David:
This is the BiggerPockets Podcast show, nine seven C. What’s going on everyone? This is David Green, your host of the BiggerPockets Real Estate podcast, the show where we arm you with the information that you need to start building long-term wealth through real estate today. And I’ve got a surprise for you. We’ve got a Seeing Green episode that’s right in today’s show. If you’ve never heard one before, we’re going to take questions from you, the listener base that sent them into me directly and answer them for everybody to hear. In today’s show, we get into if interest rates justify holding a property that’s not performing well or if you should reinvest that money into better opportunities, what to do with $70,000 if your job is to escape the rat race and a little back and forth going on in the BiggerPockets forums. What to do when you’ve got a bunch of equity in a brrrr stir?
David:
That’s a brrrr property that’s now a short-term rental and more up. First, we’ve got a flipper wholesaler who is looking to expand into multifamily and storage. He wants to do all the things and wants to know where he should start. Most importantly though, if you want a chance to ask your question, please go to bigger p.com/david where you can submit a question, be featured in the show. If you don’t remember what I just said, we also put the link in the description. I love it when you guys listen to me. Thanks so much for submitting your question. Let’s kick this thing off. Alright, up next we have Mike Larson out of South Carolina. He was featured at episode 2 75 of the Rookie Podcast and he’s here joining us on Seeing Green today. Mike, what’s your question?
Mike:
What’s going on guys? Well, first I just want to say thank you for having me. This is truly a ton of value. So right now I own a small wholesale and a flipping business and I’ve built up the systems to find single family homes, but I want to start to scale into storage and multifamily and I use your basic marketing cold calling, texting P-P-L-P-P-C, direct mail and stuff. But how are you guys marketing and finding properties that are 10 plus doors or storage facilities that are a hundred plus doors?
David:
James, what are you doing to find these? You got a whole bunch of apartment complex stores, don’t you?
James:
Yeah, we’ve been buying a lot the last 24 months too. Even with these high rates, one thing that we’ve learned, and Mike, I started the business doing what you’re doing. We had a wholesale business fix and flip brokerage, and we were always the people self-generating our own deals for small multifamily fix and flip any of the residential space. But then as we started to grow our doors, what we noticed, at least in our market is we had to expand our network because large multifamily a lot of times is a smaller group of brokers that actively know that product. So the good thing about commercial brokers or multifamily brokers, they’re not as wide as we are as investors, and so when you get into that space, you want to kind of expand your network. And so again, I self generate a lot of my own product with cold call rooms, direct mail door knocking referrals from other investors.
James:
But where we get most of our larger multifamily once we stepped in that space is those commercial brokers. Because commercial brokers work specific areas and because there’s only so much product in a lot of those areas, they know the sellers a lot more. And by getting to know your seller leads more, just like you do with wholesaling, you get higher conversions. If you know what’s going on, you’re staying in front of ’em. And so we’ve had really good luck just working with our commercial broker network and multifamily broker network, always bringing us deal flow because a lot of times these multifamily properties do never hit market. They’re trade off market. These guys are good at finding the opportunity, selling it, they’re motivated by their commissions and that is by far the most product we get is from our broker community.
David:
What do you think Mike? Makes
Mike:
Sense to me. I mean, I’m good about the networking aspect as far as what I’ve been doing so far. Hold once a month I’ll do a meetup to try and meet other people in the market and have other wholesalers send me deals. So I guess I could just do the exact same thing as far as going after the commercial brokers try and meet up with more of those
David:
Guys. So you mentioned the similarities. Like you said, you network with residential people like wholesalers and agents. Now you’re going to be networking with commercial. Here’s the differences so that you’re not walking in blind. Most wholesalers and agents aren’t worried about if the person asking about the properties is a serious buyer because it’s not hard to get financing for residential properties. There’s a million different loans that you could get right now. You got people that are putting together money and they’re thrown at an investor’s just like, please take my money. There’s more money to land than there are Deals are. When you walk into the commercial space, those brokers are going to be way more concerned that you’re a tire kicker, that you’re wasting their time, that you’re not a serious buyer than what we residential investors get used to. So you’re going to want to understand their vernacular.
David:
You’re going to want to get cut to the chase and be able to portray yourself as a serious person. This isn’t like real estate agents are willing to give me a free education and real estate hoping that I become their client. These are sharks. They’re only here because they spend their entire life building relationships with wealthy people that own these commercial properties. They’re understanding what triple net leases are, the different financing options with these things, how you’re going to improve the net operating income. They’re going to use phrases that you may not know if you haven’t gotten involved in this. And if you’re staring at them blankly, it’s a really good way to lose the trust and then that deal’s not going to you. It’s going to someone with a proven track record. Kind of got to fight your way into the good old boys club if you want to be a commercial investor.
James:
And the reason it’s like that too is these commercial brokers are working this targeted area and they have a lot of times they have a small group of sellers and they don’t want to jeopardize that relationship they’ve been working on for two years. So that’s why they want to bet you correctly. But as you go into markets too, other things, commercial brokers, they can be a little standoffish sometimes and just like David said, you want to kind of qualify yourself, but if you’re getting some pushback or they’re not bringing any inventory, other ways that we do target multifamily and Mike, if you’re a wholesaler, you could definitely do this because you know how to target direct or direct to seller targeting. A lot of times we like to pull the recently rented properties and then we pull the information on ’em. So let’s say an apartment building is running for a thousand dollars a unit.
James:
We pull that tax record up that looks below market value and we see when they bought it, then we can look at how much they’ve depreciated from that property based on if they’ve been there 10 years, they’ve depreciated most of it. Then we’re looking at their equity position and we run the return on equity. And that’s what we approach these sellers with is going, Hey, we have an opportunity for you. You have almost a fully depreciated building right now. You’re collecting this much in rent with this much equity, which is this return, and usually it’s going to sound pretty low one to 2% because it is. And that’s how we get these multifamily sellers to at least start listening to us because they’re more sophisticated than your usual single family seller. And when you’re talking to you’re, when you’re talking to ’em about buying their property and you’re giving them the information, they already understand the benefits of depreciation and return on equity, but they just don’t realize it sometimes.
James:
And so by summarizing it can get them to kind of work with you a little bit more. And so those are ways that we’re looking for because we can call them with an opportunity, they should upgrade their portfolio we want to buy. And so those are good target lists. And another really good way to find more multifamily is to reach out to multifamily property management companies. Say, Hey, look, I’m looking to buy, if you’ve put it together the deal, I’ll use it as a broker and I’ll keep your property management in play. They have a lot of sellers that it is in their best interest to sell that get ’em into another property anyways, and they might know landlords that want to move and it’s another good way to dig out deals without having to pay all the broker fees.
Mike:
That’s genius. I love that.
David:
There you go, Mike. Thanks a lot, man, appreciate it and good luck to your nephew in his wrestling tournament today. Thank
Mike:
You, sir. Thanks guys. Have a good one.
David:
All right. After this quick break, we’re going to be covering different financing types and the pros and cons of each and welcome back. We just heard from Mike who was trying to scale up from wholesaling and flipping to finding more commercial properties, breaking his way into a new asset class. Alright, James, now we sort of covered there with Mike that the networking component is different with commercial than residential. The financing component can be pretty different to especially when you’re a residential investor that’s used to buying distress properties. Can you kind of cover what people can expect in financing differences if they make the jump from residential to commercial?
James:
Yeah, a lot of times, especially when you’re buying those brrrr, multifamilies two to four, a lot of investors including myself, that you utilize hard money and construction loans because you buy it’s below market, increase it with the construction funds and then refi it into a permanent loan commercials just lot more, it’s a lot different, right? Because you’re not getting 30 year financing typically on these buildings, they’re commercial loans that have balloon payments at five, seven and 10 years. And typically when we’re buying these multifamily, small or large, we’re working with local banks and that is a big difference between your residential lenders too. When you’re getting your commercial financing, you’re actually meeting with your bankers, you’re talking to your local bank and they’re looking at it like an actual asset. Whereas if I’m getting a residential loan, I’m dealing with the mortgage broker who’s making sure that I’m packaged up right, and they’re dealing with the bank.
James:
And so commercial, as you get into multifamily, these relationships with local banks are really important. It’s good to go meet with them, establish some, move some deposits over. The more you get to know them, the better leverage they would get. And when we buy value add multifamily, it’s always a two step loan, but it’s rolled into one transaction. So when we buy these properties, we set it up with a bank financing, they give us a construction component, it’s interest only, a little bit higher rate, but it’s about three points cheaper than a hard money loan. When we close on that loan, we’ve already had our permanent financing locked. So we know when we get done with the stabilization what our interest rates going to be, and I do think that’s really important for people to look at as they get into multifamily. You don’t want to buy a property without a locked rate because if the rate changes your perform is going to change. And so the beautiful thing about multifamily is you can get your construction loan and your perm loan all locked in one, so you can actually reduce your risk, but you want to work with a local bank that understands multifamily and does construction. There
David:
You go. Another little perk that I like with that is if you’re maybe unsure of your underwriting or the process of buying commercial properties, if you’re going the route, you’re saying, James, you have a couple other sets of eyes looking at the deal that you won’t have yourself, right? It doesn’t hurt to have more experienced people looking at it and maybe saying, Hey, this could be a problem, or we would want to see this become better because you’ll learn from that experience. Great point there. Alright, in this segment of the show, I like to take questions from the BiggerPockets forums or comments from YouTube or reviews that people left wherever they listen to podcasts and share ’em with everybody. Today we’re going to be getting into a question from the BiggerPockets forums, which real estate strategy works the best to escape the nine to five rat race?
David:
My question for anyone that escaped the nine to five rat races, what real estate strategy did you use? For example, if you had between 20 to $70,000 to invest in real estate, how would you use that to replace your income of seven grand a month from your job? Would you do fix and flips tax liens, mortgage notes, buy and hold rentals, Airbnbs, what would you do? They then go on to say that they think house vacuum would be a great strategy, but they prefer tax liens and short-term rentals. Now Abel Curel from Queens, New York responded with, Hey Rodney, great question and you came to the right platform. Each strategy that you listed requires different experience, risk tolerance, networking, connections, project management and initial capital to invest. Have you tried looking further into those strategies? I’d suggest that you weed out the ones that don’t fit your end goal and your schedule.
David:
Rentals and Airbnb seem to be the most common route for investors in your situation. Depending on the cost of living in your local market and availability of two to four unit properties, house hacking may be a strategy worth exploring. Travis Timmins from Houston weighed in and said, my path was owning a business that I sold and acquired real estate along the way. It’s going to take more time than you were planning and be harder than you thought. Real estate doesn’t pay you well. If you need the money, it’s like the house knows you need the cash and something’s going to break and deplete all of the cashflow for that year. As far as the strategy goes, I would suggest leaning into your current skill set and knowledge to find an unfair advantage. Flipping short-term rentals, tax liens that set are all great strategies if you are good at them and terrible strategies.
David:
If not, if I had 20 to 70,000 to invest, I’d buy a house hack in Dallas if your debt to income ratio is solid. So it seems pretty clear that Rodney with around 20 to $70,000 is trying to escape the rat race and the people in the forums are saying, you’re probably not going to do that with 20 to 70 grand. You should start house hacking Now why are they saying that he should house hack? It’s because they’re recognizing that Rodney needs more equity or more cash to invest in real estate if he wants to get enough cashflow to quit the job. House hacking is a great way to start that journey. You start the time ticking or you start the snowball rolling of building equity and when you get enough of it, you can invest it at a return that could provide you with enough income to quit your job.
David:
But like Travis said, it’s going to take you longer than you think. It’s going to be harder than you think. This is a one step at a time journey. This is not a thing that you’re just going to learn in two to three years and then have $20,000 of cashflow coming from your single family rentals that you can just quit that job and that rat race. It’s one of the reasons that I wrote Pillars of Wealth, how to make, save and invest your way to financial freedom because you got to focus on three things, making more money, saving more money, and investing the difference, not just investing to get where you want to go. And in the book I talk about, you got to find a way to make money that you like doing. You got to find a way to fall in love with the process of becoming great.
David:
We really want to be chasing excellence, not just chasing cashflow because when you catch excellence, money will find you and you will have a lot more to invest which will turn into cashflow. Great conversation here. I appreciate everybody’s engagement and I love being a part of a community that asks questions like this and shares it for everyone to hear. If you’re liking today’s show and you’re enjoying the conversation, please take a second to leave me a five star review wherever you listen to your podcast and comment on YouTube and let me and my production staff know what do you think about today’s show and what do you wish that you could get more of? All right everyone, let’s get into the next question.
Rory:
Hey, David, Rory, corporal from Lamont, Colorado here, a longtime listener first time poster. So hey, we’ve got a mountain property that we did as a burster. We built it back in 20 and 20, 21 and the short-term rental market has really slowed down, but we are sitting on a ton of equity really thinking about what our next steps are. Looking at either a 10 31 exchange and moving that into turnkey properties or an RV park or self storage, something with real estate involved or potentially or multifamily. Another option would begin, have a HELOC on it and use those dollars to invest in some other building projects that we’re looking at as well as perhaps buying a cash pulling business. Love to get your thoughts on what we should do with the equity. We’ve got about 600 K that we’re sitting on right now, and yeah, love the show. Love what you guys have going on and really appreciate your help. Thanks, bye.
David:
All right. We’re going to take a quick break, but when we come back, a Brrr-ster property owner has $600,000 of equity and is looking for their next move. Is it a 10 31? Is it a cash out refinance? Are they going to move to The Bahamas and open a snow cone company? The tension is killing me and I bet it’s killing you. Hang tight. We’re going to hear about it after this break. Welcome back to the BiggerPockets Real Estate podcast. Let’s jump back in.
James:
Rory. He’s got the same question we all have. What do we do with this equity and how do we maximize it? When I hear this, especially when we’re talking about reloading it into 10 different asset classes, we got it’s self storage business, RV parks, multifamily, and again, that comes back to all the noise in the internet now because everyone’s promoting that their strategy is the best, and you know what? It probably works really well for them. Anytime that I’m looking at making a trade on equity, I want to put it, if you’ve earned $600,000 in equity, you did a phenomenal job, you bought the right thing, you grew it correctly. How you execute even higher is buying something that you know and you’re familiar with. And so when I’m looking at doing trades, I like to look at what is my skillset and how can I maximize this?
James:
If I did it with a single family house that maybe I was a heavy renovator, the next transition for me would be into going to maybe a value add multifamily, because it’s the same type of asset, it’s the same type of product, but a little bit different asset class. To increase the cashflow, I have to renovate it like a single family house. I have to lease it like a single family house. And with your short-term talents, you might be able to do two short-term rentals and a couple stable long-term tenants to keep your investment more stable. And you can do a hybrid blend. And so I would say you want to audit. What do you want to do with your equity? What is the return that you want to make? What markets do you want to be in? And then what products should you be looking at to meet that return expectations rather than just the next hot sizzly asset class? And I think a lot of people are in this jam right now with the short-term rentals. They bought a lot of good property that grew in equity and as that slowed down, the returns have diminished. And so you’re doing the right thing. Is my asset producing me the right return, right yield? And if it’s not, relo it out, but do that soul searching, find out you’re good at what you want to make on your return, then go look at the asset class because each asset class pays you differently
David:
A hundred percent. First off, I don’t think that you should have equity burning a hole in your pocket. I guess it doesn’t burn a hole in pocket. That’s cash equity. Would what? Burn a hole in the house. Don’t worry about it though. You don’t have to invest that $600,000. You could take your time. Second, just like James said, don’t ask the question of, well, what’s the best return out there? I don’t know that there is a best return out there. Ask the question of, well, what do my skills, my opportunities and my competitive advantage offer me? Do you have opportunities to put that money to place that someone else doesn’t because of the background? Do you have a construction background? Do you have a finance background? Are you really good with short-term rentals? And so you can buy more short-term rentals in the same area that you already have some now and get economies of scale. Think like a business owner. And then lastly James, what do you think about somebody like this lending out, maybe taking a HELOC on their property and lending that money out? Becoming a private lender to other investors?
James:
That is actually how banks make money and a lot of times people kind of forget that they borrow money and then they relend it out and they make an interest yield. I think that’s a great way as long as you are not jeopardizing your own asset. Before you do that, you really need to know how to vet a loan. You need to vet the operators and the more experienced your operators and the more you understand how to vet a hard money loan, the less risky it is. I do thousands of hard money loans a year between our company and myself privately. I have a default rate over a 16 year span that’s less than a quarter percent, or actually, excuse me, it’s less than 1%. Well, I’ve only lost money on a loan less than a quarter percent, but that’s by underwriting correctly underwriting the borrowers.
James:
I’d be cautious about taking out a heloc if you’re going to get it right now, HELOCs are about 9%. You’re going to re lend it out about 11 to 12% or maybe get some equity in there. And so the yield’s small and the gain would be small for you, and so make sure that you really understand it. You don’t want it being too high of risk for that little return. If it was me, I would look at 10 31 exchanging, go buying a property so I can get that depreciation right down the taxes and then maybe pull some out to invest it in hard money separately so you’re not taking on more leverage. I’d rather pay the tax than take on more leverage and have a smaller yield. Hard money is a great space if you want to make cashflow. The one negative is you pay high tax. You don’t get all the same benefits as you get from owning a rental property. The depreciation, the depreciation, the write-off expense, it’s ordinary income. You’re going to pay it. It’s a high. Typically I’m paying 40% tax on my hard money loans and there’s not a lot of relief there, but it is steady cashflow and it is how I live my life today. Everything I do today is paid for by my hard money passive income.
David:
Great point, James. Different opportunities come with different pros and cons, and one thing that creates analysis paralysis is investors that are trying to find the one option that doesn’t have any downside, but you’re not going to get it if you’re trying to avoid the tax implications. You’re going to take on more work or more risk. If you’re trying to get the best return possible, you’re probably going to have to learn a new thing. If you’re like, man, I just want a high return with no work, you could put it in a retirement account, but you’re not going to able to use the money for something else. So the key is to look at the downsides of every single option and find the one that the downsides affect you the least. Alright, our next question comes from Dan Way in Madison, Wisconsin. Dan says, I’m wondering how saving money in the future through refinancing would look.
David:
Most of the time I hear about refinancing, it’s when rates are lower than when you originally purchased the property. How can we ever expect to lower our monthly payments without the expectation of seeing lower than three to 4% rates? I’m looking to find my next property through Fannie Mae loans for the low down payment aspect. However, the monthly payments associated with these properties with the low monthly down payment make it almost impossible to cashflow, which I understand is harder to find in this market at this time in this first place. But how can I even rationalize these deals with little to no possibilities of lowering those monthly payments in the future? So this is an interesting question here, James. If you’re getting in at a three to 4% interest rate, you have no possibility of really refinancing any lower than that. It’s hard to picture rates getting lower than that.
David:
But if you’re buying property now and you’re waiting for a refinancing rates to go down, you don’t feel like you’re in control of your own investment future because you don’t control when the rates are going to go down. And it looks like Dan’s thinking, Hey, I’m willing to buy property that doesn’t cashflow right off the bat if I have hope that I can refinance these things in the future, but how do I rationalize these deals with little to no possibility of lowering the monthly payment in the future? So the question is, should we be buying real estate right now if we don’t know that we can refinance into a lower interest rate later? What’s your thoughts there?
James:
I think one thing I would really remember is interest rates. Cost of money is just the cost of the deal, and I don’t make my investment decisions based on interest rates. I make it based on cashflow and returns. Very recently, I just traded a property that cashflow $1,200 a month and I had a 4.25 rate on it and I traded it for a property that basically breaks even and I have a 7% rate on it, and there was a purpose to that. I think a lot of investors get caught on that rate. They’re like, I can never get rid of this rate, and I wouldn’t look at it that way. I would look at, okay, if it’s not working for me, I need to explore other markets to give me a better return.
James:
I think it’s important that you evaluate, Hey, here’s my strategy. You came up with my strategy. I’m going to use a Fannie Mae loan, buy a rental property with low down, I’m going to get better financing than an investor. That is your strategy. Now it’s going, how do I execute it? And maybe the market that you’re looking in right now is just not working and you need to go to outside markets because you can cashflow in this market. You just might have to explore cheaper ones. If that is your plan, I would go find the market that it works in, utilize that loan, and then look at pivoting your strategy out later. You can only do so many low down loans anyways. I would utilize it, put that money to work, but change how you’re implementing it, not how you’re doing it.
David:
That’s a great point. I’m also not a huge fan of the, I have a two and a half percent interest rate. I can never let it go. I’ve never heard a person who did really good in real estate. And when I talked to ’em about how they did it, they said, well, you know what? I got 3% interest rates and I held ’em the whole time. They always talk about the deal. They talk about the property, they talk about the increase in rents, they talk about the increase in value, which is usually a function of the location that they bought in or the time when they bought. It’s never about the rate. And so I just don’t know why we put so much emphasis on that other than the fact it just stings that it used to be better than it was. But isn’t it always like that?
David:
We talk about 2010 real estate. It used to be better than it was. I wish I had bought then in 2016, everybody thought that real estate was too expensive compared to 2010 Now. Now in 2024, we look back at 2016 prices and say, oh, I wish I had bought then. And you know what? In 2034, we’re going to be looking back at 2024 prices and saying, oh, I wish I had bought. Then we are not going to be thinking, well, the interest rates were seven and a half, and so it didn’t make any sense to buy it never actually works out that way. So try to take your attention off of the rate and try to think about the other ways real estate will make you money. Can you get a tax advantage from it? Can you shelter income from other things with it? Can you set it up to we’re making extra payments on your principal and pay it down quicker?
David:
Can you add square footage to the property? Can you add units to rent out? Can you buy in an area before everybody else gets there? That’s the next up and coming emerging market. Let’s just think a little bit more than just what fits into the spreadsheet. And sometimes those answers will pop out. All right, and that was our show for you all today. Just a little recap here. We talked about networking for commercial properties and how to build a pipeline, whether you should keep a property because of the interest rate or think about the overall returns, what to do to escape your nine to five with $70,000, and how to handle the problem of having a whole bunch of equity and not sure what to do with it. Thanks again, everybody. We love you. We appreciate you for being here. I know you could be listening to anybody to get your real estate investing knowledge from, and I really appreciate the fact that you’re coming to me. You can find my information in the show notes if you want to reach out to me personally, and if you’ve got a second, let me know in the YouTube comments what you thought about today’s show.
Help us reach new listeners on iTunes by leaving us a rating and review! It takes just 30 seconds and instructions can be found here. Thanks! We really appreciate it!
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Figure Lending shifts to new operational umbrella
Figure Lending LLC is now operating under the umbrella of Figure Technology Solutions, independent of CEO Mike Cagney’s Figure Technologies.
Figure Technology Solutions will focus on developing and distributing its proprietary, technology-enabled platform to partners and investors in the home equity lending ecosystem, the fintech firm announced earlier this week.
The launch of Figure Technology Solutions comes a few months after Bloomberg reported that Figure Technologies was working with multiple investment banks — including Goldman Sachs Group Inc., JP Morgan Chase & Co. and Jefferies Financial Group Inc. — to take its lending division, LendCo, public.
In November, Bloomberg reported that LendCo, which was valued between $2 billion and $3 billion, was expected to go public in the first half of 2024, citing people familiar with the matter.
Figure didn’t respond to requests for comment on its stance about taking the firm public, its correlation between LendCo and Figure Lending LLC, or the reasons for Figure Lending choosing to operate under a new umbrella brand.
Figure Technologies launched a wholesale lending platform in June 2023 that gives loan originators access to the company’s home equity line of credit (HELOC) offering.
CMG Financial, CrossCountry Mortgage, Fairway Independent Mortgage and The Loan Store are Figure’s private-label partners.
Figure posted HELOC originations of more than $8 billion as of February 2024 and served at least 100,000 households across the country, according to its website.
Founded in 2018 by Cagney, the former head of SoFi, Figure uses proprietary platform Provenance Blockchain for loan origination, equity management, private fund services, banking and payments.
Figure announced its plans in 2022 to go public through a special purpose acquisition company (SPAC), Figure Acquisition Corp.
But a combination of higher interest rates and rising redemption rates — which point to how many investors are exchanging their shares to get their money back — made it an unfavorable environment for SPACs, which led to the delisting of Figure Acquisition Corp from the New York Stock Exchange in December 2022.
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Apartment permits are back to recession lows. Will mortgage rates follow?
In Tuesday’s report, the 5-unit housing permits data hit the same levels we saw in the COVID-19 recession. Once the backlog of apartments is finished, those jobs will be at risk, which traditionally means mortgage rates would fall soon after, as they have in previous economic cycles.
However, this is happening while single-family permits are still rising as the rate of builder buy-downs and the backlog of single-family homes push single-family permits and starts higher. It is a tale of two markets — something I brought up on CNBC earlier this year to explain why this trend matters with housing starts data because the two marketplaces are heading in opposite directions.
The question is: Will the uptick in single-family permits keep mortgage rates higher than usual? As long as jobless claims stay low, the falling 5-unit apartment permit data might not lead to lower mortgage rates as it has in previous cycles.
From Census: Building Permits: Privately‐owned housing units authorized by building permits in February were at a seasonally adjusted annual rate of 1,518,000. This is 1.9 percent above the revised January rate of 1,489,000 and 2.4 percent above the February 2023 rate of 1,482,000.
When people say housing leads us in and out of a recession, it is a valid premise and that is why people carefully track housing permits. However, this housing cycle has been unique. Unfortunately, many people who have tracked this housing cycle are still stuck on 2008, believing that what happened during COVID-19 was rampant demand speculation that would lead to a massive supply of homes once home sales crashed. This would mean the builders couldn’t sell more new homes or have housing permits rise.
Housing permits, starts and new home sales were falling for a while, and in 2022, the data looked recessionary. However, new home sales were never near the 2005 peak, and the builders found a workable bottom in sales by paying down mortgage rates to boost demand. The first level of job loss recessionary data has been averted for now. Below is the chart of the building permits.
On the other hand, the apartment boom and bust has already happened. Permits are already back to the levels of the COVID-19 recession and have legs to move lower. Traditionally, when this data line gets this negative, a recession isn’t far off. But, as you can see in the chart below, there’s a big gap between the housing permit data for single-family and five units. Looking at this chart, the recession would only happen after single-family and 5-unit permits fall together, not when we have a gap like we see today.
From Census: Housing completions: Privately‐owned housing completions in February were at a seasonally adjusted annual rate of 1,729,000.
As we can see in the chart below, we had a solid month of housing completions. This was driven by 5-unit completions, which have been in the works for a while now. Also, this month’s report show a weather impact as progress in building was held up due to bad weather. However, the good news is that more supply of rental units will mean the fight against rent inflation will be positive as more supply is the best way to deal with inflation. In time, that is also good news for mortgage rates.
Housing Starts: Privately‐owned housing starts in February were at a seasonally adjusted annual rate of 1,521,000. This is 10.7 percent (±14.2 percent)* above the revised January estimate of 1,374,000 and is 5.9 percent (±10.0 percent)* above the February 2023 rate of 1,436,000.
Housing starts data beat to the upside, but the real story is that the marketplace has diverged into two different directions. The apartment boom is over and permits are heading below the COVID-19 recession, but as long as the builders can keep rates low enough to sell more new homes, single-family permits and starts can slowly move forward.
If we lose the single-family marketplace, expect the chart below to look like it always does before a recession — meaning residential construction workers lose their jobs. For now, the apartment construction workers are at the most risk once they finish the backlog of apartments under construction.
Overall, the housing starts beat to the upside. Still, the report’s internals show a marketplace with early recessionary data lines, which traditionally mean mortgage rates should go lower soon. If housing leads us into a recession in the near future, that means mortgage rates have stayed too high for too long and restrictive policy by the Fed created a recession as we have seen in previous economic cycles.
The builders have been paying down rates to keep construction workers employed, but if rates go higher, it will get more and more challenging to do this because not all builders have the capacity to buy down rates. Last year, we saw what 8% mortgage rates did to new home sales; they dropped before rates fell. So, this is something to keep track of, especially with a critical Federal Reserve meeting this week.
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Can I Escape the Rat Race with Just $70K?
Want to escape the rat race? To do so, you’ll need some serious investments. And if you want bigger and better cash flow or appreciation, commercial real estate is the place to start. But how do you find these bigger deals? Sure, it’s easy to log on to your favorite listing website and find a hundred houses to buy, but what about self-storage facilities, multifamily apartments, warehouses, and more? How do you find the BIG deals?
On this Seeing Greene, we’re answering crucial investing questions so you can build wealth better and reach financial freedom faster. First, Real Estate Rookie guest Mike Larson calls in to ask how to find off-market commercial real estate deals. If you’ve ever wondered how to invest in commercial real estate, this is the place to start! Next, a BiggerPockets Forum poster asks for the best investment to “escape the nine-to-five rat race.” A short-term rental investor needs to know the best way to invest his home equity. Plus, we discuss why mortgage rates DON’T matter as much as you think they do!
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 jump on a live Q&A and get your question answered on the spot!
David:
This is the BiggerPockets Podcast show, nine seven C. What’s going on everyone? This is David Green, your host of the BiggerPockets Real Estate podcast, the show where we arm you with the information that you need to start building long-term wealth through real estate today. And I’ve got a surprise for you. We’ve got a Seeing Green episode that’s right in today’s show. If you’ve never heard one before, we’re going to take questions from you, the listener base that sent them into me directly and answer them for everybody to hear. In today’s show, we get into if interest rates justify holding a property that’s not performing well or if you should reinvest that money into better opportunities, what to do with $70,000 if your job is to escape the rat race and a little back and forth going on in the BiggerPockets forums. What to do when you’ve got a bunch of equity in a brrrr stir?
David:
That’s a brrrr property that’s now a short-term rental and more up. First, we’ve got a flipper wholesaler who is looking to expand into multifamily and storage. He wants to do all the things and wants to know where he should start. Most importantly though, if you want a chance to ask your question, please go to bigger p.com/david where you can submit a question, be featured in the show. If you don’t remember what I just said, we also put the link in the description. I love it when you guys listen to me. Thanks so much for submitting your question. Let’s kick this thing off. Alright, up next we have Mike Larson out of South Carolina. He was featured at episode 2 75 of the Rookie Podcast and he’s here joining us on Seeing Green today. Mike, what’s your question?
Mike:
What’s going on guys? Well, first I just want to say thank you for having me. This is truly a ton of value. So right now I own a small wholesale and a flipping business and I’ve built up the systems to find single family homes, but I want to start to scale into storage and multifamily and I use your basic marketing cold calling, texting P-P-L-P-P-C, direct mail and stuff. But how are you guys marketing and finding properties that are 10 plus doors or storage facilities that are a hundred plus doors?
David:
James, what are you doing to find these? You got a whole bunch of apartment complex stores, don’t you?
James:
Yeah, we’ve been buying a lot the last 24 months too. Even with these high rates, one thing that we’ve learned, and Mike, I started the business doing what you’re doing. We had a wholesale business fix and flip brokerage, and we were always the people self-generating our own deals for small multifamily fix and flip any of the residential space. But then as we started to grow our doors, what we noticed, at least in our market is we had to expand our network because large multifamily a lot of times is a smaller group of brokers that actively know that product. So the good thing about commercial brokers or multifamily brokers, they’re not as wide as we are as investors, and so when you get into that space, you want to kind of expand your network. And so again, I self generate a lot of my own product with cold call rooms, direct mail door knocking referrals from other investors.
James:
But where we get most of our larger multifamily once we stepped in that space is those commercial brokers. Because commercial brokers work specific areas and because there’s only so much product in a lot of those areas, they know the sellers a lot more. And by getting to know your seller leads more, just like you do with wholesaling, you get higher conversions. If you know what’s going on, you’re staying in front of ’em. And so we’ve had really good luck just working with our commercial broker network and multifamily broker network, always bringing us deal flow because a lot of times these multifamily properties do never hit market. They’re trade off market. These guys are good at finding the opportunity, selling it, they’re motivated by their commissions and that is by far the most product we get is from our broker community.
David:
What do you think Mike? Makes
Mike:
Sense to me. I mean, I’m good about the networking aspect as far as what I’ve been doing so far. Hold once a month I’ll do a meetup to try and meet other people in the market and have other wholesalers send me deals. So I guess I could just do the exact same thing as far as going after the commercial brokers try and meet up with more of those
David:
Guys. So you mentioned the similarities. Like you said, you network with residential people like wholesalers and agents. Now you’re going to be networking with commercial. Here’s the differences so that you’re not walking in blind. Most wholesalers and agents aren’t worried about if the person asking about the properties is a serious buyer because it’s not hard to get financing for residential properties. There’s a million different loans that you could get right now. You got people that are putting together money and they’re thrown at an investor’s just like, please take my money. There’s more money to land than there are Deals are. When you walk into the commercial space, those brokers are going to be way more concerned that you’re a tire kicker, that you’re wasting their time, that you’re not a serious buyer than what we residential investors get used to. So you’re going to want to understand their vernacular.
David:
You’re going to want to get cut to the chase and be able to portray yourself as a serious person. This isn’t like real estate agents are willing to give me a free education and real estate hoping that I become their client. These are sharks. They’re only here because they spend their entire life building relationships with wealthy people that own these commercial properties. They’re understanding what triple net leases are, the different financing options with these things, how you’re going to improve the net operating income. They’re going to use phrases that you may not know if you haven’t gotten involved in this. And if you’re staring at them blankly, it’s a really good way to lose the trust and then that deal’s not going to you. It’s going to someone with a proven track record. Kind of got to fight your way into the good old boys club if you want to be a commercial investor.
James:
And the reason it’s like that too is these commercial brokers are working this targeted area and they have a lot of times they have a small group of sellers and they don’t want to jeopardize that relationship they’ve been working on for two years. So that’s why they want to bet you correctly. But as you go into markets too, other things, commercial brokers, they can be a little standoffish sometimes and just like David said, you want to kind of qualify yourself, but if you’re getting some pushback or they’re not bringing any inventory, other ways that we do target multifamily and Mike, if you’re a wholesaler, you could definitely do this because you know how to target direct or direct to seller targeting. A lot of times we like to pull the recently rented properties and then we pull the information on ’em. So let’s say an apartment building is running for a thousand dollars a unit.
James:
We pull that tax record up that looks below market value and we see when they bought it, then we can look at how much they’ve depreciated from that property based on if they’ve been there 10 years, they’ve depreciated most of it. Then we’re looking at their equity position and we run the return on equity. And that’s what we approach these sellers with is going, Hey, we have an opportunity for you. You have almost a fully depreciated building right now. You’re collecting this much in rent with this much equity, which is this return, and usually it’s going to sound pretty low one to 2% because it is. And that’s how we get these multifamily sellers to at least start listening to us because they’re more sophisticated than your usual single family seller. And when you’re talking to you’re, when you’re talking to ’em about buying their property and you’re giving them the information, they already understand the benefits of depreciation and return on equity, but they just don’t realize it sometimes.
James:
And so by summarizing it can get them to kind of work with you a little bit more. And so those are ways that we’re looking for because we can call them with an opportunity, they should upgrade their portfolio we want to buy. And so those are good target lists. And another really good way to find more multifamily is to reach out to multifamily property management companies. Say, Hey, look, I’m looking to buy, if you’ve put it together the deal, I’ll use it as a broker and I’ll keep your property management in play. They have a lot of sellers that it is in their best interest to sell that get ’em into another property anyways, and they might know landlords that want to move and it’s another good way to dig out deals without having to pay all the broker fees.
Mike:
That’s genius. I love that.
David:
There you go, Mike. Thanks a lot, man, appreciate it and good luck to your nephew in his wrestling tournament today. Thank
Mike:
You, sir. Thanks guys. Have a good one.
David:
All right. After this quick break, we’re going to be covering different financing types and the pros and cons of each and welcome back. We just heard from Mike who was trying to scale up from wholesaling and flipping to finding more commercial properties, breaking his way into a new asset class. Alright, James, now we sort of covered there with Mike that the networking component is different with commercial than residential. The financing component can be pretty different to especially when you’re a residential investor that’s used to buying distress properties. Can you kind of cover what people can expect in financing differences if they make the jump from residential to commercial?
James:
Yeah, a lot of times, especially when you’re buying those brrrr, multifamilies two to four, a lot of investors including myself, that you utilize hard money and construction loans because you buy it’s below market, increase it with the construction funds and then refi it into a permanent loan commercials just lot more, it’s a lot different, right? Because you’re not getting 30 year financing typically on these buildings, they’re commercial loans that have balloon payments at five, seven and 10 years. And typically when we’re buying these multifamily, small or large, we’re working with local banks and that is a big difference between your residential lenders too. When you’re getting your commercial financing, you’re actually meeting with your bankers, you’re talking to your local bank and they’re looking at it like an actual asset. Whereas if I’m getting a residential loan, I’m dealing with the mortgage broker who’s making sure that I’m packaged up right, and they’re dealing with the bank.
James:
And so commercial, as you get into multifamily, these relationships with local banks are really important. It’s good to go meet with them, establish some, move some deposits over. The more you get to know them, the better leverage they would get. And when we buy value add multifamily, it’s always a two step loan, but it’s rolled into one transaction. So when we buy these properties, we set it up with a bank financing, they give us a construction component, it’s interest only, a little bit higher rate, but it’s about three points cheaper than a hard money loan. When we close on that loan, we’ve already had our permanent financing locked. So we know when we get done with the stabilization what our interest rates going to be, and I do think that’s really important for people to look at as they get into multifamily. You don’t want to buy a property without a locked rate because if the rate changes your perform is going to change. And so the beautiful thing about multifamily is you can get your construction loan and your perm loan all locked in one, so you can actually reduce your risk, but you want to work with a local bank that understands multifamily and does construction. There
David:
You go. Another little perk that I like with that is if you’re maybe unsure of your underwriting or the process of buying commercial properties, if you’re going the route, you’re saying, James, you have a couple other sets of eyes looking at the deal that you won’t have yourself, right? It doesn’t hurt to have more experienced people looking at it and maybe saying, Hey, this could be a problem, or we would want to see this become better because you’ll learn from that experience. Great point there. Alright, in this segment of the show, I like to take questions from the BiggerPockets forums or comments from YouTube or reviews that people left wherever they listen to podcasts and share ’em with everybody. Today we’re going to be getting into a question from the BiggerPockets forums, which real estate strategy works the best to escape the nine to five rat race?
David:
My question for anyone that escaped the nine to five rat races, what real estate strategy did you use? For example, if you had between 20 to $70,000 to invest in real estate, how would you use that to replace your income of seven grand a month from your job? Would you do fix and flips tax liens, mortgage notes, buy and hold rentals, Airbnbs, what would you do? They then go on to say that they think house vacuum would be a great strategy, but they prefer tax liens and short-term rentals. Now Abel Curel from Queens, New York responded with, Hey Rodney, great question and you came to the right platform. Each strategy that you listed requires different experience, risk tolerance, networking, connections, project management and initial capital to invest. Have you tried looking further into those strategies? I’d suggest that you weed out the ones that don’t fit your end goal and your schedule.
David:
Rentals and Airbnb seem to be the most common route for investors in your situation. Depending on the cost of living in your local market and availability of two to four unit properties, house hacking may be a strategy worth exploring. Travis Timmins from Houston weighed in and said, my path was owning a business that I sold and acquired real estate along the way. It’s going to take more time than you were planning and be harder than you thought. Real estate doesn’t pay you well. If you need the money, it’s like the house knows you need the cash and something’s going to break and deplete all of the cashflow for that year. As far as the strategy goes, I would suggest leaning into your current skill set and knowledge to find an unfair advantage. Flipping short-term rentals, tax liens that set are all great strategies if you are good at them and terrible strategies.
David:
If not, if I had 20 to 70,000 to invest, I’d buy a house hack in Dallas if your debt to income ratio is solid. So it seems pretty clear that Rodney with around 20 to $70,000 is trying to escape the rat race and the people in the forums are saying, you’re probably not going to do that with 20 to 70 grand. You should start house hacking Now why are they saying that he should house hack? It’s because they’re recognizing that Rodney needs more equity or more cash to invest in real estate if he wants to get enough cashflow to quit the job. House hacking is a great way to start that journey. You start the time ticking or you start the snowball rolling of building equity and when you get enough of it, you can invest it at a return that could provide you with enough income to quit your job.
David:
But like Travis said, it’s going to take you longer than you think. It’s going to be harder than you think. This is a one step at a time journey. This is not a thing that you’re just going to learn in two to three years and then have $20,000 of cashflow coming from your single family rentals that you can just quit that job and that rat race. It’s one of the reasons that I wrote Pillars of Wealth, how to make, save and invest your way to financial freedom because you got to focus on three things, making more money, saving more money, and investing the difference, not just investing to get where you want to go. And in the book I talk about, you got to find a way to make money that you like doing. You got to find a way to fall in love with the process of becoming great.
David:
We really want to be chasing excellence, not just chasing cashflow because when you catch excellence, money will find you and you will have a lot more to invest which will turn into cashflow. Great conversation here. I appreciate everybody’s engagement and I love being a part of a community that asks questions like this and shares it for everyone to hear. If you’re liking today’s show and you’re enjoying the conversation, please take a second to leave me a five star review wherever you listen to your podcast and comment on YouTube and let me and my production staff know what do you think about today’s show and what do you wish that you could get more of? All right everyone, let’s get into the next question.
Rory:
Hey, David, Rory, corporal from Lamont, Colorado here, a longtime listener first time poster. So hey, we’ve got a mountain property that we did as a burster. We built it back in 20 and 20, 21 and the short-term rental market has really slowed down, but we are sitting on a ton of equity really thinking about what our next steps are. Looking at either a 10 31 exchange and moving that into turnkey properties or an RV park or self storage, something with real estate involved or potentially or multifamily. Another option would begin, have a HELOC on it and use those dollars to invest in some other building projects that we’re looking at as well as perhaps buying a cash pulling business. Love to get your thoughts on what we should do with the equity. We’ve got about 600 K that we’re sitting on right now, and yeah, love the show. Love what you guys have going on and really appreciate your help. Thanks, bye.
David:
All right. We’re going to take a quick break, but when we come back, a Brrr-ster property owner has $600,000 of equity and is looking for their next move. Is it a 10 31? Is it a cash out refinance? Are they going to move to The Bahamas and open a snow cone company? The tension is killing me and I bet it’s killing you. Hang tight. We’re going to hear about it after this break. Welcome back to the BiggerPockets Real Estate podcast. Let’s jump back in.
James:
Rory. He’s got the same question we all have. What do we do with this equity and how do we maximize it? When I hear this, especially when we’re talking about reloading it into 10 different asset classes, we got it’s self storage business, RV parks, multifamily, and again, that comes back to all the noise in the internet now because everyone’s promoting that their strategy is the best, and you know what? It probably works really well for them. Anytime that I’m looking at making a trade on equity, I want to put it, if you’ve earned $600,000 in equity, you did a phenomenal job, you bought the right thing, you grew it correctly. How you execute even higher is buying something that you know and you’re familiar with. And so when I’m looking at doing trades, I like to look at what is my skillset and how can I maximize this?
James:
If I did it with a single family house that maybe I was a heavy renovator, the next transition for me would be into going to maybe a value add multifamily, because it’s the same type of asset, it’s the same type of product, but a little bit different asset class. To increase the cashflow, I have to renovate it like a single family house. I have to lease it like a single family house. And with your short-term talents, you might be able to do two short-term rentals and a couple stable long-term tenants to keep your investment more stable. And you can do a hybrid blend. And so I would say you want to audit. What do you want to do with your equity? What is the return that you want to make? What markets do you want to be in? And then what products should you be looking at to meet that return expectations rather than just the next hot sizzly asset class? And I think a lot of people are in this jam right now with the short-term rentals. They bought a lot of good property that grew in equity and as that slowed down, the returns have diminished. And so you’re doing the right thing. Is my asset producing me the right return, right yield? And if it’s not, relo it out, but do that soul searching, find out you’re good at what you want to make on your return, then go look at the asset class because each asset class pays you differently
David:
A hundred percent. First off, I don’t think that you should have equity burning a hole in your pocket. I guess it doesn’t burn a hole in pocket. That’s cash equity. Would what? Burn a hole in the house. Don’t worry about it though. You don’t have to invest that $600,000. You could take your time. Second, just like James said, don’t ask the question of, well, what’s the best return out there? I don’t know that there is a best return out there. Ask the question of, well, what do my skills, my opportunities and my competitive advantage offer me? Do you have opportunities to put that money to place that someone else doesn’t because of the background? Do you have a construction background? Do you have a finance background? Are you really good with short-term rentals? And so you can buy more short-term rentals in the same area that you already have some now and get economies of scale. Think like a business owner. And then lastly James, what do you think about somebody like this lending out, maybe taking a HELOC on their property and lending that money out? Becoming a private lender to other investors?
James:
That is actually how banks make money and a lot of times people kind of forget that they borrow money and then they relend it out and they make an interest yield. I think that’s a great way as long as you are not jeopardizing your own asset. Before you do that, you really need to know how to vet a loan. You need to vet the operators and the more experienced your operators and the more you understand how to vet a hard money loan, the less risky it is. I do thousands of hard money loans a year between our company and myself privately. I have a default rate over a 16 year span that’s less than a quarter percent, or actually, excuse me, it’s less than 1%. Well, I’ve only lost money on a loan less than a quarter percent, but that’s by underwriting correctly underwriting the borrowers.
James:
I’d be cautious about taking out a heloc if you’re going to get it right now, HELOCs are about 9%. You’re going to re lend it out about 11 to 12% or maybe get some equity in there. And so the yield’s small and the gain would be small for you, and so make sure that you really understand it. You don’t want it being too high of risk for that little return. If it was me, I would look at 10 31 exchanging, go buying a property so I can get that depreciation right down the taxes and then maybe pull some out to invest it in hard money separately so you’re not taking on more leverage. I’d rather pay the tax than take on more leverage and have a smaller yield. Hard money is a great space if you want to make cashflow. The one negative is you pay high tax. You don’t get all the same benefits as you get from owning a rental property. The depreciation, the depreciation, the write-off expense, it’s ordinary income. You’re going to pay it. It’s a high. Typically I’m paying 40% tax on my hard money loans and there’s not a lot of relief there, but it is steady cashflow and it is how I live my life today. Everything I do today is paid for by my hard money passive income.
David:
Great point, James. Different opportunities come with different pros and cons, and one thing that creates analysis paralysis is investors that are trying to find the one option that doesn’t have any downside, but you’re not going to get it if you’re trying to avoid the tax implications. You’re going to take on more work or more risk. If you’re trying to get the best return possible, you’re probably going to have to learn a new thing. If you’re like, man, I just want a high return with no work, you could put it in a retirement account, but you’re not going to able to use the money for something else. So the key is to look at the downsides of every single option and find the one that the downsides affect you the least. Alright, our next question comes from Dan Way in Madison, Wisconsin. Dan says, I’m wondering how saving money in the future through refinancing would look.
David:
Most of the time I hear about refinancing, it’s when rates are lower than when you originally purchased the property. How can we ever expect to lower our monthly payments without the expectation of seeing lower than three to 4% rates? I’m looking to find my next property through Fannie Mae loans for the low down payment aspect. However, the monthly payments associated with these properties with the low monthly down payment make it almost impossible to cashflow, which I understand is harder to find in this market at this time in this first place. But how can I even rationalize these deals with little to no possibilities of lowering those monthly payments in the future? So this is an interesting question here, James. If you’re getting in at a three to 4% interest rate, you have no possibility of really refinancing any lower than that. It’s hard to picture rates getting lower than that.
David:
But if you’re buying property now and you’re waiting for a refinancing rates to go down, you don’t feel like you’re in control of your own investment future because you don’t control when the rates are going to go down. And it looks like Dan’s thinking, Hey, I’m willing to buy property that doesn’t cashflow right off the bat if I have hope that I can refinance these things in the future, but how do I rationalize these deals with little to no possibility of lowering the monthly payment in the future? So the question is, should we be buying real estate right now if we don’t know that we can refinance into a lower interest rate later? What’s your thoughts there?
James:
I think one thing I would really remember is interest rates. Cost of money is just the cost of the deal, and I don’t make my investment decisions based on interest rates. I make it based on cashflow and returns. Very recently, I just traded a property that cashflow $1,200 a month and I had a 4.25 rate on it and I traded it for a property that basically breaks even and I have a 7% rate on it, and there was a purpose to that. I think a lot of investors get caught on that rate. They’re like, I can never get rid of this rate, and I wouldn’t look at it that way. I would look at, okay, if it’s not working for me, I need to explore other markets to give me a better return.
James:
I think it’s important that you evaluate, Hey, here’s my strategy. You came up with my strategy. I’m going to use a Fannie Mae loan, buy a rental property with low down, I’m going to get better financing than an investor. That is your strategy. Now it’s going, how do I execute it? And maybe the market that you’re looking in right now is just not working and you need to go to outside markets because you can cashflow in this market. You just might have to explore cheaper ones. If that is your plan, I would go find the market that it works in, utilize that loan, and then look at pivoting your strategy out later. You can only do so many low down loans anyways. I would utilize it, put that money to work, but change how you’re implementing it, not how you’re doing it.
David:
That’s a great point. I’m also not a huge fan of the, I have a two and a half percent interest rate. I can never let it go. I’ve never heard a person who did really good in real estate. And when I talked to ’em about how they did it, they said, well, you know what? I got 3% interest rates and I held ’em the whole time. They always talk about the deal. They talk about the property, they talk about the increase in rents, they talk about the increase in value, which is usually a function of the location that they bought in or the time when they bought. It’s never about the rate. And so I just don’t know why we put so much emphasis on that other than the fact it just stings that it used to be better than it was. But isn’t it always like that?
David:
We talk about 2010 real estate. It used to be better than it was. I wish I had bought then in 2016, everybody thought that real estate was too expensive compared to 2010 Now. Now in 2024, we look back at 2016 prices and say, oh, I wish I had bought then. And you know what? In 2034, we’re going to be looking back at 2024 prices and saying, oh, I wish I had bought. Then we are not going to be thinking, well, the interest rates were seven and a half, and so it didn’t make any sense to buy it never actually works out that way. So try to take your attention off of the rate and try to think about the other ways real estate will make you money. Can you get a tax advantage from it? Can you shelter income from other things with it? Can you set it up to we’re making extra payments on your principal and pay it down quicker?
David:
Can you add square footage to the property? Can you add units to rent out? Can you buy in an area before everybody else gets there? That’s the next up and coming emerging market. Let’s just think a little bit more than just what fits into the spreadsheet. And sometimes those answers will pop out. All right, and that was our show for you all today. Just a little recap here. We talked about networking for commercial properties and how to build a pipeline, whether you should keep a property because of the interest rate or think about the overall returns, what to do to escape your nine to five with $70,000, and how to handle the problem of having a whole bunch of equity and not sure what to do with it. Thanks again, everybody. We love you. We appreciate you for being here. I know you could be listening to anybody to get your real estate investing knowledge from, and I really appreciate the fact that you’re coming to me. You can find my information in the show notes if you want to reach out to me personally, and if you’ve got a second, let me know in the YouTube comments what you thought about today’s show.
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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.
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Rithm Capital restructures CEO’s pay into incentive-friendly deal
New York-based Rithm Capital has changed the compensation package of its top executive, Michael Nierenberg, by reducing his annual base salary, bonus and time-based equity award. But the company also increased the performance-based share of the total equity award.
As a result, Nierenberg’s target annual compensation rose from $15 million to $17 million, according to a March 15 filing with the Securities and Exchange Commission (SEC).
A spokesperson for Rithm Capital declined to provide more details on the decision.
Nierenberg, the chairman, CEO and president of Rithm Capital, will have his base salary reduced from $1.25 million to $1 million, effective April 1, per the amendment to the compensation agreement signed in June 2022.
The parties agreed that Nierenberg’s annual target cash bonus will be reduced from $5 million to $4 million. And the time-based yearly equity award target will be cut from $4.375 million to $3 million.
Meanwhile, Nierenberg’s annual performance-based equity award will increase from $4.375 million to $9 million, “such that 75% of the target value of Executive’s annual equity award grants will now be in the form of performance-based units,” the filing states.
Nierenberg joined the company in 2013 and has recently repositioned it from a real estate investment trust (REIT) into a leading global asset manager.
He led the company during the tumultuous acquisition of Sculptor Capital Management in 2023, bringing in $34 billion in assets under management.
In the same year, Rithm also struck a deal to acquire Computershare Mortgage Services, including Specialized Loan Servicing (SLS), adding $136 billion in unpaid principal balance (UPB) of mortgage servicing rights (MSRs)
In the mortgage space, Rithm subsidiary Newrez restructured its distributed retail mortgage business, resulting in cuts to regional and divisional managers. It also included reduced compensation for loan officers, sources told HousingWire in February.
Nierenberg has been the president and CEO of Rithm since November 2013 and chairman since May 2016. Prior to joining Rithm, he held executive positions at Bank of America Merrill Lynch, J.P. Morgan, Bear Stearns, and Lehman Brothers.
In 2023, Rithm announced a $532.7 million GAAP net income, lower than its figure of $864.8 million in the prior year.
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Fannie Mae predicts that higher mortgage rates will stick around longer
Strong employment numbers and hotter-than-expected inflation data won’t provide the Federal Reserve greater confidence to ease its monetary policy in the near term, Fannie Mae’s Economic and Strategic Research (ESR) group said this week.
As a result, 30-year mortgage rates will remain higher for longer than expected.
In contrast to its previous forecast that mortgage rates will end the year below 6%, the ESR group now expects the 30-year fixed rate will close 2024 at 6.4%.
“Hotter-than-expected inflation data and strong payroll numbers are likely to apply more upward pressure to mortgage rates this year than we’d previously forecast, as markets continue to evolve their expectations of future monetary policy,” Doug Duncan, Fannie Mae’s senior vice president and chief economist, said in a statement.
Annual inflation increased to 3.2% in February and employers added 275,000 jobs last month — figures that came in higher than expected and reflected continued economic strength.
The Federal Reserve is likely to hold interest rates steady on Wednesday after policymakers wrap up their two-day meeting. An update of the central bank’s quarterly economic projections on Wednesday will provide a clearer picture of when rate relief might be in the cards.
“Still, while we don’t expect a dramatic surge in the supply of homes for sale, we do anticipate an increase in the level of market transactions relative to 2023 — even if mortgage rates remain elevated,” Duncan said.
Fannie Mae revised down its total home sales forecast to 4.91 million for 2024, down from its previous projection of 5 million.
But the government-sponsored enterprise also expects that existing home sales will trend upward in 2024, due in part to increased activity by households that will need to move due to life events and that are less sensitive to the interest rate lock-in effect.
“While we do not explicitly forecast new home listings, a future rise in listings is also expected to outpace the growth in sales, leading to a gradual loosening of the currently very tight housing market,” the ESR group stated.
“An increase in the months’ supply of homes for sales should also lead to some deceleration in home price growth over the next several years, even if a general lack of supply keeps home price appreciation positive despite affordability measures being stretched.”
Fannie Mae expects purchase mortgage origination volume to be $1.4 trillion in 2024, representing 12% growth from 2023 but a downgrade of $90 billion from its prior forecast.
Refinance originations are projected to total $397 billion, or $62 billion less than the prior forecast.
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MBA president sees opportunities for dual licensing in post-settlement landscape
Dual licensing is one of the opportunities being opened to the mortgage industry by the National Association of Realtors’ (NAR) pending nationwide settlement of commission lawsuits, according to Bob Broeksmit, president and CEO of the Mortgage Bankers Association (MBA).
“There will be market reactions to this settlement, and it will create openings for other business models where we want the buyer represented, but the seller may not want to pay 3% for a buyer’s agent,” Broeksmit said on Tuesday morning during the MBA’s National Advocacy Conference in Washington, D.C.
“One of those models could be that you, as lenders, license your loan officers as real estate agents and offer the buying agent service for less than a 3% fixed fee point. And some of you will say I want nothing to do with that. Others of you will say that is a great retention opportunity for my loan officers and the market will figure all this out,” Broeksmit added.
On Friday, NAR announced a settlement that includes a $418 million payment for damages, along with a ban on rules that allow a seller’s agent to set compensation for a buyer’s agent.
The settlement also includes eliminating fields that display broker compensation on Multiple Listing Services (MLSs) and ending the blanket requirement that agents subscribe to an MLS to offer or accept compensation. In addition, buyers’ agents must have written agreements.
If approved by a court, the changes will go into effect in mid-July.
On Friday, HousingWire reported that Absolute Home Mortgage is testing out a dual-licensing structure. Matthew VanFossen, CEO of the New Jersey-based lender, said in an interview that loan officers may start getting real estate licenses, and/or buyer agents may become licensed LOs.
It would “bridge the gap in lower commission” by these professionals “starting to take both sides of the deal,” VanFossen said. But if real estate agents transition to becoming lenders, the dual-license trend would also have an “unintended consequence” for marketing servicing agreements (MSAs) between mortgage companies and real estate brokerage firms.
Tax credit, ‘junk fees,’ Marcia Fudge
Broeksmit was critical of President Joe Biden’s housing plan announced during the 2024 State of the Union address on March 7. He said the proposals would “stimulate demand on the single-family side.”
“Any lender in the audience knows that they have a huge list of people who are qualified and able to buy a house; there’s just no inventory. So, we really need to focus on the supply,” Broeksmit said.
During the State of the Union address, Biden called for a $10,000 tax credit for first-time homebuyers and people selling their starter homes.
Broeksmit said that people selling their homes would buy another, so the tax credit would not be enough to improve supply. In addition, people sell houses based on their own circumstances, not because of government tax incentives.
“So, you’re giving money to people who would have sold anyway,” Broeksmit said. “I think a smarter thing to do would be to raise the exemption for the capital gain when you sell your house.”
Broeksmit also reacted to the decision by the Consumer Financial Protection Bureau (CFPB) to closely scrutinize what it described as “junk fees” imposed on borrowers when closing a mortgage.
A recent CFPB blog post stated that families closing a mortgage “often get an unwelcome surprise: closing costs that all too often are full of junk fees.”
According to Broeksmit, the CFPB can only review fees by reopening the TILA-RESPA Integrated Disclosure (TRID) rules, which the industry spent $1 billion to implement. “There’s no such thing as a surprise at closing,” Broeksmit said. Regarding the resignation of U.S. Department Housing and Urban Development (HUD) Secretary Marcia Fudge, Broeksmit said it’s not unusual for a cabinet secretary to leave before the end of a four-year term. In this case, “it’s a grueling job,” he added.
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Digital lender Better.com launches one-day HELOC product
Digital lender Better.com launched its One Day Home Equity Line of Credit (HELOC) product that will provide approval decisions to consumers within 24 hours of locking their interest rate.
Better launched its first HELOC product about a year ago. The One Day HELOC product is the latest upgraded version as the New York-headquartered lender looks to ramp up speed for customers seeking to access home equity funds.
“When we talk about the alternatives to a HELOC, consumers are frequently taking out credit cards or personal installment loans, and both of those products are expensive for anyone who has home equity … yet people still take those out, even though they have home equity, because they’re fast,” Better CEO Vishal Garg said in an interview with HousingWire.
“So, we said, what if we could do a HELOC at the same time that it takes you to get a personal installment loan or a credit card?”
Getting an approval decision for a HELOC generally takes about three to five days through a digital lender but multiple weeks from banks, Garg noted.
Qualified homeowners must provide required documents — including pay stubs, W-2 forms, mortgage statements and bank statements — within four hours of locking the rate for their first- or second-lien HELOC with Better Mortgage, the company stated.
Available in 49 states and Washington, D.C., the One Day HELOC is limited to a borrower’s primary residence or second home, as well as single-family homes, condominiums and townhouses that are classified as investment properties.
Better rolled out a One Day Mortgage product in January 2023 that allows customers to apply for a mortgage, get preapproved, lock their rate and receive a commitment letter within 24 hours.
“The demand has been crazy — over 80% of our mortgages today are One Day Mortgages,” said Garg, without mentioning origination volume.
Founded in 2014 by Garg, Better went public in August 2023 through a merger with special purpose acquisition company (SPAC) Aurora Acquisition Corp., nearly two years after Better’s initial timeline for an IPO.
In its first earnings report since going public, Better Home & Finance Holding, the parent of digital lender Better.com, reported a GAAP net loss of $340 million in Q3 2023.
Executives shared plans to trim expenses and expected a funded loan volume of $500 million in the fourth quarter of 2023.
The New York-headquartered lender is expected to report its earnings for Q4 2023 on March 28.
Better ranked as the 64th-largest lender in the country, originating $2.5 billion in the first nine months of 2023, according to Inside Mortgage Finance.
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National columnist examines CFPB reverse mortgage advertising data
A national syndicated columnist has taken a closer look at the reverse mortgage product category after reviewing data from the Consumer Financial Protection Bureau (CFPB) about the industry’s advertising practices, and she says that the product can have utility for older Americans as long as a prospective borrower properly understands it.
Julie Jason, an investment adviser and author, highlighted a CFPB report released in August 2023 that took a closer look at reverse mortgage advertising, both prior to and following the most restrictive period of the COVID-19 pandemic.
“The ads go beyond acquiring a reverse mortgage,” Jason said in her column. “They are also directed to households that already have a reverse mortgage, with offers of refinancing, which raises a concern. About 51% of the ads that went to people in the West region were refinancing ads in 2021-2022.”
The report led to a similar response from another commentator shortly after it was released. In September 2023, Forbes columnist John Wasik cited the CFPB data to recommend against taking out a reverse mortgage, but he did not include some key information regarding the advertising practices of the reverse mortgage business.
The CFPB report itself was centered primarily on direct mail reverse mortgage advertising and largely focused on companies that participate in the Home Equity Conversion Mortgage (HECM) program. It found that reverse mortgage advertising increased “significantly” in 2021 and 2022, registering 44 million and 48 million ads, respectively. These figures represent a sharp rise from levels observed in 2019 and 2020, two years in which the average total was 11 million.
The reverse mortgage industry enjoyed a boom in business during the onset of the COVID-19 pandemic, largely fueled by HECM-to-HECM refinance transactions. Refis comprised at least 50% of reverse mortgage volume in 2021 and 2022, according to data from Reverse Market Insight (RMI).
“While reverse mortgages can create a safety net in the right cases, they can backfire in the wrong cases,” Jason said in her column. “As always, be prepared to do your homework before getting a reverse mortgage.”
The CFPB report expressed concern that older Americans, particularly lower-income seniors, were being specifically targeted by the reverse mortgage industry. But some of the concerns outlined in the report stem from HECM program requirements that homeowners 62 or older are the only borrowers who can qualify for a loan.
The CFPB acknowledged that there are eligibility requirements but maintained its concern since the targeted potential clients could have greater levels of financial vulnerability.
Late last year, RMD reached out to industry marketing professionals at loanDepot to ask about the continued viability of direct mail advertising. Both said it was here to stay for the time being.
“I think there’s absolutely a place for the physical, still,” chief marketing officer Alec Hanson said in October. “We all get junk mail, of course, but I really think there’s going to be a place for the physical marketing that will continue to be relevant. It’s going to take creativity in what you send somebody, that can help break through the noise of just all the junk that also shows up there.”
Eddie Herda, loanDepot’s vice president and creative director of brand strategy, added that considerations about how and when direct mail is deployed should be sensitive to the needs of the senior demographic.
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Opinion: Aren’t real estate agents entrepreneurs?
Generally, people respect entrepreneurs. The show “Shark Tank” takes this notion to a new level as the entire program — successful season after season — glorifies entrepreneurialism and equates it with “The American Dream.” The secular success of Silicon Valley and the enshrinement of venture capital in the edifice of America (and now the world) further burnishes entrepreneurship. Risk and reward are the dyad that forms the basis of innovation and even of capitalism, as the story goes.
One can debate the relative merits of this argument; some would argue that stable jobs at large companies are the best alternative for most. Others would suggest that capitalism is based more on socializing risk than on taking it on headfirst. But whatever the case may be, there is a strange gap in perception when it comes to some professions. Some entrepreneurs are never given the credit for being so.
Are real estate agents undervalued?
Of these, real estate agents are in the crosshairs of the naysayers, who suggest that this group is largely paper-pushing, monopoly-driven, and low-value addition. It is a curious notion that needs to be unpacked. The issue here is not to glorify the profession but to suggest that the very logic used to elevate entrepreneurs of all sorts should also redound in favor of real estate agents. But it never does.
We’ve heard it all. “What value do they really add?” is a question we hear a lot. “It’s an easy 6%” is another truth bandied about. While the structure may not be perfect or logical (witness the recent lawsuit in Missouri), the canards that are passed off as truth are unfair to agents.
Let’s think about this in clear terms: Entrepreneurs take on enormous risk and expense to build a set of products, services, and relationships. They take on costs, remove themselves from the paycheck-life, and typically eat what they kill. They have enormous sunk investment before any notion of profit is possible. Well, so far, this describes the life of an agent as well.
Entrepreneurs and others sell their expertise and know-how. Consultants, lawyers, and accountants do that and so do bankers, engineers, scientists, and software developers. Entrepreneurs use their cultivated experience, acumen, and connections to build businesses. Sounds a ton like real estate agents.
Entrepreneurs spend money and resources on building products and services in the hope that someone, at some time, will buy them. They invest time, money, and resources in a thing that might or might not pay off. We respect them for that. What does this sound like? The life of an agent.
It’s just paperwork, right?
When presented with this sort of comparison, naysayers will often veer into anecdotes about a particular agent that made money just to “do paperwork” or a particular agent who is incompetent. Fair enough, but find me a profession in which the entire cadre is picture-perfect? Are all consultants, bankers, engineers, writers, lawyers, and accountants equally skilled and talented? We know the answer to that.
This is not to suggest that the role of the real estate agent won’t change, that the compensation structures are excellent, or that scrutiny is a bad thing. But the inconsistency and the ensuing negative perceptions make no sense.
To be honest, I believe that much of the perception stems from individuals being annoyed that they must pay when they sell their houses. But very few are honest enough to realize that whatever it is they do for a living, someone paid for as well. We all live in glass houses.
Romi Mahajan is CEO of KKM Group and CEO of ExoFusion.
This column does not necessarily reflect the opinion of HousingWire’s editorial department and its owners.
To contact the author of this story:
Romi Mahajan at romi@thekkmgroup.com
To contact the editor responsible for this story:
Tracey Velt at tracey@hwmedia.com
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Real estate agents continue to change brokerages: Relitix
Relitix’s Agent Movement Index continues to rise on a seasonally adjusted basis as real estate agents continue the trend of switching brokerages at a faster rate than 2023. Additionally, the drop in active agent count, representing those agents with a closing in the last 12 months, has been halted. This could represent a stabilization in the agent pool which is an additional helpful trend.
We are continuing a trend toward normalization of the housing market. In addition, we are watching the count of active agents very closely. The active agent pool has declined by about 14% since late 2022 but that trend may be stabilizing.
The monthly AMI value finished at 101.9 with a seasonally adjusted value of 96.2. The January values were revised upward to 98.4 and 95.7 respectively.
Trends in the relative movement of experienced real estate agents between brokerages are an important strategic consideration for brokerage and franchise leaders. The relative amount of movement fluctuates over time on a seasonal and long-term basis.
Methodology: The Agent Movement Index is published monthly and features monthly and seasonally adjusted, and 12-trailing-month values. The index is calculated using national-level data from a large sample of the nation’s most prominent MLS systems. The agent movement reflects the relative mobility of experienced agents between brokerages. The score is computed by estimating the number of agents who changed brokerages in a given month. To be counted the agent must be a member of one of the analyzed MLS’s and change to a substantially different office name at a different address. M&A-driven activity and reflags are excluded as are new agents and agents who leave real estate. Efforts are made to exclude out of market agents and those which are MLS system artifacts. The number of agents changing offices is divided by the number of agents active in the past 12 months in the analyzed market areas. This percentage is normalized to reflect a value of 100 at the level of movement in January 2016 (0.7313%). The seasonally adjusted value divides the monthly result by the average of the same month in prior years.
Analyzed MLS’s represent over 800,000 members and include: ACTRIS, ARMLS, BAREIS, BeachesMLS, BrightMLS, Canopy, Charleston Trident, CRMLS, GAMLS, GlobalMLS, HAR, LVAR, Metrolist, MLSListings, MLSNow, MLSPIN, MRED, Northstar, NTREIS, NWMLS, OneKey, RealComp, REColorado, SEF, Stellar, Triad, Triangle, and UtahRealEstate.
Rob Keefe is founder of Relitix Data Science.
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