Category: Real Estate

In 2022, 41% of renters spent more than 35% of their income on rent. As rental and living costs rise, wages are struggling to keep up. Living in a major city is exceptionally expensive, so most young professionals live in older apartments farther away to save money. With so much spent on rent, it’s unfathomable for younger generations to even think about purchasing their own homes.

But what if there was a way to live in a new apartment and save 30%-40% on rent? Furthermore, the rent includes utilities, regular cleaning, furniture, and community events. Sounds too good to be true? It’s real, it’s called co-living, and it’s on the rise.

The Case For Co-Living

The world is moving toward a sharing economy. A decade ago, both riding a taxi with strangers and living in a stranger’s house sounded inconceivable, then Uber and Airbnb emerged and became multi-billion dollar businesses.

There’s no doubt that co-living will become a big part of our lives in the foreseeable future, but building homes is not quick. A co-living property typically needs to be built from scratch because of its unique characteristics and layout. 

Co-living is a complicated strategy and isn’t about simply filling up an existing unit with strangers. The building needs to be designed thoughtfully to have enough privacy, sound reduction, amenity space, and more. Property management is certainly more labor-intensive, and the developers have to navigate through local zoning ordinances and building codes to get a co-living project approved.

Although developing a co-living property is risky and time-consuming, it’s exceptionally fulfilling and rewarding. Now we’ll examine the pros and cons of co-living.

The Pros of Co-Living

Reduces loneliness

Not everyone is an extrovert, but most of us want to feel like we belong in a community. In this new digital era we live in, loneliness is on the rise everywhere you look. Isolation, especially after the pandemic, has become problematic for many individuals, young and old.

Co-living works to solve the loneliness problem by pairing residents that are likely to connect as well as organizing several community events like yoga and cooking classes. In some co-living communities, there are even budgets for weekly dinners.

Overall, co-living, from a social standpoint, is working to heal some of the broken fabrics of our society. 

Affordability

Perhaps the best advantage of living in a co-living space is affordability, which can save tenants several hundred dollars on rent per month. For example, a new studio in Los Angeles rents for about $2,000 per month. A co-living suite will only cost about $1,400, which includes furniture, utilities, and regular cleaning.

Combined with inflation, rising interest rates, and severe supply constraints, homes are becoming more and more unaffordable. A lot of young adults have no choice but to remain as renters. But when renting is just as expensive — if not more expensive than home ownership in several U.S. cities, it’s as difficult as ever to get ahead.

Community managers

Having a community manager is a great way to promote community events. Similar to a Resident Assistant (RA) in college, a community manager is responsible for addressing tenant needs or questions, resolving conflicts, organizing social events, keeping the apartment in order, and more. A great community manager can drastically improve the living conditions of the co-living tenants.

Convenience

Co-living is convenient in three ways. First is the property’s location since most co-living properties are built in a popular area close to restaurants and transportation. You can get to most places just by walking.

Second, moving in is easy. Most co-living properties are furnished and allow short-term leases, so you can just pack up and move in with some luggage. All the essentials like kitchenware, beds, couches, and a TV are already there. 

Third and lastly, befriending people in your building is a very convenient way to expand your network. There are tons of interesting and unique people who you could meet in a co-living space. Some of these people might own burgeoning businesses that you can work with. Others might be well-connected and can help you further your career. Some might simply become your best friends.

This is exceptionally convenient for someone who’s moving to a new city where they might not know anyone.

Higher property valuation

Although co-living properties charge less rent per person, the property is actually able to charge higher rent per square footage because of its density. For example, while traditional apartments rent at $3.00/square foot, a co-living property can charge around $4.00/square foot. Even with a higher exit cap rate, by 50 to 100 basis points, a co-living property’s valuation per square foot can still be better than a traditional apartment’s.

The Cons of Co-Living

The co-living strategy is not bulletproof. Here are some of the downsides.

The potential for bad roommates

If you’ve had roommates before, then you know it’s like drawing the lottery. You don’t really know their habits until you start living together. Unpleasant roommates can really affect your daily life. 

This is why some co-living properties have private bedroom locks and bathrooms, so you don’t have to worry about the other roommates’ cleanliness as much. Some buildings even have additional sound insulation, so your room is like a mini studio. Common areas like the kitchen and living room are also cleaned regularly. Many co-living operators also try their best by doing roommate matching and hiring community managers. A community manager can act as a peacekeeper, facilitating roommate conflicts. 

Nevertheless, it’s very difficult to eliminate all of the problems, so it’s a risk that co-living tenants or landlords need to be aware of.

Less privacy

In addition to cleanliness, privacy is also a main concern. Equipping bedrooms with locks, preferably digital locks, is a must. Noise complaints are also very common. Most co-living units don’t have upgraded sound insulation, such as adding resilient channels between adjacent bedrooms. If you’re a tenant moving into a co-living property, then you should ask the property managers how the bedroom walls are insulated.

A shared bathroom is usually a nightmare. Asking your roommate to clean the toilet or the sink is never a pleasant conversation. Providing tenants with private bathrooms is highly recommended. Adding additional bathrooms to an existing building is difficult, which is why the best co-living properties are designed from scratch and by industry experts.

Safety concerns

Depending on how you look at it, co-living could be better or worse in terms of safety. Living with strangers can obviously be unsafe. However, if background checks are done correctly, then it might make you feel safer. Depending on which neighborhood you live in, it can be dangerous to live by yourself. For example, property break-ins are becoming more common in some cities, so having a reliable roommate is actually safer than living alone.

Lack of parking

Co-living properties almost never have enough parking. This is another reason why co-living is not really for families or people who prefer driving. However, some communities offer car rentals, so you can just rent the car whenever you want instead of paying a monthly car payment and insurance. 

Of course, not having a car is another way that tenants can save money, but this isn’t feasible for most people in cities outside of New York and the Northeast.

Increased wear and tear

Because there are more tenants living in a unit together, the units get worn down quickly. Things like flooring, paint, baseboards, and doors get damaged easily and will need to be replaced. The property manager needs to check in more frequently to make sure that the property remains in good condition.

Lastly, because each bedroom lease ends at different times, the unit never really gets a full turnover, making it difficult to make repairs or maintenance. Material selection is extremely important. A property manager can save many headaches in the long run by choosing commercial-grade flooring and more durable paint.

Conclusion

Co-living has a place in the future, especially as affordability continues to decline and younger generations feel less confident in their homeownership prospects.

Is co-living the right choice for families? No. But, for individuals between the ages of 18-30, it offers a cheaper, more connected, and more convenient alternative to traditional renting.

As investors, it’s important to take note of this trend and potentially find ways to profit from it.

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

New markets require new approaches and tactics. Experts and industry leaders take the stage at Inman Connect New York in January to help navigate the market shift — and prepare for the next one. Meet the moment and join us. Register here.

Anywhere Expansion Brands CEO Sherry Chris is no stranger to a market shift.

Chris has spent the past 35 years leading some of the top real estate brands in the U.S. and Canada through double-digit mortgage rate hikes, housing crashes, recessions and a plethora of other industry-specific shifts.

“I started in this industry in the early 1980s, when, you know, some of the audience members weren’t even born or were very young,” she said in a previous Inman interview. “I’m gonna say I’ve had the great opportunity to go through several cycles. There always is a cycle.”

“But I was told an interesting statistic the other day, where I think it’s like 70 percent of agents today have never been through a cycle,” she added. “And so you’re in luck, an industry veteran is going to talk about what it was like back in the old days.”

The experiences from her “old days” have enabled Chris to stoke impressive growth at Better Homes and Gardens Real Estate and ERA, the latter of which spent 2022 celebrating 50 years in the industry.

“ERA is very strong. Globally, we’re in 33 countries, and it’s a brand that will continue to grow globally,” she said. “I’m excited about the beginning of this year and what 51 will bring.”

Ahead of her latest Inman Connect New York appearances — you can catch her virtually on Wednesday — Chris sat down with Inman to reflect on ERA’s 50th year in the industry and what leaders can do to create long-lasting brands even in the midst of hard times.

Inman: We’ve talked quite a few times over the past year. The last time we spoke, you were kicking off ERA’s 50th anniversary celebration, and there was a lot of excitement about what the year would hold. Obviously, the market has changed quite a bit since.

With that in mind, how have the past months been?

Chris: Yes, the last time we spoke was in the spring, and we had our big conference in March celebrating ERA’s 50th anniversary. Since then, we finished our broker-owner retreat, Ignite, where we celebrated the success of many of our brokers and continue to celebrate the 50th anniversary. ERA is a brand that always finds something to celebrate — the overall positive attitude of the broker-owners and agents is really infectious.

At the end of last year, we launched a new women’s network for our broker-owners called The Hera Society. It’s been very well received, and we’ve continued to work on that platform with coaching opportunities and ideas shares for female owners. We also launched a Team ERA wellness program, where we’ve developed a partnership with wellness consultants and our National Advisory Council to share content to hold each other accountable.

All of these things are an example of the strong ties that ERA has as a brand with one another, and the incredible level of collaboration. I was sad when 2022 ended because it was a great year of celebration and a great year of growth as well. I have so much more I could say, but I’ll stop there for a moment (laughs).

I’ve been following ERA throughout the year, and you’ve done a great job with recruiting and retention — the latest stats said ERA brought on 18 new franchisees and renewed just about as many existing franchisees.

As you’d said before, kindness and collaboration are paramount for you. But how do you maintain that when sales decline and things start getting choppy? What’s your advice for leaders who are struggling with morale?

It’s a great question. For ERA, we’ve had a strong culture for 50 years, so it’s naturally there. But, for others, it’s important to remember that it’s never too late to build a strong culture, which is so important when we do encounter shifts in the market and face more challenging times.

One of the things I talked about over the past year is winning in the curve. So my analogy has been around horse racing. When horses are coming out of the gate, and they’re in the straightaway, everyone has the same advantage. That’s the kind of market that we’ve come from, but when we’re in return, that’s where brokers and companies can really create significant opportunities for themselves to get ahead and do things better than their competitors.

We’re in that turn right now, and when we talk about what we can do to stay ahead of the marketplace, it’s about making sure that our agent productivity increases and providing exceptional customer service to the end consumer.

I’ve been through several changes in the market throughout my career, and I see each one — whether it’s an upswing or a downturn — as an opportunity to reflect upon your business and make necessary changes.

That goes into what you’ve said about growth throughout the year. The past few years have given a lot of real estate companies the opportunity to supercharge their growth, and we’ve seen people have to cut back from that and adopt a more measured and sustainable approach.

So how are you approaching growth in 2023?

For a mature brand like ERA, there are always a lot of franchise agreement renewals that take place every year, and so far this year we renewed 17 long-term franchise agreements and that speaks to the confidence that these brokers have.

One of the things I like to talk to prospective brokers about is the fact that when we are in a changing market, it’s very important to have somebody stand at your side as your business partner, so you’re not shouldering everything on your own. I think it wouldn’t be great right now to be a small company and without help in a market like this — What do you do? How do you grow your agents’ productivity? What sorts of things should you not continue with? That’s the guidance we provide to our broker-owners.

As you said, there’s a lot of press out there that is talking about companies making significant cuts and things like that. But the way I like to look at it is right-sizing your company for the marketplace you’re experiencing today, and that makes good business sense. That’s not doom and gloom.

That is approaching business in an efficient and profitable way because, at the end of the day, we want all of our companies to not just grow at any cost, but to grow strategically and grow profitably.

I read an article yesterday about right-sizing and how journalists decide to frame the layoffs that are happening across all kinds of industries, which, oftentimes, veers toward the negative.

But staying on that topic, what are the strategies for continuing to add value even while right-sizing? How can brokerages support their agents’ bottom lines even as sales slow?

We believe that diversifying your revenue stream as a broker-owner or as an agent is very, very important. At Anywhere, we have the Anywhere Leads Group that provides leads for companies, and we have Cartus relocation services. So these are some things that we manage at the Anywhere level for our franchisees.

But from an agent’s perspective, agents should sit down and look at what the core of their business is and how they can modify that to be more productive. If they’re getting their business just from one store, that’s probably not the best thing for the future. So diversify your spending as an agent and look at the return.

For me, I like to look at a 10x return. So if you’re spending $10,000 as an agent, then you should be getting $100,000. That kind of leads me to right-sizing your business. Right-sizing doesn’t always necessarily mean cutting things. It means changing things.

So if you have a support team that is not generating revenue for your business, look at that and see how you can tweak those job descriptions so everyone on the team is actually creating revenue and has a [return on investment] attached to their compensation. These are not necessarily easy things to change in a day, but they’re very important in business. And if we look outside of real estate, that’s what companies — successful companies do.

Whether you’re an independent agent or a team leader, you are the CEO of your business. So sit down and look at what you’re bringing in, where’s it coming from and how you can optimize your spending. That alone will help agents really maneuver through any type of market condition.

Email Marian McPherson

Dave:
What’s up everyone? This is Dave Meyer, your host for On the Market and today we have a super cool show for you. We are bringing on three different super experienced lenders to help us all understand the state of the borrowing and lending market for 2023. As we all know, we’ve talked about ad nauseam for the last year or whatever, interest rates have been going up and that has really shifted the types of loans that are available, the way that mortgage companies are working. And as an investor, it’s really helpful to understand the intricacies of the mortgage industry because it helps you get better loans and just become a better borrower, find better products that are more aligned with your real estate investing strategy. So it’s a super cool episode. We have a great lineup of people who are on. And just as a recommendation, if you are looking for a lender or want to understand more, check out biggerpockets.com/loans.
It’s completely free. There’s great places where you can connect with lenders who are specifically working and geared towards investors. So it’s not just conventional loans where you can find things like a debt service coverage ratio loan or different bridge financing options. So definitely check that out because you’re going to hear about some of these different loan products that are available for investors that aren’t really meant for conventional home buyers. And if you hear something on this episode that you’re really interested in and want to learn more about, biggerpockets.com/loans is a great way to do that. So with that, I’m going to take a quick break and then we’ll be back with our lender panel.
Let’s all welcome in our lending panel today, I’d love you all to just go and explain a little bit about your specialty and who you are and Christian Bachelder, could you please, let’s start with you.

Christian:
Yeah, absolutely. First foremost, appreciate you inviting me here, and happy to take part in it. I’m Christian, I am David Green’s business partner, co-owner and founder and managing broker of The One Brokerage, which it’s been mentioned a number of times, but I think I’m the only broker here, so kind of cool we’re getting a kind of varying stance on the market, so excited to take part in it.

Dave:
Awesome, great. And in that role, do you mostly focus on residential real estate or lending, or do you have any particular niche?

Christian:
Yeah, we’re definitely a little bit of… We got a lot of tree branches kind of branching off from the main one. If I had to say what our trunk was, so to speak though, absolutely one-to-four residential is the majority of our business. While we do have commercial programs and kind of a wide variety of kind of niches that we can branch off into, one-to-four, anywhere from conventional through DSCR and kind of more creative loan products when someone doesn’t qualify conventionally, is definitely your brand and butter.

Dave:
All right, awesome. Matt Neisser, how about you?

Matt:
Yeah, thanks for having us. Appreciate it Dave. Thank you. Matt Neisser, I’m CEO and co-founder of Lending One. We’re a national lender for investors around the country, so 40 some states. We specialize both in it’s all one-to-four family, largely a little bit of multi-family, but let’s assume all one-to-four and a lot of long-term rentals. So we specialize in lending to landlords and also a little bit of fix and flip and short-term type lending programs. I think where we probably excel is the long-term lending 30-year fixed rate loans, comparable to a little bit different than a conventional lender, a little bit easier to get qualified. And then we have a larger program for large investors, non-recourse, large portfolios of properties up to say $50 million.

Dave:
Awesome. Great. And then for our final guest today we have Bill Tessar.

Bill:
Thank you, Dave. Bill Tessar, President and CEO of Civic Financial. Similar to Matt’s company, we’re a national lender, specialized really in a handful of products, your DSCR products, which is really 5, 7 and 10/1 I/Os, your bridge and fix and flip and multifamily as well. Balance is probably 45% bridge, 45% rental and about 10% multifamily. And I think it’s just under 40 states.

Dave:
Wow, that’s awesome. Well, it sounds like we have a great wealth of experience here for lending and this is something we’ve really wanted to dive into on the show. As investors, we deal with lenders and work with lenders all the time, but hearing from you, we’d love to know your insights into the industry and sort of what we can expect over the coming year or so. So Bill, let’s start with you. How would you say the rising interest rate environment over the last nine months has impacted your business?

Bill:
I think the first thing I’d say is it had a huge impact on our industry. So not just, when I say industry, I mean the whole lending industry. So if you think about it, from a conventional side, and I spent the first 30 years of my career on the conventional side and developed a lot of long-term relationships there, and it literally gutted that industry, probably second only to the financial crisis. And in many of these instances they had volume levels down 80 to 90 percent. They couldn’t cut their way out of those problems. I think that continues. As it relates to our space, I think Matt would agree that a lot of the smaller folks, medium-sized folks, really took it on the chin. They had a whole bunch of loans sitting on their warehouse lines that got re-traded by their capital partners and so they go into those trades above par and they come out significantly under.
So some of those trades are still taking place right now as Wall Street picks through those portfolios. So I think it really screwed up the capital markets on the BPL side and forced the companies that are still around really to reset and find a pricing level that could at least be at par. So they were originating for origination fees and junk fees and I think the level is there now. I think you’re starting to see, it’s the beginning of the year, more of those Wall Street guys coming back into the market and I think it’s actually pretty darn good for some of the folks that are still around. But yeah, I mean, big shake up, Dave. And probably still a little more to come on some of those peripheral lenders that hanging on by a thread.

Dave:
Matt, are you seeing something similar?

Matt:
Yeah, I mean, I largely agree with Bill. I think the fortunate part for probably both of us is there’s been a sort of demise line of large lenders and smaller lenders and the in between, probably… If you were small or large, you’re probably okay. If you were in between, those are probably much more challenging for those folks. But as it relates to borrowers, I think it’s a big reset on the way that you look to underwrite a deal. And probably for the audience here, if I rewind 12 months ago, maybe started in January of last year, and we had rates in the fours basically, 30-year fixed, which I guess when I started the business I thought would’ve been crazy. And then that ended up happening, and people were excited and people were buying stuff and could afford to probably pay the premiums that were out there to buy properties.
And I think the big shift that’s happened is now that rates not just ours, it’s really across the whole mortgage industry as we… A conventional rate tipping to 7% last year is a huge shakeup both for us as lenders and investors as a whole as to, how do we navigate? And I think that’s really what a lot of investors were struggling with of what do I do with my strategy? Does it have to shift? How do I navigate rates going from four and a half to seven? And that happening very quickly. I think probably the quickest that’s ever happened in history. So that’s what I think really this uncertainty is what created so much uncertainty for borrowers and investors understanding what am I going to do into 2022. We do feel like most people have now sort of come to the realization this is a new normal at this point and are adjusting their strategy. And we’ve started seeing that last quarter, I think Q2, Q3 people were just confused and didn’t know what to do really, frankly. So that’s what we’re seeing.

Bill:
You think about what Matt says, so I think the stats are… A typical investor going into the rate increase was making about 67,000 a transaction, in-and-out all-in return on their investments. So if you think about rates going up, let’s just say 200 basis points, and in some cases more, but at 200 basis points on a half a million bucks, it’s $10,000 of carry for the year. And so now they’re making 57,000 and at least what our experience has been is that the investors are still in there, they got people on their payrolls, the bigger firm, the bigger groups, and so they’re still going in and making trades. They’re negotiating better deals on the buy side. Yeah, their cost of capital’s cheaper, but now contractors are coming back into the space and supply chains are a little bit better. So they pick up on some areas, lose on cost of capital, and 57 isn’t a bad number if that’s the average return on your investment or transaction.
And so we haven’t really seen a lot of our investors, Matt, I don’t know about you or Christian, if you guys have seen a lot of your investors completely get out. I think they’ve just reset expectations, as you mentioned earlier. And from a volume perspective now you have these new rate levels. We really haven’t seen a dip off, which is, that’s probably the biggest surprise for me. At least mentally, I was rethinking the way 23 would look like from a volume perspective, but I actually think it’s still going to be good. And I think just everyone’s reset expectations and living with the new norm.

Christian:
Yeah, I was thinking as you were talking, and I think there’s a added layer to it, too, that especially us three, I know we’re all very investor focused. With BiggerPockets, we’re like trying to be in this realm and I think that there’s been a concentration of buyers into the people who are knowledgeable and not everybody’s able to just, oh, I have $10,000 increased carrying cost. Not everybody’s capable of adjusting their plans to accomplish still success in that realm. And that’s why I think when we’re talking about the large and the small lenders, typically, it’s all the people who just did the in between loans as well, not just the volume wise, but it’s the in between loans of maybe the intermediate experience, maybe the non-experience, but really fine-tuning systems like you said, they may be making extra premium on, maybe they’re saving on contractors, maybe they’re saving on the supply chain’s cheaper, the cost of wood is cheap or whatever it is.
And experienced investors and people who have been through the trials and tribulations of what… I know you guys do a lot of fixing and flips. With me, it’s running accurate numbers on rentals, running accurate numbers on maybe short-term rentals, being able to educate yourself on, man, is this market compacted or is there something unique that can be taken advantage of here with the right staging? I think I haven’t seen a pullback, but I’ve definitely seen a concentration into a fewer number of hands, which I think is a really interesting market trend.

Dave:
So Christian, you’re saying that total volume is remaining at a pretty steady state, but it’s just fewer people taking on higher volume per person, per investor?

Christian:
I don’t want to misconvey. Volume just on a grand total is down, but volume per investor if that’s a metric that I could use, is definitely-

Dave:
It is now.

Christian:
Yeah, so I just think there’s a larger amount happening per person that we work with, which is kind of interesting when you think of total volume being down, but volume per person… I can’t think of a whole lot of people that we’re doing our very first loan for. So many of our clients are repeat, so many of our clients are experienced, they know what they’re doing, they’ve run their numbers and just like Bill shared, that extra $10,000 holding cost if they’re making 57 versus 67, a lot of investors still take that, right? And they just pivot their numbers a little bit and they find a way to make it work. So that’s an interesting trend that I’ve seen kind of take place and our firm kind of encapsulated there.

Dave:
One thing I’m curious about, given what you’re saying about investor activity, all three of you, is are the types of loans and loan products that investors are interested in changing at all? Matt, let’s start with you.

Matt:
Yeah, I think a little bit is the answer. And it depends… Again, depending on their strategy coming into the year last year and what… If they were building a rental portfolio and relying on what a lot of clients and I see on BiggerPockets quite a bit is sort of like the BRRRR strategy coming in, buying, renovating, hopefully refinancing and then pulling equity out. I think the biggest shift I’ve seen is the challenge of them actually getting equity out, at this point, to keep that velocity going that they had before or got a little bit accustomed to. Whereas I think three or four years ago, I don’t think the perception was that every deal I did I’d pull out all my equity. I think it was every deal at least I kept some equity in the deal. And I think that mentality changed a little bit, particularly with COVID, when prices were appreciating so rapidly that people got accustomed, for 2022, it’s basically I got to pull out equity on every single deal and just keep on going.
Now that isn’t a true, true product shift, but I’ve seen that shift of on the backend, refinance then trying to evaluate, okay, can I keep this same deal level up on the buy side that I kept up a year or two years ago effectively? So that’s the one thing I am noticing a little bit. And honestly, values are down in some markets five or ten percent already. I don’t think it’s on all markets, clearly, but you’re seeing both values in a little bit or at least more conservative values from appraisers. And then you have this LTVs and they’re… They might have to bring a little bit of money to close and that’s a strange concept for a lot of people that have been doing transactions the last few years. Although-

Dave:
Imagine that.

Matt:
You go back five years ago that was like, you expected it.

Christian:
Yeah, I can piggyback on that for sure. I can’t tell you how many times we’ve had the conversation of is a BRRRR a fail if I don’t a hundred percent cash out the funds I invested. It’s like, no man, you’re getting 60% of it back, make that keep rolling. It doesn’t make the strategy completely null and void. It’s just, it’s a pivot, right?

Bill:
Yeah, I think, Dave, what we’ve seen is if I do a 24-month look back, we were heavy bridge and fix and flip and then really became super heavy on the rental. I think part of the success, and Matt you probably saw this too, but we inherited a bunch of loans and customers where lenders just couldn’t deliver at the closing table. And so, was that really organic growth or did we have staying power right place, right time, probably the latter, right? And so we saw a big swing in the rental units, not volume, units through 2022, almost to like 65%. So I think we closed just about three billion last year and 65% of that was rental. The last quarter, and going into this quarter, looking at the pipeline, what we’re seeing our investors do right now is they’re just paying the higher WAC on the bridge because they don’t want to get locked into a prepay in these high coupon rental loans, believing that rates are going to come down in the very near future.
And whether that’s true or not, I mean I do get it. Matt, I don’t know if you or Christian heard the last conference. I was at the IMN conference, and they were talking about new products. And one of the products that’s been floated around there is kind of a hybrid between the rental with the prepay and the bridge. So a little bit lower WAC than bridge, a little higher than rental, no prepaid component. So people could kind of go into nomad land for a little bit and decide whether rates are going up or down. Probably going down long-term, but this quarter, little rocky. But yeah, so right now we’re 50/50 on bridge to rental. We’ve seen a big swing recently.

Dave:
And WAC just for listeners is weighted average cost of capital, right?

Bill:
Yeah, weighted average coupon. Sorry. Yeah.

Dave:
Oh, coupon. Yeah. Okay.

Bill:
My wife always, as I’m talking to my boys that are in this… We’re talking at the table and she goes, “You guys sound like you’re foreigners.”

Dave:
No, I just want to make sure I’m tracking. And then with… Christian, I’m especially curious in the residential space, I hear a lot about sellers buying down rates for people. Are you seeing that pretty frequently?

Christian:
Oh yeah. I think, last month, we did a little internal audit. I think we got… On our purchases, I think we got seller credits on 90% of them.

Dave:
Oh wow.

Christian:
I mean it was that level where… And I mean granted that’s like the realtors that we work with, we help coach them too. Hey, we have a 2/1 buydown program, like go negotiate seller credit. The sellers, the house has been on the market for 90 days. It kind of becomes the obvious trend once a couple realtors pick up on it. But especially if… Our borrowers are also coached, so they’re advising the realtor, “Hey, I want to get the interest rate from eight months ago, 12 months ago,” whatever it is. And even though the 2/1 buydown program is a temporary buydown, right? So that’s a really big product right now in the conventional space, where the first year you’re 2% lower, the second year you’re 1% lower. And there’s even a 3/2/1 buydown that gets a little expensive at that point.
But they’re really cool products and we’re utilizing it a lot. And I know, I think even you guys, Bill, I don’t know if Civic’s got a buydown. So everybody understands, I’m a broker. I actually work with both Civic and Lending One, so we’re on their wholesale space, so I’m somewhat familiar with their products, but I don’t know if you guys are seeing more of those. I don’t know if you guys are implementing buydown programs, but that’s my experience.

Bill:
The loans are expensive on the BPL side anyways. On the conventional side, if you start with a little bit of rebate, then you get the par, then you buy into through points. It’s a little different than maybe what Matt or I get to see, because people are paying quite a bit of points if they’re going to buy that rate down. Loan still has to have value somewhere. So yeah, I don’t see a lot of it. I do believe that on your side, Christian, just having links to some of the biggest firms in the nation, they have to come out with new products and they have to come out with new products like right now, or you’ll see big companies, publicly traded companies fall.

Christian:
A hundred percent.

Bill:
They have to come… The 3/2/1 buydown graduated payment mortgages, qualifying at the start rate I/Os. If real estate values weren’t so uncertain right now, in some areas you’d see NegAm loans work their way back in for the market, like back in the ’06, ’08 time. So I think they have… The only thing conventional space can do to save the majority of the conventional spaces is come out with products that are exciting for the marketplace to get back in there and buy. And you’re doing it right now, Christian, with what you mentioned. More is coming, and way to lead the group, but more’s coming,

Christian:
I want to make sure I point that out for any borrowers. That’s probably the best said that I’ve heard it is that these programs aren’t… A lot of people have told us the programs are to save the housing market, have these temporary rate buydowns so people can still pay exorbitant prices. That’s not the goal. It’s exactly what Bill said. This is what has to happen. There has to be a loan-

Dave:
To save the lenders. That’s what you’re saying. Not to save… Yeah.

Christian:
In some capacity. Yeah. And granted, I mean, these guys are in different spaces and then in non-QM and bridge and fix and flip. But the big… I mean, I don’t know if you guys heard LoanDepot Wholesale went under, right? I mean, they don’t work with brokers anymore. I mean, there’s these very, very large lenders, we were talking about large and small kind of state. There are some big lenders they got out of the space too, the AmeriSaves and LoanDepot Wholesales. So there’s a little bit to that, Dave. They got to come up with these programs to save face at some point when they go in the right direction.

Dave:
So it sounds like, just to make sure everyone’s tracking this, there are programs right now, like a 2/1, where basically you can buy down your interest rate. Christian gave an example where you can buy down your rate by 2% for a year and then 1%. And the trend that, as a listener or as a borrower you can consider, is that costs money. You have to buy points to get those reduced interest rates. But the trend is that you have this seller who’s usually a motivated seller in this type of market, buy down those points for you, so you’re able to get your purchase and get a lower interest rate on the seller’s dime. But it sounds like what Bill and Christian are saying is that this is just the beginning, potentially, and there might be other borrower attractive loan products that come out for borrowers in the next couple of months. So I’m curious if any of you have recommendations for where listeners can stay on top of this information. What type of incentives and what type of new products are coming out that might be useful to investors?

Bill:
I think Christian’s doing a pretty good job with his company, but the fact is you won’t have to look very far. They’ll find you.

Christian:
That’s exactly what I was going to say. I mean, all of us are on BiggerPockets. If you’re just in a network or an environment, I mean, the information’s going to find you if you’re even relatively searching for it. So get with a broker, get with a loan officer for one of these guys from one with my company. It’s really something where if you want to stay on… I mean, Dave and I had an episode on our series that we were doing where a new program came out when he was in escrow. That was for the deal.
Dave, I don’t know, I think you were in the background that episode after I think they brought you in. But literally as he was in escrow, a program came out and I was like, this is a perfect match for you. And we pivoted, we completely canceled the loan, opened up a new one on an entirely separate product, and we only knew that because he was so fine-tuned into what I had to offer and obviously we’re business partners, but I knew what he was looking for. So communication is key with your loan officers

Bill:
And I don’t actually think it’s just lenders trying to solve this. This is being solved at Wall Street. You got a lot of bond traders that don’t know what the hell to do with their time. Just think about the green backwards. Matt and I were talking about golf earlier, but think about the green backwards. This stuff is being solved in Wall Street right now because there’s just no trades on the conventional side. There’s no trades. It is tumbleweeds, the way you would think about an old Western.
And so yeah, I do think they will come out with products. I’m actually quite blown away that the fourth quarter didn’t show that, but I think there was so much trauma and some of that trauma’s leaked… It kind of leaked into the first quarter that if I’m a gambling man, I would say you’re going to see stuff this quarter that is going to be good for the market. And Dave, when I think about 3/2/1 buydowns or 2/1 buydowns, I’m thinking about that as a product. Then you could employ Christian’s strategy and you could buy that start rate down, but the product is a 3/2/1 then Am for the rest of the 27 years. But you could buy that loan down and now you’re talking about a rate that people can get their arms around and live with, right?

Dave:
Yeah, absolutely. Two things about that. First, I think this conversation just underscores the idea that you shouldn’t assume, just because you’ve seen a headline, what interest rates are right now that that’s what you would be paying, and you should actually go out and talk to a broker and see what you can actually get and learn about some of these new products. Let me ask you this, Matt, and I guess all of you, is there an interest rate that you’re seeing through some of these new products where people are comfortable? Because it seems like just looking at the market, once it hits 7%, things were going crazy. I mean, things really just halted. Is there… Do you have a sense of what the sweet spot is where buyers and borrowers are feeling like that’s a tolerable rate?

Matt:
I think it also, like I was indicating before, is that if you pencil your deal to start… If I’m underwriting a deal, and I’m talking on an investor side, then we’ll talk about conventional sort of like I’m a home purchaser looking for my house. If I’m an investor and I underwrite from day one and say the rate’s going to be 7% and I’m able to get 10% off on that deal now that I was overpaying by 5% nine months ago or six months ago, it’s tolerable, it’s just more of a mental thing of getting comfortable actually doing that. Now three or four months ago, I would say that if the rate was in the sixes when it got into sevens, people started to get jumpy because they were used to paying four and five. And then it jumped to seven or eight, and then when that came back underneath seven, that was a mental trigger, as you’re talking about to say, okay, I’m interested again.
But practically, my personal view is if someone’s underwriting day one, they can get comfortable with any rate, as long as it values that they can apply the deal right. And that was the sellers hadn’t adjusted yet. I think you’re starting to see sellers adjust now. And then on the conventional side, I mean you’re starting to see it. It’s like there’s not much inventory at all, but you’re seeing all the things that were… You are, at least in my markets that I follow, seeing price reductions on the listing side. I don’t think there’s any screaming deals yet, but at least you’re directionally going the right way.
So I think some of it is just a mental breaking point with people and saying, okay, I get it now. I know rates aren’t going to all of a sudden going to be 5% again. It was six months ago, I really… Half of our borrowers believed, as Bill was sort of indicating, when things were in sevens or greater, they were still in their minds thinking things would be high fives again somehow in three months, until the Fed sort of laid out what’s happening. And then I think people started, okay, this is not going to randomly go back down 200 basis points in three months. So that’s what I’m seeing.

Bill:
I think, Matt, I think that’s a bullseye. Think about stock market, think about interest rates, think about real estate values. When things are moving around a lot, I always think the smart money just takes a step back and tries to figure out is this going to continue rattling back and forth or one way or the other, or has it just settled down and they have a new norm? And I think that’s right, Matt. Interest rate wise, it’s perspective. If you look the last 12 months, interest rates suck. If you look at the last five years, interest rates are good. If you look at the last 25 years, interest rates could arguably be great. But we lived for three years in the most incredible low interest rate market where all of us got to get fat and happy about the originations. And on the conventional side, they were rewriting customers five to seven times over 36 months.
Like, hey Bill, it’s Matt, just want to let you know I’m going to drop you from three and a quarter, 2.75, no point no fee, sending the documents, sign them. And you get a half a point rate reduction. And they would literally stairstep those borrowers down. Those borrowers, for the most part, most of them are never touching those loans unless there’s a death, a divorce or some move up or move down. I actually think you’ll see seconds kind of expanding, because no one wants to touch the two or the threes. So there’ll both be… There’s seven or eight percent on a second, and then five years from now they’ll do the cash-out refi at the four and a half. So I think you’re spot on, Matt. We’re seeing… The Fed’s probably close to being done. This next time, whatever they’re going to do quarter and a half, it’s probably, probably it.
They just need to say that. Once they say it, then I think you’ll see some smart money come back. I mean, the 10-year is better right now, just thinking about it from perspective of overnight lending rate. We’re owned by a publicly traded bank. They’re overnight cost of funds have gone up significantly, but the 10-year, because I’m a mortgage guy, but it’s so much lower than it was three rate hikes ago. So it’s interesting that way, but I think it tells me that rates are going to come down. If you had a magic wand telling you, end of the year, you’re going to see lower rates than we have today, both BPL and the conventional space.

Dave:
That’s a good segue. And just to sort of clarify what Bill’s saying here too is that we’ve discussed this on the show many times, but what the Federal Reserve controls is the federal funds rate that is not controlled mortgage rates, and the much more highly correlated indicator for mortgage rates is the yield on the 10-year treasury. And as Bill was just saying, despite the Fed raising the federal funds rate, the 10-year is back below 4%. I don’t know where it’s today. I think it was at 3.7 yesterday or something like that. And so there are indications that loan rates are at least slowing down and could start coming down towards the end of 2023. That’s just sort of my take. And Bill, you just gave yours. Christian, where do you see rates heading over the course of 2023?

Christian:
Yeah, I’m in agreement with everybody. I think they’re a lot more on the capital market side, so I know you guys have a very intricate understanding, right? Me on the broker side, I’m much more client-facing. I obviously keep up with what’s going on. What I would say is I think… I want to draw it especially to demand and what’s really driving clients. I don’t think it’s an interest rate that everybody’s looking for. I think it’s just some amount of stability. We’ve been through this 12-month period where it’s like I get pre-approved and you guys know how long it takes to buy a house. A few days to get pre-approved, your credit’s only good for 60 days, you got to go find a realtor, you got to go tour 10 houses, you got to find one you like, you make an offer, right? There’s a process to it. And a lot of times it’s 60, 90, 120 days before you have a house.
Well, when rates are changing by a point and a half in that time period over a 12-month period, it’s like nobody wants to buy because they’re like, I go get in love with getting a loan, and by the time I actually get one, we’re talking about a one and a half, two percent difference in my rate. So I don’t think it’s a rate everybody’s looking for specifically. I don’t think it’s just a magic… If rates are back in the fives, we’re ready to go. I think it’s just like can I just have some confidence in what my rate will be at this point? I don’t want it changing this drastic amount in the time it goes and takes me to find a house.
And I do kind of double down on what everybody’s saying. I think obviously the Fed can’t do it forever. I do think they’re trying to build in wiggle room because I mean we got down to 0%, right, during COVID. I mean, historically, they’ve been able to use dropping interest rates to stimulate the economy and you can’t drop them unless there’s some margin to drop them by it, right? That’s where I’m thinking is that they’re building it up to a point where they have enough leverage maybe in the future to potentially stimulate again and we play this rollercoaster on and on and on, right?

Dave:
Absolutely. Yeah. So Matt, one of the other things about rates I’m curious if you have any insight on, is despite the Fed raising rates, they’re doing their thing, the spread between the federal funds rate and at least conventional mortgages, I’m less familiar with the commercial side, is abnormally high right now? Typically, it’s like 170, 190 basis points. I think it’s well above 200 still. Can you tell me, with you and Bill, your knowledge of the capital markets, can you tell me why it’s so much higher and if you think it’s going to change in the coming year?

Matt:
Yeah, there’s a number of things going on. As Bill indicated, generally bond investors and broadly Wall Street right now in the last Q3, Q4, if it’s a mortgage, there’s a little bit of uncertainty and that means buyer liquidity has drained out. Two, you have a historically large and probably unprecedented balance sheet of mortgages held by the government, which never has happened before in terms of the size and scale. So they own, I forget if it’s two or three trillion, whatever it is, Bill, maybe somewhere in that handle, I think, of mortgages. And of which at some point they’re going to need to sell down or let it wind off. People are unsure what that’s going to be. So you have this huge net seller of unprecedented size that has never existed before, sitting on this inventory that maybe they could sell at some point. That creates a lot of uncertainty. And then three, you have really high rates, which means that when rates are very high, people need to assume that that loan will prepay at some point and that creates this inverse.

Dave:
Wow.

Christian:
That’s the tricky part. Yes.

Bill:
That’s the bullseye right there.

Christian:
Yep. Couldn’t agree more.

Bill:
He’s right. That’s it. Matt, that’s bullseye. There’s just… Think about it, rates at 7%. Who believes that’s going to be on the books for 30 years? Who believes that’s going to be booked… I think you have to have a loan on the books for somewhere between 36 and 40 months to break even if you’re a purchaser of conventional loans. I think that’s the number-ish. Think about that. Who believes a 30-year six and three quarters or seven is going to be on the books? Those suckers are going to get a call from Christian the second rate’s got-

Christian:
The three and a half all got eaten up when rates went to 2.99. I couldn’t agree with that more.

Bill:
That’s right, though, Matt. It’s, man, it’s those… And here’s kind of the scary thing that Matt mentioned earlier. You think about the government, if they didn’t have that many loans at that low of interest rates, it goes back to what we were commenting on earlier, death, divorce, some life-changing event before those people are going to get out of those mortgages. They can’t afford a home equal to that. Most people can’t, when you go up to today’s interest rates. And so they just sit, which puts some pressure on real estate inventory and probably helps us with valuations with all the other crap going on it. It’s an interesting study, but I think the government’s going to have to take it on the chin if they try to start offing some of those mortgages.

Dave:
That’s fascinating what you said, 36 to 40 months to break even on a loan. And with almost everyone predicting that rates will go down, maybe not in ’23, but probably in ’24 at least, or even ’25. That’s why the lenders are baking in this extra spread to, I guess, accelerate that break-even point.

Matt:
And to clarify, just so you know, and everyone understands. The lenders themselves, this is not more profitable for them. Put us aside for a second, our little… We’re a sliver of the mortgage market. We all pump our chest and think we’re big, but we’re like a gnat on this whole mortgage market. So if you met the whole mortgage market, those folks are not more profitable right now, even with those spreads the way they are, they are the least profitable they’ve been in a long time, because they’re not the ones taking that margin, just a risk premium built into the market. And they’re selling their loans immediately and their margins are the worst they’ve ever been. So it’s a weird dynamic right now.

Bill:
It went from being the greatest business to be in if you were the LoanDepot Wholesale or the FOA biggies that were printing profits quarterly, printing hundreds of millions of dollars, they couldn’t cut quick enough. Yeah, the bigger ones are really suffering.

Christian:
Yeah. I mean, I can’t think of… There’s like three lenders that we partner with where we have the same account executive as 12 months ago. There’s not very many. Account executives are, I mean, we have over 150 lender partnerships.

Dave:
Wow.

Christian:
So I mean, it’s like account executives have gotten axed across the board. And it’s funny, both of these guys actually have the same person. But it’s just wild to me that, I mean, exactly like Bill said, there is just that… They cut, they just cut, cut, cut, the moment it turned. That’s definitely felt.

Bill:
Well, Matt’s right, if you take the biggest three lenders in our space, those lenders do as much in a year as some of these guys were doing in a week to two weeks. It’s just not apples and turnips.

Dave:
Yeah. Well, this has been fascinating and I’ve learned quite a lot, but unfortunately we do have to get out of here. But would love to hear just from each of you, advice you have for borrowers and investors heading into this year and how to navigate the rapidly changing debt markets here. So Christian, let’s start with you. Do you have any words of wisdom?

Christian:
Yeah, I think pretty much every time I’ve been asked, I’ve always answered the same way. While you hear less people are maybe successful in real estate, less people, crypto, stock market, whatever it is, if you are surrounding yourself with knowledge and people who are well-versed in the space, you’re going to have the right guidance to be in that top 10, 20% of producers. And those are the people who make money in the hard times. I mean, there’s still people having success on the stock market right now. It’s probably the better people, the people who are more knowledgeable, the people who are more informed, the people who have more access.
Whereas, I mean, there’s people still succeeding in short-term rentals, even though a lot of markets are impacted and a lot of markets are shutting them down. The people who are well-educated and well-versed on how to run them successfully thrive throughout those times. So surround yourself with it. Listen to stuff like this, get with me, get with Bill, get with Matt. I mean, get with people who are industry professionals in the space and they know what they’re doing and that’s all you can really do is put yourself in the best position to win. And if you win, then it’s not a surprise, right?

Dave:
Awesome. Great. What about you, bill?

Bill:
Yeah, so look, I’ve sat on so many of these panels throughout the year and at the last six months, I kind of felt like I was an individual on an island by myself. I’ve heard all the doom and gloom, heard the inflation, heard the recession, heard real estate values pulled back. I’ve heard all of that stuff. But we’re close to six million homes underwater in terms of supply and demand. And if you believe any of this stuff I said earlier about low interest rates and those people not refinancing or selling out of those transactions, I think it’ll exasperate the problem.
So I am really bullish on real estate, short and long-term. I think you can get a better deal today than you could six months. You can negotiate a little bit, you could demand a little bit more. You’re not paying over list price, you’re getting contingencies on your deals, you’re getting seller concessions on points, you’re getting all that stuff. That’s great. So I’m bullish on real estate, and if I was to give a recommendation, I think you got to get your partnerships in line. So you hook up with a company like Matt’s or ours on the BPL side, you hook up with a company like Christians on the conventional. You get a kick ass realtor, you get some kick contractors, you get some good vendor relationships. And I think partnerships today will make a big difference as we go through ’23 and ’24 in terms of what investors believe is successful or not.

Dave:
Awesome. Great. Well, Matt, take us out. What’s your advice for any borrowers this coming year?

Matt:
The one thing I’d say to borrowers I say to myself is I try not to bet on interest rates. Okay. Because it’s one of the craziest things in the world of to bet on. So it’s not an all or nothing decision you’re making. If you’re out there buying 10 properties over the next two years, or multiply that by however big you are, you can spread that decision over 10 or 20 decisions over the next two years. So you don’t have to… You’re not making one big bet. Okay. This month, I don’t know, maybe my rate’s a little bit higher than it should have been, but maybe next month or three months from now, it’s a little bit lower than it was. And you’re really just like, if you’ve heard the concept of dollar cost averaging in stock market, I don’t look at it that dissimilarly to borrowing is that you just need to look at it over a couple year period and say, all right, I won some, I lost some. What’s my average over that timeframe, am I comfortable in the deals, still pencil. That’s the way I look at it.

Dave:
That’s great advice. I like that a lot. All right. Well, thank you all. Matt, where can people connect with you if they want to learn more?

Matt:
Sure, lendingone.com. We’ll take care of you. Just call in. You can call in. You’ll get someone live. We’re staffed all the time, so it’s probably the easiest.

Dave:
All right, great. What about you, Bill?

Bill:
civicfs.com.

Dave:
All right. And Christian?

Christian:
Same thing, the1brokerage.com. All of us are just company name.com. Yeah, all of us are pretty easy find. We’re all on BiggerPockets too.

Dave:
Making it easy.

Christian:
Yeah, we’re all on BiggerPockets. If you go to the find-a-lender tool as well on BiggerPockets, an awesome resource to get to find someone.

Dave:
All right, thank you. Well, appreciate you all being here and sharing your insight and experience, and hopefully we’ll have you on again sometime soon.

Bill:
Good stuff, guys. Thank you.

Matt:
Awesome. Thanks guys. Appreciate it.

Christian:
Appreciate you guys.

Dave:
All right, thanks to Christian, Bill and Matt for sharing their insight and knowledge with us. That was super interesting. I learned a lot. And I think the main thing I want to reiterate, and this is something people ask me all the time, they’re like, what interest rates should I be looking for, or I don’t think I qualify for this kind of loan or this kind of loan? And they ask me and I have no idea. So I really think that, in this type of environment, it’s super important to just connect with a lender. Even if you don’t do a deal, just go call two or three of them. As we just learned on this show, people are getting interest rates in the 5% using seller buydowns and buying points. And there’s all these different products that lenders are coming up with to incentivize people to buy right now and to borrow right now.
And so don’t just assume because you see some headline either in the media or in the newspaper or whatever that says that interest rates are at 7%. There are different products available, especially for investors, than just those top-line things. So that was my number one takeaway from this, is just talk to someone and see if your assumptions are right or learn more about some creative ways to potentially borrow on any of the deals that you’re looking to do over the coming year. So that’s it for us today. I hope you found this episode helpful. If you did, we really appreciate a five-star review on either Apple or Spotify. If you have any questions about this episode, you can find me on either BiggerPockets or on Instagram where I’m @thedatadeli. Thank you all so much for listening. We’ll see you next time for On The Market.
On The Market is created by me, Dave Meyer, and Kailyn Bennett, produced by Kailyn Bennett, editing by Joel Esparza and Onyx Media, researched by Pooja Jindal, and a big thanks to the entire BiggerPockets team.
The content on the show On The Market are opinions only. All listeners should independently verify data points, opinions, and investment strategies.

David:
This is the BiggerPockets Podcast Show 717: Quit to Become a Real Estate Professional, and in the professional status that will help your investing, but you’ll also be able to make money through all the different ways that real estate investors need services. You can become the CPA, you become a bookkeeper, become a property manager, become a contractor, work in construction, become a consultant, become a real estate agent, become a loan officer, become a processor, become a manager in one of those companies. There’s so many things that you can do. Before people just jump from one to the other and go to an extreme, I recommend them looking at the huge space in the middle of that spectrum.
What’s going on everyone? This is David Greene, your host of the BiggerPockets Real Estate Podcast here today with a Seeing Green episode for you, green light flashing behind my head.
All right everyone, we got a really good show. In today’s show, if you haven’t seen one before, I take questions from you, the audience, and I answer them for everybody to hear. Today, we get into some really good stuff, including how you should solve problems with contractors that stop replying to you or aren’t doing the job that they said they would do, when you should buy a home with sentimental value over financial value, when you should flip versus BRRRR, how to know if you should hold the property or if you should flip it for a profit, and what to do if you’re playing catch-up because you got started investing later in life. All that and more on today’s show.
Before we get to our first question, today’s quick tip is remember that when you’re investing in real estate, you’re not always trying to make money. In fact, most of you are here because you’re trying to get out of trading your time for money. You’re trying to get a life of financial freedom, which is what we’re all about here at BiggerPockets. What you’re really looking for is time. Investing in real estate can get you time back, time that you don’t have to spend working. Now of course, we often look at time through the value of money. The more money I have, the more I can spend my time on what I want. But when a deal goes better than you were hoping that it would, you got more time or you started earlier in the timeline than you were expecting. And when a deal goes bad, you just lost yourself some time, you’re going to have to wait longer before the deal performs the way that you would expect it.
But real estate will always go up because inflation always goes up. We’ll have of course momentary times where it goes down like right now, but those moments never last and it gets turned around, so buying real estate is a very smart financial move. Remember, you’re not trying to earn money, you’re trying to buy time.
All right, let’s get to our first question of the day.

Corey:
Hey David, thanks for taking my question. Mine is deal specific. I’m currently under contract on a house. All in, I’m going to pay $270,000 for, it needs 60,000 in renovations, and the ARV is going to be $420,000. I have a $75,000 personal loan that needs to be paid back. It was used for my real estate business. It needs to be paid back at the beginning of 2023. So I wanted to do the BRRRR method, pay back my investors and hold onto the house. However, when I did the math, my monthly payment is going to be around $200 more than what I think I could reasonably rent the property for.
So alternatively, I could just flip the property, pay back my investors, have a little bit left over for the next deal, and then employ a buy and hold strategy moving forward. There has been a lot of talk on the podcast about holding onto properties because of the rate of appreciation we’re experiencing right now, even if it’s slightly cash flow negative, so I just wanted to hear what you would do in this situation if you would employ the BRRRR strategy or do a fix and flip. Thanks David.

David:
Hey Corey, this is a great question, a great question and I’m glad that you asked it because we all get to learn from a minute. So it is true. I have said in the past that sometimes it makes sense to hold a property that doesn’t cash flow or even loses a little bit of money for the long-term benefit to take a short-term loss, but your question is about your specific situation. When does it make sense to hold a property? For you, it probably doesn’t, and here’s what we’re getting at.
You’re already in some debt. You said you owe $75,000 to other people. If you’re in a position where you’re going to hold a property that doesn’t cash flow, I only recommend that when you’ve got either so much money coming in from other sources or so much money coming in from cash flow of properties you already bought that it covers your loss. That’s not the case for you. You’re not making money from other deals and it doesn’t sound like you’re making a ton of money at your job where this would make sense.
The other thing that you brought up, which was a really good point, is that you do this because of the long-term appreciation. But we’re not in a market right now where we can reasonably expect short-term appreciation. It may go down, it may stay the same, it’s probably not likely to go up in the next year or so. Eventually though, real estate always goes up. You just don’t need to hold this specific property hoping it goes up. You want to hold real estate as a whole in general for a long period of time.
Now, the reason that when you ran your numbers, you’re seeing that it isn’t going to cash flow is probably because you’re not buying a cash flowing property. In other words, you said it’s going to be worth 430 I believe. If you had just went to go buy this property right now for $430,000, it wouldn’t cash flow. So you wouldn’t buy it, right? You wouldn’t want to own this asset as a long-term buy and hold in the way that it’s designed to be operated. You’d pass on it.
So if it’s a situation where you would pass on the deal after the BRRRR is done, you probably don’t want to keep that as a BRRRR. That makes more sense to flip. Now, if this was a situation where you said, “Man, this is a triplex, it’s going to have three units, it’s going to cash flow really strong,” those are the properties that I would say you want to hold at the end of the BRRRR.
So I hope that makes sense. I think for you, it makes more sense to flip this property, make your money, pay off your investors, get yourself out of debt, have a nice chunk of change to go get the next property, and it’s okay if you keep flipping them until you find the property that works as a BRRRR, just like it’s okay if you keep using BRRRRs until you find a property that doesn’t work as a long-term buy and hold and then you flip. Much like in poker, you got to play the cards that you’re given. You can’t play a hand different than the one you’re holding right now. The important thing is you’re doing the right thing, you’re taking action, you’re making money, and you’re just deciding how you’re going to hold the property based on the nature of the property itself and not based on the situation you’re in or, “I want to be a buy and hold investor.” Eventually that is going to be where you make your wealth, but it’s okay if you flip some properties in the process to get there. Thanks for the question and good luck on your deal.
All right, our next question comes from Dean [inaudible 00:06:11] out of Sarasota, Florida. Dean says that I have $200,000 in cash sitting in my savings, and I just moved to a brand new market for myself, Sarasota, Florida. I would like to start my real estate journey in buying rentals to retire early. What is the best way to do that in brand new market with $200,000 cash? Is it buying single family homes or going big on a 10 unit plus rental? Thank you.
All right Dean, great question here. First thing, this shouldn’t come as a shock. If you listen to Seeing Green or you listen to me in any context, I’m always going to say, especially as a brand new investor, your initial goal should be to house hack. You’re in a brand new market. Put as little of that $200,000 as you have to down and buy yourself a property that you can rent out to other people and learn the fundamentals of landlording, of real estate operating, and real estate investing in general with low stakes as a house hacker, eliminate your own housing expense. That’s a big one.
The next thing I’m going to say is after you got that down, it’s not bad to go for a 10 unit plus rental if you’re going to get a good cash on cash return, and I do like doing that in an area like Sarasota because population is expected to continue moving in that direction. That’s a really strong market, so I do like it. The benefit of buying single family homes is that they’re more flexible. They’re easier to buy and to sell. You can refinance them. When you buy a 10 unit apartment, you got to sell the whole thing or refinance the whole thing. When you have several single family homes, you can sell one, you can sell two, you can refinance a couple, you can refinance one. There’s some flexibility with how you operate the portfolio itself.
But at this stage in your journey, it’s not super important for you to have flexibility. You don’t really have any real estate yet. So just house hack once, house hack twice, house hack thrice. Continue to house hack every single year, and don’t rush into buying the apartment complex anytime soon. There’s a very good chance that the market’s going to continue to soften, so you’re in a position where waiting is to your advantage. Just don’t wait on a great deal if it crosses your path.

JD:
Hi David. My next question is on contractors. The rehab that I’m working on is a duplex that I’m trying to add rooms in order to increase value. First contractor I had to get rid of because he did not pull permits and charged me for things that he did not actually complete. I brought in a second contractor and things were going well until he disappeared on me and stopped replying to my texts and phone calls. Every now and then I would get a reply, but it never amounted to him actually doing what he said he was going to do. And then he said that he had a family member that was sick in the hospital, and it was a month I had to threaten him in order to get him to start responding.
So what I learned from the first contractor is I put into this subsequent contract my ability to charge for delays and for problems. I’m trying to figure out what’s fair, how do I deal with this situation, because he truly could have had something happen but the way that he handled it was not cool. He disappeared and he basically caused a month of delay and he didn’t have a backup plan. And I don’t want to be a jerk, I want to be fair, so how do you deal with situations like this when people do things, they don’t perform, they say they have problems, but they don’t really give you much to work on or work with, and I could use some help. Thank you.

David:
All right JD, and fortunately this is one of the more common questions that I get in my life is people reaching out to me saying a contractor in some way, shape, or form is not doing the job and I can’t make them, what do I do? Now the answer most people give is the contract has to be airtight. The tighter the contract is, the better you are. Here’s the problem with that. The contract itself is only applicable when you’re in a court of law. When you’ve already decided to try to sue the person and the judge has to figure out who’s in the right and who’s in the wrong, what they say is, “Well, what does the contract say?” Just like with real estate sales, just like with everything else, the contract is all that matters.
If you’re in that position, you’ve already lost a ton of money. Our goal is to prevent ourselves from ever being in a situation where you got to sue a contractor. So here’s the advice that I give, and this is what I’ve learned over years of doing rehab projects with contractors. The first is that accept that they are good at swinging hammers and sawing wood, they’re not great with other elements of business. You will receive so much relief when you lower your expectation. In general, this is not every contractor of course, every once in a while you get a brilliant business person, the problem is when you get one of those, they don’t stay doing these small single family projects like we’re used to. They move on to bigger stuff and you never work with them.
So the people that work with us as investors are typically the ones that are not super business savvy. They don’t manage cash flow very well. They have to pay their guys, they have to buy materials, they have to buy tools, and they don’t know what money’s coming in and what money’s going out. So they will frequently try to get you to pay for everything upfront. They usually don’t have a strong operation, kind of a system going on. They don’t have the same employees that show up every day to work. They’re constantly cycling through people to do the work, and they don’t know if they’re going to get good labor or bad labor, and they don’t want to tell you that.
So here’s what I do. When I draw up the contract, I have a full scope of work that they give me prices for, but I treat it as if I’m hiring three or four separate contractors to do that scope of work. I will have my contractor say, “I’m going to do this part first, demolition and rough in for these things. Then I’m going to come in and I’m going to put in the sheet rock and the drywall. We’re going to tape and texture. We’re going to put in the plumbing. We’re going to run this electrical. After that, we’re going to do this section, and in the last segment we’re going to add the finishings and we’re going to put the finishing touch on the property.” So I’ve got four separate jobs now.
What I do is I pay them to do each segment, so maybe they get one quarter of the total scope of work to do the first part. When they’re done with that, they send me pictures and videos and I have someone who’s boots on the floor go to the property and actually check to see the work was done. This could be a property manager, this could be an agent. This could be a BiggerPockets member that lives in the area. This could be someone you pay on Task Rabbit, because I have seen times where a contractor sent a picture of a wall that was painted, but the rest of the house was not painted. It’s possible if you’re not careful for them to take advantage of you.
Once the work has been done to my satisfaction, I send them the second draw and they do the second part of the work. Now, the benefit of this is I can only be ripped off by 25% of my deal. And if they stop replying to me, they stop talking to me, I don’t know if work is going on, I can find another contractor and say, “Here’s the scope of work. Here is what I will pay you to do it. Do you want to take the job?” And then they can jump in and pick up where the first contractor stopped replying. “Hey, I understand someone’s sick in the hospital. There’s nothing you can do. I’m going to move on and get the second part done with someone else. If your family member is recovered and you can work, we can jump back in and have you do the third, but if not, I’m going to get somebody else.” Doing it this way gives you some flexibility and freedom.
Now, here’s where I’m going to put on my little angry teacher hat and you’re going to get a red mark on your paper. If you’ve read my book Long Distance Real Estate Investing, I detail this pretty clearly there. I make sure that I cover all of you guys that are listening to this and all you BiggerPockets fans from losing money because contractors are one of the two ways that I see people lose money in real estate. One of them is contractors. The other is low appraisals, particularly with the BRRRR method, those are the two ways that you can get yourself in trouble.
You’ve got to manage your contractor’s payments. Every scenario that I’ve seen in my whole career where someone came to me and said, “The contractor stopped replying,” every one of them, they paid the contractor too much money up front, sometimes the whole job. Once they get their cash from you, there’s no incentive for them to finish the job. They’re going to finish it whenever they want. And if you’re thinking, “Well, I’m going to leave them a bad review on Yelp. I’m going to go to the Better Business Bureau and I’m going to report them,” most people hiring contractors will never look at that. They’re going to get a recommendation from someone else. They’re going to get a bid that’s really positive, really low, and they’re going to pick them. So it doesn’t hurt them as much as you would think to be able to do that.
So for everyone out there listening, every contractor’s kryptonite is not getting paid. They’re not good at managing money. If you set it up so they get paid after the work is completed, they will be very motivated to get that work completed because their guys are saying, “I need to get paid. I need a forward on the next thing I’m going to get paid on. I can’t find the tools. You need to buy more. I ran your truck into a wall. We need a new truck.” They’re constantly having people come to them and saying, “We need money. We need money. We need money.” They then turn to the customer and say, “I need money. I need money.” If you’re the person that gives them all the money, you solve their problem, now they’re not incentivized to solve your problem. If you make it so they only get their problem solved when they solve your problem, human nature will be working for you, not against you, and you’ll have a much better result with your contractors. It’s not in just having an airtight contract. It’s in the incentive structure that you set up when you’re working with them.
Hope that works out for you JD, sorry that that’s happening. I see you’re in the Sacramento region. Make sure you come to one of the meetups that I hold. We do them out there pretty often.
All right, at this segment of the show, I like to get into the comments that you all have left on YouTube. I’ve seen other podcasters doing this and I love it. They read the comments from their shows so everybody gets to hear it. Sometimes people say something funny or cool or profound or meaningful and everybody gets to hear. So if you’re listening to this, do me a favor and leave a comment on this show. Tell me what you thought, what you want to see more of, what you liked, what you didn’t like, and maybe I’ll read one of your comments on a future show.
Our first comment comes from Mark Ruth. “I’m finally under contract on number three. Most of what I learned from YouTube about real estate investing is not to put the properties in your own name and use a LLC. However, my lender says the fixed rate loans that you get from the secondary market requires the property to be in your personal name. How would I reconcile that?”
Okay, so there are many people that say don’t put the property in your own name, instead use an LLC, and the reason is for lawsuits. First off, if you don’t have a high net worth or you don’t have a lot of equity in the property right off the bat, that’s not really something you have to worry about. But let’s say that you do. It is very true that it is harder to get good loans in an LLC, and this is the trade-off everyone has, and real estate investors hate trade-offs. We want really low interest rates, but we don’t like to pay points for the closing costs. We want to buy in a market that’s appreciating and going up, but we don’t like the competition with everyone else doing the same. When the market’s bad and we can actually get really good deals, well nobody else is buying and prices aren’t going up, so we don’t like that either. Real estate investors hate trade-offs, but they’re a part of life and you have to accept them.
Your problem here is that if you choose to put properties in LLC, you sometimes cannot get conventional financing. And if you can, it’s usually going to be a rate that’s worse as if you put it in your personal name. Some way around that is that people go put it in their own name and then they later move the title into the LLC. There’s a trade-off for that. The lender could call the note due because technically you sold it to another entity even though you own that entity without telling them. Now, in my experience, that doesn’t happen very often, but it could happen.
So the way you reconcile this is you ask yourself what is more valuable to you? Is saving the money by putting it in your own name more valuable to you, or is reducing the risk by having it in an LLC more valuable to you? You just objectively turn it into a number. You have to quantify the risk of keeping the property in your own name. Now, I started off this reply by saying in most cases if you don’t have a high net worth or there’s not a ton of equity in the property, it’s not that much risk. It’s not like tenants are running around suing landlords every single chance they get over anything. And in the rare cases that you do get sued, your homeowner’s insurance will often cover you for most of what the lawsuit would be or all of it. So it’s not as big of a risk as people think.
In general, the people who need to worry about putting their properties in an LLC are people who own a lot of real estate or have a high net worth. So as a general rule, if you don’t have a high net worth, you don’t own a ton of real estate, you don’t have a ton of equity, your own name is fine. Just maybe buff up your insurance coverage in case you get sued. And if you do have a high net worth, it’s usually worth it to not get the better rate, but to get the protection of the LLC. Hope that helps, thank you for the question there Mark.
Giovanni Alvarez says, “I love the end of this episode,” which was episode 699, “Referring to are my standard set too high, I think it’d be awesome if you and Rob can go further into the mindset, psychology, personal development, and emotional intelligence needed to become a good investor. We need more of this for the upcoming year. Thank you for everything you do.”
Well, thank you for that too Giovanni. I personally love to get into mindset stuff. A lot of our listener base hears that and goes, “No, just give me the practical stuff. I just want to know what paper to sign and what metric to use,” but there is a lot to be said for the mindset, psychology, personal development, the intangibles that go into making someone a really good investor. So I’d recommend you check out my YouTube channel on Friday nights, it’s youtube.com/@DavidGreene24, where we talk a lot about this kind of stuff. Every once in a while here at BiggerPockets, we do a mindset episode for you.
But what you could do is you could come on and you could submit a question yourself at BiggerPockets.com/David and ask more about the mindset, the way that Rob and I or Brandon or other investors look at life and look at money and look investing. I personally believe that’s even more impactful than just telling you the 1% rule or the 80% rule or another way of explaining the BRRRR acronym for the 700th time. I think the mindset stuff will actually help people more, but that isn’t what people always want to hear. So come in, ask your question, and I’d love to get to know you better. Thanks Giovanni.
Adrian A says, “No. David said, ‘Irregardless,’ I’m done with the show. JK, I love the show and all the good info you guys provide us. You’re the man David, keep it up.” This is a problem in my life. I’ve receiving therapy, I’m going to counseling, trying to get this fixed. Sometimes I say regardless, sometimes I say irregardless, I don’t know why. They mean the same thing. I’m pretty sure the correct English is regardless. Sometimes irregardless slips out. It’s got something to do with my brain thinks that irregardless makes more sense, like without regard, but regardless also means without regard, right? So I don’t know why I do that. I know the English majors out there definitely catch it and put a comment in there. Thank you Adrian for your patience with my stupidity and my less than black belt mastery of the English language. I am working on that, especially because I am a professional podcaster now.
The question is when should someone use irregardless? Is there ever a time where irregardless makes sense? My producer here says the point of the irregardless is to shut down conversation. So irregardless is a word, it has a specific use in particular dialects. That said, it’s not part of the standard English, and so especially if you’re writing or if you’re using it in formal places, you should use regardless instead. Oh, so irregardless is a way of saying like, “I am done speaking to you. You are beneath me. Move on peasant. I’ve got more urgent matters to attend to,” which might be why I offend people when I say it instead of regardless. Guys, I’m not on an ivory tower of real estate over here. I will do my best to stop saying irregardless. My intention is not to shut down conversation, I actually want to encourage it. And what better way to encourage it than to say, go on YouTube and leave a comment. Tell me what you think about what I just said.
Our last comment comes from Gregory. Gregory, “Ha-ha, the Golden Girls, Matlock, and Murder She Wrote references, awesome, I love it.” I’m glad somebody caught those Gregory, because you’re probably in the 2% of our audience that knows what I mean. If you know what we mean by Golden Girls, Matlock, or Murder She Wrote, please leave a comment on YouTube and let us know which of those three shows was your favorite and why. What memories do you have of these shows when you would watch them? And what context can you provide for everyone else for why they should go look them up?
All right, we love it and we so appreciate this engagement. Please continue to engage. Also, just do me a quick favor, like and comment and subscribe to the YouTube channel here so you get notified whenever we have a new Seeing Green or BiggerPockets episode air. You don’t want to miss this good stuff, and YouTube will help what’s coming if you subscribe to our channel.
All right, let’s get to our next video question that comes from Julie in Reno, Nevada.

Julie:
Hey David. My name is Julie. My partner and I are looking to purchase a home from a family member in rural northern Nevada. This family member is an elderly hoarder and this family homestead has been in the family for over 100 years. Because of the hoarding, the home is in poor condition and probably would not qualify for a traditional mortgage. There is a current mortgage on the property for about $200,000 that is likely 70 to 80% of the current home value. The lot on which this homestead resides is quite large and likely could be subdivided. My partner and I don’t have cash to purchase the home outright. This family member has been unpredictable in the past, so we’re looking for a legal arrangement that would not allow the family member room to litigate or reverse a signed and completed deal. Can you talk about various strategies we could use to acquire and improve the home, including a subject to deal subdividing the lot to fund repairs or use of a DSCR loan? Thanks so much.

Corey:
Okay Julie, I understand the challenges you’re facing here and I’m glad you reached out for help. I’m going to do my best to give you several options that you can move forward. But before I do, I just have to make a disclaimer before we get into it. Objectively speaking from what you’re telling me, it doesn’t sound like this is a great deal. You mentioned that it’s got a $200,000 note that’s probably worth 70 to 80% of what the property’s value would be, so you don’t have a ton of meat on the bone. If this was a deal you were looking at that was not in your family, you would probably just pass on it right away. If the house is worth $240,000 and there’s a note for $200,000, that’s not a deal that people would be jumping at to go buy, especially when it’s in poor condition. Like you said, it’s in such poor condition then it might not even qualify for conventional financing.
So the only reason that I think you would want to buy the house is the emotional value that it has, but it’s coming with a lot of complications. You’re going to have to go rehab it and you don’t have money. You’re not getting it at a great deal. Your family member themselves is going to pose a problem as the seller could likely come back to you and try to take the property back from you once you buy it. The thing screams not a good real estate deal. Now, I just have to say that before I give you any advice because from a financial perspective, it probably doesn’t make sense to pursue this. However, if you want it for emotional reasons, I will still give you the advice that I would for what you can do to try to put in contract. I would strongly encourage you and your partner to sit down and ask yourself if this is the right financial move to make for you for real estate because this podcast is here for buying real estate for financial purposes, all right?
As you were discussing, the number one thing that jumped out at me would be a subject to deal. It wouldn’t make sense to try to go get a loan to buy the property from the current owner because it won’t qualify for financing and it’s not a great deal. The products you can use that you can buy a property that is not a great deal or isn’t going to qualify for financing would be bridge loans, hard money loans, personal loans. They’re going to have higher rates than standard financing. And because rates have gone up, my guess is the rate on the loan that they currently have is going to be significantly better than anything you could get now. So objectively speaking, it would make more sense to take over the note that’s already in place.
Another benefit of doing that is it’s probably an older note, which means in your amortization schedule you’re further along, so a higher percentage of your payment is going towards principle than towards interest. So even though it may not cash flow super strong, if let’s say the payment’s $1,000, when you first take that loan on maybe only $100 out of that $1,000 is going to pay off the principle. But you might be in a position where $500, $600, or $700 is going to pay off the principle. So even though your cash flow is going to be the same, you’re actually building anywhere between $500 to $700 a month of additional equity because a bigger chunk of the payment is going towards the principle. That’s another benefit of buying a property subject to where you’re taking over the existing mortgage.
That’s the route I would take in this scenario. I would say okay, I’m going to take over your mortgage. How much money do you need to get out of this property and move you into whatever home they’re going to move into it? I’m assuming it’s an assisted living facility or they’re going to live with another family member. You want to figure out how much money they need to move on to the next phase of their life and maybe come up with that part out of pocket.
If you can buy the property, you’re subject to financing, now you got to think about what am I going to do to rehab it? And again, you need some cash here to make this deal work. If you don’t have a lot of cash saved up, it’s not a good move. You can figure out subdividing the lots before you actually buy the deal, that’s going to be calls to the city and to tell them what your plans are and to see if that would be approved. They won’t approve it, that’s a quick answer. If they will, you want to make sure you ask them how much is it going to cost to do that and then figure out once you’ve subdivided the lots, who are you going to sell it to and how much are they going to pay because they’re going to have to then go develop it.
This is the best road of action I see for you, but again, the deal doesn’t look great. I think you’d pass on this deal if it wasn’t a family member and if the home hadn’t been in your family for 100 years. It might make more sense for them to sell you the home, let you take it over subject to, and maybe give you some money to take it over so that you can fix it. I don’t know what advice to give you as far as the family member coming back and saying, “I wish that I wouldn’t have done that.” That’s legal advice you’d have to get from a lawyer, it just sounds ugly. It doesn’t sound like there’s any good way to do this or there’s a very good chance that other family members will be upset if they think that you’re ripped off grandma and they wish that they could’ve got a piece of that. It smells rotten from a lot of different angles, so I would be highly cautious pursuing it, but if you’re going to, I think subject to is definitely going to be your best bet. Thank you for your question Julie.
All right, our next question comes from Andrew Carter out of Spain, [inaudible 00:28:20]. “Hey David. First off, I just wanted to thank you and the whole BiggerPockets team for what you guys do on a daily basis helping people around the world. That said, when you and Rob are chatting with this tax guy Matt, you brought up that real estate investing is a grab the wolf by the ears kind of situation. My question is what’s your exit strategy when or if ever you’d like to stop working 60-hour weeks and buying 15 short-term rentals per year? Is there a way to exit and semi-retired to live off your earnings without having a crushing tax bill due? Thank you again and can’t wait to hear your thoughts on it.”
[Inaudible 00:28:58] Andrew Carter. I will do my best to try to answer it. All right. First off, I’m not currently working 60 hours a week. I work when I want to now. Now, does that mean things don’t get done as fast? Yes. Does that mean I don’t make as money as I could? Yes. I’m not saying that everything is just perfect clockwork and I never work anymore. It’s more like if I want things to be better, if I want to make more money, if I want to do something different, I need to jump in and work, but I’m definitely not putting in hours like what I used to.
I also don’t buy 15 short-term rentals every year. I bought 15 at one time because I was forced into a 1031 that I didn’t really want to do, but I had to do because people were stealing the title to my properties. And once I started analyzing deals, I realized short-term rentals are the only thing that’s cash flowing, so I have to do it.
Now that being said, real estate is the best thing ever. Real estate investing is not a grab the wolf by the ears scenario. Using bonus depreciation to shelter your income is a grab the wolf by the ears scenario. And what I mean by that, when you grab a wolf by the ears, you’re safe because the wolf can’t bite you, but you lose your freedom because you can’t let go. So you’re in a stalemate, so to speak, if this is a chess reference here. Real estate itself is not a grab the wolf by the ears. It’s the opposite. You’ve got a bazillion exit strategies. It’s something that I love. So here’s a couple that you can keep in mind.
Always buy properties focused on building equity more than just cash flow. When you focus on building equity, you have more exit strategies to get out from the property. That could be selling it, that could be refinancing it, that could be selling it as well as other properties together in a 1031, that could be selling one individual property as a 1031 or not. But you have a ton of flexibility, and flexibility equals options, and options equal wealth.
Something else you could do is you could buy some short-term rentals, get them cash flowing really good, wait for the market to be in your favor when everybody wants short-term rentals, sell them to the next investor that wants to come in and find financial freedom and quit their job and instead they want to make money through managing short-term rentals, and then you take that money and you go dump it into an apartment complex via a 1031. Now you’re getting cash flow and you have enough money to hire people to manage it for you. You don’t have to work all the time. Maybe you don’t make quite as much as you did when you were doing short-term rentals, but you get all your time back. This is a very easy way to get in, build some wealth, and then basically step out and have mainly passive income getting into multi-family real estate.
You could also sell the short-term rentals and do different management structures. So I bought a whole bunch of short-term rentals and I believe 10 or 11 of them I set up with a property management company, and they do everything. Those are passive income to me as long as they’re cash flowing and I don’t have to think about it. Now, I do little things to make them cash flow more. I might spend time looking at where I’m going to add bunk beds, add games, get better pictures taken, add things to the property to make people choose it more often, but I’m not managing that property. So by getting something that cash flows at a high degree, you can now afford property management and you don’t have to work forever.
You can also do the same thing in-house. You get enough short term rentals, like 15, you can hire a person to be a full-time property manager that just manages your portfolio and now you’re not working at all. There are literally so many exit opportunities through real estate. It is the most flexible way that I know of building wealth, much more flexible than building a business or a big business or a small business or working at W-2. Even saving money for retirement, real estate is better than all of it, so I don’t want to get you confused by that reference of grab wealth by the ears. It does not apply to real estate investing. It applies to bonus depreciation, sheltering of income that you make from active income making, like the stuff I do with the businesses that I run. Thank you very much for your question, Andrew, and I hope things are going well out there in Spain.
Our next question comes from Mike Higgins in Atlanta. “Real estate tax benefit question, I need guidance. It seems my wife and I are in a real estate tax situation where we cannot take advantage of any potential tax benefits from our properties. Here’s why. We have a combined W-2 income of over $150,000. And number two, neither of us are real estate professionals. Two of the properties are self-managed and the third is under a property management company. All properties are under a Georgia LLC owned by me and my wife. I’ve spoken to two CPAs, both are painting a clear picture where we cannot pass through any expenses or write off any deductions due to the above reasons. What are your thoughts on how to get tax advantage from owning real estate investments?”
Okay Mike, I like what you’re saying here, but I want to clarify something. You are receiving tax benefits from owning that real estate. It’s not sheltering your W-2 income. It’s not sheltering all of your taxable income. It is doing a great job of sheltering the income that the real estate itself puts off. So those three properties, you’re still able to use the depreciation from them to shelter the income that they put off. So if you’re making $50,000 a year in profit from those three properties, probably only paying taxes from zero to $20,000 out of that 50, because the depreciation of the buildings is sheltering the rest.
So when you make money from real estate, or I should say when you make cash flow from real estate, it’s tax-sheltered. The depreciation covers how that income’s coming in. Also, when you do a cash-out refinance on that property, you pay no taxes on any of that. So the equity that you build through real estate is tax free unless you sell. Now, if you sell to get that equity, you can do a 1031 and you can delay the taxes that you’d have to pay on the capital gain. So as you see, the real estate itself is very tax efficient. It’s doing a great job of protecting the money that it makes from taxes. Your problem is your W-2, and what you’re finding out is that your real estate stuff cannot help your W-2 problem.
You’ve only got one option when it comes to that. Well, I guess you’ve got two. You’ve got the short-term rental loophole that they call it, where if you manage the properties yourself, you could become a full-time real estate investor. In the episode we do with Matt Bontrager, we cover that, so that might be something to take some time, look it up. But if you’re not going to do that or if it doesn’t work for you, you’ve got to leave the W-2 world and become some form of a real estate professional, which is what I did. I quit being a cop and instead I became a real estate agent and then I built that into being a real estate team. I’m now the CEO of a real estate company. I started the one brokerage. I’m now the CEO of a loan company. We’re going to be starting an insurance company, and this will be the first time I mention it, but it’s going to be called Full Guard Insurance, and that’s the same thing. These are all situations that make me a real estate professional.
I do podcasting. I write books, I teach courses, I speak to people, I do coaching, consulting. You see what I’m saying? I make my income in the space of real estate. I didn’t try to shelter my police income through real estate. I moved out of the police world and got into real estate so that I could shelter my income.
Now, there’s another uncomfortable truth here. We probably won’t be able to do this forever. I believe in 2023, you can only use 80% of the bonus depreciation to shelter your income, and then it’s going to be 60% and then 40 and eventually it’s going to be zero, and real estate professionals will be right back in the same boat as other people when it comes to bonus depreciation, taking all of the depreciation from your real estate in year one. However, we may have politicians that come back in and reinstate that role. You never know how things are going to turn out.
But what we do know is it you can’t force the round hole into the square peg, or the square peg into the round hole, I probably should say it like that. You can’t keep your W-2 and try to use real estate to shelter that income. Your CPAs are correct. You got to make money as a real estate professional, which is one of the reasons that me here at BiggerPockets and in every endeavor that I have, I’m constantly telling people, “If you hate your job, don’t quit to become a real estate investor full-time. Quit to become a real estate professional, and in the professional status that will help your investing, but you’ll also be able to make money through all the different ways that real estate investors need services. You can become the CPA, you become a bookkeeper, become a property manager, become a contractor, work in construction, become a consultant, become a real estate agent, become a loan officer, become a processor, become a manager in one of those companies. There’s so many things that you can do.” Before people just jump from one to the other and go to an extreme, I recommend them looking at the huge space in the middle of that spectrum. Thank you for your question.
Our next question comes from Laura [inaudible 00:37:03] in Wisconsin. “I don’t have a specific question. Just what advice do you have for those of us investors who got a late start? There haven’t been a lot of podcasts elated to this topic. Cash flow’s important at this age, but appreciation is nice too. We aren’t comfortable investing in markets that provide the most cash flow. Ease of management is important to us. We love a good property that can take advantage of Jeff’s strengths and add value too. We don’t want a huge portfolio, but are hoping to have enough properties to make a difference in our ability to retire comfortably. I realize this is quite a broad question, but maybe it’s a topic you can tackle in the near future. Thanks for all you do for the real estate investing community.”
All right, now for some context about Laura’s question here, she’s 57, her husband is 58. They got their first property in 2018, and they’ve done a BRRRR and they’ve 1031 into a couple small multi-families and they’re currently doing a live and flip. And her husband Jeff I presume is a contractor, so he understands construction. This is going to be the key here.
Okay, so Laura, if your husband is in construction, you have a benefit that other people don’t have. First off, you’re doing a live and flip. That’s great. I’m sure in retirement you’d like to set your roots down and you don’t want to have to have a house that’s always under construction, but you might have to deal with that for a couple years because you can earn some really good money if you buy a house, fix it up as a live and flip, and then sell it in two years and avoid capital gains on the first $500,000 probably if you’re married I believe.
Another thing you guys can do is to continue having Jeff work part-time. So he’s a contractor, but that doesn’t mean that he has to do all of the work. You guys could find these fixer upper properties and buy them and slowly fix them up over time. So what if you bought a 10 or a 15 unit apartment complex and all of the units needed rehabbing and you just waited for tenants to move out, and then Jeff and his team went in there and rehabbed it, increased the rents, rented it out for more to somebody else, and then waited for the next tenant to move out. That’s one way to do things slowly where it doesn’t feel like a full-time job and you can still enjoy some retirement.
If your goal is to build up more income for retirement, as in like cash flow, the small multi-family or medium multi-family space is going to be your best bet. You’re going to want to look for apartments that other people are tired of managing, buy it from them, and try to only buy stuff that has a value add opportunity. Now, if your husband is able and capable of working, he can do the work, but if he’s not, he should still have contacts within the space that he can hire out to do some of this work for you.
If you’re trying to build equity, that is going to take longer, meaning you don’t want to invest in South Florida or Texas or some of these states that we think are going to receive long-term appreciation and bank on that happening. You’re going to want to do what I call buying equity. This is one of the 10 ways that I make money in real estate is I go in and I buy something beneath market value. Then you’re going to want to add equity or create equity, which is going to be through a rehab. If you can find a way to do both in the same property, you’re good. So you want to go in there and find something that needs a value add component, meaning it needs to be upgraded cosmetically or you can add square footage to it, then buy it beneath market value and you don’t have to worry about time not being on your side.
In fact, here is a cool way of looking at real estate for those that may not be at the end of their career, they may be at the beginning, the middle, or the end. When you make money in real estate, you’re not really making money. You’re just buying time. When a deal goes poorly and you don’t hit the ARV you thought, you didn’t really lose money, you lost time. You have to wait longer before that deal is worth what you thought it would be worth. Now when a deal goes better than you thought, the ARV’s higher than you anticipated or the rehab comes in lower than you expected, you didn’t make money, you bought yourself some time. The deal performed well earlier on the timeline than what you thought.
If you can stop looking at real estate as far as money is concerned and you can start looking at it as far as time is concerned, it takes a lot of the pressure off and the negative emotions associated with the deal gone wrong or a deal that came in better than was expected. You just bought yourself some time. And you can find ways to force yourself to get time by buying properties beneath market value and by using the benefits of your husband’s construction background to add value to those properties after you bought them.
And that was our show for today, hope you guys enjoyed another Seeing Green episode. We got in some really good stuff and I was able to share what I hope was some pretty sound wisdom for you all. If you liked it, please leave us a comment on YouTube. And if you loved it, please consider giving us a five-star review wherever you listen to podcasts at Apple Podcast, Spotify, Stitcher, whatever it is that’s your pleasure. Please go there and leave us a review, we want to stay the top podcast on the airways for real estate and we need your help to do it.
If you want to know more about me, you could follow me on social media. Please do. I’m most active on Instagram, but I’m everywhere else. LinkedIn, Facebook, all of those, at DavidGreene24. There’s an E at the end of Greene, and you can follow me on YouTube where I have a YouTube channel, by typing in youtube.com/@DavidGreene24.
All right, that wraps up our show for today. Thanks everybody. I will see you on the next one. If you’ve got a minute, watch another BiggerPockets video. And if you don’t, I’ll see you next week.