fbpx
Top Lenders Share “Good News” for Mortgage Rates + Trending Investor Loans

Top Lenders Share “Good News” for Mortgage Rates + Trending Investor Loans

We may be close to some serious mortgage rate relief, according to today’s panel of top lenders. With interest rates finally starting to slide after cooling inflation and lackluster job growth, investors are gaining hope that we could see more affordable mortgage rates resurface after a very harsh past two years. So, what could come next? Stick around because we’ve got mortgage rate predictions and the best investor loans to look for coming up in this episode!

Caeli Ridge, Krystle, and Kenny Simpson, our expert investor-lenders, are back on the show to give their take on the commercial and residential mortgage space. All are feeling a bit more optimistic as we see rates finally trend into the six-percent range for primary residence homebuyers, with rates up another percent or so for investors. But with today’s mortgage rates still relatively high, which loans should investors use? From DSCR loans (debt service coverage ratio) to HELOCs (home equity line of credit), construction loans, and more, we’ll get into each of these loan products and share which ones investors are taking advantage of today.

Plus, if you’re struggling to find cash flow in today’s tough housing market, our lenders offer some simple but significant solutions to boost your ROI and help you build your portfolio. Do you have an adjustable-rate mortgage? If so, you MUST heed our commercial lender’s words, as you could get a surprise increase in your monthly mortgage very soon.

Click here to listen on Apple Podcasts.

Listen to the Podcast Here

Read the Transcript Here

Dave:

Weren’t interest rates supposed to come down by now. Why haven’t they, will they this year? What loan products should investors be looking at? Today we’re talking about mortgage rates and loan products.

Hey everyone, it’s Dave Meyer and you’re listening to On the Market. And a couple months ago we had a very popular episode talking to three very experienced lenders, Caeli Ridge, Kenny Simpson, and Crystal Moore. And because this was so helpful to our audience in navigating the confusing lending market right now, we decided to bring them back on to discuss what’s going on in the lending world as we were about halfway through the year. And as a reminder, just to give you some context about why we’re doing this, again, many lenders and media outlets were predicting some rate relief by now at this point in the year, but we haven’t seen it. So we wanted to give you an update on what’s actually going on and dig into what this means for real estate investors. So let’s bring on our panel, Kenny, Krystle, Caeli, welcome back to the show. Thanks for being here again.

Caeli :

My pleasure. Good to see you. Thanks for having us. For

Dave:

Having us. All right, well Chaley, let’s start with you. Mortgage rates over the last couple of months, and we are recording this towards the end of May. Just for reference for everyone, have been on a little bit of a roller coaster up and down. So why don’t we just start by framing the situation currently for our audience. What are current average mortgage rates for a primary residence today?

Caeli :

So I checked this morning and remember everybody, there’s something called that LLPA. Dave, you and I have talked about this loan level price adjustment that will dictate what the actual rate is. So they’re not created equal like anything. So depending on loan size, credit score, property type, all of those variables. But I did get a baseline and let’s just say all things being equal, an owner occupied purchase with 25% down, you’re probably in the low to mid sixes this morning.

Dave:

Oh, okay. That’s better than I was expecting.

Caeli :

Primary residence.

Dave:

Primary residence. And how does that differ for an investment property?

Caeli :

So on average, right, again, all things being equal, you can usually estimate that the non-owner occupied or investment property is going to price about a 1% higher. So you’re in the low sevens to seven and a half, about a one point spread between owner occupied and non-owner occupied on the residential side.

Dave:

All right, well that’s tracking with what I’ve personally seen, so I’m glad to know that I’m about accurate. But Crystal, how does this compare to commercial rates? What are you seeing?

Krystle :

So commercial rates are really around mid sixes. It’s kind of the same scenario depending on the deal size and location pricing might vary slightly, but assuming a million dollar minimum loan amount, we’re pretty much 6.5 to 6.6 right now, which is why a lot of the two to four guys are trying to buy apartments right now

Kenny:

Because the interest rates are better.

Dave:

That does make a lot of sense. Well unfortunately for you all, those were the easy questions I had where you could just tell us what’s currently happening and now we have to go to what might happen in the future. So Kenny, let’s start with you. When you all were here previously, we were talking about what we thought might happen and generally the consensus, not just with you but in the broader economy was that rates were going to be coming down this year and maybe by now that obviously hasn’t happened so far this year. What do you think? Do you think we’ll see rate relief in 2024?

Kenny:

Well, I think we were all thinking back then, and I think we now know that there is a lot of money in the system and it just hasn’t got out. I mean we do know that Powell has a very tough job too. I think he wants to cut rates, but he is also does not want to do it prematurely, even though some of us would agree that maybe he should. But I think he’s very focused on the jobs, jobs, jobs, jobs. I think unfortunately he doesn’t want to come out and say it, but he wants to see people lose jobs, which would create probably some type of slow down and consumer spending more than there is now. And so until we probably see either some craziness happen or the consumer fall off a cliff or some pain in jobs, meaning probably over a 4% mark, I think we’re not going to get the cuts and we’re going to see rates kind of maintain the good news about rates, which I will say is the 10 year that the difference between the tenure and the 30 year fixed that spread was at 3.10, that’s actually come down to 2.60.

So actually the rates would be higher if it wasn’t for that. So we did get some relief. So I’m going to celebrate there a little bit just

Caeli :

To put into perspective guys. And Kenny, I’m sure he knows this too, but the jobs report in April actually was not as hot as maybe they expected. I think that I read that they were expecting 240,000, right Kenny in jobs and we actually only got 1 75. So big picture, that’s good news for us and the right department, but we need to see the trend.

Dave:

I just want to take a minute to explain a couple things that Kenny said there. First and foremost, when we’re talking about rates, we often look to the Fed and try and understand what they’re going to do because the federal funds rate, although it doesn’t directly control mortgage rates, plays a large role in the way that the bond markets work, which impacts mortgage rates. It pays a large role in mortgage-backed security markets and part of the whole global financial system that will eventually trickle down into mortgage rates. So that’s super important. But there is other parts of what sets mortgage rates and one of them is what’s known as the spread between 10 year bond yields and the average mortgage rate. And during normal times, the difference between a bond yield and mortgage rates is about 190 200 basis points, like 2% during the pandemic.

That shot up to about 3% as Kenny said. And that usually happens when either there’s excess supply of mortgage backed securities or there’s just more risk in the market. There’s all sorts of reasons, but it was excessively high. And as Kenny was saying, one of the reasons he’s celebrating is that’s starting to come down, which just shows that there are ways that mortgage rates move that aren’t related to the Fed. So it can’t, we can’t just look at the Fed when we’re trying to understand what’s happening. We have to look at bond yield, we have to look at the spread. So Kenny, thanks for bringing that up. It’s super important. I just want to make sure everyone understands that. Crystal, let’s move to you. Are you in agreement, you think we’ll have a little bit of rate relief or are you more optimistic?

Krystle :

I do think that we’ll have some rate relief as long as the trend continues. Of course, that’s why we’ve seen some reduction of treasuries in the last week or so. But definitely I think we’re seeing that credit card delinquencies are going up, the jobs numbers didn’t come in as good. Inflation came in slightly below expectations. So if we continue to have these reports going forward, then I do think that we’ll see rate relief. It might not be as much as we had hoped in the beginning of the year, but I do feel that we’ll see some relief for

Caeli :

Sure. And the feds are always good to tell us that there is a lag in this data, so there’s always going to be up to 90 days before some of the overwhelming evidence presents itself and the feds are making decisions. So I think we’re there too. I agree with Kenny and Crystal. I think we’re real close and it may take a couple months, but we’re close.

Kenny:

The other thing is rents are now becoming flat to negative. That growth, that growth stop, things like car insurance peaking, that’s not going to peak every year. So when you look at the inflation reports and the jobs report, you start breaking it apart and dissecting it, which a normal person’s not. You’re seeing pain. It just like you just said, we’re probably 90 days out to really start to see that effect. And if the trend continues, it’ll be good news for mortgage rates and investors and home buyers.

Dave:

Are you saying that I’m not a normal person, Kenny, because I start looking at that stuff every time?

Kenny:

No, you’re a nerd like me. Okay.

Dave:

Yeah, fair enough. Alright, well let’s move on and just talk about some trends that you all are seeing in terms of demand for mortgages and for loans. Chaley, you work a lot with investors and we just got through what is typically the busy season, high demand season. Did that normal seasonality present itself this year?

Caeli :

I don’t think to the degree that we normally see, but we definitely saw the trend upward. We saw an increase in applications and closings for the spring months the way we do, but I think that it was diminished a little bit to what we would typically see. So while there was an increase, it’s not as robust as maybe the last several years or what we come to expect.

Dave:

And Kenny, do you see the same thing?

Kenny:

What’s really out there? What I’m seeing, a lot of HELOCs, an overwhelming amount of HELOCs, which is unfortunately could spur inflation because people have spent their money, they tap the credit cards and now we’re on HELOCs. There’s a lot of equity. Interesting. I’m also seeing a lot of fix and flips. A lot of people are actually doing construction loans if they’re knocking stuff down here, they’re buying. And the other thing is a lot of non qm dscr, things like that. So because of these regional banks and all the issues, which will continue to problem because they’re going to have balance sheet issues, which Crystal can talk to you about on the commercial side. I think the non Q market’s going to, if as long as it remains healthy and fluid, that’s going to be a big help for a lot of investors that are going to need that product where they can’t get at a regional bank or a big bank.

Dave:

I’m surprised a little bit by the heloc. HELOC rates like 9% right now. I looked recently and they’re super high,

Kenny:

Right? I’m telling you there’s a lot of HELOCs going on a lot.

Caeli :

Just to add to that because one of the cool things about a HELOC or an open-ended revolving account that a lot of people aren’t necessarily as familiar with conceptually it’s interest only, right? The simple interest using it from a depository perspective and driving balances down and reducing the amount of interest that can accrue is a really effectual way that investors have been able to keep the lights on, I guess, or keep their cashflow as high as possible. So the regular person not knowing this, yes, I would agree with you that higher interest rate, there’s going to be some issues, but if they’re using it in a very specific way, velocity of money, they’re able to hedge and really keep up with the higher interest rate by not paying that extra interest.

Krystle :

You’re exactly right. And it’s also a much lower interest rate surprisingly than their credit cards.

Dave:

That’s a good point. If you’re using it for expenses or certain rehabs, then you should be comparing it to a credit card or a bridge loan instead of to a primary mortgage

Krystle :

And you only pay on what you draw. So that’s that other thing where we’ve used that too for investors who are maybe looking to buy a property and they haven’t quite identified that yet. The HELOC is a great way to do it because you only pay when you draw on those funds.

Caeli :

Yeah, I’m a fan.

Dave:

We do have to take a quick break to hear a word from our sponsors, but stay with us. We have more from Chaley, Kenny, and Crystal after this. Welcome back to on the market Crystal. I did want to turn to the commercial side because there’s been a lot of focus not just with real estate investors, it seems like the broader media has been very focused on lending and the state of commercial paper. Can you just tell us what you’re seeing here in the commercial side of things?

Krystle :

Yeah, I wish I had a rosy picture to paint, but lenders generally are much more selective on what deals they’re doing. I’m seeing lenders are controlling their volume, even though rates have come down over the last week or so, they’re still keeping spreads a little bit higher. And it’s mainly because there’s these kind of like this looming rules for banks to have increased reserves and so they’re really trying to beef up their balance sheet and they need some of these payoffs that were at three or three point a half percent to fall off their balance sheet. They’re also scaling way back on interest only right now. So interest only is much tougher to get right now because auditors are coming into the banks and telling them that they have too much interest only on their books and that they need to keep it within a certain ratio.

So I’m seeing a huge reduction in that across the board. But with investors, people are still trying to make deals work. So I see that most people are looking to buy deals where you can add 80. That is a big play right now. And even though I mentioned earlier that the two to four unit investors are trying to make the jump to commercial, what they’re seeing when they do that is that I’m telling them they have to put down 50, 60% on an apartment purchase. So then they go back to the other side to the two to four where they can add ADUs or play that game a little easier with way less down.

Dave:

Yeah, it’s easy to say look at commercial rates, they’re a little bit less. But then when you see the LTV requirements and how difficult it is to even find someone who’s willing to lend to you right now, it might not be as attractive I think as any experienced commercial operator might tell you. Yes. Just out of curiosity, crystal, you mentioned that auditors were cautioning banks against more interest only. I’ve never heard of that. Why would an auditor care about that or why are banks held to some specific ratio on interest only versus fully amortized loans or blue loans? Partially amortized

Krystle :

Primarily because of all the rollover. So when I talk to a couple of my banks, they’re anticipating 2025 to be a really big year, at least as far as refinances go. But the problem is is if you had your interest rate fixed, for example, I have one of mine that’s fixed at 3.1% with interest only for five years. If when I go to refinance my rate is 6.5%, I’m not going to be able to afford that mortgage. Now for me, I say we need interest only more than ever because of that reason. But auditors say that this is putting the banks in a bad position to possibly have non-performing loans. So they’re not going to, I don’t even know if they will loosen that even when the market improves. Again, I think that they’re finding that that’s problematic in their portfolios.

Caeli :

Crystal, does it have anything to do with the real estate prices, commercial valuation and where they think that may be? Because if they’re interest only, they’re not plunking down any principle. Is there any scare or any concern that values in that sector may be coming down, which might be a good thing for investors that right, you want to get in on the down and get out on the high, but do you think there’s any validity to that?

Krystle :

Oh absolutely. I mean, so if they can’t make their payment, they’re looking at a cash and refi, but they’re also looking at lower values and we are seeing that across the board here. So I’m seeing apartments are down 10 to 15% on values. Cap rates are still really low in comparison to interest rates, but I am seeing regularly 10 to 15% off or lower prices across the board. Finding comps is hard and I’ve recently just had my first appraisal come in low on a purchase.

Kenny:

The other thing just to jump in and Crystal could point on this, so when you have a commercial loan every year you have to send in your financials. And so Crystal needs to jump in on that because it’s very interesting, it’s happening there and then just letting their rate adjust and waiting. So those two things are big right now.

Krystle :

So if you have a commercial loan with any FDIC insured bank, they’re going to ask you for annual financials. They want your personal financial statement, your schedule real estate, your most recent tax return and current like the end of year p and l and a current rent role. So they’re essentially re-underwriting your deal every year to make sure that you’re meeting that one 20 debt service coverage. So what I’m seeing now is that if people aren’t meeting that the banks are having to work with them, they’re not necessarily saying you have to pay your loan down even though they could do that. I’m finding that more lenders are having to work with their clients on extending out their loans, doing some sort of a modification, especially if they’re performing, if the borrower’s making the payment, they’re just extending the loan or making exceptions, but they’re definitely seeing that their numbers are coming in below that 1.2 or 1.25 depending on the lender debt service. So the auditors are seeing those numbers.

Dave:

Interesting. So let me just explain that to people who may not be familiar with commercial loans. All commercial loans are underwritten on the strength of the asset and the deal that you’re putting together. It’s not based on your personal credit worthiness. If you are buying a primary residence or a residential property where they look at you, your credit score, assess how likely you are as a person to repay your loan, commercial loans are basically all math. They say, Hey, how much cashflow is this property going to generate relative to the debt service? Just how much they’re going to have to pay for their loan every single month. And there’s a ratio that they use, it’s called the debt service coverage ratio and basically how much, what ratio of cashflow or revenue there is to the debt service. And most of them want that ratio to be at 1.2 or 1.25% as Crystal just said. And from my understanding, normally they just underwrite that at the beginning and then as long as their people are paying, the banks were kind of just like, yeah, it’s fine. But now they’re actually reassessing that every year to make sure that that debt service coverage ratio is still holding up to their underwriting standards.

Krystle :

So it was always required, but lenders were just kind of ignoring it and not really doing it. And then after the great financial crisis, they started writing in the loan docs that you would essentially trigger the default rate if you didn’t turn in your annual financials because auditors were dinging the banks, they were basically reprimanding the banks if they didn’t have that up to date information. So I have seen it happen with clients where they go into the default rate a few times, so it’s not something you can ignore any longer.

Dave:

Wow, okay. But it sounds like if you’re performing, if you’re still paying your mortgage, even if you drop below that 1.2, most banks are going to work with you and find a solution.

Krystle :

Yes. And there are some things like sometimes you’re renovating and so you’re below 1.2, so they might put you on a watch list and check in with you a few months. They’ll get all the details on the renovation, how long you think it’s going to take, basically a plan to cure this issue, and then they put you on the watch list and then you can kind of fall off after that. That’s most lenders. I will say I don’t think lenders want properties right now, so that’s the good thing. I know some people might be suspicious that banks might loan to own, they have no interest in owning your property. They essentially want to work with you to continue to operate the asset. They just want you to make your mortgage payment. That’s it.

Dave:

Yes. The banks not typically in the business of owning property, and they would much rather you just pay as agreed. Yeah. So let’s move back to the residential side. Kenny, I’m curious, you mentioned HELOCs becoming more popular. Are there any other trends that you’re noticing in the residential space that you think our audience should know about?

Kenny:

Well, the big thing right now in California is a DU play. A couple things. Number 1, 2, 3 years ago, the problem was people didn’t understand it. Appraisers weren’t being nice with the appraisals, and now that’s becoming popular. The reason why I say that is people are coming to me, they’re buying a two unit and then they can get a fix and flip loan to actually add the A DU. So that’s very popular here. Then they’re going to take it out. That’s number one. I would say the stuff that’s really working now for people, like I mentioned as a non QM market, is really strong pricing’s actually very competitive relative to conventional financing. How’s that helping a lot of people? Number one, maybe your wife’s W2 and your bank statements and that’s how you qualify. Maybe your just bank statements, maybe you are just doing DSCR, like you mentioned where you use the property, the income from the property, they look at your credit, your down payment, and they underwrite a loan like that.

HELOCs are obviously popular for owner occupied and investment properties. So both I’m seeing on both if you have the equity, what else is really going on? A lot of bridge loans. So a lot of people are doing bridge loans and to get a property up and then we’re starting to see I did a, which is unusual, a bridge. So a 10 31 bridge, and then we’re doing the other property. So if that person is not ready to sell that property, we’ll bridge it. They’ll buy the new property and they can sell later and verse into it. Because obviously as a lot of us know, if you’re in a competitive market and you don’t have your cash ready, it’s really hard to close on a transaction quickly so that way you don’t have to have, well, I want to buy this property, but I have to wait contingent on this to sell. So those are the trends I’m seeing. But I would say non QM is very popular in helping a lot of people with a lot of scenarios these days.

Dave:

We have to take one final break, but we have so much more on mortgage activity and products investors should look at after the break stick around.

Welcome back to the show. Let’s jump back in. Well, I want to dig into it. The first thing you mentioned, Kenny, which was the A DU play. First of all, A DU stands for accessory dwelling unit. A lot of cities, particularly on the west coast, are doing what’s called upzoning, which means that you are allowed to build accessory dwelling units. It’s like a mother-in-Law Suite or an apartment above a garage, something like that, tiny home in your backyard. And this is seen as widely beneficial. I think most people agree this is a good idea. An opportunity adds a housing supply and for investors it’s a great idea. You could add additional cashflow to your property by building an accessory dwelling unit. So Kenny, can you just explain to our audience how lending works on an A DU property? Because I understand that it’s changed a little bit as of late and it might not be as straightforward as just buying, for example, a duplex.

Kenny:

Absolutely. So let’s take a step back. Two, three years ago, Fannie Mae didn’t have a ruling on it. Then they had a ruling on it, they didn’t like it, and then they finally came out and said, okay, Fannie Mae’s guidelines are if you have a single family and you have 180 U we’re good. And Freddie Mac was okay, if you have a two unit add one A U, well, we run into problems and somebody has two units and they add two Aus or they have a house and they add two ADUs or an A DU and a junior, a DU. A lot of ADUs going on here. So a couple of things. Number one is we actually a lot of times will just appraise a property as a three unit and they come in and we get it done that way with no mention, I’m in a DU to be honest, but if you have to do the A DU play, what the problem was years ago is we didn’t have comps.

So where’s the, we don’t have a comp now. There’s a lot of comps. So if some of these cities are up and coming, you’re lying ’em. What you’re going to run initially is where’s a comp? I don’t have any comps. Underwriters might come back and say, this is great, but I want to see comps. So that’s one of the issues. You can run into non qm if you do have a two unit and another two unit and for some reason you can’t go traditional, you can go ahead and do non qm. They’re okay with the ADUs and non-conforming if you want to say. But eventually I think Fannie Mae just needs to get their heads and arm dropped around it and say an A DU is a unit and just call it what it is and just whether it’s one unit, two units, whatever, and allow it. I think we’re getting there, but they’re here now. It’s just maybe going to take a few more years, but I don’t see why they’re just not doing them. Just calling them units.

Krystle :

I mean they’re approved, they have plans, permits, everything.

Kenny:

Yeah, it’s kind of crazy.

Caeli :

Well, and Kenny and ground up construction is part of that too, if they needed it, right? If it’s not just a refinance or if it’s an existing dwelling, they can look at ground up construction and add the extra unit and the city is offering tax incentive for a lot of those. Is that still right? Did I get that right? In California specifically, you

Kenny:

Can get a little bit of money, they’ll give you $40,000, but what do you get for $40,000 In California? Not much. You might get a kitchen or a bathroom, but what’s happening is if somebody will buy a property there maybe is in a garage, they want to convert or there’s already an illegal unit. So they’ll do a fix and flip loan, they’ll go get the plans of permits quickly and then, which is getting faster here, and they’ll go and use that money in the budget and they’ll start fixing that up and then they’ll take it out with long-term debt or they’ll sell the property. So those do work here. The good news is it’s getting much faster to get a DU plans here, maybe six months or less. And it used to be like a year or more is ridiculous. So that model of waiting around and paying 10% on money was painful.

Krystle :

I mean, we’re seeing people adding, I have clients calling me adding 10 a 14 adu, the number of are crazy. Yeah, they’re just looking for any lot with a big lot with a smaller building and they’re just stacking as many adu and they’re also in order to get more ADUs doing a couple of affordable units to maximize.

Kenny:

And then Dave, lastly on that, which Washington’s already due, Seattle is California had passed. They haven’t implemented, but they’re going to start allowing, if you built 14 Aus to sell them individually, it’s passed. It just has not accepted it or put it into play like in San Diego doing it in Washington. And I actually talked to one of my lenders and we talked somebody up there and Fannie and Freddie Lin on them. I haven’t had an experience to do one yet, but that is coming down the pipeline here in California.

Dave:

Wow. Well, I definitely going to be a strong incentive for developers. So if you are a developer, you probably want to look out for that one. Chaley, I’m curious as we get close to wrapping up here for our audience, and if we’re all correct here that rates are probably going to stay a bit higher than some people were hoping for or expecting, do you have any advice on how think strategically about loans in this type of higher interest rate environment?

Caeli :

So what I’m seeing for the cashflow, for those that are really looking for the highest value in cashflow, which by the way gang, there’s going to be market cycles where cashflow may be diminished a little bit and you’re really focusing a little bit more on the appreciation. So I would say ride that wave if you can because it’ll come back around. But one of the more unique things that I’ve been seeing lately is midterm rentals and check this out, this is really cool. In the states in which you’ve got all the major professional sports teams, they are signing leases for two and three years in advance. What’s happening is these kids are signing the roster, right? They’ve got their rookie contract for two or three years. So you’ve got your football, your basketball, your baseball and your hockey, right? The four majors. So finding properties in those states, usually on the higher end, these kids are, I mean, what are they making?

Minimum 400 grand just to be on the roster in many cases for a professional athlete. So they are coming from out of state, they don’t usually live in the state in which the property is located. So they’re coming from out of state, and again, they’re signing a lease for three years in advance because they want to go back to the same place. And because the actual sports themselves are in those chunks of time throughout the year, they’re vacating and then the next sport starts and the kids come in and rent. So it’s a unique idea, and I think it’s doing well in certain markets and the cashflow seems to be covering what just maybe a single family is lacking right now.

Dave:

Yeah, I’ve never done midterm rentals, but people seem to like ’em and think that they’re good for cashflow, and that’s a very interesting angle. Do you know how people could target that demand from those athletes or similar types of ideas in particular? There

Caeli :

Are turnkeys out there that are actually focused just on this right now. Agents that have adopted some of this. Ohio is one of those states. That’s the first place that I heard about it, but I can’t imagine it would be all that difficult. There’s probably easy access out there for you to ingratiate yourself into that space. I can’t imagine it would be all that hard. If you want to get the information, you could probably find it pretty easy.

Dave:

Crystal, let’s go to you. Any last advice for our audience here about thinking strategically about using debt in this kind of market?

Krystle :

Yeah, I mean, the one thing that I’ve noticed is a lot of owners have not really focused on maximizing the potential of their properties. So now, like you mentioned Shaylee, you might be seeing reduced cashflow right now, and that’s just a period of time before we get back focused on that. For us, it’s more like work on maximizing your cashflow. If there’s things that you can do to your property, if you can add storage, if you can upgrade units to get higher rent, this is the time to do that. If you’re not finding that much in the way of investments, I know a lot of clients here are getting a little bit restless. They want to find a deal, they want to buy something. Everybody’s complaining that it doesn’t make sense. For one, it’s kind of like that needle in a haystack. There’s always a deal somewhere to be had, so you’ve just got to be more patient than ever.

But I would say if you’ve got the cashflow now or you’ve got some cash, I would focus on maximizing your properties because a lot of us have been so busy the last few years that maybe we renovated 70% of our property, but there’s that last 30% that’s out there hanging. And then the other thing that I’ve been having a lot of conversations with people about is that their loans are adjusting and what do they do? Should I refinance? Now, if you have a commercial loan, you really want to check your loan docs or call your loan officer or banker and see what happens after that fixed period when the loan adjusts. Hopefully it doesn’t balloon, but a lot of lenders don’t have a cap on the first adjustment, so people need to be aware of that. So if you have a three and a half percent rate, your rate could jump up to seven and a half or so because there’s no 1% cap on that first adjustment. So you really want to check that out. And I really am telling people this is a balancing act. You probably want to wait to see if it makes more sense to wait to refi, because on commercial, you’re locked in, you’ve got prepays to deal with and all that kind of stuff. So it’s a little bit of a balancing act where I’m just staying in touch with a lot of clients to see when it makes the most sense for them to refi.

Dave:

Got it. Thank you. Kenny, last to you. Any last advice for our audience?

Kenny:

Yeah, a couple things. I’m saying number one is make sure you’re really working with a good team right now. Experience really, really matters. Not all lenders are created equal. Not all loan officers are created equal, right? And experience is really going to help you really need lenders right now as people go, how are you so busy? I said, because we’re solving problems and because we have relationships with banks and CEOs and chief credit officers, we’ve had a long time. So to get that exception and go through also on non qm, what a lot of people don’t understand is not all lenders are the same. Not all lenders sell to the secondary market. Some of them actually can balance sheet the product. So that means they can be more flexible. We can get exceptions done. So you have to understand that when you’re talking toll, a lot of loan officers don’t know that.

They think everybody just sells it. They don’t have to. And then last but not least is if you’re buying an investment property or a primary, a lot of times you’re competing with cash offers, right? You’re competing with closing quickly. So get your docs in. Maybe you have to do the pre-underwrite upfront, get your deal vetted. And a lot of people are going into escrow with their deal not vetted. And look, when I say vetted, that doesn’t mean, Hey, I’ve got a tough deal. Let me go call the rep at the lender. That means I call the head underwriter and that head underwriter calls the investor, and that investor says yes. So when I submit the file, I don’t get blown up in two weeks to tell me you can’t do the loan. I go straight to the source that’s buying it or makes the decisions. And then I come back and I said, Hey, I’d rather take 2, 3, 4 days to get a slow yes than a no in two weeks. Then it makes me look bad. The buyer, the agent, everybody. So just make sure you do your homework and you work with the best, and those people really have confidence in what they’re delivering.

Dave:

Great advice from all of you, Kenny, crystal Chaley, thank you so much for joining us. If anyone listening wants to connect with one of these three, we will put their contact information in the show notes and description below. Thanks again everyone. Thanks

Kenny:

Dave. Thank you. Thanks Dave.

Dave:

Thanks again to everyone for joining us. I just wanted to reiterate one last thing before we go, which is, as Katie said, right now, it is really important to work with an experience lender. Things are changing really rapidly. Mortgage rates are going up and down. We’re sort of on this rollercoaster, and a lot of banks are adding new products to try and account for that. There’s a lot of new legislation going on with the lending industry, and so you do need to stay on top of things. Of course, listening to this podcast, we’re going to try and give you that information as much as we can. But working with a great lender, as Kenny said, is another way to do that. And if you want to connect with one for free, we have a tool for you at BiggerPockets, just go to biggerpockets.com/lender and connect today. And for anyone who wants to connect with an investor friendly agent, go to biggerpockets.com/lender Finder and you can get matched with one completely for free. Thank you all so much for listening. Hope you enjoyed the show, and we’ll see you soon for another episode of On The Market. On The Market was created by me, Dave Meyer and Kaylin Bennett. The show is produced by Kaylin Bennett, with editing by Exodus Media. Copywriting is by Calico content, and we want to extend a big thank you to everyone at BiggerPockets for making this show possible.

Watch the Episode Here

https://youtube.com/watch?v=V7wkZovl8ks

Help Us Out!

Help us reach new listeners on iTunes by leaving us a rating and review! It takes just 30 seconds and instructions can be found here. Thanks! We really appreciate it!

In This Episode We Cover

  • Top lenders’ mortgage rate predictions and updates on today’s rates
  • Why mortgage rates haven’t fallen faster and why there’s hope on the horizon
  • Trending loan products investors are using to build their real estate portfolios even with high rates
  • Why commercial lenders are getting cautious and starting to deny this one type of loan
  • ADU (accessory dwelling unit) lending updates and why it could be easier to get ADU funding soon
  • How to boost your cash flow and maximize your ROI WITHOUT buying more properties
  • And So Much More!

Links from the Show

Connect with Caeli :

Connect with Krystle and Kenny:

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

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

Top Lenders Share “Good News” for Mortgage Rates + Trending Investor Loans

Should You Pay Off Your Rental Property, Reinvest, or Buy More in 2024?

If you’re like most investors, you’ve probably asked yourself, “Should I pay off my rental property early?” With today’s high mortgage rates, troublesome inflation, low inventory, and risky economy, many investors don’t know whether it’s the right move to pay off their mortgage, reinvest in their properties, or go out and buy more. Paying down your debt gives you a guaranteed return, but with home prices still climbing, you could miss out on the sizable appreciation of getting another rental.

On today’s show, we’re going to debate which is the best move to make. Should you pay off debt, buy more investment properties, reinvest in your portfolio, or put more money down when you buy? Each investor has a different method for their next move, but thankfully, our expert panel gives their thought processes for figuring out which decision is best for your portfolio. Henry even shares his “three buckets” framework that EVERY investor should think through BEFORE investing or paying off a property.

We’ll also discuss the crucial calculations you can use to help you decide and avoid analysis paralysis if you’re stuck between choices. Plus, how a high-risk house flipper like James protects himself from downsides even during tough markets like today. Don’t pause on making moves that could help you reach financial freedom; stick around, and we’ll show you exactly how to know which moves to make in 2024’s housing market!

Click here to listen on Apple Podcasts.

Listen to the Podcast Here

Read the Transcript Here

Dave:

With the trio of challenges facing the real estate industry, which are interest rates, inventory, and inflation. What should investors do right now? Should they try and buy new deals? Should they add value to what they have? Should investors stop investing and just pay off their current properties? Today? We’re digging into that and debating what investors should do. Hello and welcome to On the Market. I’m your host, Dave Meyer. With me today are my friends, Henry Washington. James Dainard, guys, good to see you.

James:

Morning. What’s up

Dave:

Buddy? Well, as you know with today’s interest rates, inflation, all these things, these challenges, I don’t know if you guys hear this question a lot, but I have a lot of people asking me, I have X amount of dollars, 20 grand, 50 grand, a hundred grand. They don’t know what to do with it. Do you put it into a new property? Do you reinvest? Do you pay down debt? So that’s what we’re going to talk about today. This big question is now a good time to invest or are there better ways to be allocating your resources in this economy? So I’m excited to talk to you both about that. But before we jump into today’s debate, I want to just give investors sort of a quick market update. If you don’t follow mortgage rates on a minute to minute basis, like I unfortunately do, you may not know that interest rates on mortgages have actually come down a bit over the last couple of weeks.

We are recording this on May 20th, so they shot up in April up to about 7.5%. They’re down now to about 7% at the time of this recording. So that is encouraging, improving affordability a little bit. We’re also seeing that active inventory is starting to tick up just a little bit over the course of the last few months, which is also encouraging for a healthier housing market. And as of the last reading, which is April, 2024, firmer Redfin median home price in the US is $433,000, which is up 6.2% year over year. Pretty strong situation. So James, given what’s going on with these market conditions, do you think right now is a good time to be pursuing a new investment or should people be thinking about putting their resources elsewhere?

James:

I think it depends on what kind of investor you are and what kind of your appetite for risk is. For me, I’m a riskier investor. I chase high return investments and when we have everything at high cost, interest rates, inflation, cost of product, cost of labor, the only way that you can keep up in investing is by buying high return deals and offsetting those costs. And so in today’s market, we treat this no differently than we’ve treated the last 18 years. How do we find high yielding investments that create high annualized cash on cash returns or equity growth positions? And then as long as we’re making at least three to four x of what we can borrow that money at the risk is worth the reward. And if you can get those large gains, you can reposition those and really keep up with the costs that we are all battling right now.

Dave:

I appreciate you saying that you’re a risky or investor because people do need to make that decision for themselves about where they fall in the risk spectrum and assessing their own risk tolerance and risk capacity. James, do you think you are able to take on more risk because you have an established portfolio and you have something to fall back on? Or have you kind of always been this

James:

Way? I’ve always been a high risk investor, but it put me in the position today, right? As you take on risks and you adapt your business and you create growth, if you save that growth and you save that money, you can actually make a high risk investment business actually less risky. And what I mean by that is over the years, every time we racked high returns, we would save a lot of it. It’d either get allocated to holdings that was going to pay down that real estate or we were going to take that cash and reinvest it in hard money notes, high interest interest paying investments that pay us a very high monthly income right now by saving the capital, I’ve been able to reposition it to where my monthly interest from my hard money business and my private lending business pays for a hundred percent of my lifestyle and allows me to save because I have this cashflow coming in, I can take on higher risk because if the investment gets stalled out for whatever reason, I can weather the storms by the income streams I’ve set up. So as you kind of grow as an investor, you want to set these multiple income streams up and then that’s how you can continue to grow because it’s actually less riskier when you have more income coming in.

Dave:

Yeah, that makes sense. There are a few things I want to dig in on that you just mentioned, but I first want to hear Henry’s take on a high level. Do you think it’s risky to be investing right now? Henry,

Henry:

Dave? I think it’s risky to invest in any time. Every market has different aspects of whatever’s going on in that real estate cycle that bring in a certain level of risk. And we’ve talked about this before, it’s that sometimes when people think about real estate investing, they don’t associate it essentially with as much risk as they associate other investing strategies because there are levers that we can pull to mitigate your risk, but it’s still risky. Right now the risk is cashflow. How do you buy something where you can actually make a good return on your investment? From a rental standpoint, you got to get pretty creative in those situations. And so it’s risky to buy something and then end up being upside down. But in other markets, if the market was in a place where interest rates were lower right before when the rates were low, we were talking about there was risk of people overpaying for properties because everybody was in the market and everybody was buying and there was just a different kind of risk.

So yes, I think it’s a risky time to invest, but I don’t think it’s any more or less risky than any other time. It’s about how are you evaluating your deals and what are your goals? Because when you talk about what should you do with your money, there’s really two ways to look at it. One way is you’re looking at what’s the return that I’m looking for on the money that I’m looking to put to work, and then which one of those avenues is going to produce the highest return for me? And the other aspect of it is to look at it from the standpoint of your goals. I break my investing strategy down into three buckets. There’s a growth bucket, so that’s where I’m accumulating, acquiring and growing my portfolio. And then there’s a bucket of stabilization where you’re trying to get those properties because when you’re buying value add, you’ve got to stabilize it.

Now, unless you’re buying turnkey, you’re buying already stabilized. But when you’re buying value add, there’s this period of stabilization. So just because I buy something doesn’t mean that thing’s producing me the return that I want to produce me from day one, I’ve got to get it to a point where it’s actually stabilized to produce that return. And then the third bucket is protection. So how do you protect the assets that you’ve now acquired? And that protection from my perspective is getting those things paid off so that no one can come and take them from me so that they’re actually producing that generational wealth, air quotes that people want. You’re not getting generational wealth if you don’t technically own the asset and the bank does.

Dave:

So that’s a great framework. I really like those three buckets. How do you decide what money and capital to put into which bucket is it even or how do you do it?

Henry:

Yeah, that’s where having your goals come in. Goals are different. If your goal is to create a certain amount of cashflow per month, well then that should let you know whether you need to be in the growth bucket or you need to be in the stabilized bucket or you need to be playing a little bit in both. You need to be looking at the analysis of the deals that you’ve done and say, okay, how many deals do I need to buy that’s going to hit me that goal? And then once you buy that amount of deals, then I need to stabilize these deals so that they’re actually producing me that return and getting me those numbers. And so there’s some growth there. And so you have to be consistently looking at your portfolio and seeing what are the returns that I’m getting on these assets?

Do I need to sell any of the assets that I purchased because they’re not hitting my goals? And then do I need to go acquire new ones or do I need to stop growing right now and look at stabilization so that I can actually get the return to meet my goal? And once that happens, then you can look at a perspective of, okay, now how do I protect it? If you bought, let’s say you had to buy 10 houses in order to hit your cashflow goals and then you stabilized those 10 houses in order to hit your cashflow goals, well now that you’re bought and stabilized, you may be able to sell five of those to pay off the other five, and that five paid off is going to produce more cashflow probably than all 10 leveraged. And so now you’ve got less property but making more income and you’re also protected and stabilized.

Dave:

We do have to take a quick break, but when we come back we’ll talk about whether or not investors should pay off their debts or continue to invest and acquire new properties. This when we get back. Welcome back to the show. Let’s jump back in. It’s a big debate in real estate like whether or not you should pay off your debt. It sounds like you’re comfortable with that. And James, you mentioned earlier that sometimes when you had a big win for a flip or something, you would use some of the profit to pay off some of your properties or pay down some of your debt. How do you decide when to do

James:

That? It always comes down to what is your cost of borrowing versus what is your return that you can make? If I’m borrowing at 6% on a rental property, and let’s say I owe $200,000 on that loan, but I can make 12% through lending it out via hard money at 200,000 for me, I’m not going to pay off that note at 6% because I can get income at 12, right? I can actually take the extra 6% I’m making on the cost and pay down my balance if I want to be a little bit safer. You can start paying it down that way, but it really just comes down what is your cost of capital and what is the return that you can make? And if the return is much higher than what you can borrow at, then I would leave it alone. And if it’s a lot slimmer, then if I’m borrowing at six and I can make eight, that might not be worth the risk and the effort at that point.

If I want to lend out hard money, I got to underwrite meat borrowers go through that process, it’s a business I have to run and that 2% spread might not be worth it. And the thing about debt is debt for real estate investors is your gunpowder for growth. You have to have access to it, you have to understand it, and you have to utilize it for you to make higher returns, but you cannot abuse it. You have to know when to use it and when not to use it and whether it’s worth the effort or not. And for me, as I’m trying to look at whether I can make a return or not, the money coming from, is it a business venture or is it personal? A lot of times I don’t like to borrow just because I can get a big HELOC on my personal house and I might be able to pull it out at 8% and get 12. That’s putting myself in a riskier position because I’m now taking on debt in my personal life. And so those are the things you want to ask yourself. And over the years, especially after 2008 crash, I use business debt and then personal side, I take the returns from my business and I pay down my personal debt. I have very low personal debt and that’s paid for by the interest spread I can get from when I’m borrowing at six and lending out at 12.

Dave:

This is such an important topic. I’m so glad you brought that up, James is one, it is kind of simple in some regard where you’re just like, okay, if I can invest at 8% and my mortgage is at 5%, just don’t pay off your debt because you’ll be earning more on your capital by investing it than you would be by paying off your debt. But to your point, it needs to be worth the additional risk. Buying down debt is a great conservative option for people. If you want to lower your risk and as Henry said, increase your cashflow, that’s a great option for someone who’s trying to grow as quickly as possible. You may want to just reinvest that money and you need to make sure that the spread between what your debt is and what your new investment would be is large enough so that you can justify that.

So that’s a great point, James. I agree basically with what you’re saying, but I do think there’s a time and place for paying off your debt, and Henry alluded to one of ’em, which is if you want more cashflow, other ones, Henry, I think about people who are later in their investing career generally. I think most people start their investing journey with a lot of leverage and debt, and hopefully you’re being responsible with it like James said, but you can go for bigger equity gains with more debt and less cashflow. And then as you get older, you typically want to reduce your risk and increase your cashflow. Do you think that is a good path for people or there other scenarios where people should pay off their debt? Henry?

Henry:

No, I think that’s really smart. When you’ve got runway ahead of you from a time perspective, I think it makes sense to be focused on growth early on, but have a plan to be deleveraged by the time you want to not be so active and are ready to enjoy more of what your portfolio can offer you. But if you’re already in older air quotes investor, then you have to think about what are the strategies that are going to get me to the financial goal that I’m looking for the quickest? And that’s going to depend on what resources you have at your disposal. I was speaking to an investor at a conference recently who said that it was an older gentleman, I mean he was in his sixties and he was thinking about buying a multifamily because he wanted to have something that was going to produce a high return for him so that he could build up some income to pass off to his children later in life.

And we just had a conversation about, well, where is he at now in terms of what he has to invest with? And he had paid off assets and he had access to that capital at a low interest rate. And from that perspective, I said, well, I don’t know that buying a multifamily is the best use of your capital because of the time it’s going to take for that thing to actually start producing the result you’re looking for buying a value add multifamily. That’s a lot of work for that thing to start producing the income you’re looking for. You’re talking five to 10 years is what people typically underwrite these deals for, but with access to the kind of capital he had access to, I was like lending money is probably the easiest way for you to get a return that you’re looking for a higher return than probably a multifamily can get you in order to help you build up the resources you’re looking for.

And so it’s really a matter of what resources do you have at your disposal and then looking at what are the options that are going to produce either that cashflow or that safety net that you’re looking for. It may not be that you need to go buy massive assets if you’ve already got access to capital, but if you don’t have access to capital, then you’ve got to think from that perspective. I would tell somebody if you don’t have access to capital but you’re trying to build it up, it may be that you need to flip some properties to try to build up that capital and build up that cash on cash return that you’re looking for that you’re not going to get or have time to get with a rental property.

Dave:

That makes sense. One of the popular things that’s coming around in real estate investing now is reinvesting into your existing portfolio. I think a lot of us get excited about acquisition, buying new stuff, it’s fun, but reinvesting into your existing portfolio can be great, like doing value add to properties that you’ve held onto for five or 10 years and maybe they need some, I don’t know what you call it, res stabilization, something like that. So I wanted to ask you about this sort of practically, James. How do you keep track of your portfolio to make sure that it’s optimized and evaluate it for potential opportunities for reinvestment?

James:

Yeah, we do this every year. We run return on equity and we’re looking at, okay, what do we currently have? How much equity do we have in that property? Because we treat equity like a bank account. It is sitting there and it’s making really zero. It’s making appreciation. That’s what it’s making. And if it’s a standard depreciation, it’s making three to 4% a year, then what is my return? What is my overall cash flow, annualized cash flow that I have on my equity balance? And then we look at, okay, what is that return? Can we trade it elsewhere or can we actually do more with it and we evaluate that property? Can we raise rents? Can we add value by adding an additional unit in the basement? Right now we have a rooming house next to University of Washington. It’s an eight bedroom rooming house.

It was up zone two years ago. And because of that upzoning, it allows us to build a DDU detached rooming house in the back of this property. And so we can get an additional four bedrooms unit in the back of this property. And then it comes down to is it the right decision to invest into your portfolio because it’s going to cost us 350 to 375,000 to build that unit in the back. We need to go, what is our cost of money and what is our debt service and then what is our average income? So the great thing about that is it is going to generate six to $6,500 a month in rent income. And because it’s 350,000, our debt service on that is roughly going to be on the spot about 3500, 30 $800 a month for that debt service. So that tells us that’s a great investment for us.

We can build that in the back, we can borrow it and then make a higher return. And so we’re always looking at what do we have, what is the equity, what can we trade it for? And then is it smart to add more money into that portfolio? It could be putting in new cabinets and countertops. It could be adder, washing dryers. You want to run all those metrics. What’s your current rents? What can you do to improve? But don’t forget to really run the math because just because you can get more rent doesn’t mean that it’s the smart move and you have to run your cash flow. I see a lot of people make that mistake. They’re like, I just did this, I could. I’m like, well, you could have just bought something else and made more cashflow. And so just because you can invest in it doesn’t mean you should.

Dave:

Well, I totally agree. And one of the things I recommend to people and wrote about in my book is this concept of what I call benchmarking, which is basically like even if you’re not going out and buying deals right now, you should constantly be aware of what type of return you could get in the current market. So to your point, James, if you were going to go out and buy a, let’s just say a rental property and your return on equity and that would be 10%, then if you know that even if you don’t intend to buy it, then when you go out and say, look at my current portfolio, if I reinvested and use this example and I built something, can I get 12% or could I do 14% or would it get 8% and then it wouldn’t be as good because there are actually mathematical ways that you can make these decisions about how to reallocate capital.

Just as James said, and just for everyone who doesn’t know, there’s a metric, it’s called return on equity, maybe my personal favorite, one of my personal favorites, it’s a measure of how efficiently your investments make cashflow not based on your initial purchase, which is what cash on cash return is, but based on the accumulated equity in that property. Because as you own a property, as we’re talking about investing into your own portfolio, if you own a property for five or 10 years, your equity is going to grow. And so the amount of equity you have is more and more. And so often what happens is the opportunity cost of keeping that equity in that home increases so you’re making cashflow less efficiently even though the investment is quite successful. And so that’s why, as James said, always measuring your return on equity is a great way for you to sort of compare potential investments, new investments to reallocating resources, taking out a cash out refinance so that you can reinvest it elsewhere. It’s a great metric, very easy to calculate that pretty much everyone should be using. Yeah,

Henry:

I don’t want it to get lost about how important or how overlooked this strategy is of reinvesting back into your current portfolio. It doesn’t get talked about enough, and there is absolutely opportunity there if you’ve already started building a portfolio. So one of the things that we are doing is we tested a midterm rental strategy with a property that we bought because we had the option to be able to do that and we would fall back as a long-term rental if it didn’t work. But what we’re finding is that it’s working and it’s working better than our short-term rentals. And so now that we have these data points to go off of, we are now evaluating other properties in our portfolio in similar locations and seeing, okay, instead of us going out and buying a new property, what if we take the capital we would use to do that to furnish something existing to turn it into a midterm rental, add some amenities, and then get the return on that investment even higher without having to acquire. And so you have to have your finger on the pulse of your portfolio and you’ve got to use data to help make some of these decisions.

Dave:

That’s great. And I mean it’s not any different from how other businesses operate. Most businesses aren’t just constantly acquiring new things or hiring new people. You’re constantly just looking at what you got? Is it working well? Where’s my money going to be put to the highest and best

James:

Use? I mean, sometimes it’s not to be just increasing the cashflow either. It’s about just increasing the equity and then selling. They do that quite a bit too going, let’s throw 50 grand this property and sell it because now all of a sudden every end user in town wants this property. So it’s selling for a premium and now I can trade it for value add or a different better investment even if I’m paying a higher rate.

Henry:

You also have to watch the market to know, for me, I watch the market to know which one of these buckets I have I need to be pouring into. So the market right now is telling me to buy and then I can grow and stabilize and then and when rates change and come down, even if they go up before they come down, when they come down, that’s my cue to start selling so that I can do the payoff strategy. But you don’t just want to do it blindly of the market. It could be a terrible time to sell when you’re trying to actually pay off some of your properties.

Dave:

We do have to take one more quick break to hear a word from our sponsors more from on the market after this, and while we’re away, make sure to go to your favorite podcast app, search on the market and give us a follow so you never miss an episode of the show.

Welcome back to On the Market. One of the other topics I wanted to ask you sort of related to this stuff is about putting down more equity. This is something that I’ve been considering doing on my properties is rather than taking out max leverage, which for out-of-state investors or a lot of investment loans is 25% down 75% loan, would you consider or recommend to anyone putting down 30%, 40%? Because that’s basically, it’s kind of like paying down your loan at the beginning of your investment. It reduces your overall risk and helps your cash flow, but obviously comes with the trade off of growing slower because you have more equity tied up in that property and you probably can’t use it to acquire new properties. Henry, is that anything you’ve ever done or something you would advise people to do?

Henry:

No, that would be something I would look at doing once I’ve worked on or completed kind of phase three of my plan, which would be the protection of the assets. So once you start getting some things paid off, then as you continue to grow, you can consider putting down more because you’re not in that growth period anymore and you’re not in that stabilization period anymore. Now you’re worried about, alright, how do I truly maximize the return on the dollars I’m putting in? And so from that strategy, Dave, I think where I might, I don’t necessarily say disagree with you, but what I might do with that is to say, okay, if I’ve got a hundred thousand dollars that I want to put down on this new property, I would probably look at my existing portfolio first and see, okay, can I pay off a property completely with this $100,000 because that’s probably going to net me a higher cash on cash return with that a hundred thousand dollars having a completely paid off asset versus two properties that are 50% paid off.

Dave:

Yeah, that’s a good point. James, how do you think about it?

James:

I think I have no problem putting more money down as long as it’s getting my minimum return that I want. And I think that is the most important thing for investors. We all have different expectations and buy boxes depending on where you are in the growth of your career. When I was younger, I did not have a lot of money. I could not leave a lot of money down. I had to grow it and grow it and grow it, and it was detrimental if I left too much cash in the deal. For me, I have a clear understanding if I’m going to put money and leave it in a deal for a long period of time, what is my minimum cash on cash return or equity position that I’m going to make? And if I don’t know that I can’t make that decision or not.

And so if I’m looking at putting, let’s say 50% down on a property and it’s making me an 8% return and my minimum return is 10, that is a bad decision for me to put down that 50%. Now if I have cash sitting there and all I’m doing is making four point a half percent at my bank or less, maybe putting that money down and I’m getting that 8% return makes all the sense in the world. And so having that clarity because I think people get confused. They hear about all these different strategies, I’m doing this, I’m doing this, I’m doing this. But at the end of the day, we’re all at different spots in our career. Think of it as a math equation. What am I trying to accomplish and is it hitting that return or not? Every property for me is just a math equation. I don’t care what it looks like where it is, it’s a math equation and is it going to get it to my goals of where I want to be in one year, three years and five years? And so write down those goals and really make sure that it’s hitting your returns yes or no. Clarity is key if you want to grow. And clarity is key, especially if you don’t know where to put in your capital or when to use it or where to use it.

Dave:

That’s a good point. And just to explain sort of my thinking about doing this is I invest in a different way than both of you. Everyone does it differently, but I sort of take these two parallel paths where one I invest in passively in syndications, and for me those are sort of the riskier ones. I’m just taking some bets and taking some swings to make big equity gains, whereas my rental property portfolio, I’m just trying to make sure that in 15 or 20 years that they’re paid off or that they’re generating sufficient cashflow. And for me, I am happy to put down a little extra money to just make sure that I’m generating a little bit of extra cashflow every single month and that I’m reducing my risk and just can make sure that it can definitely hold onto these assets for a long time. And

James:

There’s a little hack that investors can do too to pay off your debt faster. If you’re looking again to that example where you’re putting 50% down and you’re making an 8% return and your goal is to get ’em paid off in the next five years, that’s an aggressive plan. Yours was 15. That’s a steady plan that you can really work on. But if it’s to get it down in five, you can always put down the 20%, 25% and then take that other 25% and put it in a high yield. Like again, hard money loans. If I’m making 12% and I’m borrowing from the bank of eight and I’m making an 8% return on that investment, I can take that extra 4% from my hard money payments and just pay down that loan. That’s true. And what it does at the end of five and 10 years is you still have that balance of capital sitting there too that you have access to as you’re paying off your rental properties, but it really depends on your interest spread, your yield, and then what’s your plan? 15 years? That’s a lot more work. I would just put more money down if you want to pay it off faster. Look for different faucets that you can turn on to pay down your debt.

Dave:

Yeah, that’s a great suggestion for people. I don’t have the energy to do it, to be honest, so I will for some things, but to your point, if I’m just doing this for 15 years, I’d rather just put the money down and just let this thing be on autopilot for a while. But I think that’s an excellent suggestion for people who are really trying to maximize their every dollar right now. Alright, well thank you both so much for joining us today. This was a lot of fun. Hopefully this conversation helped all of you listening make some decisions about your own portfolio. Henry and James, appreciate you being here. And thank you all for listening. We’ll see you for the next episode of On The Market.

Dave:

Very Soon. On The Market was created by me, Dave Meyer and Kailyn Bennett. The show is produced by Kaylin Bennett, with editing by Exodus Media. Copywriting is by Calico content and we want to extend a big thank you to everyone at BiggerPockets for making this show possible.

Watch the Episode Here

https://youtube.com/watch?v=1FK8ySrtGpM

Help Us Out!

Help us reach new listeners on iTunes by leaving us a rating and review! It takes just 30 seconds and instructions can be found here. Thanks! We really appreciate it!

In This Episode We Cover

  • Whether to pay off your mortgage early, reinvest, or buy more properties
  • Why EVERY investor needs to calculate return on equity (ROE) on their portfolio
  • Is it too risky to invest today? Why James is making even more high-risk investments in 2024
  • The “three buckets” of your real estate portfolio that will help decide what you should do with your cash
  • What to do with extra money and how to make some serious passive income with private money lending
  • The only time when we would put a large down payment on a rental property
  • And So Much More!

Links from the Show

Books Mentioned in the Show

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

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

Top Lenders Share “Good News” for Mortgage Rates + Trending Investor Loans

These “Subtle Risks” Could Have Astronomical Impacts on Real Estate Expenses w/John Sheffield

Owning real estate could get expensive—yes, even more expensive than it already is today. Insurance prices, property taxes, maintenance costs, and more are going through the roof, and there isn’t much stopping these costs from jumping even more. What’s accelerating the rise in these upkeep costs? Hotter summers, colder winters, and more natural disasters. Growing climate risk is making real estate deals harder and harder to pencil, and even some safer areas to invest are seeing sizable pricing upticks. 

John Sheffield from ICE brings us the latest data on the financial impacts of climate risk in this episode. When we say “climate risk,” we know what you’re thinking: hurricanes, tornadoes, and wildfires. But that doesn’t even scratch the surface of what’s causing real estate expenses to jump. Areas of the US with once-cool summers are now experiencing record-breaking heat, increasing hail damage is denting roofs and breaking windows, and flooding has become the norm. These subtle climate effects have huge implications for your bottom line. So, what should you do to secure the profit you’re looking for on your next property?

John hits on the expenses that are rising the most, the areas where home upkeep costs could almost mirror monthly mortgage payments, and what investors must do when underwriting their next deal to account for this massive jump in expenses.

Click here to listen on Apple Podcasts.

Listen to the Podcast Here

Read the Transcript Here

Dave:

Inflation is driving up costs and expenses across the entire economy. We all know this, but certain expenses for real estate investors seem to be growing way faster than everything else like insurance. We’ve heard that in certain states insurance has doubled in just the last year, or property taxes or repair costs. Is inflation the only culprit here or is there something else driving up costs for real estate investors Today we’ll explore an overlooked factor driving up expenses across the entire industry.

Hi everyone and welcome to the On the Market podcast. I’m your host, Dave Meyer, and today we’re talking to John Sheffield, who is the senior director in the Data and Innovation Impact Group at ice. In previous episodes, you may have heard us talk about housing market conditions with his colleague Andy Walden, and today we’re talking about climate risk and the additional costs investors could take on. As a result, we’re going to cover increases in insurance premiums, property taxes, utilities, and CapEx. And this is a super important episode because John really understands real estate investing and understands climate risk. He really puts it in easy to understand dollars and cents terms, how to think about climate risk and how it might impact what investing decisions you make in the future. So let’s bring on John. John, welcome to on the Market. Thanks for joining us today.

John:

Thank you.

Dave:

To start our conversations, there are some investors who I speak to who don’t look at climate data and think of it when they’re underwriting their properties or trying to figure out if a market is a good one for them. So can you just talk to us at the high level about what climate risk is in the context of real estate?

John:

Yeah, that’s a great question. I think I’m going to give you a little bit of a spin on this answer that may not be something you hear all the time. So when people talk about climate risk, they often think about hurricanes, floods, wildfires, big storms, discreet events that are going to impact your property cause losses, insurance claims, et cetera. We like to frame climate risk a little bit more holistically than that. Climate risk is all of the aspects of climate and climate change that are changing costs for real estate investors and the costs of land use and home ownership writ large. So think about summers are getting warmer, insulation has to be upgraded or you’re spending more money on your annual electric bills. We’ve seen winters turn very dangerous even in Texas in places that you wouldn’t predict causing huge price spikes. We’ve seen insurance costs skyrocketing in a lot of states right now. It’s been all over the news. So we think about climate risk as the full nexus of all those changes in costs and the associated property taxes and infrastructure costs and all of the other aspects of keeping real estate performing that we’re going to see climate impacting over the years.

Dave:

That is not a take I’ve heard, and I definitely am guilty of thinking of climate risk as sort of these acute impacts. And so what are some of the more common risks that occur that people often overlook?

John:

So let’s take the one that is maybe more expected just because it’s been so much in the news lately of insurance. We’ve been hearing news like Florida insurance prices in some areas have doubled every year for a couple of years. California, there are many zip codes where you can’t get an insurance policy outside of the state plan. Insurers are dropping longtime customers who have never filed a claim. So that’s one aspect of this is there is a cost of risk transfer. At the end of the day, you have a house, somebody is going to bear the risk of that house being destroyed or damaged. That may not happen every year. It may be a long tail event that you never see in a hundred years, but somebody is holding the cost of that risk. Either it’s the insurer that you’re paying premiums to or it’s the homeowner, the investor who owns the asset and should be reserving capital against that risk of loss. And as we’ve seen these risks go up, we’ve seen everyone’s estimates of the real cost of that risk go up and that’s driving up cost expectations throughout the system. So that’s one that we’ve seen in pretty common terms across the news lately.

Dave:

Yeah, because it’s interesting, I actually was looking at this map. It was sort of this heat map recently that was showing how insurance premiums had grown. I think it was by MSA by metro area, and a lot of them were in Florida, which made sense to me because you talked about hurricanes, that’s an obvious one. We see a lot in California. There are wildfires in California, but then there was ones in, I think it was in Illinois, and in my mind I had been thinking that from what I’ve read, I don’t know of any major natural disasters that happened there. So is that what’s going on here? There are sort of these more subtle risks building up that are causing these increases in insurance premiums.

John:

Let’s maybe break down the cost of home ownership and where the risks flow in here because I think Illinois is one of the most interesting case studies in the country. So your question, what are the risks that Illinois is seeing? Not hurricane, not sea level rise, no storm surge. In Illinois, we have seen a lot of growth in what are called severe convective storms. So things strong thunderstorms, maybe tornado producing storms often associated with large hail costs. So you have an interesting intersection where those costs are going up at the same time that the insurance policies, what they cover across the country can have some pretty big exclusions. So if you think about many policies exclude flood or mudslides or things like that, earthquakes, those policy exclusions mean that in areas with high flood risk, you may or may not have to purchase a separate flood policy, but that core insurance price doesn’t bake in the flood coverage In almost all of the country, a hailstorm ruining your roof is absolutely going to be covered by your primary insurance policy. And so you see these weird effects like all across the Midwest, sort of from Texas north. You see all of those risks that are covered by most policies really starting to impact premiums, especially relative to the value of the home.

Dave:

I should have seen that one coming because I lived in Colorado for 10 years where hail is a constant issue there and I have had to file claims for hail damage in the past. So it just sounds like hail is becoming more of a problem perhaps in states or areas where it wasn’t and that’s driving up insurance premiums there.

John:

Yeah, it’s the risk of the hail that’s going up. It’s the cost of replacing a roof. As we’ve seen huge inflation and labor and materials costs. We’ve seen steady growth in home prices, so the cost to replace and repair a home has gone up with that. So insurance premiums are rising from all of those distinct pressures and in different ways across the country. It affects virtually every geography but often in different ways.

Dave:

We do have to take a quick break, but what are the other major factors and costs that are impacting real estate investors? This and more after the break. Welcome back to the show. Let’s jump back in. I’m curious if you have data that is correlated with insurance premiums going up, for example, was there any way knowing what you know about climate risks to have predicted what areas we’re going to see the highest increases in insurance costs? Or are there areas where investors might be able to start forecasting where their insurance costs might go?

John:

That’s a great question. So I’m going to start actually with a fact that I find interesting and a little scary. We identified in the 2020 to 2021 range, a lot of loans that were underwritten, especially in coastal areas of Florida, Louisiana, they were underwritten at great interest rates, prime credit, jumbo loans, beachfront property, beautiful places that are going to hold up in value. So you’re seeing loan rates in the two to 3% range in many of these areas. And we were estimating from our climate data that the expected loss on those properties was higher than the mortgage interest rate. In other words, if you think about a 2% interest rate and you compare that to a 2% expected loss, you’d expect that building to be totally wiped out and rebuilt about once every 50 years. We were seeing areas that had lower mortgage costs than expected losses.

So there was this huge divergence between the two major ways that we think about risk and real estate and pricing risk. One is what is the cost on your mortgage with all of the credit and home price and other factors that go into pricing the risk of that mortgage and what is the risk of the structure staying intact? That’s what the insurance system prices, these two things had completely diverged. So we definitely think that the Florida story with burgeoning insurance costs has been building for a long time. There was climate risk that was underpriced and maybe unrecognized. We built a lot more in Florida and people have been willing to pay a lot more for prime beachfront property in Florida and basically anywhere along the coast. So you have this almost three-way effect here of climate risk is going up and we’re building more in climate risky areas and home prices had skyrocketed in those areas where we’ve now built more at higher risk levels. And so you’re seeing this insurance crisis coming about from I think all of those factors.

Dave:

That’s super interesting. Yeah, it’s almost as, or correct me if I’m wrong, but it seems that in Florida the percentage of homes, or I guess the percentage of total home value you might even say, is being put in these prime areas where people want to live, but those happen to be the riskiest. And so as insurance, the whole point is to spread the cost between many people and so more people are moving into the risky areas, and that means everyone who’s sharing those costs is going to bear that burden.

John:

Absolutely. And I think Florida is a case study. Everybody’s sort of heard about. You hear Florida hurricanes, it’s going to be risky. Let’s talk California for a second. California is interesting because the affordability crisis in California is by far the biggest story in California markets, very expensive across the state. What that’s done, you’ve seen a lot of pressure for people to move out of the big cities. So drive till you qualify as an expression that I’ve heard commute for a longer distance because you can afford housing and get a better mortgage, more affordable mortgage. Well, in that case, what we’ve seen is people moving further out of cities into an area called the Wooey. The wildland urban interface don’t trust climate scientists to come up with good acronyms. So the wooey is where you see a lot of the most pronounced fire risk. It’s where you’re right adjacent to areas that are likely to have more fire fuels. They burn hotter human caused fires from the campfires or electrical fires, things like that are more likely to impact properties when they’re built up in these areas. And that’s where in order to afford homes, a lot of the growth in California construction has been. And so we’ve been seeing a lot of growth in value in areas that are, I think paradoxically the worst for increasing wildfire risk.

Dave:

Are there any areas, John, given the data that you track that you think are likely to experience future insurance increases?

John:

So that answer is almost certainly yes. Broadly speaking, we think climate risk is underpriced across the country. Predicting insurance prices is difficult, not just because you have this uncertainty of where is the climate going, how are new regulations and plans to mitigate carbon emissions going to work as far as limiting future climate change. So you have all of those prediction problems at your hard. There’s also the problem that insurance prices are largely set at a state level by state regulators and two, I think divergent paths that we’ve seen where you see the premiums going up and where you see insurers just walking away and leaving markets uncovered or pushing homeowners onto estate plan for example. So we definitely see areas where that risk is underpriced. Broadly speaking, we think flood is one of the big risk areas where most flood risk in terms of expected loss, how much you’ll have to pay to rebuild your property in the wake of an event.

Most of that expected loss does not sit in what are designated flood zones and compel you as the buyer of the home to go buy a flood policy in order to get a conforming mortgage. Most of that flood risk is actually sitting outside of those areas. It’s often driven by things like rainfall and hurricane precipitation. Warmer air can carry more moisture and that’s why through a lot of the US Southeast, a lot of the Sunbelt that’s seen this big demographic tailwind and the big boost in home prices over the last few years, those are a lot of the areas where this type of flood risk we think has been pronounced and likely underpriced and I think underappreciated by many of the people who are buying properties in these areas.

Dave:

Interesting. Okay, great. Well, thank you for explaining that. And I do want to get back to insurance in a little bit, but from what I understand, climate risk is also impacting other expenses for real estate investors and homeowners. What are some other areas this is manifesting?

John:

Yeah, so I think everybody has kind of heard about the affordability crisis overall in home ownership. My colleague Andy Walden was on this podcast and kind of set the stage for with coupons in the 7% range for mortgages, we would need to see major changes in home values in order to bring affordability back down to historical norms. Let’s talk about this other cost of home ownership. It’s not just the mortgage, whether you’re the investor in a home or the resident of the home. In order to make that home livable, you pay insurance and property tax, you also pay for energy costs, your heating fuels your electricity, your water bill, which can be pretty variable across the country. And even within certain MSAs or even within one city, you can see very divergent costs in energy in particular. And then you also have the cost of maintenance which have been skyrocketing, especially in the wake of the pandemic.

So all of those different angles you have to pay in order to live in this home over the long term. And we’ve seen climate impacting all those. So in the energy cost space, there are a couple of interesting effects. One hotter summers, air conditioning is no longer optional in a lot of areas. Think about Washington, Washington state, which is not known for having very risky environmental disasters, right? But most of the homes in Washington state were built to code that never expected 90 degrees summers to be the norm. And we’ve seen heat waves that go over a hundred degrees for days at a time, and that level of heat is lethal in areas that are unprepared. It’s no big deal for someone in Phoenix, for someone in greater Seattle who has no air conditioning and not enough insulation total game changer for what it means to be a resident in that property through the year.

So we’re seeing a lot of those costs increasing even in areas that you don’t think of as having a lot of disaster risk. And then one more angle that I wanted to mention is to think about, we think about real estate as an ecosystem, the patch of dirt and the house that you build on it, you have to have roads and you have to have the functioning sewer system. The electric utility has to bring power lines to your home. Everyone who is bearing the cost of climate risk right now is experiencing higher costs. Saltwater intrusion is making road maintenance more expensive. Your water system and your sewer system is getting more expensive to maintain and at some point those costs are going to be passed on to the people paying utility rates or the people paying property taxes to fund those expenses. And so thinking about that whole ecosystem of where costs are increasing and how they hit the utility costs, the property taxes you pay, and then the insurance, that’s sort of where we’ve been trying to approach the climate risk story, make it a real dollars and cents problem that I think real estate investors are used to working with.

Dave:

I had never heard that take, and it sort of makes sense that if a city is as a whole experiencing higher costs that it’s going to get spread either through property tax, sales tax, some sort of tax, it’s going to get spread around. Do you have any evidence or examples of quantifying that, as you just said, where a certain city is raising property taxes because of these maintenance costs?

John:

Earlier you’d asked about Illinois, which was lighting up red for all of these kind of hidden costs of home ownerships. So let’s talk about Illinois for a second. Overall, the state has the second highest property tax costs in the nation on average, I think New Jersey is a little bit higher. Lots of people will recognize those two. As the leaders in Illinois, one of the things that you’re seeing is property taxes have been high as a percentage. They’re going up rapidly across the state just as home values appreciate. And then in a lot of areas where you’ve seen a lot of municipal borrowing to fund infrastructure investing, you’ve seen property tax receipts or property tax revenues starting to lag behind the total cost of municipal debt. And so those are areas where whether they’re raising taxes today or they have to raise taxes in the future in order to borrow more or stay fiscally healthy, we think there are some pretty significant issues there.

One of my colleagues talks about the trilemma of being an insurer, being a municipality, and I think it really applies to real estate investing as well. Three things you’ve got to do. You’ve got to stay fiscally healthy so that you can borrow attractive rates. You’ve got to be able to finance a property or your school district or your road construction fiscally healthy. You’ve got to keep rates affordable. You can’t continue hiking rent infinitely. You can’t continue hiking property taxes or utility bills infinitely. And then you also have to invest in resilience. You have to make sure you’re not deferring maintenance. There’s only so long that you can wait to put a new roof on before that becomes a bigger problem than where you started. And those three things, you can pick two, you can stay fiscally healthy, you can keep rates low, you can continue investing in maintenance and infrastructure. And we see a lot of areas where the two that they’re picking are keeping rates low and staying fiscally healthy and they’re really neglecting, I think a lot of the critical infrastructure maintenance that we think is going to be important, especially as we start talking about how the United States reacts to the risk of climate change.

Dave:

Well, thank you for sharing that example. It’s a perfect illustration of how this could start playing out. I have a similar question about maintenance costs because maintenance costs, at least in my mind, are going up for a lot of reasons. There’s tight labor market. We’ve seen supply shortages, especially during the pandemic. So how do you target or quantify the element of those maintenance increases that is related to climate risk?

John:

Last weekend, I paid a thousand dollars to fix a woodpecker hole in the side of my house. So I’m quantifying these maintenance costs in a very personal way today. So maintenance costs are tough. There are a few different ways you can estimate them. One is to look at sort of the overall replacement cost on properties, which has been going up considerably. There are a lot of jurisdictions where they’ll separate the value of your land from the value of the improvements or the structure, and you can see the replacement costs independent of the land values changing at a pretty rapid clip. We look at data sets like building permits, and we look at how often in many of these areas you’re seeing requirements to replace roofs and things like that. So who’s incurring more of these costs because you have more frequent repairs required. And I think there are a number of indices from some of the big aggregators of home maintenance of Thumbtack, Angie’s List.

You’ve probably used some of these before that have put out studies where they’re watching significant inflation in some of those costs. So not all of that is related to climate change. You pointed out pandemic and supply shocks and general wage inflation over the last few years. We don’t think climate change drives every risk. What we think is that climate change is an accelerator of a lot of those risks. So you have a requirement for more investment in insulation, fixing your roof more often because of storms that may or may not be insurable in the damage they cause. All of those things are happening at the same time that you have this inflation in maintenance costs at the same time that you have dynamics increasing property taxes and utility costs. It’s really that nexus or the feedback loop of all these things happening simultaneously that makes climate change and accelerator.

Dave:

We do have to take one more break to hear a word from our sponsors, but when we get back, we have more with John Sheffield. Stay with us while we’re away. Make sure to hit that follow button so you never miss an episode of On the Market. Welcome back to On the Market podcast, everything you’ve said so far, John makes sense to me in a logical, intuitive way. I’m curious though if you have any examples or advice on how investors can use what you’re telling us here for their own investing decisions.

John:

Yeah, that’s a great question. So one baseline point is just to be aware of the risk, to understand the fine print of what is in your insurance policy, what’s covered, what’s not covered, and to think about those two things simultaneously. So if you know you’re in an area with significant flood risk, whether that risk is in a flood zone or not, it’s important to know that many insurance policies will not cover you for the impact of those floods. So I think there’s a very basic awareness layer that needs to happen. There are a lot of great tools out there for consumers, for small investors and large. We build a property level climate risk dataset that covers, I think a bit over 110 million rooftops in the US and there are a lot of people working in this area to just promote better transparency around where this risk is.

The other piece is when you’re thinking about underwriting a property, seeing a fit, pencils at home, prices that are still near all time highs, think about all of the costs, not just the cost of the financing, the sticker price on the property. Think about where taxes are today and the likelihood that those taxes escalate with all of these different impacts coming in. Think about your insurance costs and whether you’re in areas that haven’t seen the same level of growth that maybe Florida has, is that growth coming for you next year? So think about those scenarios where we’ve been seeing this story play out across the country in different ways and make sure, I think a lot of our take on climate risk. Make sure you have a little more of a cushion margin for error in the way you’re thinking about property pricing right now.

Dave:

Is that meaning John, that you think we’ll see property places decline in places that have this higher climate risk?

John:

There are a number of academic studies that are already showing this. I think one of the best in methodology and one of the largest effects, they called it climate gentrification in Miami. Miami’s been a good market. Property prices has been going up, but areas with higher risk, even within the Miami market have been seeing home price appreciation lags well behind areas that are at lower risk. A couple feet of elevation makes a big difference in many of these areas. We think those mechanisms are pretty varied. Buyers are becoming more aware. You can now see climate risk on many of the major real estate listing sites. We think that insurance costs are definitely starting to put a dent in affordability in areas like Florida. Some of our research has shown in Miami across the metro, 85% of the mortgage is what you can expect to pay in terms of property tax and insurance cost and energy bills. It’s almost a whole second mortgage payment in terms of the average annual cost of those line items.

Dave:

Whoa. So wait, just so I understand. Normally a mortgage is broken down into a couple different things. We would call it p and i principle and interest is the main thing. Sometimes in mortgages it’s also included in escrow as your insurance and taxes. But if those things out, you’re saying the principal and interest, and then in terms of taxes, insurance, they’re almost as much as principal and interest.

John:

So we looked at about $5.6 trillion of mortgages that were from a lot of different vintages outstanding in February this year. And you’re right, principal and interest cost and then the tax insurance energy bill line items that are other big costs of homeownership that have the risk of climate shocks and other inflationary pressures. And in Miami, 85% of your mortgage cost is the value of those climate affected cost lines and where that connects to home prices, I think in two ways. One is those costs are high and a lot of the demographic boom that we’ve been seeing in the Sunbelt states, lots of people moving for low state taxes when they get there and they find, oh, actually my low state tax bill also comes with a $6,000 annual insurance cost and significant electric bills and property taxes that are going up. I think a lot of those tax savings are eaten away.

So a lot of the tailwinds that these markets have been experiencing from lower costs, that’s starting to change and I think people are becoming very aware of it as they think about whether Florida is really the long-term retirement spot. So that’s one big aspect of this is there are fewer buyers piling in to markets where these costs are becoming more pronounced. The second is that I think everyone, the big narrative on home prices has been, yes, interest rates are high, but everyone’s sitting on a mortgage from 2020 and 2021, they’re mostly fixed rate. They don’t have to go anywhere. Their payments are low. You can still see shocks, the payment shocks from taxes going up, insurance costs, energy bills, all these other required costs of homeownership. Those are escalating and where you see nasty surprises in the cost of homeownership, even when you have a fixed rate mortgage, I think we’re likely to see in some of these markets where we have the most inflation in these other costs. One of the best lines I’ve ever heard about mortgages, rent is just an adjustable rate mortgage with zero disclosures. What we’re seeing with a lot of these excess costs of homeownership, we’re seeing fixed rate mortgages that have this big adjustable rate component with no disclosures. And that’s something that as buyers have greater awareness, we think this narrative is a little bit more complicated than everyone with a 2021 loan can stay in place.

Dave:

That is fascinating. And in the past, I’ve definitely been guilty years ago saying one of the great benefits of real estate investing is you get a fixed rate mortgage and your costs stay relatively similar. Your principle and interest don’t change if you have fixed rate mortgage. So that part is, but now in this new era to John’s point, these other costs are changing and can really drive up your expenses in a way that, at least in my investing career, we haven’t seen. And that is definitely something to think about and it’s at least I’ve found it in the past, hard to predict where taxes are going to go up, where insurance is going to go up. So that actually brings me to my last question for you here, John, is where can investors get this data? Is there a place where they can look at this and try and make sense of their own portfolio as it exists currently and use it for trying to be more accurate in underwriting future deals?

John:

Yeah, that’s a great question. So I’m going to start by plugging my colleague, Annie Walden and others at Ice run a monthly mortgage monitor report where we’ll be pushing a lot of this data and publishing research as quickly as we can mine the numbers. So I think there’s a broad interest at every level of the investor base that we speak to from small single family investors to commercial private equity all the way up to many billion dollar asset managers. Everyone is interested in climate data right now, and we’re publishing research on this around the clock. I think the big picture for where to go get data and how to think about it, look for physical climate risk, things like property level scores might be easy to interpret or if you can get actual expectations of loss because that’s what your insurer is going to be looking at when they’re pricing your premiums in three years. And then also try to get a better understanding of some of these tax and energy costs bills. We’re publishing data on this and summary reports to try to bring some transparency to those markets.

Dave:

Got it. Well, thank you so much, John. I appreciate you sharing your knowledge with us. I learned a lot from this conversation. If anyone wants to learn more about John and what his team is putting out some of the reports that he just mentioned, we’ll make sure to put links to all of that in the description below. John, thank you so much again for joining us for this episode of On The Market.

John:

My pleasure. Thank you.

Dave:

On The Market was created by me, Dave Meyer and Kailyn Bennett. The show is produced by Kaylin Bennett, with editing by Exodus Media. Copywriting is by Calico content and we want to extend a big thank you to everyone at BiggerPockets for making this show possible.

Watch the Episode Here

https://youtube.com/watch?v=eq6VggJe2uo

Help Us Out!

Help us reach new listeners on iTunes by leaving us a rating and review! It takes just 30 seconds and instructions can be found here. Thanks! We really appreciate it!

In This Episode We Cover

  • The actual cost of climate risk and the expenses that are seeing the most significant pricing surges
  • Why even areas without hurricanes, fires, or tornadoes are still at significant risk 
  • Property tax problems and underfunded local governments that could quickly raise taxes
  • Insurance underpricing that could lead to even more expensive home protection
  • Areas where home prices could drop as a result of inflated home expenses
  • Where to find and track climate data so you know where (and where not) to invest 
  • And So Much More!

Links from the Show

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

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

Economic Pessimism Peaks, So Why Are Investors Still Buying?

Economic Pessimism Peaks, So Why Are Investors Still Buying?

The unemployment rate begins to rise as job growth slows in the latest jobs report, prompting many to wonder, “Will this finally lead to interest rate cuts?” With so many investors waiting and hoping for rates to fall, this metric may point to exactly what the Fed is looking for. But while waiting for rate cuts, investors could miss out on a huge opportunity to buy at discounted prices. If you’re sitting on the sidelines, you could be making a big mistake. What do we mean? We’re getting into it all in this headlines show!

We’ve got four economic news stories to discuss today, ranging from Redfin’s $9.25 million settlement as part of the agent commission lawsuits to new jobs report numbers and what Americans really think about the economy. First, we’ll touch on Redfin news as the discount brokerage settles in what seems to be the never-ending NAR lawsuit. Next, Americans think now is the worst time to buy a house. Do we disagree? Not really! But, we do believe it could get even worse very soon for those who don’t buy before it’s too late.

Next, we’ll review the latest jobs numbers, from rising unemployment to slowing growth, and whether this will prompt the Fed to finally cut rates. Lastly, we’ll hit on consumer sentiment and America’s growing economic pessimism. With so many Americans living in financial fear, why aren’t we seeing a drop-off in travel and consumer spending? If you’re listening to this episode on a plane to Europe with your designer bag and $500 headphones, we’re talking about you! Stick around as we break down the top economic headlines and their impacts on the housing market.

Click here to listen on Apple Podcasts.

Listen to the Podcast Here

Read the Transcript Here

Dave:

Americans recently said that right now is the worst time ever to buy a house. They’re also not feeling very positive about the economy as a whole. So the question is how should investors interpret this information, this and more on today’s headline show.

Hey everyone, I’m your host Dave Meyer, and with me today are James Dainard and Henry Washington, and we’re doing one of our favorite formats on the market podcast, which is our headline show. If you haven’t heard this format before, this is basically where we go out, we pull four articles from the news cycle, talk about the metrics, give you the details, what you need to know, and then give you our opinions about how this might impact your personal finance or your investing. In today’s episode, we’re talking about redfin’s agreement to share data and settle a class action lawsuit, how Americans think it’s the worst time ever to buy a home, recent jobs reports. And lastly, why consumers are feeling so bad about the economy in general. That and much more in today’s episode. Let’s jump into our first headline.

All right, so for our first story today, our headline reads, Redfin agrees to share data and pay 9.25 million to settle lawsuit. This comes from the New York Times and it’s basically just a latest in a string of settlements that are going on between plaintiffs and several different large brokerages. We’ve obviously heard mostly about the NAR settlement and a couple of other big, I think Keller Williams, right, also settled and so this is just the latest. I still feel like things are unfolding and I don’t know about you guys, but I personally feel like despite these settlements, I don’t have a better sense of how this might unfold and actually impact people. James being the owner of a brokerage, are you settling?

James :

We’re not members of nar. So good for you.

Dave:

You avoid this whole situation.

James :

Yeah, it was. I was like, how much is it? No, no, it’s not for us. We’re a boutique brokerage. We offer specialty services. That’s what separates us, not the NAR badge. And so we just never signed up for it. I do think it is interesting that Redfin of all brokerages is pulled into this and has to write a check because considering they’re discount brokerage, it’s like you typically know as a broker when a Redfin broker writes their offer on one of our listings that we have to do a little bit more work here and then we have to spend a lot more time educating what the transaction is pushing it through because they’re offering a discount as it is. So that’s why I don’t really understand the whole Redfin got dragged into this. You would think it would be the opposite because they’re the ones offering it underselling brokers out there anyways,

Dave:

They actually got a discount at 9.25 million when Keller Williams settled at 70 million.

James :

And I don’t know how this is going to affect the brokerage market. I have had, I think investors are starting to ask the question like, Hey, what should we be offering as a commission? And for me, brokers do their job and they work for it. And as a seller and a broker, the last thing I want is to put up a property that people are going to overlook or I want to motivate salespeople to get their clients out there. And I know for us, we sell a lot of property every year, a couple hundred homes. I have no intention of cutting commission or trying to use this as a discount because at the end of the day, you got to let the business go, but I have yet to see how it’s working and I’ve yet to hear any impact from this whatsoever in people’s brokers business.

Henry:

I don’t know that from an investor standpoint it’s going to change much, right? The same way I’m not trying to get a discount because all this is going on. I want my properties to sell, I want ’em to sell quickly. I want the best representation that I can get, and so I don’t want to offer to pay less. And then now I got to go out there and figure out, well, who’s going to work as hard as I want them to work for less money, that’s just like another job. I don’t want to do that.

Dave:

Right?

Henry:

But if you’re looking from the perspective of the average everyday home buyer, they are probably going to look for a discount because this is a one-time thing for them, and money is already a big deal because they view houses as very expensive right now, and the cost of money is very expensive right now. And so any discount they can get, they’re probably going to look for an opportunity. So I think that’s where this is going to be more of a, I don’t know if you want to call it an issue, but where people may be looking to save some money.

Dave:

Yeah, I feel like there’s just going to be something that comes in and tries to disrupt the industry, whether it’s a Zillow or one of these other tech companies. I just feel like we haven’t seen the big thing that might come from this yet, but agree that in the short term it doesn’t really feel like anything has

James :

Changed. Right?

Henry:

Absolutely.

Dave:

In fact, I was looking at a listing earlier today and the compensation that I saw for the seller’s agent was 3.5%, so that just went up rather than discount it. Apparently some seller’s agents are just charging more. So I guess there’s really not much that we know about this is going to happen, but I think that the main headline here is that no brokerages are putting up a fight anymore. I think that’s sort of what we’re seeing is settlements are happening. It doesn’t seem like NAR any brokerages are going to mount a defense against these accusations like they had been. And so we’ll just have to sort of wait and see. We’ve hit our first headline now about Redfin settling, but we have three more headlines after this quick break while we’re away, make sure to hit the follow button so you never miss an episode of On the Market. Welcome back to the show for a second story we have to talk about, Americans just are bummed about the housing market. The headline from CNN reads. Americans say that it’s the worst time ever to buy a house, Henry, is it the worst time ever to buy a house?

Henry:

I mean if you look at it historically,

Dave:

If you look at it with money or time,

Henry:

If you look at it with the facts, then yeah, it is. I mean, in all seriousness, housing is expensive. Interest rates are high. Now, that’s the one thing that’s probably a little different. Interest rates have been much higher before when people were looking to buy houses, but at that time, the price associated with those houses wasn’t nearly as high as it is now, even if you look at it from a percentage standpoint instead of just a pure dollar standpoint. And so yeah, the houses were, we’ve had 12, 13% interest before, but houses were probably less than half of the cost of what they are now. And people were making more money.

There was a better ratio of affordability to what people made versus what house cost at that time. I get that. So I do agree that it’s probably the worst time ever for people to buy a house, but I also think that it’s going to get worse if rates drop even a little bit, even a little bit if you think prices are high now, prices are going to be higher later, and we’re still seeing prices climb even though rates are high now. So I don’t know that it gets better. And even if we get to a point where housing prices start to decline, I mean, what are we talking about? 10%, 5%? It’s not going to be maybe, right, right. It’s not going to be a ton. And so if you look backwards, yes, it’s the worst time, but if you can put on some sort of goggles and look forward, you should probably get in now.

Dave:

Well, so that’s interesting. I want to talk about getting in now in just a second, but just so everyone knows, according to this other article, not one of our headlines today, it’s from bank rate. It says that it’s cheaper to rent than to buy in all top 50 metros. So that’s why when Henry and I were joking at the beginning about the math by a lot of objective measurements, it is better to rent than to buy. Excuse me. And that just to be clear, is what we’re talking about is for primary residences, this is not necessarily for investors as well. James, I know you’re very in tune with demand, but you’ve previously in recent shows said that demand at least in your market has remained high. So even though people seem to think that it’s a terrible time to buy a house, they’re still buying. Do you have any thoughts on what gives there?

James :

Well, I think it depends on what market you’re in. And also this stuff always comes out. It’s the worst time to buy a house or you’re never going to be able to get a house. And the reality is we are at the same affordability of about 1984. It says worst affordability since 1984, but what happens since 1984, the housing market has gone way up, and that’s just what it does over the history of the last a hundred years. It goes up, it goes a little bit down, it keeps going up. It consistently always goes up. And I think the real question is, is it a great time to buy a property? Well, can you afford the property that you want to buy today and are you willing to stay in it for longer than a five-year period? And that’s really what it comes down to.

Can you afford it? Is it what you want? And are you going to stay there for the long haul if you’re not getting some sort of value add discount? And right now we’re seeing that that’s why the market’s moving so much is they’re so low inventory. There’s people that can afford these homes and you don’t need a lot of them right now when months of supply are less than a month in our local Seattle market and we’re seeing people still pull the trigger and what’s happening is the pricing still goes up, right? Median home price is up what, 4% year over year. And if you sit on the sidelines and wait 12 more months and rates are still where they’re at, because they very well could be, you could be paying 4% more. And so I think the thing is, if you’re looking for a house, find the one that works for you that’s comfortable, don’t force the house.

And then once you find that house, make sure that’s affordable with some buffer and then buy it because rates will come down, they always come down and pricing will go up and it will go down. And the purpose of a house is to settle in and have a long-term investment, get comfortable. And that’s why we’re seeing the market do well is people see that they have to get into the market. We did not see a collapse when the rates skyrocketed and people are realizing that they have to get into a property or it could be too late in five years.

Henry:

I completely agree with you, and this is why it’s so important for your average everyday home buyer to either educate themselves or to have a professional in their corner that is educated on some of these economic factors in the real estate industry. Before you just when rates were anywhere between two and 5%, you just buy a house, it’ll be fine, but now the cost of money is higher, there’s less inventory out there. And so if you’re going to make a decision as big as buying a home and spending half a million dollars, well you want to make sure that you’re doing it in a way and at a time that’s not going to negatively impact you financially. And there’s so much noise out here and so much misinformation and so many scary negative headlines that people just see something and they think, oh, they’ll see this article and think, well, it’s a terrible time to buy a house.

Well, that could end up costing you a lot of money and a lot of wealth. You need to be surrounded by someone or surround yourself with the information that lets you know. All we can do is look at history and history says just like James said, that real estate values are going to continue to rise even in the short term. You can look back and see, even though rates have been high, real estate values have continued to rise. And so waiting may not be the safest play, but you to got to have a little bit of guts to take that risk, but you want to do it calculated enough. And the best way to do that is either to educate yourself by listening to shows like this by people who are unbiasedly trying to give you information and we through the negative headlines or having that professional, that real estate professional in your corner who truly does understand the economics.

James :

Yeah, and I think the affordability is going to be in high demand for the next two, three years. I don’t know if rates are going to come down that much over the next 12, 24 months. And the thing to think about as a home buyer or an investor is every asset class is its seasons and things slow down right now we’ve seen what is not selling that well are two to four unit properties. They don’t cashflow. It’s hard to make it work with an investor, but my prediction is that in 12 to 24 months that those are going to become high demand properties because people are going to go, I need to buy a house and the only way that I can afford it is by having somebody next door. I think don’t get caught up in all the headlines, all the don’t buy, buy, buy. It’s like just look at what is typically done. Well in the past, we know single family houses always go up. We know two to four units exploded the last three years and now they’ve settled down. You’re going to see that cycle come back through, and I do think that they’re going to be a big asset class for these types of buyers that can’t get into a house because it’s too high in the interest rate. They’re going to have to adapt their mindset, and I think it’s a great asset class to be in. Real

Henry:

Quick too, I want to talk about why that people might look at those two to four units is because yes, you get somebody living next door who can help pay for your mortgage, but lenders will oftentimes let you count the rent that the other units are producing as income for you, which helps you qualify more to be able to buy those properties. And so it’ll be easier for people to qualify to buy those properties and easier for them to pay the mortgage.

Dave:

Before we move on, I just want to say you might not like this, but I’m not sure it is a great time to buy houses for people as primary residences. I think for a lot of people it’s maybe better to wait right now, not because prices are going to get cheaper, but because people are stretched a little bit and if your budget is stretched, inflation is eating away and you need to save some money, it might not be a bad time to rent because it is going to be cheaper for you probably in the next few years. I think what James said sort of hits the nail on the head, which is how long do you plan to live in a house? And everyone has this debate, should you rent or buy? There are good arguments on both sides, but for almost all situations, if you’re going to live five years in a house or longer, it’s usually better for you to buy.

And so I think that’s really sort of the thing that people should be thinking about is if I’m just trying to, if I want to save money for two or three years and then buy a house, I’m going to be in five years, I think that’s an okay decision personally, but you just need to understand that you shouldn’t be doing that expecting prices to go down because that might not happen. And in fact, historically it’s probably unlikely, but I do think there is some logic to one, just saving money on rent. The other thing that I personally do right now, and I’m in a unique situation, I live overseas, but I rent and I invest the money I would’ve used in a down payment into investment properties. And I think that’s another thing that is not really reflected in this headline, but is another good consideration for people is like if you can do the math, you could actually figure out what’s better for you.

And actually, if you’re a BiggerPockets Pro member, there is a calculator I built a year ago. It’s in the resource hub, it’s a house hack, buy rent calculator, and in your area you can go and just put in information about those three different things and it will help you make that decision for you. So check that out. Alright, for our third headline today, US job growth totaled 175,000 in April, much less than expected while unemployment rose to 3.9%. This comes from CNBC. I think the key thing here is that jobless claims rose and less jobs were added to the US economy bringing hope that the Fed will be able to cut rates. Now 175,000 jobs added to the economy is still kind of a lot of jobs, but it’s like the lowest that it’s been and I think since February of 2023. So it does mark sort of a trend that might be positive if you’re hoping for rate cuts. And just as a reminder, just a couple of weeks ago we were talking about the probability of rate cuts going down because inflation’s higher. And so this is just the latest data point in the seesaw of trying to interpret this very confusing economic data and predicting what the fed’s doing. But people love when we make predictions. So Henry, do you think this improves the probability that rates will get cut this year?

Henry:

I don’t know. I’d have to see it more than just one blip on the chart in the past year and a couple of months. If it continues, then that increases the likelihood, but just because this headline came or this stat came out, I haven’t changed my thought process. I still don’t think we’re going to see any rate cuts this year.

Dave:

Okay, I like it. I like it. And then if you’re wrong, it’s just fine. Right?

Henry:

Absolutely. No one’s paying me more for being right or wrong,

Dave:

But

Henry:

No, but

Dave:

I think if you’re planning for the most expensive option, right? Yeah,

Henry:

Absolutely.

Dave:

Yeah. And so if you turn out to be incorrect and there are rate cuts, then most likely that will lead to better conditions for you, better cashflow. Absolutely. James, what about you? Are you just tired of having these conversations yet?

James :

I’m so sick of this stat.

Every time my phone burns up with headlines, it’s always those three headlines like inflation jobs report and it’s like it’s that shock factor. But to kind of look at this, basically we’re at 1 75 the month before we were over three 30 in growth, and that same drop that you referenced back in 2023 was almost the exact same cut. February, 2023, they brought in 287,000 new jobs, then it dropped to the lowest it had been in March of 2023. And I remember talking about this, we’re like, whoa, there’s this big shift. And then guess what? The next month they doubled the job growth again and we’ve yet to see any consistent data. It’s just these little blips up and down, it’s spikes way high and then it spikes way low and then there’s some average months and we’re all just kind of watching it. And until I see some consistent now next month, if we see low unemployment rise and low job growth, then yeah, maybe there’s a trend here, but right now we don’t see a trend and so it’s just kind of a blip.

Data gets skewed too. I mean it is like you look at median home price right now in certain neighborhoods. Sometimes I was looking at a certain neighborhood, it’s like 45 minutes out of Seattle and the average median home price went from one month of $380,000 to the next month of 1.1 million because there’s such little data in the market, it’s like it just grabbed the one sale and it’s like, so you have to really dig into these trends before you react. And I am with Henry, I don’t think rates are going to go down until maybe the end of the year. You want to forecast that into your investing, but that you shouldn’t let that stop you from an invest, get aggressive pullback. We have yet to see a consistent trend. If you look at this graph, it is all over the place for the jobs totals in Phil. I see the trend, I really don’t care.

Dave:

I feel like this kind of minute by minute tracking of the Fed is for stockbrokers. This is for people who are trading equities where there is volatility and prices get, every asset gets repriced instantly and these tiny little things change everything. Real estate’s just like a slower moving asset. And so these things don’t really matter until there’s a trend like James said, until we have a line of sight on what might be happening a year from now, I don’t really think the real estate market is going to react that much. And you see that now in mortgage rates because they haven’t really changed that much over the last couple of weeks. They’ve gone up over the course of the year, but I think that’s probably likely to keep coming. So I don’t know about you guys, but I feel like we might see a softening in prices over the summer because demand is probably going to lag a little bit and inventory is starting to go up and that might be a good opportunity for buyers right now. Can

Henry:

You define what you mean by softening of prices? Because people hear that and they go, oh, we’re going to drop by 10%. What does that mean?

Dave:

Oh, no, no, no. I just think right now as of this is we’re recording this middle of May, so right now prices are up almost 6% year over year nationwide, which is above average appreciation for the housing market. And so I think it might go down to 3% year over year or 2% year over year, I don’t know, 4% year over year. I just think that we’ll see that still means prices are up just for everyone. They’re just not going up at the same rate slow. Yes. So that’s a very good call out, Henry, but the reason that I think it will soften and is because there’s a little bit more inventory, which is typically a positive thing for people who are looking for on market deals.

Henry:

I would agree with you typically in this scenario, but right now I have a house on the market. It was on the market so long that the listing expired and then we recently renewed it maybe two weeks ago and since we renewed it, showings have gone up and we ended up getting an offer at almost full price. And then when we got to the inspection, things didn’t go great in the inspection and they were like, well, we want to work with you. What can we fix? What can we get done? They really want to get this house and this is a higher priced house in a pretty good part of town, but it seems could be other options out there. And so I still think people are trying to capitalize on the properties that are there because that indicates to me that they don’t want to go back out to the market. They want to keep what they got so that they don’t lose it. And that is indicative of people of there not being a ton of inventory.

Dave:

Yeah, that’s true. And obviously that is reflective of the strength of your market right now.

Henry:

Yeah, very true.

Dave:

I was just actually earlier today was looking at this inventory chart that just shows by county in the US where is going up and it is going up in most counties in the United States, but Henry very notably Arkansas is not one of those places. And generally speaking, Midwest northeast is going up less slowly. When I say I think it’s going to soften, I’m talking nationally and I actually think when you look at the data carefully, it’s not that many areas that are really pulling down might soften, but actually it’s some of the places that were the hottest in the last year, like Texas seeing huge increases in inventory. Florida is actually seeing a lot of increases inventory. Same thing in Oklahoma, Colorado. So I do think that will on a national level maybe bring us a little bit slower rates of appreciation but still appreciating.

James :

Yeah, and I think a lot of that too is those markets are also bringing more inventory because their insurance cost and tax, they’ve just gone up so much. Other factors inside your payment is affecting the affordability with the interest rates and it’s cooling some markets down for sure, and I a hundred percent agree with you, the fact that it’s 6% appreciation year over year with this high rates, that doesn’t logically really make sense.

Dave:

No, it doesn’t. The

James :

Average home appreciation for the last 30 years is like 3.8% and I’m with you. I think it’s going to be two to 3% on a steady growth. That’s usually what real estate does. That’s how we factor all of our long-term holds. We run a 3% appreciation rate on a 10 year halt because that’s just the historical

Dave:

Yes, which is fine. Deals work that way,

James :

Right? It’s completely fine, especially if you’re getting some cashflow or if you want to get some extra kick, get some value, add in there, jump the line, get some extra equity and then get your 3% growth at that point. But I think the thing is the median home price isn’t going to cool this summer. Of course it will. It’s seasonal slowdown. People forgot their seasonal slowdowns. July slows down. When you go into the holidays and people are buying Christmas presents and holidays and traveling, they don’t buy houses as much and as investors, you just got to weather those times and it is some of the best times to buy is in July and August because you’re picking it up when it’s the coolest out there, people get a little finicky, they get a little nervous. And then if you’re a flipper, by the time you’re dis disposing, you’re hitting the first of the year when the market starts cranking. And that’s one thing I do not understand is investors rush in and they start buying in the spring and get really aggressive, but then they’re disposing in a bad market. Whereas if you buy when it’s flat and people are a little worried, that’s where you rip the deal. And so yes, I do think it will slow down because it always does and it’s a great buying opportunity. People should load up heavy during those times, especially if it’s a short-term dispo,

Henry:

Unless you’re James Daniel and you’re padding the stats and you’ve got 18 crews in your flip house trying to get it done in 10 days so you can get it on the market. It doesn’t matter what time you buy it, you got 37 people working in your house trying to get it done super fast. Alright, I see what you do strangle

James :

The deal. You know what the amount of money I pay on labor right now, they should show up 18 DI expected to get done fast with how much we’re paying.

Dave:

I feel like James has the equivalent of the F1 pick crew or the NASCAR pick crew

Henry:

When it was

Dave:

Fucking the house. It’s they close the deal and just all of a sudden 80 people rush the house and they’re just all working at the same time and the cloud of smoke comes up and then the house is sold for of 50% cash on cash return.

Henry:

That’s pretty much how I feel. Thanks.

Dave:

Well James, you’ve worked hard to get to that

James :

Place and sometimes it doesn’t work. I will tell you that much.

Dave:

We’ve heard our first couple of headlines about what Americans think about the housing market and what’s going on with the labor market, but how do Americans feel about the economy overall? We’ll discuss it right after this.

Welcome back to on the market. Let’s get back into it. Alright, so moving on to our last headline here. God, wow, these are all bummer headlines today. Calin, we got to get an uplifting one in the next episode because this one is, consumers haven’t felt this bad about the economy since November. This comes from C Nnn, but it’s just reporting on government data or actually it comes from the University of Michigan. It’s a consumer sentiment index. It plunged to its lowest level in six months as I’m guessing, probably because inflation data has not been great, even though inflation hasn’t really gotten that much worse. It’s sort of in the same ballpark, but I’m guessing people are feeling like there was some momentum that inflation was going down and now it’s just taking a little bit of a step backwards and that’s a bummer. What do you guys make of this?

James :

Well, I think people are slowing down too. The cost of debt is just more too, credit cards are expensive and so it’s not just the inflation, it’s the cost of money and all these things. If you want to go buy that item on your credit card, it’s going to cost you more. And I think that’s why people are kind of feeling bad. I mean if you’re looking at your credit card bill and it’s 25%, that’s not fun. And so they’re hesitant about spending money. But the funny thing is, I hear this and then I land into Seattle last night and there’s over an hour long pickup line at Uber because of the amount of people traveling. And so I hear this and I’m like, this is not what I’m seeing though. People are still spending, they’re may be just complaining, but they’re still spending money as far as I can see.

Henry:

Yeah, I completely agree with you. I travel a ton and I’m always befuddled at how many people I see packed into these airports traveling all over the country and so money is being spent, but I also on the other end like, man, have you been grocery shopping? It is.

Boy, it is expensive because we truly are trying to cook more in order to save money. And man, I’m looking at the grocery bill and I’m like, I don’t know man, might as well just go out. Probably could have ate out, probably could have ate out and done the same. A lot of these social media accounts where people are trying to teach you all the hacks to ordering cheap food at restaurants are starting to look real good right now because groceries are high, fast food restaurants are high. It’s expensive to do regular stuff like feed your family and pay your bills. Utilities are going up. It’s just a lot. I can see why people are feeling it, but it does feel like a lot of people are complaining because there is a lot of discretionary spending happening. I mean I see that as well. So I don’t know how to draw the correlation between that.

Dave:

I heard this term, I don’t know if this describes everyone, but I just thought it was interesting this term financial dysmorphia, which if you’ve ever heard dysmorphia is just kind of like a false sense of yourself. And so you basically, this article was talking specifically about Gen Z and millennials and how social media has led to this sort of dueling. So this one two punch of economic gloom where half the social media content, you guys probably see this too, is all this negativity about the economy, everything stinks. I can’t get ahead and that’s a lot of content, but at the same time the other half of the content they see is are like, look how good my life is. I’m traveling, I’m going to a private island. And so it creates, this makes sense the situation where people really feel stuck because they’re looking at these sort of unrealistic hyperinflated sense of lifestyle. And at the same time, obviously the economy has a lot of problems right now. And so I can definitely see why pessimism is rebounding in the economy right now. Alright, well sorry for all the bummers guys, but we’re just going to bring you the headlines as we see ’em. Hopefully next month when we do this again, we’ll have some more uplifting headlines for you.

James :

One thing, these headlines have been bummers for 12 to 18 months, but one thing I do know is you can make money in this market. And so don’t buy the hype. Don’t buy the fear. Just set your goals, understand what you want to buy, go put it in place and you will still make money. I know Henry’s making money, Dave, we’re going to make some money in this flip off house.

Henry:

See what you did there.

James :

See what you did works.

Dave:

Absolutely.

James :

Yeah, so don’t buy the hype.

Dave:

Alright, well Henry and James, thank you so much for coming and hanging out and chatting about this stuff with us. And thank you all so much for listening. We appreciate it. If you like this show, please make sure to give us an honest review on either Apple, Spotify, or YouTube, and we’ll see you for the next episode of On The Market.

Dave:

On The Market was created by me, Dave Meyer and Kaylin Bennett. The show is produced by Kaylin Bennett, with editing by Exodus Media. Copywriting is by Calico content and we want to extend a big thank you to everyone at BiggerPockets for making this show possible.

Help Us Out!

Help us reach new listeners on iTunes by leaving us a rating and review! It takes just 30 seconds and instructions can be found here. Thanks! We really appreciate it!

In This Episode We Cover

  • The latest agent commission settlement and the huge payout from Redfin  
  • Is now the worst time to buy a house, and what happens if home prices keep rising?
  • The one type of real estate that may see a serious uptick in demand over the next few years
  • New jobs report numbers and whether this could finally prompt the Fed to lower rates 
  • Consumer sentiment and the extremely confusing economic pessimism we’re seeing now
  • Why you DON’T have to wait for rates to drop to get your next real estate deal
  • And So Much More!

Links from the Show

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

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

Economic Pessimism Peaks, So Why Are Investors Still Buying?

Squatters’ Rights: What Lawyers Want Landlords to Know in 2024 w/Denise Medina and Patrick MacQueen

Squatters’ rights have been a serious subject of debate over the past few years. It seems that more and more investors and even one-off landlords are dealing with squatters staying in their homes, whether they’ve had a lease in the past or not. This puts landlords in a strange predicament: try to get squatters out the legal way or offer unconventional incentives to entice the squatters to leave on their own accord. But how can a landlord prevent squatters from getting inside in the first place?

Denise Medina and Patrick MacQueen, attorneys based in Detroit and Phoenix, are here to share exactly what a landlord must know about squatters’ rights and how to get a squatter out of your property legally. With new squatter laws taking effect in states like Florida, it seems that landlords and local governments have had enough. However, squatters’ rights remain strong in many other areas, such as James Dainard’s own Seattle, Washington. So what can landlords from either coast do to get squatters out?

We’ll break down where squatters’ rights even came from, how landlords can get the legal upper hand and get a squatter OUT of their property, the exact steps a landlord should take, the prevention methods to stop squatting in the first place, and how James deals with squatters frequently without ever having to go to court!

Click here to listen on Apple Podcasts.

Listen to the Podcast Here

Read the Transcript Here

Dave:

So imagine that you have a rental property, everything’s going well. Then you have a vacancy for a month only to find someone who didn’t actually lease out your property is living in it. Today we’re going to talk about this situation, which is otherwise known as squatters and squatters rights.

Dave:

Hey

Dave:

Everyone, welcome to On the Market. I’m your host Dave Meyer, and with me today is James Dainard. James being an investor in Seattle. Imagine you’ve run across squatters a time or two.

James:

This is just part of the nature of the beast. In Seattle, we deal with squatters on the regular. We always at least have one or two going on at any given time. Not fun, but it’s just a new thing. You got to dodge round as an investor.

Dave:

It seems crazy. I don’t know if you noticed this, but I’ve been hearing about it at least more on the news. Have you seen an uptick in instances of squatting in your portfolio?

James:

Yeah, we see it in the news, but we’ve also seen it in our portfolio for sure. A lot of the properties that we purchase and how we get a good buy are actually a lot of times filled with squatters or they’re very problematic, and so we have to deal with it regularly. Anything, and we’re also developers. Developers are really targeted by squatters because they’re vacant homes, they’re waiting for permits, they can check to see the permits pulled, and so we deal with especially a lot in our development, even when we board ’em up, they get inside and then we have to deal with this eviction.

Dave:

Yeah. Well, I’m sorry to hear that. It sounds like a huge pain. And I do think that at least in the media, this is coming up more and more and we wanted to help real estate investors understand what squatters are, what squatters’ rights are, and what landlord’s rights are in these types of instances. And to help us all understand this, we’re bringing on not one but two attorneys to discuss the legalities around squatters rights and what legal action investors and homeowners have to evict or to reclaim their properties. The attorneys joining us are Denise Medina, who is from Detroit, and Patrick McQueen from Phoenix. Let’s bring on these two attorneys and learn more about the situation. Denise Patrick, welcome to the show. Thank you both for being here. Thank you for having me.

Patrick:

Yeah, thanks so much.

Dave:

Patrick, let’s start with you. Can you help our audience understand exactly just what a squatter is to help us frame this conversation?

Patrick:

Well, certainly, and I would say that to preface that the answer to this question as lawyers do we preface everything. I would preface this by saying it depends on what the law in the state says a squatter is. So under original law, which is where I’m at, we basically as real estate attorneys define a squatter as anybody in a home or on land that should not be there, that has no legal right to be there. And I would say that the media right now are portraying squatters as these people who go in and sort of take over, maybe a seasonal home or somebody who’s not there. That happens a lot or more than it should. But I see squatters as a broader category of people who are overstaying their rent or their lease. They’re occupying somebody else’s land when they shouldn’t be. They’ve stayed too long on a short-term rental. Frankly, we get one where it’s family members and cousins stayed too long and you won’t leave. So to me, all of these are squatting situations, but state laws are going to be very specific as to what constitutes a squatter.

Dave:

And Denise, is that a similar definition that you use in Michigan?

Denise:

A squatter essentially is just going to be someone who doesn’t have permission by the owner to either be there or to remain there. So I would agree with everything Patrick said because I think you see when it comes to the news, you’re going to see a lot of it’s people who are like, oh, they broke in and now they’re there. They’re just someone that I have no clue who they are. They’re in my house now. Yeah, it’s actually a lot more common for a squatter to be someone who lease expired and is just there. I think you have more of the common issues of people letting other people live with them, whether it’s the tenor or whether it’s the owner of the home. You let someone live with you and then they were like, oh, I’m only going to be here two weeks, and then they just didn’t leave. So common issues like that. So it’s even like me if I’m not a landlord and I don’t own and I don’t own a home, but if I owned a home, if I let my sister live there and then she won’t leave now she’s a squatter. Yeah,

Dave:

Okay. Interesting. And so it sounds like this is a much broader definition than what has recently been in the news. So it sounds like it could just be overstaying, your lease, refusing to leave a property in addition to the people who are occupying a property without a lease and weren’t necessarily invited.

James:

And I feel like it’s definitely changed and evolved since the pandemic of what people call a squatter or not. We’ve seen a ton of stuff in the news about people renting out their house and then all of a sudden they’re trying to get their keys back or possession back, they can’t get back in. It’s all over the news and it’s in every state too. You’re seeing it. I saw it in New York where someone inherited a house and she couldn’t get it in her own property. And then I’m in Seattle, which we see a lot of occupied homes and what we see a lot too, we just saw something in the news come out saying a man with a $2 million house got barred from even getting on his own driveway because someone had broken. And I feel like it’s just been changed. And really it’s more the burden on the investor now to prove that they’re not a tenant, and then that’s kind of when it becomes a squatter. But as we see this all over the news, we’re also seeing some politicians start to change things around. What do you think the impact of all these news stories and do you guys see any kind of changes going on moving forward?

Patrick:

You mentioned the sort of evolving definition coming out of the pandemic. I think that the pandemic and the eviction moratoriums, perhaps they embolden some people into thinking that this is an okay practice. I think there’s these unique property sharing situations, unique sharing platforms out there, and there are more ways to tell people how to squat. There’s more information about what squatting constitutes and how to get away with it. But I think you’re right that this definition has evolved and squatting has been around for a very, very long time, but I think that the eviction moratorium and that sort of time around there really was what spurred on a deeper look into this stuff. And as you mentioned, there are some state governors who are starting to take action. Maybe it’s because it’s a political year, I don’t know, but we’re starting to see a little bit of movement there. We saw what Governor DeSantis did in Florida. Our governor here in Arizona had an opportunity. There was a jointly signed bill to allow for the quicker removal of squatters, but she vetoed that. So we’re seeing at least some discussion on the topic, and I suspect that that’ll continue to evolve as well. I think state governments are going to start getting a little bit stronger in terms of allowing perhaps law enforcement to make a decision and not have to require that somebody goes through an eviction lawsuit or files a quiet title action.

James:

I’ve dealt with some very weird experiences with people breaking into our homes and claiming that their tenants, there’s actually in Seattle, there’s a corner where there’s people that sell maps to vacant homes with a copy of a lease to other people and they go, Hey, here’s good prospects. What kind of weird, you guys have probably seen some weird things. We hear about all the weird things. What kind of weird cases have you guys worked on dealing with squatters over the last 12 to 24 months? It’s gotten weirder and weirder. I’ve dealt with some extremely like, this can’t be real what I’m dealing with.

Denise:

Well, interestingly enough, if you’re on the west coast, you’re dealing with a very unique situation. I mean, these stories are crazy about Seattle, a lot in California where it’s very wealthy people and very, I guess we’ll use the word poor, very poor people. And yeah, I hear very wealthy people aren’t in their house a lot of the time, so people will just go in there and I guess they’ll start squatting and they’ll be there. But I would say we’ll have to leave that to California and Seattle attorneys. But I think when it comes to Detroit, so I guess, I don’t know if I said this, I’m an attorney out of the Detroit area and squatting is actually very, it’s an interesting topic here because I’m not sure if you’re familiar if any of you have ever been to Detroit. You’re familiar actually. I know Patrick, you went to school in Michigan or are from Michigan, so you’re familiar with Detroit where there’s just a lot of abandoned property where there was just people up and abandoned their homes.

Denise:

So you had a huge, there’s a lot of tax foreclosure going on in these abandoned homes. There’s a lot of people going into these abandoned homes. So a lot of the time people come to me and say, Hey, yeah, I’ve got this house in Detroit. I can’t rent it because it’s in a poor neighborhood or it’s in a bad neighborhood, whatever it is. So now I’ve got a squatter in there. So that’s a true, if you want to talk about mainstream squatter, it’s this abandoned home where somebody just started living there and moved in. You come up with that a lot and unfortunately that kind of squatting is super dangerous. You have just a lot of crime going on. Just whatever crime can happen in an abandoned home that no one’s watching, you don’t even know who the owner is. You’re just there. You took off the boards, you went in, you’re living in this house now. So I think that’s definitely a lot more common. Detroit, I know in Seattle, I know on the West coast you probably don’t have a lot of issue of just abandoned literally blocks of abandoned neighborhoods. So that issue just comes up a lot here, especially in Detroit

Dave:

Now that we’ve learned what a squatter is, what rights do squatters have and how can investors protect themselves this and more after the break.

James:

Welcome back to On the Market podcast.

Dave:

I do want to learn a little bit more about what rights squatters have and how investors can protect themselves in the future. But I’m sort of just fascinated by the idea of squatters’ rights in the first place because it just seems from an outsider perspective, I don’t know a lot about the law that it’s kind of cut and dry. Someone owns this property, aren’t you trespassing? So can you just tell us, Denise, let’s start with you. Can you just tell us the history of squatters’ rights? What are they and who are they designed to protect?

Denise:

I don’t know if I could go way back to where squatter’s rights are coming from, but they all stem from constitutional, they’re all constitutional rights. They’re all stemming from the constitution. Your right. It’s either to your property or it’s even especially your right to due process, which means that, hey, if I am in this property, I’m making a claim, I have a right to due process. That means I have a right to be judicially evicted. I have a right to my day in court. So that’s where that’s coming from. At least that’s where you’re going to hear the biggest argument. It’s in the constitution that I’m telling you I live here, therefore you have to take me to court. Give me due process. Patrick, if you have another take of please.

Patrick:

I do. I actually, I did a bunch of research on this. I was fascinated actually during the pandemic, I wrote a book and it included the history of squatting and we actually get our squatting laws from the ancient Roman times where it was said that if one man left his field to go maybe fight a war and somebody else came and took care of the land and they tended to the crops, et cetera, then after a certain amount of time, that new guy, that new person, that new user, that sort of squatter actually has the right to make a claim to that property actually has the right to keep that. And so over time, those laws have evolved. So the original intent behind squatters’ rights, sort of this concept of adverse possession that you may have heard about was actually to protect the property so that it was getting the sort of highest and best use. People were paying the taxes on it. But now we’ve sort of turned this into something where these people aren’t there to give this property the highest and best use. They’ve completely changed this adverse possession thing on its head and said, I’m going to do this intentionally because I’m just going to do this intentionally, not that I really want to take care of this property.

Denise:

Yeah, I was going to say that if you think of the word landlord, I’m like, I have to go that far back. Property law is so old, it’s the oldest law out there. When you go to law school, your property cases are from the 18 hundreds. You’re not going to find that in the majority of other areas of law. So even the word landlord, you’re going way back, right? Landlord comes from Europe where we’re getting all of our law from. So I think that’s interesting that now we’re coming up this far.

Dave:

So somehow in 2024 in the United States, we’re using Roman and Futile law from generations ago, which sort of explains maybe why there is all this conflict because maybe the law hasn’t been updated in a very long time. But Patrick, tell us a little bit, what are sort of the basic rights that squatters have in, let’s just take one of these more publicized types of squatting where someone takes over an unoccupied building. What rights do squatters have in Arizona and what rights do landlords have?

Patrick:

Yeah, fair question. And Denise kind of hit on this. Each party basically has the right to prove their ownership. So let’s imagine you have somebody who’s squatting, but maybe they have a text message from the landowner, from the homeowner that says, Hey, just don’t worry about paying rent, or there’s some claim that they have. So they have to have at least some form of basis to say, Hey, I’m entitled to be here. And so James mentioned the fake lease. So if they can produce something showing that they’re allowed to be there, then they’re entitled to be heard on that. And so you usually will have to, in Arizona anyways, either try to evict them or you file a quiet title action to say that that document or whatever, their claim is invalid. And so what’s happening during that process, guess what? The squatters are still staying there because a court won’t evict them because they have some basis to make this claim.

Patrick:

Now, if you want to prevail and you want to actually take over somebody’s property, there is this concept of adverse possession and you basically have to act as if you own this property, you’re paying taxes on it, et cetera, for a very long period of time. So you’ve got to show something that you’re doing, and then you get a day in court and that can drag things out even longer, and you can stay there even longer. So that’s largely what squatters are doing. To have true squatters rights means that you actually, if you are more than just a squatter, then you have some sort of real estate right to be there. So I would caution any owner, anybody from having a very loose agreement when it comes to your tenants. On the other hand, as an owner, you have to be pretty vigilant in defending your property.

Patrick:

If somebody is there and they shouldn’t be there, you actually have to go through the steps. Unless you’re in one of these states that’s recently passed the legislation, you actually have to go through the steps of evicting, filing a quiet title, action, going to court, proving your ownership. So it just becomes this big mess. And that’s why we’re hearing about it, because I’ve literally seen people spend a hundred thousand dollars to try to get rid of somebody because this squatter kept putting up, well, here’s a text message and here’s the lease, and it was all fake and all that stuff, but so there are rights. Ultimately the squatters will lose, but there are rights to remain in the property for so long as this proceeding is continuing. Before

Dave:

We move on, Patrick, what is a quiet title? Action?

Patrick:

So anytime there is an issue with title at a property, let’s say that we both receive deeds to a particular piece of property and we have to prove our ownership. Or let’s say that somebody’s been occupying my shed in the backyard for 10 years or whatever, they have to go and prove their ownership. And so it’s basically a lawsuit to prove ownership to quiet any dispute, to stop any dispute regarding title. So we’ll see it if somebody records a false lien against somebody else’s property. We’ll see it in lending situations where the lender has secured too much property and something that wasn’t included in the original loan agreement. So quiet title actually covers a number of different areas, but anytime there is an issue with title, you usually have to file what’s called a quiet title action to stop that issue, to get a judicial declaration as to who owns that piece of property.

James:

Yeah, the unfortunate thing about this, and nowadays, at least in the Pacific Northwest or West Coast, is it takes a long time to prove that they’re not a tenant. And if they have any form of document, it’s going, Hey, nope, they’re covered. They have to go through the formal process, even if it’s fraudulent. The kind of sad thing is you have to go through this whole process. It can take anywhere between six and 12 months to prove that they were never supposed to be there. And then as an investor, you really don’t have, they don’t have any money. It’s not like you can go get the money out of ’em and they just kind of move on. And the things that you hear around town now or over the last couple of years is, I mean, there’s lawyers right now that actually coach people through how to do this.

James:

Our good friend Laika, who has been on the podcast a couple times, I sold their building in Seattle. Someone had moved in, installed a stripper pole in there, was shooting videos to pay for their lifestyle, and they go, no, we have a lease. And they could not get her out. And finally, the police department, because it got put on the news, they came out and fixed it real quick, but when they were leaving, they’re going, no, my attorney said I had a right to be here, and they were actually getting legal advice on how to squat for longer. It just blows my mind. And

Dave:

For those of you who don’t know, Laika is an investor out of Seattle. She works a lot with James. She was on episode three 90 of the BiggerPockets podcast, and she’s actually also the instructor of BiggerPockets Small multifamily Bootcamp.

James:

As an investor, and I know it matters state by state, some states you can get your property back fairly quickly. What ramifications do investors or owners have when this happens to ’em? For us, we have to immediately file for eviction, go through the court, and we have to go through this process, but it’s a long waiting time. How can people protect themselves and what is the legal recourse to get themselves out of that situation? Sometimes this is really bad. They’re paying two 3000 a month for a property. It’s going a year. That’s 36,000 plus damage that’s happening to it. What ramifications do investors have if this happens to ’em? So

Denise:

Let’s see your claim for the property, you’re either going to be claiming that you own the building and this other person is fighting you saying that they own it, or you’re going to be fighting someone who says they have a right to possession. So if you’re fighting someone who’s like, I own this property, then you’re going to have to file quiet title action. But if you’re fighting someone who’s saying, I have a right to possess this property, just meaning, which is what a tenant is, right? They have a right to possession. They don’t have a right to ownership, you’re going to file your eviction action. It sounds like we’re all pretty familiar with the speed at which courts move, which is very slow. Unfortunately, if there is any system that it is very inefficient for whatever reason, it is the judicial system. So it’s going to take you a long time.

Denise:

Unfortunately, at the end of the day, if you prove that you really own this property or you prove that this person does not have your permission, is not a tenant, a lot of the time it’s an occupational hazard of landlords, of investors that sometimes this happens. And most of the time the people you’re going up against, the people who are fighting you regarding possession or ownership of your property, they’re going to be people that don’t have a lot of money. So even if you went back and you sued them for your legal fees or for the money you lost out on while they were possessing, and maybe you couldn’t go rent it, you couldn’t go sell it to somebody else. I know this sucks, but a lot of the time you winning is just you getting them out of the property and that’s it. You can pursue legal action against them, but most of the time you’re just going to be wasting your money because you’re going to pay an attorney to get a judgment that really at the end of the day is just going to be a piece of paper.

Dave:

We do have to take one more quick break, but more from Denise and Patrick, when we return while we’re away, make sure to hit the follow button so you never miss an episode of On the Market.

Dave:

Welcome back to the show.

Dave:

I guess this is part of something I just don’t understand about the law, but I guess this is a civil case or a criminal case. It seems like the people who do this are squatting in these extreme circumstances. Do you seem to do it repeatedly? Is there not a situation where these people are held criminally responsible for trespassing?

Denise:

So trespass is a very different, that’s its own count, okay? You’re talking about things like if somebody’s going to break into my home or come onto my home without permission, let’s use examples here. So if somebody goes into an abandoned property in Detroit and they just start living there, they’re not doing anything bad. No one’s looking, no one’s watching the owner, we have no idea where they are, and they start living there. They start acting like they are the owner or that they are permitted to be there. So if that’s your squatter, that person has now, they’ve been living there, they’re taking care of it. No one has said no. So now if the owner came out and said, oh, police come get rid of these people of trespassing, the police is going to come over and say, no, they have been living there. They’ve been acting like they have a right to possession or to own it, whatever it is. So they’re going to say, okay, you have to go to court and prove what they’re saying is wrong. When you talk about trespass, you’re talking about I’m in my home and somebody just comes in. So at that point, I am there. I never gave you permission. I can easily prove I didn’t give you permission to come in. So the police will come and take them away.

Dave:

Got it. But I guess, Patrick, I’m curious your thoughts on this too, do people get arrested If you’re breaking into someone’s house, why is it that they just get kicked out and there’s no other ramifications for someone who may break into someone else’s property?

Patrick:

The answer is sort of what Denise said is because they are making some claim. So if they’re a pure break in, they have no basis to be there. In most instances, law enforcement’s going to take them and have them removed. But what’s happening in some of these instances is people are putting together some sort of argument that says, I have the right to be here, and here’s a lease and here’s a text message, or here’s who you need to contact and whatever it is. So they’re putting forward at least something to sort of distract the law enforcement to say that they have a right to be here. So it’s this short-term rental agreement that’s kind of, it doesn’t really make sense. There’s this weird lease arrangement that we had. There’s this relationship that we had and he said, or she said, I could continue to stay here.

Patrick:

And so that’s really the distinction. They have something that they’re making an argument on because if they have nothing, then in most instances, law enforcement is going to take care of that. And so what some states, so this transitions into what some states are doing. As we mentioned earlier, some states are making it easier for a law enforcement officer to see through the BS argument that this tenant or possessor is making and to arrest them and to get them out of there quicker. So they’re basically strengthening some of these trespass laws and to allow for law enforcement to make decisions and not just say, well, this is a civil matter. I can’t do anything. Some

James:

Of this just comes down to prevention too, just making sure they don’t get inside the property. And that’s really looking after it, doing checks on your property all the way around, making sure it’s really secure because it is kind of crazy. You can have a unit, someone kicks in the door, the door’s, evidently the jam’s been kicked in, but then they go, I have a lease. And they go, okay, well, they could have just locked themselves out, so you got to go prove it now. And the steps that people are having to take to keep people away is been, we’ve had to do some pretty weird things. I mean, we just bought an apartment building, and this building was overtaken. The owner lived in it. The people had been overtaken by squatters. They were burrowing through each unit, drywall by drywall, ripping all the electrical out, all the heat went away.

James:

And so then they started a fire to keep the building warm. But the problem is this building became this huge issue, and not only was the owner dealing with it, they were getting fined by the city every day and she’s like, I can’t get these people out, and now they’re getting fines. And so we ended up closing on this property, getting everybody out, and now what we’ve had to do to keep them from coming back is we had to hire someone. We got him an rv, he lives in the parking lot and he does checks, and as long as you have bodies on site, it really does kind of keep him away. But you’ve had to come up with all these different things to make sure that your home doesn’t get broken into and taken over. Or sometimes people are putting light timers instead of keeping criminals away. They just don’t want that new tenant. What other steps, Patrick, do you think investors could be taking or homeowners could be taking to really keep their home protected? So this doesn’t happen outside of just having to get stuck in a six to 12 month eviction?

Patrick:

Yeah, no, that’s a great question. So the first thing I always tell people is to get to know your neighbors, particularly if you’re from out of state and you’ve got an investment in another state. Try to get to know your neighbors because, and give ’em your contact information, make sure they know how to get ahold of you if there’s anything that’s odd that’s going on with the property. Second is to monitor your investment property, and that may mean different things for different people depending on the nature of the building, depending on the location, et cetera. But even with land, if you’re a land investor, you should go out and see if anybody’s putting a shed on your land, moving dirt on your land, that sort of stuff. So you need to conduct regular inspections or at least have the third party, like you mentioned, James coming out there, particularly if it’s a seasonal rental or whatever, and it’s in your off season, well, let’s have somebody go out there and make sure nothing is amiss.

Patrick:

The other thing too is to the extent you should always have something in writing with the person in your home or on your land, whether it’s a license to be there, whether it’s a rental agreement, even if it’s just a friend, even if it’s just a roommate, have something in writing that you can at least point to and say, this says I have the right to ask you to leave and you would leave within five days, or whatever it is. So I would say those three things again, get to know your neighbors, conduct regular inspections, and then have something in writing.

James:

So even if you have a buddy surfing on the couch, get it in writing that he’s only there for a short amount of

Patrick:

Time. Some of the couch surfers are some of the biggest ones that don’t like to leave. I would mean it’s an uncomfortable conversation, but I think it makes sense.

Dave:

Denise, I’m curious, in your experience in Detroit, has the situation changed over the last few years? We talked a little bit about how the eviction moratoriums may have made this more popular as well as some social media stuff, but does the municipality or law enforcement’s response to squatters, is it changing or do you think there’s anything that might be changing in the future? So

Denise:

Just in general, the law has not changed. So everybody’s still going to have the right to ownership to possession if they can prove it. So I wouldn’t say that things have changed drastically. I do think the culture in the city, and just related to here in Detroit, I think homes are, we got a mayor, we got a governor. They’re trying to make housing more affordable. They’re trying to make sure that everybody has homes so that this isn’t happening. Obviously you can’t always be 100%. So I think just the culture of people buying homes or living in their homes, houses being occupied, property being occupied has definitely changed. So I’ve been here for the last 10 years I’ve been here. Let’s see, I moved to Detroit in 2013, and then just from then until now, you could see a huge difference in the city and just what’s happening. And you’ve got younger people coming in, more affordable housing. So I’ll add that without all the caveat in that I like to leave it up to our politicians, our elected officials here to make housing more affordable so that this isn’t happening. And I think that that’s happening here in Michigan at least.

Dave:

And I’m just curious, so do you think the lack of affordable housing is the issue? Because bringing that up, because Detroit specifically is one of the least expensive housing markets in the country, so I’m just curious if there’s a correlation there.

Denise:

I have not conducted a scientific study of whether there is some correlation here, but myself, I am a millennial. I don’t own a home. Thankfully, I have a job and I can afford to rent. But I would say that, yeah, I think this is happening a lot. I’m originally from Los Angeles and I’m sure Seattle is the same way. It’s so expensive to buy a house. So I think there’s just a larger homeless population who needs a place to stay. I think that happened a lot here in Detroit where there was also a large homeless population at one point, and there was a lot of abandoned buildings in the city of Detroit. So I think it’s a huge contributing factor that there’s not a lot of affordable housing, and it’s just so expensive to rent. It’s expensive to buy, but obviously that’s just one contributing factor of the many because I’ve never squatted, so I can’t speak for somebody who’s felt a need to squat in a house or who’s been so desperate that they need to be in this situation where they’re starting fires inside of someone else’s house to keep warm. Yeah.

Dave:

Patrick, it sounds like there was some legislation in Arizona that was vetoed. Do you see anything else shifting in terms of how squatters are handled by the judicial system in Phoenix?

Patrick:

I’ve seen a trend, I’ll put it this way, of maybe a softening attitude towards people who are there improperly or illegally. So I would say when I first started practicing, this is 20 years ago in eviction action would take two weeks and the person would spend $1,500 to get rid of somebody in their property. That was sort of the going rate 15 or 20 years ago. And again, it would take no time at all. And over time though, I’ve seen judges being more lenient to people wanting to stay, judges not ordering an immediate eviction and allowing for people to stay a little bit longer or not awarding a full award of past due rent and attorney’s fees to the landlord. So fortunately, or unfortunately, depending on which side of this you’re on, if there is multiple sides, I’ve seen a softening and I’ve seen being able to get rid of these folks more difficult over the past 10, 15 years, much more expensive. And some judges seeming to have a little bit, I don’t know if it’s a heart or how you describe it, but when I first moved out here 25 years ago or so, we had Sheriff Joe and maybe some of your listeners, remember Sheriff Joe out here? He was kind of a big wild cowboy. He was out here. There was no games to be played. And over the years, we’ve had a little bit of a softening of some attitudes, I think.

James:

And as these attitudes softened up, it takes a lot of time and money to get someone out of property. And one thing that we’ve done pretty regularly the last three years is even if they get in and they have a lease, we even will just offer cash for keys, even though they had no ground for being there, because it is just such a quicker, you’re kind of like, oh, I just got stung. I got to try to offer some money to move ’em out. You have to get creative. I’d rather give someone $5,000 to move out now, then wait a year. And it’s really unfortunate. It’s a hard pill to swallow, but it has worked for us quite a bit, especially during the pandemic. I had to give out a lot of different checks and cash to people. Patrick, I see a lot of investors, they get desperate. They do the same offer and then they’ll give them cash and then they don’t leave anyways. And there’s a specific way you really need to structure this with a structured move out agreement, with a release as a tactical thing for investors to try to move this down the line. If they have to pay someone to move out of this property, what kind of paperwork and how can an investor protect themselves to where they’re giving over the funds that the people are actually giving and surrendering the property?

Patrick:

Yeah, no, I mean, I would almost have some third party property manager witness the move out and the exchange, so you can show exactly what was happening here, but you certainly certainly need something in writing. Otherwise you may be getting tricked here. So you need something in writing indicating that they are no longer making a claim to this real estate that they had no rights to begin with, et cetera, just to sort of foreclose any possibility that they’re going to try to come up with something that says, well, this agreement is a little iffy in these sort of areas. I’m going to test it again and I’m going to test this owner again even though they just paid me the 5,000. So you really need a specific agreement outlining your claims, and it needs to be in writing. And I would videotape, frankly, as much of the process as you can just in case you ever need it to show it to law enforcement officer or the court.

James:

Yeah, because what our attorneys have had us do is sign a full release and it motivates them to also sign it saying, Hey, we’re releasing you from any damage you did any possible back rent that you owe us. In addition to that, they’re releasing themselves that they have no claim to live at this property anymore. Exactly right. And that’s been really important for us to have that document because we have had times where we actually did pay, everyone moved out. They had multiple different tenant renters in there as well. The head squatter, I guess. He delegated out some money, he kept more for himself. And then the people came back the next day, they came right back in, and my property manager had on video, he’s like, you’re not supposed to be here. He already paid. And they’re like, see you. And they just walked right back in the house. And so luckily we had every person in that house sign that agreement, and then by doing that, then the police actually just removed them from the house at that point. But it’s really important you structure it in the right way because if that money gets released and you do too quickly because you just want ’em out, you could just be really giving them money to fight your legal case and they’ll be in there longer.

Patrick:

That is certainly a fear. I mean, get the locksmith over there immediately, get everything changed as well, just so it’s not as easy to get in there. But you’re right. I mean, if you’re not structuring it properly, if you’re not getting it signed again, I probably have it videotaped just to show that this was signed and this was what was supposed to happen. You’re in a little bit better shape if you can do those things.

Dave:

Alright, well, Denise and Patrick, thank you so much for sharing your knowledge on this interesting topic with us. We really appreciate it. We will, as usual put Denise and Patrick’s contact information in the show notes if you want to learn anything more about them and their work or connect with them. Appreciate your time.

Patrick:

Thanks guys.

Dave:

Yeah, thank you so much for having me. Thank you all so much for listening to this episode of On The Market for BiggerPockets. I am Dave Meyer. He is James Dainard, and we’ll see you next time for another episode. On The Market was created by me, Dave Meyer and Kaylin Bennett. The show is produced by Kaylin Bennett, with editing by Exodus Media. Copywriting is by Calico content, and we want to extend a big thank you to everyone at BiggerPockets for making this show possible.

Watch the Episode Here

Help Us Out!

Help us reach new listeners on iTunes by leaving us a rating and review! It takes just 30 seconds and instructions can be found here. Thanks! We really appreciate it!

In This Episode We Cover

  • Squatters’ rights explained, and the ancient laws that they’re based on
  • Why state governments are getting tired of squatters and tightening up their laws
  • What qualifies someone as a “squatter,” and why it’s MUCH broader than you think
  • Evictions 101 and the steps every landlord should take to get a squatter out
  • Cash for keysand maneuvering around the courts to remove squatters
  • Trespassing vs. squatting and why the police CANNOT simply come and take a squatter away
  • And So Much More!

Links from the Show

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

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