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Jobs data shows the labor market is normalizing


Is the labor market finally normalizing? Jobs Friday data came in as a beat of estimates, but the labor market is clearly starting to come back to earth, killing the fear of 1970s wage spiral inflation. We’ve had a good week’s worth of data to show that the Federal Reserve is starting to get what it wants if you know where to look. 

The headline jobs data beat estimates, but we did have 149,000 negative revisions to the previous month’s data. However, the cumulative labor data this week is a story of job growth returning back to normal and the Fed should be happy because the labor market has always been its target for pain.

From BLS: Total nonfarm payroll employment rose by 253,000 in April, and the unemployment rate changed little at 3.4 percent, the U.S. Bureau of Labor Statistics reported today. Employment continued to trend up in professional and business services, health care, leisure and hospitality, and social assistance.

Part of my COVID-19 recovery model on the labor market was that job opening should reach 10 million in this recovery. The Federal Reserve was terrified of this because this could send wages spiraling out of control, which means they had to kill this labor market. Nothing is worse to the Fed members than 1970s inflation.

That isn’t happening today. As we can see, wage growth has been cooling down, even with a tight labor market. Yes, wage growth has slowly decreased while millions of jobs were being created and we had massive job openings.

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Even if we added other variables, such as hours worked, we could see the wage growth data cooling.

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Also, this week we learned that the one data line Fed cares about, job openings, are no longer at 12 million. That number is down roughly 2.5 million since 2022. The Fed wants this to return to 7 million to feel more comfortable about the labor market. The reason I say 7 million is because that’s where we were before COVID-19 happened.

Job openings data

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One thing to remember about this labor market and the historically low unemployment rate of 3.4% is If we didn’t have COVID-19, total employment in America would be 158 million to 159 million, just taking the pre-COVID-19 growth trends.

Based on demographics, I wasn’t a huge job creation person in the previous expansion. However, the shock of Covid created a significant fall in employment, and while it has been spectacular to see the rise of people being hired again, we are still in make-up mode as long as demand is growing.

If we didn’t have COVID-19, the total number of jobs would be higher today, but the job growth numbers would be lower. So, if some people are surprised about the job data at this cycle stage with all the rate hikes and bank drama, don’t forget this reality when considering the job growth we have seen since 2022. 

Total employment data: 155,673,000

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Now let’s look at the internal report for more details.

One of the data lines I have stressed during the past decade is the unemployment rate tied to educational background. This is useful for housing data, especially when the next recession hits. Here is a breakdown of that data for those aged 25 and older:

  • Less than a high school diploma: 5.4% (previously 4.8%)
  • High school graduate and no college: 3.9%
  • Some college or associate degree: 2.9%
  • Bachelor’s degree or higher: 1.9%

Yes, you saw right, college-educated Americans with a Bachelor’s degree have an unemployment rate below 2%, which means they’re in great demand.

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This report shows the sectors where the jobs were gained and lost. Most sectors this month had job gains, of course. But, if we take a three-month average of job gains in the private sector only, not accounting for the government, it’s running at 182,000 per month, the slowest pace of job growth since early 2021. Again, the Fed is getting what it wants, the labor market to cool off.

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My 2023 forecast for the 10-year yield and mortgage rates was based on the economic data remaining firm, meaning that as long as jobless claims don’t get to 323,000, we should be in a range between 3.21%-4.25%, with mortgage rates between 5.75%-7.25%. Right now, jobless claims are at 242,000.

If the labor market breaks, the 10-year yield could reach 2.73%, which means mortgage rates could go lower, even down to 5.25% — the lowest end of my range for 2023. 

Even though we had a lot of drama this week in the market, my famous Gandalf line in the sand for the 10-year yield didn’t break. I’ve said for many months that this line is a tough nut to crack and on Friday afternoon before close the 10-year yield was around the 3.37%-3.42% level, as the chart below shows.

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Overall, April was a good jobs report; nothing is wrong with the labor data now in a meaningful way, but we see that the growth of job creation is slowing down, which was always going to be the case coming back from the depths of COVID-19.

When does the labor market break, meaning jobless claims data shoot up much higher? Even though job openings data has noticeably come down, we haven’t seen jobless claims data spike out of control, which is the most critical data line we have with labor.

I joke that in the rock, paper, scissors game, jobless claims beat job openings always. The Fed knows that all their rate hikes have a lag before they hit the economy. We can clearly see that the fear of wage growth spiraling out of control is not happening and that, over time, the inflation growth rate will ease. 

What’s next?

Over the next 12 months, we will see more of an impact from the massive rate hikes and credit getting tighter from the banks, this is why it’s more critical than ever to track weekly economic and housing data, as we do in the Housing Market Tracker every week. Like every economic cycle post-WWII, if you know where to look for clues, they will guide you to the truth.



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Rithm Capital might spin off its mortgage biz


Investors haven’t exactly treated publicly traded mortgage companies very kindly over the past 12 months. To that end, Rithm Capital, the real estate investment trust that operates NewRez, Caliber and several other businesses, is considering spinning off the mortgage division to aid its flagging stock, which company executives described as “extremely undervalued.”

“Our third-party fund business continues to be a major focus as we transition to growing our business as an alternative asset manager,” President and CEO Michael Nierenberg said during the REIT’s Thursday earnings call. “With that in mind, we are evaluating alternatives for our mortgage company and will likely file an S1 in the coming month. This will allow us to create other pools of liquidity to the extent we create a public entity and further diversify our business model.”

He added: “So what we’re doing now is when I look at the way our stock trades or how poorly our stock trades, I should say. I think for us, when I look at the mortgage company and the business that’s been created there, we will likely explore, there’s no guarantee which way we’re going to take this thing, but we’re likely going to file an S1 [a prelude to taking a company public]. We’ll look at the possibility creating a public entity out of it, which, over time, could allow us to really further diversify our business model.”

Rithm, one of the largest originators and services in the mortgage industry, saw net income drop 15% from the fourth quarter to $89.9 million. Those profits were propelled by the company’s significant servicing portfolio, which, while down 1% from the end of 2022, tallied an unpaid principal balance of $603.0 billion at the end of the first quarter. Rithm has 3 million customers through its servicing portfolio.

The company’s originations business lost $24.4 million in the first quarter, and gain-on-sale margins fell to 1.61% from 1.81% at the end of the fourth quarter. Nierenberg said originations were down in January and February largely due to seasonality, but were at a “breakeven” in March.

Nick Santoro, the company’s chief financial officer, told analysts that they expect Wells Fargo’s exit from correspondent lending to help them boost margins in future quarters.

The company remains opportunistic given the challenging economic landscape and its cash position, which remains strong at $1.43 billion.

“When we look at the space today, and we look at the opportunities around potential M&A or potential assets, there’s plenty of activity going on,” Nierenberg said. “So I think the look of the company today won’t be the look of the company as we go forward down the road.”



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The 2023 housing market is at odds with itself


A paradoxical picture is emerging as the spring market is underway. On the one hand, elevated mortgage rates continue to erode buyers’ purchasing power, and in some markets, home prices are falling. On the other hand, inventory is still low, and homes are still selling fast, often with multiple offers.

All major housing market metrics point to a restrained housing market. The number of new listings coming on the market this spring is lower than it has been in more than a decade. Sales and new pending contracts are below pre-pandemic levels. Buyer interest has increased over the past few months, but showing activity is still much lower than it would be in a typical spring market.

But if you are a prospective buyer, macro housing metrics probably do not reflect your experience. On a transactional level, many buyers are experiencing a housing market that feels very competitive and they are having a hard time reconciling the news about the housing market with their experience trying to buy a home. 

What can we expect in 2023?

It is always difficult to talk about the “national housing market” but this year, in particular, there will be wide variation in housing market conditions across the country. At the same time, there are some key trends I think will characterize the housing market in 2023.

1. Buyer disappointment. Home shoppers who are waiting to score a deal are going to be disappointed in 2023. Inventory has increased from a year ago but in most markets, it is still well below pre-pandemic levels. Home prices have come down in some places, but the price correction is relatively modest and prices are still typically 20% or 30% higher than they were three years ago. 

Even though the pool of buyers is smaller than it was a year ago, there is still a lot of competition over relatively few homes. Bright MLS’ recent survey showed that sellers in the Mid-Atlantic received an average of 3.4 offers on homes sold in March and more than a third of homes sold for above asking price.

This article is part of our ongoing 2023 Housing Market Forecast series. After this series wraps, join us on May 30 for the next Housing Market Update Event. Bringing together some of the top economists and researchers in housing, the event will provide 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, go here.

First-time buyers are having the hardest time, competing with higher-income buyers who are offering all-cash or who are able to roll equity for a home sale into a new home purchase. Unfortunately, 2023 is not going to bring much relief to those looking to become a homeowner for the first time.

2. Mortgage rate fatigue. To a certain extent, the presumption that the housing market will live or die with rates is misplaced. The Bright MLS survey found in its recent survey that 7 out of 10 recent homebuyers indicated that rates were not a factor in the decision to buy. Fifty percent of buyers said they were going to buy regardless of rates and about one in five bought with cash. Only 4% of buyers said they were buying now because they believed rates were going to go higher.

Homebuyers, particularly repeat and all-cash buyers, seem to have accepted current mortgage rates as the “new normal.” If mortgage rates rise to 8, 9, 10% or higher, the calculus for these buyers will change. But with rates in the 6 to 7% range this year, mortgage rates might not be as important as conventional wisdom suggests. 

3. Selective sellers. New listings activity will continue to be very low throughout much of 2023. However, there are some categories of sellers that could have an impact in their local market.

Who is selling right now? Some people who bought homes in far-flung locations during the pandemic are selling as employers are calling people back into the office. Others who purchased second homes or investment properties during the last few years are looking to cash out amidst projections of a weaker housing market. 

Data from Bright MLS’s survey indicated that more than a quarter of homes sold recently in the Mid-Atlantic were rental properties, vacation or second homes, or investment properties. Look for this segment to drive inventory growth in some markets.

4. Atypical seasonality. Home sales will rise throughout the spring and into the early summer, but 2023 will not have typical well-defined seasonal patterns. Economic uncertainty and constrained inventory will keep overall transactions below 2019 levels, and we will also have longer run-ups and wind-downs to the usually busy spring and fall housing markets. 

The housing market remains in a period of transition, though sellers still have the advantage. The market will be more balanced in the second half of 2023, but look for a lot of variation across local areas.

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

To contact the author responsible for this story:
Dr. Lisa Sturtevant at lisa.sturtevant@brightmls.com

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



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Incoming data will dictate future mortgage rate shifts, experts say


The Federal Reserve affirmed on Wednesday that its next key federal funds rate hikes will depend on incoming data. In turn, economists and housing industry experts have now turned their attention toward the June meeting, as that decision will dictate the future movement of mortgage rates.

The Fed’s move on Wednesday was well anticipated and should not cause a major shift in mortgage and other interest rates, experts noted. 

Mortgage rates should fall, as the bond market hasn’t really cared much about the last few rate hikes by the Fed. In turn, mortgage rates should be lower, Logan Mohtashami, lead analyst at HousingWire, said. 

Mohtashami anticipates that the Fed will push a pause on the interest rate hike in the next meeting, as the central bank is counting on credit getting tighter to create job recession. 

The impact of credit tightening by Fed officials has been unclear in the wake of both higher interest rates and turmoil in the banking system following the collapse of Silicon Valley Bank and Signature Bank in early March. Federal regulators also seized First Republic Bank and sold it to JPMorgan Chase Bank earlier this week.

Bonds rallied immediately after the news, sending yields down, as the market interpreted the Fed’s hints as an indication of a pause in tightening.

“The 2-year and 10-year US Treasury yields are down 2-3 basis points, which could help mortgage rates as the market digests the news and adjusts,” Jack Macdowell, chief investment officer at the Palisades Group, said.

On Wednesday afternoon, mortgage rates for 30-year fixed-rate mortgages were at 6.43%, according to HousingWire’s Mortgage Rates Center.

“If the economy picks up steam and the banking crisis doesn’t worsen, that might force the Fed to re-start rate hikes. However, for now, they seem OK to pause here,” Mohtashami said. 

Danielle Hale, chief economist at Realtor.com, was on the same page with Mohtashami about Wednesday’s rate hike decision, noting that it is unlikely to cause mortgage rates to shift dramatically. 

If economic indicators are lukewarm going forward, it should lead to a more sustained, gradual decline in mortgage rates — as the Fed is less likely to continue rate hikes, Hale noted. 

“However, above-expected hiring, price growth or other economic activity could lead to upticks in the mortgage rate in anticipation that tighter Fed policy will be needed,” Hale said. 

A hike in short-term rates is only indirectly impactful for mortgage rates, as mortgages are priced off of long-term rates. But when the Fed raises interest rates, it becomes more expensive for families to take out loans for home purchases.

The Mortgage Bankers Association (MBA) also expects the Fed to push a pause button on the rate hikes in June, noting that the Fed’s statement was consistent with a plan to pause rates at this level.

“Although recent speeches by Fed officials had indicated an increasing amount of disagreement regarding the next steps for policy, this was another unanimous vote,” Mike Fratantoni, chief economist at the MBA, said. 

The expectation of continued rate hikes has kept Treasury yields higher, even with expectations of an economic slowdown. This, in turn, has kept mortgage rates higher, Shampa Bhattacharya, senior director at Fitch Ratings, noted. 

“The home purchase market is more sensitive to a reduction in mortgage rates at current rate levels, with the refinance option still out of the money for a vast majority of homeowners (…).  Purchase mortgage application data as well as active listings have shown positive weekly growth recently in response to somewhat lower rates, though applications remain down 28-30% year over year,” Bhattacharya said.

Impact on housing and residential lending

It’s unclear what the Fed’s next decision will be, but the MBA is hoping for a rate hike pause. 

“If the central bank pauses its hike in June, potential homebuyers and their mortgage lenders may be breathing a sigh of relief,” Fratantoni said. 

While tighter credit conditions are expected to slow the pace of economic activity, the housing sector is already operating under tight credit, Fratantoni noted.

The MBA doesn’t expect the tight credit headwind to outweigh the benefits from somewhat lower mortgage rates. The housing market is likely pulling the economy out of this slowdown, as it typically does, the MBA said.

Looking ahead, Hale expected the rest of May to be a rocky ride for interest rates, including mortgage rates. 

“The Fed continues to remain vigilant, watching for signs that financial sector stresses have impacted the real economy. Most likely, this factor will remain a wild card for the next few meetings, as data continue to roll in,” Hale said.

If the Fed does raise rates again next month, home buyers will be scared of purchasing for several reasons, Dutch Mendenhall, founder at RAD Diversified REIT, noted.

Because there is still a relative low inventory of houses for sale, higher interest rates with higher home prices mean buyers may not find the house they want in the current price range. 

“Additionally, higher rates create higher debt-to-income ratio calculation, resulting in qualifying for lower mortgage amounts,” Mendenhall said. 

However, a higher interest rate environment can provide more opportunity for cash buyers. 

“Without having to worry about interest rates, cash buyers can be very attractive to sellers, as they know they can go to closing quickly, and as a result, cash buyers can find themselves in a much better position to negotiate a better sale price,” he noted. 

Regardless of whether mortgage rates will trend down or enter into a recession, potential buyers have a window of opportunity, Jerimiah Taylor, vice president of real estate and mortgage services at OJO, said.

“The spring market has been hotter than expected in many markets, and if you add the fuel of lower rates on what’s already happening, expect prices and competition to increase quickly,” Taylor said.



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Market conditions no longer favor large SFR players


The institutional single-family rental (SFR) market has expanded rapidly over the past decade as an alternative to homeownership, but it is now facing major headwinds in the form of a rapid jump in interest rates and still-high inflation compounded by decelerating home prices and rental rates.

That’s the takeaway from a recent analysis of the sector by Kroll Bond Rating Agency (KBRA), an analysis that also is echoed, in part, by a recent report from ATTOM, a leading curator of real estate data. 

Institutional SFR investors acquired one of every 19 single-family homes and condos in the first quarter of 2023, representing 5.4% of all purchases, according to ATTOM. However, that purchase rate is down from 6.6% in the fourth quarter of 2022 and from 6.1% in the first quarter of 2022.

In addition, year over year as of May, rent growth stands at 1.7%, the lowest mark since March 2021, according to a new report from Apartment List, a national apartment-rental platform. “Year-over-year growth is now below the average rate from 2018 to 2019 (2.8%), and it is likely to decline even further in the months ahead,” the Apartment List report states.

On top of that, the homebuying market has been flat or declining around most of the country since the middle of last year, according to ATTOM CEO Rob Barber, who notes that the median home price is off 7% since the second quarter of last year, “and is down in most major markets around the U.S.”

“If buying a home keeps getting cheaper, that could motivate households previously priced out of the market to jump back in, thereby reducing demand for rentals,” Barber added. “That, in turn, could flatten out rent increases and put greater financial pressures on [SFR] landlords.”

The KBRA report notes, however, “conventional wisdom” predicts that in a weak housing market, with home prices declining, overall homebuyer demand also declines, which should increase demand for SFRs, producing a rental-rate boost to boot. 

In a strong housing market, the KBRA report continues, with rising home prices, “the theory is that a portion of potential buyers should be priced out of the market and will instead enter the SFR market, which would also increase SFR demand and generate positive SFR rent growth.”

“In the current environment,” however, the KBRA report states, “the wisdom of this perceived hedge is being tested as rental rates are flattening, and in some instances declining, even as home prices are declining.”

L.D. Salmanson is CEO of Cherre, a data-integration and insights platform serving major players in the real estate market, including SFR operators. He said the cost of capital is increasing for SFR operators, which currently own about 5% of all SFR properties nationwide, while “rents are kind of flat, stagnating, or potentially increasing but at a slow rate.”

Salmanson added, however, that it’s not decelerating rents that are causing the “massive slowdown in the [home]-purchase rate” by institutional SFR players in recent months, “although that is affecting it.”

“Rather it’s that there are a lot less people selling because they’re not getting the [high] prices that they’re looking for,” he said. “If you got your mortgage between 2% to 4%, you’re not selling, and that’s been the biggest cooling effect. 

“Decelerating [home prices] means they are still going up … and “[home prices] now aren’t justified given the interest rates, but that’s temporary. That’s not going to last.”

Challenging environment

The slowdown in property acquisitions by institutional SFR companies also has affected a primary liquidity channel for the institutional SFR sector. Last year, there were a total of 15 securitization deals involving large SFR players valued in total at $10.3 billion, according to data tracked by KBRA.

This year, so far, there has been one offering, a $343 million securitization deal by Progress Residential (Progress 2023-SFR1) that closed in late February, KBRA data show. Progress Residential’s planned second offering this year, Progress 2023-SFR2, was postponed recently due to market conditions.

“[Institutional SFR players’] debt and operating costs are going up,” said Ben Hunsaker, a portfolio manager focused on securitized credit for Beach Point Capital Management, an alternative-credit investment firm. “Securitizations are just not as viable as a financing source [currently].

“There’s probably plenty of private lenders who will do [more expensive] secured first-lien lines against those asset classes, and that might be the solution for the near term, until you have more clarity on long-term rates.”

Hunsaker added that the headwinds facing the institutional SFR market also include rising home insurance and taxes due to the recent hurricanes that have battered Florida, a key market for the SFR sector.

David Petrosinelli, a New York-based senior trader with InspereX, a tech-driven underwriter and distributor of securities that operates multiple trading desks, said while the institutional SFR sector is facing headwinds now, they also have the “benefit of bigger war chests and have the ability to ride out any blip, if not an outright freeze in the market.”

“There are different pockets of capital that can come in,” he added. “It’s just a matter of do those deals make economic sense. 

“Will these [SFR operators] that have deeper pockets, can they afford not to use securitization for three months or so until the market thaws?”

The only way the SFR business works in the current high-cost environment is “like old-school real estate,” where you are buying “at the right place, where the demographic trends are favorable,” said Nick Smith, the founder and CEO of Rice Park Capital Management, a private investment firm serving institutional investors, family offices and high net worth individuals.

“Unless you’re one of the winners who gets that equation right, then you’re buying real estate in a market where real estate values are falling and financing costs are going up,” Smith added. “So, it just doesn’t make any sense to me. It’s a real business, but I just think right now it’s very challenging.”

If the headwinds get severe enough and continue beyond a short-term bump in the road, eventually that could lead to a reshaping of the institutional SFR business, Smith added.

“Listen, anytime you have a challenging environment, there’s going to be impacts, and consolidation is one of the potential things that happens, that operators consolidate, and we see people getting out of the business.”

Marvin Owens, chief engagement officer at Impact Shares, a nonprofit investment firm that manages several socially responsible exchange-traded funds, said at the same time the institutional SFR players are pulling back from the market, there also is an expansion of new-home construction underway “with large builders ramping up their production again.” 

Owens stressed, however, that because of inflation and high interest rates, those new homes will not be an option for families who cannot afford to purchase market-rate housing. That is not a good outcome for the affordable-housing market when coupled with a lack of affordable rental properties — even if SFR players high-volume home purchases in the recent past served to drive up housing costs in some markets.

“This [the institutional SFR sector] is such an important part of the housing environment, and any signal that they’re slowing down, any signal that they’re having a difficult time, [impacts] opportunities for people to be able to find a find a place to live, and so it’s not a good sign,” Owens said. “Families who aren’t in the market-rate housing market, they’re going to be hurt, and they’re going to continue to be hurt in this current environment.

“So, I see this as being a real negative in terms of what’s going to happen around housing affordability and access. … It means everybody’s going to be hurting, quite frankly.”

SFR silver linings

There is a silver lining in dark clouds over the SFR market currently, according to ATTOM’s Barber. Despite the challenges in the SFR market, ATTOM projects that the average gross yield on a three-bedroom SFR property will “grow from 6.7% in 2022 to 7.5% this year.”

“The latest nationwide projected gross return on single-family rentals sits below where it was several years ago, when it was closer to 8% and 9% in 2019 and 2018, but the expected growth in 2023 follows four straight years of declines,” Barber said. “That suggests a brightening picture for single-family landlords, which should help them with rising interest and labor expenses.”

Kurt Carlton, co-founder and president of New Western, a private real estate investment marketplace serving some 165,000 investors, stressed that the institutional SFR market is really quite young, emerging in the wake of the global financial crisis some 15 years ago.

“This is a small pool [of SFR operators] that was growing fast, and then it froze,” he said. “And it will thaw out … when rates start to fall a little bit more, whenever that’s going to happen,” Carlton said. “And when rents start to outpace home-price appreciation, when the economics get back in balance, they’re back in the game.”



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How to optimize leasing ROI with smart home automation


As proptech evolves, so does the ability to automate processes within the real estate industry. Automation can lead to some serious ROI for property managers and operators, but it’s important to automate the right processes — otherwise, it may feel like you’re throwing money and technology at a problem without solving anything.

According to Rently, a smart home and self-guided touring solutions provider, automation is key to ROI for property managers and operators, particularly leasing automation and smart home automation.

“Leasing automation is the ultimate ROI enhancement,” Rently COO Andre Sanchez said. “It plays a key role in facilitating better, more personalized experiences for customers while moving them through the entire leasing process faster and more efficiently.”

It typically takes 8 to 12 touch points to convert a lease, but with the use of lease conversion automation, it only takes an average of 6 touch points. By integrating a leasing automation tool with their current CRM, operators are experiencing conversion rates of 30% or more.

Jared East, vice president of Product at Rently, explained that the key to generating income lies in the efficiency of the leasing process and implementing a system that minimizes touchpoints and still increases lease generation. He added that Rently achieves this by automating and streamlining rental property management with smart home technology.

Ultimately, the quicker and easier it is to lease — and to move in — the better, from both a renter and operator perspective.

Where does the ROI come in?

So automation makes leasing more efficient — but how? And where does the ROI come in?

According to Sanchez, a lot of the operators using Rently are looking to centralize leasing and address the staffing challenges many operators are facing right now.

“There’s a lot of high churn, so anything you can do to automate work so that onsite staff can focus more on the human elements and more sophisticated processes of their job is an improvement,” he said.

Smart home automation can also lead to reduced energy costs, he added.

“It’s been shown that strong energy management in a unit can reduce the cost by up to 20%,” he said. “We’ve had some clients even report internally that they’ve seen reduction in utilities just during the vacancy period by 9-10%.”

And both operators and renters can benefit from the added security that smart home automation provides.

“Everything we’re building out really enhances the security of the entire platform,” Sanchez said, citing facial recognition to screen and vet prospective renters and keyless entry locks in particular.

But the biggest benefit, Sanchez said, is facilitating touchless entry and the leasing life cycle with smart home automation. A top 50 owner-operator recently rolled out Rently’s smart home technology on a large portfolio of their communities and by automating their processes: they’ve streamlined their workflows and reduced their operating costs by 60%.

Rently’s “street to suite” solution

Rently’s leasing automation and smart home automation technology solutions follow what they call a “street to suite” journey. The street section carries the prospective renter through the touring and leasing process, while the suite section involves the smart home technology actually in the renter’s home once rented.

The street portion of the journey begins with Rently.com’s listing site, which provides an automated property marketing tool. Managers can syndicate to multiple sites from one platform/login and prospective renters can directly book self-guided tours of a property, even on demand.

Those self-guided tours are facilitated by automated touring and “Wayfinding” navigation that helps a prospective renter navigate a property. This expands the property showing opportunities and pleases rental prospects with a positive touring experience.

“We really want to get the person to the door,” East said. “We’re not in the business of just generating leads for profit. We’re in the business of generating efficiency for our customers.”

From there, the rental application provides automated prospective renter screenings, combining screenings for ID, income and credit. Rently’s Know Your Customer screening process involves AI verification and facial recognition to the renters’ ID. This accelerates renter screenings, eliminates fraud, improves security and streamlines workflow for property staff.

Additionally, when a prospective renter fills out their ID information for a tour, Rently can use that information to prefill about 30% of their rental application, streamlining the process for the renter as well.

Once the prospective renter’s application is approved and their lease is signed, they’re passed onto the suite section of their journey with automation. Upon their move-in date, they begin to experience the smart home technology day-to-day, which increases security, improves energy management, prevents damage and increases ROI.

“Once they end their lease, if they want to go back into the street ecosystem, they can go back into Rently and start the journey all over again,” Sanchez said. “That’s really what we’re about — taking that resident for a life cycle and making sure they love it.”

Automating many small steps in the leasing and smart home process leads to significant cumulative ROI gains for operators. Reducing the friction that comes with leasing delights the prospective renter, and creating a touchless smart home automation experience does as well.

“This is all a return on investment play,” Sanchez said. “I think smart home [automation] was perceived as an added bell and whistle — it’s really cool and your residents should do it and you can charge a premium — but I think now, given the macroeconomic headwinds, people are looking more at, ‘How do I drive efficiency? How do I reduce costs?’ And this is where that technology really shines.”



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DataDigest: The remarkably resilient agent commission rate


On Friday afternoon, my real estate agent called with good news. 

“Congratulations!” she said. “You just sold your house.” 

The agent wished me well and said that she would appreciate a review on her website. And that was that!

A little backstory: The four-bed, 1.5 bath house in the Poconos showed well and I priced it very competitively – at $269,000. Within 72 hours of it being listed on April 1, I had two full-priced offers in hand and expected to receive a third. I wanted to close before May 1, so I selected a buyer who was already in underwriting.

My agent exchanged a few emails with the buyer’s agent over a few minor repair requests, but this was all buttoned up very quickly. 

My personal experience speaks to a data trend we’re seeing with agent commissions – when the deal closed, the agents received the full 6% – $16,140, which they’d split evenly.

I had sought out the agent because she had the best track record in the area, worked with a lot of investors on the buy side, and had a history of closing quickly. She made clear in our first conversation that the commission would only drop to 5% if she also found the buyer. 

Unlike loan officers, whose commissions are highly regulated by the government, real estate agent commissions are based largely on long-standing industry practices and market forces. 

According to RealTrends’ historical data, agent commissions reached a high point in 1991 at an average of 6.10% and fell to a nadir of 4.94% in 2020 before climbing to 5.06% in 2021 and 5.32% in 2022. 

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What’s especially interesting is that unlike average or low-performing agents, top-performing agents simply don’t lower their commission rates very often. 

“I think one of the underreported factors that we first noticed back in 2020 was that the top-performing individual agents and teams were grabbing a rapidly increasing share of the market — a trend that continued in 2022,” Steve Murray, a senior advisor for HW Media, told my colleague Tracey Velt. “If we were to look at the average commission rate for top agents and teams, we would find that it mirrors these results.”

By that measure, we might expect commissions to remain elevated for the foreseeable future. 

It wasn’t so long ago that experts said the internet would drastically bring down agent commissions. They were wrong. Relatedly, discount brokerages have promised big savings to sellers for decades. They’ve never caught on.

I briefly considered a “listing only” agent, but chickened out. No one wants to be the fool who steps over dollars to pick up pennies. 

Because selling a home is a high-stakes, low frequency transaction, the vast majority of homeowners stick with full-price brokers and bake the fee into the sale price. 

But what happens when that calculation collides with the worst period of housing affordability in decades?

Two forces could quickly change the calculus – inventory shortages and strong demographics demand, as well as the specter of class-action lawsuits that attack the traditional agent commission structure. 

The legal threat that looms largest is what’s known as the “Moehrl case.” The National Association of Realtors and several of the country’s top real estate brokerages are going to trial in a class-action commissions lawsuit that has potential damages of $13 billion. The plaintiffs essentially argue that sellers are subsidizing buy-side agents and it’s an anti-competitive practice that lacks transparency. 

If the NAR and brokerages lose, buyers would likely have to negotiate commissions with their own agent.

The case applies to sellers who paid a commission between 2015 and 2020 but could also apply to “current and future” sellers across 20 MLSs. Should the NAR and brokerages lose the Moehrl case, commissions would almost certainly fall. We could also see portals like Zillow step in and create a platform for buyers to negotiate commissions with agents. The more comfort people gain in negotiating commissions through a portal, the more commission discounts we would see.

We are also seeing new models proliferate, albeit on a small scale and in targeted markets. Opendoor in the fall launched “Opendoor Exclusives,” an Amazon-like marketplace for off-market deals that don’t involve real estate agents. See the house? Like the price? Click the button and buy it. Real estate industry consultant Rob Hahn also recently launched Decentre PX, an online auction marketplace that will allow homeowners to sell without having to pay a commission. In a world of ultra-low existing home sale inventory, where many buyers still have multiple bids and can sell their homes quickly and at full price, I expect other models that put pressure on agent commissions to gain some headway. 

Still, it would be foolish to bet against the remarkably resilient traditional real estate commission model. Over the decades it has survived scrutiny from the Justice Department, beaten discount brokerages in federal court, and has even persevered in the Internet age. Consumers have more information than ever, but rarely choose to go it alone or even with discount brokerages or listing-only agents.

Like me, when sellers are dealing with one of the biggest transactions of their lives, they’re too chicken to try the alternatives or simply don’t believe it’s worth the risk.

DataDigest is a newsletter in which HW Media Managing Editor James Kleimann breaks down the biggest stories in housing through a data lens. Sign up here! Have a subject in mind? Email him at james@hwmedia.com.



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19, Broke, and No Credit to 28 Units and Over $1 Million in Real Estate


Over $1 million in real estate with $0 down—at 19 years old!? After reading the book Rich Dad Poor Dad and catching the real estate “bug,” today’s guests went from broke college dropouts to real estate investors with three multifamily properties to their names in a matter of months.

In this edition of the Real Estate Rookie podcast, we’re speaking with real estate duo Caleb Hommel and Chuck Sotelo. After his parents dealt him a six-month ultimatum to figure out real estate and move out, Caleb knew he needed to land a deal fast. The issue? These two friends had very little money, and at just 19 years of age, no credit history. Facing a seemingly impossible challenge, the pair went to work—calling roughly 1,000 different real estate brokers in pursuit of their big break. Finally, the right opportunity came knocking.

Today, Caleb and Chuck own properties in three different Texas markets for 28 total units. If you have yet to land your first real estate deal, whether it’s because you don’t have money to invest or you haven’t found the right market, you don’t want to miss today’s episode. Tune in as we talk about how to buy real estate with no money down, how to build your buy box, and how to find the best property management companies to take care of your out-of-state assets!

Ashley:
This is Real Estate Rookie, Episode 283.

Caleb:
Yeah. So today we’re at 28 units. We’ve got three deals across Texas. We’ve got a 10-unit in McAllen, an eight-unit in Laredo, and a 10-unit in Houston.

Chuck:
Well, first of all, we love just more units. I mean, it’s just more scalable, so we can just keep that momentum going. But also, I feel like there’s a lot of opportunity in that mid-size multifamily range, or small, or whatever you want to call it, because a lot of them are just self-managing.
So if we can get a good manager, a good operator, and we throw them in there, and we do a little bit of renovations, we pick it up, the ship, so it’s actually moving.

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

Tony:
And welcome to the Real Estate Rookie Podcast, where every week, twice a week, we bring you the inspiration, motivation, and stories you need to hear to kickstart your investing journey. And as always guys, we’ve got an amazing episode for you today.
We’ve got Caleb and Charles. They’re a slightly younger duo that’s been crushing it in the small multifamily space. I think they’re up to 28 units as of this recording.
And in today’s episode, we break down how basically they had a six-month ultimatum from their families about whether or not they were actually going to be real estate investors, and they parlayed that into a successful real estate business.

Ashley:
Yeah. One of my favorite things about this episode, and we’re actually going to have another episode in a couple weeks that we recorded today, too, is talking about how many phone calls they made. And the other episode we do talks about how many handwritten letters, somebody did to get their first deal.
So if you are struggling to get that first deal, listen through this episode just for some motivation and inspiration, and how long it took them to actually get that first deal done after continuously making these calls.
And also how they transitioned from not just calling the owners, they stopped calling owners that became to be too frustrating for them. So listen through to see who they call to actually get these deals done.

Tony:
Yeah. I think the other thing to call out is how they were able to negotiate seller financing on this 10-unit at a ridiculous deal, and it really came down to understanding one thing about the seller. So make sure you listen for that part as well.

Ashley:
Tony, do you have a review for us? I just want to hear how wonderful and beautiful and amazing you are.

Tony:
Absolutely. So this review comes from wblakec, and Blake says, “I loved your episode about sober living homes. BiggerPockets motivated us to open our first house here in Virginia. Grand opening is in August, and we’re planning on implementing the BRRR and opening a woman’s house down the road. Love BiggerPockets.”
So if you guys didn’t listen, that episode was with Devana, Reid. Her and her husband shared how they built a pretty sizable portfolio of sober living homes. I don’t recall the episode number. If you go back a few episodes, I’m sure you’ll find it. And the receptions, that episode has been fantastic. So I’m glad someone got some value from that.
But if you guys are listening, all of our Rookies listening, if you haven’t yet left us a review on Apple Podcast or whatever platform it is you’re listening, please take a few minutes and do that. The more views we get, the more folks we can reach. And the more folks we reach the more folks who can help and impact on their journey to financial freedom.

Ashley:
And I should mention that today’s episode, Tony is in Mexico where is wonderful and beautiful and he has turned his camera several times to show me his view. Well, I’m sitting here in Buffalo where it’s been snowing and raining all day here in April, so.

Tony:
Yeah. This is actually the first time I’ve recorded two entire podcast episodes in my swimming trunks. So this is the best thing ever. So I got to come to Mexico more often.

Ashley:
Usually Tony’s in his black shirt and then his underwear. So yeah, this is a big change for him.

Tony:
This is a big change for all of us.

Ashley:
Well Chuck, do you want to start telling us a little bit about yourself and how you got into real estate?

Chuck:
Yeah. So we kind of got into real estate together. It was just Rich Dad Poor Dad. My mom gave it to me, was it junior high school? And then I couldn’t really act on it because I’m 16 years old, but I just kept reading books and then eventually got into contact with my mentor.

Caleb:
Yeah. It was kind of, I’ll piggyback off that a little bit. It was kind of a whole perfect storm that came together. It was kind of junior year, the COVID thing hit the world. That’s when we were still in high school and we was like, “What do we do?” It’s like we’re bored out of our mind. None of our friends can leave our house. Luckily we lived pretty much right next to each other. So Chuck’s mom’s like, “Oh, I heard of this good book!” And then Rich Dad Poor Dad, he gave it to me and then we just started going down this path together.

Tony:
So if you guys get this real estate or financial freedom bug pretty early, but like you said, you can’t do much as a 17-year old in high school. So kind of fast-forward to the point where you guys are actually at a point where you can start taking action on what you learned.

Caleb:
Yeah. It kind of went by pretty quick. It was like so, went through our senior year of high school, a little more normalcy and then we’re both in junior college, I’m still playing baseball at the time. Chuck’s just going to school.
And I think I can speak for both of us when it’s kind of like, “Gosh, this just isn’t where we want to end up.” So that’s kind of when we started getting back into everything and kind of branching out, looking for where to start now that we were actually legally aged.
So we just started networking and then we eventually just found our mentor. We cycled through a couple different people and we didn’t really get anywhere. And then we eventually found Cody and he kind of just guided us on exactly what to do.

Ashley:
So what did you do?

Caleb:
Yeah. When that whole thing started, I met Cody very early on. This was before he was even on BiggerPockets and just got referred to him through a local loan broker down here in San Diego. And just was bugging him with questions, as many as you could do in a day, just constantly hounding him.
He is like, “Hey, I’m actually starting up a mentorship program right now if you’d be interested.” And me not having the money for the monthly fee, I call Chuck and I’m like, “Hey, you want to go in and all this thing together?” And then that’s kind of how we got started with that.

Tony:
And what strategy did you guys end up landing on? Because there’s so many different ways to get started in the world of real estate investing. So what was the path you chose and help us understand why you felt that was the best room for the two of you.

Chuck:
We went with creative financing, because number one, we’re young so we can’t get regular traditional financing and we just didn’t have any money. So it was kind of the only option unless we were going to partner on some big syndication or something like that, and we didn’t really find. See that as our path.

Caleb:
It was like being young, broke, no credit, none of that stuff. And it’s like, “Gosh, how do we do this?” And it really lucked out having Cody and Christian as our mentors because that’s exactly the path they had went down. So there was a great blueprint already in place and we’re like, “Well, we don’t have any money. You’ve got a little bit more money than us, but you still did it. Let’s see if this works.” It kind of starts stumbling our way down in.

Tony:
Can we talk a little bit or just clarify for folks? Because the phrase creative finance encompasses a few different strategies and techniques. So when you all say creative finance, what exactly does that mean? Break it down for the audience.

Caleb:
Yeah. With creative financing, basically we did all three of our deals have been seller financed. We haven’t delved into any of the wraps or sub2. One thing Cody and Christian really instilled in us was just keep it as simple as possible, and seller financing’s how we found to do that.

Ashley:
I just want to mention real quick, that Cody that you’re talking about, he was on episode 554 of the BiggerPockets Real Estate podcast. If anyone wants to go back after this episode and take a listen to it.

Tony:
So if you guys can, let’s break down what seller finance means and why is that called creative financing versus traditional financing.

Chuck:
Yeah. So all it is just the sellers acting as your bank. Instead of going to the bank getting a loan, the seller’s actually just going to lend you the money.

Caleb:
And that’s great for people getting started. Because bank, you have all this underwriting, you have to meet all these qualifications. Seller financing, there’s just none of that. It’s all made up or brainstormed by you and agreed to it the seller.

Ashley:
Let’s talk about that first deal. What were you guys doing to source the deal?

Chuck:
Yeah. So it was a hundred percent just on market stuff. We were just calling pretty much every broker in Texas. We didn’t even really have a real buy box or anything. We’re just like, “Okay. We’re just going to volume this out and we’re just going to call everybody. Look at every single deal and see if we can make something happen.”

Caleb:
Yeah. There were a lot of calls between zero and number one.

Ashley:
So was this when you guys were still in high school at this point in time or what were you guys doing at this point of time in your lives?

Caleb:
Yeah. At this point, so we had gone through junior college we met Cody and then Cody joining. Cody gave us the confidence to drop out of school. And so Chuck told his parents, I actually didn’t tell my parents, I just stopped going to baseball practice and stopped going to school. And then from there just kept following Cody has preaching and then that was around winter of 2021 until spring of 2022, is when this whole thing was really going on.

Ashley:
So were you leaving the house to go to college classes or…

Caleb:
That’s actually how my parents found out, is I just wasn’t going to class or baseball anymore. They’re just kind of like, my dad took me out to breakfast one weekend, he is like, “What’s happened to school?” And I’m like, “I don’t go anymore. Didn’t appreciate that very much.” And that’s when we got set our timeline, or at least myself. I had six months or I had to get out of the house.

Ashley:
So that was what your parents set for you?

Caleb:
Yeah. It was just, “You got to figure out the deal or got to go find somewhere else to stay.”

Tony:
Can we just pause for a second on that? Because I think kudos to your parents for not overreacting and saying, “Hey, you better go back to school or else.” But to give you the grace, to give you the time to try and figure that out on your own. It kind of gave you permission to go all in on this and I’m sure it probably motivated you, because who wants to be homeless as a recently graduated high school kid. Right? So what were the steps kind of flowed from that?

Caleb:
Yeah. I know exactly. Nobody wants to be homeless at 19 years old, so that was nice they gave me the grace. Kind of when I talked to them about it, how the six months came about is I was like, “Well look, if this is my dream and I’m going to chase it. The worst case scenario that happens is I’m back here in six months in the fall semester for college. It’s just an extra six months to go try to chase this.”

Ashley:
So, with doing your DoorDash, did you ever come across any properties? Maybe you’re delivering at one house and you see the next door, the properties vacant, there’s mail piled up at outside. Did you kind of incorporate any driving for dollars?

Chuck:
Not really because we weren’t really looking to buy in our backyard, San Diego. Just it’s tough to break into that market if you have no money and just not a ton of connections. So we just were focusing on our Texas deals.

Caleb:
Yeah. One thing we were doing though is when we were doing DoorDash and driving, at least for me, I always had a real estate audiobook on. It was always just trying to make the most of my time. But yeah, not much driving for dollar San Diego. I mean it’s hard enough to start real estate with no money, let alone start in San Diego, California.

Ashley:
And how did you guys choose your market then?

Chuck:
So initially we were looking in Northern Nevada and you’re looking on just on market deals. I mean, there were only a handful and we just wanted to volume it out. So we’re like, “Okay, we need to go somewhere else that’s pretty relatively close that we can go fly to, but has a enough deals where we can just call, call, call, day in, day out.” So we just went through Texas, it’s because it’s just a huge bucket.

Caleb:
Yeah. It eventually, piggybacking off what Chuck said. It eventually came down to, “Well, we’re either going to do Texas or Florida.” And kind of the logic was Texas is halfway closer across the country than Florida, so we’re going to try here first and see what happens.

Tony:
How many, you mentioned that there were a lot of phone calls. Roughly, how many people did you have to call in Texas before you actually got a deal that turned into something?

Caleb:
Yeah. That’s a great question. Gosh, amount of brokers. It was probably around 500 to a thousand phone calls. Somewhere in there.

Tony:
Can we break down? So you mentioned that you had a script. What exactly were you saying when people picked up the phone to pitch them on the seller finance?
Was it the first thing that came out of your mouth like, “Hey, will you sell the finances deal?” And it’s like a quick yes or no or were you trying to understand their situation, their motivation? What did that conversation typically flow? Mic.

Caleb:
Yeah. So I was doing the majority of the calls and they were mainly to brokers. Just we had bad luck with owners. We tried them a little bit, but it was kind of got shut down pretty quick. So we’re like, “Gosh.” And we actually went out to Texas to meet with an owner. Had five meetings scheduled, four of them canceled.
So we’re kind of like, “Yeah, this isn’t going to make much sense when we’re saving every penny to have for this and then gets kind of screwed over last second.” So what we ended up doing was just calling brokers and the first thing was just making sure the deal was still available just because if it’s not, it’s a waste of five minutes of their time and my time.
And then we knew which areas in Texas we liked. We’d look up population growth to obviously see how the area is, but neighborhood to neighborhood, we weren’t too sure. So I wanted to go find out about that, find out neighborhood in the area. And then after that is when we’d bring up the seller financing. How long have they owned it, what’s their motivation here for selling? And then if it’s older looking to retire, we’re like, “Would they be open to a seller finance?” And most of the time it was no. But eventually we landed on a few yeses.

Ashley:
Can you talk about some of the advantages for the seller to do seller financing? And do you ever work that into your pitch?

Chuck:
So that’s not really a big focus of ours because we’re just talking straight to the brokers or the brokers communicating with the seller. But a couple of the advantages I’ve seen, is if you’re passing it onto your children, it’s a lot easier to just pass on a note than a building. I mean, a lot of these people are self-managing it. They don’t want to just throw it all on their kids to actually manage the building.

Caleb:
Yeah. And then piggybacking there as well, I think a huge advantage is being able to give the price that they might be looking for. Sometimes with conventional financing. Currently, the building just isn’t worth X, but seller financing you’re like, “Okay, I know it’s worth blank day one and I know I can get the rents up to this, get the expenses down so the building will be worth enough.” But just day one, it’s not. So there’s a lot more room for creativity and getting sellers what they’re looking for.

Ashley:
We just had Pace Morby on episode 280 where he talked about seller financing and that was kind of exactly one of the things that he had said too, is that the purchase price is sometimes just what’s important to the seller. And with doing seller financing, you’re able to get there too.

Caleb:
Yeah. I think everybody’s motivation’s different, but a lot of these people, they just have a purchase price set in their mind, especially in the market today. They just have that one purchase price they’re looking for and they’re not going to move off it. So with seller financing sometimes that’s the only way to get it done.

Tony:
One question I want to go back to guys is, you talked about 500 to possibly a thousand calls you had to make. Over what timeframe was that? How long did it take for you guys to get those 1000 calls before that first deal came through?

Caleb:
It took about five months for us to actually get a deal under contract. I mean, it’s just a long time of doing it day in and day out.

Tony:
So to go through that process, a thousand calls, five months. A lot of people I think would’ve given up after 90 days of, some even after a week of just kind of banging your head against the wall.
So what was the motivation for you? That’s a lot of rejection. What was the motivation for you guys to keep pushing until you found that first yes?

Caleb:
Yeah. I think one of the big ones is just knowing it was possible. If we hadn’t met Cody or doing this on our own, we’re like, “Gosh, maybe this didn’t just isn’t real. Maybe you just can’t do it.” But having met and Cody and Christian and seeing that they had actually done this and made it happen, it was like, “Okay, we know that this is possible. It’s just we got to figure out how to find the right deal.” But that was a big one and then also it was just our dream.
It was since we were 16 years old, we had been looking to buy real estate and we’re like, “We’re not just going to give up now. We’re going to ride this thing out, see if we can make something happen.”

Ashley:
Okay. So let’s talk a little bit about your guys’ partnership going into this. So you guys read Rich Dad Poor Dad together. When did it become official that you guys were going to work together?

Chuck:
It was kind of just straight away. We just kind of hopped in it together and we were learning with each other and it was kind of scary at first just talking to anybody, especially cold calling an owner or a broker. It’s just like, and you’re 18 years old and you have no idea what you’re talking about it. So hopping in with him just helped me a lot. I’m sure it helped him a lot, just having more confidence.

Ashley:
And you guys have partnered on all your deals together or have you done some that are separate?

Chuck:
Well, we’re partnered on all 28 units so far.

Tony:
Just for context, how are the two of you separating duties? Caleb, what do you do? Chuck, what do you do and how do y’all make sure that you’re not stepping on each other’s toes or get in the way of each other?

Caleb:
That’s a great question. At the beginning we were doing a lot of the calls. I was doing a lot of the calls, but Chuck was helping out with most of the underwriting duties. So it was like, I’d find the deal, be like, “Hey, I got a deal, look at this.” Send it over to him. Then we’d kind of get together, congregate on it like, “Hey, this is what we’re thinking, could this work?” Almost every time it was no. And now today it’s a lot more of, I’m kind of the one still doing the acquisitions and Chuck is handling most of the operations and kind of the back end stuff.

Tony:
And then do you guys have an agreement, an operating agreement or a joint venture agreement or a partnership charter? Have y’all kind of sat down to outline what this partnership looks like or is it more of a handshake back and napkin type of relationship?

Chuck:
No. We have an operating agreement, yes, because we also have our capital partners, so we got to make sure they’re protected as well. And we’re all just fulfilling our duties as managers and them as members.

Ashley:
Yeah. Let’s get to your portfolio then. What does it look like today? Are you holding properties and how many deals have you done?

Caleb:
Yeah. So today we’re at 28 units. We’ve got three deals across Texas. We’ve got a 10-unit in McAllen, an eight-unit in Laredo, and a 10-unit in Houston.

Ashley:
What made you guys want to go after the small multifamily, instead of doing single-family or even duplexes to go ahead and jump in with something a little bit larger?

Chuck:
Well, first of all, we love just more units. I mean, it’s just more scalable, so we can just keep that momentum going. But also, I feel like there’s a lot of opportunity in that mid-size multifamily range, or small, or whatever you want to call it, because a lot of them are just self-managing.
So if we can get a good manager, a good operator, and we throw them in there, and we do a little bit of renovations, we pick it up, the ship, so it’s actually moving. We can actually increase the building a lot because they’re so under rented. Our first building, the rents were all at 600, easily can be at 800 with just a little bit upgrades.

Ashley:
With the multifamily, are you guys doing the operations then? The property management, the asset management, that piece of it? And what are you outsourcing, if any of that?

Caleb:
Yeah. So being out of state, we have property managers for our properties down there, but we’re overseeing the managers kind of making sure the assets going in the direction we want, handling the renovations, overseeing everything.

Tony:
Can we talk about how you guys chose and vetted that management company? Because I think for a lot of folks they underestimate how much goes into managing the property manager and choosing the wrong person can obviously derail your deal.
So how did you guys choose the right property manager for your market and how were you able to hold them accountable? What does that relationship look like?

Caleb:
Yeah. So when we’re vetting the property managers, I had called, one huge benefit of calling so many brokers in the state of Texas is I had called so many different people in so many different markets. So once we finally hit in those markets, it was like, “Hey, who’s your PM here? Who’s your go-to, who’s your favorite property manager?” And then one name kept coming up.
So we were called them, just was like, “Hey.” Just talking to them, wanted to see what their vision was for the property, if it aligned with ours, if we kind of had the same goals in mind with it. And then we did. And so we decided to go with them.

Tony:
And then in terms of the ongoing relationship, because I know Ash and I will talk about this where you see some PMs where the costs are kind of spiraling out of control and the day-to-day management things are slipping. So how do you all act as asset managers and hold your property managers accountable?

Caleb:
Yeah. I think it’s a weird balance because you have being on them too much and you have being on them not enough. So it’s a constant struggle to find that perfect balance. So I think it just all depends on what’s going on.
If you’re doing renovations like we’re getting into now it’s, you got to be on them a little more like, “Hey, how’s it going? What are we doing here?” The progress, everything. But it’s just letting them do their job at the same time. It’s, they’re a property management company for a reason. So it’s just the big thing is just finding a balance between being on them too much and then not being on them enough.

Ashley:
If you guys could do it again, or maybe you did this in the beginning, but what are some questions that you can give to our listeners that they can ask when interviewing a property management company?

Chuck:
Yeah. I think a huge one. I don’t know about you, but it’s how many units they own in the area and how long they’ve been doing it. It’s because some of these fresh managers we’ve interviewed, a few of them just didn’t really know what they were doing.
It was, they kind of sounded uncertain on the phone and I’m like, “Well, you’re uncertain, there’s no way you have…” If you’re uncertain, I’m going to be uncertain about this. So it just didn’t make sense. But just how long they’ve been doing it and how many units they have is a huge thing.
And then I think market rent and then how they’d handle certain situations like, “How would you handle vacancies? How do you go about filling vacancies? What do you see as market rent here? The units are currently at this, do you think we’d get to this? What would it take?” So just their understanding of the area and knowledge is huge if they’re going to manage your building the right way.

Ashley:
I do agree with you that I think there have been a lot of startup property managers the last several years of people just thinking that, “Here’s a opportunity. I’ve got a couple units myself, I might as well share the overhead. I can manage these units great.” And then go on and it ends up not really working out that well.
Or I’ve also seen where they do start and then they grow too fast where they don’t have the processes and systems in place to handle that many units and that’s where it kind of starts to hurt them.

Chuck:
Yeah. I know, I definitely agree. We have three managers, because we’re in three different cities in Texas, so it’s the same process for all three. Each city we came across in, people got a recommendation, they were really fresh in the game. It’s had barely in our units under management, not even in the area.
We were looking in that city and it’s like, “Oh, I think we’re going to go a different direction here. So I, hundred percent agree. It’s about finding one that’s established has been in business and has a clear plan for your building.

Ashley:
And what do you think about fees? Are you willing to pay a little bit more for the property management fee instead of going with somebody who’s cheaper even if they are more green?

Chuck:
Yeah. This is something you can’t skimp on. Property management is almost everything when you’re going out-of-state investing, so you need to make sure you find the right one.

Tony:
And on the note of fees, I just also want to talk about again, just what that relationship looks like. So when your property management company is solving problems on a day-to-day basis, at what point do you require that they communicate with you? Is there a dollar threshold? Is there a certain, I don’t know, impact level that you’re looking for? How do you make sure that you, as you said Caleb, you’re not over-managing but you’re not under-managing either.

Caleb:
Yeah. Usually it’s, if must it’s a little fix in the building, it’s just go ahead and get it done. But if it’s an AC unit or something like that of that nature on that level is, when I’d like to start to be notified like, “Hey, this tenant’s AC went out, we need to get a repair.” “Okay. Let’s get on that.” But at that level and up is probably when I’d like to be notified.

Tony:
Yeah. I know what I did when we had our long-terms, we had a specific dollar amount in our property management agreement that said, “Anything under this dollar amount, don’t talk to me about it, handle it on your own. Anything above this dollar amount is where I need to be involved to get the final say.” And Ashley, I think you have a very similar thing in all of your property management agreements as well. Right?

Ashley:
Yeah. It’s a dollar amount and then the appliances, which has been a big issue for me. “Do not ask me to replace an appliance. Please just replace it.” What am I going to say? “No, the fridge isn’t working.” “Let me think about it for a couple days and I’ll get back to you.” “No, don’t even ask me. Just take care of it.”
But I want to ask about the rehab process too with using the property management company. You said that they kind of oversee it and you have to keep on top of them for that.
What are their roles that they’re doing for you during the rehab process? And then what are your responsibilities? Are you designing the rehab? Are you the one hiring the contractors? Are the managers doing it? And what does that whole process look like?

Caleb:
Yeah. The main thing so far has been, they kind of hook us up with their contractors in the area that they’ve been in business with for a while. Then that contractor gets me a quote and they kind of oversee the work as that contractor goes about it. And it’s all different.
One of our PMs, the one in Houston’s like, “Hey, we got this. They’re asking for this on the floor. If we can get this done, we can get it rented out for X by the end of the month.” And it’s like, “Okay, let’s go ahead and do it.” The other ones is going more through the contractor because they don’t have an in-house. So each one’s different, but it’s kind of just making sure we oversee it and that they stay on top of the contractors as well.

Chuck:
And we work with great property managers, so they’re really good at assessing what we need and what we don’t need. So usually it’s pretty tight and we can get the best ROI for our money on the renovations.

Ashley:
And then are they charging you a project management fee on top of your regular management fee at all?

Caleb:
Not so far, no. They’ve kind of just been, “Hey, our contractor’s doing this.” And then that’s the company that outsources it. He’s really close to them and the other company just has an in-house, so.

Tony:
That’s actually pretty solid. Right? Because a lot of property management companies, they make more revenue by upcharging things like repairs and maintenance and managing construction projects. In fact, they’re giving it to you just kind of on the house. It’s a good property management company.

Caleb:
No, it’s awesome. Have great relationships with then.

Tony:
So I want to deep dive one deal. So do y’all have maybe one deal on mind that we can talk through the numbers on?

Chuck:
Okay, yeah.

Caleb:
Yeah. Well our Houston 10 plex.

Tony:
Okay. Let’s talk about the Houston 10 plex. I’m going to shoot you some questions. Just give me some rapid fire questions. We’ll set the table, we’ll go back and kind of deep dive it from there. So first, what was the purchase price on this property?

Chuck:
It was 725,000.

Tony:
725. And you said this was a 10 plex?

Chuck:
Yep.

Tony:
And that’s awesome. You guys are crushing it. And did you find this property on market? Off market?

Caleb:
Off market from a broker relationship I’d built.

Tony:
And then how did you fund this property?

Chuck:
We just brought in an equity partner. So they own half the deal, we own half the deal and we just split the cash flow.

Tony:
So first, before we even go into the deal, what you just said, where you found the deal, you kind of put the whole thing together and you brought in a partner to pretty much carry all of the financial burden for the deal and then you split everything 50/50.
I’ve done that countless times in our business and the majority of the properties in my portfolio today, we purchased without using any of our own capital. But it’s because we found the deal, we did the work, we set it up, we managed it long term, and there are so many people out there who have the capital but don’t have the time, desire, or ability to do it themselves. And they would happily partner with someone else who’s willing to do those things for them just in exchange for a little bit of cash.
So you guys are a great example of that. So let’s kind of take this deal from the beginning. So what about, I guess just kind of give us the story. Right? Walk us through how you found it, how you found this partner, how you put the whole deal together.

Caleb:
Yeah. It was just so, it was a broker relationship. I had called him on a deal in Houston two months prior and just kind of stayed checking up every three weeks or so, like “Hey, how’s it going? You got anything coming on the line?” “No, no, no.” Then he shoots me a text one day, “Hey, 10 plex in Houston, would you be interested?” I’m like, “Of course.”
So start looking at the deal and it’s like, “Holy cow.” For asking this guy once, this deal’s bringing in, what was it? Over eight grand. It was like, “This thing is a cash cow.” We knew a good deal when we saw one. “Okay, wanted to make sure he’d seller finance a hundred percent.” And we got the confirmation on that. So after that we started negotiating the terms, “Hey, what’s most important to him?” And it was the interest and the purchase price and then just kind of went under contract from there.

Ashley:
What did you guys end up doing for the terms? What was the amortization period in the interest rate?

Chuck:
So it was interest only, it was 5.25% and it was 10% down.

Ashley:
Okay. And then how long was it interest only for? Did you have a balloon payment or how did that work?

Caleb:
Yeah. So we have a balloon in three years, but the only reason we are okay to compromise on that balloon time is the deal. We bought it so under market value. It’s realistically we could go refinance right now if we wanted to. So we were comfortable shorting the balloon on that. And then yeah, IO for all three years.

Ashley:
I did a seller financing with interest only and did a balloon for a year and I was sweating. Man, it was the same day closed on it and then I did it. I mailed the check overnight to the guy that did the seller financing and he didn’t get it and I was just like, “Oh my god.” And I was in sheer panic and he thought it was going to be hand delivered to his house.
But he had lived in some development where they have mailboxes at the beginning of the development and the postmaster from that town, I called her, I was like, “I don’t know what to do.” And she actually drove out there and was like, “Um, it wasn’t his mailbox.” He thought it was going to be delivered to his door.
I mean, that was hours of pure panic and pain that I felt. So that’s good that you guys, give you guys a good cushion for three years compared to one year. But I think that’s a great example of looking at the different variables. You guys bought so below under market that you’re not worried about when you do have to refinance that it’s going to appraise enough so that you’re able to pull all your money back out and pay off that seller financing.

Chuck:
Exactly.

Tony:
I was just going to ask. What does the rehab look like? Was this a turnkey property? Did you have to put in capital to get this rent ready and increase the value?

Caleb:
Yeah. So day one they were rent ready, but they aren’t to market standard on the units. They’re already achieving, we’re making 15% cash on cash on the deal day one. It’s, we love it, but they’re still an extra $200 upside per rent or per unit and rent. So it’s, we just go in whenever they leave the lease. We just go in, renovate it, get an extra 200 to 250 on the rent.

Tony:
And what’s the potential or projected cost per unit to get them that additional $200 in rent?

Chuck:
Just usually about three grand. It’s super simple. Reno. It’s that one company we’re talking about before.

Caleb:
Yeah, they have in-house contractors just handle everything like, “Hey, this person’s leaving, let’s go and get this done.” They give me over the quote, it’s like, “Okay, let’s get it going.”

Ashley:
What was one lesson that you guys learned on this deal?

Caleb:
I think the biggest one is everybody’s motivation’s different, with sellers. Some sellers are just like, “Hey, I need this price, blah, blah, blah.” Or they want a large down payment or they want a lot of interest.
This guy was like, “Hey, I just don’t want to manage it anymore. Can we please just come to an agreement?” He wanted to keep it off market. He didn’t want his tenants knowing he was selling the building, because he had built such a great relationship with his tenants that he didn’t want to let them know and damage that relationship and have them all leave. So it was completely off market. They didn’t know, and a big motivation for him was not upsetting those tenants either.

Ashley:
We talk a lot about estoppel agreements and sending those out to tenants before you take over to verify the lease information or especially if there isn’t a lease with what the property owner is saying. Were you guys able to do those or were you not able to, since the owner didn’t want the tenants knowing they were going to sell?

Chuck:
We did something else. I think, what is it called, an affidavit or something along those lines. I can’t remember exactly what it’s called, but it’s basically, he signs off on it himself and if they were to be incorrect then we can go after him legally.

Caleb:
But yeah, they all ended up being correct. We closed, got them all verified with our management company and everything’s been going smooth.

Ashley:
That’s awesome. Well congratulations guys, that’s really cool.

Caleb:
Appreciate it.

Tony:
Just one last thought on my side and I’m so glad that you brought that up, Caleb, is that every seller has a different motivation and we can’t always assume that we know what’s going to motivate someone to sell a property.
And for some people it could be time they want to close quickly. For some people it could be price, they just want the highest overall price. Some people it could be cash in pocket today, they want the biggest down payment. Others, it could be interest, it could be an infinite number of things. And for your seller, interestingly enough, they were most concerned with making sure that they maintained that relationship with their tenants. And as long as you’re able to solve that problem, now you are in a position where it’s a win-win situation.
And I’ll never forget, Ash and I interviewed somewhat, that was quite some time, I can’t remember which episode, but they end up getting a really great deal on a single-family house. And all they had to do was pay for a moving company to help this old lady move.
In her mind, the biggest reason or the biggest obstacle to her moving was packing up all of her stuff. And this person was like, “Well, ma’am if I just get you a moving company and help you move to your next place, would that help?” And she was like, “Oh my gosh, that would help so much. And would you really do that for me?” And it’s as long as you’re listening, you can identify what those challenges are and if you can solve that, you get a great deal.

Caleb:
Yeah. Couldn’t agree more. One thing that’s difficult, more going through brokers is you don’t always know what that motivation is. It’s because sometimes all the brokers aren’t the best at conveying what the seller really wants. So once you find that key, what they’re really looking for, that’s when negotiations really take off.

Tony:
So that’s a great point. If I can ask one follow up question. So a lot of times agents aren’t super excited about seller financing because in some of those situations their permissions could cut or things like that. So how did you still incentivize the agents to actually present this deal to you?

Caleb:
Yeah. I think I had let him know what I was looking for as seller financing over time, like, “Hey, this is what I’m looking for. Seller financing, Houston five to 25.” Made it very clear. And for him there was no stress. Just I made it clear like, “Hey, we’re still going to get you your commission.” That’s not get an issue. And when he was confident that we weren’t going to cut the commission or anything like that, it was just a normal deal for him.

Ashley:
Okay. Well you guys, thank you so much for sharing that deal. I’m going to take us into our rookie exam. So we’ll give you guys each a question here. First, Chuck, let’s start with you. What is one actionable thing rookies should do after listening to this episode?

Chuck:
I would say just hop straight in, because that’s how we basically learned everything and Cody gave us a little bit of information, a little bit of direction, and then we just go heavily apply it, just apply it, apply it, apply it. And that’s how we just did all of our learning. And that’s how you really get started. Even if you don’t know everything day one.

Tony:
All right, Caleb, next question’s for you. What’s one software app or system that you use in your business?

Caleb:
Nothing too complicated honestly. Just make sure you’re keeping track of everything. For me, I use Excel spreadsheets. It’s, you want to keep it as simple as possible, but just make sure you’re keeping track of things. Even if it’s just broker calls.
If you’re calling a thousand people, you’re not remembering every single call from three months ago. So it’s just staying on top of it, whether it be Google Sheets, Excel, Notes in your phone, whatever. But just make sure you’re staying on top of what you’re doing.

Ashley:
Okay. And then this question is for both of you. Where do you plan on being in five years? Chuck, you want to go first?

Chuck:
Here at least one goal. I want to at least have one building paid off in five years. That’s something I, hundred percent want to do. Probably that 10 plex pay that thing off, that’s where I see myself in five years.

Caleb:
Yeah. I think I agree with that a hundred percent. I’d love to pay that building off. And it’s also just keep scaling up and buying the seller finance deals.
So I mean, seller financing, it’s not everybody’s open to it, but it’s just the easiest way to get a deal done. It’s the simplest works for both sides. It’s more of a win-win in most scenarios. So just at least 150 units by then, bare minimum.

Tony:
Love that. Those are some amazing goals guys. And the pace that you’re moving at, I have every reason to believe you guys will hit that number. So kudos to you both.
Cool. So before we start to wrap things out here, I want to give a shout out to you this week’s Rookie Rockstar and this week’s Rookie Rockstar’s name is Derek Gocal. And hopefully I got the name correct there. But Derek said, “My goal was to purchase my first investment property within a year and a half of graduating high school, and I did it. Being 19 years old, I gained a few or saw a few negative reactions to people who didn’t think I could do it, but hard work, drive and a strong support system can help you achieve anything.” So Derek, congratulations to you for being 19 years old and getting that first deal done.

Ashley:
Well, Chuck and Caleb, can you guys let everyone know where they can find out some more information about you and reach out to you?

Chuck:
Instagram’s the best if you want to reach out, @chucky_sotelo and then…

Caleb:
I’m caleb.hommel, and we also have a YouTube channel. It’s Caleb and Chuck.

Ashley:
Well, awesome. Thank you guys so much for taking the time to come on today and share so much value with us and the listeners.

Caleb:
Thank you.

Tony:
Yeah. You guys are great.

Caleb:
That was fun.

Chuck:
That was awesome.

Ashley:
What a great episode with Caleb and Chuck, what a inspirational seller financing story as to, here they are, they have no money, they’re doordashing just to learn about real estate to pay for some mentors. And then here they are now, they have three big deals locked up with seller financing.

Tony:
One of the things that, I think Caleb said this, that really stood out to me was he talked about his buy box and how the fact that he was so specific when he reached out to these brokers is what eventually led to one of them sending him that 10-unit deal that they closed on.
And he said, we told every broker that we spoke with that we’re looking for between five to 25 units, specifically sellers that are willing to sell our finance in this area of Texas, and when you’re that specific with an agent or a broker when something matches that, they have a reason to want to reach out to you.
And then the second thing that Caleb said was that he was able to still incentivize the brokers to send him deals because he made sure to reassure them that he was still going to give them their commissions as if it were a regular transaction.

Ashley:
Yeah. And they talked too about their partnership, how that kind of formed. And it was definitely over time, it wasn’t just they met one day and they decided to partner. So I think that’s kind of an interesting story as to how they’ve grown their partnership in and work together today and also how their roles and responsibilities have also changed.
So Tony, let’s do a social media shout out to Sara today, because Tony’s wife Sara recently changed her Instagram handle from Sara Rad to Sara Rad Robinson. Right? Can you spell it out for me?

Tony:
Yes. She did. So S-A-R-A-R-A-D Robinson. So Sara Rad Robinson, she made it official. And it’s because the whole Meta verify thing, you can’t change your username afterwards. So she was like, “Am I going to be Sara Rad forever? Should I be a Robinson?” I was like, “I didn’t marry you for you not to change your last name on Instagram. So you got to have the Robinson in there.”

Ashley:
But it did take her a long time to change her name because I remember when she did change her handle, I was like, “But did you actually change your name to that?” But Sara puts out a lot of great content, but unlike Tony, it’s not just great content. There’s also very funny reels that she posts that are real estate related. So I think should give her a follow.

Tony:
Yeah. And actually, Sara posted yesterday, and I don’t know if I shared this on the podcast yet, but Sara is officially four months pregnant right now. So she posted on her Instagram yesterday and we kind of shared it with the world. So come October, baby Robinson, we’ll be here.

Ashley:
Yes. And so excited for both of you. I’m really excited for a little tiny baby co-host. Be a part of this podcast. So guys if you haven’t already, go wish Tony and Sara, congratulations on their Instagram account and maybe we’ll get some baby love time here on the podcast episode a couple times, so.

Tony:
Thank y’all. Appreciate it.

Ashley:
Okay. Well thank you guys so much for joining us. I’m Ashley, @wealthfromrentals and he’s Tony, @tonyjrobinson. And we will see you guys on Saturday for a Rookie Reply.

 

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CFPB proposes rule to bolster PACE loan borrower protections


The Consumer Financial Protection Bureau (CFPB) announced on Monday a proposed rule that seeks to bolster consumer protections for borrowers seeking Property Assessed Clean Energy (PACE) financing for home renovations.

These loans, which are often used to finance environmentally-minded renovations, like the addition of solar panels, have led to financial instability for some borrowers. The proposed rule would implement a Congressional mandate establishing consumer protections for the residential PACE loans.

“When unscrupulous companies bait homeowners into unaffordable loans with exaggerated promises of energy bill savings, this can lead to serious financial distress,” CFPB Director Rohit Chopra said in a statement. “We are proposing new rules that would require sensible safeguards on these clean energy loans.”

With a residential PACE loan, renovations are financed and are then paid back by the borrower as property tax payments to their local government, resulting in higher property tax payments for borrowers. Eligible renovations can include property preparation for natural disasters or modernization to a home’s electrical or water systems. Between 2014-2020, the majority of PACE loans were used for natural disaster preparedness.

However, some borrowers have fallen behind in recent years, according to the CFPB — and the newer, higher tax payments are tied to the property rather than the borrower.

“The obligation of paying the loan back through higher property tax payments remains with the property even if the borrower sells the property,” the CFPB said. “Although PACE lending is authorized by local governments, private companies typically administer the programs, which can include marketing of the loans, managing originations, and making the lending decisions.”

The Federal Trade Commission (FTC) and the State of California sued a private company called Ygrene Energy Fund in 2022 for “deceiving consumers about the potential financial impact of its financing, and for unfairly recording liens on consumers’ homes without their consent” in regard to PACE financing.

The FTC and California alleged that Ygrene deceived consumers regarding PACE’s impact on home sales; misled consumers about PACE’s impact on refinancing; and trapped consumers in PACE liens without clear consent.

The rule’s announcement also comes five years after the Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018 was signed into law. The Act charged the CFPB with handing down ability-to-repay rules for PACE financing while also applying the civil liability provisions of the Truth in Lending Act (TILA) for violations.

“If finalized, the proposed rule would require PACE creditors and PACE companies to consider a consumer’s ability to repay when issuing a new PACE loan, and it would amend Regulation Z to address how the Truth in Lending Act applies to PACE transactions,” the CFPB said. “Among other amendments, the proposed rule would adjust disclosure requirements to better fit PACE loans and to help consumers understand the loans’ impact on their property tax payments.”

Public comments on the proposal are due by July 26, 2023, or 30 days after publication of the proposed rule in the Federal Register.

The CFPB also published a report about PACE financing, which found that PACE financing increased a homeowner’s property taxes by roughly 88% on average. The report found that PACE loans are generally tied to higher interest rates — at 7.6% on average — compared to the average interest rates for home purchase or home equity loans.

Consumers with mortgages and PACE loans are also more likely to face mortgage delinquency, and those without pre-existing mortgages are more likely to have higher levels of credit card debt, according to the report.

The impact of PACE financing also disproportionately impacts borrowers of color, the report said.

“PACE borrowers were more likely to reside in census tracts with higher percentages of Black and Hispanic residents relative to the average for their states,” the CFPB said. “Reforms and regulation of PACE loans in California appear to have substantially reduced the volume of delinquencies compared to the trend in Florida over the same period.”



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The ONE Factor That’ll Make or Break Your Rental Property


A rental property doesn’t need to be brand new, have the best amenities, or offer 24/7 property management to do well. An older home can out-cash-flow a new build with one specific factor. So, what is THE key to having a profitable rental property, and why do so many rookie real estate investors not pay attention to it? Tune in, and find out on this week’s episode of Seeing Greene!

We’re back with your “I finally remembered to turn on the green light!” host, David Greene. This time around, David is taking questions from all levels of real estate investors. Questions like what to do when your HELOC (home equity line of credit) rate is about to skyrocket, how fast to scale your rental portfolio, whether new homes are worth it as rentals, and how to turn a couple of rental properties into a real estate retirement plan. We even get a quick cameo from tax expert Tom Wheelwright on how to avoid taxes the next time you’re selling a rental!

Want to ask David a question? If so, submit your question here so David can answer it on the next episode of Seeing Greene. Hop on the BiggerPockets forums and ask other investors their take, or follow David on Instagram to see when he’s going live so you can hop on a live Q&A and get your question answered on the spot!

David:
This is the BiggerPockets Podcast show 759. All things being equal. It is absolutely better to buy a new home than it is to buy a resale home. But all things are usually not equal. In any market, they typically build homes in the most desirable areas first. So, after they built on the best land, they then go to slowly inferior land as the construction develops. Location will always be the most important rule of real estate. The only thing that you cannot improve or change about a house is where it is.
What’s going on everyone? Glad that you’re here. This is me, David Green, your host of the BiggerPockets Real Estate Podcast here today with a silky, smooth, Seeing Greene show. If you haven’t heard one of these before, there are variation of the podcast where I take questions from you, our listener, and I answer them directly, so everybody else can hear giving financial advice, real estate help, guidance, encouragement, support, even a little bit of chastisement if you need it. Whatever it is, it get you over that hump and into building wealth through real estate.
In today’s show, we talk about several wealth building strategies and ideas, including what to think through when a family member leaves your property, if you should buy a new home and make it a rental, if the numbers work or if you should stick with resales, and how to evaluate a bigger opportunity versus keeping the great interest rate that you have. All questions that are on people’s minds everywhere with the shifting economy that we are going through all for your listening enjoyment.
Before we get to our first question, today’s quick tip, brought to you by Batman. What is something hard that you can go do today? Can you disrupt your comfort zone? I just want you to start small and put big intention behind making a change towards tomorrow. Don’t let your brain tell you you need to go do something huge. You got to build momentum to get to something huge. Can you take a short run? Can you eat a piece of broccoli? Can you do 10 pushups right now? Can you just do the littlest thing that before you check your phone, you do five calf raises just to get in the habit of doing something different than what you’ve been doing, get new juices flowing to your brain and seeing new results?
And remember, if you want to be featured on an episode of Seeing Greene, just go to biggerpcokets.com/david, submit your question there, and hopefully we can get you on the show. All right. Let’s check out our first question.

Clint:
What’s up, David? Love the podcast. Thanks for everything you do. My question is this. I purchased my first rental property in December for $220,000. I used a HELOC from my primary residence for the down payment, and I was planning to do a BRRRR after the six-month seasoning period is over, which is July, and the goal was basically just to recoup the down payment and move on to the next one. The house is in a great, great market, and I have almost 100,000 in equity after six months. My current interest rate is 3.5% which is fixed. The HELOC is adjustable interest rate, but it’s at 4.5% over a 10-year period. The current cash flow is about $400 a month after all expenses, so it is cash flowing pretty good. The problem is the rates have skyrocketed in the last six months since December, and a cash-out refi would basically eliminate all of my cash flow, whereas the HELOC interest rate is not fixed, but worst case scenario could basically double to like 9% and I would still be cash flow positive.
So, I’m struggling a little bit on an exit strategy to pay back the HELOC. Do you have any suggestions for a different strategy to recoup my down payment, pay off the HELOC? I’m actually considering doing a flip in my area with the simple goal of just paying down the HELOC. Once I do, my cash flow will increase about $200, give or take, so I’ll be at about $600 a month once I pay down the HELOC.
So, my question is really, do you have any other strategies for recouping costs when the BRRRR strategy doesn’t necessarily make sense right now because of interest rates? Am I missing something altogether? I would love your feedback. Love to hear what you have to say about this particular scenario, and thanks in advance.

David:
All right. Thank you, Clint. Couple things to go over here. I don’t know that it’s that the BRRRR strategy doesn’t work right now because of interest rates. It’s more that when you got into the BRRRR… when we get into the BRRRRs, we’re basing the end result off of today’s interest rates, and when interest rates go up, that means the deal doesn’t work out like we originally analyzed it too. So, what’s happening is, we’re paying more for the property upfront than we should if we knew what the interest rates were going to be at the end. So, I still think you made a good move. You still have a lot of equity in this deal, and you have two very good interest rates, one in the threes and one in the mid-fours. This is much better than I was thinking I was going to hear when I first started listen to your question, so let’s tackle what your options would be here.
First of all, you mentioned paying off the HELOC to increase your cash flow by $200 a month. That would work, but that isn’t the reason I would want you to pay off the HELOC. I would want you to pay off the HELOC because it’s not going to be 4.4% when it adjusts. You’re incredibly lucky you’re there. Some of the HELOCs that I’ve been seeing on investment properties have been quoted as high as 11.5%, so you need to pay that thing off for safety reasons, for defense, not for more offense, so to speak.
Now, that would move us into talking about, I guess, another question. Should you refinance, get your money back out, or should you keep these rates? I’m leaning towards keeping the rates, but here’s how I would make the decision if I was you. If you pull your money out, can you invest that money and get a $400 a month return on that money because that’s what your cash flow is on this current deal? If you can invest that money and get $400 in another deal, it makes sense to keep the original one breaking even and just paying off the mortgage and getting rent increases every year that eventually become cash flow and acquire another asset that replaces the 400 you lost. So, if that’s the decision that you make, you end up with two properties instead of one. You add equity to the second property just like you did to the first, which increases your net worth. You replace the cash flow that you lost with a new property, so you don’t lose anything there, and your original property doesn’t cash flow, but it will cash flow later because real estate will go up over time and so will the rents. If you’re not able to reinvest that money in another property and get that same $400 a month, it might make sense to just keep the rates that you have and look to make money in a different way.
The real estate, which you kind of alluded to and you talked about house flipping, I think that’s a great idea. If rates are going up faster than you can control to make the BRRRR work at the price you pay in the original amount, you probably want to move away from BRRRR, right? Like BRRRRs are very close to flips. You could flip a property instead of refinancing, and it’s a very, very similar process. Maybe you plan on that. You go after the equity, you know what the cashflow will be if rates are at a certain point, but if rates go up more than that, you just sell it. You actually could probably sell the property you’re at right now, and you could recoup some of your money that way. You don’t have to refinance it to get the money out. You could sell it, turn that into a flip, and then go do it again.
So, this is why knowing different strategies helps because in certain markets like this one where you started with a BRRRR, it worked as a BRRRR. It just didn’t work perfectly. You’re not able to get your money back out of it. You ended up with a great traditional rental here. You could just flip the next house. Look for a property, has a lot of meat on the bone, add value to it, buy it right. Decide at the end, do I want to flip it and get some cash which I could use to pay off my HELOC, or do I want to keep it refinance and go on to the next one?
But that’s the advice I’d give to everybody that’s in your position where they’ve got BRRRRs that are having a harder time working out. Just ask yourself if selling it makes more sense or if holding it makes more sense. As long as there’s new deals that are coming into your funnel here, you’re fine to sell real estate and buy new ones. The problem becomes when you don’t have new deals coming into your funnel. If you sell the property and flip it, you end up with nothing, you have nowhere to reinvest that money again, and you have no long-term cash flow. So, what you want to avoid is having no deal flow. As long as you’ve got deal flow, whether it’s a hold, as a BRRRR, or whether it’s a sell as a flip, you’ll make money in one of those directions and keep snowballing it into new deals.
Thank you very much. Let me know how that turns out.
All right. Our next video clip comes from Kyle Wilkin in Asheville, North Carolina.

Kyle:
Hey, David. My name is Kyle Wilkin. I live in Asheville, North Carolina. We bought our first home in 2020, so we got a really good interest rate. We currently rent out our basement and are able to pay our mortgage each month with that money. So, we’re trying to figure out what’s next. And my question for you today is how much is too much when we’re making this first step in our investment careers? There’s a farm that’s 22 acres, has four buildings on it. We would rent out three of those and live in one of them because we would have to sell this home to put the down payment down on that farm.
So, I’m not asking if it’s a good deal because I think it’s a good deal, but my question is just if you were in the beginning stages of investing, would you recommend us making a leap for something bigger like this farm where we can store my landscaping equipment because I have my own business and rent out three of the homes and potentially have some more land to sell off later, or create other business stuff like wedding venues or stuff like that, or would you recommend us sticking with what we have in our home and the income from our basement until we can get another single family home? And that would allow us obviously to have more cash flow at the beginning stages.
So, I’m just curious what you would advise people like us who are just getting into the game. Thanks, man.

David:
Kyle, this is a great question. I love this. All right. Thank you first off for saying you’re not asking if it’s a good deal. You already know it’s a good deal because now I can give you advice based on the assumption that this property’s a good deal that has three houses that could be rented out as well as a barn to store things.
I’m assuming when you say good deal, you’re meaning that it will cash flow and that the return will be something that you’re happy with. Now, the part where your question gets tricky is that you’re saying you have to sell the home you’re in to put the down payment on the farm. I don’t love to put the down payment on this next opportunity. I don’t love that. You’re living for free right now. The tenant is literally making your entire mortgage payment renting out the basement. That is a big win for you. I don’t know what rent would be. I’m assuming it’s somewhere around $2,000 a month, so you’re cash flowing positive whatever that mortgage is that you’d normally be paying. Let’s assume it’s $2,000. Is this next deal so good that it makes it worth losing that $2,000 a month of cash flow? Because in your head you’re probably thinking of it like this property is a net even. It’s just breaking even. It’s saving you a lot of money, a lot of money. And by the way, you’re not taxed on money that you save. You’re only taxed on money you make. So, a $2,000 savings of not having to pay mortgage is probably more like making $2,500 a month. It’s even better if you sell this property to buy those ones, can you say that it will be the same, right?
I would rather see you take a HELOC on this property you have that’s already awesome for you. Use that as the down payment money for the next one assuming that you have the equity. If you don’t have the equity, can you borrow money from somebody else to buy the next deal? Because as long as you’re paying less than $2,000 a month for the money that you borrow, it’s still better than selling your house and having to take on a mortgage somewhere else.
Now, I think you mentioned that you could move into one of the three houses, so you’d be renting out the other two and getting the storage for your equipment. Run the numbers that way. Can you buy this property with three homes on one lot, live in one of them, also, not have a mortgage, and be a net benefit to where you are right now?
So, let’s just assume it’s apples to apples, right? Right now, you’re living for free. If you buy that one live in one of the units, you’ll be living for free again. Is that real estate worth more than the one you have? Because that could be a win, right? Let’s say you go from a $300,000 of property to $700,000 of property, but it’s still a breakeven for you. Now, you have three potential units going up and rent instead of the two that you’re in right now. There’s an argument to be made that that could work. Is the storage of that barn going to save you money that you were spending to store your equipment somewhere else, and what’s your quality of life like? Do you enjoy the house you’re in more than you would enjoy living in that one?
Here’s what I want to make sure you’re not doing. You crushed it on your first deal. You’re living in North Carolina, you’re living for free on a house act. That is incredibly difficult to do. Most people don’t get to live for free. It’s a win if you just live for less than what it would be to pay the full mortgage. I don’t want you to think that every deal’s going to be like that one and be in a rush to jump into the next one because you had a good experience on the first one, but I also don’t want you to miss out.
So, if I was in your situation, I would look into getting a HELOC on my primary and using that for the down payment. I would look into borrowing the money from someone else and paying them interest to use their money to buy the new property, or I would analyze where I live now and what I’m saving versus where I would live there and what I’d be saving. And if that is a superior move to where you are now, yes, you could sell your house, and you could go buy that property. Just make sure if that’s the road you take that you put it under contract contingent on selling your home so that you don’t lose your deposit. If you’re not able to sell your house or you don’t want to put your house on the market, try to sell it to get the money, and then, when you go to buy this other property, it’s off the market or somebody else has bought it. Let me know how that goes.
All right. Our next question comes from Wendy Clark in Meridian, Idaho. I love your podcast with the very helpful in-depth information you provide and with your sense of humor and your chair swiveling. That is funny. She’s mentioning the chair swiveling because when I start talking and thinking at the same time, I sometimes fidget a little bit, right? So, I’ll do this thing with my chair, or I have a couple other little idiosyncrasies, and she’s calling me out on that. That’s fun.
I currently have no portfolio, but I own my home free and clear in my trust, and I want to know if it’s possible or smart to move into the ownership of my real estate investing LLC instead to rent the house. It’s individual, three bedrooms, two baths to traveling nurses for short to medium term rentals as it would be part of my new REI business, and would this be doable? Is it smart or not smart or helpful?If you’re not the person to ask, I apologize. If not, who would you kindly direct me to be the person that I could ask this to?
Thank you so much, David, for all that you do to teach us and move us forward and upward on your REI journeys. With gratitude, Wendy.
Well, first off, Wendy, that is very sweet of you. You said a lot of very sweet things in here, and I can tell from the way you worded this that you are overwhelmed, and your mind is a little bit jumbled with all the options. Let’s try to take this big ball of yarn and straighten it out into several little strings that we can analyze more clearly.
You did mention that your home is owned free and clear in a trust. So, does that mean that there’s a stipulation that it cannot be used to generate income, or if it generates income that you’re afraid that that means the income has to stay in the trust? That could be what you’re getting at here. I would wonder if you do rent the home out even though it’s in a trust. If you could claim the income as business income that is not related to the property itself? So, maybe the appreciation of the home or the loan pay down the equity that stays in the trust, but the cash flow that comes out of running it.
Could your LLC rent the home in the trust and then keep the additional cash flow? That’d be one way I would look at it. The first thing is you have to ask a lawyer. That’s who you’re going to go to that understands trust law because I don’t. I’ll just tell you that right now. I’m thinking out loud, but I don’t know if that’s the case. Then, you want to talk to your CPA and find out “What would the tax implications be if I do this?” If you don’t have a CPA, and you want to sign up with a new one, you could email me in. I’ll put you in touch with the one that I use, but that’s exactly what I would do.
Then, rather than them saying, “No, you can’t do it.” Here’s what everyone needs to understand. You go back and say, “How could I do it?” Or you throw options, and you wait for them to say, “Oh, yeah, that could work.” So, I just came up off the top of my head, could your real estate investing LLLC rent the home in your trust, and then, lease it out to traveling nurses and keep the profit that it makes while paying your trust rent to use the home that you’re not in anymore, right? I don’t know that that would work, but that’s what I would throw in front of the CPA or the lawyer to find out if that would work.
I love that you’re asking this question of me. I love that you’re being involved in Seeing Greene. You’ve got a great idea. It’s not going to be as challenging as what you’re probably thinking. There is a way around this problem. You just got to ask a CPA and a lawyer what to do. I’d start with the CPA because they’re usually going to be cheaper, and then, I’d ask them if they had a real estate lawyer referral you could talk to.
Thank you, Wendy, for your awesome question, and let me know how that goes.
All right, everyone. Thank you for submitting. My favorite part of the show is we have questions that we can answer, and that’s what you’re all here for. Please make sure to like, comment, and subscribe to the channel.
In this segment of the show, I’m going to read comments that you, I, audience have left on previous shows to see what everybody thinks. These are often fun, insightful, sometimes mean, but usually cool.
Our first comment comes from Professor X. This was just perfect. The answer to the question scenario about paying off properties was exactly what I needed. I’m going to keep working and enjoying living at the same time.
I love hearing that because it’s more about just getting a bunch of money. It’s about getting money in a way that you enjoy and enjoying life while you do it. Thank you, Professor X.
Our next comment comes from Marshall Hennington. By the way guys, these all come from episode 747. If you want to go listen to that and find out why people are commenting.
Excellent, David. You’re a good dude and very humble. I have followed BiggerPockets these last three years, and it inspired me to have acquired two homes, a triplex and two fourplexes, and I’m currently an escrow on another property, and I own my own main home. All due to taking action. Yes, it is. Five years ago, my credit sucked, and I was in debt and had student loans. I cleaned up all those problems and that was five years ago. Now, I’m building a small portfolio. I also plan to pay off three properties in the next three years. If I can do it, anyone can do it. Get to work fellows and start your new life.
Marshall, that is an inspiring comment. That is an encouraging comment. It’s a freaking awesome comment. I love hearing this, and what I love about it is you didn’t just say how you got a deal. Most people come and that’s their question. How do you get the deal? Okay, I got the deal. How do I get my next one? But you actually talked about how you cleaned up your entire life to get the deals. Real estate didn’t just get you some cash flow. Real estate caused you to clean up your credit, pay off your debts, manage your money better, put systems together to scale the multiple properties and be disciplined enough to pay them off.
There are so many benefits that you picked up from your pursuit of real estate, and this is why I tell people, let real estate be the carrot that drives you to make better life decisions. This is my opinion. I don’t speak for everyone. But when I hear people say, “David, how do I buy real estate with no or low money down?” My first inclination is to say, “Why do you have no money? Is there a good reason?” Maybe you have child support payments that are just destroying you, or maybe you’re a caretaker for a sick parent or child and you can’t go make more money. That’s okay. You should not feel any shame about that. But what if it’s just that you’re 38 years old and you still live at your mom’s basement chasing the dream of being a video game engineer, and you need to let that go and get your grown man on.
What if you have terrible spending habits, and you make good money, but it flies out the window just as easily because you’re not disciplined? Is the fact that we don’t have money an indication of a bigger problem in our lives? It’s easy to look for a way around that. Well, how do I buy real estate without having to change anything about my life? I don’t like it. I’d rather that we said, “I want to buy real estate.” These are the habits that are getting in the way of buying real estate. I need to change them, okay? If you want to have a six-pack, of course, there’s always an answer around it. You could get liposuction, okay? You could have ab implants. I think that that’s a thing that people actually get to look like they have it, or you could say, my lack of exercise, my poor diet, my lack of sleep, my issues are stopping me from having a six-pack.
I’m going to go make changes in my life so that I could get what I want, way healthier. Not only to get the six-pack. You get better cholesterol levels, more healthy life, better energy overall, a better mood. A lot of you might meet people at the gym that are friends. A lot of benefits that will come out of making these changes. The book I’m working on for BiggerPockets right now, keep an eye out for it. It’s going to be called Pillars of Wealth. Has to do with the ways that you can change your entire financial picture, not just one part of it which is real estate investing.
Marshall, thank you so much for sharing that. I hope you post that in the BiggerPockets forums as well.
Guys, we love and we so appreciate the engagement. Please continue to like, comment and subscribe on this YouTube channel. And if you are listening on Spotify, even if you’re not listening on Spotify, but you have the Spotify app, do me a favor, go there and keep an eye out for polls. Spotify has recently allowed us at BiggerPockets to ask questions to see what you like about the show, what you don’t like, and how to make it better. So, keep an eye out for those polls and engage with them, participate with them whenever possible because we want to make the show as good as possible. If you could take a quick moment right now to leave me a comment on today’s show and let me know what you thought, what you liked or something that you noticed, I would love it.
All right. Our next question comes from Casey Penessey.

Tom:
Casey says he and his brother have several rental properties that they want to sell. They do want to reinvest, but they’re a little concerned about the timeframe restrictions of Section 1031. Remember, you can exchange properties in a 1031. You use a qualified intermediary, and by doing so, you avoid most, if not all of the income tax from selling the properties.
So, you really have two choices. The first is you do have… You would meet those two tests which is 45 days from the time you close on the old properties to find or identify up to three potential new properties that you choose from, and then, 180 days to close on those new properties.
You can also do a reverse 1031 exchange which means, you can actually buy the new properties before you sell the old properties, and that gives you a lot more time to actually be dealing with this. So, the 45 days is 45 days after you close, but you can do it up to two years before you sell the new property. So, you just need to work with a qualified intermediary who really understands reverse 1031 exchanges to do that.
The other option you have is to sell the property, recognize the game, and then, close on a new property or new properties by the end of the year. What happens then is your new properties, you’re going to get bonus depreciation for 2023. That’s 80% of the cost of leasehold improvements and contents of the building which probably is about 20% to 22% of a property with a good cost segregation, and that is probably enough to offset the tax from the game. Actually may save you money. So, be sure to run the numbers and decide, “Do I want to do a regular 1031 exchange, a reverse 1031 exchange, or do I want to simply recognize the gain, and then, buy new properties?” But be sure you do that by the end of the year so that you match up the tax benefits from the new properties in the same year as the tax consequences of selling the old properties.
All right, David. What do you think?

David:
I think that was some fantastic advice, Tom, and I don’t really have a whole lot to add to it. You covered every single base that I was thinking, and you did it much better than me because you know taxes, and I don’t. It’s nice to see you on the podcast again. I love when we get to hear from you. You’re my favorite tax person. You made a very good point there. I’ll just highlight that.
When you are trying to shelter income from one year, it has to be the real estate that you bought in the same year. You can’t be in January closing on a property and use the depreciation to shelter income from the previous month in December. The cost segregation studies don’t always have to be done at the time that you buy the property. You could buy it in December and do your cost tag studies in January for the previous year’s taxes, but you do have to buy the property in the same year that you are taking the loss.
Very good point there.
All right. Our next question comes from Arjun Kadam. Arjun owns one property aside from his personal home and has about 500,000 in equity at this point.
Hey, David. I’m a huge admirer of you, and oh, I have a not so secret admirer. There we go. And really wanted to ask you a question that’s been on my mind for a while now. I’m a new investor in the Phoenix, Tucson market. In the last four months, I’ve made over 10 offers on resale properties, and each offer has been over asking. I’ve been seeing that because of the huge spike in the values of homes in the last two years, especially in Phoenix. There’s not much of a difference in price between a really old house versus a brand-new house. In some cases, the difference is as low as 10 to 12K. Considering that a new house will not have any capital expenses for five to eight years and will also attract better renters, do you think it makes sense to invest in a brand-new home as long as the numbers make sense for it to be a good rental? What suggestions would you give to someone who wants to buy brand-new properties for rental investments? Are there any red flags? I have never really seen anyone discuss the prospects of buying a brand-new home as a rental property on BiggerPockets and would like to really hear your thoughts on the same. Thank you.
All right. First off, Arjun, congrats on asking what might be the best question of the entire Seeing Greene episode. This is awesome, and I love how you’re thinking. In fact, my mind used to work in a very similar way when I was a new investor. So, assuming that you want to have a career like mine, you’re off to a good path. If you don’t want to have a career like mine, well, I don’t blame you because sometimes, I don’t even want to have my own career, but you’re asking good questions, nonetheless. Let’s get down into this, all right?
All things being equal. It is absolutely better to buy a new home than it is to buy a resale home, okay? So, now again, this is the caveat of all things being equal. There are less capital expenditures. You’re getting better technology. They’re more energy efficient. Your tenants are going to like them more. There’s a lot of benefits of buying a new home, but all things are usually not equal, and here’s where we’re going to dig in on this, okay? Arizona’s not the perfect market to make this point, okay? So, what I’m saying is in general, markets like Arizona, you probably would be better getting the new home construction. Not every market’s like that, and here’s why.
In any market, they typically build homes in the most desirable areas first. Now, Arizona’s different because it’s all desert. So, of course, there’s some areas that are better than others, but objectively speaking, it’s just a different part of the desert depending on where you are if you’re like in Phoenix, right? So, you don’t have as big of a difference between homes that were built 50 years ago and homes that are built today. But what if you’re in Austin, Texas? They’re going to build the best homes in the best part of the area. What if you’re in San Francisco, California? They’re going to build the best homes on the beach side with the cliff views, the ocean views, the closest proximity to the freeway. What if you’re in Southern California? They’re going to build the best homes in the best locations with the best weather and the best views.
You see where I’m getting at? So, after they’ve built on the best land, they then go to slowly inferior land as the construction develops. So, you get more homes being built further away from the ocean, further away from the downtown centers, further away from all the infrastructure that you want. You got to drive farther and fight more traffic to get to the best restaurants or the best entertainment.
Now, of course, this is not hard and fast across everything. I imagine in areas like Kansas, it’s not a huge difference. There’s just a bunch of land, so part of it is understanding the market that you’re getting into, but you’re asking very good points. New construction is better. What I want to make sure that you get right is that location’s even more important than age of construction. Location will always be the most important rule of real estate. The only thing that you cannot improve or change about a house is where it is, unless you pay to have your house picked up and move somewhere else, which usually is not financially feasible. You’re better off to just buy another house somewhere else. You can’t move it, which is why location is the most important thing. It’s also the first thing tenants and owners search for, “Where do I want to live?” Then they say, “Okay, what’s the best house?” Nobody looks at pictures of houses and then says, “Oh, I really love that. When I’m going to buy it? By the way, where is it?” You start with location first. That’s always the most important part.
The other thing with new construction is it often comes with more regulations than stuff that was built previously. In almost every market I’ve seen, if I buy a 40-year-old home, a 50-year-old home, it has almost no restrictions on renting. There’s no HOAs. There’s way less likely to have the covenants, codes, and restrictions that say what I cannot do with the property. You get freedom.
On all the new home construction, you get hit with the HOAs that say, “You can’t or can’t do this. These are all the things you have to do with the property. We have regulations for this part of the city where you’re not allowed to rent it out this way.” You see what I’m saying? When you buy new home construction, you are also buying into new rule sets. Not all the time, but most of the time. So, if that’s the road you’re going to take, make sure that you have a very good agent or broker that can look into this for you to make sure that you’re not missing out.
Buying a property that you’re now not able to rent out to people or that has more expensive HOAs or other restrictions that won’t let you use it the right way. It’s because of that that I have typically not bought very many brand-new homes. I usually end up buying the resell myself because they’re in the better locations, and they have less restrictions on how I can use them, but I love how you’re thinking. This was an awesome question.
All right. Our next question comes from Nels in Minnesota.
Hey, David. I’m a newbie investor from Minnesota with no properties under my belt who has been consuming all things real estate investing for the past year. So ready to get into the game, especially with my lease ending this summer. I’m all in and will likely be house hacking a small multifamily property by myself, but there’s more to the story.
My grandfather passed during the pandemic, and he left behind two properties to my mom. We are a close-knit family, and she wants me to manage what has done with these properties. I’m thrilled to not only help set her on a path’s retirement but take my own steps towards financial freedom as she wants all decisions to benefit her, my siblings and me.
The properties, number one is a partially completed project in rural Wisconsin, not far from where I live in Minnesota. Think of a completely empty house with not much other than a bunch of tools and new appliances, none of which are even hooked up. An evaluation of this property puts it in the $150,000 to $200,000 range. The second property is completely paid off, three bedroom, one bath with a nice size lot in San Jose, California. Well, San Jose’s right down the street from me. My grandfather show… My grandfather has owned it outright since ’69 and not a thing has been updated since as far as I can tell. It needs work, but it’s valued right around a million.
Although my grandfather’s passing is unfortunate, we have an opportunity to create a family legacy because of him. If you were in my position wanting to take steps to both retire my mother and launch and scale a real estate in business myself, how might you attack this strategically?
Here’s my initial thoughts. Sell the Wisconsin home to get my mom’s some financial cushion and use the excess plus some of the equity in the San Jose home to add value to that property. Work with a local property manager out there to make monthly cash flow. However, if we want the cash-out refi route, we would also be able to put equity into additional properties and really get the ball rolling. Is this option a no-brainer?
On top of this, I make a high W-2 salary working in tech which will also fuel this engine. All in all, I feel like there is so much potential in all of this, and I’m okay making mistakes, but I’m needing a little push to jump off this diving board.
Thanks for all, you, Rob, and everyone at BPD. You guys make learning so fun and dreams achievable.
All right. Nels, that is a lot of detail and a really good situation for you to be in. First off, sorry about your grandfather. That is very sad, but the silver lining is that your grandfather left quite a bit of opportunity to his family. Another reason that I encourage people to invest in real estate, when you’re gone, that real estate stays, and the people that you love can really benefit from it. That’s got to be a really good feeling to know, on your deathbed, getting ready to pass that your family is going to receive a huge blessing when you go to take the sting out of missing you.
Second, you live near me. You need to reach out to me directly to talk about some of this real estate stuff. We’re going to do our best to answer what I can on the show, but you’re going to need a little bit more detail and opportunities. I do like what you’re thinking. I don’t think it makes sense for you to keep this project in Minnesota. You might have to put a little bit of money into it before you sell it, but it is probably something to sell. You don’t have experience in managing property. It doesn’t sound like this is a highly appreciating area. You’re better off to sell that property and get the money and put it into something where it going to get a higher return, which could be that second property in San Jose. Here’s why.
You mentioned it’s a three bedroom, one bathroom, right? I’m a real estate broker, and I serve in that market. If you were my client, and I hope that you will be, you would come to me, and I would say, “Look, we got a three bedroom, one bathroom. Can we turn this into a four bedroom, two bathroom?” That would increase the value a lot. If it’s worth a million as is that we’re talking like hundreds of thousands of dollars that you can increase the value of this home. “Can we convert the garage to add more square footage? Is there a way that… You sent us on a nice size lot. Do we have options to make this property worth more in addition to just updating it?”
Now, you also said to be put in touch with the property manager. I’ll be able to help you with that, but let’s make sure that it makes sense to rent it out. You might be able to sell this thing after you’ve made it worth more and buy a lot of rentals. Buy an entire apartment complex with the money that would come from this paid off thing that would cash flow much more than this property would, which would then allow you to spread that cash flow amongst your family. Maybe take ownership of that apartment complex and split it up amongst you, your siblings, and your mom, like you said, and everyone benefits.
Really, you and I need to sit down and look at how much money we would get out of the property in its current condition, how much we would get if we upgraded it, and how much we would get if we sold it and reinvested the money into somewhere else. But the one thing that I do think you’re on the right path with the selling the Wisconsin property, you’re going to have a hard time finding tenants in most rural areas as a general rule, and I don’t think that that’s an area likely to appreciate, so you’re better off to probably sell it and take some of that money, put it into the property that is going to benefit a ton from being upgraded and basically, build your family’s financial future from this point forward on the backs of what your grandfather left you.
So, thankful to him for what he did for you, and thankful to you for having a heart that wants to help your entire family. Make sure you reach out to me.
All right. Our last video comes from Veronica Gordon from Chicago.

Veronica:
Hi, David. My name is Veronica. I live in the suburbs of Chicago. Love your podcast. I’m learning a lot from listening to it. I appreciate your candid stories and your honest advice.
Hey, I am reaching out to you today because I want to know what your next step would be in scaling our business.
My husband and I have two long-term investments and we just recently completed a flip for our long-term investments. We have property A that makes about $200 and profit free and clear that I’m not so happy with, and our second property makes about 400 plus in profit and both of them are townhouses.
Want to know what would be your next step? Sell property A, 1031 it, and find something else like a multifamily. Sell both properties since they’re townhouses and we could be making a little bit more on them, or do we invest out of state? Maybe look at short-term rentals. What would your next steps be?
We’re in our ’40s. We’re looking at maybe getting some passive income for our retirement, and also, helping to fund our children’s college.
Love your show, and I appreciate your advice that you can give me.
Thanks. Bye.

David:
All right. Thank you for that, Veronica. This is another really good question here. Okay. You’ve got two town homes. You just completed your first flip. You didn’t mention how the flip went, so we don’t have anything to go on there, but if the flip went well, I would encourage you to keep doing that. I think this is a market where if you can get really good discounts on real estate, flipping makes a lot of sense. You don’t necessarily have to hold it. As much as I would’ve advised people to four, five, six years ago because the appreciation that we were seeing that was exploding is slow down a lot, so you’re not missing out on as much if you’re not holding the real estate.
Regarding the two properties you have, $200 a month in cash flow and $400 a month in cash flow. You can definitely improve that.
In general, townhomes don’t make great long-term investment properties compared to regular homes. The rents don’t go up on them as much. You can’t do as much to improve the value of the house, so they’re likely to appreciate every year and they’re likely to get more rent, but not as much as if you got the money out of the town home and into a home.
So, the first thing I would look at would be selling, like you said, property A. 1031 it into a multifamily property that’s likely to have more cash flow. That might not be as easy as it sounds because rates are likely higher now than when you bought it. So, the townhome might be cash flowing at the low rate. But if you sell it and reinvest the money, unless you get significantly more rent, you might not get an increase in cash flow.
So, I need you to run the numbers looking at whatever that equity is you have in the townhome at today’s rates. Would it cash flow the same or more in another property? Now, assuming that it does, one option that you could get into would be buying multifamily real estate. Another one would just be buying a single family home in a great neighborhood and trying to find one that could have two units, a house with an ADU. Can you find one of those? Could you find a couple of those? If you can, then, you have the obvious recourse of selling the second house and going and doing the same thing again.
Another option that you might want to look into. Can you sell one of those, and use the money to house hack? Can you get a better home in a better neighborhood with more than one unit that you guys could move into, live in a smaller space, and get more rent? Not just because you’re getting more cash flow, but also, because you’re buying into a better location that’s going to appreciate over time.
All of your goals have to do with the future. You want cash flow when you retire. You want help paying for your child’s education. You need to be thinking about the biggest payoff you can get when you need it, which is not right now. So, if you sacrifice a little bit of the cash flow in the near term to get a bigger payoff in the longer term with better appreciation buying into a better property, you will make more money with that strategy than just maximizing the cash flow right now. But even if you don’t do that, you can still probably improve the cash flow by getting out of the town home and getting into an asset like small multifamily that’s likely to cash flow more.
Another thing, just throwing this out there, what if you sold both of them in 1031 into an apartment complex? We’re likely to be seeing a lot more of those coming into the market because people that own them have balloon payments due and rates are much higher than when they first bought it. So, if you could go find an eight unit, a 10 unit, a 12 unit apartment complex, can you sell both of them? 1031 into that, get way more cash flow, and then, set yourself up so that cashflow grows every year because you have 12 units increasing at rent, not one unit of a townhome or two units of two different townhomes. That can set you up very nicely.
I think that we’re poised in this market. There’s a lot of opportunity for new blood to be getting into the commercial multifamily space. So, people that never were buying apartment complexes can get in on those smaller like five unit and up stuff, and they should be doing it because the people who own them now are not going to be able to refinance or sell for as much as they want to with the increase in rates and the cap rate expansion that we’ve seen.
Thank you very much, Veronica. Love the question.
All right. That is our show for today, and guess what? I remembered to keep the light green for the whole time.
Thank you. Thank you.
I’ve been practicing this all week. I come into my office. I visualize success. I go and I turn the light from blue to green, and it is working, and so, I want to encourage all of you to do the same. What can you visualize right now that you want your life to look like that will change, and what hard thing can you go do? I missed jiujitsu for nine months because of life happening, and I finally went back this week, and it kicked my butt. I’m exhausted from that different kind of exercise, even though I’ve been lifting weights for six months. How many ways have we fallen out of shape in ways that we don’t realize it?
Have you been steadily showing up to work at your W2 and doing a good job, but putting your future goals aside? Did you go into your journal and make a plan for what you wanted your life to look like, and you were sticking according to those goals, but there’s other parts of your life that you haven’t been analyzing or evaluating that are falling apart? What can you do to build the smallest bit of momentum today? Something different. Can you start the day with a five-minute run? Can you do 15 pushups today? Can you read a book that’s different than you normally read? Can you listen to a podcast that you normally wouldn’t have listened to? Can you do anything that will shake you out of the complacency that we so easily fall into and get our mind thinking in different ways?
Thank you very much for joining me today. I want to see you win, and that’s what we’re here for. If you’d like to be featured on Seeing Greene, just go to biggerpockets.com/david. And if you’d like to know more about me, you can find me at David Greene 24 on all social media, so go, give me a follow, and then, check out my website, davidgreene24.com and do this. Go to my website. Check it out. Then, DM me on your favorite social media, and tell me what you like about my site. I would love to get your guys’ feedback just like you love to get mine. Let’s make this a two-way relationship here.
Lastly, if you’re listening to this podcast and you didn’t know that BiggerPockets has a website, we do, and it’s awesome. You are absolutely missing out if you’re not checking out the website and all the resources that BiggerPockets has to offer you. So, go there. Make a profile. Start checking that out and find yourself lost in that wonderful world just like I was when I first found it myself.
This is David Greene for Seeing Greene signing off.

 

 

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