Silver, Sovereign Debt, Venezuela, and the Signals Beneath the Surface

Silver, Sovereign Debt, Venezuela, and the Signals Beneath the Surface

by | Jan 8, 2026 | Industry, Investing, Market Trends

If you spend enough time watching markets, you eventually stop focusing on day-to-day price moves and start paying attention to longer patterns and what tends to move first. For me, silver has long been one of those assets — not because it’s a prediction machine but because it often reacts early when deeper pressures begin building in the system.

Right now, several of those pressures appear to be converging.

 

Key Takeaways:

  • Silver has surged ~150% as supply deficits enter fifth consecutive year
  • Bank of America outlines scenarios where silver could reach $135-$309/oz
  • Extreme paper-to-physical ratios amplify price volatility, especially when markets demand physical delivery
  • Real estate and precious metals respond to similar monetary forces

 

Why Silver Is Worth Watching

Silver occupies a unique position in global markets. It isn’t purely a monetary metal like gold, and it isn’t purely an industrial input like copper. It sits somewhere in between.

That dual role makes silver especially sensitive to:

  • Changes in monetary policy
  • Industrial demand cycles
  • Physical supply constraints
  • Shifts in investor confidence

When silver moves sharply, it’s often responding to multiple forces at once. That’s what makes it useful as a signal — particularly during periods when the broader macro environment is unsettled.

Recent Price Action as a Signal, Not the Story

Silver’s recent price surge has been substantial, moving from roughly the $30 range in early 2025 to highs in the $80s – representing gains of ~150% before pulling back modestly later in the year. Moves of that magnitude are unusual and rarely occur without broader macro stress in the background (see recent silver price data on Trading Economics: https://tradingeconomics.com/commodity/silver).

This doesn’t mean silver prices themselves are the story. More often, sharp repricing reflects rising concern around:

  • Liquidity conditions
  • Currency stability
  • Debt sustainability
  • Demand for assets outside purely financial systems

Silver tends to respond quickly because it sits at the intersection of all four.

The Structure of the Silver Market

Another reason silver behaves the way it does has to do with how it’s priced.

Most silver price discovery occurs in futures and derivatives markets, where “paper” claims on silver trade in volumes far exceeding the amount of physical metal that changes hands (some estimates suggesting ratios exceeding 100:1 or even 300:1). This structure is standard in modern commodities markets, and I believe it may be a lever to moderate pricing. The paper instruments can expand and contract on a dime, and flow in to meet sudden ebbs and flows that happen.

In some ways, the paper silver market functions like financial leverage; it enables liquidity and efficient price discovery, but when fundamentals shift sharply, the same structure that provided stability can amplify moves in both directions. Price moves become sharper, and markets adjust faster than many participants expect, that’s where the leverage analogy becomes most visible.

That dynamic often makes silver one of the first places stress shows up.

Debt, Monetary Policy, and the Search for Stability

Zooming out, it’s difficult to ignore the broader backdrop.

Sovereign debt levels — particularly in developed economies — are historically high. Monetary policy has oscillated between tightening and easing in relatively short order, and confidence in long-term currency stability has become less absolute than it once was.

In response, some countries have explored ways to reduce reliance on the U.S. dollar for trade and reserves. This trend toward diversification doesn’t mean the dollar is disappearing, but it does suggest a world where capital is more actively searching for alternatives when uncertainty rises. Compared to literally any other countries’ offerings, U.S treasuries are STILL the best available in that category.

Hard assets — especially those with limited supply — tend to benefit in that environment.

Supply Constraints Are Not Theoretical

Unlike financial assets, silver supply cannot be expanded quickly.

Global mine production has hovered around relatively stable levels while demand has continued to grow. Industry reporting indicates that silver markets have experienced persistent supply deficits of 100+ million ounces for multiple consecutive years, driven by both industrial use and investment demand (see analysis at CarbonCredits.com: https://carboncredits.com/silver-price-hits-64-as-supply-deficit-enters-fifth-year-prices-may-reach-100-oz/).

For a long time, industrial consumption absorbed much of that imbalance quietly. What’s different now is that investment demand has increasingly layered on top of already tight fundamentals — an environment that tends to produce volatility rather than gradual price adjustment.

 

What Institutional Analysts Are Saying

While extreme price targets should always be treated cautiously, it’s notable that some mainstream analysts have begun outlining scenarios where silver could reprice substantially under certain macro conditions.

Bank of America’s Head of Metals Research stated that while gold may act as the primary hedge, silver could, under specific ratio-based and macroeconomic scenarios, top out as high as $309 per ounce (reported at Kitco: https://www.kitco.com/news/article/2026-01-05/gold-will-be-primary-hedge-and-performance-driver-2026-silver-could-top-out).

This isn’t a forecast — it’s a conditional scenario. But its existence matters because it shows that discussions about higher silver prices are no longer confined to fringe commentary.

Resources, Processing Capacity, and Geopolitics

Geopolitical decisions are rarely driven by a single variable. Energy security, trade routes, domestic politics, and strategic competition all play roles.

That said, access to resource processing infrastructure still matters.

Venezuela is widely known for its oil reserves, but it is also rich in mineral resources. According to reporting by the International Business Times, JPMorgan Chase underwrote approximately £6 billion in financing for a U.S.-based metals smelter plant within hours of U.S. legal actions targeting Venezuelan metal assets, highlighting how control over processing infrastructure can move quickly alongside geopolitical developments (International Business Times: https://www.ibtimes.co.uk/jpmorgan-funds-6-billion-smelter-plant-hours-after-us-seizes-venezuela-metal-wealth-1768359).

This doesn’t prove that precious metals were the primary motivation behind any specific action. But it does illustrate how metals, refining capacity, and strategic resources remain part of the broader calculus — especially during periods of global uncertainty.

A Historical Lens

The closest modern parallel may be the inflationary period of the 1970s and early 1980s.

That era was defined by rising debt, delayed policy responses, and a long process of restoring confidence through tough monetary decisions. Even then, stabilization took years — not months.

Today’s circumstances are different in many ways, but the lesson remains: monetary shifts unfold over long timelines, and early signals often appear in places most people aren’t watching closely.

What This Could Mean for Real Estate

Real estate doesn’t exist in isolation from these forces.

Loose monetary policy tends to increase liquidity and aggregate demand over time. Unlike the pandemic period, builders have had time to catch up on supply, reducing the likelihood of another extreme shortage-driven price spike.

Still, periods of economic uncertainty often reinforce interest in tangible assets. That can show up as sustained demand and increased transaction volume — even if price appreciation is more measured than in prior cycles.

In that sense, real estate shares more in common with precious metals than many assume. Both respond to the same monetary forces, both have supply constraints, and both attract capital during periods of currency uncertainty. The main difference is liquidity and transaction costs, but the underlying dynamics are remarkably similar.

Final Thought

None of this is a prediction carved in stone. Markets are adaptive, and policy decisions can change trajectories quickly.

But when multiple indicators — silver price action, supply constraints, debt expansion, institutional commentary, and strategic resource developments — begin pointing in the same general direction, it’s worth paying attention.

Silver isn’t the destination.
It’s one of the earliest signals.

And in complex systems, early signals tend to matter.

$30K/Year Cash Flow from 2 Properties by Doing What Other Investors Won’t

by | Oct 16, 2024 | Investing, News Feed

Has the Airbnb market become TOO saturated? It might not matter if you can rise above the competition and make your property stand out like Katie Cline did. Thanks to luxury amenities, personalized touches, and an unforgettable guest experience, her two rental properties bring in a whopping $30,000 in annual cash flow!

Welcome back to the Real Estate Rookie podcast! When Katie saw a golden opportunity to combine her extensive background in hospitality with real estate investing, she bought two short-term rentals and focused all of her energy on creating places where she would want to vacation. In just eighteen months, this move has already paid off, as this pair of New York properties generates constant five-star reviews and a huge amount of profit that helps build her real estate portfolio!

In this episode, Katie offers some game-changing advice that will elevate your property, increase your bookings, and boost your cash flow. Tune in to learn about the “little” details that will raise your bottom line, using social media as a powerful marketing tool for your business, and the two things Katie believes will set new investors up for success!

Click here to listen on Apple Podcasts.

Listen to the Podcast Here

Read the Transcript Here

Ashley:
How do you make your Airbnb stand out in today’s market? Is it too saturated to be successful? Of course not. Katie Cline has built a portfolio of two Airbnbs and what sets ’em apart are the high end touches that keep the guests coming back from luxury amenities to personalized details. Katie has mastered the art of creating an unforgettable guest experience. If you’ve ever wondered how to elevate your own short-term rentals and increase bookings, this episode is packed with insights you won’t want to miss. We are going to discuss how Katie went from purchasing her first property in London to two short-term rentals in the us. Then why she believes customer service is just as essential in real estate as any other business. Lastly, how social media impacts the success of her portfolio. Welcome back to the Real Estate Rookie podcast. I’m Ashley Kehr, and sadly, I am not joined by Tony Robinson because he’s busy being a real estate investor, but he’ll be back next week. Welcome to the podcast where every week, three times a week, we bring you the inspiration, motivation, and stories you need to kickstart your investing journey. Let’s give a big welcome to Katie Klein.

Katie:
Thank you, Ashley. Such a pleasure to be here with you today.

Ashley:
I am very excited to have you on because as I was telling you before the show started, I have a property right now that I feel like could use some jazz and get those nightly rates up, and hopefully we can talk about that during the episode.

Katie:
Absolutely.

Ashley:
Okay, so Katie, to set the tone here, what was life like for you before you started investing in real estate?

Katie:
Yeah, I’m actually a fairly new real estate investor. I purchased my first property in March of 2021, and that was actually in the uk. I was living in London with my husband at the time, so we bought a small apartment or as the Brits would say, a flat. But I come from a deep background of hospitality. I led global PR and communications for some of the world’s best hotel brands. That’s brands like Ritz Carlton, Ritz Carlton Reserve, W Hotels, the Luxury Collection, St. Regis and many more in both New York and in London. So applying that hospitality background to short-term rentals was something I always wanted to do. And once we moved back to the states, we acquired now two in the last really year and a half short-term rentals. And really what has shocked me the most in the space is a lot of people will get into short-term rentals for the real estate investing aspect of it, which we all know is an incredible reason to jump in. But I really believe once you open your doors to your first guest, you shift from real estate investor to host, you shift into hospitality. So from my actual career background, really distilling those actionable insights and tips that all of us can take to make our real estate investments that much stronger and drive those high ADRs.

Ashley:
Katie, that is awesome and congratulations on acquiring those three properties. The London one sounds so interesting and I feel like we could probably do a whole episode on investing out of the country and what that was like. But today I want to focus on your US based investments. So tell us about the first property you purchased and what was your strategy going into that property?

Katie:
Absolutely. So we were moving back to the US after spending about five and a half years living abroad. Unfortunately, my mother is very sick, so we wanted to be back in the area to be able to help her. And my dad, they live on Long Island, which is where I’m from originally. So we thought we’re going to go back to the New York City area and real estate’s very expensive here, and we weren’t really sure what our long-term plan was. So we thought maybe this is the moment that we can actually try this short-term rental thing out. My husband and I had been camping in an area called Lake George, which is about three and a half hours north of New York City pretty much every summer since I met him. And it was always, wouldn’t it be nice if one day we could own a place here?
So even though we had bought the place in London and when we bought it, we knew we’re not going to live here forever. The plan is to long-term rent it. I think it was really this first short-term rental property that made me feel like, okay, I’m doing real estate investing now. It’s how I found bigger pockets and really started reading all of the books, listening all the podcasts and trying to educate myself on this space. So it was before we moved back, we were moving back at the beginning of 2023, and it was in October of 2022 that I saw our property go live on Zillow. It just looked magical. It was a chalet, it was close to the lake, but really secluded on six and a half acres and I could just see its potential straight away. And it sat on the market and it sat on the market and I thought, okay, if we get to Thanksgiving, surely it will still be available by the time we arrive back.
And of course it went off the market and I thought, it’s going to come back, it’s going to come back. And luckily that deal fell through and it did come back on the market in December. So it was literally the third day we were back in this country still jet lagged, dragging our nine month old daughter to go see this property. Within a few hours we had made an offer and it was accepted and we kind of looked at each other like, all right, I guess we’re doing this. So it was a real moment of how can we apply the background of hospitality and all the learnings I had from hotels to make this property stand out from the competition.

Ashley:
So with this first property, this chalet, you’ve got the property now, kind of give us a rundown what the actual numbers were on the property and how you were able to fund it.

Katie:
Yeah, absolutely. So we were lucky to be able to do a traditional conventional mortgage and actually we looked at Air DNA and trying to understand what type of a DR we would be able to get in terms of when we were renting it out. And to us that was kind of like best case scenario, right? I believe in having a plan for worst case scenario too. And I thought, okay, I can cover this monthly mortgage amount if no one ever comes and rents it. And I thought, best case scenario, we’ll cover our costs and I’m very happy to say cash on cash. We’re looking at about 10.5% right now. Our second property doing much better than that thankfully as well. And I think that’s part of the learning process. But we also bought at a time when interest rates were kind of higher. I mean I still hesitate to even say high because we know historically how high they can get, but that property we have at a 6.125%. So if we can be performing as well as we are right now at that interest rate, I’m hoping that at some point we’ll be able to refinance and then see the profits go up even further

Ashley:
With this property. You said that when you were looking at Zi and you looked at the property, you could just imagine the potential it had. So what are some of the unique things you did to this property to make it a standout listing?

Katie:
It’s really funny because if I think about long-term rentals versus short-term rentals, I think of long-term rentals as you almost need a white box. And I don’t mean actually physically white. I mean proverbially white in the sense that when a prospective tenant walks in, you want them to be able to envision their life and their stuff in that space. Short-term rentals I see as quite the opposite. You want a place with character, they’re only staying for a few days. It absolutely should still be comfortable and functional, but you want it to have a bit of personality. And our first property in Lake George just had that right away. Now I really had to just do a lot of stripping away from that property. They had a lot of floral curtains and floral rugs and bad furniture and things that were just distracting from the beauty of the bones that existed.
Even something as simple that all of the walls were painted off white instead of a clean wipe, things like that, that just instantly brought it up to date, but still really maintained the character. Whereas our second property, which is about 40 minutes south in Saratoga, a place you’re probably familiar with as well, having gone to school in Albany, that house was a bit more like cookie cutter suburban house. So really I thought my goal there is how do I add the personality into that, whereas the first property, I just need to strip things away to let it actually sing.

Ashley:
Stay tuned after a break. For more from Katie, if you’re hoping to invest remotely, you will need a team to help manage your properties. Go to biggerpockets.com/property manager to learn more. Learn more. Okay, let’s jump back in. What about the services for these two properties, along with just making it a unique property to at and to experience? What are some of the services that you have provided that would be different from a standard short-term rental?

Katie:
Yeah, I wouldn’t say that I am a personal concierge who’s holding their hand throughout their stays by any means. I am a remote host based in Astoria Queen, so about three hours south of both properties. But I like to think about certain things that hotels do really well and how can I apply that to my business. So first and foremost, when I was working for a brand called La Meridian, we did some research that found the first 10 minutes of a guest really impacts their entire perception of their trip. So that to me as a short-term rental owner is like, did I give you good enough directions or did you have to drive past the house a few times before you found it when you drove up the driveway, if you arrived at night, did the light come on and did it stay on long enough for you to unpack the car or get the baby out of the car?
Are you fishing around to try and find a physical key or do you have the lockbox code that I gave you straight away? And then of course, once people walk through the door cleanliness, I think if you walk in and you see something is dirty or out of place, you then put on your critical eye and you start looking at every crevice and you’re just setting yourself up to start from a place of recovery as opposed to people walking in going, this is great, and then they’re kind of more relaxed in the space. What we do also try to do is provide over and above on amenities in terms of I leave a handwritten welcome note for everyone. We do a bottle of local wine, which I know the SDR community is divided upon if you should or shouldn’t leave alcohol. But all of our renters are at least over 25 years old, so a bottle of local wine.
We also do a type of coupon to allow the guests to go back into the winery and try more wines on a buy one, get one type purchase. We have created a branded tote bag because we’re close to the lake. So since we provide lake towels for people to be able to bring down to the water, we wanted to give them a tote bag to be able to bring those down with them. And the fun thing is seeing our guests tag us in social media long after their stay of still using the tote bag. So it’s little things like that. It’s by no means am I sending them hand discording them to Michelin’s star restaurants by any means, but I think it’s that personalization and that eye for details that makes people feel really looked after.

Ashley:
There’s this hotel called the Lake House Canandaigua, and I want every single thing that is branded by them because, and that is just the thing. As soon as you were talking about that, that’s the first place I thought of, and I just love every little detail. A disposable coffee cup has their logo on it, just like any piece of glass, there’s a little etching of their logo in it, and it’s just this really unique and almost like a warm cozy feeling that you are part of this brand now that you’re getting this experience. So I love that idea of the tote bag. It’s just something that I’m sure you probably could just go online and order a batch of them,

Katie:
And they’re not very expensive to do. We had actually first made them for our wedding because we thought, oh, instead of giving a throwaway bag, let’s make a tote bag for everybody. They’re probably, I don’t know, three to $5 a piece. And I think that is where in the short-term rental industry, you see people struggling to pay money into it, but it really I think affects the a DR. Now, am I on my Airbnb page or on my personal social pages being like, look, if you stay with us, you get a free tote bag. No, absolutely not. It’s those little surprise and delight moments that people arrive and think, oh, this is so cute, this is so sweet. And I don’t know about you, but what I’m really seeing too is a shift in the expectations from the short-term rental renters community. I think in the past people thought, I need enough coffee for that first cup and I need that first garbage bag, and then it’s my responsibility to go to the store and stock things. And now more and more, I’m seeing people really expect to have enough for their entire stay. And quite frankly, with the rates that I’m charging, I think they’re right. Why should you have to interrupt your vacation to go buy a box of garbage bags that you’re only going to use a handful of anyway? If I can just overdeliver on that and then that meets their expectations, I’m going to be set up for a five star review much more easily.

Ashley:
Let’s go into that a little bit more of what your opinion is. If you should be an investor that goes after buying two to three small rental property, or not even small, but just two or three and have a small portfolio or going out and building a larger portfolio, but it’s more of a cookie cutter model because you need these systems in place to actually manage all of these. And what do you think is actually the better strategy for maintaining your short-term rentals for the longest period of time for protecting your investment? What is going to last the person who’s got more in their portfolio? So if one rental isn’t doing good, they’ve got the other short-term rentals to kind of carry it, or that person that has just two or three that has those unique experiences with those amenities.

Katie:
I absolutely love this question, and I’m not going to give you a PR answer, but I kind of am and say it depends. And I think it depends on everyone individually. And I love that you’re asking it because I think for at least when I started diving into this world, all you heard was automate and more, and how many doors do you have and how quickly can you scale? And that is great, and that is super right for some people, but that also may not be right for everyone. And it’s taken me until my second property, my second short-term rental, did I start to say, hang on, what is the right strategy for me and how do I actually want to approach this? So I think at this point in my investing journey, I’m really interested in what I like to think of as lifestyle assets.
So how do they impact my life and bring me some joy in addition to hopefully bringing me some cashflow as well. So the fact that my guests always take priority, someone who’s paying for a booking always gets the house over me, but if it comes to Thursday and the house isn’t booked, we’re like, yes, let’s go upstate. Let’s go see the house, let’s go enjoy Lake George in the summer, Saratoga in the fall. And I really love that about the houses. And plus, I think what they’re amazing at too is letting you try out neighborhoods. I really feel like a local in both of those places now because I’ve spent so much time renovating and being there. So number one, that means I can give better recommendations to my guests. I am not just going to say, Hey, there’s a deli across the street. I’m going to say, Hey, there’s a deli across the street and the line gets super long, but actually you can order online and then pick up. So little tips like that. And then for us, we are thinking maybe one day we want to move to Saratoga, but as someone who’s mostly lived in big cities my whole lives, I was a little bit nervous about a transition to the suburbs, and this is now a nice way to get to almost try on a neighborhood. So I guess the answer is everyone should really decide for themselves what do they want to do? And then therefore there’s a strategy out there for you. If you don’t have 400 doors, you’re failing at this.

Ashley:
Yeah, and I think that’s a great answer, giving your opinion on why you may choose either side, because it can definitely be as much as everyone says, don’t make an emotional decision purchase based on the numbers. Well, this is also your lifestyle that you’re talking about. Do you want to be building out systems and processes, hiring full-blown teams to manage 20 rentals? Or do you want to take the time to do the stuff that you love design and really add these different aspects and these little touches that will take up your time? But if it’s something you enjoy and you want to do, maybe you can bring up that daily rate so that after this person with this huge team, you’re maybe not even making that much less than them because they’re not providing that unique service that you are providing to.

Katie:
That’s exactly it. I think there are many people out there who have 20, 30 hundreds of doors that might be making the same amount of cashflow as people with much less doors than that. And I think when you pick places that you would also be a guest of you, therefore understand your target audience so much more easily because it’s you.

Ashley:
Katie, I want to try and transition here a little bit. You mentioned the tote bag and being tagged on social media. So how has social media made an impact on your rentals?

Katie:
What I think is really well done in the hotel industry is they know the value that they provide. So when I was working for some of those great hotel brands, we would work with social media influencers and say, Hey, we’ll trade you. You can stay for a couple of nights and in return you’ll give us certain content you’ll post on your social channels, et cetera. So I learned that there. And then when I acquired this first property in Lake George, I thought I could do the same thing here. And now you’re probably not working with the same influencers. It’s not necessarily going to be people with millions and millions of followers, but that’s not necessarily what you need. So I think for short-term rental owners, our content is our number one marketing vehicle. If we don’t have good photos and ideally some good videos too, why are people going to spend money with us in the first place?
So I’m a huge, huge proponent of get great images. And the way I think a really economical way to do that is to find influencers, whether they shoot in a certain way that you think is aligned with your house’s style or they have the right following. If you start to see that most of your guests are coming from a drive market, let’s say three hours away, then you can make sure that their followers are going to be in that area. So for me, it was really about content as opposed to growing the social following. So finding people who knew how to photograph wooded homes and make them look fantastic and then saying, Hey, would you be interested in staying? So the only cost to me is just covering the cleaning fee for them. And then in return, I’m getting 30, 40 photos, some drone videos, just things that I would’ve never been able to capture myself. So that has been really, really helpful to be able to do.

Ashley:
And even to pay someone to come and take those pictures for you can be pricey. We just got two properties photographed today, and that will be about 600 to $700 to have those two properties done to get full listing photos.

Katie:
Definitely.

Ashley:
Katie, you talked about the Lake George property and then the Saratoga property. How were you able to get that second property? Was it within a year and a half, you got those two properties? Give us an idea of what the funding looked like for those properties.

Katie:
It’s probably boring to say, but we save from our W2 jobs. I see a lot of people buy much nicer things than us, but I am so obsessed with real estate. When I get a bonus or something at work, I’m like, Ooh, I can’t wait to put this towards the next asset. So I think that’s the beauty of a W2 job. But at the same time, I think Covid showed us that things can happen in the world that could potentially take away a W2 job really quickly. And that’s what really interests me in real estate to begin with, is starting to build something that’s really my own on the side so that God forbid myself or my husband lost our jobs, or if one of us was unhappy and just not feeling like we had to stay there, all of a sudden we’re building something on the side that in the future it will be optional versus mandated.

Ashley:
Isn’t it funny how it seems like just saving is so boring, a boring answer? It is not like I did some creative seller financing with the deal and I did this. I have no money into it. But that is one of the easiest ways to purchase a property because your, it’s not dependent on the deal. It’s not you’re having to try to find a deal that’s going into foreclosure or that has a desperate seller or is going to do seller financing or can do sub too. It is just saving, and it sounds boring to talk about, but if you can decrease your living expenses and you don’t get that lifestyle increase at up creep that when you get that bonus or you get that pay raise. And that is definitely one of the easiest ways is to live below your means and to just save, to get started in real estate

Katie:
And put in the work physically yourself. When we bought the first property and the second property, it was three months or so of working five days a week and then driving upstate late on a Friday night and then working the whole weekend on what projects we could get done. And once you have that systems in place and it kind of starts going on its own, you’re like, that was really worth it. And I think it goes back to what we were talking about earlier about finding what’s right for you. You hear a lot of people talking about seller financing and partnerships and how do you get the next one, next one, next one. And that’s great, and that’s super exciting for a lot of people. But I really like being able to have the control and being able to say, I think it’s worthwhile to have, I have two social influencers coming this month because it’s autumn in the Adirondacks.
It’s going to be gorgeous and magical. That’s why we got pictures today, great time of year to get some photos going, and I don’t want to have to go to other partners and explain to them why I’m paying those two cleaning fees. And they’re great partners to work with in the sense that they’re taking weekdays and usually we really only have weekend business this time of year, but still, I like being able to have that control or to be able to say, the linens don’t feel great to me anymore, so I’m going to replace them. Versus having a partner say, oh, well we get to a year on that. Those little things. I think it’s important when you’re in the driver’s seat,

Ashley:
And this could be a whole nother episode, but I have a friend who’s selling a property right now because they partnered with someone and there was the discrepancy in those decisions, and then they had a property manager who had an opinion too, and between the three of them, and that was the reason they are now selling the property because of that. So it’s definitely something to think about before going into a deal with a partner. We have to take the final ad break, but more on how a small but mighty Airbnb can cashflow extremely well in today’s market. Welcome back to the show. We’re joined by Katie Klein. Okay, so the next thing I want to kind of go into is we talked about providing service, the amenities, what your portfolio looks like and how you were able to save for those properties. But what is next for you? Is this, it is you’ve got your small and mighty portfolio, or do you want to continue on and grow this portfolio even more?

Katie:
Definitely want to grow it. I feel fully addicted now. You know what I would say to anyone listening, I think sometimes for those of us who really immerse ourselves in this world and read all the books and listen to all the podcasts, you have a little bit of imposter syndrome of the sense of everyone’s got 40 doors and I need to get started and I’m late to the party, but sometimes I kind of zoom out. And I think to myself, actually in my personal life, I know one person who has a short-term rental. I don’t come from a world where many people do real estate investing. And when we bought our first property in the US in Lake George, my dad looked at me and was like, I don’t understand. You’re going to own two properties and not live in either of them. And then when we bought the third one, I mean, he couldn’t look me in the eye was shaking his head.
He’s like, I’m just so worried that you’re going to get yourself in over your head. And when you have someone you really respect questioning, fairly questioning things, it makes you really question yourself. But now that we’ve gotten the two properties under our belt, I feel like I’ve been let into this Narnia of why wasn’t I told this sooner and wow, this is an incredible world to be a part of and look at what I could potentially build for my family one day. So absolutely hooked in love with the space. And I have two markets that I have my eyes on right now, hopefully for an acquisition probably next year I would say, because I have to re-save again.

Ashley:
Do you have a cashflow number in mind that you want to reach?

Katie:
I, I think long-term, what I would love is to replace our salaries. We’re probably very far from that right now. And quite frankly, I love what I do. I still work in communications. I really enjoy my job. But I think going back to what we talked about earlier, I like the fact that if that all went away or if things changed and I didn’t enjoy it anymore, it would be an option to walk away and not how many people feel of like, well, I have to stay until I find the next thing because I have all of these bills that I need to pay. So I think that’s the beauty and the power of real estate is setting ourselves up for hopefully generational wealth. But if anything, just to have that safety net in case things fall apart,

Ashley:
It’s that multiple income stream, having those in place and just continuously building those out makes such a difference in the security you feel while you’re building wealth. For sure.

Katie:
Exactly. And I think also what people don’t talk about too is it’s not just about getting to high levels of cashflow. Saratoga is a great example. Something that we’re exploring is maybe we’ll rent it for a couple more years and then save all of our profits from that, then do a cash out refinance, completely renovate the house to the perfect way that we want it, and then that could become our primary home, which would mean we’d essentially have our perfect house for probably half the price that you would get it for in the market right now. So that would only be possible to us because of renting, and it’s not necessarily something that we’ll definitely do, but the fact that we have an option like that is just incredible. Versus most people say, I’m going to go buy my house and I want it to be perfect, and therefore their mortgage is insane, and then they’re stuck in that job whether they like it or not.

Ashley:
So basically what she’s saying is you need to buy the house that you want in the future now that needs rehab, rent it out for several years and then go ahead and rehab it and live in it when it is appreciated.

Katie:
It’s kind of what we’re thinking about with Lake George too. Our house is wonderful, but it’s not on the water, and that would be my dream is to be on the water one day. And if I was just buying that for ourselves, I mean, that’s a very, very lofty goal. It’s very expensive, but maybe in 10 years I could buy it, not in its perfect turnkey position, rent it for another 10 years and then have the ability to renovate it to the spec that I want. So yeah, it’s just an incredible world that is opening up for us and really grateful to BiggerPockets for all the information that you guys have out there to make us feel like we’re not alone when we’re the crazy person at the party

Ashley:
Or even selling the Lake George House and using the equity from that to put as the down payment on the waterfront property too. That’s the thing is you have so many options available to you and doing a 10 31 exchange and all these different things. So one thing is what is the actual cashflow that you’re getting from Lake George and what is it for the Saratoga house and then for London too?

Katie:
So London is not great. I think at best we’re breaking even there. And what’s interesting about that market is you refinance every two to five years there. So it’s very different than the US market and not something we really understood when we first bought it. To be honest, when we first bought it, again, we weren’t really thinking of ourselves as real estate investors per se. We were thinking, can we afford the down payment? Can we afford the monthly and is the monthly less than what the rent would be in the area for one day when we rent it out? So now our mortgage has gone up, our monthly mortgage has gone up twice since we’ve owned that property

Ashley:
With refinancing because of the interest rates changing. Wow.

Katie:
Exactly. And it’s not like the arduous refinancing process that we have in the us. If anything, there’s about like a thousand dollars fee, which can be added to your mortgage, so it’s just very normal there.

Ashley:
What about the Lake George House and the Saratoga house? What is your cashflow on those properties?

Katie:
Yeah, so the Lake George House is doing well. We have a really strong A DR. Our summer month is really, really strong there. So we’re probably at about around 12,000 annual cashflow. I’d say for the Saratoga House. It’s doing even better than that. I’d say around 18,000, and this is our first year, so we really just kind of opened the beginning of May, but what’s really reassuring to me is we already have a few good bookings for next year. We had someone book for a month, and then that same person also booked for two weeks, and those are outside of our peak season, which is around the horse racing track. It’s the oldest horse racing track in the us so it drives a lot of visitors.

Ashley:
My best friend goes to it every year. People

Katie:
Love it. I love hats.

Ashley:
I’m going to have to tell her to stay at your house next time. Yeah,

Katie:
You definitely should. You definitely should. But honestly, of course, those bookings can fall through. They can cancel up to a month before I want to say. But if that comes through, that really gives me a lot of reassurance that next year we’ll be much more even of a banner year and that house is really performing well to begin with. Now, the challenge with that house is it’s in the neighborhood, so we do have some issues with neighbor complaints, whereas in Lake George, we’re much more remote, so you can’t really see any of our neighbors around. So we haven’t had any of those issues. So that’s something that I’m thinking about with the next properties that we invest in and something that I’m really going to be mindful of and something that quite frankly, we were mindful of when we bought the Saratoga place to begin with. But I think when you add in X factors that are outside of your control, especially when you’re like, this property is doing so well, but if the next door neighbor’s not happy about things, how do you handle that?

Ashley:
Yeah, and that’s the hard thing too, is when there’s those outside factors that you just can’t change with dumping money into it or anything, maybe putting up a privacy fence. There’s some things you can do, but most likely that person’s still going to complain. And

Katie:
Exactly. Actually, my dad had great advice. He was like, you need to bring him a present. And my initial reaction was like, what? And then I’m like, no, he’s totally right. You catch more flies with honey. So we need to be a good neighbor, and we have the same interests at heart. We both want the assets to be protected. We want to take good care of our home, and we’ve been really lucky. We have great guests by and large, but he’s entitled to his opinion.

Ashley:
Well, the last thing I want to add there is, with these properties, congratulations on your success for what you’ve been able to build and this portfolio you’ve created. We’re going to link your social media information into the show notes, and also they can find you on biggerpockets.com. But the last thing is, what is the advice that you would give a rookie investor if you were starting out today, what’s something that sticks right out to you that you would’ve wanted to know when starting?

Katie:
I’d say two things. One, know your worst case scenario. I think the fact that I felt confident we could cover the monthly mortgage if no one ever came to stay, gave me a lot of ability to sleep at night, and then everything else just felt like gravy. The second is surround yourself, whether it be physically in person or virtually through podcasts and books with other like-minded people who make you feel less crazy. Because I think if I had taken the advice of my dad or other people who said, you’re going to buy these places, but you’re not going to live in any of them, that’s nuts. If I would’ve thought, oh yeah, that is nuts. I wouldn’t be here right now. So they all have great intentions, and actually I think it’s really good for us all to critically think about every next step, but there are lots of people out there doing what we’re doing, and I’m at such a small scale comparatively, but it gives that reassurance that you might be taking that right step for yourself.

Ashley:
Well, Katie, thank you so much for that last piece of advice and for sharing your journey, and also for giving so much great inspiration as to what someone else can do with their short-term rental.

Katie:
Thank you for having me today.

Ashley:
I’m Ashley, and this has been an episode of Real Estate Rookie, and we can’t wait to see you guys next time. If you’re watching on YouTube, make you like and subscribe. If you’re listening on your favorite podcast platform, make sure to hit the follow button and to leave us an honest reading and review. We’ll see you guys next time.

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In This Episode We Cover:

  • How Katie makes $30,000 in annual cash flow from just TWO rentals
  • Making your vacation rental stand out in a saturated market
  • The keys to crafting an unforgettable guest experience for your Airbnb
  • The luxury amenities and personalized details that will explode bookings
  • How to use the power of social media to grow your Airbnb business
  • Two types of short-term rental portfolios (and which one you should build!)
  • And So Much More!

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

Should You Keep or Sell Your House? Use This Tool to Find Out in Minutes

by | Oct 15, 2024 | Investing, News Feed

Real estate investing is one of the best vehicles for building wealth, reaching financial independence, and saving for retirement, but you don’t need to become a full-time investor to reap the benefits. If you have no plans to leave your W2 job or manage rentals, there are several ways to use real estate for passive income!

Welcome back to the BiggerPockets Money podcast! When Devon Kennard entered the NFL, he ran into more money than he had ever made. But with no guarantee of a pay raise or second contract, Devon forewent the flashy car and multi-million-dollar home and started saving and investing instead. Shortly after buying his first rental property, Devon realized that he was going to need passive or semi-passive income streams if he wanted to have success on the football field. He landed on four different types of passive investments that have helped him scale his portfolio to twenty-nine doors and over forty syndications!

In this episode, Devon talks about the importance of increasing your income in your working years and why small wins make all the difference early on in your investing journey. You’ll also learn about the dangers of “shady” real estate syndications and how to properly vet an operator, as well as the differences between fast and slow money!

Click here to listen on Apple Podcasts.

Listen to the Podcast Here

Read the Transcript Here

Mindy:
Interest rates were at all time lows, and then they jumped and they jumped and they jumped and they jumped. If you were lucky enough to lock in a sub three or 4% interest rate, you definitely don’t want to let it go, but that doesn’t mean that your house is always going to continue to work for you. Q the, I’ll just turn it into a rental mindset. Today Scott and I are going to run through his epic spreadsheet so you can do the math to see if it’s truly a good idea to hold onto that property and that interest rate. Hello, hello, hello and welcome to the BiggerPockets Money podcast. My name is Mindy Jensen and with me as always is my huge spreadsheet nerd cohost Scott Trench.

Scott:
Thanks, Mindy. Great to be here with you. You always excel at these types of introductions. I’m looking forward to really nerding out today. This is going to be a little bit different of an episode. I know that many of you are going to be listening to this on a podcast. We will try to make it as helpful as possible, but this might be one that you might want to come back and rewatch on YouTube because the problem that we’re solving just has to be addressed in great detail with a large number of calculations which are done in a spreadsheet. So I’m going to be sharing a spreadsheet. This is available on BiggerPockets. You can go to biggerpockets.com, hover over, analyze deals in our navigation bar, and then go to the sell versus keep link there and you’ll be able to find the spreadsheet. And with that, let’s get into it and I’ll share my screen and preview What I’m trying to solve for here, and the way I’ll do that is I’ll actually start with a quick story about the last couple of years.

Scott:
So let’s set the scene here. We’ve got, I’ll call this person lovingly average Joe. This is a use case I like to start with in a lot of analyses, right? This is the median American home buyer. The year is 2019 and our perfectly average or more specifically median American home buyer. And this average Joe bought his first home. Joe bought this for $258,000, which yes was actually the median home price in 2019. He uses an FHA mortgage and puts 5% down. And what happens next is crazy, right? So over the next several years, the market explodes and by September of 2021, Joe’s property is worth $395,000, a 53% increase in value in just 18 months. So that $12,500 down payment is now worth close to $137,000 in home equity, and it doesn’t even stop there. It keeps getting better. Again, this is the median situation for a homeowner who bought in 2019.

Scott:
So Joe, average Joe used a 4% interest rate mortgage when he bought his first home between his principal interest, taxes and insurance. His payment in 2019 was 1687. Again, the median home payment for a new home purchase at that point in time, by 2021, average mortgage rates had fallen to 2.75%. So what does Joe do? He makes the average decision to cash out, refinance his home. He takes a mortgage for $297,000 or roughly 25% of the new $395,000 value. And because his current mortgage or his then mortgage is $245,000, he literally extracts $52,000 of cash, puts that into his pocket, and he lowers his payment because he’s getting rid of his PMI and he’s got a 2.75% mortgage. So at the end of this sequence of events, which if you can’t follow, I totally understand, all you have to know is Joe buys for 2 58 in 2019, he refinances in 2021 to a lower payment and puts $50,000 of cash in his pocket.

Scott:
And today here in 2024, he’s got a property worth on average $412,000 with a whole bunch of equity of very low payment in cash in his pocket. And this is the median situation that extraordinary set of circumstances has created what we’re calling the lock-In effect, millions of people are in the same position where they’ve got a low interest rate and they’ve got a home that they can’t sell right now or don’t want to sell. And I think that this is a major problem that’s going to confront about 20 million people over the next five to 10 years is because I have that low interest rate mortgage because I bought back in 2019 or I refinanced back in 2021, should I sell this thing or should I keep it? And that’s the analysis I want to go through today. So any questions about that median situation before we run through the calculation?

Mindy:
No. Although I am going to say I have all these numbers in front of me and it was still a little bit difficult to follow. So if this is your situation and you need to really determine should I sell it or should I keep it, go watch this on YouTube. Our YouTube channel is

Scott:
Just type in BP money into YouTube

Mindy:
And look blam, there it is.

Scott:
Okay, so let’s pull it up here. Alright, so this is not an easy thing. I tried to simplify it. You saw how I failed miserably just now and trying to talk it through. The spreadsheet is no less of a beast. You have to make every single one of these assumptions or inputs in order to make a quality decision here in my view. And so I’m just going to walk through them one by one for average, Joe, the person that bought that property at a medium price point in 2019 and has and refinanced it in 2021 with that lower interest rate mortgage. So today the median home price is $415,000. In 2019, the medium home price was $258,000. So look, this is a beast of a spreadsheet. It is very complex. There are a large number of inputs that we have to put in here because it’s a complex analysis to determine whether you should keep or sell your home.

Scott:
I’ve built this around four use cases. So someone deciding whether they want to keep or sell their home needs to decide. A couple of fundamental things. Are they going to self-manage as a DIY landlord? Are they going to hire out a property manager for example? They’re moving and going to move out of state and they want to have somebody manage it for them and then if they sold the property, would they put the money into an index fund or would they sell, would they take the money and use it towards a new home mortgage reducing their cash outflows here? So those are the four general options people have. There’s an infinite number of options about what you want to do with the money. If you sell a place, I didn’t build it out assuming you bought another rental property or you bought a business or whatever.

Scott:
So you can put in different assumptions there. This is meant to be a tool to help people with the most common use cases. So let’s go through it. In order to determine whether we should sell or keep a primary residence, we need to know a lot of things about that property. We need to know the current value, the original purchase price. We need to know what the mortgage balance was at origination and what it’s amortized to today, which is a calculation here. We need to have an assumption about the equity that we’ve got in that property. We need to understand the term of our mortgage, the rate, and we need the insurance and taxes, PMI or MIP if that applies to you, and that gets us to our monthly PITI payment principal interest, taxes and insurance.

Mindy:
Okay, Scott, I’m going to jump back here because we just told people to gather up a lot of information. Where are they going to get an idea of the current value of their home?

Scott:
So first what people will do is they’re going to go on Zillow and look at this estimate, so go do that if you must. Mindy has opinions about whether that’s a good idea or not. The right answer of course is to look at comps, really kind of follow what other properties have sold for in your local market or better yet, talk to a local agent. You can go to biggerpockets.com/agents for example, to talk to people who can give you an opinion of value on there. If you’re considering selling or keeping your property.

Mindy:
And the rest of this information about your current mortgage should be available on a mortgage statement. The only thing that might not be is the mortgage balance, which I believe you can get from calling up your mortgage company

Scott:
And I think to, you’d obviously have to go look at your mortgage statement, which you must have at some point be able to. You can log into the portal and download that and you should get approximations for all of these things. Note that the p and i payment will be fixed, but your property taxes and insurance will grow over time and later on in the spreadsheet will have to make an assumption about what that growth rate will be, what the inflation rate will be on those types of expenses. So that gets us our PITI payment. Next we need to understand what would we get if we sold the property, and this is complex, we have to assume we have to account for what we’re going to pay to a listing agent and the buyer agent on the sale

Mindy:
If we choose to compensate the buyer’s agent. So there was this big lawsuit that I’m sure everybody has heard of and essentially sellers are no longer obligated to pay the buyer’s agent, however, they were never obligated to pay the buyer’s agent. So it’s a silly response to this lawsuit is that now sellers are being told you don’t have to pay the buyer’s agent. However, I’m a real estate agent. I’ve been a real estate agent for 10 years. Real estate agency has been around I think since the dawn of dirt. And in America, when you are selling your home, if you don’t offer buyer’s agent compensation, that then falls to the buyer themselves. There’s a lot of buyers who don’t have the money for their agent commission on top of the down payment and all of the expenses that they have associated with the purchase of a house. So this is something that I am going to encourage you to talk to your agent about what they’re seeing in the local market and strongly consider not going out on a limb here, depending on how urgently you need to sell this house offering a buyer’s agent commission could help get it sold quicker.

Scott:
Yeah, so because this is an opinion and an initial estimate here, all these numbers are changeable. I have put some notes in here including occasional snarky ones like this one for how to think about the inputs that I have already populated the spreadsheet with on this. So I’ve assumed 5.5%, but as discussed in the spreadsheet, if you’re angry about me for putting that as the initial assumption, you can email your complaints to [email protected]. Okay, now moving on to seller closing costs. I assume 1% here for kind of miscellaneous sellers closing costs, excluding title insurance. Mindy, any opinions on those or anything you want me to change here

Mindy:
It is. So market specific, the closing costs and if you are not sure what your market is going to bear, go with 2%, go with 3% because it’s always better to run these numbers and say, oh, okay, I’m going to get a hundred thousand dollars and then you in fact get 105. Well, that’s a better scenario than you ran the numbers, you sold the house and you’re like, wait, I was supposed to get a hundred, I’m only getting 80. I always want you to do these numbers very conservatively.

Scott:
So yeah, I’m going to stick with 1%, 1% for these two numbers and my 5.5% assumption for now in this analysis, but if you download the spreadsheet, you can change those numbers at any point as well. So all of these are location specific and the best way to get good estimates is to talk to an agent, which is always linked there and always available for you on BiggerPockets. If you want to refine these and get more serious about the next steps on making a determination here

Mindy:
While we are away for a quick break, we want to hear from you, are you considering renting versus selling your property? Okay, we’ll be back after a few quick ads.

Scott:
Let’s jump back in. So those numbers get us to a net sale proceeds. Net sale proceeds are going to be a function of the current value of a home minus the remaining mortgage balance minus any transaction costs. Confusingly, that is different from a capital gain on the property because the capital gain is the sale price less the original purchase price of the property. And so that’s different in this scenario, which it is for millions or tens of millions of Americans because the average thing to do in 2021 was to refinance the mortgage often with a cash out refinance. So we’ve got a bigger capital gain than net sale proceeds here in a lot of situations in this country right now. So now that we have our capital gains number and we have our net sale proceeds, we have another function here to understand what you’re actually going to put in your pocket after selling this thing because we got to incorporate taxes here for most homeowners, taxes will not apply because if you’ve lived in the property for two or more years and have a capital gain of less than $250,000 if you’re single or $500,000 if you’re married, there’s a capital gains exclusion on the sale of a primary residence.

Scott:
Mindy, what’s that law called again?

Mindy:
Section 1 21,

Scott:
Section 1 21, right? So I have defaulted the spreadsheet to saying capital gains taxes do not apply, but you can just toggle this to a yes if you have capital gains taxes that do apply, and that will default to a 20% rate for federal and a 4.55% rate for state, which is the state capital gains tax rate here in Colorado. You will have to look up your tax state’s tax rate in order on that calculation there and then that will automatically populate with capital gains taxes for the sale of your property if they apply. And now we get our real prize, the number here, $106,503. This is what would actually hit your bank account if you sold the property under this set of assumptions. Is there a simpler way to get to this number? I don’t think so. I think you have to do all of these things in order to get to these numbers and that’s just the first two sections.

Mindy:
Oh wait, there’s more.

Scott:
Oh, we have to keep going here. Now we have to say, okay, the most obvious case, the one that we talked about BiggerPockets money is just put that money in the stock market and we have to make an assumption about what that’s going to yield here. So I assume VOO, and I’ve put in a 10 or 9% rate here. 9% is kind of the true average stock market over the last 30, 40 years return, but I’ve bumped it up to 10% and the reason I’ve done that is to illustrate that, is to increase the appeal of putting the money in the stock market relative to keeping the home. I want to make it less appealing to keep the home than putting the stock market because keeping the home is going to involve a lot of work, geographic concentration, those types of things. If you believe the stock market is going to perform better, you can bump this number up.

Scott:
If you believe it’s going to perform worse, you can knock it down here. Okay, so the next section here is assumption is the first case, right? So if case one is assuming you’re going to invest this money in the stock market, case two is you’re going to use the sale proceeds towards your next down payment. So this person is selling their home and they’re going to buy a new home and that new home mortgage is going to be at a much higher interest rate. So this was built a couple of months ago here in September of 2024. Rates have come down a little bit and I bet you can get up to like 5.8% on the next property here. So let’s change that one right now. That gives you a new monthly p and i payment, and if you put the $106,503 down and as additional down payment towards the new home, you reduce your mortgage balance from three 50 to 2 43 and therefore reduce your monthly p and i payment by about 500 bucks.

Scott:
That’s an important consideration. We’ll flow that through to the model’s outputs when we get down into the next section. Okay, another case, you can keep your home as a rental. In this case, we need to make an assumption for rents. Gross rents. I’ve assumed $2,600 here. We’ve got a rent estimation tool at BiggerPockets, which is linked in the spreadsheet. You want to use that. We know our p and i, our principal interest taxes and insurance payment from up here, so we just pop that down here. We’ve got to make assumptions for vacancy, maintenance expenses and CapEx. We have an assumption here for landlord paid utilities if you are going to not have the tenant pay those and that gives us an approximation for cashflow. Next section done. Any questions here so far, Mindy?

Mindy:
Yes. What is good cashflow?

Scott:
What is good cashflow? It’s all relative to your property. In this case, let’s say this is about 500 bucks a month. That’s going to be a little less than $6,000 a year. So to five and a half, 6% cash on cash return on this 1 37 in equity or 106 and true net equity. That’s pretty good. That’s probably like a at least four and a half to maybe bumping up against five and a half percent cash on cash yield in this scenario, if you believe these assumptions, if you don’t like these assumptions, bump ’em up. I have a hundred bucks a month for a small, nice newer property and three bucks a month for a old crappy larger property. So it’s really a tough guess here. Some people do it on percentage of rents. I’ve kind of taken a middle ground here and assumed a different assumption for each maintenance and CapEx here, but this is about 10% of rents for example, 8% of rents for both categories for example, which I think a lot of landlords would agree with on here.

Mindy:
Okay, so when I’m looking at these numbers, how do I know this is good cashflow? Remember, I am a homeowner, not an investor.

Scott:
Well, that’s what the tool’s going to do. So the tool’s going to show you what your cashflow is going to look like in each of these scenarios in the first year and over time as we roll through with the assumptions. So what does good look like? Well, good is relative. It’s what do I do with this $137,000 in equity in my home or $106,000 in equity that I’ll realize after taxes if I actually sell the thing. And so my choices are keep it where it is as a rental property, put it in the stock market or put it towards my new home mortgage. Again, there’s other choices there. If you have a better use case than any of these, sell the property and put it towards that, but that’s not what I think most homeowners are going to struggle with these fundamental challenges. Do I keep my old home and rent it or do I sell it and if I sell it, do I put the proceeds toward my new home mortgage during the stock market?

Scott:
So those are our kind of four cases and then we have to assume several additional things here. We have to say, what is this thing going to appreciate at on a long-term basis? I’ve assumed the case Schiller 3.4% rate growth rate for both home prices and long-term rents. You can certainly change those and I’ve assumed expenses will grow in line with that, although expenses may grow in line closer to the core inflation target at about two to 2.5%, but this is I think, reasonably conservative here unless you’re a big bear on inflation. Again, that’s why it’s an assumption you can change it. I’ve just populated with what I think are reasonable assumptions for average Joe in a median situation here

Mindy:
And I’m curious to see how other people’s calculations shake out. So if you do this and you want to share this with us, [email protected] [email protected] or email us both,

Scott:
We got to take one final break, but stick around for more on the numbers you need to be considering before you sell your property.

Mindy:
Welcome back to the show. Let’s move down to these graphs because I know you look at these graphs all day long. I don’t look at graphs all day long. What is this one telling us?

Scott:
I wanted to kind get to two fundamental outputs with this exercise. One is how much cash comes into the person’s life based on either decision? And this is less important in this specific example, but when we go through a higher priced house, I’ll show you why this one could be a major impact here, but it is an important consideration. If you keep this place as a rental and you believe these cashflow numbers, then keeping the thing as a property and DIY managing is going to make a big difference for you. That’s $7,000 in year one cashflow compared to what is that $1,400 in cashflow from an index fund investment. Now one caveat here is all additional cash once we get into the model for building this out, there’s a complicated model here, you can go and dive into it for all this. This one’s a real beast to look at and I had a lot of fun constructing, but what I do just behind the scenes for anyone who’s wondering is I take all of the cash flow and I invest that cash flow in the stock market at whatever this assumption was.

Scott:
So if you generate a couple thousand bucks in rent, then I’ll take that rental income and profit and I’ll put it in the stock market and I’ll assume that you get these returns on that investment. Make sense? So that’s going to come in there and that’s not going to be exactly the same as the outputs in the model here. It’ll add that in, okay? Just to be fair, from an opportunity cost perspective, so the stock market’s going to produce the least amount of cashflow in this particular example, the passive landlord is going to produce the second least amount of cashflow. The DIY landlord is going to get the most and that will ramp dramatically over the next few years. But in year one at least I want to call out that selling the property and using those proceeds towards a new home mortgage will reduce that mortgage balance by enough and the cash outlay for that, that this will, you’ll actually have a bigger bank account balance at the end of year one if you just sell your property and put the proceeds towards your new home mortgage to pull that down, which I think is interesting.

Mindy:
So based on this graph, Scott Trench, real estate investor, CEO of BiggerPockets, creator of this beast of a spreadsheet, what would you do if this was your numbers?

Scott:
Oh, I’d keep this. So first, this is the cashflow impact. I keep this thing as a rental all day. Look at this, you’re going to produce a ton of cashflow in year one and it’s because you have this low interest rate mortgage and high leverage against it. And even with this low rent to price ratio, that mortgage is such an asset in this case, this is a keep decision all day and it gets even better when we think about the net worth impact. So this starts out pretty close and let’s, let’s actually walk through what’s going on in the net worth impact and why I got this funky spike going on. Okay, so let’s start with this. If I use the proceeds towards the new home mortgage, then I will have bumped down that mortgage a little bit and I’ll be saving from a net worth perspective the amount that I’m spent not spending an interest, I’ll be able to invest that in the stock market and grow wealth.

Scott:
So that’s going to grow the least relative amount of long-term net worth. In this particular example, if I sell and invest in passively an index fund, then I start off with that basis and compound it and reinvest the dividends with this blue curve. In the case of keeping the home, what’s happening here is I’m computing your net worth on an after tax realizable proceeds basis. What does that mean? Well, remember this tax component here. If you sell this property and you don’t live in it for the last two years, the gain becomes taxable. And so you at least for the first two years can still realize that tax exclusion after year three, you age out of that. You haven’t lived in that property for two out of the last five years and you no longer can get that tax exemption. And so the net worth impact the real value of this property to you on a net worth after tax basis declines. Now, this is a very conservative way. This is the most unfair possible way I can build this in favor of selling the property and moving the proceeds into an index fund because the index fund, if you sell this, you’d pay taxes on it on this fund, but I’m trying to keeping the property as unappealing as possible because I know there are the soft problems that go along with it of the active management piece. Is that making sense, Mindy explaining that? Well,

Mindy:
Yes, and I know that three year rule, and I was still until you said that, I was like, what’s with that big weird jump? Yeah, that’s great.

Scott:
That’s why you’re seeing this funky bump here. Now, the next two charts on the right here are just the same graphs, but pulled out 30 years to show the long-term impacts of this decision. And now we can see that these really begin to amplify, right? The DIY landlord is going to generate a lot more cashflow for the life of the loan. And then in year 27, remember our mortgage is already three years old on our property, the mortgage will get paid off and therefore your cashflow will bump. That’s why you’re seeing this spike at the end of the tail here. For those who are curious in true spreadsheet nerds and then the cashflow impact on the payoff, the mortgage and the stock market are much more muted down here on a relative basis. You get way more cashflow over life of this, whether you keep it as a DIY landlord or hired out to a property manager.

Scott:
And in this situation, you also get way more net worth over a 30 year period. I think it compounds to what, $3.4 million in this particular example versus a $1.8 million. This is a $1.6 million decision over 30 years. If you believe this set of assumptions on this, and I got beat up in a comment on this from somebody in the blog and they’re like, yeah, the average American can’t manage their home, they can’t. It’s like, guys, yes, renting a rental property is work. Yes, it is not going to be completely passive, but the average American I think should take the time to run these numbers and say, do I believe this? And if I do, am I willing to just keep this thing and deal with some of the headaches in exchange for the opportunity to make an incremental $1.6 million over the next 30 years? How much am I going to earn for my career during that time period in there?

Scott:
And so I just think run the analysis and make the decision right now. Why is this happening? It’s because of leverage. This is a highly levered property, still a $277,000 mortgage on a $415,000 property with a low interest rate, and every year, if we believe it appreciates on average 3.4% and the growth at 3.4%, those magnify the returns. And that’s why you’re seeing this outcome really compound so much in favor of the landlord in this situation. So this is the median, and I think that millions of Americans who are in situations similar to this really should, I think the tool says keep the property or really strongly considerate and know that they’re giving up a big opportunity cost if they sell it, if they believe again, these long-term assumptions. Okay, so that’s part one. Mindy, are we ready for part two and more expensive property?

Mindy:
Yes. Because you said you made this as unappealing as possible towards keeping the house. I’m wondering if these change so that it definitely makes it an easier decision to keep or sell.

Scott:
Well, yeah, look, so one of the things here is the stock market return for, so the real estate equity piece in this is computed as the realizable proceeds after tax. If you were to sell the property to make it more fair in favor of stocks, we’d have to say we have to do the same thing. And we’d say, okay, if I took $106,000 and compounded it to $1.8 million over the next 30 years, then that $1.8 million, if I sold that, I’d pay a 20% long-term capital gain and I’m left with $1.5 million in this situation. So that would bump that down if it was apples to apples on this, and I would actually say that you could reasonably do that, you could bump this down to 1.5 and bump this one up because real estate has opportunities to 10 31 exchange, pass it on to your heirs at a stepped up basis, those types of things. But those are not factored into the spreadsheet. So the actual gap, if you’re willing to be really smart and crafty from a tax strategy perspective is potentially much larger than this.

Mindy:
Run your big numbers. Let’s see how this works with a higher,

Scott:
This is all fine and dandy. So this is the median home price in America. BiggerPockets money and BiggerPockets general members tend to be wealthier and live in nicer, larger, more expensive homes than this median price point. And I’ll tell you right off the bat, once we plug in different numbers here, this is going to change and it’s going to be sell all day rather than keep the thing on this. But let’s go through it. Let’s take a Mindy, what’s a home you recently sold to somebody maybe like in the seven, $800,000 range. Can you build that picture in your head?

Mindy:
Angie’s under contract at six 50.

Scott:
So let’s do a $650,000 home and let’s say this home was purchased at 400, let’s say it was purchased at 3 85. Okay, in 2019, let’s say that they’ve got a mortgage, they didn’t refinance it or they refinanced it at a lower mortgage price. So we’ve got a $325,000 mortgage back from 2021. Oops. By the way, this number has to be entered as a negative number. I’m sorry for my bad UX here on this, but if you’re going to use this tool, enter as a negative number. I’ve called that out here, but you saw, I just forgot it there as well. Okay, so we’ve got this new mortgage at 3 46. We’ve got our low interest rate. Let’s bump these property taxes and insurance up. They’re not going to sit there at a property of this level. So let’s call $4,000 in property taxes and let’s call it a 3,300 in insurance. Does that sound reasonable, Mindy?

Mindy:
Yes.

Scott:
Okay, awesome. We’ve got our brokerage fees and all those types of things. Again, if you don’t like those, you can know who to email. We’ve got our net sale proceeds and we’ve got our capital gain here. So we are still under the tax threshold in this particular example, and we can pull those up. Okay, let’s keep the same assumptions here for a new home mortgage on this. Keep the same. And let’s now change the assumptions for the rent situation. So what would this place rent for Mindy?

Mindy:
This place would rent for $4,000 a month.

Scott:
Ooh, this one might be a keeper actually as well. We’ll probably need to bump these up. It sounds like a nicer property. Might need a little bit more maintenance. So let’s bump those expenses up here and now we’ve got a real winner on this particular property, $1,200. So this one’s also going to be a keeper here. This is a bummer example on this. Let’s cheat here a little bit and let’s bump this current value up to eight 50. This property is now worth eight 50 with those same assumptions. We have a more expensive house, 850, $500,000 mortgage on it. Same old stuff here we’ve got, let’s call, the new mortgage is going to be 600,000 on the new property, and we’ve got our kind of same assumptions here for these. Let’s put, let’s bump these up even a little further here. 5,000 and 4,000. Now what we’ve got is a very interesting and very different picture for this person in the wealthier cohort with a little bit more of a more expensive home, right?

Scott:
All of a sudden the big factor here is how much is the mortgage on the new house going to be? That’s overwhelming everything else because we’re dealing with such a big number and a big pile of equity that we’re going to be able to extract here. So this, if they’re using the 200 or the $319,000 in after tax proceeds to pay down their new mortgage at 5.8%, they’re going to reduce their payment from 3,500 to $1,600 a month. That’s a $22,000 swing in cashflow. Now, that may have different impacts on the net worth basis over the next 30 years, but that may be your primary consideration in this case and cannot be ignored. And that’s why these two graphs in combination are so important. The cashflow on this type of house is also not going to be that great because properties of this value tend not to have a great rent to price ratio, and that’s going to impede your cashflow to a large degree and it might go to zero or even negative if you’re to hire out management.

Scott:
So we’ve got a very low amount of cashflow here on the, if you keep it as a passive investment, you’ve got a very small amount of cashflow if you put it into the index fund and a little bit more if you DIY landlord, this thing on the net worth side, you’re just earning the interest rate here by not paying the interest on the new home mortgage. The other three are super close here, and once we factor in that tax advantage out after year three, the stock market becomes a clear winner in this particular case in terms of relative net worth on this. So for the more expensive home that’s less levered, if you have a lot of equity in a more expensive home, you’re probably going to be better off selling the place than keeping it as a rental. And if you’re in a less expensive home with a little bit better of a price to rent ratio or achieving a little bit more cashflow, it’s probably going to make a lot more sense to keep the property.

Scott:
And this is so case by case. You can see how each one of these inputs can blow the assumptions and the rest of the model here when we think about it. So those are the two takeaways I wanted to basically share at the highest level. I wanted to preview the tool. I don’t know how to make it that much simpler, so I think it has to be done this way, but again, this is available for anyone to [email protected]. All you got to do is go to the navigation bar, hover under, analyze Deals, and go to seller keep. So this is available for anyone to use as long as you’re a BiggerPockets Pro member. Of course, at biggerpockets.com, you hover under over the navigation bar, go under, analyze, analyze Deals, and then click on sellers Keep, and you’re going to be able to find this and use the tool and make your own assumptions about the property. Also, happy to answer questions if you want to DM me on BiggerPockets or post questions to the BiggerPockets forums about the outputs of the spreadsheet here. But I think this is a critical analysis that tens of millions of Americans are going to need to make, and the answer is going to vary by person, and the opportunity costs can be huge depending on what you think is going to happen over the next 20, 30 years.

Mindy:
Scott, I agree. I’m glad that we had these giant swings. So you could see that sometimes it is going to say sell is the best choice, and sometimes it’s going to say keep is the best choice. I think this is very, very interesting. I am definitely going to be running these numbers for potential real estate clients because they are going to want to know, I’ve had a lot of real estate listings right now saying, should we keep it and rent it out or should we just sell it? The number one question that I think you should ask yourself is, do you want to be a landlord? Do you want to deal with these issues? No, because I think that this could be a very emotional decision as well, and not everybody is going to be able to look at this and say, oh, it’s going to cashflow all day long. I should keep it. I don’t want to be a landlord. Really.

Scott:
Okay, I just want to push back on that particular thing there. I got that intimate comment here as well. Respectful, respectful disagreement. Mindy, I don’t want to be a landlord. I run BiggerPockets. I don’t want to be a landlord. Being a landlord is work. It involves managing tenants. What I want, however, more than not wanting to do the landlording duties is $1.6 million per property over 30 years. So that’s the thing that I think people need to ask themselves is, look, nobody wants, if you could get the work of not being a landlord, of being a landlord without doing the work, then of course you would take that. But that’s not the choice. The choice is there’s an opportunity cost. There is massive incremental cashflow and massive incremental net worth that could be had by maybe 20 million Americans who have own homes that are priced at the median price point in this country.

Scott:
If they keep the home and become a landlord, and again, depending on they need to run those numbers. And then you make the decision, okay, I don’t want to be a landlord. How much would someone have to pay me to be a landlord? That’s a better question. And if that answer is a hundred thousand dollars a year, then this is not enough. But if that answer is 5,000 or $10,000 a year, this is way more than enough. And that, I think is the piece that millions of people need to consider here. That’s an entire career of wealth accumulation in one decision.

Mindy:
Okay, Scott, I asked the question so people who are driving down the road don’t have to or can’t because they’re not sitting here talking to you.

Scott:
Yeah, sorry, I get animated about this because I got beat up a comment on that.

Mindy:
I think that’s a great answer because there are a lot of people who are siding with me. I don’t want to be a landlord, I just want to sell, or, it’s not enough money. I love your impassioned speech.

Scott:
Well, thank you for allowing me to have an impassioned speech here. I hope that folks appreciate the spreadsheet. I went, it had a bunch of, went through a bunch of different cases. Really appreciate any feedback that you find here. And of course, if you need any help with the assumptions, I’ve got these notes and or links to resources on BiggerPockets that can help you out, like taxes and agents and our rent estimation tool, property manager finder, if you want assumptions for rent and those types of expenses. So go check it out and thanks for watching today. We’ve also got a special coupon code for this and all the other tools that are included in the BiggerPockets Pro membership, which includes all of the features you would need to DIY manage your property. And any BiggerPockets money listener who’s listening today can go and get the BiggerPockets Pro membership with a seven day free trial included for anybody, but they can also get 20% off by using the code BP money at checkout. So thank you for listening and we appreciate you and hope you try it out. Use it. Give us feedback.

Mindy:
Yes, [email protected]. If you have found anything you would like to comment on his spreadsheet, he created this from scratch from his big, beautiful brain. Alright, Scott,

Scott:
Let’s get out of here. Thank you, Mindy.

Mindy:
That wraps up this episode of the BiggerPockets Money Podcast. He is Scott Trench. I am Middy Jensen saying we must depart zebra heart.

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In This Episode We Cover

  • A step-by-step walkthrough of Scott’s new “Keep or Sell Your Home” worksheet
  • Two realistic examples of when to sell your home or keep it as a rental property
  • The numbers you need to make a rock-solid decision on your investment property
  • The crucial question you should ask before keeping or selling your home
  • How ONE decision can impact your future by hundreds of thousands of dollars (or more!)
  • And So Much More!

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

Public Housing As a “Solution” Only Makes Affordable Housing Worse

by | Oct 14, 2024 | Investing, News Feed

Think of public housing, and a familiar picture comes to mind: hulking, run-down brick tenement buildings, graffiti-strewn malfunctioning elevators, crime, drugs, and all the social ills that go with it. Unsurprisingly, previous governments sought to move away from public housing as a solution for low-income residents. However, the affordability crisis has placed housing firmly back in the spotlight, and public or social housing, as it is now being termed, is once again being touted as a solution. 

If only it were that simple.

The Urgent Need for Affordable Housing

With homelessness on the rise and both the working and middle classes feeling the effects of elevated home prices—homes are unaffordable in 80% of U.S. counties—high interest rates and escalating rents, there’s little doubt about the need for affordable housing. Even both presidential candidates have offered solutions.

“This is hitting first-time home buyers that can’t get into the housing market. This is hitting middle-class renters who are spending more than 50% of their income on rent,” Brian McCabe, Associate Professor of Sociology at Georgetown, told Time. “It’s not that there’s never been an affordability crisis before, but it’s now an affordability crisis that’s hitting a much broader set of Americans.”

The Different Sides of Public Housing

Not all public housing consists of crime-ridden, poorly maintained tenements. It’s back in the spotlight because of innovative and attractive developments such as The Laureate in Montgomery County, Maryland, which has transformed notions of what the term can mean. In most settings, the Laureate would be termed a luxury apartment building with its raft of amenities and attractive, modern construction. 

Montgomery County has been an innovator in public housing initiatives. It instigated a landmark law that requires developers to set aside about 15 percent of the units in new projects for households making less than two-thirds of the area’s median income—now $152,100 for a family of four. For-profit developers built the Laureate, but the controlling owner is a government agency, the Montgomery County Housing Opportunities Commission. H.O.C. has a 70% stake, so the Laureate can set aside 30% of its 268 units for affordable housing.

It’s a far cry from the first self-contained and largest cooperative housing development ever built, Co-op City in the Bronx. Few can dispute the bold intentions and even bolder scale of the 15,000-unit development, completed in 1973 and often referred to as a “city within a city.” Democratic lawmakers Alexandria Ocasio-Cortez and Tina Smith cited Co-op City as an example of how public housing can work. However, that development has a history of poor management, corruption, and squalid conditions, which led to an emergency repair bill of $500 million in 2003. Co-op City, while laudable for its intentions, is hardly the shining star to encourage further investment in public housing.

But neither is The Laureate as attractive as it is. That’s because the Laureate is geared toward the middle class and is located in a wealthy county. Residents who earn around $50,000/year can expect to pay $1,700 for a one-bedroom apartment, compared with a market rent of around $2,200. Other residents might expect to pay half the advertised rate depending on their income. Montgomery County was able to kick in $100 million, using its ownership position to become a benevolent investor that trades profits for lower rents.

“The private sector is focused on return on investment,” Chelsea Andrews, H.O.C.’s executive director, told the New York Times. “Our return is public good.”

Developers Are Rejecting Government Funding

Unfortunately, that’s not a position that many financially stressed counties can adopt. Public housing is usually financed by the Department of Housing and Urban Development and operated by one of the nation’s roughly 3,300 public housing agencies, which are locked in a steady decline. 

That’s partly why private developers are rejecting government money for affordable housing. Mismanagement and red tape in the public sector have a history of bloating construction expenses and other costs for developers. It’s why—despite the commitment of tens of billions of dollars from Californian State and local government, some developers such as S.D.S. Capital Group, which recently completed a 49-unit apartment building in South Los Angeles, has self-financed the project. S.D.S. told the Wall Street Journal that it cost them $291,000 per unit to build instead of the roughly $600,000 that the city of Los Angeles has averaged for similar apartments. 

A recent report commissioned by the city of San Jose found that affordable housing projects that received tax credits cost an average of around $939,000 a unit to build there last year. The average affordable unit in the Bay Area costs $817,000 to build, according to a study by the Bay Area Housing Finance Authority and the affordable housing finance company, Enterprise.

Rather than using government cash, S.D.S., an investment firm, raised a $190 million fund to build an estimated 2,000 units for formerly homeless people in the city with mental health and other medical needs. The speed of private, self-funded construction has proved to be a big savings compared to the governmental bureaucracy that hampers similar projects.

“We believe there’s a different way than using government money, which really becomes slow and arduous and increases cost,” Deborah La Franchi, chief executive of S.D.S., told the Wall Street Journal.

“You’re cutting out millions of dollars just in soft costs,” David Grunwald, an executive at R.M.G. Housing, which is developing the S.D.S. fund’s projects, said of private financing.

Why Section 8 Has Faltered

Unlike many landlords, S.D.S.’s model is unique in that it accepts government vouchers—Section 8—to house residents. The Los Angeles City Housing Authority says there are over 1000 unused tenant vouchers at any one time, which provides a captive market for S.D.S. buildings. 

Activists have found that the rejection of Section 8 vouchers by brokers looking to rent apartments is a nationwide issue. A watchdog group, Housing Rights Initiative, filed a lawsuit in New York in 2022, citing—after a sting operation—the discriminatory practices of landlords and real estate agents when turning away prospective tenants who rely on subsidies to pay rent. It is illegal in New York City for landlords to refuse to accept applications from tenants who depend on them.

“Housing discrimination is not an isolated incident,” Aaron Carr, the executive director of the Housing Rights Initiative, told the New York Times. “It is a part of an industrywide problem.”

When Bill Clinton encouraged the movement away from public housing construction with the Faircloth Amendment in 1998, the hope was that private landlords in mixed-income buildings would take up the slack. Henry Cisneros, Bill Clinton’s H.U.D. Secretary developed a plan that consolidated grant programs and shifted the emphasis to housing vouchers over traditional public housing subsidies. 

According to a H.U.D. report, HOPE VI, a H.U.D. program aimed to redevelop “severely distressed” public housing projects, demolished 98,592 public housing units and replaced them with 97,389 mixed-income units between 1993 and 2010. It was widely considered a move out of a Republican playbook and received no blowback. However, gentrification and the demand for housing from non-voucher renters have pushed Section 8 tenants further into the margins of low-income housing in dicey neighborhoods. Many tenants feel that rejecting Section 8 is a mask for racial discrimination. Some landlords and renters conversely feel Section 8 tenants can disrupt their buildings and neighborhoods.

Insurance: The Silent Killer

As if public/affordable housing wasn’t facing enough issues, soaring insurance costs have made things unsustainable for developers, landlords, and management companies. It’s not just in areas of extreme weather but nationwide where costs have quadrupled along with deductibles. 

Unlike market-rate apartment developers, multifamily projects financed by subsidies and tax credits cannot pass on those higher insurance costs to tenants since they are limited by government guidelines as to how much rent they can collect. As a result, developers and housing authorities have appealed to state lawmakers for assistance or have decided to abandon affordable housing completely. According to a National Leased Housing Association survey, nearly one-third of affordable housing providers reported increases of at least 25 percent.

“In 2020, I would have said this is cyclical; the pendulum has always been swinging,” Denise Muha, the organization’s executive director since 1988, told the New York Times. “But this is totally different. I don’t see this really curing itself anytime soon.”

Final Thoughts

Affordable housing in America is an oxymoron in this day and age. The red tape, bureaucracy, and social issues that come with providing it have made it a minefield for developers and investors. While public housing developers such as S.D.S. have largely circumvented the problem by taking matters into their own hands and bypassing the government, there is still the issue of management and upkeep. The lessons learned from Co-op City City is that despite a city’s best intentions, when the management of a project cannot run efficiently and ethically and without the finances it needs, things will deteriorate quickly. 

Public housing advocates worldwide often point to Vienna, which, with its huge apartment complexes known as Gemeindebauten, has made Austria’s capital one of the world’s most livable cities. Why they have succeeded so spectacularly in Austria but not so in the U.S. is, however, a far longer discussion.

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8 Reasons Why REITs Are More Rewarding Than Rentals

by | Oct 14, 2024 | Investing, News Feed

I wrote an article explaining why I am investing in real estate investment trusts (REITs) instead of rental properties. In short, REITs are still discounted, and I expect their lower valuations to result in higher returns in the coming years.

Unfortunately, it would seem that many readers miss the point of investing in REITs due to misconceptions. I saw several people in the comment section claim that REITs should be less rewarding investments because: 

  • You don’t enjoy the benefits of leverage.
  • They are not tax-efficient.
  • You are paying managers instead of getting your hands dirty.

But these statements are just plain wrong, and I am going to prove it. 

The Studies Bear It Out

Studies show very clearly that REITs are more rewarding investments than private real estate in most cases, and there are good reasons for this. This may seem surprising to some of you, but it really shouldn’t be. Here are three examples.

Study 1

FTSE Equity REIT Index compared to NCREIF Property Index as an annual return percentage (1977-2010) – EPRA

image2

Study 2

Private Equity Real Estate compared to Listed Equity REITs as net total return per year over 25 years – Cambridge Associates

image3

Study 3

Performance of U.S. REITs and Private Real Estate Returns (1980-2019) – NAREIT

image1

Three Misconceptions and Why They’re False

I will give you eight reasons why REITs should be more rewarding investments than private real estate in most cases. But before that, I will quickly correct the three misconceptions that I keep hearing over and over again: 

Misconception 1: You don’t enjoy the benefits of leverage.

This is nothing more than a misunderstanding. Investors seem to think that just because you cannot take a mortgage to REITs, you won’t enjoy the benefits of leverage, but this is incorrect. 

What they ignore is that REITs are already leveraged. You don’t need to take a mortgage because REITs take care of that for you. 

When you buy shares of a REIT, you are providing the equity, and the REIT adds debt on top of it. As such, your $50,000 investment in the equity of a REIT may well represent $100,000 worth of properties. You just don’t see it because what’s traded in the stock market is the equity, not the total asset value, but the benefits are the same. 

Misconception 2: They are not tax-efficient.

This misconception stems from the fact that REIT dividend payments are often classified as ordinary income. But this is very short-sighted because there are many other factors that improve their tax efficiency—to the point that I pay less taxes investing in REITs than in rentals: 

  1. REITs pay zero corporate taxes, so there is no double taxation. 
  2. REITs retain 30% to 40% of their cash flow for growth. All of that is fully tax-deferred.
  3. A portion of the dividend income is commonly classified as “return of capital.” That’s tax-deferred as well.
  4. The portion of the dividend income that’s taxed enjoys a 20% deduction.
  5. REITs generate a larger portion of their total returns from growth because they focus on lower-yielding class A properties. The appreciation is fully tax-deferred.
  6. Finally, if all that still isn’t enough, you can hold REITs in a tax-deferred account and pay zero taxes with great flexibility.

Beyond that, REITs also have enough scale to have in-house lawyers to fight off property tax increases and optimize their impact.

All in all, REITs can be very tax-efficient. 

Misconception 3: You are paying managers instead of getting your hands dirty.

Yes, you are paying managers, but the management costs of REITs are still far lower than that of private rental properties because they enjoy huge economies of scale.

Taking the example of Realty Income (O), its annual management cost is just 0.28% of total assets. There are huge cost advantages when you own billions of dollars worth of real estate, and REIT investors benefit from this.

Now that we have these misconceptions out of the way, here are the eight reasons why REITs are typically more rewarding than rental properties: 

Reason 1: REITs Enjoy Huge Economies of Scale

It goes far beyond just management cost. Real estate is a low-margin business, with low barriers to entry. Therefore, scale is a major advantage to lower costs and improve margins. REITs excel at this. 

Take the example of AvalonBay Communities (AVB). The REIT owns nearly 100,000 apartment units, resulting in significant economies of scale at every level, from leasing to maintenance and everything else in between. 

Let’s assume that AVB owns 500 apartment units in one specific market, and it strikes a deal with a local contractor to change 100 carpets each year. It will of course get a much better rate for each carpet than what you could get if you made a deal to change just one. 

Another good example would be if you need to hire a lawyer to evict a tenant. AVB has in-house lawyers working for them, which greatly reduces the cost. 

Such economies of scale apply everywhere, and it makes a big difference in the end.

Reason 2: REITs Can Grow Externally 

Private real estate investors are mostly limited to rent increases to grow their cash flow over time. We call this “internal growth” in the REIT sector. But REITs can also supplement their internal growth with what we call “external growth,” which is when they raise more capital to reinvest it at a positive spread. 

That’s how REITs like Realty Income have historically managed to grow their cash flow and dividends at 5%+ annually, even despite only enjoying annual 1% to 2% annual rent increases. The difference comes from external growth.

It sells shares in the public open market to raise equity and then adds debt on top of it and buys more properties. As long as it can raise capital at a cost that’s inferior to the cap rates of its new acquisitions, there is a positive spread that will expand its cash flow and dividend on a per-share basis. It is not dilutive. It is accretive and creates further value for shareholders. 

Private real estate investors cannot do that because they don’t have access to the public equity markets, putting them at a significant disadvantage right off the bat. 

Reason 3: REITs Can Develop Their Own Properties 

Most private real estate investors will buy stabilized properties and rent them out. At most, they may do some light renovations in an attempt to increase the value and rent. 

But REITs go far beyond that. They are very active in their investment approach and will commonly buy raw land, seek permits, and build their own properties to maximize value. 

It is not uncommon for REITs like First Industrial (FR) to build new class A industrial properties at a 7%+ cap rate, but if it bought such stabilized assets, it would only get a 5% cap rate. That puts it at a huge advantage. Not only will it earn a higher yield from newer properties, but it will also create significant value by raising capital and developing these assets. 

REITs can do this because of their scale. They can afford to hire the best talent and tend to have great relationships with city officials, tenants, and contractors. 

Reason 4: REITs Can Earn Additional Profits by Monetizing Their Platform

REITs will commonly also earn additional profits by offering services to other investors, and you participate in these profits as a shareholder of the REIT. 

Many REITs will manage capital for other investors and earn asset management fees. As an example, they may create joint ventures when acquiring properties and let other investors ride their investments, charging them fees for managing them, boosting the return that the REIT earns on its own capital. Healthcare Realty (HR) commonly does that. 

Alternatively, the REIT may offer brokerage or property management services. Some are so active in developing properties that they have their own construction crew and offer construction services to earn additional profits. Naturally, this also boosts returns for REIT shareholders.

Reason 5: REITs Enjoy Stronger Bargaining Power With Their Tenants

REITs are large and well-diversified, and this puts them in a stronger position when negotiating with tenants. This is key to earning stronger returns over time because it commonly allows the REIT to achieve faster rent growth. 

If you only own just one or a few properties, you will be reluctant to raise the rent out of fear that your tenant will move out. You are not well-diversified, so a vacancy would be very costly. 

However, REITs can enforce rent increases because they know that they will be just fine if the tenant moves away. It won’t have a big impact on their bottom line, and they have the resources to quickly release the property at a minimal cost. 

Reason 6: REITs Benefit from Off-Market Deals on a Much Larger Scale

Most often, when private real estate investors buy a property, they will do so via the brokerage market. The properties are advertised for sale, they are priced competitively, and you also end up paying high transaction costs. 

Again, the scale of REITs gives them a major advantage, as they will commonly skip the brokerage market and structure their own off-market deals. 

Some REITs, like Essential Properties Realty Trust (EPRT), will reach out to property owners via cold-calling efforts and offer to buy their real estate. They will then structure their own leases with landlord-friendly terms and typically close the deal at a higher cap rate than what they would have gotten in a more competitive bidding environment. 

Reason 7: REITs Have the Best Talent 

I briefly mentioned this earlier, but it is worth mentioning it again: REITs can afford to hire the best real estate talent because of their large scale. 

Even despite paying them handsomely, their management cost is still far lower as a percentage of assets than what it typically is for private properties. And there’s no doubt that better skills will result in better returns over time. 

These people go to the top schools, gain the best private equity experience, and eventually dedicate their lives to working long hours for the benefit of REIT shareholders. You cannot compete with them, especially if you are just a part-time landlord.

Reason 8: REITs Avoid Disastrous Outcomes 

Finally, another important reason why REITs outperform on average is that they avoid disastrous results for the most part. The distribution of results is much wider for private real estate owners. 

Some will succeed. Others will lose it all. They are highly concentrated, leveraged private investments with liability risk and a social component. Not surprisingly, there are countless real estate investors filing for bankruptcy each year, and these disastrous results hurt the average performance of private real estate investors. 

But REIT bankruptcies are extremely rare. There have only been a handful of them over the past few decades, and most of them were REITs that owned lower-quality malls.

This shouldn’t come as a surprise, given that most REITs use reasonable leverage, are well diversified, and own mostly Class A properties. It is really hard to then mess it up. 

Final Thoughts

REITs are typically more rewarding than private real estate investments. Studies prove this, and there is a strong rationale as to why this would make sense. In fact, it would be surprising if it were the opposite, given all the advantages that REITs enjoy. 

However, this doesn’t imply that private real estate is a poor investment; rather, it highlights the importance of not overlooking REITs and including them in your real estate portfolio.

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

Building Your Real Estate Investing Team Like an NFL Coach: The Key Traits for Success

by | Oct 14, 2024 | Investing, News Feed

When I think about building a successful real estate investing (REI) team, I can’t help but draw parallels to my experience in the NFL. I played for nine seasons with four different teams, and during that time, I saw many coaches and players come and go. Everyone brought a slightly different skill set to the field, and together, we formed teams to accomplish some pretty remarkable things.

In many ways, putting together a top-notch REI team is no different from assembling a football team. Both require a clear vision, the right mix of talent, and a strategy to get everyone working together toward a common goal. 

Just like in football, everything starts with a vision. As the coach of my REI team, it’s my job to set that vision and define our big goal. In football, that goal might be to win a game, while in real estate, it could be to flip a house for a solid profit.

Whatever the goal, it’s crucial to know exactly what you’re aiming for so you can assemble the right team to get the job done. If I want to flip a house, for example, I need to think about every single team member required to do so successfully. This starts with identifying the key players, much like deciding which positions I need to fill on the field. 

For a house flip, my team might include: 

Each role is crucial to the success of the project, just like a football team needs a quarterback to lead the offense, receivers to catch the ball, and an offensive line to block and protect. 

If I can find all-stars for every role and get everyone on the same page, we’re set up for success. The trick is ensuring everyone works well together and that they’re all aligned with our mission.

Alignment and Incentives: Keeping Your Team on the Same Page 

Getting everyone to perform at their best isn’t just about hiring the most talented individuals; it’s about creating alignment. In football, every player on the field knows their role and is motivated by a common goal: winning the game.

It’s the same in real estate investing. Everyone on your team needs to understand the big picture and their part in achieving it. This means aligning incentives so that each team member has a reason to perform well. 

In real estate investing, alignment means making sure everyone is not only fairly compensated for their services, but also sees the potential for a long-term relationship and future deals. When people know that delivering exceptional results today could lead to more opportunities tomorrow, they’re naturally more invested in the team’s success. 

Think about it: If the quarterback I hire throws a great game, helps us win, and shows leadership on the field, I’ll pay him more, give him more control, and likely offer him a job for many seasons to come. 

The same principle applies to your REI team. If a contractor finishes a project ahead of schedule and under budget, or if an agent goes above and beyond to secure a great deal, you’re going to want to keep working with them.

Trust and Communication: The Foundation of Team Success 

Trust and communication are the cornerstones of any great team. 

In football, trust is built through countless hours of practice and open lines of communication,  on and off the field. In real estate, it’s no different. Your team needs to trust that everyone is committed to the same goal and that there’s transparency in all dealings. 

You build this trust by fostering an environment where communication flows freely. Make sure everyone feels comfortable sharing ideas, concerns, and updates. Just like a good quarterback has to communicate with his offensive line, you need to make sure your contractor knows exactly what’s expected, or your lender understands the full scope of the deal. 

Adaptability and Flexibility: The Ability to Pivot When Necessary 

No matter how well you plan, things will go wrong—both in football and real estate. Maybe a property needs more repairs than anticipated, or the market shifts suddenly. 

In these moments, the ability to adapt is crucial. The best teams are those that can pivot and adjust their strategy when needed. This is why it’s essential to have team members who are not only experts in their fields, but are also flexible and solution-oriented. 

In football, if the defense suddenly switches up their game plan, the offense has to adapt on the fly. The same goes for your REI team. You need people who can think on their feet and come up with creative solutions when the unexpected happens. 

Leading Your Team to Victory 

At the end of the day, building a successful REI team is all about bringing together the right mix of talent, ensuring everyone is aligned with your vision, fostering open communication, and staying adaptable in the face of challenges. Just like in football, your job as the coach is to set the strategy, put the best players in the right positions, and lead them to victory.

So think of your REI team like a football team: Find your all-stars, align their incentives with your goals, and keep everyone communicating and adapting. Do that, and you’ll be well on your way to a winning season in real estate investing.

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

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