Last week, the Federal Reserve both surprisingly and unsurprisingly raised rates. For weeks leading up to this meeting, investors had a glimmer of hope that the historical rate hikes would end and that we could finally look forward to a time of reasonable mortgage rates and sustainable home prices. But, even with high rates, the housing market has taken some surprisingly strong wins. We’ll get into today’s top real estate-related stories in this episode!

Welcome back to another correspondents show where our “housing market data without the hysteria” expert guests bring in some of the most hard-hitting headlines that could affect real estate investors. Dave starts by professing his deep respect for Jerome Powell’s decision to hike rates even higher and goes into why the Fed could be playing “mind games” with the American people. Next, Henry hits on how home price drops just hit a new threshold not seen in over a decade!

Back on the residential side, James breaks down the good news for February home sales, but soon after, Jamil and Kathy touch on commercial real estate stats that have banks, lenders, and investors starting to sweat. But, what could be bad news for some is great news for others, and if you’ve been looking to pick up steals and deals during a time when competition is low, now may be the PERFECT time to get in the market!

Hey everyone. Welcome to On the Market. I’m your host, Dave Meyer, joined by James Dainard. James, what’s going on, man?

Oh, just enjoying my time out in Seattle, Washington, this trip.

Good. Good. Henry, how are you?

What’s up guys? What’s up? Life’s good, man. Glad to be here. Thank you.

Good to see you. Kathy. What’s new with you?

Well, I’m just enjoying that you all got to see Rich’s 480 bench press video of the ’90s.

If you guys don’t know Kathy’s husband, Rich, he’s the man. And if you want to get a sense of what he’s like, go Google, Rich Fettke 480 pound bench press on YouTube and enjoy yourself. It’s an incredible video.

Oh, he might hate me for this, but it’s worth it.

It’s incredible and he should be very proud of it. Anyway, Jamil. What’s up man? How are you?

I’m fantastic. Honestly, after watching that, I wasn’t sure if that was a ’90s SNL sketch or if it was really Rich Fettke bench pressing 480 pounds, but phenomenal, incredible. I’ve always been a Rich Fettke fan, and today I know why.

New levels.

New levels.

It’s very impressive. We should check how many YouTube views he has on that video right now. And then right after this episode airs, see how many YouTube views he’s got because hopefully several thousand people should be watching this immediately after hearing this.

It’s one of those things that I think will end up going viral because it’ll get picked up and found from all the increased views from this. And he’ll be a viral sensation.

And mullets will come back so strong.

The hair is very good.

Well, fanny packs are back, so why not mullets?

Yeah, the ’90s, late ’80s, ’90s, it’s all coming back.
All right, well we have a lot to talk about today. We’re doing a correspondent show, and if you’re unfamiliar with this format of show, Henry, James, Kathy, and Jamil have all brought a story about the real estate market that they’re following and we’re going to talk about it, but I have a story I feel like we need to talk about first, and that is today, we are recording this on the, what is it, the 22nd of March. We just found out that the Federal Reserve raised interest rates once again. And I kind of felt like this one was the first tossup we’ve had in a while. I actually thought they were going to pause hikes due to the banking crisis and to try and reduce some stress on the banks, but Jerome Powell just doesn’t give a. He just went for it. So curious what you guys think about this.

I wasn’t surprised. He’s still battling inflation and he’s made it really clear, he’s going to do that no matter what breaks. But I also, on the other side of it, it’s like it’s the Fed. They could bail out banks, they’ve done it before. They’ll do it again. They’re going to keep doing it, and that could create more inflation if they’re printing more money to do that. So it’s a quandary. But for real estate, real estate performs generally well in inflation, and then it brought rates down, mortgage rates.

Yeah. Somehow today after they announced a hike, bond yields went down, for some reason. So mortgage rates might go down as well. So it’s very interesting. I guess what I was reading is that the logic here is that obviously, inflation is still too high, so they want to keep raising rates, but I was thinking because a lot of the banking crisis, not direct result of Fed policy, but it indirectly is pretty tied to what’s going on with interest rates, that they were going to just take a pause to reduce stress on the banks. But apparently, the Fed was concerned that if they did a pause, they would make the banking crisis seem worse and signal that there is a lot of stress on the banks when they don’t want people to think that. So it’s just all these crazy mind games and I’m going to just give up on predicting what’s going to happen at this point.

I think it’s interesting though that they did signal that rate hikes would likely pause after this. And so I think that looking at it, we’re in this weird world where bad news is good news, good news is bad news. And so the economy, it has suffered. And that’s what the Fed was trying to accomplish, was to slow things down, and that it’s done.
But I understand the logic that if they had stopped or if they had paused the rate hike now, they would’ve signaled that there was a further crisis in the banking sector. And it was also interesting that they were very clear in calming any fears with respect to what’s going on it with US banks and made a point to comment on the stability of the US banking system in general. And so I think that it is a mind game, Dave. I think that the mind game is being played rather effectively and we can almost guarantee that the next meeting will result in a pausing in rate hikes because they couldn’t do it too quickly. They had to give us some runway. And so I think at least we see some reprieve around the corner.

I’m just going to say a quarter point, not half or three quarters because those three-quarter hikes were brutal. And so I don’t think this is going to do much to what’s going on in the current market conditions. And I could see that he continues to raise a little bit though because this labor market still isn’t breaking. I mean, I’ve had an accounting job up for a month and man, I can’t get anybody in the door. It’s just like, it’s tough to hire right now. And that’s half the reason, it’s not just the rates. They’re also trying to beat back that labor market and slow the economy down. And it has not slowed down in certain sectors. I mean people still can get paid and things are still moving pretty fluidly.

It could also be that there’s very few people that want to be James Dainard’s accountant, but-

The numbers are too high.

Speaker X:
It sounds like a nightmare.

The numbers are too… Yeah.

It’s much easier to be someone else’s accountant where the figures are a lot smaller.
I think it is worth noting though that I read something that the recent bank issues, some economists have equated to something like a 25 or 50 basis point hike, just by the tightening of credit will have a similar effect as another 25 basis point hike or so they estimate. And so that could give the Fed reason to pause, as Jamil said.
And there is something that released that’s called the Dot Plot, which is basically a forecast of where the Federal funds rate is going to go. And right now, the median is 5.1 and so that is similar to where expectations have been. So it’s not like people are thinking it’s going to go that much higher. So if that happens, there’s not too much different that’s going to happen in the mortgage market or anything like that. So hopefully, that’s where it is and I would like at least to just see it pause for a while and just see what’s going on. It’s not like they can’t raise again in the future if they need to. It just seems like the take your foot off the gas for a little while to see what’s happening.

But is that a red flag? Is that a red flag though? If they do cool down, does that mean they’re just totally lying to us about the banking market and the small banking because they’re like, “Oh, we’re going to break this in half”? That’s actually what my concern is, if they really, really slow it down because they’ve been so aggressive the last 10 to year. Are they backing off?
Even though they’re saying it’s healthy over here, is it really just not that healthy and we could see something else? I don’t know. I think I’ve lost all trust in anything the Fed has told us because it’s changed so many times in the last 12 months that I’m like, if they tell me one thing, I’m like, “Oh, it’s other.”

It’s a different scenario though. It’s very different than 2008 when just bad loans were given and they never should have been. In this case, the banks actually do have assets. And it seems like this was more of banks buying other banks and big banks getting bigger. The big banks seem to be in good shape, for the most part.
It’s just kind of buying a distressed asset that has assets. They’re just not good right now, but if you wait it out, they’re going to be, they just have to mature, the bonds that the bank bought. So to me it’s not as big a crisis. This may not age well, guys, but in my opinion it’s not as big a crisis as people are saying. It’s that they made some bad decisions, they bought bonds that weren’t mature yet. If they sold them now, it would be bad. So if someone else has got the cash, is buying these banks, and they get to hold onto those assets till they mature. So it just means, but there will be effect, that there will be an effect on real estate. Anyway, that’s just my humble opinion.

Well, if you want to hear more about it with last week, I had a conversation, if you haven’t listened to it yet with Mark Zandi from Moody’s Analytics. It was really interesting. He shared similar sentiment, Kathy, that the banks are… their balance sheets are actually in really strong position. The concern is people panicking. It’s not really even necessarily the banks, it’s psychology.

I mean if you really were worried about your money, you wouldn’t put it in a bank because it’s being lent out. If everybody tried to take their money out of a bank at the same time, it wouldn’t be there. That’s just a known thing. So do you know what-

Yeah, you would bury it in your backyard like the rest of us.

Buy some real estate. Don’t stick it in a bank.

At least buy a bond. Yeah.


All right. Well, that was my story. I just wanted to vent about the Federal Reserve, as usual. So we’re going to take a quick break and then we’re going to come back with our correspondent show.
All right. Henry, you’ve got some updates for us about the housing market. What have you been following recently?

Yes, sir. So I brought an article from CNN Business Release just yesterday saying that home prices have just broken a decade-long streak and that streak is that the median existing home price fell a whopping, drum roll, 0.2% from a year ago.
But why that’s significant is because it’s been a decade since it’s actually dropped. And obviously, this is a national number. When you look regionally, there are some markets down where the median home price was down 5.6. It says some down four and a half. And so as you look across the country as a whole, this is just saying the average.
But the sentiment in the article is that there is an expectation that home prices will drop some more, even though this percentage is a very small percentage. Now, does that mean it’s going to be a 5% drop or is it going to be closer to a 2% drop? We don’t know. Obviously, real estate is regional, which is why it’s important to make sure you understand the metrics in your individual market and the economy that’s driving your market. But yeah, what do you guys think about the first decline in average home price in a decade?

Not shocked.

not shocked.

We’ve been seeing it. Look, I’m in Phoenix, Arizona and I feel that we’ve taken the brunt of that decline. If you’re looking at statistics, we’re the one statistic that’s pulling. We’re probably the reason why we pulled it into a decline in all honesty, because of just how much we’ve dropped.
But looking at that, I am not shocked at it. I do however feel that it’s misleading because a 0.2% drop nationally spread off over all of those markets, it’s not really painting the picture of what’s going on. And if you look at the major metros, there’s more pain than 0.2% of a price decline in some pretty concentrated and important areas in the country. And so an interesting stat, but I’m not super buying it, just because it’s got so much data involved in it. This average doesn’t paint the right picture, in my opinion.

And I think a lot of what we’ve seen too is the 0.02 decline seems a little low to me, but that’s also because I think a lot of us are feeling, or investors are feeling the pain because we bought… It wasn’t off the median home price. We were buying off peak price for a lot of times.
And what we saw in that first quarter of 2022, I know in the Seattle market, which is similar to where Jamil is, right, we had hyper acceleration in certain markets. They’re off median home price. These homes were jumping 10 to 20% in the first quarter, so they were up 20% over that median home price the first quarter and then it snapped back down. The stat is actually a good thing if we’ve increased money by 40% and it’s only brought us down 0.2%, that’s a good thing actually.
That shows that the market’s a lot healthier than even I would expect. But I think what that does indicate though is there could be a little bit more of a slide because that’s not the impact it should be. And so you just got to be cautious. And the other thing is it depends on what market you’re in because like Scottsdale, expensive. Bellevue, Washington, expensive. We are well outside the median home price. I know in Bellevue our median home price dropped 22% year over year. So really, it depends on where you are and then dig into those specific sections because 22% is a big hit. 0.2 is not. So just dig into the markets that you’re looking at.

If you are listening to this and are confused by this statistic and saying prices have been falling. I just want to clarify what this stat is, because prices in a non-seasonally adjusted way, not year over year have been falling on a national basis since June. But what Henry’s talking about is year over year data, which is basically comparing February of 2023 to February of 2022. And that is generally considered the best way to look at real estate prices because real estate data is seasonal. And so by looking at the same months over several different years, you get to take out that seasonality and you can understand the real trends. And so this is the first time that in a year over year basis, on a national basis, prices have declined. But if you have seen prices decline from June in your market to now, that is also true. So both can be true. There’s just different ways of measuring the same thing.

If you look at it that way and go “Year over year?” I mean last year was just the beginning of the rate hikes and mortgage rates were pretty low. So the fact that it’s dropped so little given the backdrop, given that mortgage rates have doubled and payments have doubled, that’s phenomenal. And also when you look at the averages, that means that some areas were higher. That means some areas actually still grew during all of this craziness, payments doubling. And obviously those markets had to have something going on where people were coming from areas that could afford that higher payment or maybe lenders are sellers are paying points to buy the rate down so that people can still afford. It’s just phenomenal that a year ago when people were really certain that 2022 was going to be the year of the housing crash, to just a year later be down so slightly, it shows the strength of the housing market.

Yeah, I agree. And to echo all your sentiment as well as Jamil is this doesn’t really paint the full picture. It does. The article goes on to talk about how it’s not reflective of the home sales that have happened over the past month. So we got the home sales data for February that’s come out and it’s showing a percentage increase, which I know James is going to talk about. So yes, we have had a decline, but at the same time, I think in lots of market, we’re starting to see pending sales go up, more offers coming in on properties, more buyers entering the market. And so I think it’s a great point to dig into that February data.

Well, thank you for doing my job for me, Henry. I appreciate that.

You’re very welcome.

James. Take it away. That was a buttery transition.

I know. That was smooth, man. Yeah, so I have an article. It’s from the NAR realtors and what it talks about is we have broken a 12-month slide on existing home sales for the last 12 months. It’s been sliding for the amount of sales that are going on. And in February, they jumped 14.5%, which is a huge jump, but that is still down 22% year over year.
Why I think this is a great stat and a great article is that the market’s becoming alive again because everyone got so shocked and they were waiting for this crash. And we were just talking about how the median home prices down .2. And I think to a lot of people’s expectations, the market didn’t do what they thought was going to happen. We thought they were going to go into a free for all and so everyone kind of stood off side the sidelines. And now as the seasonal turnaround has came back and the market, we’re going in that spring market where it gets hotter and hotter, we’re seeing a lot more bodies come through houses.
For us, we have a lot of listings. We’ve over 60 listings. The amount of people we’re getting two to three showings a week, now we’re averaging seven to eight showings a week. And so there’s way more bodies in the market. And I think what is happening is people were waiting for the crash. It didn’t quite happen. It has gone down and it’s made it a little bit more affordable with the pricing. We’re seeing some compression, but now they’re seeing homes sell and they’re getting FOMO. And they’re going, “Okay, I’m never going to get a house.” And so they’re back in the market.
And I think one thing that people should remember, and I had to remember too, is quarter four, since I’ve been doing this for 18 years, it’s always a dead quarter. I would never ever list one of my projects in December. But during the pandemic, the rates were so low, we would list in that time because it would still get absorbed up fairly quickly. And so that seasonal slowdown did happen. We had the fear of the market crashing, plus we had our seasonal slowdowns. I think those are back. Like quarter four will be slow, just like it should be. And now we’re seeing this kind of spring back and things are transacting, which is a great sign. I don’t know if this means the market’s going to go up in value, but it shows that we’re getting back to stability, and stability is key for all of us as investors.

That’s an interesting take. And I’m curious what the rest of you think. Have you seen pretty consistent upticks in activity in the housing market since the beginning of the year? Because part of me was wondering when I saw this data, and it is pretty amazing that it jumped so much, is was it a result of January having relatively low mortgage rates? They dropped down to about 6%. They’ve come back up in February and March. So I was kind of wondering if this momentum that we saw in February is going to be continued. And since as James said, there’s sort of these lead indicators that we can look at, which is traffic at showings and seller behavior, open houses. Are the rest of you seeing that as well now into February and March as well?

From the wholesale side, I can tell you that our inventory is flying faster than it has in months. We can’t keep our wholesale properties on our website for longer than a day.
And so that shows me that investor sentiment is strong or returning. We had a lot of investor… We still had investor activity when things were looking a little grim, but they were taking advantage of pricing. At that time, investors were coming in and they were banking, they were expecting deeper, deeper discounts and they were getting them, but those discounts have seemed to bottom. And pricing has seemed to bottom.
So I think what’s happened is that, A, the investors realize that prices are going to start to… If they haven’t leveled off, they’re going to start to kind of uptick a little bit now, slightly. It’s just slightly because I feel like we’ve seen the worst of it.
So with that said, in the wholesale side, there’s a lot of activity. The investors are gobbling up everything that they can possibly get their hands on, expecting that there’s going to be fewer resale properties hitting the market because home buyer or home sellers, would be home sellers are locked into their houses and they’re becoming landlords instead of sellers. So that inventory crunch is creating demand and that demand is being absorbed rather quickly. So from my perspective and from the investment point of view, in the single family asset class, it’s bananas right now.

Yeah. Same for us. We are seeing, our webinars are full, our property tours are full, and this is from an investor perspective, we help investors buy investment property. It’s again, flying off the shelf, to use the words you used. Do one webinar and it’s all sold. So I do think that initial fear that the headlines that have been literally claiming a housing crash for 10 years, for a decade. In 2014, I was on so many TV shows with the background saying “Housing crash,” like no, no, no, no, you got to look at the demographics. And we, again, know that there’s such little inventory, less than a million again on the market and a growing population of people at household formation age. So it’s just simply the matter of not enough inventory and a slight shift in interest rates. Just a slight shift down brings in a few more a hundred thousand people. A half a percent down brings in millions more people who can qualify. And that’s what we’re seeing.

Yeah. Just yesterday I did what I do, which is nerdy things, and I overlaid these two graphs, which was mortgage demand and sorry… It was purchase applications and bond yields. And basically, you can see that the second that mortgage rates are going up, the number of mortgage rates are just start to spike.
So people are clearly waiting on the sidelines for any fluctuations in mortgage rates and are jumping in. And that’s only as to Kathy’s point, been pretty slight fluctuations in mortgage rates. It’s gone down from, it was like 7.1 or something, down to mid to high sixes. So if we talked about the fed’s projections, they’re projecting to get the Fed fund’s rate down to 4.1 next year in 2024. If all this happens, that’s millions of people who will probably jump back into the housing market.

And one stat that doesn’t ever get reported because you really can’t do it, is like what we’re doing with all of our listings is with these showings increasing in our pricing, we’re going, “How many showings are we getting in this?” And then we go half mile out for looking for same price product in the same. And right now in the last month, we’re having a four to one. We have four to five buyers for every house that’s for sale. And so regardless if it’s not transacting, there will be a buyer in that mix. And so that’s a healthy sign, is like because for a minute, it kind of got out of whack, but the inventory’s still not there and there’s way more buyers. And so if you have a property on market, it’s a good stat to track, how many showings you get in there, how many competitive properties are in there, go half to a mile out and really see. If you have way more buyers in the market, I would stick with your list price at that point. Even if you’re not getting the offers, there’s people looking and you can transact.

All right. Well, another great story and really interesting. I think, we’ll have to update you all, but I think it’ll be really interesting to see if this momentum in sales volume continues because that is a relatively good sign for the real estate industry and it’s not just investors and stuff. Obviously, real estate agents, mortgage brokers, these type of people depend on real estate transactions. And so seeing more of those is obviously helpful to the entire industry. With that, I think we’re going to move on to the commercial side of things. Jamil, what do you got for us?

Well, I don’t tend to speak on a lot of activity in the commercial real estate market, because you guys know that I tend to trade in a single family asset class, but I am a wholesaler and I love finding opportunity. And I can tell you that right now, there is going to be an opportunity in commercial real estate. And typically, what I like to do is zig when everybody’s zagging, right?
And what I have brought to the table today is an article by where they are reporting seeing discounts that they haven’t seen in the commercial real estate sector. So this is, we’re talking small office and they have not seen these discounts in 14 years. So price declines and pricing that reaching levels not observed since 2009. So if you’re looking for an opportunity, this is one of those asset classes that I would say you would have to play the long game on.
I don’t think you’re going to come in and snag up some opportunities and find an immediate spike in values in a return, but it’s a kind of perfect storm that we’re seeing, especially in the office space sector. We have many companies that have implemented very flexible working arrangements so that people can work remotely. I know for instance, especially in New York, they’ve got so much of their workforce that has remained remote. Even here in Phoenix, Arizona for my company, many of our staff members are still working remotely and taking advantage of some of the pandemic type working arrangements that became very popular during the lockdowns.
So that’s one of the factors that have people have lower vacancies, or sorry, greater vacancies in the office space sector. The second thing is, of course, rate hikes have put a lot of downward pressure on pricing because people just can’t get loans, they can’t tee up funding for their projects or to refinance whatever project that they might be in right now.
And so this is putting a lot of downward pressure on pricing in the commercial sector as well. So I think that there’s going to be a tremendous opportunity for people that are holding powder. And what I mean by that is actually having ready and available cash. I don’t think that lending is going to be very robust for getting your hands on these types of product, on these types of projects, but if you can come in and have cash available to take advantage of some of the pain that’s being experienced right now in the commercial sector, you can get your hands on some pretty incredible deals. And so for me right now, I’m going to be looking at opportunities to pick up some holds in the commercial, especially in the office, small office space sector.

Yeah, I think there’s a ton of opportunity in the commercial space coming our way. The debt’s getting harder to get, for sure. And as debt gets harder, it’s harder to buy. I know we’ve been looking for a building for ourselves to move into for the last six years and we couldn’t get it. And now we think this is the time. I think if you’re an owner operator, investor, it’s a really good opportunity coming your way. The only thing I would say on the commercial space, as I remember in 2008, I bought this building for 30 cents on the dollar from an appraisal. We paid a million bucks for it, and it was like this mortgage company that went out of business. Because every mortgage company went out of business.
We bought this building, we paid 90 bucks a foot for this build… It was just ridiculously cheap. And we’re like, “We are doing this.” And I would say, I think there are opportunities there, but you still got to find the tenants to make sure it’s leasing. Because we bought this building, we had it up for rent for two years and couldn’t get it filled, and we ended up having to move our whole office down there and it was like the first WE Space. We were making these little offices and renting them out.
And I think the key to this is there’s a huge opportunity and if you have a tenant attached, the financing will be there. And if not, you’re going to have to pay cash. And so it’s going to be like a double search. As you’re looking for buildings, you’re going to be looking for tenants too, and almost buying based on who the tenants that you are locked in because then it’s going to be easy to get the financing. But from everyone I know in the commercial space, they said the inventory is massively stacking up for him. Like our commercial broker locally that we work with, he’s like, “I got all sorts of stuff for you guys to look at in the next couple months.” And he’s had zero for the last five years. And so I think Jamil is right, there’s a huge opportunity, and it’s going to be a matter of whether you can execute on it or not.

I wholeheartedly agree with you. There’s absolutely opportunity in this space. What we’re having trouble finding is banks willing to lend, because the cash flow’s just not there for them because the interest rates are so high.
And so all I think that that means is that we’re not there yet. I think the prices will continue to come down. And as the prices come down, then you are going to be able to make an eight and a quarter percent cash flow. And I mean, that’s the ideal investment spot, because if you’re cash flowing at eight and a quarter, if things start to cool down with rate hikes and we level out and start coming down at some point, then wow, the opportunity is massive. The wealth you’ll be able to build. If you can get in the game, I think what it’s just going to take is it’s going to take some extreme diligence in your search and extreme diligence in your underwriting.
And James made a great point about finding the opportunities that have tenants in place because what you’re doing is you’re making a bank’s job easier, right? They’re saying they want to invest in something that is lower risk, right? And so if you can bring an opportunity that you’re getting at a discount with a good tenant in place, you’re setting yourself up to build massive wealth in the future.

Henry, to speak, just to add to that, if you are… For instance, my company, KeyGlee, we are just in this funny spot where purchasing a commercial building could be on the horizon for us because our lease is coming up and we could be looking at making a move.
So with that in mind, I see this as an opportunity for us to go out there and have our… Because my company’s got over a hundred people, that we need 20,000 square feet in order to house our staff. So we would be an ideal tenant. And if I can find a building that is, I can buy cheap enough and put myself in as a tenant and pay market rent for that, I’ve now created value. I’ve now created wealth with myself as a tenant, and I can generate cash from something that I would just need to do as a business anyways. So I think that there’s a tremendous opportunity, to add on to what James and Henry said, especially if you are a business owner and you can provide your own tenancy as part of the package, you can hit a grand slam.

And Layer on cost segregation on top of that.


It’s like a house hack, but it’s an office hack.



That’s interesting, Jamil, because otherwise I want nothing to do with office space, to be honest. I just feel like it is, especially in big commercial in large areas like New York, San Francisco, the vacancy rates are really going up and I would be pretty concerned about it, but if you have to spend the money and like you’re essentially house hacking, like Kathy said, I think that’s an interesting approach. But let me know how it goes.

Speaker X:
Yes. Thank you.

[inaudible 00:33:41] into office investing.

So again, paying attention to the fact that right now, there’s just not a lot of lenders out there that are willing to loan on these types of assets, look for those opportunities, look for that, because that’s where the pain is going to be. And I think that there’s just, especially for some of those buildings that are going to need to refinance in the next 12 months to two years, tremendous, tremendous opportunities.

All right. Well, Kathy, it sounds like you brought a story that’s sort of related to that, right? You’ve something with commercial lending as well?

Yeah, it’s a MarketWatch story called Bank Jitters, puts spotlight on commercial real estate, three charts to pinpoint the potential trouble. And then the quote says, “I don’t think it’s going to be a repeat of the ’90s, but it is going to be harder to get a loan.”
So it’s basically what I also learned at the best ever conference when I talked to a lot of lenders there. And basically what we’ve been talking about for a year in liquidity, my whole keynote speech at the Best Ever was focused on liquidity and what that means. And it’s basically available cash, whether it’s cash you have, whether it’s cash you can get from a bank, the cost of that cash. Can you get it from investors? Liquidity is needed generally when buying real estate. Most people don’t buy properties with all cash. If it’s cheap enough, maybe.
But when you get into the commercial real estate range of prices, it’s usually needing liquidity of some kind, whether you’re raising it from investors or again, getting it from a bank. And when that liquidity dries up and you can’t get it, well, obviously that’s going to have a huge impact on the number of sales and the pricing of those if you just can’t get your hands on the money.
And I went through that totally in 2008 when there were great projects, but banks had no money to lend. And that’s when I started syndicating. That’s when syndicators came out of the woodwork because you didn’t need a syndicator before 2008. You could just go to a bank and get the money. That’s where you got the liquidity.
So today, we know that the Fed is trying to pull money back out of the system. That’s why they are raising rates. They’re trying to remove some of the liquidity. There was so much of it that people were trading deals all day long, because if you can go to a bank and get the money and go buy the deal and it makes sense, you’re going to do that. When you can’t get the money, what are you going to do?
So the situation right now of course is we’re seeing banks being cautious, obviously because of these bank failures. And there’s a lot of talk about, “Ooh, is the whole financial system going to crash?” And you already heard me say, I’m not worried about that. I think it’s more of a consolidation of big banks buying small banks that just didn’t have enough liquidity. They didn’t think that went through, they didn’t think there’d be bank runs and so forth. They thought they were investing in something safe, treasuries, right?
So right now, kind of where we’re at with banks and us as investors trying to get that money from the banks, there always seems to be enough money for single family, because the Federal government backs that through Fanny and Freddie. They want people to be able to get home loans. So again, I’m not too worried about the one to four unit conventional loan sector. It’s the commercial loans and what’s happening there.
And in this article, I thought it was really interesting. They talked about the number of small banks that have been involved in doing transactions this past year versus big banks. And with the small banks, it’s 68% of all commercial real estate is with small banks. And the big banks, much, much less, like 20%. And this past year, the big banks only increased their exposure by 5%, where the small banks kind of went all in. That’s where commercial investors were getting their money this past year.
The reason why I’m not worried about the big banks is because they sell those off to commercial mortgage backed security, CMBS. It’s the bond holders who hold those, and it’s not the banks at risk, it’s the bond holders who bought the commercial real estate backed securities. It’s the small banks who don’t do that, and they’re holding onto what could be some trouble.
And so that’s another thing to pay attention to. How are the smaller banks going to handle some of the issues that come up when these loans come due and the borrowers are not going to be able to refinance into the higher rate and these smaller banks are going to have to take back these distressed situations?
So that’s really, to me, what this article is about is liquidity, who’s got it, who’s got the money, and who’s going to be lending it? It’s going to be tighter, stricter. There’s concern now with these bank failures that there’ll be more regulation, which may be a good thing. The Dodd Frank laws prevented banks that had over $50 billion… Well, I should say banks that had more than $50 billion had stricter regulations, and that changed in 2018 where it was if you had to have 250 billion.
So a lot of the small banks got to do more without the regulation that big banks have over the last, I don’t know, four or five years. So more regulation, less money circulating. It’s just going to be harder to get a loan, and that is going to affect commercial real estate. Even if you’ve got a great project and you just can’t get it financed or you’re trying to refinance. It’s a great project, but you just can’t get it refinanced. These are the things we’ll be paying attention to at Best Ever.
Again, I talked to some high level people, Marcus & Millichap, John Chang, he’s like, “It’s going to be a problem for some syndicators who aren’t going to be able to refinance,” but the bank’s okay, because there’s equity there. It’s really more the equity that gets lost and another. There’s plenty of money on the sidelines ready to scoop up the deal just for the amount that the bank has lent on it.
So I don’t really see it, commercial real estate crashing so much as some syndication projects crashing and the equity crashing, people not getting their money back on those deals, but I think banks are going to be fine and there’s plenty of money to swoop in and pick up the pieces.

Well, that’s what I was going to ask you, Kathy, is do you think people like hedge funds or private equity or some non-bank lenders are going to get more into this space? Similar to what happened in post financial crisis in the single family space. A lot of these institutional investors got in there and they’re pretty active in commercial real estate now, but I’m curious if you think they’ll start stepping in an increased way.

Well, again, that’s what John Chang said of Marcus & Millichap, and I’m happy to bring him on as a guest, if you guys want to interview him. He said that he was talking to major, major Wall Street funds who have to place money this year, and they’ve got a lot of it. They’ve got billions and they have to place it.
So they’re maybe not looking for the deals that you and I are looking for. Maybe they don’t need the kind of returns that we need. They need to just place the money. It can’t just sit there. And so he wasn’t worried.
The concern really is the syndicators who raised money, that equity gets paid last. So if you refinance and all of a sudden the payments are much, much higher and the cash flow is so much lower, either those investors aren’t going to get any distributions, or if it sells, it may sell at a price where they don’t get any money back. And that’s going to happen in quite a few deals. But I don’t think it’s the banks in trouble because like I said, someone will just take over that note because it’s cheaper now. If it’s a $50 million property and 10 million was raised in equity, but there’s a $40 million loan on it, let’s say, now that property, some other institutionals coming in to buy for 40 million instead of 50 million, but the equity got wiped out.

I think the riskiest ones on those for the banks are those value add loans they were doing though, because some of them, they were taking 15% down on some of those deals, the small bank. I mean, I know Henry loves local banks like I do, and we all love them because they’re doing the percentage of loans that Kathy’s talking about. What, 65% of these deals were going with local banks. They were really easy to work with. They looked at you as a business.
Because the other day, I was trying to figure out, I was trying to research and I wonder if Dave knows how to find this, is there a way for us to figure out how much of those loans generated the 67% of them are actually on variable debt? Because the fixed debt will remain okay, but this variable debt was, a lot of that was going on, and when you have a variable debt loan set up with a two-step construction component with an operator that, like Kathy said, there’s been some new operators in the market that may have underquoted things and they’re going to get a little sideways, that’s the risk for the banks, is not taking it back when it’s stabilized but midstream.
And there’s a lot of stuff in midstream right now that are not hitting the rent perform… I mean, I was talking a few down actually in Phoenix of all places, and they’re like, “Yeah, our rents dropped so much. We didn’t want to put the money into the project,” and so they’re in this middle stabilization period. That’s where the loans can get risky, right? Because when you’re halfway through, the value of the building almost goes down, right? You’re vacated. Things are under construction, so that properties worth less than it was when you bought it just in where it is.
And that’s what I’m trying to research right now is how many properties are these midstream properties and how many are on variable debt? Because that’s the ones where they could walk away and then a bank has to remodel these things. That’s what bankers aren’t good at doing.

Which they won’t do, and they’ll just take the haircut.

I think that’s where the opportunity is, is in… And I do think we’re not going to see this 2008 homeowner problems. It’s an investor greed problem. We’re seeing headphones getting their teeth kicked in right now. I know one that’s losing a ton of money in Seattle right now, and they’re all midstream projects and they’re bailing out.

It’s the James Dainard special.

Speaker X:
It’s half-built.

Rates are down, what, 51% year over year, and that’s mostly office, and they are just absolutely getting hammered. I think what I read is 60 billion in fixed loans are requiring refinance and 140 billion in floating debt is maturing over the next two years and it’s going to need to refinance. So if rates stay high, there’s definitely going to be opportunity for people who know how to find it. Just my point was, I think there’s just enough people thinking this way that they’re getting ready. There’s money on the sidelines, and there’s institutional investors who have to spend it. They can’t just sit on it. We’ll see.

Yeah, it’ll be very interesting.

Well, if someone figures out how to create the commercial and the multi-family, somehow get the construction costs under control, then it will really rip. Then I think that stuff’s getting all bought and converted.

Yeah, there’s going to be, I think there’s has to be some sort of public-private partnership, government incentive to do that in some locations. I didn’t know where those will be, but some municipality will get smart enough to help developers or investors convert office space as reasonable cost.

Well, we know the labor market’s broken as soon as James finds an accountant. So when we have that figured out, we’ll know that we may have some reprieve in construction costs, at least on the labor side.

Speaker X:
We have our market indicator.

That’s it.

All right. Well, thank you all so much for bringing these stories. We really appreciate them. This was a very fun show. Thank you all for listening. If you like this show, we do always appreciate a positive review on Apple or Spotify. James, Henry, Jamil, Kathy, appreciate you being here. We’ll see you all next time for On the Market.
On The Market is created by me, Dave Meyer and Kailyn Bennett, produced by Kailyn Bennett, editing by Joel Esparza and Onyx Media, researched by Puja Gendal, and a big thanks to the entire BiggerPockets team. The content on the show On the Market are opinions only. All listeners should independently verify data points, opinions, and investment strategies.


Interested in learning more about today’s sponsors or becoming a BiggerPockets partner yourself? Email [email protected].

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

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The demand for home-equity loans, particularly home-equity lines of credit (HELOCs) as well as shared-equity investment products, is now stronger than at any time since before the global financial crisis some 15 years ago.

Securitization channels for those home-equity products, however, are only now starting to catch up to the growing demand for them. Homeowners collectively nationwide now have more than $10 trillion in tappable equity (equity beyond a 20% cushion) tied up in their properties, according to the Black Knight Mortgage Monitor. Those securitization outlets for home-equity products are critical to ensuring liquidity for ongoing operations.

“Securitization of HELOCs had been a small part of the RMBS [residential mortgage-backed securities] market in the pre-financial crisis period, but issuance was still relatively commonplace until 2007,” states a fall 2022 DBSR Morningstar report focused on the securitization market for HELOCs. “After that time, HELOC production waned as defaults spiked and home values plummeted, and HELOC securitizations effectively stopped for nearly a decade. 

“Eventually, a number of small deals trickled their way into the market starting in 2019, More potential issuers have looked to add HELOC securitization funding [in recent months], especially given the dramatic rise in home values providing increased home-equity availability.”

HousingWire analysis of bond-rating report data and information provided by industry experts shows that between 2019 and March 28 of this year, there were at least 17 private-label securitization deals involving HELOCs and/or closed-end second-lien (CES) home-equity loans and separately shared-equity contracts. Those 17 deals were backed by home-equity collateral valued in total at $3.9 billion. 

Eight of those securitization deals have gone to market since 2022, including three so far in 2023. Those include a $279 million combination HELOC/CES deal issued through the conduit Towd Point HE Trust 2023-1; a $237 million HELOC-backed offering, FIGRE Trust 2023-HEI, sponsored by fintech Figure Lending; and a $153 million offering, ACHM Trust 2023-HE1, sponsored by Achieve Home Loans — which also originated the HELOCs serving as collateral for the transaction.

The Towd Point deal involved HELOCs as well as CES loans originated by nonbanks Rocket Mortgage and Spring EQ. The Towd Point offering, according to a Kroll Bond Rating Agency (KBRA) report, closed in early March, prior to the March 10 collapse of Silicon Valley Bank (SVB). In the FIGRE offering, per a bond-rating report released March 28 by DBSR Morningstar, Figure Lending was the originator of the HELOCs in the collateral pool, with Homebridge Financial Services, Movement Mortgage and Guaranteed Rate also contributing to the HELOC collateral pool.

Nick Smith, founder and CEO of Minneapolis-based private-equity firm Rice Park Capital Management, explained that the consumer is now worse off every day “as inflation outpaces their income growth.” He said if those consumers want to maintain the same lifestyle, they have few options now. 

“The only way to do that is to either draw down savings or extract part of their net worth from some other assets they hold [such as a home],” Smith added. “Savings rates have declined to all-time lows and credit-card utilization is increasing significantly.

“I think that trend is going to continue, and you’re going to see a lot of supply of home-equity lending in the market in the future because the consumers want it. And I think fixed-income investors are going to say, ‘OK, there’s volume there,’ and as long as it’s priced appropriately, they’re going to want to participate. 

“I think that’s going to be a pretty significant burgeoning market.”

The need for capital-market outlets, such as securitizations, for home-equity loans is particularly acute for nonbanks that are dependent on short-term revolving lines of credit, called warehouse lines, for cash flow. It’s also true for fintech firms that are focused on expanding their reach into the shared-equity investment market.

Nonbanks can’t originate it, or won’t originate it [HELOCs], if they don’t know they have securitization to dump it into, or if they … need a bank partner that has agreed to purchase the loans on a forward-flow basis,” said John Toohig, head of whole-loan trading at Raymond James in Memphis. “… Most nonbanks just have warehouse lines, and since they don’t have the confidence to turn around and immediately sell it [HELOC loans], many may be afraid to jump into the HELOC market.”

The most common HELOC Toohig is seeing, he said, is “a 10-year, IO [interest-only] 20-year amortization, with a lien secured in a second position.” Toohig added that the interest rate on a HELOC is normally variable, “usually prime, plus 1.5 to 2 points.”

The market tumult sparked by the recent downfall of SVB, the second largest bank failure in U.S. history, bled into the secondary market as well and disrupted private-label securitizations generally in mid-March, market experts said. In addition, overall demand for home-equity loans slowed in the final months of 2022 as 30-year fixed rate interest rates moved into the 7% range in late October and into November. 

“We’ve already seen slowdown in issuance across [securitization] sectors actually, so it’s not just not just mortgages,” said David Petrosinelli, a New York-based senior trader with InspereX, a tech-driven underwriter and distributor of securities that operates multiple trading desks around the country. “I just think we’re kind of likely to see maybe a little bit more of an extended period of time where we just don’t see a lot of deals.

“But ultimately, though, like everything else, there’s a season, and [those home-equity securitizations] will come back.”

Traditional home equity loans

Rob Barber, chief executive officer at real-estate data firm ATTOM, said the $60.1 billion in fourth-quarter 2022 HELOC origination volume was up 27.4% from the fourth quarter of 2021. Despite last year’s fourth-quarter origination dip, he said HELOCs still represented 20.7% of all fourth-quarter 2022 loans – nearly five times the 4.6% level for the first quarter of 2021, according to ATTOM. 

Interest rates, though still volatile, have since receded from the 7%-plus high mark for a 30-year fixed rate mortgage reached late last year. As of late March, they were at least half a percentage point lower, according to Freddie Mac’s most recent market survey. The borrower demand for home-equity products for the balance of this year is expected to continue to grow — barring any future market jolts, industry experts say.

Among the nonbanks that offer HELOCs and/or closed-end second-lien (CES) home-equity mortgage products are Rocket Mortgage, Guaranteed Rate, United Wholesale Mortgage, Homebridge, Movement Mortgage and loanDepot. In fact, Rocket Mortgage was a major originator of CES loans for the first second home-equity mortgage private-label securitization this year — the Towd deal that closed in early March and involved loans seasoned an average of three months, according to KBRA.

That deal involved a mix of HELOC and CES loans, with home-equity lender Spring EQ originating the HELOCs for the securitization transaction. Rocket originated 47% of the CES loans for the deal, with CES loans accounting for 69% of the total collateral pool by count. The $279.1 million offering was sponsored by FirstKey Mortgage — a securitization and asset-management firm.

Among the most active lenders in the home-equity loan space are Spring EQ and Figure — founded by entrepreneur Mike Cagney, also the founder of SoFi. Another active player in the HELOC space is Achieve Home Loans, a real estate finance company under the umbrella of consumer debt-settlement provider Freedom Financial Network Funding.

Those three lenders originated the bulk of the home-equity loans for 10 of the 13 HELOC/CES securitization offerings since 2019 — the first year since the global financial crisis that the home-equity private-label market began to re-emerge. The 13 deals — including a total of six since 2022 — involved aggregate HELOC and/or CES loan collateral of nearly $3 billion, HousingWire’s analysis shows.

Five of those securitization deals, with loans originated by Figure or Spring EQ, were sponsored by Saluda Grade, a New York-based real estate advisory and asset-management firm specializing in alternative lending products in the nonbank sector. Those private-label securitizations were offered through Saluda Grade’s conduit called GRADE.

It makes a lot of sense for homeowners that are no longer able to tap their home equity via first-lien cash-out refi [because of high rates] to now seek a second-lien home-equity instrument, either debt or equity, to be able to unlock their available home equity,” said Ryan Craft, CEO of Saluda Grade. “We anticipated and would hope that there would be [increased] securitizations in Q2 or by the summer.”

Shared equity contracts

Craft said Saluda Grade also recently secured a $300 million line of credit from Barclays Bank PLC that will be used to purchase and later securitize shared-equity contracts originated by a fintech partner called Unlock Technologies.

“Saluda is the borrower, and they face Barclays,” Craft explained. “It’s a traditional investment-banking aggregation-to-securitization line that has a little more term than the standard short-term aggregation line.

“The mission of all the parties is really to help grow Unlock’s origination volume and help Saluda aggregate that production toward more actively issued securitizations.”

Fintechs like Unlock Technologies and other companies similar to it (such as Unison and Point) are part of an emerging sector in the home-equity space that serves borrowers who may not want or qualify for a traditional home-equity product like a HELOC. Instead, they offer homeowners a product called a shared-equity contract (also referred to as a home-equity investment, or HEI, contract) in which homeowners are provided cash upfront in return for a share of the equity in their homes that is monetized when the home is refinanced or sold.

Two of the four shared-equity contract securitization deals since August 2021 were sponsored by Saluda Grade, with Unlock Technologies originating the HEI contracts that served as collateral in those deals. One of the other two shared-equity contract securitizations issued over the same period was sponsored by Unison and the other by Redwood Trust — through Point, in which Redwood is an investor.

In the final quarter of 2022, Redwood set up a $150 million borrowing facility to help finance HEI contracts, according to its filings with the U.S. Securities and Exchange Commission. The real estate investment trust, via its venture-investment affiliate, RWT Horizons, also has invested in two HEI originators: Point and Vesta Equity.

“There are a number of players in the space that have been investing in HEIs,” said Dash Robinson, president of Redwood Trust. “There’s definitely room for that group of investors to deepen and, as the market continues to grow and scale, deepening your investor base becomes easier as more investors see the opportunity to put meaningful amounts of capital to work accretively.”

Brian Hale, founder and CEO of California-based consultancy Mortgage Advisory Partners, agrees that home-equity lending is primed to grow in the year ahead, given the current climate of high interest rates — relative to the large swath of homeowners locked into very low rates on mortgages closed prior to last year’s rate run-up. Hale also cautions that even so, “it’s not a magic bullet.”

“It’s adding another lending program, but it isn’t going to replace mortgage lending in terms of revenue for mortgage companies,” he stressed. “But yes, if they can do it right and not put themselves in harm’s way, and can continue to be prudent as lenders, they can make some money at it.”

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A coalition of 24 housing organizations, individual leaders and trade groups, led by the National Housing Conference (NHC), are urging President Joe Biden to exempt affordable housing development and repair from the Build America, Buy America Act (BABA) provisions of the Infrastructure Investment and Jobs Act. This includes affordable homeownership repair and development programs and U.S. Department of Housing and Urban Development (HUD)-assisted and U.S. Department of Agriculture (USDA)-assisted multifamily housing.

“According to data from Zonda for March 2022, more than a third of housing providers experienced serious shortages of windows, home doors, and garage doors, while more than a fifth reported serious shortages of HVAC equipment and appliances,” the groups said in a letter submitted to the White House. “Today, according to the National Association of Home Builders, transformers are a major bottleneck in housing deliveries.”

The letter also cites a construction center labor shortage based on data from the Bureau of Labor Statistics, along with a study from affordable housing advocacy organization Up for Growth, which concludes the U.S. is facing a 3.8 million unit housing shortage, to illustrate their reasoning.

“This shortage has significantly contributed to extreme growth in housing unaffordability in markets throughout the country, many of which have never experienced double-digit growth in housing costs,” the letter states. “It is also a major headwind into efforts to close the minority homeownership gap.”

The NHC believes that the impact on affordable housing will be pronounced, according to its president and CEO David Dworkin.

“As currently written, the proposed guidance would increase the cost of building affordable housing, reducing the number of units that can be developed using existing federal funding,” Dworkin said. “[The White House Office of Management and Budget (OMB)] must ensure that the important work of the Biden administration addressing the nation’s housing affordability crisis is not undercut.”

The signatories also note in the letter that they have had a productive working relationship with the administration and hope that the dialogue can continue.

“Many of us have worked closely with your administration on expanding minority homeownership and rental housing opportunities, and on addressing the housing supply and affordability crisis,” the letter states. “We have had highly productive meetings with a wide range of your cabinet officials and senior staff over the past 18 months to develop broad bipartisan approaches to address these issues. We hope that this work will not be undercut by policies meant to strengthen American production and employment, but could have the opposite impact.”

Other signatories include the National Association of Realtors (NAR), the Mortgage Bankers Association (MBA), the National Association of Home Builders (NAHB), former Deputy HUD Secretary Pam Patenaude and former Bank of America SVP and Director of National Relationships and Initiatives Jacqueline O’Garrow.

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There is an almost fool-proof way to invest in real estate in 2023. It requires very little money down, no experience in investing, and can be used over and over and over again to build millions of dollars in real estate wealth. The strategy? House hacking! Real estate millionaires agree that this strategy is the BEST way to get started investing and can help launch you to the next level of financial freedom. You DON’T need a ton of time or money to house hack, and doing so could set you up for life.

And if you think our empire-building hosts, David Greene, Henry Washington, and Rob Abasolo, aren’t spitting facts, think again. All three of these investors started house hacking and credit it as the greatest move they made to build wealth. But how does house hacking work, and if it’s such a smart move to make, why isn’t everyone doing it? In essence, house hacking allows you to monetize your living space. So, you get paid to have a mortgage instead of paying a mortgage. This could mean renting out your spare bedrooms, Airbnb-ing your mother-in-law suite, or buying a duplex and renting out the other side.

And during a time when mortgage rates are higher than many of us have seen before and housing affordability is at an all-time low, house hacking can become your savior of savings, helping you keep more money every month. This compounded savings allows you to buy even more real estate, build your dream portfolio faster, and retire earlier than you thought. So, if you’re ready to invest in real estate, don’t sleep on house hacking!

This is the BiggerPockets Podcast show, 745.

I love, obviously love house hacking as a strategy and oftentimes when I’m talking to investors, the main objection that I hear is, “I don’t want to share walls.” Or, “My spouse, I can’t. I’m not going to get my spouse to share walls.” Or, “I don’t want to live next door to my tenants.”
I’m living in my dream house right now because I bought a house hack for two years. Two years of uncomfortability, one year of uncomfortability could change the trajectory of your life. Do you want to be wealthy or do you want to be comfortable? And if you want to be comfortable, why are you even here?

What’s going on everyone? This is David Greene, your host of the BiggerPockets Podcast here today with my co-host, Rob Abasolo and Henry Washington as we break into the most important phenomenally underrated strategy you cannot afford to miss in 2023. Yes, that’s right. We are talking about house hacking.
Today, we’re going to cover what you always need to keep in mind if you’re house hacking, and how things might have changed in 2023 causing you to look at this a little bit differently. We get into affordability, risk, cash flow, why experts are doing this, why more experts should be doing this. And for those of you with capital and experience, make sure you tune in because I think everyone should be house hacking throughout the real estate investing journey. I know I do. And so do others like James Dainard, Brandon Turner, Mindy Jensen, Rob Abasolo, Henry Washington, and more.
Today’s quick tip. Don’t just house hack, adopt house hacking as a mindset. There are a lot of ways that you can find expenses in your life and you can either eliminate them or turn them into income. I was blown away the first time that I heard Amazon would do this, is they would literally look at their expense sheet and say, “What do we spend money on? Well, we’re spending a lot of money for servers to host our thing. Well, why don’t we start our own company where we have our own servers and then hey, we can rent them out to other companies that need them.” That’s a company that became AWS.
That mindset, that way of looking at expenses and asking, “How can I turn them into income?” Can change your financial situation for the future. Train yourself now to start thinking like that.
Today’s show, we’re going to get into three things, we’re going to cover in today’s show and more. Why house hacking in 2023 is one of your best options? Both the benefits and the opportunity that you may not be thinking about. How you can get started and why this is not something just for beginners? Why you shouldn’t be stopping at just one or two?
House hacking isn’t just about houses, it can unlock capital everywhere. All right, Rob, Henry, anything you guys want to say before we get into the show?

I think this is one of those episodes that spouses are going to send to their spouse and they’re going to say, “See? See? Rob, Henry and David said to do it, we got to do it.” And I think a lot of people will kind of change their tune on their stance on this.

I agree. I think you hit the nail on the head when you kicked us off by saying, “Underrated.” I can’t reiterate that enough how underrated of a strategy this is and people do, they stick their nose up at it either because they’re experienced and don’t think they need to do that anymore or because they don’t want to deal with some of the uncomfortability or inconveniences that come with it. But I’m telling you, stick around and hear us out. This is something we all need to continue to do.

Yes, sir. And you need to understand the cost of not doing this. We are talking about hundreds and hundreds of thousands of dollars if not, millions of dollars in money that you could be making and saving in the future. And Rob tells a story about how his first deal turned into his first house hack, which turned into a million dollar empire that he’s sitting on now built at the feet of real estate.
And after your spouse does listen to this and they finally agree and the weight is lifted off your shoulders and the two of you are approaching real estate together and you’re full of gratitude, simply DM me on Instagram for my mailing address and you can send me the gift that you no doubt will want to, after they listen to this show.
All right, let’s get into it.
All right, welcome my friends, Rob and Henry to our show today. We are going to dive into probably the most oatmeal bran muffin, boring strategy in real estate yet by far my favorite strategy. I cannot stop talking about it. I’m an evangelist for this. I do long distance investing. I do BRRRR investing. I do short-term rental investing. I do multifamily. I do commercial. I do all of it and I still can’t stop preaching the gospel of house hacking. It’s just way too good.
So house hacking for those that have been living under rock and haven’t heard, is turning your house into an investment property. Basically it’s taking the place you live and using it to journey income. There is a host of benefits to using it and we are going to talk about why 2023 is your year to house hack. Rob, what’s your thoughts on this?

I am a big fan of house hacking. I have said for many years that I attribute all of the wealth that I’ve ever built, because of house hacking, because I was able to really sacrifice the short-term comfort for long-term gain.
I shared my space with strangers, with friends. I’ve rented, I’ve Airbnb’ed tiny homes on my property, little studios. I’ve mingled with people. I’ve had awkward conversations with people, but all in all, the rent that I’ve been paid from house hacking has saved me from ever paying a mortgage and I could not be more grateful for this niche in real estate.

Awesome, man. Henry, what about you?

Man. House hacking literally changed my life. I have multiple long-term rental properties and I can tell you without a shadow of a doubt, that I am literally sitting here right now in my dream home that we bought because we were able to house hack for two years.
I can also tell you that, even if I had never bought a single other rental property for my portfolio, I still could have got into this property and lived here and afford to live here just because of the house hack I did alone, changed my life.

That’s awesome, man. Now, house hacking helps you in so many ways, one of which is it covers your housing costs, why you’re trying to break into real estate investing. So few investors understand how important it’s to actually manage their own money, have a budget, track your expenses, know where your money’s going to be going. They just think, “No, no. I want to buy real estate estate so that I can spend money on whatever I want.” And it rarely ever works out like that.
When you start tracking your income, one of the first things that you’ll find is your biggest expense is housing, right? So it’s very common to get these books about saving your way to being a millionaire over 700 years of putting your money in the stock market and it’ll grow. The problem is that whole save a cup of coffee every day, don’t spend five bucks model. It’s such a small chunk of your income that if we were Methuselah and lived to be 900, that might actually work. By the time you hit four or 500 years old, you’d have a lot of money, but we die before that. There needs to be something more aggressive.
Eliminating your biggest expense, your housing allowance is a far, far sounder and wiser way to get money saved so that you can get into real estate. And the problem is when you don’t house hack, you’re giving up more than just what the property is going to be worth. You’re giving up all the future properties that you would’ve made.
See, real estate works in this exponentially progressive manner, whereas snowball forms. You get your first deal, you create equity, you pull the equity out, you buy three more. Those get even more cash flow, you save that and equities growing, you reinvest the cash flow, you reinvest the equity. Now, you went from one to three to eight and it exponentially grows.
That’s why you hear people like us that have been investing for five to 10 years that are having conversations that are, it just seems so easy to us. Well, it wasn’t when we were starting. It’s hard for every snowball to pick up steam when you first get started. When you don’t house hack, you’re giving up the future 10, 20, 30 years down the road of tens of millions of dollars that real estate will build for you.
There’s several ways that you can get involved. There’s the low down payment options. This is probably why I like it the most, it requires less money. FHA loans or you put 3.5% down if you’re having trouble coming up at the rehab and you can find a contractor that’ll work with it. There’s a 203(k) loan, which is like an extension to an FHA loan where you can borrow a 97 and a half percent of the construction cost as well.
And when you’re only putting down a small amount of money, this is why I think it’s even better than BRRRR when you can pull it off. The value of BRRRR is that you get your money back out of the deal. Well, if you only put three and a half percent into the deal, there’s nothing to get out. You don’t need to go through all the headache of finding this fixer upper property and going through a construction and hoping the appraisal comes in.
Doing all the things we do to make real estate work, it’s easy. You just buy the best house in the best area that you can afford with as much money as you can get pre-approved for and put as little down as possible and boom, you’re started with real estate investing. Anyone can do it, people can do it, families can do it.
If you want to get investing in real estate, but your spouse isn’t completely on board, you can often get them into this as opposed to, “Let’s go put 25% down on a $500,000 house. Let’s take our whole a hundred thousand dollars nest egg.” Dump it in one property and hope that it works out, versus, “Yeah, let’s just take out of that a hundred thousand dollars to buy a $500,000 property. We only need about 17 grand, 17,500.” That’s a much easier pill to swallow than the full a hundred thousand dollars.
So that’s what I think about it. Do each of you have anything you want to share on just how people should be looking at house hacking in 2023?

Well, what I like about house hacking is that you can get very creative with it. So when you talk about what the actual definition of house hacking is, it’s renting a room or a space or a unit on your property to subsidize your mortgage. That’s ultimately what it boils down to.
And so a lot of people will say, “Well, I don’t really want to. I don’t want a stranger in my house living with me. I don’t think I can do it.” I think I’ve got some thoughts around that. I think Henry does too, but you don’t have to let people live in your house.
When I bought my house in LA, it had a 279 square foot apartment studio underneath it, and I Airbnb’ed that studio for a long time and then I rented that to a long-term tenant. I never had to see those guests or those tenants, and they subsidized 50 to 75% of my mortgage, of my $4,400 mortgage. And then I built a tiny house in my backyard, and again, that’s not connected to my home. I would see guests walking in and out of that house, but there are just so many ways you can break into it.
I talked about this on another episode where I actually rented an Airbnb, that was an Airstream in someone’s backyard that they craned back there and they were charging a hundred bucks a night and that subsidized their mortgage. So you can get super creative with it and depending on how introverted or extroverted or social you are, I think you can sort of adjust what house hacking means for you.

All right. Henry, let’s move to you. What are some ways that people can get started if they want to get into house hacking?

Yeah. Absolutely. I think the best way, what I like about what Rob said is you’re absolutely right, you can get creative. But the best way to get started is obviously you need to find a place that you’re going to want to live and house hack.
So it’s all about that property search and it’s all about, to me, it’s about getting creative because if you don’t want to live in the same direct home as somebody else, then you look for a duplex, quadplex, multifamily. If you don’t want to live in a duplex, quadplex, multifamily, you can look for properties that have mother-in-law suites or in-law quarters or some sort of other detached type of living situation.
So whatever your comfort level is, there is probably a property out there that will fit your comfort level and needs. You just have to be diligent and smart and creative about how you’re searching and what you’re searching for. So it’s about that open communication with your real estate agent who’s helping you to look, setting up the right keywords with your searches.
I was fortunate enough that my house hack was a whole separate house behind mine, so didn’t have to share the walls. And then what Rob said is also true. The true definition is just monetizing that house to subsidize your mortgage. And so people hear house hack and they go, “I don’t want to be next to my tenants.” Or, “I don’t want to share walls.” But that doesn’t have to be the case. Just like Rob said, you can also look at something like, I call them super short-term rentals.
You can look at something like a platform like Peerspace, where you just rent maybe a room that you’ve curated to look a certain way or maybe an office or some other small space, where you can rent that space by the hour to somebody who wants to come in and shoot a commercial or a video or all kinds of things. People look for curated spaces for hourly rates.
There’s even ways where you can just ranked out random space in your garage for other people to store their stuff. There’s so many ways to house hack. So being able to find a property that fits your comfort level and your needs, is huge.

Yeah. I think there’s a website called Rooster. I don’t know if they’re still in business but, and it is basically Airbnb for storage where you say, “Hey, I got a whole garage. Come put your storage into my garage and pay me $75 a month.” Or something like that.
And I was like, “Man, they’ve really thought of everything.” You can really rent out anything in your house, and it probably makes sense. They’re going to start renting out fridge space here pretty soon, I feel.

I’ve had clients that bought a house with us and they’ve rented out the pool in their backyard. People would pay 150 bucks for two hours to go swim laps or teach their kid how to swim. I’ve seen people put little mini putting greens in their backyard and people will pay to go back there and use that. They’ll rent out the RV access and someone will pay a couple hundred bucks, kind of like a mobile home park to put a trailer back there.
As we were talking, Henry, I was thinking about how there’s people that will teach, make 200 cold calls or drive around for seven hours looking at houses and mail a letter to someone with a shabby yard, but they’re not willing to look on Zillow for a property that has more bedrooms or more space in the backyard that they could use. Unfinished square footage that could be very easily converted. I think house hacking is, it’s the one of those things that’s so obvious that you just look right over it.
Now, it can’t be that easy, it has to be harder. Let me go try to find something that’s more difficult. What do you guys think about… Oh, no, first, Henry tell us about your Washington Wealthy Walls principle.


WWWP. So we here at the WWWP, our firm believers in that wealth is not built inside of your comfort zone. No one ever builds wealth in a comfort zone. You’ve got to get at least a little uncomfortable if you want to start building wealth.
I love, obviously love house hacking as a strategy and oftentimes when I’m talking to investors, the main objection that I hear is, “I don’t want to share walls.” Or, “My spouse, I can’t. I’m not going to get my spouse to share walls.” Or, “I don’t want to live next door to my tenants.” And those things are or can be viewed as minor inconveniences.
Why are you looking into a way to build wealth? To replace your income, replace your job, get to financial freedom. These are tall tasks, life-changing tasks. And you’re concerned about sharing a wall for a short period of time? Are you kidding me? You’ve got to get a little uncomfortable. Who cares if you have to share?
I’m living in my dream house right now because I bought a house hack for two years. Two years of uncomfortability, one year of uncomfortability could change the trajectory of your life. Do you want to be wealthy or do you want to be comfortable? And if you want to be comfortable, why are you even here?

That’s a great point. Rob, one of the big issues in 2023 that we’re all struggling with, is affordability. Sellers don’t want to drop their prices to the point that we think it’s a great deal as a buyer, but interest rates are so high that even as prices come down a little bit, they’re still not at a point where they’re going to cash flow really strong or sometimes at all. So there’s a bit of a stalemate. What do you think about house hacking in 2023 as a solution to this affordability standoff?

Personally, I think that house hacking is the most important pivot that real estate investors can start to consider for 2023 because you’re right, things are really expensive, and now I do think that sellers are starting to drop prices a little bit, but even with that, the interest rates are still really high. So even if a seller drops their price $50,000, interest rates being what they are, still makes that a relatively expensive place to live, relative to what it was a year ago.
And so I think people now, are at this standpoint, that at the fork in the road, “Do I want to live in a house and sacrifice a little bit of comfort?” Or, “Do I want to keep renting?” And I think for the people in the former group who are willing to rent a room to subsidize the mortgage, it can effectively make it significantly more affordable.
Let’s say that you’re talking about a $3,000 mortgage, that a year ago might have been $2,300 with lower interest rates. Well, if you’re willing to sacrifice some of that comfort and you can get a house, that you can rent a room out for a thousand dollars, now, you effectively have subsidized it to where it is a little bit more normal to what prices were a year ago.
So I think people really have to start opening their minds to this, especially for the people that are very impatient and have been waiting a long time to get into a home and are really frustrated with the interest rates. We got to do things that make us a little uncomfortable to get ahead.
Just like Henry was saying, “Do you want to be uncomfortable? Do you want to be wealthy?” And I think most people that are in this space and that are listening to this podcast right now, I think we all have the similar mindset that we want to build wealth.

Yeah. And I think there’s a huge contingency of people listening to this right now who’ve got some money saved up, who’ve been waiting for the market to crash. They want to buy real estate. They know that they don’t want to be a renter forever. They’ve already committed to that. They don’t know when. “When do I jump in?” It’s like game of Double Dutch and you’re like, “Urgh.” You’re waiting, you’re watching that rope go. You’re trying to time it, but it never quite feels like the right moment. And then oftentimes the market can take off on you before you realize what happened and you’re like, “Oh, that was my window right when I blinked.”
One thing I love about it is the hesitation that you get to buy real estate when you’re not sure what the market’s going to do is you feel like, “I got one shot.” You’re Eminem. It’s the beginning of eight mile. You’re sitting there with vomit on your sweater, you’re super nervous. You’re like, “I only get one chance to go crush this.” And that’s massive pressure.
When you’re house hacking, you take that a hundred thousand dollars, $50,000 savings, whatever it is that you’ve earned over time. And you only have to spend a small chunk of it. You are decreasing your risk and preventing yourself from spending your entire nest egg on one deal at the wrong time. Instead of spending the whole hundred grand, you’re spending 17,000 of it, which you could save back again over a period of time.
So that it’s not like it’s the end of the world if you jumped in too soon. It’s better that you actually got the property. And then when you’re extending that over the next 30 years, there was no perfect time. The perfect time was 30 years ago. When you’re looking at it in the moment, you’re really trying to get the timing right. When you’re looking at it over a longer period of time, it doesn’t matter quite as much.
And so when you’re house hacking, you’re reducing your risk of even buying in at the wrong time, because you still have a lot of capital for it to buy another one next year to buy another one next year, versus when you’re going in there trying to buy that perfect Airbnb, you got to put 25% down on the deal, then you got to dump the money into furnishing it. You can run out of cash. Rob, what say you?

Well, let me ask you this, David. If you’re going the FHA route and you’re putting down three and a half percent, can you tell me a little bit how often can you do that? What does the FHA guideline say? Can you buy a house every year or is it every two years?

You can buy a house every single year, but you can only have one FHA loan at a time.


So you’ll get an FHA loan, you’ll put three and a half percent down. The next year you’ll just use a 5% down like a regular conventional loan, and then maybe you can refinance out of the FHA, when you have more equity and then use the FHA on a future deal. And this is so important in 2023 because we don’t know what the market’s going to do. That’s what I’m getting at. It could go down. It could go up. There is no sound advice we can tell you guys because no one knows.
We don’t know what the fed’s going to do. We don’t know what the Biden administration’s going to do. We don’t know what the next president administration’s going to do. But we know that if you don’t buy real estate at all, you never actually get out of your situation. So this to me is like the perfect medium.
You don’t want to spend all your money and hope that you bought in at the right time, but you don’t want to do nothing and just keep watching as life gets away from you. So you reduce your risk by taking on more discomfort just like Henry said. You rent out rooms to people, maybe you got to deal with some noisy walls, you learn the fundamentals of real estate, but you put as little down as possible to get as much real estate as you can.

I mean, ultimately my personal belief for house hacking, it’s not about printing money and making gobs of cash. I just genuinely feel that house hacking is about getting out of your mortgage, because the faster you can get out of paying for your mortgage, the faster you can start saving that money and compounding it over time.
So if you’re able to get into a home, let’s say that $3,000 mortgage example I was talking about earlier, and you’re able to get two or three roommates in that home that pay your $3,000 mortgage, what have you done? You have saved yourself $36,000 a year that you would not have otherwise, and now you can use that $36,000 to invest in real estate, in some other capacity.
And we just did an episode, I don’t know if it’s aired yet, that talks about how to get into real estate for $10,000. 36,000 bucks, you can do all the things we talked about three times, three and a half times.

I’m so glad you brought that up, Rob, because that was exactly where I was going to go next. I talk about house hacking changed my life and it did, but what really changed my life was the amount of money that I was intentional about saving because I didn’t have to spend it on the mortgage.
We actually took what we were currently paying in our mortgage before we bought that house and put that up against what we then had to pay or not have to pay by doing the house hacking. And we were intentional about continuing to make that mortgage payment we were used to making. We just made it to ourselves in a savings account, and we could watch that money grow. And as we watched that money grow, it triggered the chemicals in your brain that want to continue to see that grow, and so every time we found some extra money, we were throwing it in the savings account.
Just by doing that house hacking and seeing that money grow, it helped us to get more creative with more saving, that helped us save up the money that we could then use to invest in another property. So it’s really, yes, house hacking is a phenomenal strategy, but if you’re not intelligent or diligent about the savings that the house hacking provides, then you’re doing yourself a huge disservice.

Yeah, it’s basically meaningless at that point, right?

All right. So we’re all on board with house hacking as the best strategy that we can think of in 2023. It’s a combination of the lowest risk and the highest returns. It also sets you up to buy more real estate in the future, hopefully when the market crashes and we all want to jump in.
Now, you’ve got all this money set aside that you’ve been able to save from the examples that Henry and Rob both provided. So when it comes to getting started, Henry, what are some things that people need to know about underwriting the deal, what it looks like to get your first property? Et cetera.

Yeah. I mean, if you’re shopping for a home, people are very familiar with shopping for the home process. It’s very similar. You’re just shopping for a home that’s going to meet your particular house hacking requirements. So you need to connect with a real estate agent, preferably one who’s either worked with investors before or understands the concepts of house hacking, so that they’re sending you deals that make sense to kind of save you the time of waiting through lots of listings that aren’t going to make sense for you or your goals.
You want to also get pre-approved for the loan product that you are going to use, to be able to buy that property. So you can know how much you are going to have to put down or how much you are able to get approved for. Now, there are some caveats to that as well, because there may be some education that you have to provide to either your agent or your lender on the process or what they’re looking for, because there are multiple loan products for this, and not every lender is familiar with the types of loan products that you can use to do this.
And so you do need to do some of your own education, but you want to make sure that you’re working with people who, if they don’t understand, are open to you educating them. I know, that you have this, you are in the mortgage industry David, what do you think about being able to connect with the proper lender to meet your house hacking needs?

Well, you want a lender that has worked with people doing the similar thing before, because a normal lender can get you a loan, but now you’re sort of on the hook to figure out what pieces you might not be aware of.
So there are different down payment requirements for duplexes, triplexes and fourplexes and single-family houses. That wasn’t the case a couple years ago. If your lender isn’t aware of that or doesn’t tell you that, you’re like, “Oh, I’m pre-approved for $500,000.” And then you go find a duplex or a triplex that’s 500,000, they go, “Oh no, those you got to put 10% down or 15% down. It’s not like a single-family home.” You did all that work. Now, it’s not going to be helping you.
There’s other lenders that can propose creative solutions. So you find a property and you don’t quite have enough money to buy it and they say, “Well, if you can get a gift from a family member, you can use that for the down payment.” You might not have even known that was a possibility if your lender didn’t bring that up to you.
And then you also have the good lenders, like how we train ours. They’re going to look at your other assets and they’re like, “Well, you got an FHA loan on this property you bought seven years ago, that you’re at a 5.75 interest rate. We can refinance you out of that, get your PMI dropped off of it.” It’s called something different on an FHA loan, but it’s the same idea as PMI.
“Save you some money there. Maybe your rate goes from 5.75 to 6.25, but your payment’s actually less because you don’t have PMI. And you can pull a little bit of cash out of that property and now you can use an FHA loan on the next deal.” And you go from like, “Oh, how am I going to do this?” To, “Oh, that’s super simple and there’s other benefits.”

Well, isn’t there an opportunity as well to use the rents from a house hack towards your DTI? I don’t know… What are the rules there? Because I know that probably you can’t use rents from a room, but if you bought a duplex, couldn’t you apply the rents that you’d get from that duplex towards your DTI?

They kind of swing back and forth on if you’re allowed to do it in a multifamily property. Most of the time they don’t want you to. But what you can do is buy a house as a house hack, move into a new house next year, and now you can use the rents from the first one to help you qualify for future ones.

Got it.

So you may not be able to do it on every individual house, but when the minute you get your second one, you start to get that snowball effect we were talking about and everything gets easier for you with progressive deals.
What’s your guys’ thoughts on how they can use BiggerPockets calculators to help them figure out what their payments would be on the property in case their agents aren’t David Greene team agents that are experienced and helping run numbers for them?

My thoughts are, they should use it. It’s a very easy calculator to comp out a deal. Put in the numbers, put in your price, put in the rent, and it’ll split out basically if it’s a good deal or not. But it’s a very intuitive tool. I think you can go over to…


And use it for free. I think you get several uses for free before you have to make an account or something like that.

That’s right.

It’s funny because this sounds like a shameless plug, but it’s not. Before I was ever associated with BiggerPockets, I was using that calculator. I still use those calculators today. They’re there because they’re good. So just use them.

They’re easy. They just tell you exactly what to do and you don’t know what to do there’s a little question mark, you’re like, “Oh, that’s what that’s asking me. Thank you.” That’s what BiggerPockets does. We make things very easy for people that want to complicate it.
The highlight that I want to that take out of this how to get started here, is the goal is not to create a lot of cash flow out of a house hack. Occasionally that happens, sometimes a pitcher leaves a fastball right over the middle of the play and you just crush it. Those deals sometimes come your way.
Generally speaking, the goal is not to get cash flow. The goal is to remove your mortgage payment. The goal is to allow you to save more money. And when you do that over several properties, the savings of your mortgage turns into cash flow when you move out of it, and you eventually live the rest of your life never making a mortgage payment again. Which is how Henry was saying he’s able to live in his dream house.
It’s just a little bit of delayed gratification, getting that snowball rolling down the hill early that becomes something big that you then can use to take on some of the big cool multifamily projects or stuff that we talk about here.
All right. I want to transition a little bit into picking the market. Henry, are there markets you’ve seen where house hacking doesn’t work or doesn’t work as well?

Yeah. I mean obviously, the more expensive coastal markets, the New York’s and San Francisco, sometimes even the LA’s and the San Diego’s, right? Where the cost of a house is so expensive that even when you house hack, you’re not going to be able to completely offset your mortgage and you’re still going to have to cover a significant amount of that mortgage. And then you start, and then you’re moving into the realm where house hacking could get risky because not everything goes perfectly.
If you end up in a timeframe where you don’t have a tenant, that’s all on you to carry that. And if you’re buying something with a mortgage that you can’t afford to pay, unless you’re house hacking in a very expensive market, you can find yourself in a sticky situation.
And so in those very expensive markets, I think you have to be super diligent with the numbers, super and be very open with yourself about your budget and what you can afford to do in a worst case scenario. And in those situations, maybe it makes sense to look at a different strategy, but make sure that you have budgeted and done the numbers and understand exactly what you would be comfortable paying above and beyond what your share of that mortgage would be. And if it becomes unaffordable at that point, then you look at pivoting strategies.

Oh, first let me ask you, Rob, what do you think? You agree?

Yeah, mostly. I don’t know. I think you can make it work in any market. I mean, I moved to LA and I made it work there. Now, you may not be able to rent it to somebody in the long-term sense, but I bought my house in LA, 624,000, it was about four times the amount that we bought the house in Kansas City, and that was a lot.
It was actually a very scary amount. We were scared to tell anybody in our family or friends how much this house was because we just didn’t want them to judge us for buying this expensive houses. And so in my mind I was like, “Well, I had heard about Airbnb.” And that’s kind of the beginning of everything, and I was like, “Well, I think this little 279 square foot apartment, if I rented it long-term, I could make maybe 12 to 1500 bucks a month month, which isn’t bad, but if I put it onto Airbnb and list it for a hundred bucks a night, I think I can make two to $3,000 a month.” And that’s exactly what happened.
So I was able to make that property work. When I was making $3,000 a month there on my $4,400 mortgage, now my mortgage is 1400 bucks and I was able to make that work. And then I built the tiny house in the backyard and I was renting that out for at its peak, three to $4,000 a month. So I was actually making money on that property very quickly once I figured out how to make that deal work.
But I didn’t walk into that deal blind. I had done the math, I had done my comps, I had run the numbers on Airbnb and I made that work for me. And even on the flip side of that, I mean I’ve looked at, I think it’s, you find the house that you want and you figure out how to make it work, right? Because I looked at a lot of houses in LA that were under 624.
There were houses that were $500,000 that I was like, “I would never dare put my wife in this house.” And so when I mapped it out, I was like, “If I don’t house hack and I buy a house at half a million dollars, we’re going to spend so much more money than if we just spent an extra $124,000 to buy our house.” And then we house hacked the little studio apartment under it. And so we made that deal work.
So it was actually a lot more affordable to us to buy a house in LA and house hack, than it would’ve been to buy a house, otherwise, it actually would’ve been impossible otherwise.

I think you guys both make super good points and it’s this, I love that I now get to be the one to sort of parse out what each of you said and simplify it after hearing your cases.
Henry’s case is right. In more expensive markets make it difficult to get your mortgage covered completely or cash flow. A hundred percent true. So if you buy a triplex in the Midwest, maybe your mortgage on that’s 1200 bucks, you rent out each side for 600, so you end up living completely for free in that case. The tenants are paying 1200 and you’re living for free. Then you move out and you’re making 1800 on the triplex, but it only costs 1200. Boom. You got some cash flow right out the gate.
But if you go into a coastal market, you’re probably not getting a hundred percent of it paid for. The other side of that coin is that the person who bought the triplex is now making, they’re saving a total of $1,800 a month because that’s what they’re getting in rents. But the person in LA who was paying 4,800 for their rent and now only has to pay a thousand dollars, is actually adding $3,400 to their wealth every single month. So you end up making more in coastal markets, but it doesn’t show up on the balance sheet of cash flow. Okay?
So each of you are right in a sense, and that’s something that people need to be aware of, when they’re deciding how to house hack in their market. If you’re in California where we are, you’re not going to get a hundred percent of your rent paid, but you’re ultimately going to make more money every month than someone in a cheaper market.
And if you’re in a cheaper market, you do have the opportunity to get a hundred percent of your rent paid or maybe even get some cash flow, but you probably need to buy more properties to make up for the fact that not as much money’s coming in per property. That’s where you’re going to need to make sure what you’re doing. It’s even more important to save your cash so you can keep buying.
They work in both. You just approach it a little bit differently. So for some context here, if Henry was able to drop his mortgage from $2,500 a month down to $500 a month from house hacking, so he’s saving two grand a month, that’s about $24,000. And you buy a house for about 500 grand and put 5% down, that’s about $25,000. That is pretty much a hundred percent return on your money.
Where else in 2023 can you get a hundred percent return on your money and get real estate, where rents are going to go up every year and have a loan that you’re paying off? We haven’t even included in that return. And beginning appreciation and know that instead of your rent going up every single year, the tenants are paying you more every year in addition to the hundred percent return. I don’t think there’s anything even close in 2023 that will give you that, that isn’t wildly risky.
Okay, we’re not talking about a crazy cannabis enterprise here. We’re just talking about boring real estate. They get you a hundred percent return and all the future upsides. So now Rob, when it comes to house hacking, there’s more than one way to do it.
People typically look right down the box and they’re like, “This is the only way to house hack.” It’s actually tons of options available, many of which fall within your specific purview.
So tell me, what are some of the ways that when someone buys a house as a primary residence in 2023, that they can take advantage of some of the other more lucrative strategies with their home that maybe they couldn’t in other circumstances?

Yeah, man. This is where the sky’s the limit. And I’m, before we even dive into buying a house, I actually think that you can house hack without owning a property. This is a very popular model in New York specifically, where you go and you obtain the lease and you effectively find the roommates. You’re the one on the hook with the landlord, but you actually find the roommates and you basically decide what they pay you for their room and you subsidize your cost that way.
At my wife’s best friend was part of this, and she understood that where she went and basically applied for a room at this lady’s apartment, and she knew that she was paying a lot more than market rate, but it was furnished and she didn’t even have to do anything. She didn’t have to pay a deposit or anything like that, but the person who was running that lease paid $500 a month versus the other two roommates paying $1,200 a month. So that’s just a quick example of a way to supercharge house hacking.
If you really don’t even own the property, if you’re like, “Man, I don’t have the three and a half percent, I got to stay renting.” That’s a total option for you too. Another way, obviously we’re talking about the 12-month rentals, but what I wish I would’ve done when I got started, I just didn’t know about short-term rentals. And we all know that that’s my thing and I love it.
But if you’re not the kind of person that wants to commit to somebody for 12 months at a time, which is super fair because you don’t know how your tenants are going to shake out, you could rent your room on Airbnb. There is a section on Airbnb that says private home, and then there’s entire home, shared space, shared room.
You can actually rent to two people to share the room, hostile style. You can rent the room one at a time, and you can actually make a lot more money doing this than finding a long-term tenant because you can charge 50 to $125 a night for your room. And if you did that 10 times a month, like 10 days for example, that might actually pay you more than renting to a long-term tenant for 30 days at a time.
And then there’s also the fact that you can do medium-term rentals as well. With short-term rentals, you never really know what types of regulations there are. And so if there are regulations against short-term rentals, the medium-term rental bucket actually gets you out of short-term rental regulation. And when you’re renting to people 30 days at a time, you’re allowed to do that in every city because that falls under long-term rental jurisdiction. So you could rent to people on a medium-term rental basis.
And also there are a lot of cities that will allow you to rent your property on Airbnb if you live in that specific property. It might be illegal if you don’t live at that property, but if you live there, they understand that they’ll write rules in place for those types of Airbnb hosts that are legitimately trying to subsidize their mortgage.
So it isn’t just, we’re not in the age of 12-month leases anymore. I think you could do medium-term rentals. You can rent your room five days a month if you want to. You don’t even have to own the property. The sky’s the limit here. So you find a deal that you like and you make it work however you want to based on your comfort level and how much money you need to make off that property.

So where else in 2023 can you find a strategy that lets you do a short-term rental in a market that won’t let you do short-term rentals? It’s Los Angeles, Southern California, my real estate team down there. This is one of the ways we’ve figured out around all the restrictions against short-term rentals because the neighbors hate it. They just, “We don’t want it.” So then the city restricts how many permits that they issue, and they put all these ridiculous restrictions in place and it makes it so hard to do. And so you just, “I guess I can’t do short-term rentals in 2023.” Not so.
You buy that property, all of a sudden a lot of those laws that affect tenants don’t apply to you. It’s an absolute awesome loophole. So one of the things that you’ll see in a city like Los Angeles is they’ll say, “If you buy a property that has tenants in it and they’re paying $400 a month instead of $2,500 a month, you can’t raise the rent. You have to honor the lease that’s in place.” And it just makes it so those properties don’t make sense.
But if you’re going to live in it, you could absolutely bump them out of one of the units. I think of it as long as it’s the biggest one and you can move into it. And then after you’ve lived in it for a while, if you choose to want to rent it out, you can do that at market rents.
A lot of the stuff that stops investors doesn’t stop homeowners, and you have to start thinking of house hacking as a homeowner strategy that works for investing, and you couldn’t get around a lot of this stuff. That’s one of the reasons that I just wanted to highlight. House hacking in 2023 has so many benefits that other strategies don’t have.
All right, Henry, once you’ve gotten the strategy down, tell me what’s next? How do you get into this snowball that we talk about? Should you just get one or two house hacks and stop, or should you keep going?

Oh, man. My personal opinion is you should house hack every single year until your spouse or your significant other says, “I do not want to share walls or live in a duplex ever again.” Until I hear those exact words. I would just rinse and repeat and repeat because of all of the highlights we talked about leading up until this, it’s such a phenomenal way to build wealth.

Are you there yet by the way, or are you still house hacking? What’s your current situation?

I am not house hacking in this one, but as we are, we have looked at other homes and I literally won’t look at them unless there’s a way I can monetize part of that home, going forward.

It is, once you see it, you cannot unsee it.

Yeah. My wife knows, man.

We’ve house hacked for so many years. I’m at that point, she’s like, “Uh-huh, we’re good.” The money is not meaningful to us anymore. She’s like, “I know you want the content and I know you want to talk about it on you… No more.” And I’m like, “Okay, that’s fine. We did it.” We earned our badge of honor. I’ve done it. I’ve got my rite of passage.

You got your merit badge.

Yeah. Exactly.

One of the things to highlight here is that house hacking is not just a strategy, it’s a lifestyle. It’s a way of looking at the world like Henry was just saying, “I can’t not look at a property and think, how could this produce income? Because if it doesn’t produce income, I don’t want it.” We’ll find some way to make that rhyme and it’ll be a fun thing that we start saying, “This is especially important for new investors that are trying to get started, that are trying to get that momentum going with the snowball.”
We know people, I think Craig Curelop wasn’t just renting out his house, he was renting out his couch and we were teasing him like, “At one point, he is going to rent out his clothes.” People start renting out their cars on Turo, and they’re renting out the pools in the backyard. They’re renting out saunas. There’s the Peerspace movement that’s starting.
This is not going to make you a multi-millionaire, okay? We’re not saying just start renting out your goldfish for other people to play with or something like let people take your dog home for a day if they want a dog. But the point is, you can learn the fundamentals using some of these strategies and those will make you a multi-millionaire in the future.
You’re not going to stay at this level of house hacking or clothes hacking or whatever we’re talking about forever, but it can kind of get you over that initial fear of, “I don’t really know how to do this.” And then once you get comfortable with it, you stop doing it in a small scale. You start doing it at a bigger scale.
Rob, you’re a great example of how that worked out. Can you just paint us a short picture of how you went from house hacking, an ADU in your backyard to now considering rental arbitrage on a 50-unit portfolio in Pigeon Forge?

Yeah. Yeah. Okay. So that first house that I bought was $159,000, and we sold it three years later for $215,000, after all fees and costs and everything like that, we had a $40,000 profit. We used that $40,000 to put three and a half percent down on that property in LA, and after seller credits and everything, we actually only paid $18,500. And now that property today has gotten me over $200,000 in rents. It’s worth $1.3 million.
So just from house hacking, literally half a million dollars in net worth or are a little bit over half a million dollars, in net worth from sacrificing that. I could sell that house today and have half a million dollars in my pocket, because for four years I chose to be a little uncomfortable and have a roommate and have people in my backyard and people under my house. And that’s obviously led to the $200,000 in rents that I’ve gotten from that property has obviously led to me just reinvesting that into all of my Airbnbs.
I’m at 35 doors now, like you said, I just got approached about a 52-unit rental arbitrage, master lease in Pigeon Forge, and I can do everything that I am doing today because of what house hacking did for me, and I just can’t vouch for this strategy enough because it has opened every door in my life that I’ve ever wanted open.

So here’s the magic. It’s not should I house hack or long-term rental, house hack or short-term rental, house hack or BRRRR. House hack can get you in the door, and then you can use medium-term rentals, long-term rentals, short-term rentals, renting out your pool, refinancing the house later, live in flip. You can buy a fixer upper as house hack, fix it up over a couple years, sell it, not have to pay any capital gain taxes because it was your primary residence as long as you were there for two out of five years.
All the stuff you hear us talk about at BiggerPockets, almost all of it is compatible with a house hack. I’m trying to think of the right analogy. You know that website Zapier? You guys familiar with that? It basically makes any computer program talk to anything else. If you have Zapier, you can do anything else with it.
House hack becomes that, at its flexibility, it’s low risk, it’s big upside, all of this together. It just over time and time again, shows up as the best strategy possible. And going into 2023, this is the one I can confidently tell everybody, this is what you should be doing. You guys have any last words on what you want to tell the audience about why 2023 is the year that they should be house hacking?

I don’t, no. I put it all out there. I’m very staunch supporter of house hacking.

Lift it all.

I think it’s pretty clear. Yeah. I’m like, “I put it all out there on the podcast.” Just do it. It really is one of those things that at the very least, it builds thick skin and it allows you to just understand some of the discipline that goes into being a real estate investor.
And even if you do it for a month, you can at least say, “I did that.” And everything else after that is, I think it makes everything a little bit easier because once you’ve kind of done a house hack, it kind of just puts you out of the comfort zone that prepares you for the rest of your real estate journey.

Exactly, man. What a low risk way to try several of these different strategies that you’re seeing, you’re interested in. A lot of people say they want to be landlords and then they’re landlords and they may not like it. Well, this is a low risk way for you to try it. A lot of people say they want to do Airbnb and then they do Airbnb and they don’t like it. What a low risk way to try it, man.
You can kind of cut your teeth on several strategies, learn what you do, love what you like best, and you don’t have to take on a ton of risks to do it with this strategy. And by the way, you’re going to be building wealth, so do it.

Thank you guys. Rob, where can people find out more about you?

You can find me over @robuilt on YouTube and Instagram. What about you?

You can find me @davidgreene24, and please do on Instagram, social media and YouTube. Henry, what about you?

@thehenrywashington on Instagram or

And if you’re hearing this message and you are intrigued, you’re like, “Oh, this is what house hacking is. I’ve heard people talk about it.” Or maybe you’ve been knocked off of your perch of the ivory tower elite thing. “I’m too good for house hacking.” And you realized, “2023 is my year. I need to actually get in and do this.”
Head over to We are more than a podcast. We are a website, and you can simply put in the phrase, “house hack” into the forums and literally have more information than you could possibly digest if you tried on that forum. Advice people that do it, challenges they’ve run into, how they overcame them, strategies that work, how people became millionaires just from house hacking.
Plus, you can get those calculators we talked about at, and you can analyze to figure out what your property would cost in case your agent is not as good as one of us and doesn’t know how to do that.
But here’s what’s important. You don’t want to let 2023 pass and look back 10 years later and say, “That was one of those open windows where I could get into the best neighborhood. I could still get an inspection contingency, I could still get an appraisal contingency. Rates were a little bit higher, but they dropped after that I could have refinanced out of my 8% loan into a 5% loan and saved even more money, and I let it pass because I was too busy waiting for NFTs to make their comeback.” Don’t be that person. Get into real estate while you can and do it smart. You will not regret it.
This is David Greene for the BiggerPockets podcast host signing out.


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

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Agile, a Philadelphia-based fintech company focused on mortgage-backed securities (MBS), announced on Monday the execution of the mortgage industry’s first fully-automated Assignment of Trade (AOT) transaction. AOT transactions involve three counterparties — a mortgage originator, a mortgage investor, and a broker dealer — and are designed to transfer loan collateral and hedge positions to a mortgage investor.

Prior to Agile’s execution of its fully-automated AOT, MCT — a leading mortgage capital markets technology firm — completed automation of the process for loan collateral assignment between mortgage originators and mortgage investors. With this transaction, however, Agile has automated the process for trade assignment between mortgage investors and broker dealers, the company said in a statement.

“The timeliness and effectiveness of Agile’s AOT automation [have] significantly impacted how our traders communicate and execute for our clients,” Thomas McHugh, managing director and head of mortgage group and agency MBS trading for J.V.B. Financial Group, said. “From a back-office vantage point, the Agile system’s ease of implementation and straight-through trade processing has made this a seamless integration into our firm’s daily processes.”

Agile said its new automated process replaces the manual legacy practices that are typically employed by broker dealers and mortgage investors, including printing, executing, and faxing tri-party agreements.

All parties operating on the Agile trades database of record can enable an assignment process that the company says is “more seamless.” Dealer-to-dealer assignments are also electronically executed on Agile’s platform.

“As a mortgage investor, Village Capital is always looking for ways to integrate technology to improve the price and efficiency for our lenders,” said Brandon Knudson, VP of national correspondent sales at Village Capital. Agile’s full automation of the AOT process allows us to pass along improved execution to our customers as well as improve the efficiency of processing the AOTs. Since everyone is using the same database of record, it greatly reduces any potential errors and speeds up the process of acceptance.”

AOT functionality is currently available to all Agile platform users.

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Housing markets in tech hubs were in high demand during the pandemic, with potential buyers facing fierce competition on homes in cities like San Jose and Austin. But with the tech sector in turmoil, a looming recession, and consistently elevated mortgage rates, that trend is now making an about-face.

While bidding wars were common in tech hubs during the height of the pandemic, housing markets in these areas are cooling more rapidly than the markets in other parts of the nation, according to a new Redfin report.

According to Redfin’s analysis, Austin, Texas has experienced the most rapidly cooling housing market in the nation over the last year. Seattle, Phoenix, Tacoma, Denver, Las Vegas, Stockton, San Jose, Sacramento, and Oakland round out the top 10.

While Austin was the most popular migration destination in the U.S. in early 2021, the Texas tech hub has been impacted by tech layoffs, dwindling tech stock values and unsustainable high home prices. In turn, it has cooled faster than any other U.S. housing market over the last year, according Redfin’s analysis.

In Austin, the total supply of for-sale homes rose 140% year over year in February — the second-biggest increase in the U.S., according to Redfin’s data. Pending sales also dropped by 40%.

In addition, just 16% of the homes in Austin went under contract within two weeks of hitting the market. That’s a significant decline from February 2022, when 38% of homes in Austin were under contract within two weeks of being listed. 

The story is similar in San Jose, California, where the typical home sold for just 0.6% above its asking price in February, down from 12% above asking a year earlier. That’s the largest percentage-point drop-off in the nation year over year. Pending home sales in San Jose also dropped 38% on an annual basis.

The Seattle market has also been disproportionately impacted by the tech turmoil over the last year.

In Seattle, about 8% of homes sold for over asking price in February 2022, but that number dropped to 1% of homes selling for below asking price by February 2023. Pending home sales also declined by 40% year over year in this market. 

According to Shelley Rocha, a Redfin manager in the Bay Area, buyers in the Seattle and Bay Area markets have abandoned their search or canceled contracts because they’ve either lost their jobs or are worried about losing them.

The tech layoffs and dwindling tech job prospects have also kept some first-time buyers from entering the market, according to the report — and low inventory levels have put even more of a damper on buyer demand.

“Sellers are locked in because they can’t justify giving up a 2.9% mortgage rate to buy a new home with a 6.5% rate,” San Jose Redfin manager Kimberly Douglas said. “Everything coming on the market between $1 million and $2 million is getting multiple offers and selling quickly. I have one listing coming up in a desirable neighborhood with highly rated schools, and my only fear is that it’s going to sell too fast, leaving the owners no time to find something new.” 

Phoenix was another magnet for remote tech workers during the pandemic — and the housing market in this city has experienced a similar fate.

In Phoenix, 70% of for-sale homes experienced a price drop in February, up from 21% one year earlier. Phoenix is also among the markets with the biggest upticks in seller concessions — another indicator of dampening demand. 

Conversely, a number of housing markets in Connecticut, upstate New York and the Midwest have held up the best over the last year, Redfin’s data shows. Hartford, Connecticut held up best, followed by Milwaukee, New Haven, Bridgeport, Albany and Rochester.

According to the analysis, these markets were insulated because they are relatively affordable and were less affected by the surge in tech layoffs and the tech-stock issues that have impacted other areas.

Redfin’s report compared year-over-year changes in prices, price drops, supply, pending sales, sale-to-list ratio and other factors to determine housing markets that cooled down fastest from February 2022 to February 2023.

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The financial and housing markets are still trying to sort out the banking crisis and whether we have seen the last Fed rate hike in this cycle. These events led to lower mortgage rates and increased purchase application data last week, but decreased housing inventory.

Here’s a quick rundown of the last week:

  • The 10-year yield had a Lord of Rings battle at a critical technical level, pushing mortgage rates lower at the end of the week with no real break in the bond market.
  • Active inventory fell 1,109, and new listing data made a lovely comeback week to week but was still noticeably down year over year.
  • Purchase applications rose for the third straight week as rates have fallen, taking back the three weeks of negative data we saw when rates rose from 5.99% to 7.10%.

The 10-year yield and mortgage rates

Over the last week, I’ve watched the bond market attempt to break lower through a critical level that I have dubbed Gandalf’s line in the sand where the 10-year yield shall not pass. To Gandalf’s credit, he has been able to hold off Balrog for another week. As you can see in the chart below, the bottom black line tied to the 3.37% rate has been hard to break.


On these crazy days in the financial markets, I stress to people, it’s not how the trading day goes that matters; it’s the final closing number. Like a magnet, the 10-year yield has tried to break below this crucial level many times over the last five months, only to shoot back up to close at a level that wouldn’t warrant a pass.

As you can see in the chart below, this played out again on Friday when bond yields fell hard during the early trading hours, only to close back at that line.


In any case, mortgage rates were 6.75% on March 21 and 6.38% on March 24; the recent highs were 7.10%. If the mortgage market wasn’t so stressed, mortgage rates should be at 5.99% today. In a regular market, they would be closer to 5.25%. The Federal Reserve has made the housing market into an orphan left in the rain with no home to go to because there isn’t much inventory out there, so the markets are simply too wild up and down.

In my 2023 forecast, I said that if the economy stays firm, the 10-year yield range should be between 3.21% and 4.25%, equating to 5.75% to 7.25% mortgage rates. If the economy gets weaker and we see a rise in jobless claims, the 10-year yield should go as low as 2.73%, translating to 5.25% mortgage rates. This assumes the spreads are wide, as the mortgage-backed securities market is still very stressed.

And now we have a new variable, a banking crisis which the Fed and some others believe could lead the economy into a faster recession, which the Fed has been pushing for some time now. In some ways, the banking crisis helps the Fed do their job because aggressive rate hikes have been unpopular and the Fed broke the regional banking system and now even a few global banks are in trouble too.

With this new variable, I am looking at the economic data differently to see whether we get the credit contraction the Fed wants to see to stop inflation, or if they have the tools to keep the banking crisis at bay so the economy can expand, making their fight against inflation harder. We will look at the data each week to determine the answer.

Weekly housing inventory

Looking at the Altos Research data from last week, the big question is whether we are finally starting to see the seasonal increase in spring inventory. Last week I was hopeful that the inventory increasing slightly would be the start of the spring rise, but this week we saw a slight decline. 

  • Weekly inventory change (March 17- March 24): Fell from 414,278 to 413,169
  • Same week last year (March 18- March 25 ): Rose from  245,776 to 251,522
  • The bottom for 2022 was 240,194

As you can see from the chart below, we are far from the normal levels we enjoyed in the previous expansion.


One piece of good news last week was that the new listing data, which saw a significant collapse two weeks ago, rebounded excellently to return to a usual trend. I was hoping that week’s new listing data was just a one-off in the data line and not a more significant trend of new listing falling, and that looks to be the case now.

This made me very happy because the last thing the housing market needs is for new listing data to decline more than it has been this year. Of course, new listing data is down noticeably year over year, but last week’s increase made me feel a lot better about the year. This was the weekly listing data during the COVID years:

  • 2021: 60,177
  • 2022: 62,548
  • 2023: 50,800

Compare that weekly listing data to the pre-COVID-19 levels:  

  • 2015: 108,685
  • 2016: 76,109
  • 2017: 79,676

As you can see, we had more new listing data back then, even though mortgage rates were higher than in 2021.

Last week’s existing home sales report from NAR shocked many people, excluding me, for the big rebound in sales. That report didn’t show any inventory growth and we are still below 1 million active listings.


So we have had the biggest one-year sales decline in history and a significant rebound in sales for one month. During this entire period — from 2022 through 2023 — this is where we are on total inventory levels: 980,000, far from the historical norms of 2 million to 2.5 million.


Purchase application data

We had another positive print on purchase application data, 2% week-to-week. When mortgage rates rose from 5.99% to 7.10%, we had three weeks of negative data and now we have had three weeks of positive purchase application data.

Overall, since Nov. 9, 2022, purchase applications have had more positive than negative data, something I talked about on CNBC last week


Since we have a shallow bar in this data line, it tends to be very sensitive to rates, and mortgage rates themselves have been wilder than what we are accustomed to in the previous decade, where we had a range between 3.25%-5%.

Imagine the housing market if rates were in the low 5% range for a long time, not this wild Mr. Toad’s ride we see. Outside of that, it’s hard to get a mortgage rate shock like last year when rates moved from 3% to 7.37%. What happened last year will go into the record books.

The week ahead

Of course, all eyes are on the financial markets and what might come out of the woodwork next.

As I write this on Sunday night there are reports that First Citizen Bank will likely be the buyer of Silicon Valley Bank. I will closely monitor the 10-year yield to see if we can break that Gandalf line in the sand or if it will reverse course as we have in the past. Remember to focus on the closing on the 10-year yield more than the intraday trading actions. 

This week we don’t have too much economic data, but the home price report will come out on Monday and pending home sales on Tuesday. The pending home sales data might reflect some of the negative three weeks of purchase apps we endured when mortgage rates moved from  5.99% to 7.10%. 

Also, later this week, I will write an article on how to look at housing economics if the Fed gets its job-loss recession and how and why we shouldn’t compare it to the 2008 period or the COVID-19 recovery period. I can already see some people making the same mistakes they made with the COVID-19 recession.

Some Federal Reserve members are discussing a recession due to the banking crisis, so it’s time to discuss what housing will look like if this happens. For this week, keep an eye on the financial markets and the closing of the bond yield. If we see some weakness in pending home sales, that will relate to when rates spiked.

As always, one day, one week at a time, we will look forward, not backward, with this Housing Market Tracker.

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While driving for dollars, you stumble across a property with back taxes on it. What do you do? Contact the owner about your interest? Check with the courthouse first? Of course, you don’t want to make a real estate faux pas and miss out on a great deal! Fortunately, Ashley and Tony are here to help you navigate the situation.

Welcome back to another Rookie Reply! Today, we’re addressing properties with tax liens and how to potentially get them below market value. We also talk about buying property as a real estate agent and putting your commission towards a down payment. If home renovations are on your radar, you’ll want to tune in to our discussion on estimating rehab costs and pulling permits. Lastly, you’ll learn about tax strategies for flippers, and why hiring a tax planner is a must, even if you’ve yet to buy your first property!

If you want Ashley and Tony to answer a real estate question, you can post in the Real Estate Rookie Facebook Group! Or, call us at the Rookie Request Line (1-888-5-ROOKIE).

This is Real Estate Rookie, Episode 272. I have purchased two properties before that had back taxes on them, but I had to negotiate with the owner. Part of the closing, the agreement was I was paying their back taxes for them, or it was taken out of the sale proceeds. So my recommendation would be going and finding the owner of that property because you actually might be able to put them in a better situation than if that property is put up for sale and they get nothing from the property if it’s put up for those back taxes. My name is Ashley Kehr, and I’m here with my co-host, Tony Robinson.

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 kick start your investing journey. I want to start off today’s episode by shouting out someone by the username of Leo Zang. Leo says, “This is a goldmine for real estate investing, tons of valuable information and suggestions for real estate investors. You will find the roadmaps to success here.” Leo, we appreciate you for leaving that honest review. If you are part of the rookie audience and you have not yet left us an honest rating and review, please do us a huge favor, take the 90 seconds it takes to log into your phone and open up the app and leave that review. The more reviews we get, the more folks who can help, and that is always our goal here at the Real Estate Rookie podcast. All right, Ashley Kehr, what’s up? How you doing?

Good. I just got back from a girls’ trip in Las Vegas. I went with some other real estate investors. It was a nice little weekend getaway.

Here’s the million dollar question. Was that trip better than the trip that you had with me and Sarah to Vegas? And there’s only one right answer to this.

When I went with you guys, that was my first time at a pool party. When I went this weekend, it was my first time at a Vegas club. I’ve probably been to Vegas almost 20 times now, but I just never had any interest in doing any of those, except with you and Sarah, I did the pool party. Then this weekend with my friends, I did the nightclub. I hated the nightclub. I hated it.
Sarah, first of all, gave us the advice to not buy a table and said that we need to get invited to a table, so that’s what we did. We didn’t buy a table. We get in, get on the guest list, whatever. We’re in there. It’s so crowded, like awful. People are elbowing you. Not enjoyable for me. My friend Serena, got to give it to her, girl, gets a guy to invite us up to the table. So there we go. We’re in the table. We’re not crowded and packed. That was somewhat better. But I still have the music just banging and vibrating through my body. What do they… like EMD music? I don’t know where it’s just like… But, yeah, definitely, pool party, way better, for sure. You got sunshine. There’s better drinks. So Sarah ordered the good white tequila with the juices, way better.

I know that you’re a real estate investor because you call it the genre of music, which is called EDM, you call it EMD, which is short for earnest money deposit.

[inaudible 00:03:11].

That’s like the most real estate investor thing. I love that EMD music. It just gets me going.

I feel like this episode is really aging me, too.

Well, look, we’ve got a slate of awesome questions for you guys today. We’re going to talk about driving for dollars and finding properties with tax liens. We’re going to talk about being a real estate agent and if you can use your real estate agent license to help you with your down payment. We’ll talk about renovations and how we estimate project costs. We give a big shout out to James Dainard. Then we talk about taxes, which are always an important topic for real estate rookies. We finish off talking about some FHA loans and some permitting for renovations as well. So lots of really good questions. Hopefully, you guys get some [inaudible 00:03:56] from this as you always hopefully do from the Real Estate Rookie Reply episodes.

Our first question today is from Lucas Dominique. “After driving for dollars, I’ve come across a house that on county records says that the absentee owner has delinquent taxes on the property. The property is vacant as well. My question for anyone who can help is, is this considered a tax lien? If so, would I be better to address the courthouse about my interest or the owner? I would love to get a better understanding of this scenario with someone who has acquired property through this method. Thanks in advance.”
My personal experience with this is that if the property is delinquent on taxes, the county has no right or the courthouse has no right to sell the property until it is put up for auction. In Erie County where I live, they do an annual tax auction where the properties that have back taxes that fulfill the requirements of it’s been a certain amount of time that they haven’t been paid, they will go up for auction, and that is when the county can sell those properties.
I have purchased two properties before that had back taxes on them, but I had to negotiate with the owner. Part of the closing, the agreement was I was paying their back taxes for them, or it was taken out of the sale proceeds. So if I bought the house for $50,000, there’s $20,000 in back taxes, $20,000 went to pay those back taxes and then $30,000 went to the owner. So my recommendation would be going and finding the owner of that property because you actually might be able to put them in a better situation than if that property is put up for sale and they get nothing from the property if it’s put up for those back taxes where maybe they can walk away with a little bit of money if you are going to purchase it directly from them.

Great advice, Ashley. When we talk about sellers who are sometimes motivated to sell below market value, someone being in a situation where there’s a tax lien against the property is one of those potential situations where the seller might be willing to sell to you at a price that’s lower than what they could sell in the market because they do know that there’s this tax situation happening in the background.
Lucas, if you use a software like PropStream, or there’s tons of other software tools out there, but punching the address, you can usually find the owner and just reach out to them. Maybe you can bring up the tax lien if you want. From a lot of the folks that I know that go direct to seller, they usually don’t mention the exact reason that they’re reaching out. Even if this person’s working a tax lien list, they won’t usually call the person up and say, “Hey, Ashley. I see you got a tax lien on your property. Can I buy it from you?” They’ll just say, “Hey, Ashley. I’m calling local owners in your area, and I came across your property. Would you be interested in having a conversation?” and see if you can, like Ashley said, solve that problem for them. Yeah, I think it’s a great idea. There are people that literally do nothing but tax liens, so it’s a great way to get some off market deal flow.

The next question is, “If I’m a real estate agent, when I buy my own properties, would I be able to apply my commission towards the down payment?” This question is from Amber Yanhart, and it is from the Real Estate Rookie Facebook group. Tony, what’s your take on that?

Neither Ashley nor I are agents, but I do know that there are a lot of agents who represent themselves on deals for that exact purpose of being able to either collect that commission themselves or save the commission of paying it to someone else. Yeah, you should be able to take your commission and use that towards the down payment.

Can you use it towards the down payment, or is it just going to decrease the purchase price? I don’t actually know the answer to that. If you go to the bank and you’re buying the property and you’re buying it, say, for $100,000 and you’re getting your commission, I guess at the closing table you are getting that check for your commission of the property, if that can be applied as a credit to your down payment or if that’s just going to be money off of what you’re getting. I would think that you could put it towards your down payment as a credit.

Here’s the only reason why I say that. Maybe it varies from state to state. We did a deal in the past where we essentially wholesaled the property to ourselves, and we were able to get that cash from the wholesale deal at closing as well. To your point, I think it would just be a line item on the settlement statement that says commission, and then instead of it going into your pocket, it’s just applied towards your cash to close at the end.

Tony, can you tell us a little bit about that wholesaling to yourself? How did that happen, and what does that look like?

Wholesaling to yourself is a great way to pay yourself twice on any deal. For example, we had a deal that we were working on where we found it off-market. Usually, if you find a property off-market and you’re buying it from a wholesaler, when you go to close, there’s all of your regular closing costs, but then there’s an additional line item on your settlement statement that says wholesale fee or transaction fee, whatever it is, to the person that you’re buying it from. At closing, those funds get distributed to the wholesaler, and then you pay your funds out afterwards.
But if you wholesale the property to yourself, what happens is you get to essentially get paid at closing a small amount. Then if you go to flip that property, then you get paid again. Essentially, we close on a property, we got a check for 5,000 bucks when we closed because we wholesaled it to ourselves. Then when we flip that property on the back end, we got another bigger check for actually completing the rehab. You do take a little bit less money on the backend because you’re giving it to yourself upfront, so your private money loan, your hard money loan’s going to account for that fee, but it is a way to get some cash in the short run if you need that for whatever reason.

That’s awesome to know. Thank you for sharing that with us.

I actually learned that from Derrick Acuff, who was a previous guest on the podcast. I can’t remember which episode number he was, but if you guys look up “flipping a house” on Instagram, Derrick’s a really smart guy. They do a lot of flipping in wholesaling out in Texas.

Our next question is from David Sargente. “What’s the best way for someone with no renovation experience to get a working understanding of the processes, cost, and basic construction knowledge before going into it? Can any of you recommend books or YouTube channels, etc.? For books, J Scott has a phenomenal book with BiggerPockets called Estimating Rehab Costs. Obviously, it’s not going to tell you that this is what you should be paying for the price per square footage, of laying down luxury vinyl planks, or how much it will cost to have somebody come in and install that vinyl plank for you. But it gives you an idea of what you need to get costs for and how to build your estimates and what goes into actually rehabbing a property. So I highly recommend checking out that book. It’s a easy read but a great reference to go back to.
The other thing I recommend doing is kind of practicing with figuring out how much a rehab cost, so find a YouTube video about how to install a toilet. Look at all the materials you need, go to Lowe’s,, and actually pull up each of the items that it tells you so you’re looking at what is the cost of a toilet, what is the cost of the wax seal, all the things that go into installing a toilet, looking at what those cost. You can even go further beyond and then start to build out an Excel spreadsheet with links to all of these different materials so that when you are going in and rehabbing a project, you have the cost of materials right there to really help you build some kind of estimate.
Then you’ll want to find out what labor costs are, so you can reach out to different contractors. Call a plumber and estimate… Just ask them, “What’s your average cost to have a toilet installed? How much does it if you’re…? I’m going to ask for water lines. Maybe they can give you a general idea, like per foot how much it costs to install a water line. There are definitely a few things that are going to be really hard to estimate without having somebody come out and look at your project. But there are things you can at least get an idea.
Like to install tile, “Do you charge per square footage of tile?” Obviously, it will vary on the type of tile you’re having installed, too. So call around and get ideas of what that is. Flooring is usually a very easy one, or even painting where you can get a general number of price per square foot of how much it costs to install those things. Even going to your local hardware store, you’ll see signs all the time: “Ask us about getting your flooring installed.” Ask them, “What is your price per square foot?” and you can use that to run your numbers off of. Tony, I took on a business partner to kind of learn rehabbing, but for you, you’ve outsourced a lot of your rehabs. How did you learn how to actually come up with these estimates?

First I’ll say, David, we interviewed James Dainard back on Episode 165. Actually, it was a two-parter, 165 and either 166 or 167. Anyway, go back and listen to that episode because James Dainard gives a world-class breakdown of how he estimates his rehab costs. A lot of it aligns with what Ashley said. But if you want two hours of deep diving how someone that’s flipped, I don’t know, probably a thousand [inaudible 00:13:46] homes-

That’s because I was trained by James Dainard.

James gives a really amazing breakdown in that episode. So David, I encouraged you to go back and listen to that. There’s a couple of things that we’ve done in the past when we were kind of dipping our toes into the world of rehabbing. When we first started our business back in 2019, we were buying long distance. This was my first time ever taking on a rehab project, my first time ever just doing a real estate deal in general. I had zero basis for something like that might cost. So what I did was I went onto Zillow and I found properties that were recently sold that were renovated to the level that I wanted to renovate this prop that I had under contract. I showed those photos to a couple different contractors and I said, “Look, here’s what the current photos of this property look like. Here’s the kind of vibe that I’m going for. Can you give me a ballpark, without you even going to the property, on what you think something like that might cost?” They can give you a very rough estimate of what that might cost.
The second thing you can do is ask the contractors for photos of their previous work and ask them what the actual project cost was on that, and now that number gets even a little bit more concrete. While the individual project costs might vary depending on what you’re doing, what you’re really trying to identify is the average cost per square foot for that type of rehab. You hear a lot of flippers say this, that there’s the light cosmetic, the medium, and then the full-on gut rehab. Every single one of those has a different price per square foot that they apply to that. Gosh, it’s been a while now, but I want to say for the houses we were doing in Louisiana, they were pretty heavy rehabs. We were at 30-something bucks a square foot back in 2019. I kind of backed into that number by talking with contractors and understanding what they were charging other clients for similar work.
The last thing you can do is just pay them to go walk the job. This is something else that we leveraged when we were doing these remote rehabs in Louisiana is I found a contractor, I found a couple, and I said, “Look, I’ll pay you take an hour or two, whatever, go walk the property and give me a more detailed bid on what it might be.” Honestly, a lot of them didn’t even take the money because they were just open to getting the work. So they say, “I’ll walk the job for free.” That, today, is maybe a little bit harder because a lot of the good contractors, I think, are still kind of busy. They’re probably starting to lighten up a little bit now just because things have slowed. Trying to do that a year ago to get a contractor to go walk a job for free probably wasn’t happening because they were all booked out for years. So depending on where we’re at in the market cycle, that’s a little bit easier said than done.

I think that the contractors, you’ve used them before, they’re more willing to go and walk those properties for free wanting to continue business with you. Even if contractors do have the time, for them to give you a detailed scope of work takes a lot of time, and then especially if you take that scope of work and you end up hiring someone else based off of that scope of work.
The property management company that I currently use, they actually sent out an email recently saying that they are no longer providing scope of works to owners for turnovers. They have found that too many owners are taking that scope of work and going and doing the project themselves or hiring other contractors or whatever it is. They’re having owners that aren’t even responding to accept or decline the bid on doing the estimate. Now they’re also charging. They did charge to have their maintenance guy come, whatever their hourly rate is, I think it was $45, I think it just increased to $55, but they were charging their hourly rate to have that scope built out. But now they’re also charging a $250 flat fee. That’s on top of their project management fee, too, because they felt like so much time was wasted going and doing these scope of work, so they’re only going to be doing it now if you pay that fee.

It’s solely understandable. I feel like as a business owner, I can understand why they might feel that way. That’s why I think a lot of it comes down to relationship, Ashley. If you have a relationship with this contracting crew already, there’s some trust that’s built up there. I think it’s easier for them to go out and just walk a job for you. Our crew in Joshua Tree, they’ve never charged us for a bid, but it’s because they know that we’re pretty much going to use them for every single job that we do out there. So I think the more repetitions you get, the easier it becomes, I guess.
The last thing I’d say, David, is if you can find another rehabber/flipper in your market and walk one of their jobs, that’s one of the best ways to really get hands-on, tactical, tangible data on what a rehab might cost. That’s what Sarah and I did when we started rehabbing out in Joshua Tree. We found a buddy of ours, Brian Davila, who’s a flipper here in SoCal, and we spent the day with him just walking a few of his jobs and asking a bunch of different questions around pricing. “Hey, what does it cost to do this? How are you paying for this?” That gave us the confidence to go out there and start doing it ourselves at a higher level. If you can find someone, David, that is already doing it, walking their jobs is a great way to get that insight as well.

Where do you find people like that? You attend in-person meetups in your markets, or you go onto the BiggerPockets forums and ask if there are any investors in the area that are doing rehabs in your market. The best is when you can actually find an investor who is also a contractor. I love that because you’ll be able to get both sides of it. You’ll get the contractor side of him, but also the investor side as to these are the ways that you can save money as an investor because you don’t need to do this, you don’t need to do that. Where residential contractors that are just doing for people’s homes are going to have a different mindset going in.
James Dainard even talked about this on his podcast episode. He’ll only work with contractors that work with investors. He doesn’t want people that do residential remodels because there is a different end game. There’s a different result of those remodels. For residentials, for the people to enjoy their home, it’s not what’s the most cost-effective way to get my maximum return on my dollar by having renters in there or by flipping the property. I think go to a meetup, go into the BiggerPockets forums, go to the Real Estate Rookie Facebook page and connect with contractors or even investors that are contractors, too, and see what kind of guidance or information they can give you. Of course, think of a way that you can also provide some assistance to them or help them out in some way, some value to them, too.
Our next question is from Bill Seth, “Sorry for the newbie question.” Bill, please don’t apologize. We love these newbie questions. That is what we are here for. This question is, “Do flippers get taxed heavily when selling since most don’t own it for more than a year?” The answer is, yes, you are taxed at ordinary income. Almost just like you had a W2 job, but when you sell the property, that tax isn’t being withheld from you like most companies do. As a W2 employee, they’ll withhold some of that and pay some of your taxes throughout the year for you. You are also self-employed. When you work a W2 job, your company is paying part of your payroll taxes and now you have to pay, I think, it’s another 6% as self-employed since you don’t have a company you work for paying that on your behalf anymore. So it does end up being more taxes that you are paying for the property and definitely a lot more taxes than you’d pay if this was a long-term buying homes and you’d be paying a lower capital gains tax.

We had Amanda Han back on Episode 255. One of the last questions that we asked Amanda in that episode was, if you had to rank all of the different real estate investment strategies by preferred tax treatment or best tax treatments or worse tax treatment, flipping and wholesaling were at the very bottom because those are considered active income, and things like long-term rentals and short-term rentals were at the top because those are more passive income, and there’s some other things you can do along with those. Yeah, you are definitely getting the absolute worst tax treatment when you are doing things like flipping homes.
One of the suggestions that I’ve been given, and again, I’m not a CPA, I’m not an attorney, but one of the suggestions that I’ve been given is that if you plan to both flip and hold rentals, ideally to set yourself up to get the best tax treatment, you should have one entity or LLC for your rentals and then a separate entity for all of your active income. So if you’re flipping and wholesaling, you do that in one business, and then if you have your rentals, you do that in a separate business. Doing so allows you to get some slightly preferred tax treatment as opposed to doing it all under one entity. Definitely not a bad question, Bill. There’s thousands and thousands of pages of the tax code, so I think Ash and I are always happy to give some more insight on what’s worked for us and what hasn’t.

I feel like we’ve been talking about this a lot more recently is the tax planning and talking to a tax specialist who can help you figure out all these things. It’s something that’s very easy to outsource is somebody who is knowledgeable in taxes and bookkeeping and accounting where it’s something you don’t need to take the time to learn the ins and outs. Yes, you should have some knowledge of how the tax system works, but working and paying for a specialist is highly worth it. Tony, you’ve been working, doing tax planning. I think it was you and Tyler Madden, who was also a guest on here, who recently told me that the cost of paying for that tax planning has far outweighed what you’re going to save in taxes going forward.

Absolutely, right? One of the biggest mistakes I made was waiting too long to get great tax strategy help. We’d already built up… we had 10 or 14 properties before I even thought about hiring a tax strategist to help me with those things and even longer before we got a really good bookkeeper on hand. So for all of the rookies that are listening, I know it can seem daunting to invest money up front to get the right bookkeeper, to get a good tax strategist, get a good person doing your tax preparation. But if your goal is to make this a full-time business and to have a relatively large portfolio, you will literally save yourself money and make more money, keep more money at the end if you invest a little bit more upfront to set your business up the right way from a tax perspective when you have one property as opposed to trying to go back and do it when you have 30. Ashley, how big was your portfolio before you hired professional tax help?

I’ve always had a CPA. When I worked at the accounting firm, I did my taxes on my own just because I had access to nice tax software and everything and it was pretty easy. But our farm income has always been somewhat complicated, so I always had the guidance of an experienced CPA when I worked as an accountant to help me through the farm income and how to do depreciation and things like that. Then I quit. Then after that, we have always just used a CPA to do our taxes again. As far as the tax planning, that was just recently where we ended up signing up with Amanda Han, too.

I can’t say it enough. All of our rookies that are listening, find a good tax strategist today, day one. Even if you have zero properties, just pay for a consultation and say, “Hey look, here’s what I’m planning to do in the next year. What is your recommendation?” Then as you start to get those properties under contract, then actually put that person on retainer and make sure you chat with them on a regular basis.

You know what? It’s going to be cheaper probably, too, going in with one property or two properties, instead of waiting until you have 10 properties and they need to go back and look at previous years and be like, “What did you do? How can we make it better?” Where if you only have those couple properties to start with, they’ll be like, “Let’s start here,” and then you add on a little more each year. It’s just easy to add those on because they already have you in their plans.

We always talk about real estate investing as being about, how much cash flow are you getting on a monthly basis? What’s your cash-on-cash return? How much equity are you building? But one of the other amazing benefits of investing in real estate are the tax benefits. I have a friend who still works a W2 job. He’s a six-figure income earner, but he has a small portfolio of short-term rentals. He literally pays zero in taxes from his day job because he was able to take the passive losses from his short-term rental portfolio and apply that to his W2 income. So for the three years that he’s had his properties, he’s paid zero dollars in income taxes for his W2. Outside of all the big things, cash flow is sexy and appreciation, don’t forget, the tax benefits and depreciation are some of the biggest levers you can pull as a real estate investor.

Our next question is from Ryan Hoffman. “With FHA, how often is it possible to roll the closing costs into the loan? I’m ready to purchase my first multi-family house hack, but I would like to be sure that I will have enough reserves remaining after paying the down payment, if, say, I were to purchase a fourplex instead of a duplex.” With this question, I honestly don’t know the answer specifically to an FHA loan. I’ve never done an FHA loan, but I helped my sister get one. We bought a house together, but she got the FHA mortgage, and I actually gifted her the proceeds for the down payment and for the closing costs.
I do know that banks, especially small local banks, will offer no closing cost mortgages where you can actually wrap the closing costs into the loan. Sometimes you’ll have to pay a little bit higher interest rate than if you went ahead and paid those closing costs. So you have to kind of weigh that out. Is it better to pay more upfront and get that lower interest rate for 30 years, or is it better to… it’s going to take you a while to save that money, but you want to get into a property now to pay a little bit higher interest rate going forward?
There’s also programs where you can get assistance to help with your closing costs. I know banks will sometimes offer to first-time buyers where if you save so much money, they’ll match it, and then you go ahead and buy a property with them. It’s like a first-time home buyer loan. It’s completely separate and different from the FHA, but there’s more strict regulations and rules around it. For example, my friend, his girlfriend did it. She has to live in that property she bought for five years, so they’re kind of stuck there for five years because she did the loan that way. So just be cautious of the different rules that come with some of these assistance programs.

Like Ashley, I’ve never closed on an FHA loan myself. We’ve used a lot of different types of debt, but never an FHA. But just like you, Ash, there are so many down payment assistance programs out there, especially if you’re doing something where you’re house hacking. When Sarah and I bought our primary residence back in 2018, there was a program called CalHFA in California that essentially covered all of our down payment. So we had our primary, our first mortgage with loanDepot, or whoever it was that we closed with, and then we had a small second that covered our down payment. Then a year later, we were able to refinance, pay off that small second, and then we have one long-term fixed debt.
There are so many good options out there. I’d say the more you can chat with different loan officers and mortgage companies, the better idea you get of what the options are. I think, Ryan, the mistake that a lot of new investors make is that they only talk to one person. They talk to one bank. They talk to one loan officer, one mortgage officer. Whatever that person tells them, they think that that is the absolute truth and there’s nothing else outside of that. I think the more exposure you can get to different lending institutions, credit unions, banks, mortgage officers, mortgage brokers, the more flexibility you’ll have and the better options you’ll have as you look to close on this deal.
For example, we bought a lot of our homes using 10% down second home loans, and a lot of lenders didn’t even know what that was. I would have people that were messaging me on Instagram and said, “Hey, I had up my mortgage person and they don’t even know what a second home loan or a vacation home loan is.” Just know that just because these people, it’s their profession, they don’t have all of the answers to every single question that pops up. So I think exposure to more people is how you tend to get better options when it comes to loans and mortgages.

Just like we always stress here, tell them what you want to do. Don’t ask for some specific loan product. Tell them how much reserves you have, tell them that you want to buy a fourplex, and see what they can offer to you as options that you have because you may be surprised what a bank can come up with.
We have one more question for you guys this week. This question comes from Rebecca Tillman. She has a question about renovation permits. “Does anybody actually check these when it’s time to sell your property?” James Dainard, when he purchases a property, since this episode is all about things we’ve learned from James Dainard, is that he will always pull permits when he purchases a property. Part of it, he wants to see what actually is legal in there.
I think one of the reasons he does this… We just had a couple on our show that talked about, they were purchasing a property that they knew there was not a permit for an addition. They didn’t think it was a big deal because they didn’t need to use it as a bedroom or whatever. When they went to actually go and get a permit for other things in the property, I think it was maybe the plumbing or something, the inspector came in and told them they would not issue the permits for the other things until the addition was taken off the back because it’s not permitted. So I don’t really hear of just a residential home buyer going in and asking for permits or pulling permits on a property. Tony, have you ever sold a house or know a family friend or anybody who just went and pulled the permits on a property? I only know of investors that do that. I think that’s something that people should do in their due diligence.

Yeah. A lot of times, especially if it’s your primary residence, you’re like, “This is my home. I’m going to do what I want with it.” You’re not as concerned about the permits or things like that. It was Devana and Reid. I can’t recall what episode number they were. They had the sober living facilities. They ended up spending a ton of money trying to get that addition permitted, and it wasn’t even part of their initial budget. So that is a big risk that I think you run into where, if the property wasn’t permitted correctly, you can end up paying for that person’s mistakes out of pocket yourself.

I think especially if you’re going in and rehabbing the property, check and pull permits. I hope you’re not asking that question to see if you can get away without pulling permits because you definitely want to pull permits because it can cause way worse issues down the road. I think we had a couple guests on before that have talked about running into this where maybe they thought their contractor actually pulled the permit and got it issued when they didn’t. Then the building inspector comes in. They have to rip out all the new drywall so he can actually check out the electric inside the walls, and they have to go back and put the walls together. So you never want something like that to happen. You never want to take that risk.

That’s why when you’re analyzing these deals as rehabs, it’s important to maybe give yourself a little bit more time. If you think you can finish a job in three months, maybe underwrite the deal so that it takes you eight months. That way you have some breathing room in there to pull permits for the first time and understand what that process looks like. If your county’s anything like the counties that we rehab in, permits that used to take 30 days are taking 90 days right now. Just make sure that you’re giving yourself that flexibility to account for things like pulling permits, that you’re not up against the gun and your budget gets blown because you didn’t account for those timelines.

Well, thank you guys so much for joining us for this week’s Rookie Reply. I’m Ashley @wealthfromrentals, and he’s Tony @TonyJRobinson on Instagram. We will be back on Wednesday with a guest. See you guys then. (singing)

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The ongoing tumult in the banking industry brought to light by the recent failures of Silicon Valley Bank and Signature Bank — the second and third largest bank failures in U.S. history, respectively — also threatens liquidity channels for the independent mortgage banks (IMBs).

Two banks that rank among the nation’s top warehouse lenders were recently singled out by Moody’s Investor Service for potential ratings downgrades due, in part, to their reliance on “confidence-sensitive uninsured deposits”; the material “unrealized losses” linked to now-devalued bonds held in their investment portfolios; and their “relatively lower level of capitalization.” 

The nation’s warehouse lenders are a lifeline of liquidity for the nonbank mortgage sector, providing IMBs with lines of credit and other financing that serve as key ingredients in the sausage-making of mortgage origination. The warehouse lenders identified in the recent Moody’s reports are Phoenix-based Western Alliance Bank($67.7 billion in total assets) and Dallas-based Comerica Bank ($85.4 billion in total assets) — which as of yearend 2022 ranked respectively as the seventh and 14th largest warehouse lenders nationally based on market share, according to industry publication Inside Mortgage Finance.

Executives with both banks, however, contend their institutions are well-run and well-capitalized with diversified deposit bases as well as strong liquidity positions.

“In the mortgage space, warehouse lending is a very lucrative business for the banks, so in general they’ll want to keep warehousing lending, maybe over other types of lending,” said Brian Hale, founder and CEO of consulting firm Mortgage Advisory Partners. “The yields are good, they’re highly secured, highly collateralized, and they’re short-term loans.”

Even a solid lending line, however, isn’t bulletproofed against a systemic industry shock. That’s why Western Alliance, Comerica and several other banks have recently found themselves in Moody’s ratings spotlight. As important warehouse lenders, the fate of Western Alliance and Comerica, good or bad, also impacts the mortgage industry.

At the heart of the still-unfolding banking crisis is some $620.4 billion in unrealized losses, as of yearend 2022, linked to past bank investments —largely longer-term U.S. Treasuries and mortgage-backed securities (MBS). Those assets, many locked in at low coupons, have lost value in the wake of the rapid rise in interest rates over the past year. 

“Banks had large deposit growth during the acute period of [the pandemic] and didn’t have the ability to grow their loan portfolios as fast as they were growing their deposits,” said Nick Smith, founder and CEO of private-equity firm Rice Park Capital Management [RPCM]. “So, they funneled a lot of those excess deposits into fixed-rate, long-term bonds, like Treasuries and MBS, and they mismanaged their interest-rate risk.

“When the Fed [Federal Reserve] began their campaign to tamp down inflation using rate increases to accomplish that, the banks were caught in a position where they had these fixed-rate, long-term exposures that were moving in the opposite direction of rates going up, and as a result they had large unrealized losses [on those investments], so that’s the basic problem.”

That pool of looming investment losses, coupled with an exodus of deposits largely sparked by panic, played a major role in the failure of SVB. Prior to its collapse, the bank in early March sold some $21.4 billion in bonds from its investment portfolio to deal with the cash bleed and took a $1.8 billion loss on the sale, further cementing its course toward FDIC receivership.

The failures of Silicon Valley Bank (SVB), Signature Bank and Silvergate Bank [which recently announced it would voluntarily liquidate], with assets collectively of close to $325 billion, have roiled the financial system,” said Mark Zandi, chief economist for Moody’s Analytics, in a recent commentary piece on the bank failures. “Once depositors lost faith in the viability of these institutions and began withdrawing funds, the banks quickly unraveled. 

“Bank runs are rare, but they happen at a dizzying pace when they do occur. These failures were especially surprising on the heels of a lengthy period of calm in the banking system. There were no bank failures last year or the year before.”

Hale adds, however, that there is already a massive deposit consolidation underway within the banking industry, with those deposits moving from community and regional banks toward mega-banks deemed too-big-to-fail. In fact, Bank of America reportedly raked in some $15 billion in new deposits in the wake of SVB’s recent collapse.

“Deposits have been coming out banks because banks were not offering the same deposit rates as depositors could get by just investing directly into the market,” said Smith of RPCM. “[In addition], depositors have been rushing to quality and taking their money out of weaker banks, or banks that they perceive to be weaker, and putting them into institutions that they view to be safer [such as the money-center banks].”

“So, that’s a fear-based drawdown. But I’m hopeful that the banks that have already been either rescued or failed, that they are the last of them, but I think there’s still concern around whether that issue is going to pop up with additional banks in the future.”

Hale stressed that every bank is unique, and that having a high volume of uninsured deposits is not alone a sign that those deposits are going to become a problem for a lender in terms of retention. Still, he and other industry experts, contend that absent concerted efforts to calm the waters, the risk of future bank runs remains real.

“No bank, in my opinion, could sustain a 50%, 60%,70%, 80% deposit loss,” Hale said. “You could never liquify fast enough. You need help. 

“And the minute you tell a customer, ‘No, you can’t have your money because we don’t have it to give you’ — Oh, Holy God, Katie bar the door!”

Credit contraction and warehouse lending

The threat to the integrity of the banking system if panic becomes widespread is one of the reasons central banks globally as well as U.S. banking regulators have acted quickly to inject liquidity into the system and, where necessary, even rallied private-sector players to assist troubled banks with loans and deposit infusions. 

Still, even if those efforts manage to prevent another bank failure this year, Zandi expects the banking crisis and the Federal Reserve’s inflation-fighting efforts will likely crimp lending in the future. The Fed’s Federal Open Market Committee on March 22 announced that it would raise the federal funds benchmark rate by another 25 basis points to a target range of 4.75% to 5%. The rate bump is likely to create added pressure on the already devalued legacy investment portfolios at many U.S. banks, Smith said.

“Despite optimism that fallout on the financial system from the bank failures will be contained, … the current turmoil in the system will likely lead to a tightening in underwriting standards and less credit availability,” Zandi said.

David Petrosinelli, a New York-based senior trader with InspereX, a tech-driven underwriter and distributor of securities that operates multiple trading desks around the country, agrees with Zandi’s analysis on that score.

“I think there is a there’s definitely a credit contraction,” he said. “It’s just a matter of to what degree. How much will these institutions [banks, including warehouse lines] retrench … is not readily apparent yet.”

Hale added that bank warehouse lines are already “getting shrunk” because mortgage origination volume is way down, pointing to a recent Mortgage Bankers Association report showing IMBs and banks lost more than $2,800 per mortgage loan originated in the fourth quarter of 2022.

“So, as mortgage companies are less profitable, the warehouse guys get nervous, and they start pulling the lines in a little bit,” Hale said.


Moody’s in a report issued in mid-March said that despite efforts to bolster the banking sector, the high-rate climate will continue to create stress for banks, both in terms of profitability and capital, adding that action to date by regulators and other banking officials “is intended to protect the system against further funding [deposit] runs.”

“But [it] does not address banks’ vulnerability to excessive interest rate risk, which was the root cause of these banks’ distress,” the Moody’s “Sector Comment” report states. “We see the approach taken as credit positive for uninsured depositors; however, bondholders and equity holders will still need to absorb the economic losses some banks face related to higher interest rates as well as credit losses that are likely to rise with the coming turn in the economic cycle.”

In separate rating-action reports released on the same day as the Sector Comment report, Moody’s announced that it was placing the ratings of Western Alliance and Comerica, as well as four other banks, on “review for downgrade.”

In Comerica’s case, Moody’s said the rating action was the result of the bank’s “high reliance on more confidence-sensitive deposit funding,” the high level of unrealized losses in its securities portfolio,“ as well as a relatively lower level of capitalization.

“Comerica’s share of deposits which are above the Federal Deposit Insurance Corporation (FDIC)’s insurance threshold is material, making the bank’s funding profile more sensitive to rapid and large withdrawals from depositors,” the recent Moody’s ratings report states. “In addition, if it were to face higher-than-anticipated deposit outflows, the bank could need to sell assets, thus crystalizing unrealized losses on its AFS securities, which as of 31 December 2022 represented a sizeable 38.5% of its common equity tier 1 capital [or CET1, a key regulatory capital measure].”

Another report released last week by Moody’s shows that the share of Comerica’s deposits that are uninsured stood at 62.5% as of yearend 2022 while its CET1 stood at a healthy 10% — without accounting for the unrealized losses in its investment portfolio. When those losses are factored into its balance sheet, they do take a big bite out of the lender’s shareholder equity.

“Total shareholders’ equity decreased $2.7 billion to $5.2 billion at December 31, 2022, compared to $7.9 billion at December 31, 2021, primarily due to a $3.5 billion decrease in unrealized losses in the [bank’s] investment securities portfolio and, to a lesser extent, its cash flow hedge portfolio and defined benefit plan,” states Comerica’s 2022 Form 10K filing with the U.S. Securities and Exchange Commission.  

Nicole Idzi Hogan, a spokesperson for Comerica said the bank looks forward to “engaging with Moody’s during … to better understand their concerns around uninsured deposits.”

“We believe that any correlation between Comerica and the recently impacted banks in regard to deposits is an apples-to-oranges comparison,” she added. “Comerica has been in business for nearly 174 years with a track record of successfully navigating difficult business cycles. 

“Our proven, conservative business model includes commercial banking, retail, and wealth management; and thus, reflects strong industry and geographic diversification. Because of this, Comerica has a more diverse, stable and ‘sticky’ deposit base and we remain well capitalized and highly liquid.”

Western Alliance

Moody’s ratings-review report for Western Alliance Bank likewise dings the lender for its high reliance on uninsured deposits (58% as of yearend 2022); its “material unrealized losses” in its investment portfolio; and its “relatively low, though improving, level of capitalization [with its CET1 ratio at 9.3% as of yearend 2022, well above the 4.5% minimum].

“If it were to face higher-than-anticipated deposit outflows, Western Alliance could need to sell assets, thus crystalizing unrealized losses on its … securities, which as of December 2022 represented 21% of its common equity tier 1 capital (CET1) on a non-tax effected basis,” states the Moody’s report, dated March 13. “Such crystallization of losses, if it were to happen, could weigh on the bank’s profitability and capital. 

“…Western Alliance’s liquid assets represented 12% of tangible assets at December 2022, which is modest compared with most rated peers. … Western Alliance’s ability to generate capital internally may be limited by rising funding costs, and it could face difficulty raising fresh equity capital.”

In a press release issued on March 17, Western Alliance notes that its CET1 ratio would decline from 9.3% to 7.9% after adjusting for the $1.1 billion in unrealized losses in its investment portfolio. The bank also points out in the announcement that its deposit base is “highly diverse,” its level of insured deposits has jumped to 55% and that it has “immediately available liquidity of over $20 billion as of March 16.”

“We have a long history of financial stability and responsible, cautious risk management,” Kenneth Vecchione, president and CEO of Western Alliance Bank, states in the press release. 

Along with the Moody’s ratings report, the Kroll Bond Rating Agency (KBRA) last week placed a ratings watch on three credit-linked note securitization transactions issued by Western Alliance in 2021 and 2022.

“These watch placements occur amid a period of stress for [Western Alliance Bank], as well as other similarly-situated regional banks, including high levels of deposit withdrawals in the wake of the failure of Silicon Valley Bank and Signature Bank on March 10 and March 12, respectively,” the KBRA ratings report states. 

Officials with Western Alliance are in a quiet period prior to the bank’s first-quarter earnings release slated for next month and declined to comment.

InspireX’s Petrosinelli said the impact of unrealized investment losses on the Comerica and Western Alliance Bank’s balance sheets is “huge” and likely will require the banks to find additional ways to “shore up their capital positions.”

“I would think one or both of them will have to do something, and if it’s not raising capital of their own volition, then they may actually be encouraged [by regulators] to pair up with someone.

“… I’m sure those talks are going on right now, and I’m sure they’re being encouraged, maybe not so gently, to be thinking about that [a potential merger]. They may be partially bailed out of by the market [improving]. But I don’t know that that’s going to be the most likely outcome for them.”

One thing is certain, Petrosinelli added, the upcoming first-quarter earnings reports for the banking industry should offer a lot more clarity about the status of these and other lenders.

“…We will know more in the next couple of months,” he said. “There is going to be a lot more that comes out on this [during the upcoming earnings reports Q1] and a lot more that we didn’t know beyond the headlines. The devil is in the details.”

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The current bank crisis hit California-based Pacific Western Bank, a community bank owned by PacWest Bancorp that has a focus on real estate and commercial loans. 

Following the collapses of Silvergate Bank, Silicon Valley Bank and Signature Bank over the last few weeks, deposits at the financial institution had dropped to $27 billion as of March 20, a decline of 20% compared to the end of December. 

Pacific Western Bank has acted to guarantee more liquidity via private and federal facilities but excluded the possibility of raising capital at this moment, it announced on Wednesday. 

The company secured $1.4 billion in fully funded cash proceeds from the global investment firm Atlas SP Partners through a new senior asset-backed financing facility. In addition, it has drawn $3.7 billion from the Federal Home Loan Banks, $10.5 billion of borrowings from the Federal Reserve Discount Window, and $2.1 billion in Bank Term Funding Program borrowings.

Pacific Western Bank also explored a capital raise with potential investors. However, amid volatility in the market and depressed stock prices, “it would not be prudent to move forward with a transaction at this time,” the bank said. 

PacWest Bancorp’s shares were trading at $10.94 on Wednesday afternoon, down 10.4% from the previous closing. 

“We continue to be encouraged by the clear message from government officials, regulatory agencies, and industry leaders, including Secretary [Janet] Yellen’s recent remarks regarding the protection of smaller bank depositors,” Paul Taylor, the bank’s president and CEO, said in a statement.  

Pacific Western Bank reported $11.4 billion in available cash as of March 20, higher than the $9.5 billion in uninsured deposits. 

The bank’s loans and leases for investments rose by $950 million to $28.6 billion in the fourth quarter of 2022. The increase was due primarily to the residential and real estate mortgage and construction portfolios, consisting of 70% of the total portfolio in Q4 2022.  

In 2021, the bank acquired Civic Financial Services, a private money lender that caters to real estate investors, a strategic move into specialized areas of the non-QM market. Wedgewood, a real estate investment firm that focuses on distressed properties, was the seller. 

In February, PacWest Bancorp announced a restructuring at Civil Financial, eliminating 200 job positions effective in the second quarter of 2023. It will bring the company $30-40 million of annualized savings.   

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