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Buyers Return as Lower Rates Hold, Trump

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Buyers are finally funneling back to the housing market thanks to recently lower mortgage rates. But, we’ve still got a BIG housing problem to fix—undersupply. What’s President Trump’s plan to put more houses on the map? Freedom cities! By turning federal lands into high-tech hubs for workers, we may be able to solve our housing shortage. Is this possible, or are “freedom cities” just a far-off developer dream? We’re getting into this headline and all the others filling your newsfeed in today’s episode!

Home prices are about to PLUMMET…says one article for a select few property types. While much of this might be clickbait, James does think it’s time to scoop up some sweet property deals on second homes in hot vacation markets. With good value, economic weakness putting pressure on sellers, and long-term upside, this could be a solid move to make!

Want to pay even LESS to a real estate agent? That’s what everyone says, but it doesn’t seem like that’s what everyone wants as Redfin gets bought out by Rocket Companies. Is the low-cost real estate agent model finally about to bite the dust, or could Rocket turn things around, bringing buyers a whole new suite of low-cost services? Stick around; we’re sharing our thoughts!

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Read the Transcript Here

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In This Episode We Cover

  • Trump’s plan to trade federal lands for “freedom cities” that could increase housing inventory
  • Fed rate cut update: Should we still expect rate cuts sometime in 2025?
  • Great news for real estate agents and lenders as sales accelerate thanks to lower interest rates 
  • One type of rental property that could be a killer deal in 2025 (in SOME markets)
  • The end (or beginning) of Redfin as Rocket Companies buys out the low-cost-agent brokerage
  • And So Much More!

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Interested in learning more about today’s sponsors or becoming a BiggerPockets partner yourself? Email [email protected].



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Why Owning Real Estate is Always a Winning Strategy—Especially in Times of Uncertainty

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When uncertainty looms over the economy, investors face a difficult choice: stick with volatile markets or move toward stability. Stocks experience unpredictable swings, cryptocurrency remains speculative, and inflation erodes the value of cash sitting in the bank. 

In these moments, many investors seek safe havens—assets that hold their value, generate income and offer long-term appreciation. American real estate has historically provided all three.

Despite market cycles, U.S. real estate remains one of the most resilient and profitable asset classes. Whether you’re an experienced investor or just starting out, owning rental properties provides a hedge against inflation, a steady income stream, and the opportunity to build lasting wealth. Even in uncertain times, real estate remains a winning investment. 

Our partners at Dominion Financial Services are here to help you win—more on them later.

Uncertainty Makes Riskier Investments Less Appealing

In times of economic instability, investors tend to flee from high-risk assets. Stocks and cryptocurrency markets can experience massive daily fluctuations, making it challenging to preserve wealth. However, with its tangible and income-generating nature, real estate remains a stable asset class.

Unlike stocks, which can be affected by global events, company performance, and speculation, real estate follows a fundamental principle: People always need places to live. This constant demand provides a level of security most other asset classes simply cannot match.

While stock markets can crash overnight, real estate values rarely experience sharp declines, and rental income continues to flow regardless of market conditions. This makes U.S. real estate one of the safest, most reliable investments, even when the broader economy faces turbulence. 

Dominion Financial has specialized in financing for real estate for over 20+ years and has the expertise you need to push your investing journey forward.

Limited Supply, Lasting Value

One of the most significant advantages of real estate investing is its long-term appreciation. Unlike assets that can be endlessly produced (such as stocks or cryptocurrencies), land and housing are finite resources. 

Historically, U.S. real estate has consistently increased in value, even through recessions. While short-term market fluctuations occur, home prices and rental rates tend to rise over time due to:

  • Population growth and housing demand
  • Land scarcity in desirable areas
  • Increasing construction costs

A well-located property bought today will likely be worth significantly more in the coming years. Even during economic downturns, home prices tend to recover and continue their upward trajectory, making real estate a reliable asset for long-term wealth preservation.

Stable Cash Flow

Stocks and bonds may increase in value over time, but they don’t provide monthly passive income like rental properties. No matter what happens in the financial markets, tenants still pay rent—providing investors with a consistent income stream.

This is especially valuable during economic downturns, where stock dividends may be reduced and businesses struggle. Rental demand remains strong, particularly in uncertain times, as more people turn to renting rather than buying homes.

Cash flow from rental properties not only covers mortgage payments, but can also:

  • Fund other investments
  • Provide financial security
  • Serve as a hedge against inflation

Even if property values temporarily decline, monthly rental income keeps flowing, making real estate an excellent choice for those seeking financial stability.

A Recession-Resistant Asset

During economic downturns, many investments lose value rapidly. However, real estate has proven to withstand recessions better than most other asset classes.

During the 2008 financial crisis, home values took a hit due to widespread lending issues, but those who held on to their properties saw significant appreciation in the following decade. Similarly, in 2020, the pandemic caused stock markets to plummet, yet the housing market surged due to low interest rates and strong demand.

Why? Because housing remains a necessity, people will always need places to live, and rental demand often increases during uncertain times as people delay homeownership.

Even if property values dip temporarily, they tend to bounce back faster than stock markets, making real estate a resilient long-term asset.

Interest Rate Cycles Create Buying Opportunities

Economic uncertainty often leads investors to shift to bonds, which affects five-year Treasury yields. These yields are crucial in determining mortgage rates, including those for DSCR rental loans. 

Dominion Financial Services helps investors take advantage of these opportunities by providing loans tailored for rental property financing, allowing them to secure competitive rates and expand their portfolios strategically.

As bond demand increases, yields drop, often resulting in lower borrowing costs for real estate investors. This creates an opportunity to secure financing at better terms—a significant advantage for investors looking to scale their portfolios.

For those using DSCR loans—which allow investors to qualify based on a property’s income rather than personal income—this can be a perfect time to lock in favorable financing. Investors who take advantage of these moments can maximize buying power, lower their interest rates, and increase overall returns.

The Power of Leverage

Another reason real estate continues to outperform other asset classes is leverage. Unlike stocks, where you typically buy shares outright, real estate allows investors to use other people’s money (the bank’s) to build wealth.

For example:

  • If you invest $50,000 in stocks, you own $50,000 worth of stock.
  • If you invest $50,000 as a 20% down payment on a $250,000 property, you control a $250,000 appreciating asset.

If that property appreciates 10%, you gain $25,000 in equity—a 50% return on your initial investment, compared to just 10% in stocks.

Leverage allows real estate investors to:

  • Buy more properties with less capital
  • Scale their portfolio faster
  • Achieve higher returns compared to unleveraged investments

And with rental income covering mortgage payments, tenants essentially pay down your loan while you build equity.

Final Thoughts

No matter what happens in the economy, real estate remains one of the best investments due to its stability and long-term value. As a tangible asset, it holds intrinsic worth and tends to appreciate over time, even after market downturns. Rental properties provide consistent cash flow, ensuring steady income regardless of economic conditions. 

During periods of uncertainty, financing opportunities often improve, allowing investors to secure favorable loan terms. Additionally, real estate offers the ability to leverage capital, enabling investors to scale their portfolios faster and build lasting wealth. Whether you’re a first-time investor or looking to expand your portfolio, now is the time to position yourself for long-term success.

Explore DSCR rental loans today

If you’re ready to take advantage of today’s favorable financing conditions, Dominion Financial Services offers DSCR rental loans backed by a DSCR Price-Beat guarantee, designed to help investors scale efficiently.

With no personal income verification required, these loans allow you to qualify based on a property’s rental income—making investing and building lasting wealth easier.

Get started today and secure your next investment property with Dominion Financial Services.



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13 Rental Units with a “Rinse and Repeat” Investing Method

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This investor built a multimillion-dollar real estate portfolio with low-money-down loans and little cash-to-close. Thanks to his smart “rinse and repeat” strategy, he’s quickly scaled from zero to 13 rental units in just four years, all while collecting thousands of dollars of cash flow a month. He would have never been able to get to this place if he hadn’t followed a strategy many investors are too scared to try.

Mike Johnson knew the best way to take bigger career risks was to have a backup plan. The ultimate passive income plan? Rental properties. But he didn’t want to put 20% to 25% down on each property he bought, so he started where many investors do—house hacking. Four years later, he’s continued his repeatable house hacking strategy, purchasing a new property every year, living in one unit, and renting out the others.

This has allowed Mike to build a portfolio worth $3.4 million in just four years while buying in B+ or A-class neighborhoods and taking home a healthy amount of cash flow. But he has dealt with his fair share of headaches—squatters, non-paying tenants, and a lot of purple paint. Mike still says investing has been a massive win for him, and you can repeat his same strategy!

Dave Meyer:
This investor bought a property worth one and a half million dollars in a great neighborhood in a major US city with only $35,000 cash in 2024. It is actually possible. Hey friends, welcome back to the BiggerPockets podcast. I’m Dave Meyer, head of real estate investing here at BiggerPockets. And today on the show we’re talking with Mike Johnson, an investor in Chicago. Mike started his investing journey with a $13,000 down payment on a duplex in 2021, and he has house hacked his way into 13 units in just four years now. He’s living in one of Chicago’s most desirable neighborhoods with thousands of dollars in monthly cashflow and the potential for millions in appreciation over the next couple of years. And Mike isn’t doing anything that the vast majority of people can’t do. He’s found deals on the market, he’s putting down as little as possible. He’s done relatively hands-off renovation and now he’s sitting on this incredible portfolio. Just a couple of years later, Mike today is going to tell us how his deep analysis of investing options has led to real estate in the first place. How one of the more extreme problem tenants I’ve ever heard of led to a free rehab for him and why he’s a fan of the extremely long close. So here we go. This is me talking with investor Mike Johnson. Mike, welcome to the podcast. Thanks for being here.

Mike Johnson:
Nice to meet you Dave. Thanks for having me. Excited to be here.

Dave Meyer:
Yeah, so give us a little bit of background. What were you doing when you first got into real estate and how long ago was that?

Mike Johnson:
So I got into real estate four years ago during Covid in 2020, and I was a medical device sales rep that sold devices in the operating room. So once Covid happened, we were restricted access to hospitals, which was a major part of my day. Ironically. This was about the same time where I had no student debt anymore and I had this nest egg that was building. So naturally I started looking at investment vehicles on where do I park my money for the best return long term? And that’s when I stumbled upon real estate and kind of started edging my way to my first deal.

Dave Meyer:
Great. Congrats on paying off your student debt, by the way. That’s always a really good feeling and an important step on anyone’s early retirement or financial freedom journey.

Mike Johnson:
Yeah.

Dave Meyer:
So tell me a little bit about the types of investments you’re interested in because I think people get to this point where you have a little bit of capital, it’s a great place to be. You could choose to go into flipping, you could do long-term rentals, short-term rentals. What appealed to you first about real estate?

Mike Johnson:
I know when some people invest in real estate, they use it as a means to an end to get out the daily grind, quit their W2 and kind do this full time. I have the kind contrary approach to that where I enjoy my W2 job. So I am a long-term buy andhold investor. I’ve done four house hacks essentially at this point in my investment journey. So up to 13 units across four buildings. And for me it’s really just to build that passive income and it gives me security in my W2 job so that I can take more career risks with positions to get new experiences that may entail a pay cut. Whereas if I didn’t have this as a fallback, maybe I would be less prone to taking those risks in my W2, where long-term I think that’s going to pay dividends for higher level roles that require that you have some diversified experiences. And so it’s actually helped progress me in my W2 career and it’s a fun side hustle. It’s your own business, it’s yours, and it’s fun to see it grow.

Dave Meyer:
So set the seed. Where do you live and is that where you chose to invest as well?

Mike Johnson:
It is. So I was born and raised in Wisconsin, small town of 5,000 people, but I moved to Chicago about seven and a half years ago. So I’ve been here ever since I took the medical device sales job. But interestingly enough, my first deal was actually in Milwaukee. We can kind of get into the reason why I chose Milwaukee Market, but then the other three deals have been in Chicago where I currently reside.

Dave Meyer:
Alright, yeah, let’s get into it. I mean if you listen to the show, Henry has, I love the term he dubbed of Lake Effect cashflow, which is just that anywhere in the Great Lakes region, the Midwest there is high potential for cashflow. I think Chicago falls into that, but Milwaukee is always kind of one of those standouts. When you look at lists of places that do offer cashflow, Milwaukee’s always up there. So is that why you targeted it?

Mike Johnson:
It is. So for me, actually, once I got into the BiggerPockets podcast, the books did the free webinars on how to underwrite after I kind of took that in. I looked at the markets, right, a duplex two to four unit in Chicago versus Milwaukee, dramatic difference in the cash that you need to invest. So for me, in my geography, for my medical device sales job, I covered Milwaukee, a lot of rural Illinois and parts of Chicago. So I could technically move and live in Milwaukee and still do my day job, but I would’ve to invest far less cash. And so for me, Milwaukee is one of the most heavily concentrated duplex cities in the country. And so there’s a lot of options. And so that’s why I decided that if there’s any fires that I have to put out in person for some reason I could drive there and be there in an hour 20. So just having that comfort of my first investment property, that’s kind of all the reasons why I chose Milwaukee.

Dave Meyer:
Oh, cool. And did you house hack? Did you actually live there?

Mike Johnson:
So I did a 10% down owner occupancy loan. And it’s kind of funny. So right around when we closed, my geography changed from, they took away all my Wisconsin and they gave me Iowa. So I called my lender because I called my lender and I said, Hey, I got to just be honest with you. Here’s my geography and when it’s shifting in the new fiscal year, I can’t move Milwaukee, but what do I do? And he just said, as long as you change your insurance, he’s like, you had intent when we closed to live there, we’re okay with it, but obviously confirm with us, write us a letter telling us what happened. And I had the documentation right with my GI changes every year, and so I never ended up moving into that property, but I did do a 10% down owner occupancy loan. So that was November of 2020 and the duplex was 128,000 in Milwaukee. To give some context,

Dave Meyer:
All right, nice. 128 grand, you put 10% down. So I assume with closing costs and everything, somewhere around 17, 18, maybe up to 20 grand was kind of like what you needed to get into that deal.

Mike Johnson:
Yeah, 19,000 is essentially what I put into the deal itself had a 2.8% rate. So of course we all know that the rates were very low at that point.

Dave Meyer:
Do you remember what it took to carry that? What was your monthly expense all in?

Mike Johnson:
So my PIT, I mean right now is it’s 9 22, so principal insurance, taxes and interest, the building’s bringing in 1700 a month.

Dave Meyer:
Wow, that’s awesome.

Mike Johnson:
There’s a nice spread on there, and I’ve had the same tenants all four years.

Dave Meyer:
Wow.

Mike Johnson:
Zero vacancy. They’re happy to live there. The units were recently redone when I bought the place, and so it’s been very low lift to kind of maintain that property.

Dave Meyer:
That’s amazing. Wow. Very cool. I just want to re-emphasize what Mike just said to everyone listening is that Mike was able to get into his first duplex for under $20,000 total. And of course prices have changed, but this type of strategy where you’re getting an owner occupant loan with 10% down, even if that went up to two 50, maybe it’s goes from 19 grand to 25 grand, but just demonstrates that these types of lower money down options are still available. I love hearing that your PITI is under a thousand dollars. That three digit monthly payment is a rare thing. Probably pretty hard to find these days. Hold onto that for dear life.

Mike Johnson:
Yeah, nothing’s really come close to that sense that, but it was a great first step into real estate investing and no regrets with the first property at all up to this point.

Dave Meyer:
Why do you think that you’ve had tenants for four years? Is there anything you did in the screening, anything that you looked for that you attribute that success to? Because as we all know, vacancy kills zeal.

Mike Johnson:
So for me, first and foremost, yes, I am the landlord, but I try to just be a human. So I have conversations with them. If there’s any issues, I just say, just text me directly. They didn’t have a very good property management company managing the building before. So I introduced myself and I just kind of talk to ’em and say, Hey, is there anything that you basically want fixed right off the bat? Can we take care of that? And then anytime there’s an issue, I get it taken care of right away. So they trust me. There’s open communication. And so when it comes to resigning the lease, I’ve increased rent two to four years, but I always provide comps. I always give them under market rent, but then they have justification of, alright, if I move, I’m going to pay more per month and then it’s moving costs. And so they’ve just decided to stay every year. And so it’s worked out. It’s just funny because sometimes when you’re looking at getting into real estate investing, you think that there’s all these special things you need to do. It’s just you do the same things again and again. You’re a good person, you take care of issues when they occur, and most of the times over time, the investment’s going to work out just fine.

Dave Meyer:
I love your approach to this. I feel kind of the same way. I’m just don’t overthink this. Just be a good human being, underwrite deals, it’s going to work out, be patient. I think patience is another big one that some people have a challenge with, but hopefully listening to this podcast, preaching to you, real estate’s a long game. Just be patient. It’s going to work out. All right. We do have to take a quick break, but we’ll be back with Mike right after this. Hey everyone. Welcome back to the BiggerPockets podcast. I’m here with investor Mike Johnson. All right. So that was your first deal. What came next for you?

Mike Johnson:
Actually, I closed on the next house hack in Chicago and Northside of the city. This was my FHA loan that I used. So three and 5% down, it was a $750,000 four unit brick building, which is great.

Dave Meyer:
Oh wow.

Mike Johnson:
I got a 2.75% rate on this building, and the cash I invested who acquired the building was only 27,000.

Dave Meyer:
Oh, okay. I was about to say that you really must have gone up in out-of-pocket expenses because you paid 19 grand out of pocket for the first one. If you put 25% down on a $750,000, you’re talking something closer to 200 grand. How did you pull that one off?

Mike Johnson:
Yeah, so this one inherently with the 3.5% down, you’re not putting a lot of cash into the deal for a $750,000 four unit, but I always try to maximize seller credits. So maybe they’re willing to do the repairs beforehand. Sure, you’re capped out, I believe for a two to four units, a 3% of the purchase price is how much seller credit you can do. So I always try to advise that, try to maximize that. That can bring your cash to close as low as possible, and that helps push up your return metrics. So I always try to do that. I don’t know if this is common in every state, but here in Illinois we pay taxes and arrears for property tax. So if I close six months into the year, you get six months of the prorated tax amount at closing. So if you pay 20,000 in annual taxes, you’re going to get $10,000 credit and you don’t actually feel that until you sell the building. So you get all the benefits of lower money down. Oh, that’s awesome. Time value of money and getting return on that money all just because they haven’t paid the current year’s tax bill. And so you just address that so that all those things combined ended up me bringing only $27,000 to the table. And there’s some very interesting stories with this building, and I had some rehabs I also did along the way. But yeah, all in all, it’s performing well year to

Dave Meyer:
Date. Is that one of the reasons you chose to invest in Chicago rather than Milwaukee? Or were you just living there? Why switch markets?

Mike Johnson:
So for me, it’s comfortable with real estate investing at this point. I kind of got my feet wet in Milwaukee. I understand this. I’ve had some tenant interactions. It’s not the first time anymore. And so now I think for me, I don’t like to do out-state investing. I like to do it in my backyard house. Hacking money is finite. So for me, I only have so much of it. So I want to maximize and my money. And even when I did the FHA loan, I always try to go to the maximum loan limit for these. So the building that I have, the units are huge. They’re four bed, two bath, 18 hundreds for a feet. Cool. So a little bit harder to place tenants, but you can ration higher rents. And so for a four unit, you you’re maximizing the rental income. And the reason why I chose Chicago or just the Midwest in general is I always kind of use an analogy with the stock market.
So you have the tech stocks if you invest in Colorado, California, some of these maybe sexier states, appreciation wise, I think of that as a tech stock. You’re going to get a lot of appreciation, but cashflow is hard. In the Midwest, I feel like it’s a bit of both. It’s like a dividend stock, a little bit of cashflow, maybe a lot, but it’s Chicago, you’re paying more for the property, but you get a mix, you get a little bit of appreciation. I’ve had cashflow in all my properties, and so I’ve had success here and I live here, so if there’s any issues, I have eyes on the property, I have all the contacts for maintenance repairs, and it makes it a pretty seamless transition from one property to the next.

Dave Meyer:
What about tenants? Have you had similar ability to retain tenants in the same way we did in Milwaukee?

Mike Johnson:
Interesting enough. So ran into some issues at closing, and this was a hard lesson learned, but essentially for this building, I did my final walkthrough the day before closing, and the top floor tenants were all moving out, right? There’s barely anything in the unit. The seller’s agents, there again, I see them physically moving things out. I believe the best in people good to go. They did the repairs they said they were going to do. Fast forward, I close the next day I come back and the door is locked, like, well, this door shouldn’t be locked. So I tried to open it and I see a piece of paper on the door and it’s a signed eviction moratorium. So during covid you couldn’t evict. And long story short, it wasn’t even one of the tenants that was on the lease. It was a guy that was paying them a few bucks a month to crash on their couch. He’s who ended up squatting in the unit.

Dave Meyer:
And

Mike Johnson:
It took me nine months to go through eviction court. I actually lost the case, by the way. Did everything by the books. I lost the case professional tenant. And moral story is he ended up vacating on his own accord, thank the Lord. But he completely vandalized the unit. He painted everything purple, hardwood floors, tiles, cabinets, appliances what broken windows, crazy vandalism. And at this point I’m like, I’m just happy to get the unit back, but I haven’t gotten any rental income for nine months. And now I see the whole unit’s trash. And like I mentioned, this is a 1800 square foot, four bed, two bath unit, so it’s not like a two one rehab. It’s everything. So that was a wonderful experience, but it was covered by insurance.

Dave Meyer:
Oh my God. Well, I’m sorry to hear that. I have a couple questions. I do think when people think about investing in real estate and get nervous about it, it’s exactly this that people get nervous about. So can you just tell us a little bit how this happened? Did you interact with this person at any point and talk to them about what their intentions were or how did this whole unfortunate situation unfold?

Mike Johnson:
Yeah, so I mean, in retrospect, don’t ever close unless you verify the tenants are out, right? That’s a hard lesson learned in retrospect is 2020. But once we got to the point where somebody’s living in the unit, I don’t know who it is at this point, I eventually reach out to the previous owner of the building and I said, Hey, do you have any idea? Can you reach out to the tenants and see who’s maybe still staying there? Do you have any insights? And it was through actually the seller and the seller’s agent where I found out that it was somebody that was paying the previous tenants to crash there essentially. And so I found out his name, I got his contact information, and so I made contact, and of course you want to try to solve things without involving an attorney. So I tried offering him cash to move. I tried to find him subsidized housing. I talked to people in Chicago and is there any place that we can help kind of relocate him? I even offered money to the previous tenants to see if I could pay them to have them move in with them for a few months. He wasn’t interested in any of this. And that’s when I kind of decided that I’m going to have to go the legal

Dave Meyer:
Route. And so you were just going back and forth with him being like, what about this? What about this? And he was just like, nah, I’m cool. I’m staying here.

Mike Johnson:
Yeah. I even offered to say, Hey, you can’t afford to live here alone, right? It’s a four bedroom unit, but what can you afford? And so I even offered, I will place tenants in the other bedrooms so that you can stay there, you don’t have to move, you can afford it. And then it’s rented by the bedroom. I’m getting the full rental income. And I thought that was maybe a good solution, just wasn’t interested. He led me along to make it seem like he was thinking about it, but I found out at the end of the day, this isn’t the first time this guy’s done this. It’s funny how they can afford a really good attorney, but they can’t afford any of the rent. So from what

Dave Meyer:
I’m hearing, you were clearly sort of the victim in this situation. How did you lose that case?

Mike Johnson:
So accepting money was the first mistake. He said, Hey, I can afford to pay you partially right now, I accepted the partial payment, but the moment you accept money from him, it’s no longer a squadron. He’s a paid tenant, right? Regardless of if they’re paid in full or not. Essentially I did everything with serving him the notice given the court date, et cetera, correct. Did everything correctly. The reason why I lost the case is because he had a good attorney that brought up case law.

Dave Meyer:
That is rough.

Mike Johnson:
Eventually in my mind, I’m like, well, this is vandalism. It’s not really covered under my policy. But since it was so bad, obviously it was more than just wear and tear. So they ended up covering the entire rehab, which was around $55,000. Now the unit, I pretty much replaced everything. So now I’m getting $750 more a month in rent. I get better tenants because it’s completely rehabbed. And those tenants have been there for two years now. And so it was a crazy experience. It worked out in the end, but not knowing if it was going to work out, that was probably one of the most stressful times in my life, to be honest.

Dave Meyer:
I’m sorry to hear that. That’s crazy. Well, I’m glad it worked out long term. I always ask people this because inevitably every real estate investor has, maybe not to this extreme, but a story where they lost money, something unfortunate happened, it was a pain in the butt, and oftentimes it happens earlier in your career, still learning like this. So were you ever considering giving up or sort of thrown in the towel?

Mike Johnson:
It crossed my mind because once I lost the eviction case, that’s where it kind of started to sinking that this could be another nine months. And with Covid, nobody really knew at this point what it was and how long it was going to last, how infectious things were. And so in my mind, I’m like, if this drags on another nine months, I mean, I’m paying out of pocket for stuff. But retrospect, it’s my most profitable building now at this point where the PITI think is 5,300 a month, and it’s bringing in 91 50 a month.

Dave Meyer:
Oh my God. 91 50.

Mike Johnson:
Very nice spread.

Dave Meyer:
Okay. That’s

Mike Johnson:
Awesome. And I rehabbed the one other unit where I put $50,000 into our unit. So one year I didn’t buy a property, and so I, nothing penciled out. So I spent 50,000 on a rehab for one of the units, but now I have all newly rehab units, slow repairs, great tenants, and the spread is really nice. Okay, wow.

Dave Meyer:
Well, you mentioned at the beginning of the episode that you had four deals. We’ve talked about two at Duplex in Milwaukee, and next we talked about your fourplex in Chicago. We do have to take a quick break, but I want to hear about what you’ve been up to more recently right after this. Hey everyone. Welcome back to the BiggerPockets podcast. I’m here with investor Mike Johnson talking about his portfolio between Milwaukee and Chicago. We’ve talked about two of the deals so far, but the third one, what did you do after that four unit with the unfortunate squatter situation?

Mike Johnson:
So at this point, I had the bug and I’m into real estate investing and won a house hack. Again, I’m starting to look at different neighborhoods. And so I end up landing on a three unit property in a west side neighborhood of Chicago. So this one wasn’t a brick building, but ultimately ended up doing a 10% down loan owner occupancy. I moved into the top floor unit and I got a 3.87% rate. Nice. So rates are starting to go up at this point, right? Still competitive market. And for this deal, I ended up putting about $51,000 into this

Dave Meyer:
Deal.

Mike Johnson:
So by far the most I’ve put into a deal at this point, but I better understand underwriting kind of the little tricks you can do to minimize cash to close. And so that was deal number three.

Dave Meyer:
Nice. Okay. And it worked out hopefully. No squatters.

Mike Johnson:
No squatters, but I will tell you there’s been tenant a issues. No. Oh

Dave Meyer:
Gosh.

Mike Johnson:
I had a litigious tenant fix some injuries. Whoa.

Dave Meyer:
And

Mike Johnson:
It was making threats. And so at that point I said, I am not well equipped and suited for this. I don’t want to make any errors. And so I just decided, I hired a property management company that is well known in the Chicago land area. Him and his team has done a great job, and they have attorneys, they have people that are going to do things the correct way and document things. And so ever since they took over, the relationship is good. There’s no issues. But I think they see a private landlord and they think that they kind of take advantage of the situation, and I was living in the unit so they could gain access to me at any point they see me. And so one thing that I just wanted to do is just separate myself from the tenants. I don’t want to interact and I don’t want to say or do anything incorrectly that’s going to affect me in the court of law in Chicago. And so I can still self-manage the other properties, again, have good tenants, very low vacancy. And so it doesn’t really require much work on my part, but very happy that I offloaded this one property.

Dave Meyer:
So the reason the other ones though is because you’re not living there and it’s just like you have sort of that physical separation from tenants that makes you better able to manage.

Mike Johnson:
Right? I am not quite ready to forego the seven, 8% of gross income. And I’ve also, I used to do all the showings myself, but now I use an agent. So I don’t pay property management, but I will pay an agent to do the showings for me. So my portfolio is honestly very, very hands-off a couple hours a month maybe. But I have contractors that I trust, plumbers, maintenance people. So that search is over in the beginning. You’re trying to find a reliable person, and that’s stressful. But now that I have a team, it’s very low stress, and so I’m willing to pay a little bit more the cashflow. And so I’m happy to pay the price to be hands off and focus my attention elsewhere.

Dave Meyer:
That’s great. I mean, I just want everyone to hear how this just methodical approach Mike is taking can build a portfolio that’s super exciting. I mean, no offense by this mike, but you’re not doing anything super flashy. No. It’s like you’d bought a duplex, you placed great tenants, you have no vacancy, you bought a fourplex, you dealt with a lot of the headache. Now you’re generating amazing cashflow, yet another one where you learn to adapt and rather than dealing it with yourself, you’re sort of offloading the stuff you don’t want to do. And now that’s going to cashflow. And this is over the course of what, three or four years at this point?

Mike Johnson:
Yeah. I mean, in less than four years, I acquired, I think it’s valued at 3.4 million in properties and yeah, I think it was in three years, in nine months. So it’s not like this took me a long time to do. And to your point, it’s rinse and repeat the same house hacking method, and as you gain experience and rates go up, my most recent deal was a few months ago and I had a 6.5% rate, but I still was able to close in a class neighborhood. And so it’s just kind of funny following the investment journey. It’s like, okay, COVID interest rates, everything, pencils, and then as rates go up, I’ve still managed to make things work and I haven’t done anything. To your point, really outside the box,

Dave Meyer:
I just want to point out to everyone that these types of deals that Mike’s doing do still work today. The numbers might be a little different. I don’t know if you’re going to make the same exact level of cashflow, but if you’re trying to inherently just improve your financial position, these types of house hacking strategies where you move from one to the other, this is just a time tested thing that works in pretty much every type of investment environment. Just a couple of weeks ago on the show, we were talking to an investor who started doing this in 2005 and did it through the 2010s during a totally different type of environment. This is just one of those types of approaches to real estate investing that works no matter where you’re coming from. So just want to encourage people, even if you’re thinking, Hey, yeah, these were low interest rate environments, that this is still something that’s possible. And it sounds like Mike, you can tell us about how it’s still possible with a deal you recently did within the last year or so.

Mike Johnson:
Yeah, within a few months ago, it closed on this one in August of 2024. This deal was a little bit different. This was a $1.5 million four unit brick building, three units in the front with the brick coach house in the back, but it’s in Wicker Park, which if you know anything about Chicago, this is a very nice neighborhood. So it’s an A class neighborhood, very nice buildings, very walkable. And I use the new Fannie Freddie 5% down loan, so very highly levered, but conventional loan. And so I got a 6.5% rate, but this one I had to get very creative because I only ended up putting $38,000 into this 1.5 million building, which is kind it crazy when you think about that. That’s less than I put in a building that I paid 6 94, which was the three unit. So for this one, again, with 5% down, of course you have that again, maximize seller credits. So 3% on about 1.5 is around $43,000 in seller credits. I got on top of that. I think this is another popular real estate strategy that people use, but I always close in the first or second of the month.

Dave Meyer:
Oh, I love this. Yes,

Mike Johnson:
Because this building brings in almost 13,000 a month in income. So if you have two months without a payment, you have a $26,000 cushion for future repairs, anything that maybe you need to do. And it’s lower cash to close. And just the last thing was the tax preparation. Expensive building, pay a lot of taxes close the middle of the year. So I got all that tax credit as well. That lowered my cash to close, which I only had to bring, I think $12,000 I think to the closing table. But my all in with earnest money was 38 on this building.

Dave Meyer:
Wow. Unbelievable. That’s super cool. I just wanted to explain the thing you said about doing the closing on the first or second of the month. This is just such an easy way to build a cash reserve and lower your expenses. But basically, when you take out a traditional mortgage, let’s say you close on May 1st, you’re not going to pay for May. You’re also not going to pay for June. Your first payment will be due July 1st, and that might not sound like a lot, but like Mike said, if he’s generating 13 grand a month in May and June, that’s $26,000 he has without his biggest expense, you’re still going to have other expenses. You’re going to probably still have financing. And depending on the state of the building, you might have some turnover costs or upgrades that you want to make, but you’re basically taking that profit that you’re just sending to the bank and never going to see again, and you’re pushing it off for two months.
And of course you’re still going to have to pay that money back. That’s how a loan works. Just the mechanics of running a business, this is a really fortunate way to do it. So anytime you have the option or some flexibility about when to close on a property, just do it as earliest in the month that you can. First is great, second is good. Even the first week, you’re really going to give yourself a big benefit there. Obviously when you close, it’s the same amount of capital, but you won’t need to, for example, set as much aside for a cash reserve.

Mike Johnson:
And the tenants here are people that are working professionals, good jobs, high income, and just no issues. I mean, so the tenant pool is great.

Dave Meyer:
I love it. You deserve it, man. After two rough ones with tenant situations that weren’t really of your own making. Good to hear that you got a relatively calm one, but it sounds like honestly this kind of deal, you did a lot of creative stuff and kudos to you for doing your research. You learned the tricks. You learned some of the little hustles that you could do on each deal to sort of reduce the amount of money that you’re putting into it, but realistically, this kind of deal, people could do this deal. This, I think serves as a model for people listening of a great deal that you could execute on today.

Mike Johnson:
A hundred percent. And there’s two good things too. So with an FHA, you have the self-sufficiency test, which makes it really hard sometimes to have enough rental income to pass that test and even do an FHA loan. The nice thing about this 5% down Fannie Freddie loan is it’s double the rate limit. So you can buy twice as expensive of a property and there’s no self-sufficiency test. So all of a sudden you can afford to buy in these A class neighborhoods where I’m in, whereas an FHE loan would never pass here because the buildings are just too expensive. So it actually opened up the neighborhoods that I was coming to because I think a lot of people don’t want to house hack, and they’re like, I don’t want to live in that neighborhood, which it’s valid, it’s personal preference, but this new fanny, Freddie 5% down loan, it gets you into the eight class neighborhoods in most cities. And so, yeah, I was able to capitalize on that pretty much right as that loan package came out. So maybe not as common knowledge and there wasn’t as many people utilizing it yet, but it’s a great option.

Dave Meyer:
That’s a great tip. Yeah, I didn’t even realize that They don’t have the self-sufficiency test. That’s a really cool tip.

Mike Johnson:
Yeah, it’s really nice.

Dave Meyer:
Awesome. So what’s next for you, Mike? It seems like you’re sort of doing this methodically. Are you just going to keep trying to do these kind of small every year, every two years?

Mike Johnson:
So the thing about me maximizing my leverage on these properties is my DTI is pretty capped out right now.
So I may need to cool it for a year or so, but so one of two things. I think I may do the live and flip strategy where I buy a condo kind of by the lake in Chicago, and then I live there two to five years, do a rehab, and then you can sell that within five and not pay taxes on it. So still kind of use the tax advantage method of real estate that I’m familiar with or look into maybe just renting because this unit that I’m in rents for more than what I’d be willing to live in myself. This is a three bed, two bath, and I’m by myself, so I’ll probably move into a smaller unit, rent this out, and then I could maybe get into a five plus multifamily and kind of start maybe scaling up a little bit, doing some larger deals.

Dave Meyer:
Awesome, man. Well, congratulations. And just want to reiterate, this is the example I always give where people say, is your primary residence an investment? Clearly, you’ve shown us, Mike, that yes, it can be you’ve managed to acquire millions of dollars worth of real estate just by using your primary residence and even going forward. I love your thinking because yes, at some point in almost every investor’s career, your debt to income ratio becomes a challenge. You have to cool off, and that’s okay. It’s totally fine. I’ve gone years without buying deals for sure. But also Mike, thinking of good ways to do it too. I love that you’re flexible enough to think about renting. I’ve also done that. When you do the math, sometimes it just makes sense to rent or do a live and flip. That’s what I’m doing right now. It’s just another good way to make money. Alright, I think that’s all we got for today. Mike, thanks so much for joining us. Congrats on all your success and for navigating some pretty tricky tenant situations. We appreciate you being here.

Mike Johnson:
Thanks for having me. This was fun.

Dave Meyer:
It really was. And everyone remember, we are always looking for more investors like Mike to feature on the show. If you’d like to tell your real estate story to the BiggerPockets audience, you can apply at biggerpockets.com/guest. Thanks again for listening. We’ll see you next time.

 

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Making $2,400/Month Cash Flow and Getting Rich Slowly with “Boring” Rentals

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Want the time-tested investing strategy that will make you rich 10, 20, or 30 years from now? Despite market uncertainty, buying rentals is still a savvy move if you’re playing the long game. That’s what today’s guest is doing—using a mix of steady cash flow and appreciation to reach financial freedom!

Welcome back to the Real Estate Rookie podcast! After a bad experience with a financial advisor, Anthony Finger decided to take control of his investments. He started with everyone’s favorite “boring” investment, index funds, and before long, he had brought his slow and steady approach over to real estate—buying seven long-term rentals over seven years. Today, his real estate portfolio brings in $2,400 in monthly cash flow, and Anthony has already built up over $600,000 in total equity!

The conservative approach might not be as “sexy” as Airbnb or as exciting as flipping houses, but it’s a surefire way to build wealth with real estate. Tune in as Anthony shares the perks of investing in your own backyard, the benefits of buying turnkey rentals, and the secret to buying new construction at a discount!

Ashley:
Investing out of state can be scary, but we will break down the steps to make your investment a confident one.

Tony:
We’ll also cover what exactly you need to account for when analyzing a deal, along with determining the best partnership for you.

Ashley:
Okay, so we got our first question on rookie reply today. This question is, when looking at the closing disclosure and you see that rent will only cover the taxes and mortgage, if the property management fee is waived for a year, is that worth it? That would mean that the next year after the property management fee is not waived, then you’re only getting about $50 in cashflow. Would that be worth it in a not so appreciating market? So here’s some things to consider for this question. The person row, absolutely nothing else is factored in such as Cap X improvements like roofs, HVACs, usually we like to save a percentage of that, so that’s great that they called that out. They also noted this is for a turnkey provider who is providing the property management who is saying they will waive one entire year for the rental, which could be increased by only a certain amount due upon the next lease renewal. This is also a single family home in the Midwest. The rent cannot be increased right away, so I would only receive $50 cashflow after the insurance taxes a mortgage. This would not include any maintenance. Pretty much the only reason why would be anything more than $50 is because the property management fee is waived, but that’s only within the first year. Okay, so to kind of sum up this question is, is it worth it? Should they purchase this property? Tony, should we start out with kind of explaining what a turnkey provider is?

Tony:
Yeah, it’s a great call. So turnkey providers, and I believe we recently did a reply specifically about turnkey, but turnkey providers are companies who go out there, they find distressed assets, they fix them up, they place sentence inside of them, and then they sell those fully leased up units to other investors. Those are called turnkey providers because basically on day one it’s turnkey. You don’t have to do anything to it, any work, and you can really just kind of get started cash flowing on day one, hopefully. So that’s what a turnkey is. But sometimes the downside with turnkey, which is what I think we’re seeing in this situation is that your cashflow, depending on the property, depending on the market, depending on the provider, can get a little squeezed, which is 50 bucks is I think is what we’re seeing here.

Ashley:
So the next kind of question here is, well, I guess we should kind of go over expenses. What other expenses should be considered? So they mentioned that any kind of savings for CapEx, such as roofs, avac, HVACs, anything like that is not included in their numbers. So for me, a general rule of thumb is how old the property is, or if it’s been recently remodeled, saving a certain percentage. So if I’m buying a home that was built in the early 19 hundreds, hasn’t had a lot of updates or remodeling, I’m saving at least 10% to cover those improvements on the property. If it was completely remodeled, I’m may be saving 5%. Some situations, like if I did the remodel and I updated a lot, then maybe it’s only going to be knocked down to 3% of whatever the rental income is each month. But you want to factor these things in along with the maintenance.
He had mentioned any maintenance cost would basically take away that $50 of cash flow. And if you have ever had a handyman or a service tech come out, usually just for them to come out to your property is more than $50. So yeah, the maintenance, maintaining the property, so this is a single family home, so most often you’re going to have the tenant take care of the lawn care, the snowplowing, things like that. But there could be pest removal that you may have to cover or pay for depending on what the lease agreement says too. Tony, is there any other expenses that you would add? I think the last thing I can think of is bookkeeping expenses. Unless your property management company is taking into account those expenses.

Tony:
Yeah, I feel like you kind of hit ’em all right. At a business level, I think you’re right, bookkeeping tax preparation and tax filing tax strategy, if you have an LLC, any fees associated with that. So there’s always going to be some additional cost. So I mean is $50 in cashflow a lot? Obviously not. I don’t think anyone’s going to retire or get super excited off of $50, but I think the one thing we don’t have from the person answering or asking this question is why are they doing this? They’re in the Midwest. So my assumption here is that they’re not hyper-focused on appreciation. Typically in most Midwestern states, those aren’t the states that are known for appreciating. They’re typically known for better cashflow. So if you’re going into the Midwest with the focus of getting cashflow, but yet you’re only getting $50, I can’t imagine what your investment into this property is, but it would has to be a pretty small investment for that 50 bucks per month to be any sort of reasonable return on your investment.
So just from that information, that doesn’t seem like a deal to me. And the other thing too actually that I’m curious about is for the PM two waive their property management fee in the first year, obviously it’s the turnkey provider, so they’re getting money upfront just from the sale of the property to this investor. So I get that piece, but I also wonder is there any sort of long-term contract that this investor is signing up for? Because I would assume that most pns probably aren’t just going to manage for free without any sort of security that they’ll have that second year, that third year potentially. So I would think I would really just review that to make sure, because what happens if you get into year two and that first year was kind of shaky and you’re like, man, I really did not like working with these guys, but now you’re locked in for another two or three or five years. So just a couple of things that are running through my mind as I hear this question.

Ashley:
Yeah, I definitely agree. I don’t think this sounds like a great deal, especially if you’re not getting appreciation. Maybe you need this property for the tax advantages and that’s all you care about is you want to be able to write it off, then maybe it could work for you. But I think if you’re not getting cashflow or you’re not getting appreciation, but definitely do your research on that and see if there is an appreciation play. Also, when can the rents be increased on the property or is there any kind of value add that you could do? For example, turning the dining room into another bedroom to actually increase the revenue that way? Could you rent out the garage for storage? So see if there’s any other revenue potentials, but I would say this probably isn’t an investment that I would want to do. One thing to keep in mind, if this is the only way that you can get started is by going through turnkey provider, I would go and talk to other turnkey providers and compare what their closing disclosures look like, compare what are the costs that are associated with using them, what are they charging, things like that.
So you can compare the different turnkey providers to, okay, we have to take our first ad break, but we will be back shortly.

Tony:
All right guys, welcome back. We are here with our next question in today’s rookie reply. So this question says, BP community, I’m entering the real estate investing world through partnerships. Ding, ding, ding. Alright, Ashley and I love talking about partnerships. Myself and my buddy, we’ve been friends for more than 15 years and we decided to get into real estate through a multifamily house hack. We plan on pooling our money for a down payment and closing costs. If one of us can qualify for the loan amount, then we’ll choose to only have one person apply for the mortgage. So the first question is, how does the other claim ownership on the property? My understanding is that this can be done by keeping the property in an LLC and being 50 50 partners in the LLC. Are there any other ways to claim ownership without the LLC?
What is a better way to go about this? Question number two, if we plan to buy a second property one or two years down the road, how would lenders approach the underwriting? And then question number three, do we need to watch out for any pitfalls in the future for scaling our portfolio together or separately? Lots of good questions here Before I think me and Ashley jump in. We got to give a nice plug here for our book on real estate partnerships. So for those that don’t know, Ash and I co-authored a book with BiggerPockets called Real Estate Partnerships, and you can head over to biggerpockets.com/partnerships to pick up a copy of that book. So Ashley, let’s hit the first question here, or first part of this question. If one person is on the mortgage, how the other person actually show ownership of the property?

Ashley:
So for this, I think there’s different ways that you can do it. We can kind of go into that as to how to structure is it should be in your personal name, should be in an LLC joint venture. But the way that you own the property is if you are on the deed. So you could not be on the mortgage, but you could still be on the deed. So whether you have ownership of an LLC or you have a joint venture agreement, or it’s your personal name, you need to have your name on the deed or that joint venture agreement saying that you are own part of the joint venture that owns the house. Okay, so that is how you claim ownership is having a right to the deed of the property, making sure that you’re on the deed. In this situation, this property is a house hack that they are doing together.
There’s one thing you should be cautious of. When my sister was doing her house hack, I couldn’t give her money for the down payment and say that she had to pay me back. You have to use your own funds or it has to be a gift from somebody and it has to be a family member usually. So just because you’ve been friends for 15 years, I’m not sure a standard FHA loan or conventional loan would allow if this is your primary residence for the funds to be provided by somebody else to actually close on the property, they’ll want to verify. Tony, do you know if that’s true for conventional or is that just an FHA rule that you have to use your own funds for a down payment or a gift from a family member?

Tony:
And guys, when we say conventional, we just mean anything that’s backed by Fannie and Freddie, right? The big, they’re not technically government entities, but the people that insure a lot of these mortgages that are going out to the general public. I think one of the things you made a phenomenal point ash about the mortgage and the deed being different, just one thing because they also said that, should we put this in an LLC? Just word of caution, or maybe not word of caution, but just something to think about. Typically when you’re doing a house act, the reason that people like to house act is because of the type of debt that you get access to. And Ashley just talked about that I like using an FHA, but with those types of debt, typically it’s got to be in your personal name. So even if you guys created this LLC, you can still a lot of times run the income and the expenses through that entity. But the actual deed would show Ashley and Tony, right title would be us jointly on that deed together. So I don’t know if the ownership in the LLC is necessarily going to impact the ownership claim on this property.

Ashley:
And I guess really you have to figure out how you want to finance the property because that’s going to really play into what you’re actually able to do. So if you’re both doing the house hack, if you both want this to be your primary residence, which I don’t remember, does it say they’re both to live in there?

Tony:
I believe so. It seems that way.

Ashley:
Yeah. So if you’re both living there, then I don’t see a problem with you both splitting the down payment, you both going onto the deed, you both being, you can have one person on the mortgage. So even with my sister’s house hack, I’m on the deed, but I’m not on the mortgage and I gifted her the down payment fund. So you can definitely do it where you’re on the deed and you’re not on the mortgage with one of you if one person qualifies. And I really like that strategy that you’re going to try and do it that way. Just make sure you have some kind of agreement where it states that you both are responsible for the mortgage because whether it’s you or the other person that’s putting the debt in their name, ultimately if someone doesn’t pay you, say the mortgage is in your name and your friend or whatever stops paying, it’s going to be you personally that the mortgage is going to go after and say they foreclose on the house. You’re both losing out on the house, but it’s going to affect your credit score and hurt your credit if mortgage payments are missed. So make sure you have some kind of protection or security against that too, or you really, really trust the person.

Tony:
And I think that kind of ties in nicely to the second part of this question. So it’s like if we plan to buy a second property one or two years down the road, how would lenders approach the underwriting? So like Ashley mentioned, if one person is on the mortgage, both of you’re on the deed, one person’s on the mortgage, both of you’re on the deed. When you go to get that next property, even though both of you’re on the deed, only the person who’s on the mortgage only their debt to income will be impacted by this first house S act. So if Ashley and Tony buy a duplex together, but it’s just Ashley who’s on the mortgage, we’re both on the deed. When we go to buy that second property, my DTI is going to show zero in terms of mortgages and Ashley will show the house act that we have together.
Now, say both of you go on the mortgage together because maybe you can’t qualify by yourselves when you go to buy that next property, since both of you’re on the mortgage, and actually check me if I’m wrong here, but since both of you’re on the mortgage, underwriting doesn’t split that in half. If the mortgage is 2000 bucks, it doesn’t say, okay, Ashley’s liable for a thousand bucks per month and Tony’s liable for a thousand bucks per month. It says Tony’s liable for 2000 bucks per month and Ashley’s liable for 2000 bucks per month, even though both of you are sharing that cost. And the reason why is because the lender who’s doing the underwriting, they’re like, well, we don’t know who this other person is, right? Even though both of you guys technically apply together, they’re like, we don’t know who this other person is. You are always responsible at the end of the day for making sure that mortgage payment is made. So that’s why it is very, it’s helpful if you guys can get approved individually, otherwise you’ll both get double dinged for those mortgages.

Ashley:
Yeah, that’s 100, correct. So it kind of stinks because now that’s being accounted against both of you. So if you do go and get another property, they’re looking at it as you both are responsible for $2,000 each instead of a thousand and a thousand. So it can affect your debt to income on the property. And then the last question here is do we need to watch for any pitfalls in future for scaling our portfolio together or separately? So the thing that I would want to have in place is some kind of operating agreement or joint venture agreement. Even if you are doing this in your personal name, have some kind of agreement in place where you are writing out what happens in the future. And Tony, I always use what you have done as an example, as in when you take on a partner, you put in there a five year exit plan. So do you want to explain to everyone what that is and how this person should use this to protect themselves from many falling outs or pitfalls?

Tony:
Yeah, the five year exit plan I think is one of the smartest things we’ve done in our real estate business in terms of partnering with other investors. Again, part of the way that we built our portfolio was finding really good deals and then soliciting those deals to folks that we felt might be good partners for us. And a lot of these people we’d never met before, these are people who we would meet in different places through different means. So even though we had a good initial conversation, who knows if down the road we would enjoy continuing to work together? So that was the genesis of the partnership kind of five-year clause. So basically what it states is that at the end of the fifth year of the partnership, the default option, the kind of default action that needs to be taken is that we sell the property. The only way that the cell is avoided is if both parties, both partners agree to extend for another year and then 12 months later the same thing happens. So every year, thereafterwards, we have another opportunity to reevaluate that partnership to see if it makes sense to move forward. We actually haven’t needed to leverage that at all yet. Most of our partners that we have are actually pretty solid people. But it is good to have just in case things do go south, there’s an easy exit for both of you.

Ashley:
Rookies, we want to thank you so much for being here and we are so close to hitting 100,000 subscribers on YouTube. We would love it if you aren’t subscribed already, if you would head over and find Real Estate Ricky on YouTube and follow us. We have to take one final ad break and we’ll be back after this. Alright, let’s jump back in. Okay, today’s last question is, Hey all I am just getting started and in my first deal I offered more than what the property appraised for. What should I be looking at when trying to consider an appropriate offer, especially if I can’t see the property since I’m investing out of state? Okay, making an offer. How do you figure out what the property is worth and then to find that disappointment of the property not appraising. So let’s kind of work through this process here.
You put an offer on a property, the offer is accepted. Usually there will be a contingency if you’re using financing that you can back out of the contract if the bank will not lend you the amount that you stated you’re borrowing. So if you put in your contract, you’re borrowing, you’re doing 80% conventional financing with the bank. If the bank says we’re only going to lend you 70%, that can be sometimes a way to get out of your contract and the contract falls apart. There’s also a spot too that your agent could fill an interest rate. So if the interest rate, if you put has to be below 6%, obviously it has to be something reasonable or else the seller is probably not going to sign it. But if all of a sudden overnight interest rates jump to 10%, you could say, look, the bank can no longer give me that rate.
I am going to get out of the deal. So this can also go for what the property appraises for. So the bank goes and does an appraisal on the property to see its value, and then it says, okay, it appraised for a hundred thousand dollars. We are doing a conventional loan of 80%, so we will lend you 80,000. Well, if the bank says, you know what? It only appraised for 90,000, so we can’t give you that 80,000, that’s when you have to make the decision, are you going to come up with the rest of the money? So make a bigger down payment on the property? Are you going to try to renegotiate with the sellers of the property or are you going to back out of the deal? So it looks like in this situation, they must have backed out of the deal because they’re wondering what to do going forward to actually figure out what an actual appropriate offer is. So Tony, the first thing that I would’ve done in this situation is dispute the appraisal. At least attempt to do that, dispute the appraisal, try to renegotiate with the sellers.

Tony:
Yeah, I agree with you 100%. And I think both of us have had experiences where appraisals came in lower than what we had anticipated. And yeah, if you believe that the appraisal was wrong, then yeah, it is very reasonable to go out and say like, Hey, here are some comps, some comparable sales that I found that I feel are better matched than the comparable sales that the arai found. Because sometimes you guys, appraisers are coming from, maybe they don’t know the area as well, right? Maybe they’re coming from somewhere a little bit further out. They just put this appraisal, they were still on work, whatever it may be, but they don’t know that area incredibly well. And sometimes you might know that area better than the appraiser does. So if you can point out, hey, you picked a comp that was three miles away that sold for less, but here’s one that sold more recently, that’s two miles away.
Now you’ve got some ammo to maybe to really contest that appraisal. And one other thing say that the appraiser says, Nope, my appraisal is perfect. Nothing here needs to change another route. You can always go down, and this is obviously a little bit more of a nuclear option, but if you change lenders, and I don’t know if this is law or maybe just best practice, but lenders can’t use the appraiser appraisal from a different lending institution. So if you change lenders immediately, there has to be another appraisal that gets ordered. Now if you’re working with the seller, typically sellers don’t want to push back closing, but if it’s, Hey, either we’re going to close a little bit later or we’re not going to close because the appraisal, they might be a little bit more willing to working with the different lender. So just another way to put some more pressure on the appraising process to make sure it gets done the right way.
Ashley, I think one other thing that you mentioned as well that’s super important is that sometimes a low appraisal can work in your favor. You just have to have the confidence to be able to leverage that as a bargaining chip with the seller because it sounds like maybe you did run your numbers and maybe it did make sense at the purchase price, so it was a good deal. So that doesn’t necessarily mean the value isn’t there, but if you ran the numbers, you liked the deal, everyone agreed, then maybe it is a good deal. But maybe it’s just the fact that the appraisal didn’t come back where you wanted it to. So I would go to the seller and say, look, Mr. And Mrs. Seller, I’m very motivated to buy your home. I love it, the numbers work. However, if I ran into this issue with my appraisal, chances are the next buyer is also going to run into this issue with their appraisal.
So what is in your best interest? Is it giving me the 10, 20, $30,000 discount on the purchase price so we can still close next week? Or do you want to go through the process again of taking the listing down, relisting it, having another buyer who can hopefully get the right appraisal? Maybe they do, maybe they don’t. And you’re in this exact same position, another 60 or 90 days from now. And a lot of times you can get sellers who, if they’re motivated enough, maybe they will come down and meet you at the price that you needed, or at least maybe give you, Hey, let’s meet in the middle. But I think you’ve got to be confident enough to ask that question. If you’ve got a good agent, I think they should be able to negotiate that conversation for you as well.

Ashley:
Yeah, and that kind of leads into the next thing I wanted to bring up is building a team. It mentioned this person is investing out of state, so they can’t actually go and see the property, whether it’s an agent or you need some kind of boots on the ground person that will actually go into the property and be your eyes, but also take a million pictures of the property, take video of the property. We’ve had Nate Robbins on before on the podcast, when he goes to a property, he takes the pictures like you’re walking through the house basically as he takes a step, he’s taking a picture and turns around, each room takes a picture of the doorframe, so you’re entering a different room and then all of that is collected and it’s sent to his partner and then his partner builds out the scope of work in the rehab from just the picture.
So it definitely can be done, but just kind of getting an idea of this is what we should offer on the property based on what you’re seeing. And he always likes to do photos because it’s easier to zoom in on things than it is on video. But they like to have the video too, to kind of get the flow of the house as you go through it. And they do that for the interior and the exterior of the property too. So whether that’s a property manager that you find in the area that you say, Hey, I want to find a property, I want to do this through you guys. Do you have someone on your team that could walk properties for me? Maybe you do it for free wanting your business, or maybe they’ll charge a flat fee, which is definitely worth it to have the boots on the ground.
You could go to the BiggerPockets forums, you could post hate anyone in this area. And it’s not like you really have to, I guess, say trust the person. It’s not like they’re entering into your property, they’re going with your agent or they’re going along and seeing these properties looking and taking pictures and giving you their feedback. And if it’s not super detailed, then hey, you can find someone else to do it too. But I think there’s a lot of people eager to learn who would love to just go and walk houses and work with another investor to see what they’re looking for, things like that. I guess, Tony, the last thing piece I would add to this is what is the cost of a plane ticket to go and see this property? Sometimes paying 200 bucks for a round trip, airfare could be worth it to go and set up a whole bunch of properties, showings in one day or one weekend or something to fly out there and to actually look at them.

Tony:
I couldn’t agree more. Right, and obviously there’s value in long distance investing and building that team, but if it makes sense, I think there’s always value in kind of getting eyes on it yourself as well. But I guess just one last thought for me as well actually, because the question says, what should I be looking at when trying to consider an appropriate offer? You can get a good guess of what you think the property will appraise for as you can go through the process of finding comparable sales yourself, but appraising a property is part art, part sign, so it’s virtually impossible to know down to the dollar what the appraisal will come back at. So as long as you, the investor, the buyer, do your due diligence upfront, you’re using tools like the BiggerPockets calculators, you’re getting quotes from insurance agents to make sure you know what your insurance is, you’re shopping around to get the best debt that you can. As long as you’re controlling all of those things, then I feel like you are following the right process to make an appropriate offer. But don’t feel like you did something wrong simply because the appraisal didn’t come back where you wanted it to. So just a bit of a mindset shift for the rookies that are maybe experiencing a similar issue.

Ashley:
And if you want help analyzing your deal better go to the BiggerPockets calculators because they show you exactly every single expense that you should need. So if you do think it is a deal analysis thing and not actually an appraisal thing, that’s just another resource that you can kind of go, because the numbers don’t lie. As long as you’re verifying what the numbers are, go by that, and that’s what you should be making your offer on, not what you expect the property to appraise for, unless you want to go and you want to add value and then you want to flip it or you want to refinance it. But just if you’re purchasing that property, like Tony said, the appraisal could not be correct and an appraisal, it’s an art form. You could have three different appraisers go to the property and each give you different numbers on it.

Tony:
Three different, yeah.

Ashley:
Okay. Well, we have a special announcement. We have a rookie newsletter that is being sent out every single week. Tony and I writing it ourselves, and we’re trying to give you guys so much value, some reading material and some fun things to learn about real estate investing and what’s going on in the news so you guys can stay up to date as real estate investors in today’s markets. You can head over to biggerpockets.com, hit the get started tab and you’ll see newsletters and it’s got a little new shiny button next to it, hit on newsletters, and you can subscribe right there to the Rookie Newsletter. We can’t wait to hear you guys feedback. Also, if you want to respond to that email, it gets sent right back to Tony and I. So any questions or any feedback you have on the newsletter or things you would love for us to write about, please let us know. Well, thank you so much for joining us on this week’s Rookie reply. If you have questions, head over to the BiggerPockets forums, submit your question there. I’m Ashley. And he’s Tony. And we’ll see you guys on the next Real Estate Rookie podcast.

 

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My BiggerPockets forum post got some buzz when I published data on whether blue states “appreciate” more than red. My intention here is to expand on the original idea: Do a state’s or city’s politics have any meaningful effect on home price appreciation?

While you can view the post, my data, and other investors’ opinions, here’s a brief summary of what I found.

Do Blue States Appreciate More Than Red States?

To begin, I looked at each state’s voting history over the past five elections (over the past 20 years). 

If certain states voted red in 2024 but voted blue the majority of the time, I show them as blue here—like Michigan, for example, which voted blue three times over the past five elections. 

Now, here’s a map of each state’s median price growth over the past 10 years using Zillow data.

It looks like the majority of states with the most growth were pandemic boom states like Idaho, Nevada, Tennessee, Georgia, Utah, and Florida. All these states voted red in the 2024 election. 

But it’s also worth pointing out that the blue states of Maine, New Hampshire, and Washington also saw solid growth.

So what about 20-year growth?

Zillow didn’t have 2005 data for Montana or North Dakota, but the states with the highest 20-year appreciation were Idaho, Utah, Washington, Tennessee, and Oregon.

Unfortunately, this still doesn’t tell us much. 

Is there a way to mathematically describe any relationship between 20-year voting history and 20-year price appreciation? Sort of.

I calculated the correlation between each state’s growth and the categorical red or blue variable. This result came as no surprise to me: The correlation coefficient came in at 0.03. 

In English: There doesn’t appear to be any relationship between a state’s voting history and its price growth.

However, you might be thinking: This is at the state level—what about the city level? 

City-Level Zoning Policies and Price Growth

How might a blue state’s policies affect its most popular cities? After all, a state’s median price can be dragged down by lower-priced rural areas, such as California.

Speaking of California, I grew up in Los Angeles, and I’ve been to quite a few real estate meetups out here. I heard local investors mention that blue state policies, such as zoning restrictions and rent control, actually benefit their investments because these policies can limit supply, which then forces appreciation. 

But is this even true? Well, yes.

A 2003 study co-sponsored by the Federal Reserve Bank of New York stated, “The bulk of the evidence marshaled in this paper suggests that zoning, and other land-use controls, are more responsible for high prices where we see them.”

And what about rent control? Well, as my economics teacher liked to say, there is no free lunch.

There are many papers published on the pros and cons of rent control, but the Federal Reserve Bank of St. Louis sums it up quite nicely: “Economists have found that following the introduction of these policies, rental stock typically declines through channels like the conversion of rental units to owner-occupied units and major unit renovations.”

But why would rent control actually decrease rental stock? I’d like to point to San Francisco as an example. A 2019 study published in the American Economic Review found, “Landlords treated by rent control reduce rental housing supplies by 15% by selling to owner-occupants and redeveloping buildings.”

Rent control aside, strict zoning regulations keeping supply artificially low seem to be a much bigger problem. We also know that local governments enact rent control when they deem housing too unaffordable. But why would housing become unaffordable in the first place? Because there’s more demand than supply. 

So, while we do have evidence that rent control may make affordability worse for future tenants, for my next analysis, I only looked at cities and their price growth and how strict their zoning regulations were. 

Take a look at the graph I made.

The yellow bubbles are cities with the least zoning regulations. Light blue is moderately strict, and dark blue is very strict. The size of the bubbles depends on how much prices grew over the 20-year period. The larger the bubble, the more prices increased. 

Look closely and see if you can determine a pattern. Notice anything? It’s a trick question—there is no discernable pattern here. Just because a city has strict zoning laws doesn’t mean price growth will outweigh a city with moderate zoning laws.

But you probably already know this inherently. Of course, there’s more to real estate appreciation than zoning laws. There needs to be strong demand as well. 

I’ve already researched the main factors that are most correlated with price growth in a previous post on tech job growth, and the winners were household income, office employment, and total employment, depending on the market.

Final Thoughts

Just because a city is in a blue state with strict zoning laws doesn’t mean it’s going to appreciate more than a city in a red state with less strict zoning laws. It’s simply not true. Allow me to beat the point home with the following bar chart.

What does appear to be true is that strict zoning laws artificially limit supply, which can force prices up. But it also appears the variables influencing home price growth most are income and the number of new people who demand housing in an area. These “demand variables” just matter a bit more.

If you have any disagreements, post them in the comments. My only request: Just be civil.

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I want to build wealth through real estate, and I’m guessing you do too. But traditional real estate investing is not always convenient and easy to start into. 

I’ve spent years looking at different strategies and realized something important: Real estate doesn’t have to be as complicated as everyone makes it out to be. 

The problem with traditional investing is that it takes huge amounts of capital, endless research, and way too much time managing properties. Even if you are finding no-money-down deals, you still need capital in reserve. I don’t recommend purchasing a property until you have those reserves in place.

I finally found a place where you can start to invest in real estate without saving for reserves, doing a ton of research, and committing a lot of time to analysis, market selection, funding strategies, and asset management once you buy the deal.  There is a way to become a real estate investor for just $100. 

This strategy I’ve been exploring, fractional real estate, lets investors start building their portfolios with minimal cash. It lets you co-own rental properties and start earning passive income right away—without dealing with any of the landlord headaches we all dread. 

Why Traditional Real Estate Is So Hard to Break Into

First, let’s look at some barriers to entry I commonly see that stop rookie investors from getting their first deal. 

The biggest one is the money barrier. Most lenders want 20% down for an investment property—that’s $60,000 on a modest $300K house! Not to mention that you need excellent credit, solid debt-to-income ratios, and cash reserves. Not everyone has that type of money sitting around, especially if you want to save six months of reserves on top of that down payment.

Second is the time commitment. Finding properties, analyzing deals, handling inspections, getting financing—this process can take months. And once you own it? Get ready to deal with tenant issues, maintenance calls, and bookkeeping headaches.

If you have the time to implement systems and processes, you can make this property run efficiently. You might not have the time to learn the business of operating a rental property, or maybe you just don’t want to. 

Third is the risk factor. When you buy one property, you’re putting all your investment eggs in one basket. If that neighborhood declines or you get a terrible tenant, your entire investment suffers. 

If you have a lot of capital to deploy in several properties to diversify your risk, that’s great, but it’s not always an option for someone just getting started. Adding a lot to your plate when just starting out can be a challenge, too. 

These barriers can keep you on the sidelines too long. 

How Fractional Real Estate Investing Actually Works

This isn’t some get-rich-quick scheme—it’s a practical approach to breaking into real estate without the barriers to entry.

Instead of buying entire properties, you purchase small shares of professionally managed rental homes. Think of it like owning stock in a company, except in this case, you own a piece of a cash-flowing asset: real estate.

The property management is handled by professionals (no 2 a.m. toilet calls!), and you receive your share of the monthly rental income in proportion to your investment. The best part? You can start with just $100.

What I really love about this approach is the instant diversification. Rather than sinking all your money into one property, you can spread $1,000 across 10 different properties in different markets. This dramatically reduces your risk exposure and gives you a taste of different real estate markets.

The single-family rental market has grown by 60% since 2008, becoming one of the most stable real estate asset classes. People always need somewhere to live, which makes this type of investment particularly resilient.

What Makes This Approach So Attractive

If you’re missing a crucial factor, like time, money, experience, or knowledge, to get a deal, find a partner. That’s what I always say, and in this case, fractional platforms can be that partner.

The low barrier to entry is a game changer. For the cost of a nice dinner out, you can start building your real estate portfolio. No loans, no credit checks, no leveraging yourself to the eyeballs. This is a great way to get started in real estate or add to your real estate investment portfolio. 

It’s also genuinely passive. As someone who values freedom and passive income, this is huge. With traditional rentals, landlords typically spend 10+ hours per month per property dealing with maintenance, tenant issues, and bookkeeping or having to hire a property manager or virtual assistant where you have to manage them. With fractional investing, everything is handled for you—just check your account to see your income.

The growth potential is what really got me excited. By reinvesting your rental income, you can compound your returns over time. This creates a snowball effect that helps build wealth steadily—not overnight, but consistently. 

And it’s worth noting that over the past 30 years, real estate has outperformed stocks in risk-adjusted returns. It’s been a reliable wealth-building vehicle for generations. 

If you’ve followed the news lately, there has been discussion of a recession. Properties on RealBricks have no debt. That’s right: They are not leveraged, which provides more insulation and less risk against market volatility. 

What $100 Actually Gets You

Let’s be honest: $100 isn’t going to make you rich overnight. But it’s a start. And it gets your foot in the door of finally building the real estate portfolio you’ve dreamed about.

Let’s break it down with simple math. If a rental property delivers 7% annual cash flow, a $100 investment would generate about $7 per year in passive income. It’s not life-changing, but it’s real cash flow from a real asset. This is better than $100 just sitting in my savings account. 

The more exciting part is when you start thinking bigger. What if, instead of a one-time $100 investment, you invested $100 monthly? That’s $1,200 per year, which at the same 7% return would generate $84 annually. After five years of consistent investing, you’d have put in $6,000 and would be earning over $400 per year in truly passive income.

It’s all about the long-term strategy and your dedication to building a portfolio. You don’t need to wait until you have $50K+ saved—start today with what you have, and build from there.

Finding the Right Fractional Platform

There are several platforms entering this space, but I’ve been looking at RealBricks as a potential option. What I like is that their model addresses many of the pain points of traditional real estate:

  • You can start with just $100.
  • The properties are professionally managed (no landlord headaches).
  • You can diversify across multiple markets.
  • You benefit from both cash flow and potential appreciation.
  • There is no debt on the property (higher returns!).
  • It’s truly passive—set it and forget it.

When you compare it to traditional real estate, the differences are pretty stark:

What Matters Traditional Real Estate Good, but requires work, and return varies depending on skill set
Getting started $50,000+ minimum As little as $100
Your time investment Playing landlord Fully managed for you
Diversification Expensive and intensive Simple and affordable
Selling when needed Can take months Generally more flexible
Income potential Good, but requires work and return varies depending on skill set Completely hands-off and 6%-9% annual returns 

How to Get Started

Once you’re ready, the process is straightforward:

  1. Create an account on a platform like RealBricks.
  2. Browse available properties.
  3. Start with as little as $100.
  4. Begin receiving monthly rental income.
  5. Reinvest your earnings to grow faster.

The Bottom Line: Don’t Wait to Get Started

I created my account in a matter of minutes. It didn’t take long to get started. This new approach lets anyone start with whatever budget they have, even if it’s small.

Thousands of everyday investors are already using fractional real estate to start building their portfolios. If they can do it, why not you?

If you’ve been sitting on the sidelines researching real estate for months (or years) without taking action, this could be your chance to finally make a move. You don’t need perfect conditions or a huge bank account—just the willingness to begin.

Currently, RealBricks is on track to provide a 9% annualized return. I like the sound of that. It’s often difficult to find a truly passive investment yielding that kind of return.

Check out RealBricks.com to see how you can put your first $100 to work and start building that real estate portfolio you’ve been dreaming about.



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Is the 4% Rule Dead?

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Is the 4% rule dead? Most FIRE-chasers are using this retirement rule completely wrong, and it could cost them their financial freedom. With stock prices falling and many Americans fearing another recession, now is the time to tighten up your retirement portfolio and ensure you can survive if stock prices correct or crash. If you get this wrong, you could delay your FIRE for years or have to go back to work mid-retirement.

The 4% rule is one of the most bulletproof retirement formulas. It’s simple: Build a portfolio from which you can comfortably withdraw 4% annually. Need $40,000 per year to live? Your FIRE number is $1,000,000. Need $100,000 per year? Then you’re looking at $2,500,000. This math has been checked, double-checked, and triple-checked to withstand even the greatest economic depressions. However, most people have their portfolio set up WRONG, and it could put them at significant risk.

So, how do you ENSURE you can retire (early) with the 4% rule? What hedges should you make in your portfolio so your wealth stays afloat even as the economic tide starts to turn? What are Scott and Mindy doing now to prepare for a rocky stock market? Don’t miss this one—it could cost you your FIRE!

Mindy:
Hey, Scott. Is the 4% rule dead?

Scott:
Nope.

Mindy:
All right. That wraps up this episode of the BiggerPockets Money Podcast. He is Scott Trench and I am Eddie Jensen saying, see you later. Alligator or saying haha. Just kidding. We actually have a lot more to talk about this. Hello? Hello, hello and welcome to the BiggerPockets Money podcast. My name is Mindy Jensen and with me as always is my market conscious co-host Scott Trench.

Scott:
Thanks, Mindy. Great to be here. As always, great timing with your intro. BiggerPockets is a goal of creating 1 million millionaires. You are in the right place if you want to get your financial house in order because we truly believe a financial freedom at the 4% rule is attainable for everyone no matter when or where you’re starting, and the math still holds even here in the scary conditions at the start of 2025.

Mindy:
Scott, that intro was a little reminiscent of our show with Michael Kitsis way back in the very beginning of Covid in March of 2020 where we asked him that same question, is the 4% rule dead? And he said, no. Scott, for those who are not familiar with the 4% rule, what is the 4% rule? What are we talking about here?

Scott:
Sure. So the 4% rule is an attempt by a deep body of financial analysis to answer the question, how much money do I need in order to retire? And the idea is that a portfolio that is invested a specific way with a, for example, 60 40 stock bond allocation, although that range can vary between 70 30 and 50 50 stock bonds, a portfolio invested that way in major index fund investments for example, historically has never run out of money over a ensuing 30 year period. And that includes periods with massive economic pain like a portfolio where someone retired right before the Great Depression in 1929, or right before certain major events like the inflationary period in the sixties, seventies and eighties. In there it backtest every historical period that we have great data for in modern history in a 30 year look back. So while there’s an endless debate about whether there could be a future situation where the 4% rule does not hold up in a technical sense, it has held up in every historical period. Although it is true in some periods, a portfolio that starts out at a million dollars may decline in value in most 30 year periods. Someone who was withdrawing 4% of their portfolio who starts with a million dollars, would actually end up with more wealth at the end of the 30 year period than when they began. So it’s an answer to that question, how much money do I need to retire early?

Mindy:
I love that description, Scott. That was a really great description. Bill Bangin originally did this research in 1994 or 1996. I always get those dates mixed up in my head, but either way, it was a long time ago Michael Kitsis came in and ran the numbers where Bangin left off. So Bangin did it in the mid nineties. Michael Kitsis did it in 2018 and ran them. I’m looking at Michael Kit’s chart on starting principle over the course of 30 years. There are some wild numbers. I think the most it gets up to is 9.5 million and the lowest it gets to is not quite zero at year 30. In fact, if you continue on, this person loses their money and goes to zero at year 31. This is every scenario up until 2018 when he ran this report.

Scott:
Yeah, in the vast majority of cases, that chart shows you end up with more wealth after pulling 4% out of your portfolio every year adjusted for inflation at the end of 30 years than when you began. And in a couple of situations you end up with less wealth, but in no situation do you end up with zero wealth and truly run out of money over a 30 year period. Right? So that’s the 4% rule and the math has not changed. In fact, the guy William Bill Bangin actually came out with an update saying that you could actually withdraw as high as 5% with certain portfolios in new research this year. I believe he has a new book on that topic and we will certainly be inviting him to discuss this new research onto the BiggerPockets Money podcast in the coming months here. So that’s the update on the 4% rule in a sense that does it still work?
Does it still uphold Yes. We have no mathematical evidence that the 4% rule does not hold up. Now let’s talk about a couple of paradoxes here, Mindy, with that caveat that first we’ve interviewed a lot of folks in the fire community. We have met very few, maybe none so far still who have truly retired at a 4% rule allocation. We had a couple of folks reach out who said, I retired at the 4% rule. And then it’s like, well, they also have a rental property and they also have a paid off house and they also have a large cash position and those types of things. There’s always a defense mechanism in play well beyond the 4% rule for many of the folks that we talk to that actually spend Tuesday retired and not working on a mostly stock bond portfolio. So that’s the first paradox is we still have yet to meet a true retired at exactly the 4% rule and have nothing else going on out there.
Most people are well beyond the 4% rule or have some sort of cushion on there. The second paradox here is Bill Bangin, the father of the 4% rule who just came out with that research who we’re going to interview shortly here two years ago, announced that he was going 70% to cash and was 30% in stocks and bonds out there for fear of market conditions. Here I am the biggest proponent of the 4% rule in the math and the way I introduced this today, and I am not holding a 4% rule, 60 40, 70 30 or anything close to 50 50 stock bond portfolio. I’m heavily allocated to other things like real estate for example, and private lending will be a part of my portfolio in the next few months. So these paradoxes all exist in the context of the 4% role, even though the math is very sound and it is an excellent answer to the question of how much do I need to retire early?

Mindy:
Alright, so Scott, one thing that I have noticed, I don’t know if you have noticed, but since about 2012 the market has been fairly up and to the right.

Scott:
Oh my gosh, this has been an incredible bull run for the last 12, 15 years essentially, and people have made an incredible amount of money in the stock market in particular, and they’ve done nothing. They just sit there and dollar cost average into it and they’ve been rewarded to degrees unprecedented in history with those investments.

Mindy:
So I actually looked it up on macro trends.net. They have a 100 year historical chart of the Dow Jones and December, 2008 is when it hit the bottom and started climbing. There have been dips since then, but that is the last time it has been the last big low. So 2008 to 2025. Scott, do that math really quick. How long is that?

Scott:
That is 2 5 17, 17 years,

Mindy:
17 years of up into the right. So if I was in the stock market for the last 17 years, which I was, and I kept seeing it go up into the right with some small dips, I would not be tempted to go into bonds in any significant capacity because bonds have traditionally, or in those same last 17 years, what have bond yields been? They’ve been fairly low, right? I’m getting
12, sometimes 15% returns in the stock market and bonds are giving you like three or 4%. I like 15 a whole lot more than I like four. So my current bond portfolio is I believe $0 and I’m okay with that. I’m okay with the risk because I am with great risk comes great reward, potential reward, and my portfolio has gone up significantly. But the 4% rule is what I based my early retirement number on and I am not in a 60 40 portfolio. And that is what the 4% rule is based on. How many people do you think are in a 60 40 portfolio who are fire? Fire in the next year, plans to fire in the next year or have fired recently?

Scott:
I think less than 10% of the people who listen to BiggerPockets money are in a 60 40 stock bond portfolio and it may be less than 5%. Let’s review the data here. So here’s Mindy smiling face in infant mirror and now here’s, I do a poll all the time on BiggerPockets money. It’s one of my favorite things. Thank you so much to everyone who watches the YouTube channel and responds to these polls. There’s a wealth of really good information here that I just love endlessly collecting and then discussing on this. So let’s look at this one right here. Okay, do you actually invest with the classic 60 40 stock bonds portfolio? 680 people responded 90%, 89% said no. I own essentially no bonds with less than 10% of my portfolio. 4% said yes, excluding real estate or cash. My investments are 60 40 stock bonds.
So what we have here, more infinite mirror is dynamic of at least in the fire community of people who are heavily concentrated in stocks. And that is both a function I believe, of the extraordinary bull run we’ve had for the last 17 years, maybe more on there. Well, I guess 17 years exactly with 2008 being the bottom, we’ve had extraordinary bull run for that period of time and the very low yield that bonds are delivering right now, like VBT lx, Vanguard’s Bond Index Fund for example, has a yield to maturity of 4.3% and an income yield of something in the threes. So that’s just not very attractive to many investors out there, especially folks who are personal finance nerds. And that I think has resulted in heavily concentrated portfolios. And the risk I see for the fire community in many, maybe tens or maybe hundreds of millions of American households is that because of this dynamic of huge returns in the stock market and all incremental dollars going into stocks with very little bond exposure, this is a community that is not ready for a market pullback and does not have portfolios that are allocated in the way that the 4% rule has been historically discussed.
Right? The 4% rule, you are not fire. If you need two and a half million dollars to generate a hundred thousand dollars a year in spending and you are a hundred percent in stocks, you are not fire. You can fall out of fire with that. Now if you have that two and a half million dollar portfolio, 60 40 allocated to stocks and bonds, then you are meeting the 4% rule and you have at least in history, never run out of money in a historical simulation calculator. It could be that this time is different, but I would be willing to personally bet that on a 60 40 stock bond portfolio that there will not be a reduction to zero over a 30 year period going forward. We have to take a quick ad break, but want to know what you can do while we’re away? Subscribe to our brand new BiggerPockets money newsletter. Go to biggerpockets.com/money newsletter to subscribe on your very first rendition of this newsletter, you’ll be greeted with a very friendly hello, hello, hello from the one and only Mindy Jensen.

Mindy:
Yes, you will. Welcome back to the show. So Bill Benin’s original study was based on traditional retirement. He didn’t take into account the concept of retiring early because that wasn’t a thing back when he did this in the early nineties. It was like, well, it’s still weird, but it was even more weird back then. We didn’t have podcasts and internet to talk about it. I think that it’s a lot easier to get yourself to a 60 40 portfolio when you are older and you’re retiring at 65. Once you hit 60, you start to think, oh, maybe I don’t want to risk all this money, but you have really compressed your investment timeline into to fit into your fire goals. So I see both sides. Yes, bill Benin said 60 40 and the Trinity Group reran the numbers and they said, yep, he’s right. And Michael Kitsis reran them and he said he’s right. And West Moss ran them and said, yep, Benin’s, right? So all these very, very smart people are looking at all of this historical data and past performance is not indicative of future gains, but they’re looking at all this historical data. They didn’t just make this up, they said with this stock portfolio and I mean, have you read the original report or the original article that Bill bein published in the Journal of Financial Planning way back when? It’s so fascinating he ran this at, Mindy sends

Scott:
This to all of her friends. So yes, I have read this.

Mindy:
I do, I do. It’s a really long article. If you want to read it, email [email protected] and I will send you a copy. It can be a little bit difficult to find online. It was not an online publication when it first came out, but he ran all these different scenarios. He didn’t just come up with this and say, you know what, this sounds good. Somebody sent me a note to say that he was not a rocket scientist. He worked for NASA or he did something with rockets and he’s very, very, very smart. And then he decided to be a financial planner after he was done with that career. And he really looked at this from all angles and ran the numbers in all sorts of different ways. So I do believe that it is still valid. I am still basing my retirement ideas on it, but I am not following it correctly. So if I run out of money first, I will be very shocked. But if I run out of money, it’s my own fault. I’m not following the rules in the first place. And that seems rather harsh. I’m saying that about me. I hope that nobody runs out of money,

Scott:
But yours is true of everyone I have met in the fire community, right? There is a tiny fraction, less than 5% of people who will tell you that they retired on the 4% rule with nothing else. And then when you actually talk to them, oh, there’s my rental, there’s my large cash position, there’s this other thing that I’m doing here. I do this kind of thing to defray costs on this part. They all have something going on. Nobody does this with the 4% rule. Even though again, you’re asking me, is a 4% rule still sound? Does the math still work? Yes. Is it dead? Nope. Do ordinary people, the people we are trying to serve here on BiggerPockets money actually retire on the 4% rule and nothing else? No. And that’s where we need to address it head on in order to help the folks in this community actually see Tuesday afternoon in their thirties or forties the way that they wanted to do it. And I think that’s the fun challenge about this that makes this job so interesting. If it was just a 4% rule, every path would be the same for it, but it doesn’t work that way in practice. It doesn’t work that way in people’s actual psyche. And we have to address that in order to actually achieve our mission of helping people build enough wealth and then stop and enjoy their lives.

Mindy:
How do you approach market downturns if you’re getting ready to retire, if you’re retiring in your thirties or forties instead of when you’ve got a 40 year horizon to save your money? A market downturn isn’t as affecting as when you’ve got a 10 year window.

Scott:
Well, look, I think there’s a couple of ways to go about it, right? The first one, and I think that the right answer is to say there is a approach that makes sense when you’re starting out for all out aggression, right? When I got started all out aggression, highly leveraged house hack, everything was going into stocks. I’ll do that again today. The issue is if you continue that infinitely, then you’ll end up at 65 with an enormous pile of wealth in most historical situations that is far more than you ever needed and you’ll miss that thirties, forties, fifties fire retirement that you said to yourself was the original goal, right? So that’s the problem. So what one answer to the question is just keep going for many, many more years than you really need to and amass so much money that it’s so far beyond what you actually need to retire, that you don’t have to make decisions based on driving cashflow. And Mindy, I’d argue that you’re kind of maybe in that situation to a little bit of a degree, you guys went so far beyond, you have so much more wealth than what was required for the 4% rule that it allows you to not really have to worry about the technical best practices in optimizing the portfolio component. Is that fair?

Mindy:
As you were saying that, I’m like, oh, that’s me Scott. Yes, and not only that, I still work. I have this job. I am a real estate agent and I want to say I made $200,000 last year as a real estate agent working very little. I had a couple of really whopper of a deal properties, but I generate a lot of income and I don’t spend $200,000 a year except this year when we’re building the house. I generate a lot of income in a way that I’m really not reliant my portfolio right now. I have the confidence that my portfolio will eventually recover because I’m not pulling anything out of it right now.

Scott:
And Mindy, guess what? I’m in the same boat here on that front, right? I find myself having started out attempting to achieve fire so I could play video games on Tuesday and now I run an enormous or fairly large company here, do this podcast and work harder than ever on that front. So that’s one answer to the question and that is frankly the answer that you and I both chose and it’s not a terrible one for many folks on there, but there is a cost to that. You’re not retiring at the optimal point if that’s your specific goal there. So that’s one answer to the question. The second way I think to really maximize that early retirement here is to say, I’m going to be in this all out aggressive accumulation mode and then I’m going to stop and I’m going to flip the switch to something much more conservative in the years building up to true early retirement.
And it’s very hard, I think for folks to do that for seven to 10 years, grind away, increase their income, begin amassing a slow but surely compounding pile of assets and then stop and move it all into a conservative portfolio that has 60 40 stocks, bonds, and then begin enjoying it. That’s the right answer. I think that that’s technically the right way to do this is to go all aggressive and then shift it either gradually as we approach 3, 4, 5 years, seven years out from retirement or do it all at once toward the end. But I think very few people will do that in practice even though that’s the right theory, I think. What’s your reaction to those two answers to the question here?

Mindy:
I don’t think that going all out and then retiring and moving it into the conservative portfolio, the recommended is what I would recommend. It seems like you are running just as much risk as if you didn’t do that at all. I would suggest if you are retiring in the next, I dunno, three to five years or the next five years, I guess start instead of allocating your money to the stock market, keep what you’ve got there and then start allocating bonds. Start buying bonds, start buying bond funds. I know so little about bonds because I’m not in them at all. I’ve never really studied them because for 17 years or 16 years we have had such a growth market that bonds didn’t really make a lot of sense. I mean they still make sense. They always make sense because you’re hedging against other things. I wonder, Scott, do another poll.
How many people are not in a 60 40 stock bond portfolio but are 60 ish stocks and 40% something else? You just recently brought that real estate property that is acting as a bond for you. It’s not going to be generating all of these giant returns that a stock market would, a good stock market, not the current stock market, but it’s also fairly safe. It’s the kind of property that is always going to have tenants in it. It’s a fourplex. So it’s not like your tenants leave and then all of a sudden you’re like, oh shucks. Now what? You’ve got three other tenants to help you pay that mortgage until you get that fourth tenant in place. So the vacancy is not a big hit, but I wonder what other kinds of investments are acting like a bond? Like is gold, gold is an inflation hedge?

Scott:
Yes. I think that the headline is every asset class has exploded over the last six years from January, 2019, which is my favorite lookback period in the current climate to January, 2025 except commercial real estate. And then residential real estate has basically paced in price with the increase in the money supply. So I think that there’s plenty of risk in residential real estate, but that other asset classes are at extreme risk. Obviously I think bitcoin’s going to zero. I’ve made that point very clear and multiple things there. You can go beat me up in the comment section as the 900th to a thousandth comment. Disagreeing with me in my video, the Rational Investors case against Bitcoin here on the BiggerPockets money YouTube channel. Gold, by the way, is another one on there. Gold has been pacing the s and p 500 for the last six years. Really it’s gone up 2.3 ish X over the last couple of years. I think it might have pulled back recently a little bit, but gold is, gold is whatever gold was as this store of value, it has gone up in value way faster than the money supply.

Mindy:
So I am looking at the historic gold prices again on macro trends.net. They’ve got some really great charts here and I want to show you this. This is inflation adjusted. So look at this inflation adjusted in 1980, it was $2,700, now it’s $2,800 inflation

Scott:
Adjusted. So the return for gold from 2000 has been what? Five x? It’s unbelievable, right? Inflation is not. This is real. This is inflation adjusted,

Mindy:
This is inflation adjusted, this is, but it’s

Scott:
Incredible how expensive gold is in terms of its historical value. I mean investors are fearing the market right now and we’ll talk about that a little bit in a few minutes here as well. Or maybe that’s a good transition point here to talk about what is going on in the stock market right now.

Mindy:
Alright, my dear listeners, we want to hit a hundred thousand subscribers on YouTube and we need your help. While we take a quick ad break, please hop on over to youtube.com/biggerpockets money and make sure you are subscribed to this channel. Stay tuned after the break for more.

Scott:
Thanks for sticking with us.

Mindy:
Okay, Scott, what’s going on in the stock market right now? A whole lot of down, we are recording this on March 11th. Yesterday there was a 900 point drop based on a commentary from the administration. Today there is an additional drop. I haven’t even seen how much yet because I’ve been working, but it is based on double tariffs on Canadian steel.

Scott:
Look, I think the problem that I saw that I see and saw is just historically high price to earnings ratios on a reel or inflation adjusted basis. So we discussed that at length in a previous episode here. That was the risk factor in here. And I think what is causing this problem is very simple. There’s a large body of activity coming from the new Trump administration and that activity is causing uncertainty. And some could use the word chaos that is confusing markets and individuals and I think several hundred million Americans are asking themselves the question, am I comfortable having most or all of my financial portfolio and investment portfolio in stock market funds that are disproportionately allocated to the United States in the context of the current environment? And increasingly more and more of those people are saying, no, I’m not comfortable with that. And Mindy, that scares the heck out of me. We can talk about the 4% rule all day long on this and how it works. I’m just not comfortable allocating huge percentages of my net worth to stock market index funds given that risk. I think that’s a real risk and that we could have a lot more pain to come. It can go every way. Who knows what the market’s going to do with all this stuff. I just can’t handle the heat. And so I got out of the kitchen

Mindy:
And where did you go?

Scott:
I put it into real estate. I rebalanced my 401k and HSA accounts to 60 40 stock bond portfolios that my bond fund of choice is V-B-T-L-X. I also have a large pile of cash which I’ll put into. I’ll go back to private lending and that one in the hard money space and I’ll likely buy another rental property later on in this year and I’ll likely make several syndication investments in the most distressed markets around the country, probably mostly here in Denver in multifamily and or a sprinkling of office.

Mindy:
If you don’t want to rely on the 4% rule anymore or you don’t want to rely on the 60 44% rule, what options do you have, Scott?

Scott:
Well look, let’s go back to the, let’s pretend we’re retiring with a million or two and a half dollars portfolio in the 4% rule, and let’s begin to alleviate our fears, right? Even if there’s a crash as bad as the Great Depression or an inflationary environment as bad as the seventies and eighties, this rule is held up second and it’s all adjusted for inflation on the 4%. Rule math second, that 4% rule assumes that you will never decrease your spending in the event of a market catastrophe. It assumes, assumes that you’ll never earn another dollar of any type with any work whatsoever in the event of a downturn. You could get a part-time job, for example, to defray some of those expenses or offset components of it. It assumes you’ll never get social security or other forms of benefits in there. It assumes that you’ll never start a business.
It assumes that you’ll never swap certain spending for other things in an inflationary adjusted inflation environment. When eggs get expensive to eat oats for breakfast instead for a while, it makes none of those assumptions. So all of those are ways to defray the risks. The 4% rule before we even get into alternatives, once we get into alternatives, there are plenty of options. Obviously one of the ones I’m most comfortable with is real estate. I’ve been doing BiggerPockets for the last 11 years on this. This is a clear area that I’m comfortable with and feel like I have some skill in. Private lending is another one that you can get into on this. Building a bigger cash position is another one. Starting some kind of side business, even one that’s seasonal. For example, we had that Christmas lights guy, a kid come on the show kid, he was 25, but we had this Christmas lights man that was doing that and making almost six figures in a couple of months at the end of the year.
There’s so many different ways to begin doing that, but I think that having one or two of those alternatives layered into your portfolio, keep your formula. If you’re like the 4% ruling, you like the passiveness of stocks and bonds, keep your formula and go hit it and then layer on. You have likely many years between now and TrueFire every year or two, maybe every six months, if you’re like me, every 90 days, layer in some side bets that can begin to compound because you just need one or two, I believe for most people to really defray the risks, the discomfort and the pit of your stomach with the 4% rule as your only backstop in your portfolio. Just have build a couple of those over time and that should put you more than over the edge when a decision comes to actually pull the trigger and retire early,

Mindy:
The end result, there’s still, I want to say it’s 12 times that you would’ve ended up with less than a million dollars at the end, and that’s all past information. But I think that a $1 million portfolio is going to be enough for people who have a paid off house or a very low mortgage. My mortgage is $1,300 a month, I’m not going to pay it off very fast at all. I can just build that into my numbers to make that an expense. I think that I’m not in a low cost of living area, but my cost of living is low because I bought a house in 2019 for very little money compared to what I could get if I sold it. And now these prices aren’t available. It’s been five years we’ve had that market run up. If you are a renter, your rents are probably going to go up over the next 30 years.

Scott:
Yeah, that’s a key bet too. That informs parts of my portfolio. I mean, there’s a lot of math that suggests that renting is better than buying right now with historical averages. But I believe that while 2025 will not see significant rent growth, I believe we’ll see rents rise dramatically in 2026 and 2027 across this country because a large amount of the supply that’s going on, like multifamily construction will start to abate. And if interest rates stay high, that should continue to push up demand for rentals because the alternative to renting, buying a home is up there. So I think that buying is a great way to defray risk of a 4% rural portfolio because you lock in your housing expense adjusted for inflation, whether you use a mortgage or not on there. So there is something to be said for buying a home. Especially one of my favorite tactics that’s coming up is I’m talking to people from high cost living areas and they’ve got a million dollars in equity in their homes in certain parts of California or the east coast.
And those markets are also great because if you have a house like that and you’re dead set on staying there, but you want to travel, many of those markets offer things like you can rent out your house 25% of the time on short-term rentals only if you’re an owner occupant. That’s an awesome way to defray early retirement expenses, by the way. So I think that there’s, there’s options that come with home homeownership that are not available to renters where you just know your portfolio has to cover the renter’s expense in some of those. So it’s not black and white in that. Guess the math leans if you don’t have any of these side bets in place towards renting over buying right now. But it is nice to just have it locked in. No, I can stay here for 20 years and not have to worry about material inflation adjusted costs to my living outside of my taxes and insurance and maintenance, I guess.

Mindy:
Ooh, and taxes and insurance. That’s a great conversation that we’ll have another time. But yeah, I’m hearing that insurance, homeowners insurance is going up.

Scott:
I got a 90% quote for a 90% increase in my home insurance, then I shopped it around and my premium will decrease by 50%. So shop around guys, because some of these carriers are different

Mindy:
Things. Absolutely. Shop it around and if your property taxes go up exponentially, even if your property taxes go up just a little bit, protest them. Figure out how your city will have a detailed way for you to protest your tax increase and protest protested every single time. I have never protested and not gotten a

Scott:
Reduction. Yeah, I plan to shop all of my rental property insurance policies and my assessed values, my rental properties this year. I got a feeling that I’ve been neglecting that and I got a good 10,000 to $15,000 in cost savings annually in that exercise for me. So

Mindy:
They reassess on the odd year. So they’re going to reassess this year and you will probably see an increase next year.

Scott:
Yeah, well guess. Well, look, I think there’s a case that my properties are down in value. We got a buyer’s market in the commercial side on some of these, so we’ll see. Yeah.

Mindy:
Yeah, you have to do some research in order to do the protest, but I have always had it be well worth it for me to protest my tax increases.

Scott:
Yeah. Going back to the 4% rule piece there though, this is a key concept because how little you spend, the less you spend, the easier all of this gets. So if you can control adjusted for inflation, the costs to commute, the costs to live in your house, your food costs, those types of things, you can go from anywhere from reasonable, like paying off a mortgage and having your housing costs fixed outside of your taxes, insurance and maintenance to extreme installing solar panels, for example, to mitigate your electricity bill for the foreseeable future to planting a garden to grow much of your own. You can get really extreme with this stuff, but that framework as you apply it puts less and less pressure on your overall portfolio and makes that margin of safety in the 4% rule, safer and safer and safer and safer. And that’s a luxury I think that a lot of folks who do actually pull the trigger will have is not only is there these opportunities to earn more money, not only will you probably not do with nothing for 30 years that generates an income, but you’ll also be able to tackle the projects that control expenses in your portfolio, do your own taxes, those types of things to defray costs, which can make your portfolio stretch longer.
And again, that’s not accounted for in the 4% rule if you put in conservative expense estimates upfront. So those are all things you can do. And then again, there’s always the world of alternatives out there.

Mindy:
That sounds like a show for another day. Scott, I want to hear from our listeners, what do you think of the 4% rule? Are you still excited about it? Are you in at a hundred percent stocks? Have you adjusted your fire plans in response to the recent market conditions? Please leave a comment below, leave a comment on your, if you’re watching this on YouTube, leave a comment below. We will also post this in our Facebook group, so we would love to hear from you, what are your fire plans and what are your impressions of the 4% rule today? You can also email [email protected] [email protected] to give us your opinion as well. Alright, Scott. I think this is a very lively discussion. I can’t wait till the comments are coming in.

Scott:
Yeah, this was fun. Mindy, thanks so much for joining me today and I’m glad we didn’t have a 15 second episode. After all,

Mindy:
Anybody who has ever met me knows that I cannot talk for only 15 seconds. Alright, that wraps up this episode of the BiggerPockets Money podcast. He is Scott Trench. I am Mindy Jensen now saying, see you later, alligator. And yes, Jason, that’s for you.

 

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Anyone can analyze a rental property, but if you’re not careful, it’s easy to overlook significant costs that wipe out your cash flow and put you in the red. Thankfully, we’ve got some timely tips that will help you avoid these critical mistakes!

Welcome to another Rookie Reply! Ashley and Tony are back with more questions from the BiggerPockets Forums and BiggerPockets Facebook groups. Worried that your “good” real estate deal might not be a good deal after all? We’ll show you some of the things you must account for before you buy! Next, we’ll discuss the ins and outs of real estate partnerships. Whose name should go on the mortgage? How do you ensure that both parties own the property? We have the answers!

Finally, how do you make an offer on a property you haven’t seen? What if you receive a low appraisal? We’ll show you how to find “boots on the ground” in any market, renegotiate with the seller, and close on your property for a great price!

Looking to invest? Need answers? Ask your question here!

Click here to listen on Apple Podcasts.

Listen to the Podcast Here

Read the Transcript Here

Ashley:
Investing out of state can be scary, but we will break down the steps to make your investment a confident one.

Tony:
We’ll also cover what exactly you need to account for when analyzing a deal, along with determining the best partnership for you.

Ashley:
Okay, so we got our first question on rookie reply today. This question is, when looking at the closing disclosure and you see that rent will only cover the taxes and mortgage, if the property management fee is waived for a year, is that worth it? That would mean that the next year after the property management fee is not waived, then you’re only getting about $50 in cashflow. Would that be worth it in a not so appreciating market? So here’s some things to consider for this question. The person row, absolutely nothing else is factored in such as Cap X improvements like roofs, HVACs, usually we like to save a percentage of that, so that’s great that they called that out. They also noted this is for a turnkey provider who is providing the property management who is saying they will waive one entire year for the rental, which could be increased by only a certain amount due upon the next lease renewal. This is also a single family home in the Midwest. The rent cannot be increased right away, so I would only receive $50 cashflow after the insurance taxes a mortgage. This would not include any maintenance. Pretty much the only reason why would be anything more than $50 is because the property management fee is waived, but that’s only within the first year. Okay, so to kind of sum up this question is, is it worth it? Should they purchase this property? Tony, should we start out with kind of explaining what a turnkey provider is?

Tony:
Yeah, it’s a great call. So turnkey providers, and I believe we recently did a reply specifically about turnkey, but turnkey providers are companies who go out there, they find distressed assets, they fix them up, they place sentence inside of them, and then they sell those fully leased up units to other investors. Those are called turnkey providers because basically on day one it’s turnkey. You don’t have to do anything to it, any work, and you can really just kind of get started cash flowing on day one, hopefully. So that’s what a turnkey is. But sometimes the downside with turnkey, which is what I think we’re seeing in this situation is that your cashflow, depending on the property, depending on the market, depending on the provider, can get a little squeezed, which is 50 bucks is I think is what we’re seeing here.

Ashley:
So the next kind of question here is, well, I guess we should kind of go over expenses. What other expenses should be considered? So they mentioned that any kind of savings for CapEx, such as roofs, avac, HVACs, anything like that is not included in their numbers. So for me, a general rule of thumb is how old the property is, or if it’s been recently remodeled, saving a certain percentage. So if I’m buying a home that was built in the early 19 hundreds, hasn’t had a lot of updates or remodeling, I’m saving at least 10% to cover those improvements on the property. If it was completely remodeled, I’m may be saving 5%. Some situations, like if I did the remodel and I updated a lot, then maybe it’s only going to be knocked down to 3% of whatever the rental income is each month. But you want to factor these things in along with the maintenance.
He had mentioned any maintenance cost would basically take away that $50 of cash flow. And if you have ever had a handyman or a service tech come out, usually just for them to come out to your property is more than $50. So yeah, the maintenance, maintaining the property, so this is a single family home, so most often you’re going to have the tenant take care of the lawn care, the snowplowing, things like that. But there could be pest removal that you may have to cover or pay for depending on what the lease agreement says too. Tony, is there any other expenses that you would add? I think the last thing I can think of is bookkeeping expenses. Unless your property management company is taking into account those expenses.

Tony:
Yeah, I feel like you kind of hit ’em all right. At a business level, I think you’re right, bookkeeping tax preparation and tax filing tax strategy, if you have an LLC, any fees associated with that. So there’s always going to be some additional cost. So I mean is $50 in cashflow a lot? Obviously not. I don’t think anyone’s going to retire or get super excited off of $50, but I think the one thing we don’t have from the person answering or asking this question is why are they doing this? They’re in the Midwest. So my assumption here is that they’re not hyper-focused on appreciation. Typically in most Midwestern states, those aren’t the states that are known for appreciating. They’re typically known for better cashflow. So if you’re going into the Midwest with the focus of getting cashflow, but yet you’re only getting $50, I can’t imagine what your investment into this property is, but it would has to be a pretty small investment for that 50 bucks per month to be any sort of reasonable return on your investment.
So just from that information, that doesn’t seem like a deal to me. And the other thing too actually that I’m curious about is for the PM two waive their property management fee in the first year, obviously it’s the turnkey provider, so they’re getting money upfront just from the sale of the property to this investor. So I get that piece, but I also wonder is there any sort of long-term contract that this investor is signing up for? Because I would assume that most pns probably aren’t just going to manage for free without any sort of security that they’ll have that second year, that third year potentially. So I would think I would really just review that to make sure, because what happens if you get into year two and that first year was kind of shaky and you’re like, man, I really did not like working with these guys, but now you’re locked in for another two or three or five years. So just a couple of things that are running through my mind as I hear this question.

Ashley:
Yeah, I definitely agree. I don’t think this sounds like a great deal, especially if you’re not getting appreciation. Maybe you need this property for the tax advantages and that’s all you care about is you want to be able to write it off, then maybe it could work for you. But I think if you’re not getting cashflow or you’re not getting appreciation, but definitely do your research on that and see if there is an appreciation play. Also, when can the rents be increased on the property or is there any kind of value add that you could do? For example, turning the dining room into another bedroom to actually increase the revenue that way? Could you rent out the garage for storage? So see if there’s any other revenue potentials, but I would say this probably isn’t an investment that I would want to do. One thing to keep in mind, if this is the only way that you can get started is by going through turnkey provider, I would go and talk to other turnkey providers and compare what their closing disclosures look like, compare what are the costs that are associated with using them, what are they charging, things like that.
So you can compare the different turnkey providers to, okay, we have to take our first ad break, but we will be back shortly.

Tony:
All right guys, welcome back. We are here with our next question in today’s rookie reply. So this question says, BP community, I’m entering the real estate investing world through partnerships. Ding, ding, ding. Alright, Ashley and I love talking about partnerships. Myself and my buddy, we’ve been friends for more than 15 years and we decided to get into real estate through a multifamily house hack. We plan on pooling our money for a down payment and closing costs. If one of us can qualify for the loan amount, then we’ll choose to only have one person apply for the mortgage. So the first question is, how does the other claim ownership on the property? My understanding is that this can be done by keeping the property in an LLC and being 50 50 partners in the LLC. Are there any other ways to claim ownership without the LLC?
What is a better way to go about this? Question number two, if we plan to buy a second property one or two years down the road, how would lenders approach the underwriting? And then question number three, do we need to watch out for any pitfalls in the future for scaling our portfolio together or separately? Lots of good questions here Before I think me and Ashley jump in. We got to give a nice plug here for our book on real estate partnerships. So for those that don’t know, Ash and I co-authored a book with BiggerPockets called Real Estate Partnerships, and you can head over to biggerpockets.com/partnerships to pick up a copy of that book. So Ashley, let’s hit the first question here, or first part of this question. If one person is on the mortgage, how the other person actually show ownership of the property?

Ashley:
So for this, I think there’s different ways that you can do it. We can kind of go into that as to how to structure is it should be in your personal name, should be in an LLC joint venture. But the way that you own the property is if you are on the deed. So you could not be on the mortgage, but you could still be on the deed. So whether you have ownership of an LLC or you have a joint venture agreement, or it’s your personal name, you need to have your name on the deed or that joint venture agreement saying that you are own part of the joint venture that owns the house. Okay, so that is how you claim ownership is having a right to the deed of the property, making sure that you’re on the deed. In this situation, this property is a house hack that they are doing together.
There’s one thing you should be cautious of. When my sister was doing her house hack, I couldn’t give her money for the down payment and say that she had to pay me back. You have to use your own funds or it has to be a gift from somebody and it has to be a family member usually. So just because you’ve been friends for 15 years, I’m not sure a standard FHA loan or conventional loan would allow if this is your primary residence for the funds to be provided by somebody else to actually close on the property, they’ll want to verify. Tony, do you know if that’s true for conventional or is that just an FHA rule that you have to use your own funds for a down payment or a gift from a family member?

Tony:
And guys, when we say conventional, we just mean anything that’s backed by Fannie and Freddie, right? The big, they’re not technically government entities, but the people that insure a lot of these mortgages that are going out to the general public. I think one of the things you made a phenomenal point ash about the mortgage and the deed being different, just one thing because they also said that, should we put this in an LLC? Just word of caution, or maybe not word of caution, but just something to think about. Typically when you’re doing a house act, the reason that people like to house act is because of the type of debt that you get access to. And Ashley just talked about that I like using an FHA, but with those types of debt, typically it’s got to be in your personal name. So even if you guys created this LLC, you can still a lot of times run the income and the expenses through that entity. But the actual deed would show Ashley and Tony, right title would be us jointly on that deed together. So I don’t know if the ownership in the LLC is necessarily going to impact the ownership claim on this property.

Ashley:
And I guess really you have to figure out how you want to finance the property because that’s going to really play into what you’re actually able to do. So if you’re both doing the house hack, if you both want this to be your primary residence, which I don’t remember, does it say they’re both to live in there?

Tony:
I believe so. It seems that way.

Ashley:
Yeah. So if you’re both living there, then I don’t see a problem with you both splitting the down payment, you both going onto the deed, you both being, you can have one person on the mortgage. So even with my sister’s house hack, I’m on the deed, but I’m not on the mortgage and I gifted her the down payment fund. So you can definitely do it where you’re on the deed and you’re not on the mortgage with one of you if one person qualifies. And I really like that strategy that you’re going to try and do it that way. Just make sure you have some kind of agreement where it states that you both are responsible for the mortgage because whether it’s you or the other person that’s putting the debt in their name, ultimately if someone doesn’t pay you, say the mortgage is in your name and your friend or whatever stops paying, it’s going to be you personally that the mortgage is going to go after and say they foreclose on the house. You’re both losing out on the house, but it’s going to affect your credit score and hurt your credit if mortgage payments are missed. So make sure you have some kind of protection or security against that too, or you really, really trust the person.

Tony:
And I think that kind of ties in nicely to the second part of this question. So it’s like if we plan to buy a second property one or two years down the road, how would lenders approach the underwriting? So like Ashley mentioned, if one person is on the mortgage, both of you’re on the deed, one person’s on the mortgage, both of you’re on the deed. When you go to get that next property, even though both of you’re on the deed, only the person who’s on the mortgage only their debt to income will be impacted by this first house S act. So if Ashley and Tony buy a duplex together, but it’s just Ashley who’s on the mortgage, we’re both on the deed. When we go to buy that second property, my DTI is going to show zero in terms of mortgages and Ashley will show the house act that we have together.
Now, say both of you go on the mortgage together because maybe you can’t qualify by yourselves when you go to buy that next property, since both of you’re on the mortgage, and actually check me if I’m wrong here, but since both of you’re on the mortgage, underwriting doesn’t split that in half. If the mortgage is 2000 bucks, it doesn’t say, okay, Ashley’s liable for a thousand bucks per month and Tony’s liable for a thousand bucks per month. It says Tony’s liable for 2000 bucks per month and Ashley’s liable for 2000 bucks per month, even though both of you are sharing that cost. And the reason why is because the lender who’s doing the underwriting, they’re like, well, we don’t know who this other person is, right? Even though both of you guys technically apply together, they’re like, we don’t know who this other person is. You are always responsible at the end of the day for making sure that mortgage payment is made. So that’s why it is very, it’s helpful if you guys can get approved individually, otherwise you’ll both get double dinged for those mortgages.

Ashley:
Yeah, that’s 100, correct. So it kind of stinks because now that’s being accounted against both of you. So if you do go and get another property, they’re looking at it as you both are responsible for $2,000 each instead of a thousand and a thousand. So it can affect your debt to income on the property. And then the last question here is do we need to watch for any pitfalls in future for scaling our portfolio together or separately? So the thing that I would want to have in place is some kind of operating agreement or joint venture agreement. Even if you are doing this in your personal name, have some kind of agreement in place where you are writing out what happens in the future. And Tony, I always use what you have done as an example, as in when you take on a partner, you put in there a five year exit plan. So do you want to explain to everyone what that is and how this person should use this to protect themselves from many falling outs or pitfalls?

Tony:
Yeah, the five year exit plan I think is one of the smartest things we’ve done in our real estate business in terms of partnering with other investors. Again, part of the way that we built our portfolio was finding really good deals and then soliciting those deals to folks that we felt might be good partners for us. And a lot of these people we’d never met before, these are people who we would meet in different places through different means. So even though we had a good initial conversation, who knows if down the road we would enjoy continuing to work together? So that was the genesis of the partnership kind of five-year clause. So basically what it states is that at the end of the fifth year of the partnership, the default option, the kind of default action that needs to be taken is that we sell the property. The only way that the cell is avoided is if both parties, both partners agree to extend for another year and then 12 months later the same thing happens. So every year, thereafterwards, we have another opportunity to reevaluate that partnership to see if it makes sense to move forward. We actually haven’t needed to leverage that at all yet. Most of our partners that we have are actually pretty solid people. But it is good to have just in case things do go south, there’s an easy exit for both of you.

Ashley:
Rookies, we want to thank you so much for being here and we are so close to hitting 100,000 subscribers on YouTube. We would love it if you aren’t subscribed already, if you would head over and find Real Estate Ricky on YouTube and follow us. We have to take one final ad break and we’ll be back after this. Alright, let’s jump back in. Okay, today’s last question is, Hey all I am just getting started and in my first deal I offered more than what the property appraised for. What should I be looking at when trying to consider an appropriate offer, especially if I can’t see the property since I’m investing out of state? Okay, making an offer. How do you figure out what the property is worth and then to find that disappointment of the property not appraising. So let’s kind of work through this process here.
You put an offer on a property, the offer is accepted. Usually there will be a contingency if you’re using financing that you can back out of the contract if the bank will not lend you the amount that you stated you’re borrowing. So if you put in your contract, you’re borrowing, you’re doing 80% conventional financing with the bank. If the bank says we’re only going to lend you 70%, that can be sometimes a way to get out of your contract and the contract falls apart. There’s also a spot too that your agent could fill an interest rate. So if the interest rate, if you put has to be below 6%, obviously it has to be something reasonable or else the seller is probably not going to sign it. But if all of a sudden overnight interest rates jump to 10%, you could say, look, the bank can no longer give me that rate.
I am going to get out of the deal. So this can also go for what the property appraises for. So the bank goes and does an appraisal on the property to see its value, and then it says, okay, it appraised for a hundred thousand dollars. We are doing a conventional loan of 80%, so we will lend you 80,000. Well, if the bank says, you know what? It only appraised for 90,000, so we can’t give you that 80,000, that’s when you have to make the decision, are you going to come up with the rest of the money? So make a bigger down payment on the property? Are you going to try to renegotiate with the sellers of the property or are you going to back out of the deal? So it looks like in this situation, they must have backed out of the deal because they’re wondering what to do going forward to actually figure out what an actual appropriate offer is. So Tony, the first thing that I would’ve done in this situation is dispute the appraisal. At least attempt to do that, dispute the appraisal, try to renegotiate with the sellers.

Tony:
Yeah, I agree with you 100%. And I think both of us have had experiences where appraisals came in lower than what we had anticipated. And yeah, if you believe that the appraisal was wrong, then yeah, it is very reasonable to go out and say like, Hey, here are some comps, some comparable sales that I found that I feel are better matched than the comparable sales that the arai found. Because sometimes you guys, appraisers are coming from, maybe they don’t know the area as well, right? Maybe they’re coming from somewhere a little bit further out. They just put this appraisal, they were still on work, whatever it may be, but they don’t know that area incredibly well. And sometimes you might know that area better than the appraiser does. So if you can point out, hey, you picked a comp that was three miles away that sold for less, but here’s one that sold more recently, that’s two miles away.
Now you’ve got some ammo to maybe to really contest that appraisal. And one other thing say that the appraiser says, Nope, my appraisal is perfect. Nothing here needs to change another route. You can always go down, and this is obviously a little bit more of a nuclear option, but if you change lenders, and I don’t know if this is law or maybe just best practice, but lenders can’t use the appraiser appraisal from a different lending institution. So if you change lenders immediately, there has to be another appraisal that gets ordered. Now if you’re working with the seller, typically sellers don’t want to push back closing, but if it’s, Hey, either we’re going to close a little bit later or we’re not going to close because the appraisal, they might be a little bit more willing to working with the different lender. So just another way to put some more pressure on the appraising process to make sure it gets done the right way.
Ashley, I think one other thing that you mentioned as well that’s super important is that sometimes a low appraisal can work in your favor. You just have to have the confidence to be able to leverage that as a bargaining chip with the seller because it sounds like maybe you did run your numbers and maybe it did make sense at the purchase price, so it was a good deal. So that doesn’t necessarily mean the value isn’t there, but if you ran the numbers, you liked the deal, everyone agreed, then maybe it is a good deal. But maybe it’s just the fact that the appraisal didn’t come back where you wanted it to. So I would go to the seller and say, look, Mr. And Mrs. Seller, I’m very motivated to buy your home. I love it, the numbers work. However, if I ran into this issue with my appraisal, chances are the next buyer is also going to run into this issue with their appraisal.
So what is in your best interest? Is it giving me the 10, 20, $30,000 discount on the purchase price so we can still close next week? Or do you want to go through the process again of taking the listing down, relisting it, having another buyer who can hopefully get the right appraisal? Maybe they do, maybe they don’t. And you’re in this exact same position, another 60 or 90 days from now. And a lot of times you can get sellers who, if they’re motivated enough, maybe they will come down and meet you at the price that you needed, or at least maybe give you, Hey, let’s meet in the middle. But I think you’ve got to be confident enough to ask that question. If you’ve got a good agent, I think they should be able to negotiate that conversation for you as well.

Ashley:
Yeah, and that kind of leads into the next thing I wanted to bring up is building a team. It mentioned this person is investing out of state, so they can’t actually go and see the property, whether it’s an agent or you need some kind of boots on the ground person that will actually go into the property and be your eyes, but also take a million pictures of the property, take video of the property. We’ve had Nate Robbins on before on the podcast, when he goes to a property, he takes the pictures like you’re walking through the house basically as he takes a step, he’s taking a picture and turns around, each room takes a picture of the doorframe, so you’re entering a different room and then all of that is collected and it’s sent to his partner and then his partner builds out the scope of work in the rehab from just the picture.
So it definitely can be done, but just kind of getting an idea of this is what we should offer on the property based on what you’re seeing. And he always likes to do photos because it’s easier to zoom in on things than it is on video. But they like to have the video too, to kind of get the flow of the house as you go through it. And they do that for the interior and the exterior of the property too. So whether that’s a property manager that you find in the area that you say, Hey, I want to find a property, I want to do this through you guys. Do you have someone on your team that could walk properties for me? Maybe you do it for free wanting your business, or maybe they’ll charge a flat fee, which is definitely worth it to have the boots on the ground.
You could go to the BiggerPockets forums, you could post hate anyone in this area. And it’s not like you really have to, I guess, say trust the person. It’s not like they’re entering into your property, they’re going with your agent or they’re going along and seeing these properties looking and taking pictures and giving you their feedback. And if it’s not super detailed, then hey, you can find someone else to do it too. But I think there’s a lot of people eager to learn who would love to just go and walk houses and work with another investor to see what they’re looking for, things like that. I guess, Tony, the last thing piece I would add to this is what is the cost of a plane ticket to go and see this property? Sometimes paying 200 bucks for a round trip, airfare could be worth it to go and set up a whole bunch of properties, showings in one day or one weekend or something to fly out there and to actually look at them.

Tony:
I couldn’t agree more. Right, and obviously there’s value in long distance investing and building that team, but if it makes sense, I think there’s always value in kind of getting eyes on it yourself as well. But I guess just one last thought for me as well actually, because the question says, what should I be looking at when trying to consider an appropriate offer? You can get a good guess of what you think the property will appraise for as you can go through the process of finding comparable sales yourself, but appraising a property is part art, part sign, so it’s virtually impossible to know down to the dollar what the appraisal will come back at. So as long as you, the investor, the buyer, do your due diligence upfront, you’re using tools like the BiggerPockets calculators, you’re getting quotes from insurance agents to make sure you know what your insurance is, you’re shopping around to get the best debt that you can. As long as you’re controlling all of those things, then I feel like you are following the right process to make an appropriate offer. But don’t feel like you did something wrong simply because the appraisal didn’t come back where you wanted it to. So just a bit of a mindset shift for the rookies that are maybe experiencing a similar issue.

Ashley:
And if you want help analyzing your deal better go to the BiggerPockets calculators because they show you exactly every single expense that you should need. So if you do think it is a deal analysis thing and not actually an appraisal thing, that’s just another resource that you can kind of go, because the numbers don’t lie. As long as you’re verifying what the numbers are, go by that, and that’s what you should be making your offer on, not what you expect the property to appraise for, unless you want to go and you want to add value and then you want to flip it or you want to refinance it. But just if you’re purchasing that property, like Tony said, the appraisal could not be correct and an appraisal, it’s an art form. You could have three different appraisers go to the property and each give you different numbers on it.

Tony:
Three different, yeah.

Ashley:
Okay. Well, we have a special announcement. We have a rookie newsletter that is being sent out every single week. Tony and I writing it ourselves, and we’re trying to give you guys so much value, some reading material and some fun things to learn about real estate investing and what’s going on in the news so you guys can stay up to date as real estate investors in today’s markets. You can head over to biggerpockets.com, hit the get started tab and you’ll see newsletters and it’s got a little new shiny button next to it, hit on newsletters, and you can subscribe right there to the Rookie Newsletter. We can’t wait to hear you guys feedback. Also, if you want to respond to that email, it gets sent right back to Tony and I. So any questions or any feedback you have on the newsletter or things you would love for us to write about, please let us know. Well, thank you so much for joining us on this week’s Rookie reply. If you have questions, head over to the BiggerPockets forums, submit your question there. I’m Ashley. And he’s Tony. And we’ll see you guys on the next Real Estate Rookie podcast.

 

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In This Episode We Cover:

  • Costs you must account for when analyzing a rental property
  • The biggest pros and cons of turnkey real estate investing
  • How to properly budget for capital expenditures, maintenance, and repairs
  • Why you need a five-year exit plan when structuring a partnership
  • How to find “boots on the ground” when investing out of state
  • Renegotiating with the seller after receiving a low appraisal
  • And So Much More!

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The housing market saw significant “softening” in February, with inventory rising, demand shrinking, and buyers regaining more control while sellers find themselves in a tough position. Why is this happening now, especially as mortgage rates continue to dip? With recession fears and economic tensions running high, Americans worry what’s coming next, causing much of the economy to shift. With price declines already happening in some markets and more potentially on the horizon, when is the right time to buy?

We’re back with a March 2025 housing market update, going over what’s happening in the national housing market, which states are seeing the hottest (and coldest) housing demand, what’s going on with mortgage interest rates, and why the market is noticeably softening.

But the real question remains: How can YOU continue building wealth while others fear the worst? Is this your “be greedy when others are fearful” moment? Dave is giving his take and sharing how he’s tailoring his own investing strategy in 2025.

Find investor-friendly tax and financial experts with BiggerPockets Tax & Financial Services Finder!

Click here to listen on Apple Podcasts.

Listen to the Podcast Here

Read the Transcript Here

Dave:
Your real estate buying window is open. Well, maybe that’s right. The housing market is softening after several years of supreme seller power. Potential price declines can be a boon for real estate investors looking to negotiate, but they also create risk if you buy at the wrong moment. So which way is the housing market heading and how can you take maximum advantage in your own portfolio? Today I’m giving you my March, 2025 housing market update. Hey everyone, it’s Dave head of Real Estate investing at BiggerPockets, and if you know me, I believe being a successful investor is about learning and continuously improving on your skills. Things like deal finding, tenant screening, managing rehabs, all that stuff is super important. But you also need to understand the broad trends that are happening in the housing market in order to optimize your portfolio to find the best deals and to avoid any unnecessary levels of risk.
For this reason, I like to provide a summary of what is going on in the housing market and I also like to provide my personal analysis and read on the situation. I’ll even tell you what I’m thinking about and doing with my own portfolio. This is for March, 2025. So trends may be different if you’re watching this a little bit further into the future. Now I want to just say that I’ve been analyzing the housing market for a very long time. I’ve been an investor for 15 years. I’ve been working at BiggerPockets for nine and right now things are changing pretty much as quickly as they ever have and that makes it more important than ever to understand what’s happening for your own portfolio and achieving your financial goals. Alright, so let’s talk about this softening market and what it actually looks like in the numbers and of course what it means to you.
Now if you look at certain websites like Redfin, you’ll see that home prices are up 4% year over year according to what data they have collected and when they seasonally adjust it. When you look at some of the other data sources, there’s a source called the Case Schiller Index and that uses a different methodology where it basically tracks how the price of the same home change over time. And what you see when you look at the case Schiller is it’s much closer to flat. And so we’re probably in somewhere in between those two. There’s no perfect measure, but we’re probably flat-ish housing prices maybe up a little bit depending on what market that you’re looking at. So that is by no means any sort of correction or crash at this point. It’s also not really exciting data in terms of appreciation, but I think the important thing here is that the trend is just really flat or a little bit down.
We’re not really seeing appreciation or price growth start to accelerate again. And so this is just one of the reasons I’m saying that the market’s flat. Now to understand if this trend is going to continue or if we’re going to see the market reverse in some sort of way, we to dig in a little bit deeper, go one level lower to try and understand why the market is somewhat flat. And I always talk about this, but we have to do it. We got to talk about supply and demand. That’s what dictates prices in the housing market. And so we need to see what’s going on with supply, which is just how many homes are for sale at any given point or how many people are listing their homes. And we got to look at demand. How many people want to buy homes? Let’s start with the supply side.
There’s really good data about this. It’s a little bit easier. So we’re going to talk first about something called new listings. This is a measurement of how many people put their properties up for sale in any given month, and that is up year over year. It’s up 6% according to Redfin, which is good in some ways, but it’s not crazy, right? We have seen really low inventory and to return to a healthier housing market, there need to be more properties listed for sale. And so having that go up, at least in the short term is generally seen as a good thing, but you have to look not at just how many people are listing their properties for sale. You also have to look at how long those properties are staying on the market because if they’re getting listed and going quickly, then prices can keep going up.
But if more things are getting listed this year than last year and they’re just sitting there and not really selling, then prices are probably going to go flat or go down because as property owners who want to sell their property are seeing their properties just sit there on the market week after week or month after month, they lower their price or they’re willing to offer concessions. And that’s what ultimately pushes prices down. And what’s happening right now is that active listings are up 10% year over year. And again, that’s not crazy because we have to look at the historical context here. So you might know this, but back in 2019, active listings were averaging somewhere around 2.3, 2.4 million. Then during the pandemic they went down to 1.6. We actually bottomed out at 1.1 million and although they’re going back up right now, they’re still at 1.5 million, they’ll probably go up over the summer and get somewhere close to 1.9 million.
So they’re going up, but they’re still not at pre pandemic levels. And that’s one of the main things as we talk about the housing market that you need to remember is when we compare what’s happening now to what was happening during the pandemic, it’s not the best comparison honestly, because what happened during the pandemic was just so unusual. So to say, oh my god, inventory has gone up compared to the pandemic. Of course it did because it was like at all time lows. I personally like to look at that still, but compared to 2019, and so we’re seeing things come back closer to pre pandemic levels, but we’re not there yet. And so this is the reason why I am saying that the market is softening. It’s back to where it was. I would even say it’s just sort of a normalization of the market, but because we’ve gotten used to this super heated market that’s very tight, there are not a lot of things on the market, there are still a lot of demand.
And so things are moving really quickly. That’s why I’m saying it’s softening because we’re just moving back to a more balanced housing market. So you definitely see that in the active listings numbers. You see that in some other data that you can look at for these things like days on market, those are going back up or months of supply. These are just other ways to measure the housing market. We don’t need to get into them today, but what you should probably know is that all of the measures of housing market health are just saying that we’re getting closer back to pre pandemic levels of the balance between supply and demand. Now of course, what I’ve been talking about so far is about the national housing market, but there are huge regional differences. We’re actually seeing a lot of signs that the market is kind of splitting. Some markets are growing in one direction, others are going in the other direction. So we’re going to break down those regional differences in just a minute. But first we have to take a quick break. And this week’s bigger news is brought to you by the Fundrise Flagship Fund, invest in private market real estate with the Fundrise Flagship fund. Check out fundrise.com/pockets to learn more.
Welcome back to the BiggerPockets podcast. We are here doing our March housing market update. Before the break, we talked about how a lot of the data suggests that the national housing market is moving to a more balanced market, a more buyer’s market, but that is not happening everywhere in the country. So let’s just take a minute here and talk about how inventory changes are different in different regions of the country. First things first, what you need to know is that every single state in the country is experiencing increases in inventory except North Dakota. North Dakota is down 2%, everywhere else is up. This is just year over year since 2024 in February to 2025 in February. And again, I’m recording this in early March. So the last month that we have data for is February. The state that has the highest shift in inventory over the last year is Nevada.
We see California at 44%, Arizona at 41%. Vermont is up there, Hawaii is near 50%. So that’s happening everywhere where if you want to know regionally where things are happening in the least, it’s mostly in the northeast and the Midwest. So I said North Dakota, that’s kind of an outlier, but New York for example, only up 3%. New jersey’s 9%, Illinois is 9%. So it’s sort of a continuation of the trends where the hottest or the strongest housing markets, I should say are in the Midwest and the Northeast. Some of the weaker ones are in the mountain west and west coast and the southeast as well. Georgia’s up 37%, Florida’s up 34%. That’s just at a state level. But given what I was saying before about the utility and usefulness of comparing data from this past year to the year prior, it’s helpful. We need to know it because you need to know how the market’s changing.
But I also like to provide this context of how things have changed since before the pandemic because that will really give us some clues about where prices are heading in any given market. And when you look at the data this way, it is very, very different. Remember I just said that everything’s going up year over year because it was super low. But when we look at how February, 2025 compares to February, 2019, it’s a pretty different story. We have certain markets where we are still nowhere even close to the levels of inventory that we were at in 2019. When I look at a state like Pennsylvania, it’s down 50%, still over 2019. Maine is down 61%. New Hampshire, 61%, Illinois, 63%, almost all of it is concentrated in the Northeast and the Midwest. So Wisconsin, Michigan, Virginia, all of these states are really down. Actually Alaska’s down too.
That’s kind of the only one that’s out there other than North Dakota. Again, those are sort of the most significantly down, but even throughout the rest of the country, most states are still down compared to pre pandemic levels. If we look at the Carolinas, California, Nevada, Washington, Oregon, all of them are still down. So that is sort of the big picture thing that you should keep in mind is that although inventory is returning, most states are still down compared to pre pandemic. So they’re still not back to what would be considered a normal market. There are four states, however that are above pre pandemic levels. The number one with the most inventory growth above pre pandemic levels is Texas. It’s 15% above where it was in 2019. Then comes Florida with 9% above Colorado at 7%, and Tennessee actually with 2% as well. So again, the regional differences really matter, and I’m talking about states.
I can’t get into every individual metro area on the podcast, it’s just too much to do. But what my recommendation for all of you is to look at these two things for your individual market because even within Texas which has rising inventory, there are certain markets and there are certain neighborhoods where inventory is still down. Or if you look at Pennsylvania, which has 50% declines in inventory, I’m sure there are still neighborhoods in areas where inventory is increasing. So I really recommend you look at two things in your market. Go and compare inventory levels right now in February of 2025 to where it was last year, see how much that’s growing and then compare it to 2019 and you’ll get a sense of how quickly the market is shifting from that really strong sellers market. That was kind of universal for years back to what would be a more normal sort of balance kind of market.
So what does this all mean? The stuff I said and the research you should probably be doing on your own as well. Any market where inventory is going up rapidly has the biggest chances of price growth slowing. And in some markets that mean it might go from 10% appreciation to 5% appreciation. In some markets that might mean six to two. Some markets it might mean going from flat to negative. And so it really depends on the scale of the inventory changes and what’s going on in your particular market. But as a whole, just going back, zooming back out to the national level, I do think that given inventory is rising and demand hasn’t picked back up, at least in the last couple of months, we are going to see further softening. And this is one of those reasons why I’ve said repeatedly that I do think prices will be maybe modestly up this year or somewhere near flat, especially when you compare those things to inflation, they might be a little bit negative based on the data that we’re seeing here today.
Now again, that is not going to happen in every market and what that means for real estate investors is not as obvious as you think. Declining prices are not necessarily a bad thing. A lot of people, I’d say maybe even most investors think that is actually a good thing. So we’ll talk more about what a softening market means, but we sort of have to address one other big thing before we get into what you should do next, which is of course mortgage rates. Mortgage rates have been in the news a lot and as of this recording, they’ve dropped down to 6.64% for a 30 year fix, which is down nearly 0.6% from where they were. They had shot up all the way to 7.25%. They’ve come down a lot and that is generally good news for real estate investors. But of course the reason this is happening is because there is bad economic news.
So we have to dig into this a little bit and sort of unpack what’s happening and what this means. So why have rates fallen so much over the last couple of weeks? We’ve talked about this in other episodes, you can go hear about it in further detail, but we’ve seen a bunch of soft economic data. The first thing was we had low consumer sentiment. We actually had the biggest month over month drop in four years. It’s not like this is going crazy, it’s lower than it was over the last few months, but it’s pretty much in line with where it’s been from 2022 to 2025. But after the election, consumer confidence had been growing and that has reversed itself over the last couple of weeks, and that decline in consumer confidence worries investors. And so we’ve seen some weakness in the soft market. I’ll get to that in a second.
The other thing that we’ve seen is an uptick in unemployment claims. There are lots of ways to measure unemployment. This is one I like to measure because it basically looks at the number of layoffs. And so we’ve seen layoffs start to tick up. Again, nothing crazy, but these are just small things that start to spook the market, right? And what we’re talking about when we talk about mortgage rates is essentially how bond investors and stock investors are reacting to all this news. And right now, given the level of uncertainty in the world, given the level of uncertainty in the markets, people are very sensitive. They’re reacting pretty dramatically back and forth to all the news that they’re getting. And so little changes in unemployment claims, little changes in consumer sentiment are probably impacting markets more than they would if this was 10 years ago in the middle of just a normal economic cycle.
So that is two things that are happening. And so there’s actually one thing that has happened over the last just two weeks that I think has further spooked investors, not tariffs. Those are sort of obvious. That is definitely something that’s been weighing on people’s mind. But something that I think got lost in the shuffle over the last few weeks is that there is this tool called the GDP Now tool. It’s put out by the Atlanta Fed, and it basically predicts where gross domestic product is going to go for the current quarter that we’re in. If you don’t know what GDP is gross domestic product, it’s basically the total measurement of economic output and it’s super important, right? If the economy is growing, that’s generally a good thing for the United States. If the economy contracts, that means people’s quality of life spending power is generally going down.
And anyway, what happened was the Atlanta Fed tool, which has proven to be very accurate historically, has changed its prediction. Just two weeks ago it was predicting 2% growth for GDP, which is not great. It’s not like an amazing quarter, but it’s not bad. It’s kind of just like a normal kind of quarter. It basically plummeted and the estimate now went to about negative 2.5% and has held there for three consecutive weeks. And so now they’re predicting that GDP is actually going to decline here in the first quarter of 2025, and that is super significant for all the reasons that I just mentioned. So between softer consumer sentiment and uptick in unemployment claims, softer GDP projections, uncertainty around tariffs, this has just basically spooked investors and it has led to a large stock market selloff. We’ve seen the NASDAQ was down 10% at certain points, which is correction territory.
That’s a significant decline. We’re basically seeing the entire boost in the stock market that we saw after the Trump election erased we’re back to basically where we were before the election. And what happens for real estate investors for mortgages is when people sell off their stock market, typically what they do is they take their money and they put it in bonds. And I’m not talking about me. If I sold off some of my stock, I probably wouldn’t go do this, but we’re talking about the big money movers. People who manage pension plans or hedge funds, they need to put that money somewhere. And so when they take it out of stock market, they typically put it into bonds because they’re seen as safe when they’re spooked about what’s happening in the stock market or the economy as a whole, they take the money, they put it in bonds, and that increases demand for bonds because everyone wants them.
And that pushes down yields, right? If a lot of people want to lend money to the government, the government can borrow that money at a lower interest rates. That’s yields coming down. And since yields and mortgage rates are almost perfectly correlated, that will take mortgage rates down with them. And so that is why mortgage rates have come down. Of course, no one knows for sure what is going to happen, but I’ll give you at least my opinion and what I’m thinking about and doing with my own portfolio. But first, we have to take a quick break. We’ll be right back. If you’re eager to get started in real estate investing, a smart first step is to partner with an investor friendly financial planner who can help you get your house in order and ensure you’re set up for financial success from the get go to biggerpockets.com/tax finder to get matched with a tax professional or financial planner in your area.
Welcome back to the BiggerPockets podcast. We are here doing our March housing market update and where we left off, I was going to try and make sense of this whole situation and share with you what I think this all means. Now, all the data, everything that I’ve shared with you, the future and direction of the housing market to me is really about economic sentiment. And that basically just sucks because it’s hard to predict, right? I’m sorry, but I know other influencers, creators, they’re going to tell you definitively what’s going to happen, but they’re misleading. I’m an analyst and the only thing I can tell you with certainty is that right now things are particularly uncertain and that’s the most important thing to remember. It is okay for your investing thesis or hypothesis to be that it is uncertain. It is better to admit that than to act on a false interpretation or false certainty because you don’t really know.
But here’s how I am personally seeing this. It seems to me that economic pessimism is gaining steam and people will have different opinions about what’s going to happen in the future. I am looking at data, I’m looking at trends, and this is what the data shows. It shows that investor confidence is down, the stock market is turning, the housing market is starting to soften, and does that mean we’re going to a recession? I don’t know. I think it is far too early to say that the GDP now thing is just one estimate, but I’m just telling you that the change from where we were in January to where the data was in February is pretty significant. There was a lot of economic optimism in December and January that has shifted in February and it might shift back, but right now it does feel like economic pessimism is gaining steam.
And for me, there are a couple things to take away from this. The first thing that has been coming to my mind recently is if we enter in a recession, and again, that is a big if, but something I’ve been thinking about is could this shape up to be what is sort a classic economic cycle where real estate is the quote first in first out, if you haven’t heard of this, there’s this pattern that has existed in a lot of recessions in the past where things are going off great, we’re in an expansion, businesses are booming, the stock market’s going up, everything is great, people are taking out debt. At a certain point, the economy starts to overheat and that leads to inflation. At that point, the Federal Reserve raises interest rates, right? Sound familiar? This is what’s been going on. And when the Federal Reserve raises interest rates, it impacts real estate first.
And I’m not saying this just because this is a real estate podcast, but real estate is just basically the most leveraged asset class. And actually as we’ve seen over the last several decades, it’s become really sort of on its own in how leveraged it is, which basically means it uses the most debt. And sure people take out debt to finance buildings and manufacturing and expansions for businesses, but real estate is really highly leveraged. And so you see real estate bear the brunt of a recession actually before everything else. And if you’re in this industry, you’ve been probably saying this and screaming that we’re in a real estate recession for the last two or three years, transaction volume has been down, prices have been largely flat, right? We’ve sort of been in a real estate recession for a while. But what’s been amazing is that other parts of the American economy has remained resilient despite these higher interest rates.
And for one reason or another, maybe that resilience is cracking right now and it’s reverting back to what we would’ve expected that the rest of the economy is starting to feel some of the pain of higher interest rates. So that’s sort of the classic start of a recession, right? Real estate comes first and then the rest of the economy comes second. But then what happens when the rest of the economy starts to slow down? Well, the Federal Reserve wants to stimulate the economy. They’re no longer as afraid of inflation, so they lower interest rates, and that gives a stimulus first to real estate, right? Because it is a leveraged asset class. So as those rates start to come down, it kickstarts economic activity, particularly in the real estate section, and that can actually help lead the entire economy out of a recession. And real estate is big enough.
It is a big enough part of our economy to both help bring the economy into a recession. And out of it, it’s estimated to be about 16% of GDP. That is huge for any one industry. Now, if you’re thinking that’s not what happened in 2008, that is definitely true. It’s sort of the exception to this pattern, and we don’t know what’s going to happen. But the belief among most economists is it didn’t happen in 2008 because unlike this current time in 2008, housing was the problem. That’s what created the recession in the first place. Whereas right now, housing is not the problem. Housing, a lot of the fundamentals are fundamentally sound. What’s going on with housing is really a reaction to interest rates. And so what I see emerging is potentially this first in first out situation. That is probably what I think is the most likely scenario as we’re looking at it today.
I think there are two other things that are possible that I’ll just mention, but I think they’re less likely. So the second thing that can happen is maybe this is just a blip in economic data and there’s actually going to be strong growth and people regain their confidence, in which case we’ll probably see mortgage rates go back up a little bit. I don’t know if they’re going to go back up to 7.25, but they’ll probably go back up again. In which case, I think the housing market will continue on its current softening trajectory. Again, I don’t think that means a crash. It probably means corrections in certain markets where other markets are going to keep growing. But I think we’ll continue on the trend that we’ve been on for the last couple of months. So that is a second possibility. It’s not that unlikely, it just doesn’t seem like the most likely scenario.
And then the third one, I don’t think this is so likely right now, but actually when you look at some of the data, there is a little bit of risk right now of what is known as stagflation. And again, I don’t think this is what’s happening just yet, but I just want to call it out because it is possible. Stagflation is when the economy slows down, but inflation is going up. This is basically the worst case scenario for the economy, but we have seen inflation go up a little bit then it’s sort of flat, so it’s not super concerning just yet. But there is a world where inflation goes back up due to tariffs. And the GDP now tool is correct and GDP declines, in which case we would have a really difficult economic situation where the economy is contracting, but inflation is going up, and that’s basically the worst case scenario.
Spending power is going down, but wages aren’t going up, the stock market is going down. And so although that is possible, I wouldn’t worry about that just yet. It’s just something that I wanted to mention that we’ll keep an eye on in the next couple of months. So as we do these updates every single month, I will update you and let you know if that’s a concern. There is some data trends that suggest it’s possible, but I think we’re still a far way off from concluding that that is happening. So let’s just go back to what I think is the most likely scenario, which is kind of this first in first out situation with real estate. Does that mean that it’s potentially a good time to buy real estate, right? Because don’t get me wrong, when markets are softening like they are, that comes with risk.
There is further risk that prices are going to decline. And I’ve said it before, but there is a lot of garbage out there. There’s a lot of bad deals, overpriced stuff out there, and things could get worse before they get better. But there is also a case that in at least some and maybe many regional markets that a buying window may emerge. Think about the conditions that we might have over the next couple of months. More inventory coming on the market leads to price softness, which gives you negotiating leverage, right? Because if you know that prices are soft and they might be declining more, that is something that you should be using in your bid strategy. And when you’re offering on properties, try and buy below asking price or what you think the market might bottom out at. So that gives you negotiating leverage. Remember I said softening it sounds scary, but that actually means we’re in a buyer’s market.
Buyers have the power. So that’s one good thing you might not want to buy even in a buyer’s market, if you think that that buyer’ss market’s going to continue for a long time and we’re going to have this sort of protracted period of prices going down. But remember that prices have been largely flat or growing modestly over just the last couple of years. And so we’ve seen this for a while. And if the current economic mood is correct and that we are going to see a contracting economy, that means that rates might stay as low as they are now and they could go down a little bit more. And if that scenario happens, that could bring demand back into the housing market. People often think that if the economy is doing poorly and there’s a recession that causes lower housing demand, but that is not always the case.
Housing demand is almost always tied to affordability. And so yes, if you don’t have a job, you’re not going to be going out there and buying a home. But for people who feel secure in their jobs, this might actually lead to better housing affordability. If the market softens and rates go down, that means more people are going to be able to afford more homes. That drives up demand and could actually reignite price appreciation in the housing market. That’s not what happened in 2008, remember, that is an outlier. But this is what often happens. So it’s something I’ll be keeping a close eye out for, and I recommend you do too. Personally, I have been looking for deals. I’m always looking for deals. I haven’t found anything so far yet this year. I’ve offered on some, haven’t been able to make it work, but I am maybe strangely optimistic about the potential for deal flow over the next couple of months and in the second half of this year.
I think that right now, we’ve been talking a lot this year about this potential for upside. And while there is risk, don’t get me wrong, there is risk in these kinds of markets. That upside is there and might even actually be growing throughout 2025 because if rates do come down and you have the opportunity to negotiate better prices on houses, that could set the stage for really good upside and future growth. So that’s how I’m seeing it. I would love if you’re watching this on YouTube to let us know how you are interpreting this housing market and what decisions you are making about your own portfolio. Thank you all so much for listening to this episode of the BiggerPockets podcast. I hope this housing market update was useful to you. We’ll see you next time.

 

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In This Episode We Cover:

  • Why the housing market is starting to noticeably “soften” in 2025
  • Hottest/coldest housing markets in the United States with the most/least inventory
  • Are price declines coming? Whether we’ll end this year with negative price growth
  • Why mortgage rates are dropping, but housing demand isn’t rising
  • Why real estate could be the “First In, First Out” investment of 2025’s wild economy
  • Whether or not now is the time to buy and what could cause a reversal of these worrying trends
  • And So Much More!

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100% Bonus Depreciation Could Return This Year

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Real estate is one of the most tax-advantaged investments in the country. With bonus depreciation, opportunity zone investing, 1031 exchanges, and more, investing in real estate is not only the best way to build wealth—it’s the key to tax-free (or deferred) wealth. So, with a Republican-controlled House and Senate, will new tax proposals favoring real estate investments pass?

We’ve got some news that could make 2025 a “game-changer” year for real estate investors. CPA Brandon Hall joins us to break it down.

With numerous proposals floated to restore 100% bonus depreciation, extend opportunity zone investments, and eliminate taxes on tips, overtime, and Social Security, 2025’s tax laws could look very different if these changes pass.

Plus, there’s one huge real estate tax write-off you’re (probably) not taking advantage of. Brandon shares how investors can write off even more during rehabs and renovations, using a specific tax deduction most investors have never heard of.

Dave:
Hey everyone, I’m Dave Meyer. Welcome back to On the Market. The Year 2025 is shaping up to be a potential tax game changer for real estate investors. With the potential return of a hundred percent bonus depreciation and a range of new opportunities. Today, we’re breaking down some potential changes to popular tax strategies and the new opportunities that could pass Congress in the coming months. Joining me on today’s episode is Brandon Hall of Hall CPA. He’s a real estate tax expert who’s here to guide us through it all. Stick around because these moves could redefine your investing game this year. Let’s jump in. Brandon, welcome back to On the Market. Thanks for being here.

Brandon:
Thanks, Dave. Happy to be here.

Dave:
As our audience must remember, Brandon joins us probably about once a year to talk about taxes, and this is a perfect time of year to just be talking about some of the updates to the tax code that are relevant to real estate investors that we know about. And then the second half of the show, we’ll pull out our crystal balls and talk about some of the things that are being discussed in terms of new policy. And we’d just love your opinions on those, Brandon, because we don’t know exactly how they’ll shape up. But tell us, are there any new changes to the tax codes that have actually been enacted that you think real estate investors should really know about right now?

Brandon:
I would say that the big one is just that bonus depreciation continues to phase out. So this year we are 40% bonus depreciation. Next year, 2026 will be 20%, and then 2027 will be 0%. If nothing changes. Now there’s a high expectation that something will change, but as of right now, that’s what we’re looking at. So when the Tax Cuts and Jobs Act was originally implemented back in 2017, 100% bonus depreciation came with it. So if you were buying a rental property and doing a cost segregation study, historically you would get 50% bonus depreciation on various components. But with the 2017 TCJA, you could buy a property, get a cost segregation study performed, and for any component with a useful life of less than 20 years, which typically on cost sick studies is about 25 to 30% of the value of the property. Those components can be 100% written off via bonus depreciation. But that 100% depreciation’s been phasing out. So this year it’s 40%. So the value of the cost eg study is essentially being eroded. But even if bonus depreciation, 0% ever reaches that 0%, it will still be valuable to do a cost EG study. I’ve gotten that question a few times. It’s like, well, it’s always valuable to front load your deductions to create tax deductions for you, tax losses for you so that you can create tax savings, but it’s not as valuable as it would have been if you had a hundred percent bonus depreciation.

Dave:
Okay. And so I’m curious, just in your business then, there’s been a lot of talk of bonuses, depreciation, getting extended in a new potential tax law that comes out with the new Trump administration. Are you seeing people hold off on doing cost eggs or can you use a cost segregation study that is done now for your 2025 taxes regardless of when that law gets passed?

Brandon:
So we’re not seeing people really hold off. We are seeing people ask questions, but most of our clients that are doing cost segregation studies right now are doing them for their 2024 acquisitions. So you just have to do a cost study for the property before you file that first tax return, which you could do for a 2024 property all the way up until October 15th, 2025.

Dave:
Wow.

Brandon:
Yeah, so you don’t have to do the SIG study in the same year. Now all the SIG firms, and if you’re a Ssec person listening to this, don’t worry, I love cost sick people, but all the SIG people, a lot of the SIG people will really push, get a cost act done immediately, typically in November and December because they have sales targets that they’re trying to achieve. But you don’t just have to do it before you file your first tax return with that property on it. So if you’re purchasing a property in 2025, my recommendation would just be to either go ahead and do the cost ex study if you’re happy with the 40% bonus depreciation. But if you’re not happy with 40%, if it doesn’t give you the return that you’re looking for or the tax savings that you’re looking for, then yeah, hold off and kind of see what comes out a little bit later on this year.

Dave:
One thing I’m always sort of curious about with cost segregation studies is does it make sense for people who don’t have real estate professional status to do this? And maybe you can also explain what real estate professional status is because you’re probably doing a lot better than I can.

Brandon:
So does it make sense for people that don’t have real estate professional status? Yes, but every answer it depends. And it really depends on the passive losses that would be created from this CASICK study. When you front load the depreciation, you’re creating a much larger tax write off for yourself, but that tax deduction is going to be considered passive. And so you have to look at do you have passive income to offset the passive losses with, because if you don’t have passive income and you just have all these passive losses that are accruing and you’re not a real estate professional, then the passive losses will just be suspended and carried forward. So you’re not going to be able to utilize them today. And even that’s not the worst case scenario because in my situation, I’ve done a couple cost checks on properties and I’m not a real estate professional. My wife’s not a real estate professional, so we just have suspended passive losses that are accumulating on our tax returns. But now I’m in a pretty nice position where I could sell a couple of my rentals just outright and not have to jump through 10 31 exchange hoops and utilize the passive losses that are sitting on our books.
So it creates some flexibility. It’s not the worst thing. It’s not optimal, but it’s not the worst thing, if that makes sense. So yeah, if you’re not a real estate pro, it’s just a passive loss equation. That’s the game. So if you can create passive income, then you’re set. We have some clients that invest in surgical centers, they’ll invest in venture funds that are buying businesses like a venture fund might give my business some money for a stake in my business and then I’m passing profit back to that venture fund. Well, that’s passive income to anybody that owns a stake in that venture fund. So we have clients that figure out how to create passive income that they then use the rental losses to offset with. And that’s where cost stakes can make a lot of sense, even if you’re not a real estate pro

Dave:
Just for everyone. So that the benefit of being a real estate professional is that you get to use those passive losses to offset active income instead of passive income. So for example, if my wife were a real estate professional, I could then take the passive losses from that cost segregation study and apply it to my W to income and reduce my total taxable income, not just my passive income. So that is a really big benefit. And why, depending on your personal situation, you see sometimes a spouse becoming a real estate professional to enjoy some of those additional tax benefits.

Brandon:
It’s a huge benefit. If you have a spouse that’s a real estate pro and you’re a high income earner, you file a joint tax return, you’ve got a real estate professional status tax return, and as long as you’re materially participating in your rentals, those rental losses are passive. So now you’re doing a cost segregation study to front load the depreciation. You’re creating large tax losses that you can immediately use to write off against your income, and it creates immediate tax savings for you that you go and reinvest and continue to build your wealth in your portfolio. But if you’re not a real estate pro, those losses remain passive. They become suspended and they sit with your tax return indefinitely so forever, and you can use them at some point, but it’s just not as beneficial as being able to capture the tax benefit today, redeploy the tax savings into more real estate or other assets and continue to grow your wealth.
And I should also say that this is a timing play, right? So we’re talking about front loading depreciation. Eventually we have to pay that back. Whenever we sell the property, we have something called depreciation recapture. So 10, 20, however many years later, you end up selling your assets. You do have to pay depreciation recapture, which is basically all the depreciation you’ve ever claimed up until that point. They can get pretty expensive to sell, which is why people do 10 31 exchanges. And it’s also why they passed down these real estate assets to their heirs because their heirs get a stepped up basis in the property equal to fair market value at the date of death and all that depreciation recapture goes away. So a lot of our clients just continue to roll it into the next property with that eventual intention. And if they ever need cash today, instead of selling the property, they just get a loan on the property, cash it out because loans are not taxable.

Dave:
Wow, that’s a good strategy. I like that.

Brandon:
Yeah.

Dave:
Alright, well, so it sounds like depreciation and bonus depreciation, good thing to know, it’s down to 40% this year, but everyone should probably be keeping an eye out on what happens with tax policy over the next couple of months. Before we get into looking towards the future, Brandon, what are some of the other things that strategies that real estate investors should be thinking about going into tax season?

Brandon:
The number one strategy that it’s kind of more of like a compliance thing, to be totally honest with you. It’s not really like a strategy that you can actively deploy, if that makes sense. It really just depends on the competency of the professionals that you’re using or your yourself. If you DIY, your tax returns, it’s something called partial asset dispositions. So these, I believe they came about from the 2013 tangible property regulations, but basically the concept is if you replace a component of the property that you own, then you should be able to deduct the cost of the component that you replaced. So for example, if I bought a property, it obviously comes with a roof, that roof has value. Whether or not I do a cost segregation study, it is true that the roof would have some sort of value that could be allocated to it. So if I go and replace the roof with a new roof, then I should be able to identify the cost of the old roof that I ripped out of the property, and I should be deducting that cost. I would say that’s probably the number one thing that is missed on tax returns.

Dave:
Oh, ING okay.

Brandon:
Is just not deploying that. Right. So with our clients, we’re always looking at those improvement schedules and we’re scrubbing the balance sheet and trying to figure out what are the costs of the components that we rip out. And frankly, we don’t do a good enough job telling clients that we’re doing that.

Dave:
And should that reduce and a lower tax burden?

Brandon:
If you’re deducting that, yeah, you’re able to deduct it immediately. Yeah, it’s going to go right off against any of the income that you’re earning.

Dave:
Okay.

Brandon:
Yeah, it’s a great way And you don’t have the depreciation recapture on that later because you ripped it out of your balance sheet.

Dave:
Oh, right.

Brandon:
So it’s like a double whammy.

Dave:
So is that something you sort of have to do yourself though? Because I can imagine you’re not getting some tax form from your contractor saying, I ripped out X dollars amount of components. So do you just have to go and do that manually?

Brandon:
I mean, it depends, right? If you’re in a roof example or like an HVAC or a water heater type of example, you’re typically getting one invoice
For the replacement roof, the materials, the labor, right? Most people give that invoice to their accountants, and what the accountants need to do is go and say, okay, I have this new roof. Let’s identify the old roof and assign a cost to it and then deduct it from the balance sheet. But most of the time that’s not happening. And the way that you can tell if that’s happening or not, A really simple example is let’s say that you bought a hundred thousand dollars property, $80,000 is allocated to improvements, 20,000 is allocated to land. You did not do a cost egg study. So if you look at your tax returns, there are supporting schedules called the federal Asset Schedule, I think is what it’s called. It’s typically in landscape view. If you’re looking at your PDF form. So if you just scroll all the way down and look for the landscape views, there’s going to be this kind of schedule that says the name of the property, and then it’s going to say, building 27 and a half, it’s going to show you the annual depreciation, and then it’s going to show you the cost assigned to that building. So in this example, it would be $80,000. Now when I replace the roof, typically what happens is you just see another entry on that schedule that says roof 27 and a half years, $10,000. What you also want to see is you want to see the building being decreased from 80,000 to call it 75,000. If $5,000 of cost was assigned to the old roof.
Typically you don’t see that. And so what’s happening in those situations is you now have 10 K of new roof. You also have this $80,000 of building value where the old roof is embedded in. And so now you’re depreciating in effect two roofs, even though you only have one. Got it. Okay. So it’s really inefficient for real estate

Dave:
Investors. That makes a lot of sense. How if I were to go to my CPA and say, am I doing this? How would you phrase that exact question to make sure I’m asking it right,

Brandon:
Man, I’ve thought about this a lot because we see this mistake all the time, and I’ve talked about this a lot. I don’t know. I think the best thing to do is just say, Hey, I have this improvement. Can you make sure that we do partial asset dispositions,

Dave:
Partial asset dispositions?

Brandon:
Okay. I think that’s the best thing to do, and put it in writing and an email partial asset dispositions. Can we make sure we do that? Just get ’em to give you a reply one way or the other.

Dave:
I’m writing that one down. Everyone write that one down right now. Partial asset dispositions. That’s going to be helpful this year

Brandon:
And there’s some nuances to it, so you might not actually be able to do it all the time, but that is the number one mistake that we see, not people not doing.

Dave:
We’ve covered a lot already and there is plenty more to discuss. But before we head to break, I wanted to mention BiggerPockets brand new Tax and Financial Services Finder. If you’re eager to get started in real estate investing, a smart first step is to partner with an investor friendly financial planner who could help you get your house in order and ensure you’re set up for financial success from the get-go. Go to biggerpockets.com/tax pros to get matched with a tax professional and financial planner in your area. We’ll be right back. Welcome back to On The Market. I’m Dave Meyer here with Brandon Hall, and we’ve got more insights to share on 2020 five’s tax strategies. We just heard about what Brandon thinks you should be paying attention to for your taxes filing for 2024. But in the news, there has been a lot of talk and discussion of potential tax changes, extensions of tax cuts from 2017. So Brandon, maybe you could just start by telling us what are the big ticket things you think are being discussed and which ones are the most interesting and relevant to real estate investors?

Brandon:
So the biggest ticket items are just extending the 2017 tax Cut and Jobs act as is. So the house passed their budget framework. Now, a lot of people got this confused with like, oh, these are the actual tax proposals. We actually haven’t seen any actual tax proposals yet. So I just want to make that really clear. For anybody that’s listening and potentially seeing bad advice online, we don’t know what’s included yet. What we do know is that the house passed a budget framework, which basically says we want to approve this certain amount of spending to use in these various areas, and the amount that they approved would cover the entire 2017 tax cuts and Jobs Act being extended. So what was in the 2017 Tax Cuts and Jobs Act? Well, you had a hundred percent bonus depreciation. For anybody that’s developing software or tools or anything like that, you had a hundred percent expensing of RD costs.
You have the salt cap limits. That was the $10,000 itemized deduction issue that really hosed a lot of people living in high income tax states or high property tax states. You can no longer deduct all the property taxes or the state income taxes. They were capped at 10 K. That would potentially be included in this bill if it were to eventually pass, is maintaining that $10,000 cap. You also have the 20% QBI deduction that pass through deduction. And then there’s a couple things like the standard deduction is I think is a $12,000 base, I think is what it is, adjusted for inflation, that would be halved. If that’s not extended, then you’d have personal exemptions come back into play. So there’s a lot of things from the 2017 Tax Cuts and Jobs Act that would be interesting to go back and look through if you’re curious about what could potentially be extended. But essentially it’s almost like a no change, if that makes sense.

Dave:
Right? Yeah. It’s like we’re just not going back to 2016 essentially.

Brandon:
Yeah, exactly. Exactly. If that doesn’t happen, then starting January 1st, 2026, a lot of this stuff is being reverted. One of the big ones is the estate tax. That exemption is I believe roughly 13 million per person right now. And that would be reverted back to what it was pre 2017, which is half of that. So if you’re dying in 2026 or beyond, it’s not going to be good for you or

Dave:
For your heirs. For your heirs.

Brandon:
Yeah. Why would you care?

Dave:
Okay. But it seems like with a Republican controlled Congress, it feels to me like it’s almost certainly going to get extended.

Brandon:
They have to do this through the budget reconciliation process. So the challenge is that the budget has to balance in a 10 year window, typically speaking, in order to do this with the budget reconciliation process. Now, why would we do it through the budget reconciliation process? Because you just need a simple majority to pass policy through the budget reconciliation process. So the house and the Senate is Republican controlled. Thus we want to do it that way. We don’t want to have to have a super majority or anything like that in order to pass policy because then the Democrats will stall, right? Or they’ll push it away, they won’t sign on. So that’s the key. The problem though is balancing that budget over a 10 year horizon, extending the TCJA, I believe the tax foundation estimates that it’s going to cost even after GDP add-backs roughly 3.8 trillion over the 10 year horizon. So they’re going to be fighting that. How do you balance that? And that’s where we get some of the tariff talk. I believe that’s coming into play

Dave:
That tariffs would generate enough revenue to offset that.

Brandon:
Yeah, in theory. And then it’s like are you allowed to include that in the markups and the balancing? So it’s just a lot of back and forth on it. Yeah.

Dave:
Okay. So there’s a lot of gamesmanship and procedural congressional questions that are still have to be answered.

Brandon:
Yes. But I think that we’ll have a lot of clarity here. Probably within the next two to three weeks, at least the spirit of the bill, we will understand probably the next two to three weeks.

Dave:
And what about any potential further changes or policies that will affect the tax code? I’ve heard about tips not being taxable. I’ve heard tax exemptions or deductions for veterans. Those are interesting in their own right. But are there any potential, anything that’s being discussed that might pertain to real estate investors particularly?

Brandon:
So, so far, the ones that seem to be gaining steam are no tax on tips, no tax on overtime, and no tax on social security payments. So those are the three big ones. And then obviously this universal tariff baseline of driving some amount of revenue, having our foreign countries pay for our needs type of deal. I think those are the big ones that we’re seeing. But again, the problem is going back to balancing the budget over a 10 year window because you have to do that in order to use the budget reconciliation process as it stands today. So how do you extend the TCJA as it was and also add on these additional campaign promises that were made? I think it’s going to be really challenging and it’s going to be a really interesting back and forth that we’re going to witness here over the coming months.

Dave:
Don’t go anywhere. There’s still a lot to unpack. We’ll be back after a quick break. Welcome back to on the market. Let’s jump back in. Obviously all of these changes will impact you on a personal level probably, or on your ordinary income tax or if you’re a tipped worker or receiving social security or overtime obviously. But it sounds like for real estate investors, bonus depreciation is the big one.

Brandon:
I would say bonus depreciation is the big, I do think that 20% qualified business income deductions good.
But I would also say something that has really flown under the radar is opportunity funds, qualified opportunity funds. I don’t know what it would look like to extend that or bring it back or anything like that. And you could still invest in qualified opportunity funds today, so they haven’t gone away. But back when the 2017 TCJA was launched, you could essentially move money, move gains out of equities, for example, put them into real estate and delay, defer the taxation on those gains for, I believe it was like seven years. And by the time that that seven years came around, you only had to pay tax on 85% of the
Gains.
So you got this sweet tax break by moving money out of equities and into real estate that was in qualified opportunities zones, basically like lower income areas, areas that they wanted to gentrify and build up. So it’d be interesting to see if any of that comes back into play with new timing requirements. You can’t get that 15% discount anymore, but a qualified opportunity funds are phenomenal. Even still today, if you have a 10 year time horizon, they can be really, really great for you if you’re strategic about setting up a qualified opportunity fund or investing in a qualified opportunity fund because there are still great tax savings if you hold for at least 10 years. But that’ll be an interesting one to see if it comes back. I think you’ll have a lot more education and focus on that because people are now educated on how it actually works. And so if it does come back, I think it would just be interesting to watch unfold.

Dave:
Yeah, probably get started up quicker. There’ll probably be more players because last time around it felt like people didn’t really get it for a few years and the clock was already ticking unless you got into it in the first couple of years after it was passed, you sort of missed out on the best benefit and then if you waited a little longer, you missed out on the second best benefit. And that third benefit I think is still around, but it’s just not as appealing. I think that would be super interesting if that happens again. So that’s definitely something we’ll keep an eye out as well.

Brandon:
Yeah, and the problem too is it was so technical that a lot of accountants didn’t even know where to start with advising their clients on it. So they just didn’t. So they just wasn’t like something that you would include in a normal, Hey, you should do this thing to mitigate your taxes type of planning. And I think if it came back, you would see a lot more of that.

Dave:
Alright, well thank you so much Brandon for your insights on the tax code. Is there anything else you think our audience should know before we get out of here?

Brandon:
Don’t hold me to this, but I’ve got my money on. If 100% bonus depreciation does come back, it’ll be as of January 1st, 2025.

Dave:
Agreed.

Brandon:
So we’ll see. But I was talking with our national head of tax the other day about this too, because we were kind of trying to guesstimate do we think it’s going to be retroactive to January this year? But his point was like, well back in 2017 when the TCJA was implemented, it was after, I believe September 27th and beyond. If you bought a property September 27th and beyond that, if you closed on September 26th, no, a hundred percent bonus depreciation for you. Wow. But I’ve got my money on January 1st, so we’ll

Dave:
See. Okay. I was kind of assuming it would go retroactive. I don’t know why. It just seemed like the logical thing to do to just make it available for the whole tax year. But I guess we’ll have to wait and see. But not being nearly as informed as you are, my money’s with you. Alright, well Brandon, thank you so much for joining us. We appreciate it.

Brandon:
Thanks Dave. I appreciate it.

Dave:
Alright, that is all for today’s episode of On the Market. Whether you are optimizing your rental losses, leveraging cost s, or navigating new federal guidelines, solid tax planning can make a world of difference for real estate investors. So I want to thank Brandon Hall for sharing this valuable insight and information with us. If you want to connect with him, we will put a link to his website in the show notes. And if this conversation helped you gain clarity for your 2024 tax strategy, be sure to spread the word on this episode. I’m Dave Meyer, thanks for tuning in and we’ll see you next time.

Help us reach new listeners on iTunes by leaving us a rating and review! It takes just 30 seconds and instructions can be found here. Thanks! We really appreciate it!

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