Mindy:
Today’s Finance Friday guest is hoping to retire by the age of 55, but will he be able to, given how much of his current portfolio is tied up in retirement accounts and three rental properties, let’s see what’s possible today. Hello, hello, hello and welcome to the BiggerPockets Money podcast. My name is Mindy Jensen and with me as always is my blueberry loving co-host, Scott Trench.

Scott:
Thanks, Mindy. Great to be here with a very good intro, BiggerPockets as a goal of creating 1 million millionaires. You’re in the right place if you want to get your financial house in order because we truly believe financial freedom is attainable for everyone, no matter when or where you’re starting. Today we’re going to discuss can Ethan retire in six to eight years? How does he know if he has enough saved? And how can Ethan unlock wealth from his current portfolio before he hits traditional retirement age?

Mindy:
This episode is brought to you by Connect, invest real estate investing simplified and within your reach. Now back to the show.

Scott:
Ethan, welcome to the BiggerPockets Money podcast. We are so excited to have you here today.

Ethan:
I’m happy to be here. Thanks for having me.

Scott:
Awesome. Would you mind maybe opening up with a quick overview of your money story to let us know how you got to the current position?

Ethan:
So I’m a 48-year-old tech entrepreneur, husband and father of two teenagers. When I was in college, it was a founder of a tech startup during the end of the dot-com boom. That company that I founded in college ended up getting acquired by the company I work at right now. So the majority of my career has been working in technology and working for a company where I’ve more or less been an executive leader. So that’s been the last 23 years roughly. Along that way I’ve also done some real estate investing. I did house hacking when I was right out of college. My first house, I had extra rooms in the house and so I rented those out to tenants up until the point in time I got married and then my wife didn’t think that that was such a smart idea for me to have random people living in the house when she was there as well. So that ended that piece.
So I also picked up a rental property from my grandparents when they needed to move into retirement housing. So I’ve fixed up that house that they built in 1966 and have been renting it out for the last 24 years roughly. In addition to that, I’ve been doing just sort of normal investments in the stock market every year, probably for about 10 years when I would get my tax refund back, I would invest that in a brokerage account in buying stocks of companies mostly that I knew what their reputations were from working in technology. And then I read a book, I think I may have gotten it off this podcast about creating wealth and I started investing on a monthly basis and sort of V-T-S-A-X following the standard index fund investing rather than trying to pick my stocks. So that sort of brings me to where we are today. We’ve been doing that. My wife and I both work full-time. The majority of our income comes from W2 income and we have three romo properties, two homes and a condo.

Scott:
And what is your, it looks like you have, based on the expenses we saw here, could you give us a preview of your kids and how old they are and what they like to do?

Ethan:
Yeah, so my wife and I, we have two beautiful young girls. Our oldest is a freshman in high school and our youngest is a seventh grader, so she’s in middle school. Both kids are swimmers, so extracurricular activities. I think that if I add up their expenses between childcare and the activities that they do, I think that that’s more than our mortgage.

Scott:
It is. I just added them all up for you. We’ll talk about that in a second here. Yeah. Well fantastic. Mindy, do you want to give a quick rundown of the numbers here and then I have a couple of places I’d love to ask some questions just to get more context around this as we dive into the plan and your goals here.

Mindy:
So I see a very poultry income of 34,354 a month. That’s not a year, that’s a month. So nice job doing well there. No suggestions for increasing that. I see expenses of $20,000 and at first glance I’m like how are you spending $20,000 a month? But then we’ve got a primary mortgage of 2300 again, awesome on that we’ve got in your expenses, I see savings, rental, mortgages, IRAs, rental expenses and investment accounts that I don’t really consider to be expenses. They might be money coming out of your pocket, but those aren’t traditionally expenses. So I take that out and I see a total of $14,000 for monthly expenses.

Ethan:
Ethan, do you do zero

Scott:
Based budgeting

Ethan:
In business? I’m used to just doing inflows and outflows. So my budget or what I use to share the numbers with you was just based off of looking at everything that leaves our checking accounts every month and that is an outflow. And then looking at the deposits that come in from as inflow. So that’s probably why it looks that way. I see all those things pet out, so I consider them part of the budget

Scott:
And I just wanted chime in with this here before Mindy gets to the asset section because there’s two important callouts here. One is $6,500 of that is really going to savings or investments. And another 7,300 which I want to get into is expenses that I do not believe you would have in traditional retirement in six to eight years. And I think that those are two really critical numbers for us to zero in on as the conversation goes through. And those include things like tuition for private school that will maybe get bigger when college comes around, but it is not something you have to plan your retirement around as a monthly outflow. Same thing with college savings accounts, swimming and piano childcare and a couple of two other categories in your car payments potentially for smart. So does that sound right in terms of the buckets of expenses and how I’m thinking about ’em?

Ethan:
It does, and I’m hoping that some of those go away and that’s sort of why the time period, my question about time period is marked there. That should be the point in time where both kids are in college and no longer, at least in high school.

Scott:
So we’ll definitely dive back into those.

Mindy:
We need to take a quick break, but more from Ethan and whether or not he’ll be able to retire and say goodbye to his W2 right after this. Welcome back to the show. So back to the beginning, we’ve got 2300 for primary mortgage, 2000 for savings, a thousand for private school, 2000 for rental mortgage number one, $1,300 for college savings accounts, 1500 for swimming and piano, 1300 for rental mortgage number two, 2000 for childcare, 900 for car 1, 6 50 for car number two, 600 groceries, 600 shopping $541 for IRA 1500 for entertainment and travel. We’re going to talk about that one too. $600 for auto and property insurance, $400 for utilities, 250 for rental expenses, 240 for gas, one fifty five for phone, internet and cable, two 50 for household maintenance, one 50 for church and 500 for an investment account. Some of those, like I said before, I don’t consider to be personal expenses. Those are business expenses, the business of your rental properties or your investments, and maybe we should have a discussion about that sometimes, Scott, about where the investments should go in your mindset because yeah, it is money coming out of your pocket, but it’s not really an expense. It’s like saving for the future. So when we pull out those expenses that I removed, we’ve got $6,500 out. So now instead of $20,000 of expenses, you’ve got $14,000 of expenses against a $34,000 income. I think you’re doing okay there.

Scott:
We still need to get to net worth, but while you’re pulling that up, I’ll just preview where my mind is immediately jumping. This could be wrong as we get into the conversation, but I think that planning for your early retirement revolves around first excluding the amount you invest from your expenses, you don’t need to plan on that. Second planning for all of these major line items, the, what is it? 1, 2, 3, 4, 5, 6, 7, the college savings account, the private school tuition, the swimming and piano lessons, the childcare and both car payments just going away after your kids graduate or begin going to college and pulling those out. And if I pull both of those out, you spend $6,800 a month and if you pull out your p and i on top of that, now you’re at how much.

Ethan:
Right? So on the primary mortgage, lemme make sure I’m looking at the right one. Yeah, the principal payment per month is $717 and the interest payment is $712.

Scott:
Okay, so 14. So now you’re at 5,300. The reason this is important is because I can back into how much you need to retire by pulling out those and saying, okay, your actual monthly expenses, if nothing changes in the next couple of years, inflation adjusted in today’s dollars is about $5,500 a month and the asset base needed to generate $5,500 a month in income is 5,500 times, 12 times 25 or $1.6 million. The asset base needed to sustain the $20,000 headline number for expenses is 4.2. After pulling out the 6,500 of non expenses, 13,000 you spend every month is 4.2 million. So we have a huge difference once we go through that exercise of unloading the pressure on your financial position to generate a position for early retirement. And I think that that leads really nicely into the net worth conversations of Mindy, could you maybe walk through some of the net worth numbers here?

Mindy:
I will, but first I want to say his rental properties bring in $6,021 a month. So what was that $5,500 amount, Scott?

Scott:
That was the total amount of expenses that Ethan would have on a monthly basis per this spreadsheet. If there was no principal and interest on the mortgage, if he just paid off his mortgage, if there was no private school tuition, if there’s no college savings that need to be done, if there’s no swimming or piano lessons that need to be paid, if there’s no childcare that needs to be paid and if there’s no car payments inside of the position and all of those should go away over the next eight years I believe. So hopefully that’s a comforting observation. Ethan, have you thought about that before in doing this exercise?

Ethan:
Yeah, I had not thought about the mortgage payment going away in the next eight years, so I’d like to hear about how that’s going to happen.

Scott:
That’s an asset allocation decision. We may not choose to do that, but that just says, okay, this is super achievable. The numbers support this right now in some ways and now we can be working around what’s the way to fine tune it and add in plenty of padding to make that as comfortable as possible. You do not necessarily need to pay off your 3% mortgage. I’m just saying that that’s an option we have and with the headline number of how do we generate 20 grand a month in expenses to help you retire is really hard. How do we help you generate 5,500 or $6,800 in income? Oh, way easier with where we’re at.

Mindy:
Well with 5,500 we just generate that with the 6,000 that he’s making out of the rental property and then we’ve got 521 leftover, the 6,800 that he might need. That’s a different story, but let’s go in and look at this net worth statement. So I see cash sitting at about $150,000 give or take. Why do you have so much money in cash?

Ethan:
I think that that was one of those books that I had read that said you should have three months worth of expenses or more on hand. So it started there and then it was just a habit. So we just continue to put money there and it grows and lately the interest on the savings accounts are pretty good, so that’s just been growing.

Mindy:
Okay, so 20 times three is 60 and this is 1 42, so you’re at six months plus actually you’re at seven months. How does that feel having seven months of expenses in your cash? What if you dropped it down to 60 or what if you dropped it down to six months? And that’s a thought conversation to have with your partner. But wait, there’s more. Not only do we have 150 in cash, 142 in cash, we have $921,000 in a 401k. Yay. Good job did it. Right? But I look at that and I’m like, oh, is he in the middle class trap where your net worth, the bulk of your net worth is in your primary residence and your retirement accounts? Nope. Again, 137 in a Roth IRA 509,000 in a brokerage account. I see rental property asset value of $913,000 mortgages against those properties of 313,000 to give you approximately 600,000 in equity. Your primary residence is worth $743,000 and your mortgage is 297,000. So I see some pretty good numbers here. My math shows a grand total of 2.7 in net worth, so 2.7 million and you’re making $34,000 a month. What do you want from me? What can I help you with today, Ethan?
Or does Scott kind of spoil everything by saying pull all these expenses out of your expenses and look, you’re already fine.

Scott:
Well, I think that’s the big issue. Well go ahead Ethan. How can we best help you? Am I on the right track or am I jumping to conclusions too quickly?

Ethan:
Well, I mean there’s one thing sort of theorizing that it is possible. There’s another thing getting to the brass tacks of it. So I would not assume that the current budget is exactly what a retirement budget would look like and I’m not even sure that I want to completely retire. My wife and I have used this term called pre retire very loosely, and I think our goal is to just be more free to travel and do other things as soon as our kids are in college and don’t need us on a day-to-day basis, but not necessarily without doing any. I thought about maybe doing some consulting. I’ve thought about maybe buying a business that I can operate on an absentee basis. I’ve thought about lots of different ways to do that because right now we go on a family vacation maybe once a year, but my wife and I have ideals of maybe traveling, I don’t know, a third of the year and that’s not inexpensive, although I think there are ways to do it to sort of minimize costs.
So I think some expenses potentially would increase, but I don’t think that they would increase to offset all of the child related expenses that exist. I’m not sure what college will mean in terms of the amount of money that we need to be able to come up with in order to pay for college. We live in Georgia and they have the Hope Scholarship and the LL Miller scholarship. So good students if they go to in-state schools essentially get free tuition. We’re encouraging our kids to continue to do well in school and potentially go to an in-state school. But my wife and I both went to private schools for college that were very expensive and I don’t think we’re in a position where we would shut that down if they got into a really good school and they really wanted to go there. And then I’ve got the blessing of having two girls and at least at this point in time, I think that they’ll both want to get married at some point and I have no idea how much we should be saving for that. It does concern me to have pretty large expenses that could pop up right around the same time that we were talking about sort of checking out from the nine to five.

Scott:
Well that’s great and yeah, we’ll have to plan around all those. I was jumping to conclusions, I apologize there. I just look at numbers and fine. Okay, great. We’ll reframe a couple of those things around this and go on that track. I did want to ask one other question real quick based on your questions. Are we missing an asset or maybe several things that could at least one important one in private company equity that could come into play and is there anything else like that, like a pension or anything else that we should be considering?

Ethan:
So no pensions, neither my current company nor my wife’s current company have pension plans. The company that acquired the business that I started in college has issued stock options to a number of the executive team members, but it is a private company as far as I know, there are no plans to take it public and there are currently no plans to actuate a sell of any sort, especially not necessarily on the timeframe that we’re talking about. So I don’t know how to think about that. There are options, so I would have to purchase them at the time of a transaction in order to net any sort of proceeds. But given all of that, I’m still struggling with how I should feel about sticking around longer or potentially working out something to where maybe I’m working part-time after that timeframe just so that I can continue to hold onto those options should there be a transaction to be part of. Can you give

Scott:
Us a little bit of a sense for if things continue to go the way they’re going, would this be worth a lot of money or a little, is there a way to get some directional sense of this in terms of a magnitude component? And for the record, I would value them as zero in your net worth, but if they’re likely to be worth something, I would not ignore that potential either and that statements of the obvious, but it’d be helpful to understand.

Ethan:
Yeah, I would say that the transaction value maybe the tens to hundreds of thousand, but not in the, I wouldn’t say it’s going to be 200, 300, 400 or $500,000 transaction value if there was a transaction given the current trajectory of the business. That being said, I guess that’s partially in my control. If we increase the value of the business, then obviously the value of those shares are

Scott:
Higher. So this is a boost, but we’re not talking about more than potentially 10 of your net worth in most likely scenarios for this. So something to consider and factor in have the back of our minds, but not the way you would plan your life around the realization of any of these things.

Mindy:
Stay tuned for one final break to hear what investment vehicles might be a good fit for Ethan’s goals and financial timeline right after this. Let’s jump back in with Ethan. So I want to comment on a couple of things you said. You said, I wouldn’t assume that the current budget will be the same as our retirement budget and I think this is a really smart way to think about it. I think there’s a lot of people who are like, well I spend 40,000 now that’s what I need to retire. I’m not even going to consider anything else and your expenses are going to be lumpy. Some months you are going to come in way under budget, but a lot of months are going to come over budget because your tire blows or it’s time to go to the dentist and oops, you have a cavity because you don’t floss. There’s all sorts of weird things that you can’t really plan for and assuming that your current budget will be the same forever is a mistake that I see a lot of people making. So I love that thought. You said you would potentially buy a small business. Would that be so that you are putting the money into it and then getting money back without having to work there? You’re hiring somebody to run the business for you

Ethan:
Or even as a partial, something that I can do remotely, something that I just need to keep an eye on versus something that I need. I don’t want to buy a job. That would be the last thing I want to do.

Mindy:
Stay in this current one if you’re just buying a job because this current one’s pretty sweet,

Ethan:
But one of the things that I’ve thought about is healthcare expenses. So I thought well maybe if we did have either if I was working part-time or we did have a company that the company could provide the health insurance benefits, especially in the first up until medicare ages or whatever. I don’t remember exactly what, I think it’s 65 that we qualify for that. So yeah, so if we retire or if we pre retire in our fifties, I’ve been doing some bit of research and it looks like healthcare expenses can be quite expensive.

Scott:
What do you think that they’ll be if you were to buy one exchange? For example?

Ethan:
The last bit of research that I looked at for my wife and I, and I don’t even know if I’m assuming I would continue to have to cover my kids as well since they’d be in college. So probably 1200 a month probably.

Scott:
Yeah, I think that’s a good estimate. Yeah, so definitely that would be a putback into my earlier math for sure. That’s going to have to go back in there, but I still think, actually lemme flip this. Do you agree with am I approaching the problem from a right standpoint of saying here are the expenses that are going on today. We have to figure out what you want to spend in this early retirement phase to some degree and the way that I’m trying to back into that number because absolutely essential to everything else that we’re trying to discuss is by cutting out all the things that we I possibly can from the budget and then we can layer back in 1200 bucks a month in healthcare, which that’s only going to be for four or five years, right at most. And that will begin going down as child one presumably gets a job and has their own healthcare and child two eventually phases out of that as well. And then saying, okay, we want more for travel, we want more for entertainment, we want more for all the fun stuff, but we want to basically get to the lowest possible number and then build it back up I think in order in constructing the portfolio here. That sound, do you like that approach?

Ethan:
I do. And there’s probably another spreadsheet I should have shared with you guys or I took a stab at that, but building it back up and including healthcare, if I don’t count the cost of the rental, like the mortgages on the rental properties conservatively, I came up with roughly double what you were talking about, so close to 10,000 a month. But that was assuming that we continued to have, we didn’t pay off our cars and we decided to get new cars and continued sort of that run rate. I’d rather be conservative about it and know that I can trim back things than to be too tight and then all of a sudden I’m asking for my job back.

Scott:
Well either way we’re pretty darn close. You’re at 2.7 million right now and to generate 120 k, reliably 10,000 a month, you need an asset base of about 3 million. So I think it’s about fine tuning it and giving as much margin of safety as we possibly can over the next six to eight years because you could just put it in cash and you’ll be way ahead in terms of the 4% rule for this, but that’s not what we got six years, let’s maximize the opportunity to the maximum possible extent. And then the way my brain works is I always like to put in as much margin of safety there because once you get close to that point in six to eight years, you want the biggest possible asset base. And I like to think about financial independence and I have a heavy bias towards moving away from the math at that point, the maximizing returns and to keeping the expenses as low as possible to reduce the amount of income that you need to realize and pay taxes on to support that lifestyle.
And that’s where the math of paying off the mortgage at the end of that might make sense to some degree. Mindy and I had a big debate about this a while back because you need so much more income or so much more assets to pay that it just gets a lot easier when that number goes from 10,000 to 8,500 in terms of what you need to pull from the portfolio. We’re not going to do that right now. You got eight years left, why would you pay off the mortgage right now when you have eight years of investment potential to earn in other areas. But when you get there, that might be a time where you say, I’m actually going to put this in the stock market and I’m going to reallocate to the mortgage at that point or in the last two years I’m going to put all the extra cash flows toward debt mortgage. That could be good fire math even though it will result in lower long-term net worth. Those are the things that are jumping into my mind. Ethan, what’s your comfort with the rental properties? Do you want to buy more or do you want to buy? What do you want to do from an investment standpoint?

Ethan:
I don’t mind buying more. As long as the properties are relatively low maintenance properties, I understand how to do that. I’m not afraid of having to talk to contractors or even doing some of the repairs myself. So that is certainly a possibility. At one point in time I thought that maybe we should, my wife and I talked about, well, maybe we should have 10 rentals and at that point that should be enough cashflow for a nice retirement. And then I also thought about, okay, well maybe at some point we decide to sell the rentals but we hold the notes instead of selling them outright and then use that as an income, as a retirement income rather than just taking all that as a lump sum and trying to invest it. So I’ve tried to think about multiple different ways and that’s where I get stuck just in the analysis paralysis of it

Scott:
All. How about this one? What feels better to you between these two approaches? One is taking on as much risk, you’re taking on more risk and driving the mathematically optimal approach for the next eight years or saying I’m going to get there by a huge margin no matter what or most likely no matter what with all of these buffers and spending that time de-risking the situation over the next eight years, would you rather go for more or would you rather go for safer?

Ethan:
I think that I’m probably leaning towards de-risking at this juncture tried and true things I’m willing to do, but taking on a bunch of, well, I guess it depends on what you mean by risk. If you’re talking about taking on mortgage loans against rental properties, I don’t consider that a bunch of risk, but I’m not sure about the risk profile of buying a company where there’s actually no assets and it’s all service delivery and then the people that are delivering the service decide that they want to go out and do something else and all of a sudden I’ve got an asset that I, I’ve bought myself a new job if I want to get my money back out of it. So what type of risks are you thinking about?

Scott:
Well, I think I was asking if you’re comfortable levering up on more rental properties or you want to put it all into stocks or if you want to just pay everything off and say I’m done, good and gone. I think you’re much more along the, I would like to take on a little bit more risk than that spectrum. Based on your response there, you’re thinking about buying a business, continuing to invest in not aggressive but levered real estate along these lines to continue building out the portfolio is what I’m hearing.

Ethan:
Yeah, I don’t mind doing those things and in six to eight years I don’t want to be sitting on the beach all the time. I like to have things to keep me busy. I think that’s healthy, but I want the freedom to be able to go places and do things and not say, well, I only get two weeks of vacation or three weeks of vacation because it’s tied to the normal job.

Mindy:
Have you thought about specifics with regards to what types of businesses you’re thinking about buying?

Ethan:
So I did evaluations in the last year or so on two different rental property businesses where people were trying to sell their portfolio of rental property assets that they were managing. Neither one of those penciled for me, like the risk was too high that either there was a lot of concentration with one owner in a bunch of properties versus or properties that seemed problematic and more of a headache than a true business. So I’ve looked at that, listened to a couple of your podcasts where you’ve had people on talking about the fact that there are a lot of boomers retiring and trying to offload their businesses. So I’m interested in that in concept. I’ve been running businesses, I’ve been running a business for the most part for the last 20 something years. So I think I understand how to operate a relatively simple business, but I just don’t want to get stuck actually doing more than operating it. Right.

Scott:
Ethan, what is your proclivity to buy this business while you’re working your current job? I had been upbringing on the assumption this would be after you left your job, but you just said you’ve reviewed two recently. Are you contemplating doing that sooner?

Ethan:
I’d be open to it as long as it was a situation where I thought absentee oversight was all I would need to do outside of transacting the purchase if I felt like I needed to be there air 10, 20 hours a week. That’s sort of a non-starter for me right now.

Scott:
I think what’s making this conversation so hard for me is you’re super rich, super competent and super successful in all these areas. And so you have all of these options in front of you. You provide what is clearly an awesome, you and your partner provide awesome life for your girls. They’re well set up. You’re thinking ahead for all of these things. You will have no trouble retiring. And these are just, it’s kind of around that what do you want question around it because you will get there regardless of which path you take, whether it’s rental property investing, you can buy ’em cash, you could buy, you can get to 10 properties in cash over the next eight years potentially with a number, maybe not 10 properties, but you can get to five properties paid off if you want to do it. You can get to 10 easily.
If you want to take on a couple more mortgages and notes there, you’re clearly skilled at managing these things. They’re producing great cashflow and performing really well. You told us about a home run deal before the show here on this. You can run a business, you could do that today. You’ve got clearly a great job in killing it at the current profession, having run a business for 20 years with some equity and some options there. And I think that’s why I’m struggling here to give direction is because all of those sound good and you should be successful with all of them as long as you remain conservative relative to your overall situation here. And so I guess that’s the question is what sounds more fun? What sounds like more you over the next couple of years? Is it just passively accumulated in assets and stocks? Is it building that rental property portfolio or is it running a business or is it doing all three? Because you can do all three in your situation.

Ethan:
Well, let me ask you this. Maybe you can provide some guidance on this. What are your thoughts on what puts me in a better tax advantaged position? So there’s that 0% interest credit card that I had to come out of pocket to pay more than $10,000 worth of taxes this past year. Every time I do that, it hurts because we’re paying taxes on our W2 income already and then they turn around and have to pay taxes after that. I’m all for paying my fair share, but I feel like I’m given blood when tax time comes around. So I’ve been contemplating positions that put us in a better tax position as part of the calculus.

Scott:
Well, I think that your tax problem is related to the fact that you’re in $412,000 a year. So I mean that’s a great problem to have. And so you just are going to pay tax on that. And that’s where, if we go back to what I was saying earlier, if you can chunk down those expenses that I just listed in a very meaningful way and max out the 401k, all those different types of things now you don’t need to realize, you have to realize $14,000 a month after tax right now to fuel your lifestyle. That is the biggest problem here. And you can do things that are tax efficient, but it’s going to be really hard as a W2 employee with the current portfolio that you set up here. So if you wanted to say, how do I get serious about reducing my tax bill? Well, I think that by the time you retire, if you only need to realize 5,500 in income, you may pay no tax at that point in time for your rental portfolio. We have on recently, Mindy, the guy, I think we titled the episode dude actually with withdrawals from his 401k early

Mindy:
Eric Cooper.

Scott:
Yeah, Eric Cooper. That guy has a couple properties, a handful of rental properties and a little bit of passive income and he generates $97,000 a year in cashflow. But his tax bill is his A GI is 24,000. So that’s something to think about when you’re planning around this is, and that’s why I always begin with the expense side because if you need to realize 10 grand a month to fuel your lifestyle, you’re going to need to think about how to do that efficiently. If you were to go down that route that you described earlier of buying a property management business and managing properties, you’d probably get licensed as a broker in the pursuit of that. And now you’re a real estate professional. Okay, now we’ve got something interesting going on there where there’s probably a world where there’s more rental properties in the picture and there’s maybe even some syndications that provide that passive, those passive losses. And because you’re a full-time business owner doing real estate related activities as a property manager now we’ve got something really fun to begin working with from a tax perspective. But I think that the fundamental problem with building a tax, and we can talk about this more, but I think you’re going to have a hard time realizing the 80 20 of those benefits with the current job set up, which is not really that big of a problem. It pays so well, but how’s that for a reaction? Any ideas that sparks to start thinking through?

Ethan:
Yeah, so maybe that is a good transition idea to actually do the property management business as a try to start building it up while I’m doing this where it doesn’t take a lot of effort and I have thought about becoming a real estate professional in order to change our ability to realize depreciation and other write-offs related to real estate. So I would lean towards that. I think that to me that feels like something that I know how to do and that is not a far departure from what we’re doing already and one of the rental properties is out of region already. I don’t have to be there in order for it to operate. So I feel comfortable with being out of the country for two months and only checking emails and placing phone calls to help manage that kind of stuff. So I think that that is possible.

Scott:
We talked about home equity a little bit. I touched on it. Best way to free it up is to remove the p and i payment. In my opinion, one of the best ways to free it up if you are going to stay put after they’ve gone to college is when it’s paid off. You no longer have to realize the income, so I won’t go back into that point. The other one is to sell it and the last option is to pull out a HELOC or refi it, which could be an option for you if you decide you want to go into the business world, but you’re going to lose your cushy mortgage with a low interest rate right now for something higher rate or at a higher rate, or you’re going to take out a pretty expensive variable rate on the heloc. So you need to have high conviction in that business, but that would allow you to have a lower cash position or not have to diversify away from other assets. Did you have a more specific question on the home equity piece?

Ethan:
Well, the home that we’re in is great right now that we have kids, we’ve got plenty of room and all that kind of stuff. We actually probably have more house than we need because when we first built it, we had family come in and visit all the time. So we wanted to make sure we had a place for everybody. But fortunately a lot of our families moved to this nearby us. So we don’t really have all that many out of town long-term visitors anymore. So we will likely downsize in the size of property once the kids are gone. That probably is not right when they go to college, it might be a little shocking, but in retirement I’d like to sell the current property and hopefully be able to buy the following property outright and not have to take a mortgage out on it.

Scott:
That’s it. I love that. That will make life way easier on a lot of fronts in terms of planning around your retirement expenses. So I think that’s a great plan. That’s the best way to use the home equity in my view.

Mindy:
So one thing to consider with regards to buying another, buying a business, do you think that you can make more money than you’re making now at your current job?

Ethan:
No, and I’m not looking to buy a business before the kids go to college to replace my current income. I would only be looking to buy a business that I could transition into managing on a fractional basis after they get into school, after they start college that is, and the property management, I’m wondering if it doesn’t even make sense to buy one. I’m wondering if it makes more sense to try to just slowly manage my own properties as a property management business and just grow into that and try to expand the portfolio rather than turning it into taking more risk and trying to buy a portfolio of assets that somebody else is managing.

Scott:
I think that the reps, so the question I think comes back to the tax strategy that you want to implement. And I think that when you get to there in practice and you leave your job in a couple of years and the kids are out of college and you have these lower expenses, you’ll find that this portfolio in seven years will double roughly, right? I mean there we put some takes, but that’s a rule of 72, right? It’ll double every 7.2 years. So good chance of that happening certainly could not around that, but that puts you at 5.4 million before we talk about all the additional cash flows that you invest over the next several years from the spread between your income and expenses right now, which will by the way, diminish the expenses will diminish naturally over that time. So you’ll actually be accumulating more and you probably get a raise or two, you might even realize there’s equity.
So I would peg your nominal net worth between six and 7 million by the time you make that decision at that point. And then it’s going to come down to how much do you want to spend on a regular basis and what’s the most tax efficient way to generate that amount of income. And if you want to spend a lot at that point, then I think we’re talking about, okay, how do I make money? How do I make active income from reps and how do I depreciate it with rental properties and play it all of those different types of games? But I think there’s also a good chance where you’ll find you don’t really need to change that much. Your real estate income at that point will naturally be very tax advantaged because it’s rental property income. And if you buy a few more of ’em lately, levered properties like you’ve been doing, you may find that you’re able to just like Eric Cooper generate close to a hundred K with a pretty low nominal a GI without having to do that business side project.
And that’s just a bonus. Then you can just say, okay, well I don’t really have to worry about the tax angle because the rental property income is already fairly passive and I’ve got enough in my 401k to easily type me over when I get to traditional retirement. And by the way, I’ve only got to bridge this for 10 years before we can start collecting social security. So I think that that’s a perspective. I don’t know, the doubling and the compounding nature are so fantastic now that you’re at this level of wealth that I don’t know, is that a fresh angle or a new way to think about it all? Yeah, no,

Ethan:
No, that’s actually very comforting. It means that essentially you stay on the existing path, let the assets grow, and then the part-time job is just managing the rental properties that we currently have and I don’t have to.

Scott:
Yeah, and it certainly could not happen that way. You definitely want to be conservative, but you already are conservative with all this stuff. But if that happens, that would be very historically average from a portfolio design standpoint. We’ll give you great options then. Yeah, you could buy that business, but it’s just because you like running the business and getting some more extra box money. It’s not because it’s really necessary to tide you over that world. I’ll have to figure out what the putback is for inflation adjustments. Yeah, so that’s definitely an angle to pursue on this. One other note, and this is, I’m just jumping around here a little bit here, and what do you think is reasonable for weddings? How do you even think about that? I have a daughter actually some news. We have another one on the way in April. So what is the number you should be thinking about on that front?

Ethan:
Well, congratulations on having another one on the way. And the short answer is I have no idea. I know with inflation it’s got to be more than double what my wife and I spent on our wedding. So my guess is a hundred thousand dollars.

Scott:
Okay, so 200 for two.

Ethan:
I don’t know Mindy’s Gawing there. I don’t know. Mindy, what do you think is a wedding budget?

Mindy:
Well, I dunno if you know this, but I’m a little frugal. My wedding budget was $5,000 and my parents gave me a check for $10,000 and said, however much you choose to spend on your wedding is however much you choose to spend on your wedding. And this is our contribution. So if you want to spend a hundred thousand dollars, you have to come up with the 90 and if you want to spend 5,000, then you get an extra 5,000 and that was their gift.

Ethan:
My wife is more frugal than I am, so that a hundred thousand dollars will likely get,

Mindy:
She’s going to listen to this and say what? Yeah,

Ethan:
But I don’t know. It’s one of those things where when it’s your kids, you want to do what you can. So I’d like to know that we could have, do I think that that’s a wise way to spend money to be out a hundred thousand dollars in a single day? No,

Scott:
I’m with Ethan mind. I think on this one though, I think what are you going to do in this situation? But bumping up against 3 million in net worth. Good job. Kids are almost out of the house. There’s not really a world where he’s going to leave his job in the near term unless he buys a business, in which case he going to keep working on that. Why wouldn’t you plan on $200,000 weddings in terms of the way you’re projecting out the model over the next couple of years? And then it probably won’t actually come to that. And then the way you do that I think, is you just build the net worth pile as large as possible in the context of your overall relatively conservative plan. And it’s there if you need it and you don’t have to spend it if that doesn’t happen. So I think in this situation I’d be doing the same thing. I have a lot of trouble saying no to the next applesauce for my 2-year-old. I don’t know how I would say no to a wedding if that was the dream 20 years from now. But we’ll see. We’ll see. Ethan, has this been helpful?

Ethan:
It has been helpful, I think so. I think you’re sort of talking through it and having somebody to confirm assumptions. I start looking at this and I’m like, okay, well maybe we’re almost there, but then again, maybe we’re not. So this helps to clarify that. And I think that the answer is yes, we’re almost there. Stay on the path. If some opportunities present themselves, so be it. But we don’t have to drastically change anything and we should be able to comfortably step back from at least full-time work in the next 68 years.

Scott:
I think a lot of people are struggling with the same questions you are, and it’s awesome because you have done such a good job here and it’s just about finishing the play over the next couple of years. And I think you’re thinking about all the right things. You got to pick an option, but you have no real bad options on this front. You can be successful with any of the three courses in stocks, real estate or business. And because you’re clearly skilled in all of those areas around them, around personal finance. So congratulations.

Ethan:
Thank you, thank you. And thanks for your time today. Thanks for walking through this with me. This is very good.

Mindy:
Thank you for sharing your story with us. I really appreciate it and I agree with everything Scott said. I think you’re doing fantastically and this is part of that slog that you’re like, well, am I there yet? Am I there yet? You could be if you changed a bunch of your spending, but you also have kids at home so you don’t have to change a bunch of your spending and I have every confidence that you will still get there. Alright, that was Ethan, and that was a really fun series of events. I really liked what Scott said about pulling out some of these expenses that you won’t have in retirement. And I was joking at the beginning. I’m like, oh, you’ve got all this money. What do you need me for? But actually this particular problem pops up a lot. You get in your head that you need X number of dollars for your retirement and it can be very easy to overlook the fact that you’re not going to have babysitters in retirement.
Most likely you’re not going to need to be paying for high school expenses and daycare expenses and all of these other expenses that you currently have. And I really appreciated that Scott pulled some of those other expenses out besides the ones that I had pulled out when I said, these rental property expenses are not your personal expenses, those should go through your business. But I really, really appreciate Ethan sharing his story today because while his outlook is fantastic, kind of changing your mindset and looking at things a little bit differently is absolutely the reason why we do shows like this. So we would love to talk to you as well. If you have a financial situation you would like us to comment on, please email [email protected] [email protected] and we will love to review your finances with you. That wraps up this episode of the BiggerPockets Money Podcast. He is Scott Trench and I am Mindy Jensen saying goodbye butterfly.

 

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

Tony:
And welcome to the podcast where every week, three times a week, we bring you the inspiration, motivation, and stories you need to hear to kickstart your investing journey. And today, guys, we’re diving back into the BiggerPockets forum to get your questions answered. Now guys, if you are a real estate rookie, or even if you’re not a rookie, the forms are the best place for you to quickly get all of your real estate investing questions answered by so many other real estate investing experts. Now today, we’re going to discuss how to grow your portfolio in 12 months or less. The best way to increase rents and an off market sourcing strategy that not enough people are taking advantage of. Now, before we jump in, we want to thank Corporate Direct. This episode is sponsored by Corporate Direct. We want you to 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 that we found this week in the forums is how do people buy multiple houses a year? I’m new to investing and was curious how people buy multiple houses in one year. With my VA home loan, I have to live in the house for a year before I move out. Would be cool if I could split the VA loan and buy two houses in the same year. So Tony and I have neither one of us are eligible to use a VA loan, but we do know a little bit about this. And yes, that’s correct. You have to live in a property for one year with your VA home loan in order to be eligible for the VA loan. The part of the reason they don’t let you split it and buy two houses in the same year is because this loan is supposed to be for your primary residence to give you a place to live and not supposed to be so that you can invest in rental properties or whatever it may be. So the purpose is not to have an investment even though a lot of people do decide that once they move out of the property in a year to turn it into a rental. So Tony, besides the VA home loan, what are some ideas that someone could use who’s purchasing a primary residence with a VA home loan as to how they could buy another house in the same year not using a VA loan?

Tony:
Yeah, I think I would probably ask a few follow-up questions first. I think everyone’s situation is going to be slightly different. So the person that asks this question, I guess, where do you feel your constraint? Is your constraint on the ability to get approved for the additional mortgages? Is your constraint on the capital that’s needed to fund the deals? Is your constraint on where is the constraint? Because there are some folks who have $300,000 to sitting and they want to go deploy that capital. Maybe you can buy two or three houses just by plop ’em down 20%. If you buy at the right price, maybe you’re in a situation where you took all of your cash and put it into that first deal. So now it’s the constraint. So I think the first question that I’d ask is, Hey, what is that constraint? So let’s just assume that you’ve got some capital and that it’s the debt that is the potential constraint first, and we’ll go to the cash piece afterwards.
But just because you got your first loan with the VA doesn’t mean that every loan has to be a va. There are so many different loan products that are out there, and every lender that you speak with probably has a different set of loan products than the next lender that you talk with. So I would say go out there, network with both local lenders in whatever market it is that you’re buying in network with national folks. If you know people who play at the national level, but talk to a lot of different lenders, explain your situation and see if they have a loan product that matches with what it is that you’re looking for.

Ashley:
Yeah, I think that’s a great point as to looking at the different loan options available. And you’ll have to understand your debt to income ratio too, as to can you even get approved for another type of loan too based on what your VA loan is and then how much income you’re bringing in, what that monthly payment compares to how much monthly income you’re coming in. So if you haven’t used your VA loan and you’re trying to plan this out, be strategic with it as to, okay, I want to use my VA loan for my primary residence, but I also want to go and to buy an investment property. Search the loan options available to you, figure out how much capital you would need, what is the debt to income requirement for that type of loan to make sure that you can balance it out. And maybe that means you’re not going to buy as big of a house or as much of a house with your VA loan so that your debt to income isn’t affected as much so that you can go out and get another loan product too.

Tony:
So guys, if you go to episode 127, Ash and I interviewed Angel Garcia who he’s actually active duty, but he’s leveraged his VA loan to help scale his portfolio. And he talked a lot about the nuances that come along with the VA loan and he’ll be able to do a much better job than Ash and I can so just go back to that episode 1 27 to hear from Angel. Now that’s the mortgage piece of that was the constraint for you, but say that the constraint was the actual cash. There’s a lot of different ways to get the cash that’s necessary to fund your deals. You can leverage your partnership. Ashley and I wrote the book for BiggerPockets on real estate partnerships, and you can have someone come in as an equity partner, you can have someone come in as a debt partner. There are different ways to leverage the capital that other people have to help fund your deals.
So if the cash is the issue, that’s the lowest hanging fruit. But then the other thing, and this kind of depends on what you do for your day job, but sometimes it would just put your pedal to the metal, put in a little bit more elbow grease and see if you can earn some more at your day job, right? Can you work overtime and get a 20% increase in what you typically make by working some overtime and take all that overtime capital and put that into your deal. Can you reduce some of your living expenses, right? Can you save on what you’re paying on rent or mortgage or it may be. So if cash is the issue, look at yourself personally. Are there ways to decrease expenses, increase income? And if not, or if you’ve maxed those things out, are there ways to go tap into the network of the folks that you know and access some of the capital that they have to fund that next deal?

Ashley:
Before we jump into our second question, rookies, we want to thank you so much for being here and listening to the podcast. As you may know, we air every episode of this podcast on YouTube as well as some original content like my new series, 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 at youtube.com/at realestate rookie and subscribe to our channel. Okay, welcome back, Tony. What’s our next question we got here?

Tony:
So the next question here is about buying a fourplex. So this says I’m closing on a fourplex in Bridgeport, all units are two beds, one baths, and the current rents are under market at $600 against a fair market rent of $1,200 plus. So a lot of opportunity here. That’s amazing. All of the other two beds in the neighborhoods are renting for 1200 plus. So I know it’s a fair price. I will be introducing myself as new landlord soon, and I’m nervous. I was thinking to increase rent by $200 over the course of three months to get to fair market price. They’re month to month and are free to leave, which is even better because I would like to renovate the place one unit at a time. Does anyone have experience handling raising rents that are under market rent? Love this. Now, I’ll point to one resource and Ash, obviously, I’ll let you take it from here.
You’ve got way more experience here than I do. But we did an episode with Dion McNeely, episode 463 where Dion talked about the binder strategy and it was a very, I think, unique way to approach rent increases from your tenants. And it was so effective that Dion’s tenants would literally tell him, here’s what I want you to raise my rent to, and he wouldn’t have to ask themselves. So episode 463, go check out the binder strategy with Dion McNeely. But for you, Ashley, you’ve inherited a lot of tenants, you’ve raised rents. What have you found to be the most effective way to do that?

Ashley:
Yeah, if I’d rather not do a turnover and I’d rather keep the tenants in place so that I don’t have to spend the money to go in and renovate right away when I close on the property, I usually do an increase. So I really like that that’s already an option they’re considering as to slowly increase it over several months. And I’ve had really good luck with that. I also like to show comparables as to if they did decide to move what’s even out there available at usually even a higher price than what I’m increasing the rent to. But if you would actually like them to leave, because then you could go ahead and renovate the place. Maybe you don’t want them all to leave at once, but then you’re kind of in a no lose situation. If they accept their increase, great, you’re getting what you want, or if they decide to leave, you’re going to get to renovate the unit.
So I think you got to look at it as this is a business and you’re nervous because you don’t want them to be upset, you don’t want to hurt someone, you don’t want to change their living circumstances, but also you have the bills to pay and this is an investment for your family, for your future too. So you have to get over the fact that you may be hurting them. They may not be nice to you when they realize that there is an increase, but you can’t be nervous about it. You just got to take that confrontation head on. And trust me, I am one person that does not like to have confrontation, and that’s why I usually do not introduce myself as the landlord. I kind of do all the behind the scenes stuff and a lot of communication is done through mail, email, text, so that I really don’t have to deal with that confrontation. So if that is something that you’re uncomfortable with, you can always handle it that way too. And then plus you have everything in writing, which I really like too.

Tony:
Yeah, and I think you touched on a big part there too, Ashton, which is you as a landlord, you bought this property as an investment, and it’s not like the person asked this question in a way that, Hey, fair market rents are 1200, but I want to charge ’em 2000, right? It’s just, hey, fair market rent is 1200, we’re at 50% of that. So I don’t think that as the owner, you should feel necessarily bad for trying to get them to where the rest of the market is spending. So just know we bought these as investments and you’re being fair with them.

Ashley:
And too, if they’re on month to month leases, they have to understand that that means in 30 days notice or whatever the state laws are like New York, if you’ve lived there for over a year, it’s 60 days notice if you’ve lived there for over two years, I think it is 90 days. So they have to understand that being on that month-to-month lease, there always is the option that at any time they could receive a rent increase or that they could be asked to leave the property with a non-renewal. So as much as people aren’t really educated about that, oftentimes as tenants, that is the way that it is. And you have to think about it as a business that even though this is someone’s home and their livelihood, you have the right for your family too to make the best decision based on you.

Tony:
Actually, let me ask, so just in terms of tenant communication in general, what have you found, at least during that initial conversation, as the best way to get off on the best possible footing, even if you’re not doing rent increases, but just in general, how do you make sure that when you inherit tenants that you’re really setting yourself up to have a productive and I guess as good of a relationship as you can with those tenants?

Ashley:
Yeah, one thing I’ve learned is to give them an option. So I always do what the rent increase would be, and so I give them that to sign the new lease agreement with the increase, or I send them the letter stating that we’re not going to renew their lease after this date. So I give them the rent increase with the new lease agreement stating what the increase is and when it’s effective, what the terms are. But then I also send them a non-renewal, so stating that if they don’t sign the new lease agreement, their lease is no longer and it’s going to be terminated, and this would be their move out date. So I recently had my first pushback on this, and the person called our admin that answers the phone for us, our va, and she said, this person is really upset. She said she’s on a fixed income and she can’t afford the increase.
So the increase was, I think $50. She was paying 500, it was increasing to five 50. Market rent still in that area is probably 6 50, 700 for that property. And I’ve had the same tenants in it since I’ve bought it. So it was not a large increase. And so I just had my VA respond back to her and just say, we understand, please let us know what you decide. So in it’s your decision, putting it back in them, you can move out, you can find somewhere else or you can accept it. And she ended up accepting it and she’s been paying. So I think, and that may go along with the binder strategy too, is making it their decision, even though that kind of sucks. You accept then rent increase or you have to move out, but at least you’re giving them options, I guess, and making it on them. But yeah, I mean, property taxes are increasing, insurance is increasing, the water bills are increasing, which we do pay for that property. So that is a large part of it too.

Tony:
You have to obviously balance the human component with the business aspect of this. And we’re real estate investors who purchase these properties in hopes to get a return, and that allows us to live, feed our families and put roofs over our heads. And so we’ve got to make sure that we’re bouncing both of those things. We’re going to take a quick break, but when we get back, our next question will be discussing an off-market strategy that most people are sleeping on.

Ashley:
Okay, so welcome back. And our last question is about an auction buying a property at auction. So this question states, I found a deal through auction. It’s a three bed, three bath, 1400 square foot house in Colorado, and the purchase price is 177,000. I wondered if anyone had purchased this way before, and what landmine should I be aware of? The first thing Tony, I think of is the 177,000. Is that the buy outright bid or is that the starting bid? That’s what I am unsure about in this question, but I think that we can go ahead and talk about the process of this. Have you ever bought a property at auction?

Tony:
I’ve never bought at auction. I’ve actually never even been to an auction, but we’ve interviewed quite a few guests that have, and I know you’ve been to one yourself before as well, Ashley. So yeah, good call out on the one seventy seven K if that’s the price you’re seeing. Typically that’s where things are starting and it’ll kind of go up from there.

Ashley:
So I’ve done online bidding and then I’ve gone in person. I’ve never actually bought, I think the website that we had used, it was actually a handyman of mine when I was managing an apartment complex. He wanted to buy his own property, fix it up, and we bid on auction.com on this property, and it was super dilapidated, needed a lot of work, but he ended up winning the auction on auction.com. But this was a really long process because it wasn’t meeting the minimum bid. So no matter what, it would start out, say at a hundred thousand, and then people would bid it up, but if it didn’t reach 150,000, they would just close the auction and nobody would get it. And then they’d list it again a week later and you’d have to go back and bid. And sometimes they would adjust what the minimum bid was that they actually needed, and finally he got it.
But you don’t get to go to the property. I mean, this property was vacant and we definitely walked around the outside. He might’ve shoved me into the window too. I can’t remember exactly to see the inside, but a lot of times you’re not getting access, especially if it’s an occupied home, because it’s probably going to auction because the bank owns it or there’s back taxes or whatever it may be, and it’s going to be your responsibility to evict the people that are living there because maybe there’s a tenant in place, or maybe it’s that people that actually used to own it before the bank or the county took it over and sold it at auction too, so you won’t be able to get inside of it. So I think that’s the biggest thing is how much access do you have to the property, especially as a rookie investor, not knowing a ton about purchasing properties, about the auction process, but also the rehab costs and what goes into doing a rehab by just looking at pictures if there’s even detailed pictures of there. But a lot of unexpected costs can come up when not being able to view the property or having someone view it for you. So that would kind of be my first thing.

Tony:
Yeah, I couldn’t agree more because when we talk actually about investors buying sight unseen or buying remotely, we always talk about, well, hey, you can mitigate that risk by having your realtor walkthrough and give you their perspective. Having a property inspection done and letting them in a very detailed manner, point out all the things big or small, that may be an issue with this property, having a contractor walk through and give you a bid and you lose out in some auctions. I know there are some auctions where you actually can get access depending on where it’s going, but to those where you can’t, it’s like you lose out on all that risk mitigation. So I think for me personally, if I’m a rookie and I’m doing this for the very first time, it would be difficult for me to have the confidence to jump into an auction property site unseen where I get zero access until I hold the keys, because you could end up having a property. What if I know I was just with an investor this weekend and they had to replace their main sewer line, and that is a big expense. So imagine if you buy a property at an auction and you’ve got to replace the main sewer line connecting to the city’s sewer system, massive, right? That could blow your whole budget. So I would be somewhat hesitant. I think jumping in as a very first time Ricky to buy something at auction.

Ashley:
Okay, so let’s say you can expect the worst that everything needs to be rehabbed into the property because you can’t get into it. You’re counting on a new furnace, a new hot water tank, and new drywall, new paint, everything. Then you have your contingencies for even more unexpected. Then maybe it makes sense that you don’t have to go into the property because you’re already have this huge rehab budget expecting the worst. But let’s just assume for this, you are able to get access to the property through the auction process, and now it’s actually time for the auction. So what are some things that you have to watch out for when going to auction? Tony? I think the first thing is is that you know what your maximum bid amount is and you stick to it, and you don’t go over that where your numbers do not work anymore.

Tony:
Most auctions, they’re going to want you to either have, I’ve seen some auctions where it’s a big deposit upfront, and then you’ve got to come with the entire amount within 48 hours or some, it’s like we talked with guests in the past before where it’s like, Hey, you’ve got to bring certified funds to the auction to even be able to get in. So totally agree, knowing what your upper and limit is and what kind of cash you can actually bring, because the last thing you want is you’re there at the auction, you give some kind of non-refundable earnest money deposit and they’re like, Hey, you need the whole balance tomorrow and you don’t have it. Well, now you’re scrambling, or maybe you just lost out on those funds.

Ashley:
And that is a huge deal too, is understanding the auction process. So what happens once you win the bid? What happens next? So I’ve seen typically it’s like a 30 day close where you have to actually bring cash, and maybe that’s even from a hard money lender or off your line of credit, whatever, but you can’t go and get approved for a loan and then pay for it with a loan. There are sometimes I’ve seen on auction websites where they do allow you to use some kind of loan product to purchase these properties, but a lot of times you have to have the cash within the 30 days or whatever that time period is, and you’re bringing certified funds to the auction. Or if you’re doing an online auction, you’re linking your credit card and you are paying that deposit by your credit card, which you get your credit card reward points.
So that’s a bonus, but you have to understand what that process looks like to make sure that you can actually meet that. In New York State, we have attorneys involved with every closing. So I think that is also a bonus as to you can go out and find an attorney that specializes in dealing with auction properties and closing on them. But as far as the title work, so New York State, my attorneys pretty much take care of that. They review all the title work for me and I’m pretty hands off. But Tony, in your experience, are there things that could happen with title for an auction property?

Tony:
Yeah, I’m trying to think through of what that process might look like. Again, I’ve never purchased anything at auction, even here in California, but I would assume that even through auction, we still would have to go through some kind of escrow and title company here as well to facilitate that transaction. And that title company still should be doing a search against that title to make sure it’s free and clear. I guess worst case, you could maybe just pay a title company yourself to go through that process. But I definitely would not purchase a property without having a clean and clear title and having title insurance. Actually, an investor, we both know he’s flipping a house, Derek Acuff on Instagram, but he told me about a property that he purchased where during the closing process, the title company missed that there was some previous lien, but because he had title insurance, it was the title insurance that kind of covered all of the legal expenses to get that title issue cleared up. So yeah, I would definitely make sure, especially purchasing at auction, clean and clear title and title insurance.

Ashley:
Yeah, I am actually closing on a property that I’m selling right now, and I got my closing statement. I went in to sign and I was getting a way larger check than I expected, and it was because neither attorney accounted for the lien that was on the property. And it’s actually a friend of ours that was a private money lender, and I can’t wait to tell him that. I always just got the walk away with everything. But yeah, so you want to make sure there’s no liens, no judgements, contractor’s liens. You can even go to county records too and do some kind of due diligence ahead of time before you actually offer on the property or make a bid to look up the properties. I also like to look up, you can look up owners too. So if you go to your county clerk database and you search the owner’s name, it will show you counties differ as to what they have available online, but any mortgage that was taken out by that person, any deed that was transferred into their name, any lien or judgment against them too is in there.
So you can kind of maybe piece those together to see if there is anything for that property out withstanding. Okay. Well, thank you guys so much for listening or watching. If you’re on YouTube to this episode of Real Estate Rookie Reply, if you have a question of your own, make sure to join BiggerPockets and you can post into the forums to ask a question or you can go in there and answer some questions. You’d be amazed at what you know just from listening to episodes like this. I’m Ashley. And he’s Tony, and we’ll see you guys next time on Real Estate Rookie.

 

 

Dave:
What is the most expensive eviction you’ve ever had to deal with

James:
Coming out of the pandemic? Actually I lost about $175,000.

Dave:
What?

Austin:
There’s an estimated 2.7 million evictions filed every single year.

Dave:
The question I get is, should I lower my standard for tenants? Hey everyone, it’s Dave. Welcome to today’s episode of On the Market. For this discussion, I am joined by my friend James Dainard. James, thanks for being here.

James:
Thanks for inviting me to this pleasant conversation. Dave. I mean, I’m excited to talk about evictions.

Dave:
Yeah, I mean, it’s not a pleasant conversation, but it is sort of just an unfortunate reality

Speaker 4:
For

Dave:
Real estate investors and it’s an unfortunate reality for tenants as well. No one wants to find themselves in this situation, but as of now, it’s still happens. And so I think the best that we could do as investors is figure out how to mitigate our risk of evictions and sort of minimize the impact that evictions have on our own investing and on the tenants that we’re working with.

James:
Yeah, it’s all about prevention. It’s no different than preventing property damage later. If you take preventive measures, proper screening, proper maintenance, your investment does better.

Dave:
Absolutely. And to sort of bolster our conversation here, we’re going to pair James’s tons of on the ground expertise with some research that our analysts at BiggerPockets here, Austin Wolff has done for us on eviction. He’s actually looked into and come up with specific numbers for what the average eviction costs for a property owner, for the tenant and for society as a whole. And I think these numbers are pretty eyeopening in the first place, but are also really helpful when deciding how to optimize and run your portfolio, how to price your properties, how to screen tenants, because once you have a dollars and cents figure that it could cost if you find yourself in a bad situation, it’s sort of at least I find it motivating to be more diligent on the front end and to take those preventative measures. Of course, after we talk to Austin about his research, James Austin and I are going to talk about some measures that you could take to prevent or mitigate these costs in the first place. So let’s bring on Austin. Austin, welcome back to On the Market. Thanks for being here again, happy to be here. This is great. You’ve been doing some amazing research for us and today of course we’re going to be talking about evictions and the broader cost of them for landlords, for tenants, for the broader economy and society. But I want to start with just some sort of grounding of this conversation. So James, I’m actually going to turn it to you. Can you give us some context around evictions? What is the most expensive eviction you’ve ever had to deal with?

James:
Yeah, evictions are not fun. Not only do they slow your deal down, you end up having to carry the property for a tremendous amount of time. But recently, the worst thing that I’ve dealt with with evictions, I’ve dealt with all different types of ’em, but coming out of the pandemic, actually I lost about $175,000. What on an apartment building that I had bought. This was a combination from the pandemic restrictions, but then also delays from the court since then. So I bought this property two months before the pandemic hit. It was a massive fixer 12 unit building. I bought it with hard money, so I’m paying 11% interest when I close on the thing. The plan was move everyone out, unsafe conditions in the building, no one should be living there anyways,

James:
40% of the tenants weren’t paying when I bought, so they were on their way out the door. It should have took us about three to four months to go through the eviction from there. But then pandemic hits, we don’t collect rent for over 13 months on this building. Oh my gosh. And hard money paying $15,000 a month. I think we’re collecting like 25% rent and I end up having to pay 70% of the tenants, five grand cash each just to leave and forgive them all their back rent to get them to strategically move them out. And I still have one tenant I’m going through right now that I’m now formally evicting. So it’s been over two years, two and a half years.

Dave:
Oh my

James:
Gosh. And I’m still getting her out and I have about another four months, and most recently she set the building on fire on accident.

Dave:
Oh my gosh. Wow. I think you’ve done some grounding for us there, James, in setting up what is hopefully the worst case scenario for a property owner there. Austin, maybe you could chime in, but I haven’t heard of a $200,000 eviction problem before. Hopefully that’s not the normal cost for property owners or for tenants,

James:
And the worst part is you can’t do anything during that time. You just got to kind cover the cash outlay, but it’s just long. It’s a long process and you got to kind of wither the storm. Now, good thing we bought value add and we’re still going to have equity in the building even with that negative 200. But yeah, enough fun.

Dave:
So hopefully we will talk about how to avoid these problems and then also how to lessen the sting when these unfortunate situations do come up. As you could see, they could be very costly on the property management side and we’ll get into the tenant side as well. So Austin, why don’t you tell us a little bit about how James’s story compares to the averages and what you’ve uncovered in your research?

Austin:
Yeah, James’s story is certainly I would say the upper bound of costs that one can expect to pay. It

James:
Sums up my life.

Austin:
Yeah, well, it’s such a great example of market choice and certain markets are more tenant friendly and certain markets are more landlord friendly. And throughout the research that I’ve done, there are legal fees, court costs, potentially share fees, but it seems on average by far the greatest costs that you’ll incur are the holding costs and then also potentially repair costs. There might be unfortunately damage to the property or you might just need to turn it over for the next tenant. So if we try to create an average across all markets, we are going to get a lower to middle bound of maybe two to three months of holding costs. Of course there are some markets where that’s going to be much larger.

Dave:
Okay, so let’s just define a couple of these terms. So when we’re talking about the monetary impact of an eviction for the property owner, we’re talking about like you said, what there’s court costs, there’s sheriff fees, so that’s what the actual process of eviction. You also mentioned repair costs or turnover costs when you actually regain control of the property and have to fix them. But you’ve mentioned holding costs and so holding costs, at least when I hear you say that, Austin, I assume that means the property is not generating revenue while this eviction process is going on, but as the property owner, you are continuing to pay things like your mortgage, you’re paying insurance, you’re paying taxes and other soft costs, operational expenses for your business, and for every month that the eviction goes on, those soft costs add up. Did I get all the variables there in terms of costs?

Austin:
Yes, that’s correct.

Dave:
Okay. And so it sounds like what you’re saying is that the biggest variable in how much an eviction costs is how long the eviction process takes.

Austin:
That’s what the research leads me to believe. I would love to hear James’s opinion on that as well.

Dave:
Well, James, I want to ask you in a second, but Austin, when you did your research, what is the range? What’s the short end in a market for how long an eviction might take versus a really long and drawn out process?

Austin:
Yes, there are certain states that are very landlord friendly. The process might take maybe three weeks at most to evict a tenant and again, in certain markets. And so I would potentially say that that would be a one month holding cost, but then you also have to market the property and get a new tenant in there as well. So maybe it’s one month to evict and then another month for I guess turnover. So I would want to combine those and say maybe two months might be maybe the lower bound of the amount of months that you’re going to be holding this property and incurring those costs.

Dave:
That could be very expensive depending on the market. That could be a couple thousand bucks, maybe up to $10,000 depending on how much rent you’re generating on one of these properties. So super high even on the low end. James, I’m curious for you, because it sounds like this story you shared with us at the beginning was a combination of tenant friendly laws, but also the unique circumstances of the pandemic plus backlogs and all these things. What is the process supposed to look like in Seattle where if you don’t know is where James invest?

James:
Yeah, so what it’s supposed to look like and what happens is completely different. In Seattle, it’s funny, if you actually research, how long does it take to evict someone in the city of Seattle, they’re going to come up and you’re going to say, well, you’re going to serve them with a 10 day notice where you’re giving ’em a 10 day notice on the door saying pay or vacate. Then it goes into a 14 day notice, then you file for eviction, you schedule through, and typically it should be about 45 day-ish.

Dave:
If

James:
Everything was going perfect,

Dave:
That doesn’t sound that bad. I mean it’s not great, but it’s not as bad as the nightmare you just shared with us.

James:
No, the issue being is once you file for eviction, you have to get a court date, and the court date sometimes can be up to a year out one year. And so you are waiting for that whole period of time to get in to see the judge so you can get this eviction pushed through. And if a tenant, depending on the market that you’re in, in these west coast cities, some of these other cities, the tenants know what their rights are and what they aren’t and they know how to drag this out. And the longer it is dragged out, the more expensive it is. In Seattle, my average unit is $2,500 a month and I’m losing 10 months of income. That’s $25,000.

Dave:
Is that your actual average 10 months of income?

James:
Typically it’s going to take me over 10 months to get the whole eviction done from the first, no, depending on the jurisdiction in the city. And each city is so different. Every state is not the same because city Seattle, it’s a lot different. Depends on time of year now too. What time of year is it is cold, you can’t evict anyone or ask someone to move if it’s cold, god forbid. And so now there’s all these extra restrictions that delay the process and that delays can hurt. And so it’s all about being preventative. That’s why I offered to pay people to leave from that bad building I had every month that went by was costing me $2,000 a unit per tenant that wasn’t paying. So giving them five grand now was a steal for me because it’s the whole cost. It’s not the cost of the attorneys, it’s not the cost of the fees, it’s not the cost of it’s how long do you have to hold it.

Dave:
Yeah. Okay. Well thank you for sharing that. That makes a lot of sense. So it sounds like the national, I’m just going to use round numbers, but the national rent somewhere around like 1500 bucks right now. Let’s just say that. So Austin, if it takes let’s say two months of vacancies, so it’s three grand in expenses plus all these other fees. So it sounds like four grand on the low end might be about right.

Austin:
Yeah, I’d be confident in saying four grand is probably the lower bound that one can expect.

Dave:
Wow, that’s super expensive. And I mean James just told us that 200 grand is the high end, but let’s just talk about a single unit that was 12 units. So Austin, what would you consider the high end of the range?

Austin:
High end of the range. Again, if we’re factoring in the markets where they have landlord friendly laws, I would say that we might be looking at maybe 8,000 for one unit. And again, that’s sort of like the higher range. It’s not an outlier so to speak. In James’s case,

James:
I run into outliers too much. I had one single unit also during the same period cost me over $60,000. A single unit. Single unit. Wow. Oh my god. And these are nightmares. This is not typical throughout the pandemic, throughout conception of us having units, we run like 94, 90 5% collection rate or higher. And so those are the nightmare weird stories. But yes, over 60 grand on one single family house.

Dave:
We do now have to take a quick break, but when we come back we get even deeper into how these numbers add up and not just for landlords but for the economy as a whole. So stick with us. Welcome back investors. I’m here with James Dard and Austin Wolf talking about the true cost of eviction. Let’s jump back in, we’ll come back to this a little bit later in the show. But James, I do just want to ask, is this something you then put in your underwriting when you’re considering deals? Do you assume for a larger property that you’re going to have to evict a certain number of tenants?

James:
No, because if you put out the right product and you target the right neighborhoods, we have very little issues collecting rents. It’s when you do, that’s where it becomes this kind of nightmare situation. Like the one also that I lost 60 grand on, I underwrote that in because when I bought the property, I knew I was taking on this tenant situation. And so luckily I offered at least a hundred grand less so even though I lost the 60, we did build it into our underwriting. We were expecting to sit on that house for being vacant for at least 10 to 12 months.

Dave:
So Austin, you said somewhere between four and eight grand is our range. So would it be safe to say six grand is the average cost you came up with?

Austin:
I think that’d be fine to say.

Dave:
Okay. So super expensive here. $6,000 on a single unit could make or break a year, maybe more than one year depending on the type of deal that you’re looking at. So obviously something you want to avoid as a property manager. And again, we’ll get to some preventative measures that you can take in just a few minutes. But I do want to turn to the other part of your research, Austin, which is that of course this situation and eviction is obviously a really bad situation for tenants as well. No one wants to be in that situation. So can you tell us a little bit about what the costs are for a tenant that gets evicted?

Austin:
Yes. Now if they have put down a security deposit and they are being evicted, they’re likely not going to get that security deposit back. So one can say that that might be a cost to the tenant. They might also incur moving costs. And according to Angie, which is previously known as Angie’s List, the cost of moving a rental unit, an average can be between $400 and maybe up to $3,000. I would say that maybe 1500 is a good number to use for total moving costs. On average, of course it might be lower than that depending on how much furniture you have and how far you’re going to move. And as far as calculating a range that a tenant might financially incur, as far as cost goes, I think depends on if we’re counting the security deposit and if we’re counting moving costs as well. Let’s say they’re just paying a thousand dollars on the lower end and they incur $400 moving costs on the lower end, then the lower end of the cost that they might incur might be 1400. And then if we go on the higher, higher end, maybe five grand depending on security deposit and moving costs. This is a point that someone brought up in the forums on BiggerPockets. This is if we don’t calculate the gain that they’re getting from not paying rent. So

Dave:
That’s interesting.

Austin:
Yeah, if we factor that out, those are the costs they’re sort of maybe coming out of pocket to pay.

Dave:
Okay. So just to make sure I understand, let’s just use an imaginary scenario where a tenant falls behind on rent for let’s say three months. So at the end of that eviction process, they might incur the cost that you just outlined here, a couple thousand dollars, but presumably they didn’t spend money for three months because they were falling behind on rent. So you need to factor that in as well. That makes a lot of sense. I actually read this book called Evicted by Matthew Desmond. I don’t know if you guys have heard this book, but it paints a very interesting just picture of the situations and sort of the really unfortunate situation for tenants and landlords alike when these things happen. And there are a lot of harder to quantify elements to tenant for landlords too, but for tenants like mental health, physical health, credit score, those things kind of add up in the process. Did you uncover anything there as well, Austin?

Austin:
Yes, there was a study published in 2022 in the Preventative Medicine Reports journal that did correlate evictions with a decrease in mental health unfortunately.

Dave:
Interesting. Yeah, and one of the things that sort of struck me about this book was that how these situations really compound for tenants and it can create this really unfortunate cycle where you fall behind on rent, you get evicted, your credit score gets lower, and so next time you go to rent to cover risk, landlords usually charge more or charge a higher deposit for people who have a poor credit score because they’re considered riskier, that makes it more expensive for the tenant, more likely for them to probably fall behind on rent again. And it creates this sort of negative feedback loop. So obviously as real estate investors, we look at the situation and it’s a huge disruption. It’s frustrating to cost to our business, but there is also sort of a human cost on the other side of it that we should recognize as well.

James:
Oh yeah, it will wear you down. Anybody involved if they’re on the short end of the stick, it is brutal. I mean you have to almost just come to terms with that. You can’t think about it. You just got to keep moving forward because it will suck the life at

Dave:
You. Yeah, it is a tough situation. And so it looks like Austin, based on what you were saying, the costs for landlords around five grand, if we factor in the saved rent with your estimates of the hard costs for a tenant, what would you estimate the average cost for a tenant to be?

Austin:
If we’re going to factor in saved rent, it might’ve been a net gain for the tenant overall. If they’re not paying housing costs.

Dave:
Interesting.

Austin:
But if we don’t factor that in and we’re just going to discuss the actual hard costs that they’re paying, I would say might just be $400 on the lower end. If we’re not factoring loss of security deposit as well, if we’re just factoring moving costs, it might just be $400 on the absolute lowest end, higher end, maybe $3,000 if we’re factoring in security deposit and moving costs as well.

Dave:
Alright. So yeah, really depends on the individual situation there. Given who the tenant is. One thing as a, I don’t know if I’m an economist, but I look at the economy a lot. I’m curious about is what are some of the other factors that impact the economy here? Because I think the easy thing for us to understand is through are these hard costs to tenants and for property owners, but a lot of times these types of situations that are disruptive to multiple parties can have these sort of other impacts on the broader economy or society. So I’m curious, Austin, what you uncovered there.

Austin:
Yeah, it can be hard to exactly correlate evictions with the downstream effects such as, okay, if a tenant has to move and they need to find a place, maybe they move in with a family member in the meantime and they might open up a self storage unit and maybe that sort of increases demand for local storage units in that area depending on how many evictions are happening and if tenants need to actually store their things in the meantime, there could be potential, a loss of property for the tenant if they don’t claim it, or God forbid they can’t afford to move their property, they might abandon it. So that could be a potential loss as well. And then there’s also damage to the credit score to the tenant, which can affect their ability to pay for things using credit cards or ticket loans or even potentially get a new lease. So this is one of those areas that is particularly hard to quantify the downstream effects, but they do appear to be present.

James:
And I think one of the biggest costs, at least for an investor side, that hitting cost that people don’t really think about. I mean there’s your standard, you hire an attorney, you post your notices, you go through your court docs, typically on average that’s going to cost us, I would say attorney fees like two to three grand in that range with postings. And then there’s the loss of rent. Well, it’s how many days is it delayed or how many months are you not getting paid rent times that by your income? So that’s easy to quantify too, but it’s the other things that can really screw up your investing. Even that property I bought with hard money, well that required me to lock up 20% down for a two year period where I’m feeding my investment every month. There is no gain happening at that point.

James:
As investors, we make money by velocity of money, how quickly can we put it out, rack return, bring it back in. So then instead in that scenario of me purchasing that property, rehabbing it like a burr and refinancing and getting my cash back, I thought I was going to have my whole down payment or a majority back within a six to eight month period, then it turned into two years. That can be detrimental for the return. And a lot of investors do buy with bad tenants or delayed tenants or tenants in eviction, but you have to factor these numbers in and you have to make ’em big because when you take a timeline from nine months to 24 months, your return just false. It drops dramatically. And so the cost of money is one of the biggest things. It prevents growth, it locks up cash and you cannot go buy something else and start growing. And that’s one of I think the biggest costs on investors is when your money’s sitting dead, you are not growing.

Dave:
Yeah. So that’s a great point, James. I think that’s super important to remember that it’s hurting you and that’s money that you could be putting into another deal to upgrading a different apartment. It just slows down everything. It just limits your resources and ties you up. And I’m sure the same thing is true on the tenant side. You could be putting that money that you are losing or using during the eviction process into small businesses or into community or are spending it elsewhere. Alright, time for one last quick break, but we won’t leave you without giving you strategies for preventing these costs in the first place. We’ll be back with that and more hidden costs on the other side of the break.

Dave:
Hey friends, welcome back to on the market. So it seems Austin, you have quantified for us what I think most people know instinctively is true, which is that evictions are really bad situations for landlords, they’re bad situations for tenants, they’re bad situations for the economy. So how do we avoid this? Do you have any recommendations you’ve uncovered that help stave off these situations in the first place? As James said, once you’re in it, it’s kind of just a really bad situation that you have to get through. To me, it seems like the way to avoid these costs are to not have a misalignment between a tenant and a property manager or property owner in the first place.

Austin:
Yeah, that’s a great question. I would say that this is particularly what I would say common industry knowledge when it comes to renting out to tenants properly, screen them, make sure you have minimum requirements, make sure that their income is a multiple of the rent three x the rent is one common metric that many people use a minimum credit score. I’ve seen six 50, I’ve seen 700 as a minimum here in Fayetteville, Arkansas. The absolute maximum minimum that you can check for is 6 25. You can’t actually make it higher than that for a minimum credit score. So it really depends on the area. And then one thing that you might want to do as well, if you can in your market is ask for references and hopefully try to contact previous landlords, make sure that the tenant understands the lease agreement and hopefully you have an excellent property manager as well. Yeah.

Dave:
James, what about you? In your years of experience doing this, how do you prevent evictions from happening in the first place?

James:
We’re in Seattle and there’s a lot of nightmare squatter stories, eviction stories, and yes, when it does happen, it is expensive. But how do you prevent that? Well, one thing that we’ve learned is if we are delivering a very renovated, nice product to the market, it doesn’t matter what price point, it doesn’t have to be expensive, it just the quality of building really matters and who you’re attracting as a tenant. Because if you have a place that you can provide that is high quality standard and that’s where people want to live, you’re going to get the better applications. So for us, by renovating and delivering that product, we’re getting the right people that apply. It’s also the target demographic that we’re shooting for. Most of our units are in downtown Seattle where we are offering a nice place to live, fully renovated. And it attracts a lot of working professionals in tech because we’re a renovated apartment building coming to unit rather than a new construction.

James:
So our rent costs typically, or what we’re offering are units for rent are about a dollar a foot cheaper than new construction if not more. And so we’re kind of attracting the entry level tech employees and because we have a nice place to live, we are not the most expensive and we take care of our building. People make their payments. I thought the pandemic was going to be detrimental. And again, we had like 92% collection rate during that time during the pandemic, and that included the buildings we had just bought and those were the ones that were really dragging us down. And so if you’re an investor that is constantly running into eviction issues, it might be what you’re offering offer a good place to live and you’ll get good people applying.

Dave:
Yeah, that’s good advice. I get this question a lot and actually one of the reasons we wanted to do this episode is things are slowing down. It’s not as competitive as it was, and at least in some of my experiences, it’s a little bit harder to find tenants right now than it was during the pandemic when it was super busy. And so the question I get is, should I lower my standard for tenants? Is it okay to get someone with a lower credit score or doesn’t meet that three to one ratio and well, I have my own opinion about it, but James, I’m curious what your opinion is before I tell you mine, if you’re looking for a new tenant and let’s say it’s sitting vacant for a month, would you lower your criteria for a tenant or allow the property potentially sit vacant for another month?

James:
I would let it sit vacant for another month. Right now I’m actually going through the exact same thing where I’m having an issue renting a property, and this is for a rent price that I achieved three years ago. So that’s a little for me. I would think it should be higher, right? It should have standard appreciation. And so instead of dropping it because my property manager suggested me to drop it, I said, no thanks. We’re taking the time to add some extra amenities and repairs to it to make sure that we can still attract that really good tenant. It’s not worth the money. You will spend more money sacrificing your requirements, then you will just hang it in there and keeping that rent and where it should be.

Dave:
Well, that’s sort of backed up by what your research shows Austin, because usually if you have the unfortunate situation of an eviction, it could cost you two, three, maybe even four times your monthly income rather than just the one additional month that you would get from another month vacancy, I guess.

Austin:
Yeah, it appears tenant selection is arguably one of the more important things in this whole process to preventing it

Dave:
For sure. Yeah, it makes sense. And I think that it’s important to remember the cost to the tenants as well, that if you’re putting a tenant and accepting a tenant into an apartment that they’re not, or a unit that they’re not likely to be able to afford or might stretch them, that’s not necessarily helpful because it might wind up in this even worse situation where they fall behind on rents, which is obviously not good for anyone as we’ve been talking about.

James:
And that’s why it’s so important for everyone to do their research on what the rental rules and regulations are for the markets that you’re investing in. A lot of people look for the analytics, they look for the growth, but also what is the process like right now? City of Seattle in the past 24 months has passed so many different regulations on even what you can require to ask about your tenant, potential tenant and that you in city of Seattle, the first qualified tenant that hits every one of your check boxes, you must rent to them.

Speaker 4:
You

James:
Can’t go, Hey, I got these five and out of the five, they’re all great and I like this one best. You can’t actually pick your own tenant if they hit all of your requirements. They’re the first one to apply. You have to rent to ’em. It is just so important for everyone to always research the new market that you’re going into. I just moved down to Arizona, I’m researching what is the application process, what is the eviction issues and what is the process for that? What does that cost? Because you do have to work that into your performa and also just how you’re running your business. If you’re a mom and pops operator and you’re picking the tenant and you’re not supposed to be like in Seattle, if you’re like, oh, I like this person better, so I’m going to go with them, which should be a natural, in my opinion, a natural right to do whatever you want with your own house. But you need to know these things because if you do ’em wrong, it can be expensive. You can get sued and it can delay things and you might get tenants that you really didn’t really want in your property in the first place. And so look at the regulations and the requirements as much as the metrics behind them.

Dave:
Yeah, that’s a great point actually brought me to my last question I wanted to ask you here, James, is what do you do when you’re inheriting tenants? I’ve been fortunate in that I’ve only ever had one eviction in my portfolio in 15 years and it was an inherited tenant. And I look back on that situation and I don’t really know what I could have done differently except maybe underwrite or set some money aside for a potential eviction when you’re taking over, especially a multi-unit. Do you have any advice on that?

James:
Yeah, so we buy a lot of tenants. I mean, that’s how we get a lot of goodbyes. I mean, for anybody looking for multifamily buildings right now with the cost of money and the cost of repairs, if tenants are not paying their rent, it’s a non-performing asset. And actually that’s probably the biggest value add that we’re getting offered right now. Some investors, some syndicator bought the property, it’s not performing. Property management is out of control. They’re going through a bunch of evictions, it’s taking forever. And they did not realize that it was going to happen in our market. They’re usually out of state investors, they’re dumping ’em off to us. And so how do we prepare for that? Well, we either underwrite cash for keys where we might even put in upwards towards $10,000 as our budget going. Hey, if we put $10,000 into factor for the cost of the eviction to move out or cash for keys, if let’s say we’re buying a 12 unit building, well that’s 120,000 that we’re putting aside. And then the first thing we do isn’t push the eviction forward or try to save the money. We go offer the money like, Hey, because if I go to you Dave, and you’re paying me $2,200 a month or was and now you’re not paying me. And they go, Hey look, I just bought this building. How about we break up? Here’s $10,000 if you can move out by the end of the month

James:
Because we’d rather overpay them and get them moving out. But yes, so typically we’re putting at least six months of rent inside of our proforma as a cash out of pocket expense. And as long as we cover that expense and we adjust for the timelines, you can still make the deals pencil up.

Dave:
Alright, well this has been super helpful for both of you. I appreciated, and hopefully everyone here just understands that this situation is rough for everyone involved and hopefully by knowing the true expense and costs and how impactful, negatively impactful it can be on your business, that everyone should be motivated to try and avoid these situations. Austin, do you have any other last thoughts from your research before we get out of here?

Austin:
One thing that I just wanted to bring up was the total impact on the economy. If we sort of sum the costs that the landlord incurs and the costs that the tenant incurs, we just sum them up together, bundle them together. If we take say an average of five grand costs to the landlord and maybe we just say that we’re doing the lower bound on the tenant of $400, okay, we have a total cost between the landlord and the tenant on average $5,400. Well, there was a study that was released recently that said that there’s an estimated 2.7 million evictions filed every single year. So if we multiply 2.7 million by let’s say the average of 5,400 total cost between landlord and tenant, that gets us an estimated minimum negative impact of about 14 and a half billion dollars on the economy each year. Oh my God. And that’s a minimum, that’s a lower bound. So it really does suck for everybody when this occurs. So I do think to your guys’ points that screening for tenants and making sure that you have the right people in your property is the most ideal situation.

Dave:
Alright, well thank you both for talking about this interesting and unfortunate side of our industry, but bringing this stuff to light hopefully will help everyone make better decisions to optimize your own portfolio and fine tenants that are good match for the product that you’re offering as James and Austin have recommended. We do. Thank you both and thank you all so much for listening to this episode of On The Market. We’ll Be Back in a Few Days On The Market was created by me, Dave Meyer and Kaylin Bennett. The show is produced by Kaylin Bennett, with editing by Exodus Media. Copywriting is by Calico content and we want to extend a big thank you to everyone at BiggerPockets for making this show possible.

In This Article

The possibility of a recession has been mulled over ad nauseam by seemingly every economist and finance expert over the past couple of years. Hard landing, soft landing—how about a no-landing?

It looks like there is a real possibility this could be in store for the economy in the immediate future. What would this third scenario mean for real estate investors, and should we worry about it?

The Shifting Economic Narrative

Pessimism dominated predictions up until the latter half of 2023 when it became obvious that the U.S. economy was more resilient post-pandemic than it had seemed. The narrative from then onwards—and up to as recently as last week—was that a “soft landing” awaited the economy at some point in 2024. 

The reality is that 2024 is drawing to a close, and the outcome is that there isn’t a clear outcome. 

Yes, disaster appears to have been averted, and a deep recession is nowhere on the horizon: The economy is still growing, albeit slowly, and there is no mass unemployment. And yet inflation, although well below the 3.2% rate of a year ago, is still above the Federal Reserve’s target rate of under 2%. As of September 2024, inflation was at 2.4%. 

Now, the experts have begun discussing the possibility of a no-landing economy, where the economy continues to grow and inflation remains elevated despite contractionary measures. Beth Ann Bovino, chief economist at U.S. Bank, told CNBC in early October that given the strong labor market and a slowing pace of price increases, combined with declining interest rates, either a soft landing or a no-landing scenario was possible. A no-landing scenario would result in “even stronger economic data for 2025 than we currently expect.”

Why a No-Landing Scenario Could Be a Problem

So what’s the problem? Why would a no-landing scenario be a concern if it basically means that all is well with the economy, albeit with elevated inflation? Several media outlets have hailed the no-landing scenario as potentially beneficial for traditional investors since stocks would perform well in this situation. 

It’s true that in the short term, a no-landing scenario wouldn’t have a dramatic impact on anything. It would be slightly annoying for homebuyers and investors since interest rates would remain elevated, with any further cuts from the Fed administered at a much slower rate than everyone in the housing sector would like. 

But there’s more to it than that. If no-landing conditions persist into 2025, they could be symptomatic of bigger problems and potentially unusual outcomes for the economy. A “no-landing economy,” as the name suggests, is an economy in limbo, hovering above a range of potential outcomes. It is not, in itself, a long-term prognosis but a precursor. 

And the reason why economists have started talking about the potential for a no-landing economy is that while everything is well with the U.S. economy on paper, the reality is not that great. While the economy is plodding along and has avoided a recession, it may be only a few steps away from a slump of a kind not seen since the 1970s. 

From No-Landing to Stagflation?

Look at the labor market statistics: The unemployment rate in September was 4.1%—not bad, and not nearly as high as the alarming rates we saw during the pandemic. And yet, if we dig a little deeper, we’ll see a shrinking labor market where companies aren’t laying off workers en masse, but they’re also not making new hires. 

We know this partly because while new unemployment applications dipped last week, the number of continuous jobless claims was the highest since mid-November 2021. This means it is harder for people to find a new job if they leave their current one. 

It is highly likely that when the Fed meets next week, it will “shrug off” these figures, as Reuters puts it, putting the unemployment stats down to the September hurricanes. This means that it’s unlikely another substantial rate cut is coming. After all, inflation isn’t down to target levels yet. 

If the Fed is wrong about where the labor market is heading, we may find ourselves in a rare—and highly unpleasant—economic scenario known as “stagflation.” In this scenario, inflation will remain elevated while unemployment will continue increasing. The result is suffering consumers and investors.

Essentially, you’re getting the worst of both worlds: reduced spending power and rising prices, with no end in sight. And at that point, traditional measures like rate cuts no longer seem to work. 

Is this scenario too far-fetched to entertain? J.P. Morgan CEO Jamie Dimon has warned of the possibility of stagflation, most recently at the American Bankers Association Annual Convention this month. 

Dimon pointed to macroeconomic factors that will shape the economy, namely the highest peacetime deficit the U.S. has ever had, “the remilitarization of the world,” and even the transition to “the green economy.” These are all inflationary factors, as he defines them, and they may keep inflation elevated for several years to come.

Some economic experts even think that we are already there, in a way. Former Fed chairman Ben Bernanke told the New York Times back in 2022 that the economy already met the conditions for stagflation: “[I]nflation’s still too high, but coming down. So, there should be a period in the next year or two where growth is low, unemployment is at least up a little bit, and inflation is still high. So, you could call that stagflation.”

With GDP growth projected to slow down to 1.6% next year, and with the very real possibility of inflation that continues to uptick while the labor market continues to cool, the rare “stagflation” scenario may well be where the economy eventually lands—if it hasn’t already.

What Would These Conditions Mean for Investors?

If a no-landing economy did morph into a stagflation economy, investors would be in for a trying time. The housing market typically responds to a stagflation environment with a downturn. As purchasing power lowers, so does demand, which in turn reduces home prices. It also dampens new construction as building costs rise while ROIs go down. 

Eventually, a housing market downturn would stifle the supply that has just begun to recover, which would artificially push up house prices on existing homes. So we could end up in another Ice Age, where housing is unaffordable and supply and activity are low.  

However, bear in mind that it’s all relative, and economists cannot predict the precise calibration of all the factors affecting different segments of the economy. If, as Ben Bernanke believes, we’re already in a stagflation-like economy, it has failed to impact the housing market. On the contrary, the real estate sector appears to be recovering, with inventory, sales, and new construction all growing. 

It’s not that investors shouldn’t heed warnings about the possibility of a “no-landing” economy or even a stagflationary economy in the longer run. It is only sensible to keep an eye on key economic metrics like employment figures and inflation rates and to diversify wherever possible. 

However, it’s also important to keep these figures in perspective. We likely would need to experience a pretty dramatic event—another massive inflationary spike and a rate hike from the Fed or an unexpected and catastrophic labor market downturn—for the housing market to really budge. The aftereffects of the pandemic, when people couldn’t move or buy a house even if they wanted to, will continue influencing people’s behavior for a good while longer. Given the uniqueness of the post-pandemic era, it will take a lot more to dampen demand for housing than even technically living in a stagflation economy.

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

In This Article

Recently, we shared “8 Reasons Why REITs Are More Rewarding Than Rentals.” In short, studies show that REITs earn 2% to 4% higher annual returns than private real estate. There are eight reasons for this:

1. REITs enjoy huge economies of scale.
2. They can grow externally. 
3. They can develop their own properties. 
4. They can earn additional profits by monetizing their platform.
5. They enjoy stronger bargaining power with their tenants.
6. They benefit from off-market deals on a much larger scale.
7. They have the best talent. 
8. They avoid disastrous outcomes. 

But higher returns also mean higher risk, right? That is why a lot of rental property investors stay away from REITs. They perceive them as being a lot riskier than rental properties because they trade in the form of stocks, and this comes with significant volatility. But I disagree.

I think that REITs are far safer investments than rental properties. Here are six reasons why. 

Concentration vs. Diversification

Rental properties are big-ticket investments. Therefore, most investors end up owning just one or a few.

As a result, you are highly concentrated on a limited number of individual properties, tenants, and markets. If you suffer bad luck, you could face significant losses because you aren’t diversified.

A tenant trashing your home, a leaking pipe, an insurance company failing to cover you, a big property tax hike, poor local market conditions, a tenant sues you: These things happen, and that is why diversification is key to mitigating risks.

REITs, on the other hand, own hundreds, if not thousands, of properties, which results in great diversification by property, tenant, and market. Beyond that, there are ~1,000 REITs worldwide investing in 20+ different property sectors and 20+ countries, allowing investors to build extremely well-diversified portfolios that can withstand the test of time.

Private vs. Public

Rental properties are private investments, making them relatively illiquid, less transparent, and subject to inconsistent regulation, which can increase the risk of scams. Accessing reliable information is often more complicated, investor protections are limited, and many people may attempt to take advantage of the market’s opacity.

REITs, on the other hand, are public, liquid, transparent, SEC regulated, and scrutinized by countless analysts, inducing short-sellers and lawyers who are looking for the smallest issue to go after the company.

The risk of buying a private property and overpaying for it, because you lacked some key information, is much greater, and selling it in the future will also be a lot more complex and expensive, given its illiquid nature.

High Leverage vs. Low Leverage

Most rental property investors will commonly use ~80% leverage when buying properties. This means that a 10% drop in property value would lead to a 50% loss in equity value. 

This explains why so many property investors filed for bankruptcy during the great financial crisis. As property prices crashed, a lot of investors ended up with negative equity in their properties and then returned the keys to their lenders—a complete wipeout.

In comparison, REITs are far more conservative because they have learned their lesson from those experiences. They typically only use 30% to 50% leverage, depending on the property type. This leads to lower risk in case of a downturn.

Personal Liability vs. Limited Liability

A major risk many rental property investors underappreciate, in my opinion, is liability.

You may think an LLC and/or insurance will protect you from everything, but that simply isn’t true. The bank will likely still require personal liability when you take out a mortgage, and your tenants or contractors may still sue you personally if they believe you are responsible for issues that arise.

For example, let’s assume that some mold grows into your bathroom, and your tenant eventually develops a disease as a result. Even if it isn’t your fault, the tenant may still sue you personally, leading to lots of headaches, sleepless nights, and major legal bills at a minimum.

With REITs, your liability is protected because you are just a minority shareholder of a publicly listed company. You are not actually signing on any of the loans personally, but you still enjoy their benefit. The tenants also won’t ever sue you directly, and you cannot lose more than your equity in a worst-case scenario. 

Social Risk vs. Shielded From Operations

Real estate investing is a people business, and it comes with social risk. There are lots of people who like to take advantage of property owners, and this could lead to significant emotional or even physical pain.

I know people who have been physically threatened by their tenants. While it is rare, there are also cases of tenants assaulting or even killing their landlords. There are countless cases of tenants refusing to pay their rent, intentionally damaging the property, and/or squatting and refusing to move out.

All of this could literally ruin your life and cause such stress that your mental and physical health takes a hit. You may think that you can avoid this by simply being selective and only renting to the best tenants, but people will lie and change over time. If you are a landlord long enough, you will likely eventually have to deal with such issues. 

In my mind, the potential returns of rental investing are almost never worth running this risk.

I would much rather earn a slightly lower return and be completely shielded from the operations, with a professional handling everything on my behalf. You could, of course, hire a property manager, but that would come at a steep cost because you won’t enjoy the same scale as REITs.

In comparison, REITs can handle the management in a much more cost-efficient way because of their scale advantage, and they completely shield you from these operational risks.

No Quotation vs. Daily Quotation

Finally, if you think REITs are much more volatile than rental properties, think again. The reason why you think that property values are more stable than the share prices of REITs is because you are comparing the total asset value of a rental to the equity value of REITs, which is apples to oranges.

Instead, you should be comparing the volatility of your own equity value to the volatility of the share prices of REITs. If you did that, you would quickly realize that REITs are far more stable in most cases.

As noted, if you are using an 80% loan-to-value, then you only have 20% equity in the property. This means that a 10% lower property value would cause your equity value to crash by 50%. A 20% drop would lead to a complete wipeout.

Now ask yourself: If you own a private, illiquid, concentrated asset with a single tenant, high capex, and social risk, how likely is it that your property could face such setbacks? The answer is that it is very high.

A leaking roof causing water damage could easily decrease your property value by 5% to 10%, meaning that your equity value would drop by 25% to 50%. A tenant stopping to pay rent, refusing to move out, and trashing your place? That’s an easy 10% to 50%+ drop in equity value.

Even if you don’t face any issues, your property is illiquid, and information is not transparent. Therefore, its value is much more uncertain. So, if you were taking offers on a daily basis (like the stock market), you would commonly get offers 10% to 20% lower than your estimated value, resulting in extreme volatility in your equity value.

Just because you are not actually getting a daily quote and are ignoring these offers does not mean that your equity value is perfectly stable.

Now compare that to REITs. What you see traded is the equity value, and while it does fluctuate, in most cases, it’s not to the same extent.

Again, it makes sense that REITs would be less volatile, given that they are large, diversified, public, and liquid companies that are SEC-regulated, and there is ample information about them and coverage from countless professional analysts. It is then a lot easier for the market to determine the right price, and it won’t need to fluctuate as much.

A study by Brad Case, CFA, PhD found that REITs are 17% less volatile than private real estate when the right adjustments are made for an apples-to-apples comparison.

Final Thoughts

Rental properties are concentrated, private, illiquid, highly leveraged investments with liability issues and social risk.

Meanwhile, REITs are diversified, public, liquid, moderately leveraged investments that enjoy limited liability and professional management.

It is night and day in terms of risks. Rentals are far riskier than REIT investments, and anyone who argues against this is misinformed, in my opinion

This is also well-reflected in the rates of bankruptcies.

There are countless real estate investors who file for bankruptcy each year, yet only a handful of REIT bankruptcies have occurred over the past few decades.

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

Dave:
Let’s be honest, it can feel like nothing makes sense in the housing market right now. Prices are up, but affordability is super low. The fed cut their interest rate, but then mortgage rates started to climb. It’s super confusing, but don’t worry, I’m going to explain it all to you today. What’s up everyone? It’s Dave. And listen, I understand that the housing market is confusing and uncertain right now, and this is kind of a spoiler alert, but I believe that there are some signs that buying conditions are going to improve at least a little bit this winter. So I’m going to spend today’s episode helping all of us understand the bigger picture in the housing market and the economy so you can make informed investing decisions and jump on great deals when they appear. So first things first. I know everyone loves talking about prices, so we’re going to just start there.
The national median home price is now at all time highs as it has been four years, but it’s at $429,000, which is up 4% year over year. Now 4% year over year. It may not sound like this huge number because especially if you just started investing in the last couple of years, particularly during the pandemic, there were years when we saw home prices go up double digits, 10%, 15% in certain markets, but just for some context, 4% annual growth, which is the same thing as Euro over a year is above average. The long-term average for housing appreciation is somewhere above 3%. So this is higher than that, but not by that much. So it’s kind of actually a normal year. And the other thing I want to call out about this specific number that is important for investors is that it is above the rate of inflation.
There are plenty of different ways to measure inflation, but right now it’s somewhere in the low threes by most measurements. And so by seeing home prices at 4% year over year growth, it is above the rate of inflation, which as investors is something we definitely want to see. So all in all pretty good price growth this year, but we should also talk about the trend because even though it is up, it is slowing down this spring, even when mortgage rates were higher than they were now at something like 8% price growth was actually around 6%. And so we’re seeing over the course of 2024, even though by some measurements it’s getting easier to buy homes because mortgage prices have come down, we’re actually just seeing home price growth start to slow down. So home price growth is slowing, but there has obviously not been a crash.
And if you listen to this show or our sister podcast on the market that I’ve been saying for a long time, I didn’t think there would be a crash in 22 or in 23 or this year, but it is important to remember that there are some markets, even though the national growth is pretty good that are seeing modest declines, what I would call a correction, not a crash. The most prime examples of markets that are seeing some backsliding in terms of prices are Florida and Texas. And even though they are some of the coolest markets in the United States right now, it’s super important to remember that these are very, very mild corrections. We’re actually seeing that these two states, even though a lot’s being made out of the fact that they are down a little bit, they are down less than 1% year over year.
So it’s super, super mild and if you factor in all the growth that these two states in particular have seen at least since the beginning of the pandemic, they are still way up. They’re up huge amounts over 2019 and they’re just barely off peak. And of course that might get worse over the next couple of months, but again, this is a snapshot of where we are today and even though they’re down, they’re down just a little bit. Meanwhile, on the other end of the spectrum, we are seeing huge growth in a lot of states and regions of the country that don’t necessarily see a lot of growth, or at least a lot of investors wouldn’t expect to be some of the hottest markets in the country right now, Connecticut of all states, Connecticut is actually the fastest growing state in terms of home price appreciation right now at 11% we also see New York and Ohio up 9%.
So even though some of the more splashy markets like Florida and Texas are down very modestly, we’re seeing some markets that are seeing two almost three times the national average in terms of appreciation rates. That’s where we are with home prices right now. Again, they’re growing on a pretty normal year. Some markets are up a lot, some are down just a little bit and the average is very close to what we would expect for a normal year in the housing market. So when I look at this price data and listen, I don’t know what’s going to happen, but when I’m looking at all this data, what I’m thinking is number one, prices have not crashed despite mortgage rates going up really rapidly and affordability being pretty low. At the same time, we’re starting to see the market cool, and I actually think that it is going to cool a little bit further as we head into the seasonal decline.
It always starts to cool in the winter or at least usually when we’re not during the middle of a global pandemic. And so to me, this is one of the main reasons I actually think there might be decent buying conditions in the next couple of months because although the market is slowing a little bit and that means we won’t have the same level of appreciation. Personally, I’m a long-term investor and so I’m looking for opportunities to be able to buy things below listing price and to be able to negotiate with sellers. And I do think the cooling of the national housing market and mortgage rates come down, which we’ll talk about in a little bit, that could create opportunities to negotiate and get some pretty good deals on properties that have good intrinsic value. Okay, so prices were our first variable and again, growth relatively normal.
Second thing we need to talk about is home sales volume. How many transactions there are a year, and this is totally different, this is very abnormal in terms of what we would expect, what we see for the last data we have September of 2024 was that there were 3.86 million home sales and that may sound like a lot, but compared to what we would expect, it’s actually super low. The long-term average over the last 25 years is 5.25 million, so that’s about 20% below where we would expect. And I think for a lot of people it feels like it’s slowed down even more than that, like 20% drop is big, but it can feel even more significant than that because Covid was abnormal in the other direction. We were actually seeing more home sales than usual peaking at more than 6 million home sales per year. So when we compare 2024 to where we were just three years ago in 2021, we’re actually seeing a 50% decline in home sales.
That is a massive decline and it is one of the lowest I’ve seen in my career. I actually got started investing in 2010, which is actually the only time in the last 25 years that home sales have been this low, and that was obviously very different conditions, but you can understand in the fallout of the great financial prices people didn’t want to buy. That was the main reason they were so low. Right now for all accounts, all the data shows that people do want to buy, but they’re actually just priced out of the housing market. Things are just so unaffordable. So why is this going on? Why are home sales so sluggish? We’re going to talk about this a bit throughout the entire episode, but I wanted to call out one thing here that is important just in today’s day and age is that home sales are generally gritty slow before presidential election.
I am recording this two weeks before the presidential election and I think a lot of people are just slowing down. So that is just one thing that’s going on here that I think we should call out that it’s probably artificially a little bit lower than it would normally be, but don’t get me wrong, this is not the whole problem. The presidential election sales have actually been down for a couple of years now, but I just wanted to call out that it’s actually making the market slow down even further. Now, I understand that if you’re just an investor or maybe just thinking about investing for the first time, you’re wondering why did the number of home sales even matter in the first place? So actually think there’s probably three reasons that the average investor should be paying attention to this. First and foremost, there’s just not a lot of demand or supply on either side.
So either way, whether you’re trying to sell a home or you’re trying to buy a home, there aren’t a lot of options out there for you and that makes buying and finding deals or optimizing your portfolio or even planning for the future, it makes it a little bit more difficult. Secondly, I think this just matters for people in the industry and if you’re just an investor, and I don’t mean just an investor, but if you’re involvement in the housing market is as an investor, you may not notice this as much, but a lot of people who listen to this show are real estate agents or loan officers or property managers, and these home sales volumes really impact their income. And so it has a drag on the entire industry when home sales numbers are so low. And then third, it has this impact on the whole US economy.
There is some data that I’ve seen that shows that housing in general makes up 16% of the us. GDP and GDP is basically a measurement of the entire economy, and so housing makes up 16% of the entire US economy, and that housing number does take into account construction, which is a considerable part of this. But when home sales volume is so low, it can drag on the entire economy and we are definitely feeling that and seeing that in the American economy as a whole. So I just want to stress the point here from all this data that I just cited is that if you are feeling like the market is super sluggish right now, you’re right, it is very slow. It is a little bit stuck, and I know that can be frustrating for investors, but I would just advise everyone listening to this to be patient because it’s not going to stay like this forever. And although it might take a little while for this to get better, there are not as many deals, there are not as many properties to look at right now as there have been historically. And so being patient is definitely advised in this type of market. All right, I’ve been talking a lot and I need to take a break, but stick with us because I’m going to share a bit more data after the break and a couple of conclusions that you can use to guide your own investing. We’ll be right back.
Welcome back to the episode where I am giving you an update on the housing market in October, 2024. Okay, so we went over the big headline things here, right? We talked about prices, we talked about home sales, but let’s go one level deeper and talk about why these things are happening. Why is the market so slow, but why do prices keep rising at the same time? To think through this, we basically need to look at econ 1 0 1. We need to talk about supply and demand. You’ve probably heard those things before, but let me just quickly define them. In the context of the housing market supply is how many homes are for sale at a given time. The second thing is demand, and that is basically how many people want to and can afford to buy a home at a given point in time. So let’s dig into each of those and we’ll start with demand.
Demand in short has fallen a lot over the last few years, and this is mostly due to affordability. You’ve probably heard this term before affordability and it’s kind of this generalized word, but in the housing market it actually has this sort of specific definition. It basically means how easily the average American can afford the average price home. And there are different indexes that measure this, but it basically takes into account home prices, mortgage rates, and real wages, how much people money are making. And when you factor in all three of those things, affordability is near 40 year lows. The last time home prices were this unaffordable for the average American was in the early 1980s before I was even born. So this is the main reason that demand is dropping off. And I always stress this, I think this is a common misconception, but when we talk about the word demand when it comes to the housing market, it isn’t just who wants to buy a house.
It is not just who ideally in a perfect world would go out there and purchase a house today. It’s a combination of that, the desire to buy a house, but also the ability to buy a house. You need to be able to actually afford it. This is important because when we look at the housing market today, the desire part of demand is still there. There’s all sorts of data and surveys that shows that there are literally millions of home buyers just sitting on the sideline waiting until mortgage rates come down or prices drop or they get their next raise so they can afford to buy a home. We are seeing this all over the place that people are waiting until affordability improves. So that want is still there, it’s just the affordability piece that is missing. So if demand has been falling, how can prices still go up?
Well, the short answer is that no one wants to sell their home. One of the unique parts of the housing market is that 70% of people who sell their home go on to buy a new one. And so if buying conditions are not very good, that makes selling conditions worse, and that’s why we’re seeing not a lot of people want to sell. If this is confusing to you, just imagine it this way, I’m going to use some really easy numbers to try and illustrate this point. Just imagine that towards the end of the low interest rate era, that was the end of 2021, early 2022, we had this super hot housing market. So just as an example, and again, these are made up numbers. Let’s just say that for every a hundred homes there were for sale, there were 200 buyers, there were just way more buyers than there were homes for sale.
And that’s why prices were going up because when there are more buyers than homes, the buyers compete to win the bid by offering more and more money that drives up price, but then the fed raises rates to reduce demand and that actually weeded out about 50% of the people. So we are now actually down in our hypothetical situation to just 100 buyers, but because of the lock in effect, higher interest rates made, people want to sell less. So instead of having those a hundred homes for sale, now we have about 90. So in total we have way less demand, but we still have more demand than supply. And again, back to econ 1 0 1, that tells us that prices are going to continue rising. And one more thing on this since I’ve already said that affordability is the main thing, slowing down both supply and demand.
You may be wondering if affordability will get better anytime soon because that’s basically what we need to happen for this housing market to get unstuck. And remember, affordability is made up of three things. Home prices, real wages or interest rates. Prices, even though a lot of people were forecasting that they’d come down have remained really resilient and they’re still up 4% year over year. Real wages, which is basically people’s income, are now growing faster than inflation after years of the opposite. But that takes a really long time of wage growth to actually improve housing affordability. So mortgage rates are really the big variable. If we are going to see affordability improve anytime in the near future, at least in my opinion, it’s going to come from mortgage rates going down. So let’s get to the question everyone has on their mind. What is going on with mortgage rates and is it going to get any better?
First, lemme just provide a second of context because about a year ago in October of 2023, we had mortgage rates at 8%. That was the highest I’ve ever seen in my investing career. Fast forward to today, we’re back to 6.5%, give or take. So even though rates haven’t come down as much as people were expecting and they’ve actually gone up just a little bit in the last couple of weeks, you have to remember that things have gotten better. So I’ll just give you my opinion. I’ll say that I think it’s going to be a slow, volatile, bumpy road to lower mortgage rates. I think we’re going to see a lot more swings of 20 basis points, a quarter of a percentage 0.1 way or another for the next couple of months. But the overall trend is going to be downward. Even though the Fed does not control mortgage rates, they’ve said they’re going to keep cutting, which should put some downward pressure on bond yields and should provide at least a little bit of relief in the mortgage market.
Now, don’t get me wrong, I actually don’t think we’re going to see anything below 6% in 2024, certainly possible, but I think just reading the tea leaves as I do, I don’t think that’s the most likely outcome. And even in 2025, and I haven’t really put together my full predictions for next year yet, but if I had to voice an opinion right now, I currently think the lower range for rates will be around 5.5%. If we fast forward a year from now, I’d say that mortgage rates will probably stay between five and a half and six point a half percent for the next year. Obviously that’s a relatively big range, but there is that much uncertainty in the economy that trying to voice something more specific I just don’t feel comfortable doing. And of course, something else could happen outside of that range, but I’m just telling you, given the trends and data that I can see right now, that is what I think the most probable outcome is.
So what does this mean for investors? Well, I think that if you want to be in the market, I wouldn’t wait, and I know we say this all the time, but I think that it’s very uncertain what happens with mortgage rates and they’re likely to come down just a little bit. At the same time, prices are continuing to grow, so there’s actually no knowing if you wait six months, whether you’ll actually see an improvement in affordability. I actually think we might see a modest increase, but I don’t feel strongly enough about that, and I don’t think it would be significant enough to wait if you actually find a deal that works with today’s rates. So I could be wrong. I have been wrong about mortgage rates in the past. I’ve been right about them so far this year, and I do think this is the most likely outcome over the next year. All right, we do need to take one more quick break, but I’ll be back with my summary of what’s going on in the housing market and some action steps that you can take as an investor. We’ll be right back.
Welcome back to our housing market update. Last thing before we get out of here, we have talked all about the housing market, supply, demand prices, home sales, mortgage rates, all of that, but we do have to talk about rent. When we look at rents across the United States, they are pretty much flat. That’s about 1% growth. Now, that sounds okay, right? But we need to remember that 1% growth is lower than the rate of inflation. And so when you’re actually talking about real growth, real just basically means inflation adjusted. So when you talk about inflation adjusted growth, we’re actually seeing a decline in rents right now because the spending power of that rent is declining. And so as a landlord, as a real estate investor, that’s not good. But when you dig into the data, as always, there are large variances here. And what you see, the biggest caveat that you need to think about is that there is a pretty big difference between single family homes and small multifamily residential housing.
So four units are fewer. Those rents are actually up about 2.4%. That is the lowest growth rate in about a year, but it is still up a decent amount, relatively close to the pace of inflation for single family rents. When you look at multifamily rents, so this is commercial multifamily, anything that’s four units or bigger, we’re seeing pretty much flat close to zero growth in a lot of markets. We’re actually seeing negative rent growth for multifamily. And so that is really dragging down the national. When we look at rents and with all the data, there’s huge regional variances. We actually see a lot of the higher price cities leading rent growth. Seattle actually leads with 6% rent growth, whereas Austin actually has the lowest rent growth at negative 2%. So just for investors, when we look at rent, I think the important thing here, that main takeaway is not to forecast rent growth.
That’s at least what I’ve been doing or maybe forecasting it at one or 2% for the next couple of years just during the pandemic, rents grew so quickly. I think it’s what a lot of people call a pull forward, which is basically we take all the growth that we normally would have over the next couple of years, and we pulled it forward into just a really short period of time, and that means growth is going to be subdued for the next couple of years. Also, as I talked about, multifamily is dragging down rent prices, and that’s likely to continue for at least another six, maybe nine months. We know that there’s a lot more multifamily supply coming onto the market, and that’s going to put downward pressure on rents. And so when you’re underwriting deals, I highly recommend you do it conservatively with little to no rent growth, at least for the next six months.
Alright, so that is the state of the housing market today. We have a sluggish slow market, but prices are still rising and rents are rising a little bit, even though that’s under the pace of inflation. And although I want to take a few more months of data before I make predictions for 2025, I’m not personally expecting big changes for the rest of the year. So what does this all mean for investors? First, we’re starting to see some signs of thawing in markets and some of the markets I invest in and I watch, we’re seeing an increase in days on market, which means that prices may flatten out or cool a little bit, but there may be more opportunities for deals. I am eager to watch this, but don’t get too excited because I don’t think it’s going to actually change that much. I don’t think we’re all of a sudden going to see fire sales and where sellers are all of a sudden going to be offering all sorts of concessions and dropping prices.
But for an astute investor who is willing to be patient, there are probably going to be opportunities to negotiate and buy properties under asking price. And personally, at least for me, I am looking forward to this winter. I have been watching a couple properties that have been sitting on the market for longer and longer and longer, although I actually haven’t pulled the trigger and bid on any of them yet. I am thinking about it in the next couple of weeks because I think sellers are starting to get a little itchy as we head into these traditionally slower months and maybe willing to make a deal happen before we get into the depths of winter, December, January, when very few transactions happen. So that’s what I see in the housing market. Hopefully this has been helpful for you and informing your own investing decision. Thanks for listening, everyone. If you have any questions about any of this, I’m happy to answer questions about it. You can always hit me up on biggerpockets.com. You can find my profile there, or you can also find me on Instagram where I’m at the data deli. Thanks for listening. We’ll see you next time.

 

Ashley:
Hey rookies. Normally investors who come on the podcast share their personal journey of real estate investing, but it’s usually after they’ve experienced their highs and lows, which is still incredibly valuable. But what if we learn together in real time? Today we’re bringing on Rene Hosman, the community manager, and a rookie real estate investor here at BiggerPockets who just purchased her first flip and will be in real time coming on the podcast to share her experiences throughout the process. Today is just step one. We’re going to learn about how she found and closed on her flip. Keep listening if this is a strategy you’ve been interested in diving into. This is the Real Estate Rookie podcast. I’m Ashley Kehr, and I’m here with Tony J Robinson,

Tony:
And welcome to the podcast where every week, three times a week, we bring you the inspiration, motivation, and stories you need to hear to kickstart your investing journey. So welcome to the show, Rene. We’re super excited to have you.

Rene:
Thanks for having me, guys.

Tony:
No, of course. So what we’re going to get into today, we’re going to talk about what to look for in a flip in this market, how to build out your rehab estimate, which I know a lot of rookies get stuck on is how do I know how much these rehabs costs? And then we’ll talk about how Rene was able to close on this property with the help of a wholesaler. So excited to jump in.

Ashley:
So Rene, before we get started into your flip, what actually attracted you to real estate investing?

Rene:
Yeah, I wanted the stability that I could provide. I worked in the hospitality industry for a really long time and that has really big peaks and really big valleys, and I just wanted to be able to know my first intro into real estate was buying a place for myself to live in, and I wanted a two bedroom so I could rent out the second bedroom. I didn’t know the term house hack yet, but that just seemed to make sense to me. And I had just finished college, so I was used to living with roommates. It didn’t really seem like that strange of a thing. I also live in Denver, which is not the most expensive metro, but a pretty expensive place. But yeah, it was definitely the stability of knowing that no matter what I did and where I went and all of these things, as long as I can come up with this one amount of money every month, that I would have a place to live and be. Okay.

Ashley:
Rene, we’re going to be talking about your flip today, but have you done any other real estate deals as a rookie investor?

Rene:
I actually have two other condo units that are in the same building as my flip, and then currently doing a live-in flip, which is a little more live than flip at the moment, and a single family home in the Denver metro area. And in 2020, my partner and I got a wild idea to just buy some land up in the mountains that we haven’t done anything with yet. But that’s been my experience so far.

Tony:
So you’ve dabbled a little bit, which is good because it lays that foundation for some of that confidence. So I guess, let me ask, right, I want to get into this flip. Was this the strategy you were hoping to explore? Because you said you had some other condos in that same building. So when you bought this one, was it initially meant to be a flip or did the strategy change as you got into it?

Rene:
I say flip because first flip sounds nice, it’s probably going to be a bur, but I think it’s important to have multiple exit strategies. So first exit strategy is ideally I’ll keep it as a burr second, I could flip third. I could even potentially short-term rent it. I’m not really into that though, so I’m trying to stay away from that if I can. But yeah, so this unit, the building that I have my condos in is really small, so there’s only eight units total, and so everyone kind of knows each other. And I knew that this unit was going to be coming for sale. I didn’t know it was going to be so soon. I thought it would be more at the end of the year, maybe early next year. So I had to get my ducks in a row really quick. But this one I knew was going to be a much bigger project than I had ever done before.

Ashley:
Rene. So you mentioned you have two rentals in that building and then you own a flip. So you own three of the eight rentals in this building, is that correct?

Rene:
That is correct. The goal is to own all eight one.

Ashley:
Talk about buying a block,

Rene:
Just buy the building. That’s the goal that’s set in the building is here in Denver and it’s great as is right now. I love my rentals there, but there’s a lot that could be done to this building at some point to put it to its highest and best use for sure. And I am definitely still consider myself on the working side of the scale. I’m not ready to invest in a large multifamily building. If all eight units were for sale at once, I don’t know that I would have the confidence, but I love that I’m able to do it in little chunks and learn little lessons each time and then spread out the risk.

Tony:
That was my follow-up question. Say you do eventually end up buying all eights. Is there an HOA or anything? And if so, would you then just control the HOA or get rid of the HOA since you own it all yourself?

Rene:
That’s a really good question. There’s some weird legal stuff with that, but yes, eventually I could potentially buy all of it. However, don’t quote me on this, but I learned recently that apparently if an HOA goes under private control and there are still funds in the HOA that for some reason you don’t own that money. So I’d have to figure out, we have a good amount in reserves for the HOA, which I pay my dues on now three units every month. So I’d have to figure out how that works, but I am not quite halfway there yet, so ask me on unit six.

Tony:
But it’s an interesting concept because it starts to give you some flexibility around how you now use this entire building. I wonder if you could wise it, turn it into an actual apartment complex and then maybe sell it off as a multifamily. So there’s probably a lot of options that you’re opened up to as you get all eight, but not trying to force you to become this real estate mogul today. Just ask some questions that are coming to mind for me.

Ashley:
I mean, it is super interesting though maybe when you got to unit six and you’re like, okay, have two more to go. You talk with the other people and be like, Hey, are you guys ready to sell in a couple years? And if yes, and it’s like, let’s dump all of the HOA money into doing these capital improvements, you get bigger money for. Exactly. Well, I guess if they’re selling to you, you don’t want them to sell it for bigger money, I guess. But yeah, draining the HOA reserves before you controlled the whole interest.

Rene:
Exactly. And the HOA board is me and two other women who I’ve known since 2018 when I moved into the building. So I know a lot of people’s stories are very different about being bad HOA, but my experience has been the complete opposite in this small HOA building. Yeah, we get together once a year go over, we have a H property manager who manages all of our books and maintenance for the building and all of that stuff. And then the three of us on the board, we get together once a year, kind of go over the books, talk about if we are going to need any assessments the next year. So I know well ahead of time if those are coming up. And then we have an annual meeting that is usually just the three of us, maybe one of the other owners attends.

Ashley:
Stay tuned after a break for more from Rene on how she was able to close on this condo with a tight turnaround.

Tony:
Alright, welcome back. We are joined by Rene. Got it. So we started to talk about this a little bit, but I guess let’s really dive deep into this condo, this third condo you picked up in this building. So we know how you found it. It sounds like you knew the person that was living there and as they were looking to exit, you just approached them. So it sounds like it was a complete off market transaction, is that correct?

Rene:
No, I did buy my last unit in the building as a private sale. My building has a first right of refusal clause, which is super unique and not very common, but that means that any owner who currently owns in the building has the right of first refusal to essentially assume any in the contract. It’s called a bonafide offer that is made. So someone else made an offer on the unit. I had to match those terms and then as long as I could match those terms, the seller was required to sell to me instead of the other buyer.

Ashley:
Right of first refusals I think are so interesting and I think there’s a lot of opportunity in them if you really are interested in purchasing something is offering like, Hey, if I give you a thousand dollars today, would you put in a right of first refusal for your property so that one day down the road when you do want to sell, I’m the first person that has the opportunity to do that or something like that. So I think it is definitely interesting and it seems like it helped you get this property.

Rene:
It helped me get the, I guess technically the last two and it’s definitely been really worthwhile for me. We have a 10 day first rate of refusal period. 10 days. Yeah, we have 10 days.

Ashley:
So super fast you had to work.

Rene:
Yeah, well, so we have 10 days to submit our offer and then we have to match the terms in terms of the MEC plus whatever date, so the mutually executed contract date plus 30 days for closing, plus 15 days for inspection period, all of that kind of stuff. So I didn’t have to match the exact dates on the original offer, but I did have to match the same pattern of dates to get to closing. So I did have a full 30 days after they accepted, well, I had a full 30 days from when I submitted my offer, but they didn’t accept it until the 10th day. So then I actually only had 20 days to close.

Ashley:
But still even just to figure out if you can make that offer happen, that’s a very short window of time. 10 days. Yeah.

Rene:
And I was able to, I found out that it was on market the next day got, I was like, oh, someone’s probably going to put an offer in on this soon and maybe have a week to get my stuff together. And the next day after I found out that it was listed on the MLS, we got the notification from our HOA that it was first right of refusal period for 10 days. And I was like, okay, I don’t even have that week. I have a couple of days to get it all together. So yeah, it went really quick.

Tony:
Can we walk through that Rene? Because there is that time pressure and I think for a lot of rookies that are listening, they have that same assumption when they see a good deal, yeah, maybe I got a week or so before I can really get in there and run my numbers and get this offer submitted when a lot of times it gets listed and the next day it’s under contract, so you do have to move quickly. So what steps did you take during that period of your right of first refusal? What steps did you take during that period to give you the confidence to quickly say, I want to match this offer?

Rene:
So part of it was that I have to match the original offer. The original offer was cash and that was not one of my original scenarios that I had been running through. But I’ve been going to a lot of local meetups for a number of years. And most recently, a couple months ago, I met this wholesaler named Alex in the Denver area. And him and I had gotten coffee and I knew a little bit about his wholesaling company and that they also had a lending arm of their wholesale company that helps people buy flips. So my first thought was, okay, I just had coffee with Alex three weeks ago. He seems to know because he works with wholesale, he’s a wholesaler, he works with flippers all the time. He knows people who are buying in cash. Maybe he’s not the person, maybe his lending company’s not the person, but maybe he can connect me with someone.
So he was my first call. I think that I probably called him within a number of hours of getting that email. And I want to say I called him at noon by three o’clock, he had texted me in a group chat with him and a private money lender that a lot of his other clients had used who’s also Denver based. And by five o’clock I had a call with that private money lender. And within 24 hours of me just calling Alex, the private money lender had said, okay, I think that this is going to work out. Just fill out these last few paperworks just so that I can my i’s and cross my T’s. And it was really like that. I couldn’t believe it was like 24 hours. I’ve only ever done conventional mortgages and they’re normally so slow.

Ashley:
Talk about the power of the networking, and I am curious, what was that call with the call with the private money lender? What was the conversation for you to kind of vet each other?

Rene:
Yeah, I feel like my mind was running a million miles an hour and I just word vomited all over that poor man. I was like, here’s the deal, here’s what’s going on. But he was so nice and I explained to him that I really know the appropriate cost for this. I had already run my numbers for this unit. I had kind of been preparing to maybe buy something else. I knew what would cashflow, I knew the A RV because I had just had one of my other units so that I could get a heloc, all of this stuff. So that was kind of my side of just telling him about the deal. And he lends mostly based on the deal, but obviously a little bit based on a person too. So I tried to be as communicative and forthcoming as possible. And then after that, I just talked to him a little bit about what his experience was, how long he’s been doing this, where the capital comes from, because at the same time, while he was a referral from someone that I know and trust, this is kind of a big deal, and going sideways could be really set me back a lot.
So it was really important for me to know what his experience level was and that he would be able to also help guide me through his lending process in the same way. Maybe not in the same way, but in a way that when you get a conventional mortgage, someone is there telling you, okay, this is what I need. These are the steps that you filled out this form wrong. So I was pretty forthcoming with him about the fact that I would kind of need a little bit more than maybe his traditional flipper because I hadn’t done this before and then I was relying on his expertise.

Tony:
Rene, a couple follow up questions. Number one, had you ever met this person before in your life?

Rene:
The hard money lender? No. The wholesaler? Yes.

Tony:
So never met this lender before. How much did he lend you for this deal?

Rene:
He lended me the entire purchase price, which was $190,000.

Tony:
$90,000. Okay. So some person that you had never met before after a couple of hour long conversation said, I’m going to write you a check for almost $200,000.

Rene:
Yep.

Tony:
The reason why I’m saying that is because I think there is a major, major limiting belief amongst a lot of the folks inside the Ricky audience who don’t believe that there’s capital out there to work in their real estate deals. But you just very clearly articulated Rene, that as you start to build your network and you didn’t know the lender, but you knew the person that knew the lender, and you just asked the question of that person like, Hey, can you make a connection? But as you build your network, as you build your skillset in a very short conversation, you can build enough trust and confidence in someone else to write you a multiple six figure check. And that is one of the greatest skills you can develop as a real estate investor because it starts to unlock so much more opportunity for you because now you’re not bound by your own pocketbook and how much cash you have, but now you’re only bound by your ability to find good deals and find the right capital to deploy. So I’m on my pedestal here a little bit, but I think it’s such an important point to make Rene, because there are a lot of people who have the deals, but they don’t have the confidence to go out there and get the capital for it.

Rene:
I could not agree with you more, Tony, because honestly, let’s see, what day is it? It’s the 23rd today. So I submitted that offer on September 17th, about six weeks ago. I was also one of those people with that belief, and I’ve been around the BiggerPockets universe for a long time. I’ve even done other deals before, but I also suffered from that. I was like, where is this elusive private money? Where do these hide? What rock do I have to turn over to find ’em? And really all it took was just asking someone crazy enough.

Tony:
I got one more question for you before I get into that. One thing that I heard recently, it was actually from someone that runs a very large and successful self-directed IRA company. And he said that he is realized that a lot of real estate investors who have the deals but need the capital, a lot of times they’re networking in the wrong places. He was like, if you are a real estate investor, don’t only rely on real estate conferences to go out there and build your network, go to the conferences where the doctors are going, go to the conferences where the HVAC business owners are going go to the conferences where the attorneys are going. Those are the places where you’ll find the people who have the capital maybe don’t have the time desirability to do it themselves. Just one thing that I heard because you asked that question. One follow up question for you, Rene, is how did you actually structure the debts with this person? What were the actual terms of that agreement and what paperwork did you actually have to sign to make it official?

Rene:
Yeah, so I paid two points upfront, which I had to learn all of this. Literally, he’s telling me these things and I’m googling them as he’s saying the words, just to make sure, I consider myself fairly well educated about real estate. I listen to the podcasts all the time, I’ve read the books, but at the same time, you kind of get a moment of panic when you’re in the spotlight.

Tony:
Define points for us, Rene, for people that aren’t familiar with that.

Rene:
So points are a percentage of the loan that, from my understanding, I at least paid it upfront. So my loan was for $190,000 and I had two points, which means that I owed him $3,800 at the beginning. That was just kind of my loan origination fee essentially. And then I am paying 15% interest every month, and their interest only payments for up to six months. And so that means that my monthly payments to him are $2,375 a month.

Ashley:
And then you have a balloon payment at the end of the six months.

Rene:
Exactly, yes. And I’m hoping, and oh, and I have no prepayment penalty. I structured that with him because this is a two bed, one bath condo, six months. That’s what he offered me. I told him I was hoping to get it done in three. Now that we’re starting, I’m hoping I can get it done even by the end of the year, but I just wanted to give myself plenty of buffer and wiggle room.

Ashley:
Yeah, that’s safety net.

Rene:
Yes.

Tony:
He got two points upfront, 3,800 bucks, 15% interest. And you said it was over six months, so that’s 28,000 if you held it for the whole year. But we’re going to divide that by two. So he is going to get $14,000 in interest payments. So for him, he’s getting $18,000 back in six months on $190,000 investment. So if we annualize that over the year, that’s 36,000, over 190,000, that’s a 19% return that he’s getting on his money for literally doing nothing other than wiring money over to you

Ashley:
And

Tony:
A phone call and a phone call. But again, for the people that are listening, that’s why lending money is so attractive to the people that have these big piles of cash because where else can he go and get a 19, almost 20% cash on cash return backed by a tangible asset like real estate where he has to do nothing else other than wire money and have a quick phone call. So it really is a win-win situation for everyone involved.

Rene:
And I know from speaking to him that he takes this money out of a HELOC that he has on his house, and he’s paying 9% on that. So he is essentially putting no money forth out of his own pocket. He’s just taking it out of his own line of credit, and he gets the spread between the 9% that his bank charges him and the 15% that he charges me. And you know what? I’m so okay with that. It is a high interest rate and it’s a lot that I’m paying him, but I wouldn’t have been able to do without him. So that’s just the price I got to pay.

Ashley:
Exactly. And that is such a valuable point as to you don’t have to make the greatest return because some return is better than no return. So if you would’ve said, no, that’s ridiculous. I’m not paying 15%. Other people I know are paying nine, 10%, but yet you don’t get anyone in that short timeframe, that short window, and you lose the deal. Well, you’re getting 0% return now anyways. So hindsight, it would’ve been worth it to pay that 15% just to get a part of the deal. So let’s talk about the rehab on this property for a little bit. What is the expected cost of the rehab, and are you managing the contractors? Do you have a GC involved? Go into that forth.

Rene:
Yeah. Well, let’s tackle the budget first since you asked about that. And for anyone listening, I am tracking my live budget for the duration of this project. And you can see it on my notion document that will be linked in the show notes. But as of right now, my budget is $26,464, but I am giving myself that is how much I use the BiggerPockets rehab calculator. I talked to a number of people. I did some research on just how much appliances, cost and those kinds of things. Just a lot of Googling since this is my first flip, I’m giving myself a buffer of 15% so I can go 15% over and not have to worry. That’s just part of the learning experience. So my actual budget that I’ve set aside for this is $30,000, or sorry, $30,434. I hope to not hit that, but I have it there again as a safety net.

Ashley:
And do you have contractors in place already to complete the rehab?

Rene:
Yes. So I am actually using, I’m going to be doing part of this, DIY, and then part of this I will be using my handyman, who I’ve used for a lot of things. He’s just like a jack of all trades and just I feel like everyone says find your team. And Robert is my team, and he’s great. So he’s going to be helping me, and he’s also going to be teaching me a lot of stuff, which I’m really excited about too. I’ve never laid tile and I’ve always been, I’m very handy, but I’ve been very offput by doing tile. I don’t know why. It just seems really scary. And it’s a shower, so if something goes wrong, it seems like a lot of money and water damage and all of that good stuff. So between, I have my handyman Robert, I have my kind of backup assistant handyman, Kyle, who is my roommate in my house hack, and he works in construction. And then I have my plumber and I’m currently looking for and vetting a good electrician. But that is my team for this renovation. And then I’ll be doing, I’m going to try and use this as a learning experience for myself and do as much as I can as possible. I obviously have a full-time W2 job, so I can’t be over there all day. But since it’s pretty small and I have a lot of time, I’m going to try and get over there pretty much every day after work

Ashley:
To eliminate some of those holding costs and get it done faster.

Rene:
Exactly, yes.

Ashley:
Well, Rene, we’re super excited to follow along with that document that you’re providing to watch, and we’ll link it into the show notes for everyone. If you’re watching on YouTube, it’ll be in the description.

Tony:
Alright guys, we have to take one final a break, but while we’re away, we’d love to hear from you. Have you done a major rehab? If so, answer on Spotify or on the YouTube app during this break.

Ashley:
Let’s jump back in

Tony:
One follow-up question from you, Rene, on the actual budget itself, because it sounds like you had it down to the dollar. So as a rookie investor, how can someone actually estimate what those potential rehab costs will be?

Rene:
I started on the BiggerPockets flip renovation calculator, just kind of throwing in numbers and seeing what made sense. I wanted to know, okay, what is my absolute max before I’m at breakeven or worse than that in the red? And then what kind of profit would I like to see from this? And then kind of working backwards from there. I also literally went to stores. I went to Home Depot, I went to our local, it’s called Appliance Factory, and they sell the out of the box slightly dented things, which I buy from my own house. And so I went there just to write down numbers, how much does a dishwasher cost, how much does an oven cost, how much is a microwave? And all of these things so that I could just have a better sense in general. And then from there, I was just looking on the BiggerPockets forum and Facebook groups. A lot of people will post about deals that they’ve done recently, and I know it’s not always applicable depending on what metro they’re in, but someone says that they spent this much in San Francisco, then I’m like, okay, I’ll probably spend a little bit less. So instead that they spent this much in Louisiana, I’m like, okay, I’m probably going to pay a little bit more than that.

Tony:
So Rene, you’ve obviously done a phenomenal job of getting this deal, taking the deal down, getting across the finish line and the purchase side, but I guess walk us through kind of what the next steps are for you as you look to exit this deal, either through the refinance to bur or to sell it as a flip.

Rene:
Well, I’m starting demo tonight. I can’t tell right now, but I’m wearing my overalls. So we start demo and then I’m going to be doing a full bathroom gut and remodel. The bathroom is just tragic. The entire place smells like animal urine. So right now, Mindy Jensen lent me her ozone machine, so the ozone machine is running in there. I checked with the other tenants in the building and everyone’s out at work, so there’s an ozone machine in there right now. We’re going to gut the whole bathroom. So I’m in there gutting out baseboards and the bathroom over the next week, and then the kitchen. We’ve got to take all of the appliances out. There’s an original stove from the sixties. It’s actually super cool, and I wish that there was something I could do to repurpose it.

Ashley:
You could probably sell that on Facebook marketplace.

Rene:
I know, right? I’ve kind of been thinking about it. In fact, I’m actually buying because I just love a challenge apparently. And I also like I’m a Facebook marketplace queen. I love it. So I’ve been purchasing even during the closing process materials that I am going to be using for the property I already had. By the time I closed, I already had the tile for the bathroom. I already had all of the flooring I’m getting. We’re going to be not necessarily gutting the kitchen. There’s old hardwood cabinets in there right now. They’re spray painted black. I’m not kidding. Yep. High gloss spray paint black

Ashley:
On the wall. I mean, I love black cabinets, but I’m just not sure about the spray paint effect.

Rene:
Yeah, well, the walls, the ceiling and the cabinets are all spray painted the same, high gloss black. It’s interesting.

Tony:
They’re like, we going to get this done quick. Just, Hey, give me an hour. We’ll get it all done.

Rene:
Yeah. So I’m trying to refinish the cabinets. I know that it would cost me about the same to buy new ones from Home Depot or ikea, but because I have enough buffer and enough time, I really wanted to try and do that just because even though it would cost me the same amount to refinish them, I just feel like these cabinets have lasted since the sixties. They’ve still got a lot of life left in them as hardwood cabinets versus my other two units I already bought and they’d been replaced with particle board cabinets. And I’m already on a timeline where in the next five years, I’m probably going to have to replace those because they’re not doing so well. So I really want to make sure that everything is above renter grade in terms of just nice finishes for people to live in. That’s important to me, but also that it is renter, I’m trying to think of the right word to say. It can handle being slammed and not being treated as if it was someone’s primary residence in a way that sometimes tenants do.

Ashley:
Well, Rene, it looks like you’re already to get started on your rehab, and I think you had mentioned a three month timeline is what you’re shooting for hopefully by the end of the year. So we wish you the best of luck and we cannot wait to have you come back on to share the final numbers and what this rehab process was like on your flip.

Rene:
Thank you guys for having me.

Ashley:
You can find out more information about Rene. We’ll link it into the show notes along with her live budget and what she is spending on her flip as she proceeds through the process. I’m Ashley. And he’s Tony. And we’ll see you guys on the next episode of Real Estate Rookie.

 

Mindy:
Hindsight really is 2020. Today Scott and I are going to be looking back on our respective fire journeys, including timeline, fine numbers, and moving goalposts. Hello, hello, hello and welcome to the BiggerPockets Money podcast. My name is Mindy Jensen and with me as always is my not quite ready to retire. Co-host Scott Trench.

Scott:
That was a fine intro. Mindy, FINE, financial independence next endeavor because that’s what you are on this not quite retired early. Thank you. Mindy BiggerPockets has a goal of creating 1 million millionaires. You are in the right place if you want to get your financial house in order because we truly believe financial freedom is attainable for everyone no matter when or where you’re starting or even if you start with a very clear goal in mind and it changes and evolves and doesn’t look anything like that by the time you get there. Mindy, excited to get into this with you today. Mindy, did you go into your FI journey with a timeline and a number or was there one that you focused on more?

Mindy:
Anybody listening to this podcast should be aware that I am MRS. 1500 from 1500 days.com, and if you’re not, that’s okay. I don’t really talk about it, but the 1500 was the timeline that my husband and I predicted. It would take the number of days, 1500 days to reach financial independence from where we were starting, which was a position of about halfway there when we discovered the concept of financial independence. So we were focused more on the timeline to get to the number than the actual number, but we were also really focused on the number. We ended up doing it sooner than 1500 days. Conscious readers will be like, yeah, maybe you did it in X number of days. I don’t actually remember how long it was. I know it was shorter than the 1500 days, but I think that everything that we did to go about our financial independence journey outside of saving for retirement, we did wrong. We didn’t focus on the right things and we didn’t enjoy the journey.

Scott:
Mindy, I think you’re going to be a rare example of someone who was so clearly focused on the timeline and less on the number. I mean, the whole premise is 1500 days or what is that? Five, six years? Four or five years, somewhere in that range. So I mean I think the healthiest way to do it because thinking about it from the right framework, it’s about getting life back and getting control back and time as the real resource here rather than putting the money first, which I think is backwards for a lot of people, including myself and how I approached it.

Mindy:
Well, let me correct you here, Scott. I wasn’t focused on the timeline, I was obsessed with the number and we thought we would do it in a certain amount of time, but we were just hell bent on getting there. And that I think is what makes it such an unhealthy approach. And if I could go back in time, I think I would probably contribute almost as much to my investments as I did in real life, but I would be more focused on the journey. So Scott, you mentioned that you were focused on the number. Let’s talk about your journey.

Scott:
Yeah, I mean I set out in 2013, I started my job and I became pretty interested in financial independence within probably three months of starting my corporate finance gig. And I think I read the shockingly simple math of Early Retirement by Mr. Money mustache or a precursor article to that, but I’m reaching back 10 years now, but when that concept hit home, I was like, oh, boom, that’s it. And I think, well, I set a seven year time horizon to get to between $750,000 and 1,000,700 50,000 was my minimum cutoff there, and that was the original goal that I set and it’s moved all over the place for the last 10 years as I’ve evolved as a person and okay, I started at seven 50 and then by 2014 when I had gotten into BiggerPockets world, I was like, oh, if I house hack then I don’t have any housing expenses.

Scott:
My number is three 40 or whatever it was at that point in time because I don’t have any housing expenses and that’s the biggest thing and I bike to work and then you turn 25 or 26 and you’re like, you know what? The $300,000 in wealth and the house hack is not really a good FI concept. It’s back to the seven 50 to a million. And so it is evolved all over the place. As I’ve moved that journey, the foundational principles that I’ve never moved though and that I’m really glad I’ve stuck with the whole time are this concept of after tax wealth and spendable cash flow being generated by my portfolio. I think I instinctively knew pretty early on in the journey that the 4% rule was the starting point, but that I had never actually live off a portfolio where I was selling stocks. I would need to live off of a minority of the cash flows that my portfolio was generating.

Mindy:
So I think that’s really interesting. You said a couple of things that I want to highlight. First, you said my number has moved all over the place as I have grown, and I think that’s really important to underline. I am looking to talk to people who have reached financial independence. If you have emailed me, [email protected] and I want to know how their money number has evolved because when Carl and I were on our path to get to 1 million, it was always $1 million and then we bumped it up a little bit to 1,120,000 so that we could have money to pay off our mortgage if we chose, but we didn’t want to pay it off at the time, so we just like, okay, we’ll move our number, but our number only changed that one time and then that was we just kind of put that in the back of our mind, but focused on getting to 1 million, but then we got to 1 million and it didn’t feel like enough and I am truly on the path that or truly in alignment with Bill Benin’s 4% rule.

Mindy:
I believe in the 4% rule. I believe it’s going to work. I would love to talk to Big Earn because he has done way more math and says it’s more like three or 3.5 or whatever. We’re going to talk to him down the road, but the number seems to change with most people that I talked to. Oh, originally my number was this, but then once I got there, I didn’t feel comfortable with it. One more year syndrome, so I moved it again. Has your number changed as your life has changed? So I’ve known Scott for nine years when we first start. How old are you, Scott now? 30.

Scott:
I’m 34.

Mindy:
You’re 34, okay. You just had a birthday. So I’ve known Scott since he was 25, 26. He had some different thoughts back then, which is fine. You were allowed to grow and evolve, but seven 50 when you’re a single guy living in that first duplex that you were living in versus now you have a wife, you have a family, you have a different life than you did nine years ago. How has your mental financial independence number pushback? I think that there’s a lot of this moving goalposts thing in the financial independence community.

Scott:
Once I crossed the threshold, which for me I think was probably around 28 to 29 years old, and as I assumed leadership here at BiggerPockets as CEO, there was, I crossed the inflection point of what I defined as fire, right? I had well over a million dollar net worth and I was able to generate enough to live my lifestyle without depending on my job. I do not ever want to go back on the other side of that. My portfolio needs to be able to sustain my lifestyle. Yet as I work, I’m piling on more and more assets. I love my job here at BiggerPockets and I’m privileged to have good compensation and opportunities. As a result of that, my investments continue to perform. And so one of the things that I think changes is you’re like, well, why would I continue to live in a house hack duplex here?

Scott:
Why wouldn’t I begin to expand that from this position here? So I think I did a good job of keeping those goalposts from moving before hitting FI and not moving them the FI number so that I need to continue to generate more assets from active work, but also I’m going to start living my life a little bit differently here, right? I’m about to celebrate my 11th year anniversary with my Corolla, and I don’t know if there’ll be a 12th year for the Corolla. I think it’s time to get an electric vehicle. So those types of things are happening, so it’s like what is the FI number? Well, I’m definitely well past that at this point and I expect my portfolio to continue to grow and I expect to cautiously and step by step continue to hopefully get the benefits of that. I think that’s the magic of achieving financial independence early on is that that happens and I think that’s happening to you to an extent as well, you and Carl.

Mindy:
Now, a quick ad break from our show sponsors. While we’re away, we want to hear from you. Do you know when you’re going to fire? You can answer in the Spotify or YouTube app. We’ll be right back.

Scott:
Alright, let’s jump back in.

Mindy:
One of the things that changed with my financial independence journey was my salary. The household income, household expenses went up dramatically there. There’s some things you can control and there’s some things that you can’t control. What do you think people on the path to financial independence should be considering when they’re taking into account what they think their fine numbers should be?

Scott:
It’s been talked about a million times. People roll their eyes, but you have to always start it from the spending framework. Spending is generally speaking, and again, there’s multiple levers, but spending is generally speaking, going to be the number one number to figure out in order to plan and back into a five timeline. And the lower spending gets, the easier the five timeline gets. It’s a geometric relationship. A hundred thousand dollars income earner who spends 80, $90,000 a year after tax, a hundred thousand dollars after tax, 90,000 spend is going to accumulate one year of wealth in nine years, right? Or one year of spending in nine years, right? A hundred thousand dollars income earner who spends $50,000 a year is going to accumulate one year of spending in one year. That’s not a 40% or 50% increase. That’s a nine x faster path to financial independence.

Scott:
So it’s a geometric acceleration as your spending declines relative to your income and it doesn’t even stop there because generating $40,000 or $50,000 a year in income from investments is not likely to leave the first person searching for fire subject to tax. You’re not going to be in a high tax bracket if you only have to realize $50,000 a year from your portfolio. If you need to realize $200,000 a year from your portfolio, you’re going to be in a high income tax bracket. And so you’re going to have to generate more like three or three 50 in order to actually realize, depending on what source it’s coming from, if it’s truly dividends, if it’s truly passive, if it’s truly long-term capital gains might be a little less, but you’re looking at a minimum of two 40 or two $50,000 distribution just to finance that 200,000 in spend. So when you go from a more lean fire to a fat or chubby fire world, the game gets geometrically more difficult because you’re both accumulating less and you need a bigger asset base to finance it and you got to multiply, add the tax component on top of that to realizing fire. So it really does start with the expenses. When you’re planning this and trying to forecast and back into a timeline,

Mindy:
I think that there is really no way to argue with that. You need to have your spending under control, and I don’t say that as you need to be the most frugal you can possibly be. I say that as you need to be conscious of where your money’s going. And I think that when we speak with people on finance Fridays or when I’m just even chatting with regular people, one of my first questions is, is this your actual spending? Do you know what you’re spending is? And a lot of times people think that they are spending X, but they’re actually spending x plus. And of course every month is going to be different, but if you think you’re spending $3,000 a month and you’re really spending 3050, you don’t have an issue. But if you think you’re spending $3,000 a month and you’re really spending five, all of your numbers are out of whack, everything is going to be off and you’re going to be like, why am I not reaching financial independence?

Mindy:
So you’re absolutely right. Scott spending is the huge biggest consideration that you need to be thinking of, especially at the beginning of your journey, but also throughout your journey. It’s so easy to have your spending go out of whack when you’re not paying attention to it. This is one of the reasons why I tracked my spending in 2022. You can still see it. It’s at biggerpockets.com/ mindy’s budget. You can see how much I didn’t guess right on my spending, but I do think that when you are taking into account your fine number, oh, I’m spending $3,000, this is how I did mine. I’m spending $3,000 a month right now, therefore that’s $36,000 a year, I’m going to round it up to 40. I only need a million dollars. Well, okay, but my housing costs went up because I moved, my salary changed, which was beneficial, but there’s a lot of other expenses that I wasn’t having back when I made my fine number 11 years ago when I had a 6-year-old and a 3-year-old. Now I have a 14-year-old and a 17-year-old. Guess what? My 17-year-old drives, she didn’t need a car, but it’s so much easier on me if she has one. There’s clothes and school stuff, and so your expenses are going to change even in traditional retirement, your expenses are going to change because as you get older, you typically have more health issues and that requires you to spend more.

Scott:
I think that look, there’s a reason why so much of the math and so much of the discussion in the financial independence world derives around this question, and I think that if you want to achieve fi, you have to focus on this number. You have to be in control and you have to get really confident about it if you’re actually going to pull the trigger at the end of the journey and quit your job and begin living off of assets and a whole host of additional frameworks and the way I plan my finances and the way I think about pursuing financial independence that are at odds with traditional retirement planning advice derived from that very simple observation. The other day, Mindy, we talked about, or a couple weeks ago, we talked about paying off the mortgage. Even a low interest rate mortgage, if it’s a big mortgage and you’re trying to live in a nice house, for example, requires a tremendous amount of income to be realized, which puts you in the higher tax back, which compounds the problems.

Scott:
So once you start thinking about actually pulling the trigger, putting down or paying off that mortgage becomes a major factor in requiring less distributions from portfolio to satisfy the 4% rule, right? I think we used the example that you mortgage at like 2.85% was like $1,300 in p and i every month and it was like 15,000 a year and the asset base that you need to generate $15,000 a year is what? 15 times 25 is like 375 grand, which is more than the balance of your mortgage from there. So those are all considerations that derive from this, how much do I spend problem and how do I get that expense pile as low as possible so that I can rely less on my asset base, I can get to a lower asset base to get there. So everything derives from that. And then when we think about the journey definer, we have two numbers that I always look for.

Scott:
We always do these finance Fridays and these other conversations with listeners finances. There’s two numbers that I’m looking for. One is your current net worth, what are your assets in right now? And the second is what is the annual amount that you’re going to keep after taxes that you could invest? So if you have 500 K and you’re saving 50 grand a year, I can do very simple math right there. I say, okay, we have 500 K today and we’re going to have another 500 K over the next 10 years. That’s a million bucks. The 500 K is going to compound at some rate over the next couple of years if it’s in a paid off house, 3% if it’s in a stock market index fund, eight to 10% most likely if we use historical averages and those cash flows are going to compound at a certain rate eight to 10% if they’re put into a stock market, 3% if they’re paying off a low interest rate mortgage, whatever.

Scott:
And so I use those two things to begin backing into the timeline and looking for ways to shorten the journey. Now, some people listen to this will be like, I have $0 and I make $50,000 a year and I spend 45. Okay, now we’ve got $5,000 in generation a year that has to change in order to move there and it will change as the years go by and we think, okay, we build a spreadsheet here, you’re going to get to a very long time horizon to achieve five with that starting point. So we have to think about how we can geometrically expand that. How do we reduce expenses? How do we increase income and then how do we put in place some big boosts along the way, like a live and flip that could contribute a hundred to $200,000 in after tax wealth to really boost and accelerate that journey by what is that 40 years from the year one position of the 5,000, but really in practice boost that journey by 3, 4, 5 year chunks and one goes, so that’s the framework I always use to size how long this thing is going to take for people to get to their end goal.

Scott:
I

Mindy:
Think there’s a lot of people who don’t really dive into the aspects of it. They think, oh, I’m making 50 and I’m only spending 45, so I’m saving 5,000 and that’s awesome. Let’s celebrate that because that is not the norm in American society, but it’s also not going to get you to financial independence to early financial independence. It might not ever get you to financial independence unless something changes. Like you said, Scott, we just did an episode where we talked, it was, we called it a tough love episode where we talked about, you know what, you might not reach financial independence, and I’m pretty sure I gave off this Dave Ramsey quote in that episode that was episode 5 63. I don’t know if I said that. Live like no one else now, so you can live like no one else later. If you want to be financially independent, you have to change what you’re doing now.

Mindy:
And you said, the way I think is sometimes at odds with traditional PHI advice, I want you to seek out listeners, I want you to seek out people who are at odds with traditional PHI advice. You might not agree with it. Scott is a proponent of real estate investing. I’m a proponent of real estate investing. That doesn’t mean you have to invest in real estate. Look at the traditional PHI advice is V-T-S-A-X? Well, maybe that doesn’t float your boat. Maybe you want something else. Instead, go and look at what other people are doing and kind of choose your own adventure with regards to your PHI journey. But always come back to the fact that the lower your expenses, the faster you’re going to get there. The higher your income, the faster you’re going to get there. Combine them both lower expenses and higher income blam, you’re going to get there quickly.

Scott:
So I think it’s the gap between your income and your expenses multiplied by years and returns, and there’s a lot of calculators out there that will help you figure that out. What I’d encourage everyone to do, and the way I approach this is there’s a formula, right? I’m going to save this much. I’m going to invest it in the index fund I I’m going to let time compound and I got my shockingly simple math of early retirement like Mr. Money mustache wrote almost a decade ago or a little bit over a decade ago today. That’s one, but don’t stop there. This is about financial independence and if you’re listening to this and if you’re serious about it, layer on the potshots on top of that, can you do a live and flip? Can you do a house hack? Can you do it? Start a small business?

Scott:
Can you do a side hustle? Layer these things on, and my framework for that, which we’ve talked about a lot, Mindy, is nine out of 10 businesses fail. So start 10 businesses and you take two and a half years and you say, every 90 days I’m going to try a new concept. This 90 days I’m going to buy a live and flip. Then maybe I take another, and if that works out and you find the great deal, you spend the next 90 days actually completing the flip or getting as far as you can, great. That’s complete. You live in it for a year or two. Then you start, you explore a really harebrained scheme that I had around winter gloves for driving because your hands get cold, which went absolutely nowhere and was a terrible plan. And then there was winter tire rental businesses, which geometrically compounds the amount of inventory that you have to have because what you have a set of tires and then somebody else you have, that was a terrible plan, and then I did a T-shirt.

Scott:
You just try it, layer those things on and nine down 10 are going to fail. You don’t go into them because you know they’re going to fail, but you just know that’s the odds of your best ideas. Nine out of 10 of your best ideas will fail, and then by the end of two and a half years you got to winner, and then after five years you got two and after 10 years you got four and you got four business winners. One of those could really make a big difference. One of those four might drive 80% of your income or outputs on there, and that’s it. And you do those two things, the formula and those ideas and pursuing these kind of ideas on some sort of cadence, you will accelerate that timeline beyond what the formula tells you is going to happen. Almost certainly there will be periods where that won’t be true, but that will be the reality for many or most who pursue it like that.

Mindy:
So Scott, I actually quote you frequently on a multitude of things, but the oh, 90% of all small businesses fail, start 10 businesses. I say that to a lot of people who are talking about, I want to start a small business. I wish you would’ve said something back when you wanted to start winter driving gloves and tire rental. I would’ve had some advice for you then.

Scott:
Well, I never actually got them off the ground because they were terrible ideas, but I explored them for several weeks, wrote the thesis kind, did all went nowhere. That’s it. That’s it, right? That’s all. It’s you give up when it becomes clear that it’s not worth the effort on those and then you find something. But I think that’s the framework and that’s why you hear all these stories about people who achieve financial independence and they’ve always got, or not always, but a huge percentage of them have some sort of wacky, very specific situation to them, which is the norm because that framework is being applied to all of these different people who are pursuing both Boeing. We’ve got to take one final break, but stick around for more on adjusting your PHI timeline when we’re back.

Mindy:
Welcome back to the show. Okay, so let’s go in a bit of a different direction. I have talked to people who say, oh, I hope I can get to financial independence in 15 years. I’m like, okay, what’s your fine number? Well, my fine number’s a million and I’m at 900,000 right now. I’m like, you’re probably going to make it a little bit sooner than 15 years. But on the flip side, there are people who are like, I want to quit my job next year. Okay, great. What’s your net worth? Well, I’ve got a hundred thousand dollars in student loans and I make $50,000 a year now and I’m spending 49 and a half thousand every year. I’m like, well, I don’t. The eight ball, the magic eight ball says outlook. Not good that you’re going to reach financial independence in a year. What are some of the detriments do you think, to focusing on too short of a timeline?

Scott:
Two reactions. One is it will be discouraging, but the second is that in that user specific case, I don’t think the goal should be fire in there. It should be getting out of that job, right? The long-term goal is, I think for folks listening to this podcast should often be fire in terms of getting to financial independence and early retirement here and having an asset base that can remove the need for work. But if you really hate your job and you’re starting with anywhere close to a median income and zero net worth, then I would just encourage you to go a different route of flexibility and one of the problems that people find themselves as they’re trapped in their job and how do you get trapped in your job? Well, you get trapped because you optimized for income. So this is the highest paying job that I could get that was reasonable or whatever around this and there’s no other job or few other jobs that would allow me to do this kind of work and get the same paycheck.

Scott:
If you make 80 grand and you spend $78,000, you’re going to be stuck. That’s not a pleasant situation because you can’t take a $75,000 a year job that is way better and removes all the things that you hate about your life and your job because of that $5,000 difference. And so I think that the game becomes about flexibility. If you spend $40,000 a year and you make $80,000 a year, chances are you can find a job for 60 grand that removes those problems, maybe gives you more time to pursue other interests, side hustles, other wealth building activities actually make you richer over a longer period of time. But that’s the trap I think that a lot of workers find themselves in and I think that your goal in that situation should be flexibility. If someone has 80,000 a year job and they’ve got $50,000 in the bank in liquidity in their savings account and they’re saving three, $4,000 a month, they’re not going to be stuck in that job for years and years and years. Hate and life, they’re going to get another opportunity. They’re going to see something come up that’s going to give them better longer term upside. But again, there’s so many people I think that are in the prior situation of just like they spend essentially all that they earn and they’re optimized for income and so they’re just totally trapped in that job and that’s where you start to hate it.

Mindy:
I love this point, Scott, because most people who hear about financial independence pursue it, let’s be honest, because they hate their job. Either they hate their job or they hate that they have to go to a job instead of doing whatever they want. And changing jobs doesn’t really come up in a lot of PHI advice. It’s just put your nose to the grindstone and bust it out and get to PHI and then leave. But changing jobs can change the whole, it can change your whole life. It will change your whole life. I have had jobs where I get up in the morning, I’m like, Ugh, I can’t believe I have to go to this job. I hate this job. When I started working at BiggerPockets, I felt guilty that I was leaving. Carl was working with the girls and they’re fighting and bickering and whatever as kids do, and I’m like, I’m going to go to work. Bye. I’m going to have a great time. I love my job so much. This is so awesome. So just having a different job that you enjoy, maybe it pays less, but you have so much less stress changes your death march to financial independence and makes it more of a journey that you can focus on enjoying. I love that you said that.

Scott:
I think that’s also part of the dynamic in a lot of fire people. You hear a lot of fire people who are like, I’m fire and I work, and I think that that’s a component of this because hate fire is a motivator and it should be for people who hate their jobs, I want to hate my job, I want, I want to retire early. It starts that way. Did I hate my first job? No, but I didn’t want to be doing it for 20 years, and so fire was a huge motivator for me. The idea of not having to work is a huge motivator, and I think it will be for 30, 40, maybe upward to 50% of the US population on that. But as you pursue fire, as you rack up 30, 40, 50, 60, 70% savings rate over the years and decades as you accumulate assets into the hundreds of thousands or millions of dollars that generate cashflow and the wage is less relevant to what you’re doing, I think what we found with a lot of fire people is they’re like, I either love my job or if I don’t like it, it pays so much that it’s really hard to walk away from that.

Scott:
And that’s the problem you want to give yourself as a worker, right? Is you like your job so you’re not going to leave it or it’s just so compelling that the ability to add onto the pile is there. And I think that is almost a common theme among a good number of people who are pursuing fire in this space or at least that I’ve encountered. Would you say that’s true for many of the people you encounter,

Mindy:
That they either make so much money, it’s hard to quit or they actually like their job?

Scott:
Yes.

Mindy:
I would say I’m meeting different people. I am meeting the people who make so much that it’s hard to quit and I’m meeting the people who like their job, but I’m also meeting a lot of people who are like, I’m on the path. I don’t really like my job. I don’t hate it so much that it’s ruining my life, but I don’t want to continue once I have my financial independence number reached. Scott, what are the major milestones that you set to help you keep track of your progress? Or did you keep track of your progress

Scott:
In terms of milestones? I personally, I think that the events that really helped accelerate FI were each of my rental property investments. I think it was the various promotions I got here at BiggerPockets in my career, and I don’t think I really worked out a lot of different milestones. That wasn’t the way I was thinking about it. I looked at the number every week, if not multiple times a week and ran the analysis monthly or quarterly on my personal financial position to kind of run projections and estimates and those types of things. But I don’t know if I really thought about it in terms of like, oh, this milestone of 250 will be reached at this point and this one will be reached here. It was just a constant progression. How did you think about it? Mindy,

Mindy:
Carl and I didn’t really have milestones either. We had this one goal and we started a blog very shortly after we discovered financial independence and we published monthly net worth updates, so it was easier to see where we were going because we were every month we had to publish this. I mean, I remember being on vacation with Carl. He’s like, I got to fight an connection. I got to log in and get a screenshot of our net worth today before the market’s open tomorrow. I’m like, really? Is it that serious? But it helped to see where we were. I think it is important to keep track of, even though longtime listeners of this show will know that I don’t check in on my net worth now, I was reading those net worth trackers or those net worth statements when they were published just to see where we were.

Mindy:
I think it’s really important to check in, and Carl is obsessed. I tell him this too, him, I’m not talking smack about him when he can’t hear. Carl is obsessed with checking our numbers. He checks them every morning. I think that’s too much. There are people who check them once a year. I think that’s a little too infrequently. I like the quarterly or monthly, and if you are on the path to financial independence, you’re feeling terrible because the market just crashed or you’re feeling terrible for whatever X, Y, Z reason, then look at how frequently you’re checking in with yourself and change that frequency. But I don’t know that I would do the days again. I think I would focus more on the number and the experience on the way to the number.

Scott:
I think that that’s good learning here, and I’m trying to think about how I would’ve reapproached it here. I think I would’ve done the same thing. I think the framework is the right one of just set understanding the goal, keeping expenses as low as possible, tracking frequently, making sure the formula will lead me to my end destination and layering on top the additional bets that have the ability, the unpredictable, the things you can’t put in a model but have the potential to accelerate the journey. And then I think that there’s a little bit of a lighten up phrase that comes, and it probably applies to both of our journeys, Mindy, with moving to financial independence, you’re going to get there and you’re not really going to care 10 years from now if you got there six months sooner because you didn’t buy the steak and potatoes at the steak restaurant instead of the hamburger. And so I think that that’s kind of the only piece that I might’ve reframed or changed early in my journey.

Mindy:
I definitely wish I would have focused on the journey because even if it focusing on the journey as opposed to the ED number gets you an extra year of working, but now you have 11 years of a nice life instead of eight years, nine years, 10 years of this just all out desperate travel to get to the end, Carl wrote an article called The Death March to phi, and it was like, this is everything we did wrong, and it was pretty much everything except for the whole investing part. We did that part right and everything else was wrong. So I guess what I want to share with people, what’s your PHI timeline? Your PHI timeline should be fluid and it should be realistic. It should be attainable. It should be so flexible because if you have an opportunity to do something that’s going to cost a lot of money, but it’s kind of like one of those once in a lifetime opportunities, take it and extend your PHI journey. So the whole thing is enjoyable. Don’t eat rice and beans every single day unless that’s what you want to do. Don’t eat rice and beans every single day so you can reach financial independence earlier. Enjoy the parts that you really want to enjoy.

Scott:
I think that’s it, right? And again, I don’t feel personally that didn’t do that. I think that too much of it, I can remember several instances, but it’s like, I dunno. I prioritized partying on the weekends and video games, my nice computer there and those types of things. And I didn’t prioritize a nice car, a nice place to live steak at the restaurant, which is probably one of those things that I could have done and gone out to more dinners with friends and those types of things. But I think that you can do that, and I think that, again, that phrase lightened up, I think applies to a degree. But I will take the stance today that I’m very glad that I did what I did in my twenties and approached it with the level of intensity that I did because I think it is a big reward and it’s great to have those options now at 34 and to be able to not have to worry whenever I want to do something fun with my wife or baby at this point. That’s stuff I worked hard for and I’m enjoying that now, and I believe I will have the ability to potentially do that for the rest of my life. And I think that that’s worth it by a long shot. Well, this has been a really fun discussion. I think Mindy, and I think it was really introspective. I think I was actually expecting to go a little bit of a different direction with some of the ways we talked about it, but I think that just talking about our journeys was hopefully helpful and illuminating for some folks.

Mindy:
I want to hear from our listeners, how was your journey? How would you have made changes to it? Knowing what you know now, if you knew it then and how long did it take you? Did you focus on the number or the timeline and did you enjoy the journey or did you death march it? Like Carl and I did? Email [email protected], [email protected] or email us both.

Scott:
Yeah, and I want to say thank you. I mean, we actually put a similar message out to reach out to us for how to reach fire based on your income, the episode that released on October 1st here on BiggerPockets money, and Bob must, 50 of you must have reached out to me. Thank you. It was very thoughtful and detailed messages, so just know when. I love that. Please do. I will respond to every single one. Just know that in some of these, it might take me a couple of days, but I look forward to hearing from you guys, and thank you. Me and Mindy both appreciated that.

Mindy:
Yeah, it’s awesome to get emails from our listeners, so [email protected], [email protected]. We made it real easy. You don’t even have to remember our last names, however, I will tell you that that wraps up this episode of the BiggerPockets Money podcast. My name is Mindy Jensen and he is Scott Trench, and we are saying goodbye Peach Pie.

 

 

In This Article

Despite mortgage rate unpredictability, the real estate market is growing in some of the country’s priciest cities. According to the latest Zillow data, listings and homes going under contract have increased markedly in September. Cities at the top end of the market, such as Seattle, Los Angeles, and San Jose, showed the greatest gains.

“Generally, new listings and sales moved closer to pre-pandemic norms in September,” said Kara Ng, a housing economist at Zillow, told Yahoo! Finance. “That’s still a long way to go in terms of normalizing supply.”

Rate-Locked Buyers Come Off the Sidelines

The top end of the market had been stagnant amid the post-pandemic interest rate increase, with homeowners rate-locked and unwilling to give up sub-4% interest rates for 7% and higher. The recent movement at the high end could reflect optimism about future interest rate cuts and a desire to jump into the market before prices climb. It could also signal a pent-up need to move, which had been stalled amid interest rate and market uncertainty.

Despite a slight softening overall, with around 940,000 homes for sale nationwide in September, the market is still 23% below the level it was at the same time in 2019. However, according to Realtor.com data, listings were still up by 25% or more over the previous year in top-end cities and regions such as Seattle, Silicon Valley, Denver, and Washington, D.C.

Silicon Valley Has Helped Ease California’s High-End Market

The housing market on the West Coast has been a particular cause for concern in recent years, with 28% of the country’s homeless being in California. However, on the high end, a surge in tax revenue, particularly with high-flying Silicon Valley companies, could have also helped loosen the real estate market in some rate-locked regions, with employees choosing to cash out stocks for real estate.

Similarly, wealthier homeowners flush with cash would not be as affected by the fluctuations in mortgage rates as other buyers who need to borrow more. 

California Housing Trend Speaks for Pricier Homes Nationwide

The idea that the real estate market is increasingly polarized between the affluent and middle class is reflected in stats throughout the year. Redfin’s first-quarter report showed that overall real estate sales fell 4% nationwide. However, luxury real estate sales increased more than 2%, posting their best year-over-year gains in three years.

The real estate data and listing company’s second-quarter report showed that investor home purchases were up almost 30% in pricey West Coast markets such as San Jose and Las Vegas, followed by Sacramento, Los Angeles, and San Francisco. San Jose also saw the largest gain in overall home purchases, which rose 15.2% year over year in the second quarter. San Francisco came in second place.

Most of the investor activity was in the single-family home sector. Craig Pellegrini, a real estate agent in San Jose, said at the time of the report’s release in August:

“San Jose has a lot of overseas investors buying sight-unseen, and a lot of home flippers who are purchasing dilapidated homes, putting some lipstick on them, and selling them for a profit. I’m also seeing parents buy second homes that they plan to rent out for a while and then pass on to their kids, some of whom just graduated college and can’t afford to buy themselves.”

Zillow’s price index report for September (previously mentioned) echoes the market trend. On the upper end, interest rates are less of a concern for cash-rich buyers, who are making moves now before prices increase amid further rate cuts.

The Outlook for the California Housing Market in 2025

The trajectory for increased activity in the upper end of the market is reflected in the outlook for the California market in 2025, according to the California Association of Realtors. CAR president Melanie Barker, a Yosemite Realtor, said in a press release:

“An increase in homes for sale, along with lower borrowing costs, is expected to entice more buyers and sellers to enter the market in 2025. Demand will grow as we start the year with the lowest interest rates in more than two years, particularly for first-time buyers. Meanwhile, would-be home sellers, held back by the ‘lock-in effect,’ will have more flexibility to pursue a home that better suits their needs as mortgage rates continue to decline.”

CAR senior vice president and chief economist Jordan Levine added:

“Inventory is expected to loosen as rates ease; demand will also increase with lower mortgage rates and limited housing supply, which will push home prices higher next year. Price growth is expected to be slower, but the housing shortage will keep the market competitive outside of big economic shocks, so prices will still rise.”

How Investors Can Capitalize on Increased Liquidity in the Top-End Markets

All this sounds great. But how do you make the most of it as an investor? Here are some strategies.

Target emerging markets located around pricier ones

Buying on the border of some expensive real estate markets is a trusted strategy when predicting where to invest, as there will always be people priced out of expensive cities. Whether investors flip homes or rent, there is likely to be high demand for housing here. Examine the emerging markets for investment around these cities, and you’ll be on secure footing.

Flip homes

The risks and rewards are both high when flipping homes in expensive cities. However, if you’re a well-funded house flipper, flipping here makes sense because the demand for housing will always be there. Assuming you buy right, there is plenty of scope for high profits, even if you are tearing down an older home, building a new one, or simply doing a cosmetic upgrade. 

Team up with wealthier residents to do deals

Many residents of expensive cities are flush with cash but don’t have the time outside their primary jobs to invest in real estate. That’s where a knowledgeable, well-organized investor comes in. 

Borrowing large sums of money or teaming up with a well-heeled silent partner requires a highly competent flipper with a good track record who can deliver on their objectives and has a solid contingency plan for any potential downsides, where the investor is protected as much as possible.

Wholesale deals for high profits

In expensive markets, wholesalers must be credible and adhere strictly to local real estate guidelines. If that means closing deals before selling, they will need the cash to absorb the expenses. However, the potential profits could be high because of the price points.

Purchase long-term rentals for equity appreciation and cash flow

One advantage of buying deals in expensive cities is that eventually, the market corrects many mistakes because properties continue to rise in price. Conservative investors can build their net worth simply by holding on to a property that pays for itself with rental income but accrues appreciation. Over time, with rental increases and mortgage paydown, these pricier assets will start cash flowing, too. 

Final Thoughts

Timing emerging markets is where the gold is in real estate, but it’s also a risky endeavor, as it could mean being saddled with homes that don’t turn the corner as quickly as hoped. 

If you can afford it, buying in already-established markets is a safe move with few downsides, as long as you do not over-leverage. Given the market cycle, buying now as the market rises as rates eventually drop could be a good move. 

However, with an election and a new president, many investors have put buying plans on hold, regardless of the outcome. This might represent a gap in the market for bullish, well-funded buyers to make a move.

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

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In This Article

There’s a peculiar narrative circulating the Internet about affluent lifetime renters who rent by choice rather than out of necessity. Stories are going around about people who prefer the freedom of movement and dislike the idea of having to do repairs abound. A few months back, Architectural Digest ran a story about lifetime renters, including a 71-year-old financial professional, a Forbes journalist, and a middle-class NYC family who love to travel.  

From an investor’s point of view, these are dream tenants: financially secure, likely to rent long term, and highly likely to look after a rental like it was their own home. Now, there is research data that suggests that “forever renters” are on the rise across the U.S. 

What the Data Says (Sort Of)

More specifically, properly management software company Entrata conducted a survey of 2,000 renters earlier this year and got some notable (and quotable) percentage points. The most-quoted one is that 41% of renters surveyed said that their concept of the American Dream had “nothing to do with homeownership.” And 20%, or 1 in 5, said that they anticipated becoming lifelong renters ‘‘by choice’’ rather than due to financial constraints. In fact, 17% of those surveyed said that what they specifically liked about renting was the financial freedom of not being tied to a mortgage. 

Many media outlets interpreted these figures as signs of a tectonic shift in Americans’ mentality, or a “paradigm shift,” as Rental Housing Journal excitedly called it. 

You can probably sense that what’s coming is a bit of skepticism about these figures. First, the Entrata survey’s sample population was all people who lived in large apartment communities of over 50 units. We can deduce that these were mostly urban renters. 

Coincidentally—or not-so-coincidentally, as we’ll see—Architectural Digest’s interviewed forever renters all lived either in NYC (Manhattan, no less) or Seattle, which is well-known for its thriving renting culture with plenty of choice. 

I have no doubt that being a lifelong renter in Manhattan, Seattle, or the nicer parts of Miami is indeed a viable and even attractive lifestyle choice, provided the renter has the means to sustain it. Not worrying about roof repairs or yard work is definitely a pro of renting, especially if you are frequently traveling. 

Moreover, the overall culture and how we fit into it plays a huge part in our decision-making. As someone who lived in a large city for many years, I know that renting not only doesn’t need destigmatizing there, it’s so normal that no one bats an eyelid. This was so much the case that yours truly, too, professed her contentment to be a “forever renter.”

Now, I live in the suburban Midwest—and I can confidently tell you that no paradigm shift regarding homeownership is happening here. That’s not because there are no options for renters. There are several new apartment blocks in the vicinity of where I live, most of them build-to-rent communities. The cheapest one in the least luxurious block is a small studio that costs nearly $1,300 per month—about the same as a monthly mortgage payment on a decent two-to-three-bedroom home in the area. 

Whichever way you cut it, it doesn’t make good financial sense, although the lack of available funds for a down payment without a doubt keeps many people renting. The long list of available apartments in build-to-rent blocks that came up during my search suggests that they are not nearly at full occupancy. Private landlords able to offer single-family homes have the edge in this area: Renters just get more space for their buck.

Is There a Cultural Shift Toward Renting? 

But the issue is not just the cost per square foot. The deeper issue is the ingrained culture of homeownership in this area—and many, many areas across the country. 

The further away you are from a major metro area, the more people tend to own their own homes than rent. And we all know that you cannot (want to) be what you cannot see. When everyone around you is a homeowner with a nicely maintained yard, you also want to be a homeowner. 

This isn’t just this writer’s opinion. Forbes, identifying the most- and least-competitive rental markets, points out that what’s normal for an area is a major factor shaping the demand for rentals. 

No one will be surprised to see New York in the top five most competitive rental markets. Of course, New York is also unaffordable, but it also is one of those places where renting for many years or even a lifetime, has been considered normal for a very long time. Renting there doesn’t necessarily correlate to low income, either: Some New Yorkers rent in the city while owning a home elsewhere; others live in rent-controlled properties and are happy with that arrangement.

By contrast, the Detroit-Warren-Dearborn metro area is one of the least competitive rental markets. As Forbes explains, “Renting isn’t as common as homeownership in the Detroit metro area, so renters won’t face strong competition in the market.” 

This long-standing preference for homeownership checks out in another statistic: Whether people choose to renew their leases or not—when it’s a real choice rather than one dictated by the unaffordability of other available options. 

RentCafe did a snapshot of the hottest rental markets recently, looking at percentages of occupancy and renewal rates.  There were some telling results: For example, suburban Chicago emerged as the hottest rental market in the country because it has both a very high rental occupancy rate (95.6%), and a high lease renewal rate of 69.5%. By contrast, Chicago proper, while it does have a high occupancy rate of 94.7%, has a lease renewal rate of only 58.7%. 

In other words, people have to live in central Chicago for all sorts of reasons, but they don’t necessarily want to stay. It’s also worth noting that the high lease renewal rates in suburban Chicago are due to the overall low affordability of homeownership in the area more than anything else. 

The figures point out that this lack of an overall appetite for long-term renting is generally more pronounced the smaller and more rural you go in the Midwest. For example, Des Moines, Iowa, has a lease renewal rate of 58.8%, and the state of North Dakota saw an even lower lease renewal rate of 55.8%. At the same time, it’s worth noting that all of these places still have an occupancy rate of well over 90%. This means that people rent everywhere, and investors don’t need to start worrying about not finding tenants in small-town Midwest. 

But it’s worth knowing that the vast majority of renters in these areas are almost certainly not renters by choice and mostly would like to move on to homeownership as soon as they can. If you’re an investor in these areas, you should factor the possibility of high tenant turnover into your planning. When you do find a tenant who is content to rent for a longer term, know that you’ve found a rare(ish) and valuable thing.

Alternatively, seek out places with an established or emerging culture of long-term renting. How to find them? Here’s a clue: Look for desirable, midsized metro areas where renting is both accepted and financially sound for the area. 

A good example would be a city like Grand Rapids, Michigan. It is not (yet) unaffordable and has enough going for it to sustain the desire to live there longer term. I personally know people who lived there initially for a short time but ended up staying for years. It also has a big student population, which contributes to the overall normalization of renting.

Final Thoughts

Far from a uniform paradigm shift toward renting as a choice, increased numbers of long-term renters mean mostly what they’ve always meant: a lot of people who would like to own a home but cannot. This isn’t true everywhere, though, and overall desirable locations do have higher-than-average numbers of people who are happy to rent for longer. 

If one of your goals as an investor is to reduce tenant turnover, then seeking out places with an established renting culture is well worth the effort.

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