Henry:
How much do real estate investors actually make in 2026? If you’re thinking about buying a rental property or just want to make sure your deals actually match your analysis, we’ve got good news for you. Amelia McGee and Grace Gutenkoff from Wire are here to share real numbers from their real rental properties. This isn’t that fluffed up profit number you hear all the time. This is the actual cash flow they’re making on their rentals, like the number you give your CPAs when you’re filing taxes. We’re going to go through four properties, each with completely different financing structures, giving you the purchase price, rents, expenses, and cash flow. One of these properties is losing money every month while also making Amelia very wealthy. How is that even possible? You’re about to find out. What’s going on everybody? It’s Henry Washington here, co-host of the BiggerPockets Podcast. And back on the show today are Grace Gutenkoff and Amelia McGee, and they brought numbers with them from a few of their properties.
So let’s jump in. Grace and Amelia, welcome back. You’ve been guests before, but for those who haven’t heard of you or don’t know who you are, could you give us a little reintroduction?

Amelia:
Yes, thanks for having us back. I feel like we’re just old pros on the show at this point. We’ve been on a few times and both been on the rookie podcast, but I’m Amelia McGee. I am based in Des Moines, Iowa, and that’s where I live and invest. I’ve been investing since 2019. I started with a single family flip and have since moved into basic boring long-term rentals and dabbled in every other strategy along the way, but I definitely like the basic long-term rentals. I’m also, like you said, a co-founder of the WIRE community. WIRE has two eyes in it. And then Grace and I are also co-authors of the BiggerPockets book, The Self-Managing Landlord. And my real estate portfolio currently consists of about 41 doors, which are a combination of long-term, midterm, and short-term, but the majority are long-term rentals.

Grace:
I also invest in Iowa and Grace Gudenkoff, but I currently live in Tucson, Arizona. So I’ve been doing long distance real estate for the past three years. And I started as a DIY investor doing burrs with my husband, and that’s evolved into mainly new construction between midterm and long-term rentals. And I have probably about 25 doors all within a five-mile radius in Eastern Iowa.

Henry:
Awesome. Well, thank you so much for the reintroduction. We all know you guys are amazing and fantastic. That’s why we have you here. And we get to do one of my favorite things, which is look at other people’s real estate deals. So Dave and I did something similar where we kind of gave the background of some of our recent deals, so I’m excited to look at your deals. So Grace, let’s start with you. Can you tell us about the first deal you have?

Grace:
Yes. This is a long-term rental duplex. It’s a side-by-side duplex. It was actually the second property I ever bought. So this is long-term rental. It’s semi-updated. It’s been a pretty easy property that I bought in 2021 maybe. And I actually talked about this on Rookie a long time ago, but I negotiated with the bank to just put 10% down because I was buying into a lot of equity and stabilized tenants. I found it because a local investor had sold it on contract to the tenant and then the tenant wanted out. So he called me and said, “Do you want to buy this property?” And I said, “Absolutely.” Walked it once and put it under contract with a bank loan.

Henry:
Oh man, you negotiated with the bank for 10% down. I’m assuming this was a community bank.

Grace:
It was. Small local bank that I’d banked up forever.

Henry:
People don’t realize that, especially dealing with local community banks, a lot of the structure of the loan, the rates, the terms, the fees, a lot of that is very negotiable. It’s not like working with a conventional loan where everything is very rigid, set in stone. Did you bring up the fact to them that like, “Hey, I’ve got a lot of equity here. Can I put less down?”

Grace:
Yeah, I probably heard it on a podcast somewhere. And historically speaking, Amelia and I bank 95% of our deals at small local banks, different ones. But you’re right, it is so powerful to have a great relationship.
But I just called them, said, “Hey, this is who I am. I really want to put 10% down because of X, Y, and Z. Here’s what it’s worth. Here’s what I’m buying into.” And on that same phone call, because it was such a small bank, they got the VP on the line and he basically gave me a yes. I actually was going for no money down because I thought there was enough equity and we settled at 10%. And to be super candid at that time, I couldn’t do more. That’s what I had. I was just starting investing in real estate, so I had to figure out how to make that work.

Henry:
Okay. So let’s hear the numbers on this thing.

Grace:
Okay, here are the numbers. The rent is 2,150. They’re both two bed, one baths, so that’s about a thousand each. And my pity is 1,247. So my phantom cash flow is at about $900. However, we all know that phantom cash flow is not what actually happens inside your bank account because life happens. There’s a lot of things that you pay for that you maybe don’t think about when you first purchase it. So when I pull up my QuickBooks and I look at the last 12 months of finances, here are the real numbers. The rent was 20,354. I had $4,100 in repairs for tenant turnover, and that was because my original inherited tenant who stayed there for three years left it absolutely disgustingly. And so my net income was $7,170.96, so just over $7,000 for the year. So my actual cash flow after you take out principal and everything that you spend money on was $5,304, which comes out to $442 a month.
If we go back to that phantom cashflow number, that’s telling me I should really be making more like 770 a month, closer to 800. But again, life happens. Sometimes tenants leave things awfully and you have to renovate or do repairs. So all in all, $442 a month for a duplex I put 10% down on, I feel really good about. And the current tenants, I feel really good about. So I know moving forward, my numbers will stay looking nicely.

Henry:
I love the term phantom cash flow. I haven’t called it that. I often just say cashflow is a myth.

Grace:
Yeah, that’s true.

Henry:
I mean the same thing. And I often say that because a lot of investors get into this business, well, most of us got into this business to buy rentals, to generate cash flow, to replace our expenses. And then as you buy rentals, you realize that is very hard to do because yes, you’ve done the math here and it came out to about $440 a month in cash flow, but that doesn’t mean you were getting $440 every month. And so if you’re trying to organize your life around some sort of consistent income, it’s very hard to do with cash flow.

Amelia:
What did you buy it for again, Grace? What was the purchase price?

Grace:
Oh, I did not say that. The purchase price was 135, $135,000.

Henry:
Man, give me one of those.

Grace:
Well, I bought it in a package deal. It was two duplexes for 255. So I put 10% down on that 255, but it bought me four units. If you think that’s inexpensive, wait till we jump over to Amelia’s.

Amelia:
Oh, I know. I’m in an even smaller market. But I think, Grace, I think your market for this particular deal is super realistic for a lot of investors, especially in Midwestern markets because it’s not crazy outrageously expensive. I’m not sure how people that are buying $500,000 duplexes are making any money. They probably aren’t, unless of course rent is equivalent to that, but a lot of times it’s not. But if you’re thinking, okay, how many rentals do I realistically need to be able to quit my job and be a full-time real estate investor? What, you made $5,000 a year off of this property. So if you want to make $50,000, you need 10 of these back into, okay, if each one costs 150,000, you have to put 20% down on each one, that’s how much you’re going to have to come up with for all the down payments for that.
It takes longer than you think and longer than people make it seem online to actually make a full-time income with real estate. You have to have some other source of active income while you’re building your portfolio up.

Grace:
And another thing, Henry, something Amelia and I have been talking a lot about is your total return because the cashflow piece is just one small piece of it. So when we zoom into cash flow, sometimes it looks quite depressing. But then when you zoom back out and you’re like, this is actually hitting my bank account with tax benefits and cash flow and it’s hitting my net worth with debt pay down and appreciation, there is a lot that’s working there. And then extrapolate that over 10 years. You get further into your amortization so the debt pay down’s bigger. That’s really where you see the power. So if you’re listening, you got to know that all this over time is what makes it so powerful.

Henry:
Can you tell us the true value of that property was when you bought it?

Grace:
Between, again, when I negotiated, it was for the four. So I paid 255 for the four and I thought they were worth easily over 300.

Henry:
And what would you say the value of these assets are now?

Grace:
I just got them appraised and I haven’t really put much money into them besides that $4,000 turnover. And I want to say they both appraised at 200, so 400,000 for what I paid 255 for.

Henry:
That’s awesome.

Grace:
So I was pretty excited about that. That’s five years though. So again, in one year it’s not going to look crazy, but over five, 10, 15, it starts to look better and better.

Henry:
My deals that look the best on paper are the ones I bought right around the same timeframe as you, because now you’re starting to really see that equity bump. Rents have increased, and if you’ve added value by putting money into them, it just kind of grows exponentially. And so this is why people say real estate is a long game. Yes, you want cash flow from day one if you can get it. 100% you want to shoot for it. But if you’re getting cashflow from day one, just wait till year five and then wait till year 10 and then wait till year 20. It gets better the longer you stay in the game.

Grace:
And all in all, I think that these numbers demonstrate that tenants are everything. So you can buy the best property, but if you get the wrong tenant, that cash flow is gone so quick. And because of tenants, turnover is everything. So maybe think twice about losing a good tenant over a little bit of rent. Obviously you should increase your rent when you can, but really think that through because turnover and tenants kill your cash flow. So all in all, super happy with this property. Out of all the ones that I bought my first couple of years, this is definitely one of my better properties because of the location, because of the current tenants, and I think a side-by-side duplex is just really hard to beat. But not every property I bought when I first started, I still have. So I’m learning and these are not things that I learned day one on the property.
These are lessons learned over the last five years.

Henry:
Fantastic. Thank you, Grace, for sharing that. I’m excited to continue to hear more. Next up, we’ve got a deal from Amelia, but before we dive into this one, we’re going to take a quick break. We’ll be right back.

Dave:
Before we go to break, if you’re someone who’s bought a couple of deals and you’re looking to scale up your portfolio into something bigger, I have a really exciting announcement for you. BiggerPockets is hosting its first ever conference focused just on scaling up. It’s this December, it’s coming up soon, this December 5th through 7th in Phoenix, Arizona. We’re going to have a full day of programming with speakers like myself, James Daynard, Kathy Fecke, and Devon Kinard talking about how to scale up and build a sustainable business. Tickets are on sale now, but there are only 100 tickets. So go to biggerpockets.com/conferences now and get your ticket today.

Henry:
All right. Welcome back to the BiggerPockets Podcast. I am here with Grace and Amelia, and they are giving us a peek behind the curtain. We’re diving into the real numbers of real real estate investments. So this isn’t the fancied up version that people give you on Instagram where all you see is the highlights. This is the actual net cash flow that investors are seeing on real deals. Amelia, what you got for us?

Amelia:
Yes, this is one of my favorite deals, so I’m excited to share it with you. When I introed myself, I said I mostly own long-term rentals, but this property does have one unit that is a short-term rental, a little small but mighty, one bedroom. So the property itself is a triplex. Actually, fun fact about Grace and myself is we’ve probably purchased, I would say, 70% of our portfolios off market and we invest separately. That’s another little known fact about us. Everybody thinks that we do everything together and we do except for invest in real estate. We each have our own portfolios. But I saw this property driving for dollars. It’s in a small town in Iowa, and I’d driven past it many times. I noticed that it had three mailboxes. I noticed that it was pretty run down. It looked like maybe one of the units was ever filled and nobody was living in any of the others.
So I looked it up on the assessor website, found out who owned it. Usually I try to find the owner on Facebook, but these people were pretty old, in their 80s, and they had owned it for many, many years, over 30 years. So I figured it was probably paid off in full. I couldn’t find them. I went to the old school phone book at my parents’ house.

Henry:
Wait, what’s this?

Grace:
Yeah, I love this part. What’s

Henry:
This technology you speak of?

Amelia:
Paper phone book. Called them, no answer. They had an answering machine, left a voicemail, asked them basically, “Hey, are you interested in selling this property? I see that you own it.” They called me back right away and we set up a showing for the next day. I actually ended up buying it on seller financing at 0% interest. So I put a really large down payment down and I knew that I was going to do a burr on it, so I knew that within a year I would be able to pay them off in full. So I wasn’t really worried about making monthly payments. I didn’t even make monthly payments to them. I made a really large down payment. I think I bought it for around $50,000. So again, small town Iowa, but every single unit needed pretty much a full, at least cosmetic renovation. The bones were great, but every unit needed quite a bit of work.

Henry:
I love the hustle. Nobody drives for dollars anymore, it seems like.

Amelia:
I don’t know why.

Grace:
Ain’t nobody looking up the phone book and dialing numbers in the phone book.

Henry:
Right.

Amelia:
Nobody wants to actually get their hands dirty anymore.

Henry:
A, you hustled and you found it. B, this is my favorite list for multifamily.

Amelia:
Mine too.

Henry:
Mom and pop multifamily owners who own the property in their personal name or a trust, not in an LLC, that have either owned it for more than 20 years or have a hundred percent equity. And I love just reaching out and talking to them because even if you don’t get a deal, you’ll get one of the best conversations you’ve had in ages. They will talk your head off and tell you all the good stories.

Amelia:
Oh baby, I can schmooze an 85-year-old couple all day long. They’re my favorite person to buy a property from because they’re so fun to talk to. They’ve got honestly a lot of learning lessons about owning rental properties for 35 years and managing tenants.

Grace:
Amelia’s really good at this. And like you said earlier, people don’t want to put in that work. They don’t want to have the conversations. They don’t want to spend an hour on the porch shooting the talking to Mr. and Mrs. Seller. And Amelia is so good at this. You’ve done this deal essentially three times.

Amelia:
Four times.

Grace:
You’ve done a very similar deal over and over and over again because you’re willing to do the things that everybody else, they look it up on Zillow, they call some random number, and then they don’t answer and they leave it and they’re like, “All right, done. Not a deal.”

Henry:
All right. Now we want to know the numbers.

Amelia:
Yeah. So two of the units are long-term rentals. There’s a one bedroom rents for 625. There’s a three-bedroom that only rents for 700, but I have an amazing tenant in there that hopefully will stay forever. And then this unit was a little bit of an experiment. It’s a short-term rental, but again, this is in a town of 5,000 people, so I wasn’t sure how this was going to perform, but it has been on average bringing in about $900 per month after all expenses. So I’m happy with that. My other exact mirror of this unit makes me 625. So yes, there’s a few extra expenses with short-term rentals, but it is bringing in enough to make it worthwhile for me.

Henry:
So 600, 700, 900, you’re bringing in just over 2,225 – ish dollars. What is it costing you to have this property? I

Amelia:
Refinanced this back in 2023. I bought it in 2022, refinanced end of 2023. My interest rate’s 7%, which is high with my small local bank. I could get them down to 6% now, but it’s honestly just not worth it for me to go through with the refinance. So 540 for the mortgage, 120 for insurance and 230 for property tax. So my pity total is 890 per month on this. So my phantom cash flow, if you take 2,225, subtract 890, phantom cash flow is 1,335 per month. However, if we go further in, for the full year of 2026 so far, I’ve collected about $16,000 in rent. My pity has been around $7,000. My utilities are 3,400 because I’m paying water and I’m paying heat for this building. Not only heat, but it has essential for an essential AC. So year round, I’m paying a pretty hefty bill to cool or heat the whole building.
And then about $1,000 in extra expenses for the Airbnb unit, so internet and some supplies. So my cashflow for the last eight months on this property is about 4,600, which equals out to about 580 per month. So I got Grace’s duplex beat in that category by a tiny little bit, by a sliver.

Henry:
This is awesome. 580 per month on a three unit building. That’s fantastic cash flow.

Amelia:
I’ve considered paying off the remaining mortgage actually between 65 and 68,000 to have a completely paid off property, which would add about 540 back into my monthly cash flow for this because that’s what my mortgage is. But I need to determine is that extra $6,000 a year worth it or would I rather just keep paying the mortgage and maybe ride it out? So it is fun to have the option though. If I ever wanted to, I know I could pull a lot of equity out of this property.

Henry:
Yes. This is when real estate starts to get fun, when you get to a point where your leverage is in this kind of position, because now the conversation you’re having with yourself isn’t, I need to go buy another property to hit my goals. It’s, is my dollar better spent buying another property or is my dollar better spent in my own portfolio paying off this asset? Which option gives you the better cash on cash return? And that’s a fun place to be because man, it feels good to pay off a house. I’ve paid off two so far and man, it feels better doing that than it does when I buy a new one. All right. Thank you, Amelia. What a cool deal. I love the owner finance strategy. Excited to hear Grace’s second deal, but we’re going to talk about that right after another break. Welcome back to the BiggerPockets Podcast.
I am here with investors Grace and Amelia. We are looking behind the curtain at their actual real estate deals, at their actual net cash flow, not the phantom cash flow that most people consider what cashflow is. And Grace has got a second deal for us. Grace, what you got?

Grace:
This one is boring and I think that is the exact point that I’m trying to make. My

Henry:
Favorite.

Grace:
Yeah. I was all into this property for maybe $100,000. It’s worth 130. It was a perfect burr. It rents for 1,300 a month. And looking back at my last 12 months of expenses, besides my pity, I had one expense, a $50 business license. So this one cash flows $283 a month, like actual cash flow. And what is so interesting about this deal is I think that for a Midwestern single family home, people might be like, “Is that even worth having a tenant and all these things?” And the point of it is this is so stress-free. I’ve not gotten one maintenance call from this person. They are a great tenant, and I know that because we go in and I do have maintenance do furnace filters, so they lay eyes on it. And this person wants to be there for a long time. It’s completely renovated property.
And for $283 a month for something that is as close to passive as you can be, because we all know real estate’s not passive, this feels really good. So if you are out there and you’ve got a low cash flow property, that’s okay, as long as it matches the stress and the work involved and it still matches your long-term goals. So nothing life-changing, nothing interesting, but a very typical single family deal in Iowa.

Henry:
That’s a fantastic point, right? Your reward needs to be worth the risk, and if you don’t have a lot into it and it’s not taking a lot of effort, taking a little less cash flow isn’t that big of a deal. Would you mind telling us how you found it and what you paid for it?

Grace:
Yes. I think I paid 79,000 and I was all in around a hundred, and I found this. It was an off-market deal that I had a realtor looking out for me for pocket listings because I had bought the house next door and she brought this to me before they listed it. And they actually wanted way more, but I knew my number because I had bought the house next door and it was the same exact house. And I followed up with her for four or five months every month like, “Hey, are they ready to accept my number? Are they ready to accept my number?” Finally, they accepted it, got them paid out. I think it might’ve been an estate where the owner had passed. So really it was just persistence and having a good network.

Henry:
You said it’s in good shape. Did you renovate it or was it renovated prior to you buying it?

Grace:
I renovated it. It was gross when I bought it. I completely renovated it. It’s a really tiny house, so didn’t take a ton, but yeah, I put the money into it, got the higher value, and then refinanced.

Henry:
I love old boring real estate, man. This is the classic base hit play. I would do a million deals like this. One of my favorite types of deals, just set it and forget it. Easy peasy, standard, basic single family home. Boring real estate. It doesn’t make me fun to talk to at conferences because everybody’s like, “What new interesting things are you working on?” And I’m like, “I don’t know. I bought a house. I renovated it and I have a tenant in it.”

Grace:
It’s the same thing. Yeah.

Henry:
All right. Now we’re going to wrap up with Amelia’s second deal. I’m very, very interested based on what you’ve told me about your first one. So what do you got, Amelia?

Amelia:
This one’s interesting because spoiler alert, it’s a negatively cash-flowing single family home now. I’ve owned this property now for five years. I purchased it in a package deal with a lot of equity already in it. The small local bank that I worked with allowed me to not put a full 20% down. That’s kind of an interesting fun fact about this. I bought it for 55,000 – ish and it’s on a five-year arm, which if you’re not sure what that is, it’s an adjustable rate mortgage. So that’s the type of loan that my small local bank gives out. So every five years, the interest rate’s going to change. Well, we just came up on that, and so the interest rate changed and it went up. And because of that, I chose to do a refinance on the property because I wanted to start working with a different lender that I actually like better.
So I pulled out, I did a refinance. I had the property appraised. It appraised at 110,000. So I bought it at 55, never did a single thing to it. I’ve had the same inherited tenants in there for the last five years. It’s a family. I don’t know that I’ve ever even spent a dollar on maintenance for this property because they treat it like it’s their own home. They take pride in it. They want to stay there. It’s really hard to find single family homes of this size because it’s a three bedroom, two bathroom in this market. So they’re never going to leave unless I force them out, which why would I do that? So they’re currently paying 825 in rent. My mortgage just went up to 600 because we pulled out 75% of equity of that 110,000. So 82,500. We had to pay off the original lender, which was 40,000.
So we were left with about $40,000 of tax-free money. That’s the biggest thing about a refinance is that is not income for me. And that’s why I was willing to take this hit because they’re paying 825, my mortgage is 600, my insurance is 160, and my property tax is 170. So every month my expenses are $930, not including any maintenance if that ever comes up. So I’m actually negative $105 a month on this property.

Henry:
Yeah. That seems like the big real estate no-no, but there is reasons to do this. I’m curious.

Amelia:
Yes. So in my mind, I was thinking even if I was before the refinance, probably making between 250 to $300 a month in cashflow on this property, I was able to make tax-free $42,000 off of this in the refinance. I got to pocket that money. Even at $250 a month in cash flow, it would’ve taken me 14 years to make $40,000 off of this property. And I had other plans for that money. I actually went and bought an 11-unit apartment building that’s going to make me much, much more than $250 a month and cover the negative $100 a month that I’m now eating off of this property.

Henry:
Yes.

Amelia:
That’s why it’s worth it.

Henry:
This is called portfolio management, right? And once you have more than one unit, you now have a real estate portfolio. And if you have a portfolio, it doesn’t matter what each individual property is doing. What matters is what is your portfolio producing as a whole and how can you move the chess pieces around the individual properties, the loans, the tenants? How can you move them around to increase your overall performance? And so yeah, you might not be cash flowing month over month on this particular property, but you took money out, you bought an 11 unit, and your 11-unit produces enough income to cover the loss that you’re taking every month. So as a whole, you’re in the green. That’s the point. And I don’t think enough investors focus on portfolio management. I think a lot of investors, even after they build a sizable portfolio, are still very individually property focused and tweaking your portfolio can make massive changes to your income.

Amelia:
I agree 100%. And I actually do plan on raising the rent. People are usually reasonable. My plan is to actually take them all of my expenses and say, look, I have to raise your rent because I am no longer making money off of this property.

Henry:
I

Amelia:
Have very slowly and very small increment raised their rent over the last five years. I really don’t see them giving me hardly any pushback. I’ll probably raise it to 900, so I’ll still be negative $30 a month in cash flow. Big deal. They probably won’t really even bat an eye at that. They’ll totally understand. And I know that if the tenants ever do move out, we’ll do some cosmetic repairs and I can probably sell it for about 150K. So I still have lots of equity in that. That’s the spread between what the appraisal came in at and what it’s actually worth on the market. So still a great property even though I’m not making monthly money off of

Henry:
It. And I love the approach of showing the tenants. I like to call the way I invest brutally honest investing in general. Even when I’m making offers to sellers, I show them what I’m going to make in profit. I show them everything about why I’m making the offer I’m making. And I’ve just found that that’s served me well. And I’ve just found that if I just trust people to be decent people, people act decently. But we’ve done the same thing with tenants is to show them the numbers. And I’ll pull the rental comps. I’ll say, “This is what things are renting for around here. This is where I’m going to put you. I’m still charging you less than it would probably cost you to move somewhere else. If you want to look around, feel free. Go and look. But here’s all my expenses. Here’s how much money I’m making and/or not making, and this is why I need to make rents the way I need to make rents.” And I’ve literally never had a tenant be upset about it, not once.

Amelia:
Me either. I say it’s because I don’t even give them the opportunity. I feel like sometimes people will over apologize or open the door up for feedback. I just don’t even open the door for feedback. I just kind of let them know this is what it is and that’s that. Brutally honest investing.

Henry:
Brutally honest investing. Just treat people like people. Be a decent human being. And this business doesn’t have to be as difficult, I think, as sometimes people People make it out to be or people think it is, but they don’t actually have the experience.

Grace:
That’s an understatement.

Henry:
All right. Any lessons from this property you want to share with the audience?

Amelia:
I would just say that similar to what we’ve talked about, tenants make or break a property. And if you’ve got great tenants, like I said, I haven’t increased the rent very much at all on this property because that’s worth it to me to keep them in there. If I had to go in and do a total turnover, it’d probably be $5,000 and that would eat all of my negative cash flow every year at this point. And I think just being around other investors that can talk to you about portfolio management. If you’re really siloed, that can be a problem because you don’t even realize all of the different levers that you have to pull. And like I said, the refinance is tax-free money because it’s debt on the property. I learned that from another investor. So just having these conversations with other people that are also doing bigger deals in portfolio management.

Henry:
That’s a fantastic point. If you’ve got a portfolio, especially a sizable portfolio, being around other people who either have sizable portfolios or have had them in the past to see how they’ve maneuvered their portfolio can literally either save and/or make you thousands upon thousands of dollars. Grace, any last words for the people?

Grace:
I was going to say same. I would never have known that I could ask for 10% down if I hadn’t heard somebody else say that on a podcast. So you don’t know what you don’t know. You don’t know your own blind spots. So go borrow everybody else’s knowledge before you have to learn it through a mistake yourself.

Henry:
All right. Well, this has been super fun. Getting a look behind the curtain at real numbers on real real estate deals, not fake hype social media wins, but actually what’s happening. I mean, you heard them tell you about a deal that they’re not making monthly cash flow on. That’s why lessons like this are important. That’s why you need to get around more investors so you can understand what it’s truly like to operate a real estate business so that you can repeat these things on your own. Grace, Amelia, thank you so much for joining us. And can you let everyone know where they can find you?

Amelia:
Yeah, you can find me on Instagram. It’s Amelia Jo, R-E-I. Jo is just J-O. You can find the Wire community on Instagram at wire.community. Wire has two I’s or wire.com and then I’ll let Grace tell you where you can find her.

Grace:
You can find me on Instagram at grace.investing.

Henry:
All right. Thank you so much for joining us. Thank you for the honesty and transparency. It is much appreciated. If you’ve enjoyed this episode, then please continue to follow the BiggerPockets Podcast wherever you get your podcasts from. And as always, we’ll see everybody on the next episode.

Grace:
Thank you.

Dave:
The US is facing an affordability crisis, or at least that seems to be what every politician is talking about right now as we’re just a few weeks away from the midterm elections. And there is a reason that we keep hearing about affordability, because it matters to Americans. Gas is over $4 a gallon, inflation just spiked up to 3.7%, and for the first time in three years, paychecks are falling behind prices. Now, six in 10 voters say the cost of living is their top economic worry. But the question is, is this actually a crisis? Does the data support the idea that things are actually less affordable than they used to be, or is there something else going on here? Today on On the Market, we’re going to answer that question with data. We’re going to measure eight parts of the household budget against wages going back to 1999, look at how Americans actually spend their money today versus the past, and dig into two numbers that I think are going to explain why everyone feels so squeezed right now, real wage growth and the savings rate.
This is On the Market. Let’s get to it.
Hey everyone, welcome to On the Market. I’m Dave Meyer, investor, housing analyst, and chief investment officer at BiggerPockets. Last week on the show, we went deep into affordability, but we focused on housing. I have to say, we got great feedback about that show. Thank you all so much for listening. It was one of the best received shows I think that we have ever had, so appreciate that. If you didn’t hear it yet, go back and check it out, but I’ll just give you a TLDR. We talked about what it would take for the housing market to get back to “normal levels of affordability” and the answer is a lot. It’s not happening anytime soon. Just since 2019, the typical mortgage payment is up 116%, so more than double. Meanwhile, family incomes have only gone up 37%. So relief in the housing market is going to take a while.
Again, if you missed it, go check out that episode. But because of that, and honestly, I’ve wanted to make this show for a long time, we’re going to do something else this week. We’re going to broaden the scope and talk about affordability in general, the whole household budget. We’re going to talk about healthcare, transportation, rent, childcare, college, energy, food, all of it. And this stuff matters a lot for investors. It matters for rent growth, and it also matters a lot, in my opinion, when we talk about the potential for a recession and what that could do for the housing market and to our portfolios, because if people can’t afford to spend on rent, other goods and services, things in the economy can break. And I actually think this is a very good time to talk about this. Again, I wanted to do this episode for a while, but it does seem that affordability is kind of the issue in the 2026 midterms.
There was just a Fox News poll that just came out and said six in 10 voters say cost of living is their top economic worry and 55% say inflation is “not at all under control.” So people really care about this and it’s going to shape what happens in November with the election. I just want to say, I have no political intentions for this. I’m not telling you who to vote for. Both parties are using this word. It’s just getting used so much. I decided to figure out for myself what is real about a “affordability crisis” and what is not. So today we’re going to answer three questions. First is, is the affordability crisis real? Where is it real? And where isn’t it real? And what’s actually not being measured in the data that could be driving some of this sentiment around an affordability crisis? So that’s the plan.
Let’s get to it. First up, we’re just going to talk about how we’re measuring affordability. I like to just always explain how I’m doing these analysis so you can follow along. And the first thing you need to know is that I’m talking about something affordability. It’s a little bit different than inflation. What inflation measures is how much prices went up year over year or month over month. It doesn’t tell you whether or not you can afford those things. If we want to measure affordability, we have to look at two things. We need to look at prices, yes, and if they’re going up, but we also have to compare that to paychecks and income and whether those things are growing at the same rate or one is growing faster than the other. As an example, let’s just use eggs because eggs have gone through a roller coaster of prices over the last couple of years.
Remember those weeks when you couldn’t get eggs? That was crazy. Anyway, if eggs prices go up, let’s just say 30%, that’s a lot. But if your paycheck at the same time goes up 35%, relatively speaking, eggs got more affordable relative to your paycheck. And so that’s how we’re going to be measuring this, prices versus paychecks. And our yardstick that we’re going to be using is the Bureau of Labor Statistics publishes median weekly earnings for full-time workers. This is basically just typical person in America’s paycheck. So that’s the paycheck side. And then for prices, we’re going to use the CPI, the Consumer Price Index. This is the most common measure of inflation, again, from the Bureau of Labor Statistics. And I’m going to compare the first half averages, so January to June for four different periods. We’re going to do today and then we’re going to look back to 2019, 2009 and 1999.
And I kind of just picked those years a little bit randomly, but I wanted to compare today to pre-pandemic because that’s been a period of a lot of inflation. And then just to go 10 years back into 2009 and 10 years before that, I did 1999. So that’s the methodology that we’re using. Let’s get to the scorecard. Let’s just see where we’re at today. And I’m going to throw this up here on YouTube if you’re watching on YouTube, but if you’re listening to this on audio, I’ll just describe to you. But basically if you compare wages today to where they were in 2019 before the pandemic, they have gone up 37%, which is not bad, right? Since 2009, they’ve gone up 69%. And since 1999, they’ve more than doubled. They’re up 130%. Now compare those wages to the Consumer Price Index, and you’re going to be surprised by this, but what it shows is that the Consumer Price Index over that same period only went up 30%.
So wages went up 37% since 2019. The CPI, the Consumer Price Index, only went up 30%, meaning that headline big picture number here, wages have been growing faster than consumer prices. And that should mean that just by that one sliver of this analysis alone, that means that an affordability crisis should be no more real today than it was in 2019. Now that is obviously not the whole story here, and we’re going to get into some of the caveats and break this thing down because that’s where the story really is. But headline, wages have in aggregate grown faster than CPI. I should also say that the same thing is true since 2009 where wages have gone up 69% compared to 55% for consumer goods. And in 1999, it was 130% versus 100%. So all three different timelines that we’re looking up, wages have grown faster than the CPI, but not that much more, but they are up.
But if you break this thing down by category, that’s where things really get interesting. So most notably, energy costs, for example, that’s on everyone’s mind right now. That’s where things have really gotten crazy recently. These are everything from electricity to gas to diesel. Since 2019, wages are up 37%, but energy is up 45%, making it less affordable. Since 1999, wages went up 130%, but energy went up 205%. So energy is one example, but I think there are other ones too. So the big one, we all know if you listened to the episode last week is housing. This one is just massive. It’s not in the CPI, and that’s a really important thing here. Home prices are not measured in the consumer price index. So it is not reflected in inflation data, but it’s one of the biggest things. Mortgage payments have gone up 116% versus just 37% for income.
So this to me, if you’re talking about a crisis, that’s a crisis, right? When you talk about mortgage payments more than doubling and your income only going up 37%, it’s hard to argue this is anything but a crisis. Housing affordability is awful right now. We know this. We’ve been talking about this for four years on the show, but that’s just another example. A third example where I think you could say there is a crisis as well. Energy is up, I don’t know if you call it a crisis, long-term. In the last year, it’s definitely been a crisis, buying a home, but also college and childcare, you probably all know this if you have a family or if you have student debt, but tuition in terms of childcare and college and lumping them together has gone up 200% since 1999, 200% versus 130% over the same period for wages.
So again, these things are getting much less affordable. We also see rent has outpaced wage growth and health insurance has actually stayed somewhat steady over the last 30 years or so, but it is probably about to get worse. If you’ve seen any of the data out there about how much insurance premiums are going to go up next year, I think people are going to be shocked. You can see that they’re going to go up very, very significantly for people across the board next year. And so we are going to see a decline in affordability in health insurance on top of rent, home prices, energy, childcare and college. So when you break it down, that is where we see real affordability challenges. Where we don’t actually see it or where we don’t see it as much is food. I got to be honest, I was surprised to see this because every time I go to the grocery store, I’m just shocked these days.
I can’t believe the prices. But actually, if you look at using our methodology, food prices since 1999 up 113%, wages up 130%. So groceries are actually relatively more affordable than they were 27 years ago. Even just since the pandemic, it’s about even. And so although I agree, to me, grocery prices seem insane. It feels really crazy to me, but the data does not support the idea that groceries are growing faster than wages. Other things that have stayed relatively the same, transportation, so cars, and then just the big bucket. If you look at everything combined in the CPI, it’s not that crazy. Remember, so these are things like car insurance, home insurance, your cell phone bill, your internet bill, all those things combined also have been relatively flat. So if you just look at this data, the answer to the question, is there affordability crisis? It depends on who you are and where you are in life.
If you’re trying to buy a home, yes. If you rely on diesel or have a long commute and you pay a lot for gas, yes. Do you have a family? If you’re trying to send a kid to college, you’re trying to pay for college yourself. Do you have childcare? Yes. But the overall basket, wages have actually kept ahead of prices in most of these categories, and that’s the puzzle we need to solve, because if the data is telling us that actually the CPI and wages have been somewhat close and wages have outpaced this API, why is everyone talking about affordability right now? That is a hugely important question, and we’re going to get to it right after this quick break. Stick with us.
Welcome back to On the Market. I’m Dave Meyer. Today we’re talking about affordability in the United States. And before the break, we talked about the fact that since 1999, and yes, even since from 2019 until now, if you look at wage growth as measured as by the BLS and you look at the CPI, the Consumer Price Index, wages have grown faster than inflation. And that’s good. We want that to happen. That is good news. But the question then becomes why are we struggling with affordability or why are people talking about affordability so much? Let’s break this down because this is hugely important to us as investors and for our society in general. So let’s talk about this. So first up, one reason I believe that people feel affordability is so low is that wage growth is incredibly slow. Even though it is faster than inflation over the long run, it’s a kind of a slow burn.
If you look since 1999, the “real wage growth,” so that’s adjusting for inflation. So these numbers are going to be different from what I was saying before, but if you adjust for inflation, how much are wages growing over inflation? It’s only 15% total in the last 27 years. So that’s roughly about half a percent a year. So that doesn’t feel like a lot, and it’s not. Actually, if you look back historically in the United States, real wage growth where your earnings grew faster than inflation has been very, very low since the early 1970s. And so I think part of it is that even though people see their paycheck going up, their actual amount that they can save or the amount of things that they can buy don’t really go up. It does actually by half a percent a year, but you don’t really feel that, right?
It’s barely perceptible. And so it seems to me that for 27 years now, at least, and honestly longer, even though people get a raise or they get a promotion and that feels good for a minute, ultimately they say, “I actually can’t buy any more stuff because the increase over inflation is just so minor.” The second thing is that for a lot of the last five or six years, we have had negative real wage growth. So during the 2021 to 2023 inflation wave, real wages fell for two years. That hurts. We saw inflation of up to 9%. That was brief, thankfully, but from 21 to 23, there was a long period where inflation was about 5% and wages sure weren’t growing at 5% a year back then. And so we had a lot of time when spending power was going down and that hurts. People notice that quickly, and that happened for two or three years.
And although it did get better for a little while, we’ve flipped back to that again now. In 2026 where we sit today, real wage growth is negative. We are again losing power. On average, the average American is now losing spending power every single month because inflation is going up faster than their wages. And so even though the aggregate looks okay, if you just look at recent history, real wage growth hasn’t been great and there’s probably some sort of recency bias here. And I don’t blame people. I’m not saying it’s just necessarily a bias. People don’t want this. I’ve made the argument on the show many, many times that real wage growth is the number one barometer of whether an economy is succeeding or failing. And right now by that measure, we are failing. If people are working full-time and they cannot outpace inflation, that is a huge problem.
And that has been happening for a lot of the last five or six years, and it is happening right now. So real wages are negative right now, but I still think this doesn’t fully explain what is going on here. And I spent a lot of time thinking about this because I was surprised by the data, honestly, because you hear all about these affordability crisis. I’ll be honest with you, I feel it myself. I feel like things are less affordable. I look at my own budget and it just sometimes doesn’t make sense to me that I feel like I am able to save less money. And that is true across the board. You are seeing, even though we are seeing the data that I just shared with you, people are saving less. In the 60s, people at the average savings rate was about 12%. From 2010 to 2019, it was about 7.5%.
Right now, it’s around 3%. So we’re seeing this data that, yeah, prices and wages are close, wages are winning, but people are saving less. So something is missing in the data, right? That’s what we have to identify because clearly the whole picture is not being told here. And I spent a lot of time thinking about this. This is the fun part of being an analyst is trying to figure out what’s going on behind the scenes. And I came up with a list of the things that are driving this affordability crisis that people feel are happening, even though some of these headline numbers don’t suggest that they are. Number one is something I would call levels, not rates. So just because inflation has come down from the high of 2021, price level right now is 30 something percent higher than in 2019, and it’s never going to go back.
People though remember 2019 prices. They remember 2010 prices, and they tend to not remember that their paycheck has gone up. And I do this too. Everyone, I’m not saying this like blaming people, but that is just human nature, right? It’s like you look at your receipt when you go to the grocery store and you’re like, “This is crazy.” You forget perhaps that your wages went up during the same time and you’re just kind of bummed that they basically track each other and that even though you’re getting raises, you’re not increasing your spending power. The second part of this is I just think there’s price fatigue. A lot of us, myself included, if you’re a millennial, you never really went through a time of high inflation before. I was born in 1987. There was periods of brief inflation, but we’ve had pretty low inflation for most of the last 40 years.
If you grew up in the 70s and 80s, you’re used to this kind of inflation, but I just don’t think we’re used to it. And so we see prices go up. We’re not used to our wages matching them or we don’t even think about that side of the equation and we’re just tired of it. We want to go back to the time when inflation wasn’t a thing. Believe me, I want to go back too, but I think there’s just an element of fatigue around this and trying to keep up and seeing prices go up and up and up. Even if your paycheck is going up, it still feels exhausting. The second thing, and I think this is maybe the biggest one, is waiting. Weighting of the CPI. And this is a thing that is debated a lot. The CPI is not a perfect metric, far from it, but it’s the most consistent data set that we have going back in time.
So I don’t really know a better data set to use, but the Consumer Price Index, that big headline number that’s 3.7%, the people who put this together, they decide how much to weigh things like childcare versus your phone bill versus rent versus car prices versus medical care. And it is so different for everyone what the weighting actually should be, right? The CBI is measuring everything in the economy, but if you are looking to buy a home, an affordability crisis is acute for you. We know that’s the biggest one, and it’s also the biggest expense, right? We know that consistently… Actually, I pulled some data on this. If you go back in time, we’ve spent about 33, 35% of our income on housing. And if that has become so unaffordable, that unaffordability in that one bucket is going to impact your household’s overall spending far more than if your cell phone bill goes up by 40%, or even if your cell phone bill went up by 100%.
If you’re in the market for a home, this is going to really impact you. And it’s not just homes, it’s all about waiting. If you’re trying to go to college, you are probably noticing the affordability crisis. If you drive a truck or you’re in construction and you rely on diesel, you’re probably noticing an affordability crisis. If you have kids that you are sending to childcare, you’re probably going to notice the affordability crisis. So it really depends on who you are and how much each of these categories are weighted in your own personal budget. If you are any of those groups that I just talked about, you’re probably feeling it because the data actually does support that. If a lot of your money is going to one of these categories that has really gone up, like energy, like childcare and like housing, then you’re going to feel it more than people who own their home outright, who don’t drive a lot and maybe are empty nesters and don’t have kids anymore.
And honestly, this is a side note, but I think this is a generational issue for a lot of people because younger folks, they need housing, they’re not as secure, they don’t have a low basis in their homes or locked in mortgage rates. They have childcare, they’re looking for rent, they drive a lot. I think younger people are probably feeling this more than older generations. Just as an example, if you think about a young family right now, they’re trying to buy a home, they’re paying for daycare, healthcare costs are about to go up. They’re kind of hit by all three of the worst categories all at once. And so that’s why I think this waiting is probably one of the biggest elements of why people feel that there’s an affordability crisis, even though the headline data doesn’t suggest it. And if you dig into it and were to create your own bucket, you could.
There’s actually online tools that you can do this. You can go create your own basket of CPI goods and how much money you put into different things. Go do it. It’s actually pretty interesting. You’ll see that depending on where you are in your life stage, affordability might be way worse for you right now. And I know a lot of older folks like to say, oh, young people don’t work as hard, but I think the data actually suggests here that where prices have gone up the most are very concentrated for young people and young families. And so I don’t think it’s a fact that people aren’t working that hard. I think if you look at it, people are still earning wages. It’s just that the big ticket items that young people typically buy in their 20s and 30s or early 40s have gotten way, way, way more expensive than wages have gone up.
So that affordability crisis is real. So that’s a big one. There’s a couple other small ones, then I have one more big one I want to share with you. So just a couple of the other things just to reiterate that the cushion is gone. I think that’s really impacting people that their savings rates are lower and that psychologically is not great. It’s not great for anyone, but I think it’s psychologically. I also think sort of the most visible prices are the worst ones. You look at your gas bill, you see that all the time. You look at houses on Zillow right now, you see that all the time. And those things are just really visible. You don’t really think about the fact that TVs have gotten less expensive, those kinds of things. Or honestly, a lot of consumer goods have gotten less expensive over the last 20 years, but we just don’t think about that as much as some of those big picture things.
But here’s my hypothesis. I’m curious if you guys agree with this. This is something I just kind of came up with on my own. It’s just a theory. It is not backed by data, but it is just my own interpretation of the data that I’ve read and what I think is really going on here. Here it is. We all collectively are just buying more things. I think this is a huge part of it, to be honest, because the CPI measures how much goods go up. You look at one pair of headphones, how much does this exact item go up? It measures how much my phone goes up, how much does this go up, or my watch, whatever it is. It doesn’t reflect how many things that you buy. And frankly, in today’s society, I think there is a pressure to buy a lot more stuff than you used to have.
And this is not a judgment on people. I think certain people definitely overspend, do not get me wrong. I sometimes do too. I try to resist it and I encourage you all to try to resist it too, but let’s be honest, we are all market to constantly being told to buy more and more stuff. Just as an example, I was thinking about this when I was doing this analysis. I have a young daughter, she’s three months old, and the amount of stuff I need to buy for her is insane. And it’s not like I’m just going out there looking to buy stuff. It’s stuff that is recommended by doctors for me to go buy. And it is way, way, way more than what my parents needed to raise me, way more. Trust me, I have asked my parents about this. They tell me all the time, the amount of stuff that we are encouraged to buy is up.
And if you are better at resisting that, good for you. I don’t live a lavish lifestyle. I try to not buy that kind of stuff, but you do. There’s just so many things that you’re constantly encouraged to buy, and that is really hard to measure, but I think it is a big, maybe the biggest piece of this. Our economy is driven by consumers. 70% of GDP is consumer spending, and there’s a lot of marketing that goes into growing that number every single month and every single year. And so yes, prices going up on individual things is part of it, but the fact that we buy more things is also part of this feeling of affordability crisis. Just stick with me. This is a simple example, but in 1999, if you needed a hundred items to run your household, I’m just making that number up, but if you need a hundred items to run your household, and yes, wages have gone up faster than the prices of those hundred items, but now to run your household, you need 120 items, that means your budget is getting stretched, right?
Not because one individual thing got more expensive, but because everything got more expensive and we just buy more stuff. Just as another example, think about an iPhone, right? Have wages kept up with prices on an iPhone? I think largely yes. But in 1999, did you need a $1,200 cell phone every two years? Did you need a $75 a month data plan? No. Sure. Yeah. My phone offsets other things I would’ve spent money on, but I think you get my point. Now today in today’s society, you need a phone to function. What about the fact that everything is a subscription right now? You used to be able to just buy something and the fact that the price went up every year didn’t really matter because you actually owned it. Now every software, heck, even your car, certain things are on a subscription and that goes up every single year.
Buying things typically in the past is a hedge against inflation if you think about it. If you buy a car, that means you don’t have to pay the rising prices of cars until you go and buy a new one. But now if part of your car is on a subscription, that price goes up every single year, right? So we used to have a one-time expense for a baby monitor. Now your baby monitor is a subscription, and so you have more things that you have to pay for, even though the price of those things might be keeping up with inflation. Does that make sense? The more I think about this, I just think that this is kind of at the core of what’s going on. Some of it is consumer behavior. I totally get that. I’m guilty of that too, that I probably spend on stuff that I don’t necessarily need, but I’m just living a normal, comfortable lifestyle.
I don’t think of going crazier and things feel strained. And I think a lot of it is because the expectations of what we need to have to live a comfortable life have gone up, one, but two, so many things have become subscriptionized that you are just paying for things in perpetuity all the time. And that is not reflected in the CPI. That does not get reflected in inflation data. And I think that’s a lot of where people’s money is going right now. So that’s my hypothesis. I would love to know what you think because the data is kind of clear, but the interpretation of it is up to you. That’s how I’m interpreting this data is that some of it is people overspending, some of it is the expectations of us on consumers. And the third thing is really about the subscription economy that we live in where you’re constantly paying for everything.
You never get a break from paying for anything anymore. But we got to talk about one more thing. Let’s talk about what this means for the housing market and for investors. We’re going to do that right after this quick break. Stick with us.
Hey everyone. Welcome back to On the Market. I’m Dave Meyer. Today we’re talking about affordability and the bottom line from our analysis is that we’re not in an everything is unaffordable economy. We’re in an economy where certain things have gotten a lot more expensive and how unaffordable things are, I think depend a lot on what you spend your money on and what stage of life you are in right now, because things like home ownership, childcare, college, energy have all gone up a lot faster than wages. And so if you’re reliant on those things, then you are probably feeling affordability challenges more than people who don’t rely on those things as much. On top of that, we also talked about just the quantity of stuff that we buy, the quantity of services that we have and the subscriptionization. I don’t even know if that’s a word, but I’m going to make it one.
Subscriptionization of the economy is probably also leading to this as well. But let’s turn our attention to what this means for investors because there are specific implications for the housing market. I think the first one, probably the most obvious, but this is going to impact if you’re a rental property investor, your tenants, right? If people have a lower savings rate, if they have negative real wages, that means they have less room to pay Pay their rent. It means you should moderate expectations for rent increases and probably count on higher rates of nonpayment or late payments depending on the tenant profile that you are working with. I hope that’s not true and I hope that everyone who is renting can afford their rent and that you get paid on time. But if you look historically at times when these things have happened, affordability challenges have been in the economy before, this is something that happens.
And so as an investor, I recommend that you prepare for that. And the way that you do that I think is keeping more reserves. You need to keep higher reserves in case people pay late or there is non-payment or you have longer vacancies. Or if rent growth is flat for a couple of years, I think those are going to matter a lot. If you’re underwriting a new deal, do not underwrite for strong rent growth. I still think rent will grow a little bit. It tends to in these kinds of environments when there is really high housing prices because there’s more demand for rentals. I don’t know if it’s going to keep up with the pace of inflation. I think we’ll have some nominal rent growth, but I wouldn’t count on it being very robust. That’s how I would underwrite my deals right now. The second thing about keeping reserves is to also remember that your operating expenses are also going to go up.
If you pay utilities for your rentals, that’s something you need to underwrite for now. Energy prices are going up, so you need to keep an eye on that and forecast for that. Keep reserves or underwrite if you’re buying a new deal where you are paying the utilities. Other things are going to go up too. If you think about just maintenance and repair costs, a lot of construction companies, they rely on diesel. Those prices are going up, at least for the time being. Hopefully we get some resolution to this war and diesel prices go back down. But for now, I think your operating expenses are going to be negatively impacted. You’re going to see prices and materials and labor go up on a lot of these things because input costs are going up. One bright spot might be that demand for affordable units are probably going to go up.
In these kinds of environments, it depends on your market of course, but more affordable living situations, whether it’s house hacking, rent by the room, smaller units, ADUs, multi-generational setups, those kind of things I think are going to be more popular. And so if you can pivot your offering to provide affordability, that could be a great way for you to increase your occupancy and to maintain your business during this challenge. But overall big picture, I think I’ve said this last week, if you listened to the episode about housing affordability, I think the same thing is true about rents here is that until affordability improves, there’s only so much the market can better. Whether you’re talking about the rental market or the housing market, there’s not really a way around it. People have X amount of dollars and it’s getting pulled in a lot of different directions, especially for younger people.
And so if they’re getting spread out into different categories, there’s not as much room for people to spend on rent or to spend on housing. And ultimately that’s why I think housing prices need to come down in inflation adjusted terms to improve that affordability. And hopefully in the meantime, we’ll see real wage growth start to pick back up. I’m worried about AI suppressing wage growth to be honest, but hopefully I’m wrong about that. And we’ll see wage growth grow up and that could bring some life back into the rental market. It could bring some life back into the housing market, but we just don’t know when that’s going to happen. So that’s my take on the affordability crisis. Again, headline numbers, it is not as bad as I think as everyone says, but the headline numbers disguise a lot of the nuance here and there is a lot of nuance.
It really depends on what stage of life you’re in, where you spend your money, what your priorities are. And I think again, for younger people, they’re sort of getting sandwiched in a lot of different things, whether it’s the cost of childcare, the cost of college or the cost of housing, those are huge buckets. They are big weights in your budget. No matter how frugal you are, those are where your money goes. And if those things are rising faster than wages, which they are, you’re going to feel that in terms of affordability. And that’s going to cascade through the economy and I think it’s going to cascade through the housing and rental market as well. I’d love to know what you think though. Again, I shared the data, but there’s different ways to interpret it. I gave you the way I’m thinking about this, but please let me know the way you are thinking about this in the comments if you’re watching this on YouTube.
Thank you all so much for listening to this episode. I hope it was helpful for you in understanding what’s really going on with affordability in the United States. I’m Dave Meyer and I’ll see you all next time.

Ashley Kehr:
At 18, Josh Yates’ parents offered him their nearly paid off mobile home park. He said no and now calls it the worst financial decision he ever made. And years later, he accidentally became a landlord, sold that rental out of frustration and had to decide whether real estate still belonged in his family’s future.

Tony Robinson:
Josh eventually restarted more intentionally with a $65,000 two bedroom house and built a six property portfolio while raising six children, serving as a pastor and working a W-2 job. And today we’re breaking down the tax refund and the home equity that funded his first purchase, the DIY rehab that consumed every evening, the buy box he discovered along the way, and the multi-generational housing plan that turned three family homes into rentals covering his new mortgage.

Ashley Kehr:
This is the Real Estate Rookie Podcast. I’m Ashley Kerr.

Tony Robinson:
And I’m Tony J. Robinson. And with that, let’s give a big warm welcome to Josh. Josh, thanks for joining us today, brother.

Josh Yeatts:
Hey, glad to be here.

Ashley Kehr:
Well, Josh, your family owned a mobile home park and at the age of 18, they actually offered it to you and it was almost nearly paid off. Why did you decide to reject it and what do you understand about that opportunity now that you could not see them?

Josh Yeatts:
Yeah. So when they offered it to me, they were looking to retire, to not have the park anymore, and they offered it to me. And at the time I had so many other things that I kind of wanted to do with my life. And I had been around it my whole life. I had helped out with mowing the grass and helping with different projects and things. And I was just so tired of it and didn’t want it anymore. And I said, “No, I don’t want that stupid mobile home park,” is probably the words I use. And I could kick myself now, of course, because I realize the value in it now that it could have been basically the only job that I had would’ve been to manage this mobile home park more or less for them. I could have just paid them a little bit of money each month or whatever, and I could have enjoyed time with my family.
But at 18, you know what you know and you don’t know what you don’t know.

Ashley Kehr:
Josh, do you know offhand how much you would’ve made a month off of that property? What was the cash flow off the mobile home park that you would’ve been able to live off of?

Josh Yeatts:
Well, I do know that each mobile home rented for… They actually did it by the week. They rented it by the week and most of them were like 200 to 250 a week. So approximately about 800 a month per unit and it was 16 mobile homes. I have done the math before, but I don’t know the exact number, but it would’ve been enough to live off of.

Tony Robinson:
Now you eventually did end up buying your first rental, it was just a few years later at the age of 21, where you bought it as your first home and then you turned it into a rental for some friends from church. Can you walk us through, Josh, what happened in those three years to take you from, I don’t want this free investment to actually turning a property that you bought into an actual investment?

Josh Yeatts:
I bought my first house. I never wanted to rent from anybody. I wanted to own and that was kind of instilled in me. So at 21, instead of going to find a rental house or something to rent, an apartment, I said, “Let me just go and see if I can buy my own home.” I did. I paid $35,000 for this little two bedroom, one bath home, and I put a little bit of work into it, just paint and countertops and cabinets and stuff. And my dad had some health issues that we ended up having to move in with my dad to help him. And some friends from church were like, “Hey, what are you going to do with that house? We need a place to rent.” And I was like, “I don’t know. I guess I could rent it to you guys being that we know you.” And I believe they paid me like 400 or 450 a month and I just started renting it to them.
And from there, after they moved out, I was like, “Well, I guess I’ll rent it to somebody else.”

Ashley Kehr:
And how did that go? Because you eventually sold that property because you were frustrated with it. What happened and do you regret it now?

Josh Yeatts:
I absolutely regret it. I wish I could go back and not sell that house. The reason I got frustrated, my wife, she never really wanted to be in the real estate investing world. And because I would let people kind of walk all over me, I wouldn’t maybe speak up when I needed to. Lots of times that caused friction and she would always say, “Well, what if you just sold it? What if you just sold it?” And we ended up selling it and walking away from it for a few years and I missed it. After I sold it, I missed it. And I always wished that I’d have just kept it.

Tony Robinson:
Now, several years later, Josh, you ended up telling your wife that maybe you want to get back into real estate investing, right? Hey, can we leverage this as a tool to maybe someday replace the income from your day job and allow you to spend more time with your growing family? What did your finances and schedule look like when you started having that conversation? And ultimately, what convinces you of you guys to give this whole real estate investing thing another shot?

Josh Yeatts:
We started talking about it back around 2021 when I talked to her and I said, look, I would like to buy some rentals and I think it’ll be a lot easier buying a house that is strictly a rental, that’s not a house that we… Because the first house, I bought it and we renovated it together. It was where we lived. It was our house as opposed to a house that I was buying as a rental house that didn’t maybe have that sentimental connection that the first house had. And I told her, I said, “I really believe that if we give this a go, if we buy some more rental houses and we actually run it as a business, not just having people that we know maybe rent from us and feeling bad and saying, well, okay, you can pay the rent a few weeks later or whatever, but actually run it as a business, I really believe that this would be something that I can eventually walk away from my W2 job, spend more time with the family.” And I feel like once she kind of saw that picture of what it could look like, she was on board.

Tony Robinson:
Josh, just out of curiosity, I know you talked her through it, but what was it, if you remember, that really finally made it click for her? Was it just laying out the numbers in that way and the vision or was there maybe a specific thing you can share with the Ricky audience who also wants to get their spouse on board that they can replicate to get that alignment?

Josh Yeatts:
In talking with her, like I said, I told her that I want to be there with my family. I don’t want to miss the kids’ games and different things that I would miss with my W2 job. I want to be able to take vacations and not have to worry about calling into work or I want to be able to have this freedom. And as we began to talk about it, and it took some time, it wasn’t just talking about it for a night and she was on board. It took time. But I think the main piece was once I told her, “Look, we’re going to run this as a business. It’s not going to be like it was with the previous home. It’s going to be a business and we’re going to run it as such.” That was kind of the turning piece for her.

Ashley Kehr:
Now, Josh, what market did you end up deciding on to make this purchase in?

Josh Yeatts:
I wanted it to be, especially for my first few rentals, and so far it’s been all my whole portfolio that I have now. I wanted it to be in my own backyard. I wanted it to be where I could lay hands on it. If something broke, I have a little bit of experience with growing up with my family. I can do a few things on my own and I wanted to be able to fix some things that I could fix personally. So I went ahead and really looked in my own backyard. And at the time we lived in an area called Chatham and the house that we first purchased as a rental was just a few minutes away from us. Now it’s about 30 minutes away from us since we moved, but it was very close to where we lived.

Ashley Kehr:
Now, after you decided on your market, how did you actually find your first deal?

Josh Yeatts:
I actually, I went on Zillow and they asked you, “Do you want to find an agent?” And I was like, “Yeah, I want to find a real estate agent.” And I clicked on the link or whatever. And the person that ended up talking to is a very good friend of mine now. And we actually are doing a deal together now that we’ve had this time to… As my real estate agent, he’s brought me a lot of deals and we’ve did a lot of work together. But when I called this gentleman up and we talked, he said, “I’m going to help you find something that will not only be in the price range that you want, but he had an eye for being able to look at a house and say, looking under the house and seeing his floor joists didn’t look right or he would actually steer me toward or away from certain deals that he felt like would be the best fit for a rental.

Speaker 4:
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So as your portfolio grows, your banking and bookkeeping can actually keep up with you. Open your account with Baseline at baseline.com/bp.

Tony Robinson:
I think that’s a benefit too, Josh, of having a good partner in that way because there are a lot of agents who aren’t investors in any way, shape or form. And they’re really good at the transactional side of being an agent, but less so about the business side behind the real estate. When you can find what we call the investor friendly agent and it can make that first deal a lot easier. And by the way, for all the rookies, if you guys don’t know, BP offers an agent finder tools. If you go to biggerpockets.com/agentfinder, you guys will find that for yourself. But you work with this agent, you end up finding a good deal. Walk us through the numbers in that first one, Josh. What was the price, how much you put down, and really where’d the funds come from for that down payment as well?

Josh Yeatts:
Very interesting story because when you’re first starting out, for me, I was just trying to find the money to put down and the closing cost. I knew how much I had or that I could draw from and ended up doing a HELOC home equity line of credit to help pull the money for the down payment. And I also, it was around tax time and I said, “I’m going to take the tax money, my tax refund.” And a lot of people, I think they just don’t think about. You can take your tax refund and rather than blowing it on stupid things, you can invest it. And so I took my HELOC along with my tax refund and scraped up enough to put the money down. I paid 69,000 was the purchase price for this home. And right there at that 70,000 mark and ended up putting down with the closing costs, it was a little over $20,000.

Ashley Kehr:
Now walk us through that acquisition. Was there anything that came up maybe during the inspection of the property? Did you do an inspection? How did that loan process work for you? Kind of get us to the actual closing day of the property.

Josh Yeatts:
I did not do an inspection. There again, I kind of put my life in the hands of this agent who I probably should have maybe not been as trusting, but it did work out for the good. But I took his word. He said, “This looks like a good one, man.” He said, “I would buy this one if I was able to.” And he kind of had looked over it and at the end of the day, it had a lot of the pieces that were there already were good. The roof looked great. The plumbing looked great. The HVAC was, it was a little bit older, but it still looked good. And so I waived the inspection. Not a great idea, but I waived the inspection. And going up to the close date, like I said, I had that HELOC and the tax refund and he kind of helped walk me through a lot of it.
I also found a great lender who I have now developed a great relationship with, can call personally and talk to him about different deals that I’m looking at. And so relationships are so important. That’s, in my opinion, the most important thing, the most important tool that you can have is those relationships.

Tony Robinson:
Now, Josh, you got into this because you wanted the additional cash flow to be able to spend more time with your family. This first true, true investment, ballpark, what’s it doing right now for you in terms of cash flow?

Josh Yeatts:
Well, for this one now, I started off, the payment was around, I think it was around 500 a month and I started off charging 850 a month. I now charge 1150 a month. So the rent has gone up and I’ve had, this is the third tenant that is in this house. So 1150 a month now.

Ashley Kehr:
And what is the timeframe? How long from that 850 to 1150 since you purchased it?

Josh Yeatts:
Each tenant has been there about a year, maybe a little more than a year and purchased it around four years ago. Yeah.

Ashley Kehr:
So not bad to see that increase over those four years from 850 to 1150. Is there a reason that the rents increased by that much in your market?

Josh Yeatts:
Well, so we do have a casino that has opened up in Danville, but the big piece has been that casino coming and just making all the rents go up.

Tony Robinson:
I think that’s the beauty of buying real estate is sometimes even when we underwrite, good things still happen that we couldn’t have anticipated, right? And that rent increase is pretty solid. So it sounds like, Josh, the first deal served you guys pretty well, right? And that kind of sets you guys up for your second intentional real estate purchase. And I know you deliberately looked for another two bedroom, one bath, one that needed some light work that could support maybe like a burr, we’re doing like a cash out refinance. As you started thinking about property number two, did your process change in how you were screening properties given you wanted to execute a burr?

Josh Yeatts:
A little bit. I still kind of was looking for that around $70,000 home because I knew that I could put the 20% down. And the only difference is I knew that I was going to have to do some renovations. And the way that I kind of anticipated the renovations was I said, “I’m going to use a credit card for the renovations.” And I knew it was work that I could do, very simple things, paint, flooring. I refinished all the hardwood floors in the home. And again, it was one that my realtor was very confident with the comps around the area, with the renovations. He knew that I could anticipate being able to pull enough out at least to do another home. And so I looked for that 70-ish thousand. I think I paid 75,000 for the second property. And just as soon as I got it, I started working on it and had some long nights renovating it, but got it done within about a month and got it on the market.

Ashley Kehr:
Now with that second property, give us the full numbers on that one. You said the purchase price was around 70,000. What did you do for a down payment, closing costs, and then did you have a renovation budget at the time?

Josh Yeatts:
Yeah. As far as the down payment and closing costs, by this time, I was starting to save up some money. I actually cashed out my 401 at work. I’ve done some pretty crazy things to be able to get the down payment.

Ashley Kehr:
Did you take the tax hit and the penalty hit on it?

Josh Yeatts:
Yeah. Yeah. But to me, it’s worth it.

Ashley Kehr:
Oh yeah. If you can make more money than your return you were getting in the 401 and to cover the taxes and penalties, it’s way worth it.

Josh Yeatts:
Yeah. So I cashed that out. I had saved up a little bit and I believe it was right around tax time again that I just said, “Hey, let’s put the tax money with what I’ve got and with the 401 and let’s go ahead and buy this one.” And then like I said, I used the credit card and it took about $13,000. I kind of had anticipated about 10,000, went a little bit over that. Like I said, it was mainly just paint, flooring, some of those things, but I kind of anticipated 10,000 and did all the work myself. And when I did the refinance, I believe it appraised for, it was a little bit less than what I thought it was going to appraise for. I believe it appraised for like 120. And so I was able to pull out, I believe it was about 20,000, give or take, out of it for the next deal.

Tony Robinson:
Josh, you’ve used, as you said, a combination of different sources to fund your deals, tax refunds, HELOC, cashing out your 401k, obviously leveraging the cash out refinance. As you think about maybe rules around leveraging that money and really just making sure you’re accounting for the repayment, because a lot of those have your HELOC has a payment, your cash out refinance, the mortgage goes up. How do you account for those repayments so that recycling your equity doesn’t put your home or your portfolio at risk?

Josh Yeatts:
Yeah. So I actually, one of my saving graces, because I’m not saying this is the best idea for everybody to do, but with the sale of my home that I had the HELOC on, I knew I was going to cash flow with paying the mortgage and the HELOC each month. But once I sold that home, of course, from the sale of that home, I had to pay that HELOC off. And so I kind of anticipated with selling the home that it was going to come a time where I was going to have to pay that HELOC back, which in turn, because I didn’t have the HELOC anymore, I was able to cash flow more. But yeah, it was, like I said, maybe not the best idea, but it was when you’re hustling and you’re trying to make it work, which you feel like you got to do at the time.
But I would highly encourage people when they get their tax return, even if you don’t use it right then, save it and put that toward an investment property because I mean, rather than spend it on something dumb, spend it on investment.

Ashley Kehr:
Or even a bonus at your work. If you’re getting a bonus above and beyond what your standard pay is, start saving those too. But Josh, another thing I want to touch on is you actually did a lot of the rehab yourself on a couple of these first properties, but now you rely on contractors for almost everything beyond a couple small repairs. How did you build these vendors in your network and how do you vet them, compare bids, define your scope, confirm that they actually do quality work? I guess, what’s your best rookie advice for finding and vetting contractors?

Josh Yeatts:
Just so happened, two of the contractors that I use for, I’d say 99% of my work, just so happened to… One of them, my daughter dances with his daughter and my daughter and his daughter started hanging out. Actually, both of the contractors, their daughters dance with my daughter. And as we just –

Ashley Kehr:
Tony, you’re missing out. He’s got daughters in dance and he’s not finding any contractors.

Tony Robinson:
I found zero contractors. Yeah. I got to change their vet studios.

Josh Yeatts:
But yeah, my kids started hanging out with their kids and we would, of course, I’m not going to let my kids hang out with anybody. I don’t know the parents. And so I get to talking to the parents and they say, “Well, I’m a contractor. I own a contracting business.” And I’m like, “Really? I might use your help.” And as far as kind of vetting their work, it really come down to giving maybe a smaller job or whatever saying, “Hey, can you come and do this job?” And seeing what that looked like. If they did a good job with that job, then I would hire them again for the next job, maybe a bigger job.

Ashley Kehr:
Now, Josh, continuing on in your journey, a larger house actually across the street came up for sale and you initially believed it was unaffordable, but how did your wife connect the house’s basement in an additional wing with your parents and grandparents’ housing needs to actually make this a workable plan for you guys?

Josh Yeatts:
Yeah. So a lot of people probably think we’re crazy.

Ashley Kehr:
Yeah. I think you’re coming up with your own family compound here we’re about to hear about.

Josh Yeatts:
Yeah. So my grandparents, of course, this is the same parents and grandparents that had sold the mobile home park years ago and purchased two homes in cash, no mortgage on these two homes. And my grandparents are in their late 80s. My grandpa will be 89 this year. And they had told me, they said, “Josh, we just need something that is no maintenance. As we get older, we don’t want to have to worry about mowing grass or if something breaks, having to try and fix it.” And so they were talking to me and they were like, “Maybe we could give you our house, put it in your name, and then we could rent something and you just pay us the money for the rent.” And when this house came available across the street from where we lived, I told my wife, I said, “Let’s go look at it.
It can’t hurt to look.” And the purchase price on this house, they wanted 430,000 for this home, but it was humongous. It was way too big for us, but it was such a beautiful home. And my wife said, “What if we turned the basement into an apartment for your grandparents? Then they wouldn’t have to worry about maintenance. They wouldn’t have to rent somewhere. They would have a nice place to live that we are right there just on the second level and we can move them in.” So we started thinking through that. One of the contractors, one of my friends, he did all the work and it turned out just amazing. And we took their house and rented it out. But before that, my parents said, “You’re not going to move them in and not move us in.” And so like you said, the house has a second wing off the back that had a bedroom.
It’s a shared laundry, but a bedroom, laundry, and a full bathroom and a sunroom. And so we decided you guys can move in here, move into this room. And what we’ll do is we’ll take both of your homes and the home that we lived in across the street, rent these out. And it ended up more than paying for the mortgage each month.

Ashley Kehr:
Well, Josh, that’s incredible. Tony lives a couple houses down from his sister-in-law. I live a couple houses down from my sister, but I think we need to take it to this next step where we’re actually building a compound within one home. But Josh, that’s incredible that you’ve been able to help your family out with this situation and be able to live close together and make it work for everybody. We really enjoyed having you on the podcast today and sharing your journey and your story with us, but where can people reach out to you and find out what else you are doing in real estate?

Josh Yeatts:
Well, so I have on my Facebook, it’s just Josh Yates, but I also have a little YouTube channel that I kind of do some tips and things that I’ve acquired along the way. And so that’s Next Gen Wealth with Josh. People can get on there and follow me on there. I share some of my journey with these different projects and houses that I’ve acquired.

Ashley Kehr:
Oh, great. We’ll have to check that out. So if you’re listening to this episode of Real Estate Rookie, make sure you check out Josh’s channel and also check out Real Estate Rookie on YouTube. I’m Ashley, he’s Tony, and we’ll see you guys on the next episode.

Henry:
Is Dave Ramsey actually right about rental properties? You want to buy a rental property, it’s $300,000, so you save roughly $60,000 for a down payment and get a mortgage to cover the rest. Now you control an appreciating cash flowing asset and you bought it with only 20% down. This is how most investors buy rental properties. But if you were to ask Dave Ramsey, he’d probably tell you you’re wrong. After all, debt is bad, right? Instead of paying hundreds of thousands in interest and taking on the extra risk, wait a little longer, work a little harder and own the same property free and clear. But does the Dave Ramsey way actually work? Can the average person build a rental portfolio buying properties with only cash? Or let’s say you do use leverage, but you use Dave’s preferred method of a 15-year note. Can you really find properties that will still cashflow with that kind of mortgage payment?
What’s up everybody? I am Henry Washington, co-host of the BiggerPockets Podcast. And today I’ve got a guest co-host, Deandra McDonald, and we are going to be answering that exact Dave Ramsey question plus more in today’s BiggerPockets Forums Q&A episode. So let’s jump in with Deandra.

Deandra:
Hello. Hello, ladies and gentlemen. I’m glad to be back. It’s

Henry:
Going to be fun. You can hear Deandra’s full investor story on episode 1105. That was back in April of 2025. But for anyone who missed it, can you tell them a little bit about who you are and what you do?

Deandra:
My name is Deandra McDonald. I am a commercial real estate investor in Central Virginia. I was introduced to you guys back in maybe 21, 22 when I was flipping motels into residential properties. I’ve grown since then. I’m excited to answer y’all’s questions.

Henry:
Well, thank you for being here. I’m super excited. As you can tell, we do not lack for energy on this episode. Not in this life. Buckle up, folks. Buckle up. It’s going to be a ride. All right. Our first question comes from Jimmy in Phoenix and he asks… I love starting out with something like this. He asks, “What’s your opinion on Dave Ramsey’s method for success? He mentions it’s best to buy real estate with cash, with no debt or a 15-year mortgage as a last resort. But for most that are just getting started, it’s almost impossible to have over a couple hundred thousand dollars to invest in real estate with cash.” All right. If you are new, don’t let the fact that you don’t have a ton of cash stop you.

Deandra:
Yeah.

Henry:
All right? There are hundreds of thousands, if not millions of real estate investors who got into this business, built wealth, and did it without paying cash for properties. Now, most people want to grow and scale. And to grow in scale, you have to do it with leverage, right? Unless you just got mountains of cash, if you want to grow and scale a real estate business, you’ve got to do it with leverage. And Dave sees leverage as something that’s bad. And to me, debt is a tool. And like any tool, if you use it properly, you can get a job done efficiently and effectively. And if used improperly, you can injure yourself, right? Now, one thing I will say, Dave also says that you need to pay off all your debt before you start to invest. My general thoughts are you need to pay off high interest debt,
But smart investors don’t pay off medium to low interest debt before investing. My thought has always been, if I can get a better return on my money through the real estate asset and that return is higher than the interest that I’m paying on the debt, it makes more sense to buy the asset, use the asset to pay off the debt than it does to pay off all your debt and then invest. Because if you pay off every single ounce of debt you have and you’ve bought no assets along the way, then you are debt free in a shoebox. You don’t have anything to show for it. It’s just my two cents.

Deandra:
I agree in some points. I disagree on some. Something I tell the people I work with is Dave Ramsey is for addicts and I think you have to have that mindset, right? Because he was talking to people who got pre-approved and bought an 18 bedroom home and a pool and a two acre lot and never… He was talking to people who had a quarter million dollars in undergrad student loans, somehow got qualified for $95,000 in credit cards. Those people do need to pay off their debt or handle it, I guess, because they are addicts. And so the way you racked up $100,000 in credit card debt, you are going to go after pretty properties that don’t necessarily profit. Now, if you are not an addict and/or have a plan for your debt, so you have a lot of student loan debt, but you’re on the PSLF and you plan to pay it off in these 10 years or these are the minimum payments graduated doesn’t happen for two or three years.
You are not increasing your credit card debt on things that are not making you money. You are not spending 50 to 60% of your income on your personal home mortgage, then yeah, I think it is totally reasonable to take out debt and to buy a property for sure. But sometimes one of the reasons you have no money and you have to take out the debt so you keep spending on other stuff. You don’t have no capacity for it. And that’s where I agree with Dave of part of being a real estate investor is having the capacity to flow. And so if it can only work this one way because all your money is taken up somewhere else, you might have to pay down debt for a little bit, get yourself together and then get into that world.

Henry:
If you’re bad with debt, if you’re sitting on mountains of credit card debt right now and you’re paying 20 something percent interest on those credit cards, yeah, you need to focus on paying those off before you go buy a rental property.

Deandra:
And don’t blame Dave Ramsey because you’re spending up these credit cards and he’s not giving you the out you want. Okay? Okay.

Henry:
Oh man. All right. Good start. Good start, Deandra. I like it. I like it. All right, moving on to our next question. We have Mike in Washington DC and he asks, “For landlords who manage their own rental turnovers, what part usually creates the biggest delay? Getting access to the property, completing the inspection, building the scope, waiting for estimates, making repair decisions, contractor scheduling, change orders or final quality control. In my experience, missing information between each stage is what stretches the timeline and creates additional vacancy.” I would love to hear your perspective as somebody who is a professional landlord.

Deandra:
Okay. I would say it’s going to vary between expected turnover and unexpected turnover. Expected turnover is I know the tenant is leaving. They’re agreeing to leave. We’re all aware of the date and the condition. That is an expected turnover. Someone has decided to not renew their lease or cash for keys or, “Hey, we have a court date and it’s coming whether you want it or not.” Versus if I show up and the unit is abandoned, question mark.

Henry:
That’s always

Deandra:
A fun day. If I show up to an eviction and I can hear them breaking stuff inside, if I don’t know that someone has been left, I hear a dog, but I don’t see the person and I smell a cat, but they shouldn’t have had one, that’s when things extend. And so I would say with unexpected turnovers, the hardest has been getting the keys. How do I have legal access to this unit to remove the stuff, to turn over utilities, change the locks, lock the windows? Because I can think it’s abandoned, but I have to go through the legal process to make sure it’s abandoned. I can think the tenant is gone, but until the sheriff comes and gives me the all clear, I can’t remove their stuff. I can’t just decide it’s time for me to enter. And because that stuff is usually still in there, I don’t know the condition.
So even trying to talk with a contractor, are we just doing paint? Are we doing drywall? Do we have to replace the floors? Are the appliances good? I don’t have the answer to any of that until I have full access. But expected turnover, if there’s just cleaning, painting, delivery of new appliances, that’s pretty easy to schedule. That’s not difficult. But if it’s, “Oh, I didn’t know I had to redo the floors. Can I get on your schedule? It’s the summertime.” And my contractor’s like, “No, you absolutely can. It’s the middle of May. No, I can’t fit you in for this 600 square foot job.” So that would be the harder of it’s not baseline things that I know how to do or I can have my team do, but I don’t know if I can get on their schedule.

Henry:
Yeah, that’s a great point. For me, this is the same with rental properties and with flips. When I’m turning over a unit or when I’m renovating a property, it’s not the full renovation that takes the longest. It is the last 5%, the last blue tape touch up, something wasn’t done right and I got to get the contractor back out there. That’s the stuff that lingers and takes longer. I can schedule a renovation. I can walk into a place and say, “Oh yeah, paint floors, new appliances, call the guy, they do the bid, they go do the work.” It’s when they say, “Hey, we’re all done,” and then I go and they’re not all done. So now we’re fighting over this little thing and that little thing and, “Hey, I need you to come back out here and fix this,” but they already started another job and they’re lollygagging to get back out there.
And so I’ve had to learn different tips, tricks, tactics to ensure that I get those people back out. And sometimes what even happens is you finish a renovation or you finish a turnover and you get in there and you’re like, “You know what? I should have replaced that flooring. I didn’t think I needed to, but now that the place is all painted and turned over, I just don’t like the way it looks.” That last 5% kills you because now I got to go find a guy to do this very small job and to do it quickly and I’m calling him and I already need it done when I call him. I need it yesterday and I’m calling him today and then there’s a two week delay before he gets out there and then he does it and then you have to go and check on it.
So some of the things that we do, I always withhold a final payment until we are all done. Everything is done, we’re checked off, you fixed all the things, it’s good to go. A lot of contractors, the minute they put down the hammer or the paintbrush and walk out of that unit, they’re hitting you up for a check, you can’t pay them everything.

Deandra:
That’s

Henry:
Right. You got to withhold a thousand bucks at a minimum. So enough that they’re going to want to come back and finish so they can get their money after you check it.

Deandra:
I like the tips and tricks of how to minimize it because I forget that that has been happening. For example, for me, flooring was huge in between turnover. If they’re scratching this laminate, then this is going to extend it. So I’m going to actually switch to tile. So now we don’t have the scratch no more. I won’t ever have this issue or I’ll start walking the properties a month or two before they’re out and pull up a rug, move a couch so I can get on his schedule four weeks in advance to minimize that. That’s good.

Henry:
All right. Well, it’s good to know I’m not the only one that struggles with that misery loves company. Thank you, Deandra. We’ve got more questions from the BiggerPockets community and Deandra and I will be back after this break to answer those. We are back on the BiggerPockets podcast. Deandra and I are answering forum questions that you guys have submitted and it has already been a good time. So hope you stayed buckled. We got a few more to go. Our next question comes from BiggerPockets community member, Miguel, and he asked us in the forums, “I have a potential tenant who is willing to pay a full year of rent in advance. She told me ahead of time that she has bad credit and might have a domestic charge from a past relationship with her ex. She wants a year to get her credit better to buy a house.
What do you think?” Now, I have been paid a year in advance and it was lovely. I loved everything about it and I would love for everyone to pay a year in advance. So if you have a good tenant or a prospected good tenant because they may be new to you, you haven’t had them yet, but everything checks out in terms of their application and everything that’s been going well so far and they want to pay you all your rent on day one, give it to me. I’ll take it. I will take it. Absolutely. I don’t have a problem with that. The caveat to this question is she told me ahead of time that she doesn’t have great credit and she might have a charge from a past relationship, but she wants to use the year to get her credit better to buy a house.
So this leads me into the red flags on tenant selection conversation because here’s the thing. I don’t necessarily rule out a tenant because they have bad credit. There’s a lot of things that cause bad credit that I don’t hold against you. If anybody’s ever been through a divorce, they can probably tell you that it destroys your credit. Now I’ve never been through one, but I’ve evaluated plenty of tenants who have been through divorces, terrible, terrible credit. Doesn’t mean they’re bad people, doesn’t mean they’re not going to pay their bills. Medical debt. Medical debt’s crazy in this country. Some people just literally cannot afford to pay it and it’s hurting their credit scores. So I look past some of those things. So my answer to Miguel would be based on how do you think she fares as a tenant based on your review process? And if you think she’s a decent tenant and you would rent to her, whether she’s paying monthly or whether she’s paying yearly, then I would say go for it.
But if you’ve got some concerns with her as a tenant, regardless of what she’s trying to pay you, then I would say listen to your gut and don’t do it.

Deandra:
I’m pretty much on the same page as Henry. Nothing in her application would have said no to me. I run her credit. I’m not picky about credit. Income, depending on her job, but she’s paying me all up front. Now her background check might be concerning. I’m glad you read it out loud. When I read that question, I thought she was running, not that she was the incident. We’re going to find out what this may mean. We’re going

Henry:
To

Deandra:
Find out. We’re going to find out. We may check this maybe, especially my multifamily properties because I don’t know what’s triggering you. I don’t know what the cause of this. You’re going to be living with a bunch of different people, right? So we need to know what’s going on. Now, depending on what comes back, criminals are not a protected class. I can decide, “Hey, this is a good fit for this building or this single family or unfortunately, no, it’s not a good fit.”
The one thing I would just warn people about is if it doesn’t go according to plan, legally, do you know what you have to return? Because I don’t want you to say, “Hey, the rent is $1,500. I got a check for 18 grand. You know what I did? Henry’s taught me how to get to the clothing table.” Buy me another house. I went out and bought me a flip. And then she decides to break her lease six months in and sues you for the rest of that money and you can’t produce it. So make sure that if something goes left, you either still have that money in a high yield savings account of some sort, or you know if you have to give it back or not.

Henry:
That’s a great point. Hadn’t even thought that, but that’s a fantastic point. And I love what you said about checking out their criminal history because again, what we’re really talking about here, folks, is the most important job of a landlord and that is being very good at tenant screening and tenant selection. That our job, that’s our responsibility. But I don’t necessarily rule anybody out because they have a criminal background or a criminal conviction on their record. It depends on what it is for, right? My best tenant to this day, probably my longest standing tenant now to this day, is a convicted felon who did 14 years for a nonviolent drug offense. Oh

Deandra:
Wow.

Henry:
When I tell you this man was almost in tears when we agreed to rent to him because he had wasted so much money on applications and things and people just to turn him down just because he was a convicted felon. So there are tons of good people who were actually rehabilitated or weren’t even in that big of a trouble to begin with based on what they did and they need a place to live. So I don’t rule them out. We got to be good at tenant selection. I also love what you said. It’s a multifamily that you might have been looking at and so there’s other people that live there. So it matters what they did. You don’t want to put a sex offender into a multifamily where there’s kids. You have to pay attention to these things as a landlord.

Deandra:
One of my longest tenants has a DUI, but the DUI is from 99. We’re 25 years past that, but it’s still on her record. It has been expunged. It has been removed and it gets dinged. And if you don’t open to just see what the ding is, you will say, “Oh, this thing you haven’t gotten in trouble for 25 years when you’re 19 is still causing you a problem.” But yes, let me also say for everybody, the criminal charge matters. So number one, yes, sex offenders are also supposed to ask you as a landlord if they’re children in the building because it is their responsibility to figure it out. But I had somebody who come and he was beating up Black people. I said, “Well, number one, this is not going to work.” This idea works. I

Henry:
Don’t know if you are aware, but…

Deandra:
But number two, I can’t have you in this building. That charge was two years ago. No. If you have a hate crime on your record, unfortunately, you will not be in these buildings. Not with me. Absolutely not. So check those criminal records. There are a lot that you can excuse, but there are a lot that you can’t, and it’s okay to say no.

Henry:
That is right. All right. We’ve got another one. This one comes from Kyle and Dayton. Kyle’s 18 years old, very little credit history. I mean, that makes sense. He’s only 18. Yeah.
Very little credit history and very little capital. He says, “I’m eager to start, but can’t get around the glaring issue of not having enough capital. So I was wondering if there are any methods you would use to raise capital or is it just time to put my head down and put in long hours?” I got thoughts, but I want to hear what you got to say because young investors, hey, I love it. I love that you’re even thinking about this at 18 years old. Energy. I can tell you at 18 years old, this wasn’t nowhere on my radar. Not

Deandra:
At all. Not even longer.

Henry:
Proud of you for even thinking about these things.

Deandra:
Okay. There are two things that his message kind of flared up for me. One, he wanted to raise the down payment. My concern with a lot of people who just want to raise a down payment is you are now 100% leveraged and you don’t know how to make money, right? So you are 100% in with now two different groups of money because if you have the down payment, you plan to loan or get a loan for the other 75 to 80%. You are 100% all in and you don’t have no money on your own. So if anything goes left, and it will, babes, it’s your first property. If anything goes left, you can’t get out of it. I only do private money deals at this point, and I do 100% financing on my private money deals at this point. But you know what? I have money.
So if something goes left or not according to plan on that roof, I though I had another eight years, I don’t. I can pay for it if I needed to, or there’s space in the deal for me to use the property to pay for itself. The second thing that came up was he said, “Or should I just work?” And I said, “Oh, so you haven’t been. Okay.
Then why was the first jump other people’s money?” And part of it is BiggerPocket’s fault. It’s our fault because we love OPM and I love it too. I

Henry:
Use it

Deandra:
Exclusively at this point.

Henry:
You do too.

Deandra:
However, OPM at 100% financing from individuals is not an intro level strategy because you don’t know how to balance other people’s money like that.

Henry:
You’ve got no fallback if you got to pay back your lenders and your deal’s not done yet.

Deandra:
100%. And I’ve told my members, and I’m not getting trouble, but that’s okay. This is not my business. I don’t mind if you lose the big bank’s money, right? They have a whole foreclosure process. They know how to do all that. They’re going to take your property, get your money back. Please don’t lose your grandmothers. Please lose your friends. That’s a whole different world because they don’t have the resources to take it back. They don’t know if you’ve set it up right to take it back. So my two things are, hey, 100% leverage feels wild for your first few properties if it’s not your primary residence. And number two, if you are asking if you have to work, the answer is yes.

Henry:
I agree. I’ve said this before on many episodes. It is absolutely possible to buy real estate without using a ton of your own money. It is not possible to own real estate with none of your own money.

Deandra:
Absolutely.

Henry:
You cannot own an asset with no money because 30 days after you close on that house where you didn’t have to put a down payment down, what do they want? They want your first mortgage payment. Where’s that going to come from? You need to have some money. If something breaks in that first month, two months, three months, like me on my second or third rental property, literally the first week after I put a tenant in there, the HVAC went out. Somebody had to come up with $8,000 out of nowhere. Did I budget for that? Yeah, I bought the property right. I underwrote it and bought it at a discount so that I could afford to replace an HVAC. But all that really means is I bought the property a little cheaper so that the property as it appreciates, it pays for itself over time. But I hadn’t owned it long enough for it to produce enough cash flow for me to pay for an HVAC yet.
So it had to come out of my pocket. So just because you can finance a deal 100% doesn’t mean you should. All right.
Got that on the table. Now I understand. Kyle, dude, you are 18 and that is awesome. You are giving yourself such a head start. Raising private capital is fun, but it is also stressful because now you’ve got the burden of not messing up somebody else’s money. And if you are 18, it is going to be very challenging for you to raise private money from people who don’t know, love or like you. Now, you can absolutely probably go raise private money from family, close friends, or maybe they don’t know you, but they know your friends and your family and where you come from. They might give you some money, but the smart ones, even in those circles, are going to be a little cautious because you don’t have a track record yet and you’re going to make mistakes and screw up and they don’t want you learning lessons on their dime.
So it’s probably going to be a little challenging to raise capital until you get some deals under your belt. I’m not saying you can’t do it. You probably could get some money. Should you do it is another question. The last thing you said is, “Should I just put my head down and put in the long hours?” I know I just sound like the old man who’s like, “You just need to pull yourself up by your bootstraps and work hard.” But the one resource you have that a lot of us don’t have as much of is time and youth, which means you can work hard. If you don’t have a wife and kids, it’s just you. You can work two and three jobs. We interviewed a guy on this podcast. His name was Neil Whitney. Neil was in his, I think it was late 40s, early 50s.
I can’t quite remember, but he wanted to invest. His wife said, “Cool, you can do that if you don’t touch our money. You got to go make other money and invest with that.” So Neil drove Uber to raise the money he needed to buy his first rental property. Okay? So Kyle, you’re 18. Just work, save the money. First thing you should do is if you live at home, stay there and then pay rent, but pay it to your savings account. Because what a lot of people do when they don’t have a living expense is they absorb that into their lifestyle. They get used to not having a living expense, and then when you have to move out, it’s a shock to the system. So if you’re living at home now, cool. What would it cost you to live in an apartment by yourself in that same city?
Whatever that average amount is, that’s what you need to be paying every month. Pay it to yourself in a savings account. That’s how you start saving up number one. Then start working and doing extra jobs and saving and building up some of that money. Do your first deal with that money. Get a track record, learn some lessons on your own dime, and then go try to raise some money. I’m not saying you can’t have capital raising conversations with your friends and family in the meantime, and it’ll go a lot smoother if they see you working, saving, hustling, and having a plan for the money and putting it to use. It’ll be so much easier for you to get the money from people if they see you actually doing work, saving money, putting in the effort. But the fact that you’re thinking about these things at 18 and going to put a plan into place, you’re going to give yourself such a head start in life.
But use the resources you have at your disposal right now. You’ve got time and youth. Go make some money, my friend.

Deandra:
Can I also add, if you have no responsibilities, a way to double dip here is also for the work you are about to do to be on your own property. So if you are able to, as a regular, I don’t know, Starbucks, Chipotle, whatever employee, if you’re able to qualify for a little handyman special,
If your extra three hours a night are all learning how to replace this floor and learning how to put in some crown molding and replace a vanity and update some paint, in two years, when you go to sell that property, anything you have made is now tax-free, right? Now I’m guessing it’s not going to be $125,000 in profit in this first property, but anything under that threshold now is just yours. And you would not have made that about working extra as a delivery driver at night past your job. So if you can qualify for a property, because hopefully you have no debt, you have no student loan debt, you didn’t go to college, then buy yourself a good little starter property, fix it up for two years, and now you have that 30 or 40,000 you could use to the next deal.

Henry:
Boom. Sounds like you got some good advice to get you started there, Kyle. I hope it goes well for you. I hope you turn into the most awesome real estate investor that you want to be and it provides you the life that you are dreaming of. All right. Our next question is right up Deandra’s alley, and I can’t wait for her to chime in on it, but we’re going to do that right after this break. All right, we’re back on the BiggerPockets podcast. Investor Deandra and I are answering your questions in the BiggerPockets forums, and right now I have got one that’s basically a slow underhand pitch right down the fast lane for you to knock it out of the park. This question comes from Priyan Shu. He is a real estate agent in Columbus, Ohio, and he posted this question, “I’ve been watching the commercial space and it feels like we’re hitting a tipping point with distressed hospitality assets.
I’ve been heavily focused on converting underperforming hotels into workforce housing or senior living communities. It’s amazing how much the valuation math changes when you re-underwrite the asset based on long-term residential cash flow.” Is anyone in the commercial space looking at a hotel to housing conversions right now? If you’ve done one, what is the biggest hurdle you’ve run into? Was it zoning, heavy CapEx conversion, or something else entirely?

Deandra:
I do do this. So this is where I really expanded my portfolio, was focusing on rundown motels that were no longer performing and transitioning them into not necessarily workforce housing, but just housing in general. And I am totally in it. I’m all about it. It is my favorite type of conversion. It is my favorite type of project. Now, those motels are not as distressed as they were during COVID.

Henry:
Oh, you fixed them all. You fixed them all, is what youre saying.

Deandra:
That’s right. I found them

Henry:
All,

Deandra:
You fixed them. But it is a great solution. There are some issues like you brought up, Priyanchu. The first, I would say largest that I tend to stay away from is zoning. There are some motels that are just not zoned for 30 day stays. The city will not allow it. The county will not allow it because that is part of their five-year plan, their 10-year plan to keep all the motels and hospitality in one section so it doesn’t spill into the rest of the community. For some people, they want it to all be intertwined streets, some are Airbnbs, some are regular rentals, some are housing run by the government. But a lot of counties who have that strict zoning, I would say don’t get involved. It is not for you. Unless you want this long-term plan, don’t do it. It’s not worth it. In terms of the capital to fix it, I would argue it’s no different from a large multifamily property.
I try to go after motels and hotels that are more suite style living so that the setup is already kind of there. I’m not necessarily busting down walls.

Henry:
So it already has a living room, bedroom situation?

Deandra:
Yes. Or if it’s going to be a large studio, there’s already a kitchen with a sink and a spot for a fridge.

Henry:
Oh, that probably saves a ton.

Deandra:
I cannot explain because now I’m just more upgrading everything for long-term living than I am building out a brand new space.

Henry:
For those who are listening, when you think about motel conversions, the part that gets expensive is they’re usually on concrete slabs. So if you need to add plumbing, you’re tearing up the foundation.

Deandra:
Everything.

Henry:
Yeah. And a lot of these have cinder block concrete walls. So it is extremely hard to add plumbing because you got to go through concrete on the floor and on the walls. And so your renovation bill just skyrockets.

Deandra:
Now you’re pulling permits because you have to replace this stuff and the city’s like, “Oh, well, what bodies are in these walls?” You’re like, “Oh, I’m so sorry. If you could not look over there and just focus on the one thing that’s coming out, just the pipe, that’d be great.

Henry:
Please stay focused on the man over here, not the man. It’s fine. Don’t worry about him.

Deandra:
In terms of senior housing, I thought when I started buying these hotels, oh, this is going to be great. We have the silver wave coming. This is going to be a great thing for me to transition into.” It’s not as an investor myself. So let me tell you, let me say. It’s not. It’s not because I don’t know what they need. If I’m going to go that route, I need to be working with a nursing home to give me much more specifics because my brain just doesn’t know. I’m not in the care field like that. Even when I think about my elderly grandma, she might have mobility that they need more than that, or she might have strength and they need more, or they have to be a different sprinkler system or intercom system, all of these pieces that –

Henry:
Commercial kitchens.

Deandra:
It never crossed my mind. The driveway, the wheelchair access, the cost of that is not just, oh, assisted living or workforce housing, either or, which is what I naively though when I first went into it. So if that is what you’re going to do, great. I would work with the care facility already and be like, “Hey, I’m just going to be the landlord.” But what do you need in order to run your business well?

Henry:
I love the point about the city. You said if it’s not in their plan. Working with cities is challenging. It is very hard, very hard to get a city, county, municipality to change their mind on what they want. It is a whole lot easier for you to get approval to do what you want to do if it fits within what they are already doing or what they want to do. And then they can be the best assets and allies on your side. You’re helping them accomplish their goals. The whole dynamic changes. But I think a lot of investors spend a lot of time trying to convince the city on why their plan is what the city should do. And a lot of the times they look at you like, “I do this every day. This is my job. I work here. I improve this city.
And you’re telling me what needs to happen in my city.” There’s tension upfront already. So do the research, learn before you go buying an asset or even making an offer on an asset, try to get some sense of what is that city or municipality wanting to do in that area of town?

Deandra:
Absolutely. I had a visceral reaction when Henry said, “You can’t get what the city doesn’t want.” I remember sitting in a meeting and the guy said, respectfully, “We pay more consulting than you are about to buy this property. You’re not budging us on this.” Right. Got it. My bad. I said, “Let me…”

Henry:
Let me see my way. Thank you.

Deandra:
You’re right. You’re right. And had to sit with Deandra. I get that you’re energetic. You want to do something big and this is really cool. People live here. You don’t even live in this city. No, they care about their place. So take it as that too. Because sometimes take it as you guys don’t want growth. Y’all actually care deeply about it. So what Deandra has done is Deandra has got on those boards. So the town meetings Henry’s talking about, I’m on them now. So I can see in real time, I get to make the decision and also understand that these are real people and when I’m alive, what they’re trying to do, life’s a lot better.

Henry:
Absolutely. All right. Well, thank you so much, Deandra. That was fantastic information. I mean, we wouldn’t expect anything less.

Deandra:
Thank you for having me, Henry. This was great.

Henry:
Absolutely. I’ve enjoyed this so much. Hopefully you guys have enjoyed this as well and gotten great information out of it. For the folks that are listening and they’re like, “Man, Deandra’s pretty awesome. Where can we learn more about her?” How do they do that?

Deandra:
Well, if you want to follow me on Instagram, you can follow me at Deandra McDonald, or if you want to follow me on TikTok or YouTube, simple real estate is my handle.

Henry:
Awesome. All right, everybody. Thank you so much for listening to this episode of the BiggerPockets Podcast. And before we go, as a reminder, these questions are from the BiggerPockets Forums. So if you have real estate questions of your own, you can go to biggerpockets.com/forums. You can get advice from over three million members of the community totally for free, and maybe one day in the future we’ll pick your question and answer it right here on the BiggerPockets Podcast. Thank you so much for listening to this episode. We’ll see you on the next one. Bye.

Ashley:
If you want to start building a real estate portfolio in 2027, watch this.

Tony:
We’ve interviewed hundreds of real estate investors and have scaled our own portfolios to replace our incomes. Now we’re financially free. So what would we do if we were starting over in 2027 with little money and no experience, which is exactly how we started initially.

Ashley:
We’re about to share exactly what we do starting on day one to not only buy rentals and start building our portfolios, but what we would do to do it way faster and smarter than we did it when we first started.

Tony:
So this episode will be split into three main parts. The initial setup, which is just getting you ready to buy your first rental, the strategy, how to buy your first rental in 2027, and then the streamlining. So how do we make a system so you can scale even smarter?

Ashley:
If you are serious about building wealth through real estate, replacing your income with rentals, or being the first in your family to kickstart generational wealth, we’re sharing how to do it starting in 2023. So let’s start with the setup. There’s things that you have to do before you can actually buy your first property. And I think one of those things is to actually submerse yourself into the world of investing by not working with people who are actually doing it.

Tony:
Yeah. So step one is just getting into the right rooms with the right people. And we’ve talked on other episodes before where part of the challenge of being a rookie investor is that you’re by yourself. And chances are you’re probably not listening to this podcast episode in a group setting with five of your closest friends.

Ashley:
And if you are, that’s so cool.

Tony:
That’s fantastic. Let us know. We want to come to the listening party. But chances are you’re walking your dog or you’re at the gym or you’re on your way to work in the car by yourself. You’re consuming this content in a very kind of isolated setting. And I think sometimes while you’re building the knowledge base, you’re not yet building the confidence because you haven’t actually met a lot of people in real life who have done this themselves. So if you can get into the right rooms with people who are one step ahead of you, who you can shake their hands and say, “Hey, tell me your story,” that builds the confidence in your ability to replicate what they’ve done. So just getting into the right rooms, local real estate meetups, BiggerPockets, the RBPCon conference, just getting into the right rooms with the right people.

Ashley:
But I think it’s also important to not just attend and see what will happen or who you will meet. Actually go to these meetups, attend these events with intention, as in what are you bringing to the table? What can you share? And if you literally feel like that’s nothing, what is your current job? What are you currently doing? That’s something you could share with someone. But what do you want to learn about? What do you want to get out of the meeting? Do you just want to meet people? Do you want to understand something you don’t know about real estate investing? A lot of good meetups, the very beginning of the meetup or when it starts, they’ll have some kind of open forum where you could… Sometimes everybody gets into a big circle and you say who you are, what you’re doing there and what you need from somebody.
So a lot of ways before you even start connecting with people as to you’re looking for a lender. Okay. Your goal at that meetup is to talk to as many lenders as possible about what you’re trying to do.

Tony:
And getting in the right room doesn’t necessarily just need to be in person either. I think that’s the goal is to get in person to get in real life, but you can also do it virtually, getting active in the Facebook groups, getting active in the BiggerPockets forums. If you don’t know, there is an entire forum ecosystem on BiggerPockets with a ton, a ton of great information from very, very experienced investors. So even if you can’t necessarily get in person often, at least invest the time, the effort, the energy to go find the digital place. If you want to join a paid community where other people are paying to be in the same room, it’s another great opportunity, but just find the place where other investors are congregating and get there, whether it be digitally or in person.

Ashley:
And if you want to find a meetup, you can go to biggerpockets.com/meetups. And I mentioned this as you want to be prepared going into these situations and you want to provide value also. You don’t want to be the person just asking everyone for help. So what can you do that will provide value for someone that… And you may be thinking, “I know nothing about real estate. This is my first time listening to this podcast. I know nothing. I have no value to bring.” And Tony knows I love to bring up this story. We were at a networking event for rookies and someone raised their hand and said, “I have no value. I have no experience. I’m just starting out as a rookie investor.” So he said, “Okay, what do you do for your job?” And he said, “I’m a project manager.” So Tony and I said, “Okay, everybody here who would love to have a partner that could manage the rehab project?” Almost every single hand shot up in that room.
And so I think there’s a lot of skills that you may have from past experiences, even from your childhood. Your dad’s a contractor, you walk job sites with him your whole childhood, but

Tony:
There’s – I though you were talking about how fast I could ride my bike as a kid, that might be somehow valuable as a real estate investor.

Ashley:
But take some of those things that, I guess, what can translate into real estate because there are so many skills that people already have that translate into this industry.

Tony:
And even aside from your skills in the workplace, oftentimes even if it’s just like how much time do you have on your hands? If you are someone who has an abundance of time, that in and of itself, even if you currently have zero skills, can you be the person that just walks over to the house that the flipper wants to bid on and you take photos of the exterior and the interior? Do you have an iPhone? Do you have a means of transportation? You got some free time? You can be of value. Can you run to Home Depot to pick up whatever materials they need picked up so that way the crew can keep working and be efficient? Then you can bring value. So even if your only value today is that you have some excess time and bandwidth in your life, that can be extremely valuable to the people who are maybe successful but lack time.

Ashley:
Yeah. And that also made me think of social skills. If somebody wants to partner with me and I will literally never have to talk to anyone, they’ll do every phone call, they’ll talk to every seller, they’ll talk to every vendor, contractor. You have those communication skills and you are extroverted and that is something you’re really good at is communication. That to me would be a huge benefit to being a partner for me. All

Tony:
Right. So just to recap, we had step one was just getting into the right rooms. Step two was just when you get into those rooms, you make those connections, bring as much value as you can. And then step three is just partnering up and learning. We actually just interviewed Vibov and Vibov had a story where he started off in single family rentals, graduated up into multifamily syndications, like larger multifamily properties. And the very first syndication that he did, he partnered with another experienced syndicator and he brought capital into that deal. He was like, “Hey, I’ll give you the cash, but I got to learn along the way.” And like, “Okay, sure, come along.” And from there, he did several more deals and now he quit his job and he’s doing syndications full time. So if you can simply partner with the people who have the skill sets, that is how you really started to build expertise in an area.
And I think it’s one of the best ways to really cut your teeth and give yourself the confidence to do it on your own.

Ashley:
So I actually, when I started in real estate investing, I took on a partner and that was the way that I started. I had a friend who had money and he was also interested in investing in real estate. And so we partnered fifty fifty on the deal. He brought the capital, I found the deal, I was going to manage it. And we also did it set up so that he also got his capital back in the form of basically a mortgage payment. So he got 50% equity, got 50% of the cash flow, but also he was getting his capital plus interest, five and a half percent interest back every single month on this deal. So it was a sweet deal for him, but also he was taking a lot of risks. This is my first time ever doing this. And so I definitely don’t do those types of partnerships anymore, but we still partner on stuff today.
So it ended up working out very well.

Tony:
Yeah. And I think that’s one of the elements of a partnership is one person has maybe the time, the other person has the capital. Okay, cool, let’s come together. Sometimes both of you have a little bit of capital and maybe by yourselves you can’t really do much, but together now you can do something. So I think it’s understanding what’s the value that each person can bring into that partnership. And we talk about partnerships a lot. So if you guys don’t know, Ashton actually wrote the book for BiggerPockets on partnerships. It’s called Real Estate Partnerships. And if you go to biggerpockets.com/partnerships, you guys can find the book. But in there we talk about the different ways you can bring value and the things you can do. And again, sometimes it’s money, sometimes it’s your sweat equity. We have deals where we didn’t bring capital, but we managed the properties.
And some of these we bought six years ago now. And our partners, all of their work was signing some loan docs and wiring in some funds and they carry the mortgage, which is a big responsibility. But when the guests can’t get into the property, when the washing machine breaks, when the cleaner calls out sick, when all those different things happen, our partners are dealing with those. We are, and we have been for the last six years. So it’s our sweat equity that allows us to really bring value to that partnership. So just there’s different ways you can position the partnership as well.

Ashley:
Okay. So what’s really important to you is being focused and you can’t focus until you’ve decided on a strategy. If you are looking at properties saying, “Ooh, this would be a good short-term rental, this would be a good long-term rental. Oh, maybe I should flip this house.” That is too broad. You need to narrow it down and you need to really get focused on what that strategy is going to be. And there’s multiple things to think about as to what strategy is best for you.

Tony:
We say this all the time, but guys, no matter what strategy you can flip. And even within the strategies, there’s different asset classes. We know people who flip traditional single family homes.That’s what most of us think about when we say the word flipping, but we’ve interviewed guests who flip mobile homes. We’ve had people who come in and they only flip condos. We’ve had people who flip small multifamily, large multifamily, self-storage. So you can flip anything. There’s people who focus on wholesaling. Again, you can wholesale a single family home, you can wholesale commercial, you can wholesale different things. You can do short-term, long-term, mid-term. There’s so many different mixes of strategies and asset classes that there’s many, many possibilities. And the truth is that there are people who make a ton of money in all of those strategies, and there are people who lose a ton of money in all of those strategies.
So one strategy versus the other is not necessarily better or worse. It’s which one am I more uniquely qualified to execute well? And would I be as good of a long-term rental landlord as Ashley? Probably not. Would she be as great of a short-term rental operator as me? Probably not. We have different skill sets, different things we focus on. Could we both potentially be successful in self-storage? Maybe. But the point is look at your unique personality, your unique skills, your unique character traits, and really trying to understand which strategy aligns best with who I am and what my resources are and what my goals are.

Ashley:
I’ll share mine. I worked for an investor who bought long-term rentals. I was his property manager. I had a huge advantage and a huge opportunity from having that experience. So that’s why, first of all, I had no idea there was all these other different strategies or things out there that you could do. So that’s why I started with that, because I had that advantage. It was a huge advantage to getting started. For you, short-term rentals, why do you think that was the best opportunity for you? And you didn’t start that way. You did try long-term rentals first, but what actually made you decide, why do you think in your situation that was the best strategy for you to pick and focus on?

Tony:
I mean, two things. It was goals, the goals that we had and it was skillset. So from a goals perspective, again, lost my job, needed big income and I needed it quickly, and traditional long-term rentals just weren’t going to solve that problem. So short-term rentals gave us that avenue. So from a goals perspective, very strong alignment. And then from a skillset perspective, my wife Sarah, who really kind of spearheaded the guest management side of things, she came from that kind of background, giving experiences to people. And she worked the green room at the late, late show and she worked the VIP suites at these celebrity events.That was her thing was giving people experiences. So between the two of us, it felt like a really natural fit. She wasn’t excited about the long-term rentals that we owned in Shreveport, Louisiana, but as soon as we got the first short-term, that’s when she got excited.

Ashley:
That’s so funny you say that because before I asked you that question, I was like, “Okay, I know what my advantage is.” And I was very curious as to what you were going to say your advantage was for short-term rentals because I could only think of Sarah. 100%. What did Tony bring to the table?

Tony:
Not a whole heck of a lot, honestly. I’m riding her coattails all the way and I’m not ashamed to admit. All right. So step number five guys is to find undervalued deals. And obviously easier said than done, Tony and Ashley, like duh, we all want good deals. But the truth really is that you make money when you buy. So we’ll talk a little bit about maybe the different strategies that we’ve used to find good deals and maybe even focus in on the strategies that we really focus on today and moving forward.

Ashley:
And we’ll also tell you about the properties that you could buy from us that are

Tony:
Undervalued. That really good deals. If anyone wants a good deal, I’ve got one for you. But I’ve leveraged, I think, a lot of different ways to find deals. Obviously, the easiest, most abundant way is just going on the MLS. And the MLS gets a bad rap in a lot of different places online because people are like, “Oh, MLS is where deals go to die.” We have, what episode number are we on? 780 something? We’ve had 780 different reasons to show why the MLS is still a great place to start. And a lot of the investors that we interview, they find good deals right on the MLS. Now, does it mean that it’s going to be easy to find those deals? No. Does it mean that what they initially listed it for is going to be the right property? No. Does it mean that the current condition of the property is going to be the end result?
No. But does it mean that you can actually find something? Yes, you can. I think about Ariel Herrera, if you guys go back into the archives, you can find her episode. But a big part of her strategy was she looked for properties. She had this tool that she built to help her do this, but she looked for properties where the square footage for the bedroom count was a certain percentage above the average square footage. And she knew that she found those properties that it would be easier for her to then add additional bedrooms. So she was basically buying a two bedroom that had the square footage of a three bedroom. And then her whole strategy was like, “Hey, let me just go and add a bedroom.” And she could immediately increase the value. The Nawsums who we’ve interviewed, they’re out of the Pacific Northwest, their whole strategy is, “Hey, let’s buy a five bedroom, get rid of the dining room and the living room and turn it into an eight bedroom.” And they did student rentals.
Students don’t need a formal dining room, so they got rid of that excess space to turn it into something that was more usable for them. A lot of those deals came right off the MLS. So depending on your strategy, you can go to the MLS and find a deal that actually works still.

Ashley:
And you can also buy our deals as… In my market, I’ll say this, is there are properties that are selling over asking, getting multiple offers, and they sit within a certain price range. They’re usually single family homes that families are looking to buy within a certain price range that don’t need a ton of work. If they do, maybe it’s just cosmetic stuff. Those are selling so fast. Small multifamily duplexes, they’re not traditionally selling that fast in my market. I just sold the duplex. I sold it in three days, but I listed it low. It was a good deal. I have another duplex that has been on the market for over a year. Went under contract six months, and finally the seller walked away after closing, or on closing day, they walked away from it. Then it was another month that we couldn’t list it again because we had to figure out the escrow, things like that.
But I think in every market, there’s probably a certain property type that is doing the same, that is selling right away, but also those are the ones that are not selling where they’re being listed, they’re sitting, and there’s investors like me that are willing to take a way lower price just to get rid of it.

Tony:
You mentioned some properties going over asking, some going under. We’re shopping for a new primary residence for a new home for ourselves right now, and there were two homes in our neighborhood. They were literally two doors down from each other. One of them, and they’re very similar in size, square footage, super similar. One of them listed at 899. The other one listed at 945. The one that listed at 899 ended up closing at 925, so that they went 25K over, and the one that listed at 945 closed at 915. So it’s like sometimes even if you just… My whole point is that you never know the motivation of the sellers, and just because someone listed at 945 doesn’t mean that’s the number they’re willing to take. And sometimes people do the inverse where they’re going to price low just to get the competition going. But the MLS is still very much a place that you can go to get deals.

Ashley:
And if you have no idea what that range is or what property type that is in your market, easy. Go to biggerpockets.com/agents, connect with an investor-friendly agent in your market who’s actually there to guide you through this information. The reason I know some of this stuff is literally because of my agent, that she’s the one that is selling me this information. And then of course I’m tracking Zillow like a crazy person looking at how many days something is pending. We just did an episode on AI, another thing I could probably have AI do instead of me manually going into Zillow and looking at all of this stuff. But yeah, go to biggerpockets.com/agent and you can find an agent that will actually help you with all of this if you don’t know for your market. And that can also help you build out your buy box.
Is there a property type that isn’t selling, isn’t sitting, because maybe there’s not a lot of people that are investing right now in buying those small multifamily properties. Maybe it is the single family homes. It’s the opposite in your market. Maybe there’s a price range or a rehab level that people aren’t taking on right now that maybe you can find a way to take advantage of that and put in those low ball offers and find those properties that are undervalued.

Tony:
Aside from the MLS, there’s other strategies. I’ve done direct mail. I’ve gotten deals that way where I’m mailing out postcards. I’ve worked with wholesalers and the entire goal of a wholesaler, the entire reason they exist is for them to do all the work, to hustle up and find these really great off-market deals, and then they go to you and they resell those deals to you for a small margin. So working with wholesalers. I feel like I’ve tried a lot of different things, but just pick the strategy that aligns, again, best with your skillset. If you’re someone who’s comfortable talking directly to sellers, like getting on the phone, then yeah, maybe take your shot at going to source your own deals, hand write letters. I’ve shared this on the podcast before, but when we were looking at long-term rentals in Louisiana, I had a very specific zip code that I was looking at, like a buy box.
It was pretty tight. I hand wrote, I don’t know, several hundred letters to this area and I dropped them all in the mail. I ended up getting a few calls back, but there was one lady who… Mary was her name, I never forget Mary, and she and her husband had built a portfolio in that town. They were looking to sell and they had, I don’t know, 20 houses or something like that they were looking to sell. At the time, the deal didn’t make sense to me because she was just asking a little bit too much and there was too much deferred maintenance. But I remember she ended up calling me two years later, two years later after I talked to her the first time and she’s like, “Hey, Tony, I think we can do your number now.” Two years later. Now at the time I’d already moved on to short-term rentals.
We weren’t really interested anymore and I was like, “Hey, thanks.” But you never know, even just one letter. She had 20 properties she was looking to sell, right? So you never know where even just writing a letter to a homeowner can take you.

Ashley:
Now the next step, so step six, would be actually streamlining your processes. So what does it look like for you to actually do a deal? So like Tony was just talking about, how are you going to source deals? Let’s implement that process. What does that look like? Are you going to be scrolling Zillow? Are you going to use AI to actually scroll Zillow for you? Because when you do these first deals, those systems and processes that you do can be repeatable for every deal after and after. And yeah, you’ll have to fine tune them and things like that, but if you can build out those systems and processes now, it is so much easier than when you’re onto deal five and now you have a portfolio to asset manage and maybe even property manage and to have to pause to put these systems and processes in place, it’s so much easier to actually document it and do it now, especially with AI too.

Tony:
Yeah, you hit the nail on the head because we both experienced that where we scaled super fast. We didn’t have the systems and processes in place, and then we both wanted to pull our hair out. And obviously I was the only one that was brave enough to do it and Ash still has her hair, but that’s what happens when you scale too fast, is that you put yourself in a position where things start breaking around you. So if you’ve got one deal, just document every part of that process. If it’s a long-term rental, okay, what do you do when you first get the keys? What does that checklist look like? For us in the short-term rental space, we have a, I think it’s like a 93 point Airbnb launch checklist that we run through for every property. And the reason that we built the checklist was because there was a lot of things we kept forgetting when we were setting up our properties.
We were like, wait, let’s just write down everything we need to do. So anytime we get a new deal, we know exactly the box we need to check. Whenever we have a cleaning at one of our properties, there’s a checklist that our team follows to make sure that we do all the right things. So focus on the high leverage activities in your business and just put a system that’s repeatable around each one of those, and you will thank yourself as your portfolio starts to grow that you did it early rather than later.

Ashley:
And there’s so much software out there that can help you with a lot of these systems. And if you’re a BiggerPockets Pro member, so if you’re doing a long-term rental, RentReady, you get RentReady for free as a BiggerPockets Pro member. You get to use Baseline for your banking and bookkeeping. It’s free that you can implement. Setting this all up now with property one makes it so much easier to implement these softwares for property two, three, four, five, six, because you already have it instead of that pause. Now I have to add five properties into RentReady, which still they make the onboarding easy for you, but it’s definitely way easier to do with property one. Also too, even estimating rehabs with being a Pro member, you get great pricing with Home Depot. Usually if a contractor would have to spend $100,000 per year to get this type of pricing, you can get that.
But what they have is a bid room and a quote room. So you basically build out a quote with all of your materials. I actually used to physically do this with a spreadsheet. Then I would go and add everything into my cart and then I would say, “Okay, this costs this much.” But now you can build that all into Home Depot. So you add your things to cart that you, okay, I need X amount of square footage for flooring. I need a faucet. I need a vanity. You add it all into there and then you now have a quote, a rough idea of what your cost will be for materials. And you also can save it all right in there so you know, okay, every time I’m doing a unit, I know that I’m using this paint color. I know that I’m using this flooring and I know what it’s going to cost me.
But then also too in Home Depot, you can take it a step further and actually submit it to them for bid where you can get even bigger discount, especially if you’re buying at bulk.

Tony:
And then the final step guys, step seven, is just helping other people. I think Ash and I both benefited tremendously from just giving away a lot of free content online. Even before the podcast, we were both giving away things on social media and just being present. The first time we ever property managed for someone, we didn’t do a ton of this, but the first short-term rental where we did third-party property management, it was someone who I met at a meetup and he was like, “Hey, Tony, you seem like a great guy. Do you want to manage this Airbnb?” I’ve had deals brought to me at meetups and places like that and people on my DM to send me things. It’s like if you just give, give, give, give, people reciprocate that and you become the person that’s top of mind for a lot of those opportunities.
So obviously I’m not saying that you need to go start a podcast, but even if you’re just a person who hosts a local meetup, what an easy way to build your network and give value to all of the other real estate investors and real estate interested people in your local city. You become that linchpin that connects everyone else. Great way to provide value.

Ashley:
Tony, you have a calculator, a short-term rental calculator you give out for free that people can download at realestaterobinsons.com.

Tony:
Realestaterobinsons.com/calculator.

Ashley:
Yeah. And then I have a little storefront with free downloads, so buy box, different things like that, acquisition checklist. So you can find that the link in my bio at wealthfromrentals on Instagram, but biggerpockets.com/resources. Us and other investors have made an incredible library of free resources that you can go to and download to that are all available to you to use, checklists, templates, calculators, different things like that to be able to use. So maybe there’s something you’re already doing, trying to find deals or understand your why, and you could post about that, you could share that, and that could help one other investor even. And then too, as you’re going about your journey, think about the people that are using the team that you’re building and referrals, your agent, refer your agent to other people, share your contractor with other people, share your lender with other people.
That is a huge way that I work with people is referrals. This lender was referred to me. The contractor referrals are a huge thing for me is that’s how I’m finding my contractors and working with them is referrals. I have another investor in Buffalo, and most of the time I am texting him and saying, “Hey, what contractors do you use for this?” He’s also a GC and an investor, and I rely on him to get a lot of my referrals, but he adds a lot of value to me from that.

Tony:
So guys, there’s always a question of is now the right time to buy real estate? There are some years where it’s easier, there are some years that it’s harder, but the answer to that question is always yes. Honestly, the best day to buy real estate was yesterday. The second best day is today. So the goal for our episode today was to simply give you a quick framework that you can use to give yourself confidence that you can actually do this, right? And while there are lots of people who are maybe screaming doom and gloom and saying like, “Oh man, interest rates are too high, inventory is too high,” whatever it may be, we don’t take advice from people who haven’t done the things that we want to do, right? So focus on the people who are actually doing it, who are living it, and take your advice from those folks.

Ashley:
Well, thank you guys so much for joining us today on this episode of Real Estate Rookie. If you’re not already, make sure you subscribe to our YouTube channel and you can follow us on Instagram @wealthfirmrentals and @TonyJRobinson. I’m Ashley, he’s Tony, and we’ll see you guys in the next episode.

Dave:
I’ve been looking across different asset classes, both in real estate and across the entire economy, whether that’s residential real estate, commercial real estate, gold, cryptocurrency, equities, and one asset class continues to stand out as the best opportunity for the next five to 10 years. And I’ll just give you a spoiler. I think it’s commercial real estate because if you look at residential real estate, it’s great for a lot of reasons, but the prices are high. If you look at equities, prices are high. If you look at commodities, prices are high. But in commercial real estate, prices have already come down at least 20% and in some sectors like in office, up to 50%. And I personally think that those declines could increase giving a perhaps once in a generation buying opportunity for investors. And today, to test this hypothesis, I’m inviting back investor Brian Burke, who is the smartest person I know when it comes to multifamily real estate.
Brian always gives it to us straight and he’s got one of the best perspectives on how to view the multifamily market and how to take advantage of what’s coming next. This is On the Market. Let’s get to it.
Hey everyone. Welcome to On the Market. I’m Dave Meyer, and today I’m selfishly bringing on Brian Burke because I want to talk about commercial real estate. I look at the market and I think, man, there’s going to be quite a buying opportunity here in the next couple years. There is a lot of distress, which stinks. I don’t root for that, but it just is. It is inevitable. I’ve said this before, but I kind of think that 27, 2028 could be to commercial real estate what 2007 and 2008 was to residential real estate. The drop and the correction could be that big. And a lot of people kick themselves now for not buying into residential in 2010 and 2011. And I think a similar dynamic might exist in commercial real estate a couple years from now. And so to test this theory and to just hear how to take advantage of it, because I do invest in multifamily, but I am not as experienced as some other people, I’ve brought on one of our favorite guests, frequent guest, Brian Burke, who will forget more about multifamily than most people will know in their lifetimes.
He’s always a very fun person. He always gives it to us straight. So let’s welcome on Brian Burke. Brian Burke, welcome back to On the Market. Thanks for being here.

Brian:
Thanks for having me back, Dave.

Dave:
I am excited to have you here because you are an expert in a lot of things, but today I really want to talk to you about what I see as a real disaster brewing and also maybe an opportunity, and that’s in the multifamily space. So let me just ask you straight up, how bad is it out there? How ugly is the multifamily market right now?

Brian:
Dave, are you just now telling me that you see a disaster in multifamily? No,

Dave:
I

Brian:
Will. We’ve been talking about this for months. Remember when I described it as a traffic collision in a four-way intersection two years ago on the show?

Dave:
You’ve been right, but every time you’ve been on for years, I’ve been like, “Why hasn’t it happened yet?” I thought the distress would be sooner. I feel like we’re kind of there. I don’t know. At least the sentiment in the industry, the people I talk to, people are finally coming around to this inevitability that the market sucks and it’s probably going to get worse before it gets better. At least that’s what I hear and I think too.

Brian:
Well, I was on a call earlier and somebody asked me, “What do you think about the multifamily market?” And I said, “It sucks ass.” So I think this is a family show. I probably shouldn’t say that. Yeah, this

Dave:
Is why you’re here. No, it’s great.

Brian:
But I kind of think that’s exactly what’s happening. I mean, it’s a complete disaster, but it’s been a disaster for a long time. And I don’t think that it’s necessarily anything that’s brewing now. I think this has been brewing. It’s been the old proverbial frog boiling in the pot, right? I mean, at first it doesn’t really feel anything. And then all of a sudden the frog’s a boiled frog and there’s a lot of boiled frogs in the making out there and they’ve been boiling for a couple years. It’s only now that the water’s starting to boil over and people are realizing like, “Hey, wait a minute, we got a real problem.”

Dave:
It just has seemed so obvious that this was going to happen, but were people just assuming wrongfully that the Fed was going to cut rates and come in and save everything?

Brian:
Well, maybe, but if they were, they were also not understanding how this economic system works. The Fed isn’t in charge of anything. The Fed is in charge of overnight borrowing, interbank borrowing. The Fed is not in control of the 10-year bond, and that’s what’s setting debt rates in multifamily. Now we’re seeing how it’s kind of triggering this whole second wave. The first thing that happened is the Fed actually did raise interest rates on overnight borrowing, and that triggered increases in the SOFR, the secured overnight financing rate, which is what a lot of floating rate debt is tied to. So that was problem number one, and that kind of set this whole collision in motion, so to speak. Now what we’re seeing is the 10-year bond is going up. Well, nobody’s in charge of that. So nobody made some decision and said, “Hey, let’s increase the 10-year bond.” But what does that do?
That increases the rates for long-term debt. So now anybody that was hoping like, “Oh, I’ve got this awful short-term debt that the interest rate doubled. I’m going to refinance out and go into long-term debt,” is now finding that that very long-term debt they were coveting is more expensive than it was, and now they’ve got a real problem. So they can’t solve the other problem with long-term debt because it’s just too darn expensive. And I think that kind of sets the next shoe to drop, which is something I’ve been saying for a while is cap rate decompression. You can’t sell real estate at four and 5% cap rates in a five and a quarter treasury market. The numbers don’t work.

Dave:
Literally before this call, I was checking my email and I got an email from a broker in Denver where I invest and they were just pushing these used class B properties in this market at a 5.3 cap. I’m like, “You’re calling me a fucking idiot if you think I’m going to buy that. That is a worse return than even a 10-year treasury right now with a lot, lot more risk in one of the worst markets in the country right now. Denver’s absolutely collapsing.” What do they think they’re doing? Are people just naive or is this the greater fool’s theory where they’re just trying to find someone dumb to buy it before the next shoe really drops?

Brian:
Well, I don’t envy the position of a broker right now because really what they’re doing in all fairness is they’re trying to appease their client who is the seller. And this is the classic real estate conundrum, is that in an increasing market, the buyers always want last year’s price and the sellers want next year’s price. And in a decreasing market, it’s the other way around where the sellers want last year’s price and the buyers want next year’s

Dave:
Price. Right, exactly.

Brian:
So the broker is employed by the seller and the seller wants last year’s price. In fact, they want five years ago’s price is what they really want. So the brokers are trying to do their job, I guess, which is representing the seller and getting the best price possible. But the piece that’s getting missed is that nobody wants to buy that trash. I mean, you don’t want to buy into negative leverage. And negative leverage means if your cap rate is lower than your interest rate, that is negative leverage because where you make money in commercial real estate is the space in between what it costs you to borrow money and what the property throws off. And if that’s an upside down relationship, by definition, you’re losing money and no sane person wants to buy it.

Dave:
People were over the last couple of years, but I guess like you said, no sane person wants to buy it. So there’s a lot of insane behavior out there.

Brian:
And why were they doing it? They were buying it because investors were funding it. And why were investors funding it? Because they just really weren’t paying attention. They didn’t know better. They were just throwing money at real estate. They were thinking hard assets, that’s better than stock market. There were reasons for that to happen, but now that people are awakened and they see what’s really going on, the investors are not funding that. And if they’re not funding it, that means no one’s buying it.

Dave:
Well, it’s good that they’re not funding it. This correction needs to happen, at least in my opinion. So I mean, we’ve talked about this at length, but just for people who maybe haven’t heard you on the show before, Brian, can you give us a quick rundown of why this is happening right now? What were the conditions during the pandemic that sort of primed the market to face this kind of correction in this kind of rate environment?

Brian:
Yeah, I mean, I can describe this best the same way I described it on this show probably a year ago, which is that this is a traffic collision in a four-way intersection. All the lights were green. From one direction, you had cap rates, from another direction you had interest rates, from another direction you had rent growth, and from another direction you had occupancy, and all of the lights were green, and then all of a sudden everything collided in the middle of the intersection, and now none of those things are working. There’s no rent growth, interest rates are higher, occupancies declined, concessions increased, all these things happened, and then you had this massive collision of real estate and there’s a big mess to clean up. Really, what does all this mean? It means that buyers were overexuberant. They were irrationally exuberant and were buying real estate at any price without paying attention to the fundamentals.
And the fundamentals at the same time have been eroding. People sometimes dismiss the demographic impacts to real estate, but look at a few demographic pieces here. Who is your primary renter on apartments? It’s the 18 to 30 demographic, right? Well, birth rates have been falling for 18 years. That means there are more 18-year-olds today than there will be at any point in the future for at least the next 18 years. And so therefore the number of potential renters is declining. You also have population growth that is at historic lows. I think it was 2022 was the lowest population growth since World War II. It came up a little bit in 23 and 24, but because of international immigration. But now you look at what’s happened to international immigration in 2025 and 2026, sharp decline. So you don’t have a lot of new people coming in, but at the same time, builders were building apartments like there was no tomorrow.
I mean, take a look at what happened in Austin, Texas. Denver is right in there with Austin, Texas, maybe not quite as bad, but you’ve got this whole demographic and supply and demand dislocation where the left hand and the right hand aren’t coordinating with one another. And that’s kind of what’s created this situation that we find ourselves in. Everybody wants to blame it on, oh, well, the Fed raised interest rates and all that. That’s not the only story. That’s just a piece of it.

Dave:
It absolutely is. Well, I want to back out and sort of talk about what happens from here and then we’ll talk about opportunity, but we got to take a quick break. We’ll be right back. Welcome back to the On the Market Podcast. I’m Dave Meyer. I am here with Brian Burke talking about the four-way traffic collision as Brian described it, that’s going on in the multifamily space. It seems to me, Brian, it sounds like you agree that the rubber is starting to hit the road, but does that mean this is going to be a crash quickly? Do things fall apart in the next few months or is this kind of going to be dragged out over the next couple of years?

Brian:
Oh, this is going to take a couple years. There’s no question about it. I think I’ve said before on here that the only people that make money at a traffic collision are the ambulance companies and the tow truck drivers. These are the people that are kind of cleaning up the mess and trying to make things right, right?

Dave:
Yeah.

Brian:
That’s the same thing that’s going to happen here. I mean, you’re going to have people that are going to come in and buy some of this discounted real estate and they’re going to make a lot of money off it. There’s absolutely an opportunity to be had, but you don’t want to be in the opportunity too early because you can have a steep trough and you could say, “All right, we’re at the bottom. It’s time to buy because I want to buy at the bottom and I’ve got to get in at the very bottom when prices are the lowest.” But you don’t know how long this bottom is going to be. Nobody knows how long… This could drag on like this for years. I remember in 1992, property values fell about 10% and did not move until 1997. So for five years, property values were completely flat, and then it took a couple years just to get back to 1992 prices.
We could see something like that where these prices are down for five or six years. It’s already been like four, so it won’t take much longer for us to beat that. Another piece that I think people don’t appreciate fully is that this is the third time in the last 50 years that there’s been a double digit decline in commercial real estate prices. It’s the third time. The other time was in the 1980s after a tax law change, and then the time after that was in the 2008, 2009 great financial collapse. Subsequent to both of those previous double digit declines, we saw a multi-year bull run that lasted longer than a decade. So I think the important thing for people to realize is that you don’t have to get in at the very, very bottom. You can wait for the evidence to show that the bottom is clearly behind us and still take advantage of a decade long bull run.
There’s no rush to get in.

Dave:
Yeah. The point is get in somewhere near the bottom, somewhere in the trough, which could be, I think you’ve said on the past, it could be a window open for several years, right?

Brian:
I think so. And I think there’s just no rush. I mean, I’d rather be a week late than a day early because when you’re a day early, you don’t know. You’re taking on so much additional risk for how long that bottom’s going to scrape along. But if you get in after the bottom has clearly been formed and you’re starting to see an uptrend, you get in then, it’s a lot less risk and you can still capture a lot of upside. Okay, maybe you missed a couple percent, big deal.

Dave:
Yeah, but you’re taking so much risk off the table.

Brian:
Yeah.

Dave:
That makes a lot of sense. All right, so how do we do it? How do you take advantage of an opportunity like this?

Brian:
Well, I think first you keep your eyes open and you wait for the right time. I am a believer in employing some degree of market timing. I know a lot of people think that that’s kind of not very smart, but it’s worked out well for me.

Dave:
Well, I tell people not to do it, but I also do it myself. I just do the hypocritical approach.

Brian:
Well, there you go. I mean, that’s one way to do it, but you’re a podcast host, you’re supposed to do stuff like that. The thing that really matters is what are you actually doing because that proves who you really are and you’re really an investor. I mean, you’re really thinking about this long-term because that’s what you want to do. You want to be watching the market really closely. And I’ll tell you, it’s always darkest before the dawn. So when it really sounds like everybody is just completely pessimistic, probably tells you you’re getting close to the bottom. But the things I’m looking for is I’m looking for declining rates of concessions on new move-ins.

Dave:
Oh, like rental concessions. Rental concessions. Yeah. Okay.

Brian:
Rental concessions. I mean, that’s how things are priced. I mean, income property is really priced off the income it generates, so that’s what you need to be looking at. Forget about the price of the building. Look at the income the building generates. When rental concessions are declining, that’s a sign that there’s some strength. If lease trade-outs are positive, meaning that the new tenant that moved in is paying more rent than the last tenant that moved out, that’s a positive factor. Right now, it’s not. The new lease trade-out is negative in a lot of cases. Look for vacancy rates to be declining. Look for rent growth in the market. These are the things that you want to see, and when you see those positive indicators, then you know that maybe you’re a little bit past the bottom and making an investment will make a lot of sense.
Now, if you’re a long-term, long, long-term investor and you’re thinking like, “I’m going to buy stuff now that I’m going to hold the rest of my life, and that’s my retirement plan. It’s 30, 40 years out,” the timing doesn’t matter. You can buy it any time. But if you’re buying large multifamily buildings with investor capital and you’re raising money and all that kind of stuff, that is a whole different game and you need to really time it right.

Dave:
But shouldn’t you still try and time it even if it’s your retirement? I’ll just be honest, I’ve told you this in the past. I am thinking about and actively making steps to try and consolidate my own portfolio, selling off some residential, not because it’s performing badly, because I see opportunity in multifamily and I want to buy exactly what you just said. I own older buildings, I want to get rid of them. I want to buy purpose-built multifamily, 20 units, something like that, a couple of those, and hold onto them for the rest of my life. But I still want to buy it for the best possible. I know I could buy it today, but I’m still trying to at least identify the bottom because I think it will just help my cash flow, and obviously getting it at a lower basis helps performance for the rest of your life.

Brian:
Yeah, I think that’s absolutely true, but no one piece of advice works for every investor. And if you’re a new investor who maybe can buy one property a year, that’s a different position than somebody that might say, “I’m going to buy four properties a year, so instead of buying four this year and four next year, I’m going to buy eight next year because I think I’m going to get a better deal.” That’s a different position than somebody that’s like, “Hey, I can scrape together enough money to buy one property this year. I’ll scrape together enough to buy one property next year.” That investor, it may work better for them to sort of dollar cost average and buy things over time. I

Dave:
Think that’s true. Yeah.

Brian:
I think you can’t go wrong waiting. I mean, there’s certainly, in my opinion right now, there’s going to be just as good of deals next year as this year and probably the year after as well. I feel like there’s no rush, but if you see the right thing come along and you can buy something at a really good basis because it’s a distressed property with a distressed owner, et cetera, et cetera, and now’s when you found that deal and it’s the one deal that you can buy, I would say you’re probably better off jumping on that opportunity as opposed to just saying, “Yeah, I heard Brian on a podcast. I think I’m going to wait another two years.”

Dave:
Right. That’s kind of the advice I’ve been giving in both commercial and residential right now is that you just got to make offers and look for the distress. And right now, at least in residential, the distress isn’t acute. There is some distress, but there’s very little forced selling going on in the residential space. But in multifamily, that’s only going to increase, in my opinion. It sounds like you agree. So yeah, if you can find the distress now, but there’s going to be no shortage of it per se.

Brian:
There will be no shortage of it in a lot of markets. Now, everybody’s market is different too, and we got to be aware of that, that some people might be in markets that may not see a lot of distress, and therefore the advice to them changes. I’m not buying any multifamily. I’m completely pencils down on multifamily. We’ve been buying a lot of senior housing, but all the stuff that we’ve been buying has been that kind of a situation where you’ve got this retiring owner, been in financial distress since COVID, and things aren’t going very well, and they’re trying to figure out how to get out and we can buy something at a really, really attractive basis. Buy. If you can find those kind of situations, that’s fine. But if you’re just playing the market and saying, “Hey, I’m going to pay full market value because I think the market’s going to go up,” you’re pushing a string uphill at least for the next couple years.

Dave:
So what would a good multifamily deal look like to you this year in 2027? What are the numbers and the rates of return that you’re looking for?

Brian:
Well, primarily, I’d have to see positive leverage and really a couple hundred basis points of positive leverage, which means that if it’s costing me 7% to borrow money, that would be a 9% cap rate. And I don’t even see Class F properties asking 9% cap rates. I

Dave:
Know, it’s crazy.

Brian:
Yeah, it’s just not there. So we’re buying senior housing at nine, 10, 11, and 12% cap rates. Wow. To me, that makes a lot of sense because you’ve got that spread. I have not been able to find that spread in multifamily yet, and I don’t expect that I will until one of two things happen. Either the distress gets really acute and the sellers just have to get out, or the banks are the sellers and they’re just getting out, or the cost of capital has to go down, meaning interest rates need to decline. I’ll tell you one thing for sure, I’m not betting on that one.

Dave:
Is that just your read of the geopolitical environment or is it just a policy of yours not to bet on interest rates going down because it’s out of your control?

Brian:
Well, I think it’s both that we don’t control interest rates, so therefore make an investment plan that’s kind of agnostic to that. I mean, I’m more of one where if I’m buying something and I’m thinking about interest rates, I’m thinking about the rate being higher than where it is currently because then I get pleasantly surprised if it isn’t versus betting or hoping that the rates are going to fall because it’s just unlikely and if it does happen, then it’s just lucky.

Dave:
Yep. I always say on the show, I love to underwrite to profit when I’m wrong. That’s my favorite thing to do, because if you’re really pessimistic about rates or any other thing happening, then if you’re wrong, you’re like, “Oh, awesome. Things went better than I was expecting.” I made

Brian:
More money than I thought it was going to make. What’s wrong with that?

Dave:
Yeah. Any investment that needs everything to go right to succeed is a bad investment.

Brian:
Yeah, that’s right. I agree. And right now, I don’t see anything that is pointing towards rates going lower. People say, “Oh, the Fed this, the Fed that.” Again – It doesn’t matter. No the Fed. It

Dave:
Doesn’t matter.

Brian:
The high 10-year rate is really being triggered a lot by inflation. That’s one. And people can say, “Well, inflation’s going to come down, so that’ll help.” Or there’s going to be a recession, then inflation will come down, and then interest rates will come down. Maybe. But there’s another piece to this, and that is just supply and demand of capital. One of the reasons why the 10-year is going up is because investors don’t want to put money into 10-year bonds. Why? Well, in part because government spending is out of control, but also another part is they have options. Now you’ve got really high quality companies that are borrowing billions upon billions of dollars for AI infrastructure build out on bonds, and people are saying like, “Hey, I can invest in a Microsoft bond and get very creditworthy borrower and a little bit better interest rate than treasuries, so I’m going to do that instead of investing in 10 years.” So then the 10 year keeps going up.
So part of it is just supply and demand of money.

Dave:
Completely agree. I think the AI debt thing is something that people are completely overlooking. I am very worried about a situation where yields stay high, even if we go into a recession. I think there’s a lot of risk right now. People are saying that rates are going to go down because AI, I don’t know if you’ve heard this logic, but people said AI, one way or another, either it blows up and then we go into a recession, mortgage rates go down, or it goes so well that it’s deflationary that mortgage rates go down. I can’t get behind that. It’s such a speculative thing. And what about the scenario where the stock market plummets, but inflation stays high because inflation right now is not demand pull inflation, it’s supply push. It’s because of supply shocks, which does not get solved by a recession, and it’s not all of a sudden going to cause people to flug into bonds in the same way that they usually do.
So I just think there’s a lot of wishful thinking when people talk about mortgage rates. It’s been going on for four years. Every six months, it’s a new reason why rates are about to come down and why you should go date the rate, marry the house and do something dumb. But I think hopefully now people are realizing and getting used to this idea that rates are just going to be higher for longer.

Brian:
I think so too. And this is a situation where even interest rates can’t fix those supply shock inflation. So there’s really no fix to it other than letting it play out and letting it play out is kind of the very thing that’s causing all this strife in real estate. So you just got to wait it out, and that’s why I say there’s just no rush to get in because this is going to take a while to work its way through the system. I think we’re in for a little bit of a long haul.

Dave:
Well, I want to talk to you a little bit more about a playbook for people who do want to start monitoring this market and maybe getting into it over the next two or three years. We got to take a quick break though, but then we’ll hear from Brian how you can capitalize on some of the distress that’s going to happen in commercial real estate. Stick with us. We’ll be right back. Welcome back to On the Market. I’m here with Brian Burke talking about the multifamily market. We’ve talked about how things are going to be pretty ugly for the foreseeable future, but there is a window, a window that’s just starting to open and potentially will stay open for a while in the multifamily space. Brian, you told us about a couple of things that you’d be looking for in terms of deals. How does an investor get in front of the best deals right now?
Because I think a lot of us, I mostly invest in multifamily as an LP, I’m not super familiar with outside of CoStar and outside of the MLS. How do you find this distress? Because to me, what I hear is it’s going to the lenders and they’re bringing it to their preferred buyers, but is there a way we can all see this distress and these good deals first?

Brian:
Yeah, but it’s not going to just come to your inbox or knock on your front door. I mean, you have to go out there and go find it, and it’s not necessarily easy. When we had the foreclosures that happened back in 2009, 10, 11, 12, I was buying foreclosed multifamily properties back then. I mean, hundred unit type stuff from banks and none of it was on the market. Part of the way that I was doing that was going through my property management companies. And so if you align yourself with really good property management companies, those property management companies are probably going to get hired by asset managers and lenders who have properties on their books that they don’t have an asset management team, so they need an on-the-ground property management company in that area. They’re going to know about that stuff long before even brokers will know about it.
So I would always start there with property management companies that are being used by lenders and, “Hey, who’s calling you about the next property they’re about to take over that went into receivership or whatever that you guys are going to need to manage and are they going to want to sell it?” So that’s one way. Another way is just getting in front of owners, and that means landlord associations or going to conferences, talking to people and that sort of stuff. But it also, I’ll say the B word, it also means brokers.

Dave:
That’s good. Yeah. They have access to deal flow.

Brian:
They have access to deal flow. They are calling constantly talking to owners. I still own about a thousand units of multifamily. I tried to sell it all before the crash and sold three quarters of it. I stuck with the other quarter of it, but I get calls all the time from brokers asking about our properties and, “Well, what are you going to do?” And I’m like, “I’m good. I got five more years on my loans. I’m not worried about it at all. I’m sitting and waiting.” They know that. They know I’m not a seller, but when I am a seller, they’re also going to know that too. And so brokers know, even not just getting listings and stuff like that, they know the situations of the various owners in their markets and what they’re thinking and what their constraints are and what their problems are and when they’re really going to need to solve those problems.
So I would start there, property managers and brokers. It doesn’t sound all that creative, but it’s a recipe that’s worked for a long time.

Dave:
No, absolutely. I mean, it’s not crazy. It’s just a relationship business. I think commercial is probably more of a relationship business than residential just because there’s fewer transactions and they’re bigger transactions, and so there’s fewer players, and so you need to get to know those players in the markets that you need to operate.

Brian:
Without a doubt.

Dave:
In addition to just getting in front of these deals, Brian, you also need to be a good buyer and be in a position to solve a problem because I think that’s what we’re going to see. A lot of these distressed properties are either going to be owned by the banks and the lenders or threatened to be owned by the banks and the lenders. And so how does a buyer position themself to be able to be a good Good solution to the distress because that’s how you land these deals.

Brian:
Yeah. I mean, you’ve got to have access to capital. I mean, that’s really what it comes down to because anytime a lender makes the decision that it’s time to offload a property, that’s a decision that they want executed with certainty. It’s like, we got to get this thing off our books by the end of the quarter because if this is in the next quarterly report, my job is on the line. So they need a buyer that’s going to perform, and that means that they want to know that that buyer has access to capital in some way. So if you want to be that buyer, you’ve got to figure out how to get your capital lined up ahead of time so that when those opportunities do present themselves, you can demonstrate to those sellers that you have the capacity and the ability to perform.

Dave:
And do you need to have capital lined up at the time of an offer?

Brian:
Yeah, I would. I mean, it doesn’t mean that you have to have a proof of funds and the money in the bank. It just means that you have to have a very viable path for having those funds ready for closing. And so you’ve always got to be looking and talking to your investors, looking at your investor base, figuring out what you’ve got, get people lined up, get people at least soft committed to way more than you’ll ever need. If you talk to your potential investors and you think that you reasonably have $20 million that you could raise at the snap of the finger, then you could probably execute a deal that needs $5 million worth of equity. And you could probably demonstrate to the seller there’s a real high certainty that you’re going to be able to close because you’ve got quadruple that amount and potential soft commitments.
Puts you in a much better spot than, “Oh, well, I got 10 million in commitments now. I know I need 20, but I think I can get the other 10.” And it’s like, “Yeah, okay, next buyer. We got this guy over here that’s got a blank check.”

Dave:
Yeah. Okay. One last question here. So if you find these deals, you network, you line up your financing to be a good buyer, what are the types of debt that you recommend people use? Because so much of what’s happening right now is because people used inadvisable debt products.

Brian:
Well, they use inadvisable debt products for the wrong reason at the wrong time. That’s what got them into trouble. If you’re at the very top of a market and you’re using high leverage bridge debt because you don’t have enough investors to raise enough money to use low leverage fixed rate financing, that’s all the wrong debt for all the wrong reasons. If you’re buying a highly distressed property at the bottom of a market for 50% of what it sold for a couple years ago, and you’re using bridge debt because the property won’t qualify for agency financing because the occupancy’s too low and all the other stuff, then that’s probably a different story. And that’s using that debt as a tool.

Dave:
That’s fine.

Brian:
So I would love to sit here and say like, “Oh, you should only be looking at 10-year fixed rate financing.” I think that you should be looking at long-term fixed rate financing as a takeout and a long-term solution, but you may need to be open to the possibility of considering other debt options in the interim while you get that property fixed up, stabilized, out of a foreclosure distress situation into a performing asset.

Dave:
And do you just use traditional banks for most people or how do people find the best debt products?

Brian:
The best debt products I’ve found come through debt brokers that specialize in the type of assets that you’re financing. So if you’re looking at 50 units and up multifamily, you want a debt broker that specializes in 50 units and up multifamily. If you’re looking at 20 unit multifamily, you want a debt broker that’s in that smaller balance commercial space because they’re going to know who all the lenders are. Every deal is different. It depends upon the performance of the asset, the purchase price, the loan to value ratio, the market that it’s in. That’s all going to dictate who the most ideal lender is going to be. And it may not even be obvious at first. It may take quotes from multiple lenders before an obvious winner really shows up. And that’s where the debt brokers really earn their keep is that they can present like, okay, here’s the five most logical choices for this asset in this market and this condition.
Get the quotes from those five and you go like, well, one is clearly better than the other four and there you go. There’s a lot of different choices that are out there and each circumstance is going to dictate which one is going to be the best fit.

Dave:
All right. Well, any last advice other than debt and being a good buyer and deal flow for people who want to get in and take advantage of this opportunity in the next few years, any last advice on things they should be working on now to prepare themselves?

Brian:
Yeah, they should be working on building their investor base. They should be working on building up a business plan. They should be working on relationships with people that are going to provide them with that potential deal flow. They should be building a buy box of exactly what it is that they are looking for and what their plan will be once they have it. Anybody that goes into this without a plan, without a really targeted approach is just going to find themselves in this paralysis of analysis or deals that they can’t jump on because they were ill prepared for it. This is a time for preparation. It’s a time to build your systems and your business so that when the opportunity is there, you’re ready for it and you know that it’s time to make the jump.

Dave:
Great advice, Brian. As always, thank you so much for being here. We always appreciate your candid take. And don’t worry, it’s not actually a family show. We’re all adults here. You can say that it sucks ass.

Brian:
Yeah. Well, it really does. So yeah, if you don’t want to do the same, then just watch what you’re doing.

Dave:
But for buyers, it could be good soon, right? It could be in the near future. And I’m going to keep asking you every six months to come on here and tell us, is now the time.

Brian:
I will be here to tell you because I will say this, and I’ve said this before, chaos breeds opportunity.

Dave:
Oh, for sure. And the

Brian:
More chaos you have, the more opportunity there will be. And every six months that passes between my visits to this show is nothing but chaos in between those visits, which is just breeding even more opportunity. So when the opportunity shows up, it’s damn well going to be good.

Dave:
Brian, thank you as always for coming, giving it to us straight and just being so much fun as a guest. If anyone wants to check out what you’re up to, where should they do that?

Brian:
Check out our website for Praxis Capital. It’s praxcap.com, P-R-A-X-C-A-P.com.

Dave:
Awesome. Well, thanks again, Brian, and thank you all so much for watching this episode of On the Market. We’ll see you all next time.

Henry:
Financial freedom with just three rental properties? It almost sounds too easy, but it’s reality for today’s guest who went from making roughly $11 an hour to having more than enough cashflow to live on. With a little hard work and discipline, Lucas Teague saved $10,000 to buy his very first rental property. He made several offers and heard several nos, but he only needed that one yes. And that first yes changed everything. Lucas repeated this process, buy a cheap property, live in it, fix it up, and make tens of thousands of dollars. But instead of racing to build some massive portfolio, Lucas settled on just three rentals and started paying them off. Now, he’s almost completely debt-free, living in his dream home, and he earns enough rental income to cover his family’s expenses and then some. Lucas has all that he needs. Now he’s focused on a new objective, giving back.
In this episode, he’s sharing his unconventional but proven path to financial freedom so you can do the same. What’s going on everybody? I am Henry Washington, co-host of the BiggerPockets Podcast. And today we have an investor story with Lucas Teague from Indiana, so let’s bring him on. Lucas Teague, welcome to the BiggerPockets Podcast, my friend.

Lucas:
Yeah, thanks Anneria. I’ve been watching this show for probably 10 years now and it’s an honor to be here.

Henry:
Why don’t you give us a little bit of background. What got you into real estate in the first place and when did you get started?

Lucas:
I’m in my early 30s now. I’ve been investing in real estate for about 14 years. And really, I think it boils down to financial freedom. As a kid, I had a parent who lost their job after working for a place for about 30 years and just all of a sudden they came home one day and didn’t have a job. I was probably 15 or 16 and after that I made the decision I’ve got to prevent that if at all possible.

Henry:
How did that turn into real estate being the source for that extra income?

Lucas:
Yeah, so I’ve always had the mathematical lens. And so I looked at, “Hey, can I buy a business?” And this is at 18 years old, so it’s zero capital at the time. Well, with no money, it’s a little bit difficult to buy a business. So then I turned to, okay, what if I invest in some stocks? Well, once I get to $2 million in stocks, maybe I can make 60 to $80,000 a year, but it’s going to take me about a hundred years to get to two million at the money I was making at 18. So I moved on to the next thing, which was real estate. And in my area at the time, there were houses selling for 20 or $30,000 and you could rent those out for three or $400 a month. And I’m crunching the numbers and man, I could do something within a decade probably or five to 10 years and get the tax benefits and all of the other benefits that come with real estate investing.
And it seemed like a no-brainer.

Henry:
So what year was this when you’ve had this epiphany?

Lucas:
Yeah, this was probably 2012. So I graduated high school in May of 2012, and I worked in the pharmaceutical industry at the time, and I still do today. I work for Eli Lilly, the largest pharmaceutical company in the world. So I do that. And then I’m also a real estate agent, but at the time I made about 11.95 an hour. And so my first year was essentially just saving up $10,000 for that either down payment or that first house that I purchased later in 2013.

Henry:
Okay. Well, that’s some good bit of background. You bought that first property in 2013. What’d that deal look like?

Lucas:
Yeah, so this was a HUD foreclosure and it was listed on hud.gov on an auction website for about $50,000. And my poor realtor friend, we spent probably a month, we’d submit our offer on the auction website, we’d wait a week, it would get declined. And so it was listed at 50,000. We started at 6,000, then 7,000, then 8,000. And after about a month of doing that, the bank or whoever owned the house on the auction website, they finally accepted the offer of $8,000. So at the time I had about $10,000 in cash and I went for it. So I figured, hey, for $8,000, what could go wrong?

Henry:
That’s an uncomfortable offer. They’re asking 50, you’re offering a couple grand to start out. What helped you just start making uncomfortable offers? Because that’s a big hill to climb for a lot of investors.

Lucas:
I try to look at it with a non-emotional lens. In this instance, it was a bank that owned the property. I’m probably not going to hurt anybody’s feelings if I submit a low offer. Even if it’s a person who owns the property, really, you shouldn’t hurt their feelings if you’re offering something low. We deal with this, especially now being a real estate agent, an offer is better than no offer at all. They can say no and then move along and that’s better than not hearing anything.

Henry:
If you’re listening to this and you’re like, “I don’t know what to do to get my next deal,” go open the MLS and find a bunch of houses that are for sale that are in your buy box. Who cares what they’re listed for? And make an offer that makes sense to you. Worst case scenario is they say no. Best case scenario is they say, “I don’t want that offer, but let’s talk about it.” That’s why an offer is better than no offer, no matter what it is, because you’re basically saying, “Hey, I’m willing to have a conversation about this.” So you did that first deal in 2013, you bought a house for $8,000. That sounds to me like you didn’t buy much house, so tell us about it. What’d you do with it? Do you still have it? How did it work out?

Lucas:
No, so I sold that after about a year of owning it. I put about $2,600 into that house, did all of the work myself, watching YouTube videos and the bones of the house were good. It was really cosmetic. It needed paint, it needed some flooring, some kitchen stuff. And so I worked on that for about a year and sold that in early 2014 for about 60,000. So I had about a $50,000 profit on that place.

Henry:
What goes through your mind after that? Because I think a lot of investors get to this point where it’s like, “All right, I did a deal, but what do I do now?”

Lucas:
Well, I think I said earlier at the time I made 11.95 an hour, which I thought was a ton of money and I was hourly. And within a year I had just made 50,000. And if I worked on that full-time for a year, that’s $25 an hour, which was double what I was making for my W-2 job at the time. And my mind was completely blown that you could do this and make… It was essentially part-time, a few hours a week. I worked on that property for a year and I could make double what I made at my W-2 job. So thankfully I had a good experience on the first property and yeah, I think that I got the bug after that and I kept looking and quickly transacted again shortly after that.

Henry:
So what did the next one look like? How’d you find that one?

Lucas:
The next one was probably 30 minutes northwest of where I live, and it was a triplex that was for sale for about $45,000. I had enough work experience at the time to actually apply for financing and get financing on this place. Unfortunately, this is where I learned a lot of lessons. The house was about 150 years old. It had two vacant units in it. It had one unit where somebody was living there, but they weren’t paying any rent in there. So I had to go through an eviction and get those folks out of that apartment. Essentially, I just moved into each one of the apartments. I’d lived there for three to four months. I would renovate everything. I’d move into the next unit that’s available, get that previous unit rented out and did that for about a year as well and sold that in 2015.

Henry:
Okay. So you paid about $45,000. How much money do you think you spent fixing up the entire property?

Lucas:
I would say between five and 6,000. Structurally, the house was in good shape. It was more of a cosmetic rehab, flooring, paint, that kind of stuff. So probably 5,500, I would say.

Henry:
Okay. And what were you renting the units out for?

Lucas:
Previously, they were rented for probably 400 before I had to do the eviction. Once I remodeled everything, I moved those up to about 700. So once it was completely turned over, the property brought in about 2,100 a month.

Henry:
2,100 a month on a note of where you’re only paying 45,000. That’s a crap ton of cash flow. That’s amazing. But then you said you sold it, so why sell instead of keep the cash flow? I

Lucas:
Was still 19 or 20 at the time, and it was not in the best location. So the area had some extracurricular activities kind of going on in the area and not the type of tenants that I wanted to have long term. And so it was quite a bit of headache and stuff, but I was doing the math. So I listed the property for 100,000. I got a full price offer on it. And so at the time, having the capital at 19 or 20 years old meant a lot more to me than making the $2,100 a month.

Henry:
I know people are listening to this and going, “This was so long ago. The numbers don’t work like that anymore.” Now you can’t pay the same price points you were paying then, but there are deals that you can still get at a discount and you can still rent and get current cash flow. And what I want people to focus on is not necessarily what the dollars were for the purchase price, but look at the spreads and understand the concepts of what Lucas was doing. This stuff still works. You can absolutely still go buy a single family home, live in it while you renovate it, and then sell it for a profit when you’re done and not have to pay capital gains taxes because you lived in the property, especially if you lived there for two years. If you lived there less than two years, you’re going to pay some capital gains, right?
You can absolutely go and find yourself a triplex and live in a unit, renovate it while you’re living in it, move to the next one, renovate it while you’re living in it, rent it out and then sell it when you’re done or keep it as a rental when you’re done. Those strategies worked then. They still work now. The dollar signs are bigger now, yes. But also the purchase prices are bigger, but so are the rents and so are the sale prices, right? So these strategies still work and the way you use to find these deals still works. There are bank-owned properties again, guys. That died off for a while, but a lot of them are back. People are getting foreclosed on and banks are sitting on some properties. You can absolutely go bid on foreclosures. There are opportunities on the market if you’re willing to make offers that make sense to you.
You’ll have to make a lot of them, but conceptually what Lucas did is very much still possible in today’s environment. Is it going to be a little more challenging? Yes. Will it be more expensive? Yes. But it can also be more profitable if you do it properly. So thank you so much for sharing some of those lessons and being transparent with it. I want to learn more about what you continued to do after that second deal, because now you’ve done a live-in flip as a single, you’ve done a live-in flip technically as a triplex. You’ve gotten a taste of that. I’m curious, did you continue down the same path or did you transition to something different? But we’ll get into that right after the break.

Speaker 3:
Before we go to break, if you’re someone who’s bought a couple of deals and you’re looking to scale up your portfolio into something bigger, I have a really exciting announcement for you. BiggerPockets is hosting its first ever conference focused just on scaling up. It’s this December. It’s coming up soon, this December, 5th through 7th in Phoenix, Arizona. We’re going to have a full day of programming with speakers like myself, James Daynard, Kathy Fecke, and Devon Kinard talking about how to scale up and build a sustainable business. Tickets are on sale now, but there are only 100 tickets, so go to biggerpockets.com/conferences now and get your ticket today.

Henry:
Welcome back to the BiggerPockets Podcast. I am here with investor Lucas Teague, and he has been sharing his real estate investment journey. He started back in 2013, bought a single family, lived in it, renovated it, sold it, moved on to a triplex, and the concepts for the way he did this are absolutely still possible today. So I’m curious, Lucas, what did you transition to after that? Did you stay the course on what you were doing, live in flips, or is there some other strategy you tried?

Lucas:
Now to some extent, yes. I took a two-pronged approach at this point. So I needed a place to live, obviously. I had sold the place that I was living. So I bought a primary residence for myself and same pattern as the first two. The house had good bones. It was a cosmetic flip where I didn’t want my family to come over for Christmas, but it was very livable. And so I did that on nights and weekends as I was working my W-2 job. And at the same time, I started looking for… I wanted to be in the long-term rental business, which is what I’m in today. So in my area, I’m shooting for a 15% cash on cash return. So I’m starting to look for these properties, and maybe that’s once a year, maybe that’s one property every three years. And so probably around 2017, 2018, I began to buy these 15% cash-on-cash return long-term rentals and simultaneously working on the house that I was living in, shooting for that two-year turnaround time, that way I could avoid capital gains taxes and do both simultaneously.

Henry:
What I like about your strategy is what makes it possible is you said you had a goal of 15% cash on cash return. That was the goal. So that was the thing that was important. Not volume of deals, but deals that meet your very specific criteria. And whether that meant one deal a year or one deal every three years, that wasn’t what was important. What was important was that the deal met your criteria. That discipline is exactly what makes investors successful in a down market like we’re in now. And what makes that kind of strategy possible is because you had a day job, right? You had active income from going to work every day. And so I know a lot of people are listening to this podcast because they want to retire from their day job. There’s absolutely a path to do that. It takes longer now than it used to, but yes, you can do that.
But there’s also still a path that builds wealth. If you have a job you like or a job that you enjoy, you don’t have to focus on quitting your job, but the benefit of not having to quit your job allows you to have the discipline to have a strategy like this, to be able to say, “Hey, I want 15% cash on cash return. Maybe that sounds wild, but the deals are out there and if I got to buy one deal every three years to get it, then that’s what I’ll do because I have a job that’s bringing in the income.” So you were looking for this 15% cash on cash return type deals. How long did it take you to find one?

Lucas:
Really not long. Again, I’m a mathematical focused person, and so I found ways to export the entire MLS into an Excel spreadsheet, use Excel to calculate cash on cash return for thousands of properties simultaneously. That’s still something today that I do as a real estate agent, just make analyzing properties so much faster. And so maybe took me a year and the first one was a house listed at 150. I offered 110 thinking we would negotiate and hey, they accepted 110. We still have that property today and it’s way under rented. It’s 1350 a month, but still off 110,000, it’s well above the 1% rule.

Henry:
That’s super cool too. So you basically made a spreadsheet that told you what price to offer for all these properties in order for it to hit your number. Did you just go down the list, pick your favorites and start making offers?

Lucas:
Yeah. I would just sort the column by, “Hey, what’s the highest cash on cash return that’s on the market currently?” And of course some are going to come up 20, 25% cash on cash return. You look at the pictures and it needs a complete gut. But it gives you a list to look at where you’re not looking at thousands of properties, you’re looking at five or 10 and spending your time focusing on the ones that are most likely to work for

Henry:
You.This strategy’s so much easier now with AI. Literally anyone can do this now. You can scrape the MLS or have your agent send you a bunch of listings and then you can just have AI put it into a spreadsheet, use some basic rental knowledge on what you think the rents would be and calculate cash on cash return for all the deals that are on the market and have it literally tell you this is the price you would need to pay for this to work and you could just start submitting offers. You can do this today.

Lucas:
Yeah. So speaking of AI, I’ve built a tool as well that will analyze the micro environment of your specific town and neighborhood. I live in a city with 5,000 people and you can even specifically target neighborhoods and everything like that now with AI.

Henry:
Okay. Tell me what that means though for normal people talk. What does the tool do?

Lucas:
That means now you can analyze news articles, anything that would affect the market value in your specific town, and then maybe there’s specific news where something, a new business is going to go in close to a specific neighborhood. And so you know over the next five years it’s going to increase 15% or 20% in that neighborhood. Now you can find those 15% cash on cash returns in that neighborhood and get the appreciation simultaneously.

Henry:
That’s really cool. Let’s put a pin in it because I want to get back to the story, but that’s super cool. And of course you did something like that because why wouldn’t you? All right, so you did that first 15% cash on cash return deal. What year was that?

Lucas:
That was 2019.

Henry:
That wasn’t that long ago. And so did you just ramp up continuing to do that or how did you go from there to where you’re at today?

Lucas:
So I attempted to. This was in rates were under 3%. So I found another one in 2020. I bought that property for 120,000. It rents out for 1,525 per month per day. I continued to look through 2021 until about 2026 earlier this year and just honestly could not find anything that was worth my time to look at. I asked myself, what else can I do if I’m building up this cash pile to buy these 15% cash on cash returns, but there’s none out there, what can I do to hit financial freedom faster so I can pay down debt and deleverage myself? And so for the past four years, I would have a cash pile enough to purchase a house, but if that started to grow and grow, I would use the additional to pay down leverage.

Henry:
I love this conversation. If you are a real estate investor, buying a new property isn’t the only way to help yourself achieve financial freedom. You have a couple of options and I love that you explored this option. You can look inwardly at your portfolio and say, “Yes, I have this property. It cash flows great leveraged if I pay it off. So if I take this $50,000 and I pay off my loan on this asset, what kind of cash on cash return do I get now? What kind of return do I get? And is it better than going and buying a new one?” Because if you’ve got cash flow of, let’s call it $300 a month and you can pay that asset off and now you’ve got unleveraged cash flow of $1,200 a month, that’s a substantial increase. And is that return higher than if you just go buy another leveraged house and add it to your portfolio?
That’s the math you get to do. Another option is maybe you can pivot a strategy, take a long term and make it a short term if it makes sense. I guess the point I’m trying to make is you don’t have to go buy another property, consider your current portfolio. Can you pay for something either paying down the asset, remodeling a kitchen, adding a bedroom? Can you add money to your current asset to increase the rents and will that produce a higher cash on cash return than buying a new asset or just paying something down? Because paying something down not only gives you more cashflow, but it gives you less stress. So that’s my favorite part about it. So then what do you do? Are you just going to focus on paying off deals now or is there something else you’re working on?

Lucas:
No. So probably three years ago, my poor wife was so patient with me for the past 10 years, moving her into a different place, having half the house under construction. And so I told her, “Hey, at some point we’re going to have to buy the house that we want to live in for a longer period of time.” And this is your seasoning as you go through your investor life cycle, right? In the beginning, you’re looking for anything that you can do. You’re willing to live right next to tenants. And once you’ve done that five or six times, you’ve got to be making some progress within yourself and within your family as well. So we found 66 acres out in the country where we live here and we decided, hey, we were going to clear a small section and build our dream house on there. So it took me about a year to clear about four acres, get all my permits and stuff, and that’s where I’m here now.

Henry:
Oh, wow. So you found wooded acreage.

Lucas:
Exactly.

Henry:
What did 66 acres cost?

Lucas:
378.

Henry:
378. How long ago did you start that purchase?

Lucas:
So that was in 2022 is when I purchased that property. And throughout 2022, I cleared the… It was about four acres of smaller trees that I had to clear for the house and continued to save up to have enough for a down payment to actually build the house that we wanted to live in for the rest of our life.

Henry:
I’ve got tons of questions because I’m doing something very similar, and I’m going to ask you some of those questions right after this break. All right, we’re back on the BiggerPockets podcast. I am with investor Lucas Teague, and he has been sharing his investor journey starting at a young age back in 2013, and now he has told us he purchased 66 acres, cleared out about four to five acres, and has built a home on that land. I have lots of questions because this is kind of a popular concept right now. I just bought 20 acres. I’m going to build a house on it. I’m excited about it. So how did you purchase this land? Because there’s several ways to do this. I know some people buy the land and get a loan for the land and building the house all as one, but you had to buy land, clear land, there’s site work, there’s utility work.
What did you have to research, and then how long did the process take between finding the property and then being able to start a build?

Lucas:
So it probably took us two or three years to actually find the property. And the reason we signed up for this one was it was right next to where my parents lived at the time. And my father was sick at the time and didn’t have much time left, and so I wanted to be close to family when that time were to come. And so my parents owned 68 acres to the north, and this property came up just to the south of that at 66 acres. I mean, it came up for sale. I did a little bit of research. Thankfully, it’s not overly difficult to get permits in our area. It’s not easy, but we’re probably right there in the middle. So there’s some utility work that you’ve got to do. There’s some elevation profile. There’s floodplains you’ve got to look at. Mistake that I made, there’s no internet access out where I live, there’s no fiber.
So I’m calling in from Starlink here, which saved me. So there’s a little bit of homework that you need to do before you purchase something like that.

Henry:
And did you use one loan for all of it or did you have to do this all separately?

Lucas:
No. I stayed pretty conservative. I put probably 50% down payments on the land. I did a specific land loan on a 15-year fixed at 3.7%, and that was back in 2022. And then I waited about another year. I got a construction loan to build the primary residence, which we finished construction of that in June of 2023. Since then, I’ve spent three years of just paying that property off. So now essentially, we’re debt free with our primary residence and our land, and so our monthly basis of what we need to make is fairly low.

Henry:
That’s really cool, because there’s a lot of different ways to A, purchase land and to B, build on that land. Not only are there combined loans like I talked about, so for those that are listening, you can get one loan that will allow you to purchase the land and build the house. Now you have to have done a lot of research on the front side because you need to know who your builder are. You got to have your plans, right? But a bank can loan you everything to do this, or you can go the route like I went and like Lucas went, which is to go buy the land first, and then a lot of banks will let you leverage the land once you own it as your down payment so you don’t have to put money down for the construction loan. So talk to the banks and find out what products they have that can help you do something like this.
I also hear that there’s all kinds of grants and programs to help people take raw land and develop something on that land. It just depends on what it is that you want to develop on what programs that are available to you. Did you look into anything like that?

Lucas:
I did, and that’s something that I’ve hardly ever heard discussed anywhere on any real estate podcast. So if you own raw land in most of the United States, we have an issue where invasive species like bush honeysuckle, espediza, automolive, those invasive species seeds are coming in from, it could be China or Russia or Australia, things that are not native here to the United States. So our government has funding where they create a pool of funds to give to landowners to eradicate those invasive species on the property,
Which was something I have never heard anywhere. And so I’m doing some research, “Hey, I’ve got these 66 acres. Do I want to timber this? No, not really. I don’t want them destroying the forest. Well, what else can I do?” And so I stumbled across this. It’s United States Department of Agriculture and then the subdivision Natural Resource Conservation Service, and they will essentially come out and look at your land, see the level of invasive species that you have on the property, and then assign a budget for your property to get those invasive species removed. It’s a one-time grant that you’ll get usually over three to five years, depending on how invasive the species are at your property. In my specific case, they gave us about a thousand dollars an acre over the course of three years, so about 66,000. We just finished that contract about three months ago or so, and yeah, super, super easy.

Henry:
So they just gave you a thousand dollars an acre. Now, you had to go do the work to eradicate the invasive species of plant. What does it cost you to do that versus what they’re giving you?

Lucas:
In my specific situation, the levels were so high where I subcontracted it out to a group of folks, they would come out here, do the work for me, and so we basically split the money fifty fifty. I paid them, and then I kept the rest as well.

Henry:
That’s so cool. I am absolutely researching this the second we got off this podcast. That’s really cool. So how did you even stumble across that?

Lucas:
Just researching. I mean, I have the 66 acres and I wanted it to produce some cash flow just like a rental property would. And really, am I going to raise farm animals? Probably not. That’s not my skillset. I could do a timber harvest. Can I let somebody else use the land maybe for hunting? I wasn’t really comfortable with any of those things. So I just kept researching, “Hey, you can use AI now too. Hey, I’ve got 66 acres. What kind of ideas do you have for me to make money from this where it’s not too disruptive to my lifestyle?” I mean, sure enough, there it was. And honestly, it’s a great program. Three years later, our forest is so much healthier. We have 99% native species out here. The birds, the turkeys, all of the deer, the wildlife are happier because there’s more calorically dense food out there, and so it’s really a good program.

Henry:
Well, Lucas, this has been really fun. What a cool story of how to use real estate to supplement your lifestyle, right? Not everybody needs to start investing and retire in a few years, but you can still build a pretty cool life and a pretty cool lifestyle using real estate and keeping your job. I love that you’ve kind of talked us through how you did that. So before we get out of here, a couple of things. Can you tell us a little bit about where you stand today as an investor, what’s your portfolio look like?

Lucas:
So today we have three rental properties and we’ve got our primary residence on the 66 acres, which is paid off. And so complexity started to enter my life at some point, and I decided to simplify. And so we have a very simple portfolio that covers all of our family’s basic needs. I still continue to work my W-2 job for different reasons than what I did 12 years ago, but now I’ve shifted into a different phase of it’s not as much about me and my family. It’s about what I can give back to my community, what I can give back to other families. So I’ve been able to donate very large sums of money to local charities and families and things like that. I’m giving a house away to a family member that needs it as well, and so I’m moving into an all new chapter of life here.

Henry:
I love that. I love that more than anything. I’m just truly a believer in that. We are chosen to be stewards of wealth. When I hear stories all the time of people who’ve amassed wealth and lost it, I always see people who were selfish with it, but people who have philanthropic ambitions or who are using it in good ways always seem to continue to find more, and I don’t think that that’s a coincidence. So that’s really cool that you’re doing that, and it’s really cool that you’re able to do that all through buying a couple of properties back in 2013. That’s really, really fun. All right. So earlier in the show, you were talking about this tool you built with AI to help you analyze neighborhoods. Can you give us a little more detail on that?

Lucas:
We’re now in the generation of AI, and it is such a powerful tool. Hey, 10 years ago, prices were significantly lower than what they are now, but there was not tools like this that existed and made it so easy for the average person, and you don’t even have to be an expert. You can type into ChatGPT or Claude or Grok or whichever app that you’re using, and you can ask any series of questions and will make your life so much easier. But one specific thing that I do for my real estate clients and from an investing lens is in my specific market, there’s maybe 100,000 people, and there’s businesses going in, there’s new neighborhoods going in, there’s so much stuff that’s going on just in my micro economic circle and something you can use AI for, you can have it analyze all of the local news that’s going on in your specific area, have it overlay those news articles with a specific map of your area, and then chart out what’s the next five years going to look like?
What’s the next 10 years going to look like? If a new business goes in that’s hires 5,000 people, what that’s going to do to the property values? There’s some news that happens to neighborhoods where the prices are probably going to go down 10%, maybe a new neighborhood’s going in and prices are going to raise Based off that new neighborhood or shrink. If a business is going in, there’s going to be more jobs most likely. And so probably property values in that area are going to increase. And you can use AI to analyze that massive data set, overlay it with the map of your area. And now you can even target specific neighborhoods that have a higher probability of having more appreciation than what the normal house would in your town.

Henry:
That’s pretty cool. How long have you been using this tool?

Lucas:
Probably a year now. And I just purchased my first property almost using exclusively AI. I trended the neighborhood. I found a specific area that’s probably going to appreciate 20% in value over the next five years. Then I overlaid that with my 15% cash on cash return AI tool. And sure enough, hey, a property came up. I went and looked at it in pretty good shape. So yeah, we’re already seeing results in roughly six months.

Henry:
Have you seen results that match the research?

Lucas:
Probably not on the appreciation side yet. I would say on the cash on cash return side, yes, but I’d say too soon to tell on the appreciation aspect.

Henry:
It is rare to find great cashflow and great appreciation. And you’re using technology to help you be more strategic to where you have a higher probability of getting both, which is super smart. Thank you for sharing that. All right, Lucas, thank you so much for joining us on the BiggerPockets Podcast. Is there a place where people can find out more about you or find you?

Lucas:
Yeah, you can find me on biggerpockets.com or you can find me on Facebook, Lucas T.

Henry:
Awesome. And thank you everyone for listening to this episode of the BiggerPockets Podcast. This was super cool. I’ve got some homework I’m going to go do based on what I learned from Lucas. Hopefully you do too. As always, we’ll see everybody on the next episode.

Ashley Kehr:
Today’s rookie replies about the decisions that happen after the first deal looks possible. A lot of rookies know the strategy headline, but the real risk is in the next layer, the refinance payment, the HOA rules, the property manager, and the people who will actually help you operate the assets.

Tony Robinson:
Today, our questions are coming from rookies who are asking about things like how to underwrite a refinance before it actually happens, or a family member trying to buy housing for a disabled relative and a new property manager asking how investors actually find property managers.

Ashley Kehr:
This is the Real Estate Rookie Podcast. I’m Ashley Kerr.

Tony Robinson:
And I’m Tony J. Robinson. And with that, let’s get into our first question, which today comes from Cassandra in the BiggerPockets Forums. Cassandra says, “Hey guys, I’m new here with the question about underwriting when a cash out refi, burr, HELOC, or loan is part of your plan. I often hear in the podcast, especially the real estate podcast, talking about using your home’s equity as a vehicle to finance your next purchase. I currently own one long-term rental that I’ve had for about eight years and a 2.5 COVID era interest rate and an MTR, an accessory dwelling unit on my residential property. I have significant equity in my first home, the long-term rental, and I’m considering taking out some equity to help me buy my next deal, but I have no experience with this.” Everyone makes it sounds like a burr or other strategies like this are super easy to do because you add value or do a light rehab and you can just “take the money out for another home.” But the truth is that money still isn’t yours to keep.
You still have to pay it back to the bank, so it’s not something you can just get free and clear. So how do you factor this into your underwriting? I feel like no one talks about that part. How do you know you’re getting a good deal even though after you refinance and take the money out, you have an even bigger bill or mortgage to pay? There’s no way to really know what your interest rate or monthly payment will be or even what your new home value will be when you’re initially looking at trying to buy that property. Okay, so this is a great question, right? Cassandra’s basically asking, if I want to use the equity for my current property, how do I account for that cost as I go look to purchase my next property? But let’s just define a few things here for Ricky’s because she threw out a few terms.
I just want to make sure that we get those defined for you first. So she said cash out refi, burr, HELOC.
Those are all slightly different ways. Well, slightly different strategies and ways of accessing your capital. Let’s talk about HELOC versus cash out refi. A HELOC is a home equity line of credit where your original mortgage stays in place. So for Cassandra, her 2.5% COVID era interest rate loan, that stays in place, but she then adds basically a second mortgage in addition to her current property. So the current mortgage stays there, but she gets the second mortgage that allows her to tap into some of that equity. And a home equity line of credit operates like a credit card where you really only get billed for what you use. If you’re not using it, you’re not paying for it. Once you use it, you got to pay it off like you would a credit card. A cash out refinance is replacing your current mortgage with a new mortgage and you get the difference between the balance of what you originally owed and what the balances of your new mortgage.
So if your original mortgage was $300,000, your new one’s $400,000, you get that difference of 100K as part of your new loan. So I just wanted to define those so folks understand as we talk through what this looks like. I actually just did this on my own primary where before we moved out, we pulled the HELOC and then we use that HELOC as part of our down payment for our next property. And the way that we did the math was we said, okay, once we pull this HELOC, we know what the rate’s going to be, at least ballpark, and we just want to make sure that we account for that in the underwriting of this new deal. And can our old house, can the one that we’re moving out of with its rents cover both the current mortgage and this new second mortgage? That’s the way that we did it.
But if you’re looking at it from an investment perspective, then you simply say for the deal that I’m about to buy, if I also include the payment for this HELOC, can this new rental cover its own mortgage, its own expenses and the HELOC payment as well? So that’s one strategy to make sure that you’re accounting for those costs.

Ashley Kehr:
Cassandra, you have a really good point asking about the interest rate. You don’t know what your interest rate is going to be when you’re ready to refinance, whether that’s three in the months from now, six months from now, 12 months from now. And obviously it’s easier to estimate when you are closer, when you know you’re going to be refinancing in three months. But what you can do is look at the worst case scenario. Worst case, what do you think this interest rate will be? There was a lot of people during COVID that went and got these bridge loans and needed to refinance later on, but interest rates were like 3%, so they were getting these good deals. But then when interest rates shot up, those weren’t good deals anymore because their mortgage payment had gone up so much. And some of them couldn’t even refinance because the bank wouldn’t lend to them because it wouldn’t make sense on the deal anymore.
So you are asking a really great question. So the first thing is when you’re doing a bur, what is going to be your timeframe? So the shorter you can make your timeframe, the better, the less risk of interest rates changing rapidly. Especially if you’re a rookie, you shouldn’t be taking on a huge full gut rehab that’s going to take over a year to get done anyways. So you’re starting with something smaller. All of my first properties were cosmetic rehabs. I wasn’t ripping down vaults. I wasn’t putting in all new plumbing, anything like that. They were mostly cosmetic. So it was a very short period of time before I had to go and refinance. But you’re going to run the numbers with putting some caution in place and you’re going to look at what’s the worst case scenario of the interest rate. So play around with it.
What would happen if the interest rate jumped two points? If it went from say you’re getting 7% now and then it went all the way up to 9%, what would that look like? Would there be any cash flow left? So that would be my recommendation is use a worst case scenario number. And I don’t know exactly what that would be, I would say depending on the timeframe, but try and look and see what’s your worst case of what percentage does this property no longer cash flow for you? And then you’re going to have to try and gauge whether you’re going to take that risk that you can refinance in a period of time before interest rates jump that much. For interest rates to jump up 2%, I don’t see that happening within a three month period. Maybe in a six month period that actually could happen.
Over a year period, it definitely could. So I think gauging what your timeline is for your rehab to refinance along with looking at the worst case scenario of what’s the highest your interest rate actually could be before you’re losing money and kind of gauge that as to like, okay, how much do I feel comfortable with this deal?

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Ashley Kehr:
Cassandra’s next question is about underwriting the next debt payment before she makes a move. Our next question is about underwriting something harder to put in a calculator, a family driven housing decision. Okay, so here’s Elizabeth’s question. “My brother is disabled and needs a stable place. He receives disability. After a series of unfortunate events, he is not in a position to receive any housing vouchers. My father is helping him find a place, but my brother is a difficult person and often finds himself kicked out of roommate situations. While this is not ideal for a first time investment situation, it is the reality. So here are some of the options I’ve come up with. Invest in a tiny house in my dad’s property, but I have no idea how to recover the investment if I do.” So I think in this scenario, Elizabeth is saying she would buy a tiny home and place it onto her dad’s property.
So the second option is to invest in a relatively lower price condo nearby, which would be 99,000. If we did this, we would put down half the value of the sale price, so 50,000 and mortgage the rest so that the mortgage payment plus the HOA fees, utilities, and the weekly cleaning fee would be in range of my brother’s disability income while still giving him enough to live on. So here’s the advice that I would need. We live in Washington state. My brother lives in Texas. Who would you recommend for accounting and educating us on the tax income implications? Two, what other considerations am I missing for option two? And three, how would you recover your investment of either the tiny house on the property of a parent or looking at the condo? Thank you in advance. So great question. And I also love that this is something you want to do for your brother.
And I think that real estate investing is something that gives us the opportunity to do things for the people that we love and we care about that a lot of other investments or careers wouldn’t allow us to do. So the first question is that she needs advice on recommendations for accounting and educating them on the tax income implications. So I’ll give you my two cents and then we can give you a recommendation of an actual professional because remember everybody who’s been listening, I failed my first ever CPA exam, so I am not the person. So for the tiny home, so purchasing the tiny home, because you’re putting it onto a lot that you don’t own, you will not get any of the real estate tax benefits from that. So I potentially don’t see any tax write-offs like depreciation, property taxes, things like that. If you are charging your brother rents though, you will have rental income and you can offset some of the expenses you may have, like if you’re going to be covering any of the utilities or any expenses you’ll have to have to maintain or repair the property, you’ll be able to write off to offset the income you’re collecting from your brother.
So that’s one thing to think about with the tiny home. The second thing is the condo. So the condo, you will be owning a piece of real estate, so you will have more tax benefits than you would if you were just then putting the tiny home on your dad’s property. For the condo, when you sell the property, since you’re purchasing this as an investment property, you will have tax implications for the sale of that. The same with the tiny home as if you’re purchasing it, you’ll have to sell it at some point. With the condo, you could get more tax benefits with it because you’re owning the piece of property where with the tiny home, you wouldn’t.

Tony Robinson:
There’s another way too that we can approach the kind of tiny home is can we actually build a true ADU on a fixed foundation? And one of the things that she mentioned was how will I actually recover the investment into that property if I do? There are companies out there because ADUs are becoming more and more popular, so naturally the markets respond and there are lending options out there that help folks finance the cost of ADUs. And much like when the short-term rental industry started picking up a lot of steam post – COVID, there weren’t a ton of financing options in 2020. There are many, many, many today. The same thing is kind of happening in the ADU space where you’re seeing more lenders offer financing options to build out ADUs. So that is one way that you could potentially, not even necessarily recoup your costs, but just have less costs in general to get into it.
And then on the other hand, say that you were just going to kind of pay cash to build out this property, maybe the way that you can recoup that cost is by then refinancing your parents’ property. I don’t know what their interest rate is or what that looks like, but now that they’ve added this ADU, if they go back and get it reappraised, does that then give them the ability to get some cash back to repay the cost of building this out? I don’t know if there’s any right or wrong answer to this, Ash. It’s a very kind of deeply personal situation and a lot of kind of emotional part inside of here, but my gut I think would be to probably do the ADU on the back of the parents’ house because I just feel like from a mathematics perspective, it’s what I think would probably make the most sense.

Ashley Kehr:
I love these moments, Tony, but I’m going to disagree with you. We’re going to get into a heated debate right now. I’m going to go with the condo because with the condo, it’s two family members. It’s Elizabeth and her brother. With the tiny home, it’s her investment, her dad’s property, and then her brother living there. I think about what if the dad and the brother get into a dispute? The dad doesn’t want the brother there anymore. They don’t like living there. The brother doesn’t want to live there. It’s not like, are you going to be able to go and now rent this tiny home out on your dad’s property to somebody else? So I like the condo because it’s less personal because this is the dad’s home because she does say we will put half down. So I don’t know if the dad’s chipping in or something onto the condo or whatever, but at least it’s not the dad living there and it’s not his home or whatever.
So I think it makes it personally less complicated for the family if it is the condo. If it doesn’t work out with the brother and they decide that it’s not working out anymore, they can at least take the condo and rent it or sell it to recoup their investment. Where with the tiny home, I feel like that’s more restricted as to how they can recoup their investment if the brother doesn’t end up living there anymore with it being the dad’s property. So that’s how I look at that situation. So I’m going to say the condo.

Tony Robinson:
That is actually a great point, Ash. And the only thing that comes to mind for me is maybe a counter. And we’ve talked about this before and guys, I’m not an ADU expert in any sense because I’ve never done an ADU, but I know that we’ve interviewed Leika, Dave, Thatch Point has talked about this as well, where they’re building these ADUs and they’re actually separating them off as their own parcel. And again, there are probably implications to the initial, the main homes, maybe appraised value or even potentially the mortgage. And I’m not sure what that approval process looks like, but I wonder if they are able to do that, does that then solve that situation? So the brother’s still close, she can hopefully recoup back some of that cost of building it out and she then doesn’t have to worry about the co-mingling of her investment with her parents’ property.

Ashley Kehr:
One last thought too as to how I’ll be nice today and I will say one positive towards your choice, your situation is that she did say the brother didn’t live well with roommates and things. So maybe it won’t work out in the condo because he’ll be in apartments and he won’t get along with the neighbors or something like that, where at least at the dad’s house, he’s with the dad and you don’t have to deal with people complaining because they’re not getting along or things like that too. So there is another personal side where maybe it actually is more beneficial, but I think financially the condo is the safer bet as an investment. But also looking at the HOA too is making sure they allow it for rentals and what you can do with it as far as that too, if the brother does move out too.
All

Tony Robinson:
Right. Our last question today guys comes from Blanca Munoz and she is asking from the property manager side, but the answer is actually incredibly useful for rookie investors too because it tells you what a good property manager should be doing for your own portfolio. So the question is pretty straightforward. It says, how do investors find property managers and are investors simply interested in hiring property managers? So let’s answer this question, but again, we’ll talk about it from maybe more so from the perspective of being an investor. Well, first I think rookies need to decide, do I want to self-manage or do I want to hire a manager? And there are different reasons why different people come to those conclusions. When I bought my first long-term rental, I just didn’t have the confidence that I could self-manage it myself. It was several thousand miles away. I’d never done anything like that before.
Didn’t necessarily have someone in my corner who could guide me through that process. I was working a full-time job. I just had all these things swirling in my mind to say, I don’t know if I can do this. So I made the decision before I even bought the property that I was going to hire a property manager, just lifestyle, all those things, skillset, confidence, I just didn’t have it. So I knew that I wanted to hire someone. And my approach for finding that person was I just searched, I think I went on even just Google. I think I even checked in the BiggerPockets forums. It was a smaller town though, Shreveport, Louisiana. It’s not a major metropolitan area, but I found a handful of property managers. I emailed them all and just said, “Hey, here’s who I am. I’m looking. I don’t have anything yet, but here’s what I’m looking for in this market.” And I just sent them a few questions that I think I scraped from somewhere in the BiggerPockets forums like, “Hey, ask these questions.” And I was just trying to get a sense of who they are, how they operate, how many units are they managing, how long have they been in business, some kind of key highlights from their management agreement, like what do they charge for, what’s included, just trying to get a good sense of who they are and how they operate.
And I think of the, I don’t know, five or six that I emailed, only two of them actually replied to my email. So that weeded out a lot of them from the beginning. And then when I actually went out there, when I was closing on the property, I met with a couple of them in person and the ones who I liked more, that’s who I ended up going with. So that was my motivation for hiring a manager, and then that was my process for actually trying to source or identify which manager was a better fit for me personally.

Ashley Kehr:
Your first step is going to go to biggerpockets.com/pmfinder. I found a nice little link for you guys to go to, and you can search and find property managers in the market that you’re looking at. For me, I definitely did it wrong when I was looking for a property manager when I decided I didn’t want to do it anymore. I didn’t want one of the big huge companies that manages thousands of rentals and commercial buildings and all of this. So I looked for smaller ones. My mistake was that I found a property management company that was in its growth phase. So they had never done any large apartment complex before. And with my partner’s properties, we were giving them all together to property management. He had large apartment complexes and they would be his first. And that’s very different than managing single family and small multifamily units.
So not getting clarification on what their experience is as far as managing. Then the second thing was not getting clarity on the fees and if the fees can change. So after probably a year of having management in place, they sent a letter to every owner saying that they are going to start doing inspections in every single unit twice a year and it’s going to be like a $80 fee to the owner to do it. Well, okay, that doesn’t 80 bucks, but you’re doing it twice a year. If you have one property, that’s going to be a decent amount of your cash flow. But also too, if you have a large apartment complex, one was a 40 unit and $80 per unit, that adds up to quite a bit of money. And then once they go in, they would say like, “Okay, here’s all of these different things that we think you should do.” And some of them needed to be done.
At one point they said that the smoke detectors should be updated in the 40 unit apartment complex. “Okay. Yeah, we should do that. That’s a safety. We don’t want them to fail. Let’s update it. They need them. They quoted us a price to just like, if I were to walk into Lowe’s and buy it off the shelf, that’s the price. Between the two 40 unit apartment complexes, we’re buying 80 of these. So 80 of them, we can’t go and get bulk pricing somewhere. So asking about the cost, the pricing, a lot of that stuff, especially at a larger scale is something I did not do ahead of time. So if they’re doing a turnover and they’re doing the remodeling, are you getting a bid? What is their project management fee? I think theirs was like 10% on top of doing the project, which is fine.
They’re coordinating it all, getting the materials, things like that, plus the hourly labor. So I would just become knowledgeable about what all those fees are and how their maintenance process works. So some maintenance companies, they’ll let their tenants know and we will respond within 48 hours. For an issue like this, we will resolve it within four days. They have kind of expectations they put out to the tenants when they rent with them. So ask, do they have anything like that? How does a tenant get a hold of the property manager on the weekend? So if it is an emergency, is there someone on call? Does it go to a voicemail? What is that process? I didn’t ask enough questions about the tenant side of things. And when your tenant is not happy, it’s ultimately going to cause problems for you. Even if you have the property manager as the middleman, over time, you’re going to see more vacancy because people don’t want them as a property manager, don’t want to move in there.
They leave because it’s not great property management.
And then eventually the issues are going to have to come to you because they’re going to raise a big enough stink about things. So I would say just ask as many questions as you can. Ask AI, be like, “Here’s the property management company I’m looking to interview. Scroll through anything and find me any Facebook posts, any reviews, anything that mentions this company in this market, Reddit.” They could be anywhere, especially if it’s bigger companies. And I want you to give me a summary of what you found about this company and then give me 50 different questions that I should ask them and then you can kind of weed through them and see which ones you actually want to ask the company to. But that’s where I would start. Well, thank you guys so much for joining us today on this episode of Real Estate. Rookie, if you have a question, you can leave it in the BiggerPockets forums and we may answer it for you on the show.
I’m Ashley. He’s Tony and we’ll see you guys next time.

Dave:
I’m seeing a huge buying opportunity in the housing market right now. Home sellers are cutting their prices at a higher seasonal rate than we’ve seen in years. In the most recent set of data, more than 20% of properties on the market had a price cut in just the last four weeks. So what does that mean? It means sellers are finally getting realistic. They’ve accepted that they can’t get 2020 prices anymore, and you can take advantage of that and start picking off premium properties at a discount. Buy below market price, collect the instant equity, and set up your portfolio for years to come. That’s what I’m doing, and I’ll explain all the data behind my thesis in this October BiggerPockets housing market update.
Hey everyone. Welcome to the BiggerPockets Podcast. I’m Dave Meyer, real estate investor, CIO at BiggerPockets, and a housing market analyst. And today on the show, we are doing our October 2026 housing market update. As you all know, a lot is changing in the housing market all the time. I know I say that every month, but it is true. In the world we live in, in 2026, things are changing in the housing market more than they normally do. And so in today’s episode, we’re going to do the three things we always do, which is first look at market update. We’re going to go through the data, what’s happening with prices, with inventory, with mortgage rates and all of that. Then I’m going to share an opportunity that I am seeing in the market that is supported by data and evidence that I think all of you should be paying attention to.
And then third, we’ll do what we always do, which is go through our risk report because you can’t turn on any media channel these days and not hear someone claiming that the housing market’s going to crash or some economic disaster is coming. And since those things are always possible, it is worth spending some time talking about if it’s coming. And we’re going to have an honest conversation about what risks exist in the housing market and for real estate investors. So we’ll talk about that at the end of the episode. So that’s the plan. Let’s get to it. We’re going to start with our market update. We’re going to go into prices first. It’s what everyone always wants to know is the big picture, what’s going on with home prices? And surprisingly, or you might be shocked if you go on any news site these days, home prices are still up nominally, not inflation adjusted.
The price you see on Realtor, Redfin or whatever, that is up two and a half percent year over year. That’s just about the historical average, just so you know, is about 2.5% appreciation per year. So from a price perspective, we are actually having, despite everything going on, we’re having quite a normal year in terms of pricing in the housing market. If you look at Case Schiller, which is a great data set, you look at Redfin, you look at Zillow, they’re all kind of in the same space. So no, we’re not in a market crash at all. It is important to know though that the data that I’m talking about is what is called nominal. It’s not inflation adjusted. And that’s what most people care about. That’s what you see on your contract when you go and buy a house or you sell a house. But I do want to call out the important caveat that if you do inflation adjust home prices right now, they are down.
It is not keeping up with the pace of inflation. And as investors, that’s normally what we want. We want our investments to keep up with the pace of inflation and that is not happening from a price perspective right now. But I think the real story in the housing market is looking at some of the forward-looking stuff, the stuff that helps us predict what is going to happen in the next couple of months. So let’s get into that. And for that, we really want to look at demand and we want to look at supply. What is happening with new listings and inventory? And the story with new listings are that for most of the data we have, it’s flat. If you look at the July data, the last couple months of really good data that we have, it’s actually flat. So the amount of people who are choosing to put their homes on the market, basically the same year over year.
This is again as of July. If you look at active listings, which is the number of homes for sale at any given point, that is also flat. And so if you look at the monthly data that we had in July, the last monthly data that we have, it looks pretty stable, right? Prices are up nominally. They’re a little less than inflation. Pending sales, they’re down a little. New listings are flat, inventory is flat, days on market is flat, the sale to list ratio is flat. So by and large, we have the same market today that we had a year ago, and that is happening even with higher mortgage rates. They are at 7.6 as of this recording. They were 6.3 a year ago. But again, I want to call out that they were a little lower. They were closer to about seven or 7.1% when all of this data came in.
So I think we need to ask the question as investors and people who care about the housing market, we need to ask the question, is it going to last? Is this stable market that we have that is very similar on paper to what we saw a year ago going to stay for the rest of the year? And what about into 2027? Of course, no one knows, but I will give you my opinion. No, it is probably not going to last. Now don’t freak out. We’re going to talk about the risk report later and what risks exist, but my base case, as it has been for years, is that the housing market is going to get weaker. And again, this is kind of nerdy, but we’re looking at monthly data. If you look at the weekly data, that’s the most recent stuff, you start to see the housing market moving in a weaker direction.
Pending sales, which is the number of people who literally go out, sign a contract to buy a property, that’s down 9% year over year. That’s a lot. Roughly 10% drop in contracts being signed is a lot when we’re already at a low level. So that signals lower demand. That means less people want to buy homes, right? The second thing is new listings are low and they’re probably going to stay low because fewer people want to sell their homes in this environment. If you think about the lock-in effect and what’s keeping people in their homes right now, these people are trapped with great mortgages. It’s a good problem to have, but it’s still a problem for the housing market. But all these people have three, 4% mortgages, when mortgage rates go up to six, 7.5% like they’re now, that’s going to get locked in even more.
That means that we’re going to see less new listings, but active listings are starting to climb. Now, if you remember back to what I said before, how does that happen? Well, maybe there’s less new homes coming onto the market, but the ones that are sitting there are sitting for longer. They’re not selling. Remember, there’s less pending sales. And so if you look at all these things together, what you’re seeing is a weaker market. And that means, in my opinion, the number of transactions can go down. They already are starting to. And I also think it means that prices are going to soften, especially as we head into winter. It’s already a time when prices go down. It’s actually why, personally, my favorite time to buy a home is in the winter. That’s where you get the best deals. There are not a lot of home buyers in December, Thanksgiving, Christmas, January.
Great time to make offers because those people are not getting a lot of offers, especially in this kind of market. So this caveat, but great time to make offers. Sort of my hypothesis going into next year is that prices are going to weaken. I already predicted I thought they will be down by the end of this year. I think they’re going to weaken more. And so this is sort of the information. The reason we do this housing market update every month and why it’s one of our most popular formats is because this is the stuff that really tells you how you should be planning your own investing. If you look at what’s going on here, you see a market with declining prices, which will scare some people, but as an investor, that shouldn’t scare you. That means discounts. That means better deals are coming, right?
And so you need to just think about how do you adjust your tactics for a declining market? And the answer is to buy it for cheaper. It’s kind of pretty simple. If prices are falling, if they’re going to fall 2% next year, 3% next year, then you need to buy that property for 10 or 15% less than what it’s worth today. Not what it’s listed for today, what it is worth today. You need to comp that out or use an investor-friendly agent. You can find one on biggerpockets.com to figure out what that property is truly worth today and don’t buy anything unless it’s 15 to 20% below that price. That’s how you get equity without market appreciation, right? We’ll talk about whether this could get worse, and I will tell you there are always risks that it can get worse, and we’re going to talk about it at the end of the show.
But the data that today that we are looking at suggests this is a classic correction. We are not seeing new listings flood the market like we did in 2008. We don’t have bad credit like we did in 2008. People have a massive equity cushion, and so this should be seen mostly as a buying opportunity. And I think the winter is a really good time to start making offers because people are going to be nervous. Sellers are going to be nervous. Their property has been sitting on the market for a while, now rates have gone up, buyers are drying up. Then you go into the winter, even more buyers dry up. People are going to be willing to negotiate. And that actually brings us to our second segment for today, which is this big opportunity that I’m seeing in the market right now. And I’m going to share it with you, but we have to take a quick break.
We’ll be right back.
Welcome back to the BiggerPockets Podcast. I’m Dave Meyer doing our October housing market update. Before the break, we talked about how we’re largely in the same market as we were last year, but things are starting to soften, which makes perfect sense to me given where we are in the economic cycle, where we are with mortgage rates, where we are with housing market affordability. It’s all pointing to a market that is going to soften. And I should have mentioned this before the break, but it’s true. Of course, this is all regional. What happens in your market is going to depend on local factors. I’m talking about broad national housing market trends, which do matter, by the way, because even if you’re in a market that’s up 7%, a softening market might mean that it’s up 4% next year. It doesn’t mean it’s going to crash, but I think the general trend is going to be softening across all markets just because of how low affordability is.
And we’re seeing that in a lot of regions, even some of the stronger Midwest and Northeast markets are starting to slow down as well. So that’s my expectation, but it’s also an opportunity. Lower prices, this is what people have been wanting for a long time, right? People are saying housing is too unaffordable. Well, prices are starting to come down. And this brings us to our opportunity this month that I want to call out, which is that right now we are seeing more than 20% of home sellers cut price. That’s just in a four-week period. They might cut price more than once. That’s just within four weeks. And it’s the highest share on record for Redfin who tracks this, that’s where the data’s coming from. So it only goes back a couple of years. It’s not super old data, but just the last couple years, rates have been high for a while, but we weren’t seeing sellers cutting price.
They were being very stubborn. And I mean, if they could get their price, why not? That’s in their best interest. Even in 2023, for example, when rates went up and affordability was at one of the lowest it’s been, we only saw about 18% of sellers cut price. Now we’re at 21% home sellers cutting prices. So I know this isn’t a lot. It’s not some record thing where we’re seeing 30 or 50% of sellers cutting price. But to me, this is a sign that the stubbornness is fading and that sellers are getting realistic about pricing because you have to remember with price cuts, two things are happening here. Price cuts on their own, I don’t think are as useful as a lot of people say. People are always like, “Oh, there’s so many price cuts. That’s sign that the market’s crashing.” Not really. The price cut is actually a reflection of how well that home is priced.
So in a lot of markets, what we’re seeing for many years is that yeah, there are price cuts because people are pricing it like 2022. Whereas in markets where sellers are being more realistic, prices might actually be down in those markets, but there aren’t price cuts because they’re going into it with a realistic price given where the market is today. So I think this is a good sign because it tells us two things are happening. One, the fact that it’s not exploding does not mean that prices aren’t falling. I think that a lot of markets are probably just going in at lower asking prices. You actually see this. You can see this in the data. The average home price is up 2.5%, but the average list price is not up. It’s about flat for the year. So you can see that in the data as well.
And then the fact that it’s going up, I know it’s not a huge going from 18% to 21%, but this has been a very, very stubborn metric, and I think people are finally accepting that prices are not what they were. And this is the opportunity for investors. Like I said before, we’re entering a slow season. Anyone who’s selling their home right now knows what’s going on with mortgage rates, at least I hope so. If they have an even mildly competent real estate agent, they should know that mortgage rates are going up and that’s going to pull demand out of the market. It’s going to make their home less affordable and they’re going to have to list it at a price that is lower in order to attract a buyer. And I think a lot of sellers have just been waiting for years under the assumption, like a lot of buyers are doing, that interest rates were going to come down.
And now that we’ve been on this seesaw for so long and there is no end in sight to higher mortgage rates, and that is a hill I’m going to die on this year. I have said many times, I don’t think mortgage rates are coming down and I stick by that. Maybe it’ll come down to like six and a half percent next year. I don’t know, but they’re unlikely to come down meaningfully. And I think sellers for them finally get it. If they’re going to sell their house, it doesn’t benefit them anymore to wait six months. I think sellers are saying, “What if it gets worse? What if mortgage rates don’t get below 7% for the next year or two? What if inflation stays high? I got to sell my house now while the stock market’s still good.” I’ll be honest, I was talking about this on the market, my other podcast the other day.
I’m thinking about selling my house, not out of panic, but I’m thinking about moving anyway. And now is maybe a time to do it because mortgage rates probably not going to get better. And I think while the stock market is still high, it’s probably a relatively good time to sell a house. If the stock market tanks, sure, mortgage rates could come down a little bit, but that is not going to be a good environment to sell your home. So I think a lot of sellers like me are having this realization, and that means they are more open to negotiation. And I know this winter right now feels like an incredibly uncertain time in the economy and in the housing market, and it is. I’m not going to sugarcoat it and pretend that we know what’s going to happen. But remember that if you are a buyer, sellers are having that same emotion.
And I’m not saying this to take advantage of it, but it might mean that they’re going to be reasonable or they might be willing to say, “Hey, I know I’m not getting top dollar, but I want to get out of this home. I’m ready to move or I need liquidity for other parts of my life or I’m concerned about my job.” A lot of those things are happening. And so if you want to be a homeowner, if you want to be a rental property investor, there are going to be opportunities right now. And it’s going to take you putting yourself out there and making offers. The things I’ve been doing recently is I am glued to on-market deals that have been sitting on the market for 60 days or more. Those people are probably likely to cut a deal. If you go in Redfin, you can actually filter for how long they’ve been on the market.
So like 60 days, you can do 90 days, you can do 180 days, whatever, how long they’ve been on the market and people have dropped price in the last couple of weeks. Those are going to be motivated sellers. And when I look in the markets I invest in, they’re not crappy homes. They’re good homes in these categories. A lot of times what happens is these people listed and price too high in the first place and then it sits and then the home just becomes kind of tainted for whatever reason. It’s not really logical. The value is what it is. If it’s been sitting for 90 days and they’ve dropped the price by 10%, that might be worth paying for, but a lot of home sellers aren’t going to look at it again because they already went and looked at it or they saw the listing and they’re not going to do it again.
Those are the kind of things that you should be looking for. There’s absolutely going to be stuff that’s out there on the market. The other opportunity I’ve been seeing, this is not true in every market, but a lot of flippers I know are looking to get rid of inventory. And so if you can create something that’s mutually beneficial, those are another group to target if you want to buy rentals. I live in Seattle. A flipped home still doesn’t work as a rental here, but in a lot of less expensive parts of the country, flipped homes that are done in a good way are going to be really nice. They’re going to command a lot of demand from renters. They’re going to command a higher rent from renters and could be a way for you to get a recently renovated home for a good price and to help a flipper out of a tough situation.
So those are the two things outside of direct to seller marketing that I would look for as we enter the winter because everyone’s feeling the lack of buyers. And if you are a buyer, you have a lot of leverage and remember that and use that in your investing strategy. All right, so that’s the opportunity. Now to end the show, let’s talk about the big risks because they’re out there. There are always risks in the housing market and we are in a very uncertain economy. So let’s talk about the specific risks that exist and how you can mitigate them. But first we got to take a quick break. We’ll be right back.
Welcome back to the BiggerPockets Podcast. I’m Dave Meyer and on today’s October housing market update, we’ve talked about market trends. We’ve talked about opportunities heading into the winter, and now let’s go into our risk report. This is something we do every single month because as I shared with you earlier, the market is somewhat stable right now, but I think people want to know what risks exist out there for a crash. It is very hard to go on any media platform right now and not hear someone calling for a crash. And maybe that’s just my algorithm. I don’t know about you guys, but I get a lot of that. And so I want to address what risks exist. And upfront, is the market going to crash? Can it crash? The answer to can it crash is yes, it always can. There is always a chance that the market is going to crash.
Real estate, just like any asset class, is not without risk. And I think personally it has less risk than things like the stock market right now or crypto right now. These things ebb and flow, risks change, but to me, the valuations in crypto and the stock market are crazy. I think in residential, we’ll probably see a correction, but I think the relative risk of a crash is low. And I’ll explain to you why. I think a lot of the people who go out there and call for a crash are basing that on emotion or they’re maybe just trying to sell you something, I don’t know, but they’re just saying, prices are too high, there has to be a crash. That’s not really how it works. Prices can stay high for a very long time. We’ve had unaffordable periods in the housing market. The 1980s were less affordable than they were today, early 1980s.
Market didn’t crash, right? That is not a good way to evaluate whether the market’s going to crash. The best way to look at it, in my opinion, is to look at distress and demand. You need to look at how many people want to buy homes and how much supply is there. And we’ve already talked that the market is relatively stable in that regard, but the one thing that can cause the market to go from a correction, like the one we’re in, into a crash where prices really drop 10, 20, 30%, maybe in a year, something like that, it takes something called forced selling. If the selling conditions are bad, not many people are going to choose to sell their home. And that’s kind of the situation we’re in and have been in for three years. That’s the lock and effect. But if people stop being able to pay their mortgage, that whole formula changes, right?
Because then if you stop paying your mortgage and you go into delinquency or you go into pre-foreclosure, if you go into foreclosure, then you can become forced to sell. That’s a really bad situation we don’t hope on anyone, but it is a situation that can happen and was a large factor in the 2007, 2008 crash of the real estate market is that people were not able to pay their mortgages largely because the mortgages that were given out were predatory and people were given mortgages that they could not afford. They had adjustable rate mortgages, and when they adjusted, people could not afford them. And so all of a sudden, all of this inventory flooded the market that created an excess of supply during a time when there was already low demand that caused the market to crash. Generally speaking, when we look at delinquencies and foreclosures, I just call that distress.
How much distress is there in the market? And the answer to that for today, how much distress in the market is not a lot. It’s not tiny, but it is pretty close to the long-term average. And if you look at the top of the funnel, delinquencies right now, they’re really not bad. They’re actually 0.35% or 35 basis points below where they were this time of year in 2019. And I say this on every show, but just as a reminder, in 2019, no one was worried about a foreclosure crisis and we are below that level. So keep that in mind. That is the big picture here is that delinquencies are relatively low. Have they gone up from COVID? Yes, they have. But it’s up from this artificial low, right? It’s up from COVID period when there were forbearance programs in place and basically no one was getting foreclosed on.
And so if you’re asking, does it come up from there? Yes, of course it comes up from there. But even though it’s up, foreclosures are still below the 2019 level. And can this change? Yes. And I’ll talk about that in a second, but the thing to know is that right now, despite the scary headlines, delinquencies are below where they were in 2019. Distress is below where it was in 2019. And that means that the housing market, in my opinion, is still at a lower risk of crash. There are definitely pockets that aren’t looking great. And actually I flagged earlier this year FHA loans. These are designed for low income folks, so it always has a higher degree of distress than a conventional mortgage. But just want to call out, I flagged that three, four, five months ago. I was like, I’m going to keep an eye on this because it’s starting to go up.
Great news. It is going down. The delinquency rate on FHA loans has declined over the past three months. That is really positive news. Happy to see that. On the other end of the spectrum though, VA loans, veteran affairs loans, this is for active duty and veterans, that is where defaults are actually concerning to me. I think that is one of the areas that is worth keeping an eye on. We are seeing, unfortunately, again, not rooting for any of these things, I’m just reporting what I see. VA delinquencies have risen about 25% year over year. That’s a lot. And so hopefully that turns around. FHA, we saw it spike last year and then it flattened up. I think that was likely what we will see with VA loans as well, but it is something I do want to call out because this is a risk report.
That is a risk that we should look at. Now again, similar to what we talked about in the pricing part where we’re talking about things as they stand today, but what we really want to know is what’s going to happen into the future. And the question is, is distress going to get worse in the market? As of today, there is no evidence that it is going to. If you look at the unemployment rate, if you look at the jobs numbers, they’re up and down, but they’re really pretty historically low. That said, I think there are some reasons to think that there could be a rise in unemployment. Everyone and their mom is talking about how AI is taking everyone’s jobs, right? Inflation is eating away at people’s spending power. And so I do think there’s a decent chance that distress goes up in the next couple of months and maybe approaches that 2019 level, maybe it goes a little bit higher.
But I am sticking with my call as of now that I don’t think, let’s call it the next year that a crash is likely because I think it will go up modestly. Unless there is some massive financial crisis, which is possible, I’ve done a lot of shows on the market. I’m very worried about an AI bubble popping, right? That’s an example of something that I can see. I think the valuations in the stock market are very speculative. I think AI is an incredible technology, but I think that the betting on it and speculation on it is running rampant. And if that bubble pops, could unemployment go up? Could there be more distress in the housing market? Yeah, I think that is possible, but not to the effect of 2006, 2007 levels, at least in the housing market. In your most sober moments, you need to say what evidence is out there and the evidence does not support a crash.
I feel very strongly about that. And that’s why we do this every month is because these things can change, and that’s why I update you every month is because I want you to know what’s happening. But another month, I don’t think this has changed. I do not see any evidence of a crash. And that’s why I think the opportunities we talked about earlier in this episode remain true. Yes, you need to protect yourself against falling prices. You don’t want to “catch a falling knife.” You don’t want to buy a property only to see it lose value. So you need to buy below market price. You need to do value adds. You need to find ways to build equity in your properties that don’t rely on the broader economy and on macroeconomic conditions to help you out. That’s also just called real estate investing, right? That has been what we’ve always done for years.
Outside of the years from 2013 to 2022, that was just normal real estate investing. That’s what you always did. You did not bank on appreciation. You’re grateful for when you have it, but you don’t count on it. You have to be skilled at it, and that’s the environment we’re in today. So hopefully this is helpful to you because I know a lot of people are going to be scared and are going to see this data and see rising mortgages and think this is a terrible time to invest in real estate. If you’re trying to make money by next year, it is a terrible time. But if you’re at a long-term buy and hold investor, you see this as a buying opportunity. Prices are coming down, better assets are going to be for sale, adjust your strategy, protect yourself, but keep your eyes out for the opportunities that absolutely will be there.
That’s our housing market update for October 2026. Thank you all so much for listening to this episode. If you enjoyed it, or if you’re arguing with your friend or uncle over Thanksgiving about the housing market, send them this episode. Let them know what the data actually suggests and turn them on to the BiggerPockets Podcast. We would really appreciate it. Thanks again. We’ll see you next time.

Dave:
The housing market is not going back to normal anytime soon. And today I’m going to prove it to you with real math and real data. Everyone wants to know when the housing market gets better, when it becomes easier to buy a home. I hear this question from buyers. I hear it from sellers. I go on the news frequently and I hear this question all the time. My friends who are renting ask me this question all the time. Everyone wants to know. And there actually is a sort of simple answer to this question. The answer is the housing market gets better when housing affordability improves. That’s the single thing that is causing the sluggish market that we’re in. And once affordability gets better, so will the housing market. But how does it actually get better? When most people hear the word affordability, they think mortgage rates, and that is an important piece.
But how far do mortgage rates have to fall to restore affordability? And what about the other pieces of affordability? Because it’s not just mortgage rates. It also comes down to home prices and wage growth. Those are the three components of affordability. And you have to look at all three if you truly want to understand why affordability is so bad, where it’s going, and what to do about it. So today on the show, we’re going to do the math and we’re going to figure this out. We’re going to figure out how and when we’ll actually get back to a normal housing market with normal affordability. And I’ll give you a spoiler. The answers here are uncomfortable, but knowing them will help you. They’ll help you set realistic expectations for your buying, for your selling, if you’re investing for years to come. This is on the market.
Let’s get to it.
Hey everyone. Welcome to On the Market. I’m Dave Meyer, investor, housing analyst and chief investment officer at BiggerPockets. Today we’re talking about one of my favorite topics, which is housing affordability. I said back in 2022 and every year and every week basically since that affordability was going to dictate what’s happens in the housing market, which markets, regional markets are going to grow, which ones are going to contract. And so far that has been true. The good news for a while, for a couple years was that affordability was actually improving. After 2022, we saw this huge spike in interest rates where affordability deteriorated, but we were sort of slowly going in the right direction. Wage growth were going up, real home prices were sort of flat and mortgage rates were trending down and that was improving affordability. But now the opposite is happening. Rates just went above 7.5% as of this recording.
And right now there’s not really a clear line of sight on things getting better. And so the question becomes, and the question everyone asks and I try to answer as much as possible is when is this going to get better? What is it going to take for the housing market to get back to normal? And I know everyone on social media has a take about this, but as you all know, I’m an analyst and I decided to solve this question with math. So rather than just feeling this out on vibes or some random person’s opinion, I am putting real numbers to what it is going to take to get back to a housing market that looks something like normal. And for the purposes of this episode, I’m going to use two different definitions of normal. So I calculated the long-term affordability average. So this is going back decades, what is a normal housing market affordability?
And then I’m also going to use 2019 as a different yardstick because that was kind of the last quote unquote normal market we had. If you were investing then or just paying attention to the housing market in 2019, it felt pretty normal. It wasn’t growing like crazy. Rents were going up a little bit. Affordability was a little bit constrained, but it was fine. And so those are the two benchmarks we’re going to look at and we’re going to figure out what is it going to take from where we are here towards the end of 2026 to get back to something that feels normal. Let’s jump into it. First up, just want to address what affordability actually means because some people hear affordability, they think price, they think mortgage rates. It’s not. It’s actually three different things. It’s a combination of home prices, so how much you’re paying, two, mortgage rates, what it costs to borrow.
And I guess if you’re buying cash, that part is not in there, but most people are using leverage and are using a loan, so we’re going to talk about mortgage rates. And the third is real wages, how much people are actually earning. So those are the three elements of affordability and there are different ways to measure this. People do it differently. NAR has their own version. New home builders have their own version. Wells Fargo has their own version. They’re all fine. I like NARs because it basically uses something called the payment to income ratio. This is basically comparing your monthly mortgage payment to your income. Makes sense, right? Super easy, right? What percentage of your take home pay is going to your mortgage payment? That to me is a very good way to measure affordability. So that’s what we’re going to use for our analysis today.
So knowing that, let’s talk about the benchmarks and what “normal affordability” is in the housing market. And I told you before, I’m going to do two different benchmarks. The first one is the long-term average. And so basically what we’re looking at for a long-term average payment to income ratio is 18.5%. In other words, on average, going back to 1989, so almost 40 years, you could say that the average gross income before taxes, gross income, about 18.5% of it goes towards your mortgage. And that average includes great times in the economy. It also includes terrible times in the economy, and it averaged out at 18.5%. Now, I do think it’s important to mention that this only goes back to 1989, and so it does omit one of the worst periods. Actually, outside of right now, the worst period of housing affordability that we’ve had in this country in the early 1980s.
Prices weren’t high, but mortgage rates were in the double digits. Some people were paying 15, even up to 18% mortgage rates. And at that time, we don’t have a data series for that, but you can actually calculate points in time. I’m getting nerdy about this, sorry, but 36% of your income back in the early 1980s. So I just want to call out that if you went back further, like another 10 years, then you’d probably have something closer to 20 or 21%, but I don’t have consistent data during that time, so I’m going to use this 1989 starting point. That said, I still think this is a good benchmark. If you look at the last 40 years, that’s a long time. We’re in a new economy. The last 40 or so years, 18.5%. Then let’s talk about benchmark number two, which is what I call the last normal market, 2019.
So again, I’m just choosing this year because it was the last year before COVID. You were guests in the low interest rate environment, but interest rates were starting to crawl back up. It was like a normal, healthy, functioning market. And back then in 2019, the payment to income ratio was 15.6, let’s call it 15 and a half. So long-term average, 18 and a half. Then we had 15 and a half in 2019, so better than the long-term average. Those are our benchmarks, 18.5 and 15 and a half. Now let’s talk about where we are today. Let’s compare to these benchmarks. Well, the last time NAR broke this down, this is like the data series I based this off of, our percentage is 24.6%. Again, we’ll call it 24.5%. So now we can see significantly more of everyone’s take home pay is going to their mortgage payments.
This is 6% of people’s income more than the long-term average going to their mortgage, and it is 10% higher than in 2019. So if you’re wondering why it feels so bad right now, it’s because we had abnormally good affordability in the years going up to COVID and now we have abnormally bad affordability. And I should mention that this 24.6 number, that came from June before mortgage rates went up. I just think they haven’t published this yet, but I just extrapolated how they do this with today’s interest rates in the middle of October. And what you can see is that it goes up to 27%. That’s serious stuff, right? That is significantly worse affordability than we were. You want to know why the housing market is sluggish and slow and difficult? This is it, right? It all comes down to affordability. The whole story here is that since 2019, when we had abnormally good affordability, home prices are up 63% on average.
Meanwhile, family income is up only 37% on average. And with mortgage rates going up significantly, not just over where they were in COVID, but were higher than they were in 2019 and much of the 2010s and really much of this century so far, monthly payments are up 116% since 2019. They have more than doubled. Meanwhile, income has only grown by a third. So you want to know why the housing market is slow, you got it right there. But you all probably know this, right? You know that the housing market is slow and affordability is bad, but today why we’re here is to talk about how it gets better. And so I did three different analyses here and I’m going to go through each of them, but basically what I’m going to do in this next segment is talk about what has to happen to each element of affordability to get better.
So we’re going to hold two of the levers of affordability constant and we’re going to change the other one. So just for an example, we’re going to say if mortgage rates stay the same and prices stay the same, how much do wages have to go up for affordability to improve? So we’re going to go through each of these scenarios and then we’ll talk about how some combination of these things can happen. Spoiler, that’s probably what’s going to happen, but I think going through each of these will help you understand exactly where we are in the housing market. We got to take a quick break before we do that though. Stick with us. We’ll be right back.
Welcome back to On the Market. I’m Dave Meyer. Today we’re going through our affordability analysis and I’m going to walk through the ways that affordability can get better. Remember, we have three levers. There are three legs to the affordability stool. They are wages, mortgage rates, and they are prices. And we’re going to look at each one individually. We’re going to start with wages. In my opinion, this would be the best way for affordability to get improved, right? Mortgage rates can stay the same. Prices can stay the same. I don’t care. If everyone’s wages just went up a lot, that sounds great, right? That would be better. Is that realistic? Could it happen? Well, in order to get to our long-term affordability of 18.5% of your income going to your mortgage rate, we would need wages to rise 33%. Real wages, that’s inflation adjusted wages, would need to go up 33%.
To get back to 2019 affordability, they would need to go up 57%. Do you think that’s realistic? Well, take this stat. Why don’t you just ponder this one for a minute? Real median wage growth did grow 56%, which we need 57. It grew 56%, but it took from 1967 to 2025, 58 years, right? So if you calculate that, that means that on average real wage growth, that’s inflation adjusted wage growth, so you’re actually earning more even after inflation is accounting for, amounts to just 0.8% a year since 1968. I’ve done other episodes on this in the past. I’ll do more on the future because it’s a huge problem in our economy that real wages really don’t grow, but I think you can see that wage growth is really not the solution here. If you were just calculating this, how do we get back to 2019 affordability?
We would need 59 years of wage growth at existing rates. And right now I should mention that real wage growth is negative. It turned negative this year because inflation is higher than the average pay raise right now, and so it’s going negative. But even using the historical average, 59 years to get back to 2019 affordability to get back to our long-term affordability, it would only take a mere 40 years. So I think it’s safe to say that wages aren’t going to get us out of this problem. Now, this isn’t part of the analysis, but I will just say the one good thing is that if you look at wages, they are growing faster right now than home price appreciation. So that has helped affordability a little bit, but just look at the big picture here. You can all see that unless something really big changes in the economy, wages are not going to solve this problem for us in the housing market.
And like I said, wage growth negative right now. If you look at some of the trends in AI, it’s hard to imagine wage growth picking up in an environment where AI is replacing a lot of high paying jobs. I just don’t see it. So can wage growth contribute to better affordability? Yes. But right now it’s going in the wrong direction. It’s actually detracting from affordability. And even if we get back to the long-term 60-year average of wage growth, it’s going to take two generations for the housing market to get back to normal. So I think it’s fair to say don’t count on wage growth. Let’s move on though to lever number two, which is mortgage rates, right? This is the one that everyone keeps talking about because it is the most volatile, especially in the last couple of years. It’s not always volatile, but in the last couple of years, we’ve seen mortgage rates go up, they go down, they go up, they go down.
And so people are thinking with all this volatility, rates are going to go down and that’s going to improve the housing market, right? Well, that is true. That is a very reasonable piece of logic there, right? You co say, yeah, mortgage rates go down, affordability to get back. But how low do mortgage rates actually need to be? To get back to 2019 levels of affordability, the last normal market that we have that everyone wants to get back to, you know what mortgage rates are going to need to be? 2.7%. 2.7%, pretty low. I’ve heard a few people, some mythical creatures out there who have mortgage rates at 2.7%. Pretty rare though, even in 2021, the best mortgage market we’ve ever had and we’ll ever see in our lifetimes, in my opinion, I do not think we’ll ever see that again. The average rate was 3%.
So are we going to get back to 2019 affordability with mortgage rates? I don’t think so. I don’t think we’re getting to 2.7%. I think we’d all be super stoked if we got to 5.7% in the next couple of years. So we’re not getting to 2.7%, not to 2019 affordability. Even to get to the long-term average of long-term affordability, mortgage rates would need to drop to 4%. Might happen again in our lifetimes, but maybe not. Before the financial crisis, 4% mortgage was absolutely unheard of and maybe they’ll come back. That’s possible. I don’t think 2.7 will ever come back, but 4% is possible, but it would take a lot of unusual things, bad things in the economy to happen for us to hit 4%. So again, mortgage rates probably not going to happen. And I’ve talked about this at length, so I’m not going to go into super detail on this.
You’ve probably heard me talk about mortgage rates all the time. I’m not even going to talk about 2.7% because it’s just not going to happen. But let’s just talk about 4% because I see people on social media being like, rates are going to be 4% next year. I’ve been spending four years telling people that’s not going to happen. And I’m just going to explain why it’s not, because it doesn’t matter what the Fed does. They can cut interest rates back down to zero again and we won’t get 4% mortgage rates. I’m just telling you that right now, not while inflation is high. We need to win the battle on inflation. That is how mortgage rates come down and it’s just heading in the wrong direction. It’s not like going out of control. I know there’s a lot of talk of inflation. It’s not like it was in 2021 when there was 9% inflation.
It’s not like that, but 3.4% inflation matters because mortgage rates are based off of this number, right? Again, I’m not going to go into all the mechanics of this, but inflation really dictates what happens in the bond market and what happens in the bond market impacts mortgage rates. And when inflation is up, it pushes all of these things up. And so unless we start to see inflation come down to below, even below the Fed’s target of 2%, we would probably need to see inflation at 1% maybe to get 4% mortgage rate. So that’s possible. It is definitely possible, but it doesn’t look likely. We’ve spent five years above that target, well above that target. And if you’re thinking the difference between 1% inflation and 3% inflation doesn’t matter, that’s incorrect. It does matter. It’s incredibly important for the bond market. And so it’s not going to happen.
Just look at the bond market, just Google 10-year US treasuries. I know no one’s going to do this, but you could. You could just see it’s going in the complete opposite direction. So if you’re searching for hope in the mortgage market, could they come down next year? Yeah, I hope so. I hope that there’s a resolution to the conflict in Iran and maybe mortgage rates go back to 6.5%. Maybe they get to 6%. That’s my most optimistic case for 2027 is like 6%. That would be great, but we’re not getting a 4% anytime soon. I’m sorry, that’s going to be at least several years and maybe never. We might never get to that point. We have all gotten used to mortgage rates that are much lower than our normal. We’ve had zero interest rate policies for a lot of the last 15 years, 17 years.
And I think the Fed’s learned its lesson with the inflation that we’re having to not do that unless there’s an extreme emergency. And so another reason I wouldn’t count on mortgage rates bringing back affordability anytime soon. Will mortgage rates trend down over the next 10 years? I don’t know. I hope so, but I wouldn’t necessarily count on big moves down. Could they get into the 5%s? Yeah, I hope so. I think that would be a great place for us to land. Personally, if we could see mortgage rates at 5%, 5.5%, I think that would be good, but it’s not getting us back to old affordability. So again, don’t count on mortgage rates. That brings us to our third lever. We’ve talked about wages, we’ve talked about mortgage rates, both of which I think are going to be a challenge to help us in the next year, two years at least.
We need to win the battle on inflation. I’m not counting on wage growth. That brings us though to home prices. How do we get back to average affordability with home prices? Well, in order to get back to 2019 levels, we would need home prices to crash, like truly crash 36%. That’s huge. To get back to that long-term average, we would need them to go down 25%. So just for some context, to get back to the long-term, back to 1989 average, we need the average home price to go down to about $335,000. Right now, it’s 446. That is a huge, huge crash. To get back to 2019 levels, we would need prices to go down to 284. That is an even bigger crash. And just for context on this, the biggest price crash in modern history, as far back as we have reliable data for, was the great financial crisis in 2007, 2008.
And prices went down during that time, about 20%, 22%, depending on who you ask, but neither this big. And I just want to stress that that was a real estate created crisis, and there was bad debt, and there was all sorts of situations that contributed to that, that do not exist right now. A 25 to 35% national crash is unlikely, in my opinion. I’ve said it many times on the show for four straight years while everyone’s calling for a crash. I’ve said that this is unlikely. If you look at what’s going on with the lock-in effect, that is going to provide a lot of padding for the housing market. About 80% of mortgages are below 6%, 50% are below 4%, and 20% are below 3%. That’s unbelievable, right? It just causes people not to sell. They don’t have to, and they won’t because moving will be more expensive.
That’s the difference between 2008 and today. People did not have equity in their homes back then. They had adjustable rate mortgages that was making it progressively more expensive for them to stay in their homes. They were underwater on their mortgages and they were forced to sell. Right now, as mortgage rates go up, what happens? The lock-in effect is only getting stronger, right? There’s not going to be as many homes going on the market. That is my number one prediction. I did this on social media the other day.People say, “What’s going to happen?” Fewer people are going to sell homes right now. That doesn’t mean inventory is not going to go up. They are going to go up because the ones that go on the market are going to sit longer, but fewer new listings, that is going to happen. The lock-in effect is only getting stronger.
The second thing is inventory is not growing that much, right? In order for a crash to happen, we need to see a flood of inventory. It’s not happening. We are seeing, yes, increased inventory, but from a year ago, it’s up five or 6%. It would need to go up a lot more than that. For a crash to go 25, 35% crash, we’d probably need to see at least 50% inventory growth, if not more, so that’s not happening. And the third reason a crash is unlikely is there’s just not a lot of distress. I know there’s all these media posts about foreclosures going up, and that’s true because they’re going up off this artificial low during COVID. But if you look at actual numbers, if you truly care to take the time and study this, which I do, you look at the distress in the housing market and it’s really not bad.
Delinquency rates are lower than they were in 2019, and they’re actually going down. They’ve gone down the last several months. So yes, foreclosures are going up because it’s people who fell behind during COVID and they’re working their way through the system. This takes years, and so now some of them are getting foreclosed on. But if you look at early level distress, people are entering the foreclosure funnel now, it’s gone down. And so there is very little distress. Now, of course, regional corrections are real and possible. You look at parts in the Sunbelt, Austin, you can argue that that’s a crash. They’re down more than 10% in nominal terms in Florida, Texas, places like that. Markets I invest in, in Denver, it’s not down that much yet, but I think they will go down more than 10% in Denver. In Seattle where I live, I think there’s real danger there.
There’s regional places. In the Midwest, prices are still going up, right? So on a national level, a crash remains unlikely. And so this is why I started the show saying that the realities here are tough to swallow. If you look at these realities, no one lever can fix it all by itself. Wages aren’t going to grow out of it, mortgage rates aren’t going to come down enough, and prices are not going to come down enough. So the only realistic path here is that it has to be some combination of these things. Again, this is something I’ve been saying for a long time, that this is the most likely path for the housing market, but today I’ve actually brought you some numbers on how long it could actually take. And we’re going to get into that, but we got to take one more quick break. We’ll be right back.
Welcome back to On the Market. Today, we’re talking about housing affordability and the paths that it could take to get back to normal. And as we talked about before the break, no one lever or pillar of affordability is going to fix this problem. Wages aren’t really growing, so that’s not going to help. Mortgage rates would have to fall to really low levels to get back to 2019 affordability, and we’d have to see a price crash bigger than the financial crisis to get us back to normal affordability. So you can’t just look at one of these things altogether. You have to look at them in combination. And I did. I actually did the math on all of this stuff to look at some of the most likely outcomes. So first up, I’m going to call this the base case. This is not my opinion. So just be clear, this is what I would say is what the average real estate person thinks is going to happen.
This is the base case. They would say rates are going to come down to about 6%, prices are going to stay flat, and income’s going to outpace inflation a little bit. It’s a totally reasonable scenario. This is not pie in the sky stuff saying that rates are going to go to 6%, home prices are going to stay flat, income is going to go three and a half percent per year. If all those things happen, how long do you think it would take for the housing market to get back to normal? It’s not one year. It’s not three years. It’s not five years. It would take seven years for that to happen. So that’s what people are thinking, right? This could be a long time. We could talk about some other scenarios. I’m just going to name a couple I ran because I was curious about them.
So I came up with a scenario where rates stay a little bit higher, right? So if rates stay at 6.6%, home prices stay flat, income is at 3.5%, just that little difference, that little difference from six to 6.6% in rates, that would take our years to go to normality from seven years to 20 years. 20 years it would take for that to happen. That’s crazy. Actually, you want to know something that’s really crazy? If you want to get back to 2019 levels of affordability, even if rates go down to 6% and home prices don’t even grow, and you just assume good wage growth, it’s going to take 12 years. That is not good. This is not a scenario that I think is realistic because the housing market is going to get strained before that happens. And so when I look at these numbers and I say all these assumptions people have out there that rates are going to come down, that prices are going to stay somewhat flat, that wages are going to keep growing, I don’t think the housing market can stay in this stall, the great stall that we’re in for another seven years.
To me, the most likely scenario is rates come down 6%. Wage growth I think is going to be muted, right? AI, all of these things, it’s negative right now, but hopefully inflation comes down and real wage growth goes back up. Let’s just call it 2% real wage growth. That’s optimistic. But even if it is, prices, if they come down 2% per year, so a correction, a prolonged correction, it’s still going to take about five years for the housing market to get back to normal levels of affordability. I know that’s a sobering analysis for real estate investors and for people who are in this industry, but I want to be honest with you. The math is tough here. It is really hard to figure out and to model out a way for the housing market to get back to normal. Like I said, even if rates go down, a full one and a half percentage points, even if wage growth goes from negative to positive 2%, and even if home price is just correct, 2% per year for the next couple years, it’s still going to take five and a half years for the housing market to reach its long-term affordability.
Now, the thing here I want to call out here is that a lot of influencers and people who call for crashes say that we need to get back to historic affordability. And I would hope for that because I think that’s good for our society, but I don’t think that’s true. I just straight up think that’s wrong actually. I think we are in an era where housing is going to take up a higher percentage of people’s income than it has in the past. There’s a lot of reasons for this. We can go into it another time, but I just believe that trying to get back to that 18.5% rate is unrealistic. Could we get to 20%? That would be good. 22%, not as good, but I think the market could start functioning again if we’re in 20%. So could that happen? Yeah, I think that would take three to four years.
But again, that requires prices coming down two or 3%. That requires mortgage rates coming down from seven and a half back down to six. That requires wage growth to happen again. And I think if the wage growth doesn’t come, if the mortgage rates don’t come, prices are going to come down more. And again, I am not saying a crash, right? We saw double digit declines in one year in the great financial crisis. But when I look at this math, after doing this analysis and looking at this stuff for years, I don’t see how prices don’t go down in the next couple of years. And I’ve been saying this for years. It’s not different from what I’ve been saying. I predicted this year, we do predictions on the show that prices are going to go down and I’m sticking with it. Again, if you look at nominal home prices, they’re up modestly, but real home prices, like inflation adjustment home prices have been down or flat for four straight years, and I think that’s just what’s going to happen.
And I know that might sound like it stinks and people don’t like that. I think it’s the worst for people who work in this industry an agent or a loan officer who rely on transaction volume, that’s the tough pill to swallow because transaction volume will not go up until affordability improves. I feel pretty strongly about that, that they are very closely correlated. And so that’s tough. As an investor though, this is an opportunity to buy. It just is, but you need to take into account that this could be a prolonged period where appreciation is low. And it goes back to the things we say all the time on the show, but I always say you need to buy below current market comps. You can’t just say, “Okay, this house is worth 200 grand, I’m going to buy 200 grand.” If you’re holding onto it for a long time, you got to buy that for 170.
You need a 15, 20% discount off current market comps to feel good about it. It depends on your market, of course. If you’re in a super hot market, that probably doesn’t apply. But if I think about buying in Denver, I think it would have to be 20% off current market comps and cash flowing. That’s the only way I would buy that because when I look at this, we’re not going to get appreciation for a while. So you have to make it yourself. There’s only two ways to make appreciation. One is on the buy, you buy below market comps, or you do value add. Both of those still work. So that is the positive news for real estate investors or homeowners who want to do this as well. It works for homeowners as well. But man, do not listen to those people on social media who say, “We’re a year or two away from the housing market recovering.” It’s really not.
The only scenario I can see where the housing market becomes affordable again in the short term is a big recession, a big one, a massive recession where it causes inflation to drop and money pours into bonds, so mortgage rates come down. But mortgage rates would probably sit in the four or 5%. And we’re going to have the lock-in effect. So we’re not going to see this huge flood of inventory. And in that case, maybe home prices go down five or six or 7% a year instead of 2% a year. And then maybe in two to three years we are back at affordability levels. But that’s not a good scenario. No one wants that scenario. So there’s no good way out of this. Either we wait or there’s a really bad economic outcome. I don’t see a way we grow out of this. I know people say AI is deflationary.
That really hasn’t proven to be true. I don’t really buy that line of thinking. I don’t think we’ve ever really seen service deflation in the United States as far back as I’ve seen data for. And so yeah, it’s optimistic, maybe it’ll happen. I hope it happens. That would be great. But service deflation may bring down the inflation number, but it also might bring down wage growth. So all these things are just so optimistic. I don’t like being pessimistic. I don’t think I normally am, but in the last couple of years, I just try to let the math do the talking. And the math is kind of clear to me here. It is very unlikely we’re going to get affordability back in the next couple of years, and I really think it makes sense for you to plan accordingly. I am not one of these people out there who’s going to go tell you to buy real estate at all costs.
I still believe real estate is the best path to financial freedom. I still think you can and should buy right now, but it’s not because there’s going to be appreciation in the next few years. There will be appreciation again, that will happen, but it’s going to take some time. And so you need to position yourself. You need to buy so low that you’re not losing money in the next couple of years. And then when appreciation does pick up, you got in at such a good basis that your returns are going to be huge when it picks back up. That’s what happened in the financial crisis. People who did well bought super low back then. A lot of times they bought in 2008, 2009, 2010 before the market recovered. The market didn’t bottom until 2013. They bought then at a low enough price that when the market did recover and those returns came, they were able to benefit from that.
And it’s the same playbook here. It’s very different from 2008, a lot of the fundamentals, but the playbook is the same. You have to do value add, you have to buy really low to outlast this scenario. And in this scenario, there will be more motivated sellers and that means you have more leverage. So use it. That’s the play. That’s what you do in today’s market. But go into this with clear eyes and sober about what’s likely to happen in the housing market over the next couple of years. I hope this analysis helps you do just that. If you have any questions, let me know in the comments. I am happy to answer them. Thank you all so much for watching this episode of On the Market. I’m Dave Meyer, and I’ll see you next time.