David Greene:
This is the BiggerPockets Podcast, show 621. Most of us have some goals that are similar. We want freedom. We want our time back. We don’t want to be stuck in a commute. That’s pretty much an overall general consensus we can all agree with, but there’s some people that really want to make a ton of money and they’re limited in their ability to do so at their W2 job.
There’s other people that just want a little bit of money, but they want it to come easy. There’s other people that know they have a creative itch that they want to scratch and real estate helps them do it. And then there’s other people that just love human beings and they want to work in an industry where they get to talk to and sort of be in touch with other people.
What’s up everyone? This is David Greene, your host of the BiggerPockets Podcast coming at you today with a seeing Greene episode. In today’s show, we are going to take questions from different people that have submitted them. And you’re going to hear my perspective, how I see it because I’m Mr. Greene. We have a lot of really good stuff for you, several different topics that I don’t get asked very often that I thought was really cool that people ask questions.
So one of them had to do with, is there a way around a debt service coverage ratio loan? Or is that my only option when it comes to getting financing if I don’t have a W2 job? We go into a very, very sort of a deeper situation of when you should pay off your properties mortgages, and when you should use financing or leverage. I think there’s a lot to learn from understanding.
There’s not one way to do it, but there is usually a right way for you to do it. So I break down this particular situation and give advice that you might not be expecting me to give. And then I actually talk about why I decide to publish my books with BiggerPockets Publishing. All that and more at this seeing Greene episode.
If you’re looking to learn, if you’ve got questions that you want to ask, if you want to hear other people asking questions so that you don’t have to be the one to ask it, this is the right place to be. And for today’s quick dip, speaking of BiggerPockets Publishing, my newest book just dropped today with them. It’s called Skill. So I, my last book that I wrote was called Soul. This was a book written for real estate agents to learn how to make money in the real estate agent game.
This book is about how to become a top producer and make really good money. So if there’s a real estate agent in your life that you know, that you love, that you appreciate, that you’re rooting for go to biggerpockets.com/skill and get a copy of this book to give to them. It is a very difficult business to be in. Most people have no direction of what to do.
And this book is written to give a very specific play by play for real estate agents to be good at their job. So if you’re working with an agent that’s good, but you want them to be great, if you have people in your life that sell homes and you think that they would be happier if they made more money, please go get them this book. Give it to them. I would appreciate it and so would they. All right, that’s enough ado. Let’s get into today’s show.
Deborrah:
Hi, blessing, David. My name is Deborrah Fang. My questions for you are okay, I’m a widow. I lost my husband couple of months ago and right now I’m not working. I quit my job as a teacher a year and a half ago to stay home taking care of him. And after he’s gone, he left me with his life insurance. So I get the life insurance.
I pay off the house I’m currently living. So I also purchase a property in Colorado Spring, pay off, and I still have $200,000 cash in my hand. Now, I learned about these real estate investment. Make me feel like paying off my mortgage wasn’t the smartest move. However, I’m thinking, should I get cash out refinance from the current two properties that I have already paid off to buy more properties?
Also, I don’t know, should I pay them off or should I just, I mean, for the new property, should I just do a 25% down payment? Also, for the 200,000 cash in hand, the same thing, do I find more properties, just pay the initial down payment? Or should I just buy one property within the $200,000 range, pay them off and receive rent coming in as the positive cashflow?
Currently I’m still taking care of three kids. Two are in college and one is staying home with me. He’ll be a sophomore in high school. So yeah, that’s my questions. And thank you for your help, bye.
David Greene:
Hey Deborrah, thank you for the question. First off condolences, I’m very sorry to hear about your husband and please send those condolences to your kids as well. I lost my dad when I was 27 and my brothers were even younger than me. And it’s incredibly hard when that happens. Sometimes it feels like the entire cornerstone of your family falls apart.
So you’ll be in my prayers. As far as the question from a practical perspective that you’re asking here of, should you take out loans or should you own properties free and clear? And if you’re going to take out a loan, how much should you be taking out? I see all the options that you’re presenting and I can tell from the way you’re spitballing that, you’ve got a lot of uncertainty and questions in your mind, and I’m really glad you reached out.
Let’s talk about when you should take out loans and use what we call leverage and when you should pay a property off. The majority of the time the people that are listening to me are coming from a perspective of trying to grow an empire, okay? So the advice I would give them is different than you if you have a different goal than what they have. And that’s what we have to get into here.
This is the way that I look at borrowing money to buy homes or using leverage. It will increase your ability to grow wealth, which is what I’m going to call offense, but it comes at the price of being more risky, which is what I would refer to as defense. So ideally we want to be able to have as much offense as possible with as much safety or defense as possible. And that’s what we’re striving for, but the two are typically mutually exclusive.
You can’t have both at the same time. So what somebody has to figure out is how much do I care about risk and how much do I care about growth? So for you, Deborrah, anytime you take out a loan, you have to make the debt payment on it. And as a new investor, you could easily find yourself in a place where you pick the wrong tenant or you buy the wrong property and you’re not able to generate rent from the person, or you have to spend money to fix things up.
And now you’re in this situation where you don’t have enough money to make the payment on the mortgage, and you’re also not making money from the property and you could lose the entire thing. And that’s what I don’t want to see for somebody in your situation. Now, if you’re not working and you don’t plan to work, that does increase the risk of investing in real estate.
The reason it increases the risk is you don’t have money coming in from a job in case you make a bad decision or something goes wrong with the property. You’re sort of operating without a bulletproof vest, I would say. One mistake, that bullet’s going to get right in there and it can really hurt you. And that’s what I don’t want to see happen.
Now, if you’re planning on getting a job and you are going to work and you think you can generate decent money, that now opens up some doors to where financing could be a safe option for you because even if something goes wrong, you’ve got a cushion with money coming in from work. So the first question to ask yourself is, do you want to work? Are you willing to work? Or is that not the case?
There’s so many scenarios that I could lay out for you, but in general, if you’re not going to work, I would probably advise you to not take out a loan, okay? Just buy whatever you’re going to buy in cash and at least learn how to invest in real estate with as little risk as possible. You’re still going to have property taxes.
You’re still going to have homeowner’s insurance. You’re still going to have different expenses like repairs and maintenance that are going to pop up, but you are having less of a debt service if you’re not taking on a loan so that you can kind of learn the ropes. It’s kind of like training wheels while learning to ride a bike.
Now, let’s say you take to this like a fish in the water, or at least you become competent at it. At that point, you’re going to make better decisions on what you buy and how to manage it. And at that stage, I would say taking out a loan to buy property could make some sense because you’re not learning at the same time that your risk is high.
Your risk is going to be much lower because you’ve already learned how to do the job and there’s less surprises that are going to jump out for you. And if you do that well, you may never have to get a job because you can make a career investing in real estate full time. All the money you make can come from the rents, but you’re not going to do this by just snapping your fingers, jumping in to becoming an amazing investor.
You’re going to have to start very small. Start slow, start with low risk, buy in good areas, pay the house off, learn how to manage the tenants. I would recommend looking for what we call small multi-family, a duplex, a triplex, a fourplex, something along those lines. With $150,000, maybe you had more, I think you said you have 150K, you’re probably not going to get a bigger property, like 10 units.
It’s going to be very hard to make that work. So get what you can get for the money, pay cash for it. Make sure you buy in the right area, get a property manager that’s really good that can kind of teach you the ropes. Get that first property, see how that goes. And then scale from there. Next question is from Yasir in Atlanta.
I’m a 21 year old from Atlanta, Georgia, and was trying to see what you do if you were in my shoes. I’ve never bought any real estate. I got a good job paying well, and I just didn’t want to let that money sit in the bank. Should I start with the multifamily unit? How much should I save for emergencies? Really good here, Yasir.
First off, this is a situation where you would really benefit from listening to the BiggerPockets Money show. So they get into personal finance, how to live beneath your means, how to make more money, how to manage the money that you have at a more holistic level than just investing in real estate. So you should check that out and other people that are in your situation, especially younger people that haven’t learned how to manage money yet can get a lot from listening to a show like that.
Let those seeds get planted of how to build and grow wealth at a very young age. Second off, before you start worrying a ton about investing in real estate, I think your energy would be better put towards finding a career. Do you know what you want to do? Are you going to work in the trades? Can you make good money learning a trade? Are you in college right now and you plan to get out of school and work a job?
Do you know what you’re going to do to make money? So making money at work is much less risk than just buying real estate and the best real estate investments typically happen when you’re already making decent money at a job and you can afford to take on a mortgage. Now I’m going to assume here that you have some money saved up. You’re able to do this.
You’re ready to buy real estate. You’re financially strong, because that’s the position that I advise most people to start from. If you’re not at that position, get to that position first. But if you are there, you should house hack. You should look for small multi-family property that you can afford, live in the house and rent out the other units. Or maybe buy a house with a lot of bedrooms, live in one bedroom and rent out the other bedrooms.
When you’re young, this strategy works the best. You’re not going to want to rent out bedrooms if you’re married, if you have kids. It’s a completely different scenario. So if you’re still young and you’re single, which I’m assuming you are, you actually didn’t mention that, buying a house and renting out the rooms is one of the best ways to learn the fundamentals of real estate investing, choosing tenants, having them sign leases, managing people while keeping your risk relatively low.
BiggerPockets has a book on house hacking written by Craig Curelop. I would recommend that you check that one out, get some ideas of how to house hack as well as Google the term house hack and learn some strategies that you can use where you can put a very low down payment, 3.5%, get your first property and learn the fundamentals without taking too much risk.
David:
Hi David. My name’s David also. Firstly, I just want to say thank you so much for all the content that you put out and all the insights that you provide. You’ve taught me so much and you’ve really helped change my wife and I’s life really. So just can’t thank you enough. Thank you so much. Just to give you a background, we own a number of short-term rentals.
We own a few long-term rentals, but mainly short-term rentals in Tennessee. We’ve purchased them over the last few years. They do really well for us cashflow wise. We recently purchased expensive home here in Orange County in California. So we are actually pretty much using all of our W2. I work as a teacher, my wife works in retail and we’re pretty much using all of our W2 income that’s going to go directly to our mortgage.
We earn a lot more money from our rentals, but we’ve always thought about cashflow, cashflow, cashflow. You’ve kind of helped shift our mindset with looking more about appreciation, just underlying the benefits, particularly the long-term benefits of appreciation. So we’ve really shifted our thought about that. But with this higher price property that we’ve just bought, we’re starting to be in a little bit of two minds.
Do we need some more of that cashflow that may have not been as important previously? We are kind of at a point where we’ve been able to refinance a lot of those properties. So we have quite a lot of capital to be able to deploy that we want to purchase more rental properties with. We are in two minds as to, do we just keep going with the cashflow, just keep buying these vacation markets?
Or do we diversify potentially buy more of your traditional markets that have the likelihood to appreciate population growth, job growth, all of those kind of things? Places like Phoenix or Tampa or Salt Lake city, those kind of places. So maybe just wanted to get your idea based on our situation, what you would advise.
I know you’ve had some people on your podcast before talking about renting by the room, just being creative like that. We’re pretty on top of the short-term rental thing, so we feel really comfortable with Airbnb. So we’re more than willing to do something like that even in a more traditional market provided the regulations lend itself to that.
But yeah, really want to shift away from the vacation rental markets that have been so good to us, but then at the same time still want to be able to make a little bit of cashflow. So just wanted to get your idea on what you think. Maybe you could point us in the right direction. We’re at a bit of a crossroads at the moment, and then potentially if you have some ideas on markets.
I know I mentioned some of those growing markets that we all know about, but yeah, just wanted to get your insights on this particular situation for us and any advice you might have. Thanks again for everything, and I hope to hear from you soon. Thanks.
David Greene:
Hey David, thank you for the question. All right, here’s what I’m picking up from the way you went about that. You and your wife are not sure what your goal is. You know you want to make money in real estate, but you don’t know how, you don’t know what you want your life to look like. You’re not sure what you value the most.
And because of that, you’re kind of bouncing around between all of these different options and you’re not sure which direction to take. Let’s break down in general, the different roads you’ve got. You’ve got the high cashflow road. This is where you’re going to try to build up as much cashflow as you can every month, meaning the properties are going to generate rental income and your expenses are lower than that.
So you get to keep that money. You kind of get the immediate payoff right off the bat of cashflow. In general, cashflow comes at the expense of appreciation because you usually make more cashflow in markets where homes are lower price and therefore don’t go up as much. Or you make more cashflow at the expense of more work, which would be the short-term rental market, where you got to put in more work to get that cashflow.
Then you’ve got the appreciation road. This is going to make you the most wealth in real estate, but it comes with the most delayed gratification as well as the highest risk. Because when you’re playing the appreciation game, you’re not getting as much cashflow or sometimes you don’t get hardly any. So you could lose the property more easily than if it was cash flowing very strong.
And even when it does work out, you don’t have access to that money. It sits in equity in the property until you access it via a cash out refinance or selling the property. So the appreciation road as opposed to the cashflow road has less of an immediate payoff. It’s more of a long-term play.
Then you’ve got the short-term rental game, which kind of stepped into the industry, that combines the two of them. You’re now able to buy in high appreciating markets and generate more cashflow, but it comes at the expense of being more active and less passive. So here’s your problem, David. You’re not sure what you want to do.
It sounds like you don’t want to have to work a lot and you want a lot of cashflow, but you also want a lot of appreciation and that’s why you’re stuck. My advice is that you and your wife are going to have to sit down and ask yourself what kind of lifestyle do we want to live? If it’s all about having more of your time back now, I would say you should chase after cash flowing properties that are stronger on that side, which are probably going to be small multi-family or larger multi-family that you probably haven’t considered.
You can hire a property manager and manage it. It will put off more cashflow and you won’t be as directly involved. If you say no, we’re willing to work right now, then the short-term rental game is what you should keep doing. And you should just find different markets to get into if you can’t make it work in the one you’re at.
The more short-term rentals, you get, the more income you can generate, the more money you have to pay someone else to manage it for you. And that’s one way that you can get your time back. Another road that you could consider would be the appreciation game where you say, hey, we’re willing to work really hard right now. We don’t need as much time, but when our kids are older, that’s when we want to know that we’ve got a lot of money set aside.
So I can’t answer your question unless you know what your goal is. If you’re really not liking short-term rentals, because that was my original thought when you were talking is, hey, you want appreciation and cashflow? That’s the perfect mix. You’ve got to hire somebody else to manage these properties for you. Now I’m actually looking for something like that myself.
I’ve got a couple of short-term rentals now and I plan on getting more. I want to hire a person that will manage the logistics of it. So if you’re listening and you want to make some extra money, get paid by the hour, message me if you have experience with short-term rentals. David, you could do the exact same thing.
I’m looking for someone that has done it before, they can manage the cleaners, the supplies, the reviews. They don’t have to worry about getting it booked, but they do have to make sure it’s ready for the next guest that wants to stay in it. If I can do this, so can you. That’s what I think that you should be looking for.
But before you get too deep into that, you’ve got to talk to your wife and figure out what you want your life to look like. Then submit another question, letting me know and I’ll give you some more specific advice about different strategies or roads that you could take to get where you want. Hey, we’ve had some great questions so far. I love being able to do these episodes. So I need more of your questions to keep doing it.
Please go to biggerpodcast.com/david and submit your question there. For everyone that has already submitted, thank you very much. If you’re listening to this on YouTube, please hit that subscribe button so you get notified when additional episodes come out, as well as like this and share it with anyone you know who’s also a real estate geek.
At this segment of the show, we like to read some of the comments from previously shows we’ve done and give some air time to people that were on YouTube and participating in the conversation there. Our first comment comes from Daphne Hill. Love these shows David. You are a natural teacher and never make guests feel like their questions are dumb or have been answered hundreds of times before.
Thank you. Thank you for that, Daphne. I appreciate that. Made me feel good. Next comment comes from Lauren. David, I would appreciate some bookkeeping recommendations. Should each property have a separate bank account or use one account for all properties? Set everything to autopay, et cetera. In my personal situation, I have no partners, closing on my first short-term rental in April and looking to get my second short-term rental after, thanks.
Well, Lauren, I will try to answer this, but I will say, I don’t know that my way is necessarily the best way. And I know that right off the bat. How I typically work bookkeeping is that I have all of my single family properties managed in one account. So I have a bookkeeper that goes over all the property management statements, puts them into a spreadsheet.
I can see what every property makes or loses and all of the expenses are on auto pay coming out of that account as well as all the income goes into it. I have a separate account for short-term rentals. And the reason I created a separate account is I wanted to keep more reserves in that account than in the other ones, because I feel like the income from short-term rentals is less reliable.
So therefore, I offset that risk by putting more reserves in that account. Then I have a different account set up for my 15 or $16 million property that I bought because it’s huge and it needs a ton of money in reserves and I don’t want that money to be mingled with the other money because I need to have extra money in there for that really big property where the mortgage is $80,000 every single month.
Then I’ve got a different account set up for my real estate sales, a different account set up for money that comes from the one brokerage and so on and so forth. I run a private mastermind where I teach people how to build wealth and how to be entrepreneurs. And so that has its own bank account. So I like to keep mine basically by income stream, is how I set up my bookkeeping.
And I have different accounts for the different sources of income. Now, there are some sources of income that kind of all fit together like all of the single family rentals or book royalties that I would receive, okay? There’s times where… Or maybe speaking fees, I can put all those into the same account, but I typically put all the money into the same account when there’s not expenses associated with it.
So for example, I don’t have expenses associated with book royalties from books that I’ve written. There’s nothing that I’m paying for that. So I’m okay to stick all that into an account, because there’s nothing coming out. There’s no risk associated with that. And that’s just kind of the way that I set it up.
If I have an income stream that has some risk associated with it, I put it in a separate account where I can keep more reserves in that specific account. And then I have a spreadsheet that my bookkeeper has to take all of these different income streams and all of these different businesses and take my net profit from every profit and loss and put it in the column for that income stream.
Then I look at that every single month and I see, hey, which properties are doing well? Which asset class is doing well? Where am I losing money? Where am I making money? And I kind of put my time and energy towards the stuff that I think is making more money. Now I’m in the process of switching bookkeepers right now and it’s taken them a long time to get up to speed.
So it’s probably been three or four months now I’ve been flying blind where I haven’t been able to see yet how much of these businesses are making. And I hate this feeling. It’s just the worst every time you have to switch over, but it was necessary because I’m working at a faster speed now than the person that I had could keep up with.
So I don’t know that I answered your question, but hopefully by giving you a little bit of insight into me and my life and how I’m structured, that right answers will make themselves known for you. Our next question comes from William Kahn. Love the show. Just giving a comment to support you guys. Thank you for that, William. Appreciate it.
Next comment comes from CD Mane. Wow, finally, the audio isn’t screaming for help. Hey, we’re slowly getting better. Shout out to the production team at the BiggerPockets Podcasts for making me sound like a normal human being. I tend to move around a lot when I talk. I get too close to the mic. I get further away from the mic.
I don’t know why I do that, but I’m a person that can’t sit still. Do you guys have that problem? Do you ever get a phone call and you start talking on the phone and you get up and start walking around? That is me every single time. I constantly walk around the parking lot of the area where my offices are because I can’t sit still and talk on the phone. If that’s you, if you do the same thing, tell me in the comments.
Tell me I’m not the only crazy person that has this compulsion to move around and walk when I’m on the phone. And then also let BiggerPockets know that you love the production team, that they’re doing a great job. That my audio sounds good and that they got me looking fresh. Last comment comes from randoms on my mind. Wow, that house hacking topic was fantastic. I didn’t think about the math behind house hacking.
I’m going to look into that. Well, that’s what I’m here for. It’s to open your eyes as to new strategies that you might not have understood, because I’ve helped so many clients with house hacking and I’ve done it myself that I have some unique insight into that that not everybody has. So if you live in California and you want a house hack, reach out, let me know.
I’d love to be able to help you do that. Same thing goes, if you have a house you want to sell, or if you need a loan, I would love to work with you. And what I’d love even more is if more of you leave comments like this letting us know what you like about the show.
So please tell us what hit, tell us what you like, tell us what made you think, tell us what worked and then even say, hey, if I don’t like this part of the show, that’s okay. Let us know that too. So if you’re not following on YouTube, make sure you do so and leave me a comment.
Jenny:
Hi David. From Melbourne Australia, I’m Jenny. I’m a professor and a real estate investor with properties in Atlanta, Los Angeles and Melbourne. I’m wondering if BiggerPockets publishing would be interested in a book I’m writing called Investing in Real Estate Like a Professor.
The book is aligned with the goals of BiggerPockets, to help people make good decisions about getting started and building a sustainable portfolio in real estate. Professors have a particular way of looking at the world, which I think a lot of investors and would be investors will relate to.
Our perspective weaves through the lessons of history, the dilemmas of the human condition and applies these big ideas to our own lives. I started writing it with other professors in mind as my audience, but I think now that the book would also appeal to a general audience like BiggerPockets where learning is centered in the process of investing. One thing that professors do in our jobs is publish.
So I have some existing relationships with book publishers, but I’ve read all of your books, which are published by BiggerPockets. My questions are, why did you decide to publish your books with BiggerPockets instead of a traditional publisher? And how would I contact BiggerPockets Publishing to find out if they have an interest in my book? Thanks a lot, David.
David Greene:
All right, thank you, Jenny. Man, this is a very unique question that I haven’t been asked before in a public forum. So first off, my producer of the show reached out to you to put you in touch with the BiggerPockets Publishing team. So hopefully that goes well. As far as the next two questions, what do I think about approaching book writing?
I think what I’m getting at is you’re asking, what do you think about approaching writing a book from the perspective of an individual person written for their specific scenario? And then why did I choose BiggerPockets Publishing? And the answer to both of them is oddly enough, the same answer. So I think when you’re learning how to invest in real estate, you shouldn’t just be learning about, well, how do I do it?
Because there’s a million ways to do it. It’s more, what is my goal and how do I make this work for what I want? And that’s the thing. It’s every person is different. Most of us have some goals that are similar. We want freedom. We want our time back. We don’t want to be stuck in a commute.
That’s pretty much an overall general consensus we can all agree with, but there’s some people that really want to make a ton of money and they’re limited in their ability to do so at their W2 job. There’s other people that just want a little bit of money, but they want it to come easy. There’s other people that know they have a creative itch that they want to scratch in real estate helps them do it.
And then there’s other people that just love human beings and they want to work in the industry where they get to talk to and sort of be in touch with other people. So when you’re writing a book, it is best to be asking yourself, well, who’s my audience that I’m writing this book to? And I’m writing it to a perspective that they would understand.
And I think that that’s what you’re getting at about when you’re talking about writing it from a professor’s perspective. Well, the reason that I publish my stuff through BiggerPockets is the majority of people that follow me, trust me, listen to me, respect me, they’re people that are in the BiggerPockets community.
So rather than writing a very niche topic where I said, okay, I’m going to write about say how to be a real estate investor as a first responder, because I had a career in law enforcement. I was able to run on a broader topic like long distance real estate investing or the Burr method, but give it to a more specific audience that already was looking at real estate from the same perspective of me.
And that’s why BiggerPockets Publishing made the most sense. The people that were already following me were BiggerPockets people. The people who read my books, typically aren’t finding about me for the first time just from the book. They’re finding about the book from this podcast, from the YouTube channel, from social media, from my involvement with BiggerPockets in general.
And that means that they’re more likely to get something from the book because as I hear people say, I hear your voice in my head when I’m reading it or they’ve heard me answer questions like this before. So they know my background or my philosophies when it comes to different real estate investing strategies. So that’s why I went with BiggerPockets Publishing. I also just really like this company.
They have a good heart. They mean well. They’re trying to help people empower themselves. They’re not looking at giving people a handout. They’re looking at giving people a hand up. All things that I really can get behind and like. So it’s also fun frankly, to make money for the company that I love working for. So thank you for asking that question and I wish you the best of luck on your own boo writing endeavors.
All right, the next question comes from Jones in my hood, the Bay area, California. Hey David, my question is about a HELOC for rental properties. HELOC stands for home equity line of credit. I recently bought a single family in Oakland Montclair Hills which I closed on earlier this year. Even before closing, I gained over 200,000 in equity on the property. I bought the house for a million.
The property is currently rented on a one-year lease agreement. I was looking to tap into this equity via HELOC to grow my real estate portfolio. I also have a good amount of equity in one of my rental properties in Cincinnati. My loan balance is 85,000 and I estimate property values is around 180. I’ve been researching a bit and I found it’s difficult getting a HELOC on a rental property. Why is this the case?
And is there a way around it? I don’t want to do a cash out refinance because I have a pretty good rate on these properties and I haven’t found a property which I would like to buy yet. I don’t want to have cash sitting in the bank either. So my preference is for the HELOC. Well, first off, congratulations on that property that you’re able to buy. I work in that area and Montclair Hills is a great area.
The fact that you got something for a million means you did really good. That’s a pretty low price for that area. Second off, let’s talk about why a HELOC is hard to get on an investment property. So what a HELOC is, is it’s really a second position mortgage on a home. So the lender’s only going to give a second position mortgage if there’s enough equity to support paying off the first mortgage and then paying them off if something happens and the house goes into foreclosure.
Most HELOCs will basically take the value of the home, subtract what you owe on that home and let you borrow up to 80% of the difference. So you might, if you only have 20% equity in the property, you might not be able to get a ton out of a HELOC on that home. Now, as to your question of why are they hard to get on investment property?
The reason is because to a lender’s perspective, an investor is more likely to let a house go to foreclosure than a person who lives there. So if someone lives in the property, it’s their home, it’s perceived as being more secure because people would let all their properties go except for the one they live in. That would go last. So the risk profile to a lender is higher if it’s an investment property.
There are still some banks that do it, but you’re generally looking for credit unions in the area of where the home is. That’s where I have found luck, is going to credit unions to get HELOCs on investment property. Now I also understand you don’t want to have cash seating in the bank. So the HELOC seems like your best bet.
I will give you this piece of advice. Interest rates are going up and HELOCs typically are adjustable rate mortgages. Everyone I’ve ever seen has been adjustable rate. If you take out a HELOC and you use the money, just know the payment can keep going higher as interest rates keep going higher. And if you’re running your numbers based off of whatever the payment is when you first take out the money, you could find yourself surprised when the payment goes up later.
Mason:
Hey, David. Mason here from Austin, Texas. Wanted to say, thank you for everything you guys at BiggerPockets do and for this show that y’all provide to like-minded investors, I’ve been listening for about nine months and have been such a huge fan. It’s changed a lot of things for me. So thank you for that.
And I’ve gotten to the point where I’ve got to now submit my own question, because it’s been so valuable. A little bit of background about me and my situation. I’m 24, sold my tiny home in January for a good profit and was able to kind of use that to start a short-term rental here in Austin, Texas with my girlfriend.
And the good problem to have is that it’s done so well that we are just so hungry to do it again, and rinse and repeat so to say. We had quite the time getting the conventional loan just because I am 1099 and banks love W2 income. And we were able to get it done of course, but for that reason, debt service coverage ratio or DSCR loans are very attractive to me now.
The problem with resources and with those now is that of course, a lot of them are requiring 15 and usually 20% down. So my main question is, is there a way to creatively finance say half of the down payment? Or the range that we’re kind of looking at is nicer homes to instead of hitting a so-called triple or going for a triple, trying to hit a home run with the next one.
And those kind of range of homes, 20% would be out of our resources as of right now and I don’t want to just wait and save for that long. So I want to know if there was a way or creative financing via hard money loan or obviously cash out refinance is an option, but we’re within that six month period where it’s I’ve got to wait again.
But if there was an option to creatively finance say 10% of the 20% of down payment or equity kind of in the deal and if lenders or someone out there did that, or if you knew of any kind of creative ideas. Obviously there’s friends and family, but I didn’t know if there were other options or anything. But yeah, I appreciate again, what you guys do and any and all input would be greatly appreciated. Thanks.
David Greene:
All right, Mason, you are in a position that many people are in where it’s not enough just to be financing 80% of the value of the property. You’re hoping to finance 90, 95% of it, maybe 100% of it, which means you don’t have a big down payment. Now the easiest way to solve this problem is to get a primary residence where you can put 5% down or 3.5% down on an FHA loan and you don’t have to borrow the money.
But if you’re looking to buy a pure investment property, you do run into this problem. And here’s why it’s designed that way. In general, only people that already have a good amount of money are the ones that are buying investment properties. They’re literally investing the down payment that they already have into a property, which is where they set it at 20%. But you’re looking at investment property from a different perspective.
You’re not wanting to invest money you already have. You’re wanting to grow wealth through an asset and you’re wanting to borrow other people’s money. You’ve got a couple of options. So from the lending perspective, you can look into an 80,10,10 loan. That’s a loan where you borrow 80% of the property’s value on your first position loan.
Then you get a HELOC or a second position loan for 10% of the remaining balance. And then you put the other 10% down yourself. So if you find a mortgage broker that you feel comfortable with, you can ask them if they have access to 80,10,10 loans. You can always reach out to us at the One Brokerage and we can look into that for you as well.
You also have the option of borrowing money from someone else. So if you’re going to be putting 20% down on a property, what if you put down 10% and you borrow the money from somebody else to put down the other 10% and you split ownership 50/50? That’s another option if you don’t have a ton of cash. You’re right to look into the debt service coverage ratio loans, because you’re working as a 1099, but those are typically going to be 20% down loans.
So there was a time where we were able to get them for our clients at 15% because we did a lot of volume. Those have gone away right now. They may be coming back later. So when you’re someone that does a lot of business with us, you’ve done more loans. You’ve sent those referrals. Now we sometimes have access to getting you those better loan programs if the lender is willing to give them out, because we do a lot of business with them.
But you can’t count on that. That’s what I’m getting at. Those are oftentimes like a special circumstance. So your best bet might be to make other people money through what you’re doing. Give them a chunk of the equity in exchange. Maybe they put all of the down payment in and they get 60% of the equity and you get 40% of the equity in the cashflow for finding the deal and managing the whole thing.
But you’re going to have to come up with something like that where you find other people that have money and you give them something to make it worth their while if you don’t have that cash. And then just remember, as you get older, as you do better at work, as you start making more money, you will become less and less dependent on other people till you can buy real estate with your own money.
All right, our last question comes from John Paul Kissinger in Mount Hope West Virginia. Hey David, I’m a paid firefighter in a small town getting paid via 1099 for my department. I’m looking at getting my first rental. I’m concerned that my 1099 may be an issue on getting a loan. I also have one mark on my credit from an unpaid medical bill from four years ago. I paid it two years ago, but it’s still showing up.
I have enough cash for a 20% down payment. I’m worried about rising interest rates and whether this is a good time to start. Also, do you have any advice on what I should do to get pre-approved for a loan or where? Well, that’s a silly question. There’s mortgage brokers everywhere that you could talk about getting pre-approved. If you’d like, reach out to me and I’ll get you in touch with my team that does my loans.
Happy to do that for you. We’re the One Brokerage because we’re the one brokerage that can do it all. Now, as far as your question about is now a good time to invest? It depends on the market. So I will say right now, I don’t really know much about West Virginia. I don’t own any proper there and I don’t know anyone else that does either.
So I can’t tell you if it’s a good time to invest in your market, but in the markets that I’m investing in, I think this is the best time to invest. Now, let me tell you why and the perspective I have and then you can decide for yourself if you agree. So I am investing in markets that I think are going to be very strong for the future.
More people are moving there than normal, okay? So there still is not enough supply to keep up with the demand that’s going to push rents and it’s going to put prices of those assets higher. At the same time, rates have gone up, meaning a lot of people are scared. So there’s less buyers competing with me for these homes than there was before.
So I don’t have to go in as fast or as aggressive as I was going in specifically because other people are getting out. So I have all of the long-term upside with inflation that continues to spiral out of control, with the near-term upside of less competition. So I’m going at it hard. I’m looking to buy some really expensive properties very soon because these interest rate hikes have caused everybody to slow down.
Now, depending on when you’re listening to this, this advice might be of a different value. But the fed has said, they’re going to continue to raise rates. Which means when everyone who goes, oh, no interest rates went up. I don’t want to buy real estate. When they realize that they’re going to keep going up, today’s rate that feels expensive will seem cheap.
And when the rates seem cheap, everyone’s going to jump back in and you’re going to get another flood of people that are all trying to buy real estate. So I actually think that this is kind of the best of both worlds. This is a unique opportunity. This is the same thing I saw when I bought my Maui condos. Those have both gone up between three and $400,000 each in about a year since when I bought them, because I recognized the same thing.
The shelter in place happened. A lot of people thought, oh, don’t buy real estate, there’s a crash coming. I saw the window I jumped in when everybody else wasn’t jumping in and boom, I did really well on those. So that’s my advice that I would give to you. Also, if you’re worried, instead of putting 20% down on one house, what if you put 5% down on a house to live in and then next year do the same, and then next year do the same and spread that money out over several properties and just house hack it?
That would be the best way to reduce your risk if that’s what you’re looking to do. And John, as far as your 1099 income, if you have a stable work history where you’ve done it and you’ve claimed this on your taxes, which I’m sure you have, you can get approved to get a loan with 1099 income. It just takes more time. It takes more effort for the processors to get all your information together to submit it to the underwriter.
The underwriter has a lot more questions that they have to verify because you’re probably making different amounts of money every month. If that’s not the case, it’s even easier. But don’t let your 1099 income deter you. You just need to find a mortgage broker and let them know your situation, and they’ll tell you what they can do for you.
Your other option is a debt service coverage loan, where they’re going to use the income from the property instead of your own income. Here is what I would say for someone in your position. I would advise you to get a 30-year fixed rate and not an adjustable rate mortgage even if the teaser rate is lower, because unless you’re in a position where you have overtime that you can work or you can earn more income, you don’t want to end up with a loan that’s going up over time faster than you can make up the difference in money to get it paid.
All right, that was our show for today. I want to give a big thank you to everybody that submitted a question and I want you to do the same. Please go to biggerpodcast.com/david and submit your questions there so that I can answer your question. And we can have more of these seeing Greene shows to learn from. If you enjoy this, please let me know in the comments.
And if you say something funny, insightful, clever, we will make sure that we read it on a future episode of this podcast so that other people can hear what you said. And then let me know what you think of the show. If you want to hear more questions about a certain topic, let us know. My production team will read those comments and they will find the stuff that you’re looking for.
Lastly, please subscribe to us on YouTube and share this with someone else that you think might benefit from hearing it. If you would like to get in touch with me or follow what I’m doing, you could find me on Instagram, Facebook, LinkedIn, Twitter, pretty much all of them @DavidGreene24, there’s a E at the end of Greene, or you can find me on YouTube, youtube.com/davidgreenerealestate.
Go give me a follow there. Thank you everybody. If you’ve got some downtime, go check out the BiggerPockets website. They have an amazing forum with tons of questions being asked, literally the best in the world. They also have a very, very strong blog section that I used to just read religiously when I was new, learning how to invest in real estate.
I read every single blog that ever came out and learned a ton from that. BiggerPockets has a lot to offer you more than just this YouTube channel or just this podcast. So go check it all out.
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CPI Report Gives Alarming Inflation News: Is a Recession Next?
Last week, the Bureau of Labor released data showing the Consumer Price Index (CPI)—the most commonly used measure of inflation—rose 8.6% higher in May 2022 compared to May 2021. This is up from an 8.3% reading in April and represents the highest year-over-year inflation figure in more than 40 years.
Unfortunately, another high inflation figure shouldn’t be a huge surprise to anyone. We all know that inflation has skyrocketed. We see it daily at the gas pumps, the grocery stores, and just about everywhere we spend money.
But even as we all have come to expect inflation, the details of this most recent report were particularly bad. It actually represents an acceleration in rising prices.
As you can see in the table above, we saw monthly increases in the CPI average of around 0.7% for most of the last several months. Then, in March, it spiked to 1.2%, primarily due to the impact of the Russian invasion of Ukraine and the corresponding shock to the energy market.
In April, things started to look up. While prices still rose, a monthly increase of 0.3% was the best print we saw in months and offered a glimmer of hope that inflation, while still increasing, was starting to approach a peak.
Then May rained on that parade. While most economists believed inflation in May would grow around 0.7%, it was up 1%, which is a big step backward.
If you look at the chart, in most of the last several months, at least one or two categories saw lower prices on a month-over-month basis. Every category in May saw increased prices for the first time since November 2021.
This was a discouraging CPI report, and inflation will likely be with us for a while. So, the question remains, how and when will inflation come under control?
To answer that question, we need to briefly review what inflation is and how we got here.
What is Inflation?
Inflation is when the spending power of the U.S. dollar declines. In other words, prices rise, and you have to pay more to get the same goods or services.
Inflation is a highly destructive force in an economy. It stretches the budgets of everyday Americans and makes it more difficult for people, especially those at the lower end of the socio-economic spectrum, to make ends meet. It also damages the U.S. in terms of international trade and can cause other societal issues. It’s crucial to contain inflation when it spikes like it’s doing right now.
It’s worth noting that some modest inflation is considered a good thing, as it stimulates the economy. Because people know (in normal times) prices will continue to rise a bit each year, they are incentivized to spend their money now rather than wait. For example, why would you wait to buy a car if that same car will be 2% more expensive next year?
The incentive to spend ensures businesses can continue to grow. This is why the Federal Reserve targets 2% annual inflation.
What Causes Inflation?
A variety of complex factors causes inflation, but as with most economic concepts, it can be traced back to supply and demand. When demand exceeds supply, which is where our current economy is, inflation occurs.
Right now, demand is up for two primary reasons.
First, people want to do stuff and spend money again! After a couple of years of restricted activity, people want to travel, go out to eat, buy cars, and experience life again. It’s as if all the pent-up demand from the last two years is being injected into the economy.
Second, a tremendous amount of money has been introduced into the economy. This is known as an increase in “monetary supply,” meaning more money is moving around the economy. People are willing to pay more for goods when there is more money in the economy.
Just think about it, if you had only $1,000 to your name, your willingness to pay for a sandwich might max out at $10 (1% of your net worth). But if you suddenly had $1,200 to your name because more money is injected into the economy, perhaps your willingness to pay for that same sandwich goes up to $12 (still 1% of your net worth).
Overall, demand is high due to the easing of COVID-19 restrictions plus a rapid and dramatic increase in monetary supply. These are conditions that make it ripe for inflation.
But on the supply side, we also have conditions primed for inflation. Typically, in a healthy market, when demand spikes, suppliers increase production to meet that demand. This keeps prices relatively stable and allows the suppliers to sell more goods and generate more revenue.
But, given the global supply chain issues we’re facing, suppliers cannot scale up production to meet demand. Instead, the only way to moderate demand is to raise prices.
Right now, we really do have the perfect storm of inflation—super high demand alongside constrained supply.
What Happens Next?
Many economists and analysts (myself included) expected inflation to peak (not stop or deflate, just slow down) sometime in the middle of 2022, mostly because supply constraints would moderate. The thinking was that as economies reopened, the supply chain would recover. While demand would likely remain high, suppliers could increase production to meet that demand, and inflation would cool off.
Unfortunately, two major geopolitical events upended that hope. First, Russia invaded Ukraine, and dramatic sanctions were introduced. Removing Russia (and Ukraine in many ways) from the global economy is straining a supply chain that was already struggling. Secondly, China has continued to impose lockdowns to contain COVID, leading to lags in Chinese manufacturing and the production of goods.
It seems that the May inflation report reflects this new reality. Demand has remained high, as most people expected, but the supply-side relief that was hoped for is not coming to fruition. As such, inflation is higher than its been in over 40 years.
This is where the Fed comes in. The Fed’s primary tool to fight inflation is to raise interest rates. Raising interest rates reduces the monetary supply because fewer people want to borrow and spend money. As we discussed before, when the monetary supply decreases, so does demand. In short, the Fed is trying to curb demand through both businesses and consumers by tightening the monetary supply.
This typically works, but it takes time and can have other negative economic consequences—namely, a recession.
As interest rates rise, people borrow less money to make big-ticket purchases like a new car or home. That reduces revenue in those industries, leading to less spending and layoffs.
As for businesses, they are also less likely to borrow money and, as such, will purchase less equipment, hire fewer people, expand into fewer markets, and often have to lay off employees. This, in theory, cools the economy to the point where demand shrinks to meet supply at equilibrium.
So that’s where we are. Inflation is unacceptably high, and the Fed is raising rates aggressively to stop it.
My Thoughts
While no one knows what will happen, here are my current thoughts. Remember, this is just my opinion based on the currently available data:
As the Fed raises rates, many parts of the economy will be negatively impacted. We’ve already seen the stock market enter bear market territory this week (down more than 20% off its high), and Bitcoin is down more than 60% as of this writing. There are still roughly 10 million job openings in the U.S., but I expect the labor market to loosen in the coming months as layoffs pick up. With all these factors converging, I believe a recession will likely come in the next couple of months.
That said, recessions come in many different forms. Right now, it’s very unclear if it will come, how long it will last, and how bad it could get. I think that depends on if and when inflation comes under control.
As for housing prices, which I’m sure everyone here is curious about, I think there is a growing market risk. I’ve said for the last few months that I believe prices will moderate dramatically and could turn flat or modestly negative (on a national basis) in the coming year. Still, I think that by the end of 2023, housing prices will be +/- 10% of where they are today nationally. On a regional basis, I expect some markets to see dramatic drops (more than 10% declines) while others may keep climbing.
What do you think the implications of this inflation data are? Let me know in the comments below. Be sure to also listen to the On the Market podcast, where we discuss the direction of the economy and the housing market in more detail.
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Logan Mohtashami: “biggest affordability hit in our lifetime”
In this HW+ Slack Q&A, HousingWire Lead Analyst Logan Mohtashami answers questions from our HW+ member community. Mohtashami focused on the latest inventory and the Federal Reserve’s rate hike announcement.
As a member of HW+, you get access to 30-minute Slack Q&As, where we invite the HW Media newsroom to break down the hottest topics in the industry. This Q&A was hosted in the HW+ Slack channel, which is exclusively available to members. To get access to the next Q&A on June 29th, you can join HW+ here.
The following Q&A has been lightly edited for length and clarity. This Q&A was originally hosted on June 15th.
HousingWire: Since purchase application data is still the hottest topic, what is the current data looking like?
Logan Mohtashami: Purchase application data:
I had anticipated 18%-22% YoY decline trends with rates this high after the price gains. We aren’t there yet but heading in that direction.
Starting in October we will be having harder comps so, if this trend continues, we will be seeing 25%-35% year-over-year declines. Some historical context with previous rate increase moves in this data line.
In 2013-2014, when rates jumped very fast, this index trended down by negative 20% year over year to hit an adjusted population all-time low in 2014. In 2018, when rates got to 5%, this index was primarily flat to positive year over year, with only three mild negative year-over-year prints. When this index moves positively and negatively, it’s up or down 20%-30%. We are going to have more challenging comps starting in October.
A look at what happened in previous times when rates rose: demand always declines, and with 4%-5% rates it looked like a standard higher-rates-hit-demand trend. Now at 6%+, we shall see how much damage that does after the significant price gains since 2020.
2022 purchase application data will be the first year where this index has declined since 2014. As long as we see year-over-year decline trends, demand will keep falling with it.
HW+ Member: We’re expecting a Fed announcement in less than an hour. What do you expect to hear? How will the announcement impact mortgage rates? What’s priced in?
Logan Mohtashami: Fed Day Is Here! Bond yields have made a massive move higher before this meeting, and now people have priced in a 0.75% rate hike. So the bond market has always got ahead of the Fed rate hikes in terms of pricing, and the Fed is playing catch up! Except, we have more interesting data for the Fed to think about. The Builders Survey data is falling big time, before the current higher rates; this is one of my last two out of six recession red flags that can be raised before I go on full recession watch.
Retail sales also came in a bit lighter than expected:
HW+ Member: Are you implying that the builder survey and retail could influence the Fed to come off the 75 bps guidance?
Logan Mohtashami: So, The Fed will hike, but it will be interesting to hear what they say, because Q2 GDP is tracking flat; this means on a growth basis, we are going to have back-to-back negative GDP.
If they hint that this is on their minds, bond yields can retrace and head lower giving better pricing for mortgage rates. Some of the economic data today shows a more significant slowdown than in the past few months, which can carry over to lower their core PCE growth concern. They will be asked this question today! The last time I had four of my six recession red flags up it was 2006 and the other two came that year.
HousingWire: Circling back to inventory, what is inventory data reflecting and how important is it to homebuyers?
Logan Mohtashami: On a good note, inventory is rising this year, and we should be getting more inventory this year and next year. The weekly data is showing more inventory growth, so the NAR data will need time to catch up.
On a sour note, we still need more inventory to return to normal. Once we hit 1.52-1.93 million things can get back to normal.
HW+ Member: Question on this viral TikTok! I had a friend send this to me for input, and immediately knew it’s a great question for you! She makes a three-minute case — which has gotten a lot of views — on investors taking all the inventory! I know this is a topic you talk about a lot. What is your response to this?
Logan Mohtashami: The investor narrative has been blown out of proportion because they’re not the biggest buyers of homes in America.
It’s an effective trolling media tactic done by everyone, but if you don’t hate on the Millennials for driving down inventory, you’re doing it wrong since they’re the biggest buyers. Last year we had roughly 6.7 million total home sales, so the 500K of home sales to investors — which most are mom and pop investors — sounds fishy to me.
Also, inventory is rising, so maybe some people should spend more time pricing their homes right instead of blaming investors. I say this because if investors were so big, then housing demand should never fade, but it is fading.
The investor narrative to me was always, in theory, trying to make housing seem like it can’t ever go down. When rates rise, demand fades, inventory goes up when we see demand weakness. Also, renters are human beings too, and rental units on sale are low, so it’s not like these homes are being bought and nobody is living on them.
If she were being honest, she would say we have tons of second homes and vacation homes not being used for renting or home buying; that at least is a valid premise. The reality is that the supply on both ends was dropping for years.
Come 2020-2024, guess who came to the shelter game? The biggest homebuyers in America.
HousingWire: What else would you like to add before we wrap?
Logan Mohtashami: The critical point: housing demand is getting weaker, and rates are now over 6%, which means it can get more vulnerable than the trend we have seen lately. Don’t make it complicated: higher rates with the home price growth we have seen since 2020 is the biggest affordability hit of our lifetime.
This is why my model kept talking about how we would be fine if home prices only grew by 23% for five years; that didn’t happen. While we have these higher rates, home prices are rising yearly because total inventory is still too low. Now you can understand my theme that this is a savagely unhealthy housing market and why I believe once the 10-year yield broke over 1.94%, the housing market changes.
Have more questions for Logan? Share them in the comment section below. We will work to address them here or in the next Slack Q&A session.
The post Logan Mohtashami: “biggest affordability hit in our lifetime” appeared first on HousingWire.
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As rates skyrocket, ‘Wall Street’ single family rental investors see opportunity
Two new single-family rental (SFR) securitization deals sponsored by large institutional players — often described as “Wall Street” investors — hit the private label market in June, bringing the total deal count so far this year to 10.
The healthy volume of SFR offerings over the first half of 2022 is being fueled by a strong SFR market resulting from fast-rising interest rates and tight housing supply. Those dynamics are making it much harder for many to purchase homes, helping to expand demand for rental properties, triggering fast-rising rents.
That rental income serves as the underlying revenue-stream collateral for these institutional-sponsored private-label securitizations.
The upward pressure on interest rates was given another boost, with the Federal Reserve announcing today, June 15, that it will bump the federal funds rate up by 75 basis points — a rate-hike pace not seen since 1994. With rising interest rates expected to continue fueling demand for rentals, SFR securitizations are likely to continue rising in count as well going forward — with institutional players seeking to expand their reach into the market that in many ways is made more attractive in an up-rate cycle.
“Despite the growing appetite, institutional equity ownership in SFR today is still estimated at only around 2%,,” a market insight report from MetLife Investment Management (MIM) states. “MIM believes that institutional SFR ownership is likely to grow significantly over the next decade.
“MIM’s analysis indicates that simply moving institutional ownership of SFR from 2% today to 10% [of the investment-property market] in the future will result in a need for over $200 billion in incremental debt financing.” The bulk of second homes and investment properties today are owned by smaller real estate firms and so-called “mom-and-pop” investors.
One of the new SFR deals hitting the private label market this month involves the largest player in the space, Progress Residential. The SFR platform recently unveiled its fifth securitization deal of the year, dubbed Progress 2022-SFR5, a single-borrower, single-loan transaction.
The new Progress SFR offering involves a $632.3 million fixed-rate, five-year loan from German American Capital Corp. secured by mortgages on 2,273 income-producing single-family rental homes, according to a presale bond-rating report by Kroll Bond Rating Agency (KBRA).
About two-thirds of the properties involved in the Progress transaction are in the Sun Belt markets of Atlanta, Jacksonville, Las Vegas, Phoenix, Tampa and Nashville, the KBRA report states. The Progress Residential SFR platform was launched in 2012 “to capitalize on dislocation in the U.S. housing market” in the wake of the global financial crisis, KBRA reports.
“As of June 2022, Progress Residential had invested approximately $19.9 billion in its portfolio of more than 80,000 properties,” the KBRA report continues. “Progress is the largest private owner and operator dedicated to the acquisition, leasing and management of SFR properties throughout the U.S.”
Also out with a new SFR offering this month is FirstKey Homes. It’s recent securitization deal, titled FirstKey Homes 2022-SFR2, (despite the label) represents FirstKey’s third SFR offering so far in 2022. Its securitization deal is collateralized by a $1.4 billion fixed-rate, five-year loan originated by Morgan Stanley Mortgage Capital Holdings. The loan, like the Progress offering, is secured by a pool of 3,882 income-producing single-family rental homes
The bulk of the properties involved in the FirstKey securitization are in Sun Belt markets as well, with Atlanta, Charlotte, Houston and Dallas leading the pack. FirstKey Homes single-family rental-home portfolio includes some 45,000 properties, according to KBRA.
Unlike more traditional residential mortgage-backed securities (RMBS) deals, in which bonds are backed directly by pools of mortgages, a single-family rental securities offerings is collateralized by a single loan that is, in turn, backed by a pool of income-producing single-family homes.
KBRA bond-rating data show that the 10 SFR securitization deals it has tracked to date this year involved some $7.8 billion in loans secured by a total of some 25,500 single-family rental properties.
“The historically low inventory of homes to buy, coupled with apartment vacancy rates hovering around 2.5%, have positioned SFR owners for success in today’s housing market,” said Rick Sharga, executive vice president of marketing for real-estate research firm RealtyTrac, a subsidiary of Attom Data Solutions.
Sharga added that in addition to acquiring existing single-family homes in target markets, “there’s also been a bit of a shift in recent quarters by the institutional investors to more of a ‘build-to-rent’ model.” That model involves “working with homebuilders to create new SFR inventory,” Sharga explained, “instead of competing with mom-and-pop investors and consumer homebuyers for extremely limited inventory.”
As evidence of that trend, Indianapolis-based Onyx+East earlier this year partnered with Pretium, an investment management firm with some $44 billion in assets under management. Pretium is Progress Residential’s parent company.
The joint venture “will invest approximately $600 million to develop, build, and operate new single-family, build-to-rent communities across key Midwestern markets and Florida’s West Coast,” states the press announcement of the build-to-rent partnership.
The joint venture plans to eventually build more than 2,000 single-family rental homes, with some 700 new homes planned this year in suburban communities in Indiana, Ohio and Florida.
“Progress Residential, Pretium’s single-family rental platform and a leading manager of build-to-rent communities, will operate and manage the new single-family build-to-rent communities on behalf of the joint venture,” the press announcement states.
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As mortgage rates skyrocketed in May, ARMs doubled
A panel of experts assembled at a recent Mortgage Bankers Association (MBA) conference in New York predicted that adjustable-rate mortgages (ARMs) will become far more popular this year as purchase mortgages increasingly dominate a housing market contending with fast-rising interest rates.
A June market report by a major digital mortgage-exchange and loan-aggregator, MAXEX, which offers an overview of loan-trading activity through the exchange for May, confirmed the MBA panel’s projections. The exchange, founded in 2016, averages about $1 billion per month in non-agency loan-trading volume and counts J.P. Morgan among its investors.
“There was too much 30-year [fixed-rate mortgage paper] out there in the market for a while because it was just so cheap, and it was the right thing for the consumer,” said Matt Tomiak, senior vice president of nonagency originations at Bayview Asset Management.
Tomiak was one of the four MBA panel members who addressed an audience of loan originators and other industry players gathered at the New York Marriott Marquis hotel near Times Square last month. The topic of the panel discussion: “What’s New in Non-Agency?”
“I think we’ll be seeing a lot more ARMs shortly,” Tomiak added.
That also was the consensus forecast of the four-member panel of non-agency industry experts who spoke at the MBA’s Secondary and Capital Markets Conference & Expo in New York City. The recent MAXEX market report provides evidence supporting the panel’s prediction of a rising demand for ARMs in the face of rising interest rates — propelled by the Federal Reserve’s monetary-tightening policy.
“Adjustable-rate mortgage trading volume soared in May with nearly half of the loans locked through the exchange coming in the form of an ARM loan,” according to the recently released June MAXEX report. “Interest rates on ARM loans through the exchange were as much as a full point lower than 30-year fixed rates, making them extremely attractive to homebuyers who are trying to battle ever-appreciating home prices.
“This trend is only expected to continue through June as three more MAXEX buyers are adding ARM programs and pricing, offering sellers the opportunity to take advantage of the growing market.”
The network of players on the MAXEX exchange includes 320 bank and nonbank originators as well as more than 20 “high-profile investors,” according to the loan-trading platform’s report. Those exchange originators were behind explosive growth in ARM loans, which more than doubled in May, making up 49% of purchase volume versus 23% in April, according to the MAXEX market report.
“Spreads between fixed-rate and ARM loan interest rates eclipsed 100 basis points during the month, making ARM loans extremely attractive to borrowers,” the report states. “This is only expected to increase as MAXEX buyers implement additional ARM pricing options for lenders on the exchange.”
MAXEX reported the most popular ARM was the 7-year note, which made up 54% of the exchange’s ARM volume in May. ARMs sold on the MAXEX exchange have rates that adjust every six months following the initial fixed-rate term of 5, 7 or 10 years.
“What has started to salvage purchase originations is lenders and investors leaning into ARM loans,” MAXEX’s June market report states. “As long as ARM rates remain at least 50 basis points in rate lower than a 30-year fixed-rate loan, we can expect to see significant volume trade through the exchange as three buyers on the exchange are expanding their ARM pricing options.”
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New Western taps new chief marketing officer
Real estate investment firm New Western has named Kuba Poraj-Kuczewski as its chief marketing officer. Poraj-Kuczewski will lead the company’s marketing strategies and oversee its marketing team.
Poraj-Kuczewski plans to focus on driving “customer awareness, demand and retention” to support New Western in its growth stage and to make the firm “a leading industry brand,” he said, according to a statement.
Poraj-Kuczewski brings the expertise of “a leader with a proven track record optimizing capabilities, positioning and tangible business results,” according to Kurt Carlton, co-founder and president of New Western.
The executive brings more than two decades of experience in customer acquisition, engagement and marketing communication strategy. Poraj-Kuczewski most recently served as vice president of marketing at ClickBank for more than two years. Before that, he led marketing at tech companies including Quote Wizard, Redfin and Education Dynamics.
The Texas firm has locations in more than 25 cities and connects with sellers more than 100,000 local investors looking to rehab houses, according to its website. Last month, New Western opened its first office in Chicago, marking expansion into its 19th state.
The company has a goal of revitalizing some $543 million in residential properties in the Chicago market during the next five years, according to representatives for New Western. It estimates there are about 3 million “aged properties” in the Chicago area alone, with almost 88% of them built before 2001.
New Western calls itself “the largest private source of investment properties in the country.” Since it was founded in 2008, New Western has bought and sold about $12 billion in residential real estate.
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Non-QM players still doing PLS deals despite rate volatility
Non-QM lender Angel Oak Cos., through its mortgage-backed securities conduit Angel Mortgage Trust, is out with its fourth private-label securities offering of 2022, even as rate volatility in the market continues to throw sand in the market’s gears.
The recent offering, AOMT 2022-4, involves a pool of 407 mortgages valued at $217.2 million and includes primarily non-QM loans along with some mortgages backed by investment properties. To date, including three prior private-label securities (PLS) offering completed this year, Angel Oak has securitized loan pools valued in total at $1.73 billion, bond-rating reports show.
Since its first securitization deal in 2015 through 2021, Angel Oak completed a total of 29 non-QM PLS offerings valued at more than $10 billion, according to the company. Non-QM mortgages include loans that cannot command a government, or “agency,” stamp through Fannie Mae or Freddie Mac. Non-QM loans typically make use of alternative-income documentation because borrowers cannot rely on conventional payroll records or otherwise fall outside agency credit guidelines.
Year to date through early June, overall, there have been a total of 54 non-QM PLS offerings backed by loans valued in total at $21.9 billion, representing nearly half of all PLS deals by loan volume over that period, according to deals tracked by Kroll Bond Rating Agency. That compares to 34 non-QM deals involving near prime, nonprime and investment property-backed deals valued in total at $9.3 billion over the same period in 2021.
All those non-QM securitization deals are occurring this year in a volatile interest-rate environment that has been less than favorable for both the PLS and agency secondary markets. The baseline rate for a conforming 30-year mortgage jumped to 5.78% on Monday June 13, up from 5.45% last week, as fear sweeps the markets due to rising inflation, which reached 8.6% in May — a four-decade high.
“Bond pricing is worse this morning as Treasury yields moved higher in early trading,” Mortgage Capital Trading (MCT) reported in its June 13 morning market wrap-up report. “The U.S. 10 -year Treasury yield is currently at 3.244%. Friday’s inflation data reignited fears that central banks will have to use aggressive monetary policy tightening.”
The fast-rising rate environment has made it far more difficult for lenders like Angel Oak and others to execute PLS deals. It also is causing heartburn in another liquidity channel for lenders — the whole-loan trading market. That leaves mortgage originators between a rock and hard place when it comes to keeping liquidity channels flowing smoothly.
“There’s no question [loans] are being sold at discounts,” said John Toohig, managing director of whole loan trading at Raymond James in Memphis.
Part of the problem with the spike in mortgage rates is that mortgage prepayment speeds (normally via refinancing] for lower-rate loans decrease rapidly, creating loan-supply issues in the market along with shrinking demand for mortgages — with much of that downward pressure being sparked by current Federal Reserve monetary policy.
“The Fed has created demand destruction by increasing rates, and there is an argument it has also created supply destruction [for the PLS and loan-trading markets] because there are millions of people locked into low rates,” explains Robbie Chrisman, head of content at MCT, in a recent market analysis report. “At current lending rates, 99% of American homeowners have no incentive to refinance their mortgages. … One year ago, about 66% of the universe had incentive to refinance.”
KBRA projects that 2022 will still be a record year for post-global financial crisis PLS issuance, with expected securitization volume of prime, nonprime (including non-QM) and credit-risk transfer offerings totaling $131 billion. Much of that volume, however, is front-loaded.
“KBRA expects Q2 2022 to close at approximately $38 billion, and Q3 to decrease further to $29 billion across the prime, non-prime, and credit-risk transfer segments because of rising interest rates and an unfavorable spread environment for issuers,” KBRA states in a recent forecast report. “… To date, issuance spreads [have] widened rapidly for all sectors as supply and demand volatility hit nearly all-time highs.”
Still, even in this volatile market, mortgage demand exists, even if at a diminished level. And, as the numbers from KBRA indicate, about half of that demand — for loans securitized in the PLS market so far this year — is now being addressed by non-QM lenders.
It’s important to note that rates in the non-QM space are typically set about 1.5 percentage points above agency loan rates, according to Tom Hutchens, executive vice president of production at Angel Oak Mortgage Solutions, part of non-QM-driven Angel Oak Cos.
“So, you’ve got agency loans where the performance is guaranteed by the government, but with our loans [non-QM], there is no guarantee, so private capital is looking for a spread in order to finance these loans and securitize them,” Hutchens explained in an interview. “If you look at where agency rates have gone, it’s very safe assumption to say non-QM rates are 150 basis points higher than that.”
As rates rise nearly week-over-week now, however, the securitization of lower-rate loans made earlier in the cycle becomes harder to execute at desired margins for most issuers because the goalposts have essentially been moved.
“Nobody really knows where this [rate volatility] is going to stop because there’s so many factors that that make up rates,” Hutchens said. “So, it’s hard to predict levels of origination, but I still think we’re at a really good space [in non-QM lending].
“The interest in securitization and investing in this space is still very strong. The hiccup that we’ve seen isn’t a credit issue. No one’s concerned about the quality of non-QM loans — it’s just that the rate environment has been so crazy.”
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About 82% of origination comes from purchase mortgages
Overall mortgage rate lock took a hit in May, led by a drop in refinance activity, both for rate-term refis and cash-outs. In a higher rate environment, lenders were more reliant on the purchase market for origination volumes.
Rate locks were down 4.8% last month, according to Black Knight’s monthly mortgage originations market report. Purchase locks, which are not as rate-sensitive as refinancings, accounted for 82% of the entire share of rate locks in May, the largest slice since Black Knight’s Optimal Blue began tracking the data in 2018.
Mortgage rates, measured by Black Knight’s Optimal Blue OBMMI pricing engine, finished the month of May at 5.34%, down 7 basis points from the previous month, but that wasn’t enough to push up refinance rate lock volume.
Rate/term refinance lending activity declined 23.6% in May from the previous month and was down 89.9% year over year. Cash-out refinance locks also dropped 11.9% from April and 42.2% from May 2020.
“We’ve seen rate/term refinance activity essentially evaporate and cash-out activity is now suffering as well,” said Scott Happ, president of Optimal Blue, a division of Black Knight. “While there is volume pressure across the board due to rising rates, purchase volumes are holding up the best and are now driving 82% of all origination activity.”
Purchase volumes fell 2.3% in May from April and remained unchanged from the same period last year. When excluding the affect of home appreciation on volumes, purchase locks were down 8.5% year-over-year in May.
Government loan products gained market share as the Federal Housing Administration (FHA) and Veterans Affairs (VA) lock activity increased at the expense of agency volumes, a trend also likely reflected in the decline of the average loan amount, ranging between $362,000 to $359,000, according to Black Knight.
Borrower credit scores dropped 20 points in the past three months, which are now below 700 on average. A steep drop in cash-out refinance credit scores drove the decline in May, which fell 33 points year over year.
Black Knight’s monthly market monitor reports provide origination metrics for the U.S. and the top 20 metropolitan statistical areas by share of total origination volume.
The New York-Newark-Jersey City MSA had the highest rate lock volume at 4.4% in May. The Washington-Arlington-Alexandria area had the second-highest lock volume rate (3.8%) trailed by the Los Angeles-Long Beach-Anaheim (3.7%) area.
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Is Paying Off My Mortgage Early a Mistake?
Paying off your mortgage early—to some people, this sounds like a dream scenario. But to others, it could be a cash-tastrophe. We can already hear real estate investors yelling out “always use leverage”, “what about the low interest rates!?”, and “you can scale so much quicker!” Like many real estate investors, David Greene knows the power of leverage and loans to buy rental properties faster. But, it’s safe to say that for some people, paying off a property or buying a home in cash may be a much smarter move.
Welcome back to another episode of Seeing Greene where David answers questions directly from BiggerPockets listeners and viewers on YouTube. This time around, we have some seriously useful questions being answered for the new investor. These questions range from when to take out a loan and when to pay off a property, how to get started in real estate in your early twenties, how to build more cash flow as your expenses increase, how to get a HELOC on your rental property, and how to raise money for a down payment. All these questions (and more) are coming up!
Want to ask David a question? If so, submit your question here so David can answer it on the next episode of Seeing Greene. Hop on the BiggerPockets forums and ask other investors their take, or follow David on Instagram to see when he’s going live so you can hop on a live Q&A and get your question answered on the spot!
David Greene:
This is the BiggerPockets Podcast, show 621. Most of us have some goals that are similar. We want freedom. We want our time back. We don’t want to be stuck in a commute. That’s pretty much an overall general consensus we can all agree with, but there’s some people that really want to make a ton of money and they’re limited in their ability to do so at their W2 job.
There’s other people that just want a little bit of money, but they want it to come easy. There’s other people that know they have a creative itch that they want to scratch and real estate helps them do it. And then there’s other people that just love human beings and they want to work in an industry where they get to talk to and sort of be in touch with other people.
What’s up everyone? This is David Greene, your host of the BiggerPockets Podcast coming at you today with a seeing Greene episode. In today’s show, we are going to take questions from different people that have submitted them. And you’re going to hear my perspective, how I see it because I’m Mr. Greene. We have a lot of really good stuff for you, several different topics that I don’t get asked very often that I thought was really cool that people ask questions.
So one of them had to do with, is there a way around a debt service coverage ratio loan? Or is that my only option when it comes to getting financing if I don’t have a W2 job? We go into a very, very sort of a deeper situation of when you should pay off your properties mortgages, and when you should use financing or leverage. I think there’s a lot to learn from understanding.
There’s not one way to do it, but there is usually a right way for you to do it. So I break down this particular situation and give advice that you might not be expecting me to give. And then I actually talk about why I decide to publish my books with BiggerPockets Publishing. All that and more at this seeing Greene episode.
If you’re looking to learn, if you’ve got questions that you want to ask, if you want to hear other people asking questions so that you don’t have to be the one to ask it, this is the right place to be. And for today’s quick dip, speaking of BiggerPockets Publishing, my newest book just dropped today with them. It’s called Skill. So I, my last book that I wrote was called Soul. This was a book written for real estate agents to learn how to make money in the real estate agent game.
This book is about how to become a top producer and make really good money. So if there’s a real estate agent in your life that you know, that you love, that you appreciate, that you’re rooting for go to biggerpockets.com/skill and get a copy of this book to give to them. It is a very difficult business to be in. Most people have no direction of what to do.
And this book is written to give a very specific play by play for real estate agents to be good at their job. So if you’re working with an agent that’s good, but you want them to be great, if you have people in your life that sell homes and you think that they would be happier if they made more money, please go get them this book. Give it to them. I would appreciate it and so would they. All right, that’s enough ado. Let’s get into today’s show.
Deborrah:
Hi, blessing, David. My name is Deborrah Fang. My questions for you are okay, I’m a widow. I lost my husband couple of months ago and right now I’m not working. I quit my job as a teacher a year and a half ago to stay home taking care of him. And after he’s gone, he left me with his life insurance. So I get the life insurance.
I pay off the house I’m currently living. So I also purchase a property in Colorado Spring, pay off, and I still have $200,000 cash in my hand. Now, I learned about these real estate investment. Make me feel like paying off my mortgage wasn’t the smartest move. However, I’m thinking, should I get cash out refinance from the current two properties that I have already paid off to buy more properties?
Also, I don’t know, should I pay them off or should I just, I mean, for the new property, should I just do a 25% down payment? Also, for the 200,000 cash in hand, the same thing, do I find more properties, just pay the initial down payment? Or should I just buy one property within the $200,000 range, pay them off and receive rent coming in as the positive cashflow?
Currently I’m still taking care of three kids. Two are in college and one is staying home with me. He’ll be a sophomore in high school. So yeah, that’s my questions. And thank you for your help, bye.
David Greene:
Hey Deborrah, thank you for the question. First off condolences, I’m very sorry to hear about your husband and please send those condolences to your kids as well. I lost my dad when I was 27 and my brothers were even younger than me. And it’s incredibly hard when that happens. Sometimes it feels like the entire cornerstone of your family falls apart.
So you’ll be in my prayers. As far as the question from a practical perspective that you’re asking here of, should you take out loans or should you own properties free and clear? And if you’re going to take out a loan, how much should you be taking out? I see all the options that you’re presenting and I can tell from the way you’re spitballing that, you’ve got a lot of uncertainty and questions in your mind, and I’m really glad you reached out.
Let’s talk about when you should take out loans and use what we call leverage and when you should pay a property off. The majority of the time the people that are listening to me are coming from a perspective of trying to grow an empire, okay? So the advice I would give them is different than you if you have a different goal than what they have. And that’s what we have to get into here.
This is the way that I look at borrowing money to buy homes or using leverage. It will increase your ability to grow wealth, which is what I’m going to call offense, but it comes at the price of being more risky, which is what I would refer to as defense. So ideally we want to be able to have as much offense as possible with as much safety or defense as possible. And that’s what we’re striving for, but the two are typically mutually exclusive.
You can’t have both at the same time. So what somebody has to figure out is how much do I care about risk and how much do I care about growth? So for you, Deborrah, anytime you take out a loan, you have to make the debt payment on it. And as a new investor, you could easily find yourself in a place where you pick the wrong tenant or you buy the wrong property and you’re not able to generate rent from the person, or you have to spend money to fix things up.
And now you’re in this situation where you don’t have enough money to make the payment on the mortgage, and you’re also not making money from the property and you could lose the entire thing. And that’s what I don’t want to see for somebody in your situation. Now, if you’re not working and you don’t plan to work, that does increase the risk of investing in real estate.
The reason it increases the risk is you don’t have money coming in from a job in case you make a bad decision or something goes wrong with the property. You’re sort of operating without a bulletproof vest, I would say. One mistake, that bullet’s going to get right in there and it can really hurt you. And that’s what I don’t want to see happen.
Now, if you’re planning on getting a job and you are going to work and you think you can generate decent money, that now opens up some doors to where financing could be a safe option for you because even if something goes wrong, you’ve got a cushion with money coming in from work. So the first question to ask yourself is, do you want to work? Are you willing to work? Or is that not the case?
There’s so many scenarios that I could lay out for you, but in general, if you’re not going to work, I would probably advise you to not take out a loan, okay? Just buy whatever you’re going to buy in cash and at least learn how to invest in real estate with as little risk as possible. You’re still going to have property taxes.
You’re still going to have homeowner’s insurance. You’re still going to have different expenses like repairs and maintenance that are going to pop up, but you are having less of a debt service if you’re not taking on a loan so that you can kind of learn the ropes. It’s kind of like training wheels while learning to ride a bike.
Now, let’s say you take to this like a fish in the water, or at least you become competent at it. At that point, you’re going to make better decisions on what you buy and how to manage it. And at that stage, I would say taking out a loan to buy property could make some sense because you’re not learning at the same time that your risk is high.
Your risk is going to be much lower because you’ve already learned how to do the job and there’s less surprises that are going to jump out for you. And if you do that well, you may never have to get a job because you can make a career investing in real estate full time. All the money you make can come from the rents, but you’re not going to do this by just snapping your fingers, jumping in to becoming an amazing investor.
You’re going to have to start very small. Start slow, start with low risk, buy in good areas, pay the house off, learn how to manage the tenants. I would recommend looking for what we call small multi-family, a duplex, a triplex, a fourplex, something along those lines. With $150,000, maybe you had more, I think you said you have 150K, you’re probably not going to get a bigger property, like 10 units.
It’s going to be very hard to make that work. So get what you can get for the money, pay cash for it. Make sure you buy in the right area, get a property manager that’s really good that can kind of teach you the ropes. Get that first property, see how that goes. And then scale from there. Next question is from Yasir in Atlanta.
I’m a 21 year old from Atlanta, Georgia, and was trying to see what you do if you were in my shoes. I’ve never bought any real estate. I got a good job paying well, and I just didn’t want to let that money sit in the bank. Should I start with the multifamily unit? How much should I save for emergencies? Really good here, Yasir.
First off, this is a situation where you would really benefit from listening to the BiggerPockets Money show. So they get into personal finance, how to live beneath your means, how to make more money, how to manage the money that you have at a more holistic level than just investing in real estate. So you should check that out and other people that are in your situation, especially younger people that haven’t learned how to manage money yet can get a lot from listening to a show like that.
Let those seeds get planted of how to build and grow wealth at a very young age. Second off, before you start worrying a ton about investing in real estate, I think your energy would be better put towards finding a career. Do you know what you want to do? Are you going to work in the trades? Can you make good money learning a trade? Are you in college right now and you plan to get out of school and work a job?
Do you know what you’re going to do to make money? So making money at work is much less risk than just buying real estate and the best real estate investments typically happen when you’re already making decent money at a job and you can afford to take on a mortgage. Now I’m going to assume here that you have some money saved up. You’re able to do this.
You’re ready to buy real estate. You’re financially strong, because that’s the position that I advise most people to start from. If you’re not at that position, get to that position first. But if you are there, you should house hack. You should look for small multi-family property that you can afford, live in the house and rent out the other units. Or maybe buy a house with a lot of bedrooms, live in one bedroom and rent out the other bedrooms.
When you’re young, this strategy works the best. You’re not going to want to rent out bedrooms if you’re married, if you have kids. It’s a completely different scenario. So if you’re still young and you’re single, which I’m assuming you are, you actually didn’t mention that, buying a house and renting out the rooms is one of the best ways to learn the fundamentals of real estate investing, choosing tenants, having them sign leases, managing people while keeping your risk relatively low.
BiggerPockets has a book on house hacking written by Craig Curelop. I would recommend that you check that one out, get some ideas of how to house hack as well as Google the term house hack and learn some strategies that you can use where you can put a very low down payment, 3.5%, get your first property and learn the fundamentals without taking too much risk.
David:
Hi David. My name’s David also. Firstly, I just want to say thank you so much for all the content that you put out and all the insights that you provide. You’ve taught me so much and you’ve really helped change my wife and I’s life really. So just can’t thank you enough. Thank you so much. Just to give you a background, we own a number of short-term rentals.
We own a few long-term rentals, but mainly short-term rentals in Tennessee. We’ve purchased them over the last few years. They do really well for us cashflow wise. We recently purchased expensive home here in Orange County in California. So we are actually pretty much using all of our W2. I work as a teacher, my wife works in retail and we’re pretty much using all of our W2 income that’s going to go directly to our mortgage.
We earn a lot more money from our rentals, but we’ve always thought about cashflow, cashflow, cashflow. You’ve kind of helped shift our mindset with looking more about appreciation, just underlying the benefits, particularly the long-term benefits of appreciation. So we’ve really shifted our thought about that. But with this higher price property that we’ve just bought, we’re starting to be in a little bit of two minds.
Do we need some more of that cashflow that may have not been as important previously? We are kind of at a point where we’ve been able to refinance a lot of those properties. So we have quite a lot of capital to be able to deploy that we want to purchase more rental properties with. We are in two minds as to, do we just keep going with the cashflow, just keep buying these vacation markets?
Or do we diversify potentially buy more of your traditional markets that have the likelihood to appreciate population growth, job growth, all of those kind of things? Places like Phoenix or Tampa or Salt Lake city, those kind of places. So maybe just wanted to get your idea based on our situation, what you would advise.
I know you’ve had some people on your podcast before talking about renting by the room, just being creative like that. We’re pretty on top of the short-term rental thing, so we feel really comfortable with Airbnb. So we’re more than willing to do something like that even in a more traditional market provided the regulations lend itself to that.
But yeah, really want to shift away from the vacation rental markets that have been so good to us, but then at the same time still want to be able to make a little bit of cashflow. So just wanted to get your idea on what you think. Maybe you could point us in the right direction. We’re at a bit of a crossroads at the moment, and then potentially if you have some ideas on markets.
I know I mentioned some of those growing markets that we all know about, but yeah, just wanted to get your insights on this particular situation for us and any advice you might have. Thanks again for everything, and I hope to hear from you soon. Thanks.
David Greene:
Hey David, thank you for the question. All right, here’s what I’m picking up from the way you went about that. You and your wife are not sure what your goal is. You know you want to make money in real estate, but you don’t know how, you don’t know what you want your life to look like. You’re not sure what you value the most.
And because of that, you’re kind of bouncing around between all of these different options and you’re not sure which direction to take. Let’s break down in general, the different roads you’ve got. You’ve got the high cashflow road. This is where you’re going to try to build up as much cashflow as you can every month, meaning the properties are going to generate rental income and your expenses are lower than that.
So you get to keep that money. You kind of get the immediate payoff right off the bat of cashflow. In general, cashflow comes at the expense of appreciation because you usually make more cashflow in markets where homes are lower price and therefore don’t go up as much. Or you make more cashflow at the expense of more work, which would be the short-term rental market, where you got to put in more work to get that cashflow.
Then you’ve got the appreciation road. This is going to make you the most wealth in real estate, but it comes with the most delayed gratification as well as the highest risk. Because when you’re playing the appreciation game, you’re not getting as much cashflow or sometimes you don’t get hardly any. So you could lose the property more easily than if it was cash flowing very strong.
And even when it does work out, you don’t have access to that money. It sits in equity in the property until you access it via a cash out refinance or selling the property. So the appreciation road as opposed to the cashflow road has less of an immediate payoff. It’s more of a long-term play.
Then you’ve got the short-term rental game, which kind of stepped into the industry, that combines the two of them. You’re now able to buy in high appreciating markets and generate more cashflow, but it comes at the expense of being more active and less passive. So here’s your problem, David. You’re not sure what you want to do.
It sounds like you don’t want to have to work a lot and you want a lot of cashflow, but you also want a lot of appreciation and that’s why you’re stuck. My advice is that you and your wife are going to have to sit down and ask yourself what kind of lifestyle do we want to live? If it’s all about having more of your time back now, I would say you should chase after cash flowing properties that are stronger on that side, which are probably going to be small multi-family or larger multi-family that you probably haven’t considered.
You can hire a property manager and manage it. It will put off more cashflow and you won’t be as directly involved. If you say no, we’re willing to work right now, then the short-term rental game is what you should keep doing. And you should just find different markets to get into if you can’t make it work in the one you’re at.
The more short-term rentals, you get, the more income you can generate, the more money you have to pay someone else to manage it for you. And that’s one way that you can get your time back. Another road that you could consider would be the appreciation game where you say, hey, we’re willing to work really hard right now. We don’t need as much time, but when our kids are older, that’s when we want to know that we’ve got a lot of money set aside.
So I can’t answer your question unless you know what your goal is. If you’re really not liking short-term rentals, because that was my original thought when you were talking is, hey, you want appreciation and cashflow? That’s the perfect mix. You’ve got to hire somebody else to manage these properties for you. Now I’m actually looking for something like that myself.
I’ve got a couple of short-term rentals now and I plan on getting more. I want to hire a person that will manage the logistics of it. So if you’re listening and you want to make some extra money, get paid by the hour, message me if you have experience with short-term rentals. David, you could do the exact same thing.
I’m looking for someone that has done it before, they can manage the cleaners, the supplies, the reviews. They don’t have to worry about getting it booked, but they do have to make sure it’s ready for the next guest that wants to stay in it. If I can do this, so can you. That’s what I think that you should be looking for.
But before you get too deep into that, you’ve got to talk to your wife and figure out what you want your life to look like. Then submit another question, letting me know and I’ll give you some more specific advice about different strategies or roads that you could take to get where you want. Hey, we’ve had some great questions so far. I love being able to do these episodes. So I need more of your questions to keep doing it.
Please go to biggerpodcast.com/david and submit your question there. For everyone that has already submitted, thank you very much. If you’re listening to this on YouTube, please hit that subscribe button so you get notified when additional episodes come out, as well as like this and share it with anyone you know who’s also a real estate geek.
At this segment of the show, we like to read some of the comments from previously shows we’ve done and give some air time to people that were on YouTube and participating in the conversation there. Our first comment comes from Daphne Hill. Love these shows David. You are a natural teacher and never make guests feel like their questions are dumb or have been answered hundreds of times before.
Thank you. Thank you for that, Daphne. I appreciate that. Made me feel good. Next comment comes from Lauren. David, I would appreciate some bookkeeping recommendations. Should each property have a separate bank account or use one account for all properties? Set everything to autopay, et cetera. In my personal situation, I have no partners, closing on my first short-term rental in April and looking to get my second short-term rental after, thanks.
Well, Lauren, I will try to answer this, but I will say, I don’t know that my way is necessarily the best way. And I know that right off the bat. How I typically work bookkeeping is that I have all of my single family properties managed in one account. So I have a bookkeeper that goes over all the property management statements, puts them into a spreadsheet.
I can see what every property makes or loses and all of the expenses are on auto pay coming out of that account as well as all the income goes into it. I have a separate account for short-term rentals. And the reason I created a separate account is I wanted to keep more reserves in that account than in the other ones, because I feel like the income from short-term rentals is less reliable.
So therefore, I offset that risk by putting more reserves in that account. Then I have a different account set up for my 15 or $16 million property that I bought because it’s huge and it needs a ton of money in reserves and I don’t want that money to be mingled with the other money because I need to have extra money in there for that really big property where the mortgage is $80,000 every single month.
Then I’ve got a different account set up for my real estate sales, a different account set up for money that comes from the one brokerage and so on and so forth. I run a private mastermind where I teach people how to build wealth and how to be entrepreneurs. And so that has its own bank account. So I like to keep mine basically by income stream, is how I set up my bookkeeping.
And I have different accounts for the different sources of income. Now, there are some sources of income that kind of all fit together like all of the single family rentals or book royalties that I would receive, okay? There’s times where… Or maybe speaking fees, I can put all those into the same account, but I typically put all the money into the same account when there’s not expenses associated with it.
So for example, I don’t have expenses associated with book royalties from books that I’ve written. There’s nothing that I’m paying for that. So I’m okay to stick all that into an account, because there’s nothing coming out. There’s no risk associated with that. And that’s just kind of the way that I set it up.
If I have an income stream that has some risk associated with it, I put it in a separate account where I can keep more reserves in that specific account. And then I have a spreadsheet that my bookkeeper has to take all of these different income streams and all of these different businesses and take my net profit from every profit and loss and put it in the column for that income stream.
Then I look at that every single month and I see, hey, which properties are doing well? Which asset class is doing well? Where am I losing money? Where am I making money? And I kind of put my time and energy towards the stuff that I think is making more money. Now I’m in the process of switching bookkeepers right now and it’s taken them a long time to get up to speed.
So it’s probably been three or four months now I’ve been flying blind where I haven’t been able to see yet how much of these businesses are making. And I hate this feeling. It’s just the worst every time you have to switch over, but it was necessary because I’m working at a faster speed now than the person that I had could keep up with.
So I don’t know that I answered your question, but hopefully by giving you a little bit of insight into me and my life and how I’m structured, that right answers will make themselves known for you. Our next question comes from William Kahn. Love the show. Just giving a comment to support you guys. Thank you for that, William. Appreciate it.
Next comment comes from CD Mane. Wow, finally, the audio isn’t screaming for help. Hey, we’re slowly getting better. Shout out to the production team at the BiggerPockets Podcasts for making me sound like a normal human being. I tend to move around a lot when I talk. I get too close to the mic. I get further away from the mic.
I don’t know why I do that, but I’m a person that can’t sit still. Do you guys have that problem? Do you ever get a phone call and you start talking on the phone and you get up and start walking around? That is me every single time. I constantly walk around the parking lot of the area where my offices are because I can’t sit still and talk on the phone. If that’s you, if you do the same thing, tell me in the comments.
Tell me I’m not the only crazy person that has this compulsion to move around and walk when I’m on the phone. And then also let BiggerPockets know that you love the production team, that they’re doing a great job. That my audio sounds good and that they got me looking fresh. Last comment comes from randoms on my mind. Wow, that house hacking topic was fantastic. I didn’t think about the math behind house hacking.
I’m going to look into that. Well, that’s what I’m here for. It’s to open your eyes as to new strategies that you might not have understood, because I’ve helped so many clients with house hacking and I’ve done it myself that I have some unique insight into that that not everybody has. So if you live in California and you want a house hack, reach out, let me know.
I’d love to be able to help you do that. Same thing goes, if you have a house you want to sell, or if you need a loan, I would love to work with you. And what I’d love even more is if more of you leave comments like this letting us know what you like about the show.
So please tell us what hit, tell us what you like, tell us what made you think, tell us what worked and then even say, hey, if I don’t like this part of the show, that’s okay. Let us know that too. So if you’re not following on YouTube, make sure you do so and leave me a comment.
Jenny:
Hi David. From Melbourne Australia, I’m Jenny. I’m a professor and a real estate investor with properties in Atlanta, Los Angeles and Melbourne. I’m wondering if BiggerPockets publishing would be interested in a book I’m writing called Investing in Real Estate Like a Professor.
The book is aligned with the goals of BiggerPockets, to help people make good decisions about getting started and building a sustainable portfolio in real estate. Professors have a particular way of looking at the world, which I think a lot of investors and would be investors will relate to.
Our perspective weaves through the lessons of history, the dilemmas of the human condition and applies these big ideas to our own lives. I started writing it with other professors in mind as my audience, but I think now that the book would also appeal to a general audience like BiggerPockets where learning is centered in the process of investing. One thing that professors do in our jobs is publish.
So I have some existing relationships with book publishers, but I’ve read all of your books, which are published by BiggerPockets. My questions are, why did you decide to publish your books with BiggerPockets instead of a traditional publisher? And how would I contact BiggerPockets Publishing to find out if they have an interest in my book? Thanks a lot, David.
David Greene:
All right, thank you, Jenny. Man, this is a very unique question that I haven’t been asked before in a public forum. So first off, my producer of the show reached out to you to put you in touch with the BiggerPockets Publishing team. So hopefully that goes well. As far as the next two questions, what do I think about approaching book writing?
I think what I’m getting at is you’re asking, what do you think about approaching writing a book from the perspective of an individual person written for their specific scenario? And then why did I choose BiggerPockets Publishing? And the answer to both of them is oddly enough, the same answer. So I think when you’re learning how to invest in real estate, you shouldn’t just be learning about, well, how do I do it?
Because there’s a million ways to do it. It’s more, what is my goal and how do I make this work for what I want? And that’s the thing. It’s every person is different. Most of us have some goals that are similar. We want freedom. We want our time back. We don’t want to be stuck in a commute.
That’s pretty much an overall general consensus we can all agree with, but there’s some people that really want to make a ton of money and they’re limited in their ability to do so at their W2 job. There’s other people that just want a little bit of money, but they want it to come easy. There’s other people that know they have a creative itch that they want to scratch in real estate helps them do it.
And then there’s other people that just love human beings and they want to work in the industry where they get to talk to and sort of be in touch with other people. So when you’re writing a book, it is best to be asking yourself, well, who’s my audience that I’m writing this book to? And I’m writing it to a perspective that they would understand.
And I think that that’s what you’re getting at about when you’re talking about writing it from a professor’s perspective. Well, the reason that I publish my stuff through BiggerPockets is the majority of people that follow me, trust me, listen to me, respect me, they’re people that are in the BiggerPockets community.
So rather than writing a very niche topic where I said, okay, I’m going to write about say how to be a real estate investor as a first responder, because I had a career in law enforcement. I was able to run on a broader topic like long distance real estate investing or the Burr method, but give it to a more specific audience that already was looking at real estate from the same perspective of me.
And that’s why BiggerPockets Publishing made the most sense. The people that were already following me were BiggerPockets people. The people who read my books, typically aren’t finding about me for the first time just from the book. They’re finding about the book from this podcast, from the YouTube channel, from social media, from my involvement with BiggerPockets in general.
And that means that they’re more likely to get something from the book because as I hear people say, I hear your voice in my head when I’m reading it or they’ve heard me answer questions like this before. So they know my background or my philosophies when it comes to different real estate investing strategies. So that’s why I went with BiggerPockets Publishing. I also just really like this company.
They have a good heart. They mean well. They’re trying to help people empower themselves. They’re not looking at giving people a handout. They’re looking at giving people a hand up. All things that I really can get behind and like. So it’s also fun frankly, to make money for the company that I love working for. So thank you for asking that question and I wish you the best of luck on your own boo writing endeavors.
All right, the next question comes from Jones in my hood, the Bay area, California. Hey David, my question is about a HELOC for rental properties. HELOC stands for home equity line of credit. I recently bought a single family in Oakland Montclair Hills which I closed on earlier this year. Even before closing, I gained over 200,000 in equity on the property. I bought the house for a million.
The property is currently rented on a one-year lease agreement. I was looking to tap into this equity via HELOC to grow my real estate portfolio. I also have a good amount of equity in one of my rental properties in Cincinnati. My loan balance is 85,000 and I estimate property values is around 180. I’ve been researching a bit and I found it’s difficult getting a HELOC on a rental property. Why is this the case?
And is there a way around it? I don’t want to do a cash out refinance because I have a pretty good rate on these properties and I haven’t found a property which I would like to buy yet. I don’t want to have cash sitting in the bank either. So my preference is for the HELOC. Well, first off, congratulations on that property that you’re able to buy. I work in that area and Montclair Hills is a great area.
The fact that you got something for a million means you did really good. That’s a pretty low price for that area. Second off, let’s talk about why a HELOC is hard to get on an investment property. So what a HELOC is, is it’s really a second position mortgage on a home. So the lender’s only going to give a second position mortgage if there’s enough equity to support paying off the first mortgage and then paying them off if something happens and the house goes into foreclosure.
Most HELOCs will basically take the value of the home, subtract what you owe on that home and let you borrow up to 80% of the difference. So you might, if you only have 20% equity in the property, you might not be able to get a ton out of a HELOC on that home. Now, as to your question of why are they hard to get on investment property?
The reason is because to a lender’s perspective, an investor is more likely to let a house go to foreclosure than a person who lives there. So if someone lives in the property, it’s their home, it’s perceived as being more secure because people would let all their properties go except for the one they live in. That would go last. So the risk profile to a lender is higher if it’s an investment property.
There are still some banks that do it, but you’re generally looking for credit unions in the area of where the home is. That’s where I have found luck, is going to credit unions to get HELOCs on investment property. Now I also understand you don’t want to have cash seating in the bank. So the HELOC seems like your best bet.
I will give you this piece of advice. Interest rates are going up and HELOCs typically are adjustable rate mortgages. Everyone I’ve ever seen has been adjustable rate. If you take out a HELOC and you use the money, just know the payment can keep going higher as interest rates keep going higher. And if you’re running your numbers based off of whatever the payment is when you first take out the money, you could find yourself surprised when the payment goes up later.
Mason:
Hey, David. Mason here from Austin, Texas. Wanted to say, thank you for everything you guys at BiggerPockets do and for this show that y’all provide to like-minded investors, I’ve been listening for about nine months and have been such a huge fan. It’s changed a lot of things for me. So thank you for that.
And I’ve gotten to the point where I’ve got to now submit my own question, because it’s been so valuable. A little bit of background about me and my situation. I’m 24, sold my tiny home in January for a good profit and was able to kind of use that to start a short-term rental here in Austin, Texas with my girlfriend.
And the good problem to have is that it’s done so well that we are just so hungry to do it again, and rinse and repeat so to say. We had quite the time getting the conventional loan just because I am 1099 and banks love W2 income. And we were able to get it done of course, but for that reason, debt service coverage ratio or DSCR loans are very attractive to me now.
The problem with resources and with those now is that of course, a lot of them are requiring 15 and usually 20% down. So my main question is, is there a way to creatively finance say half of the down payment? Or the range that we’re kind of looking at is nicer homes to instead of hitting a so-called triple or going for a triple, trying to hit a home run with the next one.
And those kind of range of homes, 20% would be out of our resources as of right now and I don’t want to just wait and save for that long. So I want to know if there was a way or creative financing via hard money loan or obviously cash out refinance is an option, but we’re within that six month period where it’s I’ve got to wait again.
But if there was an option to creatively finance say 10% of the 20% of down payment or equity kind of in the deal and if lenders or someone out there did that, or if you knew of any kind of creative ideas. Obviously there’s friends and family, but I didn’t know if there were other options or anything. But yeah, I appreciate again, what you guys do and any and all input would be greatly appreciated. Thanks.
David Greene:
All right, Mason, you are in a position that many people are in where it’s not enough just to be financing 80% of the value of the property. You’re hoping to finance 90, 95% of it, maybe 100% of it, which means you don’t have a big down payment. Now the easiest way to solve this problem is to get a primary residence where you can put 5% down or 3.5% down on an FHA loan and you don’t have to borrow the money.
But if you’re looking to buy a pure investment property, you do run into this problem. And here’s why it’s designed that way. In general, only people that already have a good amount of money are the ones that are buying investment properties. They’re literally investing the down payment that they already have into a property, which is where they set it at 20%. But you’re looking at investment property from a different perspective.
You’re not wanting to invest money you already have. You’re wanting to grow wealth through an asset and you’re wanting to borrow other people’s money. You’ve got a couple of options. So from the lending perspective, you can look into an 80,10,10 loan. That’s a loan where you borrow 80% of the property’s value on your first position loan.
Then you get a HELOC or a second position loan for 10% of the remaining balance. And then you put the other 10% down yourself. So if you find a mortgage broker that you feel comfortable with, you can ask them if they have access to 80,10,10 loans. You can always reach out to us at the One Brokerage and we can look into that for you as well.
You also have the option of borrowing money from someone else. So if you’re going to be putting 20% down on a property, what if you put down 10% and you borrow the money from somebody else to put down the other 10% and you split ownership 50/50? That’s another option if you don’t have a ton of cash. You’re right to look into the debt service coverage ratio loans, because you’re working as a 1099, but those are typically going to be 20% down loans.
So there was a time where we were able to get them for our clients at 15% because we did a lot of volume. Those have gone away right now. They may be coming back later. So when you’re someone that does a lot of business with us, you’ve done more loans. You’ve sent those referrals. Now we sometimes have access to getting you those better loan programs if the lender is willing to give them out, because we do a lot of business with them.
But you can’t count on that. That’s what I’m getting at. Those are oftentimes like a special circumstance. So your best bet might be to make other people money through what you’re doing. Give them a chunk of the equity in exchange. Maybe they put all of the down payment in and they get 60% of the equity and you get 40% of the equity in the cashflow for finding the deal and managing the whole thing.
But you’re going to have to come up with something like that where you find other people that have money and you give them something to make it worth their while if you don’t have that cash. And then just remember, as you get older, as you do better at work, as you start making more money, you will become less and less dependent on other people till you can buy real estate with your own money.
All right, our last question comes from John Paul Kissinger in Mount Hope West Virginia. Hey David, I’m a paid firefighter in a small town getting paid via 1099 for my department. I’m looking at getting my first rental. I’m concerned that my 1099 may be an issue on getting a loan. I also have one mark on my credit from an unpaid medical bill from four years ago. I paid it two years ago, but it’s still showing up.
I have enough cash for a 20% down payment. I’m worried about rising interest rates and whether this is a good time to start. Also, do you have any advice on what I should do to get pre-approved for a loan or where? Well, that’s a silly question. There’s mortgage brokers everywhere that you could talk about getting pre-approved. If you’d like, reach out to me and I’ll get you in touch with my team that does my loans.
Happy to do that for you. We’re the One Brokerage because we’re the one brokerage that can do it all. Now, as far as your question about is now a good time to invest? It depends on the market. So I will say right now, I don’t really know much about West Virginia. I don’t own any proper there and I don’t know anyone else that does either.
So I can’t tell you if it’s a good time to invest in your market, but in the markets that I’m investing in, I think this is the best time to invest. Now, let me tell you why and the perspective I have and then you can decide for yourself if you agree. So I am investing in markets that I think are going to be very strong for the future.
More people are moving there than normal, okay? So there still is not enough supply to keep up with the demand that’s going to push rents and it’s going to put prices of those assets higher. At the same time, rates have gone up, meaning a lot of people are scared. So there’s less buyers competing with me for these homes than there was before.
So I don’t have to go in as fast or as aggressive as I was going in specifically because other people are getting out. So I have all of the long-term upside with inflation that continues to spiral out of control, with the near-term upside of less competition. So I’m going at it hard. I’m looking to buy some really expensive properties very soon because these interest rate hikes have caused everybody to slow down.
Now, depending on when you’re listening to this, this advice might be of a different value. But the fed has said, they’re going to continue to raise rates. Which means when everyone who goes, oh, no interest rates went up. I don’t want to buy real estate. When they realize that they’re going to keep going up, today’s rate that feels expensive will seem cheap.
And when the rates seem cheap, everyone’s going to jump back in and you’re going to get another flood of people that are all trying to buy real estate. So I actually think that this is kind of the best of both worlds. This is a unique opportunity. This is the same thing I saw when I bought my Maui condos. Those have both gone up between three and $400,000 each in about a year since when I bought them, because I recognized the same thing.
The shelter in place happened. A lot of people thought, oh, don’t buy real estate, there’s a crash coming. I saw the window I jumped in when everybody else wasn’t jumping in and boom, I did really well on those. So that’s my advice that I would give to you. Also, if you’re worried, instead of putting 20% down on one house, what if you put 5% down on a house to live in and then next year do the same, and then next year do the same and spread that money out over several properties and just house hack it?
That would be the best way to reduce your risk if that’s what you’re looking to do. And John, as far as your 1099 income, if you have a stable work history where you’ve done it and you’ve claimed this on your taxes, which I’m sure you have, you can get approved to get a loan with 1099 income. It just takes more time. It takes more effort for the processors to get all your information together to submit it to the underwriter.
The underwriter has a lot more questions that they have to verify because you’re probably making different amounts of money every month. If that’s not the case, it’s even easier. But don’t let your 1099 income deter you. You just need to find a mortgage broker and let them know your situation, and they’ll tell you what they can do for you.
Your other option is a debt service coverage loan, where they’re going to use the income from the property instead of your own income. Here is what I would say for someone in your position. I would advise you to get a 30-year fixed rate and not an adjustable rate mortgage even if the teaser rate is lower, because unless you’re in a position where you have overtime that you can work or you can earn more income, you don’t want to end up with a loan that’s going up over time faster than you can make up the difference in money to get it paid.
All right, that was our show for today. I want to give a big thank you to everybody that submitted a question and I want you to do the same. Please go to biggerpodcast.com/david and submit your questions there so that I can answer your question. And we can have more of these seeing Greene shows to learn from. If you enjoy this, please let me know in the comments.
And if you say something funny, insightful, clever, we will make sure that we read it on a future episode of this podcast so that other people can hear what you said. And then let me know what you think of the show. If you want to hear more questions about a certain topic, let us know. My production team will read those comments and they will find the stuff that you’re looking for.
Lastly, please subscribe to us on YouTube and share this with someone else that you think might benefit from hearing it. If you would like to get in touch with me or follow what I’m doing, you could find me on Instagram, Facebook, LinkedIn, Twitter, pretty much all of them @DavidGreene24, there’s a E at the end of Greene, or you can find me on YouTube, youtube.com/davidgreenerealestate.
Go give me a follow there. Thank you everybody. If you’ve got some downtime, go check out the BiggerPockets website. They have an amazing forum with tons of questions being asked, literally the best in the world. They also have a very, very strong blog section that I used to just read religiously when I was new, learning how to invest in real estate.
I read every single blog that ever came out and learned a ton from that. BiggerPockets has a lot to offer you more than just this YouTube channel or just this podcast. So go check it all out.
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HW+ Member Spotlight: Stacy Esser
This week’s HW+ member spotlight features Stacy Esser, founder and team leader at Stacy Esser Group/SEG Realty Keller Williams. Based in New Jersey, Esser and her team have been recognized as the No. 1 agent in Tenafly, New Jersey and the No. 1 agent for the Bergen County.
Below, Esser answers questions about the housing industry:
HousingWire: What is your current favorite HW+ article and why?
Stacy Esser: I am a Logan Mohtashami groupie, I’m proud to say! His articles are always my favorite. His recent article, “Purchase apps are at 2009 level: where’s the inventory?” takes a deep dive into what the heck is going on with purchase applications, housing demand and inventory levels.
Logan totally nerds out, and I try to digest the story he’s sharing, the graphs and numbers. He helps me make sense of what my 12-agent team is feeling on the front lines, helping me to help my team be the best agents they can be.
We can’t just show homes; we have to be a professional real estate business, which means being able to have real conversations when buyers and sellers ask us questions like, “Did we miss the market?” “Are we in a housing bubble?” and “Should I sell now or wait?”
We let the data do the heavy lifting. This article, for example, asks why, if purchase applications are down to 2009 levels, are inventory levels still so freaking low? Of course, the answer is about why this is not the same market — in any way — to post 2008. When I try to explain this to people, I have to relate to them in some way, help them understand.
There are many reasons this isn’t like 2008: people are staying longer in their homes, aging in place and have more equity in their homes than 2008. And, of course, there is the sheer demand, with our demographics being the best-ever for homebuyers.
This article comes at the same problem from a different angle: a mortgage application perspective. So, it’s another way to show my clients that not all markets are the same, and this is not 2008.
HousingWire: What is the weirdest job you’ve ever had?
Stacy Esser: I was one of those people who dressed up in full costume and did singing telegrams.
HousingWire: What has been your biggest learning opportunity?
Stacy Esser: It is when I f— up, or as I like to say, when I fail forward. In fact, with my team, “failing forward” is embedded in our culture. So much so, that during our weekly team meetings, we each share a fail forward for the week — what happened and what we learned from it. It’s a very powerful team-building experience.
HousingWire: When do you feel success in your job?
Stacy Esser: I felt like a success at my job once I realized that I could go away with my family, be present, and my business would still run successfully without me. I also feel like a success when my agents are achieving their financial goals. It’s interesting, upon reflection, that my answer is not about selling $150 million.
It’s rather my inner success, the thing that makes me feel really good. You know, that authentic smile you get when you know you’ve impacted other people whom you really care about. My role as a leader is what sticks with me and what drives me.
HousingWire: What is the best piece of advice you have ever received?
Stacy Esser: The best piece of advice I’ve ever received is to “stay in discovery mode.” This means that when you’re having a conversation with someone, stop talking and ask questions and dive deep. If not, you will constantly be trying to solve the wrong problem.
Discovery mode helps you to understand the other person’s pain points. People work harder to avoid pain and want to move as quickly as possible toward pleasure, so you need to ask what’s on their mind, why they feel how they do, so you can know what they really want and need. Discovery mode also allows you to build trust, and a rapport with the other person. It’s an essential skill for anyone who wants to be successful in sales, coaching, and leadership.
HousingWire: What are 2-3 trends that you’re closely following?
Stacy Esser: First, rising interest rates are one of the most closely watched trends in the housing market. As rates rise, it becomes more expensive to borrow money for a home purchase. This can lead to a slowdown in the housing market since buyers are hesitant to commit to a purchase when rates are high.
Additionally, rising rates can also lead to a decrease in home values, as buyers are willing to pay less for a home when they can get a lower interest rate elsewhere. The actual yin/yang here will be played out in the months to come.
However, it’s the sellers and buyers that we are working with whom really matter. Sellers are always the last to know when prices come down, and that means tough conversations, managing expectations and searching for their pain points to get them to say yes to a sale price that’s not quite what they expected. This is especially true in a luxury market where buyers and sellers are very tied to the financial world. Most of those sellers don’t need to sell, and will hold on to a price too long just because three months ago they may have seen that number.
The market is shifting, and our prices must shift with it. It’s still a strong market and prices are still up, just not as much as they were before. New and move-in ready is what everyone wants — Millennials and Baby Boomers alike are competing for the same product.
In a shifting market, a house with flaws (like a detached garage or situated on a busy street) will not so easily be overlooked. I believe it’s important to communicate often and lay the groundwork early, so there are no surprises with your clients.
Second, another closely watched trend in the housing market is the inventory of available homes. When there are more homes on the market, buyers have more choices, and can be more selective about their purchase. This can lead to a decrease in home prices as sellers are forced to compete for buyers. Additionally, a large inventory can also indicate that there is a slowdown in the housing market, as sellers are not able to find buyers as easily.
Finally, the last closely watched trend in the housing market is construction activity. When there is an increase in new construction, it indicates that builders are confident about the future.
HousingWire: What keeps you up at night and why?
Stacy Esser: For me, what keeps me up at night is lack of inventory and unaffordable housing. I see too many people struggling to find a place to live, and then being priced out of the market. It’s not just first-time homebuyers, but also people who are looking to downsize or upgrade.
This affects my team’s ability to convert. Are they spending time with buyers that are ready, willing and able? Time is our most valuable currency, and I spend a lot of it thinking about how to best leverage my team’s skills.
I want to make sure that we’re doing everything we can to be successful — for ourselves and our clients. I also think about how we can better market our value proposition, and if we’re effectively communicating what makes us unique. Sometimes it’s hard to turn off my brain and stop thinking about work, but I eventually fall asleep.
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The Overlooked Tool Every Investor Needs
I was talking with another investor recently and used a term I assumed he would be familiar with. He wasn’t, which led me to realize that a simple but very effective tool for decision-making was likely to be overlooked by many others as well.
The tool/concept is called expected value (EV), and I’m most familiar with this concept because I spent my youth playing way too much high-stakes poker.
In poker, EV is one of the most common tools used to determine an optimal decision (fold, call, raise, etc.) in the middle of a hand, especially in big situations where all the chips are on the line.
But, EV can be applied to a wide range of decisions, including decisions related to our investments.
How Does Expected Value Work?
Let’s look at how EV works, using a straightforward example from the poker world.
We’re sitting in a poker game. It’s the end of the hand, and there’s $400 in the pot, and the other player in the hand bets $100, making the pot $500, requiring you to put in $100 to see a show-down.
You have a decision to make: Do you call the $100 bet or not?
While I could give you all the details of the hand—what cards you have, how the betting played out, whether the other player looks nervous. The only piece of information you need to make an optimal decision about whether to call is what you estimate the likelihood of you having the best hand (and therefore winning the pot).
To determine the expected value for a decision, you multiply the probability of each possible outcome by the value of that outcome and then add up the results.
In this case, there are three possible outcomes:
Let’s say that you believe there’s a 25% chance that you have the best hand and a 75% chance of having the worst hand. In other words, you will most likely lose, regardless of what you do.
But what about the expected value?
There’s a 25% chance of the first scenario above happening (you having the best hand and win), and if it does, you’ll win $500 (the amount in the pot). There’s a 75% chance of the second scenario happening (you have the worst hand and lose), and if it does, you’ll lose $100 (the amount you need to spend to call the bet).
To determine the EV, we multiply the probability by the outcome for each scenario and add them up:
EV = (25% * $500) + (75% * -$100)
EV = ($125) + (-$75)
EV = $50
The Expected Value is $50. What does this mean?
It means that, while we have no idea if we’ll win $500 or lose $100 this hand, if we were to play out this exact situation a million times, we should expect to win, on average, $50 per situation.
A good poker player knows that while there is a 75% chance of losing this hand and going broke. Over the long term, taking that risk every time it comes up will ultimately make money.
In fact, if a poker player finds themselves in this exact situation 100 times, they should expect to earn 100 * $50 = $5,000 across all these situations.
A positive expected value investment/decision is one that you should always consider making. A negative EV investment/decision is one that you should always consider passing on.
Had the expected value for the poker situation above been negative, a fold would have been the right move.
How Expected Value Applies to Other Investment Decisions
We can apply the same logic to other types of decisions and different types of investments.
For example, it’s typical for house flippers who do a high volume of deals to consider “self-insuring” their properties. This means they don’t get insurance for the flips and assume the risk/cost themselves.
But is it smart to self-insure your flips? Let’s make some assumptions and run an EV equation.
Let’s assume:
Should we pay the $1,000 in insurance for each of our flips? Or self-insure?
Let’s take a look at the EV for self-insuring. We’ll start with the possible outcomes and the value of each:
EV = (97.5% * $0) + (2% * $10,000) + (.5% * $100,000)
EV = $0 + $200 + $500
EV = $700
The EV on self-insuring is $700. That means, on average, we’d spend $700 per project paying for things that would have otherwise been covered by insurance.
In other words, if we were to do 100 flips, we could expect that we’d save about $300 per flip by self-insuring. Or $30,000 across all 100 flips!
Final Thoughts
While this is highly simplified, and you’ll have to use the numbers that make sense for your flips (both insurance costs and likely claims), you can see why many house flippers who are doing large volumes of flips choose to self-insure.
There are thousands of scenarios you’ll run into, both with your investments and daily life, where expected value calculations allow you to make much better decisions than just “going with your gut”.
Disclaimers about expected value
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