purchased a brand new build that was a rental property. So maybe in that case you could even go lower for the first several years of not having a lot of maintenance come up. But that’s kind of where I keep my balance at is if it’s an older property, I’m doing eight to 10% and if it’s been remodeled and rehabbed and the mechanics are good, then I’m doing 5% that I’m allocating every month to maintenance.

Tony:
Honestly, not much to add to that. Ash, I think you hit the nail on the head with that one. Those are pretty much the same ballpark figures we use as well.

Ashley:
Okay. So kind of the last piece of this to wrap up here is what are other things that you can use to calculate the NOI and stuff? And I think that just the answer to that is really just go to the BiggerPockets and go to the calculator reports and just look at all of the expenses that you can allocate in there. Tony, besides as far as operating expenses, do you think there’s anything offhand maybe for short-term rental that you see that oftentimes people leave out? One example is bookkeeping fees. You’re going to have to pay either an accountant to file your taxes every year or a bookkeeper to do the monthly bookkeeping. I see a lot of people leave that out of their not operating income. Is there anything else that you notice that maybe he should be taking into account?

Tony:
Yeah, the two biggest ones that I probably see are consumables. So things like your toilet paper, paper towels, body wash, soap, shampoo, et cetera. People tend to forget that. And then the other piece that people tend to forget is your cleaning fees. Now, your cleaning fees, they are an expense that you pay out, but they’re also income that you collect. And it’s important to account for both of those when you’re doing your analysis because sometimes you might collect more in cleaning fee income than you do in cleaning fee or than you pay out in cleaning fee expenses. So there’s actually some margin there, but cleaning fees and consumables are the two things that typically see people miss on the short term side.

Ashley:
Before we jump into our second question rookies, we want to thank you so much for being here and listening to the podcast. As you may know, we air every episode of this podcast on YouTube as well as some original content like my new series Ricky Resource. We want to hit 100,000 subscribers and we need your help. If you aren’t already, please head over to our YouTube channel. You can go to ww.youtube.com at realestate rookie and subscribe to our channel. Okay everyone, welcome back. So for our second question, Tony pulled one out of the real estate rookie Facebook group, right?

Tony:
I did. And it was a question that Ash and I both separately had looked at and we were like, this seems like a good question. It seems like the universe is talking to us here. So let me pull up this question and we can all read it together. Alright, so here’s a question. It says it’s been a while since I posted, but I need to vent. I have a tenant that submitted a maintenance request this morning because the outlet to the refrigerator stopped working when another vendor moved the refrigerator in the ticket. They said that they have plugged the refrigerator into another outlet using an extension cord. He then told me that he wanted someone out there to fix the problem by 5:00 PM today or else he’ll have his friend come and fix it and just bill me. I don’t even know if this friend is a certified electrician or the company that he’s representing.
I have my electrician that can come out after five 30, which is still same day service. He told me that he’s going to call the county inspector, the city inspector, all this because I won’t let his friend work on my property and he wants me to pay for the Thanksgiving food that is in the refrigerator. Is it me or is this tenant potentially being unreasonable? I feel like it always gets a little dicey when we’re talking about Thanksgiving dinner. People want to protect the Turkey, so we got an outlet that’s gone out. But I think the interesting part here, and maybe we need a little bit more clarity here, but it says that the outlet stopped working when another vendor moved the refrigerator. So I’m not sure what that means, but I guess maybe I’m interpreting that as the tenant themselves hired someone to move the fridge and that somehow led to this outlet going out or are you reading that in a different way, Ash?

Ashley:
Yeah, so when I was looking at that, and I don’t know for sure if it was somebody the tenant hired to come in, maybe they already had someone in there doing maintenance on something. But either way I just look at this and I’m looking at the timeframe as in this is taken care of, same day there shouldn’t be this big of an issue. And I think it really goes back to setting your expectations. So Ashley Wilson, she owns a whole bunch of apartment complexes and one thing I love in her property management model is that when you move into one of her properties, she has almost like an expectation sheet that she gives out to all the tenants. That it’s if you have a plumbing issue, it’ll be taken care of within 24 hours if you have a handyman issue, 48 hours, whatever it may be.
And it goes through this whole list of things of maintenance issues that could come up and it says, we’ll take care of it within X amount of time. And she said this is over and above what it actually takes them. So say for example, if the hot water tank isn’t working and they say we will take care of this within 48 hours, she knows that they will actually always be able to take care of this in 24 hours. So there’s this expectation and then when they exceed the expectation, it makes them look even better and the tenant more appreciative that it was taken care of even faster than what they agreed to upon signing the lease. So if there’s some way that when you create your lease agreement is to putting into your lease stating this is when maintenance will be performed and these are the timeframes.
If we cannot get someone to you in a timely manner, then yes, that is our fault. We’ll decrease your rent or do something like that. But same day service. And I don’t think that you should fret, if there’s one thing that I’ve learned is for someone to harass you and to threaten you that they’re going to have someone coming in and take it. What’s going to happen in this situation is if they bring someone else in, they pay that person, they’re probably going to withhold rent, they’re going to pay you for whatever is extra for rent, and then you’re going to come after them and say, Hey, you still owe me the rest of rent. They’re going to say, no, we had to pay this electrician to fix your problem. And then it comes down to is it worth you hiring an attorney to send them a notice saying that you have passed you rent?
We’re going to go after the eviction process. So depending on the amount, it may not even be worth having an attorney start an eviction process or sending them notice that they’re in lease violation because they haven’t paid their lease or in lease violation because they had a contractor come in that wasn’t certified. So it really does get messy, but I think the biggest thing is is that remaining calm, I’ve been in so many circumstances where I’ve just wanted to freak out, but remaining calm and just overly effectively communicate with the resident. And I think what was the timeframe in here? There was like 5:30 PM when the person actually got there.

Tony:
Yeah, five 30 versus five.

Ashley:
And as far as the food and everything in the fridge, at some point it gets to the thing of, you know what, I will give you a $20 gift card to the grocery store or something like that if you really just want to make this tenant happy and the problem go away. But also you don’t want to get into that area where now they’re always going to expect different things. So we actually had in our lease agreement for a long time, if we weren’t able to get your fridge or freezer repaired, we would reimburse you for ice and for a cooler if it was such a certain amount of time. So it was still on the resident to go and get the cooler, get the ice or whatever, which still is a huge inconvenience to them. But we had that in the lease agreement so that they were signing and saying, yes, I agreed to this.
If my appliance is not working and we can’t get someone out to fix the appliance or replace it that same day, then that’s where we’re going to reimburse you for that. And we had a circumstance one time, I remember where it was over a weekend and we literally could not get anyone to this person’s place. And we ended up, they had the receipt from their last grocery trip and we did cover that whole thing. So sometimes it comes down to is it really worth fighting over $40 if that’s what they’re asking for? So there’s a lot to take into account, but I would say that this person is very over the top if they do not think that you are taking care of this in a timely manner.

Tony:
Lemme ask a few follow-up questions actually. Well first I love the point you made about setting expectations. I think so much of being, whether it’s short-term, long-term, midterm, whatever it is, anytime you have someone staying at your property, so much of how smooth that relationship goes is dependent upon your ability to set and keep expectations, right? Set realistic expectations and exceed those. I was actually talking to someone the other day and he had, it’s a short-term rental that he hads and the previous guest smoked inside the house, which is not allowed based on his house rules. And they left a cigarette burn, small little cigarette burn inside of the pool table. And he’s like, yeah, the cleaner said it kind of smelled the smoke. So he had a guest checking in, I think the next day he ended up canceling that reservation. He’s like, I just didn’t want them to walk in and be shocked by the smoke.
And I was like, I get why you’re doing that. I was like, but you just lost out on how much money by canceling that reservation. I think a better thing would’ve been to let them know, just be honest with them. Say, Hey, look guys, I’m super excited to host you this weekend. Unfortunately, the guests who just checked out didn’t leave the place in the best shape. We’re going to make sure it’s all tip top and clean for you when you get here. However, there may be some lingering smoke smell potentially by the time you guys get there. If you want to cancel, hey, no harm, no foul, but if you want to stay, I’ll give you guys a small discount for the inconvenience. Are you okay with that? And if you were to frame it up that way, now they’re not going to be upset because the smoke smell is there. They’re going to be upset if the smoke smell is there and they weren’t notified beforehand if they’re surprised by it. But if you can set that expectation, it makes everything so much easier. So I love that you set the expectation, Pete.

Ashley:
Well, Tony, on that note real quick, how you just said, for as a short-term rental as an example, as in you’re in the hospitality industry and you’re going to do what you can to make your guests accommodate them. And I think that is something that gets so construed looking at long-term rentals and short-term rentals that in short-term rentals more often you want to make the person happy, you want to make them feel home, you want to be at service for them. What extra things can we do for them? And there is such a stigma as a long-term landlord that, oh, you got to stick to your guns, they pay you rent, you do the maintenance, what you have to do, not anything extra. And I think sometimes it is so vastly different. If this was a short-term rental tenant that was staying in your property and the fridge didn’t work, wouldn’t you be instead of saying like, oh, I’m in the right, this is okay, I feel like you would’ve taken this, this would’ve been a whole different question. It would’ve been completely phrased differently. And I think that’s sometimes maybe we should look at our long-term rentals more as a customer based business and think like, oh, it’s okay to actually give them some money or to accommodate them, things like that too. But

Tony:
I think the difference, I think there’s probably two big differences. Number one is that every single person that stays at one of my Airbnbs has the ability to write a public review afterwards. And in the long-term rental space, I mean, I don’t know, maybe they could go on if you have a Google page or something. But typically there’s no way for one tenant to communicate with the next. And then the second piece is that obviously there’s typically more revenue generated by short-term rentals. So if we give a guest 50 bucks, that’s a very small percentage of our profit for that month. Whereas if I have a long-term rental, say I’m netting maybe 200 bucks, that’s what 25% of the revenue that I just potentially collected, right with that $50 refund. So I do believe there’s some nuance here, but I couldn’t agree more that putting the tenant, putting your resident as the focus in the long term will probably help you grow and build a bigger business.

Ashley:
There’s this book, it’s by Jay Bayer, I think that’s his name, and it’s called Hug Your Haters. And it is all about customer service and how to kill people with kindness and how to handle people, especially when they are a tenant that has a complaint or is upset about something. It’s a really great read for a landlord. It’s built more for like if you have a business and people are leaving you bad reviews and things like that, how to handle that and how to respond. But it is great for tenant customer satisfaction too. Okay, so let’s move into our second ad break because we love talking about real estate and we love answering questions like this with you all and we’d love for you to hit the follow button on your podcast app wherever you are listening. So we’re going to take one final break and we’ll be back with our last question.
So back from our break and we have one last question. Hi, my spouse and I are both the W2 employees. Most of our savings have been parked in the s and p 500. We wanted to diversify into real estate investing and thus came into this forum. Well welcome. I’ve seen some of the resources online and it’s a bit overwhelming. Can you please share any resources or advice on how to get started in real estate investing? Here’s a few details about US savings available for investing 70,000. Our current residence is renting in the Northeast. We haven’t bought yet because our rent is super low, 30 KA year. Geographical preference to buy anywhere in the us but would prefer to avoid West Coast. Current W2 income is 250 K per year. How much time can I dedicate to this? It is 10 hours per week. Okay. I don’t know if this question has been asked before or if my information is relevant, but I’m a fast learner and highly motivated to invest in this space to diversify my assets and get some extra cashflow on the side. Thanks. Well, first of all, welcome to BiggerPockets and welcome to Real Estate Rookie. We’re really excited that you are a new rookie investor wanting to get into investing.

Tony:
I think first they’ve got a pretty decent profile here, right? 250 KA year in income, only 30 KA year in rent expense and 70 K saved. I would assume on that income you could probably save a good chunk every single month as well. Like that income to your rent, assuming that everything else is kind of I balance as well. So first, just kudos to you guys for I think laying a really solid foundation. But the question here is like, hey, if I’ve got 70 K in about 10 hours per week, what is a good strategy? Or maybe what’s a good way to get started? And I think we’ve set this quite a bit on the rookie podcast, but I think a lot of it comes down to your specific investment goals. Now she says that we want to diversify into real estate. So it’s good that there’s that initial motivation, but if we dig a few layers deeper, what is beyond the desire to diversify?
Are you looking to diversify into real estate so you can pay maybe less than taxes on that two 50 that you’re earning? Do you want to diversify into real estate just so that you have maybe a tangible asset that’s going to appreciate over time in a way that maybe stocks won’t? Do you want to diversify into real estate for the active cash flow so you can actually get some cash coming back into your pocket? I think depending on which one of those motivations, each kind of next step would be a little bit different. I dunno, what do you think Ash?

Ashley:
Yeah, I mean in the details about us, it did say they want to get some extra cashflow on the side so we know that’s at least somewhat of a priority and they want to not in the West coast. So kind of eliminating that space. I think one of the best places to start is to go into the BiggerPockets blog posts and you’ll find a whole bunch of different articles there based on cashflow and what are different markets, markets On the BiggerPockets Real Estate podcast, they have done a couple episodes recently, like if I had a hundred thousand dollars to invest, what would I do with it? If I had $50,000 to invest, what would I do with it? Where would you invest the top markets for 2025? So I’d recommend going back and listening to those episodes with Dave Meyer and getting a gauge. So the first thing I would do is look at where other people are investing that are getting some cashflow that you want.
Then pick some of those markets and then go ahead and analyze them. Do a brief overview of those markets, make sure they’re going to be a good fit for you. So once say you pick Cleveland, Ohio, this is where I want to invest, that seems to have good cashflow. And also if you’re having 70,000, how much of that do you want for the down payment, the closing costs? Do you want to buy a house in all cash With that? Think about how comfortable you are with how much of that you want to spend and you want to keep some for reserves too. So let’s say you’re going to do a down payment, so you want to see what your budget is. So if you have to put 20, 25% down on an investment property, which is typical, how much is that? How much can you actually afford to buy with that down payment?
So that will help you narrow down which cities you can actually invest in too. Then you want to look at tenant landlord laws, which ones are maybe more tenant friendly that would be better for your rental? Narrow down some of these cities. Then once you actually decide on a city niche down into neighborhoods. So there’s some great websites like Neighborhood Scouts, pride Investor, where you can actually click on neighborhoods instead of just the city as a whole and see are people moving to this area even though a city may have decline. If you look at some of the suburbs, you might actually see the people in the city are moving to the suburb and from other places are moving into the suburbs. So there’s actually population growth going on there, but I just did a rookie resource video too on the real estate rookie YouTube channel, all about analyzing markets, how to find broadly across, decide on which market to invest in.
Then once you actually decide how to narrow down and what data to actually pull out of that market to analyze. And there’s two worksheets too that go along with these videos. So if you watch the videos, you’ll get the link too to actually pull up these and you can use these templates to actually go in and analyze. So that’s kind of like a starting point as to really figure out what your strategy is going to be, what your motivation is. If it’s cashflow, look at where other people are investing, what actually matches what you want to do, what’s your budget? Pick a city and then narrow down a niche into neighborhood. And that’s where you can go to the BiggerPockets agent finder and you can actually find an agent that works with investors in that neighborhood who can kind of be your boots on the ground and really help guide you through putting in offers and properties there.

Tony:
Yeah, actually that was a masterclass on kind of niching down and choosing the right markets. The only thing I’d add is BiggerPockets just have a tool to help, not just rookies, but all investors find new markets. So if you head over to biggerpockets.com/markets, the BP team has put together a phenomenal map-based resource with tons of information on different markets, rent to price, ratio of unemployment appreciation, population growth, et cetera. So lots of good data to help you choose your market. I think the one thing that I would consider, and I appreciate that she put in here, that she’s open to a lot of different geographical locations, but I think the mistake that we see with a lot of new investors is that they only choose cities based on either familiarity or proximity. And I’m not saying that you can’t start with those cities, but I see some new investors who almost force a market just because it’s closer, just because they’re familiar with it and not necessarily because it’s the best place for them to invest.
So my strong recommendation is to choose markets based on how well they align with your goals on how well they align with your resources. Not necessarily how close they are or how familiar you are with them already, but yeah, Ashley’s point of using the, I think seeing where other folks are investing is a big one. I think the other piece too, and we’re kind of assuming here that she wants to just get into the rental space. And maybe with that time commitment, 10 hours per week, maybe that actually is what makes the most sense for you. But I think maybe even an easier way to get started that we probably don’t talk about enough, but maybe it’s just lending money to other real estate investors. If you got 70 K, you lend that out 12%, maybe a point or two upfront, and you do that a couple times a year, that might be a great way to really quickly accelerate the growth of that 70 k from 70 to a hundred to one 20 to one 50. And you look up in a couple years and you’ve maybe double what you’ve been able to make. So just another potential avenue that would take way less time than actually gone there and getting your own real estate deal.

Ashley:
I think we need to do an episode on, as a rookie investor who wants to lend money, how do you do that? How do you protect yourself? What are the documents that need to be in place? In New York state, if you’re lending on a property and you want to lien on it, you have to file as a mortgage and you’re paying the mortgage tax on it, you’re paying fees. It is not convenient for someone to lend private money in New York. But we could kind of go through some of those examples of what it would look like, because as a rookie investor, you may have no idea how to go and purchase property, let alone how to lend someone money and make sure that you are protected and they just don’t run off with your money too. So that might be a good idea to do one of those. Well, if you want to get involved in the community like all these other real estate investors, go to biggerpockets.com/forums. Thank you so much for listening. I’m Ashley. And he’s Tony. And we’ll see you guys on the next rookie reply.

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Can Trump Push Jerome Powell Out of the Fed?

November 22, 2024 No Comments

Has the Federal Reserve gone too far? Many Americans are critical of the Fed’s move to raise interest rates sharply, pause for years, and then slowly start implementing rate cuts. The arguably most prominent critic of the Fed? President-Elect Donald Trump, who, shortly after nominating the current Fed chair, Jerome Powell, reversed his opinion on whether Powell was the right person for the job.

Now, with Trump coming back to the White House, Powell’s job hangs in jeopardy—or does it? Can a President fire the Fed chair? Does the President have the authority to influence how the Fed operates? What would happen if Trump decided to go after Powell and request his resignation? Nick Timiraos, reporter at The Wall Street Journal and Federal Reserve expert, is on to answer these questions.

Nick gives us the latest update on rate cuts, where the Fed is headed, how the future of the Fed looks with Trump back in office, and why some politicians champion “Fed Independence,” while others argue that Fed power has overstepped its bounds. Are Trump and Powell more aligned than they think, and is this government drama all talk? We’re getting Nick’s expert viewpoint on it all.

Dave:
The Federal Reserve has a huge impact on the economy and particularly on the housing market. But after the recent presidential election, people are wondering what is the future of the Fed, everyone? It’s Dave. Welcome to the BiggerPockets podcast, and today I am joined by Nick Timiraos, who is a reporter for the Wall Street Journal and one of the foremost fed reporters in the entire country. And we actually recorded this podcast to go on our sister podcast on the market, but this is such an important topic for real estate investors that I wanted to air it here on the BiggerPockets podcast as well. If you’re not familiar, the FED stands for the Federal Reserve, and although they don’t directly set mortgage rates, they have a huge impact on the economy and particularly on real estate because they help set borrowing costs. And as you probably know, most people who operate in real estate investing borrow a lot of money. So Fed decisions and policies have a huge impact for all of us. So I wanted to give everyone the opportunity to listen to what Nick has to say about the future of the Fed because it’s probably going to impact each and every one of us. Let’s jump into my conversation with Nick. Nick, welcome back to the show. Thanks for joining us.

Nick:
Thanks for having me.

Dave:
So you’re here and I’m going to ask many questions about the future of the Fed, but maybe you can help bring us up to speed. We all know that there was a Fed meeting right after the presidential election. They cut the federal funds rate by 25 basis points, but what else happened in the last meeting that I and our audience should know about?

Nick:
Well, I think the big question right now, is the economy going to avoid a recession? And if so, the bond market certainly thinks so. And so you’ve seen yields rise. I mean it’s unusual, right? The Fed has cut now 75 basis points this year and you’ve seen the 10 year treasury yield go up. I don’t know, a half point, probably not what a lot of people expected. And so I think the big question now is what happens from here, both on the policy side, Donald Trump’s policies are a little bit unclear exactly how far he’s going to go on tariffs, tax cuts, spending cuts, regulatory rollback. What does that mean for growth? What does that mean for inflation? There’s going to be a lot to digest.

Dave:
Got it. Yeah, and just to make clear what Nick’s talking about here, we’ve seen that the Fed has cut first 50 basis points, half a percentage point back in September. Then we had a quarter point cut here in November, but at the same time, mortgage rates have gone up for all of us in the housing market, and that’s because Fed doesn’t control mortgage rates. That is much more closely tied to the bond market. And when the bond market believes that there is less risk of a recession, bond yields usually go up and take mortgage rates up them. Just a quick primer on why mortgage rates have gone up in the last couple of months. Now, Nick, obviously we’re going to unpack some of the stuff that you talked about in terms of policy, but after every Fed meeting there is a press conference that some of us pay a lot of attention to. Did Jerome Powell and his press conference give any indication for what the Fed might do in the coming months or should we be expecting more rate cuts?

Nick:
Yeah, I mean the Fed has signaled they expect to keep cutting rates. And so Powell repeated that view. I think in terms of the economic outlook, maybe the most interesting thing Powell said was around the forecast for inflation, because inflation is looking maybe a little bit firmer than expected. And Powell said that they still expect inflation to come down because what they really see right now is the firmer prices are an echo of past strength, strengthen the economy. They don’t see new sources of heat.
If you think about a fire, they don’t see the fire reheating sort of on its own here. They think these are catch up increases in prices. And what would be an example of that? Your car insurance premium has gone up because car prices went up a lot two and three years ago. It’s not that there’s something new that’s running through the economy. These are sort of the echoes of earlier price increases. And so if that’s your story on inflation, then that suggests less concern that you’d have to do something different from interest rates from what you were expecting. The Fed had said they were going to cut interest rates. You still think inflation is coming down, then you’re not going to react maybe quite so much to these, a little bit stiffer than expected inflation readings.

Dave:
Okay. So we still have to see what happens. I think there’s one more meeting this year in December, so we’ll see what happens there. But it seems like the general consensus is still that the Fed intends to cut rates and get to a lower federal funds rate in the next couple of years. We just don’t know exactly when and how rapidly those rates might come. At least that’s the last thing that we’ve heard so far. Now of course, we all sort of speculating and want to know what’s going to go on with the Fed because it does have big implications for the economy and for the housing market. But there’s sort of this other storyline that’s been going on since the presidential election, and you actually, Nick wrote about this in the Wall Street Journal sort of about the future of the Federal Reserve and whether or not Jerome Powell might be staying in his position. So can you just give us a primer on that situation?

Nick:
Yeah. Powell was made Fed Chair initially by Donald Trump in 2018. Of course, Trump soured fairly quickly on his selection because the Fed was slowly raising interest rates at that time, and Trump didn’t think that inflation was a problem that needed to have preemptively higher interest rates. The Fed stopped raising interest rates and actually cut a little bit in 2019 because of some concerns that global growth was slowing, inflation was not picking up. And so there had been questions over whether Trump could fire the Fed chair. He had sort of vented to his advisors in 2018 and 19, I don’t like this Powell guy. I’m stuck with him. Can I get rid of him? And they told him no. They said there’s a four year term for the Fed chair. He also has a 14 year term as a governor that the Federal Reserve Act, which created the Fed, says that you can only replace a governor, a fed governor for cause.
And that’s been interpreted by a court to mean malfeasance, impropriety, incompetence, not just, I don’t like what the guy’s doing with interest rates. Okay, so Donald Trump loses in 2020. Biden comes in Biden Reappoints Powell in 2022, and the concern that the Fed chair would be fired is sort of over until Donald Trump comes back and people begin to ask him, well, what are you going to do with the Fed? Would you try to replace Powell? Now, what Trump has said this year is, no, I wouldn’t try to replace him as long as he’s doing the right thing, which is sort of an interesting condition to, it’s not an unconditional pledge. Well, the current situation thing seemed fine. I will point out Trump has been very clear that he regards inflation is a serious problem. He called it a country buster that you have to fix inflation.
But at the same time, Donald Trump has always preferred low interest rates. So a number of people have been asking, well, would Trump decide to try to push Powell out again if he thought maybe the Fed wasn’t cutting interest rates fast enough or if he just wanted to have his own person in there? And there are some people in the president’s orbit, allies of the president who have been saying, no, we really think you could get this guy out if you wanted to. There are other people around the president who think that’s a horrible idea. I should say the president elect who think this is a horrible idea. You don’t want to do this. You don’t want to mess with the Fed right now, especially when bond markets are kind of looking ahead and saying, wow, deficits are a lot higher than they were four years ago. Inflation has been a problem. So you start to interfere with independent monetary policy and you might not like what the bond market does.

Dave:
All right, time for a short break, but we’ll be back with Nick Timiraos unfed independence and how the Trump Powell relationship might look right after this. Hey everyone, welcome back to the show. I do want to ask some questions just about the legality of all this, but maybe we should just talk about independent monetary policy. You just stated that, and the Fed sort of operates in this gray area. The Fed Governors and the Chair are appointed by the president. They’re not elected officials, but they sort of have had historically this space where they don’t need government approval for their decisions. So when Jerome Powell and the rest of the Fed Governors decide to change interest rates, the federal funds rate, they don’t need approval for the president or from Congress, right?

Nick:
That’s right. It’s a very peculiar setup because normally, I mean, you wouldn’t take a committee of tax experts and say, all right, you guys are in charge of tax policy. You go decide how much. I mean, those are very political decisions. So why is it that when we talk about independent monetary policy, well, why do we have that? Well, first of all, what is independence? I mean, I think it sometimes can get over torked to mean that nobody can ever second guess the Fed. What it really means is they have some degree of operational autonomy. Congress and the executive branch set up the Fed and over time decided the Fed should set interest rates with an eye towards keeping inflation low and stable. They call that price stability and then maximum employment, or I would call that a solid, a good labor market outcome. You want to balance those two goals, and sometimes they’re in conflict, but we’re going to let the Fed figure out how to do that with really one instrument which is interest rates.
So they have the autonomy to do that. And why do they have that? Well, a couple reasons. One is that we’ve found through history that when you let political factors dictate what should happen with interest rates, I mean politicians always want to win the next election. So you’ll always sort of accept some stimulus today, and if it overheats the economy, IE, if you have a little bit more inflation, well that’s okay because we will take that risk and you want to have an independent central bank to come in and say, actually, no, we need to make sure that inflation doesn’t get out of control. That’s what happened in the 1970s. And so after that, central banks around the world sort of fought for more autonomy or independence, and governments gave it to ’em because it seemed like a worthwhile trade off. The other reason I think we have this arrangement where central banks enjoy more independence is frankly, Congress doesn’t want to make these decisions to raise interest rates. They’re unpopular, they’re difficult decisions, and so they’re able to blame the Fed. They’re able to say, well, I’m not the one that made your mortgage rate or your auto loan rate go up. The Fed did this. And so you can sort of blame the Fed. They become a convenient scapegoat for political purposes. So it’s not written in stone anywhere that the Fed should be independent. It’s sort of a norm that has developed over decades really with some trial and error. And so that’s why we have the system and arrangement that we have.

Dave:
Well, that’s a great explanation. Thank you, Nick. And it makes clear some of the arguments for Fed Independence. Like you said, it’s a convenient political scapegoat is one reason, and it might help mitigate political short-term thinking by either party, but what are some of the criticisms of Fed independence?

Nick:
Well, I think the criticism of it is why do you have this unaccountable and very powerful institution? And I mean, this is how I believe Trump thinks about it is he owns it. If the economy’s doing well or if it’s not, people are going to hold him accountable. So why should he have more say over what this very important interest rate setting body is doing with policy? His advisors said to me when he was president, he doesn’t really understand this fetish around Fed independence. He thinks that if the Fed’s doing the wrong thing, he should be allowed to say it. For 30 years before Trump was president, there had been this soft norm really begun by Bill Clinton and then continued by George W. Bush and Barack Obama that the president wasn’t going to opine on monetary policy. And the reason Clinton did this, he had an economic advisor who later became treasury secretary Bob Rubin.
Bob Rubin had been at the top of Goldman Sachs, and he had seen how George HW Bush in 1991 and 1992 was in a fight with the Fed. He was arguing that the Fed should cut interest rates more and the Fed didn’t always go along. And so Rubin saw this and he said, well, this exposed how weak actually Bush was. You create concerns in the market that the Fed’s not going to be as focused on inflation that send interest rates up. You also fight with the Fed and you lose. It shows that you’re weak. So he went and said, the White House is not going to talk about monetary policy. Now, Donald Trump decided he should be allowed to have his say because he thought, well, if these guys are royally screwing it up, somebody needs to stop ’em. One final point on this is the Fed does try, especially compared to 30 years ago, part of defending their independence is being more transparent about what they’re doing and why. And so that’s why you see all of the speeches and they release the minutes, they release the verbatim transcripts of their meetings, albeit with a five-year lag, but they’re trying to show people that this isn’t some political operation that they’re running. They actually are informed by what they think is the best thinking and analysis, and they try to justify their decisions. And so that’s sort of a way to guard against the risk that, well, this is just an unaccountable fourth branch of government and we should wipe this away.

Dave:
Nick, you’ve told us a bit about how President-elect Trump thinks about Fed independence, but what do other politicians think about this? How is Fed independence generally seen in Washington?

Nick:
Well, up until recently at Senate Republicans, when I would talk to members of the Senate Banking Committee, which is the committee that has jurisdiction over the Fed, they were quite supportive of Fed independence, and they were certainly supportive of it. The last time Donald Trump was president, once he realized he didn’t like what he was getting from the Fed, he began to suggest nominees who he thought would be more loyal to him. And some of these nominees were seen as not terribly qualified by Senate Republicans and they resisted. I think the big question going forward is, are things different now, Trump seemingly has a broader political mandate than he did eight years ago when he was elected. So do Senate Republicans push back on this more or do they say if Trump wants his way with the Fed, he’s the president, he’s entitled to it. But generally the Senate has been sort of a bulwark to support this idea of having a more independent monetary policy.

Dave:
And does that go for the business community as well?

Nick:
I think so. I mean, I think we haven’t really run the experiment here of what would happen if you had a Fed that maybe was seen as more responsive to political factors. I should note some people think the Fed is very political and that they take politics into account in everything they do. If you talk to people who are former Fed officials, they completely reject that idea. But these are difficult economic judgments you’re making. Will tax rates boost growth without inflation? Will deficit spending boost growth without inflation? If not, do you have to raise interest rates? You can’t kind of divorce those from whatever you think about what taxes are spending due to the economy. So there’s always going to be some room for interpretation.

Dave:
Let’s get back to where we are today. Obviously, Trump was elected just a couple of weeks ago, and there has been more speculation recently about whether Trump will try to fire Powell right away or he’ll ask him to step down. But from what I’ve seen, Trump actually hasn’t suggested that he’s going to fire Powell or ask him to step down. Is that right, Nick?

Nick:
That’s right.

Dave:
Okay. So is the new renewed speculation basically just based on things that happened back in 2018?

Nick:
I think it’s a part of that, and it’s also the fact that you’ve had some advisors around Trump arguing for a more muscular executive branch. I think the reason you’re seeing the questions now after Donald Trump’s reelection is people want to know where are the guardrails going to be in a second term? And so they’re asking these questions, Donald Trump, would you try to replace Powell? He has not said that he would. And people are going to ask the Fed chair the same thing.

Dave:
And how has Powell responded to those questions

Nick:
Powell’s to those questions? Exactly the same way that he did five years ago. He said five years ago that he has a four year term as chair and he intends to serve it. And he was extremely direct at the press conference in early November when he was asked, do you think the president has the authority to replace you? It was a one word answer. No,

Dave:
We actually pulled the audio of that interaction. Here’s the clip.

Speaker 3:
Some of the President-elect advisors have suggested that you should resign. If he asked you to leave, would you go?

Speaker 4:
No.

Speaker 3:
Can you follow up on do you think that legally you’re not required to leave?

Speaker 4:
No. Do you believe the president has the power to fire or demote you? And it has the Fed determined the legality of a president demoting at will, any of the other governors with leadership positions not permitted under the law, not what not permitted under the law.

Dave:
All right. Super interesting. Thank you, Nick. So it seems like Powell is pretty dug in on serving out the rest of his term. So how might this play out, Nick? I won’t ask you to predict the future, but what are some of the possible scenarios from here?

Nick:
Well, I think the main scenario is that Powell just serves out his term. It ends in May of 2026, and so that’s 17 months of the next four years of Trump. I think that is the base case scenario. Could Trump change his mind and decide to do something? Of course. So what would happen in that scenario? I mean, if you want to go into that kind of hypothetical rabbit hole. Well, one scenario that Trump’s advisors floated last time was, okay, the law says you can’t fire him as chair. And his advisors told him last time, you can’t do this. And I reported recently that in 2018 and 19 when this did become an issue, Powell told treasury secretary, Steven Mnuchin, I will fight this. You need to know that I will fight this if people want to make an issue of this. And of course, Trump didn’t fight it, right?
He later tells Powell in a phone call, he described this phone call to some other people. He said that he had told Powell, I guess I’m stuck with you. And so even though Trump talked a lot about potentially replacing Powell, he never did it. And it’s possible he never did it because he knew that there would be a legal fight, that it would be very disturbing of markets potentially. And so his advisors had come up with this idea, well, you can’t fire him, but maybe you could demote him as the chair. Why would you do that? Well, the law that creates the chairs for your term is silent on the for cause removal protection that the governors have. So there are some people who said, well, maybe you could just demote him and then could you elevate somebody else into the chair? Seems like a lot of effort to do that for just again, a 16 or 17 month term that Powell has left. And then if you look at different court rulings and opinions from Supreme Court Justices, a number of them have sort of said they see the Fed as different, that monetary policy, the history of the Fed and the predecessor institution, the second bank of the US creates some reason to think that maybe the Supreme Court would rule in favor of the Fed or Powell on this. But I will stipulate we’re talking about sort of extreme tail risk hypotheticals here.

Dave:
Yeah. So it sounds like the most likely scenario is that Trump and Powell find a way to work together for the 15 or 16 months, as you said, of Trump’s second term. And then Trump would correct me if I’m wrong, then he could name his new chairperson. But does that chairperson have to come from the existing Fed Governors or would he be able to appoint someone completely new?

Nick:
He’ll be able to appoint someone completely new because the way the Fed governor seats work is one of them turns over every two years. So in January, 2026, one of the current Fed governors, her term will expire, Adriana Kugler’s term will expire. And so on February 1st, 2026, Trump will be able to put somebody new into that job, and that’s about four and a half months before Powell’s term as chairs up. So presumably whoever gets that seat could become the chair four months later. And if anybody else on the Fed Board retires early, maybe they take a Fed Governor, Mickey Ballman and make her the head of a bank regulatory agency that would give you another vacancy to fill on the board. So people don’t normally serve their entire terms. If people step down early, then that gives you other vacancies on the board. But this is a difference from eight years ago in Trump’s first term, when he took office, there were a lot of vacancies on the board. He had an opportunity early to remake the Fed. He had up to five vacancies in his first 13 months. And this time, if everybody stays and nobody leaves early, he’ll only have one vacancy in his first two years.

Dave:
All right. Time for one final break, but stick with us more on the future of the Fed and how different scenarios might affect the market on the other side. Welcome back investors. Let’s jump back in. Okay, so of course no one knows what’s going to happen, but it sounds like the most probable scenario again is that Trump and Powell choose to work together for the first 12, 16 months. And if at that point Trump is unhappy with the direction of the Fed, he’ll have the option to name a new Fed governor who could then be appointed by Trump to be the chairperson of the Fed and assumably. That person would have monetary policy inclinations that are more aligned with. And so it sounds like Nick, you believe that’s more likely because rather than sort of go through this potential legal battle, that Trump will have a chance to name a new Fed chairman anyway within the first two years of his second term?

Nick:
Yeah, that’s right. You’d go through potential legal battle. The market might react very badly. I mean, economists I talked to think this before a court would even pick it up. The market would react in such a way that everybody would reconsider whether you really wanted to go kind of the nuclear option here
To the courts, it would probably be harmful for everybody involved. It’d be a lose lose for the Fed even if you won this decision. I mean, I think people have said to me, well, why is Powell, why would Powell be so committed to this? Is it kind of personal ambition? And the answer is no. This is about defending a principle of central bank independence. If Powell were to resign at the President’s asking, you’d establish a new norm that the Fed chair answers to the President, and if the president doesn’t like the monetary policy he’s getting, then you just replace the Fed chair. That would be a completely different turn from the central bank that we’ve had for the last 50 or 60 years.

Dave:
Nick, do you think it’s possible that Trump and power are actually more aligned than people think they’re, because we’ve just talked about that the Fed intends to keep cutting rates. Trump has said that he’d like lower rates. So is it possible that they are actually trying to do the same thing?

Nick:
It is possible. I mean, the Fed’s goal is to have the soft landing, to have inflation come down without a downturn. It’s what we’ve seen signs of happening this year. I think the challenge here is that Trump’s policies, it’s very hard to know how to model them. There’s a couple examples. Regulatory rollback, you could see that as something that might help with inflation because your increasing competition, you’re making it possible for the productive capacity of the economy to produce more goods and services. So that could be disinflationary tax cuts. How much growth do they create? Are you increasing deficits and are you going to have to compensate investors more to buy a treasury security to buy a treasury bond that could cut in different ways? Tariffs, I think, are a wild card. There’s an argument that even if tariffs increase prices, they only send up the price once inflation isn’t a one-time increase in the price level, it’s a year after year increase.
So the question right now is, would the Fed, how would they react to a one-time increase in a tariff? Would you allow prices to go up once and then say, we’re not going to try to offset that with tighter monetary policy because that could create a slowdown that you don’t think is necessary if you don’t think inflation’s going to be a problem, or there’s a world in which officials conclude, we just went through these inflationary shocks. Now consumers have become accustomed to inflation. Unions are bargaining for higher wages when prices go up. That’s maybe a different inflationary environment we could be in where the Fed decides that they have to raise rates if tariffs go up. That would be something that I would think the Trump administration would be quite frustrated about. So it’s a little bit like shaking up a soda bottle and trying to predict how much is going to come out when you open the lid, how quickly you open the lid. There are different forces, and I think modeling Trump’s economic policies for the Fed is just going to be more challenging.

Dave:
Well, thank you so much, Nick. Although we don’t know exactly what’s going to happen, one thing has been made clear is that it’s going to be a very newsworthy and eventful year for the Fed, and we’ll be certain to keep our audience here posted about any news that impacts the economy and the housing market. Nick, thanks so much for joining us today.

Nick:
Thanks for having me.

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FI by 34 After Making “Calculated” Bets that 99% of Us Would NOT Take

November 22, 2024 No Comments

If you follow the almost unbelievable path of today’s guest, you, too, could achieve financial independence in your thirties. Would we recommend mimicking his strategy step-by-step? No! Because if you get it wrong, you could be further from FIRE than when you started. Only the most prudent, risk-tolerant, and financially savvy among us could do what Andrew Schrader did.

After racking up six figures in car loans and student debt, Andrew knew something needed to change quickly. Thanks to his financial discipline, he paid his debts down fast, but what would he now do with the money he was sending toward debt every month? After a coworker threatened to quit on the spot without a care in the world (the coworker was FI), Andrew knew exactly what his next goal was.

So, he set out to do the impossible: Stretch his dollar as frugally as possible, spending in a year what many Americans live off of for a month and taking calculated bets that he knew the risks of. His unbelievable journey to FI will have you squirming in your chair (like Mindy did!) as you hear what incredible lengths you can go to reach your financial goals WAY faster than most Americans.

Mindy:
Have you ever wondered what your life would look like if debt didn’t hold you back or if you could actually live mortgage free? Today’s guest has a financial background that began with the familiar middle class money challenges. Many of us know all too well growing up in a single income household. He saw early on how debt and limited financial flexibility shaped life’s choices. After racking up nearly $100,000 in debt, in student loans and car debt right after college, he quickly realized that earning more didn’t always mean having more. Now he’s saving almost all of his income, living off rental, cashflow, and on track to hit five by age 34. Andrew’s journey highlights the power of keeping your expenses low, investing wisely, taking advantage of opportunities that are presented and allowing yourself to be okay with a bit of risk. All the things we keep talking about here at BiggerPockets Money. Hello, hello, hello and welcome to the BiggerPockets Money podcast. My name is Mindy Jensen and with me as always is my also five before 34 co-host, Scott Trench.

Scott:
Thanks, Mindy. Great to be here. As always, that intro is a great kindling for an awesome money discussion that’s coming up here. BiggerPockets has a goal of creating 1 million millionaires. You’re in the right place if you want to get your financial house in order because we truly believe financial freedom is attainable for everyone. No matter when or where you’re starting, we’ll give you the spark. This episode is brought to you by Connect, invest real estate investing simplified and within your reach. Now let’s get into the show. Thanks so much for joining us today, Andrew.

Andrew:
Yeah, thanks for having me. Been a long time follower of this podcast and both your journeys in the public space and BiggerPockets, so thanks for all the help that you guys do.

Mindy:
I just want to say, Scott, I saw what you did there right at the beginning and now to Andrew. Where does your journey with money begin?

Andrew:
So thanks, Mindy. So I would say my money journey leads back to start in middle school. My dad encouraged me to get lawn mowing jobs. When I graduated college, I had probably about 70 grand in student loan debt and a reliably unreliable car. And so that thing finally broke down on me like a month or two post-graduation and I decided, screw it, I’m going to buy a brand new truck. I deserve it. I have a good job. So got up to a hundred thousand dollars in debt probably there, and that’s when I was kind of scratching my head, comparing myself to some of my peers and like, wow, I’ve got a boat anchor behind me to catch up to them, some of them that just had parents pay for school, stuff like that. And so I started researching, investing, started aggressively paying off debt, Googling how to pay off debt, how to save money, how to reduce debt. Stumbled into Dave Ramsey’s program, as many listeners have probably been through that and thankfully followed that and it’s relatively straightforward and it works. And so I was able to pay off most of my debt there.

Scott:
How long did it take you to, so you graduated college in what, 2013? 2012?

Andrew:
Yep. 13.

Scott:
Okay. That was the same year as me. Great year. And you accumulated a hundred thousand dollars in debt in the first year in 2013 in 2014, is that right?

Andrew:
Yeah, my student loans throughout college plus my truck added up to about a hundred grand in debt that I was at. 2014 ish. Yep.

Scott:
Awesome. And when did you discover Dave Ramsey?

Andrew:
I couldn’t tell you the exact year, but it was within that first year or two of college, of graduating college because the first year I was still probably figuring it out. I thought a $75,000 salary relative to making 10 grand a year was going to be instantly rich. So I was in my mind, rich for a few months. Then I was like, okay, this actually isn’t working. And my income in my expenses were very close to one another, so I had to be conscious and be frugal to make all my student loan payments and truck payments, stuff like that. So it was within that first year or two.

Scott:
Okay. And then how long did it take you to pay off your debt?

Andrew:
It was probably like six years total. I would say 80% of the way there. Before I started house hacking, I wanted to kind of do things one step at a time, and so I was like, I’m going to pay off my loans before I start saving up for a house. And then once I got my truck debt and student loans down to five to $10,000 each probably, then I started saving up for a house and bought a duplex to start house hacking.

Mindy:
And what year was this?

Andrew:
So I bought the duplex in 2018 after somewhat learning about the fire movement and rental real estate.

Mindy:
And how did you discover the financial independence movement?

Andrew:
I used to work at a larger refinery in Minnesota and I had a coworker there who bought one duplex, moved into it, waited for the neighbor to move out, moved next door, remodeled it, bought another duplex, another duplex. And he started in his early twenties and I think by his early thirties he had half a dozen duplexes and we’d worked these large shutdowns at the refinery. They were one to two months long. You’d work seven days a week, 13 hours a day. And I remember one of those, the bosses were coming around like, Hey, Bob, you’re going to do this, Jim, you’re going to do that, Susie, you’re going to do this. And this gentleman was like, oh, actually I’m going to sit this one out. And they’re like, oh, it’s not really, it wasn’t a question, it was a statement that you’re going to do this.
And it was a long one. It was probably seven weeks of 13 hour days, seven days a week, you pretty much give your life to the plant there. And he was like, oh, sorry, I’ve got a remodel coming up. It’s a big one. I’ve got to take care of it. And his boss was like, well, I don’t really care what’s going on in your personal life. This is work. And he was like, yeah, I get that. I’ve done the last 10 of ’em, but this one’s just not going to work for me. And his boss was like, I don’t care about your remodel. He was like, well, if you want, I can put the higher contractors and put it on the company credit card. I’m sure you’re not going to go for that, but it is an option to you. The other option is today’s my last day.
I don’t need this job anymore, it’s just to buy me more rentals and I can live off my rental income just fine. Our third option is I can work 40 hours a week and I’m just not showing up on the weekend so I can do this remodel. And his boss was mid fifties, sixties years old, and this guy’s 32 years old and it was just like jaw dropping for me to sit back in the peanut gallery and watch this. So I was like, there’s something going on with these duplexes. I got to dig into this more.

Scott:
That’s awesome. And what year was that conversation? When did that happen?

Andrew:
That would’ve likely been 20 15, 20 16.

Scott:
Okay. So that was what kicked the fire end fire to go after paying off the rentals. Did that change the aggression or the pace or the way that you accumulated capital or conducted your financial life in any way?

Andrew:
It made me lean into it more. I definitely wanted to pour some gas on the fire there and I was relatively frugal. Some of my friends or family members could definitely speak to Andrew being frugal in his young twenties, but some of my peers didn’t care if they paid off their student loans by 40 or 50. I wanted those things gone as soon as possible. I personally don’t enjoy being in debt at all. Then I was like, okay, I start early, like Paula pants afford anything. You can afford anything but not everything. And so I was like, I’m going to try these little one month things of no restaurants this month or no new hunting gear or camping gear this month and try to figure out can I suffer through one month of mini deprivation in one category to save another 50 bucks or a hundred bucks? Because what I found is I can nickel and dime myself to being poor in a month or to giving away all my money so I could also nickel and dime myself to paying off student loan debt or nickel and dime myself to saving up a housing down payment. I don’t always save a thousand bucks at a time. Sometimes I save 50 bucks, 20 bucks, 150 bucks, and over time it adds up.

Scott:
And then what was your income situation like during this time period, and I presume that with 13 weeks of 80 hour weeks and you’re full time on this job that there’s overtime pay or something like that? No,

Andrew:
Kind of, but it’s relatively disappointing. So they sold you on, it was good experience for your resume. So we were salary, we’d get $0 an hour overtime and then assuming zero of the 2000 contractors on site had safety incidents, you’d get a thousand dollars per week pre-tax bonus. So after this seven week shutdown, I did the math in front of my boss. I got just under a $3,500 bonus and I worked just over 350 hours of overtime and I was like, I’m pretty sure I’m making less than minimum wage. So with all due respect, I have my experience full on my resume and I’m good on this.

Mindy:
Wow, this is good resume experience working for free. I’m sorry, a thousand dollars pre-tax.

Andrew:
To answer your first question, I was making about 75 to 85,000 At this time.

Mindy:
We need to take a quick ad break and while we’re away, we want to hear from you. Unlike Andrew, were you well capitalized when you bought your first real estate property answer in the Spotify or YouTube app? In the meantime, we’ll be right back.

Scott:
Welcome back to the show.

Mindy:
I want to go back to that gamifying your savings and trying, okay, how can I deprive, for lack of a better word, how can I deprive myself in this one category to see if I can save an extra 50 or a hundred bucks? Did you take that extra 50 or a hundred bucks and put it into your debt or into your savings?

Andrew:
So really Mindy, the answer is both. At first, I followed the debt snowball method, so on my student loans I had multiple student loans as many of the listeners probably do their, I didn’t refinance all mine into consolidation, so I was just trying to pay off the smallest lump sum student loan there. So I was just trying to cross those off one at a time and that was definitely a big win for me every time I paid off one of those and then once they were sub $10,000, I was really interested in getting a duplex, so I started to not put all my extra savings towards student loans. Then I started just putting it into a house down payment fund afterwards and maybe to circle back after I bought that duplex to remodel it, I had no more money and it was smoked in, hadn’t been updated in 50 years, pretty rough shape. So I got a 0% credit card for 18 months and I put 25 grand on it. So it was relatively risky, and so I did the math. I was like, well, if I take my old rent payment, my old student loan payment, my old truck payment, and I’m extra frugal and either a hundred or $200 for 18 months, I can save $1,500 a month or whatever to pay off 25 grand in 18 months, and I got it done with one month this bear.

Mindy:
So I’m hearing a story of intentionality. You weren’t intentional necessarily with collecting your student loans and then you decided to make it an even a hundred K by throwing another car on top or a truck on top of that. But then after that, I am hearing you say, I don’t like debt. I wanted to get this done as soon as possible. I’m playing games, mental games with myself to save this extra money to throw at my debt. I am then taking those same mental games and the extra savings that I’m not paying towards my student loans and my truck anymore, and I’m putting that into fixing up my duplex, which is now a cashflowing asset. Was it a cashflowing asset? I guess I didn’t ask.

Andrew:
I mean, the rent is probably $50 more than the mortgage. So yeah, I would say it’s cash flowing and if I were to move out, it would cash flow pretty well.

Mindy:
Wait, the rent from the half of it is $50 more than your mortgage and you’re living for free then,

Andrew:
Correct? Yeah.

Mindy:
Yeah. Okay. I say that’s cashflow.

Andrew:
Yeah, I would say so. So that’s been pretty nice and even to gamify it a little more and add more risk to the fire. So I took out that 18 month credit card. I started saving up in a brokerage account. I can handle a little bit of risk, so I didn’t actually pay off any of the credit card. I put it all in the s and p 500, which I would also probably not recommend on an 18 month timeline with a 20% interest risk if I lose at the backend. So I started saving up a year later, my realtor called me one day and he is like, Hey, I found this Sixplex first sale. I think it’s really poorly marketed and it’s probably listed for two thirds of what it should be listed for. Do you want it? Do you have 50 grand? And I was like, yeah, I have 50 grand. And I was like, yeah, let’s go look at it. I was like, should I pay off the credit card or should I go buy another rental property? So I looked at it and that cashflow right off the get-go like a thousand or something. So I was like, okay, yeah, sure, let’s do that. So I went and toured it and made an offer that day. Got it. Then I was like, great.
Had probably $2,000 less than what I needed for a down payment. So I was like, okay, I’ll be super frugal for the next month, Dave Ramsey’s beads and rice, but I can save up two grand by closing date. So yeah, we’ll be good.

Scott:
I would react a couple of things here because there’s the right way to buy real estate. How should you be capitalized? Well, we’ve gone back and forth on this right answer, I think look something like this, you have the down payment, you have all of the projected repairs that are going to come up immediately that are baked into that. You have emergency reserve of, let’s call it 10 to $15,000 for the property or maybe three to six months expenses, whatever is greater among those two things for it, and that’s what you do. You’re a credit and your DTI all work and you’re good to go on that, and yet very few people seem to meet all of those requirements when they buy their first property. For this, I certainly didn’t meet that requirement when I bought my first property, my first duplex. You didn’t come close by a long shot. Mindy, how did you do? Did you meet those requirements when you bought your first property?

Mindy:
No, I borrowed my down payment from my parents.

Scott:
Yeah, so what’s the right answer to how much did you have for buying your property? Well, there it is. I gave you the technical right answer and the reality is not many people meet that actual set of criteria and when you’re getting started, it’s an all in bet. In your case, it was two all in Bess, you put all of it into the middle of the table and get going, and that’s why real estate’s so hard to break into is because for so many people it’s either that all in bet or it’s you wait, you’re delaying that purchase by years to get into that well capitalized state. I think for the record, all three of us did it the wrong way, and yet I think you’ll find it rare to meet the investor who used real estate as part of their wealth building journey, didn’t get into real estate later, but used as one of the primary assets in their wealth building journey who did meet all those requirements. So kind of conundrum about what’s responsible or not. So does that ring true with the other people in real estate investing, Andrew?

Andrew:
Yeah, I’m fairly involved in the Montana real estate investor meetup groups and I would say that’s more normal. That’s the rule. It’s not the exception is a well capitalized investor and even some large land developers that I know, they seem to, they’re not betting with 5% of their net worth by any means.

Mindy:
I am having heart palpitations listening to your story because that is, I mean it turned out great in the end. Spoiler alert, it turned out great for you in the end, but were you having a hard time sleeping? I mean you stopped contributing to your Roth ira, you took the money that you had set aside for your credit card payment and you put it in the stock market and then you bought a sixplex instead of paying off that credit card, incurring more debt and you had a whopping $500 net worth. That’s not how you do it.

Andrew:
Yeah, I mean, was I probably anxious or nervous? I’m not a doctor so I can’t diagnose myself, but do I have significantly less stress with an emergency fund and no credit card debt? Absolutely, by a lot and it’s hard to articulate that until you’ve been on both sides of the coin there. But yeah, I was intimidating and very committing. I was well aware of that. I wasn’t like naive of that. It was a calculated risk, but I knew the risk and I thought the math would work out and yeah.

Scott:
Alright, we got to take one final break and then we’ll be back with Andrew.

Mindy:
Let’s jump back in. I don’t want to say lucky, but yeah, kind of you did. So you said a couple seconds ago, you don’t want to be foolish, but sometimes you just have to try. I look at the statements that you made surrounding the circumstances with you buying the sixplex. How was that? Just trying and not being foolish. Was it because it was so low? You said it was at two thirds the price it should be. Was it all rented out?

Andrew:
Yeah, it was all rented out and it was cash flowing like a thousand dollars and the rents were relatively low, so I was able to increase the rents immediately, get it to cash flowing $1,500 a month. So I thought long-term, I’d be really grateful for buying it and I thought short term I could handle the risk of my credit card. I still calculated out that I could pay off the credit card before I paid any interest and I knew that worst case I would have to take $10,000 out of my 401k, which had 50 to a hundred grand in it at the time. So I was like, I can take out 20 grand out of my 401k. That’s not optimal, but it’s not catastrophic, and if I were to even need another 20 grand to pull out of my 401k to use as a down payment to buy this sixplex, I thought it would be worth it. I thought that the appreciation and the cashflow from that sixplex would be well worth the 20 grand plus taxes and fees.

Mindy:
Do you still own this sixplex?

Andrew:
Yeah, I do.

Mindy:
And the duplex?

Andrew:
Yep. How are they

Mindy:
Going?

Andrew:
They’re going great. I mean, I’ve had, knock on wood, no terrible property management stories. I’ve had great renters throughout Covid and I’ve remodeled, I mean most of the units by now, and so I mean they’ve probably tripled in value. I don’t know, maybe more than that, but probably 300% of what I bought ’em for.

Scott:
So you have 20 extra money

Andrew:
Probably. Yeah,

Scott:
You could have paid the credit card interest.

Andrew:
So I’ve probably put a hundred grand into real estate and probably have, yeah, I dunno, a million in equity or something.

Mindy:
Oh, well that’s a nice trade off.

Andrew:
Was it risky? Yeah, but it was still calculated risk. I wasn’t naive to what I was doing, but I calculated out like, oh, what happens if this stock market goes down 30%? Then I need to take out seven grand for my 401k. I was like, okay, I can do that if I need to.

Scott:
The next couple of years are not going to be like that, but that’s the beauty of real estate investing over a long time horizon. I’ve put way more money into the stock market in terms of dollars invested than I have into real estate and the portfolios are about the same size and equity value and that’s a remarkable power of that. I put more into real estate than you did, but not a ton more, and that’s again, 50% of my portfolio. It’s amazing how much that appreciation in the last couple of years is powered returns in here.

Mindy:
Okay, I want to jump in here really quickly and say to anybody listening, thinking, oh, I’m going to buy a sixplex with the money that I had saved up for my credit card payment 18 months, Andrew had other places that he could find money to pay off that credit card should something happen to the stock market where he was keeping his credit card money. Don’t keep your credit card money in the stock market, but it worked out for Andrew. I can’t say it’s going to work out for you, but

Scott:
The other thing that really de-risked your situation, Andrew, is how little you spent there was a huge gap between your income from your salary and the amount you spent on your life. And so that’s what like 30 grand a year, 40 grand a year.

Andrew:
So I looked this up. I have my budgets back. I could tell you how much I spent on groceries in April of 2017. So my annual spend in 18 was 10,000, 19 was 10,000, 2020. I lived it up 17 grand, 2118 grand. I’ve since increased my expenses a lot back then, but I remember I have old graphs for when I’m going to become financially independent once I make $833 a month in dividends.

Scott:
Wow, you got there with one sixplex. That’s the real item here. I think that if that’s your situation, you make 75 or 80 grand a year and you spend 800 a month, then you can responsibly take a risk like what you took there. What would be totally inappropriate and probably not even possible for many folks, they wouldn’t have had these other options is if you spent 70 grand and made 85 to be able to do what you just did there

Andrew:
Because at that time I was saving four or $5,000 a month. So $25,000 is a lot of money to myself or somebody that’s making 75 grand a year. But I also figured out, I was like, okay, let’s say I refuse to take money out of my 401k, I’ll pay this off in four or five months. I was like, yeah, I’ll deal with that. That’s fine. So even a 20% interest rate when you’re paying it off over four months, it reduces the severity of your interest there. So I think one of the ultimate superpowers of house hacking or even getting into real estate is your expenses get so low or can get so low, and assuming you don’t do lifestyle creep with your rental income creep, then you can save so much money. And I have so many peers who save 50 bucks a month, a hundred a month, two 50, and with most people can obviously afford a rent payment, student loan payment, car payment when they’re recently graduating college, but once you pay off those debts and you house hack and you no longer have a rent payment, then just that simple math, that’s like $2,000 a month that’s easy to save.
And so I think if you house hack, a lot of people can start saving two, three, $4,000 a month even on a median salary and then you’re saving 50 grand a year, 70 $500,000 a year, and then your stock portfolio, which is where I put all those savings sounds like similar to you, Scott, then that can start growing very, very fast.

Scott:
That’s the magic of this, right, is if you can keep your expenses low on a medium and upper middle class salary really low where you’re saving 60, 70, 80% of that income, all these options rack up really rapidly because cash is accumulating, you don’t need the job at that point. You are able to take risks like what you’re talking about, the next house hack feels like a luxury and a huge lifestyle upgrade when you go from the $800 a month house hack to the slightly, the nicer one there. It is just an incredible, I think, amplifier of this. Right? And a great analogy here is if you’re saving 250 bucks a month on that 75, $80,000 salary, let’s call it, let’s call it 10% of your income, you’re saving 7,500 to 8,500 a year. You’re saving one year of expenses every nine years, right? If you’re doing that math, you were saving what, four years of expenses every year?

Andrew:
Yeah, probably 80% for four or five years.

Scott:
So when you think about it, it’s not twice as fast or three times as fast. It is 40 times as fast or something, 30 to 40 times as fast, the amount of relative wealth you were accumulating and options that you were accumulating and that just produced these opportunities and probably I would love to hear more of the story, but I bet you the opportunities have continued to explode for you since making those two investments and will continue to explode for the rest of your life if you could sustain this path.

Andrew:
Yeah, I think house hacking or side hustles, there’s many ways to skin the cap. I think it’s such an asymmetric bet where if you’re extra frugal or you live less cool than your peers for three to five years, you’ll have 30 to 50 years of abundance or however you want to define it. I recently went to FinCon and hung out with Mindy and some other folks and that’s probably the most expensive vacation I’ve ever been on, but just not, and I’ve recently started a YouTube channel and trying to start an online business, but the ability to buy some camera equipment, lights, mics, all that, fly to Atlanta to try to learn something, it’s just, it’s crazy where now I can make these five, $10,000 bets of I want to start YouTube channel, spend 10 grand on equipment, see if it works, and if not, then I’ll try the next thing. But I think that’s just so powerful and I really like what you say, Scott, all the time about starting a business. If 10 percents of success try 10 times, you have a hundred percent odds of success by the end of it, and obviously it’s more complex than that.

Scott:
I actually have to do the math there for the probabilities now. I’m curious what is 10? Yeah, there’s some compounding geometric thing that makes it getting very high probability by the type of bet, but yeah, we can really nerd out on that one later. So I hope one of your first ones does though.

Andrew:
And I don’t have any other big opportunities that I’m currently working on, but I’m definitely close to financial independence and I’m trying to figure out what is that next step. I don’t feel called necessarily to just have a corporate nine to five job anymore, but I have a good job. I do. I’m good at it. It pays relatively good, and so I’m like, oh, do I just keep saving? I can more or less save my entire salary if I want to spending money on this YouTube equipment and trips takes out of that a little, but it’s like, do I do that or try business ideas and I don’t want to just sit on the beach drinking margaritas for the rest of my life or sit on the couch. That’s not a way to live.

Scott:
What did your life look like? What did you do for fun when you’re spending 10 or $17,000 a year and what does it look like now?

Andrew:
I still live in western Montana, so there’s ample outdoor activities, hiking, hunting, skiing, rock climbing, very popular out here as they likely are down in Colorado. A lot of those activities are relatively cheap At those times when I wasn’t doing a remodel project on the weekends, I was rock climbing, skiing, a lot of those thousand to $2,000 in equipment to get into ’em, and then it’s more or less free unlimited times you go, maybe not skiing, I would get a season pass, stuff like that, but I was noticeably frugal probably, and I still have that same truck from 2013, so I was just house hacking, but a lot of my peers were renting, some of them definitely bought nicer single family homes. So I don’t live in the coolest house by any means of any of my peers, but I drive a 2013 truck with 200,000 miles on it and hunt and hike as much as the next guy in Montana.

Mindy:
And you have the coolest bank balance of all of the people that

Andrew:
Maybe, yeah, probably.

Scott:
Do you just own those two rentals? You bought these two ones pretty quick and then you’ve been allowing, so what you have today it sounds like is a lightly levered real estate portfolio, and I imagine a lot of cash has piled up over the last couple of years. What have you done with all that other catch?

Andrew:
It’s just all in the s and p 500. I really haven’t. I’ve just been investing in that since 2019 when I bought the sixplex, I’ve been wanting to buy a house, but mentally I’m still in 2018 prices to some extent, so I haven’t wanted to buy a $600,000 house today. Starter homes are probably 400 to 500, so I could definitely sell my duplex and get a starter home, but to me, a starter home’s not that much cooler than a single family starter home. So a nice house is 6 7, 800 and I just don’t want to get a four or $5,000 mortgage and I’ll probably sell the duplex just for capital gains taxes, but I’m also just hanging out and saving cash and figuring out what the next step is. I’m trying to debate, do I buy a new family house and then quit my job and then have higher overhead and then try to start a business to dedicate 40 hours a week for that, or do I stay living in my duplex with rock bottom overhead, arguably financially independent and then keep my job so that I have access to a mortgage, easily get a business off the ground, wait till it makes a dollar a month or a thousand dollars a month, then quit my job so I can lay the gas pedal down and give it 40 hours a week or do I just quit my job?
I got a cool camper this year because I was like, I want to live it up a little bit, so I’m going to buy a used camper and road trip to West during the summer and work remote and do some of that. So I was like, do I rent out the duplex and just road trip the west for a while, hit all the national parks, for example, and just live off rental income? I could totally do that or do I just quit my job and lose the mortgage access, have to do creative financing and then get a business off the ground and maybe just pay cash for a house next?

Mindy:
How much time would you be spending getting the business off the ground? I can see if we’re talking about a YouTube channel, I can see once you figure out what you’re going to talk about and you get all of your editing processes down, I can see that being a pretty low hourly lift. So then you’ve got all this extra time. I love the W2 for the ability to get you a mortgage. Do you like what you do or are you still working those 13 hour days for an extra dollar 50?

Andrew:
No, I don’t work a lot of overtime anymore, but I don’t love my job. It’s fairly corporate and I just feel more called to be an entrepreneur. So that’s what I want to do long term. And one of my questions is let’s just say I’m 80% fi. If I save up for another year or five years and I’m 110% FI or 150% fi at that date, I’m still want to go and start my business. I’m not going to want to just sit on the couch and be twiddle my thumbs for the rest of my life. So I’m just, in my mind, I’m like, the best day to start house hacking was five years ago or today and not five years in the future. So it’s like the best time to start a business is today, not five years in the future. And when I look back on buying a real estate, it’s not like, oh, thankfully I waited until 2018. I’m like, oh, I wish I would’ve started in 2014.

Mindy:
So starting a business, you will either succeed or fail, let’s succeed quickly or let’s fail quickly so you can move on to the next thing. So start your business now.

Andrew:
And that’s what I’m trying to do on the side, and I totally agree that once all your systems are in place, I think you can have a YouTube channel with 5, 10, 15, 20 hours a week, probably less than 40, but right now that startup phase is a little more learning, so that takes a little more time. And so I’m commonly working on Saturdays and maybe one or two evenings to get a video out, and I don’t want, so let’s just say for made up numbers, it takes a thousand hours to get a business off the ground. Maybe it’s a YouTube channel, maybe it’s a digital marketing agency. I’ve got a couple ideas, but I can either do 10 hours a week for a hundred weeks or work every Saturday for two years, or I can do that in six months or three months working full time at it and then fail quickly and then onto the next thing. Or also just the compounding of the skill development and the learning versus waiting a week to re-figure out how to make a thumbnail or something.

Scott:
I would bet on the full-time, effort, reward all day every time. The reason that most people can’t do that is because they need to spend 60, $70,000 a year to maintain their lifestyle and the job is a requirement in order to meet that work. And so the other effort has to be done the side, but I mean there’s almost no world. It is possible, but it’s so unlikely that someone in your situation will get richer faster by staying at a job. So unless you intend to buy another rental property, like you said, that’s the rub here is if your expenses are still in that 20, $30,000 range and you have the cash piled up for a couple of years, the entrepreneurial route makes so much more sense than trying to compete entrepreneurially in your free time on the side, I think. What do you think, Mindy?

Mindy:
I really like creating a business like this where you can do it, you can do it a couple nights and on the weekends, and then if your friend calls you up and is like, Hey, I have this really awesome experience available, you could be like, I’m just going to do that instead. I like starting that with a safety net of a job underneath you. So if it doesn’t pan out and nine out of 10 won’t, then you’re still generating income, the rentals, throw a bit of a monkey wrench into it. Are you actively looking for new rentals or are you just, if something comes up that is intriguing,

Andrew:
I would say I’m inactively looking. I’m still open to buying and I have a couple hundred grand in my taxable account, so in my mind I’m like, I likely years and years of living expenses, assuming no rental income, or I could probably live off my rental income just fine and take nothing out of my savings. So I hear what you’re saying and clearly it seems like I’m willing to take on more risks than the average bear, but in my mind it’s like I would argue I’ll get a business off the ground faster, obviously doing it full time and I can do it Saturdays and evenings, but it also, I’m not energetic and creative at 8:00 PM on a Thursday after work Monday through Thursday, same with even Saturday morning.

Scott:
What’s your annual spending now?

Andrew:
It’s probably now I donate to my church a lot more, so I probably spend $4,500 a month.

Scott:
So 50 grand a year,

Andrew:
50 grand a year. Yeah.

Scott:
Still you keep saying I have a higher risk tolerance. You did not have a higher risk tolerance. You’re so conservative on the spending front that these other plays that are more long-term focused from an investment perspective that don’t require liquidity in the near term or don’t require income generation are very reasonable. If you have 400 grand in a taxable brokerage account or whatever and you spend 50 KA year, even if the market crashes, you got four years of living, it crashes 50%, you got four years of living expenses. So I think that’s the whole Trump card. Everything else in your strategy that you’ve pursued here is reasonable because of that one variable that’s ultra conservative that nobody else or very few people will replicate, and the option is going to provide you just going to be incredible.

Andrew:
Another option is I have enough in my taxable to pay off my sixplex and I’d have 50 grand left owed on my duplex, so I could either go frugal for another six months or just take 50 out of my 401k. I’m not arguing that’s optimized perfectly, but I could just then pay off my sixplex duplex and probably cash flow, I dunno, $6,000 a month and I need 4,500 to live off of. So that’s another option is pay off everything and then start a business and save a thousand dollars a month while doing that. It’s not a bad option. I don’t know. I like having cash. I’ve been broke so many times before, I’m kind of over that, so I kind of don’t even want to pay off the sixplex and just keep the cash and if I need to pull a thousand or two out here and there, then so be it.

Mindy:
Andrew, if you did decide to leave your job, there’s a couple of things that you’re going to have to consider. Let’s say you quit, your last day is today and then tomorrow your agent calls you up and says, I’ve got this amazing property that’s going to cashflow just like your sixplex. It’s so fantastic, but you got to jump on it right now. How would you fund that?

Andrew:
I know of creative financing strategies, but I don’t have a private money lender. I don’t know the easy button there. Obviously you can get pre-qualified, but you have to verify employment commonly at closing. So really the answer is I don’t know how I would do that. I have enough in my taxable plus my retirement to likely pay cash for a nice family house, so I could maybe play a game there, but I don’t want to liquidate my 401k to buy a house and then pay taxes and fees and then refinance. That sounds like I’d lose a lot in taxes. So that’s kind of why I’m still working. I am not comfortable with creative financial strategies. I know they exist, but I don’t know how to do them.

Mindy:
They do exist, but yeah, I have the ability to get a mortgage, so I haven’t dived into creative strategies. I would encourage you to also go into the BiggerPockets forums, biggerpockets.com/forums where there is a creative financing forum and lots of discussion about creative financing simply because we find ourselves in this kind of unpleasant interest rate environment right now. So there’s definitely opportunities and now is a really great time to start looking for those. So when your agent calls you the day after you quit your job and says, I’ve got this awesome property, you’re not starting your creative financing education then and trying to cram it all in. Another thing that pops up frequently is health insurance. So how are you paying for your health insurance if you don’t have a job?

Andrew:
Yeah, I’d have to buy it on the open market. I’ve shopped around a little bit in my mind it’s not crazy unaffordable, it’s like 500 to seven 50 for an individual. So I think I could stomach that.

Mindy:
In my experience, it is not unaffordable to buy on the healthcare exchange through the A CA. I would encourage you and anybody who is listening to reach out to an insurance broker in your state who can give you more information. They did not make the a easy to understand. In fact, I think they made it difficult to understand on purpose because it’s a government thing and that’s what they do, but it was very difficult. I consider myself to be rather knowledgeable about health insurance in general, and I went onto the exchange and I was like, I do not understand any part of this. And I had a really great chat with a broker and it was kind of changing because I didn’t need nearly as much as I thought I would need for my health insurance. So I’m glad you have already thought of that as well.
Scott, what are some other things people talk about when they’re early retired? Oh, I’m going to be bored. That’s not it with you. What about dating? This is something we don’t really talk about here. I mean, you’re there financially. It isn’t a question of, oh, can I do it? Can I not do it? I think you’re doing really well. You’ve got your income or your expenses covered by your rental. I would maybe stay a couple more months and get a fatter emergency reserve just because you won’t have another bucket, the income bucket to pull from. But other than that,

Andrew:
At FinCon, I was asking how much would be an appropriate emergency fund in per se timeline, and people were telling me six to 12 months, but so if I have five years, is six years better than five years?

Mindy:
No, six years.

Andrew:
It’s the same. It’s like, and I’m literally transitioning into trying to start a business with the intention of making income. I’m not transitioning into siping margaritas on the beach, so I’m like, I think I will become bored if I’m doing something that’s so unproductive after 12 months straight, after 2000 hours of it, I’ll transition and I’m like, within a thousand days I can make a dollar or I’ll just start my middle school lawn mowing business again. Or crazy idea. Go back to engineering.

Mindy:
Exactly. There’s always a demand for engineers,

Andrew:
And that’s kind of why I’m leaning towards starting an agency instead of a YouTube channel, like learn the skills and then do video editing and hire and lead a company doing that or audio editing or making YouTube videos for realtors and posting all the short stuff like that. So then it’s likely a faster timeline to generating income because really I love working. I enjoy it. I just don’t want to work for others anymore and I want a scalable career. So it’s like if I want a raise, I don’t want to ask my boss for a raise. I just want to work harder, and then I want to get a raise.

Mindy:
Okay, that right there is the answer. I like working. I just don’t want to work for somebody else anymore.

Andrew:
We’ll see. Yeah, we’ll see what next year brings. It’s like one more Roth, a little more savings, another camera, and let’s play ball.

Mindy:
Okay, Andrew, I am super excited for what next year holds and I demand that you check back in with us and let us know what you decided and how you came to that decision. So we’ll circle back in three to six months and see exactly what’s going on with your story. See how many of those 10 businesses you’ve started so far.

Andrew:
Sounds good. Yeah, really appreciate all your encouragement, Mindy and Scott, and all the education you’ve done to everyone over the years, and you’ve definitely helped me and many others become millionaires through BiggerPockets. So it’s a great tool, great forum, and yeah, huge. Thanks. So keep up the good work.

Scott:
Thanks for the kind words. Congratulations on all your success. Before we go, what is the name of your YouTube channel if people want to check it out?

Andrew:
Yeah, it’s Andrew Jacks,

Mindy:
J-A-X-C-K-S-J-A-C-K-S. Okay. And we will include those links in our show notes. And Andrew, thank you so much for your time today. This has been super fun, and I’m not kidding, three to six months, I want you to send me a note.

Andrew:
Yeah, I’ll do that. And if I’m pulling my camper through Denver, Longmont area, I’ll hit you guys up and buy a coffee or a beer, so thanks.

Mindy:
I’ve got an awesome place to sleep if your camper, you want to take a break from the camper.

Andrew:
Sounds good. Thanks.

Mindy:
Okay, Andrew, thank you so much for your time and we will talk to you soon.

Andrew:
Yeah, looking forward to it.

Mindy:
Okay, Scott, that was a fun set of circumstances that Andrew finds himself in and I like when we’re talking to somebody and they’re like, well, which one of these options would work? You know what? You’ve got a lot of really great choices, but I do think we need to address the elephant in the room. Andrew bought his rental properties at a different time. He bought them in 2018 and 2019 when interest rates were lower. So that part of his story I don’t think is going to be so repeatable right now. However, we are still able to take advantage of keeping your expenses low, investing wisely in other ways, taking advantage of opportunities that are presented. There are still real estate opportunities available right now, just not for a 2% interest rate or whatever ridiculous rate he has and allowing yourself to be okay with a little bit of risk. I think those are all points that people need to keep in mind when they are exploring their own financial journey and trying to take advantage of the opportunities that are presented. I mean, that right there, anybody can be presented with an opportunity, but how many people are going to say yes to it? You, Scott had a good job at a corporate company and you left to go take advantage of an opportunity that presented itself this little internet startup. How’d that work out for you, Scott?

Scott:
It’s been a fun ride here for that, but I think it comes down to the quality of a bet, your execution of it and separating that from the outcome. And Andrew made good bets, executed them well, and the outcome was great. It was very possible that if you follow that playbook at random intervals over the last 30, 40 years that you’re executing that playbook in 2006 or 2007 and seeing that portfolio crash and it taking a year or a decade to unwind the pain or a hundred grand more specifically to unwind the pain of buying those properties at the wrong time on average, his set of bets is probably going to win and it’s probably going to result really well. The timing of a 2018 purchase and really going all in at that point in time was particularly fortunate for him. So we want to be respectful of the role that luck plays and acknowledge that that bet on average is a good one, especially the way that he put it together in the context of an extremely frugal lifestyle and the ability to accumulate a lot of cash. Even if he had bought in 2006, 2007, kind of at that peak right before a crash timing, I think that he would’ve been fine because he would’ve been able to cashflow and frugal his way that transition, but it obviously would’ve been very painful for him as well.

Mindy:
Yeah, absolutely. I think that’s a good point. Timing, and I want to hammer home the point when you have an opportunity, taking action is what separates people being retired at 34 and being retired at 64. Alright, Scott, should we get out of here?

Scott:
Let’s do it.

Mindy:
That wraps up this episode of the BiggerPockets Money podcast. He is the Scott Trench and I am Mindy Jensen saying, off we go, leopard Gecko.

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In News

Can Trump Push Jerome Powell Out of the Fed?

November 21, 2024 No Comments

Dave:
Last week, headlines swirled about whether Donald Trump would try to fire fed Chair Jerome Powell today to answer this question, I’m here with Nick Timiraos of the Wall Street Journal to talk about whether that’s possible, how this might play out and the future of the Federal Reserve. Hey friends, it’s Dave. You’re listening to On the Market, the Real Estate News and Economic shows for informed real Estate investors. Let’s get into my conversation with Nick. Nick, welcome back to the show. Thanks for joining us.

Nick:
Thanks for having me.

Nick:
Well, I think the big question right now, is the economy going to avoid a recession? And if so, the bond market certainly thinks so. And so you’ve seen yields rise. I mean it’s unusual. The Fed has cut now 75 basis points this year and you’ve seen the 10 year treasury yield go up. I don’t know a half point. Probably not what a lot of people expected. And so I think the big question now is what happens from here, both on the policy side, Donald Trump’s policies are a little bit unclear exactly how far he’s going to go on tariffs, tax cuts, spending cuts, regulatory rollback. What does that mean for growth? What does that mean for inflation? There’s going to be a lot to digest.

Dave:
Got it. Yeah, and just to make clear what Nick’s talking about here, we’ve seen that the Fed has cut first 50 basis point half a percentage point back in September. Then we had a quarter point cut here in November. But at the same time, mortgage rates have gone up for all of us in the housing market, and that’s because Fed doesn’t control mortgage rates. That is much more closely tied to the bond market. And when the bond market believes that there is less risk of a recession, bond yields usually go up and take mortgage rates up with them. Just a quick primer on why mortgage rates have gone up in the last couple of months. Now, Nick, obviously we’re going to unpack some of the stuff that you talked about in terms of policy, but after every Fed meeting there is a press conference that some of us pay a lot of attention to. Did Jerome Powell and his press conference give any indication for what the Fed might do in the coming months or should we be expecting more rate cuts?

Nick:
Yeah, I mean the Fed has signaled they expect to keep cutting rates and so Powell repeated that view. I think in terms of the economic outlook, maybe the most interesting thing Powell said was around the forecast for inflation, because inflation is looking maybe a little bit firmer than expected. And Powell said that they still expect inflation to come down because what they really see right now is that firmer prices are an echo of past strength in the economy. They don’t see new sources of heat.
If
You think about a fire, they don’t see the fire reheating sort of on its own here. They think these are catch up increases in prices. And what would be an example of that? Your car insurance premium has gone up because car prices went up a lot two and three years ago. It’s not that there’s something new that’s running through the economy. These are sort of the echoes of earlier price increases. And so if that’s your story on inflation, then that suggests less concern that you’d have to do something different from interest rates from what you were expecting. The Fed had said they were going to cut interest rates. You still think inflation is coming down, then you’re not going to react maybe quite so much to these a little bit stiffer than expected inflation readings.

Dave:
Okay. So we still have to see what happens. I think there’s one more meeting this year in December, so we’ll see what happens there. But it seems like the general consensus is still that the Fed intends to cut rates and get to a lower federal funds rate in the next couple of years. We just don’t know exactly when and how rapidly those rates might come. At least that’s the last thing that we’ve heard so far. Now of course we all like speculating and want to know what’s going to go on with the Fed because it does have big implications for the economy and for the housing market. But there’s sort of this other storyline that’s been going on since the presidential election and you actually, Nick wrote about this in the Wall Street Journal sort of about the future of the Federal Reserve and whether or not Jerome Powell might be staying in his position. So can you just give us a primer on that situation?

Nick:
Yeah. Powell was made Fed Chair initially by Donald Trump in 2018. Of course, Trump soured fairly quickly on his selection because the Fed was slowly raising interest rates at that time and Trump didn’t think that inflation was a problem that needed to have preemptively higher interest rates. The Fed stopped raising interest rates and actually cut a little bit in 2019 because of some concerns that global growth was slowing, inflation was not picking up. And so there had been questions over whether Trump could fire the Fed chair. He had sort of vented to his advisors in 2018 and 19, I don’t like this Powell guy, I’m stuck with him. Can I get rid of him? And they told him no. They said there was a four year term for the Fed chair. He also has a 14 year term as a governor that the Federal Reserve Act, which created the Fed, says that you can only replace a governor, a fed governor for cause.
And that’s been interpreted by a court to mean malfeasance, impropriety, incompetence, not just, I don’t like what the guy’s doing with interest rates. Okay, so Donald Trump loses in 2020. Biden comes in Biden Reappoints Powell in 2022, and the concern that the Fed chair would be fired is sort of over until Donald Trump comes back and people begin to ask him, well, what are you going to do with the Fed? Would you try to replace Powell? Now, what Trump has said this year is, no, I wouldn’t try to replace him as long as he’s doing the right thing, which is sort of an interesting condition to it. It’s not an unconditional pledge. Well, the current situation, things seem fine. I will point out Trump has been very clear that he regards inflation as a serious problem. He called it a country buster that you have to fix inflation.
But at the same time, Donald Trump has always preferred low interest rates. So a number of people have been asking, well, would Trump decide to try to push Powell out again if he thought maybe the Fed wasn’t cutting interest rates fast enough or if he just wanted to have his own person in there? And there are some people in the president’s orbit, allies of the president who have been saying, no, we really think you could get this guy out if you wanted to. There are other people around the president who think that’s a horrible idea. I should say the president elect who think this is a horrible idea, you don’t want to do this, you don’t want to mess with the Fed right now, especially when bond markets are looking ahead and saying, wow, deficits are a lot higher than they were four years ago. Inflation has been a problem. So you start to interfere with independent monetary policy and you might not like what the bond market does.

Dave:
Alright, time for a short break, but we’ll be back with Nick Timiraos unfed independence and how the Trump Powell relationship might look right after this. Hey everyone, welcome back to the show. I do want to ask some questions just about the legality of all this, but maybe we should just talk about independent monetary policy. You just stated that and the Fed sort of operates in this gray area. The Fed Governors and the Chair are appointed by the president. They’re not elected officials, but they sort of have had historically this space where they don’t need government approval for their decisions. So when Jerome Powell and the rest of the Fed Governors decide to change interest rates, the federal funds rate, they don’t need approval for the president or from Congress, right?

Nick:
That’s right. It’s a very peculiar setup because normally, I mean, you wouldn’t take a committee of tax experts and say, all right, you guys are in charge of tax policy. You go decide how much. I mean, those are very political decisions. So why is it that when we talk about independent monetary policy, well, why do we have that? Well, first of all, what is independence? I mean, I think it sometimes can get over torqued to mean that nobody can ever second guess the Fed. What it really means is they have some degree of operational autonomy. Congress and the executive branch set up the Fed and over time decided the Fed should set interest rates with an eye towards keeping inflation low and stable. They call that price stability and then maximum employment, or I would call that a solid, a good labor market outcome. You want to balance those two goals and sometimes they’re in conflict, but we’re going to let the Fed figure out how to do that with really one instrument which is interest rates.
So they have the autonomy to do that. And why do they have that? Well, a couple reasons. One is that we’ve found through history that when you let political factors dictate what should happen with interest rates, I mean politicians always want to win the next election. So you’ll always sort of accept some stimulus today, and if it overheats the economy, IE, if you have a little bit more inflation, well that’s okay because we will take that risk and you want to have an independent central bank to come in and say, actually, no, we need to make sure that inflation doesn’t get out of control. That’s what happened in the 1970s. And so after that, central banks around the world sort of fought for more autonomy or independence and governments gave it to ’em because it seemed like a worthwhile trade off. The other reason I think we have this arrangement where central banks enjoy more independence is frankly, Congress doesn’t want to make these decisions to raise interest rates. They’re unpopular, they’re difficult decisions, and so they’re able to blame the Fed. They’re able to say, well, I’m not the one that made your mortgage rate or your auto loan rate go up. The Fed did this. And so you can sort of blame the Fed. They become a convenient scapegoat for political purposes. So it’s not written in stone anywhere that the Fed should be independent. It’s sort of a norm that has developed over decades really with some trial and error. And so that’s why we have the system and arrangement that we have.

Nick:
Well, I think the criticism of it is why do you have this unaccountable and very powerful institution? And I mean, this is how I believe Trump thinks about it is he owns it. If the economy’s doing well or if it’s not, people are going to hold him accountable, so why shouldn’t he have more say over what this very important interest rate setting body is doing with policy? His advisors said to me when he was president, he doesn’t really understand this fetish around Fed independence. He thinks that if the Fed’s doing the wrong thing, he should be allowed to say it. For 30 years before Trump was president, there had been this soft norm really begun by Bill Clinton and then continued by George W. Bush and Barack Obama that the president wasn’t going to opine on monetary policy. And the reason Clinton did this, he had an economic advisor who later became treasury secretary Bob Rubin.
Bob Rubin had been at the top of Goldman Sachs, and he had seen how George HW Bush in 1991 and 1992 was in a fight with the Fed. He was arguing that the Fed should cut interest rates more and the Fed didn’t always go along. And so Ruben saw this and he said, well, this exposed how weak actually Bush was. You create concerns and the market that the Fed’s not going to be as focused on inflation that send interest rates up. You also fight with the Fed and you lose. It shows that you’re weak. So he went and said, the White House is not going to talk about monetary policy. Now Donald Trump decided he should be allowed to have his say because he thought, well, if these guys are royally screwing it up, somebody needs to stop ’em. One final point on this is the Fed does try, especially compared to 30 years ago, part of defending their independence is being more transparent about what they’re doing and why. And so that’s why you see all of the speeches and they release the minutes, they release the transcripts, verbatim transcripts of their meetings, albeit with a five-year lag, but they’re trying to show people that this isn’t some political operation that they’re running. They actually are informed by what they think is the best thinking and analysis, and they try to justify their decisions. And so that’s sort of a way to guard against the risk that, well, this is just an unaccountable fourth branch of government and we should wipe this away.

Dave:
Nick, you’ve told us a bit about how President-elect Trump thinks about Fed independence, but what do other politicians think about this? How is Fed independence generally seen in Washington?

Nick:
Well, up until recently, at least Senate Republicans, when I would talk to members of the Senate Banking Committee, which is the committee that has jurisdiction over the Fed, they were quite supportive of Fed independence, and they were certainly supportive of it. The last time Donald Trump was president, once he realized he didn’t like what he was getting from the Fed, he began to suggest nominees who he thought would be more loyal to him. And some of these nominees were seen as not terribly qualified by Senate Republicans and they resisted. I think the big question going forward is, are things different now, Trump seemingly has a broader political mandate than he did eight years ago when he was elected. So do Senate Republicans push back on this more or do they say if Trump wants his way with the Fed, he’s the president, he’s entitled to it. But generally the Senate has been sort of a bulwark to support this idea of having a more independent monetary policy.

Dave:
And does that go for the business community as well?

Dave:
Let’s get back to where we are today. Obviously Trump was elected just a couple of weeks ago, and there has been more speculation recently about whether Trump will try to fire Powell right away or he’ll ask him to step down. But from what I’ve seen, Trump actually hasn’t suggested that he’s going to fire Powell or ask him to step down. Is that right, Nick?

Nick:
That’s right.

Dave:
Okay. So is the new renewed speculation basically just based on things that happened back in 2018?

Nick:
I think it’s a part of that, and it’s also the fact that you’ve had some advisors around Trump arguing for a more muscular executive branch. I think the reason you’re seeing the questions now after Donald Trump’s reelection is people want to know where are the guardrails going to be in a second term. And so they’re asking these questions, Donald Trump, would you try to replace Powell? He has not said that he would. And people are going to ask the Fed chair the same thing.

Dave:
And how has Powell responded to those questions?

Nick:
Powell’s responded to those questions exactly the same way that he did five years ago. He said five years ago that he has a four year term as chair and he intends to serve it. And he was extremely direct at the press conference in early November when he was asked, do you think the president has the authority to replace you? It was a one word answer. No,

Dave:
We actually pulled the audio of that interaction. Here’s the clip.

Speaker 3:
Some of the President-elect advisors have suggested that you should resign. If he asked you to leave, would you go?

Speaker 4:
No.

Speaker 3:
Can you follow up on do you think that legally you’re not required to leave?

Nick:
Well, I think the main scenario is that Powell just serves out his term. It ends in May of 2026, and so that’s 17 months of the next four years of Trump. I think that is the base case scenario. Could Trump change his mind and decide to do something? Of course. So what would happen in that scenario? I mean, if you want to go into that kind of hypothetical rabbit hole. Well, one scenario that Trump’s advisors floated last time was, okay, the law says you can’t fire him as chair. And his advisors told him last time, you can’t do this. And I reported recently that in 2018 and 19 when this did become an issue, Powell told treasury secretary, Steven Mnuchin, I will fight this. You need to know that I will fight this if people want to make an issue of this. And of course, Trump didn’t fight it, right?
He later tells Powell in a phone call, he described this phone call to some other people. He said that he had told Powell, I guess I’m stuck with you. And so even though Trump talked a lot about potentially replacing Powell, he never did it. And it’s possible he never did it because he knew that there would be a legal fight, that it would be very disturbing of markets potentially. And so his advisors had come up with this idea, well, you can’t fire him, but maybe you could demote him as the chair. Why would you do that? Well, the law that creates the chairs for your term is silent on the for cause removal protection that the governors have. So there are some people who said, well, maybe you could just demote him and then could you elevate somebody else into the chair? Seems like a lot of effort to do that for just again, a 16 or 17 month term that Powell has left. And then if you look at different court rulings and opinions from Supreme Court Justices, a number of them have sort of said they see the Fed as different. That monetary policy, the history of the Fed and the predecessor institution, the second bank of the US creates some reason to think that maybe the Supreme Court would rule in favor of the Fed or Powell on this. But I will stipulate we’re talking about sort of extreme tail risk hypotheticals here.

Nick:
He’ll be able to appoint someone completely new because the way the Fed governor seats work is one of them turns over every two years. So in January, 2026, one of the current Fed governors, her term will expire, Adriana Kugler’s term will expire. And so on February 1st, 2026, Trump will be able to put somebody new into that job, and that’s about four and a half months before Powell’s term as chair is up. So presumably whoever gets that seat could become the chair four months later. And if anybody else on the Fed Board retires early, maybe they take a Fed Governor, Mickey Bowman and make her the head of a bank regulatory agency that would give you another vacancy to fill on the board. But this is a difference from eight years ago in Trump’s first term, when he took office, there were a lot of vacancies on the board. He had an opportunity early to remake the Fed. He had up to five vacancies in his first 13 months. And this time if everybody stays and nobody leaves early, he’ll only have one vacancy in his first two years.

Dave:
All right. Time for one final break, but stick with us more on the future of the Fed and how different scenarios might affect the market on the other side. Welcome back investors. Let’s jump back in. Okay, so of course no one knows what’s going to happen, but it sounds like the most probable scenario again is that Trump and Powell choose to work together for the first 12, 16 months. And if at that point Trump is unhappy with the direction of the Fed, he’ll have the option to name a new Fed governor who could then be appointed by Trump to be the chairperson of the Fed and assumably. That person would have monetary policy inclinations that are more aligned with. And so it sounds like Nick, you believe that’s more likely because rather than sort of go through this potential legal battle that Trump will have a chance to name a new Fed chairman anyway within the first two years of his second term?

Nick:
Yeah, that’s right. You’d go through potentially legal battle. The market might react very badly. I mean, economists I talked to think this before a court would even pick it up. The market would react in such a way that everybody would reconsider whether you really wanted to go kind of the nuclear option here to the courts, it would probably be harmful for everybody involved. It’d be a lose lose for the Fed even if you won this decision. I mean, I think people have said to me, well, why is Powell, why would Powell be so committed to this? Is it kind of personal ambition? And the answer is no. This is about defending a principle of central bank independence. If Powell were to resign at the President’s asking, you’d establish a new norm that the Fed chair answers to the President, and if the president doesn’t like the monetary policy he’s getting, then you just replace the Fed chair. That would be a completely different turn from the central bank that we’ve had for the last 50 or 60 years.

Dave:
Nick, do you think it’s possible that Trump and Powell are actually more aligned than people think they’re, because we’ve just talked about that the Fed intends to keep cutting rates. Trump has said that he’d like lower rates. So is it possible that they are actually trying to do the same thing?

Nick:
It is possible. I mean, the Fed’s goal is to have the soft landing, right? To have inflation come down without a downturn. It’s what we’ve seen signs of happening this year. I think the challenge here is that Trump’s policies, it’s very hard to know how to model them. There’s a couple examples. Regulatory rollback, you could see that as something that might help with inflation because you’re increasing competition. You’re making it possible for the productive capacity of the economy to produce more goods and services. So that could be disinflationary tax cuts. How much growth do they create? Are you increasing deficits and are you going to have to compensate investors more to buy a treasury security to buy a treasury bond that could cut in different ways? Tariffs, I think, are a wild card. There’s an argument that even if tariffs increase prices, they only send up the price once inflation isn’t a one-time increase in the price level, it’s a year after year increase.
So the question right now is with the Fed, how would they react to a one-time increase in a tariff? Would you allow prices to go up once and then say, we’re not going to try to offset that with tighter monetary policy because that could create a slowdown that you don’t think’s necessary if you don’t think inflation’s going to be a problem, or there’s a world in which officials conclude, we just went through these inflationary shocks. Now consumers have become accustomed to inflation. Unions are bargaining for higher wages when prices go up. That’s maybe a different inflationary environment we could be in where the Fed decides that they have to raise rates if tariffs go up. That would be something that I would think the Trump administration would be quite frustrated about. So it’s a little bit like shaking up a soda bottle and trying to predict how much is going to come out when you open the lid, how quickly you open the lid. There are different forces, and I think modeling Trump’s economic policies for the Fed is just going to be more challenging.

Nick:
Thanks for having me.

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

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Here’s Why North Carolina Could Be the Next Big Time Boom State

November 20, 2024 No Comments

The Raleigh and Charlotte, North Carolina, metros grew tremendously over the past five years, with a population growth of 11.53% and 8.81%, respectively (the U.S. average was 2.94%).

Raleigh also had a 64.2% increase in its median price, while Charlotte experienced a 76.9% increase (the U.S. average was 46.9%).

One could consider North Carolina a pandemic boom state, along with the likes of Texas, Florida, and Arizona. But I think in the long term, it has more potential for growth than is being recognized.

Let’s take a look at everything North Carolina has going for it.

Business Tax Climate

A 2003 study published in the National Tax Journal found that “corporate income tax has a significant negative impact on employment, while the sales and individual income taxes do not.”

If this is true, a more business-friendly tax environment should continue to support employment growth over time. And when the local economy grows, so does the local real estate market.

Let’s take a look at the corporate business tax environment across the states. Here is a nice visual made by the Tax Foundation:

CIT Rates 24 — *Corporate Income Taxes by State – Tax Foundation*

You’ll notice there are a few states without a corporate income tax rate. Unfortunately, while this is a plus for investment, it doesn’t paint the entire picture of the business tax environment.

“No Corporate Income Tax” Isn’t the Entire Picture

These states don’t impose a corporate income tax:

Nevada
Texas
Washington
Ohio
Wyoming
South Dakota
North Carolina (by 2030)

However, Nevada, Texas, Ohio, and Washington also impose what’s known as a “gross receipts tax.” This is a tax on a company’s gross sales, without deductions for its business expenses, such as cost of goods sold.

This can benefit companies with a high profit margin while penalizing companies with a more narrow profit margin. It can also hurt startups, which have low-to-no profit margins to begin with. Or these companies may pass these taxes on to the consumer, as depicted in this image:

FF845 fig3 — *The Effects of Tax Pyramiding – Tax Foundation*

On the flip side, in Nevada and Ohio, these rates are relatively low to begin with. Ohio also recently implemented new thresholds that will exempt many small businesses from this tax. This means things are looking up for Ohio.

North Carolina already has the lowest corporate tax rate, sitting at 2.5%. And by 2030, the state’s corporate tax rate will drop to 0%. This will put North Carolina into the same category as South Dakota and Wyoming, which are states with no corporate income tax or gross receipts tax.

What’s interesting is that Wyoming’s population only grew 0.13% per year from 2008-2023 from net migration. The U.S. average was 0.27% per year, and over the same time period, South Dakota saw a 0.51% increase, and North Carolina saw a 0.84% increase. (If you’re curious, Florida had the highest average population growth, at 1.29% per year from 2008-2023).

If the corporate tax environment were all that was needed to grow the number of employers, and thus, the number of employees in an area, Wyoming and South Dakota should have seen more growth than North Carolina (and these states aren’t even the top five fastest-growing places). We inherently know there’s more to the story.

Employers need access to well-educated employees in order to expand. In fact, for each new university patent, researchers estimate an additional 15 jobs are created outside the university in the local economy.

So next, we’ll specifically look at the number of colleges offering a large proportion of STEM degrees in each state.

Colleges Offering a Large Proportion of STEM Degrees

After downloading college scorecard data from the U.S. Department of Education, I filtered out all universities not offering four-year degrees, small universities, and universities not located within a city or nearby suburb. I wanted to track only large institutions located within or near major metro centers.

Next, I calculated the percentage of STEM degrees given to recent graduates. Then, after sorting from the highest percent of STEM degrees to the lowest, I kept only the top half of institutions. For anyone curious, the median percentage of STEM degrees given for this set of large institutions was about 22%.

Then, I simply summed the number of large four-year universities left in each state that had more than 22% of its graduates earn STEM-related degrees. Here were the results (states with no colleges fitting these criteria were not included, such as Wyoming):

Notice how California, New York, and Texas are on top, three of the four most-populated states (the other being Florida).

As a side note, I’d also like to point out that Ohio has one more of these universities than North Carolina. This, combined with how affordable Ohio is and its business-friendly tax environment, makes it an excellent place to invest for the long term.

The only strike against Ohio for me personally is its high property tax rate. But the Kentucky side of Cincinnati (literally across the river) looks quite attractive, as you could benefit from the city’s growth without the accompanying high real estate property tax cost.

North Carolina’s Colleges: The Research Triangle

So far, North Carolina has one of the best business-friendly tax environments, and by 2030, it will be comparable to South Dakota and Wyoming, with no corporate income tax or gross receipts tax. However, unlike South Dakota and Wyoming, North Carolina has many prestigious universities producing many STEM-focused graduates.

Three of these universities are all within one combined statistical area (essentially, one large metro). North Carolina State University, Duke University, and the University of North Carolina at Chapel Hill make up what’s known as the Research Triangle, which includes the largest research park in America and is home to numerous tech companies.

Take a look at Raleigh’s employment numbers over the past decade:

An Investor-Friendly Agent on Raleigh’s Real Estate Market

It’s always helpful to get knowledge from a boots-on-the-ground expert. We’ve been collaborating with Katie Rother, a real estate agent who works with investors, on a breakdown of the Research Triangle market (Raleigh-Durham-Chapel Hill).

Here are a few highlights Katie mentions in her new report:

What areas are seeing the most growth in the Triangle?

“Over the next five to 10 years, places like Pittsboro, Sanford, Hillsborough, Lillington, Angier, and Benson are showing strong price increases and will continue to see growth.

Within 15 minutes of downtown Raleigh, towns like Cary, Apex, Wake Forest, North Raleigh, and Knightdale are also thriving, with more amenities and housing developments popping up. Even areas further out, such as Wendell, Zebulon, Clayton, and Benson, are becoming more attractive to buyers and investors, as they offer more affordable housing and more space.

For long-term growth and appreciation, I’m particularly focused on areas like Sanford, Fuquay-Varina, Holly Springs, and Pittsboro, as they show great potential for the future. The Triangle has a little something for everyone, from the vibrant city life of Raleigh and Durham to the suburban charm of places like Cary and Apex, and the peaceful, growing communities farther out.”

How are buyers and sellers navigating this market?

“In today’s fast-paced and competitive real estate market, buyers and sellers are leaning heavily on their agents to guide them through the complexities of buying and selling a home. Whether it’s navigating pricing, negotiations, or market-specific practices, having a knowledgeable agent makes all the difference.

For buyers:

Understanding Costs: Many buyers have questions about due diligence fees and earnest money deposits, especially if they’re new to the area or the homebuying process. Agents are crucial in explaining these upfront costs and ensuring buyers are comfortable with their investments.
Home Inspections: Buyers often look to their agents for advice on inspections—what to expect, what to prioritize, and how to handle repairs or contingencies that arise during the process.
Market Strategy: With competition high, agents help buyers craft strong offers, prioritize needs versus wants, and identify homes that are a good value for their budget.

For sellers:

Pricing and Marketing: Sellers rely on their agents to recommend competitive listing prices and market their properties effectively to stand out in a crowded market.
Preparing for Sale: Agents help sellers decide on presale improvements and staging to attract buyers and maximize offers.
Negotiating Offers: From handling multiple offers to answering compensation questions, agents ensure sellers are informed and in control throughout the process.

For both buyers and sellers:?

Agents are the go-to resource for navigating tricky questions about compensation, contracts, and market trends. Whether you’re a first-time buyer or a seasoned seller, a trusted agent can make the process smoother, more informed, and less stressful.”

Final Thoughts

My personal interpretation of the data is that the high number of well-educated graduates in the region, along with one of the best business environments in the nation, will continue to drive growth in the Raleigh metro area for years to come.

Would you like to see a data-driven breakdown of the best neighborhoods in the Raleigh-Durham area to invest in? Let me know in the comments. If enough people are interested, it’ll justify spending the time to gather and analyze the data.

Find the Hottest Deals of 2024!

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

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Did the NAR Settlement Lower Commissions? Here’s What the Numbers Look Like Three Months After

November 20, 2024 No Comments

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After a mammoth $418 million National Association of Realtors (NAR) settlement threatened to decimate real estate agent commissions, AccountTECH, an accounting software firm, has crunched the numbers to see how much agents’ earnings are actually down now. The results might surprise you.

Despite headlines a few months ago that predicted the end of real estate as we know it, with many agents and brokers fearing they would have to find new jobs, a study by AccountTECH found that there has been little to no movement in commission numbers since industry rule changes took effect. The evidence is substantiated by Mike DelPrete’s analysis of commissions dating back to last September.

The lack of variation may be partly because it’s still relatively early in the aftermath, and many deals have not yet cycled through the system. However, agents fearing instant income armageddon can breathe a sigh of relief—at least for now.

The Data Is Consistent With Our Interviews

The AccountTECH study found that the percentages paid to listing agents increased marginally, while those paid to buyer agents declined slightly. Specifically, the study found that the average commission rate for seller agents was 2.738% at 60 days post-settlement, up slightly from 2.724% in 2023—a number that the study’s authors agree falls within “the range of normal market variation.”

The study bears out the sentiments of many of the agents BiggerPockets interviewed a month after the settlement. They felt that real estate professionals at the top of their game would not feel much of a hit.

“It has not changed anything regarding obtaining business; the changes are how we communicate with new clients once we get connected with them,” Ian Hoover of Deacon & Hoover Real Estate in Pittsburgh told BiggerPockets at the time. “We must have more in-depth conversations upfront to explain the process and how it works, now and into the future…. Occasionally, buyers will want to represent themselves, especially if the process is not explained effectively. This will be a one-off and should not decrease revenues too much.”

Is It Too Early to Draw Conclusions?

A better barometer for the change the settlement has engendered will most likely be felt by next summer, after the spring buying season. The study’s authors advised:

“Industry watchers should keep tracking this number closely, since a continuation of this two-month trend of 0.05% decrease per month would bring commission rates on the buyer side to 2% by June 2025.”

The report analyzed data from 625 real estate offices and 17,358 buy-side pending transactions.

Real Estate Investor Takeaways

Here are the factors real estate investors should consider.

Buy-side transactions drop precipitously

Despite the modest commission dip, the study found that buy-side transactions had dropped noticeably by 10% year over year during the 60-day period analyzed.

The authors noted that the buy-side numbers could be indicative of many factors other than the NAR settlement, such as mortgage rates and the overall economy. A more extended period with more data points would give a better indication of the overall trend.

Commissions distribution

Breaking down numbers, the most common commission rate on the buy side was 3%, paid on 5,251 transactions, 2.5% (5,090 transactions), and 2% (4,026 transactions).

Numbers tally with BiggerPockets interviews and brokerage reports

As stated, many of the agents interviewed by BiggerPockets didn’t expect to see a meaningful change in revenue among established agents. Real Estate News said this was consistent with third-quarter earnings calls from many brokerage CEOs.

HousingWire begs to differ

Although the NAR settlement only went into effect in mid-July 2024, HousingWire released an article on Aug. 2 entitled “Buyer agent commissions down to 2.55% since the NAR settlement.” The story was based on Redfin MLS data, which showed that commission had dropped to 2.55% from an average of 2.62% in January.

However, Redfin admitted that factors other than just the NAR settlement could have been affecting their data. Redfin chief economist Daryl Fairweather said in a statement:

“Still, even before the blitz of publicity around the class-action lawsuits and NAR settlement, commissions were coming down. That’s partly because of the competitive housing market before and during the pandemic—which motivated some sellers to offer a low commission because they knew they could still attract buyers—and greater fee transparency.”

What should you believe?

In a study released Sept. 1, AccountTECH found that hundreds of brokerages across the U.S. will become unprofitable if the NAR settlement reduces commission rates and brokers fail to transform their operations. AccountTECH reviewed the finances in depth for 100 randomly selected companies and found that if commission percentages drop to 2%, 79% of the companies in this analysis would be unprofitable.

The study based this on three assumptions:

Commission “splits” between real estate agents and their companies will remain static.
Total commission volume will remain the same.
Operating expenses will remain at current levels.

Final Thoughts

While the latest AccountTECH study showed that the NAR settlement has thus far had a minimal effect on agent and brokerage commissions, it would not be wise for real estate professionals to rely on this finding so soon after the settlement has gone into effect. There’s little doubt that the real estate industry is evolving, and the traditional way of doing business has changed. The widespread use of social media to show, buy, and sell homes means that, inevitably, homebuyers will look to have more control over the homebuying process with a more DIY approach, using lawyers and title companies rather than brokers.

To keep up, brokerages will need to insert themselves into the process. Recent reality TV shows have shown that modern agents are as much social media influencers as they are real estate professionals.

In addition, brokerages can leverage technology to streamline their processes and offer buyers a range of services tailored to their specific and diverse needs. If a brokerage can continue to add value for its clients, it will continue to be useful.

Ultimately, buying real estate involves a lot of money, with great potential for risk and loss. A brokerage must convince its clients that paying a commission for a safe pair of hands to guide them through the transaction process is well worth the price.

Ready to succeed in real estate investing? Create a free BiggerPockets account to learn about investment strategies; ask questions and get answers from our community of +2 million members; connect with investor-friendly agents; and so much more.

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

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Landlords, What Are Your Wildest Tenant Stories?

November 20, 2024 No Comments

Every landlord has some wild tenant stories. We’re sharing the ones you probably won’t believe in this episode. And we’re not just talking about a bad eviction or an upstairs neighbor blasting loud music. Instead, we’re talking about identity theft, living room toilets (this actually happened), random people sleeping on YOUR couch, and the mystery of the magically appearing staircase.

Being a landlord isn’t always easy, but some stories make real estate investing truly worth it. We’ve seen some of our tenants turn their lives around completely, all by having a safe place to live. Even with all the chaos, broken toilets, non-paying tenants, and occasional hard conversations, being a landlord can be pretty rewarding.

Do you have a tenant story you want to share? Drop it in the BiggerPockets Forums!

Dave:
Real estate is a people business, but people being people, they’re going to do some crazy things in your properties. Hey everyone, it’s Dave and I’m back here with Henry Washington Henry. Today we’re going to talk about tenants. So my first story is, I don’t even know why I’m telling this story. Basically just going to give everyone who thinks that house hacking is a bad idea. You have to share a wall with your tenant. I’m going to make all their worst dreams because their worst nightmares come true. I think, I don’t know. So I was house hacking. This is like five years into my investing career. It was this little one bedroom, 600 square foot. It was a nice apartment though in a cut up old house, there was a main unit and then a basement unit. I was just sleeping one morning and woke up in my apartment and just heard some noise.

Dave:
It sounded like someone was in my apartment, and I’m pretty casual about these things. So I was just like, yeah, whatever. I was tired. I just rolled over and I was like, okay, this is whatever. That probably isn’t someone in my apartment. I go back to sleep and a minute or two later I hear the toilet flushing and I’m like, what? Okay, that’s pretty weird. This is not that big an apartment. There’s only one bathroom. And I’m like, oh, it must be Jane, who’s my girlfriend at the time. But we weren’t my current wife, but we weren’t living together at the time. And I kind of all of a sudden snapped too. And I was like, Jane didn’t stay over here last night. And so I’m like, someone is in my apartment and I just looking around my apartment, I’m in my boxers and I found, so I like camping.

Dave:
So I pulled out my camping knife and I’m stocking around my apartment, and I walk out into the living room and there’s just this woman fully clothed, asleep, face down on my couch. And I’m like, what is this person doing? And so I went over to her and I just started shaking her and I was like, hello? And she was like, leave me alone. And I was like, no, you’re in my house. Well, you have to get up. And she was like, no man. It’s cool. It’s cool. I was like, no, it is not cool. You can’t be sleeping in my apartment right now.

Henry:
It’s very not cool.

Dave:
It’s very not cool. So it was going on for a minute or two and finally she’s like, no, no, man, it’s cool. CJ said I could sleep over. And I was like, oh my God. CJ is my tenant who lives in the basement and I’m looking around my apartment and I see she had just left cigarettes and a lighter on my floor and I don’t smoke cigarettes. And so I was like, oh, she must have gone outside to smoke or something, gone outside and come back in the wrong door. She was still hammered. You could smell it on her breath. And so I guess in retrospect, I learned that the latch on my door kind of was off, and if you pushed it really hard, it would open. I fixed this later, but didn’t know that at the time. But the funny thing is she wouldn’t leave.

Dave:
I had to call the police to come. I was like, I’m not going to touch her. I’m not going to physically remove from the house. So I was like, I’m calling the police. She’s like, yeah, whatever. She was still so drunk. I was just like, call the police. So the cops came and physically removed her and they’re like, do you want to press charges? And I said, no, obviously. And I went and talked to my tenants and let’s just say that wasn’t the only problem I had with those tenants, but luckily no one was harmed. No one else was there. But that was probably the worst house hacking landlord experience I had.

Henry:
You did more than I would have buddy. I’m not playing that game. I’m so sorry. I’m in Arkansas. I walk out into my living room and there’s a lady laying on the couch. I’m just going to go lock myself in my room and call the police. I’m going to let them deal with it. I don’t know. Her wasn’t, I didn’t touch her. I didn’t talk to her. True. I don’t know nothing. That’s true about nothing. You take care of

Dave:
This. In retrospect, that is true. I probably should have done that. I was just so surprised. It was just so weird. And thankfully nothing happened. But I think that was the worst living in the same building as my tenants story, even though it wasn’t my tenants, they clearly we’re doing something weird. If that was the result,

Henry:
I don’t know. I think everybody, at some point, if you’ve ever partaken of Alma Hall at some point, has had a story where either you or somebody walked into the wrong house apartment building. No, I’ve never, never. I wouldn’t

Dave:
Dream. Yeah. But it was just funny. It was the next morning at nine. It was like 9:00 AM Anyway, so that was my don’t not house hack because of that. It was also my fault because I didn’t realize that my lock was broken, but it was and nah,

Henry:
You got a drunk person, test him.

Dave:
Yeah, it’s true. Putting all of your weight against it and just slamming against it.

Henry:
Well, you need to thank her. She might’ve stopped an actual burglar.

Dave:
That’s a really good point. Maybe she prevented something and this was just a good test for me. Alright, so that’s my first story of me not securing my own property and luckily getting out of that situation without any serious trouble. Henry, what’s your first tenant story you want to share?

Henry:
Well, my first tenant story is the case of the stolen identity. So we had a tenant who applied to live in our unit.

Dave:
This is like a Scoopy do episode. I like

Henry:
It. Yes. Yes. They applied to live in this unit and I would normally keep names out to protect the innocent, but this person who applied name was Samantha Suarez. And Samantha Suarez passed a background check. She was very friendly, she seemed very respectable, and so we said have at it. She moved in and within,

Dave:
Wait, can I ask a question?

Henry:
Sure.

Dave:
Did you meet her in person? Was this on the phone? Was it digitally?

Henry:
Nope. Met her in person.

Dave:
Okay. Now I’m even more intrigued.

Henry:
Seemed like a decent person passed a background check, was a paralegal. She moved in and then within a couple of months she started having issues with payments. But when we would send her the three or five day notice just to let her know, Hey, your rent’s due, she would have very reasonable excuses and she would even say, Hey, I can get you paid by this much. And she would make a little payment plan and timeline and then she would pay by the timeline. But what would happen is she’d pay, it would go through and then the a CH process would then drag out and then it would get rejected. But that process takes several days.

Henry:
And so then we’d have to reach back out and say, Hey, your payment failed. And she’d be like, oh yeah, sorry. I’ll try again. And then it would happen again. And then by the time we come around to it, the next month is due. Right? And so we said, Hey, I understand things are an issue, but we really got to get you caught up and since you were having trouble with the A CH, why don’t you just pay us in person? And so we met her in person and she paid us cash, but it wasn’t as much as she needed to pay, but she gave us some cash and so things were getting a little weird, but she was essentially, once they make a payment, whether it’s full or partial payment, you as a landlord are saying, Hey, I’m allowing you to stay. And so we couldn’t just evict her because she’s made a partial payment and she did seem to have reasonable excuses and she did look like she was trying to make efforts to pay, so I wasn’t going to put her out if she’s trying to make efforts to pay as long as she gets caught up.

Henry:
Well, things were still getting a little fishy and I wasn’t liking it. And then I was out shopping. My wife and I were out shopping for a dress for her for an event, and I got a phone call. It was a lady saying that she was Samantha Suarez. What?

Dave:
And

Henry:
I was like, my tenant. And she was like, no, I’m Samantha Suarez. Someone has stolen my identity. And we were like, what? She was like, I think it’s the person living in your house. And so they wanted us to call the police, and I’m like, well, you need to call the police.

Dave:
I don’t know who the police is. How’d she even get your

Henry:
Number? I don’t know. I think she found it online. I don’t know. She had some line on this lady living there and found my phone number, called me to tell me that the lady living in my house wasn’t Samantha Suarez, and she was Samantha Suarez. And I was like, okay. I was like, well, you need to call the police. I don’t know what’s going on. And the police are going to have to be the ones that are sorting it out.

Dave:
Yeah. It’s not like you’re a detective and can figure

Henry:
This out, but who is a detective? My wife. And so my wife was like, I’m going to get to the bottom of this thing. And so she started doing reverse image searches and started seeing different names and then would confront the lady about the names and the pictures and she would say, oh, that’s my sister. And that opened up this whole can of worms, and we started to reconsider everything we knew about this lady.

Henry:
Oh my God. Then we started to look at the letters she had given us about her employment and the letters and all these things turned out to be completely fraudulent. And so we sent it all to the police and they opened up an investigation. And as my wife was searching, she then found a mugshot of this lady who was our tenant, but it wasn’t her name, it wasn’t the Samantha Suarez name. And so we finally were able to get an eviction processed, and as we were filing the eviction, what took so long is she was fighting the eviction on her own. She was a paralegal and had some legal background. And our attorney even said, I’m really impressed by what she’s doing to fight this case.

Dave:
Wait, so she made up the name part but was actually a paralegal?

Henry:
Yes.

Dave:
So she was still half the identity? Yeah. Right, right. Just the name. Okay, interesting. I guess that’s probably a good tactic.

Henry:
She was holding it off long enough to keep her in there for a little bit, but eventually she lost the case and we were able to get in there with the sheriff, and when we got in there, we show up. The AC unit has been taken apart. All the copper is out of it. We found medical marijuana cards in there with different names on them.

Dave:
I mean, isn’t that a felony?

Henry:
Yeah. I mean, of course this lady’s committed lots of felonies apparently. Wow.

Dave:
Did she get arrested?

Henry:
I don’t know. She was gone.

Dave:
Is it just because the eviction court and the criminal court are different?

Henry:
They completely,

Dave:
It doesn’t get passed along.

Henry:
Exactly. They weren’t there to arrest her. They were there just to evict her, but she was long gone.

Dave:
And I guess you don’t have standing right? That actual Samantha Suarez would need to press charges, right? For the

Henry:
No correct.

Dave:
Felony part of it. Correct. You were just doing eviction.

Henry:
Correct. But we found out who she really is and we gave all that information to the authorities. And so Samantha Suarez, if you are listening, we do know who stole your identity, so hopefully that can help you in some way.

Dave:
Oh, poor real. Samantha Suarez. That’s a terrible story, but good for your wife for figuring that out.

Henry:
Yeah, she was not playing games.

Dave:
That must be so strange to have that confrontation.

Henry:
Yeah, it was super weird.

Dave:
All right. That is a crazy story. I’ve never had that. And honestly, I guess if someone really stole all the information, that’s kind of hard to guard against. If someone really had your social security number and knew this stuff about you, maybe that could happen. That’s kind of scary, but glad that it all got it resolved.

Henry:
Yeah, the identity she applied with was a solid identity. It was a great credit and background check. I don’t know what else I could have done there.

Dave:
Yeah, yeah, for sure.

Henry:
Alright, it’s time for a break. We’ll be back with a few more of these crazy landlording stories on the other side. Thanks for sticking with us. Here’s more of me and Dave talking tenants.

Dave:
Alright, well I have a very crazy story for you. This is not just a crazy tenant landlord real estate investing story. I feel like this is just a crazy coincidental story. So I told you a little bit already about I was house hacking this apartment and that below me was this big beautiful four or five bedroom apartment. And for the whole time I was house hacking. And years after, there’s this group of women similar age to me at the time who lived there and we were all really friendly. We didn’t hang out all the time, but if we were having a beer in the backyard, they’d come sit down kind of thing. And they wound up actually living there for I think three or four years minimum. And towards the end they were getting taking advantage, I think of me a little bit. They were moving their friends in and out of different bedrooms without letting me know.

Dave:
And I kind of let it slide all pretty cool. They always paid rent, they took care of the apartment. I was kind of like, whatever. So then eventually they moved out of the apartment and they just didn’t clean it and I was pretty annoyed by it. I thought we were all pretty cool and I just sent them a text and I was like, Hey, I’m going to hire professional cleaners to clean it. It’s expensive. It’s like a 3000 square foot unit. So it cost like 800 bucks. And I charged it to them. I took it out of their deposit and they got super mad even though I documented all of it. There was milk in the fridge, it was gross. There was just food everywhere. They just didn’t clean it up. And so they threatened to take me to small claims court to reclaim that $800 and it just kind of turned nasty.

Dave:
This is really the only time I’ve ever had this in my landlord career where it sort of turned nasty and I was kind of bummed about it. We all got along well and I have a pretty good track record I think, of having good relationships with my tenants. And so it always didn’t sit right with me. Fast forward a few years, I moved to Amsterdam and I’m just chatting with a friend of a friend and he’s like, I was telling him I own these properties in Denver. He was like, I know that apartment. And turns out he was friends with a couple of these women and we were just laughed about. And I told them the story. Fast forward again to just this past summer, my wife and I had a summer party and we invited the guy who was a friend of a friend, we’ve become friends. And in he comes to my party this summer and brings the woman that I had had this spat with and who was threatening to sue me. And she just walked into my apartment in

Henry:
Amsterdam.

Dave:
In Amsterdam this year. This is 10 years later, this is 10 years later. And I’m looking at her and she’s like, because I think my friend Joe told her that we were going here. And she was like walked up to me and I just started laughing because who cares at this point? And I was like, oh my God, what are you doing here? And she was like, oh my God, I wanted to tell you. I’m so sorry for what happened. I don’t know what got over. You were always so cool to us and all this stuff. And I was like, oh, don’t worry about it. It’s all so great. She wound up staying at her party for four hours. We were drinking together until the wee hours of the morning. We had this great closure moment 10 years after the original event. So I don’t know why. I just love that story. It was so great.

Henry:
Well, first of all, what are the chances? Did you party in Amsterdam?

Dave:
Right?

Henry:
But you got your tenant closure. That’s sweet.

Dave:
Yes, it was very

Henry:
Sweet. That’s sweet. So now you can still say, I’m a great landlord and I’ve never had an issue.

Dave:
I think so. I did have some problems with inherited tenants, but not ones that I actually properly screened. But it was actually pretty funny. So my buddy, the guy who connected us the first time, he was like, dude, we used to throw some parties at that house. And I was like, yeah, I know. I lived upstairs. I could hear them. And he was like, yeah, man. The cops used to always get called. I was like, no, they didn’t. He was like, yeah, they never showed up. But I heard the cops were called. And really what was going on is I was pretty cool with it. I was 26 at this time, so I was going out, but at two or three in the morning when I was ready to go to sleep, I would just call my tenant and be like, the cops just called. They said, they’re on their way. Can you just shut down the music and the party and I’ll tell the cops not to come. And they’d be like, yeah, okay. But I was just totally waking it up every time because I wanted to go to sleep.

Henry:
Professional house hacking tip right there, folks.

Dave:
Yeah, there you go. Just bluff that the cops are on their way and you can stop parties

Henry:
That way. You stop the party and you get to say face. Look at you,

Dave:
Look at you. Exactly. Everyone

Henry:
Wins. Creative solutions. Yeah.

Dave:
Well I guess both of mine so far are kind of funny, but obviously not all tenant stories are funny. So do you have any stories, Henry, that you’ve learned something important from

Henry:
Yeah, absolutely. I do. Lemme tell you about this tenant situation we had where didn’t end up going very well, but we definitely learned a lesson. So we had a tenant apply to live and it was a two bedroom, one bath apartment. It was over by the university. And so typically we have students that live there, but this guy was a single male and he had one child financially he seemed to check out in terms of his employment and his background check. And so we rented the place to him and as we fast forward, we started to hear that there was a woman there all the time and there was no woman on the application. And so we always get an application and a background check from anyone over the age of 18 who will be living in the property. And so when we found out that this woman was spending a lot of time there, we were like, Hey, we know you got a girlfriend. We need her to apply. So she took a while to apply.

Dave:
How long is a while?

Henry:
Oh man, we probably sent her the application and it took her about a month and a half before she actually filled it out.

Dave:
All right, so you let it slide for a little while.

Henry:
Yeah, we were lacking in a lot of areas

Dave:
Here.

Henry:
So she finally filled it out and it was not great, but not enough for us to say, Hey, you guys need to move out. But that was kind of the first red flag that she was living there. And then we started to get complaints about noise from children and we were like, well, we thought there was only one kid, but apparently she had several kids and he had more than one kid. And so this is a two bedroom apartment, so there was at least four kids living there and the two adults.

Dave:
Oh my God.

Henry:
And so that should have been enough for us to go ahead and put them out. But there’s kids living there and they need the space and the complaints weren’t that bad, so we really just kind of lolly gagged about that. And then we started to get complaints about smells and both bad smells and marijuana smells. And so we were like, Hey, well we can’t have you smoking inside. And so we talked to ’em about the smoking inside multiple times, but this carried on for maybe, I don’t know, four or five months of the smell. Somebody would complain, we’d tell them to stop it, things would stop and then a month or so later it would start again.

Dave:
Who was complaining other people? Was it a multifamily?

Henry:
Yeah, it’s in apartment building. And so the unit above was complaining because of the smoke smell would get into the HVAC and all that stuff. Again, none of this seemed like enough for us to just say, Hey, you got to go. But then they stopped paying and when they stopped paying, we started to chat with them about that and then they just wouldn’t make payments. And so we started the eviction process and the eviction process drug out really long because what would happen is they kept telling us, Hey, we have a new place to live. We’re just waiting on X, Y, Z to get out or X, Y, Z to get approved. And then they would send us text message screenshots from the other property manager that showed that, Hey, your unit’s not ready yet. We need a couple more days and then you can move in. And so these look like legit screenshots, but one of them finally, they sent me and I saw the name on the screenshot and I was like, Hey, I know that property manager, she manages for another landlord that I know. And so I had this internal debate, do I reach out and tell them, Hey, these people haven’t been great,

Henry:
Or do I just let it ride and let them get out of my property?

Dave:
Well, that’s one of the biggest conundrums and sort of misalignment of incentives in this industry, right? Because if you have a bad tenant and they’re like, I’m going to leave, and then that other property manager calls you for reference, you’re kind of like, well, I want him out of here. But you also want to be honest. It’s definitely a dilemma.

Henry:
Yeah. Well, I like to operate from a place of integrity. And so I called him and I was like, Hey bud, you guys are interviewing. I just want to talk to you about what’s going on with him in my place. And they said, oh yeah, we talked to him, but we told him no immediately. And I was like, what do you mean? They’re showing me screenshots of you guys saying you have a unit ready for ’em? They were like, no, we rejected them immediately. And I was like, what? And so that’s when I was like, okay, they’re forging these screenshots. They really, they’re just trying to just get places to stay. And so finally we had to go full bore with the eviction process, and so it got down to the point where the sheriff had to come and get them out. And so the day the sheriff showed up, they happened to already be out.

Henry:
And so the sheriff gets to the door and my sister-in-law’s with him, we were managing the property on north this time. My sister-in-law’s with him. The sheriff gets to the door and he tells my sister-in-law. He’s like, you know what? I’m going to need you to wait outside. I smell something that smells like a dead body. He was like, I’ve been doing this a long time. I know what a dead body smells like. And so he didn’t let her go in. And so he goes in, clears the place. There’s nobody in there, there’s no dead body, but what there is is just piles of human poop. What? In the corner of the living room, they were just using the bathroom in the living room and it wasn’t recent. There was just lots, lots of human poop in the corner of the living room. There were kids living

Dave:
There. No

Henry:
Four kids living there.

Dave:
Where’d they go? Oh, that’s

Henry:
Terrible. I don’t know where they went.

Dave:
That’s disgusting and terrible.

Henry:
My sister-in-law walked in immediately starts vomiting, so she goes outside and starts vomiting. So we had to get ServPro in there and do a full, what do you call it, make sure that it’s all sanitary and done properly. So we had

Dave:
To get that thing completely sterilized entire place, completely

Henry:
Sterilized, had to redo the floors, had to paint the whole house. It was a lot. And part of the story that makes me the most angry is that they were kids living there in those conditions, man, because it wasn’t like they just were doing that to spite me.

Dave:
I just feel so terrible for those kids.

Henry:
That stuff had been there for a while. And so

Dave:
That is both traumatic and really sad.

Henry:
And it’s tough, right? Because part of the reason that we ran into them is we felt bad for the single dad who couldn’t really find a place to live. And then we let him live there and then we drug the process out because there was kids there and we didn’t want to put everybody out. And at the end of the day, we have a business to run and we learn we have to be more diligent in our background checks. We can’t just believe a screenshot that’s sent to us. We need to actually call the number on there or call the name on there and see if things are legit, right? We need to be more diligent about making sure and following up to see who’s actually living there. Because we had two adults living there and one of ’em wasn’t on the application, and they obviously did that on purpose because when we saw her application, they applied with her in the beginning, we probably wouldn’t have rented to them, and so they were trying to circumvent the system. The red flag that came up for her is she had an eviction on her

Dave:
Record,

Henry:
And so should we have evicted them? We found out she had an eviction before probably. But knowing they had small kids there and they were paying at that time, it was hard for me to just say, you know what? You should leave with your kids. It was tough. So we have to be more diligent. We can’t trust everything we have to trust but verify. You just have to have a solid landlording background and screening process that you follow every single time the same way, regardless of what the story is of that tenant.

Dave:
That’s the real thing about, we always talk about this, but prevention is so much better than dealing with it once. People are always living there. It gets really sticky and really challenging with those kinds of situations. Well literally sticky in this situation. But yeah,

Henry:
Literally sticky and stinky in this situation.

Dave:
Yes, that’s right. We have to take a break, but stick around because coming up, Henry has one of the more uplifting tenant stories I’ve ever heard.

Henry:
Welcome back folks. I’m here with Dave on the BiggerPockets Real Estate podcast.

Dave:
I’ll actually tell you a story in case you probably haven’t listened to the first time. I was a guest on this podcast when it was my first year working at BiggerPockets. I told this story, but I’ll retell it. So my first property I bought was this four unit and I was a year out of college. I did not grow up handy. I wasn’t fixing stuff. And this property, I was 80 years old at the time and needed some work, and I just decided I could teach myself. I was self-managing and I wanted to save some money because all the money that was spending on contractors could have gone towards my rent. I was still renting at the time this before I was house hacking. And basically when the inspection happened, there was this railing and staircase that needed to be built in the backyard that goes out to the parking lot.

Dave:
And I decided I would build it myself because I’m an idiot and didn’t realize that building staircase is incredibly difficult. You’re so hard and no business doing it. I started, I’m sure for someone who’s experienced, they could do it pretty easily, but for someone who hadn’t done that much with power tools in his life, I probably bit off more than I could chew. So I went to the pawn shop and bought some tools because actually pawn shops have pretty good tools. They have the best tools. And so I went to the pawn shop, bought some tools, watched some YouTube videos, got the supplies at Home Depot and sat out there just trying to build this staircase and just failing just so miserably over and over again. And so I’m there for four hours the first day, second day I come back and spent six hours just failing again.

Dave:
I think I did this for three or four days in a row. And then the final day I show up and I pull into the parking lot and there’s just this beautiful immaculately built staircase out there, and I’m like, what the heck just happened? And I’m sitting out there amazed. You just saw a leprechaun or something. I was so just taken back by this situation and I’m just staring at it. And my tenant, who I just placed, they were brand new, walked out of the back door and comes up to me and she goes, my dad was over visiting yesterday and he was watching you and he just felt so bad for you that he just built this staircase for you.

Dave:
I was like, oh my God, you’re amazing. Let me reimburse you for this. And I paid him back for the materials that he incurred, but he was just like, you’re a young guy trying your best, trying to hustle and be an entrepreneur. I thought I’d help you out. It was so nice. It was such a wonderful thing for that person to do, but also so embarrassing. I could not look at my tenant for the rest of their tenancy. It was two sisters and they lived there for two or three years. I had no authority with that. My credibility was absolutely nothing. But luckily they were cool and we all got along

Henry:
Pretty well. Oh man. He felt terrible for you.

Dave:
Yeah, which was very kind.

Henry:
He saw what a wreck it was and was just blown away that he was like, this is just a normal 20 something year old man trying his best.

Dave:
Yeah, exactly. Yes. What a nice guy. I don’t even know. 23. Luckily I learned to be a little bit handier, but not that much more, to be honest. I could do some things, but not carpentry.

Henry:
I guarantee you. You did way better than I would’ve ever been able to do.

Dave:
It was just so pathetic. I did not have the right tools. It was just such a, that’s a cool story, really good learning experience, but also aside that people are really cool most of the time.

Henry:
Yeah, man, that’s a cool story.

Dave:
Do you have any uplifting ones,

Henry:
Man? Absolutely. So in this case, we had a tenant who is a convicted felon. He spent 12 years in federal prison for a nonviolent drug charge. Before he applied to live in our place, he had spent over $700 in application fees. So every time he, he’d try to find an apartment, he’d have to do an application fee just for them to tell him they’re not going to rent to a felon. Even when they would tell him he’s a felon beforehand.

Dave:
I hate that. I hate when landlords use applications as a revenue stream. It’s not a revenue stream.

Henry:
No, it’s terrible. And so the way we found out about him was through my wife’s counselor. My wife’s counselor was his prison therapist at one point. And so we reached out to him and when we first talked to him, he just sounded so down and out because he had spent so much money and no one would rent to him, and he was concerned that he wasn’t going to have a good place to live. And in his eyes, he had served his debt to society, which he had, and he just wanted a place to have a good start so he could go to work. But he spending all of his money on these application fees and he is running out of money. He just felt defeated. And so we did tell him that he needed to apply because we did need to see his credit and his background check, and he applied and his story completely checked out. Everything he told us that we would see, we saw it wasn’t any clearly he was being upfront. And when my wife told him that we would rent to him, he started crying. He was

Henry:
So thrilled that someone was going to take a shot on him, and he promised us like swore up and down. He was like, I’m not going to let you down. And it’s been three years now. He’s been our tenant and he called us recently last week to tell us he was getting married. Oh, wow. And he’s just been great, and he always pays on time. There’s never any issue. He doesn’t complain about anything. And then it’s in a duplex and the tenant next door is a little old lady who is very old, and we inherited her and we just didn’t want to put her out because she was a little old lady on disability. And so we’ve kept her in there and he goes and he mows her side of the yard and his side of the yard and make sure that she doesn’t have to do any of those things. He’s just been an amazing tenant who needed somebody to take a chance on him.

Dave:
That’s so great. I mean, did you have doubts when you were agreed to rent to him?

Henry:
I mean, yeah, things like that could be scary. You never know, but he seemed genuine. It was the fact that he seemed so down and out, it was hard to fake that I feel like somebody was looking to take advantage of a situation, wouldn’t be down or bummed about that situation. He was just genuinely saddened that people weren’t having any faith in him, and so we gave him that shot.

Dave:
That’s awesome. Well, good for you. I think that’s super important because people like that don’t have that many options, and it sounds like you read him as a human being. Well, there’s some things that come up on a tenant report, but just meeting and talking to someone will tell you something totally different.

Henry:
Absolutely.

Dave:
Well, thanks for sharing that story, Henry. That is a very nice story to end on. I appreciate you telling us this. Is that your experience that most of the time tenants are pretty cool?

Henry:
Yeah, I mean, we’ve got a lot of tenants and most of them we don’t have any issues with. It’s a select few that we end up having issues with, and it’s either people we’ve inherited or people where we just read the situation wrong. But a lot of the times, man, when situations go bad, life just life starts life in the people, right?

Dave:
Yeah.

Henry:
Even though you can pick a good tenant who ends up in a tough life situation and then things can go south, man, it’s hard to always just remember that yes, you are running a business, but these are people and people have people problems, and sometimes you just got to put yourself in their shoes and that it’s not always most important to make the best business decision. We try to make the best people decision, and sometimes that costs us money, and we’re okay with

Dave:
That. Well, I would say sometimes you don’t make the best financial decision, but that can be a good business decision. You know what I mean? It depends on the kind of business you want to run, and I totally agree that you don’t necessarily need to make the most profitable decision, but sometimes good business is just being reasonable with your tenants. They need to get out of the lease, let ’em out of the lease. You need to do cash for keep. Sometimes that’s just what you got to do. I don’t know. For me, it lets me sleep at night. I don’t stress about it as much. If I could just be a reasonable human being and maybe that makes you lose some money in the short run, but I actually think over the long run, that kind of stuff comes back to you positively. And so that you’re going to find tenants who are going to stay longer, who are going to take care of your place if you just put that good intent out into the world and into your business.

Henry:
Couldn’t agree with you more.

Dave:
All right, well, thanks for sharing the story. Let us know if you like these types of tenant stories. If so, we’ll rack our brain and come back with some more fun, horrible, uplifting stories for all of you here on the BiggerPockets podcast. Thanks so much for listening. We’ll see you next time.

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Quitting His Job with Real Estate After Cracking the Cash Flow Code

November 20, 2024 No Comments

Want to quit your job with real estate investing? Rookie investor Miller McSwain has a strategy anyone can copy to make serious cash flow. This investing strategy is rookie-friendly and allows you to learn the real estate investing ropes while making serious money. Miller now has six properties with forty-one units in total, and today, he’s sharing this easily repeatable strategy for quickly building wealth.

Miller will be the first to tell you that his “coliving” strategy is not rocket science. He should know—he’s a former rocket scientist. After house hacking and renting out the rooms in his home, he realized how much cash flow the rent-by-the-room strategy makes. But instead of buying houses with as many rooms as possible, he began focusing on community living and homes with inviting common spaces, allowing for higher rents.

So, how do you start with this strategy? Miller explains, in detail, precisely what makes a great coliving investment property, how to market your rooms to get the most tenants possible, and what to do when conflict arises between roommates. After six properties, he’s still hunting for more, and if you’re looking for higher cash flow rentals, this is a strategy you should definitely try.

Ashley:
Ever wondered how some investors are maximizing cashflow in today’s competitive real estate markets? Today’s guest has cracked the code with a unique strategy co-living by creating shared community oriented spaces. He’s achieving impressive cash on cash returns that outperformed traditional rentals. Tune in to learn why co-living might just be the ultimate strategy for real estate investors looking to boost their returns and how it could work for you too. This is the Real Estate Rookie podcast. I’m Ashley Kehr and I’m here with Tony J Robinson.

Tony:
And welcome to the podcast where every week, three times a week, we bring you the inspiration, motivation, and stories you need to hear to kickstart your investing journey. And today, super excited to welcome Miller McSwain to the podcast. Miller, thanks so much for jumping on with us today, brother.

Miller:
Yeah, thanks for having me. I’m stoked to talk all about co-Living.

Ashley:
Yeah, Miller, before co-Living even became involved in your life, give us a snapshot of what you were doing before real estate.

Miller:
Yeah, so before real estate, I was a nuclear rocket scientist. So interesting title, very hard to do. And so I’m glad that I’ve since transitioned to being full-time real estate. But yes, that’s what I was doing before this. It was a great W2 that kind of got us started as far as that was great income that we could use to buy our first handful of house hacks that turned into a larger portfolio down the road, but that was kind of the kickstart that gave us our initial portfolio.

Ashley:
And Miller, why did you decide to choose real estate as the wealth vehicle that to you wanted to dump that money into compared to all the other investments there are out there?

Miller:
It wasn’t the original idea. Whenever I was in high school, I had a coach who was teaching economics and he did not teach economics at all. He just threw Dave Ramsey videos up on the board.

Ashley:
I mean, honestly, not a bad thing. I can’t remember anything I learned in economics in high school, but I do know Dave Ramsey and principals, he teaches,

Miller:
Yeah, it was much better than knowing about Federal Reserve and well, I dunno, maybe that’s becoming more applicable now, but I found it much more valuable to know about how to budget, what our mutual funds, index funds, those kinds of things. But really that’s where I kind of learned what compound interest is because Dave’s great about showing all these plots like, Hey, if you put in a thousand bucks for the first five years by 40, it turns into this versus the guy who started investing 15 years later and put in 10 grand a month or whatever. So that’s kind of where I learned that principle. And so throughout college, as I was doing internships and started making money, I would dump all that into index funds, mutual funds. And honestly, that did grow to be a pretty decent chunk that helped us buy our first house act.

Miller:
But I was sitting there in college thinking about what all these returns look like. And I remember that my parents had mentioned that they would buy me a duplex in college, I could learn how to manage and all this kind of stuff, and that did not happen. I’m sitting in an apartment as I’m thinking about this, it was great that they planted that seed, but then I started doing some research and I was like, oh, this is potentially a faster way to build wealth. It’s a little bit more involved. You have a little bit more control, which is something that I’m a fan of. So then that kind of got me started on the real estate path.

Tony:
I want to get into the co living strategy, which you’ve kind of nailed to help you scale this portfolio in a profitable way. But before we do you share with us before we hit record, that you had a recent life event as it relates to your day job. So what was that man? And kind of give us the backstory and how you got there so quickly.

Miller:
So I worked in that W2 for probably two and a half years, and as of a couple of months ago, I quit that to full-time, purchased more co-living properties, focus on optimizing management even more, and just focus on the self-employed business side of things. The way that I was able to do that, honestly, I think I made that jump earlier than a lot of people would. So I know a lot of rookies out there. That’s the goal you want to get out of your W2, you want to quit your job job and focus on something that you can build yourself. And there’s a spectrum of when people feel comfortable enough to quit. So in my case, my advantage was that I have a wife who has a job,

Ashley:
Moral of the story, go get a wife that has a job investing strategy.

Miller:
So she works a job, she makes, I mean, I don’t mind saying here, I guess. So she makes around 60 grand a year, and we’ve kept our expenses low enough to where that covers all of our expenses. So whenever I did have a job, it was gravy on top and that was great. That helped us scale, but we got to the point to where it’s like, Hey, I can lose the money that I was making. We can reduce our income by half still survive, pay for groceries, pay for, I mean our housing’s covered because we house hack, but pay for all the things that we need to pay for and that will give me the time to really scale the business so that if we did stay with the W twos three years down the line, we might be at 150,000 a year gross, but instead we’re going to cut it right now, but then three years down the line, we’ll be way higher because we’ve had that exponential growth. I had time to spend on the business.

Tony:
Well, first Miller, congratulations on taking that leap. I think it’s always cool to see someone use real estate as a vehicle to actually achieve some level of financial independence. But two things I want to comment on because I think they’re important for the rookies to understand. First was that you didn’t just jump off Willy-nilly, right? You were very methodical and intentional about keeping your expenses low enough to the point where you could survive on a single income. So even if Miller’s real estate investing activities didn’t bear the fruit that you were looking for, you could still make sure that the lights were paid, the lights were on, bills are paid, and everything’s solid there. So I think that’s the first piece, but the second you’ve got a degree and an experience as an engineer that is probably going to be just as marketable two years from now, five years from now, 10 years from now.

Tony:
So the absolute worst case scenario for Miller is that you attempt to go full-time into your real estate business. You try it for 12 months, 24 months, 36 months, it doesn’t work. And then you just go dust off the old resume and get a job as an engineer making the same amount of money you’re probably making before, maybe even more. So the worst case scenario for you is what you were already doing. So I think there’s a lot of comfort in knowing that, hey, if this doesn’t work out, I can just go back to what I was doing before. Did that cross your mind at all as you were kind of walking through that decision?

Miller:
Yeah. Yeah. That was an important piece. I think it’s important to maintain good relationships at your job, don’t burn the bridges, all of that. So be a good, great employee while you’re there. Whenever I did give my notice, also be generous with that. I knew I was going to quit, but I gave ’em two or three months just to help keep things alive there. But yeah, I mean they were like, will you please stay, please? And I’m like, I don’t know. Maybe I feel like I should just totally cut this off and go do my thing. But they offered that and then they’re like, okay, well whenever you want to come back, then you’re welcome. So I think keeping those bridges alive is a great idea. Before you make the jump,

Ashley:
Before we get further into the show, Miller, kind of give us an overview of what your portfolio looks like today.

Miller:
Yeah, so right now we’re at six properties, which is 41 rooms. And that just quick recap is that was we had one house hack. We had a second house hack. I still live in the second house hack. So this is totally a rookie applicable strategy. We’ve been here for a couple of years and since then we’ve bought four more that we do not live in. So that’s where we got the total of six.

Ashley:
So let’s get into that strategy. I mean five properties, what was it, 41 units you said That’s a lot of units packed into these properties and they’re not small multifamily. These are single family homes then that you’re purchasing. Okay, so let’s go into co-living. Give us the breakdown of what this is and how you implemented this strategy into your properties.

Miller:
So I think when you’re thinking about buying a property today or anytime within the last couple of years, we’re in higher price type market. We’re in higher interest rate type markets. So in most cities across the US it’s going to be difficult to buy a long-term rental just out of the box, 20%, down, 5% down, whatever, and make it cashflow. So you’re going to need to do something a little bit special to kind of get that cashflow out so that you can live off of it or reinvest it or whatever you want to do. So kind of the three strategies that always come to mind is like you could short term rental a property and you can do this, all these strategies you can do when you live there as a house hack, or you could do it in something that you don’t live in, that you move out of, but either you’re going to short term it, you’re going to midterm it 30 days or longer and it’s furnished whole private space or you could rent out rooms.

Miller:
And so we evaluated all of those strategies and landed on renting rooms. And historically there’s been some stigma that can go along with that. It’s like, hey, you’re just cramming a bunch of people into a house. And even more recently, if you look around online, a lot of people are getting rid of living rooms, getting rid of common spaces so that they can pack in more rooms and eat more cashflow out. And I think it’s because of the interest rate environment and it’s tougher to cashflow than ever, but I’m not a fan of doing that. So instead of just renting rooms, I’m doing what we’re calling co-Living, which stands for the CO is community, community living. And the idea behind this is, yeah, you’re renting out rooms, but you have a big emphasis on keeping the living room, having house events, doing all these things to spur friendships within the house because I mean, a lot of people are just really lonely out there, honestly. So this kind of helps out with that and of course helps out with a lot of the affordability issues that renters can see in these bigger cities.

Ashley:
Ricks we want to hit 100,000 subscribers on YouTube and we need your help while we take a quick ad break. You can go on over to youtube.com/at realestate rookie and make sure you’re subscribed to the channel. Stay tuned after a break for more from Miller.

Tony:
Hi guys, welcome back to the show where we are joined by Miller.

Ashley:
So with the co-living, what are some things you’re looking at or amenities that you’re looking at when you’re purchasing a property? What does your buy box look like as you’re analyzing them?

Miller:
Yeah, so I think it starts with the market. Not every market’s going to be great for this. A lot of them will be, but not everyone will. So when you’re looking at the market piece, the first thing that I look for is how unaffordable our rents there. Because you guys have heard with midterm rentals, you’ve heard of traveling nurses. That’s the typical person that you’re going to rent to in the co-living space. The typical average tenant that everyone’s looking for is just lower income workers. So we have elementary school teachers, social workers, security guards, minimum wage people. So if you can find a city where those people exist, then you’re probably in good shape. So what that means is you’re going to look for rental unaffordability. So specifically if you look at studio rents in a market or you look at one bedroom apartment rents, that’s the most comparable to a room historically, that’s going to be the cheapest thing that someone can go after.

Miller:
So if you look at that and divided by what the typical income is in the area, the higher that percentage means it’s rooms should be in more demand because people need cheaper housing there. So I’d say kind of start out by doing that, but once you start looking at houses specifically, the easiest thing to screen them out on is parking. Most houses do not have sufficient parking, and that’s a lesson that we learned the hard way. The first two houses that we bought, the two house hacks and both of those, I didn’t really care about parking too much. I knew legally we can park on the street wherever we want to, so legally I’m in the right, so we’ll buy this house. And we’ve had issues at both houses at that first one. Once we got the house filled up, I had to park across the street in front of a neighbor’s house and I came out one morning and all my decals had been pried off in my truck and they’re sitting on the ground.

Ashley:
Oh my god, geez.

Miller:
So maybe that’s an extreme case, but even in my current house hack, sometimes neighbors will come ask me, Hey, what’s up with all the parking? And fortunately I live here right now, so I’m like, oh, mortgage is just expensive. So I have some roommates so it kind of goes over a little bit easier. But if I didn’t live here and it’s like, oh, it’s a rental property, then I imagine you could start to see some issues. So first things looking for parking, that can be garage parking. So two car garage, you can have two people there. It could be street parking in front of your own house. It could be a corner lot where you park along the side of your own house or kind of the sneaky one that you can put in there is across the street. If it’s like a neighbor’s side yard, like they’re on a corner lot and they have a fence along it, then I don’t mind if we parked there because the owner’s not going to see the cars and all of that. We found that that’s been okay, but never park in front of someone’s house. That’s the first thing to look for.

Tony:
Now Miller, appreciate the breakdown on the market piece and kind of what to look for. And the affordability focus I think is such a smart way to kind of tackle that because if one bedrooms, I pulled it up and in the area that I’m at, we have one bedrooms going for 1900 to over 2000 bucks for a one bedroom. There’s some that are close to three grand, which is so out. So it makes sense.

Ashley:
Ours are like seven 50

Tony:
Even where I live, right? There’s opportunity.

Miller:
Yeah, if you do see that rents are seven 50, then that is an indicator that, hey, why would anyone rent a 500 $600 room when they can have their entire private space for 700 bucks? So that’s a great example of why we do look for the places with the $1,700, $1,800 rents and then incomes are not keeping up with that.

Tony:
I want to get into kind of how you’re choosing the properties here, but before we transition over there, Miller, I just want to really clarify for the listeners what the difference is between co-living and then just a traditional rent by the room type strategy. So I guess is there a difference, and if there is, can you clearly identify what those differences are?

Miller:
Yeah, there’s a difference now that it’s become a need to differentiate those two things just because in the space at this point, it’s becoming more common, like I said, to get rid of those community type spaces. I mean, in 2020 when you could buy things at a decent price and you still had the lower interest rates, it was easy to buy a five bedroom house that would cashflow if you rented out five rooms. As times got tougher so that people could maintain cashflow, they started cutting out those community spaces. So that’s where I think why I differentiate this into a little bit different of a class because even in the current environment you can still, we cashflow very strongly on these properties, but it does take more work to do that. We look at 800 listings before we close on one, whereas the guy who’s cool with getting rid of his living room could probably look at five listings and find one that works.

Tony:
Can you clarify what do you mean getting rid of the living room?

Miller:
Yeah, good question. So it’s becoming more common to wall off, basically turn the living room into a bedroom, which building bedrooms is the name of the game with a strategy. We do build bedrooms and houses all the time, but we make sure to preserve the living room because we want to have space for the community events that we throw. We want people to come home from work and sit down on the couch and turn the TV on and then someone else walked through the living room and Oh, you’re watching this show. I’m watching it too. Let’s sit down and hang out and watch it. So that’s what I mean is turning the living room into a bedroom.

Tony:
You’ve mentioned community events a couple of times here as well, Miller, explain that as well. Are you actually hosting as the landlord different things within the property itself or do you mean you’re getting all of your different properties together in one kind of communal event? Describe the community piece.

Miller:
There’s no set guide for how to do this strategy at this point. So there’s a lot of different ways that you could do things that could be the right way. What I mean by this personally is that everything that we do on our properties, I want to be able to do remotely because if I do have to go over there, it is going to hinder scale. But if you want to have five places and you want to live next to all of them, that’s totally cool if you go over there and fire up the grill and have your residents come out and get feedback and chat with them and everything. So I think that is a great idea. But in our case, what I mean is we’re doing things like having pizza nights totally doable remotely. I can pull up the Papa John’s app and schedule for three days down the line to deliver pizza at 7:00 PM and then just message all the residents, Hey, pizza’s going to be here, come downstairs, grab a slice and meet your housemates.

Miller:
And the idea behind this is that one, it allows people to meet each other and socially they can get friends and help with mental health and all that kind of stuff. But two, it really does help out me as the landlord, as the investor as well. Because as soon as somebody meets one friend, they’re likely to stay there for three months extra six months extra just because they have a buddy in the house now. Because by default when you move into these houses, you’re shuffling around avoiding people, but just by providing spark for people to meet that really helps reduce your turnover and all that while they make friends as well. But you could also do game nights and movie nights and there’s a lot of options.

Ashley:
And then there’s me who hides when the mail lady comes just to drop off a, so the big question that I think a lot of people are always wondering in these situations as what are some of the expectations you have to set? So there are not disagreements and how do you handle the disagreements?

Miller:
There’s a lot of preemptive things that you need to do to reduce conflict before it happens. I guess I would say as far as when conflict does happen, you just got to handle it. You got to email people and call people and it’s going to be different for each situation, but you can stop these things from happening in the beginning. So my wife and I, we lived in room rentals throughout college. So when we went to go do our first house hack, we knew what could go wrong because it’s happened to us. So for example, whenever I moved into my college apartment, all the other guys that already lived there, I didn’t know them. So I was moving in just the new guy and I bought toilet paper for the room for the bathroom that me and the guy shared. And I noticed that my toilet paper stash is going down way quicker than it should be.

Miller:
There’s no way I’m using this much. So obviously the other guy’s using it. And that’s going to happen. That’s what’s going to happen in these sort of properties. So to mitigate stuff like that and prevent friction that would kind of occur between residents. We provide all shared supplies for the house. So you could think of this kind of like a short-term rental. A lot of the things we do, we really modeled after that strategy. We do want to provide an exceptional experience with co-living, but I mean that may sound like a headache, like, oh, how are you going to provide toilet paper? So any consumable that’s used by multiple people, we’re going to provide. So how do we provide toilet paper and paper towels and trash bags and dish soap and hand soaps and all of this. I’m not driving around every Saturday dropping supplies off.

Miller:
Like I said, we want to do this remotely. So it, it’s as easy as just ordering the stuff on Amazon. Two days later it shows up. And I guess just like a quick tip on the label for the name, we just put resident put in supply closet so it shows up, it’s labeled, they know exactly what it’s for and they’ll put it in the supply closet. And the way that we get notified about this, we used to just have people text us like, Hey, I pulled the last toilet paper roll, can you guys order some more? And that worked for a while, but now we have a laminated sheet on the supply closet with a QR code on it that just goes to something like a Google form and you could totally use that. And they just drop down, what house are you at? Drop down. I’m amount of batteries for the TV remote. Boom, it’ll show up in two days. So that’s one thing, but there’s probably a lot of tips we could go into.

Ashley:
Yeah, that’s awesome. I think right there, the QR code is such a great idea.

Tony:
And you read my mind, I was going to ask how you’re managing inventory. I know how we do on the short-term side, but I just want to plug, I have no relation to this company, but I’ve met them. I met the owner and it seemed like a cool tool, but supply mate.io, supply mate.io, and they’re a tool. They initially started off in the automotive industry where they were helping people in service departments at dealerships manage inventory, but they’ve kind of recognized the need to manage inventory in different industries. But supply made.io and basically what you said, there’s different QR codes associated to different products and then it kind of feeds into the software that you then get notified as the person you can kind of track, see what’s been ordered, what hasn’t. So just if folks are looking for a tool to manage that supply made, IO is one to check out.

Ashley:
Tony, a question for you. Is there any other property management software that has this integrated already for long-term rentals? AppFolio has an inventory integrated and we use it for our locks and smoke alarms, just things like that where we can buy in bulk and then we go and charge whatever property it went to. But does any short-term rental software have that already integrated?

Tony:
Yeah, some of the PMSs might have that built in, but there’s a tool that we use called Breezeway that has an inventory kind of functionality. And breezeway is what we use for all of our back of house operations. So that’s where we schedule all our cleaning, take care of our maintenance tasks, but there is no QR code functionality. So really it’s just like as the cleaners take things, they can decrement it systemically as they’re doing their cleans, but there’s no QR code to say, Hey, we need to reorder this thing. So it works in a slightly different way, but you achieve the same end result.

Ashley:
Okay. So Miller, any other tips and tricks you got process here you want to share? Because this is awesome. I think really valuable for someone, even if they’re not doing co-living, I think a lot of the stuff is applicable to any kind of system you’re creating to run rentals.

Miller:
Some other big ones that we’ve done that have really helped things, we have a handyman that goes through and does quarterly inspections on the properties. So with co-living, you have six, seven people in a house. It’s like you’re going to have more wear and tear for some reason there’s always a toilet seat that has a crack in it. I don’t know why, but at any given time, one of my toilet seats is cracked. You’ll get more use on the faucets. They’re just going to leak faster anyway. A lot of these things, you’re going to have door stoppers that go missing. People are opening sudden doors. So whenever we get those sort of requests that aren’t super immediate, like, oh, we’re missing a doorstopper, okay, I’m just going to add that to a list. I’m not going to have my handyman go out to just install one doorstopper because they’re okay without that for the next month.

Miller:
That’s fine. Then we’ll have our handyman come through on this every three months, hit all of those things at the same time. Like I said, we want to be able to manage totally remotely. I do live near my properties, but I don’t want to go to them if I don’t have to. And so we have him record the entire house record inside of all the bedrooms. He has access to all the electronic clocks and everything. So goes through the bedrooms, records, everything, uploads it, and I can review it to make sure no one has a dog, nobody has holes in their walls, that sort of stuff.

Tony:
Alright guys, we need to take our final ad break, but we’ll be right back after this.

Ashley:
Okay, let’s jump back in with Miller Miller before you go into the next one, what are you paying the handyman to do these inspections per property?

Miller:
Yeah, I think it’s like a hundred bucks per 80 bucks per, so it’s effectively two hours of his time or so. And the more properties you have, I guess I’ll say the better you can get on pricing. So I’ll kind of lead that into the next tip is we have a cleaner that comes through in our case on a monthly basis. So a lot of our residents are military, so they’re typically clean and orderly and all that. If you had students for example, that’s another category that you could cater to, maybe you need to go every two weeks or every week. They’re just going to be a little bit messier probably. So they need to go at some sort of frequency. But the cleanings are a lot cheaper than you would think because if a cleaning in your market usually runs like $300 or 250, let’s say that’s for cleaning the whole house, we don’t need the entire house cleaned. Residents take care of their own. They’re going to vacuum and do whatever they need to do in there. We’re just cleaning the shared spaces, living room, kitchen, shared bathroom. So it’s about half of the house. It works out to be about half of the price, but you have to find a company willing to take that on though.

Ashley:
So it seems like you have a lot of the common things that could cause issues taken care of and included in the rent, which I think is a great idea, especially not having to fight over a dirty bathroom with the person you’re living with or who’s using all of the toilet paper.

Tony:
One follow up, Ashley, before we move off of this piece, and I guess somewhat connected, including a lot Miller in the property, which is maybe more than what a typical tenant is accustomed to. They’re getting the consumables, they’re getting the cleaning, there’s maintenance and stuff that’s involved. How are you marketing this when you’re actually posting these places for rent to really communicate all of what’s included?

Miller:
So of course there’s rental descriptions, but no one reads those. We have all of that in there, but in reality what happens is people hop on Facebook or whatever listing site they’re going to and they sort by price and they message the top 10, and then whoever replies first is who they’re going to look into further. So I guess I’ll say reply really quickly, but as far as we’re how we’re conveying these benefits, I think the biggest thing that we do is whenever we reply, I include a YouTube link to the specific room that they’re interested in, which gets them personally kind of involved. So for example, if you’re on Zillow and you’re looking for a house to buy, and I think they do this for rentals too, but you can do those 3D walkthrough things where you’re walking around and can get a better sense of the space.

Miller:
That’s cool, but it’s so cold, right? No one’s talking over it. Even when there’s wholesalers sending videos, they’re just walking around not saying anything, and it’s a very cold sales approach. So instead we have this YouTube tour of the whole house plus that room that they’re interested in. And I’m talking over the entire thing. I’m like, oh yeah, here’s the kitchen. You can think of it like a short-term rental. We’re going to provide everything you need except for your food. Oh, here’s the wifi, the WiFi’s included. So I’m talking over it, explaining the benefits, and people are very likely to watch that YouTube link, whereas they’re not very likely to check out that listing description.

Tony:
Miller, I can tell that you’ve got an engineering background because every question that we ask you, you’re like, oh yeah, here’s the exact process that I have laid out for how to tackle this thing, man. So I love that.

Miller:
Yeah,

Ashley:
It was almost like he was a rocket scientist.

Tony:
I know. It’s interesting, huh?

Ashley:
Okay, so along the lines of you’ve great all of this information to give ahead to your prospective tenants, but what are you doing to give them, to ensure some kind of privacy and balance so that it’s not just all shared all community? Is there anything that you’re doing for that kind of aspect of it? Or maybe somebody who doesn’t want to completely live with other people?

Miller:
Yeah, so I mean, first thing, their bedroom’s totally private. I’ve talked to some operators in this space who don’t put locks on the doors, which I cannot imagine not having a lock on a bedroom door, especially when you live with random people. So first off, of course there’s locks on the doors and they’re electronic, and that’s great. We can program them from afar that’s super great so they can retreat to that space at any point that they want to. But yeah, all the community stuff is totally optional. I mean, we find that even if somebody doesn’t seem too keen on it, eventually they hop in and it’s kind of a benefit to them. But if they don’t want to, they definitely don’t have to. But it just kind of does improve the experience, I would say.

Ashley:
Now what about the screening of them? There’s definitely different rules. If you are living in the property, you can be more selective and don’t have to be as strict with fair housing. But what about the properties you are not living in? How are you screening them? Is there anything specific you’re doing to make sure they get along with the other residents that are already in there?

Miller:
So I’m going to give you a super engineering answer. There’s a funnel and we put a lot of things into the top and a certain percentage will convert along each step. So breaking this down, we’re going to bring a lot of people into the top of this funnel. Well, lemme start by saying this. So if you have a long-term rental, for example, let’s say, yeah, you’re a rookie and you have two properties that you’ve moved out of and you turn ’em into long-term rentals. The marketing headache there is very low. It’s like you have two properties, they’re going to stay there for three years on average, let’s say, okay, you’re filling a vacancy every year or less than that. So you can kind of willy-nilly like, oh, there’s a vacancy. Let me go handle that. Nothing too crazy. With a co-living property, let’s say you have two properties, six bedrooms each, and they stay on average for a year, you’re going to have a turnover every month on average in that case.

Miller:
So you’re always looking for someone new. So that’s where a funnel does come in handy because you’re always bringing people in. You always need a certain amount to come out of the bottom and become residents. So bring people into that funnel listing on Facebook and Zillow and some of these places. But then the next piece that we do is part of the screening is everyone who messages us, we include that YouTube link, and then we include a link to something like a Google form that asks the exact same questions as the application, like the exact same thing. It’s just free and it’s unverified information. So instead of it running a credit check, it just says, Hey, what do you think your credit score is? Instead of having all their pay stubs, just like, Hey, what do you think your income is? And based on those responses, you can do it automatically or you can do it manually in the beginning, but we can reply to them and say, Hey, it looks like you’ll qualify.

Miller:
Here’s a link to the application. If it looks like they may not, you still need to allow them to apply because they haven’t technically been denied, but you can say, Hey, it looks like your credit score wouldn’t meet the requirement. Feel free to apply if you want to. So then a certain percentage will apply, and at that point, that’s where the real screening kicks in. So the application, the data that we get back super standard to any long-term rental that you could read about in any book out there, we’re going to check their credit. We’re going to do look at their pay statements and see if they make enough. But where it gets a little bit special for co-living, I mean everyone should do this, but we do actually check the rental references. We actually do call them and text them and email them. And the reason that we do this is because it’s a really good indicator of if they have good references, they probably have pretty good behavior, they’ll mingle in the house.

Miller:
Well, there’s going to be less issues if we have references from people who’ve actually met them and said that they’ve left the place clean, they were nice and all that sort of stuff. So we will actually reach out to them. And I think one special thing that we do is we actually adjust the security deposit based on how many positive references we get. So the reason behind this, let’s say that someone has three awesome references. Landlords say that they’re great, they were clean, they moved out and gave us notice and all that. They’re not a risky tenant to us at that point, right? They’ve proven to three people that they’ve been great. So I don’t need a whole month of security deposit and they need half a month, let’s say. So now they only have to bring me $400 for security deposit instead of the whole thing.

Miller:
And where it gets really interesting is if they provide zero rental references, that’s kind of a red flag. It’s like, do they really not have any history or do they have bad history and they don’t want to provide it? So in that case, we charge a higher security deposit. It’s like, you are a very risky resident to us. You have zero references, so we’re going to charge you 1.5 times or two times a monthly rent, whatever you decide. And that honestly screens out a lot of people automatically who would be bad residents because they have that poor history, and then they see that they don’t provide any references. So now they get that higher security deposit and they don’t want to pay 1200 bucks just for the security deposits. They move on and go find somewhere else to live. So I guess that’s one big tip there for how to get better people. In

Tony:
One follow up question to that, Miller, you’re doing a lot of screening upfront, which I’m sure helps prevent this, but I would assume that maybe there’s been a few bad actors, bad apples, not good fits that have maybe slipped through the cracks. Has that happened, and I guess what were the repercussions of that and how did you actually deal with that inside the house?

Miller:
Yeah, so there’s a couple of examples. So over the years we’ve had, I think close to 80 residents. So of that, I can only think of two incidents where I really had to step in. We were talking about at some point you do have to step in and take care of the preemptive, the proactive stuff won’t always help. So there’s a couple of things that have slipped through. One, we just got rid of this person three weeks ago. She was in our personal house hack, and my wife and her started having issues. So I’m getting really motivated to get this person out. My wife is on me about it, rightfully so, things were not going well, but it’s something that I messed up on the front end. I let her in when she did not meet certain criteria.

Miller:
I think it was credit score was the main thing, but I think her rental references were being weird or something like that. But anyway, I still let her in even though she didn’t meet a few things because, and this is a good lesson for the rookies, but moving from the first house hack to the second house hack, especially if you’re renting rooms, is actually really hard because we left the first house hack had two vacancies there. Now we’re gone. We’re not occupying the basement with the two rooms. Now we’re at the second one and we have four new rooms. It’s a lot of vacancy to take all on at one time. So I have all of these and I’m working on getting everything filled up, and I feel like I have to start compromising on the criteria in order to get it filled up. Instead, what we do now, if we bring a new house on, we’ll have six vacancies.

Miller:
Again, similar situation. What I do is just drop all the prices of everything by 20%, so then more people are in that funnel, and I can still pick people who are qualified. There’s just more of them to choose from. So I think that’s a better approach there. But yeah, so in that case, I compromised on some things and she was kind of rude. She was very rude. Ultimately, that’s not reason to kick them out, but there was some lease violations that we found that we could use, but we offered her just basically cash for keys to leave instead, so we wouldn’t have to do the eviction.

Ashley:
What was the amount that you did for cash? For keys?

Miller:
It was just like a hundred dollars or something. And actually she ended up not even really taking it

Ashley:
Well Worth it.

Miller:
Yeah, because really what I said, I was like, okay, can you be out in the next seven days? You don’t have to pay rent for those seven days. And she was like, no, I’ll just leave today. So it actually worked out super, super well. I was in Cancun when this happened for BP Con, so I was ecstatic that I was worried about it the whole time and it was over. So

Ashley:
Miller, I guess along those lines, that’s something that you’re having to do with your day-to-Day. Now that you’re not doing your W2 job, what are some of the other things that you’re actively doing now as a full-time investor? Give us kind of the insight of the day-to-day. Are you looking at new acquisitions? Is it all just tenant management?

Miller:
So in our case, we’re looking to continue scaling our portfolios. So a lot of time is spent on the management side optimizing things. We’ve had a few VAs that we’ve hired, a few virtual assistants try to help with this management stuff. And I think I’m not good at hiring yet, and I’m not good at managing yet. These are skills I really need to figure out. All quit. Everyone of ’em has quit, so now it’s back to me. So I’m optimizing some things and then going to focus on hiring, so I can let go of some of that. But the other portion of time is working on acquisitions. So we’re looking at more deals, looking at the parking, looking where we can build rooms, all that sort of stuff that I mentioned. At the same time, we’re looking for more money. So at this point we do buy with partners typically. So it’s a lot of networking. It’s a lot of following up. It’s a lot of phone calls and dinners and getting with people, all that stuff to kind of maintain and build relationships to purchase properties down the road.

Tony:
Yeah. Well, Miller, congratulations on the success that you’ve had so far in building this portfolio, and I think even more kudos to you for doing it in a way that was very like, Hey, we’re going to make sure that we have some systems and processes in place as we scale this thing up. Because I think Ash and I have both talked about this, where sometimes you scale so quickly that you kind of look down and there’s a big hole in the middle of the plane are like, oh, we got to fill this hole.

Ashley:
Or it’s all in your head and you have to stop and take the time and try to explain it to someone else how this is supposed to happen.

Tony:
So kudos to you for it, for kind of doing it the right way, I guess. Last question, Miller, before we let you go here. As the market evolves, as this model of co-living evolves, I guess, what are you seeing as maybe the future? What are some of the trends you’re keeping an eye on, or maybe even more importantly, what does a rookie need to keep in mind if they want to be successful with this strategy?

Miller:
Yeah, I mean, the biggest thing I think to keep in mind, especially as a rookie, is that if you’re going to house hack one of these, that is the absolute best way to get started financially. That makes sense in everything, but living in the property while you’re managing it is the best way to build your systems. Whenever we lived in that house and we had three roommates living up above us, I could literally, we’ve added the cleaner that was something new that we added, and I just go up there and ask them like, Hey, how is this? Do you like this? Do you not like it? How often do you think we need to do it? It’s like a super quick feedback loop, being able to just go upstairs and talk to them. So really nail all your systems down when you live there so that then when you move to the second one and you’re not physically in that one anymore, you have all those learnings, you have all those tips and tricks, you have the exact list of things that you need to follow to keep it running smoothly.

Ashley:
Well, Miller, thank you so much for joining us. We really appreciated having you on today, sharing the systems and processes you have in place, and also talking about co-living and how you’ve been able to implement it into your real estate investing journey. So, Miller, if people want to learn more about you, where can they reach out to you and find more information?

Miller:
Yeah, I’m actually writing a book about co-living right now. So if anyone was interested by this conversation and they want to learn how to rinse out rooms in a house hack or rent it out when you don’t live in them and do it in a way that you can actually scale the business and it’s not a huge management headache, then yeah, feel free to look me up on Instagram. It’s just my name, Miller McSwain, M-C-S-W-A-I-N, and if you want to shoot me a DM book, then I’ll send you, we have a link for, it’s coming out here soon, but we have a link for people to pre-sign up for it and get discounts and all that sort of stuff. So yeah, that would be great. I’d love to chat with anybody who wants to reach out over there.

Ashley:
Well, awesome. You didn’t add Author to your day-to-Day work when we talked about what you’re doing, but congratulations, that’s really exciting. I’m Ashley, and he’s Tony. Thank you so much for joining us on this week’s episode of Real Estate Rookie, and we’ll see you guys next time.

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