Dave:
Do you feel like given everything going on in the investing climate, that you missed the boat on real estate investing? Well, today’s guest bought his first deal only 15 months ago, experienced pretty much everything that could possibly go wrong in his first year of investing, and he’s still building a great portfolio at super affordable prices and what he calls small town America. Hey everyone, it’s Dave and I’m back here with Henry Washington. Henry, what’s up man?

Henry:
What’s up bud? This is a doozy.

Dave:
Yeah, this is a very fun conversation that we’re going to be having with investor Clay White from Manhattan, Kansas. He started in real estate last year with very little capital and honestly not much more than a desire to avoid a corporate nine to five job at all costs. But he’s become an agent and his own general contractor and he’s surviving in the business on what seems like pure hustle. So let’s get right into this conversation. Here’s me and Henry with Clay White. Clay, welcome to the BiggerPockets Real Estate podcast. It’s great to have you here.

Clay:
Nice to be here.

Dave:
It’s good to see you again. I actually had the privilege of having lunch with Clay and his mom at BP Con. You had won some sweepstakes for private lunch, all of us together. It was a lot of fun.

Clay:
Yeah, it was.

Dave:
Well, I’m glad to have you here now. I was very intrigued by your story when we were having lunch together. Let’s just start at the beginning. I know you graduated from college a few years ago, so can you just take us back to when you were graduated and trying to figure out what you were going to do and why you sort of picked real estate?

Clay:
Yeah, I mean, I had no idea what I was going to do to be honest, but everyone else was graduate at the same time and it seems like they were all going out finding their nine to five. So I figured that must be the thing to do. So I followed suit, I went out and I applied everywhere. I got a job offer to go down to Houston, Texas and work a nine to five, but that day, that job offer came in. I was like, wow, is this really what I want to do for the next 40 years of my life? I’ve always been an entrepreneur. We did a whole bunch in college and I almost felt like I was selling out by taking that. So I said, no way. I can’t do it. So I turned it down, got my real estate license.

Henry:
Literally, this is what people go to college for to get the big job opportunity. That’s a good point. Out of state even you get to go and join the workforce. How did your parents feel when you made that decision?

Clay:
I think they were pretty supportive at that point.

Henry:
We got different parents, bro.

Clay:
Yeah. But no, I went to college with a high lofting goal of getting a good job and going into middle management for the rest of my life. I was convinced I was middle management material. I was going to have an awesome life and that’s what I was going to do.

Dave:
Well, it’s so funny Clay, because I think a lot of people, they start that job, realize that they hate it and then try and find a way out, but you were just like, Nope, Uhuh not even starting.

Clay:
I couldn’t do it. I couldn’t do it. I felt like I was so myself short.

Henry:
What gave you the confidence to know you could figure it out outside of turning down that job?

Clay:
Well, I read the wrong statistics for sure. I went online and I looked what real estate agents earn and I read somewhere they made $80,000 year one and I was like, ah, that’s got to be so easy. This is perfect. I’m going to knock it out. No problem.

Dave:
Alright, well tell us what you did next. You made this decision and how did you go about actually getting into real estate?

Clay:
So I used to paint houses as part of an internship in college and I had an old buddy of a buddy several years older than me that got into real estate and I figured, hey, apparently they make great money and that’s just such an easy job. It’s a no brainer. So I called him up, I had a few questions for him and he was like, sweet man, let’s get you down for an interview. And I was like, awesome. Done. So I walked in a few weeks later after I got my license applied and got hired on with him, and I sold houses for probably three months. I want to say. I got hired in March of 23 and then around June I was like, wow, these people are getting steals. Why am I not doing this?

Henry:
I mean, you’re telling the story that a lot of people who have jobs in the real estate industry tell is that they realize, hey, these investors seem to be getting the long end of the stick on all these transactions I’m working on. How do I go from where I’m at to where they are? So how did you make that jump? What was your first dealer?

Clay:
Yeah, so I read a few news articles and I figured I know everything there is to know. This has got to be super easy for sure, for sure. So I saw a $20,000 home pop up in a market 30 minutes away from where I live. Said it’s a no-brainer, walked right through, offered ’em $17,000, got to be a winner. I mean, it’s cheap enough what could go wrong, but this thing was filthy. The old owners just left. I ended up buying it for $17,000. I figured this is all I’ll ever need. So I liquidated all of my investment accounts that I had to buy this sucker cash and I bought it. I closed on it and I went out there with just those big old contractor bags of Walmart trash sacks to go clean out all the trash. And I showed up and there was a condemnation sign on the front door. But when I looked down, I realized this was a home condemned in May of 2023 when I was purchasing it in July of 2023, which means that it was not disclosed that sellers had a pulled it down and then they even found it the city had, because I called the county immediately, I called the city and I was like, Hey, what’s going on

Henry:
Guys? Alright, so Clay, you said there was a condemned sign on the door. So what did that actually mean?

Clay:
So in this particular situation, it means that nobody should be living there. So this was a home that’s been vacant for a year and they kind of catch you on it. So first it was overgrown grass that needed to be cut, and then the front porch rotted out and that front porch would actually condemn the home. It makes it a safety hazard. And when they have that excuse to go in, then they’ll go through and nitpick that whole house. So the only way to bring it up to livable condition is to then fix a 30 page document that the city wrote out.

Henry:
Okay, yes. In my area, they call it red tagging. So if they red tag your house, that basically you have a laundry list of things that they make you fix before they’ll give you a certificate of occupancy. So they basically had a condemned slash red tagged house and no one told you until after you bought it. Congratulations.

Clay:
That’s pretty bad. I was stoked. I knew this was the perfect deal for me. So I was like, wow, I didn’t know what to do. City said there was nothing I could do since it was condemned months before. If it was condemned the day I bought it, they would’ve been a lot more lenient on fixes and whatnot. But I went back to the title, I said I would love my money back. And luckily they were able to reverse it. They

Henry:
Did. Did you return a house?

Dave:
Yeah. Oh my God, I returned it. I have never heard that. I’ve never heard of that all of the years I’ve been doing this. I didn’t know you could return a house. I mean, it’s just like Nordstrom or REI, one of those stores that will just take returns, no questions asked.

Henry:
He’s like, look, I got my receipt. I don’t know what the problem is. Yeah, I mean it was actually pretty easy.

Dave:
Well, like is it the title’s responsibility to that should have been on your title report, right?

Clay:
Yeah, it should have been there. And then I had about $1,500 worth of fines that was owed to the city that they also didn’t disclose.

Dave:
Does that house just revert back to the previous owner? How does that

Clay:
Work? Yeah, it went back on market. Wow,

Dave:
Okay.

Henry:
Alright, it’s time for a break, but we’ll be right back with more from this week’s investor story in just a few moments. Welcome back to the BiggerPockets Real Estate podcast. We’re here with Clay White from Manhattan, Kansas.

Dave:
Okay, so false. Start on your first deal. What did you do next?

Clay:
Well, I was pretty defeated for a second, but I realize I never heard of anybody buying a condemned home, at least accidentally. So I figured it couldn’t be that common. So I jumped right back in. I had already liquidated my savings account so that money had to be spent on something. So my second deal, first deal I bought with a partner with a buddy of mine from college in October of 23. We purchased it for $35,000, got put 20% down, took a loan out on the rest, and I was in the middle of reading the bur book and they said, Hey, interview everybody. Do everything. So this is a town of 20,000 people or so. So we had six legitimate property management companies. We sat down, interviewed every single one of ’em same day. We asked them all for different ideas on the house, contractor recommendations, you rent estimates, and at the end of that day, I found just the most spectacular property manager. I hired her contract on for the job and the day after Thanksgiving, so about a month later it was completed, I turned it over to property management and she had it rented that Tuesday for $275 over our rent estimate. So it went shockingly well after the first one.

Henry:
So you hit a foul ball on your first deal and then hit a home run on your second deal,

Dave:
Clocked

Henry:
A digger

Clay:
Right

Dave:
After

Henry:
That. So where’d this deal come from? How’d you find it? Talk to me about that.

Clay:
Yeah, once again, on the MLS somehow, first one was wholesaler that listed on the MLS. This one was just a bank foreclosure that was having trouble selling. That area is a big VA area and FHA area, which means a lot of those loans are not any distressed property is not going to close with those loans. So it’s me and the two other investors in that town fighting for these deals and they obviously weren’t interested. So bought it right off the MLS.

Dave:
Now looking back on it, is that pretty normal in the market you were operating on where these kinds of deals are available?

Clay:
Somewhat. So we have two markets. We have the main market where I live, and then this little satellite market of about 20,000 where that pretty generally is the case. Anybody purchasing a home in that area is going to be military, which is buying on a va, which is super, super stent as far as the criteria and condition of the home. And then the same thing with any FHA loan and it, it’s not a ginormous town, so there’s not a ton of investors going around. So I mean, you really are in a dog fight with three other people and that’s it.

Dave:
Yeah, I remember you mentioning something like that when we were having lunch and I was like, man, I should move to this town. I like the idea of this low competition.

Henry:
One of the things we’ve talked about before on this show where a lot of people have talked about is if you can’t get into your first deal by yourself to bring on a partner. So it sounds like this is somebody you knew before. You guys did a deal together. How did you know you needed a partner for it and then how did you structure it?

Clay:
Well, the house was $35,000 and I had $25,000, so I was good indication to make it

Henry:
Work.

Clay:
But no, it worked out really, really well. I initially went to the bank on the first one and I was 22 working 100% on commission with just a little bit of money. So they told me no, and I tried again at the second and third bank who also told me no. So I figured I need a partner.

Henry:
That’s good, man. And what I want people to realize, this is first of all, I think the reason you had success early on is more about your mentality and your mindset approach to what you were doing versus the tactics. Yes, you had good tactics, but a lot of people a wouldn’t have said, you know what? Screw this corporate gig that’s going to pay me a bunch of money in Houston. I’m going to go be a realtor estate agent. And then to jump into a deal and fall flat on your face and to get back up and say, okay, I’m going to this again. And then to find a deal that you couldn’t do on your own, banks would say no. And then you just said, okay, well I’m going to go find a partner. A lot of people would’ve quit along that journey and just thought, well, this isn’t for me or I can’t do it. We hear it all the time. I can’t get a loan, so how am I going to do this? So I think that that mindset is huge for new investors. It’s a good example of the kind of mindset you need to be successful. So in your partnership, did you just structure things 50 50? Do you have a role or does he have a role who does what?

Clay:
Nope, it was a true 50 50. We figured we were both learning. We both might as well do everything and we will all learn as we go. So every single property manager interview, every single contractor, interview every single city inspection. We both went to ’em, we both sat back, we both asked questions and we both learned and absorbed as much as we could. Obviously we didn’t know. I read a few books and thought I had it.

Dave:
And did you have it?

Clay:
Not even remotely close,

Dave:
But it’s still the deal worked out right,

Clay:
Worked out shockingly well still have it.

Dave:
Okay. So I mean I remember a little bit from when we discussed this earlier, but what did you do after that first deal? I remember you just have been taking on a little bit of everything.

Clay:
Yeah, a little bit of everything. So after that, through both of these properties, I was renting with six other roommates and I figured maybe I don’t need six roommates at this point in my life.

Dave:
How many bedrooms?

Clay:
Five.

Clay:
So it wasn’t terrible. It wasn’t terrible, but I figured it was probably time to get my own place. So in January of 24, I purchased a duplex in the town I live in. I had the backside was rented for six 50 a month on a long-term lease. And then the front side was completely vacant and once again distressed. But I was able to get it on a portfolio loan in-house with that same bank. So they didn’t care on the condition, they knew I’d fixed up one. So they hedged their bets and figured, Hey, he may do it one more time, which I was so excited that they gave me that loan.

Dave:
How are you financing the rehab

Clay:
Out of pocket? At that point, I had liquidated all my investments. I felt like I would go in embarrassed and timid to say, Hey, please take my money back. I’m backing down here. But I wasn’t willing to admit that. And going with the partner and getting a loan on the first deal meant I stood a little bit left and I did most of the work myself. So it was just a cost of material.

Dave:
How heavy of a rehab was it that you did the work yourself?

Clay:
It wasn’t ideal. I’ll say we ended up redoing most of it. This was a home that somehow it passed inspections, but this is a 1910 tiny little thing that was laughing plaster on paneling, on drywall with just coated, they just, anytime anybody moved out, that’s two more loads of kills on top of everything. So I pulled it all apart and essentially to the laugh, we replaced the windows. We replaced four joists. We replaced flooring, paint, trim, countertops, cabinets.

Henry:
Oh, so you built a house.

Clay:
The framing and the foundation was there.

Dave:
Nice. So that was, I guess at the beginning of this year, I assume you’re still living there. It was a house hack.

Clay:
So I am not, actually, I sewed a lease until August, so I figured I’d make a little bit of money off of it. So I tried to look for a long-term tenant, realized that that is not enough to cover my mortgage at all, and I didn’t traditionally want to be losing money on that. So I tried to Airbnb it and I realized I’m not that kind of person. I’m not a Airbnb person myself. So I went on, I tried to find a big company, they weren’t super interested, so I just went on Airbnb, looked up a unit that was as close to mine as physically possible, and I found some lady that had nine of them just like mine. So I made a fake reservation for her, ask her if she’d be willing to come check out my house and give ideas and potentially manage it. And she walked through, loved it, and she’s been managing it since May 3rd of this year.

Henry:
That’s so smart. Oh my

Dave:
God, that’s such a good trick. So you didn’t know this person beforehand, right? You just fake reservation, dude, that is some hustler skills right there. That’s pretty good.

Henry:
Yeah, man, that’s a hustling mentality. That’s awesome, man. Again, that mindset of, I’m going to figure this out. That’s the very first lesson I learned in real estate. It’s the very first lesson I learned in entrepreneurship in general, but in real estate, because my first deal, I didn’t think I was going to be able to buy it. I had gone a bunch of different routes and couldn’t find the money, and my then unofficial mentor, I called him to say, can you buy this house? I told this guy I would buy it and I don’t think I can. He’s like, look, I’ll buy it. But if you want to be successful in this business, you got to figure it out. This is your first entrepreneurship lesson. Go figure out how to get this done. There’s a million ways we just don’t know the way that’s going to work yet, and that mindset will carry you far. So that’s super cool, man.

Dave:
So I can’t wait to hear what comes next in this story. There’s just a lot of twists and turns. We’re only a year into your investing career right now, clay. So what did you do after the Airbnb situation?

Clay:
Yeah, so we hit the home run on the first one, and I was flush with cash after that. Duplex, I was loaded. I got my first rent check and I was $400 richer after throwing $25,000 into two different deals. And I bought a meal and I realized I was out of money. So luckily we aced that first deal. We bought it for 35. We spent $21,000 on the rehab. So we were all in for about 56, took it back to the bank and we reappraised it at 1 37, which was so much better than we were expecting for sure. So we had that $80,000 or so in equity. We were going to do the cash out, but decided at those small local banks, they work with you well. So they actually just used that equity in the property on a line of credit for us. So then we purchased a flip in April of 24 off that line of credit. Henry, why are you

Dave:
Celebrating over there?

Henry:
Literally what happened on that same story, I was just telling about my first deal. I did a bur, but except for the refinance, I pulled a line of credit and used that line of credit to help me continue to grow. And I think that the bur with the H at the end, HELOC instead of refinance bur, yeah,

Henry:
It’s a good tactic because refinances are great and in certain situations you need to refinance, especially if you’ve bought it on hard money or private money and you’re paying a hefty interest rate. But if you’re not, you don’t have to refinance. You can get a line of credit because refinancing is selling your equity. You’re selling it to yourself, but you’re selling your equity. And so when you refinance, then you end up getting a new mortgage at a higher rate. And so refinances also hurt your cashflow because your debt service is now more. When you do a line of credit instead you don’t get a new mortgage. You keep your cashflow and you get access to the money just like you would’ve had access if you refinanced it. So I think it’s a good tactic in the right situation.

Dave:
Kendra, just for everyone listening, what is the right situation? Do you have any simple advice on when you refinance versus look for a line of credit?

Henry:
Yeah, I think you should refinance if you need the cash, right? So if you need the cash because you used a high interest rate loan to buy the property, yeah, you got to refinance and get out of that high interest rate loan. If you have a plan for the cash outside of real estate, sometimes people are refinancing because they need the cash to go do something, live life, whatever that is. If you need the cash right now, then yeah, you can refinance. But if you don’t necessarily need all the cash right now, but you want access to the money so that you can buy your next deal, a HELOC works well because now you’re not paying interest. When you do a refinance, you’re paying interest on that money you took out right away because you have a new 30 year fixed rate mortgage typically, and your interest is front loaded in the first seven to 10 years anyway.

Henry:
So you’re paying interest on that money that you took out versus with a line of credit. If you don’t need to use that money right away, well now you’re not paying any interest, but you have access to it when you need it, and then you only pay interest on the money that you use off the line of credit. So in his case, he had about 80 grand. If you only use 20 to buy your next house, we are only paying interest on that 20 instead of paying interest on the full amount you pulled out on a refinance.

Dave:
So back to your story, clay, you pulled out a refinance and what was the deal again? Sorry, I lost it in our discussion of HELOCs.

Clay:
Yeah, so it was a flip that we purchased at the very, very end of April of 24, bought it for 52 5. We had about 60,000 in planned repairs because this was all with a general eight week holding cost. Just I figured what could go wrong. You figure that a lot

Dave:
Seems to be a theme here. Yeah,

Clay:
I pretty generally figured there’s going to be zero hiccups and it’s going to go perfectly smooth all the way. But we got this roof replaced. I got the sewer and I went to go hook up the water. I called the city, they came out, they hooked it up and they turned it on and just left. And luckily my contract was there and he goes, Hey, your water’s not shutting off just outside the home. So he grabbed the city guy, he had him shut off, he walked in and I had about four inches of water covered my entire home, just completely flooded it. And that was one which was pretty rough, which obviously that causes a little bit of rot. And we already had all the sheet rock was getting moldy, which means some of the studs behind was getting moldy. So I had a two studs underneath a window that were completely rotted and we went to go replace him, which seems more than fair, that’s something you should do.

Clay:
But the bad news was the neighbor next door was also getting a roof replaced, and he just so happened to see our two window studs out in the front yard when we cut him to go replace them. And he goes, well, that is a structural, the city inspector said that is a structural on an exterior load-bearing wall. So you cannot do that. I know it’s small, but according to code, they shut us down, said you guys need to get a licensed general contractor here and figure this out. The only bad thing is this is a town of 20,000 people. We don’t have a bunch of licensed general

Henry:
Contractors. You are the licensed general

Clay:
Contractor. Yeah, kind of. I was like, fair enough. So I called every licensed general contractor in that town, and this is two studs under a window, so keep in mind, so half the people didn’t respond to me.

Dave:
Yeah, just not a big enough job.

Clay:
Yeah, not a big enough job. I only had three people look out and said it’s not worth it. I had one guy that said we could use his permit to do it, but he wants 20% of the total job. So the cost to fix these two studs would be 20% of my $60,000 rental budget.

Dave:
What?

Clay:
Yeah. God. And I was like, I can’t do that. So yeah, it was

Dave:
Rough. Well, that’s extortion.

Henry:
I’ve never heard of anyone going through every problem in real estate investing in their first two years. All of what? Yeah. You feel literally had all of them other than a fire. It seems like you’ve had all the real estate investor problems.

Dave:
Well, we don’t know. We haven’t got to the end of the story.

Henry:
And on a second note, coincidentally, two studs under a window is the name of Dave and i’s new LLC for our property we’re going to buy.

Dave:
Oh. Oh my god. Can you imagine the

Henry:
Logo that we’re going to create for this? Just two handsome dude. It just us sitting under a window back to just a window, two studs under a window. What do you know? What small world? I can’t wait to make that the actual

Dave:
Name. Our L statement. Well, okay, before we hear the resolution of this story, clay, you’ve talked about doing a burr rehab. Are you pretty handy yourself? What gave you the confidence to do this flip as if I’m counting right, your third deal.

Clay:
So other people do, so I figured why couldn’t I? I’m not exceptionally idiot by any it tracked in my head for sure, but no, I’m not particularly handy. I love to be hands-on. I do what I can do. But the first deal, we had a rockstar contractor, this deal, I had a rockstar contractor and pretty generally since then I was just super lucky just hitting ace in the holes. And I’ve had one fantastic contractor for the last six months that’s been lights out for me. And then we have another guy who’s done incredible work too.

Dave:
So wait, how did this story end? The one with the two studs under the window?

Clay:
So luckily this is Kansas, so it’s not a super big deal. They’re not coming after you for everything. So I bought a $295 prep course online, did it in two days, went in and took my state exam, and I got my general contract’s license.

Dave:
It’s funny because Henry was joking that you were the only guy in the 20,000 person town who was a gc, and it turns out you are the gc

Henry:
Now. Somebody had to, this is the most fun starter story I think I’ve ever heard.

Dave:
Yeah, talk about hustle mentality, man. That is super cool. So wait, so let me just ask 290 bucks, how long does it take?

Clay:
Well, it’s based off of your hourly, sort of just like a real estate license is, but all the general contracting exam is how you locate it in a book. It’s not based on true knowledge in the sense of the word, can you read a code book, can you understand code? And how do you find that? And it’s a four hour licensing exam. So all that textbook was, Hey, here’s where everything is, here’s how you find it, go get your license. So that’s really all it was.

Dave:
Well, I mean it’s great for this story because clearly you didn’t need to be super sophisticated to fix this one problem that you had, but that makes me even more surprised to hear that you found great contractors in Kansas because the barrier to entry seems comically low. So good for you on finding good contractors. Did it take a while screening people?

Clay:
The first one wasn’t terrible, so we just interviewed every property manager and asked every single one of them from contractor recommendations. Two of them came up with the same name, met him, seemed relatively honest, and I was like, sweet. And he knocked the first one out of the park. Then I went through a few rough ones. And the nice part about having your GC license is you don’t really need the grade. A contractor is going to charge you two or three times as much. I need some exceptionally handy people and I’ll manage it myself.

Dave:
That’s a very good recipe for success there. So after you’ve fixed the two studs under the window, how did that deal finish out for you?

Clay:
So as of right now, we’re not going to be falling behind. We’re still anticipating about a 25 to $30,000 profit on that at current margins. But this is still, it went on two or three months longer than it should have been, and it’s a loss in that sense. But we’re going to come out unca,

Henry:
That’s called real estate investing. So tell us again, remind us the numbers. What’d you buy it for? How much are you all in for and what are you expecting to sell

Clay:
For? We bought it for 52 5. We’re going to be in for just over 60 at this point. And we’re looking to list about 1 49 and depending on how that goes, most of the buyers in our market are going to be va, FHA. So we’re anticipating they’re going to ask for five, $10,000 in closing costs and then obviously commissions on top of that.

Henry:
And are you representing yourself as an agent on that deal?

Clay:
I am. I

Henry:
Am. Okay. So you’re making slash saving some money. Yep.

Clay:
That’ll help a little bit.

Henry:
We have to take one final break, but stick around to hear more about how Clay is making deals work right now. Hey, let’s jump back into this week’s investor story.

Dave:
Alright, well after that one, what deal did you do and what went terribly wrong?

Clay:
Pretty much I bought a $20,000 home in May of

Dave:
24. I can’t believe you’re saying this. In 2024, $20,000 home. That’s unbelievable.

Clay:
$20,000 home. It was not worth $20,000, I’ll tell you that.

Henry:
So you overpaid really? You overpaid. You overpaid

Clay:
Over significantly. Significantly paid after events unfolded for sure. But this was a home that I tried to buy in November of 23, but it was going through government foreclosure and then they wouldn’t get back to you and then it all went pending. And how those government deals work is you are just so far on their back burner for six months and then all of a sudden they’re ready to go and they needed all your paperwork and documents yesterday. So this is something I offered on in November that I bought in May and $20,000. We figured I would have about $65,000 in there. But when I walked in and the living room was still fine, but in the kitchen, all the sheet rock had just fell right through the ceiling and it was just on my kitchen counter now and the back bedroom also caved in.

Dave:
Oh my God.

Clay:
Which is not ideal for the most part. Typically not ideal. That’s correct.

Dave:
Yeah, for the most part, I don’t think there’s any situation where the house caving in is a good situation

Clay:
Pretty much. And I found that there was termites which weren’t so bad, they were treated, but there was terrible grading. So I had mold on all of my sill plate and a lot of the studs back there, termites had started eaten through the framing. So all the exterior walls were essentially non load bearing. So the rafters was holding up the roof. And I realized that when we got in to get the roof replaced and with the roofers walking around there, they also broke the sheet and all of the back bedrooms because there’s no support back there. So we had to put a pause on that, go through, replace all the sills all the way around the house and a lot of the studs and framing a lot of the floor joists so that way we could get up and then also patch the roof. Once we got the roof done and replaced, we went back up before we res sheet rocked over and we noticed we had about eight cracked rafters because the home could not support the weight of everybody working up there.

Dave:
Oh, from the we people? Oh my gosh.

Clay:
Yeah, yeah. So it was not ideal, but we got ’em all pasture replaced, had to completely remove them, which is not fun. We ended up going through, it lasted two months, so we may, and then we listed two or three weeks ago, but finally got it all done. We ended up going $22,000 over budget. I anticipated 65 and I think we’re 86. So we’re all in at about 1 0 8 on that property. Right now we’re listed for 1 49, so still should work out. There was a lot of cushion, a lot of cushion on a $20,000 home

Henry:
In base hits. Man, the lessons you’re learning are invaluable. Just through all these pitfalls, it probably feels like you’re going through the ringer and you are, but they don’t all go this way. And at some point I think things should start to balance out. If you’re learning lessons about the properties you’re buying, things should start to balance out. So it sounds like you’re flipping homes. Is that what you’re continuing to do now? And if so, how are you sourcing these deals and how are you finding the money?

Clay:
Yeah, so as far as the money goes, at that point I had had a little bit of track record, even though they’ve been super chaotic, somehow they got to the finish line and somehow they all made good enough money where I was a decent bet at that point

Henry:
Where you want to keep doing it. Yeah,

Clay:
Pretty much. Pretty much. So I went back to the bank and said, Hey, I’m so excited, I’m ready to get another flip. And they said, I’m very happy for you, but you’re still 22 and you’re still in commission and there’s no way we’re giving you that money. So I went back with my first partner and they told us the exact same thing. They said, Hey, that equity’s done, good luck. Keep it rolling. So at this point still, I knew I wanted to keep going and they always say, find the money, you can’t just give up. So I went to my parents and I said, Hey, would you guys want to do a deal with me? It’s only going to cost X amount of money, just throw some cash my way. It’ll be awesome. We’ll all be super happy. And they also said no. They said, you’re not that kind of bet yet. So good luck.

Henry:
And your parents have real estate investing experience, right?

Clay:
They do.

Dave:
I love that. I mean, I feel bad for you, but I kind of love that.

Clay:
Yeah, they do. And they’ve had some rentals back where I’m from, so I was like, okay. I went back to the drawing board and I said, you don’t even have to give me money. You don’t even have to give me money. Just put two of your rentals up as collateral on a line of credit for us. And that they did agree to, since it wasn’t money coming out of pocket. So they put up two rentals to give me a line of credit to keep going.

Henry:
So your parents pulled a line of credit on two of their rentals and so when you needed money, I assume you had to go to them and say, Hey, I need X. And then they would pull the money from the line and give you access or did you have direct access to pull from their line?

Clay:
So I have direct access. So we set up an LLC together and structured an agreement, and now it’s pretty much, it’s still through my bank that we pull everything from, which is super awesome and convenient.

Henry:
That’s super creative, man.

Dave:
Yeah, good for you. And is this where you stand today? Is that the last two you’ve done?

Clay:
No, so I’ve bought two flips since then, a triplex, and I’m buying a commercial building on Thursday, so we’re getting there.

Dave:
Oh my god. And how are you financing all of those?

Clay:
So the nice part about how they go is one, it goes off the line of credit. We purchase ’em on the line of credit, fixed it up on the line of credit, and then anything we’re going to keep it gets turned over and amortized on its own individual loan, which replenishes the line of credit and then obviously all the flips just paid off and keep going.

Dave:
Wow. Super cool, man. I was waiting for you to say you became a loan officer or a fighter pilot or something else in the middle of this crazy story. But Clay, this has been super fascinating and just everyone out there, this is such a good example of how you could make deals work in 2024. Obviously there are hiccups here. You don’t have to be buying $20,000 deals, but clay’s finding a way that works for him. And honestly, man, I got to say, I really respect your attitude. You’re coming on this show, talking about your wins, your losses, and have a great attitude about it. To me that just signals that you’re going to be very successful at this for a long time. So you bought all these deals, we’re going to have to have you back on soon, man, and hear how the rest of these stories go.

Henry:
Yeah, I’d be excited. Yeah, man. Can’t wait to hear more about this in the future. And you are the inspiration for two studs under a window, LLC for Dave and myself.

Dave:
Yeah, we’ll make you an honorary member. You’re on the advisory board. All right, perfect. So Clay, thanks so much for joining us and telling us your story. If you want to connect with Clay, we’ll put his contact information in the show notes below. Henry, thanks man for being here and joining us on this fun discussion. And thank you all so much for listening. We’ll see you next time.

 

Ashley:
Today’s guest is proving that the bur strategy by rehab, rent, refinance, and repeat still works even in today’s challenging market with a knack for finding value in unexpected places and the determination to keep growing despite rising rates. They’re scaling their portfolio one property at a time, ready to find out how they’re pulling it off. This is the Real Estate Rookie podcast. I’m Ashley Kehr, and I’m here with Tony J Robinson.

Tony:
And welcome to the podcast where every week, three times a week, we’re bringing you the inspiration, motivation, and stories you need to hear to kickstart your investing journey. So today we’re going to discuss first finding a real estate strategy that works for you. Number two, building slowly to hit financial independence, and finally, how to pivot your portfolio based on the market you’re in. So today I’d love to welcome Karl Denton to the podcast. Karl, what’s up brother? How are you doing, man?

Karl:
Good, good. How’s it going, Tony?

Tony:
What’s it I guess that initially drew you into real estate? What even kind of piqued that initial interest to say, Hey, this is what I want to do with my extra time, money, and energy.

Karl:
So initially when I got into real estate, I was a firefighter at the time working locally in the area here, and I got into stock market first and I got into stocks and we got into it with a group of guys at work and we started trading some options and we really got into it for about a year. And then my tax accountant was like, this is a lot of work for not a lot of money. And I was like, yeah, no. I’m like, I’ll sit in front of the computer when the bell rings and then it rings again, and I’m like, I’ve been in front of the computer all day trading stocks.

Ashley:
Wow. So your CPA really called you out there?

Karl:
Yeah. So I was like, alright, I need to find something else to do to build some wealth here. The stocks were fun while it lasted, and I have some long-term stocks, which are great, but I started getting involved in real estate. I heard some people talking about it. My father still owned his initial duplex from when we were kids and grew up in, so I knew there was money to be made and people were doing it, but I just didn’t know how and it was kind of scary. I only had only ever bought my personal property, so I just started getting involved online. I started watching videos just so I learned about the stock market. I found BiggerPockets online, I started joining. I went through the forms. I was able to ask questions and learn. Then I joined and became a pro member because I saw the calculator functions and a couple of the other added features that I was like, oh, this is really good to be able to analyze deals and see it virtually. So that was really nice.

Ashley:
Karl, I’m interested as to what initially drove you to choose the BR strategy over any other investment strategy.

Karl:
Sure. So it kind fell into me by accident basically. So on my first deal I had found just by asking, and we had found a family member who was sitting on a property through my wife’s side who basically didn’t want to take care of it anymore, but he wanted to remain in the garage space that he occupied. He was just getting an old tired landlord syndrome pretty much. And so that’s kind of how we fell into our first property, got an under market deal, and the BR strategy accidentally happened because we basically renovated it because that’s how I wanted to make it. We wanted it high quality and we renovated one of the units and we upgraded the furnace system. And then just as rates were starting to creep up, I had met with a local investor As I was learning, this is the beginning of my journey, I didn’t really know a lot, but I had studied BiggerPockets and things that I learned and he told me, you should cash out refi and pull the cash that you sunk into the deal and get it back out. And I was like, oh, I should, okay. So I cashed out refied at 4.5% just as the rates were creeping back up. I wish I did it sooner, but I was able to pull most of all the cash a little more out of that deal that we required to put down using an investment loan, which was like 20% at the time before I knew any creative financing or anything like that.

Ashley:
Do you want to tell us a little bit about what the B strategy is as exactly if someone else was going to follow the same strategy?

Karl:
With the burrs strategy, it’s basically you want to figure out what kind of property you’re going to buy, you want to buy that property, and then you want to rehab the property. So this property was older and had good bones, but it was older. So we had rehabbed the property to increase the value. So then by increasing the value, we were able to refinance the property. And then the last step, I believe is to repeat and just continue doing that, but you need to find those distressed properties of course, to be able to get that value add to be able to rehab them and then refinance them and be able to pull the cash out and hopefully and then some more by adding that value to them.

Ashley:
So that was definitely a surprise entry into real estate for you. I am assuming after that deal happened, you were addicted to the B strategy?

Karl:
Yeah, I was just addicted to real estate in general. I just started learning more and seeing the cashflow come in was nice, and then you start managing all the finances and the expenses and then I had inherited those tenants, so it was like knowing I got cashflow coming into the deal, which was great, but then it was managing those tenants, putting them under leases, realizing that I didn’t take as much information in the beginning as I should have. But yeah, from then I just continued that process and then it took me a little while to analyze a couple other deals and to find some value in the market that we’re in because it was creeping up at that time after Covid prices were going crazy. This was back in 2021, so I got a little more creative. And a couple of the deals I ended up finding after were from tax lien lists and other places, I find that could add value just even on MLS too. But you got to really stay focused on looking.

Ashley:
What was your end goal of real estate investing? Did you have an exit strategy in mind? What did you want to get out of it?

Karl:
Sure, yes. I think for my exit strategy in real estate, I didn’t really know what I had in mind, but in the beginning, taking on the long-term tenants, I think my exit strategy was just long-term rentals. Everyone else was being landlords and doing it, and it seems simple. You get ’em on one year leases, you don’t have to worry about ’em. So they said, and I just was like, wow, this seems so simple. But then I soon realized that work came involved with it and lots of it, of course, that’s why if it was so easy, everyone would be doing it right. But that’s where I slowly ended up rotating from the long-term rental to the short-term rental and with midterm rental in between.

Tony:
So there’s a few steps of the burr process and you, you’re kind of getting into the management side, which is the later part of that burr equation. But I want to go back to that first part, the buying Karl, because again, like I said, there’s a lot of folks who understand the value in the Burr strategy, but in order to make the burr work, you actually have to buy a really, really good deal. So you briefly mentioned some of the different strategies that you’ve used, but I guess what’s working today to find good deals that still work with the bur strategy

Karl:
After this deal, this was kind of got the ball rolling and got the addiction started. And so the next deal I ended up finding happened to be on MLS. And that didn’t happen for a while. It took probably three years of just looking and trying to figure out different strategies. And during those three years, there was a couple other partnership deals and I was an LP and a syndication, but as far as getting my own deal, I was still looking for that. And while I was doing that, I was diversifying and I was also doubling down on the property that I had and stabilizing it, creating more cashflow out of it. And I think that’s what a lot of people forget to do is while you’re looking for deals, focus on what you have currently. If you have one deal or maybe you have a home with an empty room in it, focus on maybe making an empty room, renting it out or having an Airbnb or something and really stabilizing or double downing on what you have currently instead of chasing what you’re looking for and then wasting all that time.

Karl:
So while I did that, I was stabilizing and creating more cashflow, and then I was also using Redfin on MLS and really just looking at the markets that I wanted in the areas and setting kind of my buy box of small multifamily single homes, even single families under this price. And so I’d get emails every morning and I would check them and I would see houses that started to sit certain ones, and you wonder why. So then you go walk those houses and I see what they needed and some needed extensive renovation that I didn’t know how I was going to take down. So those, I put in low offers, but I still took action. I was always putting in offers even if they were low because you don’t know if you don’t ask. And that my whole career has taught me that with doing sales earlier on and even real estate.

Karl:
So if you don’t know or if you don’t ask, you don’t know. And when I saw this one property in MLS, it started out at like two 50 or two 40 I think. And so from there it had a price drop and then I saw a drop under 200. And that’s kind of when it really alerted me. I was like, that area under 200, there’s not a lot that has been on MLS sold under 200, let me go walk the property immediately. So we went, we walked it, and it needed rehab and it probably needed more than I saw, but I was like, I can take this down. I’ll figure it out. I’ll make this work. And so we put an offer at asking, it was at 180 5 at the time, and I was just worried that someone was going to scoop it up because normally that’s what’s happened.

Karl:
Someone else has been able to scoop the deal before me. So this was an area closer to me, a little farther from the central area. So I think what helped me really with this deal was it was off the beaten path per se. I wasn’t investing where everyone else was investing, I was looking at other markets that were in my area, but I think the focus was taken from them because they weren’t in the heavily populated areas. So we walked it and we ended up getting under contract for 180 5. We just came in at asking for that one. And just by taking action consistently, I guess what ended up leading to that next deal.

Ashley:
Yeah, Karl, I think that’s a great point as to how you’re finding the deals is taking that consistent action. But you mentioned making low ball offers, not being afraid to actually make those offers on properties. And also continuously looking at the MLS, you’re constantly looking for deals, but also where that value add is, could you add a third bedroom? What can you make of it? I just saw a property today on the MLS, and as soon as you were talking about this, I thought of it, it’s a two bedroom, one bath, but it’s 1200 square feet and there’s got to be room for a third bedroom in there somewhere. Maybe you’re taking one huge bedroom and cutting in it to two, maybe there’s actually two living rooms in there, you can make another first floor bedroom. So I think that’s great advice as to how you’re making or how you’re finding those deals is by looking for properties that have added value, making those low ball offers, but consistently taking action and actually looking at deals altogether and taking the time to go through them. Rookies, we want to hit 100 K subscribers on YouTube and we need your help while we take a quick ad break. You can go over to youtube.com/at realestate rookie and make sure you’re subscribed to the channel. Stay tuned after a break for more from Karl.

Tony:
Alright guys, welcome back to the show where we’re joined by Karl.

Ashley:
Before we go any further, Karl, what is your portfolio right now? How many deals have you done? What does it look like?

Karl:
I have a three family and it has five bay garages on it as well. So we actually rent those out for storage or anything in between really. They just can’t run a business out of them. And then after that, I ended up getting into a syndication as an lp. So currently I’m still an LP and that’s syndication and that’s out in Indiana in Evansville.

Ashley:
Can you just explain real quick what an LP is and a syndication just super brief overview.

Karl:
It’s a limited partner. So basically there’s GPS and LPs. GPS are the general partners which basically run the deal. And the LPs are more of the passive side. We’re just the investors. We just come with a amount of money into the deal. So there’s multiple of us. It’s probably 30 or 40 of LPs involved in that deal. And that allows the gps who are running it to take down these large deals, but then all the LPs get a huge benefit for being an investor. It’s almost like buying a share in a stock is kind what I like telling people.

Ashley:
And then the rest of your portfolio

Karl:
There was the three family, the syndication, and then as of this year, we finally ended up getting a single family under contract, which we’re currently renovating and we’re going to make another Airbnb. We’re also going to do some insurance housing out of it. And then we also recently just after that one, I signed the documents Friday before I flew to Cancun for bp. We closed on a single family that’s going to be a fix and flip. And that one was a partnership deal. We made that come together in two weeks and that was actually on a attack that was from a tax lien.

Ashley:
Oh, awesome. Congratulations.

Tony:
Yeah, you’ve been busy, man.

Karl:
Yeah, yeah. All of a sudden it went from zero to busy.

Tony:
Now one thing I do want to call out though is that you found a deal on the mls and there’s a lot of influencers, just people in this space who just kind of poo on the mls, but I think there’s still opportunity there. You just got to know where to look and actually made a really great comment of like, Hey, what if there’s a two bedroom that’s way oversized? And we interviewed, I was trying to find the episode number, but we interviewed Ingrid, so if you guys look up her name, Ingrid, last name is D-U-Q-U-E. So you’ll find her in the BiggerPockets archives, but she had an entire strategy where she was looking for oversized smaller property, so she was an engineer, so she had some sort of algorithm that was scraping Zillow and finding any two bedroom that was 30% larger than all. So you don’t have to get that complicated, but just the process of saying, Hey, is there some hidden value here that maybe other investors are overlooking?

Tony:
We had the nasims on the podcast recently and they talked about how they looked for properties that they could convert into larger properties where they could then rent out different parts of the room. So there’s so many different ways to find good deals on the MLS. You just have to get a little bit more creative with the strategy that you’re using to make those numbers work. Now Karl, you mentioned tax liens and I think that’s something that we haven’t talked about much at all on the Ricky podcast. So if you can first maybe define what a tax lien is and then what is the process for actually purchasing one of those deals?

Karl:
A tax lien is when the owner hasn’t paid their taxes that they owe to the local municipality, and then it ends up going so long that the municipality puts a lien on their house. And if it’s not paid by a certain amount of time, that tax lien then goes to auction. And then once it goes to auction, there’s usually about a six month period of time when the tax lien gets sold to, they have six months to basically figure out an exit strategy if they’re going to be able to pay this tax lien now with a heavy interest rate. And if by the end of the six months they don’t, then they’re going to get a notice to quit and they’re going to be basically evicted from their house that they could own outright and they might only owe 20, 30, 40, 50,000 on, but they own a 250,000 house. So you got to wonder what happened there.

Tony:
And then what’s the actual process for being the investor that can purchase these? Is there just a big website that you’re going to, are you going up to the county steps? What is the process for finding these, tackling liens and then buying them?

Karl:
Yeah, so we’ve done a lot with finding the tax liens and we finally found one that worked, that came in actually as a lead to us from someone we knew. And so basically we’ve gone to the auctions and you got to go with a certified check. So you got to have some funds to be able to go to the auction and every auction’s different and you can bid there for them. You also can go to the municipalities and you can request the list of tax liens from them. Usually they don’t want to give them to you, but most of them will. We found most municipalities just want us to print for the pages that they’re printing out, which is perfectly fine. It’s like 10 cents a page, perfect investment, and then we can comb through those and we can call them, we can direct mail them, which we’ve done both.

Karl:
We’ve called and direct mail and we’ve built out a list of people from tax liens that most people are just like, call me back later or keep in touch. And I think that the consistency with that is what ends up locking up these deals eventually. And the one we had got was basically from a lead that was given to me from someone I knew who said, Hey, this lady needs some help. She has a tax lien on her house. I told her you’d be the one to be able to help her because you’re really creative and you have a good network of people to take the deal down. And I said, yeah, I can always find a way. If there’s a will, I’ll figure it out. So I talked to the lady and that was just after the taxing auction had sold. Now most people think when the tax auctions get sold and they get auctioned off that they’re gone forever, but they’re not.

Karl:
You can rectify that. You just have to structure it with your lawyer so that basically the tax lien gets paid first and then the sale happens right after because that’s what needs to happen once the tax auctions are sold, it has to get paid with the interest and then you can purchase that property. And that’s exactly what we ended up doing with this last property we got from the tax lie list. But it took months. We had talked to her I think five months before the end date that she had. Then she sat on it and we went back and forth and I kept in touch here and there, and then she reached out pretty much two weeks before she had to be out of there before it was up. And that’s not a lot of time. Most people, you need 45 days to close and sometimes it gets extended. So two weeks I was like, this will be my first one. I brought in a partner who was a little more seasoned than I was for sure, and he was able to bring the cash to close and have the lawyer that was able to throw it together in two weeks and get the deal done. And we both have a 50 50 split, so something’s better than nothing. That absolutely.

Tony:
So Karla, it sounds like it. Thank you for walking us through that. I think you just educated a lot of us, myself included, but it sounds like there are multiple points along the tax lien journey where you as the potential buyer can actually step in. So one point is, like you said, direct mailing, these homeowners who have gotten this notice about the tax lien and then trying to work with them directly before that property goes to auctions, that’s one opportunity. The other opportunity is just going to the auction yourself and just being the buyer there at the courthouse steps. And then the third option is kind of what you talked through where it sounds like it had actually, the auction had already happened, but there was still a little bit of time after that auction to rectify and you were able to go in and get it there. So I didn’t realize that that third option even existed. I thought it was really just the first or the second. So I guess from your perspective, if a rookie is starting out, which one of those do you think makes the most sense to start on? Is it going to the courthouse steps or do you think it’s trying to catch the seller before it gets to the auction or doing what you did?

Karl:
Yeah, so I would say the two things is go to the auctions. Even if you’re not there as a bidder, you can just sit there and watch the auction. And that’s exactly what I did when I first got started. We just went to the auction with no check. I brought a guy from work that was interested in real estate with me. We both went there and we just watched to see and learn what the prices went for, how high these guys were bidding, did everything sell on the list to kind of gauge is there a lot of interest at these tax liens? And the room wasn’t full. There was rooms to bid, but you could tell there were a couple of people on certain properties, they were there to win it no matter what the deal was. And you get anyone there from the investor to the homeowner that really wants it and they’re just bidding with sheer emotion.

Karl:
So I think that’s a good strategy. Get in the auction, get in the action, maybe take a certified check if you have the funds, but then go to your municipalities, go locally to these municipalities and just build your list off, Hey, what are water liens you can ask for? Go ask for the water liens because before they go to tax lien, they usually get their water turned off. So get the water lien list. If you can get the tax lien lists, and even if you’re interested in a certain property, you can go pull the property card online and you can even go to the municipality and pull the file to check out the permits, see what renovations has been done, see what open permits there are. I may tell you a little bit more about that property too. So you might have the upper hand when you go to that auction. You may know more on the property that you’re interested in.

Ashley:
Well, Karl, thank you for that in depth detail of how a tax lien auction actually works. I’ve only gone one or two times, I think to a large county one, I bid on a property for somebody else, not for myself, but we didn’t get it. But I remember having to go and get the cashier’s check or the certified funds and thinking, how does this work? I don’t know how much money to get and what do I do with the checks if I don’t buy anything and learned, you take them back to the bank and they’ll put the money back into your account. But yeah, it was definitely a learning process for me as to how that worked.

Tony:
Alright, guys, we got to take our final outbreak, but we’ll be right back after this.

Ashley:
Okay, let’s jump back in. Now, Karla, you’ve done a couple of rehabs with your properties and I’m sure with this flip there’s going to be a rehab that’s going into that too. How confident were you going into doing a rehab? Do you have any experience and how did you estimate your rehab costs

Karl:
With rehabs? My experience is I’ve always been a DIY, right? Do it yourself. My father growing up was never the guy to pay the guy to come fix the house. It was I can do it better and I can do it myself for cheaper. So that’s my greatest weakness and my greatest strength because I am starting to learn how to get away from doing everything myself because I can’t manage and do all these properties on myself and still have a family and a life. So I think that the first property we got, I ended up doing the renovations myself, and then when we renovated one of the other units on that same property, I tried to step back and at least do less than 50% of it myself. And on this new single family that we’re renovating fully, I would say I’m probably going to do 25% of the work. So I’m slowly dialing back from doing the renovations, learning how to manage contractors, find contractors, find guys to work for me that can get these renovations done while I’m out doing other things or finding deals.

Ashley:
I just did an interview with my contractor and we had two flips going on at the same time. One flip he was doing for me and then he was the contractor on his own flip too. And we did this little interview comparing our flips, and they were very different type houses, different price points, things like that. But we talked about his margins compared to mine with me completely outsourcing everything and the edge that he had because he was able to do some of the work and he could put in a higher offer on the property to purchase it because he was doing some of the work himself where other investors, and that gave him kind of that competitive edge when trying to find deals. And his flip turned out phenomenal for him. So I think there’s kind of the, oh, a really great ambassador doesn’t do any of the work. They outsource everything. You have to get yourself in that position, which yes, that’s really nice, but also when you’re growing and scaling, that kind of gives you that edge that you can put in that sweat equity, and that’s okay. That doesn’t mean that you are not the greatest investor because you don’t have somebody else doing it for you. I think that’s awesome.

Karl:
No, that’s a great point because that really dials back to how you can do the burr in this modern investment world now or this modern market. And that is exactly what we did with the single family home that we bought, and that’s probably how I got it is because I knew that I’d be able to put in some sweat equity and that I could take action on the renovation hands-on where other people won’t, and it just didn’t work for their numbers. So I think that’s how I definitely got that deal, and I know that I’m going to be leaving some money in the deal. And I think that’s where, when I talk about the modern burr, that’s kind of going to be it. You got to figure out if you can leave money in the deal and how much, because for me, if I’m buying and holding that deal, I don’t mind leaving some money in that deal because it allowed me to be able to get that deal and still be able to flow some money out of it.

Karl:
And so with my strategy going towards a short-term rental game now from the long-term, leaving money in the deal was perfectly fine with me. So when I ran my numbers, I knew that I was going to have some money in the deal on a perfect burr. I don’t think those are very hard to do in this market where you get 100% of the money back and even then some. I think that the modern burrs, you just have to know you’re going to leave some money in the deal. So how much money are you going to be comfortable leaving in that deal?

Tony:
Karl, now we’re talking a little bit about the rehab portion. Kudos to you for having the DIY skillset to help, like Ashley said, pat some more margin into these deals. But let’s say that we drop you into, I don’t know, a city clear across the country, a city you’d never been to before, but you find a deal, the numbers seem like they work. How would you go about building the rehab crew in that new market thousands of miles away?

Karl:
So I think you got to think creatively to figure out who to find in that market because when you go to Facebook now and you just say, Hey, who’s a contractor? Everyone in their grandmother is a contractor and you just don’t know where the good ones are. So some creative strategies for that.

Ashley:
Everyone’s grandson is also a contractor having their grandmother’s name.

Karl:
They show up and then they’re 14 years old and you’re like, yeah. So I think that what people don’t know is you can go to the municipalities and you can call them and you can ask, Hey, who’s been filing a lot of permits recently for roofs? Or who’s a good roofing company? And you’re asking a person who may not know contractors at all, but if there’s a certain individual that’s doing 20, 30, 40 roofs in that municipality, chances are town hall knows their name and they know who they are because they do a lot of business and submit a lot of permits. And so first of all, if they’re doing permits, they’re doing it correctly and the building inspector probably knows them. So you can even call the building inspector and ask them, Hey, who’s a good building in the area that does a lot of buildings?

Karl:
I’m looking for a rehab or I’m looking for a new construction. And that’s what exactly what I would do. And I would try to find a construction crew doing that and then go look at referrals, ask what their last three jobs were and call those people. I mean, you’re like vetting contractors, like tenants almost where you need to see how they operate. And then you need to ask, do they require a deposit? How much deposit do they take credit card? Do they take cash, right? Because those could be red flags. I would like to put a deposit on a credit card if I’m investing out of state because if something goes wrong, I have that credit card company to back me to dispute the charge. If I send some guy, I don’t know a check, he could be in Mexico at BP, Cancun, and before I find them,

Tony:
I love those approaches, Karl. And just to add to that, so actually I don’t even think I shared this with you, Ashley, but after we did an episode recently where Ashley, myself and Dave Meyer talked about like, Hey, what market, where we want to go invest into if we were starting Overton? And I picked Oklahoma City and I liked so much what I saw in Oklahoma City that I literally reached out to agents in Oklahoma City to potentially start flipping out there. But I found an agent through the BiggerPockets Agent Finder and a bunch of agents replied, but she sent a really detailed email and in that email said, here are the property inspectors that we worked with that we know and that we like. Here are the title companies that we typically work with. Here are some handymen that we typically work with. Here are general. So she literally had a Rolodex of everyone in that city who I might need to go contact. So if you are a rookie and you’re looking to maybe break out into a new market, like Karl said, leaning on some of those referrals is a great way to build some confidence, and especially the BiggerPockets agent founder, because these are investors who work with investors like me, like Karl, like Ashley. So I love the idea of going down that path as well.

Karl:
I actually did something similar to that, exactly that, and I dialed back and invested back in my home state. But we looked at Indiana and we used BiggerPockets, the agent finder, we found a good agent that was really good on there. He emailed me and we had an hour long conversation while I was driving one day, and I called him and I kind of knew he was a good fit because of that, and he dedicated that amount of time. And from there he had had those same connections and the Rolodex of different people to use in that area, and he would go look at homes and send us videos and stuff, and then we kind of dialed back. That was the exploring phase after this property, figuring out what direction I wanted to go in having that shiny object syndrome out of state investing in state investing, where do I want to do long term short term?

Karl:
So then I was kind of reeled back into, why don’t I just figure out some solid foundations back in my home state before going out of state investing because I’m not in a state where it’s impossible to invest, right? I’m not in California. It’s a lot harder out there. So they were just like, you can do it here. You can find good deals here. It takes a little time, but you can build the foundation here and then if you decide to go to Indiana, you kind of have the experience and the foundation and everything kind of set up. So yeah, that’s a good, great point though.

Ashley:
So Karl, now that you have, let’s say you’re going through your bur process, you finished the rehab, when do you decide to refinance? Are you looking at what the market is doing, what interest rates are, what your comps are for the appraisal? Or is it as soon as you get that tenant in place, give us an overview of when it’s time for you to actually refinance a property?

Karl:
Refinance can be scary. You want to make sure every detail is done and you want to get as many dollars as you can out of the deal to be able to refinance, get the highest appraisal value. So I think leading up to the refinance, you want to know what adds value for the refinance, right? They’re not going to care what kind of handles you have on the cabinet drawers, they’re looking at the big CapEx expenses, the roof, the furnace, the foundation, how’s the house, the exterior. So they look at a lot of the big ticket items. So we want to make sure that those at least look good and if not are updated and are newer and replaced so that the appraisal value definitely comes out higher. The other thing to do is before you get the appraisal, look at your own comps in that area, and you can even give them those comps to the appraiser.

Karl:
But really with the refinance process, how we know we’re ready is right at the end when everything’s pretty much almost a hundred percent together is we’re starting the refinance period or the refinance process usually a little bit earlier. It takes about a month or so to be able to figure out who’s got the best rates you’re going to go with for a lender. So start early so that when you’re ready for the appraisal, that’s pretty much when you’re wrapping the job up and you have it all cleaned up and ready for a walkthrough with an appraiser.

Tony:
Karl, when you’re doing your refinance, because there are some banks, the first I did two burrs to start my investing career, and I was able to get the kind of construction loan and the long-term debt with the same place. Ashley, I think you’ve done maybe a couple bur like that before as well. But Karl, I guess, are you kind of teeing up the refinance on the backend, so you already maybe have an idea or are you just saying, Hey, let me separate those two things, just focus on the acquisition debt and then just focus on the refinance debt?

Karl:
Yeah, I think it’s a little bit of both. So I think the first deal we ended up doing, we just got it under contract and got it with whatever bank we found quickly. That was the initial. Then when we did the refinance, I was referred to a local bank, and it’s a small local bank that is in only in our state, and they had better terms and better rates. So I went to that local bank for the one coming up, we’re using hard money for the single family home. That’s how we were able to purchase it. And then they do offer a long-term debt, I believe, through that lender. We haven’t talked about the terms yet, but it is something I’m doing to explore. So I’m going to ask that lender to see what they have, and they may offer me better terms because I did the hard money with them, but I will go to the small local bank and also talk to them, their department and see what they have for the refinance terms. So I think exploring multiple options is what I’m getting at basically.

Ashley:
Yeah, I did that before when I did a line of credit with a hard money lender. So I’d use the line of credit to go out and purchase the properties, and then they would want me to refinance with them. And I have to admit, I did not ask enough questions when going into this hard money lender, and it ended up being an awful experience, but an option they had was to refinance with them once the property was rehabbed, rented, ready to go. But what I didn’t know and wasn’t clear to me at the beginning was that you had to have three properties ready to go. So I had to have three of my burrs completed and ready to refinance, and they would do it as a portfolio. Well, I’m only buying three to four maybe five deals a year at max. So I ended up just refinancing with somebody else and didn’t actually use that hard money lender to do the long-term. But Karl, I’m curious as to, you did your burrs, you did the long-term rental, but it seems to me that you’ve now adjusted a little bit or a pivoted to doing a short-term rental, and was this a cashflow play? What was kind of the reasoning behind that?

Karl:
So this was another kind of fell into it by accident. So we inherited the long-term rentals. Like I told you before, in that three family, we had one older gentleman leave. We rehabbed that unit, and that was going to be my first experience on finding a tenant to place in that unit. When I had started looking for a tenant, this was 2021. Now after Covid, there was for some reason just an influx of the tenant pool that you had of people that just would throw an application. So when I had put it on apartments.com, my phone was blowing up. We had our inbox full applications coming in left, but not anyone that was overly qualified or even qualified for the income to what the rental rates were. They all got pushed after covid just because everything went up, pricing, insurance, everything. So from that, I was almost overwhelmed of how do I find a tenant to place in this?

Karl:
And I had just started to hear about the travel nurses and they’re looking for housing and they stay for three month contracts. And my local network over here had a meetup, and that’s exactly what they were going to talk about that Thursday. And so I was going to go to that meetup, and on Wednesday I received a phone call from a guy out of Houston, Texas, and he was a travel nurse, and he said, Hey, I found your listing in apartments.com. I’m looking if I can rent it for a three month contract, I’m willing to pay a little bit more. I know it’s a short-term contract. You’re looking for a one year lease. And I’m like, okay. And you got to wonder, is this a scam? And I’m seem like a nice guy. So I was like, yeah, I mean, I think we could do 1500 a month for short-term rental kind of thinking.

Karl:
The sales tactic in my mind, like 1200 is a long term, but the short term’s 1500. And he is like, yeah. And I was like, that was really quick. I should have said 2000. No. So I was like, okay. So then I’m like, well, I’ll include all the utilities on top of that for an extra 300. And he is like, alright, cool. I can pay in full. And I’m just like, this has got to be a scam. This is not real. So I was like, listen, let’s not this not speed this. Let’s figure this out. I’m going to meet up tomorrow to literally learn about this. Lemme go learn about this and then we’ll figure out how we’re going to do this tomorrow. He’s like, yeah, give me a call. I actually vetted him as a regular tenant. I did a credit check background. I didn’t know what I was doing.

Karl:
I was set up for learning how to vet regular tenants for long term. Then I was like, listen, we talked the following week, we got everything all figured out. The lease was signed. He sent the money on Apple Pay. So I was like, oh my God, this is crazy. So I got a chunk of money, he’s not even there yet. I’m thinking to myself, where are you going to stay at this place? It’s empty. You know that. And he’s like, yeah, I’ll just use an air mattress. I’m just coming to workout, get overtime and go to the gym. So I’ll just be there to sleep. And I’m like, I mean, yeah, okay, sounds nuts, but let’s do it. I’m all about crazy. So I picked him up from the airport, learned a lot about him, and learned what the travel nurses were, what is important to them, having good wifi or having a comfortable place to rest their head.

Karl:
They weren’t really concerned about the high amenities as a short-term rental. They were concerned, I just want to safe comfy place to chillax after work. I’m like, okay. So actually while he was there, we ended up furnishing the place, and that’s a whole funny story. We started buying furnishings on Facebook marketplace. Now I’m getting into something Ive never done before. I’m like, well, now we got to furnish it. I’m like, I felt bad. He’s, I have an air mattress from my mother’s house. I let him borrow. So I’m like, that’s how Airbnb started, I guess, on air mattresses. So I start furnishing it and I go on Facebook marketplace and I drive to the local college, which is five minutes down the street from me, and I pull in and it’s the end of the semester, and that’s why the Facebook marketplace is flooded with furniture.

Karl:
And I would see all these dumpsters as I’m driving in and I’m like, oh yeah, everyone’s moving out. Oh, okay, cool. They’re all selling their stuff. And then as I’m driving out, after I bought an entertainment set in a carpet or something, I think for the living room, I just pause and I’m like, look at my buddy who came to give me a hand. I was like, dude, these dumpsters I think are just full of good furniture. I hate to go dumpster diving, but I feel like we need to recycle this. So we went dumpster diving and we pulled out pots and pan set, brand new furniture, lamps, everything you could think of because these college kids were moving out and their parents probably just said, ah, we don’t want that. Don’t bring that stuff home. Just throw it out. And so some of the good stuff was left outside, and some of it we hooked out of the dumpster and we basically furnished a one bedroom rental for just under $600.

Karl:
And we bought things like the bed, the mattress, the important stuff, the microwave, the things that we needed. But aside from that, all the rest of the furnishings we cleaned up and even the travel nurse helped me wipe everything down, clean it up, and kind of refurbish it to use in the rental. And that’s kind of what we got our jumpstart in. We did midterm from probably the beginning of the year all the way up until November, and it was going great. We listed on Furnish Finder, which was a platform that we could use to find leads from travel nurses and other traveling professionals, and everything was going great. And then November came and it dried up, or at least that’s what it seemed. And I was like, man, do people not travel for the holidays? This is our first winter. I now have a heating bill I have to pay for.

Karl:
I’m like, maybe people don’t travel for Thanksgiving and Christmas. Maybe it starts back up in January. So I was like, now I feel like I’m at a point where I need to pivot again. What do I do? I have a whole place that’s furnished now. So then I’m like, I guess we’ll go on Airbnb. I’m like, that’s a vacation rental app. I don’t know. I am not in a vacation market. I’m just in an old urban town. So I went on Airbnb, took some pictures, made the listing, and our first booking came in and I was like, alright, sweet. We got a little income for that month. Perfect, that’ll hold us over to the next month. Then more bookings came in and I’m like, wow, this is cool. And then more came in, and then before I knew it, we were filling this place up, and then I got long-term bookings on it because I didn’t have high rates and I had some monthly discounts and just the rest is history. Then we didn’t even have a space that we could go back to furnish Finder, unfortunately. And we went over from long term going to midterm and then just fell into short term to fill a gap. And I’ve really never looked back. We are still doing midterm stays, but we’re only doing them through the Airbnb and the VRBO app, which are both transient housing apps for short-term, long-term, midterm, however long they want to stay, they pay basically. So

Tony:
Karla, it sounds like each, I guess problem led you to another solution which kind of forced you to pivot a little bit. And I love how each time you’re like, Hey, let me just see what happens. And each time it seems like some good things happen, and dude, kudos to you. You got to be like in the short-term, midterm rental hall of fame for having your guest help refurbish your furniture. I don’t think I’ve ever heard anyone say that before. That is an amazing accomplishment.

Karl:
And he had bought stuff of his own for the unit that he needed, and he was like, just donated it. He’s like, you can just keep it. I’m not bringing it back with me to Texas. So yeah,

Tony:
That has to the perfect first guest for you. That’s amazing, man.

Ashley:
But also, you have to remember, Karl went and picked him up from the airport too. How many Airbnb hosts are going to pick you up from the airport?

Tony:
That’s true. So Karl, from a cashflow perspective, right? So I know you said, Hey, long-term, 1200 bucks a month, dude, I’m going to charge you 1500. What do you think you’re doing now from a revenue perspective on that unit as a short-term slash midterm?

Karl:
Sure. Yeah. So it’s substantially more, and that was incredible, just seeing that because when I initially got this place, because I got such a good deal, we found it from a family member that was tired of managing it. I was already satisfied with the cashflow, but now it’s funding my real estate journey with the short-term rental income. So the regular long-term income was 1200. We went up to that 1500 for that midterm, and I think at max during the midterm rental, we were at 1650, and I was like, wow, that is awesome. And then from Airbnb starting out, and we did upgrade the furnishings and we did hired some designers, did it right, figured out how to really double down and manage a good performing STR are. We started pulling in over 2000, and then certain months we’ve pulled in anywhere from 2,500 to 3,500 just on that one bedroom unit, which mind you, in my area, it’s 550 square feet for that one bedroom unit. So it’s a bedroom, a living room, a kitchen, and a small bathroom. There’s no dining room. So you eat in the living room or you stand and eat in the kitchen. There’s not even a room for a table. Yeah. So yeah, it’s like you just eat on the couch or in bed I guess, or you go outside. But yeah, so it was pretty interesting. So we’re pretty much, I would say, consistently doubling the rent and then on the high months tripling, if not going over that.

Ashley:
Okay. So to kind of wrap it up here, I am wondering what would be your best advice for a rookie investor that’s looking to follow your footsteps to do their first bur strategy?

Karl:
I think consistency and taking action are probably the two biggest key takeaways, right? Don’t get discouraged because you haven’t had a deal. My first deal fell into my lap because of a family member. But that also, when you think about it only happened because I asked if I didn’t ask, he might have not come to us. It was a family member that we didn’t see all the time. It wasn’t like my parents or anything. And so just by asking created, taking action, because I would just, once I got started in the real estate investing journey, just tell everyone that you’re now a real estate investor. You don’t have to own anything. You’re looking into invest in real estate. You’re a real estate investor. So I think by doing that and basically taking the action to ask and say, Hey, if you’re ever interested in selling, let me know.

Karl:
Sparks the thought in certain people’s minds to be like, oh, you want to buy this? You want to buy this. And then you figure out how do you buy this? Whether it’s creative financing, seller financing, start learning about all the strategies. So really that just education is huge. Learn as much as you can. There’s so much free stuff online. Don’t pay for anything people get discouraged by. They have to have a lot of money to pay for courses and stuff. I think there’s so much free stuff online between the BiggerPockets forums, questions, you can ask seasoned investors on there. People respond to those questions that even have their own course, and they’re giving you an answer to your question you ask. So I think that’s great. But yeah, consistency. Look at the MLS, try to find a realtor, try to low ball a bunch of deals, put in offers. It’s free to put in offers. It doesn’t cost you anything. Your real estate agent may hate you, but find a good one. Take some action. Be open with your real estate agent of what you’re doing so that you set the expectation of, Hey, I am beginning real estate investing. I’m going to put in a lot of low offers, like are you with me or not? And they can decide if they’re a good fit for you.

Ashley:
And also make sure you’re able to close too.

Karl:
Yeah, figure out your strategy. Use the education to figure out how you’re going to close that, how you’re going to close the deal. If you have no money, you may have to go find a network, go to these meetups. That’s how I met all these partners. I would be like three or four deals less today if I didn’t go to these meetups. And that’s this last deal that we just closed happened because I was able to network and I knew someone that could bring the cash to close. And I made a phone call at midnight and I said, meet me in the morning. We’re going to sign this document with the individual at Dunking Donuts. And that’s where the deal went down.

Tony:
And guys, I do just want to call out, BP does have a meetup section on the website. So if you’re looking for a local meetup, obviously check your local Facebook group check meetup.com. But BP also has a meetup section as well. So if you’re looking for an event somewhere to go check there as well.

Ashley:
So Karl, overall looking at your portfolio, what is your average monthly cashflow from all of your units that you’re bringing in?

Karl:
We have two that are being renovated, so those are negative. But I would say on the three family, we now have one long-term renter and two short-term rentals out of that. And those two short-term rentals actually create three listings because they can of course occupy each unit individually. But there’s a third listing we made to tie both of those listings together because they’re in the same building. If they have a bigger family, we can appeal to the market of three to four people versus just two people for the single bedroom. So we actually have a booking that just came in this morning for a family that’s coming for Christmas, and so they’re booking up both of those units. And so with that, our cashflow, I would say we probably 3,500 all the way up to 6,500. It depends what month the Airbnb is not like the long-term rental income where you’re guaranteed that same amount every month, and even then you’re not guaranteed because they cannot pay Airbnb. It fluctuates on who’s coming, when they’re coming, what dates gets booked, how long and the different seasons. There’s always, in different markets, there’s stronger seasons than others, so you just got to figure out where that is. But yeah, I would say that’s our cashflow currently monthly is probably around three to 6,500 variable.

Ashley:
Yeah. Awesome. Congratulations.

Karl:
Thanks. Yeah.

Ashley:
Well, Karl, thank you so much for joining us on today’s episode. We appreciate you taking the time to come on to the show today. We’re going to link your information into the show notes, or if you’re watching on YouTube, you can find it in the YouTube description. If you like today’s episode, make sure to leave us a rating and review on your favorite podcast platform or watching on YouTube. Make sure to like and subscribe. If you have any questions for Karl, you can also put them into the YouTube video questions and comments down below. Thank you guys so much for joining us. I’m Ashley. And he’s Tony. And we’ll see you guys next time on the next episode of Real Estate Rookie.

 

Dave:
I just read this new report that says that the American Dream now costs $1 million more than the average American makes in their lifetime, and this certainly feeds into this consumer sentiment, slump, vibe, session, whatever you want to call it that we’re in. But what are the numbers behind this report and do they add up? Today we’re breaking down the cost of the American dream. Hey friends, it’s Dave. Welcome to On the Market, and I’m joined by my favorite MythBuster and voice of reason, Henry Washington. What’s up man?

Henry:
What’s up bud? This is exciting. I am looking forward to learning what this craziness is going to be about.

Dave:
Yeah, I think this is going to be a fun new format that we’re trying out. I think it’s safe to say that you have not prepared for this recording at all. Is that correct?

Henry:
I know nothing about what you’re about to tell me.

Dave:
I knew you would excel in this role of doing nothing before the recording. Boom. Nailed it. Okay. My sweet spot casting. Nailed. Alright, so basically though, this is a joke. The whole point was I’m basically going to walk Henry through an article that I just found was super interesting and he can interrupt me with questions or be the voice of reason here. So let’s just jump into it. I found this article and found it super interesting because we see all this economic data right now that is very positive, right? GDP just came out and it’s up. The labor market’s doing surprisingly well. Real estate, despite people saying it’s going to crash, is being resilient, but the people aren’t happy. I think that’s safe to say, right? People are not feeling the economy even though some of the high level data says it’s doing well. And I read this article and I was like, this is it, right? Expectations are X and reality is Y, and there’s a big gap between the two.

Henry:
I think people just feel abused, and so when they hear the headlines and say, the economy’s doing well, it’s like an abused person. Go, yeah, whatever you say it’s doing well. Yeah, but I don’t feel that way at all.

Dave:
Right? Yeah. People feel gaslighted. It’s like sure, whatever you say, yeah, okay, you’re lying to me. But I think the reason, I guess we’ve talked about a bunch on this show, but the reason I think people feel that way is both things can be true. The total pie, the total economy can be growing and it might not be impacting ordinary people all that much. You see a lot about how CEOs and executives and big corporations are taking a ton more money, but it’s not necessarily leading to more income for people. But let’s talk specifically about this. So this comes from Investipedia, and according to their research, the American dream now costs $4.4 million, and that’s the estimated lifetime household cost of common milestones. So that includes stuff like getting married, raising two children, buying a home, having new cars, saving for retirement, going on yearly

Henry:
Vacation. So are they saying that you need $4.4 million a year to afford the American dream, or that you will need to spend that much over your lifetime?

Dave:
Over your lifetime? Yeah.

Henry:
You buying it?

Dave:
Maybe. Maybe. But that’s a daunting number, right?

Henry:
Yes.

Dave:
What’s so daunting about is they go on to say that the average American with a bachelor’s degree, so that’s only about a third of people have a bachelor’s degree. The average American earns $2.8 million during their whole career. So if you’re single, you’re totally screwed. You can’t do this. But I guess this dream probably is talking about a couple. It has wedding and raising kids in there. Not that you can’t raise kids. I think

Henry:
That could be a little misleading though. If you think of the average cost of a house, so what’s the national average right now? 450?

Dave:
Yeah, it’s four 40. Yeah,

Henry:
Four 40. And then the normal American may maybe own two to three homes over their lifetime.

Dave:
Yes.

Henry:
So four 50 times three is what?

Dave:
1.3 million.

Henry:
Okay. So that’s 1.3 million in just housing. But people don’t typically pay their houses off. They might need it to buy it, but they’re not going to spend the entire amount they’ll sell before they get through paying off the home typically. So I mean, it’s probably a little misleading that number.

Dave:
So the number they gave for housing as part of this calculation is $930,000. And basically I figured out the way they were calculating is that they do pay it off and it is 440,000, but if you finance a $440,000 house at seven and a half percent interest rate, you’re paying 900 grand over the course of 30 years to own that home. So it’s a lot of money.

Henry:
Oh yeah, man, that 4.4 million,

Dave:
Yeah,

Henry:
That’s intense.

Dave:
Okay. But the 930,000 wasn’t even the biggest cost. I’ll ask you to guess what the biggest cost was. It’s probably not something you think about. It’s not something you necessarily buy.

Henry:
Oh, goodness, man, I have no clue. Insurance, no. Make us pay for that forever. For everything. Forever.

Dave:
Well, we’ll get to that in a minute, but I don’t think that’s even included in this calculation. So the retirement is $1.6 million, so that’s just retirement savings, which honestly I would argue that’s not enough. Doesn’t sound like enough. That’s not enough. It doesn’t sound like enough. If you retire at 65 and let’s just say you live 20 years after that, hopefully longer, but that’s 80 grand a year, that’s 80 grand a year. And depending on how you’re doing that, you’re probably paying taxes on it. So let’s like five grand a month in spending money, and by the time you and I retire, just a rule of thumb on inflation is that the spending power of a dollar Hals every 30 years. So you’re going to need double that in 30 years.

Henry:
Yeah, absolutely. That’s not enough. And people also forget that the older you get, the more expensive your housing costs becomes because if you have to go into a home or a community that’s between five to 10 grand a month right now, on average, it’s only going to go up. Yeah, it’s nuts,

Dave:
Man. Oh my God. That’s insane. That’s

Henry:
Nuts. Okay,

Dave:
So those are the two biggest ones. The third biggest one is raising two kids and their four year colleges. That’s like a lot of expenses all mixed together,

Henry:
But they’re taking loans out.

Dave:
Oh, for colleges,

Henry:
People are taking student loans,

Dave:
But still they estimate the cost of raising two kids with four year colleges at 832 grand. You got two kids, you putting that aside,

Henry:
I don’t know. I feel like 832 grand is per year, right? Kids are expensive. Do you know how much it costs to put your kids in activities? I don’t know how kids afford activities.

Dave:
Yeah, swim classes are 80 grand a year,

Henry:
And then my wife will be like, oh, we got to take her to ballet and then dance tomorrow and then swim the next day. And I’m like, what does this cost? No, it’s expensive, bro.

Dave:
Yeah, it seems crazy. I mean, I don’t have kids yet, but I have a financial planner and she was asking if you have kids, are you going to pay for their college? And I was like, no, it’s too expensive. That

Henry:
Has to include daycare too, right? Because daycare is nuts.

Dave:
I think so, yeah. I think it does include childcare from what it says.

Henry:
See, care is the most unaffordable when you’re young and when you’re old, it’s a couple grand a month when you’re preschool age and it’s another five to 10 grand a month when you’re a senior.

Dave:
It’s insane. Yeah,

Henry:
It’s nuts, man.

Dave:
All right, so we’ve hit some of the categories that cost Americans the most over their lifetime, but when we come back, we’ll talk about other elements that are part of the American dream and the expenses that are not even included in this 4.4 million total. Welcome back friends, Henry and I are here breaking down the cost of the American dream. So just so we’ve recapped so far of the American dream retirement, that’s something everyone aspires to, obviously they’re saying 1.6 million. I think a classic part of the American dream is owning a home, which is 930 grand. We have raising two kids with their four year colleges. This next one, which isn’t the last really big one, which I find this kind of crazy, but they say owning a new car and they count both people in the couple having new car Lifetime, 800, $11,000. And I sort of reverse engineered the math and it’s basically if you own a car, if you take out a five-year loan of the car and make payments on it, and then the minute you’re done paying, you

Henry:
Buy a new car, a new one.

Dave:
So that to me seems too much.

Henry:
That seems like a lot.

Dave:
Is that the American dream though, to just constantly own a new car? I guess for me that’s never been part of it.

Henry:
Oh yeah, for sure. 100%. Yeah, absolutely.

Dave:
I’m just not a car guy.

Henry:
I know people with over a thousand dollars a month car payments on cars that aren’t that cool. Somebody will go out and buy a regular car, but they don’t have great credit, but they want to be fancy. And so instead of getting a Honda Accord, they get a Mercedes-Benz and they’re paying $1,200 a month. They have a 7, 8, 9, 10% interest rate because they got to keep up with the Joneses and all their friends have new cars. I see. Yeah, I definitely see that.

Dave:
Yeah, I saw something that the average car payment now in the US is like $600 a month.

Henry:
That’s

Dave:
Too much. That is too much. I don’t care how much money you make, don’t do that. It’s a bad

Henry:
Idea. That doesn’t shock me at all.

Dave:
I mean, my perspective is warped. I haven’t owned a car in five years. I have a bike that I bought to ride that every day, so it’s a little different. But yeah, man, that part was super expensive.

Henry:
So I mean if you’re doing the math right, the 4.4 million, how many working years are we giving people?

Dave:
I think 45.

Henry:
4.4 million divided by 40, so that’s $110,000 a year consistently through your working mind

Dave:
As a couple.

Henry:
Oh, that’s a family

Dave:
With two people with a family. But I think that’s what’s so crazy about this is that the median right now for family, I think it’s like 80 grand. So that’s why people are pissed, right? It’s like if this dream is yours, retirement, owning a home, raising two kids, having nice cars, which is kind of a reasonable dream. That’s what we’ve all been conditioned to want. The average person can’t afford that. And so no wonder people are angry.

Henry:
Yeah, I mean I get that mean, but breaking it down, that’s 55 grand per working adult for your entire working career. That doesn’t seem too crazy.

Dave:
It’s not, but I think it’s just different than in the past when this dream was like you could just have a regular job,

Henry:
You could work at a factory.

Dave:
Exactly. And you could get that and now you can’t. That’s fair. That’s a big shift in our society and I do want to talk about that more, but let me just tell you the last couple categories they included here, pets 36,000. I mean honestly, I’d spend the 8 32 on my pets wedding. The average place for a wedding now is $44,000.

Henry:
That unbelievable. That makes me so angry. It’s just ridiculous. In a culture where people don’t stay married, that seems absurd to me.

Dave:
It’s insane because if you just say the word wedding to anyone, they just double their prices. When my wife and I were getting married, I was like, we should just call it a family reunion. Let’s just call the photographer and the caterer and be like, we’re having a family reunion. Can you cater it for us? My wife might show up wearing a wedding dress, but it’s a family reunion. It doesn’t matter. We’re saying vows at our family reunion. What’s it to you? But it’s unbelievable. 44 grand.

Henry:
That’s ridiculous. That’s the dumbest thing in the world

Dave:
So much. It’s unbelievable. And then annual vacation at 180 grand. So I figured that’s like 60 years of vacations at three grand a pop.

Henry:
That’s fine.

Dave:
Yeah. I don’t know why they included this either calculation, but they put funeral as 8,500 bucks. I don’t know what I imagine the American dream, I’m not thinking about my funeral all that much. I guess in some respects I think about a funeral as part of the American dream is that I hope they don’t just dump my body behind the funeral.

Henry:
Funerals can be expensive. I honestly think that’s probably cheap.

Dave:
Yeah, I think it is.

Henry:
I think people spend a whole lot more on funerals.

Dave:
Yeah, I think that’s pretty cheap. So I think what’s crazy to me about this is $4.4 million, but it doesn’t even include living expenses. This isn’t food, it’s not eating. Even the owning a car doesn’t include maintenance and gas. So this is outside of your living expenses.

Henry:
It’s funny when you said what’s the most expensive part? And you asked me that question, my immediate thought went to food. I guarantee you it’s my most expensive part’s, my most

Dave:
Expensive part for you and me probably

Henry:
I put a high priority on good food. Absolutely. If that’s not food, that’s insane.

Dave:
You had been so proud of me this weekend. I went to a barbecue restaurant with some friends, got a full brisket entree and then ordered another rack of ribs on top of it, and everyone looked at me like I was crazy and I ate every damn bite. It was so

Henry:
Good. That is the happiest thing I’ve heard today.

Dave:
But

Henry:
Then

Dave:
$120 later, that was dinner. So that adds up. So I think when you think about the fact that living expenses aren’t even included in this, then you’re pretty far away from achieving this. If you earn a median income, which is average, half of people make media income or less. So that’s what what’s just kind of so crazy to me about this.

Henry:
I mean, it’s scary to think there’s a big piece of this pie a lot of people are going to miss out on. And typically it’s going to be the things at the latter end of the spectrum, like retirement, and you’re going to have to cut back on a lot of the things like housing expenses. And that’s crazy, man. I don’t know how people can do it.

Dave:
What sort of bums me out is I don’t feel like it’s going to get better. Maybe I’m pessimistic or I’m missing something. But for me it feels like a long path for this to get any better. Things aren’t getting less expensive, and although wages are going up, it would take a long time of stable prices and increasing wages for this to meaningfully change.

Henry:
Yeah, no, I don’t think it truly gets better. I do think there is still a gap between what things cost and what people make. And I do think that that gap is going to continue to close, but I don’t think it’s going to be able to solve all of the problems that we’ve identified here.

Dave:
And I mean, this is a reason why I think you and I both got into real estate investing because you need to find ways to supplement your income. But the other thing I wanted to ask you about is it strikes me that the average person is probably going to have to adjust their expectation of what the American dream really is.

Henry:
Absolutely the American dream, I mean American dream is what to own a home, to have a job, own a home, be able to retire and take care of your family. And I think that people still want that, but I think that that’s why side hustle culture is so popular. And we do live in a time now where it is a lot easier to find ways to make money on the side than it was in the past. And now I think side hustles become more of a necessity than something a few people do Occasionally. I think a lot more of the American population is going to have a second sort of income on the side and it just be a normal part of life.

Dave:
It seems to me that you sort of have two choices here. You either increase your income and you could do that by doing a side hustle like you said, or pursuing a career that’s going to earn you higher than the median income. And I did mention that statistically people in the US who have a bachelor’s degree do earn higher amounts, but that’s not a hard and fast rule. You can make a lot great money in the trades. There are other ways to make great money. You can go to a coding bootcamp and make a ton of money. So I just mean in general, finding a way to increase your W2 single job or supplement your income or on the other side of things, sort of define your own version of the American dream. That probably doesn’t include one of these major categories here. Raising to do kids retirement, that’s hard to give up.

Henry:
I’m just sitting here thinking of the fundamental differences between the times and I think what you and I grew up seeing because kind of on this cusp of two generations who have two different paths. And so for our parents and for us, almost essentially a path was laid out for us where all you had to really do was just walk down it and you could afford the American dream. They told you what to do, you go to school, you get good grades, you go to college, you get a degree, you get a job, you climb the corporate ladder, you’ll make enough money to live your life and this is the first time when really that path doesn’t lead you to the American dream anymore.
Yeah,
It’s still there, but it doesn’t lead you all the way to the American dream anymore. It stops somewhere short of it. And so now people are forced to essentially become their own trailblazers if they want to get to the American dream. It’s a different thing now.

Dave:
It’s absolutely right. It just requires, I think, a little bit more creativity. You need to figure out how you’re going to do it, whether that’s house hacking, something like that, which is a great way to do it, or driving for Uber or becoming a real estate investor. Those are all good ways to do

Henry:
It. And I guess the question is, is that bad or wrong? Do we feel like we are entitled to the American dream
Like
We were before? Because you see it all the time on TikTok and people can’t afford a home and they can’t afford to do these things and it needs to be fixed. And it’s always been on us to get to the American dream, but now it’s on us to figure out how to get there too. The path doesn’t take you there anymore.

Dave:
Okay, so we’re getting pretty deep here, so stay with us because Henry and I are about to get into some of the underlying causes tied to the cost of the American dream, the parts of the dream that we personally would consider giving up first. And the things we don’t want you to know are lifetime total spending on all this right after the break. Welcome back to the show. Let’s pick up where we left off. I think it would be great if everyone could just follow a path like you said, and be financially secure. That would be an ideal situation. I do think it is an opportunity to sort of rethink the American dream and what pieces of it actually matter to you. Because when I was looking at this, I sort of alluded to this, but to me owning a new cart just doesn’t matter.
It’s not something I prioritize. I think if I need a car again in the future, which I’m sure I will, I probably won’t buy a new car even though I can afford it, it’s just not super important to me. And I think there are things like owning a home that needs to be seriously reconsidered. I’ve rented for the last five years, I have own a home, so I don’t want to be a hypocrite, but I do think there might be a future where people choose to rent for a longer time because it actually is right now, in today’s day and age, it is a
Financial
Benefit. It is cheaper to rent by any metric. Don’t listen to your agent who tells you that you should buy necessarily,

Henry:
Because total cost of ownership is what we’re talking about. It’s not just your mortgage payment. Yes.

Dave:
Yeah. When you talk about everything, and that includes appreciation, it is cheaper right now to rent and that might change. That pendulum sort of swings back and forth over history, but I think it’s actually quite liberating if you can remove yourself and sort of divorce yourself from that part of the American dream where you think I have to own a home last five years, it just didn’t make sense to me. I rent my house and I take the money. I would’ve invested in a home and I invested in rental properties and that’s just been a better financial situation for me. Does that come with some emotional downsides of not owning our own home? Sure. But that’s sort of one of the trade-offs that we have to make in this day and age.

Henry:
Yep, I agree.

Dave:
If you had to remove one of these categories from your American dream, what would it be?

Henry:
Am I thinking as I’m following a traditional path or like myself? You, oh gosh, man. For me, it would be retirement because I’m going to use real estate as my retirement, so I wouldn’t even budget that in.

Dave:
Yeah, I guess that’s true. You’re not saving that money, right? You’re not going to have a amount in your savings account that you’re going to deplete. You might have to put that money into a asset, but then it’s not going to deplete because it’s going to be income producing. Correct. I guess when I look at this, I’ll be honest, I spent more than that on my wedding. I did not even close. I don’t know how it happened, but man, when you look at the final bill, it sucks.

Henry:
I did not.

Dave:
But that one is one I would maybe reconsider.

Henry:
Oh yeah, yeah, definitely. For me, I’m, it’s never been that big of a thing for me, and luckily I married someone who did not want it to be a thing either.

Dave:
Yeah. I think my wife would’ve been fine with a totally different kind of wedding.

Henry:
Oh, so this was all you is what you’re saying?

Dave:
Yeah. Oh, I was just a groomzilla for sure. No, actually we were thinking about eloping, but we got engaged in the fall of 2019 and we wound up waiting four years to get married because of Covid and we live in another country, and we just decided we wanted to have all of our friends stay in one place. We hadn’t seen people in years and it was totally worth it. It was awesome, but

Henry:
I wouldn’t know. I wasn’t invited, but

Dave:
No, you definitely weren’t. No.

Henry:
So you’re a smart man.

Dave:
I can get, in retrospect, we should have invited you, but it was a very small wedding. That would’ve been fun. We’ll do another not for that amount of money though. It’s going to be cheap this time. Fair enough. But no, so I think the thing, the one hope I have for something getting cheaper is college. I actually saw something the other day that college costs have been going down according to the college board.

Henry:
Yeah. Demand is down.

Dave:
It’s just got to break. It’s just one of those things that does not make sense. I can rant about this for hours.

Henry:
Oh, I can go off on this. I’ll get on a high horse about this.

Dave:
I don’t know if you know this, but before I worked at BiggerPockets, I worked in ed tech in higher ed and this, the cost spiral of higher education drives me absolutely insane. It makes no sense. No one benefits from it. They’re all nonprofits. No one even makes more money. It’s just nonsense. The worst, the whole thing is the worst, the worst, worst. So I have some hope that maybe we’ll see either trade schools become more popular or demand will decline so much that colleges will have to rethink their pricing structure and what they prioritize. And rather than building out a buffalo shaped pool at the University of Colorado, which they did for $3 billion, and then pass that price on to students for some reason, you might just maybe become a little more focused on the education piece and not all of the auxiliary things and let people decide what’s important to them and whether they want to spend money on a fancy gym or whatever it else. It is the school is buying on students’ behalf. But that’s a whole nother episode. We should just start a

Henry:
Rant. I would love to partake in that episode.

Dave:
Yes. All right. Well, we could just get on and complain about stuff. This is our new show format, by the way. Henry and I have just too gruy dude. Just complaining about you. Yeah, exactly. All right. Well, thanks for this conversation. This has been a lot of fun. Hopefully y’all are listening to this, but I have one last question for you, Henry. What category of spending do you never want to examine in your life? You don’t want to know the lifetime total of how much you’ve spent on what part of your life.

Henry:
Oh, it’s 100% eating out for me. I don’t want to know it. Here’s why I don’t want to know it. I will not change. No matter how absurd the number is. It doesn’t, the number can be the most absurd, ridiculous amount. You might as well not so. I might as well not know it when we budget. I’m like, I don’t need to see that part. It’s just, I’m going to do this.

Dave:
That’s how I feel about vacations. I just, that 180 grand over the lifetime, that’s not going to do it for me. I’m sorry. I just spend way too much money on it and I never calculate it.

Henry:
This is why I’ve achieved financial freedom so that I can spend money on food when I want, how I want, where I want. I’ve always been that way. If I online shop for some clothes right after I spend 200 bucks, buyer’s remorse, I’m like, I didn’t need those shirts. That’s crazy. But I can go to dinner and spend a grand on a dinner with my friends and not blink, not even think about twice

Dave:
Hundred percent.

Henry:
Don’t even think about it. Just in my sleep.

Dave:
I love it. I mean, because it’s fun. That’s what you want to do. Forget the acronym. Fire Financial Independence, retire early. Mine’s. F-I-G-O-V. Mine is fi gov. It’s financial independence. Go on vacation. Because I’m not trying, I am not trying to retire early. I’m trying to take more vacations. That’s what I’m in the game for.

Henry:
Yeah, I Exactly, man. I don’t want to retire. I love what I’m doing. I never want to retire, but I definitely want to be able to go out to eat where I want.

Dave:
This is why I’m so excited to hang out with you in Vegas next year for Bebe Con because it combines are two favorite things. It’s good. It’s just going up. It just, and all the good

Henry:
Food. Good food, yes.

Dave:
But Henry, thanks so much for doing this show. This was a lot of fun. Please let us know what you think of this format. We always are trying to bring you news and recent information. This is not exactly real estate, but it really has to do with the economy and I think it’s very indicative of what’s going on in the broader economy in an American society. And so if you found value of this, please let us know.

Henry:
Great conversation, and it sounds like to me, you need to reach out to the travel channel and see if you can just be the new Anthony Bourdain because then you can just travel and eat food everywhere.

Dave:
My hero.

Henry:
What an icon.

Dave:
Alright, well, thank you all so much for listening to this episode of On The Market. We’ll see you next time.

In This Article

The Fed announced on Nov. 7 that it was dropping rates by 0.25%, following the 0.5% (50 basis point) cut in September. Investors might hope that—with inflation under control—another rate cut could signal the start of a more affordable housing market. However, it’s not that simple.

The cut brings the federal funds rate—the interest rate banks charge each other for borrowing money—down to 4.5% to 4.75% from 4.75% to 5%. However, the most recent rate cut will not change things much for mortgage seekers and other borrowers.

“Once a few more cuts happen over the next few months, the impact will add up to something that moves the needle for the average person struggling with debt,” Matt Schulz, LendingTree chief credit analyst, told CBS News “For now, however, the effect of these cuts won’t be very noticeable.”

Don’t Rely on Lower Rates

Many potential homebuyers, sitting on the fence after the September cut and expecting further cuts and lower rates, were surprised when mortgage rates increased over the last month—with the average interest rate on a 30-year fixed-rate loan at about 6.79%, according to Freddie Mac. That’s up from a September low of 6.08% due to the effects of other economic trends, such as the unemployment rate and the presidential election, playing a role. Certainly, in the short term, it’s unlikely that homebuyers will see much of a drop in rates.

“As long as investors remain worried about what the future may bring, Treasury yields, and, by extension, mortgage rates, are going to have a tough time falling and staying down,” LendingTree’s senior economist Jacob Channel told CBS News.

The Election Result Changes Everything

One goal of increasing interest rates was to lower inflation and consumer prices. However, the effects of a Trump presidency could also mean less regulation and more tax incentives for real estate investors and builders. 

“There’s likely to be two sides of the coin,” Mike Fratantoni, chief economist at the Mortgage Bankers Association, a trade group, told MarketWatch. “Overnight [since the election result], we’ve seen the 10-year Treasury rate up about 20 basis points, so you could reasonably expect that it is going to translate pretty closely to a similar increase in mortgage rates.” 

Fratantoni expects a Trump economy to see a higher growth economy, higher inflation, and, hence, higher interest rates.

Homeownership Might Be Tough for New Buyers

“We should expect more volatility in the housing market,” Lisa Sturtevant, chief economist at Bright MLS, said in a statement about the incoming administration. Over the longer term, she expects homeownership to be “harder to attain for first-time and moderate-income homebuyers, as his policies favor high-income individuals and existing homeowners.”

Sturtevant cautioned investors expecting the return of a low interest rate in 2025: “Bond yields are rising because investors expect Trump’s proposed fiscal policies to widen the federal deficit and reverse progress on inflation.” 

Lawrence Yun, chief economist at the National Association of Realtors, told MarketWatch: “In the short term, mortgage rates will tick higher as the budget deficit outlook does not improve, even as the Fed is cutting its short-term interest rates.” Given the election results, Yun expected that the Fed would not make further rate cuts unless Trump’s economic and housing initiative decreased inflationary pressure. In short, don’t expect rates to come close to pandemic-era lows.

“You never say never, but the circumstances that would bring mortgage rates that low again are unhappy,” Fratantoni said. “We had to live through a pandemic to get there, so it would take a major economic crash or another downside … to get the benefit of very low mortgage rates.”

Less Regulation Could Make it Easier to Get a Loan

Despite uncertainty about interest rates, most experts agree that another Trump administration will see less regulation than the Biden administration. That extends to the lending industry, which could mean more approvals, building, and houses being sold, thus easing the market. However, those banking on an immediate change shouldn’t hold their breath.

Daryl Fairweather, chief economist at Redfin, told MarketWatch:

“Homes will still be in short supply. If the economy is growing, rents and home prices will grow too. The cost of borrowing isn’t likely to come down much. With Republicans in control, national housing affordability is not a top concern, so expect the status quo to continue.”

Final Thoughts

While the Fed tries to keep its distance from politics, Trump’s election win overshadows everything they are likely to do.

“The main takeaway is that his election injects a higher degree of uncertainty into the outlook, both for growth and for inflation,” Blerina Uruci, chief U.S. economist at T. Rowe Price, told the New York Times. 

Stijn Van Nieuwerburgh, a professor of real estate and finance at Columbia University, also told the New York Times: “There’s a widespread expectation that Trump is going to cut taxes, and that will add to the deficit and the debt of the country. This current move is reflecting the market’s best guess of what his policies will mean.”

With the recent election, no one has a clear indication of how the real estate market or interest rates, given inflation uncertainty, will fare over the next few months. For investors who are just looking at rate cuts to inform their decisions, the simple solution is, don’t. 

One of the great things about real estate investing is that when done well, it succeeds despite government decisions and economic fluctuations, not because of them. Getting down to basic deal analysis is the key. 

How much will a property cash flow after all expenses? If it does not cash flow enough, then don’t buy. There are still deals, motivated sellers willing to sell at a discount, and tenants willing to rent. Now more than ever is a time to analyze the numbers and exercise good judgment in buying deals that make sense for right now, instead of speculating about the future.

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

In This Article

It’s hard to let go of control. Scary, even. But every time I’ve taken a calculated risk to surrender control in exchange for more freedom, I’ve made progress toward my larger life goals. 

This is because you can’t have both freedom and total control. You need to choose—in your real estate investments, in your business (if you have one), and in your personal life. 

We run a Facebook group with nearly 50,000 landlords and active investors. Whenever we talk about more hands-off real estate investments, we get a lot of pushback from them. It all boils down to one objection: “I want to keep complete control over my investments.” 

My days of arguing with people on social media are long behind me. But if I were to bother trying to change their minds, I’d paraphrase Ellie from Jurassic Park: “You don’t have control in the first place. That’s the illusion.”

Here’s how my own struggle with control versus freedom has played out, to get you thinking about your own choices moving forward. 

Committing to Move Overseas Without Knowing Where

At the start of 2015, my fiancée approached me about moving overseas. She knew I had some wanderlust, and she was curious about living abroad herself. She signed up with a recruiting agency for international schools, and we decided to commit to doing it. We flew up to Boston for a weekend job fair in February, knowing she’d have a job by the end of the weekend. 

Within 24 hours, she had offers from a half-dozen schools around the world, and we decided to take one from a school in Abu Dhabi. We figured we’d go have a two-year adventure, then move back to Baltimore and pick up where we left off. 

That was nearly 10 years and three countries ago. 

We spent four years in Abu Dhabi, four years in Brasilia, and going on two years in Lima, Peru. We’ve also spent a month at a time in places like Genoa, Prague, and Patagonia. 

Each time we moved to a new country, we faced the same uncertainty: We had to make the leap without knowing where we’d land. 

Letting Go of Control as a Real Estate Investor

When we moved to Abu Dhabi, I still owned 15 rental properties. I quickly came to realize just how much I’d been subsidizing those properties with my own labor. 

Even though I had a property manager, I still coordinated with contractors and city inspectors, got phone calls from tenants, and had to make sure the accounting and bookkeeping were straight. I still had to manage the manager as well. 

I had been telling myself that I’d been earning 5% to 8% per year on those rental properties. But when I calculated in the cost of my time, I was actually losing money on them. 

The contrast was especially stark when I compared the rentals to my stock investments—completely passive investments, earning an average of 10% a year. 

So I sold off all my rental properties. But I love real estate, and still wanted to invest in it.

Switching to Passive Real Estate Investments

I invested in a few public REITs, but I didn’t like the volatility and correlation to stock markets. I then started experimenting with real estate crowdfunding, investing through a half-dozen platforms. But I realized that public investments pay market returns by definition: You’re buying and selling at market prices, earning whatever the market allows. 

Then I discovered private, passive real estate investments. That started with private notes, then private partnerships, and then syndications, equity funds, and debt funds.

Not just anyone can invest in them. In fact, most people have never heard of them, and if they have, they don’t understand them well. Read: competitive advantage. 

But I didn’t like the high minimum investment, typically $50,000 to  $100,000. So at SparkRental, we started experimenting with going in on these together, first with our course students, and later as an investment club that anyone could join. Today, we vet a new passive investment together every month, and any member can invest with $5,000 or more. 

I don’t operate any of these properties or have direct control over them. I don’t manage tenants or putz around with contractors and inspectors and permits. We just gather our group investments together and wire money in, then sit back as the distributions or interest flow back to us. And my returns have never been higher. 

Letting Go of Control as an Entrepreneur

As an employee, you ask, “How can I create so much value for my employer that they’ll pay me more to avoid losing me?”

As an entrepreneur, you reframe that question to: “How can I create so much value for my customers that they’ll keep coming back to me?”

There’s nothing wrong with that question. In the early days of any business, the founder has to perform many different jobs and wear many hats to get the business off the ground. But if you want to grow your business and help more people, you need to remove yourself as the bottleneck. 

Reframe the question again: “How can I create a self-managing business that creates so much value for my customers that they’ll keep coming back to it?”

In other words, you make yourself replaceable—the exact opposite of your goal as an employee. That’s hard to wrap your head around, even when you get it conceptually. 

After eight years in business, I finally started getting this lesson through my thick skull. My cofounder and I have spent this year systematizing and professionalizing SparkRental, so that it can run without us for weeks on end if need be. 

That let us continue operating without a hitch when my cofounder had an unexpected surgery, and when my family and I went traipsing around Uruguay. 

I have more freedom in my business now than ever before, because I’ve delegated some of the “control” to others. 

Action Creates Clarity and Courage

If you wait until you have it all figured out, you’ll never act. You’ll stay stuck exactly where you are. By taking action, you can start moving in the right direction, even if you don’t know exactly where you want to go. 

Sure, roadblocks will pop up along the way, and you’ll have to figure out a path forward. You may decide to take a detour or tweak your exact destination. 

That’s fine. You can and should make adjustments as you go. The key word here is “go.”

Control or Freedom?

I had more control over my rental properties than I do over my current passive investments—for all the good it did me. 

Today, I delegate day-to-day asset management decisions and control to other people. Among my real estate investments, that means choosing operators I trust to deliver strong returns even as unexpected challenges pop up (as they always do). In my business, that means delegating not just tasks, but entire projects and goals to employees, freelancers, and virtual assistants. 

I sacrifice control—but I get freedom. That includes not just time freedom, to work when and how I like, but also location freedom. I can (and do) work from anywhere in the world. 

Increasingly, it’s driving my progress toward financial freedom as well. I earn more on my passive investments than I did on my direct property investments. My business earns more as I’ve delegated work to others than it did when I tried to do everything myself. 

Even people who understand that conceptually still struggle to surrender control in their own lives, though. It sure took me a long time to work up the courage to let go of control. It remains a work in progress, but by taking the first steps, I’m gaining comfort with less control and more freedom. 

As you put your own life under the microscope, ask yourself where you’d like more freedom—and how you might need to surrender some control to achieve it.

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

Dave:
If I had to delete my entire real estate portfolio and start fresh in 2025, this is what I would do and how I would do it everyone, it’s Dave. Today on the show, we have two guests joining us Today we have Henry Washington. Henry, thanks for being here.

Henry:
What’s up bud? Glad to be here.

Dave:
It’s good to have you, but you’re here often. I’m actually just way more excited to have Tony Robinson here. To be honest, he’s just cooler than you and he has perfect expertise for this show, being the host of our sister podcast, the Real Estate Rookie podcast. Tony, thanks for joining us.

Tony:
I appreciate you having me, brother, man. Super excited to jump in with you guys.

Dave:
Well, of course, between the two of you and myself and our real estate experience, we’ve made a lot of good decisions, maybe made many of mistakes since our first deals. So today we’re going to talk about, given everything that we’ve learned over our investing careers, how we would start over if we were doing it in 2025. So let’s get into it. Tony, let’s start with you. You’re known for specializing in a specific niche of short-term rental investing. If you were starting again today, would you choose the same niche? I

Tony:
Would, right, because I think for niche, and I still believe this, that if you want long-term appreciation, if you want cashflow, if you want the tax benefits, short-term rentals still offer the best mix of that. And those are my goals. And I still feel like that is the asset class that most closely aligns with that strategy for me. And the barrier to entry isn’t as big as something that’s commercial, right? It’s not apartment complex. I don’t need to syndicate a bunch of money, but I can typically earn more cashflow than a traditional long-term rental. So for me, that’s what I’m going all in on.

Dave:
Alright, sticking with it. Henry, what about you? I actually don’t know. Did you buy a rental? I know you do both. You do rentals and flips. What did you do first?

Henry:
My first deal was a rental. Smart

Dave:
Flipping as your first deal would be terrifying.

Henry:
Yeah, no, my first deal was a rental. Similar to what Tony said, flips and rentals will help me get to my financial goals, but that’s not the only factor that I put into it. I really enjoy the people aspect of single family real estate and small multifamily real estate. Because you’re so tied into your community, you’re dealing with sellers and fixing problems, I’m able to be much more flexible with my community and I can make decisions because they’re smaller, less risky assets that maybe don’t make financial sense, but make the most sense for the people that are involved. And that just really makes me feel good. I never want to make money off of a community without being of service to that community. And I say it allows me to meet my financial goals, but also meet my warm fuzzy goals. So I would stick with the same strategy.

Dave:
How do you quantify your warm fuzzy goals? It’s

Henry:
Just a feeling in the

Dave:
Gut, man. How fuzzy do you feel today? Yes.

Henry:
How warm and fuzzy do you feel?

Dave:
Well, I don’t know if this show is going to be very boring or if this is just the right answer. I would do the same thing. I started in long-term rentals, small multifamily. It’s still what I mostly buy, so I just feel like maybe we’ve all gotten so comfortable with what we do that we don’t see a need to deviate. Tony, tell me a little bit about how you started when you were just getting into your first short-term rental. What were the first few steps that you took and would you do any of those more tactical sides of building your portfolio any differently?

Tony:
Yeah, we just kind of blindly jumped into that first one. I did zero analysis. I bought sight unseen in a city I’d never heard of before.

Dave:
So you do it all the same again?

Tony:
It was 2020. Oh, he says, ah, you nailed it. Yeah, right

Tony:
At the time before we started buying short-term rentals, we actually wanted to do apartment syndication, but this was during Covid deals started drying up as a first time someone trying to syndicate. It just was not the right time to try and become an apartment indicator. So we had some money sitting on the sidelines. I had a buddy of mine who said, Hey Tony, have you ever heard of Pigeon Forge, Tennessee? And I’m in California. No one vacations really to Pigeon Forge in the West coast. And I was like, I was like, what are you talking? What is that a real place? Is it an amusement park? What are you talking about? And he is like, yeah, man, I just bought a cabin out here. And he kind of walked me through the numbers and again, just we saw what he was doing with his, ended up talking to some other folks in that market and kind saw what was going on. And this was before prices had kind of skyrocketed there. And yeah, dude, we found a cabin literally without even going out there, without doing any sort of analysis, we put some money down and that was one that kind of tipped everything off for us.

Dave:
So not even nothing about how much money you could be bringing in.

Tony:
So we just saw, saw what other people’s numbers were and the kind of revenue they were doing. And that was valid because dude, at the time I had I think four long-term rentals that were cash on 200 bucks a month. Okay. So to go from that and seeing someone who was making, I don’t know, 4, 5, 6 x that every single month, I was like, dude, this is what we need to do.

Dave:
Oh, so I didn’t realize that you had long-term rentals before you did your first short-term rental?

Tony:
Yeah, we’d done a few long distance burs before we got into the short-term rental space.

Dave:
Oh, okay. So I guess that reframes the question. I assumed wrongfully that when you started, you were in short-term rental. So given that if you’re starting over today, would you, again, it sounds like you’d chose short-term rentals instead of doing those long distance spurs.

Tony:
Yeah, 100% man. And again, like Henry said earlier, I think it really does kind come back to your personal goals, your skillset and what brings you joy as a real estate investor. And for me, like I said, I wanted the tax benefits because at the time I was working a W2 job, so the short-term rental tax loophole was a big thing back then. I wanted the increased cashflow because I was doing the math at 200 bucks a door for these long-term rentals. I’m going to need a million units to try and retire from my job. Not a

Henry:
Million,

Tony:
Not a million. I would need a whole lot more, and maybe a small but mighty short-term rental portfolio could get me there faster.

Dave:
That’s great. I totally agree with the philosophy of just finding something that you like that you’re comfortable with. I got to admit, I don’t agree with the no analysis approach to buying for sorts of red. You lost me there.

Tony:
I would also not encourage anyone to do that. Now we have a much, much more robust process for projecting things like average daily rates and occupancy, and there’s a much more scientific method to it now. But that first one call it dumb luck, but it was what kind of pulled this in.

Henry:
Would you say that looking back now that you truly did buy a good deal in terms of a short-term rental? Or was it more that the market and the appreciation that happened from 2020 to 2022 really kind of helped save you on that deal?

Tony:
No, it was literally a rock solid deal. And obviously the price point back then I think helped a ton.

Henry:
But

Tony:
The location of that cabin, again, that’s not even knowing what Pigeon Forge was. We just happened to buy in a fantastic location. It was a larger cabin, it’s a five bedroom sleeps, 16 people. There’s not a ton of that in that market. So I think there’s always a lot of demand for those larger cabins. So there were just some things within that market that unknowingly we kind of stepped into a property that people in that market really wanted, but it was totally by accident.

Henry:
So what you’re saying is, I mean, you can blindly throw a dart at a dartboard, and sometimes you might hit a bullseye

Tony:
Sometimes, but other times you can end up buying something that’s absolutely terrible. And I want to caution everyone that’s listening do not do that, right? Because also the market has shifted, right? Because say that we did buy a bad deal, our interest rate on that is 3%, so we got a lot of room there for error, but today, if you’re buying at a 7% interest rate, your margin there is probably a lot less than what we have. So even if we were off by 50% on our revenue projections, we still would’ve been solid. So yeah, I think today you got to be a little bit more dialed in with the analysis there.

Dave:
Henry, that dartboard approach is definitely how I’ve picked stocks in the past. It doesn’t work that well, but I think it’s important to bring this back to what we’re talking about here, which is how we’d start over. And honestly, in 2020, it wasn’t the worst idea to just throw a dart at a dart or everything was going up so quickly that you would have to really mess up to have missed back then and now starting over. I think it’s really, as Tony said, important to be much more diligent about that. So as a rookie, Tony, what would your first step be? Because you said that you actually started with a partner, which is super interesting. Do you recommend that to people or do you recommend finding properties first looking at a market?

Tony:
Yeah, if I’m starting over in the short-term rental space today, the first thing that I want to do is find the right market. And I see so many people who choose a market based on proximity or familiarity and not because it’s the best market that actually supports their investment goals. I talk to a lot of people who want to buy their first short-term rental, and if they’re on the east coast, every single person says, I want to buy a short-term rental in Disney. Everyone just says Florida. And it’s not because they’ve done any in-depth research to understand does Florida actually support a profitable short-term rental? It’s just because they know that they like to vacation there and they know that a lot of people come from the theme parks. And so I think the first thing you need to focus on, especially today, is understanding the underlying economic data within these different markets. How is revenue changing? Is it going up? Is it going down? How is supply changing? Is it going up? Is it going down? How is the relationship between supply and demand? Is that healthy? So now there are a lot of other things we look at to really gauge does this market make sense? But for me, that would be my first step is finding a market that’s up and coming, still has some room for growth that I can go in there and compete at a high level.

Dave:
What about you, Henry? I know that you, well, let me ask you, I don’t know this, but did you take a similar approach when you started or were you a little more analytical on your first deal?

Henry:
There was definitely some ready, fire aim in my approach as well, a little different. So my first rental I found through word of mouth. And so the analysis that I did to determine that if it was a good deal was that I knew I was buying it for about 116,000 and a real estate agent told me it was worth about 160. So to me, that seemed like a good enough discount. I didn’t know enough to know how to run the numbers in detail. I think I put it through a couple of calculators and I saw I could rent it for about 16 or 1700 bucks a month. And so to me that was good enough. I knew I was getting a fairly decent deal. I think where the Ready fire aim happened for me was I just put it under contract and I didn’t have any money or a decent enough credit score to garner getting a loan. Well, at least I didn’t think, but I didn’t let that stop me from saying yes and signing a

Dave:
Contract. I mean, some part of that makes sense to me when you’re first starting because you can be overly analytical and just going with the flow and doing enough to make sure that you’re not doing something really crazy, but not getting so in the weeds that you talk yourself out of something. So do you think that in retrospect was the right approach?

Henry:
Absolutely. I do. I do. I think that’s the approach that people should have. It’s again, not to be reckless and not do due diligence. You need to do your due diligence, but once you know that you’re dealing with a good deal, you kind of have to get out of your own way. I think we as investors or people in general will make generalized decisions for other people. You’ll hear investors say, I think I found this good deal, but I don’t have enough money to buy it. Well, how do you know? Haven’t tried to get a loan yet. You don’t know how much down payment you need. I mean, you think you do based on the limited research you’ve done, but you haven’t turned over every rock in terms of financing options. You haven’t applied for loans yet, you haven’t talked to multiple bankers. We make these generalized decisions and we’ll talk ourselves out of building wealth all the time. So you kind of do have to have this, okay, I know I have a good deal now. I need to try my best to get this thing closed and kind of get out of my own way and let the people who can truly stop me, stop me. If you can’t get financed, they’ll tell you, we will tell you I’m not financing your deal.

Dave:
That is probably the number one step I would recommend to people that I don’t understand why no one does it. Just talking to a lender right away, so many people are like, oh, I found this deal, but I don’t know if I qualify. It’s completely free. Just call a lender. They will tell you, Andrew just said, I think it’s such a good important thing to do to just ground yourself in what you can afford. And from there you can start to look at different markets, different types of deals based on what is reasonable for you or go find a partner if you can’t afford the kind of deal that or market you’re looking at.

Tony:
But Henry touched on something super important. The whole theme of this episode is if I were starting over, and for most people that are starting, like you said, it’s not necessarily the deal that’s holding them back, but it’s like their own psyche. And I think so many people who are looking to get started, they try and only make decisions that make them feel comfortable.

Henry:
Oh man.

Tony:
But if you’re doing something that you’ve never done before, it is physically impossible to feel comfortable and grow at the same time. You can’t do both of those things. So

Henry:
It’s

Tony:
Like you have to put the comfort aside and lean into the fact that it’ll be a little uncomfortable, but then just let the data support that decision and lean on that to give you the confidence to move forward.

Dave:
I love that. Just nothing makes me feel more, my warm and fuzzy is a spreadsheet filled with, filled with high quality assumptions and data. It’s so lame, but it’s so true.

Henry:
You’re telling 100% the truth right now. I have.

Dave:
Whenever I get anxious about a deal, I just go beat myself up in a spreadsheet and just look at every possible angle and it makes me feel a lot better.

Tony:
There you go.

Dave:
All right, it’s time for a quick add break and then we’ll be back for more of this week’s deep dish. We’re back with Henry and Tony. Alright, so Tony, you said you’d start with a market and what if someone finds a market that they can’t afford, similar to what we were just talking about, what would you do in that kind of scenario? You found a great area that you want to invest in, but perhaps it’s not something that you have cash on hand to pull the trigger on.

Tony:
I always believe that, and you kind of mentioned this before Dave, one of the first things that you should do as someone who wants to invest in real estate is understand what your purchasing power is. And your purchasing power is a combination of the capital that you have access to for down payment, closing costs, furniture design, et cetera, and the amount of debt that you can get. Now, it doesn’t have to be you getting the debt or you bringing that capital, but you have to have access to both of those things. And once you understand what those limits are, then you go out and find markets to match that mold

Henry:
Because

Tony:
Everyone wants a beachfront property in Maui and it’ll probably do really well, but can you afford that? Do you actually have the cash to make that happen? Why even waste your time digging into those numbers? So for me, it’s always starting with access to cash on hand, access to debt. Those two things give you an idea of what markets you should be focusing on.

Dave:
I think it’s a really great advice, and Henry, correct me if I’m wrong, but I think it’s applicable to not just short-term rentals, right? We’re talking about if we were starting over out what you can afford, number one thing, then moving on to markets and identifying if the markets that you’re thinking your head or considering are actually feasible for you. Is that what you would do for flipping or long-term rentals as well?

Henry:
I think in long-term rentals and single and small multifamily, yes, I think that is an approach you can take to understand can I afford it or will I need to bring on a partner? Just because your market is expensive doesn’t mean you can’t do profitable deals in your market. So I don’t want people to think that you can’t do a deal in an expensive market. You can’t. You’ll have less monetization options in a more expensive market in terms if you’re going to buy single a small multifamily real estate in my market, I can buy a single family and if I buy it at the right price, I can long-term rent it. I can short-term rent it, I can fix and flip it, I can midterm rent it, and all of those things could end up being profitable. But in a more expensive market, you might take three of those exit strategies off the table. You might only be able to flip it or short-term rent it. And so you do need to understand based on your strategy and the price point of your market, can you afford to do a deal there? And if you can on your own, that’s great. If not, you also can consider bringing in a partner. But yeah, understanding if your market makes sense in terms of will it help you meet your financial goals and can you afford the property is absolutely something you need to know on the front side.

Dave:
Yeah, that’s great advice. I think about this a lot with my own investing. I invested in Denver, which was a lot cheaper when I first started, and I didn’t even consider out-of-state investing, but because I couldn’t afford it, I just went out and found partners. But I went and got qualified first and was like, oh, this is a stark reality. I have dollars and I am not going to be able to buy a fourplex unfortunately. But at that point, I was able to get three other partners. But if I think realistically about if I were starting over and was living in Denver today, I don’t think I could have raised the money to invest in Denver. Even with bringing on three partners, it’s just so expensive relative to incomes now. And so I think I would probably look for a cheaper market if it were me starting over and I had followed these steps, gotten qualified. I don’t think I could have realistically said to myself that even house hacking in Denver made as much sense as either moving to another market or potentially moving out of state, but I would’ve only known that if we had followed the steps that we were just talking about here. Alright, so let’s move on to once you’ve gotten qualified, you’ve identified a market, Henry, you’re the deal finding guy. So given all you’ve learned, if you were looking for your first deal, how would you approach it?

Henry:
Yeah, I think if you’re starting out and you are going to look for your first deal, especially if you’re going to do single small malts, long-term rentals or flips, you really have to put your blinders on. What I would want if I was starting over was to make the rest of the process after I find the deal as easy as possible. And the best way for the rest of that process to be as easy as possible is for your deal to be amazing. And so if you can focus and put the blinders on, you’re going to want when you’re new, you’re going to want to get your ducks in a row. So you’re going to want to know, get your lenders already, get your contractors already, get your team built. Who’s your realtor, who’s your title company? All these things. You’re going to be trying to focus on all those things, but at the end of the day, none of those things matter.

Henry:
If you don’t have a deal to buy anyway, none of those people can work with you unless you have something for them to work with you on. And so if you focus your time and attention on figuring out what a good deal looks like in the market you want to buy, right? So what’s that mean for me, it’s pretty simple. I want to buy at between 40 and 70 cents on the dollar depending on the neighborhood. Just having that filter alone helps me know that, Hey, I’m walking into a good deal. And so learn what a good deal looks like in the market you want to buy and then figure out what’s the one strategy that you can afford to fund. So the one deal finding strategy that you can afford to fund with the resource that you have, because finding a deal is going to cost you something.

Henry:
It’s either going to cost you time because you can find deals for free. You don’t have to spend any money, but if you want them to actually produce results, you’re going to have to put the time into them for them to produce results or it’s going to cost you money. So if you don’t have money, but you have time, take an inventory of the time that you have, truly think about how much time do I have day in and day out to spend on finding deals? And then think about money. How much money do I have extra money? Do I have to be able to help me find deals? You need to have that inventory. And then you can literally research deal finding strategies, and there is so much data on all these strategies they’ve been around forever. Like direct mail’s not new, right? Cold calling’s, not new door knocking is not new on market.

Henry:
MLS offers aren’t new. These things have been around. You can do enough research to figure out, okay, it’s typically going to take me this much time to find a deal in 30, 60, 90 days, it’s typically going to cost me this much money to find the deal with this strategy in 30, 60, 90 days. And then pick the strategy that you feel like you can afford to fund with the resource that you have and that you feel like you can stick to. Because a lot of these strategies are going to be uncomfortable and you have to figure out at what level of uncomfortability you’re the most comfortable with. So for me, I doesn’t matter how much time or money I have, I’m not knocking doors. It’s not my thing. I’m not going to go do it. I’m not to beat the streets guy. I’m just not. I’ll hate it, I’ll hate it and I won’t do it, and I know that about myself. So what strategy could I do? That’s how I ended up on direct mail and then hiring third party cold calling services. I knew I could afford to fund them appropriately, and I know that I’ll stick to them for the long haul because all these strategies, no matter if it’s a free strategy or a paid strategy, it’s going to take consistency to work.

Dave:
So do you think that makes sense though for a new person? I wish. That’s another bandaid I wish I had ripped off earlier. I say earlier I’ve only done one, so I’ve never really ripped off that bandaid, but I wonder if that slows people down this idea that you don’t need to, but do you think it becomes overwhelming with all these different deal finding strategies? Or should a new person just try and find something on market or a pocket listing that might be a little bit more achievable?

Henry:
Well, that’s the thing. I think finding something on market is one of these

Dave:
Strategies,

Henry:
And I think that that’s a fairly reasonable strategy to pick when you’re new, arguably, I think that’s one of the first things you should do. You have access to it through a realtor. Unless you’re a realtor yourself, then you have direct access. The first thing you should do is identify what’s my buying criteria, and then have your realtor send you a list of all the properties on the market that meet that, and then go through that list, analyze those deals and start making offers. The catch is that that strategy to truly work takes more time than people give it credit for. People just think, I can just look at a few houses and then make an offer here or there. That’s not going to get you a deal anytime soon. You have to make the offers in volume if you truly want to get a deal.

Henry:
And making offers in volume takes time. You have to analyze all those deals. You have to figure out what your price point needs to be. You have to get an agent to make these offers for you under market value, which means you got to convince the agent of why you need to be doing all these things are going to take time and effort, and so there’s no easy button for finding a really good deal. Sometimes you can get lucky and get it through networking, but you have to really figure out, okay, if I’m going to do this free strategy, if I’m going to make offers on on-market deals, how much time is it really going to take me? And then are you really going to do that? But I think that’s a great place to start. That’s low hanging fruit. Everybody should be looking there.

Dave:
Yeah. Okay, good. That’s a great way to frame it. Is it fair to say that when we’re talking about how we’d start over, at least in terms of process we’re talking about, we’ve talked about identifying your financial position and using that as sort of a cornerstone of your buy box, then moving on to market, then picking a deal, finding strategy from the different methods that Henry and Tony have shared. Henry, what do you do next after you get the deal? Yeah, once you find it, we’re talking about how you’d start over. Let’s see you find your first deal. What have you learned about setting up your operations or going from identifying your first deal to then setting yourself up to be an investor and sustain this?

Henry:
That’s why finding the good deal is the most important because once you get a good deal, the rest of the steps are a whole lot easier. It’s going to be easier to find a contractor who can get the job done within your budget because you should have a good margin between what you’re buying it for and what it’s worth, finding somebody who wants to finance it. So if you’re making offers on the market, you’re going to have to get pre-qualified first. So you should have already had conversations with lenders to get pre-qualified. But if you’re making offers off market, you might not necessarily have the financing lined up, but getting financing for a great deal is a whole lot easier than getting financing for a bad deal.

Henry:
So your financing options have opened up for you. You’ve also opened up your options to protect yourself in the event you don’t find the financing. If you have a great deal, but for some reason you can’t get financing, you can always sell that deal to somebody else because it’s a good deal and they will want it. And so you can still monetize your deal in some way. So the next step is if your financing’s already secured, great. If not, then you need to secure your financing. And then the one thing I wish I would have known or done better is to document at a high level the steps,

Dave:
Oh my God, yes.

Henry:
That I’m taking

Henry:
When I’m going through the process. Because if you’re going to do this at any level of scale in the future, you’re going to have to have your processes documented. And going back and trying to document them later on is a nightmare and you’re going to be too busy. But also documenting your steps that you’re taking will just help you be better on the next deal. And I’m not talking about something super in depth, but you can just knowing these are the steps I took when I was looking for financing. These are the steps I took when I was looking for a contractor, 1, 2, 3, 4, 5. These are the steps I took when I was post-closing, right? I had to turn on utilities. And then you’ve got these checklists throughout the life cycle of your deal that you can then go back and review and be better prepared for your next deal.

Henry:
Or you can go back and review and tighten up your processes. Maybe there are things that you spent a lot of time on that didn’t matter as you were going about it. And so I think anybody that’s new doing this, just having high level documentation of each step in the process. So I would break it down to the steps you took to find the deal, the steps you took to finance the deal, the steps you took to renovate the deal, the steps you took to disposition the deal. If you just break it up into those four buckets and have literally just a list of steps, you will learn so much and become such a better investor faster than I did.

Dave:
It’s very, very sound advice. I know everyone’s saying like, oh, that’s so boring, but it’s so true. It’s not fun to document all this stuff. It’s the least fun part of being an investor in my opinion. But it’s super important.

Henry:
Do you know how much money I’ve spent on utilities for properties I don’t own anymore? Because I didn’t have a checklist of just going back and saying, oh yeah, cancel the utilities at that house. Oh yeah, cancel the insurance at that house.

Dave:
Totally. I thought you were going to say, do you know how much money I spent on contractors? And I was going to say no, because I didn’t document any of those, so I have no idea, or at least in the first few years did not just process the one thing I wanted to add, but just expenses and where you paid what account you paid those things out of where the money’s going into, you

Henry:
Can’t document enough. It’s having anything.

Dave:
Yeah, I mean can after two or three minutes of documentation, I’m pretty done, but you should be doing a better job of that. We do have to take a quick break for some ads and then Tony and Henry will have more about how they’d start over in real estate. Thanks for sticking with us. Let’s jump back into our deep dish. What about you, Tony? That was some stuff Henry would do differently. If you were starting over today, do you have any things that you would suggest to new investors starting in 2025 that’s different from how you approached it?

Tony:
Yeah, I mean, yeah, I totally agree with Henry. On the documentation piece. We scaled our portfolio pretty quickly and a lot of things broke as our portfolio scaled and we had to kind of go back and it’s much more difficult. So echo what Henry said there. I think a couple of things come to mind for me specifically on the short-term rental side. One is we always talk about money and reserves, which obviously we all know is important as a real estate investor. But one of the things that my wife and I have realized we need is short-term rental hosts is just like a reinvestment fund.

Tony:
I’ll give you guys a quick anecdote. This really cool all-inclusive resort that we like to go to in Cancun, and we go down there a couple times a year and every time we go, as you’re walking the grounds, you’ll see employees fixing and improving and working on something. It could be something big. They’re doing an entire new wing of the resort, or it could be something small. They’re repainting the handrails, they’re replanting pots, they’re whatever it may be. And one day we’re walking and we notice that we’re like, man, they’re always doing something to make this place look better. And it was kind of a light bulb moment for us to say, well man, we should be reinvesting back into our portfolios as well. So 20 23, 20 24, as rates crept up and it got more difficult to buy deals, we didn’t just leave our money sitting in the bank, we reinvested it back into our properties.

Tony:
And it was so crazy because we were able to get a better return by reinvesting into our existing properties, and we would’ve maybe even put it into another deal. There was a property in our portfolio that wasn’t performed the way that we wanted it to, and we reinvested, I think it was like $12,000 to convert a garage that we had into a game room. And we did a phenomenal job. The team did great with it. My wife did the design and $12,000 investment into this garage and the first two months that we launched it, so we looked at the two months right after we launched it versus a two months year previous, it was an $8,000 revenue difference.

Dave:
Wow.

Tony:
My God. In just two months.

Dave:
So

Tony:
Even if nothing else happened, we just got, what is that, a 75% return on that 12,000

Henry:
And

Tony:
You take it over the course of a year, it’s even more.

Henry:
Yeah, that took on water recently.

Tony:
No, no, not that one. It was one of our other game rooms. Yeah. But the reason why is because we did it once and we saw that it works. We started adding it to all of our other properties. So reinvesting back into your properties and seeing if you can squeeze more juice out of what you already have.

Dave:
Yeah, it’s such a mindset shift. I feel like it takes over the course of investing. I actually was going to say something a little similar, that one of the things I learned was to not treat income and revenue from a rental property or an investment as your money necessarily. It’s the business’s money and it’s a weird shift that you have to make. But it’s similar to what you were saying, Tony. It’s like you could have taken that 12 grand, put it in a savings account, gone to Cancun and stayed at a nice all inclusive resort, but it’s the business’s money and the business needs that money at a certain point. And just that mindset shift, it’s a long-term mindset, but really not just helped me become a better investor and generate better returns like Tony was talking about, but also have a bit less anxiety about the performance of your deals when something breaks. You’re like, that’s not my money. I was just holding onto it until that house needed a new HVAC system and now it needs a new HVAC system. So the business is getting the money

Henry:
Back. Along that same train of thought, the one thing I would get my mindset shift focused around early on is that not living off of the cashflow. I think when I first got started, I had the same mentality that I think a lot of new people, new investors have, which is I want to build a portfolio, build up enough cashflow and leave my job. And after doing a few deals, I quickly realized that cashflow’s good and it’s what you want. It’s really just a measure to let you know if you bought a good deal. But the cashflow is always going to need to be spent, like you said, on the business at some point. And so if you start living off your cashflow and start living off of it too soon, you’ll just find yourself feeding your business out of your personal account and that defeats the purpose.

Henry:
And it can help you feel discouraged and make you feel like maybe this wasn’t such a good idea investing in real estate. But what I quickly realized after doing a few deals was it really started to make sense what people said about real estate in that it’s a long-term game and you build long-term wealth. And the true benefit of investing in real estate, especially in the long-term rental space, comes from holding your properties for a long period of time and getting the equity and the debt pay down and the appreciation. Those are the things that build the true wealth. The cashflow is great and you should absolutely shoot for it. But I quickly shifted to saying, okay, I don’t want to live off my cashflow.

Henry:
So that’s really why I started flipping houses. I was like, I still need to generate income, and I still love the real estate aspect of it. So flipping houses started to make sense. So now I flip to generate the income I need to do the things that I want to do with my life or my family and the rental portfolio money just stays there. And it’s not something that we’re looking to live off of. I’m not saying you can’t build a portfolio that you can live off of your cashflow, especially if you’re going to do something like short-term rentals, which is a much more cashflow heavy exit strategy. But if you’re going to do long-term rentals, I wouldn’t be focused on trying to quit your job from your cashflow in the next year or two. It’s, it’s not that kind of a game and people think it is,

Dave:
Unless you got 10 million to invest in,

Tony:
Unless you got a big starting spot. But Henry, even in the short-term rental industry, I couldn’t agree with you more. I think for people who have this desire to walk away from their day job, whatever number of cash flow you think you need, just double that. You need twice as much. Yeah, double that number, right, because like you said, the portfolio is always going to need something. And like you said, if you pull that trigger too soon, you could put yourself in a bad spots. Yeah, I couldn’t agree with you more.

Henry:
And the bigger your portfolio, the bigger your portfolio problems until you see your p and l at the end of the year, it’s hard to see the forest through the trees on a day-to-day basis. I have a hundred and something units, bro. When the weather shifts and it goes from winter to summer, I don’t just have one HVAC that goes out, I have 10 at

Dave:
Six grand a pop, bro, go to Costco and buying HVAC systems in the ball. That is just how it goes. Yeah. It’s like you feel on top of the world one day you got all the cash flow and then it gets wiped out real fast. Yeah,

Tony:
Man. But you bring up a good point there too. It’s like, Hey, I’ve got this big portfolio and that means problems at scale as well. And I think that’s one of the things that my wife and I, we’ve kind of realized in our own portfolio that we want to shift is how can we get more efficient with each property

Dave:
And

Tony:
Not have to have a thousand short-term rentals, but still achieve the same cashflow goal and what does that look like? And that’s part of the reason why we bought our first boutique hotel earlier this year because we saw an opportunity there to get some efficiencies of scale. There’s onsite management and the management workload is a little bit less, but the cashflow is honestly probably better than a single family home would be. So we’re looking for opportunities to maximize the cashflow while reducing the number of properties we need to bring on.

Dave:
Same. Totally. Yeah. I mean now we’re getting away from how we’d start over, but my 10 year plan is like, how do I own four 20 units paid off? That’s it. That’s all you need. It’s super efficient if you just have a couple buildings.

Tony:
Right.

Dave:
Alright, well thank you both so much for being here. This has been a lot of fun hanging out with you guys and talking about how we’d start over. Tony, any last thoughts before we get out of here?

Tony:
No, just I appreciate you both always get to talk shot with two rock stars like you guys, so I appreciate you both having me all.

Dave:
If you want to learn more from Henry, of course you can find him on this show very frequently or on our sister podcast on the market. And if you want to learn more about getting started and investing head over to learn more from Tony and his co-host Ashley Care on the Real Estate Rookie podcast, which airs what days of the week, Tony?

Tony:
Three times a week. I want to say Monday, Wednesday, Friday.

Dave:
Perfect. There you go. Well, thank you all so much for listening. We’ll see you soon for another episode of the BiggerPockets Real Estate Podcast.

Tony:
See you.

 

 

Ashley:
Let’s get your questions answered. I’m Ashley Kehr and I’m here with my co-host, Tony J Robinson.

Tony:
And this is the podcast to help you kickstart your real estate investing journey. And today we’re going back into the BiggerPockets forms, which if you didn’t know, the BP forms are one of the absolute best places for you to go as a rookie to get your real estate questions answered by real estate experts like me and Ashley. Now what we’re going to discuss today, we’ll talk about how to determine if you should rent or sell your property. We’ll talk about how to fund the rehab for Flip and we’ll discuss if house hacking is dead in this high interest rate market. Now, before we jump in, we want to thank Corporate Direct. This episode is sponsored by Corporate Direct Protect your properties with an LC and let corporate direct take care of the paperwork. Go to biggerpockets.com/direct for a free 15 minute consultation and 100 bucks off if you mention the podcast. Now, let’s get into the show.

Ashley:
Okay, so the first question I pulled today is my wife and I recently moved to Lynchburg, Virginia for work and we’ll be living here for approximately a year and a half. Our work is expected to be completed by early 2026, after which we plan to move back to our hometown. In the meantime, we purchased a home with the intention of converting it into a short-term rental. Once we leave, we also plan to finish the basement, which would add about 700 square feet of living space. Before purchasing the property, we ran preliminary numbers and converting it to a short-term rental seemed promising. However, after taking a deeper look at the financials, we realized the property would barely cashflow based on recent short-term rental projections. We expect about $40,000 in annual revenue for a five bed, three and a half bath near River Mount Boulevard, which would only net us a couple hundred dollars in monthly cashflow.

Ashley:
The estimated cost of finish the basement is around 25,000 with an additional 25,000 needed to complete the rest of the property. Our latest calculation show a cash on cash return of just 5.87% based on the 40,000 revenue projection. At this point, we’re feeling uncertain. We’re seeking guidance on the best approach moving forward. So should we pursue the short-term rental strategy and aim to be one of the top performing properties in the market to increase cashflow potentially up to $1,000 a month? Or should we pivot and rent the house to long-term tenants? However, the potential long-term rent is about the same as our mortgage, meaning we lose money when factoring in repairs and maintenance. Should we go the short-term rental or long-term rental route to break even and rely on future appreciation with the goal of selling in five years? I plan on DIYing the basement to save costs, but it is having this extra square footage even worth the trouble.

Ashley:
Should we just sell the property when we leave and cut our losses? Our ultimate fear is that we dumped 50,000 into this property for a very small return. The biggest issue is that we already currently own the property and are unsure where to go from here. So Tony, there’s a lot to address here, but as our short term rental expert on the Real Estate Rookie podcast, let’s start off talking about the revenue potential here and should they finish the basement and what are some ways that they could actually be in one of the top places to stay and do you think that’s actually achievable?

Tony:
Yeah, so whenever we analyze, and this is true for any short-term, long-term, midterm, whatever it may be, but we look at a worst case, a best case, and then a most likely case scenario. And what it sounds like is that your worst case scenario is that you’re cash flowing a few hundred bucks a month on the short-term rental, which is better than the long-term rental option of breaking even or losing money potentially. So your floor on the short-term rental is much higher than the ceiling on your long-term rental. So I think that’s one data point taken into account. Now, I don’t know how you came up with this. You said potentially up to a thousand bucks per month, but it sounds like that might be your best case scenario is getting a thousand bucks per month in cashflow on this property, which then doubles your, or maybe even triples your cash on cash return to the low teens somewhere in that ballpark.

Tony:
So I like the range there. If the floor, I say we’re still doing better than the alternative and we’re still cashflow positive, that is not a bad floor to have the ceiling. I think in order to really understand what that ceiling is, I try and find as many supporting data points as I can to say, well, are there other properties that are, what did they say it was a five bedroom, three and a half bath? Are there other five bedroom three and a half baths in this part of town that are doing the kind of numbers 60, $70,000 per year in annual revenue? And if they are, is it a property that I can actually compete with? Right? Is it similar in functionality and layout and design aesthetic? Do they have certain amenities that I can also incorporate into my property and just ask yourself, can I actually compete with those listings? And if you can, then there’s more confidence for me to say, okay, well actually turning this into a short-term rental might be the best option. But that’s my thought on that first question there, Ashley, of like, Hey, should we or should we not?

Ashley:
Yeah. And kind of a follow-up piece to that they ask is, is it even worth renovating the basement for the extra square footage? And I think that goes right along with what you were saying is you have to look at the comparables and look at, okay, if you add that square footage, what is the new daily rate you can charge? How much more are they making and is it worth it that way When you actually run the numbers on it, how long is it going to take you to recoup that 25,000 that you’re putting to finish the basement?

Tony:
One other thing that I’d ask to this, because it said the estimated cost to finish the basement is 25 grand and then an additional 24,000 needed to complete the rest of the property. Five bedroom. I don’t think they gave the overall square footage for the entire house, but when I look at a five bedroom, I feel like you’re probably going to need more than 24,000 bucks to furnish and design the rest of that property because we typically say about 20 to 25 bucks a square foot if you want good design. So if you’ve got, I don’t know, five bedrooms, maybe three to 4,000 square feet, somewhere in that ballpark, I don’t know, I’m making up numbers here, but say it’s 3000 square feet, 3000 times, 20 bucks, what is that 60 grand that you’re going to have to spend on design and furnishing so that even the 24,000 feels a little light to me? And I think that’s the mistake that a lot of people make when they get their first short-term rental is that they underestimate how much capital actually goes into setting that up the right way from the beginning and then they don’t perform the way they want to. Not because the property didn’t have the potential, but because they simply didn’t put the necessary investment into that deal to make it reach that number. So just one other caveat, 24 grand feels a little light on a five bedroom plus 700 square feet of a basement living space,

Ashley:
And maybe they’re going to leave some of their own personal furniture, and maybe that’s why that number is off. But I wanted to address their decision between doing a short-term rental or a long-term rental. So it seems like they’re pretty comparable as so they’ll make a little bit of cashflow or basically break even may have to put money in if there’s repairs and maintenance that need to be done for the long-term tenants. So I’m looking at, okay, can you save that 50,000 by not adding the square footage in the basement, not furnishing it and get a long-term tenant in there? So how much would you end up losing throughout the next five years if your goal of selling in five years is that less money than if you were to go and dump the 50,000 and just break even? So I think look at that, but also look at your resources and your opportunities.

Ashley:
Is there a great short-term rental manager that is going to run this property for you? Is there a great long-term rental property manager? Because the operations of whichever route you go can highly impact, which will be a better investment for you. So if you were just going to self-manage remotely and a short-term rental, that’s going to be a lot more work than if there’s a long-term tenant in place too. So I think taking into account the actual operations of them can kind of help you decide too as to what strategy do you want to do. I think sometimes people get too caught up in just looking at the numbers and not what is the time consideration that can go into a strategy, but also who are the resources or the people that they’re able to outsource to that will really make or break their investment Also,

Tony:
What do you think about the just rely on appreciation with the goal of selling in five years? What are your thoughts on them knowingly getting into a deal that may either break even or lose money, but our hope is that five years from now we can exit on the appreciation.

Ashley:
So I’m going to say you’re at least getting mortgage paid down. You’re having somebody that’s paying your mortgage every month, so you’re going to recoup that equity from the mortgage pay down. I would have to look at, do a little market analysis as to has there been appreciation in that area? Does it stay stagnant? Are people moving into that area? Is the population growth? Are there things that are driving up prices in that area? But I do love having the mix of appreciation and cashflow, especially since you already know that you want to sell this property in five years. And also if you do lose money every month, but you think that this property can make you a hundred, $150,000 in five years when you go to sell it, what are you going to have to put in every month if you do lose money on the property and how does that offset each other? But I don’t like the risk of losing money on a property and waiting for appreciation to kick in.

Tony:
Yeah, I feel like the appreciation, and depending on why you bought this, it seems like you bought it for the immediate cashflow and the appreciation is just kind of like the icing on top. So I feel like I would, again, we talk about floor versus ceiling, your floor, if you go potentially long-term rentals that you lose money on this property every single month. And it’s like, are you comfortable personally with that floor, with that type of risk? So yeah, I think the final piece of that, should we sell the property when we leave and just kind of cut our losses? Again, I think that comes down to, well, why did you buy this in the first place and do you see a clear path forward to actually achieving what that goal is? And even if you’ve already invested time, effort, and energy into purchasing this property doesn’t necessarily mean you need to keep it and maybe subject yourself to even more future losses, even more money that you can’t recoup.

Ashley:
And it says there’ll be living there a year and a half, so they’ll be moving out in 2026 it says. So I’m thinking too, why do they expect to take a loss in 2026? Why do they think that they’re going to take a loss? It’s not like it’s right now where they know that it’s going to sell. They’re looking at comparables and it’s going to sell less. So I think that as you get closer, this isn’t a decision that you need to make now, but you can continuously watch what the market is doing compared to looking at home sales, looking at rental prices. Maybe today when we’re recording this, we just found out we have who the new president is going to be. So that could dramatically change the market in the next year and a half. So I think you don’t have to make this decision right now, but continuously looking at what are the short-term rental rates, what are the long-term rental rates even?

Ashley:
What are the short-term rental laws that are in place in this market? And will they change during this time period too, which may affect your strategy? So I think you don’t have to make a decision now and you can kind of keep an eye on everything and know that you’re actually in a position to have three options, which is great. Not a lot of people can do that with a property. Before we jump into our second question rookies, we want to thank you so much for being here and listening to the podcast. As you may know, we air every episode of this podcast on YouTube as well as original content, like my new series Rookie resource. We want to hit 100,000 subscribers and we need your help. If you aren’t already, please head over to our YouTube channel. You can find it at youtube.com/at realestate rookie and subscribe to our channel. Okay, everyone, welcome back, Tony. What’s the next question you got for us?

Tony:
This one says, I’ve saved a 20% down payment for a property, but I’m struggling to save the remaining 60 5K for actually fixing this property up. For example, the property costs $150,000. I’ve saved up $35,000, but I’m struggling to save up an additional 60 5K to do the rehab. My understanding is that the lender will not give me the rehab money right away. I have to pay my own money to start rehabbing, and the lender will then reimburse me in stages of the rehab portion. Is that correct? Is there a lender who will give the construction budget right at closing When I purchase the property, I have some equity in my rentals, but I don’t want to touch them with the interest rates being so high. If there were a lender who could lend to me without needing to save up the 60 5K, that will be great. Thank you. So what this question is really asking us here, Ashley, is are there different loan products that exist that might allow this person with his 20% down payment to cover not only his purchase price but his renovation costs as well? I know you’ve done a lot of burrs, Ashley, so I’ll kick to you on this one first, but have you seen any loan products to kind of fit what this person is looking for? Yeah, what are your thoughts?

Ashley:
Yeah, so I think the first question I would have back is this for a primary residence or this purely investment property, because that will definitely impact what type of loan product you’re going to get if it’s going to be your primary residence. There’s a 4 0 3, is it 4 0 3 B? Yeah.

Tony:
Okay. I don’t know.

Ashley:
I was going to say 4 0 3 K, but I was like, no, that’s 4 0 1 where you can go to the lender and they will lend you a percentage of the purchase price plus the rehab on the property. But during that time period, you have to use a contractor that is approved by your lender, you have to do draws. They’ll have an inspector that comes out and inspects the property. And I’ve heard I’ve never done this type of loan that it can be kind of gruesome going through all the hoops and going through the whole process. Everything is documented, everything just a lot more grueling than if you had your own cash and you’re paying out your contractor going along the process. So there is that option for you, which it has worked for a ton of people to go this route. But there also are small local banks that do in-house portfolio loans where if you are buying this property under market value and can show them that this property is right now worth a hundred thousand, but I have it under a contract for 80,000, they might be willing to lend you more money than what you’re actually purchasing it for so that you can use that on the rehab too.

Ashley:
As far as your other properties that you have, you don’t want to touch because of the interest rates being so high. I would go to one of these small local banks or a credit union and ask about a commercial line of credit. So get a line of credit on these rental properties and then you can use that. So that’s actually what I do. I pretty much fund all of my rehabs with a line of credit that’s on two of my rental properties, and I will take money off as I need it. And then once my rehab is done and I either refinance or I’m selling the property, I pay back my line of credit and then it sits there until I’m ready to use it for the next deal. So I’m not continuously paying interest on it just when I’m using it. And this is a way better option in my opinion, than going out and borrowing from a lender for the rehab and having to follow the rules and their processes.

Ashley:
But also, there’s hard money lenders too that you can find, and you can go into the BiggerPockets forums and get recommendations where they’ll do a lot of these loans where they’ll lend you percentage of the purchase price, maybe all the rehab, a percentage of the rehab, and then their expectation is that you’re going to go and refinance this property and sometimes they have it in house where you can just go ahead and refinance with them for your end loan product that’s a fixed rate over so many years, or you’ll take it somewhere else and refinance and pay that loan back. But if you have that equity in those rentals, I would definitely try to tap in and get a line of credit for sure, because then you don’t have to go through inspections. You don’t have to get approval and go through the loan process every time you want to do a rehab on a property, you’re able to just use your own line of credit and honestly will probably, the interest rate will be better than if you’re going to a hard money lender than having says sometimes pay points and pay usually a higher interest rate.

Tony:
Yeah, I couldn’t agree more. I think that the hard money portion is probably the most expensive debt that you’ll maybe run into, but I think actually you hit on a super important point. Like a lot of the smaller local banks and credit unions, those might be a great place to go because they tend to have a little bit more flexibility than even hard money lenders in some situations because some of these bigger, hard money lenders are these massive organizations and corporations as well. I think one of the things that I realized as we’ve grown our portfolio is that even though a mortgage is a mortgage and debt is debt, every lender has a slightly different way in which they package that debt to you as a real estate investor. And I think the more lenders you can talk with, the more potential financial institutions you can build relationships with, the more tools you start to add to your tool belt to say, well, hey, this debt actually makes a ton of sense for this deal or this type of loan product makes a ton of sense for this deal. So if you’re buying, you said property costs 150 K, you’re probably buying in a smaller town. There were probably credit unions in that city who would love to give money back to folks in your area to say, Hey, let’s go revitalize some houses in this community.

Ashley:
Well, you guys, we love talking about real estate. We love answering your questions like this with you all, and we’d love if you’d hit the follow button on your podcast app. Wherever you’re listening, we have to take one final break and we’ll be back with our last question. Okay. Welcome back. Our final question today is, hello bp. New to the forums and new to real estate investing. I’ve been debating on house hacking into homes because the prices of homes are just so pricey. My question is, is house hacking dead and to live rent-free no longer exist in today’s market? I’m looking at a duplex and I’d owner occupy it. My game plan is to buy and hold multifamily houses to build my portfolio off appreciation due to cashflow. Homes seem so hard for me in my market. Okay, what do you think, Tony? Let’s answer that first question is how’s hacking dead? Let’s use this as a social clip to stir up some debate.

Tony:
Is house hacking dead? I don’t think in any way, shape or form that house hacking is even close to debt. It’s not even on life support. It’s not even in its old age. House hacking is young and spry. Now, is it slightly more challenging because of the interest rates that we’re seeing? Sure, but that’s just real estate across the board. It’s not specific to house hacking. It’s house hacking. It’s medium term, it’s commercial, it’s whatever it is. We’re all seeing a bit of a pinch because of the increased interest rates. But to say that house hacking is dead, I think it’s probably one step too far. Now, I think that for some people, they only categorize a house hack as a success if they can 100% cover their living expenses and produce cashflow on top of that.

Ashley:
I think that was with the Burr strategy for a long time too. People said, oh, if I can pull all my money out and cashflow, that is a burr where that is really hard to do. Now,

Tony:
For sure, even for the Burr example, say that you have a hundred thousand dollars little nest egg that you’re starting with, and maybe you don’t get a hundred K back, but what if you get 50 K back, right? Well, now you still have 50% of your initial capital that you can go deploy into something else. Is that a US No. Right? So yeah, I think it’s redefining what a goodhouse hack actually is, but our biggest expense monthly is the amount of money we spend to live the roof over our heads.

Ashley:
And if that is not the case for you and it is your car or a depreciating aspect,

Tony:
That’s true, you

Ashley:
Need to go back and lose at all our episodes.

Tony:
For most people, it is their mortgage, it’s their rent, and if you can get that even 80% lower, well now you’ve just freed up 80% of your income to pour back into buying more real estate, which is a win. So is it dead? Absolutely not. I think we just need to redefine what success as a house hacker actually looks like and that it’s a bit of a range and not just a black and white answer.

Ashley:
So let’s kind of put together an example, and this is the way I always like to describe my sister’s house hack. So the first duplex she got, she was paying $45 a month and it wasn’t, she had to pay something, but if she would’ve lived in that same exact unit somewhere else, today she’s paying less than 45 now she’s probably paying zero now just because rent has increased and her mortgage payment has stayed the same, but that same size unit when she moved in could rent for $900 per month. So if she had gone and moved into a house that was similar and rented it, she’d be paying $900. And instead she went and bought the house and she paid $45. And then the person that lived below her paid a thousand dollars a month I think it was, and that covered her mortgage. So she was not making cashflow, but she was getting mortgage pay down. So equity built up in the property, she could save that $855 every single month.

Tony:
And I just did the math. It’s just over $10,000 a year that she’s putting back into her pocket

Ashley:
And then you get increase in rent. So she’s lived there, I’m trying to think, 2019, maybe 2018, maybe it was. So she’s lived there a while, and I think right now that downstairs person is paying 1200, so it’s increased $200 in that five, six years that she’s lived there. So now she is cashflowing off the property. But yeah, so I think there’s other metrics to look at instead of just cashflow on the property. So you’re having someone pay part of your mortgage, I think is really a win. But if you’re having somebody live there and it’s not making a dent or you’re going to be paying more money than if you were to go and rent somewhere, then maybe it’s not it for you because you’re having to increase your living costs so much, even though it is you’re buying an asset. But if it’s just going to be more of a burden on you because you are paying more every single month than if you were to go live somewhere else, then maybe that’s where you should reconsider is to know this isn’t the deal. For me,

Tony:
I think the other big benefit of house hacking is just the reduced level of capital that you actually need to get into a deal. When Sarah and I, my wife, when we bought our first home, our first primary residence together, we got a, I think it was a 5% down conventional loan. And at the time we live in California, there was a grant for first time home buyers, and the grant covered the majority of our down payment. And I want to say we bought our house, I think it was like, I don’t know, just under half a million bucks when we bought our house. And the total cash out of pocket for us was like $13,000, something crazy like that. So we were able to control this property that’s worth half a million with $13,000. And it’s like I’ve heard and seen that same story so many times from so many different people where you can go out, either buy a five big old five bedroom house and you’re renting out the other rooms, go out and buy a duplex or a triplex or a fourplex and rent out the other units. But the cost of capital, the amount of capital that you need to actually get into the deal is so incredibly low. The interest rate is going to be lower than if you’re doing it as a traditional investment property. The terms are going to be better. Everything about the debt and the acquisition is so much easier. So how could we say that house hacking is dead when that still exists?

Ashley:
And I think too, and the point of that story isn’t to say, oh, if you have very little money, this is your way to get in. It’s more of like, you still want to have money so that you have reserves and you get to be more liquid. So if I have $50,000 and I went and put $13,000 down, like Tony said, I can save the rest of that. I can put that in my four and a half percent interest account and be more liquid and have more reserves on hand or use some of that to invest in something else or continue to grow that. So I think the opportunity of house hacking is just incredible if you are able to do it.

Tony:
Yeah, we just interviewed Jefferson Galloway on the podcast. His episode may be out already, but if you go watch and listen to his episode, he bought six properties in six years, almost house hack, I think it was like half of that portfolio. He house hacked. He would buy a property, move in, live it in himself, rent out some additional space, move out of it, go do that again somewhere else. And he did that multiple times and he built a cashflow cashflow machine, right? I think he said on that podcast he had gotten to a million dollars in equity cash flowing about 50,000 bucks a year. And it all started with him buying properties that he was going to live in himself. And this is recent. This is in the last couple of years, right?

Ashley:
2020. He bought the first one, I think. And yeah,

Tony:
So it works

Ashley:
Well. If you’re listening and you want to get more involved in the community, like all these other real estate investors, you can go to biggerpockets.com/forums. Thank you guys so much for joining us. We really appreciated having you listen to us today. Whether you’re on your favorite podcast platform or on YouTube, don’t forget to follow or subscribe to the podcast. I’m Ashley, and he’s Tony. We will see you next time on Ricky Reply.

 

Mindy:
Hello, hello, hello and welcome to the BiggerPockets Money podcast. My name is Mindy Jensen, and today I have a very special episode for you, my dear listeners. Today we’re going to share another episode from the YouTube series on the BiggerPockets Money YouTube channel that I host, the features stories of people that are either on their way to or have already achieved fire. Today we’re featuring my friend Arik Peterson’s financial journey. Eric was able to reach financial independence and retire early in just a decade. After reading Mr. Money Mustaches famous Fire blog, Eric quadrupled his savings overnight and started investing all the money he had into those boring investments most Americans don’t pay attention to. Don’t miss this episode to find out how. Before we get into the show, we want to thank our sponsor. This episode is brought to you by Connect Invest Real Estate Investing simplified and within your reach. Now back to the show. Eric, I’m so excited to talk to you today.

Arik:
I’m super happy to be here.

Mindy:
So Eric, how did you discover the concept of financial independence?

Arik:
That’s probably like a decade old journey. I was in the investment management side of things, so I made mutual funds in my corporate job, and one day I was just scrolling through doing some research on something and I came across an article and I want to say it was in Barron’s, that there’s this guy that retired when he was 29 and his name is Mr. Money Mustache, and read the article. I’m like, wow, this guy’s got it figured out, and he’s a similar age to me. So I went to his blog and just started consuming it as much as I could. I think I read his whole blog in a month or two. He just opened up my eyes. He said, you don’t have to do the nine to five. Well, nobody does nine to five. You don’t have to do that until you’re 65. Luckily, I was in a position where I was making decent money and I could start super saving, and before that I always knew I should save, but he just kind of is like, well, you can live a little more frugally and save a lot more, and then your age of retirement drops dramatically. Given all that, I was just like, Hey, my wife’s name is Shelly. I said, Shelly, let’s go after this and see if we can do it. And she’s like, yeah, that sounds like a good idea. And so here we are.

Mindy:
What was your life like before you discovered financial independence and before you started pursuing it?

Arik:
I think the key thing is I was stressed out. The corporate job was working with C-suite people, and there was just a lot of pressure behind delivering and getting things done and playing all the politics and all those things that go along with corporate America and a lot of stress to me. I mean, my wife would say it impacted my home life too. If you’re constantly thinking about your job, you’re not thinking about the things that are really important, like your family and taking care of yourself and all that stuff. I think it’s kind of that typical story of you’re living for your job and then you try to squeeze in fun things to do on the weekend or maybe a show or two at night and just kind of trot along.

Mindy:
I don’t think we ever really dive into the stress levels that a job takes on you on the BiggerPockets Money podcast, but when you said that, I was like, yeah, of course your life is usually really stressful. There’s the unicorn person who works in a job they love and you’ll never work a day in your life when you do what you love and it’s still stressful. I mean, there’s always something happening at work that you carry home with you and it does take a toll and you remember, oh, I’ve got to work on that project. Or, oh, I hope I make it into the office on time tomorrow, so I get that project done so it’s on my boss’s desk or whatever it is. And your mind isn’t fully or at all in the conversation that you’re having with your family. Yeah, that’s not all the time, but that can happen a lot, and that starts to erode your relationship with your kids and it can get really, really, really difficult, especially if you’re in a job that you hate or you’re in a job where you’re making mutual funds and everybody’s money is riding on whatever you decide to put inside your fund and one bad stock and everybody hates you, I’m assuming.

Mindy:
Is that what happens, that when you make I’ve never made mutual funds clearly.

Arik:
Yeah. It’s kind of funny. I wasn’t running money. I was kind of the research and development guy, and I made this big spreadsheet that evaluated our own internal stuff. I was known as the Grim Reaper when I came to meetings sometimes because I had the evaluation on, Hey, this fund is not doing what it’s supposed to be doing and we need to talk about killing it. That was me a big stressor. It’s funny you’re talking about how you don’t forget about it, but I remember I was so proud the day that I earned a Blackberry at work. I was like, oh, this is so cool. And little did I realize, I’m like, oh, now I’m tethered to my job. 24 7.

Mindy:
Yeah, now they can get in touch with you anytime. When you said Blackberry, I’m like, is that an award? Like a little berry? Oh, you beat the old school.

Arik:
Yeah, that shows how old I am.

Mindy:
So what was the most significant change that you had to make once you discovered this concept of I don’t have to work until I’m 65?

Arik:
The most significant was thinking about savings more. Like I said, I was saving at a good rate and I went back and calculated, and it was like before I figured out the fire movement and stuff, it was like 17% a year, which is pretty good for your average American. But once I discovered, hey, there’s another way, we basically ratcheted up, we’re making decent money and we were saving about 70% of our income living on a very frugal lifestyle. I think we dialed it into like 44th grand a year for a family of four, and this is in Midwest, so it was pretty cheap living, but it just allowed us to save so much more, so much faster. We didn’t cut back significantly. I mean, we still felt like we’re living our lives, but we didn’t feel super deprived now that we’re on the flip side live in Colorado now, which is awesome. That’s part of the whole fire thing too. There’s more to, it’s a beautiful thing when you have money, you have options.

Mindy:
I love that quote. When you have money, you have options. What was something you thought was going to be hard to give up but ultimately wasn’t?

Arik:
In terms of the biggest thing to give up in that situation, and a lot of people say this, but it’s the relationships at work. I mean, you make some good friends, you make neat connections, and when you’re no longer there, you don’t talk to ’em as much and they’re still great people.

Mindy:
That is one of the downsides of PHI is losing the work connections, although you then make different friends, at least I have. We live near each other and I live in Longmont. It’s kind of this mecca for phi, and I have a lot of these retired friends in my circle, so different. The transition has been different for me, but yeah, that can be tough. Have you been able to keep anything in your life that you thought you would have to give up?

Arik:
Well, I just bought a really expensive mountain bike. We’re kind of the same. I mean, honestly, we’re still frugal. We’re not like penny pinchers and full disclosure, my wife still works. So there’s income coming in that way and you just dial it in more. And that’s one thing, I think that’s a big takeaway from fire is when you kind of do this subculture or you start thinking about it differently, you have to really examine your own values and it sounds cool. It’s like, oh, yeah, what do I really care about? But there’s a big responsibility there too. Am I being true to myself? Am I being true to my values that I’ve reflected on? And sometimes when you’re just working all the time, you don’t have time to think about that. It’s a bigger responsibility than I thought it would be.

Mindy:
Yes. It’s so easy to get swept up in other things when you can’t focus on yourself, when you go for a walk and you have your phone with you, you don’t have to be alone with your thoughts. You can check out, oh, what’s on Twitter? And who’s texting me? And maybe I’ll take a phone call. When you go for a walk by yourself and you’re alone with your thoughts, depending on how long that walk is, you can get into some really deep conversations with yourself. And the same is true when you don’t have work distracting you all the time. You’re thinking about yourself, what do I truly value? Having that conversation with no distractions can be eye-opening. It can be eyeopening that you don’t know what you truly value. It’s not necessarily a bad thing that you don’t know. That just means you have a homework assignment. Let’s go figure out what I want to be when I don’t have to work anymore.

Arik:
Yeah, but what do I want to be when I grow up? Because you’ve had all these inputs from your parents and from culture and from school. It’s really truly a point where you’re like, okay, I can actually think for myself and I can actually figure out what I truly value.

Mindy:
Did you track your spending prior to retirement? Did you have a good handle on what you were spending or an amount or where it was going?

Arik:
Oh, yeah. So I was thinking back on stuff preparing for this. I was obsessive. I was to the point where I would check sometimes daily on what my net worth was. And it’s so funny because once we hit fire, that all went away. And I remember saying one time, I’m like, I obsess about money so I don’t have to obsess about money. And that was during my working years. And it’s funny, I just looked at my net worth this morning, and the last time I updated it was in March of 2022, and then prior to that was another year. So I’m like, I don’t care. I know generally where we’re at, but it’s a beautiful thing.

Mindy:
I should redo that intro of recovering money.

Arik:
Yeah, big time.

Mindy:
That’s awesome. Can you teach my husband how to not obsess? So do you still track your spending?

Arik:
No, we’ve done a lot of the different things. We’ve done a spreadsheet budget, we’ve done a cash budget in the past. We’ve just kind of generally tracked it, and right now we don’t. You’re kind of in this area of where you’d know where you’re at. If you go over on a month, you just take some from savings and take care of a credit card or whatever. And if we’re going to do a big trip, we’ll be like, oh, we’re going to take the money from X, Y, Z and do it that way. So we’ve really cut back on the tracking and all that stuff. And in full disclosure, we’re not super wealthy by any means. We’re probably right on the cusp of fire between the FU money and fire. So we don’t have unlimited resources, but we still have, I would say, a fulfilling life.

Mindy:
So let’s look at your money where it’s parked. What are you investing in? V-T-S-A-X gets the jail college stamp of approval, but where are you putting your money?

Arik:
I was in the business. I know how the sausage is made. Ew, and it’s kind of insane where everybody gets paid. So I’m a big huge believer in index funds. I’m a huge believer in asset allocation, and I think that sometimes gets overlooked in terms of 92% of your returns come from your asset allocation. So that means that little 8% really matters on what funds you picked. I do like individual stocks. I do like the possibility of hitting a home run. I’m fine with the fluctuation and the risk and all that stuff. One little tidbit is I always say, put your risk in your Roth. And the reason why that is is if you do hit a home run in your Roth, the government can’t tax it. So if you turn whatever your Roth is, your a hundred grand into 1.2 million, that’s a beautiful place to have it.

Mindy:
Or your PayPal stock into 5 billion your deal.

Arik:
Yeah, yeah. I mean, you can always dream right?

Mindy:
You can always, that’s the best story ever,

Arik:
But it’s out there and so why not take advantage of it?

Mindy:
Put your risk in your Roth. I love that. I don’t think I’ve ever heard anybody say that, but that’s such a great idea because yeah, if you’re going to put that kind of risk in there with all the rewards, I mean your Roth, it grows tax free, you withdraw it paying no taxes because you paid the tax upfront. What a brilliant, why is nobody saying that

Arik:
Coin today and beneficiary things? It’s so well protected. And that’s the other thing too. I grew up through the whole financial services and I read Ed slot’s book on taxes, and that’s only half the game is accumulating your wealth. The other half, and it made me even more important is figuring out your tax strategy. That’s probably something, and maybe that’s another discussion, is figuring out how should you spend your money once you are retired and how do you keep the government’s fingers out of it as much as possible, all on the up and up, obviously, but there’s a lot of loophole, there’s a lot of things you can do.

Mindy:
They’re not loopholes. They’re tax strategies. And yes, you should absolutely pay every dollar of tax that you owe, and you should absolutely try to pay as few dollars of tax as possible by taking advantage of these tax strategy.

Arik:
A hundred percent.

Mindy:
Eric, you said that you’re on the cusp of financial independence. I’m assuming that you used the 4% rule to determine your number.

Arik:
I don’t know about the 4% rule. I get it. I understand it. I think it’s more of the, let me back up. I want to have diversification in terms of how my income comes in. So as I check these off, then that just makes me feel better. So we don’t live off of our investments at all. We live off of my little income doing handyman stuff and my other projects, and then we live off my wife’s income, and those are just sources of income. So in the future, because I’m listening to BiggerPockets and whatnot, we’ll have a rental and in the future, my side businesses, my little side hustles, those will produce income. So it’s less about the 4% rule, it’s more about what does our lifestyle require in terms of income. It’s kind of answering the question.

Mindy:
Okay, so you have a nice nest egg and then you are looking for sources of more passive income.

Arik:
Yeah, and fun income. Fun income. I think

Mindy:
Fun income.

Arik:
It’s not passive, but I’m fine with that.

Mindy:
Yes. For all of you out there listening or watching who think that real estate is passive, you’re wrong. I’m sorry. All those people who tell you real estate is passive, they are incorrect. There’s an element of, I dunno, that maybe there’s a new word. There’s an element of ity with real estate because technically you’re doing nothing. They give you a check at the beginning of every month, but then things break. Eric, walk me through your PHI timeline. How old were you when you discovered Mr. Money mustache? How long did it take you to become comfortable with the amount of money that you had so you could quit your job? And how old were you when you finally quit?

Arik:
Yeah, that’s a good one. Probably around 34 when I found that article on Mr. Money mustache, and then it took about a decade. So at age 44, I had a beautiful moment at work and it was called getting laid off. I was smiling in the whole meeting, and luckily I had prepared prior to that. So that kind of sparked me getting into the true fire thing, and maybe I would’ve drug it out longer. Maybe I wouldn’t have, I don’t know. But it was a good, perfect, perfect timing. So my first year I literally just decompressed. I went fishing, I went biking practically every day and just took in the beauty of not having that job. And it was a lot of, yeah, this is how I thought it would be, but then at some point I was like, Hmm, I should probably start doing something.

Arik:
And year or two is when I started to take off and start helping friends with, because I’m relatively handy helping friends with home improvement projects, that kind of stuff. And the word kind got out. I was like, oh, well, kind of accidentally started handyman business at some point. I was like, well, I should probably charge these people something for it to have some type of value exchange. And the other thing I did too was something I’m really proud of, and I think this is my little legacy thing, is I started a comic about being a dad. I’ve had so much fun with that, and that’s one of those things that’s a labor of love. I’ve had a lot of connections because of it. And you can probably see, so my wife did this for me for Father’s Day a couple of years ago where she prints it out, some of my comics, and I’ve actually started to, I’ve done those.

Arik:
I have 80 of them out there now, and I’ve started to ramp it up because these people are coming back and they’re like, Hey, you need to make a book and you need to do this. And I was like, oh, geez. Didn’t really think I’d go that far with it. But another beauty of being fired, pursuing something just for the fun of it, and then this might be one of my semi passive income streams. And then the other thing that I really got to do a lot was just, this is funny. I just got back from a Moab trip, mountain biking web trip, and we were talking about the crazy big lottery of a billion dollars or whatever, and people are like, oh, what would you do? That kind of stuff. I’m like, well, I would just build cool stuff. I didn’t say stuff. I said something else. And that’s kind of what I do too. We’re talking about bikes. I built electric bike and next week I’m going to do a three day fast, but to keep my mind busy, I’m going to build a bike out of wood. You just don’t get those options when you’re working 95. It’s just a beautiful thing to have that time.

Mindy:
Eric, you’ve mentioned your comic strip dads are, where can we find this comic?

Arik:
I love hearing comments of my comics. A lot of ’em are really good and some of ’em are really funny. It’s on Instagram at dads RARE, not R. And then on Facebook, it’s just dads R. And hopefully someday you see a book published. I’ve been talking to some people and there’s definitely some interest there. So again, you just don’t know where you can go when you don’t have to do that nine to five and you’re stressed out. So one of those cool options.

Mindy:
Eric, I love your dad’s art comic. They don’t all relate to me, but many of them do to me, my husband, my dad, and I can see those on t-shirts, hats. I’ve already harassed you about this. I can’t wait for the book to come out. And since I have your phone number, I’m going to keep asking until it does.

Arik:
Sounds good. I like it. It’s good to have an accountability buddy.

Mindy:
Eric, I really appreciate your time today. This was so much fun. Is there any place else that people can find you online besides your dad’s r comics?

Arik:
I have a live long, live often website, and it’s basically just, it’s merchandise, but it’s like do what you do and do it often. So live long fish often. Live long ride often. Live long quilt, often. Do what you want to do and do it often because that just makes you happy. So that’s another little tangent that I’ve been able to start up too, since I don’t have to work all the time.

Mindy:
Live long draw often.

Arik:
Yeah. Yeah. Well, it’s a beautiful one. Yeah.

Mindy:
Eric, thank you again for your time. It’s always lovely to talk to you.

Arik:
Thank you. I appreciate it. And this was great, awesome time.

Mindy:
If you liked this video, please click the thumbs up and don’t forget to subscribe to this channel for more videos with inspiring fire stories. Just like Eric. This is Mindy Jensen signing.

 

 

Dave:
If you listen to this show often that part of what we do here is analyze the economy now so we can get a sense of the investing landscape in the future. And for me, I do this partly because it’s fun, I’m weird and I like this, but also I do it of course so I can make sure that my investments and hopefully yours stay optimized no matter the economic conditions ahead. While we of course don’t have some on the market crystal ball, our guest today comes pretty close today. Ben Miller, the CEO of Fundrise breaks down what he thinks will be the most powerful asset classes to invest in over the next five years.
Hey everyone, it’s Dave and this show is for all the analytical nerds like me out there and our guest has a lot of cred in that department. Ben Miller, as I said, is the current CEO of Fundrise. They’re a direct to investor platform with over 2.8 billion of equity under management. But what’s cool about Ben is that he’s worked in real estate development and his experience at Fundrise has him investing in commercial real estate in residential, also in debt, and he actually has a whole new asset class that he’s been taking on. So I’m really just curious to talk to Ben about what he’s investing in these days beyond real estate and within real estate and why he’s doing it. Ben’s been on the show a couple of times before, so if you’ve listened to any of his episodes, he is super knowledgeable and really in-depth thinker about finance investing and the economy in general. So let’s get into it. Ben Miller, welcome back to On the Market. Thanks for being here.

Ben:
Yeah, thanks for having me.

Dave:
Yeah, it’s been a while excited to talk to you specifically about some different asset classes and how you think they might be performing. So let’s just start with real estate. What’s your outlook for commercial real estate over the next few years?

Ben:
Few years? That’s a little easier right now. It’s pretty foggy. The jobs report came out, inflation came out today. I mean it’s definitely foggy mirror at the moment.

Dave:
Are you just concerned about financing interest rates or are we still working through some of the supply and multifamily or what are the sort of main variables you’re tracking right now?

Ben:
We were debating this at the team, at the investment community level. Is this one of the best times invest in real estate or actually are we better off investing in private debt in the debt side of the stack rather than in the equity side? The real estate market today is sort of more choppy than it’s been in a long time.

Dave:
Yeah, and I guess the question about commercial real estate right now is like are you going to miss the bottom? It feels like the bottom to me is at least still a couple months away at a minimum, and at least personally I invest in some commercial real estate. I don’t feel a sense of urgency like now is the time to buy given all the uncertainty out there. To me it just feels like it might be better to wait.

Ben:
Yeah, I mean I think the bottom was last year actually, I think October, 2023 was when treasuries hit 5%. I feel like that was actually the bottom and it’s gotten a little better since then. But yeah, the reason to buy real estate now would be because thinking about a long horizon and probably the best time to buy real estate for the next 10 years. But if you’re thinking more opportunistically, shorter term, more of capture the moment, I think there’s other things that might be better

Dave:
And is one of those things private credit

Ben:
On balance? Yeah, private credit and tech I think are pricing better. So we can do private credit for a minute. It’s sort of easier to price just to get a little complicated. But if you look at a apartment building, you can buy the equity as you said, for a five and a half cap maybe, and you can be in the debt at 65% loan to value or maybe 75% loan to value and be getting a double digit yield, 10, 11, 12% yield, maybe higher. And so you say, okay, do I like being at a 75% loan to value at a 12 or an 11 better than being in the equity where maybe I do better, maybe I do worse is certainly unclear in the debts a lot safer.

Dave:
Yeah, because the debt, you’re earning that 10, 11% and you have a pretty solid asset to fall back on with that loan to value ratio. But I guess you bet on the real estate, if you think cap rates are going to compress, like you said,

Ben:
I mean if you make the argument, which we certainly debate internally, you’d say, okay, well there’ve been oversupply, multifamily, that oversupply is hit rents, rents are flat, rents are soft,
Cap rates are a lot higher, interest rates are a lot higher, but everything is sort of against real estate at the moment. And if you sort of go more intuitive point of view, that’s a good time to buy things. And so some of those things are going to reverse. You can feel really confident supply is going to flip, it’s going to be undersupplied within 18 months, 24 months. There’s no starts are falling off a cliff, so there’s not going to be new supply. So you could feel good about rent growth and a world interest rates stay high, then there’ll be no new construction for a long time. So if you don’t get the benefit in interest rate, you’ll get the benefit in rent growth. There’s a good argument for it and it’s more tax efficient than debt debt. You have to pay ordinary income.

Dave:
That makes a lot of sense. I just want to make sure everyone’s following that when we look at multifamily, it’s pretty easy to forecast where supply is going because it takes several years to build and you need to file for permits. And so we’ve seen this glut of supply that’s been coming on for years. Everyone’s known it’s been coming and I think that’s why people have sort of been a little wary sitting on the sidelines a little bit waiting until things play out. But as Ben alluded to, we can all see that the pendulum’s going to swing back in the other direction because once people saw this glut of supply interest rates started to go up, new construction starts from multifamily, at least in most places across the country have just fallen completely flat. There’s basically nothing historically speaking. And so we’re going to be in this environment where as Ben said, there’s not going to be a lot of construction if interest rates stay high and depending on what you think about the residential market affordability for single family homes probably still going to be pretty difficult for the average person. And so there’s going to be at least in my opinion, be a lot of demand for rental properties and not a lot of supply, which as Ben said, could be driving up rent prices in the next couple of years.

Ben:
That’s the argument for it. And the argument against is I think simply like is there something better
That’s not that bad actually, right? So one, there’s growth from rents, which I feel like you’re going into a really strong market. If interest rates fall, the value goes up because cap rates will fall if interest rates don’t fall. You get it in rent growth, you get your growth in rent growth. If interest rates do fall, you get it in cap rate compression. So you have now a pretty good either way, you’re in good shape. And then if you’re worried about inflation, if you’re worried about government printing a lot of money in the old days, you would hold real assets, you’d hold commodities, real estate. Now people hold Bitcoin, but you hold it all for the same reason. And so the argument for owning an apartment building or owning real estate would be that you’re not going to be able to get that same price per square foot price per unit in the future. So I think that’s compelling. It’s just at the same time because debt markets are so distressed, you can lend into the market and get really good, really good returns, better than I’ve seen in almost a decade. I mean, both are great options.

Dave:
Yeah, I mean that’s a very encouraging take. I appreciate that. It could look pretty dismal right now and it has been pretty tough couple of years. All right. So it seems we’re in a uniquely good time for lending, but what specific sectors does Ben’s research tell him are the most investible? We’ll get into that right after the break. Hey investors, welcome back to my conversation with Ben Miller. Can you tell us a little bit more about the specific areas of lending that interests you?

Ben:
So God, what’s so fun being across asset classes and across sectors, you really can garner insights you might not otherwise have and you’re going to have better choices. And so we are an owner of about 20,000 residential units. We have own a few million square feet of industrial. We’re across the country. And so that gives a sense of what’s happening on the ground. But being a lender, you can sort of play that knowledge as an owner or as a credit provider. And one of the great fun things we did in the last couple of years was we went and started doing asset-backed securities.
So we do two kinds of lending. We do direct lending. We’re mostly apartment buildings. That was probably the most common execution. And we’ve done a few hundred million dollars of this where somebody’s going to build an apartment building, they had a loan, the term sheet from name your bank, bank of Texas or something, and they were going to get 70% or 75% maybe an interest rate. They were thinking the interest rate was going to be five or 6%. And now it’s like they’re going to get 55% bank cut back a lot and there’s a big hole now in their capital stack. 20% of the capital just disappeared because the bank paired back their lending. And so that 20% we’ve been lending is mezzanine debt or preferred equity, and you can get 13, 14% for that. Sometimes 16%. You’re talking about new construction, high quality apartment buildings that was going to be the lender’s last dollar. And we’ve done that handover fist. I mean, God, that’s the best thing you can get out there. Just you can’t get as much as you want.

Dave:
There’s just not enough good deals.

Ben:
Yeah, I mean not that many people are starting those construction buildings, but we’ve done a few hundred million of it in the last couple, probably the last 24 months. And that’s something that we do, but it’s not enough. And the other thing we’ve done is actually, if you look at the asset-backed securities market, which is most people probably not that familiar with, it’s pretty similar. All you’re doing is lending to an apartment building or portfolio of apartment buildings and just for picking where you want to be in the stack. So you could be in the triple A, which is like if you safest part of the stack or you can be in the triple B or unrated, but you can actually get to the same place in the stack. We can be at the mezzanine place in an asset backed security. It’s just like liquid actually. So we can sell our piece. And we started doing that in summer 2022, the markets blew up and we started lending into that market. It’s been great. And then we started going and doing that for industrial. And so the aspect securities market has been great because interest rates have been high and capital markets have been fractured. So in general, you can get double digit yields for debt like risk. That’s amazing. And that was not true for a long time. When interest rates were zero, it was like half that.

Dave:
That’s totally flipped over the last few years. Lending through most of the 2010s was not that lucrative for interest rates just weren’t high enough. And now you’re talking about two different ways that you can make money in lending. And I just want to explain for our audience, if you’ve never heard of the stack, it refers to capital stack. It’s basically the different areas where capital comes from, particularly in commercial real estate. And usually you kind of visualize this from the bottom is the most senior debt, so that’s usually your biggest loan. And then up from there would be something like a mezzanine loan or a bridge debt. And then you have different levels of equity. And the reason you think of it this way is because the people at the bottom, the biggest debt holders get paid out first. So it’s the lowest risk position in the debt stack where Ben is talking about investing is that next step up, which is called mezzanine debt. And that’s basically still relatively low risk debt, but it’s a little bit riskier than being the primary first position lender on commercial real estate. But it sounds like if you’re making 14 or 16%, it’s worth that little bit of extra risk to be in that position on the stack,

Ben:
But it’s a temporary moment. There’s not that many deals like that. Obviously if you could get 14% or 16%, we would just only do that for sure, but there’s not enough of that out there in the world. That’s why the good thing about spec securities is a big market. So you can find good deals, they’re not going to be that high. They’re going to be probably, I guess how much leverage you put on it, but 12 or something. But it’s still 11, 12 still pretty good. And it’s liquid, which is different direct lending. You have to wait for the property to sell to get your money back. But when it’s securitized, I can turn around and go on a Bloomberg terminal and sell it and go do something else with the money. So funny because there’s such a separation between real estate people and securities market people. I’m a real estate person. I only started understanding the securitization market over the last couple of years and they don’t think about their real estate the way we do at all. Couldn’t be more different. I’ll give you a quick story because our team, we went down to Miami for the securitization conference, which of course has to be in Miami. Sounds super fun. Yeah, those guys really not a party.
And we go in the room to meet with these different trading desks. You’re meeting with RBS and Noura and different banks and they say to us, what label do you buy? And we go, we don’t know what you’re talking about. You’re running a huge five.
You don’t even know what they’re talking about. What label do you buy? And they’re like, aa, aa, single B, triple B. Be like, oh, whatever makes sense, whatever price per square foot and yield. And they’re like, what are you talking about? And I’m like, I don’t understand. What do you mean? What am I talking about? They’re like, well, everybody’s a label buyer. That’s their mandate. They have to buy a label. And I’m like, they have to look at price per square foot and whatever the market risks and stuff. And they’re like, no, no, no. They just buy a label and they pricing compared to other labels and stuff like that. And I’m like, well, how does that make any sense? They worry about the risk of the securitization and stuff and it’s like, no, they’re only thinking about it as the way you might think about spreads and pricing versus treasuries. It

Dave:
Sounds like a bond, right? Yeah,

Ben:
It it’s like they don’t think about credit. It’s just nothing like us. Nothing like a real estate person

Dave:
Because trusting the label, right? They’re just saying a B is X. We know the risk reward profile for that

Ben:
Label. The is the risk, and that’s all they have to know and they can go repo it and lever it up and I don’t trust the label. Right. Well, good for you for sure.

Dave:
Yeah. Well, I kind of want to explain just for a second, and I’ve never bought securitized debt, so I just, correct me if I’m wrong here, but Ben’s been talking about two different types of debt. There’s direct lending, I’m familiar with that. I do some of that myself. It’s basically just funding a very specific real estate deal, but this whole other side of real estate debt where loans are packaged together and sold on securities markets, they’re sold sort of stocks. For example,
This
Happens in the residential market as well. Fannie Mae and Freddie Mac buy up residential mortgages and those can get packaged and sold. And this happens in commercial real estate too. And so Ben is saying that he’s been buying these because they are good deals right now. But it sounds like, and this is sort of leads to my next question, that a lot of the people who buy these securitized assets, it sounds like they’re like hedge funds, they’re pension funds, they’re probably just huge buyers or are there individuals, just normal people, do they buy this stuff?

Ben:
Oh, no, no, you’re not allowed to buy it unless you are a qui A QIB.

Dave:
I don’t even know what that is.

Ben:
So it goes normal investor. Then there’s accredited, we have a million net worth, and then you have a qualified purchaser, which you have a 5 million net worth, and then a QIB is a hundred million dollars

Dave:
Net worth. Okay, so that’s how you get invited to the table.

Ben:
Yeah, it’s actually a hundred million of securities. It’s not even like if you a hundred million dollars in real estate, they wouldn’t count. You have to have a hundred million dollars of liquid securities. Banks and insurance companies are the big buyers of the aaas. It’s like a highly institutional product, but it’s massive. If you think about a building, there’s way more debt than there is equity in that building. So it’s in a way bigger market so far away from normal people and it’s so weirdly synthetic. They’re in the moving business, that’s what they say, it’s makers, takers and movers. And so their job is to move it, just move it along like, oh, a thousand people bought houses. They need mortgages. That mortgage gets packaged up and securitized, and so they’re just moving the moving business. They don’t really care what they’re moving. My analogy for this is that if they’re moving and the box says kitchen, they’re going to put that box in the kitchen. They don’t open the box and find that, yeah, what’s in the box doesn’t matter. They’re like, my job’s to move this stuff, don’t talk to me about what’s in the box. My job is not to look inside the box.
And so when I was trying to say, well, what’s in the box? They’re like, what are you talking about?

Dave:
Yeah, it’s such a weird position, especially you do direct lending where the whole business is looking in the box, right? That’s the whole job.

Ben:
Yeah. There’s no box, right? There’s just the forks and knives and stuff, right?

Dave:
Yeah. You see it all laid out there.

Ben:
It hasn’t been packaged. They package it, they securitize it. That’s the packaging
Anyways, but it’s so interesting. You can see when the market’s volatile normally, the market’s really efficient. There’s really no opportunity for people like me. If you were to go up and it’s all like a Amazon warehouse or something, everything’s moving really fast through it, but when something gets messed up, there’s a hurricane and everything’s backed up and supply chain’s messed up, that’s when you can go in and make good deals. So the supply chain in the financing market has been messed up for the last couple of years as it gets messed up, there probably won’t be much for us to do, but as long as it’s messed up, there’s good deals to be had.

Dave:
That’s a great way to look at it. And do you think for just normal people who aren’t quis, do you think the direct lending side of commercial real estate is still a good option for people looking forward at least for the next year or two?

Ben:
I think so. There’s supply and demand and that’s just how things are priced. And so the supply of money has been choked off in real estate, and that means that if you supply money to the sector, it’ll be priced well. This is what I mean by sitting across different places, different asset classes, even different geographies. Sometimes the supply and demand gets disjointed and when it does, things are mispriced,
But
Normally supply and demand is boring. It’s whatever it is. In 2017 or 18, the supply and demand for most of the economy was just humming along and then the pandemic hit in a way that hasn’t still normalized. There’s still lots of weird things out there.

Dave:
There’s just a lot of volatility on both sides. It totally different asset classes. And to your point, yeah, a couple years ago, supply of money super high and it was doing fine. Now there’s still a lot of demand for that money, but since the supply has declined so much as Ben has pointed out, you can charge a premium essentially for supplying that money, whether it’s a mezzanine debt or if you’re just providing primary mortgages, it’s just people will pay up for it

Ben:
If you want to make a whole loan. That’s also, that’s usually a bigger check. But anyway, so that’s in a way in what Fundrise been trying to do at Fundrise is say, okay, there’s most people invest in stocks and bonds, maybe real estate, but then only maybe buying single family homes typically. And there’s a whole world of investments out there that typically big institutions do alternative assets. And so I’ve been trying to figure out ways to democratize access to the best alternative assets, and those are real estate and private credit and venture capital. There might be another one, but if you all look at the Fortune 500 or something, it’s mostly those people, tech, finance people, real estate people make up most of the Fortune 500.

Dave:
And that brings me to my next question, which is why Ben and Fundrise are investing more in venture capital. We’ll get to that after the break, plus the questions on Ben’s mind about the future of the economy. Welcome back to On the Market. Let’s jump back in, and you have been spearheading a venture fund, which to be honest, I was surprised to hear because I’ve known you for a couple of years now, and as a very knowledgeable about real estate credit markets, what inspired you to go into the venture space?

Ben:
So the business case is normal. People can’t invest in venture capital. Venture capital historically has had one of the best returns, if not the best return, blah, blah, blah. So it’s really good. So why don’t people invest in it? You’re not allowed to. It’s only for accredit investors, institutions, and then also it’s really hard to get the good deals. There’s not that many great companies. How many great tech companies are there in the world that are private? Maybe a thousand, maybe a hundred.

Dave:
The established ones? Not that many. Yeah,

Ben:
Yeah. How many real estate properties are there? A hundred million, right? Yeah. There’s so many buildings in America that could be well priced, could be good, but there’s only a hundred tech companies you’d want to own maybe less than a hundred. So it’s a really, really small space. It’s typically insiders who knows who. I’ve been building software and building a tech company for now 12 years, and I’ve spent a lot of time with venture capital, and it’s rare you meet somebody in any sector where you’re like, wow, this person’s really blows me away. Most people, they’re just smart people, but they’re just selling you money. Venture capital has a sizzle to it. They’re more like bankers than they are tech founders in reality.

Dave:
Yeah, that makes sense to me. Yeah.

Ben:
Yeah. It’s just like their MO is that they went around taking credit for companies that they invested in, so invested in Facebook, I helped build Facebook, and you’re like, no, you didn’t,

Dave:
But not making day-to-day decisions. Certainly,

Ben:
Yeah. They don’t drive. They don’t make things happen, right? Yeah. Anyways, you need governance. I’m not against that. It’s just like the credit of creating something from nothing goes to the founding team anyways, so I just thought we should probably be able to get access to good companies and people should be able to invest in these great companies, and we went to the SEC and we created something that didn’t exist before, which was a venture fund anybody could invest in. There’s never been a venture fund that people could invest in that were normal people, and we made it happen. And then people said, well, can you get good companies? And we went out and we got, I’ll just say, I’ll argue are the best companies in the world if you were to go list the top 10 best companies in the world, maybe 80% of our fund is the top six or seven, and it was a lot of luck and some execution, and those companies are mostly AI companies at this point. Who’s the best AI company? Who’s the second best AI company? Who’s the third best AI company? We own all of them, and AI is going to be probably the most transformative technology of our lives. If it’s not, I’m going to be shocked. I’m with you on that.

Dave:
I don’t really understand how it will be transformative, just that it will be very transformative.

Ben:
Even that, I think you could probably guess and be mostly right actually this point, which is that it’s going to be a person doing work that people do.

Dave:
I guess the second order effects are what sort of confused me. What does that mean for people? What do lives look like and how does it impact society? Is hard for me to wrap my head around.

Ben:
Yeah. Yeah. I don’t think I had an email address until I went to college. I think my first email address was in college and I was like, what is this crazy thing? I worked for a tech startup in the late nineties to the early two thousands. I worked in tech startup and people were like, what’s the internet going to be like? What’s the second order effects of the internet? Everyone was so wrong. There’s no predicting it, but they were massive.

Dave:
That’s sort of how I feel here. It’s like we know it’s going to be massive, predicting it as just futile, so nation that we just can’t guess,

Ben:
But it’s going to be massive, you know, want to be part of it. There’s probably massive economics available if you can figure out how to be part of the best of it, and so that’s what we’ve been doing. Our list of investments are just like, I mean, the funny thing is that most people hadn’t heard of these best companies. You’ve heard of some of them, but you’ve heard of Databricks. Most people haven’t heard

Dave:
Of Databricks. Yeah, I’m a data science guy though, so

Ben:
Yeah. Yeah. DBT. Then we also invest in DBT if you’re a data science guy. Yeah, I know that we

Dave:
Use it. Yeah.

Ben:
Yeah. DBT is awesome. We use it too. Invested in DBT. Andre Andre is the top defense AI company. They’re more than that. Canva. We invested in Canva, ServiceTitan invest in ServiceTitan, and then Anthropic and the other big AI company, which they don’t like me, the big one. I keep the biggest one. Yeah, yeah, them too. It’s awesome.

Dave:
Yeah. Wow. Congratulations on doing that. I think it’s cool on a couple levels, obviously AI is super exciting, but what you said earlier, just democratizing this whole asset class that is not available to people. You have to be super wealthy. To invest as an LP in a venture fund typically, and making that available to people I think is just very admirable. It’s kind of very much in line with what we’ve always tried to do at BiggerPockets. It’s like try and make something that’s hard for people to wrap their head around and get in on and make it accessible to normal people, so it’s super cool

Ben:
And hopefully it’s going to have good returns.

Dave:
Yeah, that too. Yeah, of course. That too. Even cooler when it works. I do have just one last question for you, so we’re sort of turning the clock here on 2024. I won’t make you make predictions, but what are your big questions heading into 2025, about the economy?

Ben:
I mean, my question, I think the question on everybody’s mind who’s sort of in the markets is that there should have been a slowdown from high interest rates. There really hasn’t been. It defies all expectations. I mean, there are some explanations, there’s lot of government spending, there’s a lot of immigration. Those things drive growth and prevent a downturn. But my question is essentially, will the economy land with low interest rates, low inflation, high unemployment, everything is coming together, everything. It’s like it’s a perfect 10. I’ve never seen that in my life.

Dave:
Does it almost make you nervous? You’re like, what am I missing, kind of

Ben:
Thing. Yeah, it’s like of all the things to predict, you can predict. I went through nine to nine and saw the stock market bubble blow up. I went through oh eight, went through the pandemic. It is just nothing in my life would predict a perfect 10 economy, and that it’s blowing my mind and it makes me nervous. It makes me like, well, this can’t be possible,

Dave:
And you feel that people’s sentiment is low. I feel like a lot of people feel that it intuitively doesn’t really make sense,

Ben:
But I mean the facts are that it’s been the case and it seems like most of the risk, the longer it goes on, the less likely it is to unravel.

Dave:
That’s a good way to think about it.

Ben:
People are working their way through. I mean, the problems that existed in 2002 when Silicon Valley Bank blew up and real estate companies were stressed, time is great. Timeless people work through problems and people have had a lot of time, and AI really hasn’t hit the economy yet. The growth that is going to come from AI is going to be just enormous. It probably doesn’t really hit the economy for another 24 months or so,
But
It’s coming. There’s so many positive things happening in America today. It’s really extraordinary. If you know what’s happening in other countries, we’re so lucky.

Dave:
That’s totally true.

Ben:
Yeah. I just feel more nervous when things are going well than when things are going poorly. I know that feeling, Matt.

Dave:
Well, it probably makes you a good steward of other people’s money not being overconfident. Alright, well, Ben, thank you so much. This has been a great conversation. Really enjoyed speaking with you today. If you want to learn more about Ben or any of the stuff he’s talked about that Fundrise is doing we’ll, of course put the link in the show notes or you know where to find [email protected]. Ben, thanks for joining us.

Ben:
Yeah, thanks for having me.

Dave:
Despite what you hear, you can find great deals on the market all across the country right now. And today we’re going to prove it. Hey everyone, it’s Dave. And today’s show is a simple challenge. I’m joined by Henry Washington and Ashley Kehr, and I’ve asked each of them to find one deal that they would actually do right now or consider right now on the MLS if they had $75,000 to invest. Hey Ashley, thanks for joining us again.

Ashley:
Yes, Dave, thanks for having me.

Dave:
And Henry, always good to have you back.

Henry:
What’s up buddy? Glad to be here.

Dave:
I love doing the shows, the three of us. I feel like it’s always supposed to be research and we just turned it into a competition. So I’m looking forward to competing with you two to find the best deal on the market right now. And the reason we’re doing the show is that I think a lot of people may hear or think that finding solid investment properties right now, you need to pound the pavement for off-market deals, or you need to start with hundreds of thousands of dollars. Both of those are good things to have, but they’re not the only ways to get started and not even the ways I necessarily recommend for most people. So let’s talk about some real deals that we found. The parameters for this challenge was to start with a hypothetical $75,000. We had to find deals that were on the MLS and we had to account for things like closing costs, cash reserves, and maybe if you were going to do a renovation in your deal, you have to account for that too. And we also, because we talk about house hacking frequently on the show, decided that this could not be a house hack. So let’s jump into the deals. Ashley, I’ll start with you. How did you go about this challenge? Where did your thinking and research start?

Ashley:
Yeah, so I took the rookie mindset of I want kind low risk if this was my first deal and some kind of security safety net. So I looked within my market. So as a rookie investor, I’m building my team within my market because maybe I already have connections, opportunities. So I looked within the Buffalo area and that kind of gave me a sense of comfortability, I guess. So I narrowed in on a neighborhood West Seneca. So I actually have some investments really close to that in South Buffalo right now. And this West Seneca area is kind of the overflow, I would say, from the higher end area of South Buffalo.

Ashley:
So I found a single family home. One thing that I was looking for is that the price point was under 200,000, so I’m not spending all of my 70 5K just on the down payment. And then I was also looking for a property that had very light value add. So I actually came across a single family home that was a two bed, one bath listed at 180,000. The thing that stood out to me was that it’s 1,220 square feet, which is actually pretty big for a two bedroom house. So I’m going into this thinking that I could add a third bedroom to this property. So just judging by the pictures, it looks like on the second floor you could turn the one bedroom into two bedrooms because it’s so massive.

Dave:
Oh yeah, for sure.

Ashley:
Putting in a little bit of value add of adding a wall, adding a closet, adding a door, and then the rest of the property I put into my rehab budget to paint it. So I had about 5K of expenses, just very, very minor because it’s pretty much turnkey and rentable as it is.

Dave:
Okay, so let’s break down some of that. So you said you wanted it under 200,000. How’d you come up with that number specifically?

Ashley:
Yeah, so I didn’t want to spend all of my 75,000. So I’m looking at if I’m coming in and doing 20% down on the property, so buying at 180,000, this would be about $36,000 down. So that still leaves me a lot of money for reserves. And then closing costs, I calculated about three and a half percent, so that’s around 6,305 grand in the rehab, creating that third bedroom and just touching up some paint, redoing some paint in the rooms just to freshen it up for about 47,000, I’m spending of that 75,000.

Dave:
All right, you’re coming in under budget. That’s very, very impressive.

Ashley:
So part of that reasoning was that I would have that extra money left over for reserves.

Dave:
Okay.

Ashley:
And that way it would make me feel more secure on my first deal, that if something really bad happened, like the furnace goes in the first week of ownership, I have that money to put into the property. So I’m saving that for capital improvements on the property. And my kind of exit strategy on this is to hold it for five years and then to sell it, maybe do a 10 31 exchange scale up into the next property.

Dave:
Yeah, I love that idea about the reserves because I’m looking at the photos here. It actually looks like a pretty nice house. It seems like it’s in close to renting condition, at least from the interior. It’s kind of hard to tell

Ashley:
Obviously

Dave:
From photos, but probably an older house, you’re going to need some reserves there actually, once you add a third bedroom, what do you think you could get for rent here?

Ashley:
So I actually talked to a couple other investors as to what they rent there’s for, and once turning it into a three bedroom, I could get around 1600 a month for rent, 1650 around there. Especially with it being a single family home, a lot of the apartments that were three bedrooms were going for around 1500, but the single family home gave it more value that you’re not in an apartment complex.

Dave:
It has a big lot. So like a 6,000 square foot lot, there’s a garage on the property too. So there’s definitely some nice amenities here. So would that cashflow at 1600, 16 50 with the purchase price and the renovation costs?

Ashley:
So you’re looking at a total monthly payment for your escrow, so your property taxes, your insurance, your principal, and your interest of about 1,254.

Dave:
So

Ashley:
Definitely not a ton of cashflow. And then if you count in 15% for reserves, so repairs, maintenance, cap x, a vacancy, that’s about another two 50, that 15%. So that only leaves $150 of cashflow. But since I already have my reserves in place that I’m already banking on, I’m not going to be saving that two 50. So then it ends up being about 400 bucks cashflow a month.

Dave:
Oh, that’s great. That’s a very solid deal.

Ashley:
But one of the things that really sold me was the appreciation in this property as far as in the last five years, this area has seen 63% appreciation. So just modestly, obviously we’ve had a crazy market the last five years, but just modestly, if say there was only 45%, that would be 81,000 in appreciation plus $10,000 mortgage pay down plus say I’m only getting $200 in cashflow a month, that’s another 12,000. So it ends up being in five years, you would have 103,000 from mortgage pay down your appreciation in the property and then the cashflow you’ve gained over the years.

Dave:
And that’s investing, what was it, 60 grand total?

Ashley:
Yeah.

Dave:
So you’re doubling up your investment basically.

Ashley:
Yeah. So also this area, they have a upstate Niagara, which is like a milk and dairy processor, and they are adding an expansion to their plant where it’s going to be a 54% increase in jobs too.

Dave:
Wow.

Ashley:
That’s in that neighborhood.

Dave:
And you said also this neighborhood was sort of on the fringe of one of the nicer, more established neighborhoods as well.

Ashley:
Yeah,

Dave:
That’s always good. If you took this house and transplanted it into that South Buffalo area, do you have any sense of what it would cost?

Ashley:
It definitely wouldn’t be 179,000. It would

Dave:
Definitely

Ashley:
Be more like probably 2 25 I would say.

Dave:
Yeah. So I mean that gives you, obviously when we look at appreciation, it’s backward looking, but when you think of it in that way, it shows you that there is more room for appreciation in nearby neighborhoods that prices are, what is that, 30% higher, 40% higher. So that is definitely encouraging for appreciation prospects. All right. Well done Ashley on this challenge. One question for you. We gave you this assignment looking on market, do you think these types of deals or on market deals in Buffalo are feasible for rookie investors or any sort of investor?

Ashley:
Yeah, because I think this is a safe deal. It’s a low risk. You’re in an area that’s getting a little bit of cashflow. If you have the 75,000, you’re not using all of your money and scraping by that you have that. And then also I think the little bit of cashflow, the appreciation in this area, the job growth that’s happening there, even people that were moving into this neighborhood, I don’t remember the percentage in the last year, but that was an increase in population of people moving into the area too. So I would say especially if you’re in the Buffalo market and you have already some team members in place, that this would be a good area and a good property to look into.

Dave:
Awesome. Well thank you. Mission accomplished on this deal. You were able to find an on-market deal for under 75 grand. You are in that lake of effect cashflow area though, so you do have a leg up in your own home market. Alright, it is time for a break. Stick with us on the BiggerPockets Real Estate podcast. Welcome back to this week’s deep dish. Let’s jump back in. Let’s move on to Henry. Henry. Does this assignment just in general go against everything you believe in? I know you absolutely love finding off market deals and that’s why I wanted you to come and make you do this.

Henry:
Absolutely. I much prefer going direct to seller and I much prefer to invest in my backyard, but since the challenge was to have or find a deal on the market, that’s not easy to find in my backyard. So I had to get all outside of my comfort zone.

Dave:
Alright, well, where did your uncomfort zone take you?

Henry:
Well, I did have a bit of a leg up being that I do a lot of research for multiple shows that we record. And so I have looked into this market previously and took it as an advantage to go ahead and do it again. And so I chose racing Wisconsin.

Dave:
Of course you did. Of course you did.

Henry:
I was surprised. Surprise.

Dave:
If you don’t listen to the show or on the bar gate, Henry and I for some reason were always talking about racing Wisconsin. It just comes up in every conversation.

Henry:
I first learned about it when I was watching an episode of my first million or whatever it is on HGTV where people win the lottery and then try to buy a house and these people were buying in racing and just what I saw of the town and the price points. And I was like, man, this looks like a cool place. And then it was right in between Milwaukee and Chicago. And so part of the reason I chose the market is because of its proximity to Milwaukee and Chicago. There’s a heavy working class population that lives there, but works either in the Milwaukee or Chicago area for a lot of the major corporations that are headquartered there. Also, SC Johnson is headquartered in racing Wisconsin itself

Dave:
Really. So

Henry:
There’s a big working population and so there’s heavy demand for rental properties, but the price points are really, really affordable. And so you can get a singles and multis on the market that cashflow there. Now, the one downside that you would say for a market like Reine, Wisconsin is that it doesn’t have a lot of appreciation or hasn’t historically had a lot of appreciation, but I feel like it’s a really good time to be buying in this market because the city has been investing in infrastructure in and around the corridor in between Milwaukee and Chicago. So they’re putting in more transportation options to take people to and from those cities, you’ve got other companies like Amazon building warehouses in and around that area. There’s just a lot of growth. And then the city’s revitalizing. The downtown areas are pouring a lot of money into growing this area because the population is starting to grow because some people are moving away from the bigger cities to more affordable areas so that they can afford to buy. And so I think appreciation may be coming in the future. I know it’s speculation, but the price points are so low and you can get the cashflow that it makes it reasonable to go ahead and invest and have some speculation. You’re going to be making cashflow in the meantime.

Dave:
Well, yeah, it’s not speculation if there’s another way to make money. The way I think of it, it’s like if you’re only counting on appreciation, at least to me that’s speculation. If you are making money elsewhere, either through value add or through cashflow, and then the market appreciation is like the cherry on top, that’s a different situation in my mind because you’re probably through cashflow and amortization still doing better than the stock market or what you would do with your money elsewhere. So this is just a better use. And to your point about investments, Ken and I were actually just talking about this yesterday, Ray, and so I was googling it like businesses that were moving there and just in the last year Microsoft announced it was investing a billion dollars into a data center there. We saw other big companies like Central Storage Warehouse, I didn’t even know what they were, but they’re some big company investing millions. The one that really got me is Nestle USA announced a $70 million investment to expand their cookie dough operation in racing Wisconsin. Sold. Yeah, if that is enough, if my wife hears me say that we’re going to be moving to Racine, Wisconsin, so I’m all in on this one. Makes a lot of sense. So you explained the reasoning behind Racine. Well, what do the deals look like in this area?

Henry:
Yeah, man, the price points are fairly low. So what I was looking for was I wanted to find a multifamily, but I wanted to find one that didn’t need a ton of work that was pretty much turnkey and could make money from day one, but maybe had some potential for value add because again, I don’t live there. I haven’t built a team there yet. And so I didn’t want to have to take on a big construction project if I didn’t need to. And so I found a duplex, it’s a five bed, currently five bed, three bathroom duplex in RAC, Wisconsin. And the list price, the price has recently dropped, so it’s down to 147,000 for this purchase. Now this is one where if this was something I was going to go forward and buy, you have to get some boots on the ground and going and take a look at this because looking at the pictures and reading the description, it’s hard to tell kind of how the unit mix is. It seems on its surface like it is maybe three or four bedrooms upstairs with two bathrooms and then one bedroom, maybe two downstairs and a half bath downstairs. And so a couple of ways to look at it. So with $147,000 price point, if I’m buying it and putting 20% down, that’s about a $30,000 down payment that you would have to put down. But a four bedroom in that market’s probably going to rent for 1500, 1600. So

Henry:
Just alone,

Dave:
Just one of the units is a 1% rule is

Henry:
1% rule. So if I do nothing, I’m probably sitting pretty good mortgage payment’s going to be somewhere around eight 50 plus you got your expenses and whatnot. So you’re probably doing okay on the cashflow perspective with just the one unit. Now, if you go and spend 10 to $15,000, maybe less, depending on how much it’s really going to take you to get that work done to add a shower or a bathtub, and that downstairs bathroom, there is space down there that’s not accounted for in the square footage. So you’re able to turn that half bath into a full bath and then you’ve got a two one downstairs and you can get about $900 a month rent out of that. And then you’re really cooking with gas on the cashflow. So

Dave:
If you do that Henry one 50, it’s like 37 500. Exactly. I just did that on a calculator is the down payment. So you have basically double that so you have another 37,000 for your cash reserves, your down payment, and then given what Henry was saying, he doesn’t seen this deal. And so if he needs to go and actually put in 10 grand to it, he has plenty leftover.

Henry:
Absolutely. And then still have plenty leftover for reserves. The other thing I wanted to look for was a lot of these homes in this market are going to be older homes. It’s just the mix of properties that are around there. And so I didn’t want to get myself into a situation where I’ve got high CapEx in the next three to five years. And so I wanted something where there wasn’t a lot of the big ticket items that need maintenance. So I like that this property has a newer roof. I like that this property has newer siding. I like that this property has vinyl windows all the way around. So a lot of that big ticket stuff that can really eat into your cashflow is already taken care of.

Dave:
And especially we’ve on the three of us have talked about Great Lakes region. A lot of the housing stock is super old, and so trying to find places that do have some of these key upgrades can be challenging in certain markets. But it sounds like this one has some of those big CapEx items that are already handled for you.

Henry:
Yeah, man, I think this is a pretty safe ish investment that that it’s out of my comfort zone in terms of location and not having a team. I think you really got to be careful with some of those big ticket items on some of these older homes, but having something where that’s covered, plus it’s been remodeled inside as well, and cash flows as it sits, even if you don’t have to add the bathroom, all those are a win in my

Dave:
Book. I love it. I mean, it sounds like this would be right for an investor who wants to prioritize cashflow, who doesn’t want to do a lot of work, maybe a little bit like you said, you’d have to get in there and find out, but if you wanted to invest out of state, this is a pretty good place to do it. I like the idea of being between two major cities. I have always loved the idea of the satellite city philosophy. Like you go between or close to some big cities, there’s always overflow. They’re usually more affordable and over time they just grow. So I think this one is fundamentally sound and congratulations, man. I know this was a big moment for you looking at a deal, even pretending to look for a deal on market. It was like a big step for you.

Henry:
It was very uncomfortable. I’m still not quite great with it, but for my hypothetical $75,000, I can do it.

Ashley:
And Henry too, another thing with your deal is that it just sold in 2022 for a hundred thousand.

Henry:
So

Ashley:
If they do sell it at that 1 47, I mean, I don’t know how much work was done or what they put into it, but that’s some appreciation right there.

Henry:
Absolutely. Absolutely. I think it’s only going to get better there.

Dave:
It’s time for a break. Stick with us on the BiggerPockets Real Estate Podcast. All right, we’re back. Here’s more of our $75,000 on market challenge. Alright, well I’ll share with you my deal. So the way I went about this, I sort of took a data first approach. Shocking. I know. But basically what I did was I figured out I want to keep 5,000 bucks for cash reserves. I’m going to keep $5,000 for closing costs and just five grand for whatever, just make ready kind of costs. And so when you think about that, it comes out to a price point. You can afford something at about two hundred and sixty, two hundred seventy $5,000 if you’re going to put 25% down, which me as an out-of-state investor, I’m going to do that. And then I started going through some of the research and data sets that I have at BiggerPockets and I decided I would set an upper bound of the median home price at about $325,000.

Dave:
And if you’re wondering why I just said I could spend 2 75 and I’m looking for markets that have an average of 3 25, it’s because I’m going to buy something below the average. And I think that’s usually what I would try and do in these types of situations where you’re looking for cashflow or you’re looking for a value add opportunity. You don’t have to buy right at the middle. And if the median of a market is 3 25, it means there’s going to be half of the deals are going to be cheaper than that. So I wanted to open myself up for that. I went through and looked for a bunch of different markets that met sort just basic criteria for me, which are that price point. The population has to be growing, there has to be job growth, and I wanted to see something that had a reasonable chance of cashflow given the rent to price ratio. So I looked for something that was 0.6 or above and there was plenty of markets there. Just for everyone who’s thinking Henry, Ashley and I have cherry picked three markets. There was probably 70 that met those criteria. I don’t know if all of them would be great, but there were 70 that met my list. And from those I picked three markets that I would go and research. So the three I picked were Fayetteville, North Carolina. You guys know anything about that?

Dave:
I’ve heard it’s good. I think there’s a military base there. It’s a big military town. So I checked that out. Clarksville, Tennessee, didn’t know anything about that until I looked at it. And then Tulsa, Oklahoma.

Henry:
Good market.

Dave:
Yeah, so I looked first in Fayetteville. I liked the idea of North Carolina for some reason. There’s just a lot going on there, but I couldn’t find any deals there, even though on paper it made a lot of sense. There just wasn’t a lot of inventory in the type of properties I’d be looking for. And so I just want to caution, even though I talk about data all the time, that clearly doesn’t tell you everything. It just helps you narrow down potential areas to invest in. But in honestly, 10 minutes of looking around in the BiggerPockets deal finder, I just wasn’t getting a good vibe for the type of properties that I could afford there.

Ashley:
Dave, what were you looking for? Was it single family? Small multifamily

Dave:
Either. And the small multifamily was out of the price range. I couldn’t find anything for two 70. So then I started looking at single family homes and it was good, but the rents were just too low. So for a $200,000 property,

Henry:
1800,

Dave:
I was seeing rents at like 1200 bucks.

Henry:
Oh, works.

Dave:
Wow. Yeah, and even if you renovated ’em, you could maybe get ’em to 1500. So that just wasn’t passing the sniff test. So I moved on to Clarksville, Tennessee and sort of had the same thing there. Rents were even lower there. Clarksville does seem like an appreciation play, but my philosophy about out-of-State investing is to do what I call as a hybrid market where you at least get a little bit of cashflow and then you look for upside. And since both of those, I didn’t think I could get it. I moved on to Tulsa, Oklahoma, and I found a great deal within minutes. So what I found was a single family home. It is really close to the middle of Tulsa and I don’t know the market that well, but this is a super nice house, four bed, two bath, 1900 square feet recently renovated.

Dave:
Everything looks brand new. I think it’s vinyl playing flooring, but it looks super nice. The kitchen is really like an ideal kitchen. It has a nice two story layout. I would live in this house, it’s super nice and it’s on the market for just 210,000, so less than the national average. And the estimated rent for this is 2104, so it’s right almost exactly at the 1% rule. Now the one thing I learned about Oklahoma is that insurance costs are very expensive there. I looked at that because at one point was considering investing in Oklahoma City and the average insurance, there’s like seven grand a year. It’s crazy.

Ashley:
Oh

Dave:
My

Ashley:
God. Is that because of tornadoes or

Dave:
Maybe I don’t know anything about weather, but

Henry:
There’s not that many. There’s not that many.

Dave:
Yeah, right, exactly. Maybe you get a couple every few years and even when they come, they don’t do the damage on the scale of a wildfire or a hurricane. So I don’t know what’s going on there, but they’re super expensive. And even in Tulsa, insurance costs were six grand a year for a $200,000 house, which as a ratio is insane. But even with that, if I could get that 2100 bucks a month and I could pay 200 grand for it instead of two 10, and I don’t know if that’s possible, but it’s been sitting on the market for 45 days now, considerably longer than the average in that market. So suggesting it might be a little bit overpriced, I could get a cash on cash return of 5.6% on this, unlike a recently remodeled super nice deal that probably would have relatively low CapEx. I still put my normal CapEx in there and assume that I would need to put in considerable amount a maintenance at CapEx and still got 5.6% on this deal. So I thought this one was pretty encouraging.

Ashley:
I just Googled real quick the insurance thing and it says Oklahoma is named the most expensive state for insurance, and it said it was because of severe storms that have gone through as in billion dollar payouts that insurance companies are having to do. And just in the last year there was eight huge severe storms where insurance company had huge payouts and most other states have to deal with two a year or something like that.

Dave:
I wonder if that’s in Colorado. In Denver you wouldn’t expect it, but there’s really bad hail

Ashley:
And

Dave:
So insurance companies always buying new roofs for people essentially because the hail damage, which is something you don’t really think about in terms of weather, but it can be, I mean you can ask my car. It looks like a golf ball. It’s pretty bad. Hail.

Ashley:
So this looks like a house that it was flipped. It’s sold in 2023 for 87,000. Yeah.

Dave:
Yeah. This is a flip. And I have bought flipped homes before with mixed results, but so I would definitely want to go and get a good discussion with the person who flipped it and get a good inspection on there too. Sometimes people do the lipstick on a pig approach to flipping. Some people do good work. It depends who you get,

Ashley:
But the property taxes look really cheap.

Dave:
Yeah, Ashley, as you said, that really offset the price of the insurance, the taxes on this property for a year or 600 bucks. So when you look at insurance and tax together at 5,600 bucks, it’s still a lot for a $200,000 property, but it averages out to a much better number.

Henry:
Here’s some things I like about this property. It looks like they put all new windows in all the vinyl windows in the house, so that’s huge because this house looks like it has a lot of windows and that’s a big expense. The things I would look out for on a property this, that roof looks like it could be pretty old.

Dave:
Okay, yeah.

Henry:
So you may have a CapEx roof expense coming up in the next five years, and you got to get that tree away from that side of the house with the wind and the storms. You don’t want that laying on your house. And the siding looks like it’s still the original. They just painted it.

Dave:
Yeah, they put some of that cedar plank on the bottom before, but most of it’s original

Henry:
To cover up the asbestos, I’m sure.

Dave:
Yes. But I will say that with this price point, I set aside 15 grand for make ready costs, so maybe it wouldn’t buy a new roof and new siding, but hopefully one of those would be in good enough shape.

Ashley:
If you go to the Google Street view, you can see the before and it definitely is a huge difference.

Henry:
Boy, what the street view? Is that a good oh boy or bad? Oh boy. It looked like it could have been a tear down buddy. I checked that roof and that structure, so I checked the foundation in that one

Dave:
For sure. Oh yeah. Okay. Yeah, there’s a lot of plant life going on in the street view. Yeah, so I mean obviously we’re just looking at these things on market, but you would have to of course check these out a little bit more. I mean, some of the other houses on the street are actually pretty nice and manicured. It looks kind of like a mixed neighborhood. You would have to do some more research,

Ashley:
Which could be great for appreciation. It’s an area that’s turning over

Dave:
For sure. Yeah, and there are a couple, this one in street view is run down, but pride of ownership on some of the other places I’m seeing are pretty high. People have well maintained laws and nice houses, so couldn’t tell you for sure, but if you wanted to invest in Tulsa, you would hopefully do your due. But hopefully this has been helpful to all of you, just seeing that these kinds of deals are possible. Each of us, I know spent a little bit of time, but we’re able to find plausible deals in just a couple minutes with these parameters. If you’re going to invest, again, do more research than we did, but this was just a fun game to see if we could find on market deals that work. And I think the answer is yes. So Ashley Henry, thank you guys so much for this challenge. I appreciate you doing the homework and sharing what you found with us.

Ashley:
Dave, we really want to start having a winner at the end of the episode hearing. I put a lot of work into this homework

Dave:
And

Ashley:
Stuff, so for next time when you have us on a challenge, we need to have some definitive measurement to,

Dave:
Well, I competed too, so I think we all need to vote, but we just can’t vote for ourselves.

Ashley:
Okay.

Dave:
Ashley, who would you vote for? Me or Henry?

Ashley:
I’m going to vote for yours, Dave, because it’s a couple red flags in Henry’s was, it was five bed, three bath with only a thousand square feet. So I’m afraid some of that is not permitted. Will need to be ripped out. That was a red flag for me. Then also it went pending twice and fall out of

Dave:
Contract. Okay,

Ashley:
So I’m going to go with Dave’s deal.

Dave:
Henry, what’s yours? Would you vote for mine or Ashley’s? I would vote for Ashley’s. Okay.

Henry:
I think yours, the numbers pencil, but seeing that before, I would want to do those all, did inspection, check out that foundation in that roof. I think those could be big problems

Ashley:
Because it’s not a huge difference from what they bought it from to what they’re selling it for. So that would

Dave:
Make

Ashley:
Me a little cautious too with yours too.

Dave:
Yeah. It’s like, did you make no money on this or did you invest no money? Let’s guess which one they chose. Well, Ashley, I think you’re the winner. Although I love racing. I do think you’re just knowledge of your own market and knowing this neighborhood really well would make me feel like I wanted to invest in, if it were me investing in one of these deals, I would pick that. So Ashley,

Ashley:
I will put on my crown until next time.

Dave:
One point for you. We’ll have to keep a tally going forward if we keep doing these challenges, but next time I’m docking you, if you just keep saying Buffalo every time. Okay.

Ashley:
No. Or anywhere in the lake effect snow. I’ll be banned from doing anywhere in there.

Henry:
Yeah. Hey, you made me get out of my comfort zone. Next time we’re making her do it.

Dave:
Yeah, yeah, yeah. We’re going to just do a whole challenge about northwest Arkansas so Henry can get a point. Alright, well thank you so much for listening to this episode of the BiggerPockets podcast. We’ll see you in a couple of days, and if you like this episode, please make sure to share this with someone who you think would like it as well, or leave us a review on either Apple, Spotify, or YouTube. See you in a few days.