fbpx
The New Reform That Could Unlock $1B+ for Affordable Housing w/Sharon Cornelissen

The New Reform That Could Unlock $1B+ for Affordable Housing w/Sharon Cornelissen

by | Apr 25, 2024 | Investing, News Feed

America is in need of affordable housing; we’re all aware. Buying your first home has become increasingly challenging for everyday people. This is where housing subsidies come in. Federal housing subsidies were created over ninety years ago to help Americans get into the housing market and strengthen the economy, but in 2024, much of that money may not be headed to homebuyers—it could be going to banks instead.

On today’s show, we talk to Sharon Cornelissen, Ph.D., Director of Housing at the Consumer Federation of America. Sharon’s mission is to advocate for safe, affordable housing with equitable mortgage lending for American consumers. In this episode, Sharon illuminates the shocking fact that most Americans are completely unaware of—billions in housing subsidies AREN’T being used for housing. So, if they’re not going to homebuyers, where are all the subsidies headed?

Sharon discusses the banks that could be receiving a significant amount of these subsidies without providing any benefits for homebuyers, how the Coalition for Federal Home Loan Bank Reform is trying to change this, and how, if they succeed, affordable housing could see a MASSIVE influx in subsidies, that could help the housing market tremendously.

Click here to listen on Apple Podcasts.

Listen to the Podcast Here

Read the Transcript Here

Dave:

The Congressional Budget Office recently estimated that a whopping 7.3 billion of subsidies are going to something known as the Federal Home Loan Banking System. This is a little known part of the financial system, at least it’s not something that I knew about before starting to research this show. And with a budget like 7.3 billion, you would think that this should be having a huge impact on affordability and the housing market as a whole. But today we’re going to dig into whether that’s actually happening or not.

Hey everyone, and welcome to On the Market. I’m your host, Dave Meyer, and today we have an excellent guest joining us today. Her name is Sharon Cornelissen, who is the Director of Housing for the Consumer Federation of America. And with Sharon. Today we’re going to talk about the history of these subsidies that are going to the federal home loan banks and what’s going on with them today. And we’ll talk about how some proposed reforms that are going through Washington DC right now could impact affordable housing and housing inventory going forward. Alright, let’s bring on Sharon. Sharon, welcome to the show. Thanks for being here.

Sharon:

Yeah, thanks for having me.

Dave:

To start off, tell us a little bit about what it means to be the director of Housing for the Consumer Federation of America.

Sharon:

So the Consumer Federation of America is a national nonpartisan, pro-consumer organization that leads in research and advocacy on pro-consumer issues. So as a director of housing, I’m responsible for all our positions on housing and housing policy, and I do both research and advocacy on housing.

Dave:

And how did you come into this role and begin specializing in housing?

Sharon:

Yeah, it’s kind of a funny story I guess. So I first started to be interested in housing about a decade ago. I was doing my PhD in sociology and I moved to Detroit to try to better understand the city and what people were going through, living in an extremely depopulated neighborhood. So I moved to one of the most depopulated urban neighborhoods of the United States. And while I was there, homes were selling from $500, A lot of homes were vacant. Every other house in the neighborhood where I lived was vacant. So I actually ended up buying a house myself there in Detroit for $7,000. So maybe of interest to some of your listeners. So I had to of course, buy cash in these neighborhoods. All the normal institutions that normally support housing markets did not exist anymore, did not function anymore. So there were no mortgages, pretty much no real estate agents.

A lot of people did not have home insurance. So it was really challenging for a lot of Detroiters in particular to try to hold onto their home. A lot of people were losing their homes, both due to tax foreclosure, they were falling behind from their tax bills. And also because of home repairs that were kind of spiraling out of control. If you have no home equity and no insurance, it’s very expensive to maintain it. So I became really interested in housing, living there and seeing the charterers go through tax foreclosure and trying to organize to keep people in their homes. And I think if you live in a place where the housing market basically has collapsed, you understand how important it is really for housing stability for kids growing up in a stable home, but also for a neighborhood to kind of keep a community together. Housing is really important for that as well. So that’s kind of how I got into the fields.

Dave:

That’s an incredible story. I would imagine that would be very transformative in terms of your life and your career. Before we jump into some of your research, what year was that, that you moved there and bought the house?

Sharon:

Yeah, I moved there in 2015 and I bought the house in 2016.

Dave:

So even almost a decade after the collapse, that was still the situation.

Sharon:

It was sort of the secondary collapse. Detroit went through the foreclosure crisis bank, foreclosures first, and then about seven 80 years later, especially 20 15, 20 16, it went through a second crisis. The tax for closure crisis as home prices remained so low and people could not keep up on their tax bills.

Dave:

Well, let’s move on to your work at the Consumer Federation of America. I understand that you do a lot of work with housing subsidies. Can you just give us an overview of what subsidies are like in the United States and just a general landscape?

Sharon:

Yeah. Well, I think the subsidies that get a lot of attention, maybe subsidies paid to individuals. For example, you have section eight housing vouchers for people that are very low income and cannot afford to pay rents otherwise. But you have also subsidies housing subsidies that go to really large institutions that often get less attention, I think in the media perhaps because it’s less visible, they’re not that open about the subsidies that they receive. And it’s perhaps more technical people kind of check out as soon as we start talking about GSEs and housing finance reform, federal home loan banks. So these subsidies are less visible, I guess

Dave:

That’s true, but I think you’ll find a ready and willing audience here on the market. Our audience really likes learning about the intricacies of the housing market and how all works. So you mentioned there’s section eight, there’s also the GSEs. Do you have a number for the total amount of subsidies annually that are distributed for housing?

Sharon:

And this is not my number. This is a number from the Congressional Budget Office. They published their reports very recently to calculate how much federal loan banks this GSE receive every year. And they packed that number at 7.3 billion in 2024. So that’s quite a number right there.

Dave:

Okay. 7.3 billion. And that’s made up of both Section eight housing and some of the more bank side, or is that just section eight?

Sharon:

No, that’s just subsidy. That just goes to the federal home loan banks.

Dave:

Oh, okay. I see. This

Sharon:

Is a number that they receive.

Dave:

Okay. And this is taxpayer dollars that I assume are attributed by Congress?

Sharon:

No, they’re not appropriated by Congress. The subsidy kind of goes through a back door. It doesn’t show up in a budget for Congress, but it’s a subsidy nonetheless.

Dave:

How does that work?

Sharon:

How does that work? So they are a government sponsored enterprise, A GSE, and it means that they receive unique tax and regulatory benefits. They have a sort of unique status granted to them by Congress in exchange for providing unmet credit needs and public benefits. So they’re receiving the status in order to meet an unmet credit need. So this includes, for example, that there’s an implied federal guarantee on all the debts that they take out. So if you are an investor, you pick between different investment options, and in the case of A GSC, you know that if this federal home loan bank will fail, the government will step in to rescue it basically. So it lowers the risk profile. So therefore, the debt that the government is indirectly providing a subsidy on federal Hong loan bank’s debts in that way, they also have what’s called a super lien on their debts.

So that means if one of the banks that they’re lending money to, for example, a regional bank that they’re lending money to fails, the federal home loan banks have first dips basically on assets to kind of get their money back even before the FDIC. So even before taxpayers, they get first dips. So these are all features that make them more attractive for investors, and that creates this big discount that they get on their debts. So the government is basically giving them all these special benefits and statuses and tax-free status. And in total, that special status is worth 7.3 billion every year.

Dave:

Wow. Okay. So I’m going to try and summarize this to make sure I fully understand what’s going on. There are select banks, they’re called the acronym GSE applies to them that sensor government subsidized entities, is that right?

Sharon:

Government-sponsored enterprises,

Dave:

Government-sponsored enterprises. So there are certain banks, and we’ll get into which ones they are in just a minute. Let’s go step by step here.

Sharon:

So there are 11 federal home loan banks. So there are regional banks, kind of like the Federal Reserve system. So they are bank, I call them bank for banks. So they’re not like Bank of America or Chase themselves? No. This is an overarching bank for banks, basically. So banks can get cheap loans, a cheap source of liquidity from the federal home loan banks. So the role of federal home loan banks is to, they get a discount on their own debts because of their GSE status, and then they pass on that discount to their members, which are banks, credit unions, insurance, companie, all the like. So what they do is to basically give banks a cheap source of money, a cheap source of liquidity. And historically that money has been used to help banks provide mortgages, but today members are doing anything with that money. Many banks, as you know, are not even in the business of lending mortgages anymore. So they can use money for any purpose that they see fit. So it could be just for acute liquidity needs. In the very moment, Silicon Valley Bank was lending a lot of money right before it fails. Or if you are an insurance company, you could say, Hey, that’s great. That’s cheap money. Let’s borrow a bunch of cheap money and then I’ll vest it elsewhere and then I can keep the difference. I can make money that way.

Dave:

That sounds like a pretty good deal for those banks or an insurance company just being able to get cheap debt and basically do arbitrage and lend it out for a higher interest rate somewhere else, or invest it wherever they want. Yeah, exactly. So you said these are banks of banks. Have we heard of any of these banks or would normal people recognize the names of them?

Sharon:

Well, I mean, their names are the federal non Bank of Atlanta, the Federal Bank of Pittsburgh,

Dave:

San

Sharon:

Francisco. So that’s their names. I think everyday Americans have not heard of them because they don’t directly interact with you or me as consumers. They are the bank for banks. So they interact directly with big companies, not with everyday people.

Dave:

Okay, got it. Okay. We have to take a quick break, but stay with us more on housing subsidies right after this. Welcome back to On the Market. Let’s pick back up with Sharon Cornelison and housing subsidies. And so I assume that this policy and system was put in place in an effort, make home ownership more affordable.

Sharon:

So the system was founded in 1932. This was during what I call the greatest housing crisis of the last century. So this was during the Great Depression. There was really a struggle for people to own houses or to buy homes at all, but mortgages, mortgages are very expensive. Mortgage money wasn’t readily available at the time. If you are in the thirties, if you are a bank, you rely on deposits as your source of liquidity. And then depending on how many deposits you have, you can originate mortgages based on those deposits. So at the time they were like, well, wouldn’t it be great if there was a more reliable source of liquidity for mortgages? So Congress chartered the federal non bank system at the time so that they could make more liquidity available for mortgages. So mortgages would be more widely available and they would be cheaper. That was sort of the idea in the 1930s.

Dave:

And did it work back then, at least?

Sharon:

I mean, there were a lot of things that were innovated in the thirties. The Federal Housing Administration was also founded around that time, so they were in a big crisis. So crisis often is a good time for innovation and new opportunities. So I think at the time it did work. It was a good source for mortgage lending. The members at the time were engaged in mortgage lending, and this was a good way for them to get more liquidity.

Dave:

And now this is going to be a bit of a subjective question, but would you say it’s working today?

Sharon:

Well, clearly I believe it is not. I mean, I think your listeners will also understand the mortgage market has really changed over the last 90 years. So first of all, a lot of the people or a lot of the institutions that used to be engaged in mortgage lending are not anymore. A lot of the mortgage lending today is actually done by independent mortgage banks, such as Rocket Mortgage or those sort of online mortgage banks, and they are not members of federal banks at all. Right? So a lot of the mortgage lending has shifted, and a lot of traditional banks are no longer in the business anymore. And in the second big change that has happened since the 1980s, we saw the rise of securitization. So right now, if you’re a bank and you originate a mortgage, you turn around and then you sell that mortgage to Fannie or Freddie most likely, so you’re not keeping it on your books. So the capital that you need to originate a mortgage is very different from what it was in the thirties when there wasn’t that secondary markets yet.

Dave:

Well, I was a little bit joking when I asked if you liked it, because for our audience, Sharon is of the Coalition for Federal Home Loan Bank Reform. So obviously you’re looking to change this program. Can you tell us a little bit about the coalition?

Sharon:

Yeah. So this coalition started, we were sort of trying to find individuals and groups that were united around the idea that the status quo for federal owned banks is not acceptable. So right now we have 10 national organizations that includes civil rights organizations, housing, as well as a labor union as well. And together they represent thousands of smaller organizations across the country and well over 1 million local members. We also have an advisory board with a lot of GSE and financial regulation and banking experts on it. So the advisory board has been very helpful in giving us ideas for reform and just answering questions where needed, because some of these things can get pretty complex pretty quickly.

Dave:

Okay. So when you look at the state of the subsidies today, is the problem that the money’s just not going where it’s intended to? Or is it being used inefficiently? You already mentioned that banks can sort of take the money and lend it out not as mortgages. Is that the primary problem or what’s sort of the big issue?

Sharon:

So if you are A GSE, A government sponsored enterprise, there’s always sort of a tension. So GSEs, they were founded with a public mission. So there are some unmet credit needs that is not served by the private markets, so that’s why you need A GSC to begin with. Otherwise, the private market could take care of it. So you start a GSC with a public mission, but then it’s also kind of private at the same time. It’s a hybrid. So it’s also driven by maximizing profits. So over time, the profits motive has sort of eclipsed the public mission. So they’re really driven by just pursuing more volume and more profits and not by thinking carefully about, well, how can we make the biggest impact on housing? So I think that’s sort of an inherent tension that exists for federal loan banks.

Dave:

And I guess in your opinion at least, it seems that there wasn’t enough regulation put in place or specificity to the arrangement here that has allowing the GSEs to pursue profit over the public benefit that it’s intended for.

Sharon:

Yeah, I mean, as I said, the mortgage market has sort of shifted over time. So I think we’ve sort of lost track of this GS as the market market shifted, and they of course went about their business because I understand that they’re motivated by their own bottom line that is important for them to continue to exist in some ways. So the mortgage market evolved and yeah, I think they need more tight regulation to make sure that they’re fulfilling that mission for which they were founded and that we are getting the right public benefits from those subsidies. Why are we giving subsidies? Why are we giving the GSC to special status and tax benefits and subsidies if we’re not getting the equivalent in return? That doesn’t make any sense. If they are not doing that, perhaps they shouldn’t exist at all. We can’t just be handing out subsidies and not getting public benefits in return.

Dave:

Right. Yeah, there needs to be some mutual benefit. They can’t just get the benefit of subsidies without providing the public benefit. But as you said, it sounds like it just started so long ago and perhaps hasn’t evolved as quickly as it needs to in order to keep up with the current financial system. So Sharon, what are some of the regulations that you think should go into place or what needs to change in your mind?

Sharon:

Yeah, I think there’s two kind of big items that have to change. So the first one is around mission and making sure that we are really clear about what the mission is of the Federal hormone loan bank and say, well, they are there to provide liquidity for housing, affordable housing and community developments. And if that’s so, then everything else should flow from that mission. So I think clarifying the mission is sort of the first step. And the second one is membership. Who should be, if that’s the mission, and if the point is to really provide more liquidity to mortgages and to help more affordable housing developments, then who should be a member? Does it make sense that insurance companies are members of federal home loan banks when they’re not doing anything in housing anymore or they’re not originating a single mortgage? Why are they there? That doesn’t really make sense. Really making sure that the members that are part of the Federal Home Loan Bank system use it to advance affordable housing goals. So I think small bank community banks should reap the full benefits of Federal Home Bank membership, what’s called Community development financial institutions, which are CDFIs, really make sure that they can get full access to federal home bank expenses and use that money to build more housing. That’s sort of what we like to see.

Dave:

Okay. It is time for our last quick break, but when we come back, we’ll get Sharon’s take on how Federal home Loan bank reform could impact the affordability crisis in the us. Stay tuned. Welcome back, everyone. Let’s jump back in. And how is the reaction to these proposals? I know you work for a bipartisan foundation. Is this being received well by both parties in Congress and the banks themselves?

Sharon:

So yeah, we are seeing, seeing greater and greater reception of this in the administration and in Congress. So Joe Biden, in his state of the Union housing proposal, he flagged the need for Federal Home Loan Bank as one of the priorities of the administration and housing moving forward, specifically making sure that they’re devoting more money to affordable housing programs every year. Right now, they’re only required to devote 10% of their income to affordable housing programs, but the administration wants that to be at least 20% sort of a first step to make them more aligned. We see more and more support in Congress as well. So Senator Cortez Moto has been a big supporter of this. She’s in senate banking as well, and then Senator Elizabeth Warren recently came out to really supports the need for reform. But ultimately, I think it’s a bipartisan issue. I mean, I know for example, Cato Institute has written as well about the absurdity of a system as it currently exists. So we see both from progressive voices and more conservative voices that needs to really reform the system. So I’m hoping that moving forward there will be more and more people signing onto a bill and we can turn this into a bipartisan housing

Dave:

Bill. And should this pass one day, what would be the impact on the housing market?

Sharon:

Yeah, so just to give you an example, last year in 2023 was actually the most profitable year for the federal home known banks ever, I think in history. So based on that profit, they will be required to spend 752 million in affordable housing programs next year. So that 10% of their income, they’re required right now to spend on affordable housing programs. If our proposal passes and they, instead of 10% have to spend 30% on affordable housing programs every year, that would mean an additional 1.5 billion in investments going towards housing. That includes, they often spend these affordable housing dollars on gap financing for affordable housing developments like Litech developments, as well as on down payment assistance. So an additional 1.5 billion could really do a lot more in both addressing our issue of housing supply and addressing longstanding issues of and who has access to home buying in this market.

Dave:

Got it. Okay. Makes a lot of sense. For our audience of investors, if they are interested in creating affordable housing or being one of those developers, is there a way for them to get involved?

Sharon:

I think that they should look at the website of federal owned owned banks and see in what region they fall, and then from there, go look basically for that gap financing for affordable housing developments. I must say that from what I’ve heard from people, from developers, it is notoriously hard to get this type of money, and they say it’s often the last money in the first money out because it’s so complicated to qualify for it. So that’s another thing that we think should change. It should be more accessible, it should be used more logically. It shouldn’t be that complicated to qualify for this kind of financing on top of Litech or other credits. You nod. You’re saying it’s a common problem?

Dave:

Yeah, it does. We talk to a lot of developers on this show, a lot of people who represent government agencies or policy advocates like yourself, and it is just a common refrain we hear is although there is intent to create affordable housing or public-private partnerships, that they’re often quite complicated. Yeah. Well, Sharon, thank you so much for joining us today and educating us on this topic. I did not understand this at all before our conversation, and thank you for educating me and our audience. We really appreciate it.

Sharon:

Yeah, thank you so much. I was glad I could. I know it’s complicated. So happy to be a resource anytime, Dave.

Dave:

And for anyone who wants to learn more about Sharon or her work at the Consumer Federation of America, we’ll put all of her contact information in the show. Notes below on the Market was created by me, Dave Meyer and Kaylin Bennett. The show is produced by Kaylin Bennett, with editing by Exodus Media. Copywriting is by Calico content, and we want to extend a big thank you to everyone at BiggerPockets for making this show possible.

Watch the Episode Here

https://youtube.com/watch?v=kDWH_gTpfR0

Help Us Out!

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

In This Episode We Cover:

  • Where the $7.3 billion in housing subsidies is actually going
  • The Federal Home Loan Bank system and why it’s in dire need of reform 
  • How the mortgage market changed over the past century and why we’re seeing these problems
  • How over $1 billion could be directed straight towards affordable housing
  • How Sharon picked up a $7,000 house in one of the most devastated real estate markets 
  • And So Much More!

Links from the Show

Connect with Sharon:

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

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

The New Reform That Could Unlock $1B+ for Affordable Housing w/Sharon Cornelissen

Sunbelt Surge: 15 Cities Dominating the Growth Charts

by | Apr 24, 2024 | Investing, News Feed

Simply investing in any metro Sunbelt market is not a recipe for success. To catch a cresting wave of appreciation and cash flow, you’ll need to dive deep into the metrics to examine where people are moving to, how property and rental prices are increasing, and what the unemployment rate is like. 

The good news is that we’ve done it all for you! So stop throwing darts at the map, examine our findings, and pick markets like the savvy, switched-on investor you are.

Rental Oversupply and Interest Rates Are Having an Effect

The first thing you’ll notice when looking at the table is that neither house prices nor rents in our top markets are growing at a great clip. Some are declining. After the frothy post-pandemic period in 2021, when prices and rents took off like spaceships, the advent of high interest rates has done what was intended: slammed the brakes on an exuberant house-buying market. 

An increase in rental units has compounded this, as many new apartments came to market to accommodate population increases fueled by relocating job markets. National data, analytics, and listing site CoStar had the same findings in a recent report.

“The U.S. multifamily market staged a strong rebound in 2023 as the number of units absorbed rose by 122% year over year to 332,000 units,” Jay Lybik, national director of multifamily analytics at CoStar, said in a statement on their organization’s website. While the increase in demand was impressive, it was overshadowed by the influx of new units, causing imbalances in supply and demand and pushing vacancy rates higher. 

Costar’s report stated that roughly 565,000 new units became available over the last year, mostly in Sunbelt states, with oversupply causing rents to drop in some Southern markets, as our table shows. 

Austin Hits The Brakes

Nowhere has the home growth slowdown been more acute than in Austin, Texas, the poster child for the Texas tech boom, where our data shows a 6.29% decrease in home prices and a 3.01% decrease in rents over the year. It’s a decline from its dizzying high of just a few years ago, when investors purchased a record $9.4 billion in apartments in 2021, according to MSCI Real Assets, and rents increased 20%, more significant than anywhere else in the country. 

The actual decrease is more profound than our YOY data shows, with the Freddie Mac House Price Index revealing prices have fallen more than 11% since peaking in 2022, the most significant drop of any metro area in the country, according to the Wall Street Journal.

“Clearly, there’s some pockets of overbuilding,” apartment investor Larry Connor, whose company manages a 15,000-unit national portfolio, told the WSJ. 

However, counting Austin out would be a mistake. The area has so many major tech companies that once the market stabilizes, values will inevitably increase.

Charleston’s Tourism Is a $12 Billion Industry.

Interestingly, although Charleston, South Carolina, came in toward the bottom of our listing, that was due to its population growth only. Based on its house prices (up 6.31%) and rental increases (up 7.03%), the area is booming, which indicates that many of its jobs are being filled by locals. According to the U.S. Census, South Carolina surpassed Florida as the fastest-growing state in the country last year. 

According to South Carolina’s state website, North Charleston, South Carolina, which includes Berkeley, Charleston, and Dorchester counties, had the largest percentage gain in nonfarm employment from October 2022 to October 2023. Employment rose from 402,300 to 426,800, reflecting a total change of 24,500, or 6.1%. 

The largest private employers in Charleston are in healthcare, aviation (Boeing), and retail (Walmart). However, one of the biggest drivers of employment is tourism, which adds $12 billion to the local economy. Tourism would account for the increase in house prices and local employment. AirDNA statistics support this by showing double the active short-term rental listings in 12 months. 

Highest-Growth Sunbelt Cities

The fastest-growing Sunbelt cities are all relatively close to one another: Myrtle Beach, South Carolina, followed by three Florida cities: Lakeland, Fort Myers, and North Port-Sarasota-Bradenton. Here’s a deeper dive into each.

Myrtle Beach, South Carolina

Myrtle Beach is not only one of the fastest-growing cities in the Sunbelt, but the fastest-growing in the country according to U.S. News and World Report’s annual list of fastest-growing places in America, which bases its list on net migration. Our data ratified this, showing 5.17% population growth, a stable 2.08% house price growth, and 3.65% rental price growth. 

A significant component of Myrtle Beach’s success has been diversifying away from purely tourism. “We’ve said for a number of years that a key component of making this a year-round livable place is to diversify our job base and that we’re not wholly dependent on the summer seasons and the summer tourism industry,” assistant city manager Brian Tucker told News 13, a local TV station. “We have to have those job creators year-round.”

However, many year-round movers to the area are not drawn to the area for work but are retirees or work remotely. Horry County, for example, has seen an explosion of growth over the past 20-plus years, increasing from 198,000 people in 2000 to over 380,000 in 2022. Moving company Hire a Helper found that 16,000 retirees, most over 55, moved to the Myrtle Beach area in 2023.

Lakeland, Florida

Our numbers showed that Lakeland saw a healthy 4.5% population growth in 2023, a modest 0.87% home price growth, and 1.63% rental growth. 

One of the main draws to the area is its location between Orlando and Tampa. It retains a small-town feel, has lower housing costs, and is less crowded than the suburbs of the two major cities surrounding it. 

Lakeland offers diverse employment opportunities in education, healthcare, aviation, and logistics. It’s an excellent choice for people to live and retire, mainly if remote work is an option.

Fort Myers, Florida

Located between Tampa and Miami on Florida’s Gulf Coast, Fort Myers has many of the same attributes as Lakeland, in that it is not as expensive as some of the more glamorous cities in Florida and has a laid-back charm, with the addition of a vibrant downtown bar scene in the River District. It’s also a haven for outdoor and water enthusiasts. 

There are employment opportunities here in healthcare, retail, education, and tourism. The commute to Naples is not far for work in the hospitality industry at many hotels. 

U.S. News ranked Fort Myers No. 3 as one of the fastest-growing cities in the country in 2023-2024. Our figures show a healthy population growth of 4.38% and a marginal house price growth of 0.15% (due to interest rates and explosive growth when rates were lower). Rental growth has dropped 1.58% over the last year due to a rapid increase during high inflation. 

Like many cities in Florida, Fort Myers is a magnet for retirees, with residents 65 and older making up nearly a quarter of the city’s population.

North Port-Sarasota-Bradenton, Florida

Located close to Lakeland, with many of the same attributes, lower house prices, and a quieter pace than nearby Tampa and Miami, the area is busy with new developments such as Marie Selby Botanical Gardens and the opening of a 1920s house-museum in Newtown, the city’s historic Black district. 

Our figures showed population growth of 3.68%, with home price growth dropping 0.42% and rent growth dropping 0.20%. 

One of the draws to the greater Sarasota area for New Yorkers is not only its proximity to target cities, but also its active arts scene (Sarasota Orchestra, the Asolo Repertory Theatre, the Sarasota Opera House, and the Van Wezel Performing Arts Hall), as well as popular white sandy beaches. 

With a large population of retirees, it’s not surprising that healthcare is one of the big employers in the area, with the Sarasota Memorial Health Care System employing 6,550 people. A sophisticated arts scene appears to come with a price, however, as the median home price is over $450,000 and the median rent $2,382, which puts it out of the reach of many retirees.

Final Thoughts

Lower taxes, warm weather, and an affordable cost of living are the main reasons businesses and people have been moving to the Sunbelt, particularly Florida. According to U.S. Census data, Florida was the top location for newly formed business entities. Of the 5.8 million new business applications filed nationally from January 2021 to January 2022, 683,680, or 12%, were in Florida.

These businesses have spanned the gamut in size and scope, ranging from behemoths such as real estate investment group Blackstone, global investment bank Goldman Sachs, and autonomous vehicle technology company Argo AI to hundreds of smaller businesses. Combine this with remote work options and a perennially favorite spot for retirees, and you can see why Florida is—excuse the analogy—amid a perfect storm of migration. 

The reasons for moving to Texas and other Sunbelt states are similar to those of Florida: work, weather, and a welcoming cost of living. So long as these remain intact, it’s hard to see how the Sunbelt won’t continue to tighten its hold on Americans looking to escape the cold, overcrowding, and high cost of living in other parts of the country.

Investors have two main choices regarding Sunbelt housing: appeal to retirees who are hesitant to commit to long-term mortgages or appeal to the influx of younger movers drawn to jobs, the weather, and affordable rents.

Exclusive Breakdown and Data Analysis of the Hottest Region for Investors

It’s no secret the Sunbelt has been a primary focus of investors for years due to appreciation and rent growth. But which markets offer the best opportunities for cash flow?

Download our Sunbelt Market worksheet for a synopsis of the most popular metros and states for investors, and get the full data for all states and markets in our accompanying Sunbelt Market Intel spreadsheet.

sunbelt markets market intelligence

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

The New Reform That Could Unlock $1B+ for Affordable Housing w/Sharon Cornelissen

Warning: These States and Cities Are Becoming Uninvestable Due to Politics

by | Apr 24, 2024 | Investing, News Feed

Taxes and regulations impact your bottom line as an investor—and not always in direct or obvious ways. Unfortunately, as soon as you start talking about either one, the average person closes their mind, circling the wagons around their existing worldview and only hearing data points that support it. Look no further than this Yale study, which shows that people perform worse on math problems if the correct answers conflict with their political ideology. 

I’ll get it out of the way now: I find both major political parties reprehensible and hypocritical. I’ve voted for each roughly equally over my life.

Now, let’s get back to real estate investing.

Taxes and Population Change

Population drives demand for real estate, and a shrinking population poses a major problem for real estate investors. Identifying population shifts, therefore, matters to real estate investors—a lot. 

There’s been a narrative over the last few years that more Americans have started voting with their feet and leaving higher-tax states in favor of lower-tax states. Is it true? 

I started by pulling raw data from the Census Bureau. I then mapped population change for all 50 states:

Investment analyst Ben Reynolds of SureDividend.com pointed out to BiggerPockets a few much-discussed examples: “Texas and Florida are two of the fastest-growing states by population. Not coincidentally, they offer a compelling mix of no state income tax and less cold climates compared to most other states.”

That raises the question of comparing population change to state taxes. Fortunately, that data is also readily available. 

Tax Burden by State

Every year, WalletHub ranks every state by its total tax burden, which includes state income taxes, property taxes, and sales and excise taxes. 

Surprising no one, New York took the top spot with the highest tax burden (12.02% of income for the average resident). New York also lost nearly 102,000 residents last year. 

That’s just one state, of course. Let’s look at states with a population loss last year: 

  • California
  • Hawaii
  • Illinois
  • Louisiana
  • New York
  • Oregon
  • Pennsylvania
  • West Virginia

How did they rank on tax burden?

The average tax burden ranking for these states is 14. In fact, only one of these states was ranked above the median of 25, and then just barely: Louisiana has a tax rank of 27. 

So yes, there is a clear correlation between tax burden and population change. And yes, I also hear all you skeptics out there objecting that “correlation does not indicate causation.” Go ahead and cling to that if it helps reinforce your existing worldview that taxes play no role in people’s decisions about where to live. 

I’m not saying taxes are the only or even the most important factor in where Americans move. Surveys about moving trends list many stated reasons for moving. But taxes appear to play a role in the calculations—especially for wealthier Americans. 

“Higher-net worth individuals are most likely to move to states with low or no income tax,” said Alexandra Alvarado of the American Apartment Owners Association in a conversation with BiggerPockets. “It may not be the primary reason they are making the move in the first place, but it does influence which states they are moving to. Also, companies that are moving their headquarters to lower tax states also influence migration patterns, as their employees tend to move with them.”

And that says nothing of the state and local taxes you pay directly as a property investor—taxes that eat into your returns on investment. While you can’t avoid federal taxes, you can pick and choose the states and cities where you invest—and their respective tax policies.  

Anti-Landlord Regulation

People love to hate landlords. I’ve never understood this: The same activists who cry out in righteous fury that there’s not enough affordable rental housing are the very ones who rail against “greedy” landlords—the people who supply rental housing. 

In some cities and states, these activists have enacted regulations that heavily favor renters over landlords. Back when I used to buy properties directly, I operated in Baltimore, one of the most tenant-friendly jurisdictions in the country. It once took me 11 months to get a nonpaying “professional tenant” out of my rental property. 

In our group real estate investing club at SparkRental, we focus first and foremost on managing risk. Every month when we get together to vet a new investment, we look at risks like debt, construction, property management, and regulation. 

Regulatory risk matters. If it takes two months to remove a nonpaying tenant in one market and 10 months in another, it adds risk and cost to invest in the tenant-friendly market. 

Look no further than the pandemic-era eviction moratoriums. Tenant-friendly markets extended moratoriums long after the federal moratorium expired, making lease contracts one-way enforceable for years. Many renters lived for free for several years, letting their landlord pay the mortgage and maintain their home while they milked every moment of free rent. 

And now that the precedent has been set, these jurisdictions can play the same card again the next time a “crisis” arrives. 

Therefore, anti-landlord regulation adds risk to your investment. Hard stop. 

Do I Shun These Cities and States?

I’m no political crusader. I’ve invested in markets with high taxes and tenant-friendly regulations. But I’m more cautious when I do so because it adds expense and risk.

In particular, I try to avoid multifamily investments in areas with anti-landlord regulations. That doesn’t mean I avoid all real estate investments there, however. 

Take Southern California. Our passive real estate investing club got together a few months back to vet a property with 11 short-term rental cabins on it. The cabins were in an unincorporated mountain town 90 minutes outside of LA, which relies on tourism to survive. We felt extremely confident that there was no risk of short-term rentals being outlawed, and the cabins don’t allow long-term stays. 

Yes, California has tenant-friendly laws. But they don’t affect that property, and we felt comfortable making that investment together. 

Likewise, we consider industrial, retail, and storage properties in areas with anti-landlord regulations. We even consider mobile home parks with tenant-owned homes in these markets. 

Final Thoughts

But if I’m going to invest in a multifamily property in a high-tax, anti-landlord jurisdiction, I expect the deal to make up for it elsewhere with lower risk than usual. 

You invest however you like with your money. But when you evaluate risk, ignore these factors at your money’s peril.

Join the community

Ready to succeed in real estate investing? Create a free BiggerPockets account to learn about investment strategies; ask questions and get answers from our community of +2 million members; connect with investor-friendly agents; and so much more.

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

The New Reform That Could Unlock $1B+ for Affordable Housing w/Sharon Cornelissen

The BEST Ways to Protect Your Rental Property and Keep Your Tenants Safe

by | Apr 24, 2024 | Investing, News Feed

If you own a rental property, it’s YOUR responsibility to provide a safe environment for tenants. This starts with things like tenant screening, security upgrades, and most importantly, acting swiftly when a resident is in danger!

Welcome back to the Real Estate Rookie podcast! Eileen Daugherty is not only the property management business consultant here at BiggerPockets but also a fellow real estate investor, and today, she joins the show to talk about property management, new construction homes, and the importance of tenant safety. Eileen even shares her own real estate horror story, which occurred shortly after buying her first rental property and renting it out. You’ll hear how a neighbor’s seemingly innocent “crush” quickly escalated into a situation where her new tenant was being stalked, hacked, and harassed!

In this episode, Eileen shares the biggest learning lessons from this unfortunate experience and the MAJOR changes she made to improve tenant safety at her properties—from installing security cameras to providing virtual private networks (VPNs) and much more. But that’s not all! Stick around until the end to learn what it’s like to invest in the fast-growing market of Asheville, North Carolina!

Click here to listen on Apple Podcasts.

Listen to the Podcast Here

Read the Transcript Here

Ashley:
This is real estate rookie episode 397. Tenants can oftentimes be the issue, but sometimes tenant safety can be the issue as we will uncover in today’s show. My name is Ashley Care. Welcome to the Real Estate Rookie Podcast, where three times a week we give you the motivation, inspiration, and stories you need to hear to get started in real estate and busting. Wait until you hear how many emails were sent to this tenant. And when does a tenant burden become your burden As the landlord, if you have a story that you want to share that’s about a tenant, a deal gone wrong, a contractor, anything real estate related, submit your horror story for a chance to talk with me for a one-on-one therapy session at biggerpockets.com/reply. Eileen, welcome to the show. We are excited and anxious to get into your horror story, but first I want to talk about what you’re doing with the BiggerPockets.

Eileen :
Thanks for having me. So I am the property manager business consultant for BiggerPockets, essentially helping connect our investors to investors, savvy property managers, and we’re doing that all across the country and we’re getting ready to launch that up this spring.

Ashley:
So you’ve probably had a lot of interaction with property managers by now.

Eileen :
Yeah, yeah, quite a few.

Ashley:
And what would you say is one or two value adds as to finding a property manager through BiggerPockets?

Eileen :
That’s a good question. Learning landlord best practices. If I didn’t go, I did my due diligence, but if I didn’t go with my property manager, I know having a data analytics background, the research that I do, I still wouldn’t have been able to find some of these state laws that they’ve been able to share with me. And just the little nuances of best practices for being a landlord.

Ashley:
Well, I have to say that’s very convenient having somebody else do your due diligence on property manager. I could have used that about three and a half years ago, so I’m glad that’s a resource available now. So Eileen, tell me a little bit about your portfolio, because I understand you have done a couple deals before you actually got into your horror story, so set the tone for us. What were you doing before BiggerPockets and before this horror story?

Eileen :
Yeah, absolutely. So first property came in 2017, and at that time we were in Jacksonville, Florida. We were able to buy a home at 180 5 and we put in about 20 to 25 grand in Reno and sold that property for 3 25 in late 2021. Wow. Yeah, that was the time to sell in Jacksonville. We used the VA home loan and actually with that property we were house hacking and I had never even heard of house hacking when we were doing it, so I didn’t even know that we were doing house hacking. But during the pandemic, before we sold the property, I was doing many other people’s researching, how can you build wealth over time? And that’s when I stumbled upon investing in real estate. So I convinced my husband after he came home from deployment to sell that property in 2021, and we wanted to be more in between both families.

Eileen :
I’m from up north, he was from Florida. We both really liked the seasons, and I’ve been doing quite a bit of research in the western North Carolina area and I said this would be a great place to invest. So that brought us to Asheville, North Carolina, and we used the VA home loan again after selling that one in Jacksonville to buy one in just outside of Asheville. And then we also use those profits to buy an investment property in Lake June, Luka, North Carolina, which is kind of by Waynesville Great Smoky Mountains area. And then about a year later we use the entitlement for the VA home lawn that you get. And we moved again. So lots of moving and he went back active duty in late 2023. So we moved again and bought our fourth property here in Pensacola, Florida where we’re currently at.

Ashley:
Okay. Real quick, first of all, can you just describe some of the benefits of the VA loan real quick?

Eileen :
There’s so many benefits. 0% down, you can reuse the VA home loan over and over again, the entitlement that you get. So for example, we had 700,000 that we could use from the VA home loan. We used a portion of that for one primary residence. We moved to be closer to a job and we used the remainder of that to buy another primary residence, and you don’t have to put the zero down so you can really start to slowly build a portfolio using the VA home loan.

Ashley:
So that entitlement that you’re referring to, that’s up to a certain amount, that’s your max that you can use the VA loan.

Eileen :
Right, exactly.

Ashley:
Okay. So any of these properties that you mentioned are any of these actual horror story? Yes.

Eileen :
Okay. So when we moved to Asheville, now this property is just outside of Asheville. We’re about eight minutes away from the River Arts District, 10 minutes from downtown in the Biltmore if you know the area. So we really liked it and we were just outside of that Asheville City limits. So good tax break there. So we got it at in 2021. So it was of course one of those 2.75 interest rates, your typical craftsman style, new build home. But it was great because it was really convenient, everything, and we had a private drive going down to our little cul-de-sac of these five new build homes. So when we purchased that, we were the first ones and slowly people started moving in and making their space their home. Everybody was upgrading their backyards. So we lived in that property for about 15 months and we met that criteria where you were now able to rent it out if you wanted to.

Eileen :
So we decided to do a long-term rental there. Fast forward to August of 2023, and we found a great tenant, single woman. She was in her late forties. She was pretty high up in an IT company. She’s very smart. It was a perfect match for us. She came in and as she drove into our cul-de-sac, she saw the deer out in the front yard and she said it looked like a Disney movie, which it really does. And so she got along great with our neighbors, which is great. We are still very close with them as well. So everybody is making their home, their house, their home, and my neighbor’s in the middle. This is worth noting my neighbor’s in the middle of the cul-de-sac put in about $50,000 into backyard renovations. And this is an area where when it was complete, they had a fire pit and everybody would gather and have a glass of wine or something.

Eileen :
Now there’s a street behind us that was about a half acre away and you couldn’t see this gentleman’s door, and we’ll call this gentleman Bob. You couldn’t see Bob’s front door from our yard, but you could from my neighbor’s yard. So my tenant is getting along great. She’s mixing, doing happy hour with the neighbors down at the fire pit, and Bob starts joining in on them. And when we were there and living there, we always just thought Bob was kind of a goofy guy, didn’t really think anything of it, but he is in his late sixties, early seventies, and he I guess developed a crush on my tenant. And my tenant was very kind about it. She said, I guess he asked her out on a date and she said, thank you, but no thank you. And she was like, I think you might’ve gotten the wrong impression. And this didn’t go over very well. So it kind of took a turn for the worst.

Ashley:
I definitely want to get into that because this sounds like the start of a lifetime movie where Sweet Abby scenario that all of a sudden turns for the worst and this lovely neighborhood there becomes some kind of horror story that happens to it. So we’re going to take a short break and we’re going to hear more about this goofy neighbor, this interesting character, and then also we’re going to talk about five lessons you learned through this whole experience with providing a safe place for your tenant. So we will be right back. Okay, we are back with Eileen and we just started talking about this new build that she purchased, lived in it for 15 months and decided to rent it out to a tenant. And during this time in this sweet, lovely cul-de-sac where there was neighborhood gatherings and everything was so wonderful, people are making it their home. We get the situation where someone, a goofy neighbor, Bob, as we have named him, is developing a crush on Eileen’s tenant. So that’s kind of where we left the story off. So welcome back to the show, Eileen. What kind of happened with this crush and then why did this all of a sudden turn into a horror story?

Eileen :
So what happens is my tenant goes away on a business trip and she had to get a rental car for this business trip. And as she’s getting in her car one day she hooks up her phone and she gets a notification and I’m not it savvy, she is very smart. And she knew immediately from this notification, she said, this doesn’t look great. I think I’m being tracked. Someone’s tracking me. So I guess this had happened, a couple, she returned back to Asheville from her business trip and then it happened a couple more times and she found out she was able to trace it back to Bob. So Bob had been tracking her location. So

Ashley:
From her phone he was tracking her. How does this happen?

Eileen :
So mind you, my husband and I don’t know that any of this is going on, we have no idea. When we do hear about the story, our tenant tells us, I think it happened when I met him down at the fire pit and he said, Hey, hand me your phone. Feel free to text and reach out to me if you need something around the house, you don’t have to bother Steve, my husband to come by. And in that interaction, she handed him her phone and he did something to where he was able to connect into her location and had access to her internet. Wow. I know this wild. So from there he started, he was really upset that she denied his invitation to go steady, I guess, I don’t know. And he started sending really explicit emails, like pornographic emails, and it got to be to a point where he was starting to harass her 50 hundreds of emails he had gotten into her internet, he had hacked into her phone.

Eileen :
He somehow got into her work email and was starting to send them through her work email and she worked remotely. And again, single woman by herself, she finally confronts him about it and says, I know it’s you. I need you to stop. Please leave me alone. This really got him upset and it got her upset because it went from hundreds of emails to thousands of emails a day, my God, that he was sending her these images. And one day she got really upset and I don’t recommend doing this, but she changed the domain name on her internet to F you, Bob. And when I found out about it, I was like, why did you do this?

Ashley:
So her when you would go and sign up for her wifi login, that was what you would see if anyone was looking at wifi. Oh my gosh.

Eileen :
Yeah. So it got worse. And finally this all started happening I guess back in November of 2023. So not too long after she moved in, she got really close with the neighbors and all this started happening and we were texting each other, happy Thanksgiving, Merry Christmas, we had no idea this was going on. She finally gives me a call or my husband a call, and I talked to my neighbor. I was like, I got a weird voicemail from our Ken, what’s going on with Bob? And so my husband’s talking to our tenant and I’m talking to our neighbor. My neighbor decides to call me as well because apparently Bob is tracking their phones and it’s gotten, and these our poor neighbors, they’re a retired couple again, they put all this money into their backyard and now she’s afraid to go outside because Bob will be out on his front porch and he’s just staring at my tenant and at the neighbors and it’s making it a very uncomfortable scene. So as I’m listening to this on the phone down in Florida, I’m thinking, I just saw this episode on Dateline, so what do we need to do?

Ashley:
And I guess at that point in time, where do you feel like it was your responsibility, not only morally and ethically, I want to be a good person, I want to help this person, but at any time did you think of, what were you thinking of as the landlord? What is your responsibility as the landlord in that situation? Were you thinking,

Eileen :
Right, you’re wearing both hats, you’re a landlord and you’re a human. And the landlord hat kind of went off and I was like, okay, do we need to call the cops? Let’s get cameras out there. And I guess I would say didn’t really go out of the hat because that’s what I just would’ve done anyways as a landlord. I just wanted to make sure she was safe. I was going based off of her judgment and off of my neighbors. I don’t want this to escalate to anything to where you could be harmed. So she didn’t want the authorities involved, so we did not have them involved, but I said, let’s get my handyman out there. He came out that day and hooked up and installed some security cameras for her. And we also offered, Hey, what about some A DT security system installation in there?

Eileen :
I was willing to do that. That wasn’t an issue for me. Again, I just want to make sure she’s safe at this point. No, no, you don’t need to do that. I guess as the landlord, me making sure that your safety is my priority was a reassurance for her and us getting our handyman out there that day, getting some cameras installed, she did mention, Hey, I got to get out of here. We’re totally okay, let’s help you get out of there. So they both kind of went together, I guess, instead of going out the window.

Ashley:
So as in she needs to get out of there, she means she’s looking for another place to move.

Eileen :
Right, right.

Ashley:
And at the time, was she in a locked in lease? How much time was left on her lease agreement at that time?

Eileen :
Yeah, so this was only a few months ago. We had the conversation in January, early February and she still had till August and she goes, I might be able to stay till August. And I looked at Steve, my husband, I was like, no, this doesn’t sound like a very good situation. So I was like, we will work with you on getting you out of there and re-listing it and getting someone back in as much as we possibly can. So in the state of North Carolina, if you break the lease early, the tenant is still responsible to pay out until a new tenant comes in. And she was totally understanding of that. And like I said, we were willing to work with her also on

Ashley:
That because of the circumstances. And that’s where it does become so difficult and it can make you vulnerable as a landlord as to where that human compassion versus following what your lease agreement states.

Ashley:
It is very hard not to get emotional. And there’s different ways that this can come into play as far as a single mom who has three kids and maybe her husband just left and she’s saying, I can’t pay this month. I’m sorry, as to where do you draw the line as to your compassion as to where there’s somebody else who it’s excuse after excuse or they don’t even tell you they’re not going to pay. Things like that. And I’ve had more empathy for somebody who does come forward to me and let me know ahead of time this is what’s going to be happening or this is the situation and this is what I think needs to happen or whatever it is, giving me the heads up instead of in your circumstance, this lady could have just said, you know what, I’m out of here. I found another place. I’m gone try and come after me, but this is what has happened, blah, blah, blah. I will sue you because I wasn’t safe here. All these different things. So it could have been way worse instead of having a resident that you’re working with and having that relationship built between both of you to find the best solution, having that communication. So when they decided to move out your tenant, how bad did it actually get as to what was the last thing you know that this guy was doing?

Eileen :
He was sending about 50,000 emails a day. Does

Ashley:
He have three virtual assistants in the Philippines or something that’s doing this? I

Eileen :
Dunno how this guy’s doing this. And then pretty much giving the stare at everybody in the cul-de-sac from his front porch. So it was very creepy scenario. Very disturbing.

Ashley:
Yeah. Oh my gosh. So what ended up happening with this property? Has she moved out by now and moved on?

Eileen :
Yes, actually just recently she moved out. We’re getting ready to relist it for rent and this is where a property manager really came to help. This was our first long-term rental. So we’ve bought things for properties. We’ve had a short-term rental for a couple years, but this was our first long-term rental. And I asked my property manager who at the time was only helping us with onboarding, but now us being in Florida, I was like, okay, we work so well together that I’m going to pass the baton to full service for you. But he was great in telling me all of these things about the state laws and about what would be best practice in this scenario. And I said, you ever come across this? And he said, Nope, that’s a first one for me. And him having rental properties of his own, I was like, ever heard of a tenant like this? Said, no, this is definitely the first timer for me. But it did end up working out. So she is out, she is safe, we’re working with our property manager to find someone who is going to be a good, the best fit for that home. Probably not a single woman, just so we don’t have any kind of repeats of that scenario just for their safety.

Ashley:
And how do you navigate that with dealing with fair housing laws and things like that? Are you just notifying people when you’re showing the house of the previous situation?

Eileen :
If something like that were to come up because our property again is about a half acre to three fourths of an acre away from this gentleman, it’s blocked. You really can’t see him or come in contact with him until you go to our neighbors. But if someone, like a single woman were interested, me and my property manager would say, of course we would want to rent to you, but this is the situation that we’ve had in the past of for your safety, we’re going to highly recommend that, that maybe keep looking in the area. And I think pretty much everybody would agree with

Ashley:
That. And my last piece on this, did the cops ever come or did anything ever happen with this guy?

Eileen :
Yeah, so the cops couldn’t. We did speak to the authorities about it. They did not come or anything, but because he wasn’t trespassing and with other laws in place, they couldn’t do anything about it. But just wanted to touch base with those guys and see what would be next steps if something were to happen. So unfortunately he had a little bit of brain damage from a past job is what my neighbor told me. So not everything is clicking and we work really well with our neighbors in communication and they’re trying to get him help as well.

Ashley:
Well, it seems like they won’t be having any more parties at their house with coming over, unfortunately, after this ordeal. Yeah. Well thank you for sharing that experience with us. I think there’s definitely some lessons learned and we’re going to take a short break and when we come back I want to talk about five lessons you have learned going through this ordeal. Then after that, let’s get into the market maybe why someone else should invest in this market. Maybe not that exact cul-de-sac, but in that market. So we’ll be right back. Okay. Welcome back from our short break. Thank you guys so much for supporting our sponsors. It really keeps our show going just like having the rookie community. We really appreciate it. We are back with Eileen and we just heard her horror story about having a tenant who had a neighbor that had a crush on her and developed into a stalking scenario with up to 50,000 emails sent to her per day. So I don’t even think some of our wholesaler listeners, our direct mail campaigners are doing 50,000 letters or emails a day to buy houses. So maybe someone could hire him to actually do some direct marketing for them. So Eileen, what are some of the lessons that you have learned from this experience?

Eileen :
Yes, no, great question. So we develop a system, all of us as real estate investors and business owners. My husband and I, we’ve developed subsystems and we do that for us personally with our portfolio size. We do it by property. So for example, our short-term rental, we use the Slay doorknob and home app, which allows us to have up to a hundred different codes that we can send our guests checking in and out, multiple master codes. And we also have a notification every single time the door is open so we know who is coming in and coming out and we’re able to unlock and lock anywhere with wifi. So that’s always a great safety feature in there to make sure our guests are the ones who are coming into the home for long-term rentals. We did start offering if our guests wanted a DT service or if they would like to use our handyman to come in and help install their cameras on the property when they move in. And then my husband is actually going to school for it. And we’ve also been offering our other long-term tenant, Hey, would you like us to help with personal VPN? Just to kind of help further protect your tenant’s online privacy. We all have our probably logins and passwords on our laptops or mobile device. So keeping that extra layer of privacy there.

Ashley:
Well first of all, I’m pretty sure after listening to this episode, no one’s ever going to hand their phone over to anyone to get their phone number. Yes,

Eileen :
Don’t do that.

Ashley:
Yeah, that’s another great piece of advice as to being able to protect yourself, all your passwords and everything. Not letting anyone hack into your email is getting your VPN set up or different ways to protect yourself online too. Not even if you’re just a tenant, but everybody should be doing that. And then too, there was something I had seen about using solar panels too for security that you were using.

Eileen :
So for our short-term rental, we installed a ring camera has solar panel chargers, so it helps make sure our camera is always on and that we don’t have to, our cleaners handyman don’t have to worry about all the batteries die. They’re not able to get there till next week. There’s that kind of uncomfortable feeling that you’re not sitting there looking at your phone watching the camera, but just making sure who’s going into the property is the person that should be going there. So that’s always a great feature to have if you have rain camera set up on the outside of your property.

Ashley:
I think that’s also a great advice for a light too. Another exterior light, if you don’t have electric run to a pole or something, my dad has this land with a cabin he built and it’s actually all solar electric, but there is this big pole he put in the driveway or whatever and it has a solar light on it and it just illuminates the whole thing and he never has to worry about charging a battery or actually running electric to the pole to have it. It just constantly will turn on every night when it’s dark. And I think there is a remote or something for it that you can turn it off if you want to, but I never actually thought about that for short-term rentals of just adding in more lighting. We have an a-frame and it has this long twisted driveway and that actually would be a great idea to put a solar light at the end of the driveway as to here it is, pull in here for if anyone’s arriving at night too. Okay, so what about the neighbors dealing with this situation, your neighbors? Do you have any tips or advice or lessons you learned from that experience?

Eileen :
So another one would be for rookies out there, know your neighbors for multiple reasons. Having a personal connection with your neighbor helps deescalate issues that could snowball, whether it’s with them or with the tenant or it just helps deescalate any kind of situation. Also gives a second opinion on what’s going on. So in this example of my horror story, my husband was talking to our tenant, but I was able to talk with our neighbor and kind of hear, okay, spill the tea, what’s going on? And also it gives another set of eyes looking at your property because you’re going to take the best care of your property, but your neighbors are also probably going to look out for you. Give us a call, Hey, you probably want to get a tree trimmer over there. This one’s leaning, especially if you live in the wooded mountains like we did up there.

Eileen :
And then the third takeaway I would say from all of this is investing in a property manager for the onboarding and offboarding process. If you’re new to this or only if you’ve done it a couple of times, like I said, we’ve learned a lot of tricks through the trade, but one of those, for example, our property manager up there have mentioned that it’s better to show a vacant home versus a home that has all your stuff inside, even if it’s clean the first time around scrubbed it was spotless, but even with stuff inside it makes the desirability of rent for someone to rent it faster when it’s vacant, they can see their stuff. Another thing we’ve learned is educating a tenant on, again, nuances about the property. So hey, when you turn on the dishwasher, you might get a little bit of less water pressure upstairs and the upstairs shower versus them calling you. So it’s little things like using a property manager, making sure you educate your tenant, knowing your neighbors and then digitally making sure that their safety is protected.

Ashley:
Yeah, the little bit there about informing your tenants of little nuances that are in the property is such a great idea to set that expectation forward as most likely. Not every house is going to be perfect, even a new build property that you’re buying. There’s still going to be little things, but so we provide a tenant handbook as to here’s the water shut off, here’s where the electric panel is. And then also just some common how-tos that aren’t actually that common as to an outlet won’t work. Okay, first track, make sure the breaker didn’t flip and little things like that as to go through this process first before submitting a maintenance request. And now what about building your team in place? So do you have any advice on that as far as the lesson learned as you lived near the property and then you guys moved and you’re kind of a lot more hands off?

Eileen :
So we have our A team established, you’ve got your cleaner, your handymen, but having that B team and C team there, even though it’s only been a few months that we’ve been away, it’s been such a blessing that we have them there. And over time I would say, how do you get all of these people on your team? And again, we’ve got a spreadsheet with everybody’s name number on there, but going to our local real estate investors association, getting on BiggerPockets forums, really networking and see who’s the best fit for what. And then we also hired a couple of these B team, Z team people to do a couple jobs for us that we needed to have done anyway before we moved. So we got a chance to see their work and we got a chance to develop that relationship with them.

Ashley:
And then my last, if you have any lessons for this would be about doing new construction or new development.

Eileen :
Yeah, I know it’s very popular to do something like the Burr strategy, but with two kids under two and working a full-time job and all the chaos that comes with life new construction just happened to be something that we found works for us. And I would say in growing areas specifically like Western North Carolina and down here in the Pensacola pace area using either a saleable loans or the primary resident home loan benefits, we’re taking advantage of the builder incentives. Quick example of this property here in Pensacola, we closed on January 29th of this year and they offered a 4.99 interest rate, all appliances included, blinds installed, new construction, you get that one year home warranty. So a quick tip on that is anytime you have a new construction home, only schedule a second inspection on that nine 10 month before that home warranty ends that way. Any little things that’s that come up, that’s a great advice.

Ashley:
Yeah, that’s a great idea. One question real quick on that 4.99% interest rate is that amortized over 30 years in a fixed rate for 30 years? Wow.

Eileen :
Yeah, so I mean there’s a ton of benefits of, and with this being if you choose your market wisely and location and going back to due diligence and research, but if you choose your market wisely, you can cashflow a little bit. So we will cashflow a little bit on this property that I’m at in Florida right now and with the hopes that it’ll appreciate over time we see the growth around us and it’s tremendous. So it can work out for some people. It’s not that forced appreciation like the bur, but still lots of benefits with new builds.

Ashley:
Yeah, I mean it can be less of a headache with less capital improvements, less maintenance, not having to do a manager rehab project, things like that. Definitely a whole different strategy in itself compared to doing a bur. And it doesn’t mean that one is right or wrong and that’s why it’s so important to figure out what, why are you investing and what are your skillsets and what can you bring to the table and what do you want your lifestyle to be like? Because there’s people like, oh, wholesaling can be the best way to get you started because you’re just making money. You can have little money invested into it, but do I actually want to go and knock on people’s doors? No, I don’t. So finding why is what you want your lifestyle to be, what skill sets you bring and kind of incorporating that into helping you pick your strategy is such an advantage as to thinking, oh, I can maximize my return by doing this because in the long run you might actually make more mistakes and be way more miserable. And part of being a real estate investor is that you get to be happy and you get to live the lifestyle that you want and sometimes it’s hard to, you kind of lose focus on that. We

Eileen :
Were probably one of the younger couples at our real estate investment association up there in Asheville, but it was great how the older generation really wanted to help us out. They knew what we wanted to do, but new build is a great way for families with very small children, like I said, 202, so very small families to start getting their portfolio up and going to,

Ashley:
Let’s talk about the Asheville market. What are some of the advantages? If I decide today I’m going to invest out of state into Asheville, what are some of the reasons you would say this is an advantage to invest in Asheville?

Eileen :
The population growth one is just off the charts. We saw in Covid that people were coming down to Florida. Now we’re kind of seeing a little bit of an exit to that in some areas, but the population growth in North Carolina in that area of North Carolina has just been increasing over year after year. And it has been even before Covid as well. There’s companies coming in like Pratt and Whitney just built a 1 million square foot facility right outside Asheville City limits. So there’s more company, bigger companies coming there. A couple other things, year round activities if you like the outdoors. Asheville is perfect if you like craft beer.

Ashley:
Wait, are you describing Denver or Asheville? Yeah, I know

Eileen :
It’s the Denver, I always thought of it as the Denver and Portland meets the East coast and

Ashley:
Probably more affordable too,

Eileen :
Probably. It’s gotten a little pricey, but it’s probably more affordable than Denver. But you can go hiking just about year round up there. Pretty much any outdoor activity you can think of the side surfing, but the built more the Blue Ridge Parkway. And if you’ve got a short-term rental up there, which the great Smoky Mountains, which we’ve heard it on the podcast before, but it’s made for hospitality so you really can’t go wrong there. And we are booked through the year with our short-term rental. I will say that word to note is Asheville, Buncombe County, the county that Asheville is in, they are going through some short-term rental restructuring and restrictions. So that would be mindful to keep an eye on if that was your strategy going into that market. But the other thing I did want to mention is I love that area because you get the perfect amount of each of the four seasons without any extreme weather things going on. So not like three feet of

Ashley:
Snow or anything like that.

Eileen :
Yeah, very rare. Very rare does that happen. And no, you might get the tail end of a hurricane come up or a bad storm, but nothing extreme is happening over in that part of the country. So insurance costs are also low there too.

Ashley:
And what about is North Carolina a landlord friendly state or tenant friendly landlord?

Eileen :
Very landlord friendly states. That was another reason why that we chose that area as well. So crossing your T’s and dotting your, i’s there.

Ashley:
Well Eileen, thank you for that insight into the Asheville market. So what is next for you guys? What do you plan on doing?

Eileen :
This won’t come to fruition for a few more years, but we are working with our network up there with a few other experienced investors and we’re hoping to build some more affordable housing. The Asheville market has gotten pretty pricey for first time home buyers. You definitely have to have a little bit of a higher income too if you’re a first time owned buyer. So we’re looking at building some affordable housing communities up there.

Ashley:
Wow, that’s awesome. Well Eileen, thank you so much for joining us and for sharing your story. If you want to learn more about Eileen, we’ll link her information into the show notes and this is coming soon. We will be able to find you guys a property manager on biggerpockets.com. Eileen has been working hard to vet and do the due diligence work for you guys on finding property managers that will fit your portfolio to manage, oversee them, and operate your properties for you. So make sure to check out biggerpockets.com for when this will be available. So if you have a horror story or a therapy session with me to talk about a deal gone wrong, a contractor that did not show up or ran away with your money, or maybe you have a neighbor that is harassing your tenant, go to biggerpockets.com/reply and please fill out the information and we can get you onto the show to talk about the situation that you encountered as an investor so others can learn from your experience. Well, Eileen, thank you so much. We really appreciated having you on. I’m Ashley and we’ll see you guys next time on the next Real estate rookie episode.

Watch the Episode Here

https://youtube.com/watch?v=CWCGz2Tp9C4

Help Us Out!

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

In This Episode We Cover:

  • How to keep your tenants safe with landlord best practices
  • Why it’s worth building relationships with your neighbors and tenants
  • How to find an investor-friendly property manager for your rental properties
  • The three most important factors for choosing an investing strategy
  • How to scale your portfolio FAST with new construction homes
  • The pros and cons of investing in the Asheville, North Carolina market
  • And So Much More!

Links from the Show

Connect with Eileen:

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

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

The New Reform That Could Unlock $1B+ for Affordable Housing w/Sharon Cornelissen

Building Wealth with OLD Homes and How to Keep Tenants for Longer

by | Apr 24, 2024 | Investing, News Feed

How do you find investment properties nobody else is looking for—the ones with cash flow potential, equity upside, and wealth-building qualities all the other investors overlook? Simple: buy what nobody else wants. For Lisa Field Moore, that’s old homes. Most rookie investors walk into an old house, notice the foundation problems, warped floors, and outdated electricals, and quickly see themselves out. But Lisa sees money to be made—and you should too.

In this episode, Lisa shares how she’s built a sizable real estate portfolio by buying old, overlooked, and outdated homes, all in the past four years! But these are treacherous waters, and getting a major rehab item wrong could cost you a deal. To help, Lisa breaks down what isn’t (and definitely is) a red flag when looking at old homes, how she lost serious money making one easy mistake, and how to avoid doing a bad deal ever again. Plus, she shares her tips for rock-solid tenant retention that’ll keep your rental properties filled for years (or even decades!).

Want to know how to find these older homes with wealth-building potential? Stick around because DealMachine gives us a bonus segment on the five ways to find a motivated seller in ANY market!

Click here to listen on Apple Podcasts.

Listen to the Podcast Here

Read the Transcript Here

Henry:
Dave, do you buy old houses?

Dave:
I do, but somewhat reluctantly. ,

Henry:
What scares you about ’em?

Dave:
I just, I am not really good at renovations. I’ve never flipped a house. I’ve done some burrs, but it’s always been sort of hands-on where I live. Now that I’m an out-of-state investor, it just makes me

Henry:
Nervous. Well, I would say that probably most investors feel the way you feel about old properties.

Dave:
Well, I’m glad to hear that because we have a show lined up to help our audience understand how to not be afraid of old properties and how you can actually make a great business out of specializing in that area. Hey everyone. Welcome to the BiggerPockets Real Estate Podcast. I’m your host today, Dave Meyer, joined by Henry Washington.

Henry:
That’s right. Today we’re talking with Lisa Moore. Lisa has been investing for six years and she has really mastered the concepts of finding value add properties, knowing when to cut a property loose and monetize that property, as well as reducing her costs by retention and keeping tenants for a long period of time.

Dave:
So stick around ’cause Lisa is gonna break down all of that for us today. But before we get into our interview, I wanna tell you guys about a special segment that we have for you all today at the end of the episode, brought to you by Deal Machine where they’re gonna break down the five ways you can find a motivated seller. So after we talk to Lisa, make sure to stick around for that special segment. All right, let’s bring on Lisa. Lisa, welcome to the show. Thanks for being here.

Lisa:
Yes, thanks for having me. Guys,

Dave:
We’re very excited that you’re here. Now, I understand that you’ve sort of developed a niche with older homes, but a lot of investors are kind of scared or wary to get into older homes. Why do you go after those

Lisa:
One? They always have a uniqueness to them. We’re always drawn to kind of that quirkiness of older homes. They always have a lot of character. Uh, and my husband, who I also invest with is a gc and he is almost always only worked on older homes. So for us, it’s definitely an advantage when we’re looking at properties that where a lot of people get scared of what the bones will look like. For us, it’s just an opportunity and something that we enjoy doing.

Henry:
Yeah, this is, this is one of those things that, you know, I like to tell new investors is like, you really have to lean into your superpower. And a lot of people don’t really know what their superpower is yet. And it takes time to kind of figure out what your superpower is. But essentially what you’re saying is, I have an advantage because people are scared of older homes. But I have a husband who is a GC and I live in a market where there are a older homes. And so you now leverage this superpower of having someone that can A, either renovate these for you or B, look at them and go, there is no way you should buy this one .

Lisa:
Right? Yes. And yeah, and even when I bought my home before I knew him, it was an older home like Salt Lake definitely has a lot of older homes in it. And even then as a single female, I still was not too worried about it. It’s like, I’ll figure it out. Nothing was so overwhelming or overpowering to me that I was scared of buying a home that was built in the 1930s.

Henry:
The other thing too, when you think about older homes is, is a lot of the times people really just are scared of what they think could happen, but they really don’t know. And the key is just to understand that it’s not a problem that can’t be fixed. It’s a problem that can be fixed with money. So when you’re looking at an older property, you have to be able to evaluate it and then determine how much this problem might cost you and then get that much of a discount off of your property.

Lisa:
Yes. And my background is financial analysis, so I’m definitely the number side of things on the business. So yeah, so when we’re analyzing a property, we are definitely being conservative on what repairs could cost. You’re definitely building in more of a buffer because there’s always almost gonna be something that comes up with an older home. So when we’re underwriting, we’re just making sure that I am building in plenty of buffer and being very conservative on what our rehab costs are actually going to be.

Dave:
Man, that’s, that is quite a power couple there. A financial analyst and a GC talking about Henry superpowers. You both have one that, that’s a great place to start from. So Lisa, tell us a little bit about just your background. You invest in Salt Lake, when did you get started and, and what prompted you to start?

Lisa:
So I got started in 2017 buying my first property as a house hack. Um, I moved to Salt Lake in 2016. I grew up in Massachusetts. And when I moved to Salt Lake, I knew that I wanted to get involved in real estate. I knew it was a great way to build wealth and I knew that it could help offset my living expenses. So when I was looking for my first property, my goal was to live for less than what I was in an apartment. And house hacking was a way to do that. So we bought the first, I bought my first property as a single female in 2017. It started house hacking it by renting out a bedroom and met my husband. Then shortly after that and then in 2020 we really started buying and doing small multifamilies. And that was the leverage that we needed. And that gave us the cashflow for us to be able to do it full time.

Dave:
That’s great. And so we talked a little bit about how you’re looking for older deals and as Henry alluded to, there are older deals that have good opportunity and there are older properties that are just going to be a nightmare. So how, what do you have a process for identifying which properties are good, have potential for value add?

Henry:
Or said differently? Like is there something that you would absolutely not buy, like some feature or something in an older home?

Lisa:
, there really isn’t anything that I would say we a hundred percent wouldn’t buy. If it’s to the point where we just can’t get the layout to work or it is just so far gone that it’s basically a tear down. That’s kind of our, our threshold. If it gets to the point where it’s like, okay, like we’ve walked some old houses that the foundation was crumbling, the flooring was just barely non-existent. The layout was super weird. So things like that we definitely would not go for. But if it has a decent layout and if it’s, if the the bones of it are are good and it’s good foundation and good structurally and we can rearrange some walls and do stuff like that, then we’ll we’ll buy pretty much anything.

Dave:
Well how about the flip side of that. Are there any things that you see in a property, an old property, maybe some character or something that makes you really want to buy something?

Lisa:
Yeah, if we just, some of them, the, some of the woodwork, some of the old flooring, um, I mean you’ll go into some old homes and they have some really cool old wood floors that look like crap when you go in there. But you know, you can refinish ’em and they look beautiful. Um, and just some of them will just have different little architecture things within them, different arches or wood trim, things like that. So we definitely look for stuff like that ’cause we can really find a way to, to rehab that. We always like to find something from a property and keep it just to keep that old charm with it. One of our properties had a really cool front door. It was a horrible for a front door, but we refinish it, painted it and made it the, the sliding door for a bathroom. So it just has this really cool old door that we were able to refinish.

Henry:
While we’re on the topic of problems with properties or things that you find in properties that you either like or would not like, I wanna play a little game , I’m gonna say some sort of problem or nightmare feature that people seem to come up with in their heads. And then you tell me if you’ve bought a property that has one of these things and if you were able to overcome it and make money.

Dave:
Oh, I like this game. Okay, let’s

Henry:
Go. Sound good? Sounds good. Okay. Perfect. Termites?

Lisa:
Yes, we actually have a property that we own that had termites

Henry:
And you still own it and everything is okay.

Lisa:
Yep. We just had bug people come in, they got rid of everything and then they, whatever it is they call, they basically did a whole treatment around our property and now they come every month to maintain it and make sure it stays good and haven’t had an issue since.

Henry:
Perfect. Knob and tube electrical. Ooh,

Dave:
That was gonna be fine. .

Lisa:
I knew that was gonna be one of ’em. ,

Henry:
The,

Lisa:
The first house I bought still had live knob and tube live and we live,

Henry:
I’ve never seen live knob and tube. Yes.

Dave:
Oh really?

Henry:
Yes, I’ve I’ve seen it in the house but not live.

Lisa:
Yes. So I got a quote from an electric company and they came in and they replaced all the live knob and tube and we were good to go. It was built, we made sure I had that quoted before we closed, so I knew how much it was going to cost. Um, and yeah.

Henry:
Boilers?

Lisa:
No, not yet.

Henry:
Okay. And so for those who don’t know, sometimes these older homes are heated with boiling systems and they, they don’t really make ’em anymore. So you either have to either keep it or completely replace it. Dave, do you have any you wanna talk about?

Dave:
Yeah. Foundation issues?

Lisa:
Yes and no. So we’ve, one of our properties actually, uh, the, the foundation does not look pretty. So we, when we went to sell it, people had a, you know, very concern with it. But we had somebody come in and test it, um, and do whatever they had to do and got the all clear. And we do have another property that we had to put um, like the jacks underneath. So we had to pour a little cement. Mm-Hmm. a little cement pad and put some jacks in and that took care of, they have the footings and that took care of the problem.

Henry:
Septic tanks,

Dave:
. No, that’s a good one. Haven’t

Lisa:
Had a septic tank yet.

Henry:
So septic tanks, for those who don’t know this, typically a property, when you have to get rid of the human waste, it can either go through city sewer or there’s a septic tanks that sometimes go in the ground and they can get old and need to be replaced and can be costly. I know it. And it’s, it’s, it’s regional I think where a lot of these things happen. So we have a lot of septic tanks out where I live.

Lisa:
Yeah. I grew up in Massachusetts and we had a septic tank growing up and the more rural areas tend to have septic tanks

Dave:
And they can be very expensive to fix or replace. Yes. Alright, we gotta take a short break, but right after that we’re gonna hear about one of Lisa’s deals that didn’t go so well stick around.

Henry:
Welcome back investors. Let’s pick up where we left off.

Dave:
So Lisa, it sounds like you have a lot of experience with difficult rehabs and it sounds like a lot of them have gone well. But I understand you did a deal recently that didn’t go as well. Can you tell us a little bit about that?

Lisa:
Yes. Yeah, that was last year we bought a duplex. One of the things that we loved about the property was it was actually two separate buildings. So there was a front house and then they had a garage that they had converted. Um, and we built in 90 to a hundred thousand dollars for rehab. ’cause the front house was barely livable. The fact that people were living there was atrocious. But, um, and that was the property. You know, as we started pulling up the floors, we got to the subfloor and we’re like, okay, good. After pulling off like two or three layers, well that wasn’t the bottom subfloor. They had three layers of subfloor. So we ended up pulling up like eight or nine layers of flooring, two subfloors. And it just seemed like it was never ending. It was, it was funny ’cause like each level of floor we’re like kind of trying to tell like, okay, what year was this put in?
Uh, and so that ended up being more than we expected. We ended up building out the attic, which wasn’t a part of our original budget, which was about a 12 to $15,000 add-on that we didn’t plan on. But that one, when we went to sell, the big issue with that one was, aside from it, we budgeted like 90 to a hundred thousand rehab ended up being about 1 25. The attic landscaping were kind of the two main reasons that we went over on that one. But what really got us was we’re investors. So when we buy properties, we’re using DSCR loans. So they’re doing it based on income approach and they’re looking at the property. Well, for two to four unit properties, people can buy them conventionally and not every loan is going to use the income approach. So while we were looking at our numbers in our head, we were like, okay, as investors income approach, we listed it for five 60 under contract. We had multiple offers at and around five 60. But the buyer that we had was buying it with conventional financing. And their lender, even though the income approach was close to our five 60, they would not use it and they’d only use comps, which came in right around 500,000. And we, we went back and forth, we fought with a lender and they’re like, sorry, like investment wise this is going to be done as comp. So that 60,000 really is what killed us on that one.

Dave:
Wow, that’s, that’s a really interesting lesson. I’m sorry that you, you went through that no one wants to learn the painful way, but I think this is an important thing for our audience to pay attention to because Lisa said that she used something called a D-S-C-R loan, which stands for Debt Service Coverage Ratio. And this is a popular loan product for investors because it uses the potential income of the property to underwrite the loan. A conventional mortgage looks at the borrower and the borrower’s individual credit worthiness and their ability to repay that loan. And so it sounds like there was sort of a mismatch where Lisa, it sounds like you were using a D-S-C-R and you said, Hey, the rents can cover this five 60 price. But when the buyer came along, they were the, their bank was underwriting them personally and it didn’t line up. So what actually wound up happening? Did you have to drop the price there?

Lisa:
We did. We, we, we were at the option where we could have backed out and try to find another buyer, but it was a d it was the duplex. So we still were always gonna have the risk of, it could be another buyer that was coming in with conventional financing and mm-Hmm, at that point we, we wanted to sell, we wanted to pay back our private money lenders. And so we ended up losing about 10,000 on that. ’cause we did drop the price to, to the 500,000. ’cause obviously the buyers, they’re like, well we don’t wanna pay five 60. Our, our lender says that it’s only worth 500.

Dave:
So what, what do you do about that? Because that just seems like an unfortunate situation, but how do you prevent that in the future?

Lisa:
So for us, anytime we’re doing any two to four unit property that we may sell, when we’re looking at a RV, we’re basing it on comps, not the income approach. So if the numbers work as the comparables and it looks good, awesome. And if an investor ends up buying it at the income approach, which is more or potentially could be more, then that’s a bonus for us. But we’ll definitely never buy a two to four unit where if we’re gonna be doing major rehabs to a, we’re gonna make sure that we’re always using comparables for our A RV and not the income approach.

Henry:
This is a genius smart lesson. Everyone should write this down. You’ve got to underwrite especially one to four units as a comps, the traditional comps approach. Now there are some, I I’ve learned that this can be market specific. ’cause sometimes certain markets, I don’t know if it’s the appraisers that decide this, like did they have a meeting and go, alright, we’re just gonna evaluate everything four units on the income approach. Like because here I found it’s hit or miss, some appraisers will appraise our multifamily properties on the income approach and some absolutely will not. There’s no standard for why they do or don’t. And so you just have to understand that you don’t control it. But what can you control? You can control how you underwrite your deal conservatively. And I think that that’s the best smartest approach.

Lisa:
Yes, anytime we’re talking to a lender where we know that we’re either gonna be selling or we’re gonna be refinancing after our rehab, we always ask them, will we be able to use income approach for our A RV? And again, like we still make sure it works as comp, as comparables, but if we can find a lender that will use the income approach, then that’s just a bonus for us.

Dave:
Well that’s a great lesson that you’re teaching everyone. Lisa, when you experience something like this, a deal doesn’t go the way that you planned. How do you sort of take stock of what happened and make sure that it doesn’t happen again? Or you do at least everything that you can think of to try and get it to not happen again?

Lisa:
Yeah, this is definitely one we will not repeat. Um, but after every deal we do, we always try and write down whether it went well or whether it went bad. We always try and write down what, what did we learn? What lessons did we learn? The good and the bad, you know, what, what relationships do we build during this? Do we find some great contractors? Do we find some great agents that brought buyers to us but they also do multifamily that we could potentially buy deals off of. So we, we have it written down, we can review it and we, we know in the future how that deal went.

Henry:
This is brilliant and it’s something that you know we should probably do more often, but uh, it’s something that we do or we did in the corporate world a lot because I worked on software development projects and so whenever a project ends there’s always a lessons learned meeting and there’s typically some template that you fill out that basically says how did everything go? What were the, what went well, what didn’t go well? And you have this documented and a formal document that kind of goes in with the project documentation. And so a pro tip for everybody could be just go online and search for lessons learned project management document and you will probably find tons of templates that you can and just use them for your real estate deals.

Dave:
I was gonna say the same thing, Henry, actually this is just reminds me what we do here at BiggerPockets internally we have things we call ’em retrospectives, you know like after a project is implemented, success, failure, whatever, you just have to take a look back and see what you can learn out of your experience. Especially when you’re new, you know, every deal is going to be a learning experience and the more you can write it down and periodically go back through them to remember those lessons, the better you’re gonna be.

Henry:
I’m guessing Lisa, that this is a practice that you brought to the table, from your analysis background.

Dave:
? Yes.

Lisa:
Most, most certainly. P paperwork and keeping track of things is not my husband’s strength.

Dave:
Can you tell us a little bit about like the specifics of what you look at? I mean obviously you probably look at how close you were to your underwriting, any variance between your underwriting and actual deal performance. So there’s probably that sort of qualitative side but or quantitative side, excuse me. But do you also just kind of talk it out and talk about some of the more operational or procedural things and how those went?

Lisa:
Oh yeah. We definitely, there’s always no project’s ever gonna go perfect. So there’s always things that even when a project goes well, there’s still things that come up and that happen. So we always discuss, you know, as far as kind of start to finish, like how did the, the buy-in process go? Is there anything that came up in that that we can do better next time or learn from during the rehab? You know, timing contractors is always a difficult thing to do. Making sure that you’ve got the people coming in when they need to and you don’t have painters coming in when they still haven’t finished what they needed to do. Things like that. So we’re always reviewing start to finish and then even when it comes to the selling side of it, how did that go? How did the advertisements go? How much action do we get on it? Things like that. So we review start to finish pretty much everything.

Dave:
And I, I should have asked you this earlier Lisa, but do you always flip or do you hold onto some of these deals

Lisa:
We hold? So our goal is always to hold. We look at it as whatever we buy, we’re gonna hold forever. Obviously we sell properties, we just listed one for sale a couple days ago. But we are definitely buy and hold investors. So we go into it with the expectation that whatever we have, we’ll have for long term. So when we’re doing our rehabs and our remodels, we’re doing them as best of quality that we can do because we don’t wanna deal with maintenance down the road. So if there’s something that we can do to make it better and make it last longer and be of higher quality, we’re doing that.

Henry:
Okay. We have to take one more quick break. We’ll be right back with more from Lisa on how she makes her long-term rentals profitable and how she retains tenants right after the break.

Dave:
Welcome back to the BiggerPockets Real Estate podcast. We’re here with investor Lisa Moore. Let’s jump back in.

Henry:
Yeah, along those lines I would say, you know, people are hearing, you’re buying value add, you’re buying older properties and then you’re holding them. So what are some of the things that you’re doing both to the property or systematically that’s allowing you to monetize these properties? So well

Lisa:
Definitely buying them for a deep discount so we know if the numbers will work. Uh, we also always are conservative with our underwriting, especially now, um, when we’re underwriting, if they say Okay a rent could be 1500 to 1800 for this type of property, we’re gonna be on the conservative side, we’re gonna be closer to that 1500. Because if market shifts, if market changes and rents start to drop, we don’t wanna be stuck assuming we could rent this for 1800 and now all that we can get is 1500. And right now in Salt Lake, you know, this is the market that we know best. Like the rents have dropped a little bit since last year. They’re starting to recover a little bit but you know, nothing drastic, they’re kind of starting to level out. But when we’re underwriting right now, whatever, it’s the rents can be once stabilized. That is what we’re basing whether we buy or not, I’m not building in, okay well if I can raise rents five to 10% in the next, like every year for the next two years and then the numbers work, then I’ll buy it. No if once we have it rehabbed and stabilized at conservative rents, if it doesn’t work then we won’t buy it. And if we can rent it for more than what we underwrote, then that’s just a bonus for us.

Dave:
Okay. So I have a follow up question then Lisa, because you, it sounds like you do these retrospectives or lessons learned on your flips. Do you periodically revisit how your long-term holds are performing?

Lisa:
Yes. Oh yeah. I have multiple spreadsheets. ? Yeah,
And we actually every year we actually write like a year in review and we do meetings, you know, ’cause we have LLCs. So also technically for the LLCs we need annual meetings. But we review our properties every year as well and look and see, okay, how is it performing? Where is it at? Which is why one of our properties we’re selling now we have done multiple HELOCs against it, cash out, refinances against it. We’ve kind of sucked everything out of it, but there’s still a lot of equity left in it. So we know that we can sell it, take that equity and do more with it. So we’re always reviewing the performance of our properties. I

Dave:
Love that. I feel like this is something that it took me a long time to get good at and a lot of people forget about that. Investing is really all about resource allocation and if you are buying and holding onto a property, you are putting a lot of time and money into it and you need to be thinking about like is this the best use of my time? Is this the best use of my money right now? It sounds like most of your deals are doing well, but some of them it’s not a bad thing. It’s usually a success if a deal has run its course and you just no longer are, you know, you could put that money to better use. That’s a good thing. But a lot of people I know just sort of buy stuff, hold onto it and try and get their next deal but never go back and look at whether they should be holding on or refinancing or how to sort of maximize their existing portfolio.

Lisa:
Yeah. And where we’ve held some of our properties for several years in Salt Lake went crazy since 2020 with appreciation, you know, looking at return on equity, the one that we’re selling and we’re at like 1%, I was like, oh boy, yeah this one, this one can do a lot more with the equity in it than, than that. So return on equity once we’ve had pro uh, property for several years is a, a metric that we look at and really kind of cash on. Cash is good when we first buy it, but once we’ve had something for several years, the return on equity is what we start to track and what we look at.

Dave:
So that, that’s great. Lisa and I understand that, you know, one of the things that you really focus on in order to maximize the potential or the returns that you’re getting from your buy and holds is tenant retention. So tell us how you approach that.

Lisa:
Yeah, so for us, like our tenants are our customers. If we don’t have tenants that enjoy living at our places and then don’t enjoy us as landlords, then they’re gonna leave. And vacancy is so expensive, we try to avoid it at all costs. So you know, we try and go at like, we want professional quality but with like personal touch. So when it’s time for renewals, we will do anniversary gifts for our tenants. So we’ll offer them, hey, you know, if you renew your lease with us, we will, we give ’em a list of options and that could be having a cleaner come in for two to three hours, replacing a floor in one of the rooms, painting a room, painting an accent wall, uh, things like that that they help us maintain our property and give little upgrades to them. But it also gives them the choice ’cause it’s where they live, it’s their home.
So like we’ve had people, we’ve given them a of options. She’s like, I want a new light in the bathroom. And I was like, oh, never would’ve, never would’ve thought to put that one on there ’cause it’s a pretty new light. But the tenants really enjoy that. They get some say in what improvements we do and it, it helps keep tenants. We had a tenant that was getting ready to move out and we called them. And that’s another thing, like we literally pick up the phone and be like, Hey, we’ve heard you may not be staying, like what’s going on? Why are you looking to move? And this tenant was like, well we have a dog and a young kid and we don’t have a fully fenced yard and we wanna be able to like be outside hanging out and not worry about our kid or our dog running into the road. We’re like, okay. So it was three quarters fence. I’m like, so if we build the fence along the front, would you say they’re like, absolutely. So for, you know, a a short fence in the front yard, we just saved a tenant for moving out, made them happy and now hopefully they’ll stay with us for a few more years.

Henry:
This is gold, this is what people need to hear. The first thing you said I loved and it’s that our tenants are our customers. And I think that gets lost a lot of the time with new landlords or even even seasoned landlords, there’s sometimes there’s this almost superiority complex between property owners and their tenants and then it creates this tension between like, you aren’t doing the things I want you to do as a tenant and then you’re not servicing your property as this landlord. And then there’s this contention, but people don’t realize that any of that contention costs the landlord money. But if you see your tenants as your customers, ’cause this is a business in any business, you provide a product or a service to a customer and any good business provides a good quality product or a service to a customer who they provide great customer service to.
And if you treat your business, if you approach your business from that mindset, then your relationship with your tenants becomes better because they can trust you that you’re gonna provide them a safe, comfortable, clean place to stay. That’s your good quality product or service. And then the better you treat them, the better your tenants treat your property and in turn treat you. And I think if we as landlords approach tenants as customers and people first, that we will have better longstanding relationships with our tenants and that will make everybody else happy because you’ll be getting your rents on time and you’ll have tenants that wanna stay for a long period of time.

Lisa:
Yeah. And we also get referrals from our tenants. So there is a period of time where we never had to list a unit for rent because the tenants in that, in that property knew that they were like, they became friends. They literally tore down the fence between like the neighbor’s house and ours because they all hung out so much. So we didn’t have to list our units for rent because they’re like, one of our friends wants to move in and like that speaks very highly like for them to refer somebody to move into our property. You know, we’ve had tenants that have been with us for years. One of our tenants has moved three times just to stay with us. She kept moving into the property that we ended up selling, but she’s like, I wanna stay with you guys. Like do you have anything? And we fortunately always did. But a lot of our tenants have been with us 3, 4, 5 plus years, which is awesome. I

Dave:
Love that. I have that at a, a triplex I own. Uh, right now there’s a guy who’s lived there for six years I think. And he’s basically just like the house dad. Yeah. Like he just like brings in people. He like, he throws parties on the back deck. He is always responsible. He’s letting me know every time someone, uh, at something is happening with the house, he’s like, I have a good property manager. But like having that extra layer of care. Um, first of all he cares about the property a lot, but he also cares about the other tenants and it’s amazing. And you only get that if you treat your tenants extremely well and value them as, as much as you value the property itself.

Lisa:
Yeah, definitely. We, we do as much as we can for our at tenant, we try to be responsive, um, and we try and work with them. You know, if somebody can’t pay rent, like do we want to let somebody out at lease early know? But it also doesn’t do any good to keep somebody in. You know, if somebody is getting to the point where they’re having issues paying their rent, we, we talk to them, it’s like, what’s going on? And we’ve had situations where we had a, a tenant that had been with us and they were a good tenant. They’re like, they’re the boyfriend was a construction worker and he tore his ACL. He’s like, I like I literally can’t do my job anymore. He’s like, we’re like, this is our, our plan, our budget to, to get caught up on rent. We’ve already been applying for jobs like by this date we should be all caught up.
And we’re like, okay. Like as long as you can stick to those dates and you communicate with us, if something changes, we’ll we’ll work with you and let that go. But then we’ve had tenants that lost a job and they’re like, we really have no idea. Like when we’d be able to get caught up. So in situations like that we just talk and we’re like, would you be willing to move out instead of like used to, like you can’t pay rent, there’s no point in us forcing you to stay and keep adding on fees ’cause you can’t pay. Right. So in situations like that, like it’s not ideal, but we’d much rather let them out of their lease and just let it be a clean break. We’re not gonna get money out of them. They can’t afford it and it’s no good. Keep piling on and letting it get to an eviction point if they’re willing to move out. And most of the time they’re grateful that we let them break the lease without thousands of dollars of fees. So we try and work with the tenants as much as we can in situations.

Dave:
That’s great. It’s such a good approach. Lisa, I really, I imagine that you’ve analyzed this and I seen that this actually is not just good for you, good for your tenants, but it’s also good for the bottom line.

Lisa:
Yes. Yeah, vacancies are the biggest killer to our bottom line. So keeping, keeping tenants in, spending a few hundred dollars at each turnover that is well worth the money as opposed to a, a vacancy.

Henry:
One of the things I’ve noticed when I was managing my own properties was that most tenants either are coming off of a bad landlord relationship or have had a bad landlord relationship in the past. And so I think a lot of them just have an expectation that it doesn’t go well. And so one of the things that we always did was we just had a very casual, comfortable level setting conversation with the tenants when we would first have them sign the lease and it was just something to say, Hey, we are glad you’re here. We want to rent to you. We want to make sure you have a safe, comfortable place to live. If something breaks, please let me know. We will fix it. That is my job. And the, the almost like relief people would have sometimes when we, when we say these things, uh, is great because it just lets them know like, we actually care. We want you to have a comfortable place to live. Let us do our jobs. And uh, it’s, it really is kind of helped set the tone for our tenant relationship going forward.

Dave:
I I love that Henry, I do the exact same thing. I always just have this speech prepared where it’s like I just tell them if they’re reasonable, I’m gonna be reasonable and we’re hopefully never going to have to look at the lease. Like when we’re signing the lease, I’m like, there’s all these legal stuff to protect both of us in case things go bad, but like hopefully we never look at this and we could just treat each other like adults, like fellow human beings and we’re gonna have a great relationship and make this work for both of us.

Lisa:
Yeah, and for us it’s, it’s similar, you know, and when a tenant’s moving into a unit that they see is well maintained and looks nice, like, you know, we keep our properties very nice so we tell them like we care about the property, like this is our investment, this is our livelihood and we don’t want this property to become a slumlord property. We wanna make sure it stays maintained. So please like if there are maintenance issues, anything that comes up, please make sure that you notify us ’cause we want this level of quality that you’re moving into is what we wanna keep it at.

Dave:
Lisa, this is an excellent approach. It’s obviously worked really well for you and for everyone listening, if you wanna take some notes or some pointers that you can apply to your own portfolio, some of the things that we talked about. First and foremost, treat your tenants like customers and make sure they’re happy. Check in with your tenants a few months periodically, but also before renewal to make sure that they are intending to renew and see if there’s anything that you can do to incentivize them to renew. And Lisa, is there anything else you think our audience should know?

Lisa:
Yeah, just be human with them. You know, be open to conversations, don’t be afraid of difficult conversations with your tenants and just treat them with respect and let them know that you are here to make sure that they are happy with where they live. And for us, we don’t wanna lose a tenant, but the only way we wanna lose a tenant is because they’re buying a house or moving outta state. So that’s kind of what we tell them. Like we want you to stay with us as long as possible, but these are the only two reasons we wanna lose you as a tenant.

Dave:
That’s awesome. Well thank you so much Lisa for joining us. We really appreciate you being here.

Lisa:
Thank you, I appreciate it.

Henry:
Thank you again to Lisa for all the great information. If you want to learn more about Lisa and how she operates her business, you can look for that information in the show notes.

Dave:
And don’t forget, we have a special segment from Deal Machine for you now where they’re gonna share five tips on finding motivated sellers. So you definitely want to check that out for BiggerPockets. My name’s Dave Meyer, he’s Henry Washington and we’ll see you guys soon.

David:
Hey BiggerPockets listeners, do you feel overwhelmed by the number of ways to find a motivated seller that wants to sell their house at a discount? Well my name’s David Leko and I created the software deal machine that’s helped people close their very first real estate deal over 10,000 times in the past seven years. So I know the biggest reason why people don’t have success finding their deal quickly is because they hear about all the ways you could find deals. They try all of ’em, throw everything against the wall, see what sticks, but ultimately get burned out and spread their time and energy so thin they haven’t truly invested enough time into any certain strategy to finally get the result. So gonna break down the top five ways to find a motivated seller and I’m gonna give ’em to you in the order that you should approach them in.
So if you’re just starting out, the number one way is driving for dollars. Now these are homes that are run down that you’re gonna drive around and look for and ultimately write down the contact info and then look up the owner and either door knock or reach out with mail or a text or cold call to see if they want an offer on their house. This is very helpful to them because these homes are in such disrepair they wouldn’t qualify for a normal buyer to come in and buy it with a loan. So if they need to sell their house quickly and you’re the one they call, you could help them liquidate that within 30 days or less, which could be very helpful and they’re willing to give you a discount for that speed and convenience. A bonus as you get to learn your areas and most really, really advanced investors may not be driving for dollars as much as you can because they could just spend dollars to reach them in more expensive ways.
But you can actually drive around, find these lists, you’ll have less competition. The number two way is to look at tax delinquent properties. So the county actually publishes this and you can also get it inside of the deal machine software, but in Indianapolis there’s a million residents and about 1700 people that were tax delinquent in 2023 that had single family homes. So I reached out and it turned out there was somebody in Utah who bought five investment properties two years ago, but he hadn’t had any success getting a contractor to actually fix it up. So he’s kind of pulling his hair out, sold it to me, one of those properties for 20,000 less than he paid for it, plus he paid for the back taxes. So I was able to do a deal, help him out. Um, and then I even recommended my contractor if he wanted to try that for some of his future deals.
So great scenario where a high earner still took a loss on that property just to get rid of it. So this is a great motivated list and it’s free to get as well from the county. Number three is liens. So that’s homeowners that maybe didn’t pay their, you know, contractor to remodel their bathroom. And the contractor is saying, Uhuh, well you know, you didn’t pay me, you can’t sell that house unless given me a portion of it first. So it means they’re in some type of financial trouble. This can be a great list to actually pull and get, um, motivated sellers and help them out of a tough situation that they might be in. Um, there’s many types of liens. Uh, it could be maybe they didn’t pay their federal taxes, maybe their homeowners association needs some to pay dues. Um, so those are two examples.
The third thing is code violations. So this means that somebody maybe hasn’t cut their grass and the city had to do it for them to keep the environment safe for their neighbors and that’s not cheap. Could cost 400 bucks to cut a small lawn. So those bills add up and if they’re not taking care of their property, it means it’s not rented out. They have a renter that’s not cutting it or they’re just not paying attention. So this could be a great for you to just unload a problem property for them, um, and typically get a great price for that. Um, the fourth way is pre-foreclosures. Again, all these lists are free provided by your county in some type of format. Pre-foreclosure means they have actually not paid their mortgage payment. And in some states that means they have 30 days before it’s auctioned off after missing just one payment.
Crazy, I know. So you could get the list in the courthouse, often they’re posted to a bulletin board and then you could actually drive reverse drive for dollars. So it means you go to all those properties, knock on the door and say, Hey guys, I just wanted to let you know you’re on this list and we could help you save your, your credit. But most importantly we could give you peace of mind that you can take money away and have a place to live instead of wondering when is my house gonna be auctioned? Um, will I be able to stay here next week? And so you can give them that certainty by driving around and seeing if they want to sell their house. And then, uh, the other one is fifth one is probate. So let’s, if the owner has died with no will, oftentimes these types of properties, um, you know, they’re gonna be owned by the kids that have, you know, four kids and maybe they don’t want to deal with a rental property or can’t agree on what to do with it.
So you can reach out and actually do those deals. And I give you these lists in this order because the simplest is of course driving for dollars when the owner’s still living. Um, and that’s a list that you can find just by getting out there and looking. So you’ll learn your area. That’s the very first one. Uh, and the next ones are all free lists you can get from your county if you know where to look. Um, and of course we provide this all in the Deal Machine app as well. You could try a free seven day trial of deal machine and get this information for no cost by going to deal machine.com/bp. And of course, check out the Deal Machine podcast to hear all 25 ways that I’ve put together to expand this list and give you guys all the info on finding motivated sellers.

Watch the Episode Here

https://youtube.com/watch?v=DC3r3kTez1I

Help Us Out!

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

In This Episode We Cover:

  • Why you cannot overlook rehabbing older homes and outdated properties
  • The two things that tell Lisa an older home ISN’T worth investing in 
  • Why termites, foundation problems, and outdated electrical systems aren’t as bad as you think
  • The huge mistake Lisa made that ruined a $100K+ rehab project and how to avoid the same fate
  • Tenant retention 101 and best ways to ensure your vacancy rate is low and your cash flow is high
  • DealMachine’s five ways to find motivated sellers in any market
  • And So Much More!

Links from the Show

Connect with Lisa:

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

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

The New Reform That Could Unlock $1B+ for Affordable Housing w/Sharon Cornelissen

The Investor’s Guide to a Single-Family Rental Emergency Fund

by | Apr 23, 2024 | Investing, News Feed

As real estate investors, your emergency funds are a critical line of defense against unexpected costs. It prevents you from dipping into your budget to handle them.

But what should you really use an emergency fund for? And how much money should you keep in your safety net? Here’s everything you need to know.

But first, I am a big believer in having a “no-big-deal” fund. What is the difference? Mindset. Investing is not gambling. You are not identifying money you can afford to lose and spending a few hours on the slots and tables. 

What to Use Your “No-Big-Deal” Fund For

SFR investors should have access to capital and a no-big-deal fund before buying their first property. That’s not a rule, but it is a suggestion from an experienced investor. Planning to fund a no-big-deal fund from monthly rental revenue is not a recipe for avoiding disaster—it is a disaster. 

 Have your funds in place. Here are three good ways to use that money.

1. Covering temporary gaps in income

Every real estate investor knows that vacancies are expensive. While we would hope that residents renew their leases and stay put more often than not, that doesn’t always happen. People move on, and sometimes unexpectedly. 

Use your safety net to anticipate and cover costs during these times. While you don’t want to rely on emergency funds to substitute income, they can help you cover mortgage payments, insurance costs, and property taxes in the interim. 

2. Dealing with emergency repairs

Regular maintenance tasks are one thing—significant repairs are another. Your emergency fund covers these incidents. When this money is set aside and designated, you can quickly address things that adversely affect property value and cash flow.

3. Paying insurance deductibles

Insurance itself is another form of safety net. However, insurance claims almost always involve a deductible. For the investor, having cash set aside to take care of issues, even when insurance is involved, helps the process move forward.

What Not to Use the Fund For

Such a fund is not to be used for just anything, however. Here are three no-nos in how to spend this money.

1. Cosmetic renovations

Technically, you can use your no-big-deal funds for anything. There’s no rule against it. However, we would advise against using emergency money for purely cosmetic renovations. 

Renovations can (and do) increase equity in a property by forcing appreciation, but not all upgrades are impactful in this way. If you dip into your precious savings, be sure it’s worth your while.

2. Personal expenses

Keeping your business/investment finances separate from personal finances is always wise. The emergency funds you set aside for your SFRs are not to be used for your personal bills. 

3. Debt repayment

Investors need a separate debt management strategy in place. While you can dip into the coffers to cover debts in a pinch (such as mortgage payments during a vacancy), it shouldn’t become a habit. Doing so will deplete your resources, potentially leaving you high and dry when it counts. 

Where Should Investors Keep Their Safety Net?

Now that you know what to spend your emergency fund on (and not spend it on), where should you keep it? Here are three suggestions.

1. Traditional savings account

Depending on your business structure, you can open a savings account to complement your existing business checking account. The key here is to keep investment emergency funds separate from your personal finances. 

2. High-yield savings account

This type of account offers higher interest rates than traditional savings accounts, providing a decent level of growth while keeping funds easily accessible. High-yield savings accounts are FDIC-insured, making them a safe choice for your safety net funds.

3. Money market account

Money market accounts combine the features of savings and checking accounts, offering higher interest rates than regular savings accounts and providing check-writing capabilities. They also typically come with FDIC insurance or are backed by government securities, making them a relatively safe option.

While some may suggest putting your emergency funds in bonds, CDs, or other low-risk investments, these can pose a problem. CDs, for example, require a lock-in period that can prevent you from accessing funds for months—sometimes years. Bonds are safe investments and relatively liquid, but they demand a few extra steps to access cash.

How Much Money Do I Need in My Emergency Fund?

No one amount fits everyone’s needs. The best rule of thumb is this: at least three to six months of expenses for each property you own. This includes mortgage payments, property taxes, insurance premiums, maintenance costs, and other recurring expenses. 

Then, set aside your net rental income after mortgage, insurance, and management, and add it to your existing no-big-deal fund until you reach the target amount for each property. For me, this has been as high as 12 months of expenses when I started out, and I now land around six to eight months as a highly comfortable, no-worries dollar amount I like to have.  

Because the amounts will change over time between portfolio growth, changes in costs, and goal adjustments, you’ll want to revisit your target. Periodically review your financial situation and tweak your no-big-deal fund goal as needed. 

For example, if you have followed this advice, you will start off from a very strong position and only get stronger. Then, you can dip your NBD fund back down to three to six months per property and reward yourself for a job well done! Your choice on the reward, but make sure you celebrate all wins—even the ability to maintain a no-big-deal fund over time.

Need a rock-solid passive investment strategy? Your REI Nation advisor is waiting for your call!

This article is presented by REI Nation

REI NATION LOGO

Ready to add turnkey real estate to your portfolio in 2024? If so, now’s the time to invest with REI Nation. Where you invest, and they handle the rest.

Discover stress-free real estate investing with the largest family-owned turnkey investment company, REI Nation. Whether you’re a seasoned investor or just starting, they are dedicated to helping you achieve your financial goals in the world of real estate investing. Visit our website to start your turnkey real estate journey, where your success is their commitment.

Some financial advice doesn’t work anymore. Read here to find out which principles are better left in the past!

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