Mortgage rates jumped last week amid a debt ceiling impasse and expectations of another federal funds rate hike. However, rates have started to reverse course over the last few days, following news of a debt agreement and an expectation that the Federal Reserve may pause hikes. 

On the fiscal side, President Joe Biden and House Speaker Kevin McCarthy struck a deal on Saturday to suspend the $31.4 trillion U.S. debt limit until January 2025 and cap government spending. On Wednesday, the deal passed in the House with a wide margin (314-117) and the support of both parties. The Senate is expected to vote on the bill on Friday, just a few days prior to Monday’s default deadline. 

Meanwhile, on the monetary front, there is a growing perception that the Fed may skip a federal funds rate hike in its meeting scheduled for June 13-14, despite a still-strong economy and persistent inflation. Officials want to assess more economic and bank lending data and may hike rates later this summer, as the Wall Street Journal reported. Fed officials are especially focused on Friday’s jobs report and signs that the labor market has finally cooled down. 

In the housing market, Freddie Macs Primary Mortgage Market Survey, which focuses on conventional and conforming loans with a 20% down payment, shows the weekly rate increase. The 30-year fixed-rate mortgage averaged 6.79% as of June 1, up 22 basis points from last week’s 6.57%. The same rate averaged 5.09% a year ago at this time.

Sam Khater, Freddie Mac’s chief economist, said the increase in rates measured by the survey happened “as a buoyant economy has prompted the market to price in the likelihood of another Fed rate hike.”  

“Although there has been a steady flow of purchase demand around rates in the low to mid 6% range, that demand is likely to weaken as rates approach 7%,” Khater said in a statement.

Other indexes show mortgage rates’ downward trend in the last few days amid lower fiscal and monetary pressures. 

The 30-year fixed rate for conventional loans, which hit 7.14% at Mortgage News Daily on Friday, was down to 6.88% on Wednesday. HousingWire’s Mortgage Rates Center showed Optimal Blue’s 30-year fixed rate for conventional loans at 6.72% on Wednesday, down from 6.85% on Friday.

The weeks ahead 

Mortgage rates usually follow the 10-year Treasury yield, which retreated from 3.81% on Monday to 3.60% on Thursday morning as a resolution to the debt ceiling impasse seemed to materialize, according to George Ratiu, the chief economist at Keeping Current Matters. 

“The spread between the 10-year Treasury and the Freddie Mac 30-year mortgage rate remains close to 300 basis points, a range typically seen during times of significant economic volatility,” Ratiu said in a statement. 

“While mortgage bond investors remain concerned about the downside risks for both the economy and housing markets, a successful debt ceiling bill is expected to bring mortgage rates lower in the weeks ahead,” Ratiu said.

However, according to Jiayi Xu, a Realtor.com economist, the successful passage of the debt ceiling deal does not provide an absolute safeguard against negative financial and economic consequences. 

“Once the deal is reached, the U.S. government is expected to quickly increase issuance of Treasury bills, which has the potential to cause short-term liquidity challenges at banks, as businesses and households may reallocate their funds towards higher-yielding and relatively safer government debt,” Xu said. 

“In order to keep attracting depositors, banks might be compelled to raise interest rates, thereby squeezing profit margins. This could lead to further rate increases across various loan products offered by banks, including both business loans and personal loans.” 



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The second quarter of the housing market is experiencing a unique set of circumstances that are shaping the real estate landscape. The housing market traditionally experiences heightened activity during the second quarter, with increased listings, buyer interest and home sales. However, a combination of factors such as higher mortgage rates, inflation, rising home prices, lower inventory levels and recent bank collapses have contributed to a sense of uncertainty among purchasers and sellers alike. 

This prevailing hesitancy is reflected in the market, as potential buyers adopt a more cautious approach when it comes to making real estate decisions and sellers adapt their strategies to current market conditions. 

High mortgage rates, low affordability result in low buyer enthusiasm 

The ongoing situation with high mortgage rates has resulted in a decrease in buyer enthusiasm in the real estate market. During the first quarter, 30-year fixed mortgage rates fluctuated between 6.1% and 6.7%. Experts predict that these rates will continue to vary between 6% and 7% throughout the rest of the second quarter. 

The affordability gap continues to widen, making it more challenging for buyers, especially first-time buyers with limited equity, to enter the market. 

If the trend of high rates continues, it is possible that home prices may lower as the year progresses. This could occur as sellers adjust their expectations to align with the changing market conditions, giving buyers slightly more leverage.

When mortgage rates eventually do drop, it often leads to increased activity from buyers who had been waiting on the sidelines, hoping for more favorable interest rates. 

Inventory remains tight 

During the pandemic, one of the main factors contributing to the steep rise in home prices was the limited housing supply. Although inventory levels have increased compared to this same time last year, they are still only about half of what would be considered a balanced market. The rise in inventory can be attributed to homes taking longer to sell once they are listed, as well as a decrease in the number of new listings entering the market. 


This article is part of our ongoing 2023 Housing Market Update series that wraps with a virtual event that brings together some of the top housing experts. The event provides an in-depth look at the top predictions for this year, along with a roundtable discussion on how these insights apply to your business. To register for the on demand version, go here.


According to the National Association of Realtors, the inventory of unsold existing homes reached 1.04 million at the end of April 2023, equivalent to approximately 2.9 months’ supply. Further, the ongoing “lock-in effect,” which continues to discourage households with advantageous mortgage rates — over 70% of borrowers — from listing their homes. This phenomenon is contributing to the limited housing supply, and it is unlikely to change unless mortgage rates decrease in the current quarter. 

Despite these challenges, there is an opportunity for homebuilders in the market. With buyers facing fewer choices in the resale market, many are turning to newly constructed homes, resulting in an unexpected boost in business for homebuilders. Builders are capitalizing on this trend by developing more spec homes and offering additional incentives such as rate buydowns, which are not typically available on existing homes. 

Homebuilders are also targeting first-time buyers who are frustrated by the tight housing market. Some companies are strategically building in less expensive areas and reducing the size of their builds to address issues of affordability. These efforts aim to capture the attention of buyers and provide them with viable options in a challenging market. 

Future outlook 

While the current market conditions have resulted in decreased buyer enthusiasm and intensified competition, experts remain cautiously optimistic about the housing market rebounding. Adjustments in seller expectations and potential drops in mortgage rates could create more favorable conditions for buyers. Additionally, the opportunities for homebuilders to cater to changing buyer preferences and address affordability issues provide hope for a more balanced and dynamic housing market in the future.

This column does not necessarily reflect the opinion of HousingWire’s editorial department and its owners.

To contact the author responsible for this story:

Russ Stephens at russ@apbbuilders.com

To contact the editor responsible for this story:
Brena Nath at brena@hwmedia.com



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The private-label and agency mortgage-backed securities (MBS) markets, the primary sources of liquidity for many mortgage lenders, are taking a beating so far this year.

That dour performance mirrors what’s happening in the primary mortgage market — where origination volume is down drastically year to date in 2023.

There’s no sugar-coating that stark takeaway, several industry observers said. The math bears it out.

Ben Hunsaker, a portfolio manager focused on securitized credit for Beach Point Capital Management, said in the current volatile high-rate environment, it’s been difficult for issuers to execute deals in the private-label space that offer more than a very thin gain in terms of net interest margin. Consequently, he said, in addition to high rates keeping many would-be homeowners on the sidelines, many thinly capitalized independent mortgage lenders (IMBs) are “not going to push” non-agency origination volume right now because of the execution hurdles in the secondary market.

“The return for the origination dollars they’re putting out just isn’t that great … and they might have to take credit risks [on new loans] that they wouldn’t have otherwise have to take,” risking what little capital they have left to spare, Hunsaker explained.

For agency loans, there’s a similar problem facing lenders. Hunsaker said the interest rate that IMBs need to charge the borrowers “in order for them to securitize [loans through the agencies] and make a profit has to be pretty darn high, to the point where it’s going to drive down volume.”

“So, that’s why you’ve see them [IMBs] all cut material amounts of headcount in their origination channels and their loan officers, etc., because their cost structure has to shrink,” Hunsaker said. “So, it’s a really tough environment, and they’re [IMBs] very much relying on their retained mortgage-servicing portfolios to keep the lights on at this juncture.”

The MBS math

A report released Thursday by real estate data firm ATTOM shows that in the first quarter of 2023, 1.25 million single-family home mortgages were originated nationwide­ — the lowest mark since 2000. The first-quarter 2023 origination volume is down 19% from the final quarter of 2022, representing the eighth quarterly decrease in a row; and its down by 56% compared with the first quarter of 2022; and off 70% from the the first quarter of 2021.

“Lenders saw opportunities dwindle even more during the first quarter as the longest slowdown in mortgage activity in at least 20 years continued,” said Rob Barber, ATTOM’s CEO. “… The latest slide extends a run that started two years ago and has carved away nearly three-quarters of the home-mortgage business. 

“Things remain uncertain in the near future, with the potential for interest rates and inflation to go either way, but the spring buying season will be a key indicator of whether things may turn around.”

The performance and outlook for the secondary mortgage markets are equally grim. A recent report by Kroll Bond Rating Agency (KBRA) shows that issuance of private-label prime, nonprime and credit-risk transfer residential mortgage-backed securities (known as RMBS 2.0) stood at only $13 billion in the first quarter of this year, “the second lowest quarter in the last three years, only higher than Q4 2022 at approximately $7 billion.”

KBRA projects that 2023 RMBS 2.0 issuance will “be just over $65 billion, down 36% from … $102 billion in 2022.”

“…We expect all sectors to decline in the remainder of 2023, mainly due to sharp interest rate increases that have decreased overall mortgage production and have made refinancing unattractive,” the KBRA report states.

Also greatly depressed is the performance of the agency MBS market — which, for the purposes of this analysis, includes Fannie Mae, Freddie Mac and Ginnie Mae. Data from SIFMA, a leading trade group representing broker-dealers, investment banks and asset managers, shows that year to date through April of this year, all-agency MBS issuance stood at $291 billion, down from $826 billion for the same period in 2022. 

A recent report from real estate investment firm The Amherst Group forecasts that the net issuance of agency MBS is projected at $325 billion for 2023 and $375 billion for 2024. Those figures reflect a substantial reduction in new and existing-home sales and refinancing.

By comparison, agency net MBS issuance in 2021, when interest rates were half of what they are today, came in at $870 billion. Net issuance in MBS represents new securities issued less the decline in outstanding securities due to principal paydowns or prepayments.

Volatile times

In recent weeks, the flap in the U.S. Congress over whether the nation’s debt ceiling would be raised or not also factored into the already volatile rate environment. The pending resolution of that crisis — marked by bipartisan approval of a debt-ceiling deal in the House on Wednesday evening, May 25 — represents a huge tragedy averted to be sure, according to market observers. Still, it doesn’t solve the underlying issues depressing mortgage originations and related secondary-market issuances.

“I believe by the time by the time you release this story, the debt ceiling will be fixed,” said Ryan Craft, CEO of real estate advisory and asset-management firm Saluda Grade, in an interview late last week. “And, if it’s not, then nobody’s going to be reading this story because there’s going to be huge, huge problems.

“I believe that investors have been calm about it and handled it [the debt-ceiling crisis] well,” he added. “Rates have moved up mildly during the last couple of weeks, but it hasn’t, I don’t believe, directly affected things in as catastrophic of a way that it could have because I think investors and markets believe that it has to and always will get fixed [the debt ceiling].”

Craft said the major headwind ahead, however, “is going to be inflation,” which is “hard to solve.”

“We’re taking a very blunt instrument toward it with higher interest rates [from the Federal Reserve],” he said. “If inflation continues to nag at us, then you can continue to see a Fed that’s going to view interest rates as the weapon to fight it, so that obviously is a huge headwind toward mortgage lending and capital-market finance around securitization issuance and debt.”

Brian Hale, founder and CEO of consultancy Mortgage Advisory Partners, said in his view the 30-year mortgage rate has to drop into the mid-5% range at a minimum before the market can gain any real momentum. As of now, with rates in the 7% range, there simply are not enough homeowners willing to put their homes on the market, which is crippling housing inventory.

According to Goldman Sachs, some 99% of homeowners now have a mortgage rate below 6%, and 28% of those borrowers are locked in rates at or below 3%, with 72% having rates at or below 4%.

“If spreads remain wide from Treasury debt to agency MBS, and then you put non-QM [a non-agency loan] at a wider spread than that, then the pricing of that and the ability to sell that to a consumer in the primary market is very difficult,” Hale said. “If you want to be successful in the mortgage business, you have to do business … with people who sell real estate.

“So, until people are willing to sell their houses and trade for another house, you don’t have enough inventory to drive normalcy in either the real estate market, which begets the [secondary] mortgage market.”

David Petrosinelli, a senior trader with InspereX, a tech-driven underwriter and distributor of securities that operates multiple trading desks around the country, said in his view the Federal Reserve can’t really do much more harm than it already has to the housing market, even if it bumps rates another 25 to 50 basis points before pausing — or dropping the benchmark rate, now in the 5.1% range.

“Ultimately, however, I think mortgage rates will be lower by the end of the year,” he added, offering a note of optimism. “I think that will help on the supply side, even though we will continue to be challenged there for sure, but I think [secondary market] deals will become more executable.

“If I had to say where I had maybe the most conviction, I think it’s that mortgage rates will be lower by the fourth quarter, or maybe even earlier than that. …. And I think that’s a recipe for a healthier housing market.”



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Connecticut-based lender and servicer Planet Home Lending has acquired the assets of Illinois-based retail lender Platinum Home Mortgage Corporation. The financial terms of the transaction have not been disclosed. 

With the acquisition, Planet will inherit the majority of Platinum’s origination staff and branches throughout the country. The deal also expands Planet’s footprint in the Midwest, Northwest and West Coast markets. 

Founded in 1993 by Bill and Michael Giambrone, Platinum has 22 branches and 79 active loan officers, according to the mortgage tech platform Modex. The company’s assets will add to Planet’s 30 branches and 128 active LOs. 

“I don’t think retail is great for anybody right now with rates high and home values high, but it’s a good time to be investing in retail,” Michael Dubeck, CEO and president of Planet Financial Group, parent of Planet Home Lending, said in an interview.

“We’re taking a long-run view that it’s going to pay off. It’s an investment down the road,” the executive added. “We look to acquire right-sized, financially solid distributed retail companies.” 

Platinum’s current president and CEO, Lee Gross, will join Planet as senior vice president and continue to lead the Platinum team. According to Gross, the move to the new company brings “access to improved pricing, technology and marketing to Platinum’s branches.” 

“In addition to agency and GSE home loans, Planet also has niche products tailored to today’s tight real estate markets, including self-funded One-Time Close (OTC) construction loans as well as manufactured housing and renovation mortgage loans,” Gross said in a statement.  

Planet, which originates loans through the correspondent and retail channels, plans to grow organically and via mergers and acquisitions. However, according to Dubeck, the lender has no plans to enter the wholesale space, as it would create channel conflicts. 

In April 2022, Planet agreed to acquire assets from Homepoint’s delegated correspondent channel for $2.5 million in cash. The transaction doubled Planet’s clients base in the correspondent space, with 60% of these clients delivering loans monthly to the lender, Dubeck said.  

“Correspondent is probably our most mature and efficient channel,” Dubeck added. 

Planet was the third largest correspondent lender in the first quarter of 2023, following Pennymac Financial and AmeriHome Mortgage, per Inside Mortgage Finance (IMF) estimates

The lender originated $6.5 billion in mortgage loans from January to March, with $6.3 billion from the correspondent channel. According to IMF, it was enough for the lender to become the 9th largest mortgage lender in the country.

Regarding its servicing portfolio, it had $68 billion in owned mortgage servicing in the first quarter of 2023, the 29th largest servicer by this metric in the U.S. In early May, the company launched a commercial servicing division led by James DePalma and Janina Woods.  



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The debt ceiling deal struck by President Joe Biden and House Speaker Kevin McCarthy on Saturday represents momentary relief for the mortgage market, as it reduces the chances of a federal government default. But that’s just the first step in an ongoing effort to avoid the chaos. 

The deal has to receive Congressional approval before the U.S. Department of the Treasury runs out of cash by Monday. And, if approved, it does not solve the high debt level problem, which means that other risks, such as a U.S. debt downgrade, are still on the horizon. 

Regarding the mortgage market, on the one hand, the debt-ceiling agreement put an end to the recent mortgage rates’ upward trend to the highest level in two months. On the other hand, it resumes student debt payments, affecting potential homebuyers

According to Mortgage News Daily, the conventional loan 30-year fixed rate reached the 7.14% level on Friday amid the debt-ceiling drama. After the tentative deal announcement by the leaders on Tuesday, it went down to 7.02%. 

“In the short term, we watched mortgage rates over the course of the past 10 days go up significantly, so a fair amount of damage has already been done,” Melissa Cohn, regional vice president of William Raveis Mortgage, said in an interview. 

Cohn added: “And now it’s a question of whether or not the debt ceiling agreement that McCarthy and Biden came to this weekend can get voted upon. I wouldn’t say it’s a done deal. There are a lot of people that disagree about parts of it and are saying that they won’t vote for it. Every day that goes on, it’s a bad day.”

Analysts at Goldman Sachs also recognize the challenges related to Congressional approval. The House is slated to vote on the agreement on Wednesday and the Senate is scheduled for Friday, though procedural delays could push the vote into the weekend. 

“Reaching a deal between leaders has been the highest hurdle and this agreement eliminates most of the uncertainty regarding the impending debt limit deadline, though the legislation must still pass the House and Senate,” Goldman Sachs analysts wrote in a report. “Regardless, the chances that Congress allows the June 5 deadline to pass without action now appear very low.”

What’s in the agreement? 

Biden and McCarthy’s “Fiscal Responsibility Act” suspends the $31.4 trillion U.S. debt limit until January 2025, with the ceiling set at whatever level it reaches when the suspension ends. In practice, it pushes the problem to after the next presidential election, economists say. 

In turn, non-defense spending will be capped at current levels for 2024 and will rise by 1% in 2025. The spending deal looks likely to reduce spending by 0.1-0.2% of gross domestic product year over year in 2024 and 2025, compared with a baseline in which funding grows with inflation, the Goldman Sachs analysts wrote. 

The deal also makes several policy changes. It requires some older Americans who receive food stamps to find jobs; halts funds to hire new Internal Revenue Service staffers; brings new measures to get energy projects approved more quickly; and saves billions of dollars in unspent COVID relief, among other things. 

But one of the bill’s topics has the potential to affect the mortgage market indirectly: the end of the student debt payments moratorium by the end of August.

The Fiscal Responsibility Act, as it is now, prohibits the U.S. Secretary of Education from using any authority to suspend payments and waive interest. Meanwhile, Biden’s student loan forgiveness plan, which forgives $10,000 to $20,000 in student loan debt for most borrowers, is expected to be decided by the Supreme Court. 

“All this year, because of the anticipation that the student loan payments were going to resume in the fall, banks had been including that debt when qualifying borrowers. So I don’t think it has a big change,” Cohn said.

“I mean, obviously, if it were to get student debt payments deferred for a longer time or forgiven, that would have perhaps a positive impact. If you don’t have to make that payment or the debt is forgiven, you have more buying power. It’s especially important in a higher rate environment,” Cohn added. 

Pressure from different sources 

The agreement brings some relief to the mortgage market, but there is still pressure from different sources. There’s still resilient inflation running at double the target and the Federal Reserve’s (Fed) ongoing tightening monetary policy. In addition, a banking crisis is still haunting the financial markets. 

Logan Mohtashami, the lead analyst at HousingWire, said, “The debt ceiling issue, for now, is over unless something unforeseen happens, but the banking crisis and the mortgage stress are still here.” 

“We might get some short-term reprieve in bond yields and mortgage stress [resulting from the debt agreement],” Mohtashami said. “However, the spreads between the 10-year yield and 30-year mortgage rates have worsened since the banking crisis started. It will be critical to see how the bond market and mortgage spreads act this week.” 

Scott Olson, executive director at Community Home Lenders of America (CHLA), recognizes no direct connection regarding policies in the Fiscal Responsibility Act that affect the mortgage industry.

“But mortgage rates have been creeping up in recent weeks because of uncertainties, so an agreement that brings some deficit reduction and removes this uncertainty over default can only be a positive development for the mortgage industry,” Olson said in an interview. 

The agreement represents a relief from the fiscal policy side. However, there are still pressures from the monetary policy side. “Regarding the Fed’s monetary policy, inflation seems to be negative and naggingly persistent,” Olson said. 

The Fed is set to meet on June 13 and 14 to decide on the new federal funds rate. 



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Whether you believe the worst market conditions are now behind us or that the coming months will remain turbulent, there’s no doubt that title related businesses will need a combination of thrift, ingenuity, innovation and persistence to be successful for the foreseeable future.

And yet, it’s during times just like these that tomorrow’s leaders and success stories often emerge. More often than not, the small firms that become big, or the mid-cap businesses that eventually make a public offering, can explain their growth by using a new technology, business model or even product in a way that not only differentiates them during market turbulence, but positions them for sustainable success when the tide turns.

While settlement services businesses are somewhat hamstrung when it comes to introducing new products or pricing, there’s still a lot of room for growth and innovation in the title industry. Fannie Mae forecasts $1.6 trillion in origination volume this year. While that’s nowhere near the over $4 trillion in origination volume we experienced in 2021, it still signals ample opportunity for the firms willing and able to find it while separating themselves from their competitors.

Don’t grow the geographic footprint alone

One tried and true strategy for title businesses that are seeking to build revenue when order counts slip is growth. Because the title and settlement services business is closely regulated at the local level, a title firm needs to have some kind of presence or capability within the geographic footprint it serves.

Accordingly, title businesses may seek to cover more territory — preferably in a cost-effective manner — to increase their own revenue during times when origination volume declines. There are a number of ways by which they can do this, including affiliated arrangements, work share agreements or even less formal forms of partnership.

That said, simply entering a new market takes more than a new office and a marketing campaign. This is especially true if the growing title firm has little experience in the new footprint. It might be one thing for a title agent to add a few new counties in its home state, or some just across the state line. But it’s another matter entirely when a title businesses seeks to expand into multiple states or even “go national.”

Perhaps the most important element of building a growth strategy is compliance. Compliance isn’t a topic most owners approach with enthusiasm. It can be expensive, and if the approach fails, serious and expensive consequences can occur.

But the patchwork of state, county and municipal requirements — in addition to federal rules and regulations — demands that a growing firm have access to an attorney or legal resources deeply familiar with the industry, as well as the region in which that firm intends to grow.

As is usually the case in market cycles similar to this, it seems Realtors, lenders and title agencies are scrambling to form new joint ventures or affiliated arrangements on a daily basis. This can be a profitable strategy.

But far too often, these JVs are formed without enough effort in determining what’s required — not only to stay compliant, but to be cost-effective. Additionally, JVs are garnering increasing regulatory scrutiny as their number (and the number of improper ventures) grows.

If you’re seeking to build or join an affiliated arrangement, be sure your resources are familiar with the sometimes unclear requirements for a compliant venture. Cutting corners is not an option. Start by squaring away expert compliance resources.

Expand your service offerings, but do it the right way

New lines of business and the appropriate marketing to announce them are another great way for title firms to grow revenue in down cycles. Title firms are, of course, limited in the type of transactions they can perform.

However, a title agency that lacks a commercial real estate capability, or which relied primarily on refinance volume in years past, has the option of growing. Again, just hanging out a shingle — especially for commercial closings — won’t get it done.

The old saying that one has to spend money to make money is particularly true when a title firm seeks to grow its service offerings. This cannot be a temporary initiative, although far too often we’ve seen agents start to offer things like REO services, only to be outdone by their lack of planning and expertise.

Growing new lines of business is not a quick-fix approach — not if it’s to be sustainable. Again, it’s important to invest in compliance resources as well as deep expertise from within the service area to even begin to formulate a solid strategy. Many times, a well-regarded veteran from the new area of expertise can be a good place to start, and they likely have a number of strong relationships that can give the new division a boost when its launched. These kinds of resources don’t come cheaply, however.

That’s why title firms seeking to grow their service offerings should also take a good, hard look at their own operations and workflow.

Have you “automated everything automatable” yet? Do your various technologies work seamlessly, or do you still have too many staffers spending far too much time doing things like data entry or stare-and-compare tasks?

Similarly, does your existing technology match what is needed in the new service offering? Will it work well with your new clients in that market segment? The answers to these questions will invariably play a major role in how well your new offering performs.

Get the message out

As in industry, we talk a lot about marketing. Far more often than not, however, we mean “sales” or “development” when we say it. Both sales and marketing are necessary, especially when looking to establish a new geographic presence or service offering.

It’s best not to delegate these tasks to people with other roles in the business. Not all experienced sales executives are good marketers and vice versa. And even a great marketer can’t build great marketing if they’re also constantly attending closings, managing a team of escrow assistants or performing other tasks unrelated to marketing.

It’s worthwhile to make the investment, whether using or hiring internal resources or bringing in outside experts.

As to the form your marketing should take, that’s really a secondary question. In today’s world, it’s important to have a crystal clear message that accurately describes what you offer and why it stands out from other offerings. This will usually need to be conveyed through numerous methods — social media, direct email marketing, public relations, conference attendance and digital marketing — to stand out from all of the other messaging your prospects are deluged by on a daily basis.

But it’s the messaging and how it resonates with your target market that will ultimately determine whether or not your prospects learn that you’re now in their market or offer commercial real estate, or whether they move on to your competitor.

We’ll eventually be talking about a market spike — be it in refinance or purchase transactions. All down cycles come to an end.

However, we’ll probably also be talking about some new names when we talk about who’s the most successful in our industry. Some of those names might even be old names that have found new ways to reach the next level.

Now is the time to position your firm for the next up cycle. But it starts with how much time and investment you are willing to make in order to make it happen.

Scott Kriss founded Kriss Law/Atlantic Closing & Escrow in 2008. He quickly grew the full service title and settlement services firm into a national provider. Today, Kriss Law/Atlantic Closing & Escrow is licensed in 30 states and partners with mortgage lenders of all sizes, nationwide.



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Artificial intelligence (AI) is a buzzword in virtually every industry right now. And, in the mortgage industry, AI will play an instrumental role in helping loan officers to be more efficient, according to Nima Ghamsari, Blend‘s co-founder and CEO.

“Some of these borrowers have hundreds of products that they can choose from. How is an LO supposed to keep that in their head? It’s too much context and this will be a supercharger for them,” Ghamsari said in an interview with HousingWire

The most difficult part, however, is building the technology. To be effective, the AI tool would need to understand each consumer’s unique financial situation and all of the mortgage products and programs, Ghamsari explained.

Another crucial part of building the tech is having “a lot of people” using the system, which is an advantage for Blend, according to Ghamsari. Blend’s mortgage banking software processed 23.2% of the total market originations in the second half of 2022, up from 14.5% in the second half of 2021.

Read on to learn more about the opportunities and challenges that AI poses to the industry, what the company has to say about the risk of getting delisted from the New York Stock Exchange (NYSE), and insight into Blend’s roadmap for profitability. 

This interview has been condensed and lightly edited for clarity.

Kim: Blend has played a critical role in powering about a quarter of the mortgages that originated during the refi boom. It seems like the next big wave is artificial intelligence. How is Blend preparing for the era of AI in the industry

Ghamsari: I think on the AI piece, it’s about combining an understanding of what the client is trying to accomplish. 

Now that a system can understand the essence of the question the consumer is trying to understand, it (AI) can actually do that work for the LO in the background, and then when the LO shows up, that work is already done. 

Some of these borrowers have hundreds of products that they can choose from. How is an LO supposed to keep that in their head? It’s too much context, and this will be a supercharger for them. 

In order for that to happen, you have to have a lot of people using it, which Blend does. You have to be connected to all these data sources and internal systems to both the customers and etcetera — and we are. You also have to be something that the LO uses on a regular basis. 

So we’re in this position where I think we can really help the industry, and particularly LOs, who are trying to make things work for consumers.

Kim: Then I assume AI could also take that extra step in correcting some information for LOs that they provide for borrowers?

Ghamsari: I think there’s a separate piece, which is for efficiency. There’s a lot more opportunity to understand what’s required to be done on the loan file after it’s already gotten through the space.

Understanding those requirements and documentation, and actually understanding the data and saying, ‘we need this additional piece of information,’ or ‘we extracted this information, and now that loan looks like we need to change something about it to correct it for whatever reason.’

So I think that’s a separate opportunity that I think is also potentially pretty compelling. Almost think about it as like a co-pilot for an underwriter. That same exact capability could exist.

Kim: Are there any features that Blend is trying to build as the industry gets more involved with AI?

Ghamsari: Nothing I’m prepared to share today, but we are definitely looking very closely at the space. Blend has some unique things — like how many people use our system is very important, and all the systems we’re connected to are very important. All the history of data we have is very important.

So Blend is that interface between LO and the consumer today for a lot of our customers.

Kim: I’m curious how in what ways AI  can help with homeownership and tapping into a potential customer base.

Ghamsari: I think that’s the area of the market that will benefit the most from AI. Most people who are first time homebuyers, or in underserved markets, don’t understand all the products and all the things that a bank could help them do or a lender could help them do.

Imagine you’re a lender or an LO or a bank who is trying to serve the mass market. In order to serve them really well, you have to be able to do that work on every file, and it’s just not scalable to build something that requires LOs to spend 20 hours on every file bill to answer that question.

So that’s why I think the co-pilot model is especially important here, because you still want that borrower to have that LO. But you want that LO to be able to do a lot less work to serve that customer. 

Kim: The big issue when it comes to AI is getting rid of that bias in machine learning. How can we tackle that? 

Ghamsari: I think this is where having a human in the loop is important. There are programs – whether it’s the government, or banks – in place to allow for these higher LTV or lower-income borrowers to get access to credit. 

I think what this (AI) does is — in theory — this unlocks the ability to make every specific situation as personalized as possible, which is what an LO would do if they could spend 20 hours in every file.

Kim: Are there any other challenges you foresee other than the bias factor in AI?

Ghamsari: I think the technology is extremely difficult to build. It’s not just taking some large language model or adding open AI to your platform. Building something that can understand the complexity of a consumer’s financial situation and understand all the products and programs that are out there — and understand the intent of the consumer. All three of those things are actually extremely complicated.

Kim: I want to shift focus to the notice Blend received from the NYSE about not being in compliance with the bylaws. Blend’s stock price has been up since its first quarter earnings call, trending closer to $1 level led by revenue above target and shrinking operating loss. How confident are you that Blend can meet NYSE’s bylaws?

Ghamsari: We have a plan to meet it. I feel good about that plan.

Obviously, I think there’s just general challenges. We are growing market share a lot right now and helping our customers a lot. What I’ve always said is – first and foremost during times like this – it’s not about selling customers new things. It’s about being there for our existing customers.

I want everyone to use it (Blend) so they can benefit. Let’s get a prescriptive roadmap for our customers to help them, and all those other things will take care of itself.

Kim: I’m curious what the board’s response was when Blend received that notice.

Ghamsari: We knew it was coming. It wasn’t a surprise to us and we had a plan. We wrote a letter back to the Stock Exchange saying here’s our plan.

So we were prepared, we knew it was coming, and we had a plan to deal with it.

Kim: We are in a downturn of a cyclical business. I remember you saying that in Q4 of next year, Blend will have positive operating profit numbers. What are some of the crucial external and internal factors for Blend to recover its share price, which once traded above $20?

Ghamsari: We said net operating loss will be less than $20 million in Q4 of this year, and then we’ll be profitable next year. We’re going to hit that plan.

We have different levers in our business. We have a lot of discretionary investment that we’re doing for the sake of our customers. Blend has the balance sheet to do it. We have the customer base that needs it, and will stick with us. So we have to keep investing; that is our job.

If the macro gets materially worse, we’ll pull back on some investment. But we have now scoped it out to where we feel really good about that. 

In terms of getting the stock price back to a certain number, all I think about is, how do I keep making our customers get more value from us even for things they don’t pay for? How do I use that to get customers to want to do more with us? Because if we make them more successful, they’re going to want to do more with us. 



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Real estate investing has changed a LOT over the past few years. For most people getting into rental property investing in the mid-2010s, profitable properties were plentiful, cash flow was almost automatic, and equity was flowing in the tens (if not hundreds) of thousands every year. Unfortunately, this real estate market is long gone. Now, there’s blood in the streets as new investors try to salvage sickly-looking deals that don’t cash flow and come with pathetic-looking profits. And maybe, just maybe, that’s why now is the best time to buy.

Make no mistake, real estate investing isn’t easy, and just buying any house WON’T make you rich. But, the 2023 housing market has far more opportunity than most people think, and David Greene, Henry Washington, and Rob Abasolo are here to explain how. These three investors have been gobbling up rental properties as quickly as possible. And even with lower margins, slim cash flow, and limited equity, there is some method to their madness.

If NOTHING you’re looking at is cash flowing and almost every home seems overpriced (especially with today’s mortgage rates), this is THE episode to tune into. In it, David, Henry, and Rob will detail how you can “create” a profitable property while the masses sit on the sidelines, as well as go over real, authentic deals they’re doing today to show you it isn’t impossible to invest in 2023.

David:
This is the BiggerPockets podcast show 772.

Henry:
The people buying now are the people who are buying in 2009, right? Those people were pumped that they bought in 2009. This is what it looks like. This is what it looks like to build wealth. It’s not pretty now, but I think it’ll be beautiful in the long run.

Rob:
We’re always going to be pumped that we bought now 10 years from now.

David:
I say that constantly. Tell me a person you know that bought a house 30 years ago that says, “I wish I never would’ve done it.” What’s going on, everyone? This is David Greene, joined by my fellow avengers, Rob Abasolo and Henry Washington with a special episode for you guys today. We are going to be talking about how to analyze deals in 2023 in the challenging market that we’re in. The reason that we are making the show is we actually received a one-star review on Apple podcast. We wanted to share that with everyone so they can understand where we’re coming from. The review was titled, “It used to be my favorite podcast.”
The reviewer says, “I used to listen to the show religiously, but it feels like it gets more negative with each new episode I listen to, and it makes real estate investing seem unattainable.” Now, that was a bit of a bummer. However, we understand where the person’s coming from, right? The one-star review may not have even been reflective of us. It could have just been frustration with the market, or it might be that we’re shooting straight with everybody. We’re in a position here where we could tell you that everything that glitters is gold, and real estate is easy, and you should quit your job, and spend your whole day listening to us. Replace your active income with passive income.
But for those of you that are living in the real world, you’ve seen how unattainable that can actually feel. The show is a reflection of what we’re seeing in the market, and we value integrity over money. We’re never going to tell you anything that we don’t actually think will work, and it can feel like a bummer. We get it. So in today’s show, we are going to be replying and responding directly to this concept that real estate feels unattainable, and giving you some tips, techniques and tricks that work in today’s market as well as where expectations could be set, and what we are all doing to make deals where other people are missing them.
Before we get to the show, today’s quick tip is brought to you by me, and it is, “Change your expectations when it comes to real estate investing, and stop looking at it only for a cash on cash return.” We are going to talk about the internal rate of return. We’re going to talk about tax savings. We’re going to talk about adding equity, buying equity, converting equity, a lot of more high level stuff when it comes to real estate investing that the savvy investors are using to still get returns on their money outside of just a straight cash on cash return. So, think about real estate a little bit differently, and I think after today’s show, we will have helped you do that. Anything you guys want to add before we get into it?

Rob:
Well, we’ll uncover later that I’m not good at free styling, so listen to the very end to understand this reference, but no.

David:
That is perfect. Let’s get into it. Robuilt, Henry Washington, welcome to the BiggerPockets podcast. First and foremost, how are each of you today?

Rob:
Good. Good. Thanks for having me on, man. It’s always been a dream to be on this show.

David:
I know you actually mean that today because you’re not wearing a black pocket tee. You’re wearing a white shirt.

Rob:
That’s right.

David:
Your camera lighting is brighter than usual. You have a bit of an angelic glow as we’re recording here.

Rob:
New year, new me, baby.

David:
Yes. Wonderful. Henry, back in the purp as always. I see. Still looking cool. How are you today?

Henry:
I am fantastic, bud. Happy to be here talking to my buddy Rob and David.

David:
Yeah, thank you for the also ran mention there. If people don’t understand what I’m talking about, go follow us on YouTube. You will see more than you were just hearing, and all of this will make sense. Now, today’s show is going to be a little different. We are venturing into territory that most podcasts are afraid to, but because I’m hosting this thing, and I fear no evil, we’re going to get right into it, and direct this. We received a review about the show, which I think bears repeating with everybody. So, this came from… It was a review title that was labeled, “Used to be my favorite podcast.”
The reviewer said, “I used to listen to the show religiously, but it feels like it gets more negative each new episode I listened to, and it makes real estate investing seem unattainable.” The three of us put our heads together there, and thought like, “This is probably a common theme a lot of people are feeling,” that they started listening to BiggerPockets podcast. They started listening to real estate investing online, and it was this really shiny, blustery object like, “Hey…” I don’t know. Is blustery good? I’m even thinking luster, and I just added bluster, so opposite of bluster, lustery object, very appealing. You’re hearing all these stories of people that quit their job after six months, or became multi-millionaires on the power of real estate investing.
People charge into this thing super excited about real estate investing, and then they either get their clock cleaned, or they can’t find the deal that people explain that they got, and they get discouraged and think it’s something wrong with them, or they buy bad deals, because they’re trying to figure out, “Well, if you just buy real estate, it’s supposed to work.” Then no one talks about it. No one jumps up and screams, “I lost a lot of money making bad decisions.” They just slink into a hole of shame, and sit there. We want to just have an honest response to this that real estate is harder than I think it’s ever been.
So, let’s start off with you, Rob. What is your overall experience with the market now versus when you first started investing, and when was that?

Rob:
I’m going to answer that, but before I do, I just want everyone at home to know that we read every single review, and we take them all very seriously. When someone leaves us a five-star review, it makes our day. When someone leaves us a one-star review, which is rare, but that’s what happened here, it bums us out. We want to make sure that the show relates to everybody. So, going back to your question, David, what was it?

David:
I was talking about how you never listened to me.

Rob:
Yeah, that’s on me.

David:
What was real estate like when you first started investing, and when was that?

Rob:
I started investing in 2017, so around six years ago. Back then, for me, it was the Wild West. I think true Wild West for short-term rentals in Airbnb was probably like 2010 to 2014, really probably 2010 to 2017. You could have done anything, and made money on Airbnb. But me getting in, that’s when people started to figure it out and figure out that you could actually make big money on it. At the beginning, it was people just renting out a bed in their house, and they were making extra cash on the side. But 2017 is where people were like, oh man, “We could rent an apartment, and then put it on Airbnb, and make $2,000 or $3,000 a month.”
At that time, it was really, really, really hard to fail. I will totally never say that me getting into this, and building what I built was because of any particular genius. It wasn’t because I made the right decisions. It’s just because I happened to get started when I got started, not necessarily from a time standpoint, but I just started and figured it out relative to the market that I was in. So, I could really walk into any deal, and have a large margin of error. The returns from 2017 to 2021 were pretty unreal. 2021 was the most money that anyone really ever made in this industry. Then 2022 and 2023, that’s when we started to see the calibration in things hitting what I think is really back to normal.
So, a lot of people right now are… They’re a little nervous because they’re like, “Oh my gosh, you’re making way less money.” Overall, I would say most hosts are making between 15% to 30% less year over year on their properties, and that’s a big hit. I can totally understand why anybody would be scared at that metric, but I think that that’s a lot closer to what it was before 2020 and 2021. So when you evaluate everything, it does seem scary, but I just think that we’re calibrating to more realistic and normal returns. Does that make sense?

David:
Yeah. 2021 was the era of steroids in baseball. There is an asterisk that year. It was the best you’re ever going to see. Now that more people are getting into this, like you were saying, there’s maybe 15% to 30% less returns per property, but that’s because there’s probably 15% to 30% more people that are getting in this, that that money is getting spread around four, which is how equilibrium works. We have the option to tell you the truth, which is what we at BiggerPockets believe is the right approach, and all three of us that are on this show is integrity is more valuable than money. I was just telling someone that earlier today, or try to put some lipstick on that pig, and sell you on a dream, get you all hyped up, get your advertising dollars, and then watch you get destroyed when you realize, “Oh, it’s a lot harder to hit that baseball when you’re not on steroids.”
I mean, I think that’s one of the reasons 2021 was so good, and a lot of people do use that as their baseline, which would be a mistake. Henry, what about you? How long have you been investing, and what was it like when you started?

Henry:
Man, every time I do a show with Rob where we talk about our history in investing, it’s so aligned. I also started in 2017, so I’ve been doing this for just about six years. When I look at what I was buying back then, we were buying single families, small multi-families, we were buying them at about a 30% to 40% discount. We were either renting, mostly renting them, and then I would do the occasional flip. I was getting at about… At that time, I was getting between 5% and 7% interest, and so when you hear Rob talk about he feels like this is getting back to normal, that is exactly how I feel. I mean, now we’ve gotten a little past normal on the interest rate side now, because we’re up above that 6% and 7% for investors anyway getting loans, but it has felt more like a reset than a crash or what some people are saying.
So, yeah, it’s been a reset. I think there’s a caveat to my strategy versus Rob’s short-term rental strategy. It’s that I’ve always been trained to look off market. So, I’ve been building systems and processes to help me find off market deals before I even knew that that’s what I had to do. That’s just how I learned this business, and so if my deal flow hasn’t changed from then to now, I get the same amount of deals for the same amount of effort, because looking off market, you’re more buying situations than you’re buying houses, and there’s always going to be a situation where people are willing or need to sell at a discount.
That hasn’t changed, but what has changed is the disposition strategy, because the market is going to reward you in some way, shape or form. It’s either going to reward you through appreciation cash flow or equity. So when I first got started, I was holding a lot, because it was fairly easy to cash flow. I could get deep discounts. I have… I’m in a market where I can get fairly decent rents, and I’m in a market where the entry price, the purchase prices aren’t through the roof. I’m not in a California or a Florida, Texas New York realm, and so being in Arkansas, I can get good entry prices. So, almost every deal would make sense from a rental perspective, so we kept a lot.
But then 2021 hit, and I started doing the math on, “Well, yeah, I could rent this, and make a few hundred dollars a month net cash flow, or I could sell it, and make $90,000. I just bought it six months ago.” It was really hard to hold those, and so we were capitalizing on what the market… In sports, David, we say you take what the defense gives you, right? The defense was saying, “I’m going to give you a big bag of cash for this property, and it’s going to take you 15 to 20 years of cash flow to even get close to the amount of money you’re going to make if you sell it.” So, we pivoted by selling a lot in 2021, and I used that as a time to trim the fat in my portfolio. I had properties that were cashed on a little bit that I didn’t love. We would sell them.
If I had properties that were more maintenance intensive than I had hoped, we would sell them, because we could get paid for selling them in that market. So, now, I would say that the defense is telling us, “Well, you’re not going to make a ton if you sell it, and your cash flow is going to be a little difficult.” Now, we have to really pay attention to how we’re analyzing the deals, and then make a call. Mostly, that call right now is, “Am I willing to make a little bit of cash flow, or break even in hopes that when interest rates come down that we get a bump in the market, and appreciation goes up, or do I flip it and make 20,000, 30,000?” So, it’s the same game, but the disposition gets a little different.

David:
That’s a great way of looking at today’s episode. We are talking about in today’s market against today’s defense, what is it giving you, and how do you take advantage of it? There are times when, if we’re going to stick with a basketball analogy here, where you’re playing a scene with a terrible defense, and your goal is to score as much points as you can, and get your starters out of the game. This was the Golden State Warriors for years. Stephen Curry didn’t even play the fourth quarter, and it gave them a better opportunity to have a better longer season, because they could rest their stars. They could score a lot of points. Teams didn’t know how to guard him.
Then there’s times where the market’s going to give you a very difficult defense like now where you feel like sometimes, it almost might feel like it’s impossible to score. Can you run the defense ragged for the whole shot clock, and make them tired so that later in the game, you have an opportunity? Can you get fouled and start to just try to get into the bonus? There’s something that can be done, but if your expectation was, “We’re going to make three passes, and get a wide open three pointer by one of the best shooters in the world,” and if that doesn’t work within basketball isn’t working, you’re not adapting well.
Real estate is cyclical. Economic cycles are by definition cyclical. There are times where it’s hard to buy real estate. There are times where it’s easy. There are times where we are printing a lot of money. There’s times that we’re in a recession or a depression. There’s going to be different defenses that we’re going against. I think your example there is really, really good. So, let’s use that as a jumping off point. Rob, what is your preferred method of investing?

Rob:
In terms of which asset class?

David:
Yes. Yes.

Rob:
Short-term rentals, I don’t think… Not much of a secret there, but it is starting to move a little bit into… I’m doing a lot more stuff this year I think, and this will still feed into short-term rentals for sure, but I’m definitely really heavying up in the Sub2 creative finance space, because for me, that’s the solution to all the problems that we’re seeing right now with interest rates and everything.

David:
All right, so let’s talk about expectations. What were they when you started, and what are your expectations right now that you’re investing in a tougher market?

Rob:
Okay, cool. So, here’s… One other thing that I wanted to say about all this is that… I hate to even say this. Maybe we’ll cut it out, but I feel like the last five years, real estate was a get rich quick scheme like, “Everyone was making money.”

David:
I would say in the short-term rental space specifically, your experience, yes.

Rob:
But legitimately, you could make a lot of money, but most veterans, I think, know and understand that all real estate is not get rich quick. It’s get wealthy over time, and then there will be pockets within the timeline that you can make a lot of money. So, for short-term rentals, that’s what it was, and now, you can still make really good money, personally, I think. I’ll walk you through a deal in a second. I just think it’s not like… I don’t think you’re going to retire off of one property. I’ve personally anecdotally have never paid myself really for my short-term rental properties. So whether my portfolio makes 10K or 7K, it doesn’t affect me too much, because it all just goes back into all the properties that I’m buying.
But all to say these days, here’s the cash on cash that I’m looking for. Traditionally, over the last five years, I was looking for a 30% to 50% cash on cash return, which I don’t even like putting that out there. This is not really something I would ever tell anybody listening to this like, “Go get a 50%.” It’s ridiculous. It’s just how it was.

David:
Well, let me jump in there. That’s what you were getting because when you compared all the deals that you were looking at, the top, top, top deals could provide a 30% to 50% return. Because you had a really good deal funnel, you had a really good analysis system, you were good at what you do. You were only buying the best deals, which provided that. That does not mean the person who’s brand new is going to step in, and, to use the basketball analogy, get the same wide open look that you’re getting.

Rob:
Correct. Yes. Thank you for that. That’s why I’m like, “I don’t even want to put it out there,” but we bought a chalet in the Smoky Mountains. I think all in, we paid 50K for furnishings, down payment, everything. We grossed 83,000 the first year, profited like 58. I don’t know. It was something like that, right? So, that one was a perfect deal, but these days, it is just not like that anymore. I think a lot of people want to achieve that, but nowadays, I’ve really… I’ve tampered it more and more over the last year. At the beginning of last year, I was cool with a 20% to 25%. I was settling for a 20. Right now, a 15% cash on cash return is what I’m looking for when I very conservatively underwrite all my short-term rental deals.
That’s a really big change from when I started. That’s nowhere near the same return profile, but I am also really just padding my underwriting to just allow… I’m trying to make it… Even if it is, let’s say, a 25% or a 30%, I’m purposely adding so much stuff in my underwriting to try to get it to a 15% just so I’m like, “All right, doomsday scenario, can I get a 15%?” If the answer is yes, I’ll move forward with it. If it’s less than that, I won’t do it.

David:
All right, so you are still taking a cash flow heavy perspective where you want a cash on cash return at 15%. That’s still the most important metric that you’re looking at when you’re analyzing deals.

Rob:
Well, there’s more to it than that, David. I mean, look, I think when you’re analyzing a property, it’s not just the cash flow. You have to look at the overall ROI of the property, and that ROI is going to be calculated between cash flow, debt pay down, tax deductions and appreciation. So when you factor all those things in, it usually doubles roughly your cash on cash, I believe. I’d have to look at my calculator. Am I okay with… Me personally, do as I say, not as I do. I’m fine with a 10% really at the end of the day.

David:
If it’s the right property, right location, right value add.

Rob:
Yeah, because the ROI is going to be much higher than that if I ever sold it in five to 10 years. But baseline, if I were just looking at it from a cash-on-cash perspective, which I think nowadays, I’m not, but for someone getting into it, I think a 15% is a pretty good metric with the way interest rates are.

David:
There’s a good point in there. When you first start learning about real estate, we use ROI, return on investment as the metric that we teach people to look at, which is in our world, really, what we’re saying is cash-on-cash return. That’s the technical term for what we’re describing. We say ROI, but the I in ROI is investment, and we’re talking about the return on the cash we put in the deal, not the overall investment, because it makes you money in other ways too. The more accurate way of measuring your ROI is actually called the internal rate of return, IRR. That’s something worth Googling. It’s something to go onto BiggerPockets, and take a look at.
This is a metric that syndicators use, because they’re looking at the return on a property if you own it for five years, seven years, 10 years. They’re including the cash on cash return that we just described, the loan pay down, the equity that you may have created by buying an undermarket value as well as the equity that you may have created by value add to the property. Increasing the rent amounts makes it worth more money when you go to exit. There’s lots of ways real estate makes money, tax advantages. IRR really takes all of those into consideration. So when you hear someone like me say it’s not all about cash flow, that doesn’t mean cash flow doesn’t matter. It means it is a piece of…
It’d be like saying, “Well, it’s not all about how well you can score.” That doesn’t mean scoring doesn’t matter in sports. There’s more to it. That’s obviously a part of it. So when it comes, Rob, to the deals you’re looking at, where are you starting financially? How do you tend to fund most of the deals you’re buying?

Rob:
Over the last couple of years, we have been doing OPM, other people’s money, and working with individual investors. We have since switched to that, and now we’re doing fundraising with Robuilt Capital. We haven’t really launched it yet, but we’re going to be doing a fund, and working on more value ads, because I think that that’s where the real equity and appreciation will come into play for 2023. It’s taking a dilapidated RV park, making it… sprucing it up, making it a lot nicer, doubling the income, getting a lot of value, and basically forcing appreciation that way. That’s where I’m moving is out of single family acquisitions into much bigger developments and projects.

David:
All right, Henry, moving on to you here. When it comes to your expectations, what is your approach right now to real estate investing in this tougher market?

Henry:
When we first started out back in 2017, I remember I was a big BiggerPockets Brandon Turner guy.

David:
Nice subtle dig there. Let’s hear more about your ex. How is she compares to me?

Henry:
Brandon was the $100 a door after all expenses, right? That’s how I evaluated and determined if the rental property was going to make sense. I wanted a 7% to 10% cash-on-cash return, and I wanted a $100 a door net cash flow.

David:
You’re talking after expenses, after vacancy, after CapEx.

Henry:
All the expenses, guys, not just the mortgage, taxes, insurance. I’m uber conservative on my expenses numbers. I over budget for my expenses, because then when I know I see $100 net cash flow, I’m probably going to make more than that. That’s how we were analyzing deals back then. Now, things are a little different, but not much because back then, I didn’t have the consistent deal flow that I have now. I was building those processes. No, as the processes are well established, and I have great deal flow, I understand my market better, and have some… There’s some predictability with what I see coming in the door.
I’m a little more… Greedy is not the right word, but I want my numbers to be better. I’m a little more picky. So for me, we are looking at, “If I’m going to buy a single, and hold it as a rental, I want my singles to pay me a multi.” So, I want $200 to $300 net cash flow per door on a single. On a multi, I’ll take 100 to 200 net cash flow per door. I would like a 10% cash-on-cash return, but if it’s a multi, it doesn’t have to give me a 10% cash-on-cash return, because the multis are just so much more beneficial both from a cash flow perspective, also from a tax perspective. Then from a value perspective, the value of those goes up faster.

David:
Well, the fronts are are going up by $100 a year, and you’ve got three doors versus one door that exponentially starts to become more valuable over time. Is that what you’re getting at?

Henry:
Absolutely, yes. The analysis as far as how I do it hasn’t changed, but what I’m looking for or what I’m willing to take on a property has changed. I would say that that’s what everything was up until 2023, and the interest rates going the way they are, because those high interest rates are eating up that cash flow. So, it is a whole lot more difficult to find those properties where I’m going to get $200, $300, $400, $500 net cash flow per door, because I’m paying so much more for the money to buy that property. So, the game’s a little different right now. I am willing to take less cash flow if the property is in a neighborhood that I feel like is going to appreciate, especially if that property is a multi-family, again, for those same reasons, because the golden days…
Rob’s golden days, we had ours too before these interest rates, the golden days where you could buy something. As long as you were getting it at a 30% discount, if you stuck a tenant in it, you were going to cash flow, and it just doesn’t work like that anymore. So, we do find ourselves making decisions on, “Do I keep this property, and essentially break even, or do I sell this and make a smaller profit than I would typically like to?” Those are deals I wouldn’t even have considered.

David:
Because the defense didn’t make you back when you started, it was the 15% to 30% cash-on-cash return that Rob’s talking about, the $200 or $300 per door that Henry’s talking about. Those were… If you probably took a super nerdy approach, and you looked at the statistical… What’s the word? The standard deviation, and you looked at every deal, and you compared, these were in the upper echelon of deals, and so that’s what you’d go for. You’re comparing the deal. You can get to the deal you’ve seen before, and you’re looking for the one you’ve seen before. In today’s market, there aren’t those amazing cash flow numbers that we’re seeing, because there’s so much competition for these assets.
Now, it almost becomes, “Is it better to get my 7% return that Henry said or nothing?” Before, it was, “Is it better to get 7%, or wait for a 10% to 12%?” Going back to the basketball analogy here, when you first get the ball, the first thing you look at is, “Can I get all the way to the rim?” There’s nobody in there. I can beat my guy at the dribble. It’s a layup. Of course, that’s a 30% ROI. You’re going to take that every time, but as defenses get better, that’s not an option. They have a seven-foot Rudy Gobert in there who’s waiting for you, and that’s not going to happen anymore. You can’t beat your guy off the dribble.
Now, it starts to, “Okay, can I come off of a screen, and hit a jump shot?” It’s going to be tougher, but it’s better than a shot clock violation and not getting anything off. That’s what we’re describing in these situations. If you take the expectation from five years ago, and you apply it to the market you’re in now, you’re never going to shoot the ball. You’re going to have shot clock violations over and over and over, and you’re going to lose the game by virtue of not taking a shot.

Henry:
Or Rudy Gobert is going to throw it back in your face.

David:
That’s the other thing. That’s the loss, right? You tried to go after that great deal, and you got sucked into buying a $40,000 property in a terrible neighborhood that you never should have bought, because the cash-on-cash return looked great. When it comes to financing, Henry, what’s your financing strategy right now?

Henry:
Absolutely. So back in… I would say from 2017 on until about six months ago, my financing strategy was using commercial loans from small local banks. I built relationships with small local banks, and I could take down deals. If I had to put money in from a down payment perspective, the benefit to the small local banks is I could bring that money from somewhere else. So, I was either taking equity from another property, and using a line of credit to pay those, or sometimes I would borrow the down payments from other investors, and pay them a high interest for doing that. So yeah, I would… Sometimes, I would get the owner to carry back the down payments, and so we’d owner finance at least the down payment portion.
That’s how we were taking deals down, but as interest rates have gone up, and there’s been tightening amongst banks, and lending and the criteria has been a little more strict for them, and it’s harder to make deals cash flow. Part of the reason small local banks want to invest in our loan to real estate investors is because they can buy great deals that have great cash flow. As we stated, that’s not always the case, and so it’s been tougher to get the local banks to loan on deals if the numbers aren’t fantastic. So now, we’ve shifted, and we’re typically taking down deals with private or hard money at a higher interest rate, and then we’ll refinance them with either a small local bank or a non QM product.
Still, that allows me to take down deals without having to put a ton of my capital in them, but it’s a more expensive route to take because the interest is higher. Plus, you’re basically closing the loan twice, but it’s a way we found to be successful because we’re still very, very strict on our underwriting.

David:
Now, with, I don’t know the right word to use here, the decreased expectations on mostly the cash-on-cash return from real estate, are each of you buying less real estate now, or are you buying the same amount or more? I’ll start with you, Henry.

Henry:
I am buying, I would say, the same to more. Actually, I would say more. We’re doing more flips this year than we’ve done in any year. Last year, I bought more doors in one year than I’d ever purchased, so we’re doing more.

David:
Rob.

Rob:
I am doing more. I want to do more. I’m really addicted to creative finance Sub2 right now. People have been sending me deals, and I’m just like, “Yeah, why not?” So, it’s my goal. I mean, I want to take down a lot this year. I want this to be the biggest year that I operate in. The reason that it’s actually been working out relatively well so far is that, I guess, there’s that… I don’t know. Was it Buffet, Buffet? Is that his name, Warren Buffet? No, I’m just kidding. Warren Buffet, he was talking. He said, “When there’s blood in the streets…” Oh gosh, I don’t want to mess this up.

David:
When the tide goes down, you see who’s been swimming naked? Is that it?

Rob:
No. No. I know for sure he said this. He was like, “When people are scared by when people are-

David:
Oh, what you’re describing is when others are fearful, be greedy. When others are greedy, be fearful.

Rob:
Oh, you see. That’s why we pay you the big bucks, David. So, with that one specifically, everyone is so scared to get into real estate right now, so I can actually make offers and get them accepted, and it’s a beautiful thing. The property that I’m buying in Denver right now, it’s a triple-dome home. It was on Zillow Gone Wild. That got 25,000 likes on it. Traditionally, I would’ve had to have offered 200K over that a year ago. Today, I mean, I offered a little bit over just because I knew that there was another offer, and I wanted it. I think I offered 25K over, and I got it. I was like, “Wow, this feels good. It feels good to actually only be competing with one other person versus 20 other people.”
So, for me, I’m like… I’m coming in like, “Oh yeah, everyone’s scared. Give this one to me, baby.” But on top of that with creative finance and Sub2, yeah, man, I’m just going to be picking up as much as I possibly can, because if you can assume someone else’s mortgage and get a 3% interest rate, I mean, literally, almost any deal works. It’s really quite a magical thing.

David:
So, useless fact here, you mentioned blood in the streets. Did you know the high heel shoes were originally created for men to wear that were butchers for walking around in the butcher shop so that they would not get blood all over the bottom of their shoes?

Rob:
Wow. I had no idea. I did not know that. I was wondering why you kept a pair of high heels in your car.

David:
It’s a secret to these calf muscles actually. It’s like I’m always walking down a hill at all times. It’s also why we never let the camera go below my waist when we’re recording. I’m not sure if the audience is ready for that.

Henry:
I just got an image of strong hairy calves in high heels right now.

David:
It’s a great way to describe it. On my Instagram story the other day, I put a little meme that had 25-year-old guy that works his calves out seven days a week in the gym, and they’re skinny, and it’s like 42-year-old dad of three kids, and this guy is like, “Yes-

Henry:
Oh man.

David:
… massive thighs for… It’s so true. I don’t understand. Yes. All right, moving on here. Now Rob, I understand you have a deal in mind that we are going to break down for all the people joining us on this podcast to hear how deals are being analyzed. First off, tell me where is this deal? What is it? Is it your triple dome deal that you just mentioned?

Rob:
It is. It is. It’s in Castle Rock, which is about 15, 20 minutes away south of Denver. It’s in between Denver and Colorado Springs, and it’s beside the Iraqi Mountains and Breckenridge. So, it’s in this little spot that’s really cool.

David:
You should call this the Casterly Rock, right?

Henry:
Yes.

David:
As your Airbnb name, because we always give stupid names to Airbnb properties. Do you know what that is from, Rob?

Rob:
Yes. But for everyone at home-

David:
You don’t know what that is. Henry, would you like to share?

Henry:
That is the goat reference, the Game of Thrones.

David:
Yes. It’s a location in Game of Thrones called Casterly Rock. You would get a lot of… People would recognize that, and book it. I think you should go with that.

Rob:
That’s cool.

David:
Triple Dome has a good ring to it also, but what do you like about that location?

Rob:
Like I said, it’s in between a lot of different areas. So, my buying criteria in general is buying near national parks, state parks, eclectic towns, and vacation destinations. Those are my four buckets. This one is in between all of them, right? So, it’s in between Denver, which is a really big metropolitan area, and the regulations in Denver are pretty strict. So, I already feel like the overall competition is on the lower end, because it’s so hard to get a functional Airbnb in Denver, but it’s also near Breckenridge, and it’s also near the Rocky Mountains, so that’s a state park, sorry, national park, but then there’s also a state park.
It’s called Roxborough State Park. That’s right next to Castle Rock, and then an eclectic town. I mean, I wouldn’t really classify this one as that. The boulders north of Denver, that’s eclectic. That’s near Castle Rock as well. So, it’s in this booming little spot where I have so many target markets of people that are going to be going through Castle Rock just to get to some of these areas that I told you. So from a location standpoint, it checks the boxes. It’s also a very unique stay. If you’re on YouTube, we’re B rolling all of this for you to see. It’s a beautiful home. What’s really special about it is that it’s got 360-degree views of mountains everywhere.
Everyone has gone crazy about this house on the internet. The Zillow Gone Wild comments were really, really crazy, so I just feel like it’s going to be a really, really amazing portfolio piece for my direct booking website, Nick Sleeps. I think it’s going to be a very Instagramable experience, and so this is one of those, “If I build it, they’ll come type of things.” It’s already been built, but I’m going to be building the brand and everything like that. I think this one to me has a lot of potential, but I was a little bit… There are some ways that I underwrote this to make sure that it fit my criteria.

David:
All right. So, how much are you buying this for, and how is the deal structured?

Rob:
It is a conventional loan. It is a 5.99% interest rate actually, which is not bad. I had to pay about $8,000 worth of points to get it down to that rate, so I’m really happy with it. It was a million dollars, and I bid 1,000,025. I would’ve probably gotten it for a million, but someone else made an offer, and we got the intel that it was over asking. So, I just went, I was like, “Man, I don’t know how much over asking was. I’m going to go 1,000,025,” and I beat them. So, I guess I went over 10,000 or something like that. I’m not really sure. I am putting unfortunately 30% down, because I had to do that to get it to not be a jumbo loan so that I could…
Basically, it’s what I could qualify for conventionally. To the banks, I’m a poor man even though I have successful businesses, but I haven’t had successful businesses for two tax years. So, I still have to cobble together finances to get it all approved, but I’ll be putting down 30%. I’m hoping to squeak out a 15% cash-on-cash return on this particular property.

David:
All right, and then was there a subject to element to it?

Rob:
No, not on this one. This was just a straight per… I saw it. I was like, “I want this house. I’m going to buy it,” and I made the offer, and somehow got it.

David:
Now, if you had professional property management, 20%, 25%, would this deal still pencil?

Rob:
Technically yes. This would be much closer to… Oh, actually, no. It would still be an 11%. The way that I’ve underwritten it, I think I’m going to make a 20% cash-on-cash return. With a 20% management fee, it would be an 11.7% cash-on-cash return. Now, if this ends up being middle of the road… So if I get this to a 15% cash-on-cash return like I was thinking in a management company, let’s assume that Blue Gems isn’t doing this free for me. Then it would still be a 7.5% cash-on-cash return. So, it would still work. It would cash flow. I think this deal would still cash flow $2,500 a month.

David:
What were you adjusting on your calculator there to determine if it would work?

Rob:
My management fee. You asked if I had a professional manager in it at 20%, that’s what I’m putting in to see how it changes cash flow, and it would bring me down to a 7%. But if I remove that, then I go up to a 16.2%.

David:
So from 7% to 16% by eliminating the management, so there’s a point there for everyone listening who is running their deals saying, “I don’t want to be… I want passive income. I don’t want to be a short=term rental operator.” That could be why you are seeing your competition moving on deals and buying them, and you’re not because that one number made it from a pretty solid deal to most people are passing on a 7% return. It is a little bit more elbow grease. You’re going to have to put into these deals in many cases, and Rob’s one of the best in the business when it comes to these.
So, the odds of somebody else getting a deal this good, and having the vision to feel confident that it’s going to work are going to be lower than it would be with Rob. So, part of what we’re describing here is that with real estate becoming tougher, the passive element of it is passing away. Maybe there’s a play in words. We could get into that like passive has passed.

Rob:
Ooh, is that our thumbnail title?

David:
Yeah.

Rob:
Passive is dead

David:
Because real estate is cyclical, there probably will come a time where it will go back to what it was like before. We don’t know when that’s going to be, but it was much easier to get these returns, and just hand a property manager to manage it than what it is right now.

Rob:
I want to say that you’re absolutely right on this. Everyone at home, relisten to that part, because a lot of us are getting into real estate. Let’s say short-term rentals because that’s what we’re talking about for me specifically. You’re going to buy 10 properties and then 20 and then 30. Eventually, like me, I have 35 right now. You will no longer be able to self-manage those properties. You’re going to have to give them up. I started my property management company. I went in to Blue Gems, because I was like, “I need a solution for this,” but the everyday operator, you will have to give that over to a management company, and the moment you do that, it will shrink your returns dramatically.
That’s a really good point, David. I mean, that’s something that people don’t think about. If you’re good at this, you’re going to be very successful. You’re going to scale up like that, and then you’re going to have a management problem, meaning you’re going to have to pay someone to manage everything.

David:
My advice, not that anyone asks for it, is if you’re going to get into this asset class, expect to manage it yourself for three to five years. Do a very good job. Rents increase over time. Revenue increases over time. Your reviews increase over time. Your systems get better. Then you can… You’ve earned the right to hand it over to a property manager. Now, they can take over, and it becomes passive. You just can’t have the expectation of starting it for day one. That’s a theme that we’re seeing throughout today’s show, I’m noticing, is you’re just extending your horizon from when you expect that jackpot.
Henry had mentioned several deals like, “Right off the bat, we’re buying them at 70% of what they’re worth. We’re getting this kind of cash flow. I could either get rid of it, make a bunch of money, or keep it and make some money, but I had options.” It’s slowly moving into, “I can still make the same money, but I’m not making it right off the bat. I’m having to extend.” I think that’s a good advice for people to extend their expectations. Now Henry, same question to you. Do you have a deal picked out here?

Henry:
Yes, I have a deal. We’re moving from the amazing place of Casterly Rock to Sleepy Hollow, my little town of Bentonville. I’m buying a single family home, and it is… I’m buying it for I know that what is a discount, but I am in the position of trying to figure out which exit strategy is going to make the most sense given the current market conditions. So, I think it’s a good deal to talk about. I’m paying $170,000 for it. It’s going to need some work in order for it to either be flipped or be long-term rented or be short-term rented. So, I am literally in the decision process right now trying to figure out which one of those exit strategies we’re going to do.
Now, I’m buying it regardless of… This is a purchase, regardless of exit strategy, but this is that analysis that we’re talking about trying to figure out what’s the best strategy given the market and your current financial situation? I’m in a position where I can put about 40,000 in it, and I can flip it. I can put maybe 50,000, 55,000 in it, and short term rent it, or I can put about 30,000 in it, and make it a rental. If we rent it out, I could probably get 1,800 a month. So, I would be in the neighborhood of breaking even if I did that. Now, the reason I would consider breaking even for this is because Bentonville is just such a strong market with Walmart headquartered there.
Though even it wouldn’t cash flow right now, I’m going to get a big bump in appreciation because Walmart’s building their brand new home office facility. They’ve got to bring people here. It’s still a tourist destination for mountain bikers right now. There’s not a ton of hotels, and so people need places to stay if I wanted to do a short-term rental. I think once interest rates go down, it’s going to force more people into the market, and it’s going to force the values up, right? So, there are situations where I’m ready to… where I’m willing to break even because of what my analysis tells me about what could be coming in the future.
That is not something every new investor is going to be able to do. It’s going to involve you being an expert in your market, and understanding what’s coming, and doing the research to make those kinds of decisions. So, right now, I am leaning towards going ahead and selling it. The reason I’m leaning towards going ahead and selling it is because I have a pipeline of deals. There are more deals coming. I’m not… I don’t have a shortage of deals to buy, and so this one… I don’t love the long-term rental cash flow numbers, and I’m not confident. I’m not super confident in the short-term rental numbers, because of the specific neighborhood that this home is in.
I don’t know that it would produce the returns that my other short-term rentals in Bentonville will, and so I’m not super comfortable with it. I’m doing some research talking to my Airbnb property manager, seeing what’s his confidence level on what he thinks we could rent it for. I think if we did a short-term rental, we’d push that monthly income up to about anywhere between $2,000 and $3,000 a month. So, it could be great. It could not work out well. So, what I am confident in with 100% certainty is that I can put $40,000 into it, and sell it for $210,000, no sweat, and so that is… Sorry, not 210. I said 210. It’s not 210. Sell it for $275,000, no sweat, right?
That is the strategy I am absolutely the most confident in, and in this market, you’re getting punished for making mistakes. So, I’m probably going to lean toward the thing I’m the most confident in.

David:
There’s a couple points I think worth highlighting there as well. Some of this comes from James Dainard. Well, Jimmy made a point on the State of the Market podcast that I thought was really good and worth repeating here. Jimmy had mentioned that the ROI, if you’re looking at cash-on-cash return, is nominal or non-existent in a lot of deals. However, he flips a lot of houses, and the return on his investment when he looks at flipping can be incredible. He could get 20%, 30%, 40%, 50% return on the money that he put in a deal, especially if he’s leveraging other people’s money on a flip. Now, that’s not passive income. That’s active income.
We usually don’t compare these two options, because when you keep real estate, and you get $100 a month, but you bought it with 200,000 inequity, you still made $200,000 at that time. You just didn’t make it in the form of cashflow, which can be misleading. What that had me thinking about is so many people are listening to us. They want our lives, because they don’t like the job they have. Henry, you, at one point, were doing corporate real estate for Walmart. Rob, you were doing professional voice acting and marketing and overall debauchery, but the thing… I was a cop. I was sleeping three hours a night on a good night just looking for…
Every day, I woke up like, “When’s the next time I could sleep?” I was just obsessed with when can I get sleep? We didn’t like the lives we had. Real estate gave us a better life. If you’re in that position, it has been previously spoken to you that the evangelist for real estate would say if you get enough cash flow, you can replace your active income with passive income. You can quit your job. You can move on to something better. That is what is becoming very hard. However, if you quit your job, and got into flipping houses, and you made $75,000 a year flipping two different homes, that could be a job you like more than the one you don’t like, doesn’t involve you sitting in commute traffic.
You can work from home. Your schedule becomes more flexible. Now, there are some downsides to that. You’re taking a little bit more risk. There might be a learning curve in the beginning, but if you’re somebody who’s really good with real estate, you’re a Henry, you’re looking at deals all the time, and you’re like, “This thing just doesn’t add up right now for cash flow, but I could make 45 grand flipping the contract to somebody else, or fixing and flipping and moving into something different.” You do have an opportunity to get the ROI you would need to replace your job doing this. It’s a different way of looking at these opportunities, and it’s forcing yourself to stop looking at only cash-on-cash return.
It’s looking at many ways that real estate can benefit you that will open up these opportunities. Let’s say each of you to this… Well, I’m now just deeming the new approach to looking at real estate investing.

Rob:
I agree. I think we got to get back into the habit of saying, “Hey, real estate is a long game, and sometimes there will be good years. Sometimes there will be more normal years like now.” But at the end of the day, it’s like you’re just pushing the ball forward. I was thinking about this as Henry was saying it earlier, the golden years. “Hey, these were the golden years,” but I genuinely think, not to be too Andy from the office, but I do think that 20, 30 years from now, we’re going to look at now, and be like, “These are the golden years.” This is it, because we’re all good at what we do, and we’re all going to continue to crush it every single year because we love doing this.

Henry:
Absolutely. I couldn’t agree more. I tell my students this all the time. I’m like, “Look, investing is about buying something for less than it’s worth, adding value to it, and then capitalizing on its new value.” Even in the stock market, you want to buy when a stock is down, hold it until it goes up, and then you’ve made a return on your investment. This is when the wealth is built, guys. This is what it looks like. You have opportunity to buy, and though you’re not going to make money immediately, I think for the people who are actively buying right now, five years from now even, the people buying now are the people who are buying in 2009, right?
Those people were pumped that they bought in 2009. So, this is what it looks like. This is what it looks like to build wealth. It’s not pretty now, but I think it’ll be beautiful in the long run.

Rob:
We’re always going to be pumped that we bought now 10 years from now.

David:
I say that constantly. Tell me a person you know that bought a house 30 years ago that says, “I wish I never would’ve done it.”

Rob:
Well, do you remember we had Janice on a month ago, and she was like, “Yeah, I bought my first house in LA for 180,000 or something like that.” We were like, “What? In 2004?” We were so perplexed by this.

David:
Tell me a person who bought a house 30 years ago that remembers what was in the inspection report, and how stressful it was.

Rob:
Right? Right. That’s true.

David:
But also, tell me a person that bought that house 30 years ago that thought that they were getting a great deal, and they were buying it for less than what it’s worth. Most people believe they’re overpaying for real estate at the time they buy it. We always think we could have got the deal better. It’s time that really creates the wealth in real estate, and we sabotage this when we’re like, “I need to get a dunk four seconds into the shot clock before I put some work into breaking down the defense or move the ball around.” Now, Henry, you made a great point. Real estate is about buying something for less than it’s worth, making it worth more, and then capitalizing on that.
So from my framework, I would call that buying equity, forcing equity, and then having an extra strategy. Now, the extra strategy could be holding it as a rental. It could be selling it and turning the equity that you created in that deal into cash, putting that cash back into the next deal. There’s lots of ways we can do it, but on the… From the perspective of how do we make something a good deal if it doesn’t start as a good deal, I’m going to ask each of you, what advice do you have for taking a deal like Rob’s Castle Rock property that other people passed on, and making it a good deal? Then Henry, I’ll ask you the same thing.
You mentioned creative financing. That’s one way, I think right off the bat, that you said, “If you get something at a 3% interest rate, everything works, right?”

Rob:
Yeah. I mean, I think… Hold on, let me think about that for a second. Go to Henry first. No, I’m just kidding.

David:
No, we could do that. I don’t mind. Rob is not a freestyle rapper. I will tell you guys that right now.

Rob:
No. No, I am.

David:
No, you’re not.

Rob:
Well, I was trying to think of… I’m trying to… Yes, listen.

Henry:
You have to open your computer, and pull up an analysis. That is the opposite of freestyle.

David:
He needs 25 takes.

Rob:
Well, you were asking me to take you through the numbers. I would.

David:
Go home. Get to the lab. Grab a pencil. Make it suspenseful, come back and hit us with an earful.

Henry:
Did you just hit us with an eight-mile battle wrap scene?

David:
Yes, because that’s something Rob doesn’t do. Henry on the other hand, he belongs in a cipher, Rob.

Rob:
I feel that that deal was already good, so you’re like, “How do you make it work?” I’m like, “I did.”

David:
But you bought a deal other people didn’t see, so you saw something in it that made that deal work for you. What do you think that was? You mentioned the experience. You mentioned creating a unique way of marketing the property. There are things you’re doing that other people that just said, “Run the numbers on AirDNA, doesn’t work, past it.” Yes,

Rob:
It doesn’t work on AirDNA at all. I think AirDNA has this one at $60,000. I think it’s going to gross between $175,000 and $200,000. So, the way that I made this work for myself is I just did a little bit of prospecting. When you look at the market analysis, there are no unique dome homes. There are no unique homes at all in this area, and so so many people would look at this deal, and pass on it, because it’s scary. There are no numbers to support this. Where I’m coming in, I’m saying, “I’m going to be the pioneer in this space specifically. I will be the comp that people look to copy basically for the rest of time.”

David:
So, AirDNA is comparing this to a track house that looks like all the other houses around it.

Rob:
Exactly, but what I know is that a unique property can basically demand a 300% premium on a typical property. So as a typical property might only get $100 a night, this would get $300 a night on the opposite end of it. Now really, this property will get 700 to $1,000 a night, I think, whereas most people running the numbers think that it would get 250. So, it works for no one else, but it works for me because I know what I have here, but experience is the reason that I know that.

David:
Now, see, Henry, my job is to bring the greatness out of Rob that’s there that he doesn’t know he has, right? Rob, I’m going to lead you back to some more greatness. What about the hotel that you bought that was being used as a traditional hotel that you are turning into a series of short-term rentals? Did you make something there?

Rob:
Same thing. That one was… Basically, that one was approached to me. Someone approached me that, and they’re like, “Hey, do you want to buy my hotel?” He gave us a really good interest rate. I think we got it for 2.75%, 3%, but the entire hotel needed a remodel. I want to say that the owner had already started to remodel, but it just was so much work that he was like, “I’m just going to sell it to someone that can actually finish out the job.” He sold it to us, and so we’re getting to basically capture the opportunity of remodeling an entire hotel. Granted, it’s a lot of work. It’s active just like you said, but the opposite side of it is that this hotel will be worth double or triple what we paid for it.

David:
So, you’re adding value through a rehab. You’re adding value through putting each of those hotels on Airbnb, VRBO, not just a traditional hotel that someone’s going to have to look up in the yellow pages, and you’re adding value in this case through seller financing.

Rob:
Correct.

David:
That is a great example of you made a deal by those things that other people would’ve just looked at it, saw the cash-on-cash return, and said nope, or saw that it needs too much work and passed on it.

Rob:
Yep. Yep. Yep. Wow. Wow. I’m so smart. Thanks.

David:
I told you, there’s greatness in you, Rob. I just got to pull it out of you.

Rob:
I just got to be willing to freestyle a little bit.

David:
Yeah, and you got to go through mom’s spaghetti to get there, but that’s okay. We’re all going to do that together. Henry, to you, what are some ways that you’ve been able to make deals instead of just looking for deals?

Henry:
Yeah, I can totally freestyle. That’s why I wear black, so you can’t see the mom spaghetti on my shirt. Part of the ways that I make deals are through not looking through one exit strategy lens. I have learned the exit strategies of a flicks and flipper. I’ve learned the exit strategies of a buy and hold renter. I’ve learned the exit strategies of a short-term rental, and that allows me to look at a deal from multiple perspectives. So, I’m not just looking like, “Hey, this doesn’t meet my cash-on-cash return or my cash flow numbers as a rental,” and pass on it. It allows me to look at a deal from multiple angles, and see how I can monetize that. So, like with the deal we talked about, I know that I can make money on it at least three ways. There could be a fourth.
I could probably assign that contract to somebody as well if I wanted to. I can make deals just by being educated and versed in multiple exit strategies. The other way that I think somebody who’s new who may not feel that that’s something that they can do is you can make deals by being creative with what you’re looking for. You can do this even on the market, and I still do this. I will look at deals, and I am looking specifically for how can I add value? Well, where can I add the most value with spending the least amount of money? So, when I’m looking for a deal, if I’m looking, and I can’t find a duplex anywhere or a multifamily anywhere, then I’m going to start looking at single families that I can easily turn into a duplex or a multifamily either by converting a garage, or by converting an exterior building that already has.
Some of these houses that you’ll find, they’ve got a shed with plumbing and electrical in it. Well, it’s not that hard to convert that into a living space, because you’ve got the foundation, and you got some of the structure. Garages are an easy way. Sometimes you can split up a house, especially if it’s a split wing house, meaning that the master bedroom’s on one side of the house, and the other bedrooms and the bathroom are on another. It’s fairly easy to turn one side of that into a unit, and another side into a unit. Now, it takes some creativity. It’s going to take some money, some of those things, but you can make a deal, and add max value with doing a little bit of work.
What I’ve typically done in the flip space is find houses that have… We talked about this on a previous episode. It’s find houses that have sunrooms or big rooms that aren’t technically heated and cooled square footage. This works for garages as well. You can take an HVAC return, and pop it into that room, and now that space is heated and cooled. All you’ve got to do is add the flooring, insulate the walls, and now you’ve got an additional room. Rooms are going to add value, and so just because you can look at a deal, and it’s at its current state, and say, “This deal doesn’t pencil, but will it pencil if you add a bedroom?” Will it pencil if you add a bedroom and a bathroom under the same roof, and how inexpensively can you do that?
I just converted a laundry room for a house into a bathroom, which included the laundry in the bathroom. The house was on a crawlspace. It costs me about $5,000 to do that. But now instead of a three bed, one bath house, I have a three bed, two bath house, which allowed me to take the bathroom that was a hall bath, and close off the doorway to that hall bathroom, and then open a doorway from one of the bedrooms into that hall bathroom. Now, I created a primary suite, because I added a bathroom in the laundry room, because the laundry room was oversized.
I was able to sell that property for about $30,000, $35,000 more than I would have without that extra bathroom, because there was more demand for it, and because there were two bathrooms and a primary suite. It’s a much more desirable property, and it costs me $5,000 to do that.

David:
That’s a great, great advice. People should go back and listen to that again. If you’re trying to figure out how to make these things work, you’re hearing it here. The defense is tough, but that doesn’t mean you can’t win. You just got to take a different approach. Last question to each of you, we are what I would call professional investors, professional real estate people. This is what we do full time. We look for deals. Henry, you mentioned that you have a very big funnel that you’ve created that you’re looking at stuff. Rob has an entire network. He’s talking about having Rob Capital that he’s going to be creating.
You each have audiences of people that follow you that can bring you deals. We have this platform that not everyone has. For the person who is not a professional investor that wants to make money through real estate, but they’re not leaving their day job anytime soon, or their skillset would not work in the environment that we operate in, what advice do you have for that person to build wealth through real estate, and what expectations are reasonable for them in this market?

Henry:
Here’s two things. I think you need to be the… Education is vastly important more now than ever so before, and so I talked about educating myself on multiple exit strategies. I think everyone needs to be doing that. You can’t be so laser focused on one strategy, because you’re probably leaving opportunities on the table. Then you have to, for every investor, focus on what’s the lowest common denominator in real estate. It’s always going to be a deal. You’ve got to have a good deal, right? Now, we talked about ways that you can make something that isn’t a good deal at face value, look like a good deal, or become a good deal based on how you can creatively add value to that property, but you’ve got to be able to know what does a good deal look like in your market? Then you’ve got to pick a way to find those good deals.
All three of us, we have a way that we like to find our good deals, and we go all in on whatever that strategy is. So ,I can’t tell every random investor which strategy they should use or what’s the best strategy. It’s really, they all work, but you’ve got to, a, know what a good deal is for you, and then you have to pick a strategy to know how to go find it. I think the better you get at analyzing and underwriting and looking for those deals, the easier it’s going to become to monetize those deals in the future. So, I’m not going to give you the traditional answer of go house hack. That’s a great way to go make money in this market. I think that educate yourself on as many strategies as you can, find a way to find good deals.
I just happen to find my way is looking off market. Rob has his way. David has his way, but you’ve got… The more you do it, the more deals you analyze, the more deals you underwrite, you’re going to be able to start finding those diamonds in the rough, finding those gems, or creating or making the value. So, I just want people to be able to focus on one to two strategies of finding deals, and then you just go all in. I call it relentless consistency in pursuing that strategy until it yields results.

David:
Rob, what about you? Average person not quitting their day job wants to make money through real estate, what approach should they take, and what expectations should they have?

Rob:
I think that for me, I always say this, you got to throw darts at the wall. I think you got to try a few things. I like the idea of going all in. I did pretty early on. I think you got to try a few things before you go all in though. You know what I mean? I think if you… Let’s say that you want to try flipping houses, and you try that, and you’re not very good at it. Maybe you don’t go all in, because that may not be the thing that you should be going all in on. But if you try flipping a house, if you try wholesaling, if you try house hacking, maybe a little bit of short-term rentals, I think it’s at that point you can say, “Man, I didn’t realize this, but I’m really good at wholesaling.”
That’s when you go all in, right? I think you have to be willing to try a few things, and not be so locked into the thing that you think you want, because very rarely is that the thing that actually works out. So, that’s my general approach for getting into this is try a little bit of everything. Some of these things are free. You can… Henry, how much would it cost? If I wanted to get started wholesaling today, how much money would I need to get started?

Henry:
To get started wholesaling, you can get started wholesaling for free. You’re just going to spend a lot of time.

Rob:
Perfect. Low stakes.

David:
So, is that what we’re saying, someone who’s working their day job, they don’t want to be in real estate professionally, should start at wholesaling?

Rob:
Not necessarily. I’m just giving an example here like, try a few things because everyone thinks that real estate is high stakes, not every aspect of real estate. There are ways that you can try your hand at real estate. That’s not like the riskiest investment of your life. That’s what I’m saying. Then in terms of what expectations should they have, I think the expectations that they should have is that they’re probably going to be working 80 hours a week for a while. The network that you’re talking about that I have the network that Henry has, that is a network that we have built because we were working 80, 90-hour weeks for so many years.
I didn’t quit my job, dude, until two years ago, man. You know what I mean? I’ve only had this magical network for two years, and it’s just because I put in the work. But before that, I was working. I was going taking calls in between meetings. I was leaving work to go do a contractor call, whatever. I was doing so much stuff at work, taking calls at nights, missing dinners, doing all that type of stuff. So, I think the expectation is there’s still a lot of work that you have to do. It will never be an easy route to get started, but dang it, is it worth it.

Henry:
I think to add a little bit more color to that, I still believe it. A good deal is the best way to go, and so finding that good deal. But I think part of the reason that people are struggling with figuring out how to be a lucrative investor in this market is more about how much of that work are you willing to put in? Because anybody can do this right now. You can go, and you can get on the MLS in your local market, and you can pull a list of properties that have been listed 30 days longer than the average days in your market, right? You can get a list, and you can go down that list, and say you’ve just only pulled single families. You can go down that list. You can analyze every single one of those properties, and figure out what’s the number that this deal would work for me.
So, if you know you want to buy rentals, you can go analyze each deal, and say, “All right, for me to get my 7% cash-on-cash return, and $100 a door, then I have to be able to buy this property that’s listed for 350,000 for 125,000.” That’s the number that works, and then you know what you do? You submit that offer, right? If you did that for every single property listed for 30 days longer than the average days on market, and every expired listing in your market, and you did that relentlessly consistently for the next 90 days, you’d probably land a deal, but nobody wants to put in that kind of work. People don’t want to go do that work.
That’s a time-consuming endeavor. You got to analyze a ton of deals. You got to make a ton of uncomfortable offers. You got to convince an agent to make those uncomfortable offers for you, and then convince them why it’s a good idea for them to do it. So, you really have to ask yourself, “Am I willing to put in the kind of work it’s going to take for me to be successful in this kind of a market?” Because you can go find a deal. You just got to be willing to get uncomfortable, and that’s what people don’t like doing.

Rob:
Boom, baby, but I will say… I do want to plug that in one of the previous episodes, Henry talked about buying deeper, and so we’re going to do an episode on how to get off market properties. Henry will take us through his strategy, so respond to the poll if you want to hear how we find off-market deals. Leave a comment on YouTube, and we’re going to work on it for you, guys.

David:
All right, Rob, where can people find out more about you?

Rob:
Robuilt on YouTube and Instagram.

David:
Henry.

Henry:
Instagram, I’m @thehenrywashington on Instagram.

David:
I am DavidGreene24 with an E at the end of Greene. Do you guys have your blue checks yet?

Rob:
Oh yeah, baby. You know I do.

David:
Make sure it’s got a blue check, because we have a lot of fake people that are mimicking us trying to take your money through scams of a crypto nature, and we don’t want you to fall for that. I’m DavidGreene24 on YouTube and on pretty much all social media. Send us a DM if you have any questions. If you like this show, if you like the straight shooting, if you like the no BS, no fluff, we’re giving it to you like it is, and we’re giving you examples of what we’re doing to make deals work, would you please go leave us a review on Apple Podcast, and let us know what you think about the show.
All right, I’m going to get you guys out of here. Thanks so much for joining me. We went into overtime today, sticking with the basketball analogy, but we hope we gave you guys a great game. This is David Greene for Henry, Relentless Pursuit, Washington, and Rob, the Papa Doc of Freestyles, Abasolo signing off.

 

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Debt-ceiling drama pushed bond yields up last week, taking mortgage rates to a new 2023 high in the middle of the spring home-selling season. Active housing inventory, thankfully, saw some decent growth last week. Purchase application data had a second straight week of declines. 

Here’s a quick rundown of the last week:

  • Active inventory grew 8,914 week to week, even though new listing data is still trending at all-time lows in 2023.
  • Mortgage rates rose to a 2023 year high of 7.12% as the debt ceiling talks pushed bond yields higher.
  • Purchase application data had its second straight week of negative data as the constant theme of higher rates impacted the weekly data.

The 10-year yield and mortgage rates

The White House and Republicans announced a tentative deal on the debt ceiling on Saturday,  putting an end to the drama we’ve all had to deal with for the past two weeks.

And on Wall Street, many traders were short the bond market, meaning that a lot of speculative trades were made betting that bond yields would quickly go higher. These two factors sent bond yields shooting up. 

Of course, this sent mortgage rates to the yearly high of 7.12% last week, which is the second time this year that mortgage rates have made a 1% move higher from the bottom! 

Mortgage rates have been very volatile — even though the 10-year yield hasn’t reached a new high in 2023, mortgage rates have. Since the banking crisis started, the mortgage market has gotten increasingly stressed, and the recent debt ceiling issues didn’t help. As you can see below, this last move higher in bond yields was very sharp.

image-70

In my 2023 forecast, I wrote that if the economy stays firm, the 10-year yield range should be between 3.21% and 4.25%, equating to mortgage rates between 5.75% and 7.25%. I have also stressed that the 10-year level between 3.37% and 3.42% would be hard to break lower. I call it the Gandalf line in the sand: You shall not pass.” So far in 2023, that line has held up, as the red line in the chart above shows.

However, even though we haven’t hit my peak mortgage rate call of 7.25%, the mortgage market is much more stressed than I thought it would be in 2023.

This is where the banking crisis and the debt ceiling uncertainty kick in, as I tagged the peak rate of 7.25% with a 10-year yield of 4.25%. The new variable of the banking crisis is important: the debt ceiling issue for now is over unless something unforeseen happens, but the banking crisis and the mortgage stress are still here.

We might get some short-term reprieve in bond yields and mortgage stress. However, the spreads between the 10-year yield and 30-year mortgage rates have worsened since the banking crisis started. It will be critical to see how the bond market and mortgage spreads act this week.

Another aspect of my 2023 forecast was that if jobless claims break over 323,000 on the four-week moving average, the 10-year yield could break under 3.21% and head toward 2.73%. This could push mortgage rates down into the mid-5% level. Right now, the jobless claims data, while rising noticeably from the recent lows, still hasn’t come close to breaking over 323,000 on the four-week moving average. This week is jobs week, with four different labor reports I’ll be watching.

From the St. Louis Fed: Initial claims for unemployment insurance benefits increased by 4,000 in the week ended May 20, to 229,000. The four-week moving average was little changed, at 231,750.

image-71

Weekly housing inventory

The growth in active listing inventory has been tepid this year. Some feared a mortgage rate lockdown would prevent inventory from growing this spring, but that’s not the case.

Even though inventory growth has been slow, we are still seeing a spring inventory bump as we do each year; it just hasn’t been very strong. As we can see from the data below, inventory is higher than last year but far from anything we think is normal.

  • Weekly inventory change (May 19-26): Inventory rose from 424,190 to 433,104
  • Same week last year (May 20-27): Inventory rose from 338,399 to 357,582
  • The inventory bottom for 2022 was 240,194
  • The peak for 2023 so far is 472,680
  • For context, active listings for this week in 2015 were 1,131,405
image-73

New listing data rose last week, according to Altos Research, but the trend of 2023 having the lowest new listing growth in history is still intact. Even so, let’s remember that there are still people selling homes where they had low mortgage rates to buy homes in a higher rate environment: Total active listings are still higher this year than last.

Here are the new listings data for this week over the last several years:

  • 2023: 62,765
  • 2022: 83,105
  • 2021: 74,984

For this week, I want to stress the big difference between the new listing data in 2023 and the previous two years.

In 2022, when the housing market was dealing with a sharp move higher in mortgage rates, the new listing data grew higher than the same week in 2021. You can make the case that some sellers wanted to list before rates increased even more, and that was reflected in the weekly data.

But after mortgage rates got over 6%, went back to 5%, and then spiked to 7.37%, sellers decided not to list their homes at the same rate as the total cost to buy a home simply went up too fast last year. This shouldn’t shock people when you have the biggest affordability hit in your lifetime in a year; this crushes demand. A seller is a traditional buyer, so when affordability isn’t great, some people don’t list their homes to sell to buy another.

image-69

While it has been disappointing to see new listing data trending at all-time lows and low levels of growth in active listings in 2023, we still have more inventory this year than last year. Unfortunately, that’s not saying much.

Purchase application data

Over the last seven months, the big housing story has been purchase application data stabilizing from its waterfall dive in demand in 2022. Starting on Nov. 9, mortgage rates fell from 7.37% to 5.99%, facilitating 12 weeks of positive trending data on the weekly reports, giving us a big jump in sales in the existing home sales reports a few months ago.

Purchase application data look forward 30-90 days, so while sales were still falling, that data was setting the groundwork for a big rebound in demand.

As you can see in the chart below, existing home sales collapsed in the fastest fashion ever in 2022 but then had one big bounce in sales. After that, not much is happening, and for now, I am not looking for sales to get higher than 4.55 million as purchase application data in 2023 has been having a tug-of-war battle between positive and negative prints depending on where mortgage rates are for the week. 

image-74

Purchase application data is very seasonal; I typically weigh this after the second week of January to the first week of May since after May total volumes fall. As you can see in the chart below, we are working from a shallow level today, and May is almost over. 

image-72

We track weekly purchase application data regardless of seasonality, as the last three years have shown we have seen late-in-the-year runs with this data. In a recent podcast with Mike Simonsen, I talked about why I believe we get the seasonal bottom in inventory later in the year. Now that the seasonality period is ending and considering how high mortgage rates are today, the housing market has had a slightly positive year, something I talked about on CNBC recently.

The week ahead: Bonds and jobs 

On this short holiday week, I will first be focused on the bond market reaction to this debt ceiling deal. The housing market moves with the 10-year yield, so watching this is critical. 

Second, it’s jobs week again! We will get data on job openings, jobless claims, the ADP report, and the big BLS jobs Friday report. Remember, with the jobs data, wage growth is critical. The Federal Reserve wants a higher unemployment rate, and it won’t tolerate Americans making more money, so from their perspective wage growth has to slow down as soon as possible. 

Also we have home price data from the S&P CoreLogic Case-Shiller Home price index and FHFA this week.

The week ahead is all about the bond market reaction to the debt ceiling agreement, watching to see if the spreads improve for mortgage rates and jobs data. Hopefully, the weekly tracker articles have shown how essential it is to track housing data weekly. Too often, people don’t understand the turns in the market, both positive and negative, because they are forced to rely on stale monthly data.  



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Want to know how to use your home equity to buy your next rental? You could be sitting on tens of thousands in potential funds that’ll make saving for the down payment MUCH easier. But first, you’ll need to know how much equity you have, the amount you can pull out, and whether or not a HELOC (home equity line of credit) is even worth it. So, if you’re itching to get your next deal faster, stick around! Ashley and Tony will give you the info you need to take your money and multiply it!

Welcome back to this week’s Rookie Reply, where Tony wears a hat! Aside from covering up that beautiful bald head, Tony and Ashley have some solid tips for anyone looking to buy a property with tenants in place, debating the value of a whole house HVAC system (heating, ventilation, and air conditioning), or putting up the pros and cons of private lenders vs. bank loans. You’ll learn the many ways to cool your house, how to confirm rent payments before you buy a home with inherited tenants, and how to make passive income by private lending!

Ashley Kehr:
This is Real Estate Rookie Episode 290.

Tony Robinson:
The cost between a mini-split ductless HVAC system versus the traditional systems are pretty comparable. But the reason we typically go with the mini-splits is because you’re able to, hopefully, this is our logic, is save on your costs a little bit because you’re able to turn it on by the room. So if you only have one unit going, then it’s only just that one part of the house that’s going as opposed to a lot of the central heating and air maybe you only have if it’s a small house. Maybe there’s just like one unit that’s trying to cool the entire house.

Ashley Kehr:
My name is Ashley Kehr and I’m here with my co-host Tony Robinson.

Tony Robinson:
Welcome to the Real Estate Rookie Podcast where every week, twice a week, we’re bringing you the inspiration, motivation, and stories you need to hear to kickstart your investing journey. We’re back with another rookie reply where we get to answer questions from our rookie audience and give you guys the insights as if you’re sitting in the same room as me and Ashley today.

Ashley Kehr:
Today is a rookie reply. We are actually going to be turned into expert HVAC service text, Tony and I, and also our producer does chime in to correct us. So maybe not that expert, but we are going to talk about different ways to heat and cool your house. I promise this does have something to do with real estate investing. When you are looking at properties, what are the different options you may have and what may be better or worse for you depending on the property, the area you’re in and what kind of investment you are doing? The next thing that I really like we touch on are security deposits. You are inheriting a tenant. What happens with the security deposit? Are you getting a check? Are they having to pay you the security deposit? Do you get it from the seller? Do you have to come up with your own security deposit for the tenant? We’ll talk about all things’ security deposit.

Tony Robinson:
Yeah, we also talk a little bit about the difference between a home equity line of credit and a traditional line of credit because those things, even though they sound somewhat similar, there’s actually a difference between the two. So we want to make sure you understand when to use one and when to use the other. But I also want to give a quick shout out to someone by the username of Brit G. She left to say, five star review on Apple Podcast and she says, “I’m an elementary school teacher in the Los Angeles area. I’ve always been told I picked the wrong career if I want to own property in LA. While real estate rookie is helping me emerge from that lie I’ve ignorantly bought into and providing hope and practical steps to finally move towards real estate ownership. The Pace Morby episode specifically is so motivating. Thank you, Tony and Ashley.”
So Brit, we are super excited for you and I love that you said that you’ve woken up from that lie because becoming a real estate investor works in any market and any cycle. There are always people being successful with these strategies. So yeah, we appreciate that. If you’re a rookie audience member and you haven’t yet left us an honest rating review on Apple Podcast or Spotify or wherever it is you’re listening, please take a few minutes to do that. The more reviews we get, the more folks we can reach. The more folks we can reach, the more folks we can help

Ashley Kehr:
Or kindly ask all of your friends and family to do so on your behalf.

Tony Robinson:
There you go.

Ashley Kehr:
But seriously, thank you guys so much. We love reading your reviews, especially when you tell us how the podcast has helped you, what you realize, how you’ve been inspired and motivated. Also, I love the mention of the Pace Morby podcast episode right there too. That really was a great one. Before this episode started, Tony put me into group text with Pace Morby. I am now texting all my friends. I’m in a group text with Pace Morby, but we might have something super exciting that we may be working on with Pace. So stay tuned to see what that may be in the coming weeks or month. This is going to be very weather dependent as we have learned.
Okay, today’s question, our first one up is from Alex Diehl, “House A and house B are exactly the same except House A has HVAC and house B has window units. How big of a difference will this make in rents? Other things being equal?” First, I think we should explain exactly what an HVAC system is. Actually, what does it even stand for? Heating Ventilation?

Tony Robinson:
Oh, I was going to say, I don’t know what the V stands for. Heating and air conditioning, but yeah, ventilation sounds right.

Ashley Kehr:
So this is a unit in your house, sometimes it can still produce just heat and you don’t have to get the cooling system that goes with it for air conditioning. But typically, there are vents placed around your house. They do duct work throughout the house and commonly, it is a forced air unit that you use to heat your house. They’re saying the House A has this option where it’s like a built-in system throughout your house. House B has window units. So this is where I’m not sure on the exact details as far as window units doesn’t mean air conditioning units because I don’t think I’ve ever seen heating units that are in the window. Have you, Tony? Heating units in the window? I’ve only seen AC window units, so I wonder if this question is just the air conditioning is through the whole house or has AC window units.

Tony Robinson:
Yeah, I’ve actually never purchased a home with just a window unit. Every property that I’ve purchased has either had central heating and air. A swamp cooler is actually a really popular thing out in the desert. Then we do a lot of mini-splits for most of our properties, honestly. So yeah, I’m not sure if window units have the ability to push heat either.

Ashley Kehr:
So as far as the question goes, it’s how big of a difference will this make in rents? Other things being equal? I think the best thing to do is to look at comparables in your area. What do other houses have? If every other house for rent does have HVAC systems and then yours has window units, this may reflect on the price because people expect to have that, that HVAC, that forced air. If you look at rental units and it’s all different kinds of air conditioning and heat throughout the units for different properties for rent, then it may not affect your rent price at all. There’s two 40 unit apartment complexes that we have here, and each one for the AC has wall units, but they’re not like the mini-split units. It actually is half inside the wall, half outside the wall, almost like a window unit, but it’s put into the wall instead. Those are the AC units. The rent is not affected at all compared to other units in the area based on that.

Tony Robinson:
Yeah, I love your advice, Ashley, about looking at your comparables because I think Alex, for you, that’ll be the best source of truth for you. But I guess just for those that are curious, I recently had to install a mini-split system on a few of our rehabs. I’d say, “Installed,” we’re paying about three to 4,000 bucks per unit. We had a three bedroom that we did one on and that was about 15 grand because we put one in each bedroom, the one in the living room kitchen area as well. But I’ve actually never installed central heating and air on a property before. Have you had to install central heating, Ash? What’s the ballpark price on that?

Ashley Kehr:
Yeah, so I just did one in a cabin. The cabin is about a little under a thousand feet square footage, but the bedrooms are open loft, so there’s not a lot of closed off rooms in there. But I think it was around $8,000 to put the forced air unit in it with the AC with it. So heat and AC.

Tony Robinson:
Yeah, and that’s what I’ve come to see is that the cost between a mini-split, a ductless HVAC system versus the traditional systems are pretty comparable. But the reason we typically go with the mini-splits is because you’re able to, hopefully, this is our logic, is save on your costs a little bit because you’re able to turn it on by the room. So if you only have one unit going, then it’s only just that one part of the house that’s going as opposed to a lot of the central heating and air maybe if it’s a small house, maybe there’s just one unit that’s trying to cool the entire house. So that’s been our logic. Have you priced out between the central versus the mini-splits for your properties or do you just always go with the central?

Ashley Kehr:
We did a couple mini-splits probably two or three years ago in properties. Our big four unit we did. Those ended up being $5,000 each installed for them. One big decision for me though, as to whether I’m going to install those or do forced air is based on if I’m tearing out the walls or anything, if I’m doing a full gut rehab, because putting in that duct work, sometimes they have to go through, cut through the floor, go through the walls, especially if you have a second story, they’ll need to run it through something to get it up to the second story. So that’s definitely a big decision maker is if I am going to have the walls open already to run the duct work to do the forced air units. Of course there’s like that industrial look where it’s up in the ceiling and that’s actually what we did in the cabin we had.
There’s this huge pipe that runs from one loft to another into the actual closets, and then from there, it goes down into the little rooms and then it has the vents out into the main space off of the big pipe that goes across. So I think there’s so many different ways to install these things and it’s where getting a good contractor that will price out your different options for you. We originally had two contractors come out and quote this for us, and this property actually had radiant in floor heat, which is another heating option. There was when they did a pressure test on the lines underneath the concrete, because this cabin is just on a concrete slab, it didn’t pass the pressure test, meaning that there was a leak somewhere. So our options were to guess where it was and rip up the concrete floor or just not use the radiant in floor heat at all.
So we decided to just abandon that and that’s where we went and put the forced air unit in. In the other cabin though, it had a basement where you were able to access the lines for the radiant in floor heat underneath the floor. That actually passed the pressure test anyways, so we ended up just putting a new boiler in that system to run the radiant heat and we didn’t put a forced air unit into that at all. So that cabin with the radiant and floor heat, it doesn’t have a AC option. So eventually, we’ll have to go and probably put the mini-split unit in for AC in that property.

Tony Robinson:
Isn’t it crazy how every market has its own solution for heating and cooling? Radiant floor heat? I’m not even sure what you mean when you say that. I don’t think I’ve ever walked a property that has radiant … Just give me a visual of what that even looks like.

Ashley Kehr:
So you live in a warm climate, so you don’t need this, but imagine getting out of the shower and you have some nice tile floor that feels really cold on your feet. Well, you have that radiant floor heat that emits the heat up from the floor and now the tile is nice and warm and cozy and your feet don’t get cold. Actually, my house now, the whole house is radiant in floor heat. So every piece of flooring, the basement, the garage, and then it’s a ranch to the whole first level. It’s all radiant and floor heat and that’s how we heat our house. Then it’s set up into different zones. So there’s thermostats for different bedrooms, main area, things like that. So yeah, there’s so many different options.

Tony Robinson:
Interesting. Do you guys have swamp coolers in buffalo?

Ashley Kehr:
No. The only reason I know about that is because we did talk about this once and you had told me what it was, but I think you should explain it again. But yeah, I had never heard of it.

Tony Robinson:
Yeah. I had never really heard of it either. So we started investing in the desert, but it’s a common cooling option for folks who live in the desert. But basically the swamp cooler, it pulls in, it almost works like the window unit where it’s pulling in air and then it’s pushing it down into the house, but it’s not working off the traditional thing. But usually, they sit on top of the roof. I want to say there’s some kind of moisture element to it as well because now they always have these drip pants and stuff, but the thing is they’re confusing to use.
You have to open your windows a certain way and we just didn’t think the guests and short-term rentals weren’t familiar with swamp coolers could use them in the right way because we didn’t even really fully understand them. So typically, we just take off the swamp coolers and that’s what we end up put in the mini-split systems. But they are a low cost way to keep your house cool. I’ve been told, if you get a good swamp cooler, it can work just as well as central air does, but at a fraction of the cost. So an option for you guys.

Ashley Kehr:
So I think to wrap up this question here is that if it was me personally, if everything else was the same, I’d go with the house with the HVAC system instead of the window units. First of all, I think it’s a nicer look, not having the window units sticking out, especially if you’re using the AC ones, typically in colder months when you don’t need the AC, depending where this property is, you have to take the AC unit out of the window, you close the window back up and then when spring comes again, you have to put it back in.

Tony Robinson:
Stick it back in.

Ashley Kehr:
Yeah. Also, HVAC systems tend to be more energy efficient than these window units at using electric or gas or however your HVAC system is run.

Tony Robinson:
Our producer just corrected me too about the swamp cooler. He said, “Yes, they use evaporate cooling, the air flows over cool water pads and then lowers the temperature.” So there you go. That’s how the swamp coolers work. So shout out to Eric for a coming in clutch with that last little bit of information.

Ashley Kehr:
Then he also wanted to add that the window units could be a safety concern too for falls and break-ins possibly.

Tony Robinson:
That’s actually true. Have you bought any furniture from, I don’t know, anywhere recently? We bought a dresser and when we were putting the dresser together for one of the properties, and this was a couple of years ago, but it had directions that had wanted us to secure the back of the dresser to the wall, it had an anchor to take the back of the dresser into the drywall to stop things from tipping over because I guess there had been instances of these dressers tipping over on a small children. So that’s actually a really good point. Safety concerns about the wall units also.

Ashley Kehr:
Yeah. That actually happened. My son, when he was younger, he tried to climb up the dresser and luckily, he had pulled out the bottom drawer, so the bottom drawer held it a little bit so it never completely fell. But those sturdy Amish furniture, that sturdy drawer held the whole dresser. Okay, let’s go on to our next question. This one is from Eric Hyman. Once again, you guys, thank you so much for submitting questions to us. If you would like to submit your own question, please leave it on the Real Estate Rookie Facebook page and also coming soon, Tony and I will also have links in our link trees in our profiles on our Instagram accounts at wealth and rentals and at Tony J Robinson. Then your last option, and probably the easiest is just go to bigger pockets.com/reply and leave your question there.
Okay, so Eric’s question is, “I recently purchased a property for a hundred thousand dollars and put down 25,000 and the appraisal came back at 125,000. So I have some nice instant equity there. My question is, how soon after taking ownership can I take out a HELOC out on this property? I’m already looking at another property and I could use the HELOC as the down payment. Would a bank do this or want me to wait? Secondly, how much could I get? Would it be 80% of the 50K inequity, so 40K? Thanks.”

Tony Robinson:
Yeah. Well, lots of good questions here and I feel like we’ve been getting a lot of questions recently about lines of credit and HELOCs. I think the first thing that I’ll say is that most banks only give HELOCs, Home Equity Lines of Credit on your primary residence. You can get a commercial line of credit. I’ve tried, I’ve found it pretty difficult, the kind of local banks I chatted with here in California. Ashley, I think you’ve had some success with lines of credit in your neck of the woods, but I would say most banks aren’t going to give you a HELOC per se on an investment property, but they will give you a HELOC on a primary residence. Have you noticed anything different from that, Ash, or does that jive with what you’ve seen as well?

Ashley Kehr:
Yeah, I’ve been able to do two commercial lines of credit on rental properties that are in LLCs, but they’re not the best of rates and you’re going to get a way better rate if it is your primary residence. But the biggest thing is just going to different banks and asking what they have to offer on the property because you’ll be surprised at what some banks can do, especially small local banks. That’s where I’ve had the best luck, I guess, is using those small local banks. One bank that I’ve used the most frequent only has seven branches I think, and it might even be less than that.

Tony Robinson:
I think one thing to call out though and definitely check with whatever bank you end up getting your HELOC with, but what I’ve seen some people do is if they live in their property and they plan on moving, before they move, they’ll pull a HELOC on that property. Now like I said, make sure you understand the limitations of whatever HELOC you’re using. Do you have to live in it for the duration of the HELOC or you just need to be in at the time that you close in the HELOC? But I have seen some investors do that where they know that they have a decent amount of equity in the home that they have and before they turn that home into a rental property, they then go out and get the line of credit and then use that after the fact.

Ashley Kehr:
This is such a great alternative to selling your house if you want your don’t want to rent it out because you have a hundred thousand dollars in equity sitting into it and you just seem like that would be a waste to let that equity go instead of selling it, just go ahead and take out that HELOC so you can still tap into that money on the property too and use it for your next investment. As far as the second question, would it be 80% of the equity that is left in the property? So the way a HELOC works is you’ll take the appraised value of the property, what your current mortgage is, and then subtract that to get with equity you have and then they will lend up to a certain amount. So in this example, he’s saying, “80%.” So if the property appraised at 125,000, the mortgage is 75,000 and then he would be able to take up that difference, whatever that difference is from the 75,000 to 80% of 125. Tony, what is that math? Have you been calculating as I’ve been trying out?

Tony Robinson:
Yeah, so you do 125 times 80% minus your 75 leaves you with 25K.

Ashley Kehr:
Okay, so 25 K is left in equity. So as far as him saying the 50%, it’s not 80% of the equity that’s left in the property, it’s 80% of the whole appraised value. So I think that’s what we need to make clear for him. I think that’s where the confusion is. It’s not 80% of the equity, it’s 80% of the appraised value minus what you already have your mortgage for. So that would be, he’d be able to get the 25,000 instead of 40,000 on the property.

Tony Robinson:
Then one other question that Eric asked is, is there a time period on the HELOC? So I know for a lot of cash out refinances, there’s a seasoning period where they want to see you hold the property for six months or so is what you typically hear to be able to do a cash-out refinance. But I’m honestly actually not sure if there’s a time period on getting a [inaudible 00:20:50] on your primary residence. Are you aware of any restrictions?

Ashley Kehr:
No, I’m not. I only know of a seasoning period that a bank may require to go ahead and refinance a property, but not for a line of credit. But also it can depend on the bank. So asking different banks as to what their rules are for that. But a seasoning period to refinance can typically be six months to 12 months before they have you go and refinance. As far as a line of credit, I don’t think I’ve ever went and gotten a line of credit right after closing on a property, so I haven’t had any experience in that at all. Another thing I want to mention too, as far as the 80% of the appraised value to get that line of credit is that may vary too. That’s not like a lot of mortgages are standard at the 80% when you’re going to refinance, but as far as a HELOC, sometimes my one business partner, he took out a HELOC and they went up to 95% of the appraised value of his home.
So he actually had it kind of stacked. He had a mortgage that was actually with a private lender who he purchased … No, he didn’t purchase house from them, but they lended him the private money to do that and he’s pays them the mortgage payments. Then stacked on top of that, he went and got a home equity loan. So instead of a line of credit, it’s actually a payment plan split up where he is paying principle and interest on it. Then stacked on top of that, he had a line of credit, so he was very leveraged at 95% of the property. But the difference was, was that all those funds he was using to put in into our deals and our deals were paying him a mortgage payment, which more than covered the payments he was making for that additional home equity loan and that HELOC on the property too.
Okay. Let’s move on to our next question. This question is from Tim Laratour. “What is the advantage to a real estate investment company raising capital through private equity versus a bank? What’s in it for them? From an investor’s standpoint, this looks like a great source for passive income, but I’m weary.” So I think what he’s trying to say here is why would somebody go out and raise private money instead of going to a bank to fund their deal?

Tony Robinson:
Well, just to add some context. So specifically, Tim, he posted this in the Real Estate Rookie Facebook group, but he also linked to a company called RealtyMogul. If you all look up RealtyMogul, they’re essentially like a crowdfunding platform for real estate transactions. Let’s even take a step back, most people who are buying large real estate deals, big apartment complexes, large self storage facilities, big commercial mixed use developments, the majority of people who are purchasing or building those projects are not using all of their own money. They’re raising funds from two different sources. It’s usually a mix of these two sources. The first source and the majority of the cost comes from a bank. So they’ll go to a big bank and they’ll get maybe 70% of the total cost to purchase that property, and then the remaining 30%, they’ll go out and they’ll raise from other individuals who become their passive investors.
So this is called a syndication and you can syndicate anything but syndication in real estate. That’s how it goes. There’s one group of people who find the deal, put the deal together, secure the bank financing, and then they go out and they raise funds from other in individuals to cover the remaining balance. So usually 70, 30%. So Tim, first thing I’ll say is that it’s a very common practice and pretty much any big shopping center that you drive by or big apartment complex you drive by probably leverage some syndication to make that happen. So it is a very normal thing.

Ashley Kehr:
Then he said, “What’s in it for them?” What’s the reasoning for that?

Tony Robinson:
I think mostly it’s just the, say you want to buy a $100 million apartment complex and maybe you’re able to get 70 million from the bank, that’s still $30 million that you need to put up to be able to purchase that property. I’d say the average person probably doesn’t have 30 million bucks lying around, but maybe if they know enough other investors who have a hundred thousand, 250,000, $500,000, they’re able to stack up to get to that 30 million. So that’s a big part of the reason why folks leverage the syndication model is because the numbers are bigger than what they could take down comfortably themselves. Now there are some differences though, because like I said in this post, Tim links to RealtyMogul.
And they focus a little bit more on crowdfunding as opposed to a traditional syndication. So if you work with a traditional syn indicator, usually they’re going to offer you what’s called the 506B, which allows for both accredited and non-accredited investors or 506C, which only allows for accredited investors. Usually there’s some minimum investment. You might see 25K on a smaller deal, maybe 50 to a 100K on a bigger deal, which means at minimum you have to be able to put up maybe a six figure check to participate in that deal. If it’s only open to your accredited investors, you have to check certain boxes around your income or your net worth to be able to qualify to even be able to invest in those deals.
So that’s where the majority of action happens. Then on a crowdfunding platform like RealtyMogul, that one’s a little bit different because you don’t necessarily have to be an accredited investor, you don’t need to write a $50,000 check. A lot of these crowdfunding platforms allow you to get in with a hundred bucks and you’ll obviously own a very small share of that real estate deal, but your ability to get involved in the threshold is significantly lower. So yeah, it’s a win-win, I think for both people, assuming that the operator, the person putting the deal together knows what they’re doing and it could be a really easy way to get a passive return on your investment.

Ashley Kehr:
Then his last question is, from an investor’s standpoint, this looks like a great source for passive income, but he’s not exactly sure if it is. So the best thing you can do is to vet the operator of the syndication deal or the crowdfunding platform. One way to do that is to talk to other people who are investing with them. So I think a great starting point was Tim putting this in the real estate rookie Facebook group, if anybody has invested with them to hear some feedback, do that in all different kinds of Facebook groups, put it out on Instagram and see what feedback you get.
The bigger pockets forums gold for finding out information on people or companies, lots of people will give you their opinion, but also do your own research before you invest in a syndication deal, actually understand what fees you are paying, how the deal is structured, when are you actually going to get your money back, all these different things that it can be extremely confusing. So my recommendation would be to go to YouTube University, learn to understand what a syndication deal is. You shouldn’t be investing in something just by, “Oh, this company on social media looks like they do a good job. This property looks really nice that they’re about to buy, I’m going to invest in it.” That should not be your reasoning for investing with someone. So take the time to actually do some research, vet the company, then also to understand what your investment is actually getting you. Worst case scenario, best case scenario.

Tony Robinson:
I guess just one last thing, Ashley, it might be cool if we bring on someone who’s an active passive investor in syndication’s to talk about how are they vetting these different operators? How are they potentially vetting the deals? What kind of returns are they typically able to achieve? Because honestly, lending money on the private, being a private moneylender or being an LP and other people’s syndication’s are the most passive ways to be a real estate investor. So get a healthy return because you’re going to get a better return than you would typically with a REIT, but it’s definitely not as much work as managing that deal yourself. So maybe we’ll plant that seed for our producers, maybe find some LP, some passive investors and have them give their experience to the rookie audience

Ashley Kehr:
Yeah. You know who I just saw recently that posted on social media. This can be our Instagram shout out of the week. We made some cool noise about that. But one person that I saw was at Honey Money, Rachel. So Rachel, she actually just posted how I think she wants to or has invested in five syndication deals. I know, I think it was at least three that she’s done so far, maybe even this year. She shares a lot about her journey of investing in the syndication’s and she used to be a very active hands-on investor with rental properties, went through a divorce and had to sell up her portfolio and now she’s stacking it back up while also investing in syndication’s. So she might actually be a great person to have on as to how she is choosing the syndication deal she’s investing in.

Tony Robinson:
Yeah, I’m actually in a group chat with Rachel and some other investors, so I got to hit her up and see if she’s down to come hop on because she’d be great.

Ashley Kehr:
Okay, so our next question is from Jared Sutherland. “Do you check rent is being paid during 10 day inspection periods or before? I will be inheriting tenants for four months. How does security deposit work? Is that transferred or does it come out of pocket? I haven’t bought with existing renters before. Thanks.” Okay, so for this one, inheriting Tenants always a controversial issue that we discuss here in the bigger pockets forums, Real Estate Rookie Facebook page.

Tony Robinson:
I’ve never inherited a tenant because I’ve always been too terrified. So you’re the person that they can speak on that.

Ashley Kehr:
I have. I’ve had good case. I’ve had more good cases than bad cases for sure. Inherited tenant.

Tony Robinson:
Yeah, and I feel like that’s how it’s with all parts of real estate investing, I haven’t met anyone that does any strategy where it’s like, this has gone wrong the majority of the time. Every strategy that people talk about that maybe they’re hesitant to go into, it could be people feel that way about short term rentals. People feel that way about Section eight. People feel that way about investing in Detroit. You can think of any asset class and there’s always this hesitation, but I feel like in general, the reason why real estate investing is so popular and so successful is because more often than not, if you do things the right way, it’s going to work out. So I’m sorry, I’m going off on a tangent now, Ashley.

Ashley Kehr:
No, no, I think that was great and definitely relatable and 100% accurate. Okay, so the first question is, do you check rent is being paid during the 10-day inspection period or before? So your 10-day inspection period’s, your due diligence, I would ask at any time. You don’t even have to wait until the 10-day inspection. This is actually something you could even ask for before you even put your offer in or when they sign the offer, if they will give it to you, that’s definitely up to the seller. But as far as if rent has been paid, there will be a rent rider attached to your contract. So if you are purchasing on market deal, the real estate agent will provide this to you where it will tell when was rent last paid. As far as checking the accuracy of that, well, it depends on how the tenant is paying rent and if the seller is actually reporting that rental income as to how much they can actually prove to you that the tenant has paid.
In this scenario, I usually have the seller of the property tell me what the rental payment is, how often they have paid, if they’re all caught up on rent. But then I also send a notice to the tenant called an estoppel agreement where they fill out the information, can I verify what the tenant is saying and what the landlord is saying? You can go as far as asking for bank statements from the landlord, asking them to show proof of the income being deposited each month. I’ve never done this, but it’s definitely one extra step you can take to verify that the rent is being paid and collected. As far as the security deposit, this is usually taken care of at closing where you will receive a credit on the closing statement.
So say the security deposit is $1,000 a month at closing, you’ll be paying a thousand dollars less for the property, for the security deposit, but then you will have to come up with the cash yourself to actually fund that person’s security deposit. So in four months when they’re leaving, if they have the right to their security deposit because there’s no damages, you have to come up with that thousand dollars. So make sure you have that money set aside and reserved for that. You can also negotiate though that it’s not taken off the closing statement and that you are still paying the normal purchase price and that the seller actually writes you a check for the security deposit.
One thing to be very cautious of, which happened to me when I was still very, very young at buying inherited tenants, I bought a couple properties from one investor and there was two tenants that owed him some rent still, they were not caught up on rent, and he actually took that money out of their security deposit and on the closing statement only gave me the remainder of their security deposit. That wasn’t what was supposed to be done, that wasn’t supposed to happen, but I just didn’t understand, I didn’t realize and I didn’t catch it and neither did my attorney. So that’s something I always check for now is make sure I’m getting the full security deposit back. If they owe him rent, they owe him rent, that shouldn’t come out of the security deposit because that is your security deposit now per the lease agreement that is in place.

Tony Robinson:
That’s super smart. I never thought to check for that, especially about if they owe that person, that shouldn’t come out of the money that you’re owed. That’s super smart.

Ashley Kehr:
A lot of leases in our lease that says the security deposit cannot be used for last month’s rent or rent owed because a lot of we had seen that sometimes people would be like, “Oh, just keep my security deposit.” But then we get into the unit, it’s like, “We need to do security deposit to do these other things.” So check because if that’s in the lease agreement, the seller doesn’t even have a right to that security deposit because they haven’t even left the unit. So definitely one thing to check for.

Tony Robinson:
Let me ask you this question. You’ve been investing for a while now. How many different versions of your lease agreement for your own portfolio do you think you’ve gone through? Ballpark.

Ashley Kehr:
When I started working as a property manager, it was a 40 unit apartment complex. It was a one-page lease agreement. Now the lease agreement is 10 pages, I think. Then with all the addendums, the cleaning checklist when you move out like, “Here’s the keys that you’re getting, here’s your pet addendum,” all these things that, it’s actually longer than that. But yeah, so it definitely changed. I’ve had a property management company in place, and actually in a couple of days is when the in-house property manager I’ve hired takes over. So I’ve created a new lease agreement again. So they had their own. But yeah, it definitely over time and has just adapted and changed.
For each property too, I don’t use the same lease agreement for every property because there’s different things like the 40 unit apartment complex I put in there, the entry doors are locked, you get a common area key. These are some of the rules, things like that. Somebody comes in and does the snowplowing and you’re not responsible for snow removal. Well, a single family home, they are responsible for snow removal. If I put things about the shared common areas in there, I’m like, “What do you mean? Who am I sharing this with? This is a single family home.” So making sure that your lease actually applies to the property too. Then I just save all of those templates’ template, lease agreement, and then whatever property it’s for.
A lot of the duplexes and stuff, I can pretty much use the same one where it’s fillable for utilities if they’re different, maybe I’m paying the water on one, but I’m not on the other things like that. So those are pretty much standard, but going through your lease agreement every once in a while, or even just keeping a little notes in your phone. So on Instagram or wherever you see somebody included one little thing into their lease agreement that made a difference, or they had this issue that came up and they’re like, “I never thought that would happen.” Go ahead, write it down. So every quarter or every year, whenever you’re going through your leases, you have that little notepad and you can go in and add those things in.

Tony Robinson:
Yeah. The reason why I ask that question is because I want all of our rookies to understand that your lease honestly should be a living, breathing document. As you said, as tenants move out or you experience different challenges with certain tenants, the way that you problem solve for that or future-proof for that to make sure it doesn’t happen again, is that you update your lease. We don’t have leases for any of our properties because everything’s short term. But what we do have are JV agreements with our different partners that we’ve worked with. I’d say that after almost every single partnership we’ve identified something that we wanted to change or update to that partnership for the next one. So yeah, a lot of your documents that you have in your business, whether for partnerships, whether for tenants, whether for whatever it may be, you always want to make it a habit of going back and updating those to reflect whatever newer information you’re receiving.

Ashley Kehr:
Yeah, it’s so funny. I was looking back through an old folder of when I first started property management and just looking at my checklist of when a new tenant moves in, here’s my checklist. I knew nothing about property management. I was thrown into this job. I had no one to mentor me or show me what to do. I was literally just Googling stuff and I was looking at it. I was like, “Geez, I actually should start using this again. This is actually pretty good.” Yeah.

Tony Robinson:
Yeah, it wasn’t too bad.

Ashley Kehr:
But yeah, so it’s just interesting to see all the things that evolved, but also how simplistic it was. But it worked for me so well, now I’d probably take the same thing and add 50 little line items underneath each thing to expand on it. But just going back, it’s just something, some little process, some little system, some lease agreement that you can just continuously build off.

Tony Robinson:
I guess just last comment on that, because you made such a good point there, Ashley, is that when you’re a brand new investor, and obviously this isn’t even just for investing, this is for anything that you’re trying to accomplish in life. But I’ll use investing because that’s what this podcast is about. When you’re looking at someone like Ashley or Tony from the Real Estate Rookie Podcast, or you’re looking at James Dainard and Kathy Fettke and Henry Washington from On the Market, or you’re looking at Rob and David from the Real Estate Podcast, it’s easy to hear about how their businesses are running or how they’ve set things up or how things are optimized and feel like you’re way behind because you haven’t established all of those things yet. But what you have to understand is that we’re all multiple steps into this journey, and we’ve already gone through those mistakes and those rough patches to identify where we need to make improvements.
That’s what I love about James Dainard. He, he’s always so open that the only reason he knows so much and he’s able to be so articulate about running his real estate business is because he’s made a ton of mistakes along the way. Every tip that he’s giving you when it comes to flipping houses, managing rehabs, wholesaling, whatever, is because he made a mistake to teach him that lesson. So for all of our rookies that are listening, don’t get demotivated by hearing how Ashley has a 10-page lease. Instead, take what she said at the beginning that she started with the one-page lease and it was over the course of her investing career that she was able to make those changes and adjustments to get to where she is today.

Ashley Kehr:
You can also go to biggerpockets.com/pro and become a pro member and get state specific lease agreements for free that were created by an attorney. That’s a great starting point for you to start looking at those. Then you can just download them and then you can tailor them and change them as much as you want to. Then of course, when you’re done, I would have an attorney approve them if you do make a lot of changes to that lease agreement. But that’s a great starting point right there is using those documents. Also, everyone listening, please do not tell James Dainard how much we talk about him on this podcast because he’ll never ever let me live it down. So this stays between us. This is a little rookie secret. Okay? Thank you guys so much for listening to this week’s rookie reply. I’m Ashley at Wealth From Rentals and he’s Tony at Tony J Robinson, and we will be back on Wednesday with a guest.

 

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